Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.
– John Maynard Keynes, The General Theory of Interest and Employment, Ch. 12, pg. 159
Two trends that have picked up speed in recent years have made the stock market less and less of a place for long term investment and more and more like a casino:
- Increased Trading: A recent WSJ article included a chart showing that around 90% of S&P companies trading volume over the last 6 months exceeds their shares available for trading.
- Professional Management: According to an article by John Bogle in yesterday’s WSJ, “A Crisis of Ethic Proportions” (subscription required), 75% of shares of public companies are now held by professional money managers.
So essentially what you have is big money professional managers running other people’s money and flipping stocks at unprecendented rates. Long term investing and the concomitant concern with the real company and its business in the real world aren’t of much importance in this kind of investment world. The stock market, in other words, is becoming detached from the real world and the companies that underly the stocks as professional money managers trade pieces of paper for short term gain.
For an excellent commentary on this subject, see John Bogle, “A Tale of Two Markets”, Keynote Speech at the 17 Annual Conference on Financial Reporting, San Francisco, CA, October 27, 2006. HIGHLY RECOMMENDED.
Another factor contributing to the casino-like nature of the current stock market is government intervention. Radical monetary policy and massive government intervention in the economy create all sorts of dislocations and, most importantly, a massive boom and bust cycle. The boom and bust cycle dominates economic life and makes it impossible for a rational investor to focus in on a company and its long term fundamentals without considering the unstable macroeconomic environment.
I am growing increasingly cynical about the stock market and its overall value. Sometimes when I tell people I’m an investment advisor, they respond by saying the stock market is “rigged” or equivalent to gambling. More and more I have to admit they have a point. The potential is there but the reality is disappointing.