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What to do, what to do?
Old 09-08-2008, 11:30 AM   #1
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What to do, what to do?

I'm spinning this thread off of the FNMA Now Owned By Taxpayers thread, since CFB posted something that is making me think.

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After thinking it over, I have to admit its a neat trick to peel off a hunk of government, make it a publicly investable entity, take in billions of investors money, have a bunch of executives strip millions of dollars out of it, get the government to take over whats left of the husk when the whole scheme crashes down and use taxpayer money to reinflate it, then give fat separation packages to the guys who did the deed.

This is a whole new level of thievery well past Phil Greenspuns take on current corporate america...

"The Fly in the Ointment
From reading the foregoing, it seems safe to conclude that any investor can succeed merely by dumping money in an S&P 500 index fund and forgetting about it. A lot of folks apparently thought this way and the result was the massive bubble stock market of the late 1990s. If everyone wants to buy something the price of that thing will go up. The Dow went from less than 2000 in 1987 to nearly 12,000 in 2000. Were American companies really worth 6 times as much 13 years later? Historical price-earnings ratios for common stocks have averaged 15. At the peak of the late 1990s bubble, P/E ratios reached 42. With the Dow at 8000 (July 2002) the ratio is about 25, i.e., an investor is paying $25 for every expected $1 in corporate earnings. This would seem to limit the expected return in a common stock to 4% per year.

Making matters worse is the fact that corporate managers and accounting firms have been fraudulently overstating earnings. The published P/E ratios are based on the lies that CEOs and CFOs tell investors, not the actual cash coming into companies' bank accounts.

A deeper problem than fraudulent reporting is managerial theft. Investors have accounting firms and the SEC to protect them but the top managers have their hands on the company checkbook and their friends on the Board of Directors. In the old days if a company did well the managers would send a letter to shareholders: "The economy was booming last year and Blatzco prospered; your dividend is being doubled." In the 1980s and 1990s a more typical response to a boom year was management saying "Blatzco did well because we're such geniuses; we are going to take home all of the improved profit in the form of bonuses and stock options." Jack Welch in Straight from the Gut proudly states that during his 20 years as General Electric CEO the "employees", by which he means himself and some other top managers, went from 0% to 31% ownership of GE. Rephrased, Jack and his golf partners stole 31% of GE from the investors who owned the company in 1980. What's more, thanks to accounting rules that enable unlimited stock option grants without any charge to earnings, none of this had to be reported in financial statements. My cousin used to be an animator at Walt Disney. In the old days of Hollywood a boom and bust cycle of profits was to be expected. It is tough to predict whether a movie will be a hit. But after Michael Eisner joined the company in 1984 successes were attributed to superior management rather than luck. Eisner helped himself to more than $1 billion of the shareholders' money over the years. Thus when Disney ran into a string of flops the company didn't have enough cash to hang on until the next boom. Disney shut down its Los Angeles animation group and will use contract labor in Eastern Europe for future animated features.

It is tough to see how historically high rates of return on common stocks can be maintained in a world where managers steal most of the fruits that stem from the investors' capital.

Note that the 1980s and 1990s CEOs stealing from their investors are not innovators. Leland Stanford and his partners in the Central Pacific Railroad managed to steal a fabulous sum of money from their British investors by contracting the construction of the railroad to a company that they owned personally. It was a very similar scam as that pulled off by the managers of Enron except that Stanford did it in the 1860s. "
So, I have a question for CFB and any others who have an opinion. Assume the Greenspun article is accurate, and corporate executives are stealing profits from the shareowners. I'm certainly not arguing against that theory. Add to that the concept from Bernstein and others that the market is still vastly overpriced for the long haul, with expected returns of 6% or so over the next 30-40 years, whether from slow growth or a major market collapse. Then say you are past the accumulation phase of investing, retired or soon to be.

What options are there? Don't retire unless you can live with a SWR of 3%? Get your equity holdings out of the whole stock market and invest in smaller companies, where the temptation to steal isn't as great? Stick with your AA plan and hope it's not really that bad? I'd be curious what y'all think. And by the way, this is a theoretical question. I'm not panicking and bailing, just feeling a little depressed about it all. Low biorhythms today.

I've been doing a lot of reading recently and as my knowledge increases my optimism is shrinking. I had a buddy many years ago that told me the best way to lose your faith is to go to seminary. It's like that.
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Old 09-08-2008, 11:45 AM   #2
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I think corporate insiders have been "borrowing" profits since the beginning of time. However, the excess os troubling, and then throw in no accountability......
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Old 09-08-2008, 11:47 AM   #3
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Quote:
Originally Posted by harley View Post
I'm spinning this thread off of the FNMA Now Owned By Taxpayers thread, since CFB posted something that is making me think.

So, I have a question for CFB and any others who have an opinion. Assume the Greenspun article is accurate, and corporate executives are stealing profits from the shareowners. I'm certainly not arguing against that theory. Add to that the concept from Bernstein and others that the market is still vastly overpriced for the long haul, with expected returns of 6% or so over the next 30-40 years, whether from slow growth or a major market collapse. Then say you are past the accumulation phase of investing, retired or soon to be.

What options are there? Don't retire unless you can live with a SWR of 3%? Get your equity holdings out of the whole stock market and invest in smaller companies, where the temptation to steal isn't as great? Stick with your AA plan and hope it's not really that bad? I'd be curious what y'all think. And by the way, this is a theoretical question. I'm not panicking and bailing, just feeling a little depressed about it all. Low biorhythms today.

I've been doing a lot of reading recently and as my knowledge increases my optimism is shrinking. I had a buddy many years ago that told me the best way to lose your faith is to go to seminary. It's like that.
The pilferage is going on. If you doubt it, get hold of some annual meeting prospectuses and read the details of management compensation. Another approach is to compare the growth rate of the economy with the growth of stock market capitalization. It jumps all around, but there is a pretty large friction factor visible over time due to managers siphoning off cash.

I use to stress about it as I hate to be cheated, but if you don't want to work, what are the alternatives? If I weren't lazy I would work, have my own loan or private business portfolio and whack anyone who tried to cheat me.

Since I am unfortunately lazy, my approach is to try to avoid the biggest cheats, to mosly buy a stock to later sell it, to pay close attention to management buying and selling of the stock.

The other thing you can do is just buy commodities. You may get poor executions, but the wheat won't cheat.

Another thing is corporate debt. Managers stealing from a company harm the debtholders to be sure, but not as egregiously as they harm the shareholders.

Last thing is buy a set of famous-manager voodoo dolls and use them often.

Ha
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Old 09-08-2008, 01:36 PM   #4
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What options are there? Don't retire unless you can live with a SWR of 3%? Get your equity holdings out of the whole stock market and invest in smaller companies, where the temptation to steal isn't as great? Stick with your AA plan and hope it's not really that bad? I'd be curious what y'all think.
I will stick with my AA plan and not be too concerned one way or another.

I think just about all of us (even those contemplating a more or less bare bones retirement) have allowed some slack in our budgets in case it is needed. We allow for at least some expenditures beyond basic survival.

Over the long haul, naturally the market is going to go up and down. In "down years", I plan to go into frugal mode, temporarily cut back on my spending, and withdraw less. I could even re-invest some of my dividends. No big deal. It's not like I have never lived a spartan lifestyle before and it won't last forever.

We do what we can. Sometimes I think about buying an inexpensive rental property, but really I do not want the hassle. But that is always a possibility.

Anything other than going back to work is a winning outcome for me.
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Old 09-08-2008, 01:54 PM   #5
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The other thing you can do is just buy commodities. You may get poor executions, but the wheat won't cheat.
Seems like maybe the fund managers running these funds may have a suspicious bone or two in their bodies, plus the funny business they go through by using derivatives, TIPS or other means to leverage the commodities purchases can leave a lot of room for...umm...'execution problems'...:

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Another thing is corporate debt. Managers stealing from a company harm the debtholders to be sure, but not as egregiously as they harm the shareholders.
Thats Greenspuns take, although it should be pointed out that he has a lot more money than the average ER.

"Until management began stealing everything from investors, everyone hated bonds. Bonds have historically offered a much lower return than equities at somewhat reduced risk. The old theory was that bonds were good for people about to retire or who otherwise couldn't afford the risk of a crash. However, there is still some capital risk with bonds. If inflation goes way up, interest rates will go way up and the value of "a promise of money in the future" (a bond) will go way down. A 1990s Wall Street wizard worried about a crash would buy "protective puts" on the S&P 500 index. These are deeply out-of-the-money options that won't be worth anything unless there is a big crash. Thus they will be very cheap though 99% of the time you'll end up writing off your entire investment in them.

What brought bonds back into fashion was the realization that corporate top management was stealing on a grand scale. If a company had a bad year, the CEO somehow had to manage on his $1.2 million cash salary. If a company had a good year, the CEO would steal any profits by exercising stock options that he and his buddies on the board had previously issued to themselves. With bonds the company borrows $1 and has to pay back that $1 plus interest. If in the meantime the managers have stolen everything that they can from the shareholders that shouldn't affect the bondholders. "

I dont mind some corporate debt. A hunk of my first/income bucket is in vanguard high yield. Even the short term investment grade has a half decent record.

I have some doubts about large companies and the futures of the standard equity asset class, but I dont think its appropriate to abandon it. This is one of the reasons why I'm inclined towards the 'endowment' type investing that finely slices and dices into so many different asset classes and de-emphasizes the US large cap portion.

Its also a reason why I always point out how much I like dividend paying stocks. The more dividends that get paid out, the less there is to steal.

Thats also why I dont mind recommending Wellesley. Hunk of dividend payers and a bunch of corporate bonds.
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Old 09-08-2008, 02:10 PM   #6
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It burns me up too how the corporate officers can siphon off cash through compensation packages and stock options. It's disgusting.

Once upon a time, investors bought stocks for the dividend. It was harder to siphon off cash and finagle the books if you had to support a decent dividend.

But now investors care mostly about growth. Growth stocks came big into fashion a couple of decades ago.

On top of that, most stock is now held through mutual funds. Mutual funds don't police company management. They tend to turn a blind eye.

So, unfortunately, until stockholders become more activist, until they elect boards who are willing to rein in executive compensation, we're kind of stuck with this situation.

I just don't see how it's going to change. I don't see how mutual funds will ever become activist. Today, in the interest of diversification, we have truly "passive" investors. As a consequence, there is an ongoing transfer of wealth from the shareholders to the insiders.

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Old 09-08-2008, 02:12 PM   #7
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Heck, I stole a bunch of all y'alls money back in the 90's and used it to finance my ER.

THANKS!!!
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Old 09-08-2008, 02:32 PM   #8
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Well, I could almost say the same thing EXCEPT that my company's stock option plan was in place BEFORE it went public, and the principals/management already owned most of the company before it went public. They were super sensitive about stock dilution (since it was their stock already!), and therefore rather restrained with additional stock option programs.

It's when the non-owner "professional" management comes in and starts rewarding themselves all sorts of stock grants that you get the highway robbery.

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Old 09-08-2008, 02:48 PM   #9
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I dont mind some corporate debt. A hunk of my first/income bucket is in vanguard high yield. Even the short term investment grade has a half decent record.

I have some doubts about large companies and the futures of the standard equity asset class, but I dont think its appropriate to abandon it. This is one of the reasons why I'm inclined towards the 'endowment' type investing that finely slices and dices into so many different asset classes and de-emphasizes the US large cap portion.

Its also a reason why I always point out how much I like dividend paying stocks. The more dividends that get paid out, the less there is to steal.

Thats also why I dont mind recommending Wellesley. Hunk of dividend payers and a bunch of corporate bonds.
My thoughts as well. I guess I never got bitten by the growth bug in the first place so I have always emphasized income producing assets. Money in your pocket is always better than the promise of money in your pocket.
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Old 09-08-2008, 02:55 PM   #10
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Maybe its because I had a front row seat to see what management at "growth" companies do with the profits that turned me off.

By the way, this stuff isnt limited to big companies. I've seen plenty of pretty wild shenanigans at small companies...both public ones and private ones taking capital investments.

The more I've thought about it over the last few days, the more its begun to bug me how big and right out in the open this huge grab for the money coupled with a lot of gross incompetence really is. And how little we can do about it.
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Old 09-08-2008, 03:01 PM   #11
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You can invest in Berkshire Hathaway. It may go up or down, but Buffet and his mangers won't rob you.

On the topic of commodities, I was talking about commodity etfs, or futures contracts or futures options. The biggest crooks in America used to be the commodity guys, though I think the dudes at Fortune 500 companies give them a good run today.

I have a few partnerships that I have been in for a long time where I have a strong confidence in the integrity of the mangers. This is not an endorsement of MLPs in general.

Ha
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Old 09-08-2008, 03:07 PM   #12
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Nope, Warren has been pretty good so far. Although he's holding one hell of a lot of cash and wont pay it out as a dividend.

What his replacement does with all that cash is going to be pretty interesting...
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Old 09-08-2008, 03:48 PM   #13
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The more I've thought about it over the last few days, the more its begun to bug me how big and right out in the open this huge grab for the money coupled with a lot of gross incompetence really is. And how little we can do about it.
I hear ya! But as long as stocks provide superior returns to other investments, in spite of the "corruption" of corporate management, this situation will continue. Only when stocks stop providing superior returns will this stop.

There is just so much money chasing stocks. Stocks don't really have to "compete" that hard to get investors interested, and many investors are short term in their thinking anyway.

And then when you see how strong the compensation rewards continue to be even when a stock has performed miserably, and how ousted executives get huge severance packages, it just seems pretty darn hopeless.

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Old 09-08-2008, 07:45 PM   #14
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I hear ya! But as long as stocks provide superior returns to other investments, in spite of the "corruption" of corporate management, this situation will continue. Only when stocks stop providing superior returns will this stop.

There is just so much money chasing stocks. Stocks don't really have to "compete" that hard to get investors interested, and many investors are short term in their thinking anyway.
It will be interesting to see if the money stays in stocks if we go through an extended period of low (or no) growth. And as far as stockholders enforcing their wills on the boards and management, with the funds and pensions holding the reins there won't be any change individual shareholders will be able to force through. Similar to politics, they are all in bed with each other.

I agree with many of the above posts about managing your investments to try to avoid the worst of the abusers. But I also agree with Haha about being too lazy to put too much effort into it. It would be much more satisfying if some of the offenders lost their ill-gotten gains and even spent some time in club fed. Like the death penalty, it probably wouldn't act as much of a deterent, but it would make me feel better while my investments weren't doing anything.
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Old 09-08-2008, 08:12 PM   #15
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Personally, I believe that if we go through an extended period of low or no growth, money will NOT stay in stocks. We have been through periods in the past when stocks were penalized resulting in very low P/E ratios. It will probably take just such a period to clean out some of these abuses in the system. The stocks with truly cleaner balance sheets and paying dividends will probably do OK during such a period, but the others will not be so popular as "growth" gets a bad name.

Who knows? But that's one scenario I can imagine.

Audrey
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Old 09-08-2008, 08:55 PM   #16
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Nope, Warren has been pretty good so far. Although he's holding one hell of a lot of cash and wont pay it out as a dividend.
What his replacement does with all that cash is going to be pretty interesting...
I bet his phone has been ringing off the hook, and I'm surprised that he hasn't purchased large chunks of both GSEs.

Which should give us an idea of how toxic their debt really is.

For you Buffett fans, his latest authorized biography will be published in about three weeks. I can't wait to see what effect that (and the end of hurricane season) have on Berkshire's share price...
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Old 09-08-2008, 10:24 PM   #17
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Heck, I stole a bunch of all y'alls money back in the 90's and used it to finance my ER.

THANKS!!!

Sounds 'ethical', about as ethical as living of a spouse. Your DW doesn't have a part in this?
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Old 09-08-2008, 10:59 PM   #18
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Um, is it truly unethical to have only one spouse working? Don't understand that at all.

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Old 09-09-2008, 09:48 AM   #19
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Sounds 'ethical', about as ethical as living of a spouse. Your DW doesn't have a part in this?
No, but your wife did. Tell her I said 'thanks'.

May I suggest that you find a different hobby?
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