Stocks Are An Illusion
by guitry
The recent so called “credit crunch” has caused consternation world wide. It began when certain financial instruments, called CDO’s, started to “lose value” and eventually had no value at all. People started to ask: just what has value? Stocks fell, gold rose and the panic was on. While everyone has an explanation, no one is willing to face the hard truth:
Stocks values are an illusion.
Stocks are only pieces of paper which convention decrees have a “value”. But they are not backed by anything concrete. If you own a share of Microsoft or even a thousand, you do not “own” the company; you have no power. No matter what “analysts” say or write there are no immutable facts behind what they claim, only an illusion of logic. For instance why is it that Microsoft which earns a billion dollars each month, has forty billions dollars in the bank, and no debt, have a stock which has not moved in five years? There is no basis for this regardless of the reasons you may be given. The financial industry assigns value to these pieces of paper according to arcane parameters such as: “P/E ratios, growth, cash flow, EBDTA, book value, yield”, and many others constructed to fit the particular predilections of the broker or analyst “following the stock”. The fact is that all of these measures are illusory because the numbers behind them are subject to instantaneous change or are based upon other malleable data.
Take “growth”, for instance. Growth is usually measured by the increase year over year in a company’s total net profit. The greater the percentage increase the more the stock is “valued”. Assuming one trusts the figures given out by the company, this would be a simple measure, but the financial industry is never satisfied by simple measures. It is just not enough to say that the company has “grown” by ten percent during the previous year. It isn’t enough because those who bought the stock on that basis are now wondering if it will do as well next year .If it does not then the price of the stock may go down. What to do? The only answer is for someone to gauge the growth potential for next year and the year after that. Just who is this someone or better yet someones? These are the analysts, the managers of mutual funds, the pundits of Wall Street, and the executives of the company itself who usually provide “guidance”, a fancy term meaning an “educated guess” as to what the company will do next year or even next quarter, providing of course that the world remains more or less the same and that no unexpected event takes place.
But wait there is more: In addition to all the factors listed above a key ingredient determining a stock’s price is popularity. For those of you who remember your high school days, you may recall how one’s popularity unpredictably ebbed and flowed. If a consensus decides that a sector is waning all the stocks in that sector will decline, regardless of their so called individual worth. Often this “consensus” is not even a majority, but is a well organized cabal of speculators who want the stocks to go up, or down.
All of these parameters are like playing roulette with multiple white balls and you can only win if all of them fall exactly into the numbered slots which you have picked in advance of the spin of the wheel.
For those who want to “play” this stock market roulette, remember you are doing just that “playing” and please remember the old joke about the cowboy in the old west who was asked why he was placing bets on a roulette wheel even after he was told the wheel was crooked, replied: “I know but it’s the only wheel in town”.