Friday, August 01, 2014

Why You Really Aren't "Investing" In the Stock Market

Important economics lesson here boys and girls!

What does it mean to "invest?"

Well, if you're leftist it means to take other people's money and piss it away on worthless social programs, typically headed up by connected cronies in the non-profit world.  For example we "invest" in our children in the schools, but they don't learn anything and are ranked near Mexico in terms of standardized test scores.  We "invest" in communities by building (Mark Dayton's favorite) "community centers."  they don't do anything but provide a place for bums and poor people to stay warm during winter or have social workers baby sit other people's kids during summer.  In every case, the people who "invested" the money never see a dime of return because...well...the truth is those REALLY AREN'T INVESTMENTS!

You see, an investment has to have some kind of rate of return.  Something where you take the money, you INVEST it in something, and that something provides you MORE than what you invested over the course of its life.  If you use this (reality based) definition, you would think this would apply to the stock market.  Your 401k's, your IRA's, your mutual funds!  Those are all REAL investments, right?

Oh, you sad, sad goodie, two-shoes, obedient suburbanite conservative SWPL people.

So sorry, it is not.

You see, the INITIAL trade, the VERY FIRST TIME a brand new stock is sold on the stock market, that is INDEED an investment.  We call this "initial" first time sale an "IPO" or "initial public offering."  This is when a company is looking for investors to finance it.  The company decides to sell some shares in its equity and various institutions, banks, hedge funds and other financial firms pony up the billions of dollars to get in on this "IPO."

The proceeds from these IPO's then go to the company which in turn then TRULY AND REALLY invests it.  They buy assets, they buy equipment, the hire people, they build plants.  They and their original financiers make the REAL investment.  But what happens after that?

How do you good obedient 401k Clergy people "invest" if the large financial institutions did all the "real" investing already?

Well, the answer is - you don't.

You see, for a brief moment in time you may accidentally and indirectly hold some original IPO shares through a mutual fund, but over time (quite rapidly actually) those original IPO purchasers do something with those shares they bought directly from the company.

They sell them.

To who? You, them, each other.

Anybody who will pay them more than what they paid for it.

Once that happens those shares are no longer actual "investments."  They are merely speculation.

This has two ramifications.

1.  This means the entirety of the US retirement planning system is based on speculation.  It's not about "investing in a new company" or "investing in an upstart."  The vast majority of retirement dollars are based on the hope that a savvy analyst or mutual fund manager has found a 10% pricing error in a stock that allows him/her to purchase it and ride that 10% increase up before selling it (and charging you 3% managerial fees).  Of course this says nothing about how now that the share of stock is so far removed from the company that it's economic variables that account for the majority of price swings, and so with QE-291 and artificially low rates prompting companies to leverage up and buy back their shares, OH, and let's not forget you 401k mindless zombies throwing trillions into the market every couple years, the stock market has skyrocketed when there's been no real underlying reason for it to.

2.  The stock market and economic growth no longer have anything to do with one another.

I love it when liberals desperately point to the stock market as if it is some barometer of economic growth, standards of living, or well being in the country.  Nearly everyone under 35 is under/unemployed, we've lost real, fulltime times on a nominal and adjusted for inflation basis, economic growth is lethargy, but hey hotdiggitydoooo!  Dat der stock market broke 17,000!  Obama's a genius!

In there's any explanation why the stock market is NOT the economy, it's that the ONLY economic growth to come from the stock market came from those IPO's.  After that money was invested, there was NOT A CENT MORE of economic growth due to the sale of those stocks.  Thus, any price increases (once again) have absolutely no bearing on any new investment going into the real economy.

Now, I know, I know.  I'm just a party pooper.

I was a party pooper before the Asian currency crisis.
I was a party pooper before the Dotcom crash.
I was a party pooper before the housing bubble
And I was a party pooper before the education bubble.

My question is simply this.

For all of you who got angry at people who said stocks were overvalued in 1999, that housing was overvalued in 2006, and that liberal arts degrees were worthless in 2009 (and there most certainly were VICIOUSLY and FURIOUSLY angry people I had to contend with back then) were the subsequent crashes and economic recessions worth it?  Would you have preferred to have the crashes over me and people like me trying to tell you the truth?  Or would you have preferred to avoid those recessions and collapses by maybe opening up your thick skulls to entertain something that wasn't bread and circus bullshit spoon-fed to you by politicians, bankers, Oprah, media and all the other "feel good, everything is awesome" establishment types?

Wait wait wait.

Lemme guess!

"This time it's different!?"

Enjoy that freaking decline.


For more of Aaron's cheerful tirades, consider visiting his Youtube channel


Jones said...

"Once that happens those shares are no longer actual 'investments.' They are merely speculation."

As speculation, it's worth taking your gains early, hence why you want to sell these not-really-investments so you can continue to speculate.

The over-reliance on speculation is merely a symptom of "lazy investors" who won't create companies, products, or things that are worth investing in.

Want an investment? Put some money behind a plumber or electrician friend so he can expand the business.

Want a speculation? You may as well be putting money into the forex markets, essentially a zero-sum game, since you might actually be luckier at out-guessing micro-trading platforms because banks tend to do unpredictable things.

I'd be happy if lazy American mutual fund and speculation package holders would kindly stop referring to their speculative activity as "investment", because as you rightly point out, it isn't.

You'd think that for all this speculative activity, some of these people would have heard of the "Zurich Axioms", but usually they haven't ...

Anonymous said...

The problem with this line of thought is the implicit assumption that only IPO matters. That is simply not accurate as successful companies continue to expand and issue new stock or borrow money for leverage opportunities as their operations continue.

Even though the secondary stock trades (those made between stock traders after the initial offering) is not actually going into the business, the business will have more or less financial muscle to expand depending on if those trades are going for more money or less money. Their ability to expand and borrow cash is tied to their stock price even if subsequent trades are not going directly to their bank account.

I agree stocks can become overvalued but the idea that you are not fundamentally improving a company's potential to create more economic value by buying its stock is not a correct statement. Perhaps it is not "investing" but it's not pointless either.

Anonymous said...

It still is an investment, because you get dividends. That makes a stock a productive asset. There may be better investments out there--I'm doing pretty well with peer to peer lending and rental properties--but it doesn't mean it isn't one at all. Gold is speculating. It doesn't generate anything new. Companies do.

PRCD said...

Most of your advice is rock solid, Cap. I think you should read "A Random Walk Down Wall Street" and see if it changes your mind on this issue. My own experience with index funds suggests your wrong. The best way to stick it to these elites and globo corps is to achieve financial independence from them. In addition to minimalism, having a nest egg is a huge component of financial independence.

Kristophr said...

Hedge your IRA. All "investments" are stupidly dangerous in the face of currency mismanagement.

Anonymous said...

@ your comment "This time it's different?!"

No. It's no different than it's ever been. And the fact is that our stock market has CYCLES. Anyone with a background in economics knows that business cycles/short term debt cycles etc. affect the economy. Always has, always will.

The stock market apprx 6 years ago fell off a cliff. The SP500 lost 50% of it's MARKET value. Did anyone really believe that the actual earning power of those companies fell by half? The fundamentals would prove otherwise.

The market is currently near an all time high - money is finding it's way into the market, and the p/e of the SP500 is at a ratio of around 20. Not cheap, but nowhere near the overvaluations we saw during the tech bubble.

It's currently business as usual for the stock market.

Anonymous said...

Just to echo some of the other posters, companies use stock in several ways.

* Employees, particularly some executives, are partially paid in stock, often through long-term incentives. Without stock, it would drain cash from operating income.

* Acquisitions of other companies are often funded with stock. Like an IPO, this pays back the original investors, who can fund new ventures.

* Companies issue treasury stock to expand or pay other obligations. Within the past year, at least one casino firm has raised considerable cash with which to reduce the number of outstanding bonds.

That said, many stocks are overvalued and it may be better to buy bonds until that changes.

Anonymous said...

Hey Cappy. What do you think of the newly appointed Admiral Howard.
Do you think she actually earned the job on her own merit? Or do you think affirmative action had something to do with it?

Robert What? said...

So the question that inquiring minds want to know is, aside from unpredictable Black Swan, what economic events/trends will result in a major market pullback - either suddenly or over several months? Some say it with be the retiring boomers drawing down their 401K's (them that's got 'em). Some say it will be when the Fed can no longer keep interest rates artificially low - although they'll probably do that as long as they can. Any thoughts as to what and when?

Hans said...

Capital is productive, not just when it is bought. You buy it for its long term productivity (of course, it wears out and needs to be replenished). Thus the concept of dividends - the production from capital gives surplus value which can be given back to the shareholders.

Also, when......wait, the dividend ratio of the S&P500 was what, you said? 2%? So.....

Nevermind, this comment is superfluous. Carry on.

Grey Enlightenment said...

Google IPO $80 now $1100
Facebook IPO $38 now $73
Linkedin IPO $40 now $200

and many more

There's always going to be risk, but its not a rigged game nor a bubble or a crisis waiting to happen.

Plenty of people, myself included, have made good money with stocks

Kristophr said...

Grey enlightenment:

Recent IPOs have been falling on their face.

Seriously, hedge with stuff that will ride through a crash.

Winter is coming.

Anonymous said...

The movie industry is also in a decline. (This may be a new topic, but I'm sticking it in here for the Captain to find.) See for yourself. Go to The Numbers website ( and take a look at the graph titled Annual Ticket Sales. It is in a downtrend and has been since 2002.

Nils said...

Pretty much mirrors something I wrote as a comment to another post of yours. These days, the IPO usually is just a way for the initial investors to sell their shares.

That's why we call the stock market a secondary market.

It may sound like a game of semantics, but it isn't. People who think of themselves as investors usually have a harder time bailing on their stock holdings - that's why most retail "investors" exit somewhere near the bottom and the professionals make most of the money in the stock market.

Speculation isn't a dirty word in my book (neither is trading). Every business venture has a certain amount of speculation in it. You can't tell the future after all.