I will confess that economics, investing, and finance are not my strong suit. I have, for the last six or so years, been really troubled with the way it all works. Maybe it is my ignorance that makes me feel this way or maybe what I feel is actually based on some truth.
The idea that we invest in our future by purchasing stocks – the preferred method – has been promoted and bought into and made the cornerstone of how we prepare for retirement. I understand the principle behind it. Company A needs capital to start or grow, it sells shares as a way to get this capital. What I take issue with is how the value of my share is determined.
Oh yes, they calculate and put the numbers together and get a price to earnings and ratios and blaw blaw blaw. But what it all comes down to is finding someone who will buy my share for more than what I paid for it. All this ratio stuff and prospectus and business plan nonsense does nothing but sooth some other investor so he invests in the company buying my share for more than I paid for it.
Yea I know, over time, this has been the best way to make money, but it still is based on finding someone – a sucker? – to purchase my share for more money that I paid for it. They need to believe that the share I want to sell is worth the value they want to pay for it. It would be nice if it was based on something tangible – like price to earnings – but it is really based on the mood of the market. How many times have we heard the phrase “Investors are nervous’? Nervous about what? Not about the company and how it is operating but about the ability to find another investor willing to buy their shares. Fundamentally the company (i.e. Caterpillar) is strong as ever, but now dependent on the mood of investors which determines their fate by acting or not acting.
The money made on stocks is all about hype – legal hype – but hype nonetheless. We need a system that allows for investment to help companies grow and expand and we need a system that calculates risk and reward better and more evenly. Our current system is all about whims and moods of a handful of people we have put stock in – both in terms of our money and our trust in their judgment. What annoys me it that all of this will be summed up as “well that’s just risk – there is always risk involved.” I say no! – risk is investing in new technology that does not work or continuing to operate in the hopes that your product will out sell the competitions. That’s risk, not the investing we do now hoping that the bubble does not break too soon. That’s not investing – that’s gambling.