Priceless Investments

I don’t know who said “What goes up must come down…”. Was it ‘Spinning Wheel” by Blood, Sweat, & Tears or Sir Isaac Newton? I am not sure but either/both of them hit the nail right on the head.

Well, we all have heard of bull market this and bear market that but let’s define those terms first. The terms “bear” and “bull” are thought to derive from the way in which each animal attacks its opponents. That is, a bull will thrust its horns up into the air, while a bear will swipe down. These actions were then related metaphorically to the movement of a market: if the trend was up, it was considered a bull market; if the trend was down, it was a bear market. (Source: Investopedia)

So bull means the market goes up because people are optimistic and bear means the market goes down since people are pessimistic. Now we know what ‘bull’ and ‘bear’ mean, let’s see why Wall Street has inherent bull bias.

Let’s get something clear, first. The primary purpose any business is to make money, or “profit”. That means you bring in more than you spend as a business. Well, in order you to make money, you have to sell something, be that be product(s) or service(s). In case of Wall Street firms, they do both. They sell services, as in underwrite securities, both debt and equity, to raise money for both private and public entities, as well as sell marketable securities products to investors.

To sell those products and services, there has be a demand for them. And that demand has to be create by desires of people who want to invest their money. An investor typically purchases security because he or she thinks that the total cash flow from security will be greater than the cost of the security.

For instance, let’s say you buy a share of Apple Computer at $200, you are expecting that the price of that stock will go up in the future (“Bull” market bias), so you can sell it for more than $200 and make money. But what if you thought the market was going to go down (“Bear” market bias), you will spend that $200 on something other than that stock. That will lower the demand for that stock, in turn, will lower the demand for both product and service of Wall Street Firms, which will lower profits of those firms.

Therefore, in order Wall Street firms to make greater profit, they have to create demand for their product and service. That means people have to be willing to invest in securities. And we all know that we do that in hopes of selling those securities for profits down the road. Hence the inherent “Bull” market bias of Wall Street firms

By: James M Brooks

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