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Financial Analyst Calls Second Life a Pyramid Scheme
Petey_Alchemist writes "Silicon Valley gossip rag Valleywag is carrying a story about Second Life being a new spin on the old pyramid scheme.
The article, which consists mostly of selections from the report of financial consultant Randolph Harrison, suggests that not only are most people deceived about the amount of money they can make in Second Life, but also about how easily they can withdraw it. It says 'Like the paid promotion infomercials that run on CNBC, sadly SecondLife is a giant magnet for the desperate, uninformed, easily victimized. Its promises of wealth readily ensnare those who can least afford to lose their money or lives to such scam in exactly the same way that real estate investor seminars convince divorcees with low FICO scores to buy houses sight unseen with no money down.'"
Except that if you rely on luck for your stock picking, you really need to get out of the market. No, really. Day traders and the ignorant make the jobs of real investors much more difficult. Not impossible, and really not even less profitable, just more difficult.
On the other hand, if you do your research, long term investing in well run businesses with good financials has far less risk and higher return than almost anything else you can do with your money.
"Unheard of means only it's undreamed of yet,
Impossible means not yet done." ~~ Julia Ecklar
It's very possible to make money in SL. But of course taking it as a stock market is stupid. What sells in SL is services.
SL is simply an environment capable of connecting buyer to seller. You provide a service: drawing a custom picture, making a custom script, building something, the buyer provides the cash. This way of doing things simply CAN'T be a pyramid scheme.
Banking in SL is stupid - that I can agree with. People in SL simply aren't patient enough to handle a sane interest rate. Most people work with amounts like $5 USD, which they consider significant. Only maybe 1% of all people in SL works with amounts of money where a 5% interest would amount to something. So SL banks offer really insane interests, possibly operating as a Ponzi scheme. I haven't used any SL banks, but my feeling is that they're very unreliable.
Calling all of the SL economy a pyramid scheme is bullshit though. If you act as a scripter/artist/builder for hire you can make some money without problems. Build something pretty, put it on sale, and if people buy it, you get cash.
Now, indeed, you won't get rich in SL very easily. Earning say, $10 or $20 in SL is easy. Earning something approaching a real income is very, very hard. It'll take dedication, an impressive quality (there's tons of competition), selling things much below what they'd cost in the real world (meaning, what you get per hour of scripting is probably noticeably below what you can get per hour of coding in your country). Through all of it, you'll have to be your own programmer, marketing department and businessman, because involving any more people makes it even less profitable. Through all of that you have to contend with that everything in SL is intangible. With no materials other than perhaps hosting costs for things that require external servers, anything you offer for cash, somebody else could offer for free.
Now, despite all this, I'll say that selling things in SL can be a very nice experience, despite the low income you get from it. At least for me personally having something I made byself get used by several hundred people and personally hearing feedback gives a much nicer feeling than being a faceless drone in a corporation, even though the corporation pays a lot better.
Okay, I realize that you are simply making snide comments about the value of traditional investment vehicles, and that I might be feeding a troll here, but I am simply explaining the argument the analyst takes in the article, which you seem to not have read or are ignoring altogether. It does not matter what you think of the stock market, etcetera. The analyst has stated clear, identifiable criteria that differentiate the stock market and what they regard as a market in Second Life. You can dismiss the value of trading ownership in a company, but that doesn't change the fact that it is different than what the analyst claims is happening in Second Life.
Roughly speaking, a Ponzi scheme is one in which the perpetrators make false claims in order to lure investors. Once they have some investors coming in, they begin to pay back the earliest investors in order to create hype and garner more investors. People make money in ponzi schemes, but only by being at the top of the pyramid. What separates a Ponzi scheme from an actual market is that in an actual market, the items being traded have value outside of the system itself, and that access to liquidity is therefore available at levels other than the top. The article claims that because cash exchanges and the corresponding exchange rates are controlled by the people at the 'top', they are the only people with the ability to achieve substantial liquidity, and therefore, to make any money. This is why they say it resembles a Ponzi scheme more than an actual market.
Differences in valuation and perception are what make the stock market work, and why people make and loose money speculating in the market (and in other markets and industries as well). You can pay too much for anything, be it a stock, a pig, a bushel of corn, or necklace with fake diamonds you find on ebay. That doesn't make the market a pyramid, because those things have value outside of the market itself, and can be transfered independently of the market place. On the other hand, in a pyramind scheme, the items traded generally have all of their value because of the scheme itself, not because of their value to the outside world, and access to liquidity is not independent of the people who sold you the item.
This is simply false. Shareholders not only control the company, determine who gets serves on the board, and other items of fiscal policy, but they have very well-defined avenues of legal recourse. Not only that, but the company itself has no control over the valuation of its stock other than how it presents its performance to the outside world. Which once again, is strictly regulated. Once again, you may have issue with the way that the stock market works, but it is clearly different than the way that a pyramid scheme operates. TFA claims that all access to valuation is controlled (and manipulated) by the people at the top to their financial gain, and the detriment of others, and you can make snide comments about how the stock market operates, but it does clearly operate in a manner different than that of a Ponzi scheme.
On the other hand, if you do your research, long term investing in well run businesses with good financials has far less risk and higher return than almost anything else you can do with your money.
Actually, that's about as wasteful as day trading. Don't bother figuring out which company is good or bad. Other people are already doing that in an attempt to appropriate value the stocks. It's not enough to know which businesses are good; you have to know which ones are good relative to the price their stock is selling for, which is a much, much, much more difficult problem.
The alternative? Buy an index fund. They simply track the relevant broad market (large cap, small cap, foreign, bond, whatever). They don't have to pay for research and they don't rely on a manager's hunches.
No, this isn't sarcasm. Anyone not trying to sell you on a manager's stock picking ability will tell you the exact same thing. Slate has a great series going on now detailing this: see here.
Apology to Ubuntu forum.