Investing As Lotto

I have always explained to my advisees that one does not invest in the stock market. You invest in the stock of publicly traded companies, and the stock market is simply the conduit via which you make the investment. The stock market is the vehicle that allows you to choose the equity stakes in which you invest.

I have changed my mind.

I now believe that you do invest in the stock market. It has become a living, breathing monster in it’s own right. The value of a profitable widget manufacturer with good cash flow and a strong customer base does not plummet because Alan Greenspan farts. Microsoft does not shut down production of standing orders when some loon straps dynamite to himself in Tel Aviv. However, their value does drop precipitously upon those occurrences because they are now valued by a highly emotional market which is made by pseudosophisticates responding to every aberrant belch in international political relations as well as the potential formation of an occluded front over the Atlantic Ocean.

As an appraiser of closely-held companies, I readily assigned a discount for lack of marketability, i.e. lack of ease of disposal, to the value of stock in closely-held corporations. I now wonder if there isn’t also a corresponding premium for lack of marketability in that same stock. The premium arises from the fact that your fellow shareholders can’t run to the retail market counter and unload their shares because it’s cloudy today. They can’t dump their shares on the open market because they are afraid that gay couples will marry and bring Armageddon. They are in the investment for the long haul, and that forces a focus on the meaningful attributes of value, such as building product and selling it at a profit.