If you want to own and operate a banana plantation, it is probably best not to get your knowledge from the book Mango Farming Guide for Beginners. For one thing, the average life of a banana plantation is about 30 years. Mango trees are long-lived, with some specimens still bearing fruit after 300 years. Yet, when it comes to stock-market investing, that is what many investors are doing.
There are some fairly good reads about how to make money on the Philippine Stock Exchange (PSE). The problem is that they all start with the assumption that “bananas” and “mangoes” are fairly much the same. Except banana “trees” are not trees, but are herbaceous flowering plants. And a banana is not a fruit but a berry, while the mango actually is a “stone fruit”. Bananas and mangoes are considered fruits in the same way the PSE and the New York Stock Exchange (NYSE) are considered stock markets. But that is where the comparison should end.
We could spend time talking about the differences in the trading procedures between the PSE and the NYSE, but that would be like talking about the amount of water needed to cultivate bananas and mangoes. It is important but not critical, because you just have to live with those differences. You can’t grow bananas in a desert, yet mangoes are commercially cultivated in the relatively dry Andalusia area of Spain.
Where we make the mistake of stock-market comparisons is more about assuming what factors move prices on one market will also move the other.
As a comparative example, the Philippine peso to US dollar exchange rate is almost 100 percent determined by actual physical demand for one currency or the other at any given time; dollars needed for international trade and money inflows such as from overseas remittances.
We think that stock prices go higher or lower depending on whether investors want to own the stock or not. That makes sense. But in the real world, it is a logical fallacy. Ducks are birds. Ducks swim in the water. Chickens are birds. Conclusion: Chickens swim in the water.
Here is what has been moving stock prices in the US over the past eight years.
According to research from Credit Suisse, if you look at the total NYSE market capitalization—the value of all listed issues—financial institutions like banks have sold off a cumulative net 7 percent of the value. Foreign cumulative net buying has been about 3 percent and household cumulative net selling has been about 3 percent. So how has the NYSE market value increased from $45 trillion to $65 trillion? Who has been buying the NYSE?
Nonfinancial corporations have cumulative net buying of 18 percent of the total market capitalization or about $12-trillion of the $20-trillion increase in total market value. Corporations have spent $12 trillion of physical cash to purchase their own shares, which raised the paper value of those shares by nearly $20 trillion.
PSE prices go higher because you decide to invest in a corporation shares. NYSE price go higher because a corporation buys its own shares to help inflate the price.