February 2, 2021
My Dear Reader,
Over the past week, it seems as though the mystery of short trading and the tools with which numerous hedge funds on wall street use in order to generate huge returns has been solved for the general public. While it may be anecdotal, I have seen many memes in sales and finance groups over the years, created around the “glories of wall street” that seem to somewhat idealize the stock trading itself. We have a grandiose idea of stock trading in our heads, probably produced by a handful of Hollywood movies and our preconceptions around wealth, that lead us to idealize having “money in the market”. As one of my mentors said “The stock market is a place for the rich to park money and for poor people to think they’re rich.”; it seems as though many people on both the left and the right are finally waking up to the realities of the 2021 market. No longer do we care about the long term health of a company or the potential dividends over time, but the “sizzle” and the flash comes from speculation – a topic that we have covered numerous times.
In fact, the shift from a dividend based market strategy to a speculatory one is fascinating.
In 2014, an illuminating article in The Conversation documents the changes in the mindset
“Matters changed starting in the 1960s. The move from dividends to capital gains had begun in earnest. Speculation now meant investing in the hope of capital appreciation – that is, selling to somebody for a higher price than you paid. Economists writing in the new field of finance claimed that speculation didn’t really exist because markets efficiently priced securities at their anticipated earnings discounted to their present value. This meant that a share of stock was worth what you paid for it. That was investing, not speculating. Cold hard realities have brought this belief into serious question.”
What this indicates is that instead of trading on facts and known commodities, a shift began in the 1960s that moved towards what people PROJECTED and BELIEVED to be true about the value of a company over what is their ACTUAL value. The same article goes on to describe other speculative times in history.
“The tulip mania in the Netherlands in the 1600s is often considered this first recorded speculative bubble. The price of tulip bulbs surged in value then suddenly collapsed. There is less doubt about the speculative nature of derivative securities that began to develop in the 1990s and exploded at the turn of the 21st century. Those “claims on claims” (or, in Warren Buffett’s felicitous phrase, “financial weapons of mass destruction”) split up the underlying financial assets into ever smaller pieces.”
While the rapid gain of Gamestop stocks over the past few days have produced great gains for some and obviously great losses for others, this cannot be a decent long term strategy. Due to the inherent risk of speculation, it creates a situation in which retirement savings are essentially bet in a casino and no one beats the house.
To Your Creation and Potential,