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Strategies & Market Trends : ZenWarrior's Trading Paradise -- Ignore unavailable to you. Want to Upgrade?

To: p40warhawk who wrote (356)	4/4/2001 8:10:02 AM
From: TimbaBear	Read Replies (1) \| Respond to of 2462

P40... Thanks for your kind words!....No matter how much experience or education or knowledge any of us have or don't have, we are all just trying to find our way in this arena of equities. It is always a new world, and we are all newly born each day. "....My question is, "What are we taking risks for?" If we risk capital for growth and future appreciation, that is investing, in my opinion. We are seeking to help create new wealth and hope to realize some of that new wealth for ourselves...." In my opinion you are still mixing apples and oranges here. "Growth and appreciation of what?" The company or the invested capital? If it is "the company" then you gave your investment capital to whoever sold the stock to you and will be paid (when you sell the stock) by whoever buys it from you(not likely to be the company who issued it). So your invested capital has no direct impact on the company. It has an indirect impact, however. Shares of a company do indeed represent an ownership interest in that company. Part of the responsibility of management is to employ the assets of that company in such a way as to maximize the dollars earned per dollar utilized, and to minimize the cost of doing business so that more of each dollar earned "flows to the bottom line" as net profitability (return on invested capital). Another part of the company management's responsibility is to then distribute that wealth to the owners of the company in the form of dividends or to re-employ it to add further value per share of ownership. Managements at these publicly traded companies use the stocks price as a unit of measure of their performance and often their bonus compensation is linked to price targets of the stock. Additionally, many of the people who work there have the company stock in their retirement accounts and in the form of options to buy the stock at favorable prices. So these folks watch the stock price and try to improve the business performance of their piece of the company in the hopes of that increase being reflected in a higher price of the stock. What you were willing to pay when you "employed your capital" by buying that company's stock reflected what you thought of the value that that purchase represented to you, what you thought of the risks to your capital that you assumed, and what you thought of the prospects of that company going forward(the reward for risk assumed). What I am doing when I employ my capital is primarily seeking the best return I can get for the lowest risk assumed. Ownership in the company is incidental, in a way. In other words, the ownership rights serve as an insurance policy of sorts against maximum loss because it gives me a claim against the companies assets and a place in line if those assets ever have to be liquidated due to insolvency. But mainly, I am employing my capital for the sole purpose of maximizing return and I have this company as the best way of doing that. If I am wrong(and I often am), my job is to remove the invested capital, evaluate my options objectively, and then take my remaining investment capital and re-employ it elsewhere. I have no loyalty to the source of employment of that capital that is not based on rate of return I receive. That is the key. I don't confuse "noble thoughts" with "employment of investment capital". I may aspire to whatever I choose, but if I don't keep my objectives clearly separated and remain as totally objective about the capital as I am able to achieve, others who do have that objectivity will take it from me, and leave me with my nobility. "....But, as you know, there are other kinds of "investing" that have nothing to do with new wealth. With these strategies we are trying to capture wealth that already belongs to someone else. This is where I have a problem....." Apples and oranges again. First, I am neither responsible for any one elses gain nor their losses in this arena. Everyone comes to this table and plunks their money down on whatever they believe is best for them. When I buy a stock, someone is selling it to me. Their reason for selling it to me is totally different than my reason for buying it. But I better understand why they are willing to part with an investment that I believe represents the opportunity for the best return on my capital. They might be right in selling it, and I need to be able to determine that. When I sell that stock, it is because I believe I have a more efficient use for my capital elsewhere. But I must also know why someone would be willing to buy it from me. Just as a check on my reasoning. In America, we root for the underdog, we believe that effort always gets rewarded positively, good guys always win in the end. That is why we "go long the market" buy the stock, rather than sell it short. Somehow, believing in failure as a likely outcome is "UnAmerican". Yet we do it all the time. Would you buy shares in a company that has a P/E of 40,000? Of course not! Why? Because we believe that that can't continue like that and, therefore, represents too much risk for too little potential reward for that risk. A totally objective assessment might assign more value to the reward if we could somehow make money if the company's stock price did return to more reasonable P/E levels. Whether we make money when the market goes up, or when it goes down, there is no more "morally superior" direction, objectively. Subjectively, it just doesn't seem right, somehow, to bet on failure! But we still admire and seek out those investment gurus who can maximize our return in any market! Go figure! Timba

To: p40warhawk who wrote (356)	4/4/2001 11:04:34 AM
From: manfmnantucket	Read Replies (1) \| Respond to of 2462

>trying to capture wealth that already belongs to someone else. This is where I have a problem. p40 ... I'm really confused by the distinction you are trying to make here..? Stocks are a lot like baseball cards. There is a limited amount of money that can go into the market, and so every transaction ultimately produces a winner and a loser unless more money is added to the system - the catch is that the losses can occur long after the initial trade. Suppose you, Zen, and I are in a room. You have a Nomar Garciaparra card you bought from Topps for $1. Topps (and probably Nomar) made a profit, but you have a card that represents your enthusiasm for Nomar. We each started with $10, so you now have $9 cash. I decide I'm willing to pay $5 for Nomar because I know Zen really likes him and I think he'll pay me even more. I buy Nomar from you - you make a $4 profit on your "investment". OK. I sell Nomar to Zen for $8, booking a $3 profit. Now it gets interesting. At this point none of us have enough money to pay more for cards. I suspect this. I also noticed Nomar rubbing his wrist injury last season... Meanwhile, you've seen the price go up to $8 and are longing to have Nomar again. Zen is being a "strong hand" -he won't sell. So, I borrow another Nomar from Topps, promising to give it back. I sell you the borrowed card for $8. Nomar has the surgery, even though you attended the card-holders' meeting and begged him not to, since it would hurt the "value" of the cards. Suddenly, nobody really wants Nomar cards. Zen gets nervous and offers to sell his Nomar for $4. I buy it, and give it back to Topps, pocketing $4. Net result? Zen lost $6 on one long trade and has $4 cash. MfN made $7 on one long and one short trade and has $17 cash. P40 made $4 and is holding 1 Nomar he paid $8 for but has just seen it trade for $4, and he has $5 cash. Was there any new wealth created in the room? No - no new money was printed. People lost money on both short and long trades, to those who profited. So what's the "moral problem" with this? How is it any different from the stock market? What am I missing? MfN