I have been reading "Reminiscences of a Stock Operator" by Jesse Livermore, there he explains how he managed to 'manipulate' the stock price up (i.e buy back a small quantity of stocks to raise the price and stir up the interest of speculators) before unloading a huge pool of shares. He calls this as 'distributing' the stocks to public and the 'manipulation' as 'increasing the marketablity' of the stock.
Although I find no legal issues with his approach, is it okay to induce *artificially* more 'risk' to other speculators by artfully concealing ones strategy to make profits !?
A company which buys back large quantity of shares, is different story, since the company has an obligation to protect its investors, it has to get the approval of investors and should not conceal its buy back activity. What about third part speculators with large pool of shares to distribute? Is it defendable to manipulate the price up a little bit to suck in the suckers only to unload the huge pool of shares to dimwitted public !?
If we see speculation as 'betting', can we say that its perfectly okay to use above discussed strategy? after all a better has no obligation to the counter betting party except for following the betting rules.
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First of all, you would have to be talking about a pretty low-cap stock to be forcing price movements by just a "small quantity" of shares. These are generally penny stocks, which people understand are subject to more volitile movements and even manipulation. Investors understand there is more risk there.
Second, you're not defrauding anyone by simply buying and selling shares (participating in voluntary transactions), so I see no issues with this from a libertarian perspective.
Thanks John :)
Alright if we extend the same argument for the following case:
A bunch of big investors buy and sell shares back and forth within themselves, causing the share price to shoot up considerably and unload them to the public later in the rally.
Technically no one is forced but there is something wrong in the above case. Or even this is okay !??
How this case is different from my original question?
passsingbird:How this case is different from my original question?
It's not, really.
Again, as you said, no one would be forcing people to buy those incredibly active and inflated shares by the time those colluding players are ready to dump them.
But on top of that you'd have to consider the reality of what such a scenario would entail...and therefore the likelihood (or lack thereof).
First of all, again, we're going to have to be talking about a huge market share of one specific stock. That means you'd either need a really low-cap stock (which investors are already more cautious about), or a hell of a lot of people all working together, or less people but with a lot more money to play with. They would have to have to have the money to continue paying higher and higher prices...(not only unlikely, but even if they did have that kind of money, it would probably be aggregated into a few small hedge funds of something of that sort...making it that much easier to spot a price movement due to only one or few buyers).
Next, these colluders are (a) going to have to trust that the other party is actually going to follow through and buy the shares back (or sell them back, which ever end you're on) and (b) they're going to have to actually follow through. Once again, this is not likely. Everyone is out to make his own profit, and the opportunity to gain by simply not following through with the bargain is too great...not to mention, every time you cooperate with the scheme, you run the risk of being the one holding the bag if the other guy decides to screw you. Both parties are inclined to be the one to doing the screwing first.
(This is why voluntary price fixing between competitors in a market never works. There's always opportunity to profit by simply not going along with the scheme...and someone always takes the bait. This is why you always see a move by business to get government to force all players in the sector to go along with the cartel, as Rothbard describes here.)
And finally, even supposing (against all odds) that all this colluding works out, and everyone follows through, you still have the rest of the market to deal with. The entire plan is dependent upon the rest of the market buying into these inflated prices by the time the colluders are ready to sell. There's no guarantees they will. If the public was that interested in that stock at that particular time, the price would already be at that level.
What's more likely to happen is a few people who already held the stock end up selling the rise to a few other people who think they're buying into a rise (effectively trading just like the colluders, but without being part of the scheme), and ultimately there's no one left to dump the stock on, and the price will come back down.
So no, there's nothing wrong with it, but it probably wouldn't work anyway.
you pointed out how cartels come with tempting seeds of self destruction. okay... let me push the envelop one more time. Lets assume my wealthy friends and I have dealt with all practical problems and found a way to corner the free silver market across a span of 10 years. (Cornering need not be 100% , if i remember/understand correctly a 7-8 % owning of market should be suffice to make a fortune) !
Could that be considered as my proud investment achievement in free market or am I just being a clever shark eating out 'voluntary suckers' !!?
I would also say that it comes down to a simpler issue: there will always be someone who has, or thinks they have, information that gives them an edge over other investors. In this situation the information is what the colluding parties know and the public doesn't. Depending on how you define 'fair' and 'transparancy' and all the other jargon thrown around when dealing with such issues, really any and everything could be considered 'unfair' or 'criminal.' You can postulate an endless number of scenarios, all of which come down to one things: is anyone being coersed. If not then thye are assuming the risk as actors on the market, and that goes for the colluders as well as the people they are trying to manipulate. And if such a group of people did manage to collude in such a manner, good luck to them in their future attempts at investing, much less doing the same thing again. Because, shortly after their successful manipulation, word will spread rather quickly about how they profitted and I guarantee you anyone will look at the stock price of any business those people are associated with in the future much, much more closely than other companies, and trust it far less.
passsingbird:you pointed out how cartels come with tempting seeds of self destruction. okay... let me push the envelop one more time. Lets assume my wealthy friends and I have dealt with all practical problems and found a way to corner the free silver market across a span of 10 years. (Cornering need not be 100% , if i remember/understand correctly a 7-8 % owning of market should be suffice to make a fortune) !
I'm not sure what you mean by "cornering the free silver market across a span of 10 years". It sounds like by "cornered" you mean you own 7-8% of the known supply. First of all, I don't see how that could be considered "cornered". When I think "cornered" I think you essentially control the market...meaning if someone wants something, they basically have to come to you. By WWI, DeBeers had basically "cornered" the diamond market. Second, you say 7-8% would be enough to make a fortune. You'd have to already have a fortune to acquire 7-8% of a market that is actually worth something.
7% of the world's silver supply is over 100,000 metric tons. The entire weight of the Statue of Liberty is 204 metric tons. So, bascially, what you're telling me is that you and your friends would somehow come to acquire 500 Statue of Liberties made of pure silver (roughly $113,338,496,482.10 in today's price)...and then you'd be able to make a fortune?
I'd say whatever you did to acquire $113 Billion in the first place would be your proud investment achievement.
OUCH ! looks like my ignorance is bigger than silver market !!!
I got this crazy 7-8 % idea from a wikipedia entry
http://en.wikipedia.org/wiki/Cornering_the_market
"This example demonstrates that 7 per cent of a perishable good is enough to allow profit taking via cornering a market."
Its about cocoa market !
Thank God, you guys saved me & my meager savings before I venture into cornering some market with my super duper brilliant plan !
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Thanks guys ! I will summarize what I have learned from this discussion.
a) Basic premise of trading is: one guy knows better than the other, so the actor takes responsibility for the risk.
b) as far as no coercion is involved, all voluntary transactions are quite fine, given the premise (a), no one can pass moral judgement over other party's strategy.
c) Its practically near to impossible to manipulate markets without taking a huge risk of self destruction in the process.
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thanks guys !
passsingbird: http://en.wikipedia.org/wiki/Cornering_the_market "This example demonstrates that 7 per cent of a perishable good is enough to allow profit taking via cornering a market."
Yeah that's total nonsense. And they literally say that example demonstrates it...and it does no such thing. So not only is it a fallacious notion, their own story doesn't even support it. All they said was the guy bought a bunch of cocoa and it caused prices to rise. They even admit it wasn't a record...it was just the largest purchase in 14 years. (ooooOOOoooo).
They say literally nothing about profit being made because of this.
In fact, that whole page looks like nonsense. Even their definition of the concept makes no sense. They say you can corner a market by simply holding "the greatest market share in a particular industry without having a monopoly". First of all, I don't even know why they need the "without having a monopoly" qualifier. What does that mean? If I have a monopoly I haven't cornered the market?
And what do they mean "the greatest market share"? Is that just supposed to mean a plurality? So, basically I could "corner the market" with virtually any degree of ownership, so long as I own more than any other one person (or company)?
Think about it. I own 0.02% of industry x. That's more than anyone else. My closest market share competitor only owns 0.01% of the industry. By their definition, I've "cornered the market".
Basic premise of trading is: one guy knows better than the other, so the actor takes responsibility for the risk.
False. Trading takes place because of the difference in valuation of the goods being traded based upon the subjective preferences of the parties involved. In other words, in a voluntary trade, both parties can benefit. Both parties expect that what they are getting from the trade will bring them more satisfaction than what they are giving up...otherwise the trade would not take place. Trade is a positive sum game.
The notion that "one guy knows better than the other", is simply the result of the fallacious idea that trade is a zero sum game....that if one man gains, it means another man must have lost. When I go to the grocery store and give the clerk $2 and he gives me a carton of milk...I'm supposed to believe that one of use "knew better" than the other? Which one? You mean I got screwed? Or did the clerk get screwed? Which one of us "knew better" and got the better end of the deal?
Unless there was fraud somewhere in that transaction, we both got the better end. John Stossel points out that's why you always get the weird double-thank you when a transaction takes place. You hand over the money, they hand over the merchandise and you both end up telling each other thank you. What's that all about? It's because you wanted the milk more than you wanted the money. The clerk wanted the money more than he wanted the milk.
Trade is made of win. (see also "Subjective-Value Theory", "Subjective Value and Market Prices")
as far as no coercion is involved, all voluntary transactions are quite fine, given the premise (a), no one can pass moral judgement over other party's strategy.
More or less....so long as you recognize fraud as a form of coercion.
Its practically near to impossible to manipulate markets without taking a huge risk of self destruction in the process.
That, or at least near impossible to make a decent amount of profit, without taking huge risk...which when weighed against each other, the risk (and the effort) is basically too great.
@John
I think
"Basic premise of trading is: one guy knows better than the other, so the actor takes responsibility for the risk."
still holds, if one looks the trading as betting. In betting the loser pays the winner.. Perhaps I should have clearly stated it as 'speculative trading' instead of normal 'trading'.
If you take the wrong bet you lose, if you buy a stock and liquidate it with loss, you have just lost the bet and the loss money moves to the guy who took the opposite position.
In a normal grocer example we exchange values there is always a chance for 'double thank you', in trading we simply bet and winner takes all so its 'screw you, you are going regret about your position' is the norm !
This subtle difference stumped me when I started to explore speculative trading.
passsingbird:if you buy a stock and liquidate it with loss
Who said you had to liquidate it with a loss?
In a normal grocer example we exchange values there is always a chance for 'double thank you', in trading we simply bet and winner takes all so its 'screw you, you are going regret about your position' is the norm ! This subtle difference stumped me when I started to explore speculative trading.
There is no difference. Like I said..."Both parties expect that what they are getting from the trade will bring them more satisfaction than what they are giving up...otherwise the trade would not take place."
The double thank you takes place when the trade takes place. If stocks were traded personally (like other goods), you would get the double thank you. Again, both parties are expecting to win. If it's a bet, then yes, one party has to lose...but at the moment the trade takes place, both parties are getting something they want more than what they are giving up.
Just because two parties take opposite sides of a bet, and one party wins where another loses, it doesn't necessarily mean "one guy knew better than the other." When someone flips a fair coin and you call heads where someone else calls tails, and it lands heads...does that mean you "knew better"? You "knew" something the other guy didn't? That's why you won?
And what's more, stock trading is not necessarily "betting". And even when it is, it's not "betting" in the traditional sense. In normal gambling, you have a defined timeframe and a pot of available funds that one party wins at a designated point in time. In a market (yes, even a stock market) different people have different goals and different time horizons. Just because I buy a stock from you and it goes down over the next month doesn't mean I've lost anything. For one thing, I could have bought that stock specifically and solely for the dividend...with no intention of ever selling (something Warren Buffett is recommends). So just because the price went down, that doesn't mean I've lost a damn thing.
But even if I was speculating (i.e. buying in hopes of seeing some appreciation and then selling for a capital gain), you still have no idea what my time horizon is. I could be planning to sit on that stock for a 6 months, or a year or more.
I buy a stock from you and a month later it's down 3%. You didn't think it was going to go down necessarily. In fact, let's say you thought it was going to go up...you just needed some cash at that point in time. Three months later it's up 31%. Who won? Who lost? Again, your view of this is far too narrow.
Yes, superior knowledge of a market can give insight that allows for more wise decision-making, but (1) there is a myriad of ways to define "winning" in market investing...which means, again, just like in the grocery transaction, both parties can still benefit, and (2) even in a gambling situation in which one party wins where another party loses (like betting on a coin flip) it doesn't always follow that the guy who wins won because "he knew better" than the other.
And finally, if you really insist on maintaining that speculative trading is "betting" just the same, and that the "winner" "knew more" than the "loser", how the hell do you explain the fact that in study after study, monkeys outperform fund managers?
Just like poker champs, i am quite sure, guys who stays long in business and manage to take consistent profits belong to the class of people 'who knew better than others'. Poker and speculation don't belong to 'gambling' so if someone survives long enough with decent profits and risk management, they totally deserve the credit that 'they knew better than other losers'
I think most fund mangers are destined to lose by the design of the market and incentive structures but thats for another discussion thread :) !
passsingbird:Just like poker champs, i am quite sure, guys who stays long in business and manage to take consistent profits belong to the class of people 'who knew better than others'.
I basically already agreed with that.
Poker and speculation don't belong to 'gambling' so if someone survives long enough with decent profits and risk management, they totally deserve the credit that 'they knew better than other losers'
a) You're the one who compared (i.e. likened) speculative trading to "betting" (i.e. gambling). I'm the one who said they aren't the same. Now you're acting as though the opposite were true.
b) I thought I already made it clear that "winning" and "losing" are relative terms, when talking about market trading.
"a) You're the one who compared (i.e. likened) speculative trading to "betting" (i.e. gambling). I'm the one who said they aren't the same. Now you're acting as though the opposite were true."
Gambling is something where we can't *CONTROL* our profits and losses (i.e manage our risks), a genious or retard will end up with same results dictated by probability when they throw a dice.
On the other hand 'Speculative betting' and 'betting in poker' allow guys to fold the poor hands, go aggressive when they have a good hand, manage their bet size etc. allowing to manage the risk. So that's why I do NOT see 'intellegent speculative betting' as same as 'gambling'. (Ofcourse there are tons of people who gamble in stockmarket speculation! )
Both 'rolling dice' (gambling) and 'betting in poker/market' (speculation) have luck elements, luck is completely (or mostly) ironed out and only skills determine the rewards after playing several 1000s of bets in speculation/poker. Although in shorterm luck may be the king in long term skill rules in speculation/poker.
You package both 'speculative betting' and 'a gamblers bet' under 'betting', I file 'speculative betting' as a dfferent thing from 'gambler's bet'.
Hope I have made myself clear, how I see things.
Anyways we are talking about the same thing.
"Just because two parties take opposite sides of a bet, and one party wins where another loses, it doesn't necessarily mean "one guy knew better than the other." When someone flips a fair coin and you call heads where someone else calls tails, and it lands heads...does that mean you "knew better"? You "knew" something the other guy didn't? That's why you won?" Instead of fair coin, lets take a loaded coin (no speculative better bets without an edge!) There is something called 'position sizing' with respect to the odds, mathematically if I have 60% probability of winning (i.e I have a small edge), I can work out what size of my bankroll should I bet instead of betting all my money in one go. So if I happen to win that's due to the fact I *know* better ways to bet and have mastery over luck good or bad! Slowly my bankroll will grow big enough to swallow all losers! Losers who don't understand 'kelly creterion' are going to take risks inappropriate to their bank roll.... I agree subjectively winning in trading stocks depends on the person. I agree when a person hedges their long stock position by taking a short position in derivatives, then its a 'double thank you' business for both the hedger and the intelligent speculator!