She gets into trouble, I have to fish her out. A relationship.

Sunday, 02 June, Year 5 d.Tr. | Author: Mircea Popescu

We're talking about MPOE-PR, of course. What she said was

From my (limited) experience and from what I could get together eavesdropping on MPEx people, generally speaking investing works thusly: optimal chunks are decided (we want 1%, 0.1%, 10% of this company for strategic investors, we want 1%, 0.1%, 10% of our capital in this company for everyone else). This process is based on some sort of fundamental considerations, into which price (current or historical) does not figure. The trades are then executed (there may be some timing skulduggery involved here) and the desired positions entered. This situation continues until a new decision as to the optimal chunks is made (perhaps on a yearly review), after which more trades are executed to attain the new desired position.

I'm not saying it's positive necessarily, I'm not really discussing that angle. Just trying to make the point that not everybody is as last price driven as the average forum user - in a probably doomed attempt to restore some balance to the discussion. And when I say "not everybody" what I really mean is "no actual investor".

This was strongly rebuffed by some new kid on the blocki,

Perhaps it is your "limited experience," or perhaps your spinning and dissembling have reached new levels of absurdity.

Of course price is considered when making ANY investment; it's integral to even the most basic calculations related to expected return on capital, such as net present value or internal rate of return. You must have started eavesdropping too late in those conversations you overheard because these analyses are done prior to making decisions about how to allocate capital.

It's painfully obvious to all of us lowly forum users, who aren't "actual investors," that you have absolutely no idea what you're talking about. I'm sure it's standard PR procedure to apologize when you've needlessly and erroneously insulted people evaluating an asset you purport to represent.

The quest of education is obviously neverending. Let's then try and make sense of this entire thing for the benefit of those eager minds with a disposition towards their own betterment.

Most trade is driven by purchase. There exist rare instances (such as forced sales by a government authority, liquidation events scl) in which trade is driven by sale, but in general the driving force behind the moving of goods and services is the positive will of someone to acquire them rather than the firm determination of someone to be rid of them.

The ultimate source of all will to acquire is the end user. This however does not mean that the immediate source of all acquisitions is also the end user. Because the universe of offers is not homogenous over spaceii or timeiii or other relevant variables, and because the universe of demand is also not homogenous over spaceiv, time and other relevant variables, and because these variances are mostly unrelated, sufficiently advanced economies give rise to another profession, which is the arbitrageur most generally, or the trader if we prefer the traditional name.

So, the miner, who is a professional, mines. The blacksmith, who is also a professional, employs the ore mined by the miner into his trade. In between these however, if the economy is large enough and complex enough, the ore broker handles the hurdles of space, time and so forth. He arbitrages differences in price over space (by transporting, for instance), time (by buying and holding, if need be, by shorting if at all possible and the instruments are complex enough), by whatever means available. His job is to move the price as it is closer to the price as it really is, and that's what he's doing. Not an easy task, which is why this is also a professional position, just as much so as the miner's or the blacksmith's.

The case of paper, such as for instance shares, isn't particularly different. You can roughly distinguish two classes of people buying : the investors, who buy to hold, and the traders, who buy to arbitrage. They are distinct in pretty much all aspects, and perhaps examining this distinction is worth our time. Investors buy because they have spare cash, and this has to be put to work somewhere. Traders buy because they evaluate the instrument to be trading under its actual value and they anticipate a reversion to that actual value within a finite interval. This means that the positions of traders are essentially limited in time, and the better their initial evaluation the shorter the period they hold the instrument. Conversely, the positions of investors are essentially limitless in time, and the better their initial evaluation the longer the period they hold the instrument. Traders are interested in instruments trading as far away from their actual value as possible. Investors are interested in instruments trading as close to their actual value as possible. Traders are encouraged to exit a position (even at a loss) by decrease in volatility of the instrument they are holding (as this translates to them in a lower probability of successfully completing their arbitrage, which translates in turn into an opportunity cost as compared to other available arbitrages).

The list could go on for quite a while, but the gist of it is that not everybody involved in finance is required or even well advised to be marking to market and that not everybody buying or selling financial instruments is automatically an investor (even if this colloquialism is very common today in the same way calling people "sir" whether they're actual baronets or not is very common today). They who have cash and are seeking to ensure their continued relevance in the world of tomorrow have one set of problems before them, which are addressed by picking from one set of solutions. They who have patience and (presumably) skill and are seeking to make a living out of these qualities have a completely different set of problems before them, which are addressed by picking from a completely different set of solutions.

Moreover the differences in approach and outlook are quite important, and often vexing, even for experienced practitioners themselvesv. The sad fact of the matter is that in spite of a lot of intellectual effort being dedicated to this field, and in spite of the rewards being significant, we still have very little actual understanding with regards to economy. Most important questions are still open, every single theoretical model provenly broken, economy's a riot.

So, yes, contrary to what any one neophyte may think, there exists such an approach to finance wherein price is discarded as meaningless, and trades are conducted on other considerations. This is perfectly legitimate, especially in assets with very deep liquidity, on the grounds that it's unlikely for the investor to economicallyvi obtain a better evaluation of the asset than what the market is already providing. There also exists such an approach to finance wherein any information about the underlying issuer is discarded, on the theory that all needed information is contained within the stock charts. This is perfectly illegitimate, and yet the prevailing conviction, faith and reigning religion of the vast majority of self proclaimed investors as found on the Internet (it does have the advantage of being easy, cheap and somewhat fun, granted).

The only moral of this story being that domestic animals tend to presume their human caretaker is an animal of the same species, of the same gender and of the same age as themselves and young human males are not so very different : they also tend to imagine the world is equal to whatever has fit inside their head so far. This tendency, as anything natural, is nothing to be ashamed of. Allowing it to drive one's life however may in time turn a little problematic (nothing a good bout of interpretative dance + demonizing the other party won't instantly cure, however).

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  1. The most notable part of them being their tagline, which reads "It ain't what a man don't know that makes him a fool; it's the things he does know, that ain't so. -Josh Billings" []
  2. For instance factories concentrate production of specified goods from a geographical area - if the beer factory is located at 15th, Hops Avenue you can not obtain equal amounts of beer at all the numbers of Hops Avenue, but instead all the beer available on Hops Avenue will be concentrated at #15. []
  3. White fur coats will only be available for direct acquisition off the rabbit during winter. []
  4. For instance cities concentrate consumption of many goods and services to the detriment of rural areas. []
  5. See for instance W. Buffett's indignation at financial advisors recomending their clients sell stocks when they go down in price and buying back in once the same stocks have recovered to previous levels. []
  6. It's not strictly a matter of finding out exactly how much something is worth, but moreover a matter of how much such a finding would actually cost. The person employed on some minimum wage job spending three hours a week managing his two hundred dollar eTrade account is realising an overall loss of epic proportions, which would drive any investment bank out of business. []
Category: Actiuni si Optiuni
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