Thursday, August 18, 2011

Maybe the "old days" were "good"

Back when I was growing the 50's and 60's, the world was different.  It wasn't just the lack of computers or smart phones or CD/DVD players.  Economically it was different too.  Better, I think.

I recall, I think it was in the seventh grade, when our math teacher introduced us to the general concepts of the stock market.  It was, admittedly, limited to a pretty big picture, but then lots of things were simpler back then.  In any case, there are a couple things I distinctly remember about what Mr. Larson taught us.

His first observation was that very few people actually invested in stocks.  At that time you couldn't do your own trading, so you had a broker whom you called for advice or for making actual sales and purchases.  Stuff like that was done over the phone, and that usually meant sitting in an office and making decisions.  I remember that a couple of brokerage houses had offices in Portland, and my grandmother took me to one once.  That was about the only place where you could see a stock ticker.  The nightly news might mention the Dow-Jones, but it was just a passing comment.

Along these lines, he also made a big point of saying that money put in the market should be money you could afford to lose.  It was gambling, and although you could improve the odds by carefully picking stocks, they could go down just as well as up, and if you couldn't afford to lose the money you shouldn't put it in stocks.

Regular people didn't have investments in stocks back then, unless they might have some money in some sort of fund.  There were no 401-K's or IRA's or hedge funds.  There might have been some "mutual funds" but I don't recall him saying anything about them, and if they existed, not many people had money in them.  I grew up in a community where not a lot of people were "rich" so most folks had a savings account at the bank and that was about it.

The second thing I remember him teaching us was that money was made in the stock market by investing for the long term.  He showed us some charts of various stocks, showing how the price fluctuated and the impacts of buying and selling.  He said that day to day changes were usually controlled by external things and that a company was either a good buy or not.  Good companies provided solid, but not impressive, growth and stable dividends.

Today, of course, things are much different.  I don't think they're much better.

Anyone can buy and sell, and that means people are tempted to invest money they can't afford to lose.  It also means that the old adage about playing the market with money you can afford to lose doesn't apply.

In the last few years we've seen the creation of Day Traders.  The idea is simple.  I pick the right stock, buy it today for $10, it goes up to $12 tomorrow and I sell it, making a nice profit.  It sounds so simple, and for just three equal payments of $39.95 Fairly Honest Bob will share the secrets of his "system."  However, that old term "playing the stock market" still applies, and people who have no business there are playing and losing.  Big Time!

The story used to be that dad came home from the track to admit he'd gambled away the rent.  Now he doesn't even have to leave home to do that.  The internet has made everything more convenient!

The "why" of this change is easy to see.

First, you have a bunch of folks pre-disposed to any get-rich-quick scheme, and plenty of snake-oil salesmen to prey upon them.  Second, you have the national mania for Greed.  Third, you have folks like the Wall Street bankers who take home ginormous salaries for doing exactly what you want to do.  And, lastly, you have bunches of companies telling you that you can do this.  We'll supply the web site, the research, and the broker.  They make money on every trade, and you...well...yeah, we won't talk about that possibility.

Instead of a simple mention on the nightly news, the market is now the lead story, almost every night.  Tonight it was the first 4 minutes...of a 21 minute show, detailing how the market went kaboom because of worries over European debt and some number the government released.  Right!

The fact is that the market is no different than the housing bubble.  Mortgage brokers did everything possible to entice people into taking out loans they couldn't possibly afford to purchase ridiculously over-priced properties that couldn't possibly hold their value because...they made money doing it.  They then sold those loans to equally stupid investors who couldn't buy them fast enough.  It was the ultimate Ponzi scheme, and it crashed.  It crashed because common sense was over-ruled by Greed!

The market, and all those on-line brokers are the same folks.  They promise you all sorts of wonderful things that people back in the 50's would have ignored.  Nobody gets rich quick!  We knew that back then.  We knew that stocks held dangers and money could be lost.  We understood that stocks were a long-term investment.  We weren't quite as greedy.  We accepted a low interest rate on pass-book savings, and we knew the money would be there when we needed it.

There's no functional way to get people out of the stock market.  It can't be regulated, at least not in that sense.  You can't legislate or regulate common sense.  You can't control Greed.  Unfortunately, you can look at the results, and then wonder how much responsibility society has to pick up the pieces.

Ultimately, this house of cards will collapse too.  Like any respectable Ponzi scheme, it cannot endure.  Sooner or later enough people will have suffered enough losses that the word will get around.  The only real question is...well, there are two.

How many people have to find out the hard way?
Will there be enough of us who are willing and able to pick them up?

Stay tuned, as they say.  This could go either way.


Anonymous said...

I'd love the leave the stock market to the crazy people who run it. But if we're to have any hope of retiring ever, there has to be a 401k. So pretty much we feed money in, take the match, and cross our fingers.

Wish I knew a way to work it some other way instead.

Craig Allen said...

Very true. At least with a 401-K you can pretend that you're playing with the house's money...for the matching part. The alternative is to make a choice to invest those funds in safer options...bonds or whatever.

Thanks for sharing your thoughts.