Brendan: One of the things you cite in the book about the stock market is derivatives as having a negative impact. Berkshire Hathaway Inc. (NYSE:BRK.A) CEO Warren Buffett of course called them “financial weapons of mass destruction.” How do you feel about derivatives overall, and how are they so harmful for the stock market?
Douglas: Derivatives are a great example of this real-time, presentist, present shock trading. People don’t buy a stock in order to invest in the future. Certainly, traders don’t. They want to make money on the trade.
Facebook has its IPO, people buy it at 10:00 in the morning, and at 10:05 it’s like, “Wait a minute. It hasn’t gone up. Sell!” and they send the stock down. If you no longer want to buy a stock and hold it into the future, then you buy a derivative. You buy a future.
I’m not going to buy the stock today. I’m going to buy the stock 30 days from now. Then if that’s not enough temporal compression for you, “Well, I’m going to buy the derivative in the future.” I’m buying a derivative of a derivative, or a derivative of a derivative of a derivative, and each time compressing more time into that little thing.
It got so big, the derivatives market is so much bigger — about 300 times bigger than the regular market — that as we all know the New York Stock Exchange was purchased by a derivatives exchange. The New York Stock Exchange was actually consumed by its own temporal abstraction.
That’s what happens when we end up pushing so much time into it, but it makes it increasingly distant and abstracted from whatever the enterprise is, whatever’s actually going on. That’s why it ends up so destructive.
Brendan: How about present shock for a company’s strategy? We’ve seen two of the most successful companies in the past couple of years as far as stock price — you look at Google Inc (NASDAQ:GOOG), Amazon.com, Inc. (NASDAQ:AMZN) — very long-term focused, but we have so many companies that are focused on just getting the short-term results, getting that bump up in stock price.
How does the present shock theory impact when you look at a company’s strategy and how they should prepare? Should they be more long-term focused?
Douglas: Well, I wouldn’t tell them what they “should” do. They have a choice. Here in New York, where you have a start-up culture — that’s the big thing — there’s two kinds of start-up people.
There’s the kids who start up a company and want to sell it in 18 months. They’re creating a company in order to sell it, and some of them do very well. They get rich.
Then there’s kids who start up companies because that’s what they like to do. They want to start a game company because they like making games. I do think the landscape is going to begin favoring people who are doing the thing…in some sense it sounds like it’s long-term thinking — they’re doing it because they like doing it and they want to keep doing it — but it’s actually presentist.
What I’m looking at, and what I think investors should be looking for, are people who are playing the game in order to keep the game going. It’s more like a fantasy role playing game or a video game. You’re not playing the game in order to win, declare victory and get out; those are the ones that are going to start failing.
It’s the ones who are playing the game because they love what they’re doing. You can tell a company like that. You can feel the difference between a Ritz-Carlton, say, and one of these hotels that they’re just trying to please shareholders right now.
It’s the kind of places where they are truly geeks for the thing they do. If they’re geeks for the thing they do, then they’re more in the moment. They’re more presentist, but it’s not short-term. They’re presentist, they’re in the moment, for the long term.
I would argue that’s a better long-term strategy than this highly reactive, responsive, “Oh, my gosh, what are we going to do in order to make this number? In order to do this quarter over quarter? In order to make the shareholders happy tomorrow because next year, whatever. I might be retired.”
