Tuesday, July 31, 2007

Gettin' Any?

One of the myths of America is that the 'Ordinary Joe' can 'own' a piece of the action by investing in the stock market. This is the extension of the old 'streets are paved with gold' tale that lured many an ignoramus or fortune seeker from Europe to populate the New World. Some did indeed 'strike it rich' but, like stock market investors, by and large, the return was illusory.

The stock market used to be a 'closed shop' where only the wealthy had the opportunity to speculate and buy into the industry and resource development of the world. 'Risk' companies were formed as early as the 14th century to invest in trade. As in all risk, there were losses, but a return could make up for all, times over. The 'risk' enterprise gave rise to the insurance industry , a way to minimize exposure by sharing loss among all involved in risk and reward. And so it has continued to this day.

The wealthy continue to risk investment. It's the best way to achieve 'gain'. But the risk is the area that has changed? How? Insurance works, but it itself has become a target of investment and, to enable a gainful return, it engages in risk, too. Wise investors - those with most to lose- have worked hard to ensure there's a 'buffer' between them and loss, to minimize their exposure to risk in the stock market. The buffer is the small investor.

Banks, which are among the largest investors, insurance and security companies, too, sell 'products' designed to get the little guy, and his money into the market. In good times there's wealth to be shared by all. When things turn sour the big players make sure the little guys take the first hit. It gives them a chance to sell out at the best price and get their cash into safer investments. How? Simply by selling to their investors.

In the last big recession, banks mutual funds, indeed all mutual funds, lost value that has never been recouped in the 10 years since. But the banks which managed these funds posted record breaking profits during this period too. Mutual funds' market holdings lost value, the banks' either didn't - or they managed to sell them off in a timely fashion, before they bottomed out. Which they did, in the hands of the bank-run mutual funds which were left 'holding' a deflated bag.

Another form of insurance is to loan money for investments. Margin dealing allows people to extend themselves into investments further than they might otherwise go. It preys on the greed factor where good times can provide a lucrative return on money that only costs the interest paid on it to invest. Interest payments provide a steady and relatively low risk return on the bank's investment, as the bank holds he shares as security, and the borrower has a debt obligation that exists despite the vagaries of the market. Needless to say a downturn in the market engenders a call-in of margin loans when the market value of shares held falls below the cost value. the little guy often has to sell out at a loss - somebody gets to 'buy low' - or sell real property or take a forced debt to repay the bank. This is the situation - to the tune of 14 billion dollars at the current time in Canada.

The Market regularly readjusts and 'fleeces' the small investor. This is a form of 'profit taking' for the big boys, akin to the profit-taking they do from when they 'sell high'.

There are real opportunities to make money in the stock market, but they're a bit like playing a lottery. A friend made a substantial profit off a small initial investment in 'e-bay' and any original buyer of Microsoft is probably chuckling still. The purveyors of mutual funds are fond of hauling out the chart that shows that investment value has grown steadily this century. Despite wars and a great depression, the chart showing share value has risen steadily. But what they don't show is that relatively few companies that started the century in trade on the stock market, are still there. Some have merged and changed form and their stock has been redeemed and reissued. Anyone who still holds the original certificates has some interesting curios for sale on 'e-bay', for they won't negotiate at any investment house. Along the way, far more companies have passed out of existence, often taking investment with them. That steady stock market gain should have another line below it to represent the aggregate losses of investment year-by-year. That line would have a steady growth as well.

Banks which used to exist to safeguard the little guy's money are now as intent as any other 'retailer' to get it off him. The old notion of using peoples' savings to invest in mortgages and consumer loans has long gone by the board. Banks are into the market and they encourage their patrons to join the fun, by making 'investment' look like the best way of getting any sort of return on money 'in the bank'. If it's invested, the bank doesn't have to be responsible for a loss.

The Great Depression occurred, in large part, because a loss of confidence caused a 'run on the banks'. But the banks were already weakened by a collapse of loans made to allow stock market investment. What triggered the bank run was the collapse of share value in an over-inflated stock market. The world is more than ready for something like that again. In the interim, it's time for another 'fleecing'.

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