STOCK MARKET: INVESTMENT OR PONZE SCHEME

My father did not believe in the stock market. He had seen his father loose a fortune in a few minutes during the 1929 Crash. He also had little trust in banks, maintaining a small checking account. He was a country doctor and had good credit throughout the great depression, even though most of his income was in the form of fruits, vegetables, chickens, etc. When he or his expanded family, or other townspeople in Fort Myers, Florida, needed money, he would go to the bank and take out a loan. When cash money would arrive from our northern winter visitors he would start paying back the loans. Due to multitudes of mosquitoes and no air conditioning, the tourist season was only about 6 weeks long. As the season approached, he would frequently quip, “It's about time to go skin a yankee”. As the years passed, a lot more people moved to Florida (along with their money) and he could afford to pay off more debt, but he never had a savings account or plan, other than borrow and pay back. Consequently, as I was growing up I didn't get much of an education of finance, other than buying 10 cent savings stamps for the WWII war effort.

My father-in-law introduced me to the stock market. When we would visit Jacksonville, he would take me downtown to Merrill-Lynch and we would watch the ticker-tape slide across the screen.

He was a retired railroad man with a modest pension and stock portfolio, but an intense student of the market. He would tell me what companies the letters on the screen represented and how they were performing. He also showed me some of the literature on some companies and how you could tell which were good and which were not performing very well. Basically, the rule was to look at the price of the stock compared to earnings per share. The good stocks had a price/earnings of about 10. For every 10 dollars of stock value the earnings should be 1 dollar. The company would pay out about half of the earnings, as dividends, and retain the other half for company development and growth. Thus, a return on investment of about 5%. Many of those stocks are no longer listed. The stars were Standard Oil of New Jersey, US Steel, Sears, Anaconda Copper, automobiles, and a host of railroads. Investors in this time period of “the Greatest Generation” did pretty well. Few made a mint, but most were satisfied making about a 10% return on their investment. This gave rise to a period of prosperity. Then along came technology, like Texas Instruments, with soaring profits. This revolutionized the market and stock prices began to be based on expected growth of profits rather than that of demonstrated growth. Price/earnings ratios soared to 100-200 and it was a new ball game. Investments became more speculative. Executives began chasing higher salaries and company loyalty was no longer a consideration. High fliers would sometimes zoom and later crash. This led to the emergence of mutual funds.

For a fee, generally about 8 ½ per cent (load) to a sales organization, one could put money into a mutual fund managed by professionals who in turn would charge a small management fee from thousands of investors whose pooled money was invested in a wide range of stocks. The mutual funds protected investors from crashing stock by having soaring stocks and steady stocks. As this was pre-computer age, these full time managers did a much better job of keeping up the the latest information than the casual investors and the record of many of these early funds, like Fidelity and Oppenhimer, did quite well. I took the exam and became a Registered Representative of the National Association of Securities Dealer and attempted to sell mutual funds, but when good no-load funds emerged, I dropped out. I couldn't take a commission when I knew customers would do as well, without paying me. At first, these front end loaded mutuals funds thrived and became popular, new no-load funds emerged, and salesmen were no longer required. With the massive amount of money these mutual funds controlled, they could now compete with banks, insurance companies and other investing institutions. Then along comes the computer and personal computer which open up additional investment opportunities. Individuals can again enter the market with the use of charts and discount high volume brokerages. But they were playing against a stacked deck.

The market has undergone a complete metamorphosis since under the tutelage of my father-in-law when I bought six shares of Standard Oil of New Jersey. Market gurus and touts continue to state that investors will receive a 10% return over the long run. This is pure speculation. Over the last 50 years the return on the DJIA companies is down to 7%, and approximates 0% for the last 10 years. Companies that are not doing well or fail are removed from the indices and replaced by stronger companies, further skewing the indicies. Executive salaries have skyrocketed draining funds from research and development and product improvement. The long term viability of the company now takes second place behind results for the next fiscal quarter or annual report, which can result in bonuses.

Long ago, when a company bought back stock, it was a very good sign. A stock split or stock dividend was anticipated. Now the buy-backs are generally for executive incentive awards. Originally it wasn't a bad idea to reward the executives with a couple hundred shares for good performance. Now they are rewarded for mediocrity. A recent review of several top flight companies revealed the annual pay was about $1.5 million. That seems like adequate and fair pay. But then there was the reward of about $6 million in stock shares, $8 million more in stock options, plus untold millions for meeting or exceeding certain targets, plus perks, and golden parachutes. This is all quite legal, since it is approved by the board of directors. This board is generally made up of executives from other companies and are quite generously rewarded. These executives not infrequently reciprocate by rewarding their benefactor's executives with positions as directors (quid pro quo). They are generally quite grateful to be selected, and only very seldom dethrone the CEO.

In recent years with the vastly improved communication, there has been a trend of companies to export jobs to foreign countries to capitalize on lower wages for workers. This has been a quick way for many companies to quickly reduce costs and improve the bottom line which in turn generates increased remuneration for executives, but little of the improvement is exemplified by increased dividends to stockholders. Unfortunately the government has been complicit in the movement of wealth from our country to developing nations, through tax laws. Much of the blame for moving jobs off-shore is thrust upon the unions demand for ever increasing pay and benefits. But most of the jobs exported were non-union, and there was virtually no effort to negotiate with the unions prior to the export. Company executives paid little thought to the long term effects of their actions. Customers, like me, are not happy if they have to get technical advice from an Indian, that doesn't communicate well in English. There are also dire unintended consequences. The middle class, has been the backbone of our economy. Most of the job losses are to the large middle class. The resulting unemployment puts downward pressure on wages of other middle class workers. As a result, the middle class cannot afford to buy as many of the goods of the Corporations, nor do they pay as much in taxes. So! Exporting the jobs temporarily helped the bottom line, but may have disastrous long term effects on both the companies involved and in the country's economy.

Our current situation harkens back to the days of the Robber Barons prior to the great depression. Now that the “Me Generation” has grown up and is fully in control, we can no longer rely on corporate management to take actions that is in the best interest of the company, the stockholders , or the employees.

Relying totally on the market for retirement, or heaven forbid, privatized social security, would be a potential horror story. Diversification of assets is of the utmost importance in the current day and age, but some stocks will be needed to protect against inflation. Be sure to save and invest in something, but spread your saving around and don't rely on stocks alone.

Caveat Emptor.