From the Desk of The Rigorist
The New York Stock Exchange is in the news, and here, at least, I can add light instead of heat.
There is a general confusion in discussions regarding “investment” in publicly held corporations as the ones traded on the NYSE due to a semantic sloppiness in common English. I will start small and end large, from the understanding of investment we all have, to circumstances where such small ideas have no meaning.
Let’s start with a guy with an idea. He has no money but he’s got an idea. Maybe he’s Bob Ederer of Ocean Springs, Mississippi, the third-generation of a netting manufacturing family in Chicago who only needs machines to assemble and a place to run them. Perhaps he’s Tom Kossen of Jackson, Mississippi, a diesel mechanic without formal education, but a salesman nonpareil who sees the potential in on-site standby power generation systems. Instead of taking on debt which would bankrupt their businesses in their meager beginnings, they sell equity, partial ownership of their endeavors. If we have the wit and the foresight, we will buy all that they offer, INVESTING money that they will in turn invest in machinery and inventory.
Straightforward and simple so far, eh?
10 years pass and the value of our investment is now 10 fold what we paid. There is another guy with another idea. Steve Yobs or Cobbs or something like that. He has no money but he’s got an idea. We’re changing ponies and our investment is put up for sale. Yippee–ki-yay!
Joe Blow buys our equity at a premium no less, expecting increases in value and distributions of profits beyond the extra he pays. This is where things start getting weird.
So, how much of the money that Joe Blow “invests” does Bob or Tom get to use for machinery or inventory or anything else that would increase the value of the business?
That’s right. They get nothing, nada, zero, zilch, the big ROUND number. They get a brand-new guy at their stockholder meetings who knows nothing of their business, interested only in a quick return.
Joe Blow isn’t investing, he’s speculating. We call it investing, I believe, because this sort of thing is the closest regular folk get to the real thing.
10 years pass, and 10 more, and 10 more. The value of our original equity could be worth almost anything depending on what management wants the accountants to say. Bob and Tom have long since cashed out and retired. Previously authorized but un-issued stock has been sold. New preferred classes of equity have also been issued. There have been stock splits and buybacks. The number of stock owners has gone from a few to a few thousand , and no one owns a majority interest anymore.
It is that last element which qualifies this business to be traded on the New York Stock Exchange.
The price of a single share has been set blissfully free from stodgy calculations of the underlying value it represents. The double taxation of dividends has made “profit” into a dirty word, a vulgarity to be avoided. The stock price rises and falls on the hopes and fears of people more strongly influenced by the morning news and the phase of the moon. That’s not hyperbole, that’s what professional stock traders call “technical stock price analysis.” JFGI.
“Investors” gain and lose fortunes without affect to or effect of the business at issue.
So what are we to make of the rise and fall of the aggregate price of single shares of stock of 40 businesses classified as “industrial” traded on the NYSE? That is the definition of the NYSE Dow Jones index, you know.
Up 450, down 500, the only thing it means is a bunch of people have got their panties in a wad, and the MSM can mesmerize an audience with the drama long enough to sell soap.
Be very careful with the conclusions you draw from stock exchange indices.