The Concept of Value
My buddy Joe Lee and I had a short discussion about the concept of value recently. It all started when he insisted that Options Trading does not add value to humanity. I agreed with that, but mentioned that the act of Options Buying and Selling itself does add value to a system.
For those of my readers not familiar with financial instruments, I"m talking about Equity Options here. When you purchase an Equity Option, you are entering into a contract with the seller of the option, where you have an option to purchase a certain number of that particular company"s shares from the seller at an agreed price by a certain date.
This is slightly different from Futures. When you enter into a Futures contract, you have an obligation to purchase a certain amount of that commodity at an agreed price by a certain date.
Why then would anyone enter into such a contract? For both the seller and the buyer, it represents a degree of certainty. The seller would have locked in his price (and it is likely to be one he agrees with). The buyer too would have also locked in his price as well (and it is likely to be one he agrees with). In the case of Options, the seller also receives a premium (a certain amount paid by the buyer, whether he buys in the end or not) for selling the Option.
In a sense then, we are talking about both the buyer and the seller getting a form of insurance - peace of mind. That"s when Joe and I differ. To Joe, insurance is just money changing hands. To me, insurance has value beyond just money.
Any form of transaction is a case of money changing hands. When I go to a restaurant, I value the service they provide more than the cash I have with me - so I"m willing to pay them. The restaurant values the cash I have more than the service they are offering, so they"re willing to provide the service. And so money changes hand, and value is added to society.
In the case of insurance, I value the peace of mind that the insurance brings. I know that if anything happens to me, my family can be provided for...in limited ways. The insurance company (who has the cash outlay to take the risk of paying out the sum of money) values my cash input each month more than their standing cash. And so money changes hands, and value is added to society.
In the case of Options, this financial instrument was first created as a value-added service to those who may want to lock in share prices in future (large mutual funds tend towards this). It is the speculators who saw how the leverage provided by Options can be used to greatly enhance their "profits" (money that flows from the loser to the winner - a zero-sum game).
So, I do not believe insurance to be a zero-sum game. It is a value provided to society, just like a value provided to society by a restaurant.
Incidentally, how much do I value my time against my boss" value of mine? Plenty of food for thought!
Michael Chan used to be a teacher, before he left to run a managed fund. When his business failed, he returned to teaching, and is currently a Department Head at the Shanghai Singapore International School.
He constantly applies his business acumen to his job, to add value to his employer. His thoughts on K-12 education and on financial education can be found in his blog at Source: http://ezinearticles.com/
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