Mark Cuban: What Business is Wall Street in?(blogmaverick.com)
blogmaverick.com
Mark Cuban: What Business is Wall Street in?
http://blogmaverick.com/2011/08/08/what-business-is-wall-street-in-2/
122 comments
You missed the part where creating that valuation metric is becoming harder and harder due to an increasingly chaotic and fast-moving market.
If you're just trying to predict how a stock's price will change in the next couple of weeks or months under whatever market conditions happen to prevail over that time period, that's speculation. That's what the vast majority of individual investors engage in -- "I think the price of this stock will go up, so I'm going to buy it." Arguing that speculation is hard in a chaotic market gets no sympathy. Actual value investing means you think you have an idea of what shares in a particular company are worth, plus faith that the market price of a stock will reflect that underlying value over the long term. Arguing that value investing is affected requires arguing that market chaos has the power to prevent market prices from reflecting underlying value over the long haul. That's a pretty big claim and requires some justification.
Doesn't gold behave that way? Market forces prevent gold from reflecting the value of using gold for jewelry or industry or whatever else other than playing the market. It seems like an unexceptional claim that there are other financial instruments that are similar.
Gold isn't a good example of any market principle because of its historical and symbolic significance. There's a reason the term "gold bug" exists but not "wheat bug", and there's a reason it was a perfect match for Glenn Beck's theatrics. Who hasn't had a conversation in a bar about the price of gold? Who has had a conversation in a bar about the price of sugar or aluminum? Gold is a magnet for all kinds of emotion, from paranoia to get-rich-quick mania.
Gold is the longest term example I can think of, but it's hard to believe that the stock market game is not a significant percentage of the price of AAPL and that it's solely fundamentals. Stocks in general get that same goldbug enthusiasm when people plan for retirement - buying stocks is partly based on fundamentals, but partly an act of faith in the game.
Are you asserting that almost everything is priced according to fundamentals over the long term, with the single exception of gold?
Are you asserting that almost everything is priced according to fundamentals over the long term, with the single exception of gold?
[deleted]
> To traders, whether day traders or high frequency or somewhere in between, Wall Street has nothing to do with creating capital for businesses, its original goal. Wall Street is a platform. It’s a platform to be exploited by every technological and intellectual means possible.
Just because the day to day work of traders on Wall Street has been abstracted away from it's original intention doesn't mean that it doesn't continue to serve that function. When working in any large system, your focus can be absorbed by whatever smaller task you are working on, and you can loose sight of what your piece of the puzzle does. When working on a software team of many hundreds of developers, it's easily possible that the code you are working on is not at all specific to the problem you're solving. That doesn't mean that your work isn't helping to solve the problem.
The financial system is very complex, and I won't pretend to have the expertise or knowledge to explicitly explain the service that high frequency traders, for example, are providing. The way Wall Street currently operates might not be the most efficient system for allocating capital. But I don't think that you can immediately write off modern trading on the basis that it doesn't directly deal with the original purpose of Wall Street.
Just because the day to day work of traders on Wall Street has been abstracted away from it's original intention doesn't mean that it doesn't continue to serve that function. When working in any large system, your focus can be absorbed by whatever smaller task you are working on, and you can loose sight of what your piece of the puzzle does. When working on a software team of many hundreds of developers, it's easily possible that the code you are working on is not at all specific to the problem you're solving. That doesn't mean that your work isn't helping to solve the problem.
The financial system is very complex, and I won't pretend to have the expertise or knowledge to explicitly explain the service that high frequency traders, for example, are providing. The way Wall Street currently operates might not be the most efficient system for allocating capital. But I don't think that you can immediately write off modern trading on the basis that it doesn't directly deal with the original purpose of Wall Street.
The exchanges operate for the benefit of the listed companies. NASDAQ and NYSE can compete on features and trading rules. Leaving aside the problem of company officers trying to screw the stockholders (I'm not a fan of stock classes that give different voting rights), companies will list wherever the rules give the highest value to their current shareholders. And the highest value to the shareholders is provided by the market with the parasitic HFTs.
I don't understand. I though Mark Cuban was a fairly sophisticated investor, but he seems to be marveling that Australia taxes short term capital as ordinary income and LTCG at a lower rate, which is of course exactly what the US does.
I don't understand. I though Mark Cuban was a fairly sophisticated investor, but he seems to be marveling that Australia taxes short term capital as ordinary income and LTCG at a lower rate, which is of course exactly what the US does.
What you describe applies to investors. He's "marvelling" over the parallel tax system for traders where capital income is treated as revenue.
Govt will not impose new taxes.
HNIs and Corporations are bullying Govt that they'll permanently move their businesses to low cost countries.
Wall street just followed a general theme among banks. Once upon a time they were institutions built to control capital flow, from where it was available to where it was needed, to provide some social value by allowing enterprises to thrive. But apparently the credit interest was not a big enough margin, so they decided to do all kinds of other shit, investment banking was born. Which mostly makes rich people richer, without any kind of social benefit.
Wall Street just followed that model.
Wall Street just followed that model.
They aren't "hackers", they're engineers
Speaking as an engineer, no one in the financial industry remotely qualifies as an engineer. A real engineer applies physical laws to create a product with some certainty of functioning properly. Wall street 'engineers' create products that don't obey physical laws - and on a theoretical level, probably can't, since their very existence changes the rules of the market. The financial crisis also demonstrated that even the people creating these instruments don't understand them, much less the customers... and none of them particularly care if spectacular failures results, as long as they aren't the ones left holding the bag.
That would also apply to software engineers. What physical laws do they apply?
Most/all people who call themselves software engineers are not engineers. I'm not convinced that software engineering itself is actually a field of engineering, for that very reason. At most universities, software engineering is just a weak-sauce mashup of basic engineering classes, computer engineering, and compsci. I don't believe there is any agreement about the basic principles of software construction.
Just because people call themselves software engineers and schools teach it as a discrete program, doesn't make them true engineers. There are plenty of schools that offer 'financial engineering' programs. IMO, programmers have a lot more in common with traditional artisan trades than engineering. They call themselves 'software engineers' because skilled technical workers prefer to associate with their cultural equals in an established white-collar profession than blue-collar craftsmen.
Just because people call themselves software engineers and schools teach it as a discrete program, doesn't make them true engineers. There are plenty of schools that offer 'financial engineering' programs. IMO, programmers have a lot more in common with traditional artisan trades than engineering. They call themselves 'software engineers' because skilled technical workers prefer to associate with their cultural equals in an established white-collar profession than blue-collar craftsmen.
I disagree, by definition in most jurisdictions, being an Engineer is being accredited by the local Engineering body. In Canada the Canadian Engineering Accreditation Board [1] accredits undergraduate programs that teach the field of Software Engineering. I attend such a program at the University of Waterloo [2][3]. After I graduate I can write the exams offered by Professional Engineers Ontario [4]. I think this makes Software Engineering a field of Engineering.
In regards to what is taught at universities, my program involves courses on Engineering Design, Computer Engineering and Computer Science, but it also has classes on what constitutes Object-Oriented design, HCI, etc. I think those courses are more than enough to teach students on the basic principles of software construction.
Also, what do you define the "basic principles of software construction" to be?
[1] http://www.engineerscanada.ca/e/index.cfm [2] http://uwaterloo.ca/ [3] http://www.softeng.uwaterloo.ca/ [4] http://www.peo.on.ca/
In regards to what is taught at universities, my program involves courses on Engineering Design, Computer Engineering and Computer Science, but it also has classes on what constitutes Object-Oriented design, HCI, etc. I think those courses are more than enough to teach students on the basic principles of software construction.
Also, what do you define the "basic principles of software construction" to be?
[1] http://www.engineerscanada.ca/e/index.cfm [2] http://uwaterloo.ca/ [3] http://www.softeng.uwaterloo.ca/ [4] http://www.peo.on.ca/
I guess we'll have to agree to disagree. I don't see accreditation of engineering programs as proof that software engineering is a legitimate field of engineering.
The problem for me is that there don't seem to be any basic principles of software construction. Most programs just teach a selection of software development fad methodologies. A decade ago, most programs taught some variation of waterfall development. Now they tend to teach some variation of agile development. As far as I can tell, there's no scholarship to support one method over the other - it's pure fashion and industry demand. (The decline of academic research on software construction methods since the 80s is another problem) Look at software engineering programs in another ten years and I'm sure you'll see a different mix of classes emphasizing the business trends of the day.
In comparison, you could look at the curriculum for almost any electrical engineering program from thirty years ago and you would see almost the same classes as a modern program: circuit theory, E&M, electric machines, control, communication systems, etc. The only significant difference would be the addition of courses on software and digital electronics.
The problem for me is that there don't seem to be any basic principles of software construction. Most programs just teach a selection of software development fad methodologies. A decade ago, most programs taught some variation of waterfall development. Now they tend to teach some variation of agile development. As far as I can tell, there's no scholarship to support one method over the other - it's pure fashion and industry demand. (The decline of academic research on software construction methods since the 80s is another problem) Look at software engineering programs in another ten years and I'm sure you'll see a different mix of classes emphasizing the business trends of the day.
In comparison, you could look at the curriculum for almost any electrical engineering program from thirty years ago and you would see almost the same classes as a modern program: circuit theory, E&M, electric machines, control, communication systems, etc. The only significant difference would be the addition of courses on software and digital electronics.
Interestingly enough, the wiki for Engineering uses the following:
Engineering is the discipline, art, skill and profession of acquiring and applying scientific, mathematical, economic, social, and practical knowledge, in order to design and build structures, machines, devices, systems, materials and processes that safely realize improvements to the lives of people. (http://en.wikipedia.org/wiki/Engineering)
By using art, it would indicate that process is not necessarily needed for something to be classified as engineering. The fact that software engineers do use mathematical concepts (similar to how a civil, mechanical, or chemical engineer does) to build systems would make it an engineering discipline.
Disclaimer: I am a software engineer and I don't look at myself as any more or less of an engineer as any others.
Engineering is the discipline, art, skill and profession of acquiring and applying scientific, mathematical, economic, social, and practical knowledge, in order to design and build structures, machines, devices, systems, materials and processes that safely realize improvements to the lives of people. (http://en.wikipedia.org/wiki/Engineering)
By using art, it would indicate that process is not necessarily needed for something to be classified as engineering. The fact that software engineers do use mathematical concepts (similar to how a civil, mechanical, or chemical engineer does) to build systems would make it an engineering discipline.
Disclaimer: I am a software engineer and I don't look at myself as any more or less of an engineer as any others.
They call themselves 'software engineers' because skilled technical workers prefer to associate with their cultural equals in an established white-collar profession than blue-collar craftsmen.
I hate the term "software engineer" but for the opposite reason: I see "engineering" as a lesser profession than computer programming. In programming, you never solve the same problem twice; you make something new each time because you can freely reuse what you made last time. In engineering, you're building the same bridge 1000 times over 1000 rivers.
A "software engineer" is a person that makes a career out of solving the same problem over and over again. There are a lot of people like this, but I'm not going to associate myself with that.
I hate the term "software engineer" but for the opposite reason: I see "engineering" as a lesser profession than computer programming. In programming, you never solve the same problem twice; you make something new each time because you can freely reuse what you made last time. In engineering, you're building the same bridge 1000 times over 1000 rivers.
A "software engineer" is a person that makes a career out of solving the same problem over and over again. There are a lot of people like this, but I'm not going to associate myself with that.
There's nothing wrong with being a craftsman. I think programmers would be better off if they embraced programming as a craft, instead of pretending that it obeys scientific principles as yet undiscovered and can be practiced without reference to the skill of the individual programmer.
There's plenty of areas where "writing code" is engineering, and there's plenty others where its rocket science. Then there's some where its Apollo 13.
The trick is to know which is which.
The trick is to know which is which.
I think you’re missing the most basic separation.
Engineering has a long history of building things that can kill people. In that context significant caution is required which is still at the heart of any of the true engineering disciplines. Some software fits into that context but the failure of most pieces of software tend to have less dramatic outcomes with most critical systems designed to operate even if it's software does the worst possible things at the worst time.
Engineering has a long history of building things that can kill people. In that context significant caution is required which is still at the heart of any of the true engineering disciplines. Some software fits into that context but the failure of most pieces of software tend to have less dramatic outcomes with most critical systems designed to operate even if it's software does the worst possible things at the worst time.
" A real engineer applies physical laws to create a product with some certainty of functioning properly."
"Most/all people who call themselves software engineers are not engineers. I'm not convinced that software engineering itself is actually a field of engineering, for that very reason."
Extracting meaningful information from a corpus of documents involves dealing with physical laws.Identifying spam deals with physical laws. So do a lot of other problems which often have strong mathematical theory. Mathematics is lot abstract and often comes before the physics of things.
"Most/all people who call themselves software engineers are not engineers. I'm not convinced that software engineering itself is actually a field of engineering, for that very reason."
Extracting meaningful information from a corpus of documents involves dealing with physical laws.Identifying spam deals with physical laws. So do a lot of other problems which often have strong mathematical theory. Mathematics is lot abstract and often comes before the physics of things.
Remember your roots, Cuban!
http://www.nytimes.com/2000/03/05/magazine/the-idled-workaho...
http://www.nytimes.com/2000/03/05/magazine/the-idled-workaho...
It's odd to me that he thinks Wall Street was ever in the business of "creating capital for business". The only thing that can create capital is producing more than you consume and saving the difference. Now I have nothing against trading, speculating, or whatever else most people on Wall Street do. However, I think fractional reserve banking, which creates new money, is an extremely destructive practice equivalent to counterfeiting. Presumably it's fractional reserve banking that he thinks "creates capital". I recently gave a highly upvoted description of why fractional reserve banks are a scam here: http://news.ycombinator.com/item?id=2844528
It's a myth that banks create capital by employing fractional reserves. All they do is take purchasing power from some people, give it to themselves, and then charge a toll (interest) to the people they loan it to. It's unethical and it should be illegal. Unfortunately this isn't going to change until people stop believing the myth that printing new money is the same as creating capital.
It's a myth that banks create capital by employing fractional reserves. All they do is take purchasing power from some people, give it to themselves, and then charge a toll (interest) to the people they loan it to. It's unethical and it should be illegal. Unfortunately this isn't going to change until people stop believing the myth that printing new money is the same as creating capital.
Cuban is referring to when Wall Street aggregates investors' money and gives it to growing companies. Trying to grow by "producing more than you consume and saving the difference" is called reinvesting the cash flow, aka bootstrapping in the startup world. But sometimes companies see a growth opportunity that takes more capital than they can get through cash flow which is when they turn to investors. In Silicon Valley they turn to VCs, but Wall Street is the only place companies can turn to raise the really big money up to billions of dollars.
I'm assuming that he doesn't really mean "creating capital..." for exactly the reasons that you give. But, there was a day that Wall Street was in the business of capital formation - pulling together relatively small bits of capital from large numbers of investors to apply that capital to projects that would certainly be beyond the reach of normal (i.e. not government) investors. This is a valid business - one which sadly is a smaller and smaller part of what Wall Street does.
> The only thing that can create capital is producing more than you consume and saving the difference
Here are a few ways to create capital without producing anything:
1) Buy wholesale, sell retail
2) Buy in area A, sell for more in area B.
3) Buy all of product X, create a monopoly, sell at whatever price you want
4) Buy product X, hold until price goes up (or manipulate the price), sell
5) Steal
Here are a few ways to create capital without producing anything:
1) Buy wholesale, sell retail
2) Buy in area A, sell for more in area B.
3) Buy all of product X, create a monopoly, sell at whatever price you want
4) Buy product X, hold until price goes up (or manipulate the price), sell
5) Steal
Stealing doesn't create capital. It moves it. Your points 3 and 4 also indicate you don't seem to understand the difference between creating capital and moving it.
As for buying and selling stuff for a profit, you may not be producing stuff with your own hands, but you are enabling more production to occur.
As for buying and selling stuff for a profit, you may not be producing stuff with your own hands, but you are enabling more production to occur.
I don't believe that Wall Street is well-intentioned in 99.5% of its actions, but still Wall Street creates capital for business: when a company goes through its motions to file and launch an IPO, the banks are the ones who commit to finding X investor dollars. It's easy to ignore the difficulties of that process, given the glut of VC firms champing at the bit to flood the next startup with cash, but it still plays a role.
The difference between Wall Street today and a century ago is the availability of capital. A century ago capital was much more scarce and was mostly held by wealthy private (mostly European) individuals. The stock market was one of the few ways for American companies connect with those people and fund expansion.
Capital is anything but scarce today. Where a century ago the vast majority of people bought savings bonds, if they were wealthy enough to save anything, today the majority of adults need to own stock to fund their retirement. (Itself a novel concept) In addition, vast amounts of capital are held by private equity groups, pension funds, sovereign wealth funds, etc - all chasing the few opportunities for outsized returns.
At some point we reached an inflection point where the need of capital to obtain a return exceeded the demand for capital. Since then the overriding goal of the financial industry has been to obtain those returns by taking them from another player. The original function of providing capital for corporate expansion is almost irrelevant.
Capital is anything but scarce today. Where a century ago the vast majority of people bought savings bonds, if they were wealthy enough to save anything, today the majority of adults need to own stock to fund their retirement. (Itself a novel concept) In addition, vast amounts of capital are held by private equity groups, pension funds, sovereign wealth funds, etc - all chasing the few opportunities for outsized returns.
At some point we reached an inflection point where the need of capital to obtain a return exceeded the demand for capital. Since then the overriding goal of the financial industry has been to obtain those returns by taking them from another player. The original function of providing capital for corporate expansion is almost irrelevant.
At a very basic level, I don't understand the stock market. A private company can raise capital through an IPO. But what are the investors really buying? The company might pay a dividend, but many don't. Investors can purportedly elect the board of directors, but in reality, few investors have any influence. So what (liquid) investment have the shareholders bought that is actually appreciating in value?
The fact that most companies don't pay a dividend is really a tax hack. Before 1980, most companies did pay dividends.
When the tax rate on capital gains (now 20%) dropped far below that for dividends (30%+), companies realized they could spend the same amount of money buying back shares. This should drive up the share price by the same amount as an issued dividend (do the math). The difference is that investors can sell shares and only pay 20% instead of 30%+.
When the tax rate on capital gains (now 20%) dropped far below that for dividends (30%+), companies realized they could spend the same amount of money buying back shares. This should drive up the share price by the same amount as an issued dividend (do the math). The difference is that investors can sell shares and only pay 20% instead of 30%+.
"Qualified dividends" are taxed as long-term capital gains, or not taxed at all if you're in the 15% or 10% bracket: http://en.wikipedia.org/wiki/Qualified_dividend. Although apparently the reduced rates will expire in 2012 unless they're extended again.
Not to mentioned that this only started in 2003, which was of course too late.
If a company is not paying dividends, it is (hopefully) reinvesting in itself and growing. Theoretically, all growing companies will reach one of the following points:
1) It will stop growing, and begin paying out dividends
2) It will be acquired
3) It will fold
So, ownership of stocks that do not pay dividends is speculative- eventually, it will either fold or net you money. This is not liquid, of course- stock trading is the liquidation of this speculation, if that makes sense, in the same way that you hold a bond in anticipation of future returns, but you could sell the bond for more immediate gains.
(As I understand it, the reason why a growing company will, in theory, eventually pay out dividends rather than just keeping wads of cash is because once the return of reinvestment tapers off, major shareholders will band together to force the company to pay out dividends)
1) It will stop growing, and begin paying out dividends
2) It will be acquired
3) It will fold
So, ownership of stocks that do not pay dividends is speculative- eventually, it will either fold or net you money. This is not liquid, of course- stock trading is the liquidation of this speculation, if that makes sense, in the same way that you hold a bond in anticipation of future returns, but you could sell the bond for more immediate gains.
(As I understand it, the reason why a growing company will, in theory, eventually pay out dividends rather than just keeping wads of cash is because once the return of reinvestment tapers off, major shareholders will band together to force the company to pay out dividends)
You're right to be suspicious of the whole system. As a stockholder you are basically last in line to get compensation from a bankruptcy proceeding. The bondholders will get paid well before you will.
Investing without a dividend is just speculation.
Investing without a dividend is just speculation.
The simplified version:
Stock gives you a share of current and future profits (via dividends) as well as a share of the liquidation value of the company. If a company continues to acquire assets, this increases its liquidation value; some companies do this rather than paying dividends because it's more tax-efficient for investors.
One of Warren Buffett's investment strategies is to look for companies that are stable but whose stock is trading at below liquidation value.
Stock gives you a share of current and future profits (via dividends) as well as a share of the liquidation value of the company. If a company continues to acquire assets, this increases its liquidation value; some companies do this rather than paying dividends because it's more tax-efficient for investors.
One of Warren Buffett's investment strategies is to look for companies that are stable but whose stock is trading at below liquidation value.
Strictly speaking, investors buy a part of a company, buy contributing to it's equity. If company is expected to grow without putting on too much debt, its equity will grow too and a fixed part of it (if we forget about dilution for a moment) is expected to appreciate as well.
Growth
To be more precise, stock price growth. I think in most cases it is better to do dividends and move away from stock price based compensation.
If you want that then buy established companies.
Otherwise, as an investor it's better to keep money within the company to fuel its growth so it can pay better dividends in the future.
This is similar to how startup founders often don't draw a salary just to have more money to invest in the growth of their company.
Otherwise, as an investor it's better to keep money within the company to fuel its growth so it can pay better dividends in the future.
This is similar to how startup founders often don't draw a salary just to have more money to invest in the growth of their company.
Simple solution. Penny a share transfer tax for all trades. Corresponding amounts on bonds and other instruments. Watch the amazing reduction in volume and volatility. Then watch the return to focus on value trading.
Like that idea? Next, open up public companies books. Not in the formal but phony SEC/GAAP way. No, I mean realtime journal entries. I will do the accounting myself. You can too. Link the trading tax to how often the company updates its numbers. Want more liquidity for your stock? Give more information.
Still on board? Ok, now if a company releases forecasts, they must release the model they used to generate the forecast. Yes, the code. Doesn't matter how simple or complex. Bullshit forecasts will be self-evident. Data for better ones will be more available.
Now all those things would make finance productive again by putting the focus back on capital allocation and moving it away from trading, speculation and lies. Make regulators focus on enforcing real transparency, since they don't know how to regulate behavior. This takes away the upside from the regulator/industry revolving door. It would be a great world for analysts and investors.
In olden days (1980) all this would have been technically infeasible. Now we have the computing power to handle it.
Like that idea? Next, open up public companies books. Not in the formal but phony SEC/GAAP way. No, I mean realtime journal entries. I will do the accounting myself. You can too. Link the trading tax to how often the company updates its numbers. Want more liquidity for your stock? Give more information.
Still on board? Ok, now if a company releases forecasts, they must release the model they used to generate the forecast. Yes, the code. Doesn't matter how simple or complex. Bullshit forecasts will be self-evident. Data for better ones will be more available.
Now all those things would make finance productive again by putting the focus back on capital allocation and moving it away from trading, speculation and lies. Make regulators focus on enforcing real transparency, since they don't know how to regulate behavior. This takes away the upside from the regulator/industry revolving door. It would be a great world for analysts and investors.
In olden days (1980) all this would have been technically infeasible. Now we have the computing power to handle it.
Penny a share transfer tax for all trades.
What's a "share"? Equities are one of many financial markets, but not the only one and not necessarily the most important. People trade bonds, treasuries, foreign currencies, commodities, interest rates and various derivatives on top of these securities: equity options, FX options, interest rate swap options, FX forwards, etc., etc. How would you tax options contracts? Tax when exercised? But you wanted it to be a trade tax, so should it be a dollar per standard contract?
Your model is too simple and does not reflect the reality of the financial markets. And anyway, if there's one thing banks are great about, it's passing on the fees to their clients. A one cent per-share transfer tax doesn't mean Wall Street is out of business. It means you won't have enough money in your 401k to retire.
Still on board? Ok, now if a company releases forecasts, they must release the model they used to generate the forecast. Yes, the code. Doesn't matter how simple or complex. Bullshit forecasts will be self-evident. Data for better ones will be more available.
Why do companies have to have "a model"? You wouldn't ask da Vinci for the "code" behind the Mona Lisa; why should accounting be automatically less creative than painting? All regulations will do is force companies to get money from source other than a public offering -- private investment, bond issues, etc.
Anyway, I'm not saying that taxing trades is a bad idea, I'm saying that your idea doesn't make much sense in the real world. Communism is a good idea. On paper.
What's a "share"? Equities are one of many financial markets, but not the only one and not necessarily the most important. People trade bonds, treasuries, foreign currencies, commodities, interest rates and various derivatives on top of these securities: equity options, FX options, interest rate swap options, FX forwards, etc., etc. How would you tax options contracts? Tax when exercised? But you wanted it to be a trade tax, so should it be a dollar per standard contract?
Your model is too simple and does not reflect the reality of the financial markets. And anyway, if there's one thing banks are great about, it's passing on the fees to their clients. A one cent per-share transfer tax doesn't mean Wall Street is out of business. It means you won't have enough money in your 401k to retire.
Still on board? Ok, now if a company releases forecasts, they must release the model they used to generate the forecast. Yes, the code. Doesn't matter how simple or complex. Bullshit forecasts will be self-evident. Data for better ones will be more available.
Why do companies have to have "a model"? You wouldn't ask da Vinci for the "code" behind the Mona Lisa; why should accounting be automatically less creative than painting? All regulations will do is force companies to get money from source other than a public offering -- private investment, bond issues, etc.
Anyway, I'm not saying that taxing trades is a bad idea, I'm saying that your idea doesn't make much sense in the real world. Communism is a good idea. On paper.
My example tax is only a conversation starter. You would be right to say that the reality is a little more complex. But not much. I worked in the bond, fx, and commodities end of Wall Street for nearly 20 years and an average guy from my old department would know how to set, implement and administer such a tax for each product. It's not that hard. In fact a similar system existed for regulatory capital for a very long time.
The Communism comparison is really a red herring. The principles of the price system, the central feature of a free market, are under constant assault from informational asymmetries and externalities of all kinds. Before our era of jargon, they were simply called fraud and rumor mongering. HFT is 21st century micro-rumor mongering.
To protect the functioning of markets these are appropriate objects of regulation--even for a free marketeer like me. I merely suggest we modify the the regulation of an already regulated market.
Unfortunately the style of regulation we keep opting for punishes bad behavior of individuals--when it does anything at all--and ignores the systemic causes. This repeatedly plays into the hands of industry interests every time. The public interest requires more information, to reduce the tendency for fraud that our regulators have proven they cannot control.
The Communism comparison is really a red herring. The principles of the price system, the central feature of a free market, are under constant assault from informational asymmetries and externalities of all kinds. Before our era of jargon, they were simply called fraud and rumor mongering. HFT is 21st century micro-rumor mongering.
To protect the functioning of markets these are appropriate objects of regulation--even for a free marketeer like me. I merely suggest we modify the the regulation of an already regulated market.
Unfortunately the style of regulation we keep opting for punishes bad behavior of individuals--when it does anything at all--and ignores the systemic causes. This repeatedly plays into the hands of industry interests every time. The public interest requires more information, to reduce the tendency for fraud that our regulators have proven they cannot control.
"And anyway, if there's one thing banks are great about, it's passing on the fees to their clients. A one cent per-share transfer tax doesn't mean Wall Street is out of business. It means you won't have enough money in your 401k to retire."
While I agree with the rest of your criticisms, this is off base. You have to consider the second-order effects; banks will not simply continue to trade at the exact same volume as before whatever (presumably somehow fixed-up) tax is imposed, then pass the costs on to hapless consumers who have no choice but to just fork over the cash. They will have to trade less. Which is the point; however good or bad it may be, at least the core idea is making some account of second-order effects. When you tax a thing, you get less of it.
(My specific opinion is that it isn't necessarily a net gain as written, it is after all just an HN comment, but that the general idea of carefully re-inserting some friction back into the market as a damping factor may be a useful line of inquiry. But it's not going to be easy.)
While I agree with the rest of your criticisms, this is off base. You have to consider the second-order effects; banks will not simply continue to trade at the exact same volume as before whatever (presumably somehow fixed-up) tax is imposed, then pass the costs on to hapless consumers who have no choice but to just fork over the cash. They will have to trade less. Which is the point; however good or bad it may be, at least the core idea is making some account of second-order effects. When you tax a thing, you get less of it.
(My specific opinion is that it isn't necessarily a net gain as written, it is after all just an HN comment, but that the general idea of carefully re-inserting some friction back into the market as a damping factor may be a useful line of inquiry. But it's not going to be easy.)
I'm with you aside from this: "why should accounting be automatically less creative than painting?"
I'm sure you don't mean what it looks like, but I can't imagine what that could mean.
I'm sure you don't mean what it looks like, but I can't imagine what that could mean.
I think he means that if you force every company into the same financial mold, you're not going to get anything interesting in the public markets. Anyone outside the box will not play in the public arena because the rules will be so restrictive as to be unworkable.
Most people think of accounting as being like math. It's more like writing.
Most people think of accounting as being like math. It's more like writing.
Why can't your "gut" be involved in forecasting the success of your company? People often come up with the right answer without knowing how; making them write down every assumption they made while coming up with an answer would make coming up with an answer impossible.
The real world is not 9th grade math.
The real world is not 9th grade math.
People often come up with the wrong answer without knowing how, too. They just forget about those times.
It's been well documented— your perception of the "real world" is heavily distorted. That's why we have math— to figure out the right answer despite human biases.
It's been well documented— your perception of the "real world" is heavily distorted. That's why we have math— to figure out the right answer despite human biases.
My point was about forward looking statements and inducing companies to reveal their rational processes.
So by all means, use your gut. Then show your work. People can then bet on your gut. Or somebody else's work.
So by all means, use your gut. Then show your work. People can then bet on your gut. Or somebody else's work.
Just forcing a company to say "We expect X amount of growth in the next financial quarter, and the reason we expect this amount of growth is - even though we are an international financial corporation - guesswork and gut feeling, rather than any kind of formal model" would be a step forward.
You have two companies. Both predict X growth. One provides a full model which backs up their prediction. The other flat-out states that they made the number up. Which would you pick? It doesn't actually matter - the point is that their operations are more transparent and your choice is more informed.
You have two companies. Both predict X growth. One provides a full model which backs up their prediction. The other flat-out states that they made the number up. Which would you pick? It doesn't actually matter - the point is that their operations are more transparent and your choice is more informed.
Creative accounting?
How can something that is supposed to report 'reality' be 'creative'. It's analytical, and highly objective... where is the creativity?
How can something that is supposed to report 'reality' be 'creative'. It's analytical, and highly objective... where is the creativity?
It's analytical, and highly objective
Is it? The deeper you look, the more arbitrary it gets, in my view.
Is it? The deeper you look, the more arbitrary it gets, in my view.
Could you expand on that?
From my point of view, it's money in vs money out... I'm not sure how "creative" you can get before you are "lying".
From my point of view, it's money in vs money out... I'm not sure how "creative" you can get before you are "lying".
It's been a while sine I felt comfortable discussing the details of accounting, but sometimes the need to classify things gets in the way of the truth. Do you capitalize a cost or expense it? Often you can argeue both sides of the coin, but ultimately, you're forced to choose.
The quantitative nature of accounting masks a nuanced and imprecise language meant to help communicate the overall financial story of a company. It's not like physics where there is a right and wrong answer.
You could use "creative" methods of describing and classifying transactions that aid in telling an accurate story (as defined by who?). You can also twist the truth. But there is no set of rules you can universally follow that will result in The Answer.
The quantitative nature of accounting masks a nuanced and imprecise language meant to help communicate the overall financial story of a company. It's not like physics where there is a right and wrong answer.
You could use "creative" methods of describing and classifying transactions that aid in telling an accurate story (as defined by who?). You can also twist the truth. But there is no set of rules you can universally follow that will result in The Answer.
Upvoted.
While financial accounting (statements for shareholders, taxes etc) is governed by GAAP and meant to be as standardized across orgs as possible, managerial accounting (internal statements for the purpose of decision making) require a lot more decision making about how you measure things in the interest of providing the most accurate financial picture of the decision at hand.
I am very rusty so anyone who has some real experience in accounting, please correct me. That said, consider a simple example: a manufacturer which sells two types of windows and creates the glass which is used in them.
Line A of windows is selling at lower than expected prices and in financial accounting terms it is loosing money. On the other hand, line B is selling well and appears profitable. With this in mind, the company kills line A expecting to increase their profitability by the amount the line was previously loosing. Unfortunately, the subsequent decrease in the amount of glass the organization is producing reduces the scale of their glass making operation and drives up their per-pane cost. At these higher input costs, line B is no longer profitable at it's current selling price and the company looses even more money than they would have had they continued to run the "unprofitable" line A.
Of course, any competent management team would be able to forecast this scenario and devise a host of other solutions (sell glass to a competitor, for example). But the question here is: how should they present this reality in financial accounting? Decrease the recorded cost of glass used in line A? Add some sort of subsidy from the profits of line A?
All of a sudden it becomes extremely "creative".
While financial accounting (statements for shareholders, taxes etc) is governed by GAAP and meant to be as standardized across orgs as possible, managerial accounting (internal statements for the purpose of decision making) require a lot more decision making about how you measure things in the interest of providing the most accurate financial picture of the decision at hand.
I am very rusty so anyone who has some real experience in accounting, please correct me. That said, consider a simple example: a manufacturer which sells two types of windows and creates the glass which is used in them.
Line A of windows is selling at lower than expected prices and in financial accounting terms it is loosing money. On the other hand, line B is selling well and appears profitable. With this in mind, the company kills line A expecting to increase their profitability by the amount the line was previously loosing. Unfortunately, the subsequent decrease in the amount of glass the organization is producing reduces the scale of their glass making operation and drives up their per-pane cost. At these higher input costs, line B is no longer profitable at it's current selling price and the company looses even more money than they would have had they continued to run the "unprofitable" line A.
Of course, any competent management team would be able to forecast this scenario and devise a host of other solutions (sell glass to a competitor, for example). But the question here is: how should they present this reality in financial accounting? Decrease the recorded cost of glass used in line A? Add some sort of subsidy from the profits of line A?
All of a sudden it becomes extremely "creative".
How much is your car worth?
I think of accounting similar to benchmark tools for software -- it's all about what you want to measure, and depending on assumptions you have some wiggle room.
* What you originally bought it for?
* What you could buy that exact model year for today? From whom?
* What you could buy a similar car for today?
* What you could sell it for? To whom? In how much time?
I think of accounting similar to benchmark tools for software -- it's all about what you want to measure, and depending on assumptions you have some wiggle room.
Good points but I think the answer is to pick one (I'd vote #4 but I'm open to debate) and enforce it at a regulatory level. Issues arise when you're allowed to change how you value assets based on what's most favorable at the time.
Ah... but if you do that, you'll be forcing companies to pick an arbitrary measure, regardless of how well it describes the underlying economics. The goal of accounting is description, not conformance.
As a practical matter, this would require the enforcement agency to publish the correct price for every asset regulated.
Publishing a formula for this calculation wouldn't be good enough, because then you would be required to value things based on the formula and that leads you back to...accounting.
Publishing a formula for this calculation wouldn't be good enough, because then you would be required to value things based on the formula and that leads you back to...accounting.
Think about assets. What is the worth of your car, your house, your furniture, etc.? E.g. the car cost 20k initially, after two years of use, you discount 20%, so you put 16k into your books. Is that objective? Essentially, you have to predict the money-out and there is happing a lot between money-in and money-out.
I think their point is that you don't put the car on the books as worth anything. Instead you declare you own it and someone else can decide what they think it is worth. Anything that requires interpretation would be up for discussion.
Re "penny a share transfer tax", the UK already does this, it's called the "stamp tax." Unfortunately, they exempted a few large institutions from the tax, so everyone trades derivative instruments managed by these institutions who don't pay the tax. You only pay the tax if you're stupid.
Great point. No exemptions. Otherwise no point to the tax.
A penny per share tax would price small investors out of the market. If there were a penny per share tax then corporations would reverse split their shares so that a penny is nothing relative to the share price of their equity. I don't think you really want all stock to be as expensive as Berkshire Hathaway.
How many shares do you think small investors buy at a time?
If I buy 30 shares of Broadcom @ 32.00 on ETrade (their commission is $9.99), my total price goes from 969.99 to 970.29. If BRCM reverses 30:1, I save $0.29?
I'd think large companies would rather see the price stay affordable. BRK.A/B is a totally different animal.
If I buy 30 shares of Broadcom @ 32.00 on ETrade (their commission is $9.99), my total price goes from 969.99 to 970.29. If BRCM reverses 30:1, I save $0.29?
I'd think large companies would rather see the price stay affordable. BRK.A/B is a totally different animal.
To curb high frequency trading, a dollar per transaction would also work. For large trades, this would be neglegible, but if you're doing tens of thousands of them a day, it would add up.
Another idea (sans - or in addition to a tax) to improve the signal / noise ratio of the markets: mandate that all B/Os put out there have a TTL of 5 seconds or until they are hit.
So if you Bid at X, you can't pull that bid 10 microseconds later. You can't quote stuff / probe with orders you never expect to get hit. You can't create the appearance of 'market depth' where none exists at all.
So if you Bid at X, you can't pull that bid 10 microseconds later. You can't quote stuff / probe with orders you never expect to get hit. You can't create the appearance of 'market depth' where none exists at all.
Exactly. You are feeding false information into the system. Limiting the trading to epochs and holding orders levels the playing field.
Trying to understand a company's finances from its internal books is foolhardy unless the company volunteers to train you up to the standards of its own accountants. Protecting investors from the idiosyncratic and often misleading nature of a company's internal books is the entire reason for GAAP's existence in the first place.
Actually I am suggesting something more innovative (radical/extreme?) to companies. Toss away those GAAP crutches, and confess to the congregation all your transactions--realtime. Enter the kingdom of Real Transparency (TM).
I don't need your accountants, only your auditors. Imagine for a minute what that would do to the business of financial analysis. It would add real value, unlike today.
I don't need your accountants, only your auditors. Imagine for a minute what that would do to the business of financial analysis. It would add real value, unlike today.
This idea is interesting, but you still need to figure out how to account for those transactions. In today's system of accounting a transaction can take many different forms with radical implications:
For example: Company A sells product to Company B. When is cash exchanged? When is the product delivered? How much interest if any is part of the transaction? etc.
What may be required to implement your idea would be to create a new system of accounting that has more depth than traditional accounting (Accrual Accounting).
*Also, what is "business of financial analysis"? There is no such business. There are many businesses that implement financial analysis, and all of them add value to the economy and to their clients, investors etc.
For example: Company A sells product to Company B. When is cash exchanged? When is the product delivered? How much interest if any is part of the transaction? etc.
What may be required to implement your idea would be to create a new system of accounting that has more depth than traditional accounting (Accrual Accounting).
*Also, what is "business of financial analysis"? There is no such business. There are many businesses that implement financial analysis, and all of them add value to the economy and to their clients, investors etc.
Transparency doesn't mean anything if you're just looking at a stream of symbols that have no standardized meaning. Companies can make anything look good through creative terminology when they aren't held to strict standards such as GAAP. Internal books kept to internal standards simply aren't helpful to people who aren't privy to the processes by which they're kept, even if you deliver the transactions at 21st-century speed through a 21st-century firehose.
The meaning of a transaction is generally understood. All I am saying is anything that would merit a journal entry gets feed through pipe instead of consolidated and reported months (or years!) later. I will do my own accounting, you can too.
I like the concept, but I don't think we have enough people who are capable of doing the work. Those that are would have a tremendous advantage. Why would they share with the public?
It's called the Tobin tax. One of the best ways to stop significantly reduce HFT.
You have to be really careful with such taxes. Take for instance India: the Indian government places a tax on the exercise of any option. This doesn't stop HFT at all - it simply makes it more favorable to trade out of a position before exercise. My guess is it mostly hurts the business owner/investor trying to hedge risk.
Likewise, a fee on a stock trade would probably have little effect on banks like GS, etc. I imagine it would instead discourage trading through public exchanges and widen spreads - all things that are bad for the little guy.
Likewise, a fee on a stock trade would probably have little effect on banks like GS, etc. I imagine it would instead discourage trading through public exchanges and widen spreads - all things that are bad for the little guy.
In a similar spirit, allow automated trading to take place, but only if the code and underlying data sets is open sourced after 5 (or 10?) years.
If you need manual intervention (i.e. gut estimates) to feed into the automated trade, it must be logged, and will be made publicly available at the same time as the code. There will also be a lag of 1 second.
As a carrot, servers with logged code can be co-located with the exchange, for a small fee. As a stick, anything outside the exchange gets the 1 second lag.
If you need manual intervention (i.e. gut estimates) to feed into the automated trade, it must be logged, and will be made publicly available at the same time as the code. There will also be a lag of 1 second.
As a carrot, servers with logged code can be co-located with the exchange, for a small fee. As a stick, anything outside the exchange gets the 1 second lag.
This or a hundred other solutions. There's no political will to do it, because designing more efficient systems does not get you reelected.
[deleted]
I'd also like a ban on shorting.
Noone should benefit from sabotaging a company. It's way too easy to drive the price of a stock down...the slightest rumor sends them into free fall.
Granted it wouldn't solve much. Wall Street could just as well drive the price of a stock down with a false rumor, then buy up the stock at a discount before it rebounded.
But at the very least, they wouldn't make twice as much on each transaction.
Noone should benefit from sabotaging a company. It's way too easy to drive the price of a stock down...the slightest rumor sends them into free fall.
Granted it wouldn't solve much. Wall Street could just as well drive the price of a stock down with a false rumor, then buy up the stock at a discount before it rebounded.
But at the very least, they wouldn't make twice as much on each transaction.
Actually I disagree. Shorts one of the few cures for bubbles that we have and they are weakened greatly by institutional rules that favor promotion over rationality. But, and this is a big one, we would have to reveal trading positions daily to banish all speculation.
Large short ratio is the first sign something is amiss. In an environment with imperfect information, someone knows more than the news on the company press releases page.
I think you're equating short selling with fraudulent market manipulation. Short selling has no soul - flipping the buy-then-sell to sell-then-buy ( that is, shorting ) merely allows the pessimists to place their bets along side the optimists, and the markets are better off for it. A great read on the subject:
http://leedsonfinance.com/2009/06/13/the-sec-is-at-it-again-...
http://leedsonfinance.com/2009/06/13/the-sec-is-at-it-again-...
strongly disagree
It is getting increasingly difficult to just invest in companies you believe in.
This is a key point, and he doesn't justify it at all. Are value investors negatively affected by someone making a penny when the value investor makes a $1000 trade? Or are they positively affected by liquidity? He is either unaware that it's a controversy with plenty of history, or he prefers to gloss over it. He seems bothered by the fact that there's a lot going on besides simple value investing, as if any other activity must be detrimental to the operation of the market. He seems to be implying that the other activities on Wall Street are preventing stock values from reflecting investors' rational estimates of the value of the underlying businesses. Seems to be, I can't be entirely sure. If that's his point, he needs to muster some evidence, because plenty of people claim the opposite.
Individual investors and the funds that just invest in stocks and bonds are not going to crash the market.
Individual investors are very much among those who panic and sell when the market goes down, or who establish stop-loss orders with their brokers that cause market losses to irrationally cascade. Plenty of individual investors are eager to turn into gold bugs at the faintest whiff of a downturn. If amateur investors or stock analysts are better at value investing than "traders", they should eat the traders' lunch when the market panics. If it's the other way around, then the traders aren't the ones crashing the market.
This is a key point, and he doesn't justify it at all. Are value investors negatively affected by someone making a penny when the value investor makes a $1000 trade? Or are they positively affected by liquidity? He is either unaware that it's a controversy with plenty of history, or he prefers to gloss over it. He seems bothered by the fact that there's a lot going on besides simple value investing, as if any other activity must be detrimental to the operation of the market. He seems to be implying that the other activities on Wall Street are preventing stock values from reflecting investors' rational estimates of the value of the underlying businesses. Seems to be, I can't be entirely sure. If that's his point, he needs to muster some evidence, because plenty of people claim the opposite.
Individual investors and the funds that just invest in stocks and bonds are not going to crash the market.
Individual investors are very much among those who panic and sell when the market goes down, or who establish stop-loss orders with their brokers that cause market losses to irrationally cascade. Plenty of individual investors are eager to turn into gold bugs at the faintest whiff of a downturn. If amateur investors or stock analysts are better at value investing than "traders", they should eat the traders' lunch when the market panics. If it's the other way around, then the traders aren't the ones crashing the market.
He also seems to miss the point that if it is more difficult to invest in value companies, it's because the market is doing a better job of value investing.
I.e., once upon a time, Promising Tech, Inc. might have been a great value play. This means that the stock price of PT was too low. In today's market, the stock price of PT is set at a level where you don't know whether to buy or short - that is to say, the stock price of PT is just right. PT is getting exactly as much money as they deserve.
Sounds like Cuban is just annoyed that Wall St. is doing a better job than he is.
I.e., once upon a time, Promising Tech, Inc. might have been a great value play. This means that the stock price of PT was too low. In today's market, the stock price of PT is set at a level where you don't know whether to buy or short - that is to say, the stock price of PT is just right. PT is getting exactly as much money as they deserve.
Sounds like Cuban is just annoyed that Wall St. is doing a better job than he is.
Are you saying that the Efficient Market Theory (EMT) is correct?
The market is mostly efficient, but there are still many efficiencies that can be exploited by people who do their homework and are ready to stick around through volatility and/or wait for catalysts.
The market is mostly efficient, but there are still many efficiencies that can be exploited by people who do their homework and are ready to stick around through volatility and/or wait for catalysts.
Yes, that's how firms on Wall Street make money: they exploit inefficiencies in the market in the short term or long term (and, by the way, by doing so, correct the inefficiencies). Paradoxically, firms that target the shorter term do better when volatility is high, because it usually means there are some pretty massive inefficiencies going on.
I'm saying that if Cuban is correct, the market is closer to efficient than it was before and Wall St. is doing a better job than it used to.
I kind of doubt it. Just in the past decade we've had the tech bubble, the housing bubble, and now this massive correction based mostly on panic.
The market is mostly controlled by greed and fear, as always, and that makes it overshoot in both directions.
The market is mostly controlled by greed and fear, as always, and that makes it overshoot in both directions.
An alternative read is that he thinks that non-value investing is swamping value investing, and that prices have little correlation with underlying value. It's sort of like trying to figure out how much gold is worth, if all you know is how much gold is actually used by jewelry and industry - you'll get killed in the real market.
Being a private investor, I agree a lot with what Cuban is saying.
Strangely enough Australia, which Cuban suggests he's been investing in, has a few investor friendly (or trader unfriendly) regulations built in.
1. Hold a stock for over a year and capital gains tax is halved.
2. Tax (franking) credits are given out when dividends are paid. This stops double-taxing and encourages companies to pay dividends and investors to demand them.
3. You must hold a stock for 45 days to take advantage of the franking credits if you accumulate more than $5k worth.
Strangely enough Australia, which Cuban suggests he's been investing in, has a few investor friendly (or trader unfriendly) regulations built in.
1. Hold a stock for over a year and capital gains tax is halved.
2. Tax (franking) credits are given out when dividends are paid. This stops double-taxing and encourages companies to pay dividends and investors to demand them.
3. You must hold a stock for 45 days to take advantage of the franking credits if you accumulate more than $5k worth.
That's a rose-tinted view. All of the things you list as investor-friendly involve exceptions whereby the government fails to swipe money from you.
The effect of policies that tax most investment scenarios is to discourage investment because it reduces your options. Consider this situation: you think that the drop in the ASX is unjustified and want to speculate on this. You're discouraged from doing it: even if you pick it right and provide liquidity when the market is dropping, they'll tax your upside when you to exit. That is, unless they sit on it for those periods, which discourages the first interaction because on that kind of trade you're not necessarily going to want liquidity tied up for a long period.
You get all the risk, but in addition the government eats into your upside.
A quirk of the Australian arrangement - non-residents aren't subject to capital gains tax. This puts them in a better position to supply liquidity in opportunity times, which some people consider the current market to be.
The effect of policies that tax most investment scenarios is to discourage investment because it reduces your options. Consider this situation: you think that the drop in the ASX is unjustified and want to speculate on this. You're discouraged from doing it: even if you pick it right and provide liquidity when the market is dropping, they'll tax your upside when you to exit. That is, unless they sit on it for those periods, which discourages the first interaction because on that kind of trade you're not necessarily going to want liquidity tied up for a long period.
You get all the risk, but in addition the government eats into your upside.
A quirk of the Australian arrangement - non-residents aren't subject to capital gains tax. This puts them in a better position to supply liquidity in opportunity times, which some people consider the current market to be.
Great summary of the tax advantages available for buy and hold investors in Australia.
How would these concepts integrate with the US tax treatment of stock trading? As far as I know there is no imputation of dividends under USA tax law - capital gains tax concessions might be of some benefit to value investors.
I suspect they wouldn't alleviate Cuban's concerns over the impact of HFT and exploiting market movements. A flat tax on trades seems like a more effective way to reduce the prevalence of those practices (for better or worse).
How would these concepts integrate with the US tax treatment of stock trading? As far as I know there is no imputation of dividends under USA tax law - capital gains tax concessions might be of some benefit to value investors.
I suspect they wouldn't alleviate Cuban's concerns over the impact of HFT and exploiting market movements. A flat tax on trades seems like a more effective way to reduce the prevalence of those practices (for better or worse).
Here's my response from the HN discussion a year ago [0]:
-----
If Mark Cuban thinks the market is now all about exotic derivatives rather than buying stock in companies you believe in, he's listening to the wrong people. Commission-based brokers talk about exotic derivatives; Warren Buffet still talks about buy-and-hold.
The biggest wins and losses in day trading will come from exotic derivatives simply by their nature: they're highly leveraged bets. Those firms that create the vehicles to make those bets aren't "hackers", they're "Vegas". You ask for a bet against the housing market or for cattle, they set up a structure to let you make that bet, and you play the odds -- and you might beat the other betters in the market over the short term, but it's the house (taking its percentage off the top) that always wins long term. Mark Cuban is right to be uncomfortable playing that game.
Meanwhile, people like Warren Buffet continue to look for healthy companies that are underpriced and buy into them for the long term. Day-to-day the market might be driven by short-term bets, but over the course of 3 decades it's still driven by the fundamental health of companies. If anything, those who care about "the performance of specific companies and their returns" benefit from the fact that occasionally, as a result of day traders' bets, healthy companies' stocks get sold at bargain prices.
If you try to play Vegas' game, you'll probably get burned. But if you stand back, watch the game, and buy when their game creates a bargain price on good long-term stocks, you stand to get very solid returns. -----
[0] http://news.ycombinator.com/item?id=1332422
-----
If Mark Cuban thinks the market is now all about exotic derivatives rather than buying stock in companies you believe in, he's listening to the wrong people. Commission-based brokers talk about exotic derivatives; Warren Buffet still talks about buy-and-hold.
The biggest wins and losses in day trading will come from exotic derivatives simply by their nature: they're highly leveraged bets. Those firms that create the vehicles to make those bets aren't "hackers", they're "Vegas". You ask for a bet against the housing market or for cattle, they set up a structure to let you make that bet, and you play the odds -- and you might beat the other betters in the market over the short term, but it's the house (taking its percentage off the top) that always wins long term. Mark Cuban is right to be uncomfortable playing that game.
Meanwhile, people like Warren Buffet continue to look for healthy companies that are underpriced and buy into them for the long term. Day-to-day the market might be driven by short-term bets, but over the course of 3 decades it's still driven by the fundamental health of companies. If anything, those who care about "the performance of specific companies and their returns" benefit from the fact that occasionally, as a result of day traders' bets, healthy companies' stocks get sold at bargain prices.
If you try to play Vegas' game, you'll probably get burned. But if you stand back, watch the game, and buy when their game creates a bargain price on good long-term stocks, you stand to get very solid returns. -----
[0] http://news.ycombinator.com/item?id=1332422
What I don't understand is: why doesn't evolution weed out the Vegas types? Where does the steady new influx of money come from? Or was it just the housing bubble that provided the money (in the end even tapping into retirement funds of iceland)?
Maybe now we have reached a point where most Vegas types will be eliminated. Perhaps not a bad thing? Except they are probably just poor individuals who were too lazy to think about finances for themselves. The first thing I learned about investing is "don't invest in anything you don't understand", which pretty much excludes complicated investments constructs, and is not that hard to digest.
But what would be the solution? Forbidding "gambling" to individuals would possibly result in communism, as it would imply the state would have to dictate the investments.
Maybe now we have reached a point where most Vegas types will be eliminated. Perhaps not a bad thing? Except they are probably just poor individuals who were too lazy to think about finances for themselves. The first thing I learned about investing is "don't invest in anything you don't understand", which pretty much excludes complicated investments constructs, and is not that hard to digest.
But what would be the solution? Forbidding "gambling" to individuals would possibly result in communism, as it would imply the state would have to dictate the investments.
> What I don't understand is: why doesn't evolution weed out the Vegas types?
People have short memories.
Seriously, that's the answer.
People have short memories.
Seriously, that's the answer.
It's not 'new money'. For every bet you make and lose, someone is winning (the money has to go somewhere!).
Warren Buffet isn't the average value investor. He rarely buys stock on the open market. The average investor doesn't have his ability to buy control of the company, or to direct profits from a declining cash cow into another company with more growth potential. I suspect Buffet would agree with Cuban on the danger of buying common stock based purely on technical analysis.
Actually, Buffet has time and again said that if he had only 0.5-1.0 million to manage he could consistently get 50% a year. His greater capital does give him special access to management, but also greatly restricts where he can invest. I'm part of a fund that does automatic value investing based on an analysis of the fundamentals of the universe of stocks, and you can do quite well for yourself. Here Graham's "the intelligent investor" is still the bible
What fund is that?
I don't mean to praise wall street but Mark Cuban made his initial cash from stock options the same things the people on wall street trade. So he knows very well what businesses they are in.. They made him rich!
I think he is right but the biggest issue is that Wall Street has become solely a place for 'transfer of wealth'. They do not care about value or know what it is, i.e. people like Warren Buffet stepping in recognizing value and investing when the price does not match the value.
But I think the biggest problem is the market is so huge and the more money you feed it the more irrational it gets, doesn't matter wether algorithms or humans are doing the trading.
Irrational trading creates bubbles and they gamble value away until the bubble burst. And even after the bubble burst its just a reset to the market.
I do not know where it is headed but I think one day countries will realize that they were better off with out mr.market because when the value companies build are traded away and in turn the middle class/country suffers, wall street walks away with the money, i.e. the house always wins in the end.
But I think the biggest problem is the market is so huge and the more money you feed it the more irrational it gets, doesn't matter wether algorithms or humans are doing the trading.
Irrational trading creates bubbles and they gamble value away until the bubble burst. And even after the bubble burst its just a reset to the market.
I do not know where it is headed but I think one day countries will realize that they were better off with out mr.market because when the value companies build are traded away and in turn the middle class/country suffers, wall street walks away with the money, i.e. the house always wins in the end.
Cuban's tl;dr point is that Wall Street has become a simulacrum. Now go read Baudrillard.
HFTs and hedge funds are very different entities. If you want to blame someone for man-made crashes, blame the people with large capital outlays, who are forced to unwind their positions when the equity goes down (or up) enough, thus further exacerbating the movement.
Arguably, they're in the business of making money (and nothing else).
"...no capital gains tax on any shares of stock (private or public company) held for 5 years or more, and no tax on dividends paid to shareholders who have held stock in the company for more than 5 years."
Wow. That would change Wall Street in a hurry. I don't know the full macro economic effect this would have on our system but I know the effect it would have on my personal investment.
"And solutions won’t come from bureaucrats trying to prevent the traders from hacking the system."
This is obvious to anyone... except lawmakers unfortunately.
Damn. I think of Mark Cuban as a one hit wonder from the golden ages who freaks out at basketball games but this article was pretty damn intriguing.
Wow. That would change Wall Street in a hurry. I don't know the full macro economic effect this would have on our system but I know the effect it would have on my personal investment.
"And solutions won’t come from bureaucrats trying to prevent the traders from hacking the system."
This is obvious to anyone... except lawmakers unfortunately.
Damn. I think of Mark Cuban as a one hit wonder from the golden ages who freaks out at basketball games but this article was pretty damn intriguing.
I really wish this wasn't considered ground breaking. The same has been spoken of CEO compensation vesting rather than guaranteed compensation packages.
The idea of separating measured performance from compensation is a joke.
The idea of separating measured performance from compensation is a joke.
What metric could you come up with that wouldn't be gamed? Other than say, overachieving profit targets. The CEO has a lot of latitude to screw the company for their benefit.
Uh, I think it goes:
Buy stocks when it's cheap in comparison to your valuation metric and hold. Collect dividends, or if the stock becomes too overvalued, sell for profit. Start from beginning.
What did I miss?