No Body to Buy Boomer Stock

[nwsteve]

Check out the Monday's Baron's Thorton Parker column:
Excerpt
"WHO SELLS THE STOCKS that retirement plans buy? If stocks are as good as baby boomers are told they are, why does anyone sell them? Boomers have been taught to save for their retirements and use the money to buy stocks. Doing that, they are told, provides capital that companies need to grow, so their stocks will grow and eventually pay the boomers' retirement incomes. The advice is neat, understandable and wrong
Rest of article at: http://online.wsj.com/barrons/article/0,,SB108820368539348018,00.html
Anybody read Parker's book "What If Boomers Can't Retire? How to Build Real Security, Not Phantom Wealth"
Love to hear from the resident experts on Parker's premise.

nwsteve

 

[Bob_Smith]

There are a few misleading statements in the article as quoted above (I didn't want to subscribe to read the entire article). For example:

If stocks are as good as baby boomers are told they are, why does anyone sell them?

--to re-balance a portfolio
--to spend the money
--because goals change
--because perceived valuations are high
--to distribute the assets following a death
--to lock in a profit
--and a thousand other reasons

If one believes that nobody should hold stocks because people sell them, it follows that everyone should hold stocks because people buy them. Argumentum ad metum.

Boomers have been taught to save for their retirements and use the money to buy stocks.

No... boomers have been taught to use the money to buy a diversified portfolio and to re-balance periodically.

Doing that, they are told, provides capital that companies need to grow, so their stocks will grow and eventually pay the boomers' retirement incomes.

Boomers have also been taught that there are risks, how to minimize those risks, and they have access to an abundance of information about the performance of stocks in the past.

I haven't read Parker's book, but based upon the quotes supplied here, I'm not impressed. He sounds like a guy trying to sell books. A ton of money has been made scaring people away from stocks. If I had paid attention, I'd still be working.

 

[John Galt]

I never heard of him, haven't owned stocks for years
and I haven't worked for years either. Doesn't matter
the rule, there are always exceptions. Re.
"Argumentum ad Metum", I love it when you talk dirty

John Galt

 

[unclemick]

Not to worry - stick with me (Bob Carlson's Retirement Watch) - stocks ARE the place to be - retirement spans are much longer (25-30) and the selling and buying will be spread out(and he's bragging about his stock and bond picks. I'm reading 'his' sales pitch (sat.'s mailbox) while reading the posts to this thread. The touts abound.

 

[nwsteve]

Sorry, thought article was available w/o subscription
Here it is-Barrons is the source

MONDAY, JUNE 28, 2004

The Wealth Trap

Loading up on stocks for retirement requires unloading them later
By THORNTON PARKER

WHO SELLS THE STOCKS that retirement plans buy? If stocks are as good as baby boomers are told they are, why does anyone sell them? Boomers have been taught to save for their retirements and use the money to buy stocks. Doing that, they are told, provides capital that companies need to grow, so their stocks will grow and eventually pay the boomers' retirement incomes. The advice is neat, understandable and wrong.

Serious investors can learn why the advice is wrong by analyzing Table F.213 of the Federal Reserve Board quarterly Z.1 Flow of Funds Report, which shows the net issues and purchases of stocks by major issuing and holding groups, and Table L.213 which shows the market value of stocks held by these major groups. The tables are on the Fed's Web site, and go back for decades. Data for this article are in then-current dollars from the March 6, 2003, report. Dividends are not considered.

Adding the net stock-issue numbers for the years 1982 through 2002 shows that during the period companies retired $178 billion more stock than they issued. This means that little of the money that flowed into pension plans, mutual funds, and direct stock purchases during the bull market went to companies as a whole. Of course, capital was moved around, but $178 billion went out of stocks.

In spite of the retirements, the total market value of stocks increased from $1.38 trillion to $11.74 trillion. Market action produced this gain -- a compound annual-growth rate of 9.7% over the 21 years.

While net issues and retirements largely offset each other, there was a clear pattern of changing ownership, with one group of stockholders being net buyers and another group being net sellers. The net buyers were mutual funds, life insurance companies, foreign investors, state and local pension plans, and others, in that order. The buyers were largely retirement-related. They started out with $249 billion worth of stocks, bought $3.51 trillion worth, and ended up with $5.82 trillion worth. Their growth due to market action was just under 6% per year.

The net sellers were households, company pension plans, and bank trusts and estates. They started out with $1.13 trillion worth of stock, sold $3.69 trillion and ended up with $5.92 trillion worth. Their growth due to market action was 13.7% per year. Households, the largest selling group, started out with $780 billion worth of stock, sold $2.98 trillion, and ended up with $4.19 trillion worth. Their growth was 15.1% per year.

To put those growth rates in context, a dollar invested at the buyers' rate of just under 6% compounded annually would grow to $3.37 in 21 years, while a dollar at the householders' rate would grow to $19.27.
How was this possible?


NWsteve

 

[nwsteve]

PART II--Parker's Article
There are at least two sources of clues, and both point to corporate insiders. The annual Forbes articles on the world's and America's richest people are the first source. Bill Gates headed the list in March 2003 with a fortune of $46 billion, based largely on his Microsoft stock. He is reported to have sold about 2 billion shares (adjusted for splits) and still owns 1.2 billion. When Microsoft had its initial public offering, he retained 45% of the shares, and he still has enough to continue selling 20 million shares a quarter for 15 years. His cost was probably less than a million bucks, $0.001 per share, so virtually all of his receipts and the value of the shares he still owns are profit.

Gates is the extreme example, but he and the other 243 Americans identified in Forbes had total fortunes, based largely on stocks, of $700 billion, or a sixth of all the stocks held by American households at the end of 2002. In addition, there are the corporate insiders, including employees who received stock directly from companies as grants or through options. There were an estimated 10,000 "Microsoft millionaires" before the bull market collapsed.

The second source is the weekly table of Insider Transactions published in each issue of Barron's. The tables show the huge amount of money that insiders take out of stocks in relation to the amount they put in. For example, the Feb. 23, 2004, table showed the largest reported sale was 32 times greater than the largest purchase, while the reported sale at the bottom of the table was more than 100 times greater than the corresponding purchase. The amounts vary, but the basic pattern has been consistent for years.

Taken together, the Fed data, the Forbes lists and Barron's tables show that the households of corporate insiders must have been the primary sellers of the stocks that were bought by mutual funds and other retirement-related portfolios. The extreme gains that households received as a group may well have been driven by the insiders' low acquisition costs.

The hard conclusion must be that retirement-related portfolios absorb the large blocks of stocks that corporate insiders acquire directly from companies at low cost. The portfolios buy many of the shares the insiders sell and help price the stock they retain. Many insiders probably understand this, but most retirement savers are outsiders who do not. The role of insiders has not yet become a national issue, but is important for several reasons.

Insiders who have the lowest costs get the largest profits. When later buyers acquire insiders' stocks on secondary markets, most of the profits the stocks will ever produce have already been made. As a group, retirement savers who buy on secondary markets will always earn less than the insiders.

It is getting harder to make money by buying stocks on secondary markets with the passage of time. Insurance companies illustrate this. Among the net buyers, they came to the game late, bought most of their stocks during the go-go years of the 1990s, and managed to lose money during the full twenty-one year period.

There has been a symbiosis of retirement plans and insiders since 1981. The plans needed stocks and insiders wanted their money. Anyone who looks ahead can see that when boomers' retirement plans need cash to pay retirement incomes, they will have to sell stocks, and most of the domestic buyers will have to be the relatively smaller number of younger workers. That has been known for years.

But few understand that when the plans need to switch from buying to selling in order to pay benefits, the symbiosis will end. The plans will switch from supporting insiders to competing with them for the purchasing power of younger workers. A prolonged bear market is likely, and many of the insiders will be able to make money at prices that will destroy the retirement plans.

The wealth gap between America's middle class and its richest people is growing, and has become a political issue. So far, the way that retirement plans literally transfer money from middle-class workers to corporate insiders and inflate the value of the insider's portfolios has not been recognized. But unless this analysis is wrong, it is only a matter of time until that happens.

 

[Nords]

The sky is falling!  The sky is falling!!

This type of scary "news" has been bouncing around for years. I bet the first article was published in 1947, a year after the Baby Boomers started arriving and their financial planners realized that there might not be enough stock for them to buy.

I forget which book has this author's quote: "I'd like to see CNBC report that no one bought or sold any stock in today's market because everyone was happy with what they owned."

The only reason that boomers have been "net buyers" of stock is because we outnumber all the other demographic groups (so far). Being born in an 18-year window is a fairly quantifiable observation with known numbers. You can compare them to other demographics and make lots of interesting charts.

Retirement is another issue. Boomers are either all retiring early (at least we were in 1999) or we're all working until we die (the current view) or we're retiring early and then going back to work when we run out of money ("the Wal-Mart view"). But no one has established that ANY generation can affect the stock market with buying & selling. We've affected it with broad changes in stock ownership ("everyone has to own stocks, not just institutions") or the Internet makes it easier than ever for anyone to trade them, but no demographer or statistician can claim that the stock market exploded in 1982 because boomers were starting to save for retirement and just had to buy stocks.

And the market won't ever implode because retiring boomers are cashing in. It might implode for a bunch of other reasons, but they'll be filled with people of ALL ages.

Personally, I buy stocks when they stop going down and I sell them when they stop going up. I've also started selling them short before they go down and covering when they start to go up. Does anyone else have a better method involving Gen Y or the Echo Boomers or the phases of the moon?!?

 

[BigMoneyJim]

nwsteve, a note on posting whole articles: Some publications get picky about that and may complain to the site or the hosting ISP. Hopefully it would be reasonably resolved with Dory, but sometimes a host will do something knee-jerk like take the whole site offline. They did this to the REHP Yahoo group--they wiped out all the messages and closed the group when publishers complained. I think this is why Intercst now posts just links and incredibly short, if any, quotes.

I think someone else posted a whole article here recently; we need to nip this in the bud before some online magazine throws a fit.

 

[Rockpile]

I've read Parker's book, "What If Boomers Can't Retire."
His premise, that unrealized equity gains are "phantom wealth", and too insecure a basis for longe range retirement planning, seems plausible. Until you read further and realize he offers no real alternative investment.
Bonds and stocks that pay a high, sustainable dividend would appear to be a better way to go. But aren't the same risks factors involved? Bonds default, interest rates rise and dividends get cut or eliminated.
I agree with Parker that today's obsession with stock price can often be counterproductive to the company's longe term plan, its workers and the community at large.
Insiders who buy in at 25 cents a share, then do an IPO at $15 a share have enriched themselves with "phantom wealth", but haven't really added value to the company itself.
Intriguing ideas, but again, no real alternatives are presented.
My own inclination, right now at least, is to secure my annual costs from fixed income investments and keep the balance in value oriented equities.
If the stocks don't work out, at least the income from bonds pay the bills.

Richard

 

[nwsteve]

BMJ--thanks for the tip on avoiding posting entire articles. Beings still a newbie and having seen other long posts I was mistaken that as along as you gave the source attribution it was okay--kinda like the footnote in the college paper ;-). When the link requires subscription, what other ways are best for sharing full text?
Nords--great classification system for boomers. Kinda will be the same if not different approach to the future.
While the "sky is falling" is hardly worthy of being called a "strategic scenario", the boomer demographics are such, portfolio liquidation will have to take place and necessarily place more supply in the system than would otherwise be there. Unless our society generates a new demographic (e.g. immigrants/structural change in savings patterns/foreign purchases)to act as net buyers, the additional supply necessarily negatively impacts price--supply and demand 101.
Catastrophic?? Probably not but it certainly removes a significant source of demand from the market and could easily generate a prolong period of minimal if any gains And there goes the impact of compounding.
NWsteve

 

[haha]

When the link requires subscription, what other ways are best for sharing full text?

My thought on this is that there is no safe and honest way to read copyrighted work, and then publish it elsewhere. After all, the business model of Barron's and the WSJ is circulation based. They have nothing to sell but those words. If you appropriate those words and give them away to your friends, this is theft of intellectual property.

A yearlong online sub to both Barron's and the WSJ sets one back the hefty sum of $79. If the millionaires on this board are interested, they can probably afford to buy it. Or catch a bus down to the local library and peruse it for free.

Anyway, you may have noticed that the implicit cognitive model here at ERF is "the future will be more or less like the past, and if it isn't it still is useless to try to predict possible changes even in a probabilistic way."

Given this, the most easily accepted message one can post is, "it's been sunny and warm. I really, really like it that way. I sure think (hope) that will continue. If it doesn't, what the hell can I do about it? Thinking is too much like work. I didn't ER for that!"

Mikey

It may be noticed that I am in a somewhat curmudgeonly mood today. At least I haven't yet suggested that anyone perform an obscene act.

 

[BigMoneyJim]

Re: Full Text / Article Redistribution

I'm certainly not a copyright expert, and fair use clauses probably allow for more than a link and a one-sentence quote, but it seems the reality is that any website has upstream ISPs who may elect to shut off access to the material if a copyright holder complains; sure you can literally make a federal case out of it and perhaps win, but for months or years your website (or other online content) is down.

My own small personal form of protest is that I won't read restricted online articles, even if it's a free registration. (Exception for the New York Times because somebody made a bogus account with name "mumble..." and password "mutter..." that still works, so I use that.) I don't take magazines or newspapers, either, but I never really did that, anyway. The free internet and the library are my favorite sources of information these days.

I don't expect my protest to make any difference at all, but it makes me feel better.

 

[cute fuzzy bunny]

I usually "read, distill and report" at least my lame view on the topic, as I did with the couple of "book reports" I did.

As far as subscriptions...there is enough cockamamie stuff you can read for free without having to pay money for even more cockamamie stuff. Free registrations? I put in funny names and addresses and a temporary fake email. If they get too intrusive I go elsewhere. Maybe I just got too used to the "everything is free" model of a few years ago.

My perspective on this one is that his view of "profit" is sort of slanted. I was able to buy stock as an insider for under a buck a share and sell it for 70-80, but I didnt consider that margin to be profit. I worked my butt off and took a lot of risks to put myself in a position to acquire those stock options, then held them and worked for 5 years for them to vest, then reaped that reward. It was compensation, not profit.

Hence it cannot and should not be compared to post insider sales rates of return, unless the shareholders buckle up and do 5 years worth of work for the company whose shares they bought.

Some would say the insider stock is "risk free" because I dont have to exercise the options in the event the company and stock go south. They should tell that to the "next generation" of workers at my company who broke their butts for 5 years only to see their $70-80 options against a $12-20 share price, which still hasnt breached $25 a share in 3 years. Their work goes unrewarded except for salary. One can work a lot less hard at a lot of places and make that same salary.

 

[haha]

I was able to buy stock as an insider for under a buck a share and sell it for 70-80, but I didnt consider that margin to be profit.  I worked my butt off and took a lot of risks to put myself in a position to acquire those stock options, then held them and worked for 5 years for them to vest, then reaped that reward.  It was compensation, not profit.

Hence it cannot and should not be compared to post insider sales rates of return, unless the shareholders buckle up and do 5 years worth of work for the company whose shares they bought.

I really don't think that Thornton Parker was making the point that it is morally wrong for insiders to skim profits. (Although I believe that point could rather easily be made. For example, if honest accounting had been practiced, this game could not have been continued.) Parker was saying only what should be obvious- there are only so miuch corporate sales. Sales can't be magnified, only apportioned. If insiders get a larger share of it, outside shareholders get a lot less. It's the old slicing a pie analogy. If you read his data, this point is obviously correct. Insiders got a huge share of the 90's boom. So far the bagholder boomers have not rebelled. I would expect that it will only be a matter of time.

Mikey

 

[cute fuzzy bunny]

Oh I didnt think there was any moral issues in play.

Let me explain a different way.

A car dealership allows the top 10% of sales people to buy a couple of cars a year for 50% off, most of which they sell.

I think this guys take is that they're making a nice 50% profit, which subsequent sellers cant match.

But the guy had to work his butt off for the right to the discount. Hence one cant exactly say its all profit.

I should also draw a dividing line between guys like gates who made obscene profits (albeit, he took a few pretty good risks and some cream pies in the face), and guys who are actually seeing their rubber hit the road. Oh yeah, and another line between those guys and the worthless middle management types who avoided any and all risk regardless of damage to the company in order to continue riding the gravy train.

That was the most interesting part of my old company. Pretty collaborative and friendly through the mid 90's. As the stock option bonanza escalated, more and more "committees" and "processes" to reduce "risk". Fewer decisions. Less action. Lots of people wanted to "own" stuff but nobody wanted to do anything with it once they established ownership.

High stock option bonanzas can be verrry counterproductive.

 

[Zipper]

So what you are saying TH, is, you were at the trough at the right time, and that made it morally right? In other words, you, Winnick, Roth, Koslowski, et. al. grabbed for all you could get. Hell, if the cookie jar was open and full, saying "Come an' git it boys"! Wouldn't everybody? But now that the jar has a lid on it, you're feeling sorry for those who missed the party (looting).

 

[cute fuzzy bunny]

Oh BOY, do I LOVE this topic!

I see I should have left this paragraph at the bottom of my original post. I cut it back trying to increase my brevity.

I ran two programs in the last 2 years I was with my old company, where I made the bulk of what I'm living off now. One program was run with about 15 people and about $4M and we conservatively estimated the cost savings to the company at $155M. The second I ran with three people and about $250k, and we produced a $3B (yes billion) dollar revenue uptick per the chairman and ceo.

My stock options were worth about $1.7M.

A pretty fair deal, and I cant feel any more moral about it. I earned every penny of that, and more. Broke my butt, took a lot of heat, and ground my teeth to the point where I'm going to need 8-10 caps over the next few years.

So do I consider that $1.7M pure windfall profit? Hardly. I earned it.

Re-read the part I wrote about drawing a line between people who worked their butts off for the "profit" (my read: leveraged earnings) and who just porked up on free money.

I dont think the original topic, the writers article, supports "profit" from just a few hundred bazillionaires who skimmed all the money off the top of their companies stock options.

 

[COD]

For registration required sites - check bugmenot.com - they keep a database of logins, I've yet to find a site they didn't already have covered. If you use the Mozilla browser there is an extension that lets you look up logins right from the site. very nice.

 

[ESRBob]

Does anyone have the feeling that real estate markets might be the ones to get trashed when boomers sell their family-friendly homes and move to Thailand, Florida or a nearby townhouse complex? Stocks I can definitely see us owning for the long term if only to have a prayer of holding up against inflation during a lifetime that (Sorry John!) I believe we should estimate at 100 years to be on the safe side.

Oversized homes, however, we will want to dump around the time the kids are gone. But if the generation behind us is about 2/3 the size, there will be a glut. (We're talking mcmansion and family homes -- townhouse and florida sales could hold up quite nicely).

Is this a micro-effect or is it something that could have legs? Haven't seen anyone in the press really articulating this , but it makes sense to me. Anybody thought about this differently?

ESRBob

 

[haha]

Does anyone have the feeling that real estate markets might be the ones to get trashed when boomers sell their family-friendly homes and move to Thailand, Florida or a nearby townhouse complex? 

It seems so local. In many areas immigrants might take up the slack, and then some. Maybe a home that housed a family in the 60s then an old couple or widow in the 90s is now again housing a family or more likely families- only this time Mexican, and maybe having 4 earners to pay the mortgage. This is happening in Bellevue WA, and other older suburbs.

Also, plenty of retired couple like big homes. On the retirement oriented isaland where I live, most people used to have modest homes or cabins. Not any more. The local builders are very busy putting up very large and imposing houses. Of course, presumably they have sold something in the city before coming here. But it does at least suggest that some retired couples like a lot more house than I might think they would need.

Certain areas just seem to have achieved a degree of immunity to housing downturns. In Puget Sound the last few years there were big job losses. But our housing boom continued without a hitch all this period. I don't understand it, and I don't feel comfortable about it, but it is a fact.

Mikey