I’m going to indulge in a common fallacy for a moment here – and write a little bit of opinion that is 100% outside my area of expertise. This is a common way for even clever people to wind up looking like idiots – but hey – so are blogs:
technolope shared an article recently: http://www.hussman.net/wmc/wmc100308.htm , by a fellow with a “long memory.” The core of that article is the observation that sometime in the 1990s the American stock market completed a transition from what might be called “fundamentals based” trading to, perhaps “technical” trading. Rather than trying to predict the behavior and profitability of companies – people took to trading against pure patterns in the market itself. This has led to increased volatility, wildly inaccurate pricing, and bubble after bubble.
Note that bubbles are nothing new – they just come much, much faster in the new world.
My opinion: He doesn’t take it far enough. The old model might be summed up as: “Investing is putting my money to work. I will buy into the American growth engine. As the (piece of the) economy (that I own) grows, so does my wealth.” People would buy pieces of corporations based on business fundamentals, expecting “their” companies to use the money wisely and to make a profit over the long haul based on long term growth and dividends.
The new school might be, by contrast: “Investing is a fast paced, high stakes game. I will go to the poker table to fleece these other rubes out of their coin.” The thought that a shareholder might -actually- own a piece of a real company is far from most investors minds. In fact, the person who wants to buy and hold – hoping for either dividends or (snort!) long term growth is just an old fashioned sucker in this new world. He’s the guy who dumps some money on the table and then flirts with the cocktail waitress all night – assuming that his pile of chips will take care of themselves.
That guy? That’s you and me and our 401k plans.
The core difference, to me, is that in the old model it was explicitly possible for “everyone” to win. Sure, some companies would not grow as fast as others – but since the overall economy was the basic mechanism of profit – the game was non-zero-sum. Interestingly, the old system actually reinforced that economic growth because companies who looked likely to succeed in the long haul got valued more highly – and had more capital to work with.
In the new model – there is no time for that sort of thing to work. I’m counting my profits by the day and by the week. Therefore, my profits cannot come from the business or the economy at a whole. They must come from your losses – and vice versa.
The new system *explicitly* removes the most important good feature of the old fashioned stock market – putting capital to work in the economy. Because profits are instantly removed and redistributed – it actually removes money day-to-day and punishes companies who focus on business fundamentals.
What does this do for me as a guy in my 30s, trying to save enough money that I don’t have to be a Wal-Mart greeter in my 70s? Well, it means that my answer to that old question “what’s your tolerance for risk” is “I have no stomach for it.” Don’t put my chips on the table at all. I’m an old fashioned, utilities, T-bills, and specific companies kind of investor. You want my money, mr. company? Pay regular dividends and show me the math about how you’re going to grow steadily over the next 20 years.
I have no interest in contributing to wall street bonuses – so I’m getting out of the street.
See ya – suckers. True, there’s no free drinks from the cocktail waitress – but at least I’m not destroying America.