THE CASINO CRUMBLES
Andrew S. Fischer
Monday's 778 point drop in the DJIA and Tuesday's 485 point pop should end, once and for all, the notion that putting money into the stock market constitutes investing. It does not.
It was actually amusing to watch the live House vote on the failed Bailout Bill on cable TV Monday. The vote-by-vote tally was shown onscreen along with the DJIA. Initially the Yeas were plus-25 over the Nays, and the Dow didn't move much. Then the Nays gained ground and the Dow started to fall. When the Nays pulled even with the Yeas, the Dow began to tank. Still, the percentages of Not-Yet-Voted Representatives implied that the Yeas would still win. But then the Nays pulled ahead as the Not-Yet-Voted number shrank, and the handwriting was on the wall. The Dow dropped below 700 when the end result became clear.
That sequence of events illustrates that the stock market, without question, is nothing but speculation, nothing but a casino. Brokers and their clients were obviously watching the vote with their fingers on the trigger. "If it passes: buy, buy, buy. If it fails: sell, sell, sell." This is market timing at its most absurd, as millions, perhaps billions of dollars in securities changed hands in an effort to stay one or two seconds ahead of the competition.
Trading stocks is not investing. Buying into a new concern is investing. When you purchase the stock of an IPO (or hand your brother-in-law $10,000 to open a hot dog stand) you are providing capital for a new venture. You're taking a risk, and making an investment that may succeed or fail. However, when you buy already-existing shares of stock, there is no net investment. You may be investing (in Coca-Cola, for example), but since you are purchasing those shares from someone else, that person is, for want of a better word, DE-investing. There is no net investment. Thus, the overwhelming majority of the billions of dollars traded every day is nothing more than that -- mere trading. The hope is that the shares you purchased go up in value (and it doesn't matter why), and you can sell them to someone else at a profit. This is the same as playing casino craps; the only difference is that the roll of the dice doesn't occur until you sell, and you may be able to wait for years to toss them.
Over time, the general public has been conditioned to believe that risk doesn't exist, and this is being confirmed by the recent bailout events. Government's expansionist monetary policy, fiat money system and fractional reserve banking all serve this myopic view, since they create excess dollars which are forced to chase yield merely to keep pace with the rising prices (created by the very same policies). These dollars often end up chasing yield in the stock market, since "historically it yields a 7% annual return," and "stocks always go up, and there is little or no risk."
News flash: there is risk in the markets. There is risk in stocks, bonds and money market funds (let alone the insane derivatives market). These do not constitute savings. Only cash (such as it is) equals savings. Gold and silver, too, of course, if you have them in your possession; everything else has risk associated with it. When you take risks, sometimes you lose.
Money backed by nothing, which costs virtually zero to create must ultimately become worthless. It is a faith-based system which will collapse once that faith dissolves. Historically, gold evolved as a medium of exchange because it is rare and requires effort to mine it and refine it. There is actual work behind gold. This means it has value. Additionally, it's durable, transportable and divisible into smaller units. Gold and silver were chosen as money by the free market as money for these reasons (unlike the un-backed paper which has relatively recently been mandated as money by government).
Whatever happens in the stock market casino, you must realize that every dollar you put there is being risked. Your 401k and IRA holdings are subject to the whims of the market. The amounts available may be less than you hoped, or not there at all, when you want to withdraw them. Since dollars are worth less and less as more and more of them are effortlessly printed, it makes sense to trade as many as you can afford for physical gold, which is rare and requires effort to create. A system which uses paper money, printed at will, might just as well use blades of grass.
October 1, 2008
Andrew S. Fischer is a controller for an investment advisory firm in Pennsylvania. The opinions stated in this essay are his own.
Copyright © 2008 Andrew S. Fischer
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