I like very much the Wikipedia article about the greater fool (as of 2012 June 11). I would add that the momentum investors described therein must theorize about the theories of other such investors. This becomes a symmetric game and a win-lose proposition. Each momentum investor must believe that he is smarter than most of the others. Counting transaction costs I suspect that this is more often a lose-lose game—it is certainly a negative sum game. I also suspect that the winners, if any, are on Wall Street, use computers and that the losers are new scattered individual investors who think of themselves as momentum investors. I suspect that many of the Wall Street participants, who we don’t hear about, lose money. The value investor needs no assumptions about other investors and satisfies himself in choosing investments that create wealth regardless of Wall Street. That is potentially a win-win situation—usually positive sum.

Some argue that the value investor is bollixed by the momentum investor and that this fouls the market so as to prevent the social good produced by the win-win possibilities. I think that this is not so but that is a complex position to support. Perhaps it is not possible to support it on merely theoretical grounds. I believe that laws against momentum investing would be worse than the disease.

This is similar to the question of whether commodities speculators help or hinder the legitimate functions of futures markets. It is easier to see there that there would be no such beneficial market without the speculators for they are integral to the market. I am not aware of coherent descriptions of speculator behavior that should be outlawed.

This note assumes that futures traders are all speculators and concludes that the market is zero-sum—actually negative-sum with transaction costs. This perspective neglects the baker who does not speculate but hedges his decisions by buying grain futures to keep his plant running smoothly financially. Part of this logic is that the baker gets early warning of when he should order new equipment. To see that this is a positive sum game you must average over a probability distribution of future grain prices. With that you can see that it is a positive sum game with room for profit by the speculator. This perspective also neglects the speculator that is informed of natural and cultural parameters that will bear on the future price of wheat. He too will improve the total economy by sending price signals, indirectly to the baker, of what to expect. I cynically suppose that most speculators do not really understand why what they do actually produces wealth. I suppose that the sum of the profits expected by the various speculators greatly exceeds the net real profits of those speculators. This leads to the observation that the system exploits the speculators—rather the opposite perspective than the normal. They do good anyway—even those who are neither aware of market fundamentals, nor consumers or producers of the commodity—they are market makers!

Perhaps recent trans Atlantic fibers are ultimately motivated by momentum investing ideas.

The WSJ article “Nasdaq CEO Lost Touch Amid Facebook Chaos” tells the story of Nasdaq’s system’s delay in balancing the books upon the opening of the Facebook IPO. Many called foul and want collect damages from Nasdaq. It rather sounds to me as if they thought they had a constitutional right to buy low and sell at a higher price, minutes later, and this right was thwarted by Nasdaq. They imagine another scenario where that would have happened. They want to be paid the difference. They presume a constitutional right to game the system. I have no sympathy for them. Of course those whose loss it would have been had Nasdaq worked as expected are not identified and are not complaining.

I can imagine connivence between investors and Nasdaq programmers, but such potential conflicts extend far beyond IPO’s. I presume that this problem is well policed—but is such policing really feasible?

It sounds to me like Wall Street has entirely forgotten why they are good for the country. I think that is why Buffet does not live on Wall Street. I differ from ‘Occupy Wall Street’ in that I think that WS does good even when they have forgotten how that comes about.