Gambling on the Stock Market

The valuation of shares is based on four criteria. They are (1) historic performance, (2) current management perofrmance, (3) future prospects, and finally peer group opinion. Henry Ford famously said, “History is bunk.” This disposes of (1). Why is this especially true in relation to investing? Because points 2- 4 are also bunk. This leaves the investor in a bit of a bind.

The great Jeff Bezos created Amazon in 1994. Amazon was floated on the US Stock Market on 15th May 1995 and $1000 invested then would now be worth $239,045 (November 2013 when this blog was written). Any investment was therefore predicated entirely on the idea of Internet catalogue retailing. Punters* punting on Amazon have had a massive pay- out. Compare Steve Whitely at Exeter Racecourse (UK). He won £1.45M for a £2 bet on a six horse accumulator on 8th March 2011. A massively improbable bet that struck gold but it wasn’t gambling it was punting.

Vodafone had everything going for it in 1999. Mobile (cell) phones were in rapid take- off and tech companies were unstoppable. Vodafone paid £112bn** (c. $200bn) for Mannesmann and the new combined company was worth £228bn. Vodafone (November 2013) is now worth £112bn*** £116bn less than than 14 years earlier. Times- Warner(USA) is even worse. They bought AOL for £200bn in January 2000. The combined company was valued at $380bn: Just under ten years later the company was valued at $38bn. A 90% drop in value. Management were punters. They behaved like all temporarily successful punters. They doubled their bet. The ‘Masters of the Universe’ running RBS Bank Group did exactly the same in 2007. They literally bankrupted the company and with an additional flourish, wrecked the UK economy. Management in all three companies were paid punters getting the buzz but not picking up the tab.

All the world’s stock markets collapsed on Monday 19th October 1987. The US Dow Jones fell 22.61% and the UK FTSE fell 26.45%. In other words anyone, anyone at all, the savviest, cleverest investor in the world lost between a fifth and a quarter of their investment if they had invested on Friday 16th October. They lost that in a day! So why did it happen? On 15th and 16th October Iran missile attacked oil tankers in Kuwait. Fear stampeded stockbrokers. The collective wisdom of stockbrokers was ‘get out of your investments NOW! So they did. They forgot that desperate sellers have prices imposed on them. Black Monday was born. Obviously if they had known any economic history they’d have known the dictum of the Rothschild family, “Buy when the guns start firing.” This disposes of the importance of stockbroker peer group opinion about your investments.

Therefore the Stock Market operates in a haze of opinion and herd like behaviour. An investors’ life is bi- polar oscillating between suicidal pessimism and delusional optimism. Rational analysis is impossible because there are too many ‘unknown unknowns’. All investors are punters.

*A punter is a person who gambles but doesn’t know what they are doing. See my blog ‘Gambling, Gamblers and Punters’ for a full discussion
**If corrected for inflation that £112bn becomes £164.57bn in 2013 monetary terms.
***£56bn in 1999 money


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3 Responses to Gambling on the Stock Market

  1. del smith says:

    What a load of pretentious and tedious old bollocks, share prices are based on the difference between the prices some people will pay for a share and what others will sell it for i.e. simply supply and demand. No one knows why this anonymous group buy and/or sell. They do it for both sane and bizarre reasons they do it slowly and they do it quick. They respond to anticipated corporate figures, they respond to world events they do it on a hunch, they do it because their mum told them to, they try to pre-empt and they try to read the stars. None of this matters because in the long run, as a cohort, these punters can’t lose because over time and on the backs of the world’s workers the wealth of the world rises inexorably upwards.
    Every now and then a run of the mill investor gets rich quick by either luck or judgement; he is simply a prick, a pin prick, a lottery winner who “can’t believe his luck”
    None of that really matters because it’s all peripheral, in the big player market, it’s less than peanuts, everybody knows the richer you are the bigger the spread, the safer you are. Never in history was it more true that “The rich get richer and the poor get poorer”
    Stock market dabblers may think that they are shrewd but they are about as shrewd as someone who jumps on a rising underground escalator and lo and behold it goes up. Occasionally they stall, sometimes they slow, but you can be confident that eventually on they go, ever upwards. You don’t need to be an escalator engineer to have worked this out.
    All that is needed is an eye for and a yearning for something for nothing and a penchant for self-delusion.
    Of course deep down we all know that it really wasn’t really something for nothing. It was someone else’s effort, someone else’s work, someone else’s blood, and often someone else’s early death.
    Therein lays the dilemma.

    Further listening
    Lenny says it all, listen carefully…(skip the advert)

  2. peter baxendale says:

    tantalising to an economic novice like myself

  3. J.G. says:

    Always at your best when exposing the Emperor’s nudity. Great stuff.

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