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There's a distinction there. In the stock market, your decision to buy leads to a price increase which improves the ability of that specific company to raise mo

There's a distinction there. In the stock market, your decision to buy leads to a price increase which improves the ability of that specific company to raise money. Your investment decision directly impacted the prospects of that company over others. In an ideal world, speculation in the stock market means that the best companies receive funding and the worst companies are unable to and therefore appropriately go out if business.

nicoburns 5y ago
Yes, but in the real world people are makong jsut as much if not more money on comaoniea that they think other people will later invest it, rather than companies that they think are good companies. That makes it little better than crypto.
- fighterpilot 5y ago
  There's a bubble now in speculative stocks, and it's not good because it means billions in funding are going towards failing companies. That's why I said "in an ideal world". I do believe this bubble will pop eventually and the stock market will return to its appropriate primary function (which it still is doing ex-retail hype stocks) of allocating capital to the most productive companies. Note also that I was responding to the statement that no wealth was created or destroyed by speculation in the stock market. My point is that this statement is false because it makes a real world difference whether it's GME versus MRNA that gets to raise money.
  - nicoburns 5y ago
    > the stock market will return to its appropriate primary function (which it still is doing ex-retail hype stocks) of allocating capital to the most productive companies. Do you think it has done this in the last 30 years? I am of the opinion that has it has at best done this exceedingly poorly. There are many reasons for this: 1. Speculating is the one we've already covered 2. HFT, which isn't that much different to speculating 3. The consolidation of market power in a few huge funds 4. The rise of index funds which don't attempt to judge companies on merit at all It would/will take significant reforms to return the stock market to anything remotely resembling an ideal market.
    - fighterpilot 5y ago
      It has done this rather well historically. A failing, badly managed company is most of the time going to be worth less than a highly successful one or one that's growing and gaining traction. That's why when a company beats quarterly earnings, the stock price goes up. It's also why Enron's price crashed when their fraud was revealed. That means capital is typically and on average flowing in a productive direction versus the alternative, which is good for the economy for obvious reasons. HFT isn't relevant to this picture, their role is primarily market making and arbitrage and they have no net impact on pricing. Their sole role is to replace human market makers in a liquidity provision capacity, which reduces the cost to the active manager of doing business, at the expense of the extinct human market maker. Hedge funds aren't that consolidated. There's lots of them. There's no such thing as market power (in terms of oligopoly or monopoly power) for the industry either. The bigger you are, the harder it is to operate on a marginal basis, since price impact becomes prohibitive. Hedge fund spin offs are a dime a dozen since all the IP is in individual's heads. The biggest ones are resigned to longer bets where the edge is smaller. Market power is a thing only for HFT firms, due to economies of scale and scope on the tech and fee side, but as mentioned above HFT aren't relevant to what we are discussing. Index funds chase valuations set by active managers since they're typically investing in market cap weighted indices. Their existence doesn't change the value add or necessity of accurate security pricing, and they're not really relevant to that either.
wiz21c 5y ago
> the best companies you mean, those which generate the most ROI ?

nicoburns 5y ago

Yes, but in the real world people are makong jsut as much if not more money on comaoniea that they think other people will later invest it, rather than companies that they think are good companies. That makes it little better than crypto.

fighterpilot 5y ago
There's a bubble now in speculative stocks, and it's not good because it means billions in funding are going towards failing companies. That's why I said "in an ideal world". I do believe this bubble will pop eventually and the stock market will return to its appropriate primary function (which it still is doing ex-retail hype stocks) of allocating capital to the most productive companies. Note also that I was responding to the statement that no wealth was created or destroyed by speculation in the stock market. My point is that this statement is false because it makes a real world difference whether it's GME versus MRNA that gets to raise money.
- nicoburns 5y ago
  > the stock market will return to its appropriate primary function (which it still is doing ex-retail hype stocks) of allocating capital to the most productive companies. Do you think it has done this in the last 30 years? I am of the opinion that has it has at best done this exceedingly poorly. There are many reasons for this: 1. Speculating is the one we've already covered 2. HFT, which isn't that much different to speculating 3. The consolidation of market power in a few huge funds 4. The rise of index funds which don't attempt to judge companies on merit at all It would/will take significant reforms to return the stock market to anything remotely resembling an ideal market.
  - fighterpilot 5y ago
    It has done this rather well historically. A failing, badly managed company is most of the time going to be worth less than a highly successful one or one that's growing and gaining traction. That's why when a company beats quarterly earnings, the stock price goes up. It's also why Enron's price crashed when their fraud was revealed. That means capital is typically and on average flowing in a productive direction versus the alternative, which is good for the economy for obvious reasons. HFT isn't relevant to this picture, their role is primarily market making and arbitrage and they have no net impact on pricing. Their sole role is to replace human market makers in a liquidity provision capacity, which reduces the cost to the active manager of doing business, at the expense of the extinct human market maker. Hedge funds aren't that consolidated. There's lots of them. There's no such thing as market power (in terms of oligopoly or monopoly power) for the industry either. The bigger you are, the harder it is to operate on a marginal basis, since price impact becomes prohibitive. Hedge fund spin offs are a dime a dozen since all the IP is in individual's heads. The biggest ones are resigned to longer bets where the edge is smaller. Market power is a thing only for HFT firms, due to economies of scale and scope on the tech and fee side, but as mentioned above HFT aren't relevant to what we are discussing. Index funds chase valuations set by active managers since they're typically investing in market cap weighted indices. Their existence doesn't change the value add or necessity of accurate security pricing, and they're not really relevant to that either.

wiz21c 5y ago

> the best companies you mean, those which generate the most ROI ?