Before the mid 90s with the internet bubble and online trading like e*trade, I recall a lot of people investing in the stock market. At best, they invested in some funds in their 401k or they had some shares of some worthless stock their grandma gave them as a kid.
All of a sudden, you had all these people with no idea what they are doing, investing money in the very technology that lets them do it. Of course that just drove the stocks higher and attracted more people until eventually it collapsed.
You only make money on stocks when you sell them for more than you purchase them for. The problem is that you have no idea what a stock will do or what event will transpire tomorrow that may increase or decrease your value %20. IMHO, buy and hold isn’t a great strategy unless you plan to live to be 200 years old because the longer you have stock in a company, the more and more probably some disasterous event will occur to destroy the value of that stock. And it’s not like most regular folks are doing a DCF valuation or comparing P/E rations anyway. Most people buys stocks with approximately the same amount of thought they would give to splitting a pair of 9s on a blackjack table.
So does giving the common man the ability to trade stocks freely help the economy or does it lead to wild emotion driven volatility that makes it impossible for the experts to do a proper valuation of any stocks? Ultimately leading to more pronounced bubbles and bear markets?
Buy low, sell high is of course at the root of making money in any enterprise. But that is a simplistic view of the stock market. For example, you can make money when a stock declines in value by shorting it.
More to the point of the debate, people should only invest their money in what they understand. Should the common person open an auto repair shop? A restaurant? A fitness center? As with the stock market, they should only do so if they truly understand the business, otherwise someone with more knowledge will outcompete them.
Both points are untrue. On the first, you can make money with dividends. On the second, that’s like saying that owning a home is a bad strategy because the longer you own the house, the more probable it becomes that it will burn down. As a matter of fact, stocks are among the best long-term investments. On average, a blue-chip stock will perform between six and seven percent a year. Obviously you’re not guaranteed that performance every year, but you can have a pretty good idea of how a stock will perform over fifteen or twenty years. Now there is a danger of picking lemons such as Enron or AIG, but on average stocks are a perfectly intelligent investment. A smart investor doesn’t stick all his or her money into a single stock.
Well, back in ye olden days (such as 1929) I don’t think the professional investors did such a great job either. There will always be bubbles and bear markets; I see no reason to view them as more pronounced now. It’s worth remembering that if you look at the last 15 years in total, you see remarkable growth for the stock market and for the economy as a whole. Sure we’re experiencing pain at the moment, but we shouldn’t let short-term pain override long-term gains.