Marketschadenfreude

What is the point, after all, of owning shares of stock in a company?

"Many foxes grow grey, but few grow good." - Benjamin Franklin

People are free to find their own heroes in the unlikeliest of places, but it's odd to find them hanging out in online brokerages. Yet a cult of worship has emerged around the people who, coordinating themselves on a Reddit message board and wielding Robinhood accounts as their weapons, plunged into battle with short-sellers of the stock in beleaguered video-game retailer GameStop. As their fans tell it, the contrarians who coordinated among themselves as the WallStreetBets message board took on the big moneyed interests on Wall Street and forced the powerful to capitulate.

Let's do ourselves one important favor and be clear about two things:

  1. There's no honor in short-selling stocks.

  2. There's no honor in day-trading.

There may be fortune to be found in both pursuits. There may be fame. There may even be perfectly sound financial reasons to engage in either strategy. But the conscientious capitalist shouldn't pretend like either one is a dignified pursuit.

What is the point, after all, of owning shares of stock in a company?

The obvious answer is "to make money", but surely that's too glib. To own a share of stock in a company is to own a sliver of the company. And just as there are honorable ways to be a landowner, an art collector, or a proprietor, there are honorable ways to be a stockholder.

To be an honorable stockholder is to look at the merits of the firm and to decide it is a worthy place for the deployment of one's cash. Lest this sound too high-minded, consider the companies engaged in businesses that attract unflattering attention: Tobacco companies, casino operations, notorious polluters. No matter what their balance sheets and earnings reports might say, these companies are treated differently than their more benign counterparts on the same stock exchanges.

"Sin" stocks and "socially-responsible investing" are widely-used terms because people know that the purpose and behavior of a firm carry some weight that isn't captured entirely in a form 10-K. While opinions may vary about what constitutes a "good" company and what does not -- and, to be certain, this distinction isn't made by every investor -- the fact that the designations exist confirms that value judgments can be made about the worthiness of a firm.

And if the type of firm can be judged, so can the method of ownership. Buying and holding shares of stock in a company is a "good" way to invest.

“In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.” - Warren Buffett

When it causes a person to conduct careful due diligence, to watch the behavior of management, and to carefully look after the prospects for the firm, buying and holding inculcates a sense of responsible ownership. The person who looks after $25,000 in stock as though they own outright a microcosmic version of the publicly-traded firm is going to think differently about the business than someone who sees stock shares as though they are decks of cards to be shuffled.

It is the card-shuffling mentality that drives both day trading and short selling, and no honest observer could deny it. We may be forced by the awful weight of habit to call it stock "trading", but we are under no obligation to think of it that casually. There are occasionally good reasons to change one's mind on what was supposed to be a long-term investment, just as there are good reasons from time to time to move to a different home.

But any ownership model that hinges on finding a greater fool or profiting off the misfortune of others isn't an honorable one. For the two models to clash and set off a disruptive wave in the stock markets (as has happened with the GameStop story) doesn't make either party meritorious. Should we be glad if a band of pirates were ripped off by a team of bank robbers?

“[C]asino-type markets and hair-trigger investment management act as an invisible foot that trips up and slows down a forward-moving economy.” - Warren Buffett

What happened to the short-sellers of GameStop stock might well be a case of getting their just deserts. But seeking to profit from anyone’s pain isn’t good capitalism. It’s marketschadenfreude, no matter how anyone tries to dress it up.