Google Exec States Obvious Truth! Markets In Turmoil!

[ed_rex]

If 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,

"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.

Comments

[colinmarshall.livejournal.com]

I see how the tax would work, but what exactly are you saying is wrong with trading as currently conducted on the secondary market?

(P.S. I think there's a stray line at the bottom of your original post.)

[sck5000.livejournal.com]

I hope I'm one of those people, because this is just about the most stupid idea I've ever heard. Why would anyone invest at all if the moment they purchase the stock they have automatically given up their financial liquidity for at least one year unless they are a) willing to take a loss, or b) give up any current profit (an effective loss since otherwise that money would have been accruing interest or otherwise useful). Just about every purchase is now more attractive and safer. There's no motive to take the risk that the stock might drop. If the stock goes up, I have to wait five years to capitalize on it; and the stock has five years - five years of potential war, pestilence, nuclear attacks, financial mismangement, crime, and god knows what - in which it can drop below my initial purchase price and leave me with less than I started. You're suggesting a game of roulette where I have to win continuously for five years straight to win, but a single loss can bankrupt me.

Here's also why it's stupid:

1) You're making investing in the stock market akin to investing in the traditionally safer but less volatile capital retreats, like gold, but without mitigating the risk factor. You're throttling the profit potential but without staunching the loss potential, effectively making investing in resources more viable than investing in innovation. Investors typically "retreat" back to gold and capital markets during times of geopolitical volatility - they give up the potentially wider profit margins of funding innovation and technology for the safety of a stable resource. By killing the potential profit margins you've just made investing in gold and garden gnomes more attractive than investing in technology. So basically, everybody becomes hoarders, a 3rd world country in which the economic system favors keeping diamongs locked in safety deposit boxes over funding - say, cancer research.

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. Your plan requires investors to be clairvoyant. They not only have to guess what will be innovative next year, they have to have the foresight to anticipate where next year's innovation will lead to the following year (since that is the first year they stand to gain), and then if they don't want to have most of the reward for their risk taxed away immediately, they have to have had the foresight to know what the innovation of the second year will springboard into the third year. If they want to realize the profit from their risk in investing in innovation fully, the investor has to be able to see five years into the future - to anticipate each technological stepping stone and how it leads to the next, all correctly, without having the company make a single misstep in their product cycle. All for an assumption you seem to have taken as a presupposition: that all stocks accrue value.

3) You slash the population of stock brokers in half but unleash a trillion new lawyers on the planet. Now into the second year of my investment, where I finally stand to gain all of 25% of what I actually gained for my risk (assuming I didn't actually lose anything) - it is the management of the former fiscal year who is responsible for any fuck-ups. It seems to me that erroneous financial statements or ambiguous press releases from any company now become litigable back into previous fiscal years. After all, with such a long chronological gap forced upon me by a technophobic innovation-hating government in which I can finally realize the fruits of my five years of clairvoyance, companies now become accountable for their statements five years into the future.

Anyway, your idea just seems to me unnecessary and trying to fix something that's not broken. If investment fund managers are wrong about companies like Google then so what? That is the risk those investors were willing to take in order to achieve a potential gain (and incidentally, they did gain - Google IPO'ed at something like US$87 and it's now well above $300). Where's the problem? Who is the victim?

Taxing ideas

[cool-hand89.livejournal.com]

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.

Take it from a professional: your tax proposal is unenforceable!

[lykshweetdood.livejournal.com]

Well, thank god, I didn't understand half of that don't own any google stock?