Hi everyone!
I keep asking myself what an investor like Warren Buffett actually contributes to society:
- He doesn't want to invest in IPOs, so he won't inject equity capital into the companies he buys.
- He doesn't interfere into management decisions, nor does he change management or become CEO himself.
- He only buys "great" companies that would also prosper without him ever investing in them.
- Instead of injecting additional equity capital into his companies, he takes away their excess earnings in order to buy new companies.
What is society?
If you find something evil that wobbles, push it. - Gary North
Tobbog:I keep asking myself what an investor like Warren Buffett actually contributes to society:
what have you done for us lately?
quit idling with silly questions and get back to work!
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
As long as Warren Buffett doesn't come in guns blazing, forcing people to sell him their assets, it seems to me he must contribute something of value to the seller. And what exactly that is doesn't really matter.
I think I should rephrase my question:
Entrepreneurs like Bill Gates, Henry Ford or Sam Walton have earned their huge fortunes for having changed the world for the better. But, as far as I understand it, if Warren Buffett hadn't ever been born, GEICO, See's Candies or the Nebraska Furniture Market would have all prospered as well.
So to me that question is not silly but very important for my understanding of the financial markets and the market system as a whole. If you don't understand that, please stop bothering me with your answers.
For everyone else, I would be very thankful if you could answer my question.
Tobbog: I think I should rephrase my question: Entrepreneurs like Bill Gates, Henry Ford or Sam Walton have earned their huge fortunes for having changed the world for the better. But, as far as I understand it, if Warren Buffett hadn't ever been born, GEICO, See's Candies or the Nebraska Furniture Market would have all prospered as well. So to me that question is not silly but very important for my understanding of the financial markets and the market system as a whole. If you don't understand that, please stop bothering me with your answers. For everyone else, I would be very thankful if you could answer my question.
His contribution is the efficient allocation of scarce resources.
My favorite online shop: www.cafepress.com/libertyphile
go to www.capitalism.net download the free book
http://capitalism.net/Capitalism/CAPITALISM_Internet.pdf
There is a sub-chapter titled "the specific productive role of the stock market"I recommend it to you as an answer to your questions
Daniel: His contribution is the efficient allocation of scarce resources.
Okay, so how exactly does this work?
I understand that if a shareholder activist like Carl Icahn interferes with a company he deems badly managed, he creates value by improving the company`s management. But how does someone create value, who doesn't change the company at all?
Tobbog:Entrepreneurs like Bill Gates, Henry Ford or Sam Walton have earned their huge fortunes for having changed the world for the better. But, as far as I understand it, if Warren Buffett hadn't ever been born, GEICO, See's Candies or the Nebraska Furniture Market would have all prospered as well.
As Daniel said, the allocation of capital. This is key to an Austrian understanding of entrepreneurship. You may like Ford, Gates et al for utilizing capital effectively, but from where do they get capital from in the first place? From people like Buffet.
Warren Buffet, before becoming a voice for the Progressive Pro-Tax Pro-Regulation Democratic Party, made huge positive additions to society. He even said how when he commented something to the effect: "He was born to allocate capital.". He used his own ability and analysis to detemine the best uses for the scarce resource: Capital. This capital was used by people to improve their lives and the lives of others. And Buffet also withdrew capital from people who could not use it as well as he liked.
Keep in mind that in a free society, or any society for that matter, there exists scarce resources. The mechanism to allocate resources to those activities demanded most by consumers is through a capital market. Note that the alternatives are worse: Debt market where borrowers owe defined amounts of money to creditors. And worse: Government or politically allocated capital: THINK AIG, GM, etc.
Who is doing more for society the people like Warren Buffet using their talents to allocate capital to those who can serve society most OR Obama allocating capital to keep workers employeed just because they belong to the UAW or are keeping up their payments to Goldman Sachs?
I see. But how exactly does this process work?
Take for example the Nebraska Furniture Market Buffett purchased from the Blumkin family. Buffett noticed that NFM was a local market leader that had the ability to undercut all its competitor's prices. He furthermore recognized that Rose Blumkin, the company's founder, and her sons were outstandingly talented store managers. So he bought NFM and employed Rose Blumin as the store's manager and NFM proved to be the cash cow Buffett expected it to be. He didn't provide any additional capital for the store to finance its growth. He didn't change the management or interfered with it. So, as far as I can see it, if Buffett hadn't ever been born, NFM would just be in the same state it is today.
And since I think that in a market economy, the only way to become rich is to create value for other market participants, that question is a real puzzle to me.
Tobbog: I see. But how exactly does this process work? Take for example the Nebraska Furniture Market Buffett purchased from the Blumkin family. Buffett noticed that NFM was a local market leader that had the ability to undercut all its competitor's prices. He furthermore recognized that Rose Blumkin, the company's founder, and her sons were outstandingly talented store managers. So he bought NFM and employed Rose Blumin as the store's manager and NFM proved to be the cash cow Buffett expected it to be. He didn't provide any additional capital for the store to finance its growth. He didn't change the management or interfered with it. So, as far as I can see it, if Buffett hadn't ever been born, NFM would just be in the same state it is today. And since I think that in a market economy, the only way to become rich is to create value for other market participants, that question is a real puzzle to me.
Perhaps NFM would be in the same position, but Blumin would not be. If Buffet had not bid up the price he would have had to settle for less and would have gotten a lesser reward for his enterprising.
If you want the answer, read the article.
In short, the possibility of trading shares.(i.e. the liquidity of shares) is a huge part of the attractiveness of purchasing shares.Whether they be shares that are trading hands, or newly issued shares which companies issue to accrue capital.
if there are shares in a given company then its a historical fact that the company raised capital through their issuance. the trading of the shares that happens afterwards, even if no new shares are issued, counts as a positive, since if it were illegal, the benefits of owning shares (i.e. of buying them at the time of a new stock issue) would be radically curtailed, this would hamper the allocation of capital to other companies who might otherwise float shares on the market. Furthermore, and here's the 'obvious' kicker, if Buffett buys your shares at a price you like. you have benefited. buffett benefitted all those people that agreed to get paid in cash for the shares they sold him.
Tobbog:Entrepreneurs like Bill Gates, Henry Ford or Sam Walton have earned their huge fortunes for having changed the world for the better.
Give me a monopoly, and I will make the world "better" too.
At most, 5% of the population would need to stop complying to bring down the government.
Plus in addition to everything already stated, the more money and operators there are in the stock market the tighter the spreads, the lower the number of obscure relatively unexamined stock and the higher the chance the nominal price is in sync with the real prospects of the business, all of which mean that a less expert participant has a lower chance of getting burnt and shafted. Eg, somebody buying and selling at random will lose money at a much slower rate in a busy market than in a half-abandoned one.
Ludwig von Mises Institute | 518 West Magnolia Avenue | Auburn, Alabama 36832-4528
Phone: 334.321.2100 · Fax: 334.321.2119
contact@Mises.org | webmaster | AOL-IM MainMises
Mises.org sitemap