Monday, April 20, 2009

Investors or Inventors

There was an infomercial on T.V. the other day selling a groundbreaking system of stock market analysis, that when put into practice, would guarantee great returns; "We'll teach you how to get in when the stocks are low, and get out when they're high" etc. This was obviously a ridiculous scam. But it may be successful in drawing in victims. The stock market tantalizes people with the possibility of free money. But free money does not, and will never exist. All money gained from investments, (outside of that which arises from pure luck), comes from one of two sources, and both involve hard work:

1. Hard work by an investor in finding profitable investments.
2. Hard work by the invested-in company in gaining profit through its operations.

Nonetheless, in the American mind lies the fantasy of being able to sit at a computer and generate cash with the click of a mouse. People hope that somewhere there lies a perfect investment strategy. But the search for such a strategy is the modern equivalent of alchemy, and just like alchemy, it is a waste of time.
There can never be a fail-safe strategy of investing, because, no matter how sophisticated one's analysis of the stock market is, stock prices depend on an infinite number of unknown events that occur in the actual physical world. Only a piece of omniscient software could predict the future. Secondly, if a trader got his/her hands on this omniscient software, it would become useless if other traders had it too. The best that investors can settle for is to be sensible and manage their risk as much as possible.
Investment strategies are merely ways of siphoning money from the physical or intellectual assets of an economy. And if the productive capabilities of assets in an economy are impaired, it will become harder to make money as an investor. This is a law of financial physics. Even successful short selling depends on an initial price that reflects a perception of high productive capabilities. Securities' prices are merely shadows of the real economy.
Investment is the lifeblood of the economy, but careers as investment professionals are not what I hope the majority of kids of the next generation will strive to attain. I hope they will want to become inventors, not investors. (By inventor I mean someone who creates something new that is valuable to society). How useless would investors be if there were no inventors? There would be nothing to invest in. Inventors also need investors, to fund their endeavors. But good ideas will tend to attract investment. It does not take a degree in Finance to recognize a good idea. I hope the intelligence and creativity of the next generation, instead of going towards the alchemical quest of beating the stock market through technical analysis, will go towards innovations in the actual physical world. Imagine if the world's great geniuses decided to become stock traders instead of chemists, surgeons, authors, engineers etc. These geniuses might think of some great trading strategies, but there would be a lot fewer assets to invest in.
Pure speculation on the rising and falling of stock prices is a zero sum game. But sensible investment in good ideas benefits investors, inventors, and the economy as a whole.

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