Morality of the Markets

This is a subject I had written about in my prior blog, but had only saved it as a draft - leaving it unpublished as I wrestled with possible conclusions. Here I try to do so out in the open; not finding one concrete, acceptable solution, but enjoying thinking about it.

The other day, the CEO of our fine organization was in a meeting with me and rest of our investment team.  We were discussing futures and options, investment vehicles that underlie some of the products we were researching.  We were hoping to come to a conclusion as to whether to recommend these to clients, or whether they were suitable to client goals - basically, we wanted to understand what they were founded upon.

While I won't bore you with the details (they aren't necessary for this discussion), they brought up some interesting moral questions for me.  If the only way for me to win is for someone else to lose, is that morally praiseworthy, or at the very least acceptable? And I'm not talking about sports here - these are peoples' livelihoods - their nest eggs - their investments.

The ultimate reason I stopped playing online poker (please don't ever do it, it's dumb) was that for me to win, I had to take money from people, people who likely had gambling addictions, or should not be playing because they couldn't afford to lose.  Another reason was that I was spending too much time on it, but that was the main one.

In the same way, if the only way I can make money from one of my investments is for someone else to lose money (the person selling it to me or buying it from me, usually) is that okay?

Let me give you an example, not rooted in the options markets or futures markets, but in a simple stock transaction.  Let's say I want to buy Google stock (ticker: GOOG).  Suppose GOOG is trading for $500 per share.  I buy two shares for $1000, hoping it is pretty near a low point, so I can make money when it goes up -- it has been near $600 recently and has fallen for whatever reason, let's say.  So I bought the shares from Jimmy, who has spent his life savings, $1200, to buy GOOG when it was at $600/share, but got scared when it dropped down to $500 over the past few months, a 17% loss.  He decided to sell it because of his emotions - he was scared he would lose everything, and maybe hadn't thought through his decision to buy it in the fist place, and didn't realize that he could lose serious money on it.  I mean, Google seems like a very reputable company - someone investing for the first time might not realize that a company's stock price often has little to do with that (at least nowadays; 'fundamentals are out the window' is a common phrase).

So I buy GOOG from Jimmy, hoping that it's going to bounce back up to $600 and beyond - being a sophisticated investor (in this example - ha).  I have done my due diligence and know its earning per share, its EBITDA, its <enter other impressive-soundings stat here> and realize that it may well drop 17% or more, but in the long term, 5+ years from now, I am confident it will more than likely be up. And I don't need the money today - I can afford to let it go on a roller coaster ride without worrying.  Plus I'm diversified and it's not my only stock - but it was Jimmy's.

Basically I'm hoping Jimmy sold it at the wrong time, losing money, and that I will profit off his mistake as it goes back up.

Now, fast forward a few years. GOOG is trading at $700, I've made a hefty 40% profit, and have considered selling.  I read some analyst reports that the market is saturated and Google is becoming obsolete in its field of expertise (advertising and search).  I believe the stock will go down, and have other needs for the cash, so I sell both shares, for $1400, to Timmy. Perhaps I pocket the $400 profit, or reinvest in something else, it doesn't matter.  I just am hoping I sold at a peak, and that the stock starts going down soon. If it were to run up on to $800 or $900 per share I would be kicking myself for not holding onto it.

So basically, I am hoping Timmy bought at the wrong time and will lose money.

Does that sound very ethical to you?

Let me go back to my investment team meeting. The CEO is talking. He's talking about futures and options but it seems that from our example above, the stock market is similar:

At his old job, he says, options traders were stupid; they traded on emotions.  He described how his company could make so much money on it when they acted irrationally.

He said it's a zero-sum game, "in order for someone to win, someone else must lose."

That just doesn't sound like loving your neighbor as yourself to me, though.  To justify it, other members of the team assured him that the people 'losing' were big banks, hedging their bets elsewhere.  But hey, banks are made up of people, right? Or at the very least, peoples' hard earned money.

I think I'll write more on this subject in the future - this is just me fleshing out some of my thoughts. I don't believe the markets are evil - they might just be amoral.  I mean, Jesus says to "invest our talents" - literally our gold, our money, for the master... if investing and making gains were a sin, His parable of the talents would be flawed seriously. But back then, did people have to lose money for people to make money?