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ed_rexIf economics is "the dismal science" those MBAs, turned out like so many widgets during the past 20 years, who now control billions upon billions of dollars of investment capital have - yet again - proven to anyone paying attention that a university degree is no proof of intelligence, let alone of wisdom.
Google stock closed down 7%, or $27.75 per share, today.
Why has this happened, I hear you cry. Has Google blown a major investment? Is it being sued for copyright infringement or has it been targetted by US anti-trust investigators?
Er, no.
Well, has another company launched a vastly superior search engine?
No again.
Apparently, Google is "worth" 7% more now than it was this time last night because one of its executives, George Reyes told an obvious truth when asked about Google's prospects for growth in the short-term future. He said that Google is unlikely to continue growing at the pace it has maintened over the past 18 months.
To quote from the CBC's story,
I suppose it proves only that I am naive in thinking that, possibly, some of the traders out there investing your wealth (not mine; I don't have an RRSP to speak of) might have learned something from the last bust following a lunatic boom. After all, it was only 5 or 6 years ago, wasn't it, the last time we all expected economic growth to continue at an exponential rate for, er, ever?
But of course, the market isn't rational. That is, it operates according to certain mechanical rules, but the steering is done almost entirely by (almost entirely) men who are not nearly so clever as they believe themselves to be. And its original purpose - to raise funds for industry and enterprise - has been almost entirely lost in the short-term gambling that is stock trading as opposed to investing.
In other words, the stock market has become a game, a casino, where monomania is not just the rule, it is virtually a requirement. Like a conclave of shamans poking the entrails of a deer with a magic stick, stock "analysts" read corporate pronouncements for their "signals" and then, with a terrifyingly consistent mob-like behaviour, they buy or sell as one man.
Don't get me wrong. Investment is (often) a good thing. Capital liquidity is (often, and within reason) a good thing. But moving investments around like so many poker chips does no good for anyone but the traders themselves, who get a percentage of every trade.
It's time to make the stock market useful again. I just happen to have a Modest Proposal as to how this could be accomplished.
Basically, the idea is a variant of the Tobin Tax, in the economist James Tobin proposed "[a] uniform international tax payable on all spot transactions involving the conversion of one currency into another, in both domestic security markets and foreign exchange markets..." with the goal of discouraging speculation for and against, for example, the Canadian dollar.
I propose something simpler and possibly more radical: A graduated tax on financial gains from stock transactions.
In essence, traders would be punished for making a quick buck in the stock market, rather than investing for the long term. To do this, profits from "stock-flipping" would be taxed at a descending rate.
If one "earns" a profit of $1.00 on a $1.00 investment within one year, the tax would be 100%.
If one flips the stock within two years, the tax would be 75%.
Three years, 50%
Four years, 25%.
After 5 years holding on to the same stock, any profit would be the investors to keep.
What this would accomplish is two-fold. First, it would put an awful lot of stock brokers out of a job and force them to find honest work, while freeing up a good deal of potentially useful investment capital in the process. Second, it would strongly encourage those investors who remain to think about the long-term value of their investments, rather than to focus on their reading of the psychology of the market.
All right. That's it. There are at least two of you (probably) reading this who I know will think this the most stupid idea they've ever heard of. Have at me, kids. But no ad hominen attacks, this time, okay? I really don't like those.
Google stock closed down 7%, or $27.75 per share, today.
Why has this happened, I hear you cry. Has Google blown a major investment? Is it being sued for copyright infringement or has it been targetted by US anti-trust investigators?
Er, no.
Well, has another company launched a vastly superior search engine?
No again.
Apparently, Google is "worth" 7% more now than it was this time last night because one of its executives, George Reyes told an obvious truth when asked about Google's prospects for growth in the short-term future. He said that Google is unlikely to continue growing at the pace it has maintened over the past 18 months.
To quote from the CBC's story,
"Most of what's left is just organic growth, which means you have to find ways to grow your traffic," Reyes said. "Clearly, our growth rates are slowing, and you see that each and every quarter."
Reyes later put a more positive spin on his remarks. "I am not turning bearish at all," he said near the end of a 45-minute session that was webcast. "I think we have a lot of growth ahead of us. I think it's just a question of at what rate."
I suppose it proves only that I am naive in thinking that, possibly, some of the traders out there investing your wealth (not mine; I don't have an RRSP to speak of) might have learned something from the last bust following a lunatic boom. After all, it was only 5 or 6 years ago, wasn't it, the last time we all expected economic growth to continue at an exponential rate for, er, ever?
But of course, the market isn't rational. That is, it operates according to certain mechanical rules, but the steering is done almost entirely by (almost entirely) men who are not nearly so clever as they believe themselves to be. And its original purpose - to raise funds for industry and enterprise - has been almost entirely lost in the short-term gambling that is stock trading as opposed to investing.
In other words, the stock market has become a game, a casino, where monomania is not just the rule, it is virtually a requirement. Like a conclave of shamans poking the entrails of a deer with a magic stick, stock "analysts" read corporate pronouncements for their "signals" and then, with a terrifyingly consistent mob-like behaviour, they buy or sell as one man.
Don't get me wrong. Investment is (often) a good thing. Capital liquidity is (often, and within reason) a good thing. But moving investments around like so many poker chips does no good for anyone but the traders themselves, who get a percentage of every trade.
It's time to make the stock market useful again. I just happen to have a Modest Proposal as to how this could be accomplished.
Basically, the idea is a variant of the Tobin Tax, in the economist James Tobin proposed "[a] uniform international tax payable on all spot transactions involving the conversion of one currency into another, in both domestic security markets and foreign exchange markets..." with the goal of discouraging speculation for and against, for example, the Canadian dollar.
I propose something simpler and possibly more radical: A graduated tax on financial gains from stock transactions.
In essence, traders would be punished for making a quick buck in the stock market, rather than investing for the long term. To do this, profits from "stock-flipping" would be taxed at a descending rate.
If one "earns" a profit of $1.00 on a $1.00 investment within one year, the tax would be 100%.
If one flips the stock within two years, the tax would be 75%.
Three years, 50%
Four years, 25%.
After 5 years holding on to the same stock, any profit would be the investors to keep.
What this would accomplish is two-fold. First, it would put an awful lot of stock brokers out of a job and force them to find honest work, while freeing up a good deal of potentially useful investment capital in the process. Second, it would strongly encourage those investors who remain to think about the long-term value of their investments, rather than to focus on their reading of the psychology of the market.
All right. That's it. There are at least two of you (probably) reading this who I know will think this the most stupid idea they've ever heard of. Have at me, kids. But no ad hominen attacks, this time, okay? I really don't like those.
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Date: 2006-03-01 07:53 pm (UTC)Aw, Jesus Christ motherfucking hell, even part two exceeds the character limit. I'm surprised LJ isn't bankrupt already.
1) You're making investing in the stock market akin to investing in the traditionally safer but less volatile capital retreats...You're throttling the profit potential but without staunching the loss potential, effectively making investing in resources more viable than investing in innovation...
Perhaps so, in which case the same mechanism should be applied to commodities.
I knew you would say that. As usual, you want to impose sweeping new laws onto the masses to prohibit their freedom just to punish a tiny fraction whom you see behaving irresponsibly (trying to make money quickly). How draconian. Soon under your government everyone will have to wear helmets everywhere. Anyway, you apply the mechanism to commodities, without realizing that actually, everything is a commodity. So now that you have stifled investment in resources, our money goes elsewhere. Into cars and baseball cards and artwork. Do you put your tyrannical little chokehold around those now? Prevent artwork resale within a year for profit? What next? Is it OK to sell my house the same year I bought it and make a profit, or would you rather people were forced to live somewhere a year before moving? Is the instability of people's free movement unsettling you as well?
2) Your plan throttles innovation. People invest in what they see being the technology of tomorrow, and companies IPO to generate the capital required to do that R&D and bring that innovation to the market as quickly as possible.
You're buying into the myth, not the reality. People in fact, hand their pension funds over to money managers who mostly spend their time trying to out-guess other money managers. In other words, most investment decisions are made with an eye to what is sexy, not what might make good investments.
No, you're insane - you think Google in any way represents the actual stock market. You think a newborn stock in which there is expected volatility in an emerging technology somehow represents what actually happens to all stocks instead of the opposite: it happens to almost none.
Your plan requires investors to be clairvoyant.
No more so than now. The only difference is they have to be better clairvoyants in order to make significant profits.
Yep. And the more clairvoyant you have to be, the safer you're required to be to mitigate the potential loss. A very anti-innovation, anti-technology economy. May as well buy oil and invest only in car companies that promise to keep using my oil.
Don't be silly, I did not presume that all stocks accrue value. Nor did I assume or even imply that my proposal doesn't permit mis-steps. Quite the opposite. My proposal acknowledges that mis-steps sometimes happen, but encourages investors to take the long view and not (for example) dump their shares in Google its executive speaks plain sense.
Investors already take the long view - that's what RRSPs and mutual funds are for. You seem to think there's only one kind of investment, the kind where money managers read tech articles and try to outguess each other. But that's what they ask you when you give them your money: do you want to build your money relatively safely but slowly and retire on it; or do you want to try at greater risk to make some money quickly. Where's the problem? The only problem I see is that you think all people ought to have your goals, and those that do not should be legislated into having them.