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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Common stocks have delivered superior returns to bonds and bank deposits for most periods in the past centurySurviving Wall Streets Predators [In a trap you are setting] the use of a lure is undoubtedly the most effective way to kill man scent. Urine of the species of animal you want to trap, and urine of the species taken when she is in heat or in season is an infallible lure for males of that species. R. GRAVES WALL STREET HAS A LONG, sometimes raffish, record of success at setting out lures to trap unwary investors. Investor survival depends on the ability to see those lures for what they are. Since its commercial beginnings as a slave market (at the Water Street waterfront), Wall Street has come a long way; still, it never seems to quite manage to cleanse itself of the habit of finding profitable ways to exploit defenseless men and women. On occasion it reverts to its worst traditions, but it always burnishes them with a patina of slick modernity. This book is dedicated to the proposition that investor survival depends, in large measure, on how wisely one deals with Wall Street. Outdoor enthusiasts know that in nature they can encounter pests, diseases, fires, and powerful carnivores, and they prepare themselves accordingly. They assume those risks because they want to reap the unique rewards of life away from the comforts of urban homes. And so it is with investors. They could just leave their savings in bank accounts and savings bonds, but they know that the opportunities to grow their wealth in stocks, bonds, and mutual funds make those risks worthwhile. What experts call capital markets pricing theory is a simple concept: Rewards on investment are proportional to the risks in that asset class. Or: No pain, no gain. Common stocks have delivered superior returns to bonds and bank deposits for most periods in the past century. On a long-term basis (30 years), it is no contest. Indeed, if stocks did not outperform bonds and bank deposits, the capitalist system could not long exist. Stocks represent the capital in that term popularized by Marx, capitalism. They are the ownership component of the markets, and, as such, have a direct tie to the dynamism that drives capitalismfor better, for worse, for richer, for poorer. Real estate also represents equity in ownership, and it is at all times an alternative investment to stocks. As American homeowners who didnt have lucrative stock options know, since 1998 real estate has been a much better and safer investment than stocks. But these comparative returns wax and wane. Unless you are a real estate and property management expert, or unless you can share in partnerships that offer such expertise at reasonable cost, stocks should still be the core of your long-term investment policy. All the horrors and excesses of the late 1990s have not destroyed the validity of that statement. That means you must become a customerdirectly or indirectlyof Wall Street. Even if you have all your money managed by a private bank located a thousand miles from Wall Street, you are one of Wall Streets indirect customers and, simultaneously, one of its indirect prospects. WHAT WALL STREET IS The term Wall Street or the Street has long since ceased to mean just that tiny road that ends in a graveyard on Lower Manhattan. By the figure of speech known as metonymy, the term means all the investment banks and brokerage firms and their associated operations and lines of business that collectively underwrite and trade stocks and bonds, and trade commodities and financial derivatives (instruments such as futures, options, and swaps). The names of the great Wall Street firms are important parts of American history. Nor need that importance be expressed in the past tense. Unlike so many other American industries that once dominated their field globallysuch as automobiles, steel, machinery, machine tools, consumer electronics, photography, office equipment, and computersthe great U.S. investment banks and brokers have maintained their leadership at home, while gaining market share abroad in recent decades. Big banks such as Citigroup, Merrill Lynch, Morgan Stanley, J.P. Morgan, Lehman Brothers, and Goldman Sachs are formidable, well-diversified organizations with global reach. Those firms are headquartered in Manhattan, but their branches spread across the cities and towns of America and the financial centers of the world. The big investment banks on the Street make most of their money from three kinds of transactions: behalf of clients ? Advising corporations on mergers and acquisitions They also earn fees for managing investment portfolios and mutual funds, from trading commodities and currencies, and from other kinds of businesses related to the markets. At various times in the past two centuries, Wall Street has become a term of contempt, hate, and fear within the United States and in many other parts of the world. At various other times, Wall Street has become a term of admiration, envy, glamour, and sex appeal. In general, investment opportunities have been best when Wall Street was most remote from the public at large. In general, investment opportunities have been worst when Wall Street was most accessible to the public at large. Its like fishing. Serious fishermen fly in small, dubious airplanes to remote, buginfested lakes, where they cheerfully fish from dawn to dusk under frequently miserable weather conditions. (I am told that fishing is the practice of casting, trolling, and spinning while freezing, sweating, and swatting.) Unserious fishermen fish off crowded piers, where food and beer are abundantly available, and only when the weather is salubrious. If one is to believe the serious fishermen, as a class, they catch far more fishand have far more funthan their unserious brethren. THE ETHICAL CHALLENGES TO WALL STREET This book is published at a time when Wall Street is once again in the dockof public opinion, and in some cases, of criminal and civil trials. Like other cycles, such as El Nios, locusts, and Great Lakes, water levels, this too shall pass. After a series of spasms of moralizing, vengeance, and demagogy, Wall Street will be allowed to get back to its indispensable task of making markets and financing economic progress. Like Voltaires God, if Wall Street did not exist, it would be necessary to invent it. By now the public is aware of the internal conflicts of interest that major investment banks such as Goldman Sachs and Merrill Lynch face on a day-to-day basis: ? Their highest-margin line of business, and the one that pays the biggest rewards to senior management, is investment banking, which includes advising companies on mergers and acquisitions, and distributing new offerings of corporate stocks and bonds. ? They have huge research departments where staffs of highly paid analysts study publicly traded companies and advise clients on what those companies are worth. In theory at least, the costs of those departments are covered by the brokerage commissions paid by institutional and retail clients. When I was on Wall Street in the 1980s, many analysts didnt confine their recommendations to Buy and Hold. They prized their reputations as independent advisers to the institutional investors who paid for their advice with brokerage commissions, and voted for or against them in the annual Institutional Investor magazines survey of analytical excellence. That professionalism deteriorated during the booming 1990s. By the end of the decade, Buy recommendations exceeded Sell recommendations by approximately 200 to 1. On the face of it, that is a preposterous ratio. For every buyer, there must be a seller. All value is relative: A stock is a Buy because it offers much greater value than a similarly situated stock, which it should replace in investors portfolios. Without such comparative exhortations, the Buy recommendations become mere vaporous exhalations. Three excuses were offered by the Street for this patently absurd ratio: ? Since nearly all stocks worth a high-priced analysts time were going up, it made little sense to say Sell. (This justification is the irreducible distillation of the essential idiocy of never-ending boom marketing.) ? Since cash inflows to mutual funds kept setting records each year, portfolio managers rarely required Sell stories, but they had an endlessly regenerating requirement for Buy stories. (This justification used the seeming priorities of one class of client as justification for the shabby treatment of other clientsnotably retail clients.) ? Big institutional clients with big holdings in a stock that got washed away in a downpour of selling because some analyst broke the cloudless sky over the Street with that seldom-heard discouraging word got mad, and they punished the brokerage firm accordingly. (This is the No good deed goes unpunished excuse.) Admittedly, the Street did find ways to tiptoe through the tulip maniacal atmosphere of the late 1990s, creating euphemisms for the verboten wordSell. My personal favorite was Weak Hold, although such other Nice Nellyisms as Near Term Underperform, Short Term Hold; Long Term Buy, and Medium Term Unattractive entered the argot of the Street. |
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