Is the stock market a haven for speculators? And is that a good thing?

I wasn’t a big fan of Paul Krugman’s column on Friday, and his responses to readers today make him seem even more thin-skinned an arrogant than usual. (Dean Kloner: “What’s the point of the column? Anybody can concoct a scenario under which the global economy slides into a recession, no?”. Paul Krugman: “Um, the reason for writing it this way was as a slightly more reader-friendly way of describing the risks than you usually read.”)

But down at the bottom of the column is a very interesting letter from Jim Krupp, in Amherst:

Historically, when stocks paid dividends tied to profit, one could argue that buying stock was an investment in a company and that the buyer wanted to participate in its profits. But for the vast majority of speculatively priced stocks today, there is clearly no return from owning a stock unless someone else at a future time is willing to pay more for it than you did. A company’s success or failure is immaterial as an owner of shares you neither gain if a company is successful, nor lose if it is not, until you try to sell. This is a straight gamble as to whether at some future time demand will be higher or lower than today…

Perhaps the origin of the meltdown was not a bad day on a Chinese market. Perhaps it was several generations ago when stock ownership became a speculative gamble and not a prudent bet on the success of the company?

Although Krupp automatically loses my respect by talking about the stock market as a “pyramid scheme”, I’m actually rather sympathetic to the bit of his letter that I quoted. The overwhelming majority of stock investors don’t consider themselves part-owners of companies, but rather full owners of securities which they hope to see go up in value. Stocks are somewhere to put risk capital to work, rather than somewhere to truly invest your money and, literally, reap dividends. The time horizon for stock-market investors (large-business owners) is often much shorter than the time horizon for small-business owners. And, insofar as there’s a difference between investors and speculators, the stock market is dominated by the latter: people who buy something with the intention of flipping it to someone else at a higher price.

Whether all this is a bad thing, I’m not sure. I’ve got most of my knowledge and understanding of financial markets in and around the bond markets, rather than the stock markets, so I’m not particularly comfortable opining on this sort of thing. Who are the best people I should talk to if I want to understand stocks the way I understand bonds? Or is that just not possible?

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One Response to Is the stock market a haven for speculators? And is that a good thing?

  1. Lord says:

    Stock investors fear inflation more than volatility. They are willing to trade dividends for growth. The danger is increased short term volatility but that is opportunity to the speculator and long term reward for the risk of the investor. No one can retire on bonds, especially these days.

    You could read Niederhoffer’s paeans to the speculator, http://www.dailyspeculations.com/wordpress/, or Siegel’s Stocks for the Long Run for the investor side.

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