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The Almighty Buck

Pinball Wizard's Journal: Stock market a crapshoot? 2

Journal by Pinball Wizard
If capitalism is so rational, why is the stock market such a crapshoot? The basic tenents of capitalism I can deal with, but sometimes the stock market, which seems to control the overall economy and job situation, seems very flaky. Consider this news bit I pulled off Yahoo today.

NEW YORK (Reuters) - Stocks fell on Thursday as warnings from companies like Lucent Technologies Inc. and surprisingly soft U.S. retail sales data dampened investors' hopes for a swift rebound in corporate profits.

Um, hello, McFly? Wasn't Lucent one of those fucking companies laying off thousands upon thousands of workers? So let me see...you've not only crippled your staff, you are one of the leading reasons(layoffs) people can't afford to buy your products. And the fact that sales are down is a surprise?!

Sigh...when you think rationally, the parts of this world that are insane tend to drive you nuts. Its apparent to me that downsizing only appeases shareholders while at the same time ravaging the overall economy.

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Stock market a crapshoot?

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  • Your short entry actually contains a plethora of things I could expound upon. Don't know where to start...

    Capitalism is a system that only works according to textbooks with perfect information. People assume they have it. In the case of Lucent, they assume that, based on a particular bit of info, the stock is worth X dollars. When that information is 'revised', the value calculation is quickly fixed. The company is no longer worth as much. In some ways, that is rational.

    The problem is that there is too much money to be made in stock trading. By brokers, analysts, etc. Almost everyone but shareholders. But most shareholders are stupid. So, while Lucent's valuation over the next 3, 6, 9 months might be off, they are ignoring future worth. Did the cutbacks gain current value at the expense of income in 2004? I don't know. Probably. But a good chunk of shareholders disagree, and dumped it.

    You are correct that most actions only appease shareholders. CEO's and Presidents of Boards are supposed to maximize shareholder wealth. As I've alluded, the problem is in the wealth evaluation department. Tradtional business school teaching is that a share is worth the current net value of the money it will make for you. But, there is the old 'bird in the hand worth two in the bush' thing going on. A dollar today is worth two that you have to wait until tomorrow to get. Why? You might not get that dollar tomorrow. If you follow the equations out, at some point in the future (15 years??) the value of dividends at that point for today's valuation is essentially zero.

    The problem is that the market is no longer rigged to work that way. You don't buy GM hoping that it will make a small profit and return a dividend to you over the next 30 years. You buy Yahoo, hoping it will be worth twice as much next week. Again, too much money to be made on commissions. That's why I chose a fund(s) from my company's IRA that have 5 year+ performance incentives for the fund managers.

    But, yeah, the system is broken. Criminal liability for the likes of Enron and various board presidents is a start. We would be more likely to get honest valuations from the get go. But the problem of how to get investors to 'properly' value a stock... Dunno. I just don't know.

    • If capitalism is so rational, why is the stock market such a crapshoot?

    The stock market, like life, involves risk. If there was a safe investment that always made a good return, then all the money would be attracted to it to the point that it souldn't be such a good return anymore.

    That's why US Treasuries and Passbook Savings have such rotten returns, because they are very safe.

    Anything else involves the risk that it could go down, sometimes dramatically.

    This is all just rational. You seem to think that rational implies easy to understand or easy to predict. It doesn't.

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