Stocks Are Not Currency. We Buy Companies Because We Like Them. And We Like Them For Different Reasons

Felix Salmon writes:

… it’s maybe no coincidence that the Russian clients of Goldman Sachs who are falling over each other to bid ever-higher prices for Facebook shares are much the same people as the Russians paying $100 million for trophy Picassos, or Los Altos mansions.

The theory here is that Goldman Sachs, SecondMarket and the like have identified a group of buyers who are willing and able to pay through the nose for assets which are rare and special and which few other people can have. So long as companies like Facebook and Zynga meet those criteria, the winners in any auction for their shares are likely to be cursed — or, to put it another way, the final auction price is likely to significantly overvalue the company.

Looked at in this way, the market in private equity is less an opportunity for plutocrats to get excess returns, and more an opportunity for intermediaries to extract large profits by selling them overpriced equity in overhyped tech stocks.

That’s true. And you’re right that it’s not an advantage for plutocrats to have access to shares that common investors dont. But, that rather pejorative language is not the way to look at it. Instead, business men are finding a product that has extra-monetary value to investors and charging them for it. Or, more simply, Social status is a ‘good’ that people will pay for.

If I have a Ferrari, two Porsche’s an a Jaguar, and my wife has a gucci purse and a hanoverian horse, the fact is that cars, purses, and horses are not scarce. So social status is what we pay for.

Why is it that shares of stock in companies should be regulated such that people cannot buy status in companies the way that they buy status in products?

And in a market economy, paying for social status is about the only way of achieving social status.

There is nothing fraudulent about selling social status.

There are plenty of ways to lose money.

There are plenty of ways to spend money getting something that you want.

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