Tag Archives: Stocks

Weekend thoughts: Technical Analysis seems like Exegesis

The stock market has been moving lately.  Up,  down, side-to-side, every movement can launch a thousand stories, but lately I’ve seen a lot of stories pop up of how someone should invest in this market and where they should put their money.  I’m not going to say I have the answers to this question, or even the knowledge of how to find the answers, but I’ll lay out the facts of where I think you will not find the answers.

As an overview, the market is down somewhere between 20% and 25% since January.  If you think the market is going to keep going down, you’d be advised to sell your stocks and hold them as cash until the market reaches a bottom and starts going back up.  If you think we’ve reached the bottom you’d be advised to buy more stocks and rake in the profits as the market goes back up.  There’s arguments for both, but some arguments that feel unsatisfactory are those based on technical analysis.  I don’t mean to be unkind, I know many people swear by TA, perhaps even some of my readers, but TA reminds me of something else I know too much about: exegesis.

Exegesis of the bible or any other holy book is supposed to mean explaining the passages so that your target audience will better understand and act upon them.  The problem is you can make exegesis say whatever you want, because ultimately your explanation is entirely up to you.  When Jesus said “a rich man cannot enter the Kingdom of Heaven anymore than a camel can pass through the eye of a needle” what did he mean?  An exegete can claim that this is a metaphor, that the eye of a needle is a metaphor for a very narrow gate which a camel overloaded with goods would not be able to pass through, so a rich man needs to give away some of his wealth to charity and then he can enter the Kingdom.  Another exegete would say that this isn’t a metaphor, it’s a plain statement emphasized with sarcasm.  A camel cannot pass through the eye of a needle, that’s just dumb, and so Jesus is saying a rich man cannot enter the Kingdom no matter how much he gives to charity.  We can’t know exactly what Jesus meant by this because we can’t call Him up and ask Him.  And there are hundreds of passages in the bible that an exegete can claim to mean whatever they want them to mean, as long as you define enough things as being metaphors or sarcasm or straight facts in order to defend your argument.  Exegesis is a way of creating whatever meaning you want out of Scripture.

Technical Analysis seems to do the same thing with stock market trendlines.  The line is going down, are we “testing support” and will soon break through to go even lower?  Or are we “finding support” and will bounce off to go higher?  You can draw the future trendline however you want, and I’ve honestly never heard of a cogent argument proving that some form of TA is true more often than any other form, or is true more often than a random coin flip.  I’ve seen both bulls and bears quote their TA studies to support their points, and yet I’ve never seen the kind of scientific analysis that can prove the methods to be useful.  The counterargument is that many people, some of them very wealthy and successful stock traders, use TA to build their portfolios and so TA must be useful otherwise those people wouldn’t keep doing it.  My response would be that TA is no more accurate than random chance, and since the market is not zero-sum and rises on average ~7% per year, many people can become supremely wealthy based on this random chance while believing they are beating the market.  I don’t know, it all just seems like wishful thinking, and I’d love to be directed towards some studies discussing the efficacy of TA as a strategy.

Can you beat the stock market?

Since my stock posts tend to get the most traction, let’s try this one.  I wanted to post because I was recently made aware of the Efficient Market Hypothesis which essentially states (in its weak, semi-strong and strong forms) that you cannot beat the stock market.  The weak form states you can’t beat the market using prior performance, the semi-strong states you can’t beat the market using prior and current performance, and the strong form states you can’t beat the market using insider knowledge.  Essentially weak = Technical Analysis is useless, semi-strong = fundamental analysis is useless, strong = insider trading is useless.  Taken together, these hypotheses seem unappealing to a day trader or stock picker, as they suggest the only winning move is the boring play of buying whole-market ETFs.  And yet that also creates a weird contradiction because if everyone believed the Efficient Market Hypothesis, everyone (including banks, hedge funds, and investment groups) would just buy and hold whole-market ETFs and never trade stocks individually.  There would essentially be no stock market in that case!

But getting back to the hypothesis itself, why would it be true that you can’t beat the market?  Let’s start with the weak and semi-strong forms, which only make statements about publicly available information.  The hypotheses in this case are yet another statement about the wisdom of the crowd: all of us are smarter than any one of us.  If you try to use available information to guess the next moves of a stock, you will find that the next moves are already “priced in” because the market beat you to it, and so there is no way to buy low + sell high.  Before you want to buy the price will go up, and before you want to sell the price will go down because the market is always faster and more accurate that the individual.  On the face of it this seems like the joke about the two economist walking down the street: one says to the other “look, a 20$ bill on the sidewalk!” and the other says “ridiculous, there are no 20$ bills on the sidewalk, someone would have already picked them up!”  The fact is that there always has to be someone who was first to use some particular information, and does that let them beat the market?  On the other hand this hypothesis isn’t talking about individual events but averaging across all possible events.  Yes you may have bought early this time, but you can’t consistently buy early and so you’ll buy late and lose as often as you buy early and win.

As to the strong form of the hypothesis, it’s the least defensible because remember it basically states “you can’t make money via insider trading.”  The conceit is that in this case any insider information isn’t purely such, and the wisdom of the market can “price in” insider information thanks to the constant stream of rumors and leaks that even the tightest-run ship is subject to.  Still strong-form hypothesis proponents were quick to point out that this doesn’t necessarily mean insider trading shouldn’t be illegal, it can still be true that the actions someone will take in order to perform insider trading are harmful and so insider trading should be banned.  Hiding bad or good information, making very short term decision to boost the stock at the expense of long-term corporate health, these are all bad things, even if the people making them can’t actually make money off of them, the fact that they think they’ll make money is reason enough to ban insider trading as a practice.

So to finish this ramble, I don’t know if I believe the efficient market hypothesis.  The weak and semi-strong forms obviously seem the most defensible, but it’s important to remember that many well-regarded stock traders with long histories of success don’t believe it.  And what’s true in mathematical economics isn’t always true in reality

Should hedge funds be allowed to short a country’s debt?

A few weeks ago, I wrote about how credit rating agencies had cut their outlook for Italy, and how this was being blamed for Italy’s borrowing costs going up. Well, Italy’s borrowing costs continue to rise, and this time it’s being blamed on the hedge funds. Whenever I see an article like this make the rounds on social media, I invariably see some of the same comments come up: “hedge funds shouldn’t be allowed to bet against a country like that, they’re making money on other people’s suffering.”

First, I think the moral arguments are misguided. When two companies compete with each other and one drives the other out of business, the successful company could be said to be making money on the other’s suffering. But our capitalist system accepts this as the price we have to pay for an efficient economy, and so I don’t see the big difference between that and countries. Should people not have been allowed to short Lehman Brother’s because its collapse would likely harm the American economy? Surely not, so why should Italian government debt be protected in this way?

Secondly, it’s important to realize that the process of shorting is a mutually beneficial arrangement for both the entity doing the shorting and the one lending them the bond. In order for a bond to be sold short, it must be borrowed, then sold, then repurchased and handed back to fulfill the borrow. The borrowing of the bond generates interest, which must also be repaid by the entity doing the short selling. So bond-holders have an incentive to lend out their bonds to short-sellers because this lets them generate interest and therefore income on their bond. If they were not allowed to generate this income, then the bond would be worth less to them and they would not be as willing to purchase it. This would reduce the demand for a nation’s debt and thus would increase borrowing costs, which is something we’re trying to avoid by outlawing short selling.

Third, how would such a short-selling ban be implemented, and what would that affect? The processes that go into a short sale: the borrowing, selling, and purchasing of a bond, are all legal on their own. You would have to write a new, more complicated set of laws therefor to outlaw short selling but not also outlaw these individual practices which seem good and legal. So once you add this new complicated regulation to the market, how many entities will decide that it’s no longer worth it to invest in Italian debt (which has these complicated regulations attached to it) and will instead just invest in German debt (which doesn’t have these complicated regulations). And even if you could ban short-selling EU-wide, then many organizations would just pull their money out of EU bonds and park it into American, British, or Japanese bonds. People think that countries have all the power in the bond market, that they can set the rules because financial institutions need to buy bonds to make a profit. But countries’ bonds are competing with each other, there’s always another bond market people can invest in, and if you want to save Italian borrowing, then scaring money out of the Italian bond market doesn’t seem like the right way to do it.

Finally, short selling is a necessary part of price discovery. Without short selling, markets would not so easily discover the true price of bonds, and so would operate far less efficiently. Again, let’s say you banned short selling throughout the EU. Empirical evidence has shown that banning short selling only increases trading costs and lowers liquidity. That means that if you banned short selling, there would be less money in the market to buy bonds anyway, which again is counter-productive to Italy’s current predicament. In terms of Price Discovery, the failure of price discovery would mean that all prices would tend to converge together, as there is no strong discovery mechanism to discern them. That means the price of Italian debt and German debt would likely converge because investors would not be able to discern their true prices. This would be good for Italy, in fact it is exactly what some people want to accomplish by banning short selling, it might make it easier for Italy to finance it’s debts.

…but it would be bad for Germany. Germany currently enjoys a distinct position as having perhaps the most highly regarded debt in the Eurozone. That makes its borrowing costs very cheap and makes it easy for Germany to finance its obligations. Now, if the EU wanted they could always ask Germany to help out Italy, in fact years ago there was a call for Common European Bonds aka Eurobonds. This proposal would mean that member states could take out bonds which were to be paid back by all members of the EU together, making it easier for states like Italy to get cheap loans (because they were leaning on the German economy) while making it more expensive for Germany to get loans (because they were propping up the Italian economy). It is important to note that this Eurobonds proposal was soundly rejected by the EU and by the Northern EU member states in particular. Absolutely no one was willing to make Germany’s borrowing more expensive for the benefit of Italy.

So with that said, banning short selling would only accomplish what has already been deemed unacceptable. It would cause liquidity problems in the Italian borrowing market, and it could only help Italian borrowing if it also hurt German borrowing due to obfuscating price discovery across the EU. So why even do it? If Italy truly truly needs help financing its debt, the idea Eurobonds would accomplish exact what is desired without harming the bond market.

Did credit rating agencies make Italy’s borrowing costs go up all on their own?

Yesterday I discussed how credit rating agencies work and why they are a healthy part of a mature bonds market. To recap: credit rating agencies like Moody’s, Fitch, and S&P rate the creditworthiness of nations based on economic and political indicators, and publish those ratings to investors. Investors in turn pay for these in-depth credit ratings to decide exactly what bonds they should invest in and how much. Investors are willing to invest in lower credit-worthy bonds, but will only do so if they can get a higher interest rate due to the higher risk involved. That’s why it is big news when a ratings agency cuts their rating of a country’s bonds, such as Italy. This should directly translate into the market seeing Italy as a riskier investment and thus demanding higher interest rate to buy Italian bonds, forcing the Italian government to spend more and more money servicing its debt and deficit.

That’s the simple part but it doesn’t always work like that. Here for instance is the “spread” between Italian bonds and German bonds, it can be seen as how much more Italy has to spend to service its debt than Germany does. Germany’s bonds did not have any cut in outlook so they should be fairly stable, while Italy’s outlook was cut so it should have even more expensive bonds, right? Well not in this case, Italy’s outlook was cut on August 5th and since then Italy’s borrowing costs have gone down relative to Germany’s. Now I don’t want to ascribe too much to any one thing, analysts have a tendency to over-analyze market moves, but there is a sort of pattern that is often called “buy the rumor, sell the news.” In this case, investors expected Italy’s credit outlook to be cut, so they expected Italy’s bonds to get more expensive. They thus invested in such a way that the price of Italian borrowing went up prior to the actual cut, and then went down after it happened. Regardless, even with this messy pattern it’s hard to say that Moody’s alone was responsible for any increase in Italian borrowing cost, there’s clearly more to it than that.

And that’s an important caveat to the bond markets, Information from Moody’s and other ratings agencies are of course used by investors to inform their decisions, but they aren’t the only thing used. Indeed, Moody’s can sometimes seem reactive rather than proactive, it cuts a country’s credit rating after the country’s borrowing cost has already gone way up due to other economic or political news. Moody’s and the credit agencies are I think a big easy target for financially illiterate commentators because they’re easy to blame. The big bad American ratings agencies cut our credit score and made it more expensive for us to borrow. But these agencies are just one cog in the much larger bond market, and the individual actions of thousands of investors big and small is what causes the change in borrowing costs. If no one trusted Moody’s they wouldn’t have any effect on the bond market, and if they weren’t seen as trustworthy raters of bonds then no one would trust them. But Moody’s doesn’t have the kind of power and authority that its detractors ascribe to it, and Italy’s borrowing costs are expensive for many, many reasons that would not be fixed by Moody’s giving them an Aaa credit rating.

Do credit ratings agencies have too much power?

Recently, the credit ratings agency Moody’s reduced its outlook for Italy from “stable” to “negative”.  For those of you who don’t remember, ratings agencies were some of the key “villains” of the Eurozone crisis of the 2010s.  A ratings agency is simply a company who does research into the creditworthiness of people, organizations, or governments and then sells this information to lenders and investors.  Moody’s is one of the “Big 3” ratings agencies and so its ratings carry a lot of weight, whenever it cut its rating of Italy, Spain, or Greece, lenders would take notice and would consider those countries to be less creditworthy.  This in turn made it harder for those countries to borrow money to cover their expenses, just as an individual with a low credit rating has a harder time getting loans and has to pay higher interest on what loans they can get.  And for countries that were already saddled by high debt, this could be catastrophic.

Whenever Moody’s or another ratings agency cuts its ratings for European debt, the cries arise from various places that these ratings agencies are bad actors who must be reigned in.  People say that they are untrustworthy, they are profit-seeking, and worst of all they are American.  Because of all these things, they should not have this much power over the borrowing costs of European countries.  I think that while there are multiple criticisms to be made of ratings agencies (and I will try to address them later), at least some of this criticism comes from a place of ignorance and I’d like to address this.  

Let me first give a very brief explainer of how a ratings agency like Moody’s works in the context of government bonds.  A bond is basically a loan to a government, when you buy a bond you hand the government some money in exchange for their promise to pay you back over time.  So in a bond market you have the bond sellers such as Italy, and the bond buyers such as the banks and money funds.  Like any loan a bond has an inherent risk, a country that is more likely to not pay back its debts is seen as a riskier investment and must pay higher interest rates in order to sell its bonds on the market.  A government might confidently believe that there is zero risk in their bonds and thus they should only give the absolute minimum of interest rates, but if the market disagrees then no one will buy that government’s bonds and they won’t be able to raise money this way.  But how do the bond-buyers know which governments are less or more likely to pay back their debts?  Ratings agencies like Moody’s look at both the political and economic situations of the governments and come up with a rating, that rating says how risky the bond is and thus how likely it is to be paid back.  That in turn informs the market actors, who will demand higher interest rates for riskier bonds then for less risky bonds.

First of all, ratings agencies aren’t evil entities who make borrowing expensive for the lols, they are simply an element of the division of labor of modern finance.  Financial organizations, be they banks or pension funds or what have you, want to invest in stable, high quality bonds.  But if every bank and fund needed an entire team of analysts to assess exactly which bonds were high quality and which were not, there would be a lot of wasted labor as competing banks paid different people to find the same information.  Instead, banks outsource a lot of this investigation to the ratings agencies like Moody’s, then buy the information provided by Moody’s and use it to understand which bonds they want to invest in.  That in turn is a money saver and so the expenses of the bank or fund are a lot lower than they otherwise could be.  This division of labor is a godsend to modern finance, and to remove it for no reason would not be wise.  Moody’s provides a genuine service, it researches the economies and outlooks of almost every major government and investible corporation, and it has built a reputation of trustworthiness over its long history.

Second of all, ratings agencies have a lot of power in part because the market gives it to them.  Market actors such as banks and funds trust Moody’s and the rest of the Big 3 because of their long history of accurate ratings, or at least being more accurate than their competitors.  Those market actors use the information Moody’s provides to inform their investments, but Moody’s isn’t forcing anyone to raise the price of Italian borrowing, the market actors demand higher costs for Italian bonds in part because they trust Moody’s ratings and Moody’s says Italy’s outlook is not as good as it once was.  If you create a new organization, it wouldn’t necessarily change anything because a new, unproven organization would not be trusted.  The market would still trust Moody’s ratings more and thus Moody’s ratings would inform the price of bonds, this new organization wouldn’t.  You can’t really force every market actor to not use information from Moody’s.  I mean you can try, governments can always write laws, but enforcement of this kind of information ban would be a nightmare and would probably only cause bond-buying entities to flee from the EU bond market altogether because they wouldn’t want to fall afoul of new laws but also don’t want to buy a bond that they don’t know if it’s trustworthy or not.

Thirdly, trying to replace Moody’s is not an easy task and I’m not sure most of the detractors are up to it.  As I said, they only have power because the market gives it to them, so let’s say you put together a “European Moody’s” let’s call it Euddie’s (pronounced YOO-dees), then what?  Euddies won’t have the long track record of Moody’s, it won’t have the trust of the market, and so no one will buy their ratings or use their ratings to inform decision makings.  Instead they’ll just keep using Moody’s ratings and there will be no change to the borrowing price for European countries.  Furthermore, who will run Euddies?  If it’s a private company like Moody’s then you run into the exact same criticisms that people have for Moody’s ie it’s profit focused and shouldn’t have this much power over governments.  The only difference would be the nationalist complaint that Moody’s is American and Euddies wouldn’t be.  On the other hand if Euddies is an EU-level government entity, then who outside the EU would trust them?  EVERY government in the world says it is perfectly creditworthy up until the moment it defaults, so why would investment organizations trust an entity that is controlled by the very governments it is supposed to be rating?  In all likelihood without stringent ring-fencing between Euddies and the governing bodies of the EU, it would be seen as just another government agency like the ECB, without the trust that Moody’s has.  Finally, I don’t think Euddies will solve the problems that Moody’s detractors think it would, nations like Italy are still heavily indebted with poor economic outlooks, any reasonable credit agency will not give them AAA credit rating no matter where the agency is based or who runs it.  There is every reason to believe for instance that Moody’s ratings are as much reactive as proactive, oftentimes borrowing for a country will get more expensive before Moody’s even cuts their outlook.  So I don’t think that a Euddie’s organization giving preferential treatment to European government bonds would really change their borrowing costs when Japanese, American, Chinese, and all non-EU investors will continue to believe that those governments are not as creditworthy as they claim to be.

In conclusion, Moody’s and other credit rating agencies are not bad actors in the market, they are performing a legitimate service for other financial institutions and cannot be simply removed or replaced without serious consequences.  Tomorrow I will try to touch on the differences in borrowing costs between Italy and Germany, and how Moody’s ratings have fit into that.

Do dividends solve inflation?  Yes in theory, who knows in practice.

Congress just passed the CHIPS act giving billions of dollars to Intel, who turned around and cut their fab investments to hand money to investors as dividends.  One of the benefits of CHIPS was supposed to be reducing inflation by increasing the supply of microchips from companies building more fabs.  That obviously won’t be the case if companies follow Intel’s lead in handing the subsidies to their investors as a dividend.  But it made me think of how neoliberal economics believes that inflation is supposed to be self-correcting.

When demand for a particular product outstrips supply, prices will of course rise.  But what are the consequences of a rise in price?  First it means the consumers of the product will have higher costs, but that will incentivize consumers to use less of the product (reducing their demand and thus costs).  If those consumers are companies, then this can act as a market force driving efficiency, companies that can produce the same number or quality of output products while using less of the pricier input products will have an advantage over those who are more hamstrung.  In some ways we are seeing this with car companies offering cars that don’t have the full range of interior knick knacks due to the chip shortage.  If they can still produce a car while using less computer chips, then they will have an advantage over companies that cannot.  This means that the more efficient companies should remain competitive while the less efficient ones get removed from the market, thereby decreasing demand for the chips overall thanks to these efficiency gains.

For producers of the product however, when prices rise the company makes more money.  Now not all that money will be reinvested in the company, a lot of it will be handed back to the shareholders in the form of dividends.  But to neoliberals that isn’t a problem, that’s the solution.  When the company hands big dividends to its shareholders, the price of the company’s stock will rise greatly.  Everyone and their mother will realize that holding that company’s stock will net you a passive dividend income, and will rush to buy up the shares, driving share price up.  As I noted before companies like having a high share price because it gives them a source of money that they control.  They can use that share price to compensate employees and invest in large capital projects, both of which can theoretically lead to higher production either through higher quality/more motivated employees or through more factories or whatever.  And not only that, the return on investment for dividends should cause more money to flow into new companies as well that want to enter the market, because no one can resist those sweet sweet profits.  This higher production means supply increases and the cost of the good goes back down, thus massive dividends from profitable products are supposed to act as a reward mechanism that entices more investors to invest in that sector of the economy.

This paradigm, by the way, is why some neoliberal economists will oppose market interventions to alleviate shortages.  Price controls or rationing of good are supposed to mess up both the demand and supply side of the equation.  If price is controlled then the supplying company can’t make a higher profit, meaning they can’t expand supply and new companies won’t enter the market.  Likewise price controls mean that there isn’t as much gain from being an efficient demand-side company.  Rationing works much the same way as price controls, artificially keeping the price low by constraining demand.

So according to this theory of economics, supply-induced inflation should always be self-correcting.  The high price of chips should have pushed demand-side companies to buy less of them, and supply-side companies to sell more of them, both of which push the price down.  The question is whether any of this works in the real world, and the bigger question is whether the CHIPS act will sufficiently spur investment in fabs considering the money has basically no strings attached.  We’ll have to wait and see if every company decides to act like Intel.

Why do companies give out dividends in the first place?

I took a class on economics in high school, and as part of that class we had a classroom discussion on the stock market.  In that discussion, one of the most confusing parts for me was dividends.  It seemed crazy that companies will just give you free money if you buy their stocks, what do the companies get in return?  Other folks my age were more cynical, they thought that dividends were just how rich people paid themselves to avoid taxes.  Well dividends aren’t free money, and they aren’t *entirely* a tax dodge, they actually play an important part in the stock market.

As stated in a previous post, dividends are one way that a stock has value to an investor.  Even if a stock doesn’t currently give out dividends, there can be an expectation that they will in the future, and as stated the expected value of all future dividends (divided by uncertainty, multiplied by money now>money later) is part of what gives a stock value.  So if companies want their stock price to be high (and thus the value of their company to be high), they will often give a dividend to prop up the stock price.  But why would they care about a high stock price?  The important thing about stocks is that they are a source of money that the company controls.  The company can do a lot of things with stock: it can pay employees in stock, it can raise money by selling stock, it can purchase other companies with its own stock. Money is power, if a company has a whole lot of value because they have a giant stock price, then all sorts of methods to raise money and acquire assets become available.

So dividends aren’t a scam and stocks aren’t a ponzi scheme.  Companies pay dividends in order to have a higher stock price, which they want in order to finance their company’s expansion should the need arise.  These dividends are part of what give stocks value, and they are one of the reasons that no matter what Bitcoiners tell you, stocks are not ponzi schemes.

Why would investors invest in non-voting shares?

I said yesterday that stock has value in part because the investor is owning something real, a tiny part of a larger company.  With that ownership usually comes the right to vote on the direction of the company, but not always.  Some companies like Google, New York Times, and WWE have a dual-share system whereby only certain shares are “voting” shares and all others have no right to vote on the direction of the company.  Or in Google’s case, many shares are voting shares but thanks to “super-voting” shares two people (Larry Page and Sergey Brin) hold 51% of voting rights and can never be outvoted by investors. Why would an investor buy shares knowing they don’t come with any rights?

Well first of all there is still some small amount of rights that come with a share, your ownership must be compensated if the company gets bought.  And of course the share may still come with a dividend or an expectation of a dividend.  But without the ability to change the company by voting, the shareholders have no input on the dividend or the direction of the company in general.  I think that for large shareholders, they still have an expectation that they can move the direction of the company even without voting rights.  BlackRock and Vanguard Group, for example, are some of the largest holders of Google stock, and if they were to exit the company in a hurry it could crash the price.  Now these companies don’t want their Google investment to fail, they want Google to succeed so they succeed with it, but if they believe that the company is hopeless they can always exit in a hurry.  And because they are major investors (and their exit would crash the stock price), they have the ability to talk with Google higher ups on the regular.  This gives them an interpersonal line of communication to voice their grievances and request changes, even if they have no legal recourse to change Google’s behavior.  Google in turn doesn’t want to upset major investors, and so may acquiesce to some things in exchange for investor assurances.

These sorts of interpersonal dynamics go on all the time in the world of finance behind closed doors.  We can read countless examples of them from the 20th century since people retired and wrote tell-all books, but I doubt we’ll get any about Google until those books are written in the future.  But interpersonal relationships between investors and management can be as or more important than the legal framework that regulates them.  Large investors have some amount of power and access with a company, even if using their power by selling the stock would hurt the investor as much as the company.  Meanwhile management wants as high a stock price as possible and so can make an effort to placate the investors.  In this way, at least some investors will still feel that they have input into the direction of the company, even if they can’t change its direction by voting.

Now, with this voting vs non-voting shares, I do think this is neo-feudalism and must be stopped.  The WWE shares, for instance, stipulate that only the descendants of Vince McMahon can ever hold the super-voting shares in the company, any shares sold by them get converted into lower-voting or non-shares.  This allows people to inherit what are basically titles of nobility that no one else could ever have.  Only the descendants of ennobled investors can ever steer the direction of the company, even if they own far fewer shares the the other investors.  Capitalism is supposed to be plutocratic and this sort of hereditary nobility will do more to harm competition than any possible good it could do.  It’s no accident that the poorest countries during the industrial revolution of the 19th century were those that held on tightest to nobility and titles, money can’t compete with inherited rights.

A free market absolutist might claim that you can just start your own business and replace Google or WWE but we all know that’s not how the world works.  Large companies can have an outsized influence to maintain their market share even if there is some modicum of competition so that they don’t count as “monopolies.”  In the end, ennobled families will hold unwarranted power over cornerstones of the world economy, and those cornerstones will be hard to replace due to their sheer size and ability to buy or outlast the competition.  In the end, we’re all worse off.

I don’t think people understand stocks or what gives stocks value, and I think that’s why some people fall headlong into Bitcoin

Let me get one thing clear: Bitcoin is a ponzi scheme and Bitcoin “exchanges” are rugpulls waiting to happen.  There is no value in Bitcoin as an asset; anything it can do, everything else can do better.  But it’s clear that Bitcoin has a hold on people and I’ve seen many try to defend Bitcoin by comparing it to stocks.  Once you accept that Bitcoin is terrible and has no use cases, the only thing left is to claim that everything else in the world is even worse.  I’ve seen the argument made that the stock market is a legalized ponzi scheme taking money from individuals and giving it to corporations, but that argument clearly comes from a place of ignorance. Stocks are a legitimate investment vehicle, unlike Bitcoin, and I’d like to explain why.

First, why does a stock have value at all?  Two big reasons cited are ownership and dividends.  When you own a stock, you have real *ownership* of a small percentage of the company with all the property rights that come with that.  In a very real sense the stockholders can plutocratically vote (plutocracy in this case means 1 share = 1 vote) on the direction of the company. The stockholders have a sort of representative plutocracy in which they vote for the Board of Directors, who then act as the stockholders’ representatives guiding the direction of the company through their chosen CEO.  In 2021 for example, ExxonMobil stockholders led by a group called “Engine No 1” fought to make ExxonMobil commit to new environmental standards and a sustainable energy future.  There have also been cases in which stockholders such as private equity will put up a proposal to replace the board of directors and management staff with someone else in order to turn around the company and bring it back into profitability.  All these things are possible only if you can get the stockholders to agree, and this is the value that owning a share of stock has.

Another reason shares of stock have value is dividends, and here ownership comes into play as well.  If a plutocratic majority of the stockholders want it, they can demand that the company give them more and more of the company’s money in the form of dividends.  The value of the stock therefore is the value of all future dividends, divided by the uncertainty the company will stay in business, multiplied by the fact that money now is better than money later.  Say I hold a corporate stock that gives a yearly 1$ in dividend. I think the dividend is stable, so I expect to receive 1$ per year every year.  So the price of the stock is infinity because I expect to receive infinity dollars?  Well no because there is market uncertainty, I could be wrong about the company for instance, and it goes bankrupt next year. Or the market could change in ways I can’t predict and the company goes bankrupt, there’s no certainty about how long this company will stay in business.  Also, money now is always worth more than money later (even if inflation is zero, I’ll talk about that some time), so the dollars I expect to get 10 or 20 years from now are worth less than and less then the dollar I will get this year.  And so despite seeming infinite, the stock value can converge to a finite amount because there’s no guarantee I get all those future dividends. And of course different people can value a stock more or less based on their own personal appetite for risk.

So the value of a stock is based on real value.  A company has value just as much as say a factory does.  People want to buy the things that come out of it, so owning it gives you something that makes money and therefore has value.  Likewise a company gives money back to its stockholders in the form of dividends.  Now there are many reasons a company would want to give dividends, and likewise reasons stockholders would be OK with not having dividends, but going back to shares being ownership, remember that the shareholders can always demand the company give them dividends if there is a plutocratic majority in favor of it.  So dividends are demanded by the stockholders, given by the company, and the value of all future dividends plus the value of owning a part of the company itself is what gives a stock value for a stockholder.

Bitcoin does not have this value.  There is no dividend, there is no underlying thing of value that you “own” when you own a Bitcoin.  All Bitcoin has is the greater fool theory, the idea that somehow you’ll find someone to buy your Bitcoin for more than what you bought it for.  Greater fool theory isn’t unique to Bitcoin, and at least some percentage of stock market daytraders are only buying in order to sell to a greater fool, but as I said stocks have more than greater fool theory underpinning their value.  Bitcoin only has greater fools, and that’s what makes it a ponzi scheme.