“Actually the stock market is a very efficient market.”
All markets are always 100% efficient- at least from an Austrian perspective [I believe].
“It is nothing like gambling.”
So you would advise someone to put all of their accumulated savings into the stock market for the long term ,I take it, as there is no element of uncertainty to be considered, or am I misunderstanding?
Ok, in theory the value of shares can be significant without dividends… but in practice I would suggest that 99% of shares that are traded on a stock exchange are traded in the expectation of future dividends.
Not true.
Even if there was a law stating that shares, once sold, could not be resold (I’m not advocating this), then there is no reason a new share issues could not be sold at a higher price then the original ones. If, during the period between the initial shares issue and the second one, the company invented some great product and future dividends were now expected to be higher than first thought, then the second share issue will sell at a higher price.
While in theory you are correct, in practice it doesn’t work that way. Stocks are risky business. One who buys stocks in IPO or otherwise provides capital for start-ups has big risk and is of course expecting high yield in return. Holding stock into infinity to collect dividends would mean-revert his yields. There is no point in that. You may as well buy government bonds instead.
Inability to sell your investment is also kind of a risk. Sometimes you need money fast. Waiting till infinity comes to collect dividends is not an option.
Ignoring the event of banning reselling shares, new shares could not be sold for any more than the current market price.
Purposefully or not, you keep missing the point. Why would you concern yourself with why agent A (not you) buys/sell something from/to agent B (not you)? How does the fact that a transaction has or hasn’t occurred (or the buyers/sellers motivation behind it, or the frequency with which it is occurring) affect YOU in any way? To the extent that it DOES affect you, how is a world with no (or less) transactions better for YOU than a world with MANY transactions? Personally, I would prefer to live in a world where everything is traded as much as possible, as such a world would give me much better price transparency and liquidity so I can more efficiently (and less costly) allocate my assets to reflect my view of the changing world around me. So I support speculators and traders of all sorts for purely SELFISH reasons, and so should you.
Z.
This is a good article. Do you have a link to the actual source?
its page 467 from his epic book ‘Capitalism’. www.capitalism.net
Ehm, there are many ways a market can be inefficient. The simplest example being poor communications making buyers and seller meet so seldom that it gets distorted and don’t generate as many trades as is possible. Further problems can come from poor information making people achieve there expected outcome of a trade less frequently then if it was possible for them to have better information.
No, I wouldn’t advice that. I don’t understand your point.
There is uncertainty in everything, any property you have could drop in price including capital binding assets like your home or even whatever commodity you happen to use for cash. Your savings and loans bank could also go bust. These are financial risks of the same type you take in the stock market they just vary in degree from asset to asset.
There are other types of risks, like physical ones. Those are normally reduced with insurance, but then you get insurance risks instead. There is always a chance your insurance won’t pay.
Lotteries does not fall in any of these categories, in fact I don’t think any concept of risk apply to lotteries. Lotteries are about chance and entertainment…
So if you can buy a company now for a stock value of $1m and you believe that there business idea is so revolutionary that in ten years there book value will be $300m you won’t buy it cause they promise not to pay dividends?
Does it really matter if the money stay in the company or get paid in dividends if you don’t plan to do anything else with it anyway?
No, not really … actually if you think that the stock is the best investment right now then not paying dividends will just spare you the trouble from having to re-invest the funds yourself.
Dividends may be preferable to some because it gives them more freedom what to do with the returns, but for some it is not ideal at all cause it just cost them money to have to re-invest them rather then keeping them in the company from the start.
On the whole it doesn’t matter one bit if you get paid a dividend of $10 per share or if the book value of the company increase with $10 per share. It is the same thing, it is just a matter of which payment method you happen to prefer.
Well in practice in the long run it matters a great deal ofcourse. A company that re-invest all profits even if they have any worthwhile projects or not will get a lot of low interest bearing savings that will destroy there returns/assets. But if it still it the best investment for the investor that was our initial condition this is of no concern. It just can’t keep being that forever in practice…
Is investing in the stock market gambling? NO… From the phrasing of the question and the comments elicited, it appears that the underlying concepts of investing and reasons to invest (much less within the stock market) are lacking. Let’s examine 2 topics: investing, and, the stock market & gambling (I sense some cynicism here that needs to be addressed-- but then again, this is simply a bloggers inquiry).
First, perhaps we can agree that investing is a calculated risk (the ‘possibility’ of permanent loss of capital), whereby the investor temporarily relinquishes some degree of personal control of his capital for the prospect of an acceptable rate of positive return with an item that has some degree of intrinsic value. Whether it be the stock market, trading marshmallows, or any other form of bartering, the concept is very basic. Again, the concept holds true within ANY form of economy or political governance (socialist, democratic, anarchist, egalitarian, or theocratic… LOL). It is simply a temporary or permanent exchange within a mutually agreeable context. Free-market thinkers, realizing that economics is rooted in a social context that stems from personal choice, deem investing as necessary in order to advance creativity, wealth, and social progress. Investing, in the U.S., has evolved into a highly organized and supposedly more efficient level of bartering or borrowing. Let’s not digress, investing is necessary.
Next, what the topic calls into question within the second half of the statement is, I believe, whether the markets (NYSE, AMEX, FOREX, etc…) are/should remain the CORRECT context into which to make an investment. Perhaps the question of ‘venue’ (stock market), coupled with the negative use of gambling (the ‘probability’ of a permanent loss of capital-- note difference from ‘risk’ above) stems from the author’s personal tribulation in the markets (or even an unjustified notion- if you have never invested), a lack of optimism in humanity, politics, social ethics, morality or another gadfly that has made it into the author’s crawl. Let’s simply agree that there is a questioning as to whether the stock market, as it exists and has evolved in the U.S., is now a place of gambling.
Perhaps we can also agree that investing, at its root, ascribes some innate value in the item being invested in. Therefore, though subjective, each investment does possess some intrinsic value or worth which the investor perceives will have a higher value at some time in the future. Gambling, however, does NOT ascribe any value or intrinsic worth to any identifiable item. Gambling, by nature, is a process… hence, its existence infers that there is no material or goods upon which to ascribe value. Gambling is descriptive of a process that possesses no value whatsoever, but seeks to achieve gain through non-rational or unjustifiable means. One must not use semantics to argue ‘value’ when used in the context of gambling. This idea can be easily exemplified when gambling on dice. There is no intrinsic value in the number seven or snake-eyes, it is only a preference on whether one is willing to go against the odds of numerical outcome. Should one wish to argue the point that there is no value in the stock market, then one simply has no personal philosophy of the value of capital, and, therefore, should “unsubscribe” from the Mises network and declare Austrian Economics a ruse! Investing in the stock market cannot be gambling. On the other hand, one must decide whether the stock market is, in its current form, ‘worth’ investing in, which, of course, is a personal decision.
O.K., let’s make some final summaries and close this epistle for the time being.
Summary & a modest solution: A free-market economist must necessarily support the notion of investing, and investing in the stock market since it stems from the creative energies of members of that society (Remember, society infers the existence of at least 2 individuals with the same inalienable rights and freedoms). Could there be a way to invest that is better than within our U.S. stock markets, of course. However, Austrians do not mind working within the framework of the stock market as it exists. What we DO mind is the fact that the free-market economy has been manipulated by mal-individuals for the express purpose of selfish gain OVER that gain of another. Interventionist policy of the government has made the dilemma even worse because it shows favor to one faction over another as well (One may differ as to which came first, intervention or personal abuse: the chicken or the egg). Poor ethical practices by individuals (who create what we call corporate mentality) and intervention of governmental regulation within our system are rampant. It is not that the system of the stock market is bad in-itself, rather, it is flawed because people/government forget or discard the notion that their freedom and rights extend only so far until they infringe on the freedom and rights of another (others). It is the ability to make choices that is both the most genius and most depraved part of our nature. If you want to be Austrian, you have got to want it BAD… you must accept the social context first, endow each person with the same rights and privileges, and have a workable definition of capital and the value thereof.
… a modest solution? Give thought as to how best to incorporate your theories into practice and action when it comes to investing. As near as I can discern, my personal philosophy has led me to invest in my home and the land I desire. Secondly, I seek to invest in those items that possess some intrinsic value, may have a degree of permanence, are valuable to others, and are fairly priced or offered to me at what I perceive to be a discount, so that I may benefit from the exchange in the future. Pragmatically, here is what I believe an Austrian perspective means in the real world… focus portions of your capital in the areas of natural resources, anything that can be made with paper, plastic (petroleum), glass, or metal. As well, employ a Graham-Dodd-Buffett style of investing that seeks viable, simple to understand enterprises that do not trade at a premium to their intrinsic value. Further, focus upon industries that create something universal and of value… intellectual property is very difficult to value, service-based industry is less difficult, but does depend upon societal utility and perceived need. In the area of loans… (for income needs), I believe the Austrian is acutely aware that the future is uncertain, therefore, I believe relatively mid- to short obligations within the fixed income arena may offer the least risk and maximize short-term potential within a dynamic economy.
Correct. Because I will have no way of getting money from my shares. I won’t be able to sell them because any potential customers will say “how do I get any money from these shares?”
Not true. Imagine there are just four rare Rolls Royce cars left in the world. They only come up for sale at auction everey few years. Are you suggesting that the price in the latest sale can not be higher than the price in the previous sale?
Wow, I never thought of it that way! Is this the response you were looking for?
Profit, in the strict sense, is, by definition, ALWAYS based on speculation. Any part of income that is not speculative is either originary interest or wages.
So according to your definition of gambling, gambling would be synonymous with profit-making.
From Human Action, Chapter 14 (emphasis added):
The term entrepreneur as used by catallactic theory means: acting man exclusively seen from the aspect of the uncertainty inherent in every action.
and
In the context of economic theory the meaning of the terms concerned is this: Entrepreneur means acting man in regard to the changes occurring in the data of the market. Capitalist and landowner mean acting man in regard to the changes in value and price which, even with all the market data remaining equal, are brought about by the mere passing of time as a consequence of the different valuation of present goods and of future goods. Worker means man in regard to the employment of the factor of production human labor. Thus every function is nicely integrated: the entrepreneur earns profit or suffers loss; the owners of means of production (capital goods or land) earn originary interest; the workers earn wages.
No it is not. As I already told you, I make profit all the time and I’m not speculating. I offer my services to customer, if he accepts, I work. He pays me 50% before I start to work, and 50% when I finish. I have profit, and I did not speculate, and what is more important, no one else speculated between me and my customer.
Lots of speculation there. One that when you offer services, there is someone to take your services. That you will receive your final 50% when the work is complete. That your cost to produce won’t exceed the cost you quoted (you cannot lock in the unknown unknowns which could disrupt your work) and so on.
There is uncertainty in all economic activity.
You did speculate. As Mises wrote, ALL action involves speculation, because in the real world, uncertainty is pervasive. When you trained for your profession, you speculated that their would be a market for the skills you were acquiring. As you are doing the job, you are speculating that your employer will follow through with the other 50%. You are speculating that activities of your job won’t cause an accident to befall you. You are speculating that spending your time on THAT job will be more remunerative than spending it on some other job.
What you are calling profit is not pure profit in the Misesian sense; it is income. The component of your income that you would have received even in an evenly rotating consists of WAGES, not profit.
Realize that you move from example to example, or analogy to analogy, you are diluting the actual question and the answers you can ascertain.
Because the future is uncertain, because there is more than 1 person on the earth, becase of human interaction and the endowment of subjective value upon all items of worth, … there is only speculation. Speculation is the beauty of a free-market and of the social contract. It indeed will include ethics and personal obligation on the part of both parties in order to fulfill the current transaction and another one in the future.