Daddy, What Was the Stock Market

Posted: Aug 23, 2012 12:01 AM

I was recently struck by a noted columnist who asked if Facebook was a buy. 

My take on that query is a cross between anger and amazement. 

Years ago, when I entered my first securities training class, my instructor was adamant regarding the difference between a trade and an investment and I spent countless hours learning the significance of each. 

Jesse Livermore once said “an investment is only a trade gone bad.”  I, however, respectfully disagree. 

Unfortunately, mainstream media, pundits of the airwaves, and even analysts/advisors have taken it further than Livermore and have intertwined the meanings of both a trade and an investment to such an extent that it’s now very difficult to differentiate between the two. 

Historically, investments usually brought piece of mind.  Because they were very well researched, the anticipated future outcome had overwhelming odds of occurring.  Whether it was consistent cash-flow, undervaluation of asset prices, a change in corporate management, or exciting new product development, it was understood that investments had a high percentage of success. 

Did they always work out?  Of course not. 

My instructor used to say “expect the unexpected.” 

However, the anticipation of problems and the strategies and tactics implemented to overcome those problems helped to increase the odds of ultimate success.  No greater poster child for investing is Warren Buffett, who has often said that he didn’t need the financial markets to open on a daily basis in order to know that he owned a good investment.  But a trade, that’s another story altogether. 

A trade used to be based on many things, not the least of which included the development of technical patterns, the momentum of hot money, and even a change in the CEO chair.  From that perspective, Facebook has it all. 

Already, the odds are being placed on whether Zuckerberg will survive.  Will Wall Street embrace social media sooner rather than later and are there any technical patterns that look interesting? 

Given the amount of high-frequency algorithmic trading activity and just plain sector dominance, Facebook certainly qualifies as a trade. 

The question becomes long or short?  That’s for you to decide. 

But please, please, don’t use Facebook in the same breath as the word “investment” because my instructor would roll over in his grave. 

In general, social media stock should be used by most as an alternative to a day at the horse race track, an evening at the craps table, or the daily consumption of lottery tickets.  As more and more people recognize the simple truth that the stock market is no longer a place for investment, there will be less and less so-called “investors.” 

That is, until one day when a little boy will ask his father, “Daddy, what was the stock market?”