Sunday, 19 October 2008

The house always wins

The way the stock market works has always given me the idea that it is a big casino. I've always had trouble seeing people buying stock on an exchange as investors. They didn't really put money down to finance the company. They bought somebody elses shares in the hope that the shares would pay dividend or (now happening more often) that the shares will rise. Shareholder value? Only for the guy financing the company buying stock directly from the company, to put money to share in its profits, not for gamblers who think the stock is going up.

Especially the last thing has always amazed me. If theory dictates that all we know, understand and predict about the share is incorporated in the share, then why should it go up? That is a paradox. (Corollary: If the stock moves up or down, is that because we understand the future better? Or is it because we don't understand it allow and were all in some mass delusion?)

Well, today I learned from The Guardian that the financial markets are even more like casinos than I thought. It seems that many banks have bonus pools. Bonus pools that fill up regardless of the performance of the company. "At one point last week the Morgan Stanley $10.7bn pay pot for the year to date was greater than the entire stock market value of the business. In effect, staff, on receiving their remuneration, could club together and buy the bank." That sounds exactly like a rake . A fee given tot the casino for playing poker there.

So you see, the house always wins... 

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