I get upset whenever someone says they are going to “beat the market”. The market isn’t a video game. Outsmarting other people isn’t the goal.
Anyone who approaches the market with the intent of “beating” it has already lost. Sure, it’s possible to gain money on the stock market, and it is also possible to get more money than the next guy in the stock market. The same thing is true of gambling. Unless you view the market as merely a high-class casino, “beating the market” is one of the worst analogies.
If everyone lost all of their income, and you only lost half, would you be excited that you “beat the market”? What if you became rich by suckering everyone else out of their money? Is that something to be proud of? No, and those are two of the reasons why “beating the market” is a ridiculous goal.
The goal of investment in a market is to build value, period. If your goal is something else, you should get out, because you are not only likely to lose your shirt, you are likely to hurt others in the process.
The market is not a list of numbers, it is a list of companies. Buying a stock is not betting on a horse, it is investing in what a company does on a daily basis. The goal of an investment is to either (a) help capitalize an operation that you believe has future potential, or (b) provide early compensation for others who capitalized the operation earlier by purchasing for a fixed price a future revenue stream. If your goal is to just hang on until you find someone stupider than yourself to sell it to, then you are doing it wrong.
Now, by this notion, it might be that there are *no* companies worth investing in. That’s certainly a possibility. What then? I can see two clear choices: either (a) save your money (that’s what cash and precious metals are for), or (b) start your own company or help out someone who is not listed start theirs.
Your money has so much better uses than just to gamble it away. Instead, find a productive way to invest your money.
Our current economic debacle comes from having so many people focused on “playing the market” rather than actually creating value. Therefore, the gains are all fake. Because so many people “play the market” or “provide liquidity”, no one is “providing value”. This is what causes a market crash. Eventually, the market returns to the value. If no one is producing, then there is no value.
If value is being created, the actual numbers behind your wealth are much less important. Real capitalization is deflationary. Imagine this – let’s say you go to the store and buy 100 apples for $2 each. You now have $200 worth of apples, and you eat them all year. Now let’s say you buy an apple tree. Now you can, from now on, have $200 worth of apples without spending money. You might even wind up with enough to sell (which will lower the market price), or have such an abundance you give them away just to keep from having to clean them up!
All of these operations lower the value of your 100 apples. But do you care? Wouldn’t you rather have food in such abundance that you had to give it away rather than have to spend $200 each year? But for those who keep score with dollar signs, who want to do “better than you” rather than “well”, they would rather have apples become scarce, and their $200 worth of apples become worth $600. They would plow up an entire forest of apple trees to make their apples worth more. When they are starving in the street because they killed their own source of food, they will say, “I won – my assets are worth more dollars than anyone else’s”.
Which person in these stories was actually wealthier? The one with dollars, or the one with actual productive capital assets?
If you think you can successfully invest in the market, and in doing so improve the market itself, by all means be my guest. But if you want to play the market or beat the market, then for the good of yourself and others, please don’t.
Over the past few years, without anyone debating it or publicizing it, America’s national debt has been converted to an adjustable-rate mortgage. That’s right – the moment after ARM mortgages went belly-up, the treasury decided that they wanted to get in on the game. How does the national debt become financed with an adjustable-rate mortgage?
To answer this question, we have to ask, what is an adjustable rate mortgage and why is it a problem?
An adjustable-rate mortgage is one where the person receiving the loan gets a low interest rate, but the interest rate follows the market rate year-to-year. In a fixed rate loan, if your rate is 6%, it will be 6% until your loan is paid off. For an adjustable-rate mortgage, your rate might be 3%, but then next year it might be 8%, all depending on the interest rate in the markets. The problem with an ARM is that people get used to the low rates, and they forget to plan on what will happen if the rates go up. If the rates go up even a little bit, it catches them off guard and they can’t pay.
So how does the government do this with its debt?
Well, the government finances its debt on the open market. So, for instance, it might sell a treasury bond. The treasury decides whether that is going to be a 6-month, 1-year, 10-year, or 30-year bond. Traditionally, the treasury has financed the debt using primarily longer-term notes – 10 to 30 years. This means that if interest rates fluctuate, we have some time to deal with it before we need to refinance. It prevents a crisis from interest-rate swings.
Well, 10-year bonds yields are at about 2.5%/yr, but the 1-year bond is only 0.1%/yr. Therefore, to save money temporarily, the government over the last few years has rolled over half of its debt into short-term notes! This has helped the bottom line for the current years. The problem is that it means that we have $8 trillion in debt which has to be refinanced every year. Now, at the 1-year rate, $8 trillion costs $8 billion a year in interest payments. However, if the 1-year rate were to go up to any historically normal interest rate, the government deficit would shoot through the roof.
Let’s say the interest rate shot up to 4%. That is still considered low, historically. What would happen? It would cost the government $320 billion in new interest payments. That would increase the deficit by about 30%.
This is life on an adjustable rate mortgage.
ZeroHedge posted a list of things to consider before investing in BitCoin. I have never been overly impressed with BitCoin, primarily due to its lack of physicality, but also due to some fundamental assumptions that it makes about the world that may turn out to be wrong.
Anyway, here is ZeroHedge’s article.
I’ve been reading (actually listening to) George Gilder’s new book, Knowledge and Power, dealing with what he calls the “information theory of capitalism.” The book is, overall, fantastic. I heartily recommend it to anyone, and believe that Gilder provides both an excellent defense of capitalism as well as an excellent understanding of it. Hopefully soon I will write an overview, because it really is good. However, before I forget, I want to cover some of the places where I think Gilder is wrong. Gilder is an optimist. I like optimists. That’s actually one of the things about my book – it’s an optimistic prepare book. However, Gilder often goes beyond optimism to all-out rose-colored-glasses.
NOTE – this article is a followup to a previous article on the problems of an economics focused too much on money.
One of the saddest things about the left is that, although they make a lot of noise about “the rich” and similar power brokers, the injustice of money, and other ills and woes, they are actually the most enslaved to money of them all. Don’t get me wrong – there is plenty to dislike in the power structure of modern America. However, whenever I hear the left speak, it usually comes out like this:
This comic, at least from its appearance, is meant to be a jab at getting engineers to understand economics. However, I think that the real truth it reveals is the problems inherent in current economic models and economic figures.
Part of MicroSecession deals with the problems inherent in guiding your life based on numbers. At the end of the day, numbers are only indicators, and we must be wise in order to use them correctly. Peter Schiff gives a great example of this with GDP measurements, using Gilligan’s Island as an example:
What Schiff tells us is to think about what happened in Gilligan’s Island. In the first seasons, they had nothing at all, and had to build up everything from scratch. However, in later seasons, after they had built all of the equipment to make their lives easier, then they could relax and enjoy themselves and not work as much.
Now, which period was better for the people involved? Obviously – it was when they could relax. Which period produced a higher GDP? It was the first part when they were working – that’s where all of the economic activity was taking place. So, if, heaven forbid, an economist was there with them on the island, they would freak out once everything was built, because GDP had declined! They would start implementing emergency measures, and probably also destroying many of their machines and gardens that made their life better, in order to stimulate more GDP output.
It doesn’t usually matter to economists whether your life is better or worse. They have their numbers, and they had better be going the way the economists want, or else!