Ethics of the stock market.

[DCA]

I am wondering what people think about the ethics of making money in the stock marketÉ

Investing in the style of SSP does not encourage innovation, does not help the companies, breaks several Buffet rules and is taxed at half the rate of income from other sources.

There are some proposals to change things.  One that I heard would place high taxes on gains from short term holdings decreasing to low or zero rates if stock held for long term ( 25 years) while disallowing capital losses on short term holdings.

Not likely to happen - where do you thing the 1% money comes fromÉ

D

[garilou]

Wow, DCA,

I was wondering how many replies you would get, I did not want to be the first.
But it seems that no one will react: this is a very sensitive question

It is not only an interesting question, it is an essential one.

About "investing in the style of SSP"...
Well I have never thought this was investing, it is trading.
I must admit that I too am more a trader then an investor, so I take your post as if written for me, even if I am not the only one.


My mom is 13 years older then Buffet, and she invested: she was one of the first to invest in Bombardier, in Cascade and others.
For Christmas, she gave us, her 5 children, a few actions of those.
I was the only one who did not rush to sell them, I held them at least 15 years (with big profits I must say).

Lots of things have changed since Buffet started.
He was clever enough to adapt.
The problem is that while adapting, he had to change his rules slightly.

Today, I would certainly not refer to "Buffet rules" when talking about investing, or ethics.
He had said that derivatives were "financial weapons of mass destruction".
And yet, he got pulled into derivatives.

He tried to justify breaking his own rule by saying that he had taken the decision after "analyzing the fundamentals".
And where so many lose money, he managed to make a lot with those derivatives.

Do you think that Buffet's  "investment" in Goldman Sachs what ethical?
(It could have been if he had been able to force some ethical behavior into Goldman Sachs, which he did not.)

I might admire Buffet for his "smell" and intelligent analysis, but I have stopped admiring his ethics. (Apart his leadership in the matter of taxing more the 1%)

You do not need to go into derivatives to regret some investments.
Almost all stocks are manipulated (look at what is happening to Telus now).
The markets are (and maybe always were) an arena where one will win and the other loose. Except that the weapons used now are much more powerful and can cause much more harm.

Is holding a stock for 25 years a criteria to say that this is an investment?
What does the company get if one holds 25 years, or sell his/her stake to someone else?
(Here there is certainly a difference between the investors who puts 500 millions and more, and the small "investor/trader" who buy a few hundred shares).

If I hold a "blue chip" (are there any left?) for 25 years because of the good dividend, is this more ethical then holding a young promising company only for a few weeks or months?

So I guess, real investing should be made outside the stock markets.
Look at what happens when a company goes IPO.
Does any of the first buyers think of "helping" the company?
Those who will buy Facebook shares next week, are they helping creativity?
I do  not think so.

Creativity, innovation, all that happens before the company goes public.

Be it short or long term, be it Jamie Dimon or the Pope, when it goes to investing - if you only put money and no work - the only goal in to make money.
If you give money for the research for cancer treatments, for a better life for Africans, you are "investing", but differently, and you main goal is NOT to make money.

Buffet gave a lot of money to the Gates foundation, but refused to do anything else and admitted that his main pleasure in life was making money.

Bill and Melinda Gates "invested" much more then money.

I am sure that one can ethically invest even if it is not a charitable foundation.

I am very wiling to discuss about ethics, I started a post 2 years ago, on this subject, and received not one single reply.

Because the subject will always make others feel bad.

Once again, I replied too long, but I really wish that you would explain better what you consider as ethic investing, and whether or not this can be done within the stock markets.

Louise
 

[DCA]

Hi Louise,

Not only the first, but the only reply.  Perhaps no one else has a sense of ethics?

It has taken me a while to get back here.  Between my current contract and dealing with the symptoms of Chikungunya I have been a little exhausted.  The chikungunya is a little souvenir of my trips to India last year.  One of those things that you wished was fatal but isn't.

One comment I heard from Buffet about Romney was the opinion that he had not done anything illegal, but had taken advantages of rules that perhaps should not be there.  So there is an example of the difference between 'legal' and 'ethical'.

I have heard similar themed comments from Kevin O'Leary "make money first, then give to charity."

Perhaps this was Buffet's thinking with Goldman Sachs?

Bombardier, my worst performing non-debris stock of the last five years.  It does nicely illustrate the issue with buy and hold.

Telus is an interesting question in ethics.  It is manipulation but exactly what is fuzzy.  The two classes of shares was created so that the company could easily sell on the US market without falling afoul of foreign ownership rules.  Naturally shares with votes sell for more than shares without votes.  Management (many being from the US) acquired holdings in the non-voting shares.  Then, to simplify life they say, it became a good idea to change all shares to 'voting'.  The different classes of shares in Telus were trading at only a small deferential so management decided a one-to-one exchange was valid.  The argument being that the 'voting' holders would be compensated for the drop in value of their shares by the increased liquidity of being able to sell on the US market.

Makes me wonder - was management stupid or were they trying to line their own pockets?  Is stupidity unethical?

Was Facebook unethical?  $38 a share for a company that if it was valued based on other shares on the Nasdaq would be around $7.  If valued as Google was at it's IPO would be around $9.  I read a posting that said valued at the previous ratios of insane pricing would have priced Facebook at $22.

The last one is interesting in that the low on FB is ~$25.  What is strange is that it has returned up to $33.  A P/E of 105!  Google is 17.  The greater fool theory hard at work.

D

[Victor]

Well... it's been a very long time since I posted something on this board.  Seeing as this thread is relatively recent I thought I'd add my two cents.

The only reason for a secondary market is to provide liquidity to the primary market.  Think of it this way, if the stock market didn't exist then company shares would only be exchanged privately.  Trying to find a buyer would be difficult, but not impossible.  So the secondary market provides the forum for liquid, semi-anonymous, and transparent transactions.  Now, if you could only trade once every 25 years in shares of a company it would greatly diminish liquidity, and without that why have a secondary market at all.

Getting it right in the long term means being able to predict which companies can sustain a steady or above normal growth path over many, many years.  Can you predict anything 25 years out?

I'm about to jump into a new book which demonstrates why the risk premium for retail investors is zero or negative.  In today's markets I'm tempted to agree (but I'll have to follow through with the reading to get the details behind the idea).

So why trade in the secondary market?  You think you have an edge.  That's it.  Do you have an edge over all the investors, analysts, full-time dealers/brokers, all chasing that ellusive edge?  Maybe with SSP you do!  That's for you to decide.

I'd say the only way you are supporting business directly is subscribing to secondary offerings or corporate debt at issuance.  Of course, one of the incentives to participate is that you will have access to a liquid secondary market in the future.  Otherwise you are very confident in your ability to predict the distant future (I'd say you're way too overconfident if you think you can).

I don't think participation in the secondary market per se is ethical, or un-ethical.  If you have no edge, maybe you do it for entertainment.  If that's the case then your long term expectations are negative (the house gets its take too don't forget).

Your edge might be the ability to hold a set allocation and rebalance in the long term, and never succumbing to Mr. Market.  Most people can't go that long without changing and thereby reducing their edge.  The flipside is that people usually can't recognise when their edge has disappeared.  Either way, actual returns never match ex ante expectations.

Maybe the market presents a real challenge to you, to be able to make profitable judgements about how things work, what others are doing or will do, etc.  I don't see anything unethical in that.  What's unethical is spending your life chasing something with low probability while ignoring the good you can do with high probability.  Only you can judge that.

Hoping we all have an edge, know what it is, and are able to detect its demise.

V

[DCA]

The events of the last year has me thinking further on the stock market and ethics.

About 30 years ago I was sitting on a late night Hastings Street bus listening to a drunk talking.  Strange thing is that with careful effort it was possible to hear the sense in what he was saying!  "Society can produce everything it needs without the need to employ everyone."

Since then I have built a career on designing equipment to produce what is needed with less employees per unit of production.  Done well.  I think the drunk was right.

So listening to the news I hear how with every "recession" the mid-tech jobs have been disappearing and never coming back.  In extrapolating this trend into the future I arrive at one of three scenarios:

1) The right wing wins.  All the poor (those who do not own stocks) get herded onto reservations and allowed to starve to death.

2)  The left wing wins.  All industry is nationalized and everybody lives under government control.

3)  The computers win.  All humans herded onto reservations so they will stop mucking up things.

Actually the cynic in me believes that given time that all three will happen, most likely in the stated order.

D

[garilou]

Hi DCA,

Will you ever receive this reply?

I just saw it, the forum has not been very active since so long.

But I was exactly thinking about the same thing not long ago.

On one hand, yes the right wing always wins.
This is nothing new.
Think what happened in the 19th century: all the big manufactures allowed mass production thank to the vapor motors, and there were desperate artisans, who went out of job (especially in the thread mills), and ended up in the coal mines!
Together with their wives and kids!
But this is only one example.

The rich (or the most inventive) wins, the poor or the less adaptive, looses.

I hate to sound like a social Darwinist.

But since the past crisis has last so long (and we might be at the beginning of a new one), every news that unemployment was higher was bad for the market as a hole, but good for the company that announced layoffs.
If it wasn't for the FDA that made it so that every bad news became good, we might not have had this record bull market.

Then, once the markets came up to record levels, laying off was a bad sign.

But the fact is that companies have increased their "productivity" by using your services. One employee to control the robot that replaces at least 10 to 20 employes!

In the moment, it seems that we are living part your scenario 1, and part the scenario 3.

Neither Canada nor the US seem to want the scenario 2.
And the scenario 3, considering the "internet of the thing", all those clouds so tempting for the hackers, but promoted as if no company could manage its data it-self, seems somewhat dangerous to me.

I admire so much the Americans (not for everything my God no!), but for their resilience.
How they can help each other, get ideas and start new projects.
And this they can't... that must take 3 jobs per day

Lots of people do not want to live on welfare, and those who do are rarely "lazy", and have good reason to do it.

The biggest limitation is the availability of education.
You could not have built your carrier in helping companies to put employees on the street if you had not had proper studies.

But part of scenario 2 is important. Not nationalizing industries, but providing for healthcare and affordable education.

I make my-self no illusion: the rich will always be better treated , whether it is health or education.

So I think that not all 3 scenario will happen one after the other one, but entangled, each one being heavier as the other one according to the voters.
In this, I think we have more chance (although getting rid of Harper will be difficult), because in the US, voting is the biggest farce in the world.

[DCA]

Hi Louise,

I have been rather busy dealing with First World type problems so have not looked into the forum since last year.

Have read a book: The Price of Inequality. https://vimeo.com/45877301 is a link to a video interview with the author.

It is interesting that while there is debate in the US as to whether dividends and capital gains should be given preferential tax treatment here we simply live it.  Stephen Harper just gave me a ~$3000/year (and compounding) gift with the increase in the TFSA allotment but I wonder how many Canadians at the average household income of $47K will be able to make use of it?  Tax laws being that they let me balance out my income with my wife are interesting too.    Her average rate from mostly investment income is 6% while mine is 14% (self-employed) while I expect an equivalent salary income would be higher still.

Still, I do not expect any of the three scenarios to come to pass in a pure form.  Although, my sense of humour makes me like the idea of finding out that Jack Williamson (http://en.wikipedia.org/wiki/With_Folded_Hands) was right.

D

[garilou]

Hi DCA!

I was kinda throwing a bottle in the ocean, so I am happy that my message did not take longer to reach you.

But in order to reply,  I had to spend a few hours around the internet.
First I had to find what "First World type problems" were: I did not know this expression, but I love it.

I did not read Joseph Stiglitz's book, but read a lot about it.
There was a interview with him in Le Devoir, and I had also read in article (as you can imagine very biased against it) in the WSJ.

But now I listened the whole interview, for which I thank you.

And your last link brought me to read the entire novel from Jack Williamson, I who never liked science fiction books. But I enjoyed it... because it was short 
(Incredible what Internet gives us in a few seconds.)

I guess discussing about income tax is one of those "First World type problems".

But the question of inequality (not only but including the progressive or regressive income taxe rules) is part of my preoccupations. I have been spending a lot of time reading and discussing about it.

Although this was presented as good news, I was really shocked when I read that (for sure right before the elections) the Federal government finished with a huge surplus. A government should never have surplus, it is not a for profit enterprise.
A surplus at the cost of so many jobs that were cut, so many subventions that were not renewed, especially in the artistic domain.

Harper, I think, would be considered as too extreme right to be a Republican candidate to the US Presidency, and yet, "we" have elected him and might reelect him with a majority again.
I would feel so ashamed to be Canadian with such a Prime Minister, if I was not primarily a Quebec souverainiste.
So in the moment, at both levels, I have to live with 2 governments that I hate.

And as Stiglitz says: "It's the politics, stupid".

So back to Stiglitz, I have read the most negative article as I mentioned, in the WSJ.
Just an example:
"Yet the truth is that embracing Western-style free markets and adopting technologies invented in the U.S.—not central planning—have lifted hundreds of millions of Chinese out of poverty."

In order to satisfy American needs for consumption (but as cheap as possible), millions if Chinese left their rural villages to try and live in cities.
During that time, inequality in China was multiplied by such a factor that (difficult to believe), it is now greater then in the US!
But more then 50% of Chinese still live in rural areas, and they are doing much worst then before (at least relatively).

This without mentioning that in order to supply the US, China has the wildest pollution problem of the world, and "hundred of millions" will die of it.

But I do not feel "pity" for China, because they at least have now the money to save them-selves if they want to.

What about Africa! Black Africa.

Talking of ethical investing: I had bought lots of shares of Allana Potash. For the first time of my life, I had the feeling I was investing and not trading, I thought this was a beautiful project for Africans.
How it finished was so sad (you can Google around if you want to know more) and was such a disappointment for me.
Because I had traded the stock many times, at the end I finished with some gains in the 2 accounts in which I held it.
But the Potash will certainly not profit the Africans as it should have, appart of the problem that the administration and Israel Chemicals who finished by buying it just before it entered production, have been extremely unfair to the investors.
At the price Israël Chemicals bought it, I think it did it (like some drug companies do), only not to have the concurrence in India and China.

This was again the rule of the more money...

Let us hope that we find the right scenario, that will be fair, but still let enough room for individual initiatives and creativity.

Scenario 3: Rejected. "Humanoides" are not the answer, they would equate to your cartooned scenario 2.
Computers can be part of the solution, as long as they are not used as excuses ("The computer does not allow me to do this or that").

Scenario 1: whether we call it right wing, plutocracy, or what ever, has always existed. It is the economic Darwinism.

Some form of Scenario 2 is the only (and most difficult) way not only to reduce inequality, but to save the planet, on small and on large scales.

OK, I'll stop because I could go on and right if not a book at least a novel 

Thanks for you reply and the interesting information you gave me with your links.

Are we far from your initial post? Not that far, and for sure not out of topic.