The Fallacy of Investing

Anyone that has money in the financial markets, whether directly through stocks and bonds or some other instrument, or indirectly through mutual funds and such, like to think of themselves as “investors”. Unfortunately, the vast majority of financial market participants, both laypersons and professionals alike, are not investors, but rather speculators, traders, and gamblers.

On the surface, investing, speculating, trading, and gambling are all the same. They have a common goal of profiting from information asymmetry. On each side of a transaction, one person thinks because of their superior information, or superior skill (just another form of information), or just plain luck (still another form of information), that they will be able to profit. At this level, the only difference between these four activities is the time period over which the profit expectation is spread.

Gambling tends to be very short-term, say the time it takes to roll dice or for horses to run a quarter mile. Trading is a little longer-term, such as seeking to profit on the price movement of a financial instrument over a day or week or maybe a few months. Speculating extends the time frame out a bit, maybe up to a year or two, perhaps to take advantage of currency swings. Investing captures the longest time horizons, preferably covering many years as a business builds its brand and enters new markets and such. But time is superficial. The more important differentiator is motive, or purpose.

The unfortunate reality of the financial markets is that the average “investor” doesn’t care about their “investments”. They don’t care about cash flow or discount rates or business fundamentals or value creation. They don’t care about the underlying asset (a business, physical asset, etc.) represented by the security in which they are dealing. They only care that someone will come along at some point and take them out of their position at a higher price than they paid, justified or not. This is not investing. This is speculating, trading, or gambling.

Investing is the act of committing resources to some effort in the hopes of creating value. Investing is what founders of businesses do when they start a new venture. Investing is what charitable organizations do when they raise and spend money for a good cause. Investing is what governments do when they fund infrastructure projects. Investing in our children is what we do by educating them.

Investing is not throwing money into the stock-of-the-day and hoping to profit next week because you think the latest political scandal will influence the price of the stock in your favor. Investing is not jumping into the market because your neighbor told you they made a huge profit on a stock tip. Investing is not managing a mutual fund to hit quarterly goals or to beat an index in an effort to boost management fees. These are speculative endeavors at best.

This isn’t to say that speculating, trading, and gambling don’t play their part in the financial markets. Certainly, they drive the majority of financial volatility and have been responsible for every bubble and bust since the beginning of recorded history. They provide thousands of jobs to finance professionals that hope to profit by out-thinking each other. They give individual investors a way to express their inherent tendencies toward greed and fear. And that’s all well and good, but it isn’t investing.

Antiquated Sales Tax Laws Not Fit for Online Retail

Since e-commerce became big enough to think about, governments have been crying over lost sales tax revenue from online retail sales. We’re talking US here. The latest estimate is that $1.5-$2 billion in sales tax revenue will not be collected in 2013 because, per a 1992 Supreme Court ruling, online retailers don’t have to collect sales tax if the sale is to a customer that is located in a state where the retailer has no physical presence.

For example, if I buy something in the state in which I live (State A) and it has a sales tax, I’ll pay a sales tax. If I buy something while visiting another state (State B), with a sales tax, I’ll pay a sales tax. But if I buy online from State B, and the retailer in State B has no physical presence in State A, I won’t pay a sales tax. Logically and reasonably this doesn’t make sense.

Sales taxes are used to fund many types of government projects, not least of which is to build-out and maintain the infrastructures businesses and consumers need to conduct commerce, such as roads. Without tax revenue, infrastructures don’t get built and maintained and commerce doesn’t happen. It’s a circular. And governments have argued this point ad nauseam.

The problem with current sales tax laws is that they don’t take into account the dual-locality of online transactions. They don’t take into consideration that an infrastructure is needed at both the point of sale (State B, in this case), as well as the point of use (State A). Were it not for the physical infrastructures in both locations (and many points in between, including the Internet), the sale could never have happened.

So if sales taxes are needed and used to support infrastructures for commerce, who gets the tax revenue from an online sale? Is it the state in which the product is made or sold, or is it the state in which the product will be used? Or both? Should online sales tax revenue be split between states or should online sales be double-taxed? What if State A (user) has no sales tax, but State B (seller) does, or vice versa?

I don’t know that there is an easy answer, but it is clear that the structures of our current sales tax laws were never meant to take into account the dual-location aspect of online commerce. As such, not only do we need to address the collection of sales tax revenue, but we also need to consider how that revenue is split between the states.

Project Spark Should Go Beyond Gaming

This year at E3, the Electronic Entertainment Expo, Microsoft revealed a new game, or rather game making game, called Project Spark. Project Spark is a game that allows you to create your own game from the ground up, literally. From the landscape, to the characters, and their respective behaviors, Project Spark gives you the tools to build your own game. You’ll be able to play/design on the Xbox 360, Xbox One, and a Windows 8 machine. One demo I saw showed a guy using, what appeared to be, a 50″ or so touch display. He was using both hands to create a new world, drawing, dragging, inputting interaction parameters, etc.

Ok, so it’s a cool game, but why just a game? My first thought was this type of technology needs to be applied beyond gaming. Imagine city planners being able to draw out neighborhoods, business districts, entirely new cities even, with a tool like this. “Ok, how about putting city hall here, a business district here, some housing here, a few freeways…”. You can quickly design, visualize, and brainstorm ideas. If it doesn’t make sense, quickly change it or explore multiple scenarios.

Just doing a little brainstorming, here are some other ideas:

  • Traffic engineers could model out new freeways or expansions, the impact of surrounding surface streets, traffic light patterns, etc. (could overlay on top of satellite imagery)
  • Physicists could model out the universe, from planets, to stars, the impact of black holes on nearby galaxies, etc.
  • Architects could quickly model out new buildings
  • Fashion designers could mock-up new designs and digitally fit them on models (imagine a life-size touch/design screen)
  • Automakers could put together scale models of new concepts on a large touch display
  • Etc., etc., etc.

Since the underlying computing and graphics engines are there, you’d “simply” need to overlay whatever parameters are specific to the task at hand, like traffic pattern algorithms, garment hang/flow calculations, standardized and customizable automobile components, etc. Sure, all of these things can be done with existing software,  but Project Spark brings to the table a new, much more user-friendly, touch-friendly, and I think creative way, to design.

Take a look at Project Spark and brainstorm some ideas of how you think it could be used. I think the possibilities are pretty limitless.