I"m reading a book right now called "A random walk down Wall Street" by Burton G. Malkiel. I highly recommend it to anyone interested in directly investing in the stock market. The author's basic premise is that it's a losing game if you try anything other than a broad investment strategy such as a total market index fund. All his talk about the behavior of stocks (and stock investors) has got me thinking about the nature of stock. The following are some random musings on my part.
The whole premise of stock investing is that over time stocks go up in value. This has been shown to be true since stock markets began, but the amazing thing is that they go up in value faster than just about anything else around! The value rises exponentially, at an average rate of 9% per year(historically). Thats astounding. Consumer price inflation rises at about only 4% per year. I wonder why there is a disconnect between the two. The value of most everything else rises much more slowly than stocks.
Inflation itself is a tricky beast. Why does the price of everything go up over time? Because people think it does! Sounds crazy, but it must be true. The value I get from, say, a can of tuna doesn't change from one can to the next. The amount of work to produce that can of tuna doesn't change appreciable either. But over time, I pay more for each can I buy. I think it stems from people wanting more, which also explains why prices rise exponentially.
Corporations want more profits, so they raise the price of their goods slightly. A free market would punish those who raise prices by producing competitors who sell the same goods at a lower cost, which I guess is a driving factor in keeping the inflation rate down. However, everybody desires more money for their goods and services. Employees want a better salary so they go the firm that pays the most. Delivery drivers want more compensation for delivering the goods, workers want more for producing the goods, and construction companies want more for building the factories. The increases are relatively small each time, but over years they compound and thus we have inflation.
Why does the cost of goods rise exponentially vice linearly? Because of the way humans perceive difference. For example, if you were in a store and needed to buy item selling for $15, and you knew it was selling for $5 at another store, you would go to the second store. But what if your where buying a plasma television, and saw it at the store your were in for $1010 and the other store for $1000. You probably wouldn't bother. The difference is that your mind perceives the first item at a 66% discount, while the second item is at a 1% discount. People are geared to perceive the relative difference, not the absolute difference. If you made $30,000 a year, and got a $1000 raise, you would probably be quite pleased. But if you made $70,000 and only got a $1000 raise, you would probably be ambivalent or even displeased( because it isn't keeping up with inflation!)
Oh well, just be glad we aren't Zimbabwe. According to wikipedia the current inflation rate as of April is an extimated 165,000% and they just issued a $50,000,000 dollar note(US $1.20)
Still, I wonder what drives stock values up more quickly than other prices. If it weren't for stock splits, some of the older companies would be priced right out of individual investors range( such as Berkshire Hathaway, which closed today at $127,200)
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