The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

16 May 2006

In which capitalism is put through the wringer

In posting this comment, "Jorge Loco" indicated it might deserve its own thread. I agree, so have moved it here. Please offer your comments in response, if so inclined.
First, I would like to start by saying that I'm not sure if a comment is the correct place for what I'm about to say. If it is not, please do not flame me readers of "The Deipnosophist," and simply allow David a moment to remove my comments. For while I do use technology extensively; I am not 'hip' to the current trends of blogging.

David, you asked me to take a look at your website, because you were interested in increasing ... the number of intelligent responses, and while I'm not sure I'm the best choice to start with, I will do my best. Though I am writing this comment attached to "Standing perpendicular to the world," I do believe it is possibly it's own 'thread?'

The comment I would like to humbly offer is an observation I have not only concerning yourself, but others who I will refer to as 'day traders.' Before I continue, however; I would like to denote that I only have a cursory understanding of economic and market theory. I make extrapolations to what I have learned in courses/reading as an engineer or hard scientist would. Furthermore, please do not take my comment in a negative light for its sole purpose is to engage in discussion in order to promote a further understanding of the world around us.

I will now attempt to convey my comment in what will hopefully be one of the intelligent responses you are attempting to cultivate. In your 'About Me' section of "The Deipnosophist", you state the following:
==> "Life is more about the quality of our relationships rather than the quantity of money we amass."
You continue in the section, "Standing perpendicular to the world," to state:
==> "I am a swing trader who hopes to catch the bulk of each primary movement, my time frame is ~6 months."

Now without going into all of the many different ideas, thoughts, concepts, and quandries I entertain concerning our (meaning a variety of scopes) economic environment; I would like to in a sincere fashion ask, "What is the value of 'investing' on the timescale of ~6 months, or in a more extreme fashion, a few hours/day(s)?"*

When I say value, I do not mean the obvious immediate value of making money for the trader in question. What I refer to by value is the value to society and/or economy as a whole. From my perspective, based on my limited education and experience in this arena, the 'markets' are nothing more than a perpetuated fallacy created by and for most traders. Even for people who truly wish to 'invest,' they are in most cases not able to truly do so due to the extremely high 'price' to 'worth' ratios in most major markets today be it stocks, real estate, etc. After all, in my mind the purpose for 'investing,' for 'stocks' should be to raise capital to accomplish some company's objective(s), while sharing the risk and benefits of the results of said company's endeavors and a form of sustainable partnership.

I feel that today's traders are... irresponsible towards society as a whole. After all, stock brokers get paid on the 'trading' of shares, similar to how credit card companies make money. Day traders seem to make money from gambling on a stock's short term perception of worth. So from a broker's perspective in a simplistic sense, the more trades the better, for every trade means more money. But this in turn creates a 'false priority' for both investors and companies. Many companies are chasing myths of perceived future worth, that in any other scenario would be obviously impossible.

I personally would like to see 'investing'* in stocks to be changed in a fundamental fashion (though due to my ignorance in economics, this may have already been tried at some point in history.) I would like to see a mandatory hold period in all stocks of say... five years. I pick five years because that seems to be the statistical determining benchmark in determining a company's long-term viability and in part arbitrarily due to my own guess at what would make people change their outlook on the market.

I am interested in your ideas, David, on what I have said, as well as those of your other readers who are interested in an open and positive exploration of ideas. Also, while there are many tangents, some close, some far to this particular 'thread,' I have endeavored to limit its scope in a practical manner.

Thank you for your time, sincerely,
~ JL

* Note: I am excluding certain short-range investment opportunities (which could quite possibly be considered from my perspective, the equivalent of loans; i.e. some (but not all) implementations of futures markets.
Thank you for adding your comments. For the record, I should note I welcome all comments but especially treasure intelligent comments, of which this blog's readers specialize. Too, I agree with many of your comments, although you would be better served to leave off the editorializations ("gambling"), etc. After all, "One man's Persian is another man's Mead."

You seemingly believe that a single person (or entity, governmental body, etc) is smarter or better informed than the lumpen proletariat. And that person should decree what is best for all. Well, I believe that each investor knows himself or herself better than some all-knowing overseer. Moreover, I believe each person everywhere to be unique, and therefore the quest to mandate private behavior is doomed from the get-go; but especially so in a 'free' society. Of course, society might attempt to encourage certain behaviors -- for example, to change the holding period to 5 years (as in your example) to qualify for the preferential tax rate of a long term gain -- but the attempt to penalize instead behaviors not harmful to other people -- for example, to assess a surcharge tax for short term gains less than your preferred holding period -- is not a society in which I care to live. I believe there should be no preference rate whatsoever for capital gains of any holding period.

It seems you believe the duration of the holding period defines the validity of investment activity. I disagree. Investments made in which the issuing company receives the capital might be the sole type of that denotation. Secondary markets exist for very explicit reasons; the duration of an investor's holding period of shares purchased in the secondary market has zero validity on any level. That is, you cannot have it both ways: either it lacks validity, in which case you ignore it altogether or it has validity, in which case you attempt to regulate or institutionalize it, as you propose.

Remember this tidbit, however: all of those gains are taxed. (And short term gains are taxed at a higher rate than long term gains.) These tax revenues add to the coffers of our governmental bodies, which in turn finances or encourages other types of activities you possibly do support.

Apart from the increased tax revenues, I agree that my economic activity as an investor adds little value to the lives of other people... or even to the big picture. Certainly, my trading/investing creates nothing tangible; I am not building a refrigerator or car, etc. This is a matter I have dwelled upon for a long time. I yearn to be a part of something larger than myself; creating a community such as this one (and others, prior to this effort) is a manifestation of that effort. For as long as secondary markets exist and I have a talent for creating profits in them and on a consistently successful basis, then I will continue to share that expertise in the quest to help other people. It is, after all, my talent; perhaps even my sole talent. While the ostensible purpose of this blog is to help other people make money and to understand (better) the mechanisms of the secondary markets, its true purpose is to enrich my readers' lives and broaden their horizons via exposure to the humanities. That all sounds grandiose, I suppose, but it is what excites and motivates me. Hey, we each do what we can.

And if my personal visionquest helps only one person enrich their existence on whatever level is meaningful to him or her, then I am happy. To each his or her own.

-- David M Gordon / The Deipnosophist

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