harley
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
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.
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.