Chapter 1.3 WALL STREET & THE GREAT INVESTMENT MYTH

CHANGING AMERICA'S MIND Chapter 1 Part 3

Participants and Transactions

The above commentary [ previous post - Part 2] may seem too harsh.  Daily you are bombarded with a more positive picture of Wall Street and its contributions to the economy and to our way of life.  It is only appropriate that you be skeptical about the critique I have presented.  In the section below, I will attempt to prove my case by presenting a more detailed analysis of the markets, the motives of those who participate in them, and the various types of transactions.  I will start with the participants and types of transactions that have the greatest positive impact on the economy and work down to those that mostly drain money from it.

All of the transactions in the financial markets (“Wall Street”) serve one of four purposes:

1.    Ownership – to buy and sell shares of ownership.
2.    Funds – to lend or borrow funds needed for various business purposes.
3.    Insurance – to protect against risks and loss.
4.    Speculation – to make a quick buck with the least amount of risk possible.

These markets are supported by a number of professional types including brokers, analysts, rating services, investment bankers, and fund managers.  Given the intertwined relationships that these managers and professionals have with the companies and products whose shares they handle, they have a great deal of insider information that they sell to the highest bidders or take advantage of them themselves.  That is to say that mostly they serve Big Money (the financial affairs of the very rich).  They have little to do with average investors other than to cost them money.

Beyond these support personnel, there are four principle types of participants in the markets (note that any particular person may participate in one, several, or all of these ways):

1. Investors – these are people who buy shares of ownership in a new or existing enterprise with the objective of receiving dividends (or profit distributions) as well as appreciation in the price of the stock over a relatively long time frame, usually several years.  The risks range from low to high, depending on the businesses in which they invest.

Sometimes such investing takes the form of deliberately buying a particular company’s stock because of the company’s reputation or because the investor has some form of personal connection with it.  Another method is to pool money in mutual funds that invest conservatively in stock as well as bonds and other securities.  More commonly, however, people pay into a 401K or some other form of retirement plan or instrument, and that money is employed by fund managers to purchase corporate stock and other securities.  
Most such transactions, however, do not bring new money into the economy, stimulating growth, innovation, and job creation.  The proceeds from such transactions go from buyer to seller, with a portion going to pay various financial market fees.  Furthermore, since a portion of Big Money’s Portfolio includes blocks of stock, this increases the short term quarterly pressure on the CEO’s of publicly traded companies to “meet the street’s expectations” to show good earnings, usually by cutting such cost items as jobs (sent offshore) and the research and development required to create new products.  Jobs, salaries, and new patents in the United States are inversely proportional to gains in Wall Street Markets.

Less common, but of greater value to the economy, are the entrepreneurial investment activities of starting businesses.  They may be small sole proprietorships, family owned ventures, or partnerships, but they may also be start-up companies needing greater capital and seeking additional funding from angel investors or venture capitalists, usually in exchange for equity stock.  Such transactions are worthy of being called “investments” due to their contributions to increased value, growth, better and more beneficial products and services, increased ownership responsibility, and added employment opportunities.  Most of this activity happens on Main Street, not Wall Street and these are the kinds of investments that deserve support from tax reduction incentives; not the speculative use of Big Money that currently pays less than half the tax rate paid by the rest of us.

2. Saver/Lenders – these are people whose objective is to receive interest on their extra money.  Examples include CD’s, Money Market Accounts, and the purchase of Corporate or Government Bonds.  The time frame for such investments can range from a few months to a few years and the risks range typically from low to medium.  These activities provide funds that banks and other financial institutions use to lend money to existing businesses of all kinds, to help those businesses pay for operations and growth.  Such funds can stimulate the economy, but as we have seen since the Wall Street bailout, the Big Money banks and financial firms have not been providing enough of these loans to enable existing businesses, particularly small ones, to operate and grow.  Instead, they have chosen to use these funds, provided by others, to play in the speculative markets.

3. Speculators – these are people whose goal is to gain high rates of return by putting money into high risk ventures for the least amount of time possible.  There is no interest in ownership, only in maximizing return.  Examples of this include high yield bonds, futures markets options, the purchase of derivatives, hedge fund bets for or against anything, and credit default swaps.  Most of these transactions are bets in the purest sense of the word and take either the form of a short term claim on something or insurance against loss.  Such speculation mostly causes harm by funding risky bubbles that then burst and by driving up the costs of energy, food, and shelter.  They pirate the liquidity needed for a vital economy, making themselves and a few people wealthier, but at the cost of our nation’s future.

4. Traders – these are people whose objective is to take advantage of small price changes in any of the ways described above.  The only objective is to make a quick profit.  They tend to create a great deal of volatility in the market and often drive up the prices that true investors (shares of stock) and ordinary consumers (oil, gas, food, real estate, etc.) must pay.   Very little of the money resulting from any of these transactions serves to bring new money into productive businesses in a way that would stimulate the economy.  Instead, they tend to drain money away from productive uses and depress the economy.

………

Have I proved my case yet?  Are you beginning to understand the myths about investment and Wall Street and the damage they have caused?

Please post your comments below.


Larry

Next section:
Entrepenaurs and Real Investors
The Only Ones Who Should Get Tax Breaks