Byvation - February 2009, Market Strategy

Capitalizing on Market Opportunities!

Market Strategy - Capitalism in Action
February 2009
Volume 7, Issue 2
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This Month's Feature: Capitalism in Action
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"Despite a voluminous and often fervent literature on 'income distribution,' the cold fact is that most income is not distributed: It is earned." - Thomas Sowell

In This Issue:

Strategic Resources/ News
Feature: Capitalism in Action
M³ - Rich & Poor
Disclaimer

Strategic Resources/ News

Money is the root of all good - Awesome article on Money and Wealth.
Learning to Love Financial Market Barbarians - Trust me, this is a great article on how traders contribute to society.
Collection of articles on The Gap between the Rich and Poor
Interesting article on a leading indicator for economy - Baltic Dry Index, Bloomberg Chart

Capitalism in Action

"A stock market is crucial to the existence of capitalism and private property. For it means that there is a functioning market in the exchange of private titles to the means of production. There can be no genuine private ownership of capital without a stock market: there can be no true socialism if such a market is allowed to exist." Ludwig von Mises

Markets, especially the Stock Market, is Capitalism in Action; with Capitalism ¹ being "an economic system in which the means of production are owned by private persons, and operated for profit and where investments, distribution, income, production and pricing of goods and services are predominantly determined through the operation of a free market."

Money is made when less-valued things are transformed through productivity (labor and capital) into more-valued things. While the labor market is clearly seen as adding value, capital often gets degraded by the media and academics alike. Yet it's capital that greatly increases the value of labor - just look at the industrial revolution, and now the information and knowledge revolutions. Without powerful tools such as computers, lasers, and robotics - labor would produce a mere pittance of what it does today.

So how exactly does the Market represent Capitalism in Action? What is the purpose of Financial Markets, and in particular - the Stock Market?

Is the purpose of the market to generate wealth for unthinking shareholders? Is it the world's largest casino? No, the market's primary function is to value assets - stocks, bonds, commodities, and currencies. Let's look at the stock market, which serves three roles:

1) Allocate Capital. Financial markets help raise capital for start-up companies (and their financial backers) to take their ventures to the next level. Without public markets many entrepreneurial ventures would wither and die - and with it the thousands of innovative products they bring to market. Established companies also use the market to generate additional long-term capital and to reward employees.

2) Spread risk. When stock is issued to the public, risk is spread around since a large number of individuals end up buying shares (either directly as retail investors or through institutions such as mutual funds). Not only is the risk shared, the reward is shared too.

3) Provide information. Financial markets anticipate the future. The act of buying and selling securities culminates in hard information - price. Assets are valued continuously and displayed for all the world to see. As Markets digest information, it creates information as well as what George Soros calls Reflexivity. It's easy for anyone to see how the economies throughout the world are doing and offers a glimpse of the future. The same goes for industries and companies. A security's price tells a telling tale.

For more on the value of financial markets and how investors/ traders add value, check out this excellent article ² Learning to Love Financial Market Barbarians.

Most will agree that the Primary market, the market that raises initial rounds of capital, does add value. However it's claimed that the secondary market; the market that trades securities, adds little value. Yet the secondary market does add value - a lot of value! It's the secondary market that creates liquidity - liquidity that's needed for the Primary market to even exist. Without trading, few investors would invest their money - not knowing if or when they'd be able to get their money back.

Even a less robust secondary market would create problems. Individual investors would be effectively locked out of sharing in corporate profits. Only the rich would be able to benefit from the wealth created by corporations - unless governments stole their money, which would kill their spirit to invest and create. Imagine if there was no short-term trading. Liquidity would dry up big-time if there were only long-term investors. Selling would be a nightmare for lots of people. Without enough liquidity, people who wanted to sell so they could retire, pay for college, buy a car/house/boat might have to put their life on hold until someone was willing to buy their shares. On the flip side, people who wanted to buy shares in a company might be locked out if those who owned shares (i.e. institutions) stubbornly held on to those shares.

Even shorting the market helps in that it helps slow down price crashes. By its very market nature shorting HELPS the market by providing liquidity on the downside so when a position gets dumped, the downside is actually cushioned. This buys current investors time to move out of the position. Yes stocks drop hard but they would drop even harder without shorts.

Final Thoughts

As a free market tool, financial markets collectively assess the value of financial instruments such as stocks, bonds, commodities, and currencies. The free market value ³of goods and services does not necessarily reflect the philosophically objective value, but it does reflect what's called socially objective value - the sum of individual judgments of a products value.

The stock market keeps the wheels of capitalism turning. And that's one of the most important things in the world. Traders should take pride in what they do - value assets and create liquidity. Here's a quick way to look at the market:

Without Traders, Investors wouldn't invest their money.
Without Investors, Venture Capital would dry up.
Without Venture Capital, most Entrepreneurs would never get capitalized and innovation would vaporize.

Stay tuned as we discuss more about Capitalism, Market Strategies, And Trading in future issues.

Resources:

Capitalism, http://en.wikipedia.org/wiki/Capitalism
Learning to Love Financial Market Barbarians - http://gbr.pepperdine.edu/081/traders.html#_edn21
Market Value - http://aynrandlexicon.com/lexicon/marketvalue.html

Money, Money, Money (M³) - Rich and Poor

What does it mean to be Rich

When you hear the word rich - always ask, Compared to what?

Most of us that live in the United States are obscenely rich when compared to those living in most African nations. Does that make us feel Rich in a time when our economy is crashing, our investments dwindling, and we're fearful of losing our jobs. I would say - No!

But what if we confine the discussion to the United States? Some people are rich and some are poor - true. The fact is that most people confuse relative poverty with absolute poverty. The rich are getting richer, true, but so are the poor. Sure, it's at a slower rate than the rich, but their standard of living is still improving measured in absolute terms. People need to stop pretending that wealth is a pie of fixed size and the only consideration is distribution.

What does in mean to be Rich? What does in mean to be Poor? Rich is whatever a person says it is. To some people $10,000 might be rich. For others it might be $100,000, $1 million, $100 million, $1 billion, or it may be just having more money than other people. Poor is also whatever a person says it is. It's a state of mind. Abject poverty does exist for those without food, water, and shelter - but not for most people in the modern world. What does exist is a feeling of not having enough. The only people with a genuine excuse are those struck down by tragic injury or illness - they're not poor, they're victims.

Wealth is the result of productivity - of adding value in a way that society rewards. As a symbol of wealth, money quantifies effort, skill, and accomplishment.

Question: Is it right to be massively, some would call obscenely, rich?
Answer: Is it right to be massively productive? To create great value by doing that which society rewards? Is it right to pursue your dreams? To work hard? To work long hours? To take risk? My answer is Yes! As long as the money wasn't stolen - either by being a criminal or somehow getting the government to steal the money for you. Money is earned (without resorting to either force or fraud) when value is exchanged through the sales of goods and services - and yes, trading is a service - a very valuable service.

Rich people are rich because they create value (or they received money from others who previously created value). To earn their riches, the wealthy think differently from those who don't acquire riches. They don't necessarily work harder, but they do work smarter.

Here are some thoughts on how the rich and poor think:

Rich people choose to take risks, whereas poor people seem to need a guarantee.
Rich people play the money game to win, poor people play not to lose.
Rich people are committed to doing what it takes to be rich, while poor people want/ dream/ hope to be rich.
Rich people choose to get paid based on results, whereas poor people choose to get paid based on time.
Rich people take responsibility. They know that blaming other people isn't going to solve their problem. Poor people typically do what they feel like and if it doesn't work out - they look for a scapegoat.

Being rich means being a winner:

Being poor is for losers:

Sports

Life

Sports

Life

Swinging the bat as hard as you can in baseball.
Giving 100% in practice.
Working with weights in the off-season.

Finding your talent/ what you enjoy & are good at.
Working hard (including thinking)
"Thinking is the hardest work there is, which is the probable reason why so few engage in it." - Henry Ford.
Reading/ Studying/ Lifelong learning
Saving/ investing instead of spending everything.

Swinging the bat half-heartedly.
Whining about the pitcher.
Not working hard in practice.
Taking it easy in the off-season.

Doing just enough to get by.
Spending more than earned by going into debt.
Not reading/ studying/ or otherwise learning & improving skills.
Watching mindless TV
Gossiping/ complaining
Bad habits, i.e. compulsive behavior that detracts from goals.

Final Thoughts

To be rich is not only right, it's the embodiment of success. Wealth belongs to those who create value. To create value and not be rewarded is demotivating and dehumanizing. Rich people take risks and demand a piece of the pie. The rich are paid on results - not necessarily on the amount of time invested in a project.

"It is not the strongest of the species that survives ... nor the most intelligent, but the one most responsive to change." - Charles Darwin

Disclaimer

All material in Byvation is for informational purposes only. Any and all ideas, opinions, and/or forecasts, expressed or implied herein, should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Be advised that Michael Davis and/ or Brencom Business Technologies, Inc. will not be held responsible for any investment actions that you take as a result of any information mentioned in Byvation.
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"Start your strategic planning with your competition in mind. Where are they strong? Where are they weak? ... Business is about war. It's not about better people and better products." Trout on Strategy

Being rich means being a winner:		Being poor is for losers:
Sports	Life	Sports	Life
Swinging the bat as hard as you can in baseball. Giving 100% in practice. Working with weights in the off-season.	Finding your talent/ what you enjoy & are good at. Working hard (including thinking) "Thinking is the hardest work there is, which is the probable reason why so few engage in it." - Henry Ford. Reading/ Studying/ Lifelong learning Saving/ investing instead of spending everything.	Swinging the bat half-heartedly. Whining about the pitcher. Not working hard in practice. Taking it easy in the off-season.	Doing just enough to get by. Spending more than earned by going into debt. Not reading/ studying/ or otherwise learning & improving skills. Watching mindless TV Gossiping/ complaining Bad habits, i.e. compulsive behavior that detracts from goals.