Friday, June 4, 2021

Is The Stock Market Really "Worthless"?

The recent (Spring) issue of 'Left Turn',  the Newsletter of the Democratic Socialists of America, features a provocative piece by Hadas Thier, 'Gaming The System: Why The Stock Market Is Worthless.'   Predictably,  Thier first cites the Game Stop "mini-revolution"  when for a  brief time "regular people made money off the stock market." But, alas, that was only temporary as the actual wolves of Wall Street later came out and "profited handsomely from the day trading revolt."

But of course this was a radical simplification as I pointed out in an April post, e.g.    

Noting Jason Zweig's WSJ column (''The Know-Nothings Running With The Bulls',  March 27-28, p B7 ) exposing most of the Game Stop "revolution" crew as callow youths who knew next to nothing about what the hell they were doing.    The general refrain when these former gamers posted on asssorted forums (e.g. on Reddit) was "I don't know what the fuck I'm doing!"  and "I'm gonna need a professional!"   So it was no surprise that when the 'big boys' finally entered and got serious, the gamer group started losing.  Was this the fault of the stock market?  Nope, it was the fault of lazy kids who didn't want to learn in depth and believed they could take the Street's wolves to the cleaners.   They succeeded briefly, but it didn't last, e.g.  

Thier is also adamant that "the stock market has made a few people very wealthy but has  done little for working people - apart from forcing them to wager their retirements at the casino via  401(k)  plans".

But this is not entirely true.  First,  those who have stuck with the market (like our retired Nurse friend Nan) have generally come out ahead.  But it meant sticking with the market in good times and bad,  and when shares dive to just buy more because the price is lower.  Janice and I tried that for a bit in the 90s but realized we lacked the stomach to remain in for the long haul, and especially in volatile periods.  So we opted to go a different  route:  using savings to purchase immediate fixed annuities.  The idea being to provide an added stream of income each month which didn't vary, and hence one could count on to make predictable purchases.   This worked for us without causing us to lose sleep about losses, as often plagued Nan.

Second,  it is not true that  401(k) plans "force" one to partake of a "casino".  Indeed,  the 401(k) was begun (law passed) as a way for ordinary working folks to sock away savings - and hopefully even get an employer match.  In their terrific book, 'The Great 401(k)Hoax',  William  Wolman and Anne Colamosca  point out that the 401(k) was never intended as a Wall Street investment vehicle that risked losses in the stock market.  Losses that might not be made up in time to secure a proper retirement.   

 It was meant for the ordinary worker to salt money away in safe, low risk instruments - while being matched by your company to some degree- and all the while not having to pay taxes on it. But almost from the start of the plan (named after the section in the tax code), people - workers were driven to put money into stocks, mainly equities, and other high risk instruments.   This was to try to attain levels of return equal to what corporate retirees received in defined benefit plans - like company pensions.  (Which had mostly gone the way of the dinosaur by the Reagan 80s).  

Little wonder that small fry investors in 401(k)s seeking to emulate such wealth via the stock market were fried and refried, over and over again. Under such conditions, the ordinary, wage slave in the US of A risks his money and security, by investing in ANY non-FDIC insured monetary device. 

We also learned the hard way (especially Janice) that when quarterly losses were incurred, there was no company "match".  After this happened twice ca. 1998, I advised Janice move her 401(k) investment in a bond fund (sustaining $800 + losses) to a money market fund.  The quarterly earnings were pitiful for sure,  but at least she didn't lose money and always got a company match-  which was as good as a decent gain. She has maintained this strategy with a T. Rowe Price IRA even after retiring in 2012,  and has not had a loss.  

Again, the basic principle has been that suggested by Wolman and Colamosca in their book:  Treat the 401(k)  (or IRA) as a savings vehicle not an investment vehicle.  Your aim is to build a nest egg,  not to risk it.  Especially when any major losses may set you back to the point of having to return to work to make up the financial setbacks.

Where Thier has a more solid case in his stock market polemic is in the excessive use of leverage (borrowed money) to buy stocks and bonds.   As I noted in one June, 2020 post:

Both individual investors and whole companies have now taken to the leverage 'drug'  to place their market bets using borrowed money.  The losses they have accrued, along with decades of trillion dollar tax cuts,  have helped to monumentally add to the $164 trillion in global debt

He is also correct that too many companies are involved in the stock buyback game to "pay higher dividends to shareholders."  He notes that almost $8.5 trillion has been invested by companies to do this, as opposed to investing in new infrastructure and labor.

But it is incorrect to uniformly label the stock market "worthless". You just have to have your wits about you and be well-informed, prepared if you invest. Thanks to my being invested in the Janus Worldwide Fund for 3 years in the 90s, we were able  to  afford a two week holiday to Yellowstone National Park, and Grand Teton.  But, following Wolman and Colamosca's advice (on how to recognize a stock bubble),  I pulled out of Janus soon after redeeming my final shares and just before the fund plummeted - never to recover its earlier P/E ratio.   The money I had left after our holiday I put into a money market fund, and later money market accounts,  CDs  and an immediate fixed annuity.    I haven't regretted it since.

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