Everyone Counts (In Large
Amounts)
"We could get rich."
General Kwar the Dictator was reading a paper in the Welgon Age's tea room. Everyone was there, taking a break from their usual activities: Dr. Qworm the Mad Scientist was recovering from a misshapen experiment he had tried on himself that morning, cookie the harlequin was resting from having played Calvinball all morning, and Sarkon the Prophet had just gotten up from his hammock.
General Kwar, though, wasn't taking a break. He was planning his future.
"I think I'll invest in the stock market," the Dictator finally said, turning the last page of his paper. "In the long term, that's how one makes most money!"
Everyone's eyes turned towards him.
"I beg your pardon?" asked Sarkon. He was still a little sleepy, and didn't understand a word of what General Kwar was saying.
"The stock market?" asked Dr. Qworm. He vaguely remembered having heard about such a thing a long time ago – before he got stuck in the Welgon Age.
"Calvinball," cookie just said.
General Kwar sighed in an exasperated way. "The stock market is the imaginary place where shares of groups that create value are traded," he explained.
"Does anyone of us here create value?" asked Sarkon with round eyes.
"No, and that's the problem!" exploded General Kwar. "The way we squander our thoughts and efforts into trying to think of answers to the most futile questions, like why and how the universe came about, or the reasons behind the existence of consciousness and matter, makes us create no value at all! We are worthless, and as a consequence, we are poor!"
"That's what you are doomed to be when you live in a world without money, I guess," shrugged Dr. Qworm. The Welgon Age was, indeed, penniless.
"I disagree. Without money, we are neither poor nor rich: these are concepts we merely don't bother with," theorized Sarkon. "And anyway, we can't have money. The money you possess is supposed to be a tool that reflects the efforts you made in your life up to now, a tool that allows you to trade your past efforts against other people's efforts. As we don't make any effort, we can't have any money. It just wouldn't make any sense!"
"But what if one of us wanted to get rich anyway?" menaced General Kwar.
"I wouldn't have the slightest idea of how to do that," admitted Sarkon. "But somehow it looks like you are going to tell us."
"Exactly!" exclaimed General Kwar, waving his paper under Sarkon's nose. "It is all very well documented here – and I'm going to show you!"
He unfolded his paper on the table of the tea room, and everyone gathered around him to follow his explanations.
"See the first table on this page?" he asked. "Well, that's why one has to get stocks to become rich!"
The table General Kwar was referring to looked like this:
1926-1996 Average annual rates of return
Small Stocks 12.5%
Real Estate 11.1%
DJI 10.0%
Bonds 5.2%
T-Bills 3.7%
Inflation 3.1%
"In getting stocks, we would become between 10 and 12.5% richer each year!" he explained.
"Pardon me, but a 12.5% raise of zero still isn't much," Dr. Qworm commented dryly.
General Kwar sighed. "Of course, we'd have to get some money first – maybe in selling something we have!"
"Do we have anything?" wondered Sarkon.
General Kwar opened his mouth to list all their possessions. After having said nothing, he closed it again.
"We have ideas," helped cookie.
"They sure aren't worth much," gritted General Kwar.
"Maybe someone would want to buy us – to buy what we are!" cookie tried again.
"I don't think I'm on sale," General Kwar gritted again.
"You'd be surprised," cookie said.
"We have the Welgon Age," General Kwar finally remarked.
"You want to sell the Welgon Age?!" exclaimed Sarkon. "And where would you expect us to put our feet afterwards? On thin air?"
"We're already doing that, Prophet!" exclaimed General Kwar. "The Welgon Age is a cloud, remember?"
Sarkon didn't answer anything, but his dismayed face showed that he would have been quite unhappy with that kind of sale.
"So how much could we get for selling a cloud?" Dr. Qworm asked General Kwar while Sarkon was at a loss for words.
General Kwar turned the pages of his paper. There were prices for houses, cars, stocks, bonds and even submarines, but nothing was said about clouds. Frowning, he looked some more, but still couldn't find the prices he was looking for. Exasperated, he ended going back to the page with the average annual rates of return since 1926. "On second thought, clouds don't sell for much," he estimated. "Besides, real estate nets a return quite as nice as stocks, so we better keep the little we have."
"We have imaginary estate," remarked cookie, which made General Kwar sigh loudly. Sarkon, however, was relieved.
"Let's tackle the problem of how we could get a starting capital later," General Kwar went on, "and concentrate on how we should invest it. To maximize our returns, I suggest a nice and diversified stock portfolio!"
"That would make sense," Dr. Qworm seemed to agree. "And which stocks are you going to take? Quack Prophecies Unlimited, with Sarkon as CEO, Stone Age Scientific Progress, Inc., courtesy myself, or cookie's Fun Factory?" he added sarcastically.
"I certainly wouldn't bother with junk stocks!" shrugged General Kwar.
All this was getting too weird for Sarkon. "How can you be sure stocks are the best way to become rich?" he asked.
General Kwar looked at him as if he was a moron. "Haven't you seen the table? Stocks have the best return – that's it!"
"All this table is saying is that stocks had the best return!" countered Sarkon.
"If they had the best return for 70 years, there's no reason it would change now!" General Kwar rolled his eyes.
"To be sure about that, you'd have to know exactly why stocks had the best returns for 70 years!" argued Sarkon.
"Why! Of course you had to ask this question, Prophet! With you it's always why, why, why!" complained General Kwar. "Can't you just accept the rules for once instead of questioning them?"
"I don't question the rules; I merely try to find out what they are," explained Sarkon. "Maybe they are a little more complicated than 'stocks are the best long-term investment'," he ventured.
"And how could we find such rules out, apart from accepting historical evidence?" General Kwar asked, crossing his arms.
"First of all, this return of 12.5% should be adjusted to 9.4% in actual buying power, since the inflation averaged 3.1% a year," noted Sarkon.
"Ok, make it 9.4% then. But it's still better than any other investment!" argued General Kwar.
"Now we can try to determine what is the cause of the remaining 9.4%," proposed Sarkon.
"And how would we do that? Some prophecies maybe?" ironized General Kwar.
"Isn't the value of stocks determined by offer and demand?" asked Sarkon, unfazed by Kwar's skepticism.
"Indeed," admitted the Dictator. "I'm surprised you know something about this matter."
"I don't know anything about stocks specifically. All I know is that the value of something is always determined by offer and demand," explained Sarkon.
"We never demand anything in the Welgon Age, and that's why nothing has a value here," cookie explained helpfully.
"You forget my demands to be left alone!" intervened Dr. Qworm.
"How much would you pay for it?" asked Kwar.
"We don't have any money here!" exclaimed Dr. Qworm.
"Without giving anything in return, you can't demand anything," shrugged Kwar.
"Ok, so I'll give you my regards in exchange for your leaving me alone!" proposed Dr. Qworm.
"There is no demand for your regards," declined General Kwar.
"So what else would you demand?" asked Dr. Qworm.
"We have no demands," repeated cookie.
"You don't have any, so I can't have any? Is that fair?" complained Dr. Qworm.
"Demand doesn't just exist. It needs to be created. If you have demands and we haven't any, you first have to create some for us before we can satisfy yours," explained Sarkon. "Demand creates demand, and thus the world's creation goes on. Remember: we need new needs to evolve!"[1]
"Ashes to ashes, demand to demand," agreed General Kwar.
"Alright then. I'll do something so stupid that you'll demand me to stop," Dr. Qworm menaced.[2]
"You're free to do so," sighed Sarkon. "Anyway – if we could identify why the demand for stocks raised on average by 9.4% a year until now, we would be able to know if this demand is also going to grow by 9.4% a year in the future, or if it will be more, or less."
"That would be a good plan – if only we knew how," General Kwar wasn't persuaded. "I think we can believe in the past – after all, there is not much risk in believing in facts!"
"The future can't always be the same than the past. There is always a time for change – the question is just to know when. As for how to determine the causes of this raise in demand, there are lots of other tables in your paper," said Sarkon, unfazed by Kwar's skepticism. "Let's see what they show. This one, for instance."
US Population: 1920 to 1990
1920 106'021'537
1930 123'202'624
1940 132'164'569
1950 151'325'798
1960 179'323'175
1970 203'302'031
1980 226'542'199
1990 248'709'873
"For a product as broad as stocks, it's like with bread: the more people, the more demand. With this table, we see that the US population grew by 1.6% per year on average. So 1.6% of the increase in stock value can be explained by a mere population growth," theorized Sarkon.
"Are you sure about that?" asked General Kwar with round eyes.
"Ask the Mad Scientist," advised Sarkon. Dr. Qworm nodded solemnly, so General Kwar's doubts faded immediately.
"That leaves a 7.8% growth a year that we haven't explained yet," Sarkon frowned. "Let's look at some other tables.
AVERAGE YIELD TO MATURITY ON SELECTED LONG-TERM BONDS.
AVERAGE OF MONTHLY AVERAGES.
Released on 09/09/2002
aaa -----1981 14.171982 13.791983 12.041984 12.711985 11.371986 9.021987 9.381988 9.711989 9.261990 9.321991 8.771992 8.141993 7.221994 7.971995 7.591996 7.371997 7.271998 6.531999 7.052000 7.622001 7.08
Year New York Market Price
(dollars per fine ounce)
1980 612.56
1981 459.64
1982 375.91
1983 424.00
1984 360.66
1985 317.66
1986 368.24
1987 447.95
1988 438.31
1989 382.58
1990 384.93
1991 363.29
1992 344.97
1993 360.91
1994 385.42
1995 385.50
1996 389.09
1997 332.39
1998 295.24
1999 no data
2000 no data
(Cusker)
"The yield of other valuables seems to be going down," remarked Dr. Qworm.
"What does it tell us?" asked Sarkon.
"That investors are shifting their resources away from those investments?" asked Dr. Qworm.
"Away from those other investments, and into stocks. Investors are leaving former, more traditional ways of investing money for stocks," lectured Sarkon, "and this explains a lot of the remaining percentage of the stock market raise. Now, can this go on forever?"
"It can go on for quite some time," estimated General Kwar.
"The question was: can it go on forever?" repeated Sarkon. "The answer is no: as soon as gold and bonds hit the zero-mark – become worthless, that is – all investment will have shifted into the stock market, which will then have reached its maximum. The stock market can't grow more than all the available worth in the world!"
An awkward silence followed Sarkon's declaration.
* * *
"But that's never going to happen!" exclaimed General Kwar. "Precious metals and bonds are never going to be worth zero!"
"That's exactly why the stock market will stop its growth way before gold and bonds and other non-stock investments have become worthless!" explained Sarkon.
General Kwar crossed his arms defiantly. "I get your point very well, Prophet, and it all sounds very logical to me. What you failed to explain, however, is those seventy years of almost continuous growth. Seventy years ago, an ounce of gold wasn't worth millions, bonds didn't yield 120% a year, and there were more than a few hundred people around, so it's not only investment shift and population growth. There's still a large part of those yearly 12.5% you haven't explained!"
"There's one thing I can't explain, Dictator, and that's human stupidity!" countered Sarkon. "A hundred years ago, people went digging for gold in Klondike like crazy. Nowadays, people go nuts for stocks! Some things just can't be explained with rational –"
"I can explain that easily," piped cookie.
Every ones' eyes turned towards him.
"More and more people are demanding more and more of it," he explained. "In the long term, there are more people who want to buy than people who want to sell, so the prices go up."
"But why? Why?" asked Sarkon in his usual skeptical manner.
"Because people believe in statistics," explained General Kwar.
"So the stock market generates its own self-fulfilling prophecy?" asked Sarkon.
"People see that the market goes up, so they buy, so the market goes up," General Kwar nodded.
"But it must stop somewhere!" exclaimed Sarkon. "Wouldn't it spiral into infinity otherwise?"
"It does spiral into infinity – only slowly. Resources are limited, but new value is created every day. Remember that starting as unicellular beings, we created tools, writing, transportation, computers and satellites, so that the world now is more diverse and thus more valuable than the world before. We create, thus create value, and this creation of value is reflected in the value increase of the stock market. Stock value grew of 12.5% a year on average over the last seventy years? Well, that just means that, due to human creativity, the world's value grew of 12.5% a year over the last 70 years. Nothing more, nothing less!" theorized General Kwar.
"So what you mean is that the day we all stop doing stuff and creating new things, the stock market's rise will stop?" asked Dr. Qworm.
"That would definitely make it tumble," agreed Kwar. "But with people like you who worship creation like there was no other goal in life, is that ever going to happen?"
Dr. Qworm, Sarkon and cookie looked at each other. Was it possible that General Kwar had a point?
"Of course," the Dictator added, "you have to invest in shares that are actually worth something. If you get anything that's ending with .com, for instance, you might as well buy hot air!"
"Hot air is nice," said cookie.
"Nice and not much else," agreed Dr. Qworm.
"Anyway – I bet on human creativity!" concluded General Kwar with a large grin. "In the long term, stocks are and will remain a good investment!"
* * *
As General Kwar walked away with a self-satisfied assurance, Sarkon sighed. "There are those who bet on human creativity…" he whispered.
"…And there are those who make it happen," Dr. Qworm finished.
They both watched cookie. He was piling up small glass beads on top of each other in a weird pattern none of them had ever seen before. "Everyone's going to have fun with my new game!" he explained.
"Everyone is going to be awed by my most recent discovery!" echoed Dr. Qworm.
"And everyone is going to wonder at my latest theory!" added Sarkon.
They all high-fived, and when they parted to pursue their respective quests, Sarkon couldn't help saying to himself, "Indeed, everyone counts… In large amounts."