Lost Faith in Wall Street: Shun Stocks?
publication date: Jan 9, 2009
Q: I have a hard time believing in Wall Street (and the U.S. government's policies by either party) again this time around. A bubble has driven the U.S. economy every decade, and each time it got bigger and the consequences more dire. In the 80s it was leveraged buyouts (LBOs). In Po Bronson's book, "What Should I Do with My Life"), I read the confession of a former investment banker who left because he was disgusted being pressured by his superiors to do an LBO deal even though the company to be acquired did not meet his calculated criteria. In the 90s, it was the tech IPOs. I work in technology and I heard from Webvan managers how big investment bankers were fighting each other to take them public, for a slice of the IPO fee. While Webvan investors lost all, the bankers pocketed their commission. Most recently, it's the mortgage backed CDOs, CDSs and whatever complex derivatives the i-bankers came up with, making money out of money, and driving money into unproductive speculative investments yet again, and finally dragging down the slowly accumulated savings of people like me and my wife, who have been doing everything "by the book." We would have been better off putting our money under the mattress since 2000. Ordinary, boring funds that we invest in are also getting hit. To add insult to injury, our tax dollars are being used to bail out the bankers who caused the troubles. Until the incentive system is corrected on Wall Street, where bankers' ethics succumb to the pressure of chasing after the latest "innovative" fad, the same story will happen again, maybe even more frequently. Yet, you are still advising people to invest in stocks. But, why should I ever invest in equities again?
A: I hear and understand your frustration. And I do know that others share your concerns.
Change has come and will continue to come to investment banks. With the financial crisis of 2008, the industry has already undergone enormous change. The remaining independent larger investment banks now are commercial banks and subject to regulatory oversight and the leverage restrictions of the banking industry.
Economic cycles are hardly new and they've existed for far, far longer than simply the last three decades. Excesses of expansionary periods are undone in recessions.
As a young teenager, I first began my investing experiences back in the mid-1970s when my father was laid off from his job and was handed a modest balance that he had to direct. Back then the Dow Jones Industrial Average was vacillating between 800 and 1,000 if you can believe that!
I remember 1974 well. That time period made a major impression on me. Stocks got hammered and experienced a waterfall decline as they did in 2008. From a peak of 1,000 in late 1973, the Dow plunged under 600 by the late summer of 1974. The country and economy had many problems. Folks were highly disillusioned with government after Vice President Agnew resigned and then so did President Richard Nixon.
There was a war raging in the Middle East, oil supplies were being cut off due to the Arab Oil Embargo (drivers back then remember the long lines at gas stations). Inflation was surging and broke 10 percent annually. The unemployment rate was surging to 9 percent.
While I don't wish to diminish the difficult times some folks are going through right now, I find all the hyperbole about this being the worst recession since the Great Depression to be out of touch. The recessions of the mid 1970s and early 1980s featured equally or more severe economic problems than what we've faced thus far in this recession.
To be a successful stock market investor, you need the ability to see the glass as half full and filling up rather than half empty and draining. We have a resilient economy, productive workforce and now, low inflation and low interest rates. Consumers are reducing their debt burden. Things will get better and handsome returns will accrue to those who accept sensible risks and are patient investors.