Investment is a useful societal mechanism for getting new things made. Stock trading shares some functionality with investment, but seems very very inefficient, at that?
post by mako yass (MakoYass) · 2020-08-24T01:18:19.808Z · LW · GW · 2 commentsThis is a question post.
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Answers 16 johnswentworth 3 Frank Bellamy None 2 comments
Jack Bogle, the creator of the first index fund, says
The stock market has nothing—n-o-t-h-i-n-g—to do with the allocation of capital. All it means is that if you’re buying General Motors stock, say, someone else is selling it to you. Capital isn’t allocated—the ownership just changes. I may be an investor, you may be a speculator. But no capital goes anywhere. This is basically a closed system. You have new IPOs and whatnot, but they’re very small compared to this vast thing we call a market
My response to this has always been... if that's true, what is the point in all of this? It's a mechanism that predicts the success of companies, but plays only a very small role in investment? Could we get that money to do something better, then?
Answers
I wrote a post on this a few years ago. There's a few different roles that capital markets play, but I think the big one in terms of real economic value is probably warehousing. The financial markets - stock market, bond markets, etc - provide value mainly by warehousing credit. (Here I mean credit in a fairly general sense, including any sort of expected value at a later time in exchange for funds now - e.g. stocks are included, bonds are included, futures are included, etc.)
This provides value in much the same way as warehousing grain: when there's a shortage of grain, the grain warehouses can can provide grain for a little while (albeit at a higher price) to avoid starvation. When there's a grain surplus, the warehouses can buy up excess (albeit at a lower price) to avoid spoilage/waste. They smooth out the grain supply in time, and that's how they make money. Same with credit: when there's a shortage of credit, markets crash, and people/companies are desperate for cash. Those investors who were warehousing cash sell it, buying low-priced stocks/bonds/etc in exchange. When there's a surplus of credit, asset prices go back up, and the investors sell their assets off. They smooth out the credit supply in time, and that's how they make money.
Again, this isn't the only way that financial markets provide value; see the linked post for more. But I do think it's the main way.
That isn't always true. Sometimes, when a company wants to raise capitol, they sell their own stock, and you, in buying the stock, are directly giving the company capitol. In that case, the market price, which has been determined by all of this buying and selling, determines the allocation of voting power (and dividends if there are any) between the owners of the older shares of stock and the buyers of the new shares of stock.
↑ comment by mako yass (MakoYass) · 2020-08-24T13:01:48.046Z · LW(p) · GW(p)
Was this supposed to be an answer rather than a comment?
It's helpful to spell these things out, but it doesn't bring me closer to an answer, these are the things that I'm thinking might not be very efficient, most of the money seems to spill into the laps of speculators who are just not using it nearly as well as the company would?.. (If they are efficient investment mechanisms, I will need to see a more detailed argument before I'll understand)
One thing to notice here is that most companies can only benefit from the appreciation of their stock by creating more of it, effectively debasing it a bit. This seems bizarre. They dilute the investors' shares and the investors have to just say "yes good this was part of the plan" because if it hadn't been, there would have never been any publicly traded shares for them to buy because there wouldn't have been a point in the company offering them. Well, maybe there should be no publicly traded shares to buy! (I don't know. I haven't started to identify any better mechanism yet)
(imagining)
What if investors had to pay a portion of their income back to their holdings.
I guess you could implement that as... the stock continuously gradually returns to the company.
Oh, that's equivalent to continuously creating new stock at a pre-agreed rate! o-o
Replies from: frank-bellamy, MakoYass↑ comment by River (frank-bellamy) · 2020-08-25T02:56:28.710Z · LW(p) · GW(p)
Diluting the shares is only a bad thing if the companies overall value (called "market capitalization") is constant (or grows slower than the dilution). If, for example, a company has 9k shares outstanding, sells another 1k shares (10% dilution), uses the money to expand the business, increasing profits, and as a result the value of the company doubles (meaning share prices almost double), the owners of those first 9k shares should be quite happy about that.
I'm unsure what problem you are trying to solve with your proposal for investors to pay money to the companies they own shares of. What it actually sounds like to me is a buy back. Sometimes companies buy shares of their own stock from the market, decreasing the number of outstanding shares (the reverse of dilution). For the shareholders who sell the stock back to the company, they are being directly paid for their investment. For the shareholders who do not, the supply of stock in that company has decreased, which results in an increase in the value of the remaining shares.
I think you also need to realize that having stocks like this isn't just about raising capitol, it is also about creating a check on the CEO and other managers. The shareholders elect the board of directors, which has the power to hire and fire the CEO, among other things. Without stock, who would the CEO have to answer to? Powerful unaccountable people are not a thing I want running around in society.
Replies from: MakoYass↑ comment by mako yass (MakoYass) · 2020-08-27T04:25:08.968Z · LW(p) · GW(p)
I'm unsure what problem you are trying to solve with your proposal for investors to pay money to the companies they own shares of
It was "Could we get that money to do something better, then?"
It is possible for speculation to be rewarded more than is useful, I suspect that it's quite common.
Powerful unaccountable people are not a thing I want running around in society.
A part of me laughs at the idea of holding tech accountable and prepares for the ending where it is not, could not be.
I engaged in some corporate governance yesterday and... I don't think this one at least was designed to make the company accountable to shareholders, parts of it seemed chosen to preclude that. I think they give an impression of accountability, which must be reassuring to some people. One big advantage I sense is to the company; the governance process solicits motivated feedback from many parties. They will ultimately use the feedback however it benefits them.
↑ comment by mako yass (MakoYass) · 2021-05-04T02:00:11.212Z · LW(p) · GW(p)
Update: It's been proposed (at least, within IOHK) that a variant of NFTs be created that does this (proportion of profits from resale go back to the artist, or a charity designated by the artist). I think this makes a bit of sense for this scenario. Owners of a NFT want a sense that they fully own the thing, so "printing additional stock" (or selling NFTs as pools of stock that multiple people can buy) wouldn't work.
Feels like a very pre-quantitative mindset though.
On reflection, I think I have heard of "fractionalized NFTs" so uh, this gets quite blurry.
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comment by romeostevensit · 2020-08-24T03:09:05.307Z · LW(p) · GW(p)
v. suprised Bogle of all people didn't understand how spread and liquidity interact for price discovery.
Replies from: MakoYass↑ comment by mako yass (MakoYass) · 2020-08-24T04:39:20.336Z · LW(p) · GW(p)
Maybe it's because I don't know something, but I'm not so surprised. Belief that Vanguard and co would have no large effects on markets seems quite expedient for Vanguard. Right now, when people talk about the real world effects of index funds, it's all very negative, so if he can find a way to say "no there aren't any effects", he's going to want to.
Negative effect I've heard claimed: Empirical evidence of Index Funds getting involved in corporate governance to reduce competition across the whole market (very anti-consumer), negative effect I (uninformed) am considering claiming: Index Funds are kinda dumb money that goes to the incumbency, instead of to domain-expert investment firms, nor to new challengers.
Regardless of whether they're really bad or not, it is damned scary to see that the largest shareholders of most large companies now are the same three enormous organizations that know absolutely nothing about them.