Markets Exist to Serve Investors

Dear Clients and Friends,

The trading of securities for the purpose of making a market to buy and sell securities is most likely thousands of years old.  Some of the first evidence of tradable markets is in ancient Mesopotamia, both with tablets that had ledgers for future delivery of goods, and in Hammurabi’s code where Hammurabi’s stipulated that goods and assets had to be delivered at a certain price with a future date (essentially creating an ancient futures contract).  The ancient Greeks wrote about arrangements where they would speculate on future harvests with contracts to purchase and therefore make money on the future crop production.  Most market participants tend to think of the stock market as a modern phenomenon, and the modern market is definitely unique in many ways, but the fundamentals of markets have been consistent for thousands of years.

The one fundamental that hasn’t changed is the purpose of the market; which is to serve as a facilitator of trade between parties who want to buy and sell their securities.  A wheat harvest in Egypt circa 1500 BC might need the same type of security a corn farmer in Iowa will need in 2019, namely a futures contract.  The Venetian Government might need to finance ship building in the mid-13th century the same way the US government finances a deficit in 2019, namely by selling government debt. Almost every action in the securities markets needs a buyer and a seller, so markets exist to bridge that divide.  The basic need has not changed, and this basic need will always be the purpose of any market.

Over the years I have found that many view our modern markets as something like a casino.  An investor steps up to the table, rolls the dice and wins of loses.  At some point they cash out, take their loss or winnings, and go home.  In the short run, the market can act an awful lot like a casino, where casting short term bets look more like speculation than investment.  Over time the similarities between markets and casinos tend to diverge, where casinos look like pure zero-sum game, and the stock market looks much more like a wealth building machine.  So why the misperception?

The market is a random walk, where making predictions about what might or might not happen, and how prices will react in the short run is essentially a coin flip.  If your prediction happens to be right, then the market has to move in the right direction based upon the outcome.  In the short run, this is a gamble, where the odds at best are 50/50.  Many find this activity exciting and alluring, and there is always a good story behind the urge to speculate.  However, if you look at a business or economy and simply buy the long-term participation in that stock or fund, you have made a much more patient and less speculative.  Some would use the term, “boring”, but as some wise person once said, “Boring is Beautiful”.  The market is nothing more than a tool, we can use it to satisfy our more speculative urges, and we can use it to build long term wealth.

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All investing involves risks including loss of principal. No strategy assures success or protects against losses.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

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