Monday, January 14, 2008

House of Cards

I have this amorphic, nascent idea about the stock market--about how maybe it's not a perpetual-motion growth-machine, about what might happen if we all did choose to live our lives differently, about how maybe it has a terminal velocity, about how maybe the whole idea that the stock market doesn't have anywhere to go but up so we have to invest lest we be left behind is spin, that maybe the whole thing is a house of cards that dupes us into funding the dominance of corporate interests over human ones.

But that's probably dumb. It probably makes me an apocalypse conspiracy theorist, one of those infomercial guys going, "Buy gold!" Truthfully, as long as you're doing what most other people are doing, you'll never be worse off than most people, so I'm not too worried on a day-to-day basis.

I do worry, but I don't have the right vocabulary to express exactly what it is that I'm worried about. I worry that maybe it's unethical to fund these companies that are the new hegemons and maybe there's nothing I can do about that, or maybe I only think there's nothing I can do about it and that's what keeps me forking over money into shares of companies whose names I don't even know. You used to buy stock in a company because you believed in that company--you liked the way they did business, you thought their products were good. Now we buy stock in companies because someone says other people think they're good.

I heard a theory that we all follow the lives of celebrities to simulate the effect of a smaller community where everyone knows the same people--so we still know the same people, it's just that we don't actually know them. It feels connected.

I never took an economics class, and now I kind of regret that.


Sistah Ant said...

This is such an excellent post!

Ms. M&P said...

I feel your pain. I get frustrated with my lack of understanding about the economy. I'm reading Alan Greenspan's book, the Age of Turbulence, right now and it's really helping to shed light on some of the issues (even if I don't agree with him all the time). If you're up for the read, I recommend it!

Anonymous said...

Your blog is definitely the smartest PF blog that I read, and I love this post! Thanks for articulating a lot of what I (another English major grad) am thinking so well.

Ryan Niemes said...

As someone who has been 'investing' in the market for about 10 years now, I could not agree more. The problem is, there isn't much in the way of alternatives. Of course, you didn't even mention the fact that 'investment' companies have a vested interest in keeping you in the stock market - enriching themselves in the process..

Miss Noodle said...

Learning more about this did help many things make a lot more sense. Yes, I'm sure we're all perturbed about how companies do business. But it's a double-edged sword: One could argue that investing "props up" unfair practices. But even if they are, good economic performance helps everyone do better. Companies make a profit, give the stock market a jump. This means individual investors do better. They buy more consumer goods, this creates more demand, which means companies need more workers, thus creating more jobs, or something like that.

This is a rough trajectory, obviously. But in my view, it's the NET EFFECT that successful investment creates that has produced a higher living standard than the world has ever seen. You see this in the poorest of poor countries: When there are no property rights, no investment, nothing -- not even vast foreign aid -- does anything to make things better.

Our system certainly isn't perfect, and free markets do create some ugly consequences. But I firmly believe it works better than any system the world has ever seen.

It gets me upset when politicians rail about the greed of corporate titans, big companies, etc. What they don't seem to get, fundamentally, is that our destinies are all tied together. Their existence allows Americans to grow their wealth, and live better lives. Think about how much banks, big corporations, etc. contribute to charity, community events, sports -- could nonprofits ever make the same impact?

Big business isn't perfect, by any means. They do screw their employees over. But I think they get blanket-blamed for things that aren't their fault; and particularly in liberal political circles the talking heads really don't know what they're about or how their systems work.

I'm not saying you should make uniformed decisions, at all. But do your research. Find out about some more of the companies you have invested in. Also, I'd really recommend "The Birth of Plenty" by William Bernstein. It's a really easy-to-read history of capitalism and the development of our economy, and why it was so revolutionary.

Economics was the best course in college I ever took: Finally, the world made the world make sense. And it made me incredibly proud of our civilization and what we've accomplished. It's never too late to learn more about it. What about a night/community college class? Consider it an investment in your financial future.

mOOm said...

Buy and hold passive investing is all about believing that the industrial revolution which started 200-300 years ago is still going and will still keep going, companies will continue to earn profits and those profits will grow over time with the economy. And the real driver behind this is technological change, which is continuing at an amazingly consistent pace. The question going forward is whether technological change can continue to outpace degradation of resources and the environment to make do with less. Will resource costs rise faster than industry can find ways to use less of them? Will restrictions to save the environment imply a decline in production that is faster than productivity can rise? I am of the opinion that technological change will in the end come to an end. You probably won't hear much at all about any of these big issues in 90% of introductory economics courses (I know as an economist and former economics professor). Generally they assume that growth will continue. To address these issues the answer for the investor is to become as diversified as possible. Not to just invest in an S&P index fund.

The other issue you raise is on corporate behavior. You can invest in an ethically screened or green fund. Or even one that more proactively invests in greener businesses. We are investing 10% of Snork Maiden's retirement fund into one of these funds here in Australia. When/if I have more money to invest I may invest some in such opportunities too.

Andrew Stevens said...

Anything you do with your money entails risk. In the end, you're trying to beat inflation and there is no strategy which guarantees that you will. The stock market from 1966-1982 just barely kept pace with inflation and was frequently well below it. It's been the boom market since then which has convinced people that that's where their money should be. (It should be pointed out that people who invested in the market in the '70s when nobody believed in it and it never went up ended up doing fantastically well when the boom came. Perhaps the opposite will be true this time. Who can say?) No matter what you do, you cannot eliminate risk; you just have to manage it.

As for "the dominance of corporate interests over human ones," this is a false dichotomy. Corporations are a legal fiction; they are comprised entirely of human beings, those people being the stockholders (including you) and the employees (which includes the executives). "Profits," by the way, are misunderstood. I imagine most people think profits are bonuses paid to executives, or some such. Profits are what is left over after those bonuses have been paid out. Profits are usually used to invest in and grow the business or, alternately, they are distributed to the stockholders as dividends (including you, though you probably automatically reinvest them). Profits are a good thing. (The jury is still out on bonuses to executives.)

The reason why I wouldn't fear "the new hegemons" is because corporations rise and fall. What's on top now likely won't be on top in 100 years. The biggest retailer used to be Sears Roebuck; then it was J.C. Penney; now, it's Wal-Mart. There were twelve companies originally in the Dow Jones: American Cotton Oil Company, American Sugar Company (now Amstar Holdings), American Tobacco Company, Chicago Gas Company (now a subsidiary of Integrys Energy Group), Distilling and Cattle Feeding Company (now a division of Lyondell Chemical Company), Laclede Gas Light Company (now The Laclede Group), National Lead Company (now NL Industries), North American Company, Tennessee Coal, Iron and Railroad Company (bought by U.S. Steel), U.S. Leather Company, United States Rubber Company (bought by Michelin in 1990 after changing its name to Uniroyal and merging with B.F. Goodrich), and General Electric. G.E. is the only one which remains a significant player (and is, in fact, still in the Dow). Of the thirty companies in the Dow, only seven have been there for as many as fifty years (DuPont, ExxonMobil, G.E., General Motors, Honeywell, Procter and Gamble, and United Technologies Corporation).

It is an error to think that any corporation has very much power or even that corporations collectively do; corporations do not act monolithically in any way. The real argument is one of values: are the values of businessmen and stockholders becoming too dominant in our culture? This is a normative question which I will leave up to you to decide. For one thing, I'm not even sure if it is even meaningful to talk about the values of businessmen and stockholders, so I have no idea what the answer is.

It's not too late to take some introductory and intermediate economics courses, by the way, and I highly recommend doing so. But it won't tell you very much about investing. However, there are still plenty of people who practice "value investing" and invest in companies they believe in.

MEG said...

I always worry that if Americans all simultaneously started doing what they SHOULD - i.e. spend less money - then the whole economy would collapse within about a month.

Imagine it: People temporarily stop buying cars and jewelry and clothes and boats and trinkets. They quit eating out. Maybe because of a terrorist attack or other sudden fear. Few businesses have enough cash to last more than a few weeks (or even days) with no sales. They rely on lines of credit from banks for capital. But then sales stop so they go bankrupt and default on their loans. Meanwhile all the employees are laid off so they start defaulting on their mortgages and credit cards. So banks collapse. And of course the stock market crashes. And then...what?

I sometimes sort of hate having to hope everyone else will continue to keep the consumerist engine running (which is not in most people's best interest) so that my account balances will continue to grow.

PS - I am so totally serious about making sure I own land outright so that I can live on it - and off it - if I ever need to. I'll also eventually hoard gold and silver. I know it sounds crazy, but why not be prepared for the worst once you've got a lot of money in the bank?

Finance Monk said...

I've never really understood the whole "us vs. corporations" ideology that's become increasingly pervasive, especially among college students and people our age. Sure there are times when their interests are not our own (pollution, etc) but they're not really faceless giants. They're what make up our society.

General Electric is the world's second largest company, and part of the DOW Jones Industrial Average you hear so much about. It employs about 316,000 people. If you have an index fund, you have a fair amount of money in GE.

And even a company like Exxon Mobil (the #1 company), with its tainted PR, is ultimately just a company that's drilling to find gas to fill cars and heat homes in the northeastern US. It also employs 82,000 people worldwide, not counting the gas station franchises.

You're right, there is no guarantee that these companies keep growing. But they're basically what make up our society; they make up the vast majority of our employers. So let's hope they do. Considering our population is growing rather rapidly, it's fairly safe to assume the economy is going to grow at that rate. If not, we're going to have a lot of people without jobs and the benefits that come with them.

Oh, and if there's a company you'd like to know about, every one of them publish a very detailed report about who they are and what they do every 3 months, which is found for free on the internet at Many of these companies we've never heard of actually do some pretty neat things. Let me know if you're interested and I can show it to you!

Anonymous said...

may i suggest Thomas Sowell's Basic Economics?..

finance girl said...

I'd recommend reading some economic history...maybe start with Benjamin Graham's "Intelligent Investor" or William Bernstein's "The Birth of Plenty"?

May provide some perspective...?