Finance and Why I Hate Everything

I think this is a pretty false view of the world of finance and investing as a whole. So many broad, sweeping generalizations that everyone should be able to pick up on as patently misleading. This idea of a zero-sum game that you're touting just doesn't exist in a lot of investing.

For those that don't know, I'm referring to the OP's assumption that in order for an investor on wallstreet to have a gain, he believes that someone must have a loss. This is true for certain instruments like futures and options - but in a lot of investing it just isn't the case.

As well, this idea that market swings are manipulated by wallstreet to screw people investing under 100 million... certainly there are some people out there who have a lot of money - enough to manipulate the market somewhat, who use it to this end. The southeast asian financial crisis of the...late 80's early 90's I think it was, was largely facilitated by some pretty sketchy stuff done by George Soros when Thailand deregulated its financial sector to try to attract firms from Hong Kong. (my professor was the head economist for the World Bank's team assigned to investigate and track the crisis so I got to hear all about it...) But there are investment strategies that allow you to offset or minimize that risk.

I get the feeling the OP's course is actually really bad, or his professor was a depressed, cynical guy. There is not "only so much money to be made" like he suggests - rather, there is only so much money that people have to invest in the millions of ideas, new businesses and new gambles that existing companies are making. The opportunities are there, you just have to do the leg work in order to be able to invest it properly.

At the end of the day, if you do the proper research into the company numbers, and the board of directors, you can get a feel for the types of risks you are going to be taking, and can invest accordingly. Some guy in a suit hiding in a board room somewhere is probably not going to screw you. For example, during my undergrad I did an almost-thesis on the Chinese auto industry. My research spanned from early 2008- early 2009. The amount of information I obtained made for a pretty boring 40 page paper - but I predicted that it was highly likely Volvo would be purchased by a Chinese firm (1.5 years before it happened), that specific Chinese autoparts makers were really well positioned, and a few other things. Low and behold, Volvo got purchased by Geely, and all of those autoparts makers took huge positions in Western markets and had their share values triple or quadruple over just a year. If only I had money at the time to invest...

If you are one of the many investors who invests without knowing what the fuck they're doing, or without knowing about the companies that your investment advisor is putting money into, well yes there is some additional risk that your advisor could exploit your trust.

But honestly this OP just seems like fear mongering more than anything.

Edit. I figured out the problem with the OP. You say that financial instruments = zero sum game, therefore all investing is done by suckers. But not all investing is done through financial instruments as you imagine them to be, and not all financial instruments are zero sum games..

Also, there is a huge OTC market (over the counter) where laymen like us can use these zero sum instruments without having to deal with these big companies.

OK, sorry for misunderstanding, I definitely agree that unless you have 100 million invested in a major listed company, or are a significant member in an investment group, you are going to have little-to-no sway over the direction of the company simply because your votes will be such a small proportion of those of the company.

And I definitely agree as well that a big pack of dumb people investing can be exploited by someone with more wherewithal. I remember reading an article in the Economist that discussed the effects of solar eclipses on stock value. Going back something like 20 years, there was a noticeable dip followed by a rebound every single trading day which coincided with a solar eclipse. Had investors taken advantage of this irrational move every solar eclipse an observant investor could have doubled their investment value over that period.

Unfortunately the effect decreased every year, and with the release of that article I doubt there is much more to it these days to take advantage of.

With respect to smaller businesses being unavailable for investment in the stock market, there are several stock markets which list smaller companies, or venture capital shell companies (and other structures) which do invest into smaller companies, so there is a way to invest in these smaller businesses through the stock market.

And I haven't actually learned about the risk free rate plus premium that you are talking about. I'm gathering that it is a theoretical value that is sort of like a perfect stock market index - ie. it takes into account every stock and perfectly predicts what the average stock's expected returns or growth is. If that is the case and you use it as your base line, then I suppose relative to that the stock market would be a zero sum game. I don't quite see the value in looking at the stock market that way... perhaps tomorrow I will google it and figure out exactly what you mean

At any rate, even if the stock market is a zero-sum game that doesn't necessarily mean that everyone doesn't win or that the little people are being screwed. (I know that a lot of people do lose, but bear with me for the example) The futures and options markets have huge sums of money from people and corporations trying to hedge themselves against the risks of their business. An oil company may buy options based on an oil index which will pay them money in the event that oil prices tank. If oil prices stay high, they will lose money in the options market (and someone else will win), but on the whole they will still "win" because the business will be prosperous. A small-time investor could speculate on these futures and options exchanges and they wouldn't necessarily be competing with the man on wall-street in the zero-sum game.

I dunno, I think I'd be more worried about a bad investment adviser than wall street. I really like the thinking you're making me do about this, its been a while :D

The asian financial crisis was caused by several big money players doing currency speculation, so in that instance it actually was fat cats sitting in a board room - probably on mahogany furniture with cigars and cognac. When Hong Kong sovereignty was transfered back to China, people were worried that Chinese laws and regulations would interfere with its operation as a major financial center. Many countries in the Easter Asian time zone began trying to compete for the stock markets and major investment firms in the hopes that they could attract the fleeing companies. They did this by offering perks to foreign companies, and through deregulation of their financial sectors. Thailand went the most overboard - they essentially allowed foreign investors and foreign MNCs to do whatever they wanted.

This set up the perfect stage for currency speculation. My professor blames George Soros, although I think it was probably a bunch of people. Prior to 1997 Soros began gaining connections in many of the major banks in Thailand. This was done through a variety of methods. The result was that he had a whole bunch of people who were positioned to purchase large amounts of Thai currency for him. He accumulated vast amounts of Thai currency. I'll take the next part of the story from this random site I just googled:



My professor disagrees with these numbers, but the gist of the story is correct.

George Soros took a position in the market - basically, he entered into forward contracts which allowed him to turn a huge profit in the event that the Thai currency crashed. He then withdrew all of his investments and flooded the Thai market with all of the Thai currency he had accumulated. The result was that demand for Thai currency crashed, the value tanked, and he made an absolute killing.

Major corporations in Japan and Korea that had made major investments and stakes in the Thai economy under the impression that it was booming, all of a sudden had all of these toxic assets abroad and they got into trouble, so the Thai crisis spread to Korea, Malaysia, the Philippines, it made Japan's stagnant economy worse, etc. China somehow avoided it, which is interesting.

My professor claims that Soros made somewhere in the territory of $5b for his fund. This is possible without fronting any major investment since forward contracts don't require settlement until a future pre-determined date.

So the fat cats do do it sometimes. In the 2008 crisis it is argued by some that they made it worse - but they certainly weren't the sole cause of it.