No monkeys in the stock market
November 18th 2008 00:22
The following amusing snipe at the stock market is doing the internet rounds:
"Once upon a time in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each. The villagers seeing that there were many monkeys around, went out to the forest, and started catching them.
"The man bought thousands at $10 and as supply started to diminish, the villagers lost interest. He announced that he would now buy at $20. This renewed the efforts of the villagers and they started catching monkeys again.
"Soon the supply diminished even further and people started going back to their farms. The offer increased to $25 each and the supply of monkeys became so little that it was an effort to even see a monkey.
"The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now buy on his behalf.
"In the absence of the man, the assistant told the villagers. 'Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when the man returns from the city, you can sell them to him for $50 each.' The villagers rounded up with all their savings and bought all the monkeys.
"Then they never saw the man nor his assistant ever again, only monkeys everywhere!
"Now you have a better understanding of how the stock market works."
Amusing, but is it accurate? No. The story is a good guide to the art of the scam, but it has nothing to do with the functioning of a stock market.
It is fashionable in some circles to see stock markets as places of venality and dishonesty; complex and mysterious centres ruled by old money, big money, oppressive money.
Nah. If you can understand how an auction works, you can understand the stock market. As for venality and dishonesty, you will find them everywhere. If the stock market is complex, it is because of a web of rules and regulations aimed at making it what in reality it is: close to a perfect demand and supply market place. It is more open and less dishonest than your average municipal council election.
Stock markets provide many benefits and few negatives. Most of all, they provide a practical and workable mechanism for raising funds - the funds which drive growth and create the jobs which are the bedrock of our society. Companies which raise money in this way can do so only after passing the scrutiny of regulation and, crucially, the scrutiny of public investor opinion.
There is no such thing as a certain winner in gambling, but you can be a guaranteed winner in the stock market. Like property markets, every major stock market in the world has increased in value over time. That growth is inconsistent and unpredictable, of course, as are the reversals along the way. The current major downturn is an example, but eventually it will be just another correction along the way.
The recoveries from these corrections always lead markets back to new highs eventually, which means that anyone buying a mix of big company stocks and holding on to them over time is guaranteed to make money.
How much money? The debate has long raged as to whether shares or property are the better long-term investment. There is an interesting table at www.ethicalinvestments.com.au listing comparative advantages and disadvantages of the two.
Shares: perform better than property over the long term; allow for diversification because funds can be spread across various companies, sectors and regions; investors can access the share market with relatively smaller amounts of money; investors can cash out small amounts at a time without having to sell the whole portfolio; shares are a paper asset (not tangible) but more and more investors are becoming comfortable with this; investing in shares is generally less expensive than investing in property (eg, brokerage of about 1%); management of the investment can be outsourced to fund managers and advisers; shares can offer tax benefits in the form of franking credits.
Property: may perform better than shares over certain shorter periods but this is a timing issue; difficult to diversify due to large amount of funds required for each property; larger amount of funds required for property investment; difficult to make changes as you have to sell the whole property; people have strong, positive experiences with property - they understand it and feel more comfortable dealing with it; property involves higher transaction costs (eg stamp duty); management of property can be outsourced to agents; it can be difficult to find good tenants; property may suffer periods of inability to rent; property suffers from ongoing costs - rates, agent's fees, repairs and maintenance.
Shares do well in that particular comparison excercise, but the debate has been raging for decades and neither side has established a won case. The fact, however, that there is such a comparison with property underlines the integrity of stocks as a long-term investment.
Any monkey could tell you that.
youngmoney.com, blogs.domain.com.au, www.ethicalinvestments.com.au, supereasy.biz
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