Sunday, December 8, 2013

Speculation

                Pressure from shareholders seeking dividends and capital gains is a potentially troublesome thing that seems to be at the heart of many of the difficulties with capitalism.  Shareholders want dividends, or they want stock price appreciation, and many of them do not care what companies’ managers have to do to deliver it.  If they have to keep employees skittering along the precipice of poverty, that’s what it takes.  Many shareholders don’t even know what is going on.  They just want their dividends and capital gains. 
                Of the various ways of financing a company, selling shares of stock is not even the most cost-effective method.  It is generally more expensive than selling bonds or simply getting a loan from a bank, especially in today's low-interest environment.  It is also fraught with peril.  The shares go onto markets, where they go out of the control of the company itself.  If somebody with deep pockets wants to go on a campaign of buying up a controlling interest in the company’s stock, he can do it.
The long history of capitalism is littered with examples of stock being sold based on nothing but blue sky.  Today, stock offerings must by law be accompanied by endless disclosures and proofs of its reality.  Nevertheless, scams are still perpetrated.
                Despite all these problems, stock is still a legitimate mode of financing.  It has advantages for the company that sells it.  For example, there is no set time by which the shareholders have to be paid back, whereas a loan or a bond must be paid back on a specified schedule.  It is a proven way of raising lots of capital for expansion and for other purposes (including enriching the company’s founders or its venture capitalists.)
                Unfortunately, for many people buying and owning stocks is like gambling, like the lottery, like playing the horses.  It represents the hope of getting something for nothing—easy money.  Investing in a sensible manner in the expectation of growth and profits of a company is one thing.  Investing in desperation to save oneself from poverty is quite another thing.  There are always people around who will take advantage of someone’s desperation or greed. 
                There are always a few people who can “beat the market.”  They can make a lot of money by “playing” stocks.  It raises false expectations for the rest of us whose only role in the game is to lose money at the expense of the few winners in a speculative game.  For despite all the efforts of governments to regulate the markets, there is always room for manipulation, for empty hype and for playing on greed and desperation.  The many become the prey of the few who know the game.  It happens on a broad scale once in a while, but it happens on a small, single-stock scale all the time.
The Great Depression and the recent “Great Recession” were preceded by periods of excessive speculation.  In the 1920’s, it was stocks.  In the years leading up to 2007, it was real estate.  The mentality develops that prices can only go up, never down.  Until the market proves us wrong.  Whether the speculative excesses actually were the fundamental cause of the hard times that followed is not certain, especially in the case of the 1930’s Depression, but they were a factor.
                The only real way to make money, in the words of the old commercial (ironically, a commercial about investing in stocks), is the old-fashioned way: to earn it.  Once it is earned it can be invested in assets that you hope will not become victim to speculative cycles, and you can take precautions against that happening.  If you want to “play” the market, just be sure you play it with money you can afford to lose.
                The assets you invest in can include stocks if the intention is to invest in the growth and profits of individual companies.  Even then you have to beware of speculative forces and cycles, as well as other potential mishaps that could thwart your intention and turn your investment into a loser.

                Despite all the books and systems about investing in stocks, the best thing to do is just do what you do to make and save money, then let a good investment advisor invest it for you.  (The trick, of course, is finding a good investment advisor.)  And don’t expect him to make you rich; just expect him to get you a reasonable return on your investments.
               An investment advisor cannot ignor speculative patterns if they present an opportunity for profit, but they can carry considerable risk. 

No comments:

Post a Comment