Why You and I Should Avoid the Stock Market

We've been told to buy and hold stocks; that it is the path to a better future. But the common person does not stand a chance in the stock market when CEOs and their executive team are siphoning the profits. Recent news about ex-Merrill (and now ex Bank of America exec) CEO John Thain only reinforce the point.

We've been told to buy and hold stocks; that it is the path to a better future. But the common person does not stand a chance in the stock market. CEOs and their executive team are running the companies for short term gain in order to maximize their own personal wealth and siphon the profits.  Recent news about ex-Merrill (and now ex Bank of America exec) CEO John Thain only reinforce the point.

If you are a former shareholder of Merrill or a shareholder of Bank of America you should be outraged by the following.

  1. Following a year when Merrill went bust and basically had to be bailed out by the Federal government (you and me), Thain hastily authorized the payment of $3-4 billion in bonus cash to employees.  Ah, excuse me?  Since when does a failing company pay out bonus money financed by the taxpayers.  Merrill received $25 billion from the TARP to keep it solvent and another chunk of cash recently as part of BofA.  It lost a staggering $17 billion in the third quarter of 2008. 
  2. Merrill CEO John Thain decided to use shareholder cash  (or public cash) to redecorate his office to the tune of $1.22 million.  Amongst the items purchased according to court documents:

    Area Rug $87,784
    Mahogany Pedestal Table $25,713
    19th Century Credenza $68,179
    Pendant Light Furniture $19,751
    4 Pairs of Curtains $28,091
    Pair of Guest Chairs $87,784
    George IV Chair $18,468
    6 Wall Sconces $2,741
    Parchment Waste Can $1,405
    Roman Shade Fabric $10,967
    Roman Shades $7,315
    Coffee Table $5,852
    Commode on Legs $35,115

But if you think this is limited to Merrill Lynch you are incorrect.  Remember Enron or Worldcom? These CEOs were busted because their companies ran into trouble. But make no mistake that it is happening almost everywhere.  The honest CEO who eschews enriching himself unfairly from shareholder wealth is an exception. 

CEOs and their executives think they own the company and with the silent acquisence of the board, they plunder. It happened on Wall Street, where an estimated 50% of all profits were paid out in outrageous bonuses on what in hindsight were phantom profits.  And it's happening in other places.

So, if you want to make money don't put it in the stock market.  Until there are some strict limits on executive compensation, playing the stock market is just making these CEOs richer and yourself a little poorer.   

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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Comments

  • Aggravated

    January 23, 2009

    Don't forget all of the insider trading. The "power elite" make billions sharing information and trading on it.

  • StupidCents.com

    January 23, 2009

    I hope this post was done tongue in cheek. I agree the markets are a mess due to the financial collapse started by the sub-prime meltdown, but that is no reason to 'avoid' the stock market.

    It is impossible to time the market, so it's best to continue to average down in various index/bond funds. I lost money last year, true, but I did better than the market.

    I agree that policies need to be put in place for better management of the TARP funds (albeit maybe a bit too late now).

    Alas, maybe I'm not a common person.

    Stupidly Yours,

    Matt

  • Sam Cass

    January 23, 2009

    "I hope this post was done tongue in cheek."

    Thanks for your comment but this wasn't done tongue in cheek. I sincerely believe it would be best to avoid the market. Will I follow my own advice? Hopefully. I still own stocks and mutual funds but I'm thinking very hard about selling all of it.

    The fact is, the playing field is tilted against the average investor. We have no information, no access, and almost 0 rights. It's slightly better with mutual funds and ETFs. At least the managers have more power and access.

    I think it's a losing proposition right now to be trading individual stocks and maybe even mutual funds.

    So what would I do? I'd rather invest the money in my own business or the small business of someone I know and trust and can have some say over. That's partially what has made real estate so attractive and will continue to make it attractive in the future. Bonds are another area that I would invest in. Management has a much harder time plundering bondholders.

    Until the laws change and I feel comfortable I'm not being robbed by management, I'm minimizing my exposure and certainly not buying. Will I lose out on long term appreciation? Maybe, but there are plenty of other ways to get rich.

  • StupidCents.com

    January 23, 2009

    Fair enough - it's all about making your money work for you. If you have the ability to invest in yourself (starting a business), then I'm all for it. There is plenty of risk involved in that as well.

    Kudos to you, it at least got us talking even though we may not have the same view of the situation.

    I actually plan on doing a post on ETF's soon (specifically leveraged ETF's).

    Stupidly Yours,

    Matt

  • Sam Cass

    January 23, 2009

    Thanks Matt. I look forward to reading the post. Let me know when you have put it up.

    Yes, lots of risk in starting a business but at least some of it can be controlled. At least some of the time :).

  • Fitch4

    January 24, 2009

    Looks like Ichan agrees with you.

    From the WSJ article:

    "First, Congress needs to pass legislation giving shareholders enhanced rights to elect new boards, submit resolutions for stockholder votes, and have far more input on executive compensation and other issues. As companion to these reforms, Congress needs to pass legislation that prevents managers from making it more difficult for shareholders to exercise their ownership rights.

    Managers often come up with creative ways to perpetuate their reigns of error. These include myriad takeover obstacles like poison pills, bylaw provisions, and others devices that thwart shareholder efforts to hold managers accountable."


    http://online.wsj.com/article/SB123266999517008241.html

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