Thursday, February 7, 2013

Authenticity of Sale-Based Architectures for Investment

An Architecture for Managing the Mismatches Between Individual Investors
Sale-based trading in securitized assets is an architecture of ownership for investment purpose-built (back in the 19th Century) to manage the timing differences among a large and diverse population of individuals relative to their use of cash for participation in either the capital or the commercial markets.
For all but a very small number of very wealthy persons, individuals need to be able to invest their money when they can and withdraw their money from investment when they need it, to spend in the commercial markets.  They are capable, also, of only investing relatively small amounts for relatively short periods of time, when compared to the scale and longevity of the commercial enterprises in which they are investing.  Finally, they are similarly limited in time, effort and expertise they have and can devote to the identification, qualification, pursuit, construction and oversight of investments in enterprise.
Individuals Cannot Negotiate for Themselves
In short, individuals cannot negotiate the private laws of investment directly with enterprise. They lack the scale, the longevity and the resources required for that work.
They have to Buy Into Someone Else’s Deal, Already Made
If they are to invest at all, at least in enterprise of any real scale, they must invest indirectly, as a passive participant in an investment already architected for them by others.
Managing the Mismatch in Size through Securitization
This is the essence of securitization. A set of private laws defining the rights of investment negotiated directly with enterprise are broken up into bite-sized pieces for re-sale in small increments to a large number of small shareholders. It is a classic wholesale/retail distribution model that addresses the mismatch in size between enterprise needing investment and individuals willing and able to invest.
Managing the Mismatch in Duration through Exchange Trading
To address the mismatch in timing, the exchange mechanism is used. Shares are listed for trading between investors. In this way, an individual who needs to take money out of the capital markets can do so by selling shares to another individual who has money available to invest. A certain sale is guaranteed through the exchange mechanism by letting the price at which the shares will trade float to whatever price a willing buyer will pay to a seller who is willing to sell: a certain sale at an uncertain price. That is the fundamental value proposition of the exchange.
Managing the Mismatch in Resourcefulness through Standardized Structures
To address the resource constraints of the individual as investor, a standard architecture of ownership is employed that reduces the bundle of rights held by market participants to the one, single, unfettered right to sell at will, and without any residual responsibilities remaining after the sale. In addition, a large infrastructure of standardized information focused on supporting judgments about share price is established and maintained. Finally, responsibility for reinvesting profits as earned is transferred to the enterprise, leaving individuals with the simple and effective strategy of building their profits on the power of compounding, profits that are extracted from other investors by selling out over the exchange.
An Effective Architecture for Individuals Investing at Industrial Scale
This is a construct that has proved remarkably effective at achieving its intended purpose of aggregating large sums of money for investment in large scale industrial enterprises from large numbers of small shareholders.
It is a construct that has also proved wholly inauthentic to the purposes of large, perpetual and resourceful institutional investors who it was never designed to serve.

No comments:

Post a Comment