Stock Market: Speculation vs Investment

[ianlippert]

I just finished listneing to Stefan Molyneux's Podcast Stock Market: Speculation vs Investment and his basic claim is that all of our tax dollars that get put into the stock market through our CPP/Social Security payments are what causes the real short term focus of the stock market. Because there is so much money in the stock market that shouldnt be there, short term investment (speculation) is promoted and long term investment is discouraged. He makes it seem like the government sets the system up for the 'financial elites' so that they can fleece those that have no idea how the stock market works, but are forced to put their money into it. When I was listening I was picturing the government forcing people to spend 25% of their income on poker where the pros basically eat the fish up. Although in this case its worse because people dont know whats going on, they think their money is going to a good use.

My question is what systems are in place that give the elites their advantage? Where do are Social Security (Candadian Pension Plan) payments go to? Is it basically a scam where the government can hold on to our money and not worry about spending it responsibly because they wont have to deal with it for decades? Any explanation of what exactly goes on in a speculative stock market would be appreciated.

[Riddick]

Don't know about Canada but in America our Social Security payments ($600 billion in total) are immediately redistributed ($500 billion) and the surplus ($100 billion) is immediately spent and replaced with an IOU (basically a promise to raise taxes later).

The American privatization plan currently on the table would allow the option of investing in the markets, bonds, or neither.

[hmkpoker]

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Because there is so much money in the stock market that shouldnt be there, short term investment (speculation) is promoted and long term investment is discouraged.

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I agree with that. Look at the P/E ratios. THe vast majority of the worth of a lot of stocks comes from all the boobs that have their money lying around in it. When they pull out (as they like to do when it goes up), the stock goes right back down. The wealth it not really tied to anything, except the money of a bunch of faithless investors. Poor people who don't really know what's going on investing in the stock market have no edge against people with more money and better information.

But like poker, the financial elite can only really profit if people aren't gullible idiots. If you're investing in something you don't understand, you deserve to lose.

[Machinehead]

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the surplus ($100 billion) is immediately spent and replaced with an IOU (basically a promise to raise taxes later).

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Do you have a source for that? I thought the surplus went into US treasury bonds.

[lehighguy]

They do. That's the point.

It would be like writing an IOU to yourself. The government writes itself IOUs.

[Machinehead]

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They do. That's the point.

It would be like writing an IOU to yourself. The government writes itself IOUs.

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Of course, but the government does this all the time. What else would they do with it? Keep a giant room full of hundred bills? It's like when you put money in a bank, they don't keep a stack of money in safe with your name on it. They play with it.

[bobman0330]

A couple things:
-I don't know how Canada works, but in the US, Social Security money is NOT invested in the stock market, but rather in US Treasuries.
-Barring illegal market manipulation or insider trading, there is no structural factor that gives wealthy investors an edge. They merely have more familiarity with the market and the money to hire better investment advisors. Very wealthy people have the opportunity to invest in hedge funds in the US, which are less regulated than mutual funds, and frequently earn higher returns.
-A basic primer on speculative vs. "normal" markets. When you buy a share of Microsoft stock, you gain two legal rights: (a) a proportional share of any future dividends declared and (b) voting rights. Part b is generally worthless to the investor, but can skyrocket in value if there is a takeover attempt. Part a is the reason why you buy the stock, in theory. A very smart investor could sit down, project dividends for the rest of time, weight various outcomes for risk, and then use a process called discounting to calculate the present value of that stream of income. If it's greater than the price of the stock, it's a good purchase.

By contrast, a speculative investment counts in part on someone being willing to buy the investment later at a higher price. I sell you a tulip bulb for $200, which it is not worth, but you buy expecting to sell it to some other schmuck for $250 tomorrow. It only works for so long.

-As to your guy's thesis. I'm not convinced. It doesn't make much sense that people investing for retirement of all things would have a short-term focus. What does make sense is that as more money is invested in the stock market, rates of return will generally drop. This is not good for investors, but it is good for business in that they can get capital cheaply.

Another important thing to consider is that any unsophisticated investor can get a fairly safe, reasonable return by just investing in a broad index fund.

[lehighguy]

There are many things they could do with it. Pay off existing debt for one.

[ianlippert]

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-As to your guy's thesis. I'm not convinced. It doesn't make much sense that people investing for retirement of all things would have a short-term focus. What does make sense is that as more money is invested in the stock market, rates of return will generally drop. This is not good for investors, but it is good for business in that they can get capital cheaply.


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Its very likely that I misinterpreted what he was saying, but thats what it seemed like to me.

[adios]

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the surplus ($100 billion) is immediately spent and replaced with an IOU (basically a promise to raise taxes later).

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Do you have a source for that? I thought the surplus went into US treasury bonds.

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Actually they're replaced with non marketable treasuries i.e. they can't be bought and sold on the open market like marketable treasuries. So basically the only party that can redeem the non marketable treasuries is the U.S. government which means the U.S. government can do anything they please with them. So in essence the Riddick is correct.