Forum Archive Index - July 2001

[Will Bryant <will@sharechat.co.nz>]

> > Investment in the sharemarket is not gambling.  Over the long term, an
> > "average" return in the sharemarket WILL increase your wealth.  While the
> > returns in individual companies are wildly different,
First off, let me say everything in life is, to some extent, statistical in 
nature (nothing's sure except death & taxes [1]), and so I think Phil's 
definition here is about as good as one could get - investing in the 
sharemarket is not gambling, IMHO.

>Therein lies the crux of the matter.  Your term 'investment in the
>sharemarket'  The sharemarket produces no net value.  It is a glorified
>gambling hall, no less, no more.
This however is quite a seperate issue - what is the purpose of the 
sharemarket?  Shares changing hands back and forth does not, as you say, 
produce any value to the company or economy.

The point of a sharemarket is solely to raise funds for the company 
concerned, which they want in order to (say) expand their operations, and 
thus (in the long run) earn greater profits than they would have been able 
to without this capital.

This is of course only relevant at the point of an IPO (or other capital 
raising); after that the only contribution that the sharemarket and 
shareholders provide (as far as creating value in the economy) is to 
enforce rules governing accountability and management standards, thus 
hopefully ensuring that the company is better run than perhaps it might be 
were it completely privately owned and operated from behind closed doors.

However this is all of no concern to the majority of investors, who are 
interested in the sharemarket for one reason: making money.  As far as 
these investors are concerned then, what is the difference between the 
sharemarket and a pyramid scheme?  Nothing, necessarily - thus we witnessed 
the rise and fall of a paper empire in the 80s fueled by the sharemarket.

The solution to this rather philosophical problem, of course, is to invest 
in companies that you believe have value of their own accord, that is, 
aside from the fact that their shares can be easily bought and sold on the 
sharemarket and may increase in value thus allowing you to sell off your 
holding at a profit.

I think it would be fair to say that "value investing" is therefore more 
ethically sound [2]; whether this is important or not to you is a matter of 
individual opinion.


All opinions in this mail are, for once, mine only :)  Have a good weekend all.

[1] Unless you have a particularly good accountant, of course.
[2] Coincidentally, I think value investing is also less risky, as there is 
more of a "reason" for the company's share price to be where it is, so it 
is less of a gamble.  But does that make it a better gamble? :)

_______________________________________________________________________
Will Bryant, will@core-dev.co.nz                    cell +64 21 655 443
http://www.core-dev.co.nz/             Personal: http://carcino.gen.nz/
ShareChat technical manager                 http://www.sharechat.co.nz/
[PGP 0x96A7F40A, FP 827F A2A9 C718 106D 8F80  E16E A244 D5F2 96A7 F40A]


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