Market Transfers Value from Traders to Owners

We are not “traders.”  Although we buy and sell, we are fundamentally business owners.  In practice, what does that mean?

Business owners start, buy and hold companies that they expect to increase in value.  Value increases as the result of increased income (or the expectation of future increases in earnings.)   Income increases by improving margins or by expansion in terms of the volume of products or services sold at the same price.

Traders, on the other hand, view stocks and options as digital blips with statistical odds (or emotional inclinations) of moving in one direction or another. They speculate on their ability to forecast the direction of this or that price change.  They may be long or short the market but the idea of ownership does not connect directly to their ability to find or influence the value.

Furthermore, traders are fundamentally a net zero game.  For every buyer there is a seller.  You have to ask yourself, what does the seller know that I don’t know?  Which of us is the sucker? Some have said that 90% of people believe they can beat the market.  LEV does not believe that.  We really don’t care about “the market.”  What do we care about?  Ownership and absolute returns.

The primary difference between a trader and an owner is that the trader is trying to beat the market.  They are trying to out-guess the guessing of the guesser.  If that seems convoluted, that’s because it is.  An owner cares about creating goods and services for cheaper than the market prices them. In this singular, creative act, the owner hopes to extract cash.  When it works, it’s like printing money FOR THE BUYER.  That is, the consumer of your goods or services has found a value that is GREATER than what they pay and will do that for as long and far as there are marginal returns (financial or emotional.)  On the flip side, the creator of that value, when done for a profit, can and will sell their goods and services for as long as possible.  This is how and why diversity and talents are exchanged.

Effort Begets Returns, Sometimes

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In the above chart, please understand that most of the volume moving in and out of the market are traders.  The masses buy and sell paper, speculating on short and long term increases in the price of that paper. Sometimes they base this on statistics and momentum.  Other times it is more emotional.  Things like cashflow needs for retirement, tax planning, quarterly bonuses, or just plain old fear.  There are games here that can win for the short term, yes.  However, in the long term, the churn activity is fundamentally a conduit to spend money… not make money.

LEV began because the appetite for passive, index funds was too quickly satisfied.  Entrepreneurs see what others miss and this creates an edge when properly executed. Owning businesses that capture this edge can provide disproportionate returns over many years.

Do you find yourself trading stocks?  Or owning companies? Do you put in some effort but not enough?

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