What Is Next For Stock Exchange ?

Y. B. Karasik,
Thoughts Guiding Systems Corp.,
Ottawa, Canada.
e-mail:karasik@sympatico.ca

The game on stock exchange is a multi-party game. The main players are:

The participants and their behavior passed the following stages of evolution:

This brief analysis of evolution of the behavior of various players on Stock Exchange reveals the following trends:

  1. interests of profits and interests of stocks are drifting in the opposite directions;
  2. the meaning of news is constantly changing due to the effort of crooks;
  3. as a result, the fundamental principle "buy on good news and sell on bad" becomes meaningless;
  4. stocks are getting hyperinflated by employing tricky schemes of invalidating the old reputable rules and enticing the unsuspected investors into applying them.
The latter is especially worrisome because it may eventually undermine investors' belief in any rules and in the principle "buy on good news and sell on bad" since nobody will be able to say which news are good and which are bad. From here to chaos on Stock Exchange is just one step.

To correct the situation profits should regain the first priority of the companies rather than their stocks valuation. It can be done by introducing a proper taxation. E.g., by applying a very high tax (say 90%) to all gains from stocks sale which are in excess of the maximum profit per share over the last year times number of shares sold:

Tax = K x (sale price of a share - (maximum profit)/(number of shares outstanding)) x (number of shares sold),

where K is close to 1 (e.g. K=0.9) and maximum profit is calculated over the interval [the date of sale - 6 month, the date of sale + 6 month]. The tax is due one year after stock sale.

It is easy to see that such a tax would guarantee that the ratio (share price)/(earnings per share) would not significantly deviate from 1.


Footnotes:

1:According to Eugene Fama of the University of Chicago, the portion of publicly traded companies in the US that pay dividend fell to a bare 20.8% by 1999.

2: Some economists started even arguing that "profits no longer mattered to stock prices".