18 November 2009

Answering a couple of objections

by Phil Johnson

et me respond to some feedback that appeared in a different forum. I don't participate in the other forum, but the person who wrote this e-mailed it to me and invited me to respond. I'm posting my response here, because it might clear up some confusion other people have, too.

He writes,
I would disagree with him on this one [no losers in stock trading] to a certain extent. If I buy a stock at $10/share, and the value goes up to $20/share, ON PAPER it appears that ALL investors have earned money . . .BUT, that's only on paper.

That's simply untrue. It completely misrepresents how the stock market works. (See the links below.) Buying stock is an actual investment in a company. When stock value goes up, real jobs are created, company assets increase, and the potential for future profits is also increased. The increased wealth is not merely "on paper."

He further says,
If I decide to sell that stock, SOMEBODY has to fork out that extra money in order to purchase for $20 what I bought for $10. So, I am not sure if his attempt to show that the stock market has NO losers is air-tight. I seem to recall at the end of each stock trading day, there is always a report of the winners and LOSERS."


You are turning language on its head and unnecessarily clouding the whole issue. The suggestion that someone who invests in stock at a higher price has "lost" money is absurd. Apply that claim to the buying and selling of real estate and you'll see why it simply doesn't work.

And the "winners" and "losers" in the stock market report are stocks whose value rose (winners) or fell (losers). What I said was not an "attempt to show that the stock market has NO losers." And nowhere did I say there are "no losers in stock trading."

What I said was, "There are no losers when a stock gains value." The point is that in the stock market, the winners' gains do not come at the losers' expense. It's not really a complex point, but it is a significant one. In fact, it touches on the central point of my whole argument, so please don't let it get buried under a mass of unnecessary confusion.

Anyone tempted to comment further in this vein ought to do a little reading about the stock market and how it works. Many fine articles are easily available on line that show why investing in stocks is not a form of "gambling." See for example:



And here's an article that graphically illustrates the difference between investing in stocks and betting on the stock market: Just Plain Crazy, by Charles Jaffe, The Investor Direct

Phil's signature

36 comments:

Tom said...

Of course, this assumes you're not an options trader, where you actual bet on whether the company's stock will rise or fall...

Truth Unites... and Divides said...

PJ: What I said was, "There are no losers when a stock gains value."

Well, what about the person who shorted that stock and gets a margin call? That short seller thinks he or she is a loser on that stock.

Phil, as I asked before on the previous thread: "For those who defend investing/playing the market as not being gambling, would it be okay with you (Phil Johnson) to have a bi-vocational pastor who day-trades to help make a living?"

Chris said...

Oh my goodness..

Investor A taking a short position would lose if investor B, taking the long position, gains. Finance 101.

Even the farmer analogy breaks down if the farmer has a bank or investment group behind him and he loses.

Anyone who has worked in the field knows there's essentially no difference. It's all a big gamble. Call if what you may, but when you "invest" money in the market, you are "gambling" to a certain degree. Despite the nuancing and redefining of terms, at it's core, it's still gambling.

bugblaster said...

Day traders and options traders and put & call shorters are not investors. They are speculators.

Warren Buffet invests in a company. i.e. buys stocks and holds them for the long run. Warren Buffet is not a speculator. He is an investor.

Totally willing to concede that speculators are gambling. But that does no damage to the so obvious that it's surprising that it needs to be argued argument that investing adds value and is not gambling.

I could say that:
1. the Bible is God's Word; or
2. the Bible arose from complete, inerrant, verbal, plenary inspiration by the Holy Spirit in the original manuscripts, preserved in all matters of doctrinal importance to our own day.

The meaning is identical among the like minded. The more precise yet awkward second version is good, but like all creeds and formulations, is only made necessary by objectors that want to find some wiggle room to avoid the main point.

Jason Smathers said...

Stock trading definitely can be closer to gambling than investing. Think about short sales, options, and margins.

Jason Smathers said...

Do you agree that some people using the stock market are gambling and not investing (options traders, trading on margin, or short sales)?

If so, then is there a place for Christians in the stock market? Participating enables the gamblers.

Truth Unites... and Divides said...

Chris, Bugblaster, and Jason Smathers,

Would it be okay with you to have a bi-vocational pastor who day-trades to help make his living?

Brad Williams said...

Oh my goodness is right!! No wonder we're lurching towards socialism if we have so many people who equate investing in business enterprises to gambling!

I think I'm going to go and have a stroke.

I made some money on Apple stock recently, praise the Lord. I invested in it for several reasons:

1. They have great products.
2. They have great products I like to actually use.
3. I wanted to invest in that company b/c I believe in its future, and I believed it would be a good return for my money.

Why isn't that gambling?

Because I didn't have to rely on someone's failure to make the money I made. I can cheer for everyone to do well and still make a profit. I didn't have to take anything from anyone to make the money. No one lost! Everyone won! Microsoft is still making money too! And bad commercials! Yay for capitalism! Yay for free market enterprise! Yay for investments!!

I am utterly dismayed and perplexed that folks cannot seem to see the fundamental, foundational differences between the stock market and gambling, or perhaps more precisely, gambling and taking risk.

Brad Williams said...

BTW, my last comment is a personal record for exclamation points.

I hardly got that excited debating Santa Claus with Frank.

Ron said...

As an example, research Long Term Capitol Management. As I indicated earlier, these forms of proprietary trading vehicles (not only used by investment banks but most hedge funds)are what is moving the markets increasingly over the past decade or so, not price appreciation due to earnings growth, increased productivity and such. The NYSE (not Nasdaq or the options markets) previously reported this "program trading volume", even modifying the measuring parameters to alter the transparency and impact on the market, eventually discontinuing reporting this altogether.
That said, "investing" and "stock market" perceptions are no longer accurate, regardless of naive individuals and financial managers.
Gambling? Participating in something that's being misrepresented?


Please, I'm not trying to derail this meta. This was my life for several years, so I do have some knowledge and experience.But research this and present your view.

Brad Williams said...

And yes, Frank and I debated against Santa Claus once, not about his existence.

With that, I have met my comment quota early. Good night and God bless!

Phil Johnson said...

Bugblaster:

bingo. Thanks for injecting some sanity. The fact that speculators and day traders sometimes play the market like some peole bet on horses doesn't mean the market itself is the moral equivalent of a roulette game.

The articles I linked to deal with ALL those points.


Wow.

Phil Johnson said...

Brad:

Exactly.

Brenden Grace said...

An example:

5 companies are publicly traded and share their market equally (20%). 5 people uniquely invest in each company (20% of the market ain't bad!). 2 of the companies each take over 35% of the market the next year. That leaves the other 3 companies with roughly 10% of the market (a piece).

The investors of the "winners" stock goes up, in part because their companies took the market from the "losers". Over time most markets continue to grow, but investor's are looking for not only market growth but stealing market share from other companies in the near term. This "stealing" or "winning" will drop the values of stock for those who chose "losers".

Caveat: if you only invest in index funds then you are only tracking the growth of markets and not individual companies in markets. You are also not enabling fund managers to play the game of choosing winners and losers.

I am not an economist, this just seems to make sense to me ...

Sir Aaron said...

No wonder we're lurching towards socialism if we have so many people who equate investing in business enterprises to gambling

Brad, the whole profit is evil, investing is gambling comments have me seriously concerned as well. The fact that some have perverted something used for good into a device for evil somehow means the very thing is evil itself. Personally, I think there shouldbn't be such as thing as margin. Pay for it or don't get it should be the rule of the road.

Chris said...

Truth,

"Would it be okay with you to have a bi-vocational pastor who day-trades to help make his living?"

Why not? I personally would not simply because I'm no good at it.

Brad: I too recognize the differences. Yes, there is a difference between walking into a casino to play blackjack and walking into an investment house to sign some papers. But let's face it, they're both gambling to a some degree. The games are played differently, I understand that. But just because the word "gambling" hasn't formally been associated with the stock market doesn't mean it's not gambling of some form.

Let's face it, at the end of the day, you invested in Apple because you wanted to make money :-) Nothing wrong with that. You don't invest in anything to lose.

Is the only argument being made here about someone losing at another one's gain? If so, that's a weak argument because there are winners and losers in about every area of life. The gambling culture can be a bit seedy and dark. Images of casinos, hookers, drinking, and cigars have all enforced the stereotype over the years. But don't let the dignified image of the stock market cloud your judgment: it's all a form of gambling :-)

Phil: While I don't personally gamble per se, I don't see any problems with Christians doing so within limits. But you are asserting that gambling is a sin issue. I respectfully disagree. Like drinking, eating, and so on, gambling can become a serious problem. No argument there. But a sin issue in and of itself? I'm not yet ready to not climb aboard with that.

Tom Chantry said...

Well if that's not a case of reading and responding to the meta without so much as glancing at the original post, I don't know what is!

Brad Williams said...

Chris,

Hey brother. Love you, man. But they are not the same thing. You are confusing risk with gambling. Yes, you assume risk when you involve yourself in a business. No one disagrees with that. But that is not gambling. There is a significant difference.

Apple makes stuff. iPods, iPhones, and computers. My risk is that people will not buy the product I've invested in.

Gambling has no product except entertainment, and the only, only way you will ever make money at it is when someone loses money. When I make money with Apple, it is because someone bought a computer. When you make money gambling, it's because some sucker lost his money trying to get your money. That's it. This has nothing to do with whether or not gambling is sinful. This is basics economic principal we are talking about here.

By the logic folks are throwing around about the stock market, guys gamble if they work for a bank, or a fast food restaurant, or an engineering firm. They invest time into the company instead of money in the hopes that they will see a profitable return. Nobody says to a civil engineer, "Man, you sure are gambling working for Company X, they may not make any money this year and you won't get paid!"

It's silly. Equating investment with gambling is bad. Really bad. It shows a fundamental misunderstanding of what people are doing in a capitalistic economy. And that's what this has been about so far: the underlying principle that drives gambling and whether or not that underlying priniciple makes gambling sinful. The underlying principle of the stock market is you invest your money into a company you believe will make a good product that people need or want. That is not gambling. Risk, yes. *Though, modern hysterics concerning the market aside, not even that significant!*

So that's it. Hate to beat the dead horse. My main point in this is that you are confusing risk with gambling, and they are not the same thing. Gambling is risky. Investment is risky. Cats have fur. Dogs have fur. But dogs are not cats. Investing is not gambling.

I have beaten the dead horse to death and I am ashamed. Hope this was helpful to someone out there.

Phil Johnson said...

Brad Williams: "I have beaten the dead horse to death and I am ashamed"

You have nothing to be ashamed of. That's not a horse you are beating; it's a jackass. Furthermore, if it were well and truly dead, it wouldn't rise up and bray every third post or so. Keep beating.

In fact, I think you need a bigger piece of lumber.

Truth Unites... and Divides said...

Darby Livingston: "Those who are comparing gambling to other forms of entertainment are not saying all points are identical. They're drawing some of the same "principles" from both. And those who are comparing gambling to the stock market are not saying all points are identical. They're drawing some of the same "principles" from both.

IOW, if gambling is wrong because it fosters idolatry, so does just about everything. If gambling is wrong because someone loses something, that happens in all sorts of situations. If gambling is wrong because it's poor stewardship, so is any number of other things. If gambling is wrong because it leads to crime, so does all sorts of other things. If gambling is wrong because it's a lust for money, so is a lot of legitimate work people do. I can't believe this point is so difficult for some in this comment stream to understand."

I can't either, Darby. I can't either. But do get a huge, sharp wooden stake and jam it hard into the heart of the vampire jackass. Maybe, just maybe then, he'll get the message.

Not of This World said...

Even though there are newer post with regards to this topic, I have decided to write my comments in this post because it is more relevant with what I have to comment about.

If you all don't mind, let this half-baked business student give his two cents worth of thoughts.

Stock market and the different platforms is now a complex thing and unlike what it once was, so this topic is very complex to begin with.

If investing in stock markets make you start focusing on money and not on God and your thoughts is preoccupied with money and more money that it becomes your life, then it is best that one does not invest because it causes you to sin. However, not everyone faces such temptations.

Not of This World said...

Next, the main intention of stock markets is for a corporation to raise money through letting people have an ownership of the company and to facilitate buying and selling of a business when the opportunity arises. It is an instrument to facilitate all these

However, speculators and the likes (e.g. day-traders, derivatives traders, margins and shorts blah blah blah and the what nots) have abused this system and instruments to make a quick buck for themselves. Just because people abused this system and instrument doesn't mean that this system is bad per se. A vegetable knife can be used for good (e.g. cut veg, duhhh....) or be used for robbery. This does not make the instrument bad. Rather, the more important point is the intention of the user. Hence, if your intention is to make a quick buck by trading and the likes, then its time to reflect.

Not of This World said...

So why is speculation and day trading and the likes is akin to gambling? The main thing of day trading and short selling and margin buying is trying to take advantage of the daily or weekly fluctuations of the stock prices (solely for capital gains). These capital gains is unwarranted. Why is it unwarranted? The fluctuations that usually occurs within the day or weeks are usually not reflective of how well the company is doing. (small fluctuations 5 cents worth, big fluctuations more). However, which company earn 5-10 cents worth or may be more within a day? Hardly any if there is any. All these fluctuation is due to traders going in and out (usually) by looking at the ODDS of how the news will affect the stock prices or what is going around the world etc. It is not the valuation of the company itself.

Not of This World said...

Trading in the past (merchant trading-city to city trading) goes from city to city to sell goods and buy goods that has a disparity in prices. At that time, it is fine. (they earn their keeps, by traveling and providing a service to the city dwellers an opportunity to buy goods that their city doesn't provide or provide but at a much higher price. And it is their business) However, with technology, it makes this relatively obsolete (in fact the two still have some difference. There are still traders who sell goods like olden times and it is still needed because of the benefits it brings and it is a legitimate business). Most traders now tend to buy and sell using formulas and charts that have no regards for the business itself. To them, it is just a game of ripping off the loser of the day. They are driven by the focus of quick gains (just take a look at most traders, their minds are mostly thinking of money, money and money- this is not to say all, but most). Furthermore, these traders tend not to care about the fundamentals of business (e.g. what this business is about, is it going to be profitable in the long term, is it profitable to the society blah blah blah). Hence, they are going in blind except for the charts and trends and the what nots which frankly is just not good stewardship. (Who in a world buy something that they don't know its purpose or what it does or the what nots. It's almost like buying a car and crashing it into a tree hoping to get some lumber from the tree.{not a very good analogy i know, tired from all the studying})

Not of This World said...

How about hedge then? Well, for hedging, it is more complex. I think company hedge is usually justified. However, I think personal hedging is kind of unjustified. Company hedge (e.g. airline planes) hedge because they are willing to pay the oil and the what nots at that kind of price to ensure price stability and hence better estimate their operation cost. However, individual hedge tend to be just speculation. (What use does a person have with such large amount of oil? unless he has a gas guzzling car that eats fuel like there is no tomorrow or have a private jet).

Investment is however different. A investor does research on the business. He is clear of the company's goal and the market that the company is dealing with (e.g. shipping- to transport goods from continents to continents and the what nots)He look at the fundamentals of the company and evaluate how good the company is and whether there is a need for such a product in the future. He is clear of the value of the company. (cards "have value" according to the probabilities, it doesn't have actual value). An investor is therefore a businessman that look for a good company to buy into through the benefit of the facilitation of the stock market to make it hassle free to buy a business unlike last time where there are a lot of red tapes and the what nots. So, is it wrong for an investor to sell if the stock is overpriced and to buy when it is undervalued? I think it is ok, because after evaluation of the company, one may find that the company is not worth that much no matter the progress, or that it is a bargain because a company worth much more? (when is a slot machine counted as a bargain or overpriced, or a card game for that matter?)So therefore it is a good stewardship of money because you know the value of the company and do things according.

Not of This World said...

One thing that I had been struggling with is whether it is considering ripping a person off by buying a company when it is undervalued and where the person is selling, while selling a company that is overvalued to a person that is willing to buy at that price. If the person have done his evaluation and have felt that it is worth that much then that is fine (this is considering that everyone is an investor and have done their homework). However, we know that the world is not perfect and that there are speculators to make the situation of over and undervaluation worse. (and there is no totally efficient market just for the record of those efficient market theorist. There are times where it is efficient and times where it is not)

All in all, just because an instrument, a system is abused by some people doesn't mean that this system or instrument is evil. What we as Christians can do is to educate them. (whether they take it is another matter. We just have to do what is right.). If they continue to abuse the system, we really cannot stop them (unless you are the government, but even then, they cannot do everything.). Unless the system have become so corrupt that there are no investors in it, all are speculators when we should then abstain from it (because it will then be no less from roulette table). If not I think it is a very good way of stewardship. Another question which I have not tackled is why do you want to invest (motive for investing: is it greed, use it to fund missionaries blah blah blah?). I hope to come back to it soon, but I think I write enough for now (need to continue to study for exams).

Hope it helps:D
sorry for the long post. but i feel compelled to write (because have thought through this for so long, before becoming a business student)

Chris said...

Brad:

As someone has already pointed out, my purpose in equating the two is to draw out certain principles fundamental to both. I have already stated that they are indeed different. With that horse hopefully laid to rest, perhaps I can highlight again, that, at both a rational and practical level, there is essentially no difference between the two. Again, though the rules and arena are indeed different, the principles are essentially the same.

Truth Unites... and Divides said...

"Answering a couple of objections"

Honestly, I don't think the answers are good enough....

At least not yet.

trogdor said...

"I have already stated that they are indeed different."

"...at both a rational and practical level, there is essentially no difference between the two."

So they're different, except in theory and application? I... I just... how... what... GAAAHHH!!!!

Dude, if you're going to so blatantly contradict yourself, you can at least have the decency to do it in different paragraphs. At least respect us enough to make us work a tiny bit to figure out you're being ridiculous.

Not of This World said...

Truth unites.... and Divides said:"If gambling is wrong because it's a lust for money, so is a lot of legitimate work people do."

My honest answer as a brother to a person who is doing a legitimate job because of the lust of money: Rethink your purpose.

Just because a job is legitimate doesn't not make it a good job to do. If it causes one to sin, then it shouldn't be done at all.

Truth Unites... and Divides said...

Not of this world,

I didn't say that. Someone else did.

When I get criticized, I'd like to get criticized for something I actually said, not for what someone thinks I said, or imagined what I said.

Brad Williams said...

Chris,

o.0

Are you messing with me? Because, if you are, you got me.

If you aren't, see Trogdor's response. Because if we have to get out the frozen meat chub to deal with yon braying mule, things are going to get ugly on aisle 6.

Not of This World said...

oh, oops, i am sorry about it, you are actually quoting someone else. very sorry about that. but the argument to whoever who said that still stands

Chris said...

trogdor:

Are you messing with me? Because I feel like I'm about to be punk'd.

Dude, you're failing to see the distinction I am drawing. Perhaps an illustration might help. To use a philosophical term, the two are ontologically different; like, say, an apple and an orange. However, while they are very different, they are both fruit, round (to some degree), both descend from the plantae kingdom, are nutritionally benefitial, and both are declicious to eat. While they are different they are both similar, and you could say they are basically the same while maintaining they are also different. Am I the only one here not getting this?

Likewise, gambling and investing in the stock market are both different (gambling is not the market, and the market is not gambling), yet both are the same in real and practical ways: risk, gain, loss, no real control over the outcome, etc. To suggest that buying a stock in hopes that it will appreciate (with the possibility of losing it all) is not "gambling", then I'm not sure what is!

Again, I think the problem here is the word "gambling" and what it's usually associated with.

Are we perhaps redefining the language in order to justify one and not the other? I'm not accusing, just askin'.

Truth Unites... and Divides said...

Chris: "Am I the only one here not getting this?"

No, you're not the only one. At least two others, Darby Livingston and myself, get it.

"Are we perhaps redefining the language in order to justify one and not the other?"

It does appear that some folks are doing that, doesn't it?

Phil Johnson said...

TUAD: "At least two others, Darby Livingston and myself, get it."

No, I get it, too. I just think it's a totally bogus point. Here's the gist of your argument:

If people gamble out of covetousness and greed, and those motives are what make gambling wrong, then investing in stocks is wrong, too, because a lot of people who put their money in the stock market are greedy and covetous, too.

. . . which is exactly the same thing as saying this:

If dueling is wrong because people who duel are driven by murderous motives, then fishing is wrong, too, because a I know a guy who took a friend fishing only because he wanted to kill him and dump his body in the water.

Look: Murderous motives are always wrong, whether in dueling or in fishing. But in dueling, the driving motives always include murder. Not so in fishing.

Likewise, greed and covetousness are always wrong, whether in gambling or in investing. But in gambling, the driving motives always include greed and/or covetousness. Not so in legitimate investing.

That's why the comparison you are trying to make is invalid.

In gambling greed and covetousness are systemic. Gambling has no other motive or legitimate use. That's the argument I am making.

Are we clear now?