not understanding the meaning of your post
I’m asking if it’s theoretically possible for everyone, at the same time, to grow their net worth and achieve financial freedom by the method you describe.
On a macro-level, yes. It’s a gross simplification, but ‘wealth’ is created by an increase in productivity (less labor required for greater output). The stock market allows me to participate in this phenomenon in a very low cost and diversified way.
I don’t have to personally start a company that is making self-driving trucks in order to participate in the net wealth creation.
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This book doesn’t have to do with stock markets specifically, but it sounds like you may be interested in Thomas Piketty’s Capital in the 21st Century if you’re not already familiar with it
The central thesis of the book is that inequality is not an accident, but rather a feature of capitalism, and can only be reversed through state interventionism.[17] The book thus argues that, unless capitalism is reformed, the very democratic order will be threatened.[17]
Piketty bases his argument on a formula that relates the rate of return on capital ( r ) to economic growth ( g ), where r includes profits, dividends, interest, rents and other income from capital and g is measured as growth of society’s income or output. He argues that when the rate of growth is low, then wealth tends to accumulate more quickly from r than from labor and tends to accumulate more among the top 10% and 1%, increasing inequality. Thus the fundamental force for divergence and greater wealth inequality can be summed up in the inequality r > g . He analyzes inheritance from the perspective of the same formula.
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That’s not really answering the question, though (full disclosure: I’m 100% certain the answer is ‘No’ and am being mildly uh Socratic or whatever, if it’s irritating I’ll knock it off). I’m not asking about abstractedly participating in the net wealth creation and passively benefiting from the increased productivity. I’m asking about everybody taking their excess cash and socking it into a highly-diversified set of profit-making enterprises, thereby, via the rights to their collective future dividend stream, achieving financial freedom.
A crude analogy would be the lottery. “I might win the jackpot” is not an argument that the lottery is a social good. “Someone will definitely win the jackpot” is also not an argument that the lottery is a social good, like literally it is not even a bad argument to that effect. I see myself as asking something like: “Can everyone win the lottery?” which is why I’m confident the answer is “No”.
That’s one I’ve heard a lot about the last few years, but never tried. Into the backlog it goes.
Yes, assuming people have sufficient income to comfortably cover their expenses, everyone can take their excess cash, invest in a basket of profit-making enterprises and achieve financial freedom. Not sure why doubt would exist regarding that point.
To the extent people don’t have enough income to do that is not a critique of the stock market itself.
Moving on a bit from this point, it might be helpful to start at the bottom and build up to the stock market, and identify where your doubt lies.
Are you objecting to:
a) The concept of a legal entity which seeks to make a profit that is distinct from (and provides liability protection to) its individual owners aka a corporation
b) Given a) that someone has the right to buy and sell their interest in the future dividends of the corporation with another person
c) Given b) that people should be able to freely gather in a broader market to engage in this activity
d) Given c) that corporations could use that market to directly sell rights to future dividends in order to provide funding
I’m having trouble following your question, as well.
I think the simple answer is, “Yes, everyone can invest in a diversified set of profit-making enterprises and all generate wealth through that investment.” It isn’t like the lottery because the lottery, by design, is a negative expected value proposition.
If you’re asking whether everyone can achieve financial freedom via this investment, probably not, because it takes a really large sum of wealth to be financially independent. But I don’t think anyone in favor of markets is making this claim.
Am I misunderstanding your question? Do you have this same degree of concern about the existence of simple savings accounts?
Additionally, you seem somewhat caught up in the concept of price fluctuation in the value of stocks.
By and large the reason that stocks tend to go up in value over time is that they pay out a very small % of their profits in dividends, and instead retain their earnings in order to increase their opportunity to pay even higher future dividends.
Amazon isn’t selling for $3,400/share because it’s winning a beauty contest. It’s because a share of Amazon has the ability to generate a shit ton of cash if the company decided it was a good time to cut costs and begin distributing free cash flow to shareholders. At this point they have decided it’s a better strategy to keep growing.
What would happen if everyone did that, though? Ignoring for a moment the vast numbers of people who can’t afford to do that. If you’re talking about some kind of endowment for retirement or a bequest or whatever, then OK, but that’s not what I take you to mean by “achieving financial freedom” which I associate with at least the potential for a life of leisure/work for enjoyment funded by capital and/or passive income.
I’m not saying that it is a critique of the stock market as such, only that I’m looking for arguments that the stock market (all markets as people use the term “the markets”) is a social good. It may be that you and some indeterminately-sized cohort of other people on the whole benefit from its existence, but if that benefit is achieved at the expense of others, or by virtue of exclusivity of access, then this is still just a version of the argument that someone always wins the jackpot.
I’m not objecting as such to anything. I’m positing that:
e) the net effect of the preceding has been policymaking capture by the factors of these markets to a net detrimental effect
I’m in the market for reasons why e) is false and arguments that e) need not be the case.
I don’t say that they are, only that the fact not everyone can do it means that “I can do that” doesn’t give me reasons to think that the markets as they function in reality are not a net detriment, or that they are but could plausibly be otherwise.
By achieving financial freedom, I mean being able to live off the value of your investment portfolio (dividends + capital drawdown) more or less indefinitely. Historically, it has not required some kind of extraordinary income to achieve this. For many Americans, something like saving 15% of your income over 30 years is easily enough.
Imagine that you had 1,000 friends that were all very smart and hard working business people and all interested in a wide array of types of businesses. And you had the opportunity to give each of them $1/mo (so collectively $1000/mo). And they all just hustled and worked hard and started different businesses, and you got to collect your fair share (based on your investment) of all of the profit distributions from these businesses. And you did this for 30 years.
That would be a very awesome opportunity, and is essentially the opportunity that we all have with the stock market.
I’m not really sure what you are getting at with your “but what if EVERYONE participated” refrain. If you have a point to make, then go ahead and make it.
Who are the people suffering because the stock market exists, but who wouldn’t suffer in the absence of the stock market?
If everyone had access to a government-sponsored savings account that paid, say 3% per year, that would be good for everyone, even if some people weren’t able to gain financial independence via those accounts.
Similarly, access to low-cost, diversified portfolio of profitable firms that earns, say 8% per year on average with some volatility, is also good for everyone. And, unlike a lottery, full participation in that investment is not a negative expected value situation.
I feel like I’m kind of throwing spaghetti at the wall to see what sticks, because I don’t understand the costs/downsides that you seem to think are so obvious.
Well with 15% of your income over 30 years etc, you do appear to be more or less talking about funding something like an early retirement, so that removes the problem with everyone doing it. It does still leave the problem that not everybody can do it. Would you agree that the system you describe tends to exacerbate a pre-existing inequality?
The fact that not everybody can do it has nothing to do with the stock market. Tax the companies more, give people healthcare and free college, increase the minimum wage.
Also, are you going to respond to my earlier post about what part of the foundation that the stock market is built on that you have the problem with?
Like is it ok if I buy and sell interests in the profits of corporations if it’s all done privately through a broker that charges 6% and we have to haggle for a month over the cost? Or do you have a problem with the funding of corporations through the buying and selling of future interests in the first place? Or is your problem with corporations existing at all?
Mostly policy-making capture: policy decisions being beholden to the will or preferences of market actors. Plus the occasional apocalyptic crash, two of those in my lifetime and a bunch of smaller ones. For something that’s so amazing, everyone seems to spend a ton of time worrying about and being, it’s hard not to think, afraid of it.
Why are taxes so low? Why don’t people have healthcare? Why is there so much entrenched opposition to changing those among people who would directly benefit from it? How did that come to be the case?
And I told you already, I’m not necessarily objecting to any part of the above except for the regulatory and policy-making capture and those ill effects (and the occasional crashes that wipe everyone out). I’m speculating that the latter arise inexorably from the former and can only ever be weakly mitigated or temporarily restrained, never negated. And so I set out my stall and say, Come, friends: Sell Me On The Stock Market. So far it appears that you and some indeterminate number of people of similar socio-economic backgrounds can have nicer/earlier/both retirements because of it. That’s not bad as such, it’s just not really what I’m looking for, you know?
I’m going to step out here, because I’m having trouble distinguishing your complaint from a complaint about the existence of corporations, or even basic capitalism. If stock markets didn’t exist, and every company was private–like Koch Industries–there wouldn’t be any less incentive for the owners of those firms to influence politicians. Nor would the wealth generated within those private firms be distributed in a more equitable manner.
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Wouldn’t there be significantly fewer apocalyptic crashes?
I view crashes as the consequence or symptom of a really bad underlying event. So, tautologically there wouldn’t be any stock market crashes if there were no stock market. But I don’t think that the absence of stock markets would reduce the risk of economic recessions or depressions.
Besides, if the only people who benefit from a stock market are the rich people (which I think is your view), then why would you care if they suffer from a stock market crash?
Because we have a capitalistic economy built on top of a failing democracy. If the only way to buy a share of the profits in a corporation was to be a well-connected and wealthy individual or corporate founder, we would not all the sudden be raising taxes and giving healthcare to people.
This is why I keep getting back to the question about which part of all of this are you fundamentally objecting to. Once you have accepted a capitalistic system comprised of corporations, then having a publicly available market to trade in the rights to their profits is clearly better than not having such a market. Getting rid of a stock market within our current system just gives you the worst of all worlds.