Investing Creates Value?

[RT Wolf]

In some of Steve's writings, he's mentioned that he considers investing in businesses an act of value creation, such as in the following:

Making Money Consciously

Strictly speaking, the stock market is simply a secondary market for trading stocks, and if you buy shares, the money does not go to the original company. So, in a way, it's like kids trading baseball/basketball cards, rather than purchasing more from the store.

My question is, is investing in the stock market an act of value creation?

[ConquerSelf]

Of course, it's hundreds of millions of capital injections at a time. It's a giant network.

The most obvious case is an IPO to allow a newly listed company to sell common and preferred stock on an exchange. The cash they recieve gets reinvested, creates more net profit, is redistributed through dividends.

[MyEyeIsOpen]

It does provide value in that markets contain valuable information about the metrics which markets measure.

[Hyperchiller]

Investing means you're giving money to people who need money to finance their projects. This means more jobs, more energy is flowing in the economy, more value is exchanged overall.

Conscious investing would mean investing in the companies, projects and people who actually align with your values heirarchy.

As Steve has said before in his blog, he doesn't invest much (or at all?) in the stock market because most of the companies aren't aligned with what he wants to see in the world. And he thinks that reinvesting that money into his own purpose and company is investment money better spent in his opinion. I think this is a great concept to grasp. Because that means you truly believe in your goals and purpose and wish them to be created because you'd rather use the money to expand your own potential to provide value.

[AviMar]

I don't see how investing in the stock market helps at all. Perhaps an IPO would be the exception, but otherwise - you are just buying the share from someone else. The company isn't getting any new money.
Doing venture capital investing or otherwise loaning to a new company - that would be valuable investing.

(Hmm, Kiva - Loans that change lives lets you loan small amounts to entrepreneurs in developing countries, but I don't think they take interest.)

[Brutha]

Companies die if there stockmarket falls to much because nobody wants to do business with a bankrupt company.

Companies also direct their policy to get a higher stock market price. If you want to reward certain behavior on the part of companies buying the stock of companies that exhibit that behavior creates value.

[dannielo]

Originally Posted by RT Wolf

My question is, is investing in the stock market an act of value creation?

In a general sense, it is.

But at the individual level, I don't think people really invest to create value. You buy some stocks, bonds etc, and then just sit&wait to sell them later with a profit.

The one that really creates the value to the society is the company.

From what I know, the greatest investor Warren Buffet doesn't invest this way, he buys companies and then operates them from the inside to make them more valuable. Maybe that's why he is so rich, he creates more value.

[RT Wolf]

Thank you to everyone for responding.

ConquerSelf, that's all true, however if you're not investing in an IPO situation but instead buying in stock market, does it still create value of some kind to someone?

MyEyeIsOpen, I'm not sure what you mean. Can you elaborate?

Hyperchiller, indeed it does. However, the stock market is a secondary market and if I buy some shares, no money of that goes to the actual company. I am, of course, assuming that the only real value I create is basically giving them money.

AviMar, yea, that's what it seems like to me.

Brutha, stock prices fall for all sorts of reasons and not always because the underlying fundamentals are bad. In fact, Warren Buffett has amassed his fortune based on these mispricings by the market. Companies don't have to die if hteir stock market value falls. If they're smart and they know that things aren't as bad as everyone assumes they are, this can be a great opportunity to buy back stock, creating greater value for the stockholders who stick around (the market cap may remain the same but number of shares diminishes, so the remaining shares are worth more individually).

I disagree with the short-term thinking that focusing on the stock value creates. I'm firmly in the Warren Buffett camp in this respect. I am also interested in taking a long-term view and thinking that I am a partner in the company for many years.

danniello, what is the general sense in which the stock market creates additional value?

I'm trying to look at this differently. One way is that while my specific money may not be creating value, I am participating in value creation anyway by being a part owner of the company or by taking part in the stock market.

Taking the attitude of part-owner (as Buffett does), I can potentially also influence a company, thus creating value in a way that is uniquely mine.

For now, I think I will conclude that investing in the stock market creates value in a number of ways, if invested in a particular way. Being a value investor, I can help raise awareness of the real value of a stock versus the current stock price and help keep the price up by buying it if it gets too low.

Not very strong reasons, but then, perhaps I was just lookin to find any justification to amass my own financial wealth. I'll keep thinking about this and probably write abuot this on my blog if I figure anything out. This thread isn't closed, obviously, so you're free to put in your ownt houghts as you'd like.

Cheers!

[theonlyguy]

The existence of the stock market makes IPOs possible. No one would invest in an IPO in the first place if there were no guaranteed market to sell the shares to later.

The market itself is an efficient means (although far less than 100% efficient) for people to put money towards what they value. So in that sense it's a real-time reflection of peoples' values.

Also, it's one way you can put your money in and get out dividends plus capital appreciation. It's a way for individuals or groups to take advantage of economies of scale by investing into giant corporations that have spent decades accumulating wealth.

Investing in the market also allows for jobs because someone has to get paid for running the markets (market makers, brokers, financial advisors, etc.)

[Ilya]

Let me tune in to clarify some things here. I'll use the previous answers and your reaction to them as a springboard. Stand on the shoulders of the giants, if I may.

Originally Posted by RT Wolf

ConquerSelf, that's all true, however if you're not investing in an IPO situation but instead buying in stock market, does it still create value of some kind to someone?

You do create value for the company any time you are buying stock or holding it. When you buy, you drive the price higher, even if a little bit. You are creating demand. If you are holding stock, you are limiting supply, which pushes the price higher.
Of course, small individual investor's influence is hard to notice compared to the huge institutional investors, but big funds are managing the money of lots of individual investors, after all.
Now, what people seem to forget here is that the higher stock price results in very tangible benefits for the company. Don't forget that the company usually owns quite a large amount of it's own stock.
Sometimes the amount of stock on the market is just a small percentage of the overall stock there is although it's the stock on the market that defines the price of the stock and the overall capitalisation of the company.
Now the capitalization of the company has value. We say "the company is valued" as such and such. The companies have ways to monetize this value. For example they can borrow money against their stock.

MyEyeIsOpen, I'm not sure what you mean. Can you elaborate?

I guess MyEyeIsOpen was trying to say something along the lines of what I wrote above.

Hyperchiller, indeed it does. However, the stock market is a secondary market and if I buy some shares, no money of that goes to the actual company. I am, of course, assuming that the only real value I create is basically giving them money.

Again, see above. But there is a more interesting story. A story about the derivatives, like futures. They are, if I put it simply, bets on the future price of something. A something can be a stock, a commodity (like oil), some artificial statistic (like Dow), or even weather. This can seem as removed from the real value as possible, but it's not true. Futures serve as insurance for the stockmarket and the people who trade futures allow this insurance to be effective.
Recently, there is a lot of buzz going on about the "wisdom of the crowds". Well stock-market is one of the earliest working examples of this wisdom.
It does show that the crowd is not very wise overall, though.
But it provides for a mechanism of quickly reacting to changing market conditions.

Brutha, stock prices fall for all sorts of reasons and not always because the underlying fundamentals are bad. In fact, Warren Buffett has amassed his fortune based on these mispricings by the market. Companies don't have to die if hteir stock market value falls. If they're smart and they know that things aren't as bad as everyone assumes they are, this can be a great opportunity to buy back stock, creating greater value for the stockholders who stick around (the market cap may remain the same but number of shares diminishes, so the remaining shares are worth more individually).

You are right here, just keep in mind that the market cap is an asset by itself.

I disagree with the short-term thinking that focusing on the stock value creates. I'm firmly in the Warren Buffett camp in this respect. I am also interested in taking a long-term view and thinking that I am a partner in the company for many years.

There is no contradiction here. If you invest directly in stock with no leverage, than all the time you hold the stock, you are helping the company and when you buy during hard times, you are helping both yourself and the company. Of course if your (and others') help is not sufficient and the company tanks, you are screwed, but that's the price to pay for sharing the business risks of the company.

danniello, what is the general sense in which the stock market creates additional value?

I don't know what danniello will say here, but it reminded me of some other aspect.
Ok, time is money. This is as cliche as it gets. But it's true. And the reverse is true - money is time. If you have something to invest, it means that you've turned some of time of your life into a form that allows to store it, replenish it, give it. This form is money. When they say that money is not a resource that can be replenished, it's not true. The moment in the past is gone never to be seem again. But it is possible to spend a moment now and get more moments back in the future. And money is one way to do it.
But i digress. When you invest your money, you essentially let someone else borrow your time. Ideally, they will make good use of it, end up with a surplus of their own and give you your time back with a "thank you" interest.
So, basically, if you are engaging in any financial operation on the stock market, you are adding value... as long as the total sum of money (time) increases. Ultimately, this results in the overall growth of an economy. And the current recession means, that through some bad calls, the overall amount of time is reducing - is wasted in the most fundamental way.
Hopefully, the future growth will compensate this, but not for those who will die before that.
[/QUOTE]

[RT Wolf]

Ilya, thank you for the very thoughtful post. I didn't reply immediately because I needed time to think about what you wrote.

Looking back at my posts, I'm not sure what I wanted to know. I was very confused and I appreciate the wide variety of thoughts that helped me to figure out what I wanted. It was one of those, "I'll know it when I see it" things and I think I found it. And here it is:

There's no real "metaphysical" entity that goes, "you've given fifty-five units of value and you are entitled to receive fifty-five dollars". Even this principle of trading value for time is a generalization and an attempt to understand how monetary exchanges work. So, you can trade the value you create in your time for money, ie get a traditional job. You can also build and/or own/rent a system that gives value to people and monetizes that value in some way. So, this system or business maybe a website (like Steve's), a private corporation that I own and invested in but someone else runs, or a public corporation whose shares I own and it provides value to others. I, essentially, am a part-owner of a system or structure that provides value and receives money.

That, and the "best" or most garunteed way of making money is to provide value, and it has to be of value to each of the customers. For example, if I sell a VCR (I know, no one buys these anymore) for $20. For some people, the value of a VCR equals $10 and so they don't buy, for others it equals $30 or $20 and they buy it. The point of marketing, then, is to advertise and convince people that your product will provide value for them, and to let them know how your product or whatever will provide that value. That value can be any number of things, of course, that's very subjective, because different things are valued differently. For example, I place a high value on my university experience, so I'm paying thousands of dollars to have it, but I place no value on, say, sports supplements so I don't buy any of those. Value can be entertainment, things that make you cry, things that pique your interest, hell, there's value provided in cocaine or sex slavery, else no one would be willing to trade hard-earned cash for 'em.

Of course, as individuals committed to conscious growth we do not want to to be involved in, or encourage others to engage in, lower-consciousness activities. That is for each of us to decide, really, how we'll choose to engage in this and what rules we'll play by. I would like to do this for the highest good for all, in a win/win scenerio.

How's that sound? Any holes in that model, real world or theoretical? I figure once I understand the current model of monetary exchange that applies in most real world cases, I can choose to create ways of providing income for myself that align well with it and my values and other models.

[Brutha]

Brutha, stock prices fall for all sorts of reasons and not always because the underlying fundamentals are bad.

That isn't the argument I made.
If the stock price of a comany falls it's more difficult for them to make long term contracts with other firms.

Nobody wants to buy something for a company that isn't around anymore in two years to provide support for the product.
Similary nobody wants to give a loan to a company that goes out of business in two years.

[RT Wolf]

Ah I see, my bad. That is a valid point also. Thanks for clarifying my error.