Why I hate the stock market (and invest in it anyway)
I am irritated by the way stock market works and how it impacts the way business works nowadays. This post will explain why I feel that way though I have absolutely no idea nor responsibility to offer an alternative. In fact, I surrender to this situation and actually invest some of my money in the stock market.
I started investing in the stock market back in 2018. I did not put too much thought into how it works. I just know that companies stock will grow if they perform well and we should buy low and sell high. Lately, I started getting into how a particular stock price can change and I realize the mechanism behind this is pretty irritating.
Companies cannot stop at having good profit, they also need to increase their stock price. The goal of a business, as a dumb person like me would know, is to get more money from sales than you spend on operations. With the difference you can invest more into the business or enjoy the money. Now it's not enough that you have bazillions of money from profit, you also have to increase your stock price (I will get back to this later).
To increase stock prices, you basically need more people willing to buy your stocks than people willing to sell your stocks. How? By convincing them that the stock price will go up in the future, so they can sell to other people who are convinced that the stock price will go up even more in the more distant future. A very fragile mechanism, IMHO. How can you convince people that your stock price will go up? By creating good narratives about your company.
Narratives about the company are terrifyingly influential in deciding your stock prices. Narratives encapsulate everything that happen in and around your company such as: actual business performance, your specific industry future, geopolitical impact to your business, etc. These narratives, all else being equal (macroeconomic, industry performance, etc.) will determine people's trust of your company's future which will determine your stock prices. This is why companies losing millions of dollars in profit can have high stock prices.
Companies have to increase their stock prices because if not, investors will not come, and investors might invest in their competitors instead (especially in a growing industry). If this happens they will die because they do not have the cash needed to compete. So it's a no choice situation for these companies especially in a winner-take-all market.
I do not know what annoys me more about this. Maybe it's the fact that the world economy depends on these crafted narratives, maybe it's because that there seems to be no escape from this game, maybe it's because of this game that the rich get richer and the poor get poorer (though I did not touch on this point and plan to talk about this in the future).
P.S. To be fair, I am not saying that the stock market is a pure Ponzi scheme. Real business value definitely plays an important role in determining the stock prices. However, it's annoying that crafting the right story becomes just as important (or maybe even more) than actually doing business well.