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Discussion in 'Chit Chat' started by Jakeman, Aug 6, 2007.

  1. Jakeman

    Jakeman MSC Founder and Donator

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    I am not a stock market investor. The system seems flawed to me... you put money into a pool where it sits and does nothing but respond to the whims of people like this:

    http://www.liveleak.com/view?i=de8_1186355765

    ...the money doesn't do any real work to earn its profit, i just sits idle and profit magically appears (or disappears).

    The stock market shares a lot in common with pyramid schemes. You have a system where profit is a function of continued investment. That is to say that investments are profitable only if people invest. It is a means to itself, just like the pyramid. Those who get in early benefit from those who get in late, just like the pyramid.

    Pyramids are illegal because they employ an investment structure that is not sustainable and that is based on a product that has no intrinsic value. To be fair, the stock market represents companies that have intrinsic value, but that value is abstracted through public whims like speculation and fear mongering which have no value. The two people in the video discuss how this public perception is used to control the market. Most people today make investments based on this public perception. The rest of the people invest based on long term trends which also ignores the intrinsic value that exists. When was the last time you heard of some one buying stock because they believed in the value of the company... not the dollar value but the intrinsic value of the service. The market sells abstractions that have no value, just like the pyramid.

    As for the investment structure of the stock market, I think of it as a bunch of narrow pyramids. The market isn't exponential and fixed like the pyramid, but there is a widening downward growth as the value of a stock goes up through continued investment, where the people who buy low benefit from the increased value of the stock that is created by those who buy high. As with the pyramid depth, the stock market has no maximum dollar value for any one stock, people just try not to buy when that stock tops out because they need growing room. When a stock is exhausted and fails to show returns, the pyramid collapses and people try to get in at the top of another stock.

    Some people tell me that my perception of the market shows that I don't understand how the system works. Then they try to convince me to invest. Why do they care if I invest? It makes me think they are serving some self interest in trying to convince me, like they are trying to justify their confidence in the system which is required for their investments to grow.

    :suspect: :monster:
     
  2. OsIriS

    OsIriS Peasant

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    There is a quote in Gravity's Rainbow by Thomas Pynchon that I'll pull for you when I get home about the stock market. It's brilliant. I won't try to paraphrase it now.
     
  3. Wulf

    Wulf MSC Knight and Donator

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    Actually, if you invest into stocks that pay good dividends you can make a lot better money than on the crap amounts that banks pay you for interest. Its basically the same thing the bank is doing with your money anyway. You give it to them, they mark down how much you have given (Your account) and then throw all your money in a big pool, which is then used to buy stocks, funds, etc. They get a great return on some, not so good on others, and then give you a teensy percentage of that return, using the rest as profit and to cover accounts when their investment turns sour and the person suddenly wants their cash.

    So basically, even if you refuse to work the market, if you use a bank you are anyway. Me I cut out the middle man, and by investing in lots of different companies that pay anywhere from 75ยข to $1.50 per share every few months I am going to be making a few thousand dollars in 'interest' over the few hundred I would have gotten in a bank.
     
  4. Jakeman

    Jakeman MSC Founder and Donator

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    So what's your point? You seem to be making incomplete practical arguments in response to my fundamental arguments. I suppose I could run with it and argue that you ignored several important practical considerations like investment security, principal insurance, and negative gains, but none of that has anything to do with my more fundamental concerns about the stock market. I suppose you could argue that the practical benefits of the stock market outweigh the fundamental problems, but that wouldn't be my first choice.
     
  5. Wulf

    Wulf MSC Knight and Donator

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    Oh, its not for everyone, thats for sure, however most people I run into don't know that their money isn't just sitting in the bank gaining their interest. That was my main issue.
     
  6. Lurk

    Lurk Peasant and Donator

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    The money does not sit in a "pool." When you buy stock you own a portion of the company. Stockholders are paid dividends and share in the profits and losses. If a company's profits go up, the dividends it pays to it's stockholders go up, thereby enchancing the public value of the stock. The converse is also true. It's not magic. It's supply and demand. Capitalism.

    This really is not an abstract concept. Long-term stock prices are reflective of the true value of a company and its service.

    "Public speculation and fear-mongering" do affect stock prices in the short term. But day traders will inevitably fail. Always.

    Stock market investing is for the long haul, always remember that.
     
  7. Wulf

    Wulf MSC Knight and Donator

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    Exactly. What I invest in stocks is mostly for the dividends. The lower the price of the stock goes, the better the gains over time are, due to the larger buying power the dividends can get me of the devaluated stock. Then when it goes up again, large increase in profit, which can be reinvested somewhere else or put into savings.
     
  8. Gilgamesh

    Gilgamesh MSC Footman

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    You must always remember that investing in anything always has a certain amount of risk. Even putting your money in the bank does have a certain amount of risk... Ask all those people back before the great depression where their money in the banks went to.

    The question is, how much risk are you willing to accept for the amount of gain you wish to get. Plus factor in the fact of how long you have before you wish to retire and live off of your investments, because that is exactly what you will be doing. It's not a question of should I invest versus not. To live comfortably in your retirement years, you will need to have a good portfolio, diversified enough to create enough revenue for you to live off of.

    Depending on the years you have till retirement, and for the sake of arguement, lets say everyones young and has a long time, like 40 years. Like Lurk said, investing is a long-haul deal. Take the bad with the good, and in the long haul, you come out on top. You invest in moderate to low risk levels, and add in a dash of mod to high risk for spice. That way, you have constant earners, while possibly gaining large increases here and there. If you can average out at 8-10% per year, your doing great. If your impatient, and you go high risk, you could earn upwards of 20-40% per year returns on your investment, but could alsp lose some or all, too...

    Talk to an investment advisor, but you should invest in something: 401K, Roth IRA, Mutual Funds, Money Markets, CD's, etc... You could also play the market yourself, which is alot more time consuming since you then need to be fluent in the trades and dealings that are happening in the finance world so you are aware of what you are investing in, change of fortunes in your holdings, etc... A good advisor will do that for you and not charge you, since they get paid by the firms they invest in...

    And invest often... If you invest $1,000 once and watch it, it goes basically nowhere. If you invest $500 per year for 20 years, it will earn more. Need money to make money, blah blah blah..
     
  9. Jakeman

    Jakeman MSC Founder and Donator

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    Now this is off topic. I wrote a big post comparing savings accounts to various types of investments but then I realized it had nothing to do with my original post so I deleted it.
     
  10. Elbereth

    Elbereth MSC Commander and Donator

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    There is no pool - like Lurk said, you are buying a piece of the company with stock. The profitability of the company is not affected by the stock price, the money paid for stock goes to the previous owner (IPO's excepted). The company's performance does affect the stock price though - everyone wants to buy a winner.

    Smart people do buy stocks based on the company, not the hype. Although you can jump in and ride the hype, it is risky. I bought Apple stock 5+ years ago based upon anticipated gains. :D I sold it to finish school, so I missed this latest surge :( - but I got what I needed from it.
     
  11. Jakeman

    Jakeman MSC Founder and Donator

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    I already acknowledged in my post that stocks represent publicly traded companies. That was nothing more than a related fact. It wasn't even a setup for my points.

    Your last comment ("everyone wants to buy a winner") is more to the point. The vulnerability of the market to public whims is dangerous. Just the other day all of the world markets took a big hit because of fear over the global credit market. You can talk about real companies and real profits all you want, but in the end public whims have veto power over that reality.

    More practical advice... unfortunately I don't trust the system to begin with.

    We are not connecting here. It is like if I were to argue that war is bad and you guys responded by telling me how to win a war. There is a clear disconnect here.
     
  12. Kalgareth

    Kalgareth Peasant

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    Both of these arguments are flawed. There is no "public whim" arbitrarily at work here and the "fear" is very justified. The current crisis has been a long time in the making and the panic is being caused because of realities within the credit and mortgage industries.

    Let me explain just a little bit. A few years ago when the federally issued interest rate were at historic lows LOTS of people bought homes. Many were stupid and often would purchase homes with mortgage payments well beyond their means and often got sucked in to terrible deals with banks and creditors that would adjust their interest rates over time. As these interest rates have slow risen and the first few cycles of the adjusted deals are starting to impact these homeowners it is estimated that 7 million homeowners will loose their houses to foreclosure. This has a trickle down effect on the big corporations behind much of the loans. Foreclosures hit them hard in that they aren't making as much money as they were projected to make. This causes their stock values to crash, and since many of these groups are tremendously big parts of the economy and huge losses are being felt by many investors the entire market as a whole is being affected.

    That is a huge oversimplification, but the general ideas are correct I believe. That being said, you have to understand that there is some speculation like you are talking about Jake and a few of the comments you make about pyramid schemes may be somewhat correct as well in the most general sense. BUT there are fundamental differences in that the stock market is based on real world companies.

    Watch this video if you wanna hear have some of the jargon from your first link explained a bit. It also does a pretty good job of pointing out how ridiculous these credit companies have been acting and how we, the tax paying public, just recently bailed them out.

    http://www.videosift.com/video/Annotated-video-of-Jim-Cramers-meltdown

    As for friends trying to get you to invest... well... if you invest conservatively, diversify your portfolio, and realize that you should be in it for the long haul then there is no better way to make money without doing anything. The economy of the US in particular is growing in general and you will make money. The system may have flaws but it works.

    Oh and for an example of this:
    I am still kicking myself for not investing in Google when they went public. I knew their "services" would be stellar.
     
  13. Jakeman

    Jakeman MSC Founder and Donator

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    So stupid people caused the mortgage crisis, yes? Call it what you will, but for me that qualifies as one of those dangerous public whims. I don't trust an investment system that is vulnerable to the stupidity of the masses.

    I know there are differences. I already acknowledged that the market is based on real companies. Why do people keep restating that fact? I never said otherwise.
     
  14. Delphiki

    Delphiki MSC Friend

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    not so much the public's fault as is the goverments as this video illustrates.

    http://video.google.com/videoplay?docid=-9050474362583451279
     
  15. Kalgareth

    Kalgareth Peasant

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    Stupid people combined with greedy corporate people. Some would argue that the great depression was caused by similar stupid people and greedy corporations. The difference is that the entire investment system doesn't generally work like this. But you have a valid point in not trusting the system. But also realize that, as an intelligent person, you could generally see these glaring flaws and avoid them and even profit from other peoples greed and stupidity. There were definitely big winners in this whole fiasco.

    As for the second part, I think people keep restating it because calling the stock market a pyramid scheme is a fairly radical analogy and you didn't just say it once or twice off hand, rather you made it a major crux of your argument. /shrug. Don't take it personally or anything.

    Watch that video I linked in though if you haven't already. Gives the other side to Cramer's insanity.
     

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