Author: ken

Lessons to Learn

The recent Facebook IPO not only fizzled but went on to arouse considerable skepticism in the public about investments in the stock market.  That’s probably a good thing.

Recent history has led some investors to conclude that latching on to IPOs – especially in technology and social media ? is a sure fire path to profit.  And that, in turn, has lulled investors into a false sense of complacency about the market.

To be sure, a new offering from a successful, hot company is alluring.  And one can feel euphoric in following the crowd, because the crowd is always right – at least for a short amount of time.  Reinforcing its own convictions, the crowd forgets that the market is fickle and that its own certainties are short-lived.

It also forgets the extent to which market prices are driven by huge institutional investors with vast resources of information, as well as by computerized trading programs operating with the speed of light, not to mention insiders with privileged access.  It forgets this until it is, of course, too late.

Reflecting on the Facebook disappointment, Ron Leiber, the financial correspondent for The New York Times, wrote:  “The real lesson here is how hard this stock-picking game is.”  He added “it can take decades of sustained investment in individual equities for your bets to really pay off.”

Doing some research with the help of Wilshire Associates, an investment firm, they tracked the performance of companies over the past 30 years and found “the best investments are often the ones that few people have heard of, and sometimes the companies like it that way.”

Third on the list of high and consistent performers was Danaher, a conglomerate that started out manufacturing precision dental equipment.  Ask how they managed to amass such a record of success, a former executive commented:  “There was little value to sharing this knowledge and your people with companies you might acquire and improve, as opposed to them acquiring your people and improving themselves.”  Good point, and not particularly helpful to any of us, investors and competitors alike.  The point, after all, was making money, not building up their image.  (See “Picking Stocks After Facebook.”)

Leiber concluded that “Many of the people who crunch these numbers for a living, like Robert J. Waid, the Wilshire Analytics managing director who oversees its indexes, look them over and do the same thing that an increasing number of people are doing. They simply buy indexed mutual funds and treat the Facebook spectacle for what it is — an opportunity for rubbernecking and bemusement.

“I haven’t owned individual stocks in 25 years,” Mr. Waid said.

 

One Nation Under God?

Why are Americans afraid of atheists?  The belief that god does not exist is not hard to come by these days, and appears to be growing throughout the world.  But as a Pew Research Center report put it, when it comes to religiosity, “the US is closer to considerably less developed nations, such as India, Brazil and Lebanon than to other western nations.”

And those inclined to atheism in the US appear to be intimidated, according to an article in Financial Times.  “A now famous University of Minnesota study concluded that Americans ranked atheists lower than Muslims, recent immigrants, gays and lesbians and other minority groups in ‘sharing their vision of American society’”.

Nearly 48 per cent said they “would disapprove if my child wanted to marry a member of this group” (many more than the next most unpopular category, Muslims, at 33.5 per cent).” (See “In God We Must,” reprinted in Slate.)

What is it about our culture that is threatened by the idea?

One obvious possibility is the deep-rooted conviction that believing in god is essential to moral behavior.  David Silverman, president of American Atheists, claims: “We challenge the whole concept that you can’t be good without God.”  Or as Dostoyevsky put it in Crime and Punishment, “If god does not exist, all is permitted,” a belief that encouraged his protagonist, Raskolnikov, to murder an old woman for her money.

But there is little real reason to believe either that moral behavior is rooted in the fear of punishment or that people are motivated by a belief in the hereafter.  A much more plausible explanation is the power of social coercion.

The FT reporter commented:  “As I found out when I travelled across the US last year, atheists live in isolation and secrecy all over the country.”  He attributes it to “the role of churches in small-town America.”  And that fits with the fact that atheism seems considerably more prevalent and accepted in large cities.

He cites the experience of Renee Johnson, a single lesbian mother living in a small town in Texas.  “Life pretty much revolves around the churches,” says Johnson of her experiences in Texas. In her local Rains county (pop. 9,139), there are 31, of which 17 are Baptist.  “If you don’t belong to one, you aren’t part of the community, and there are few secular alternatives.”

To speak out, then, is to risk ostracism.  In that context, the internet offers some relief.  Johnson commented, “I found the East Texas atheist website, and through that the Fellowship of Freethought, the Dallas atheists, the Plano atheists and all these different other groups and I’m like, ‘oh, I’m not alone’ … Just knowing that there are 400-plus people at least, maybe thousands, an hour and a half from here that have similar beliefs is enough that I don’t feel isolated.”

That relieves the crushing force of the shunning atheists face, but still leaves us wondering why in America people are so dependent on their local and parochial churches for emotional support, and why those churches are so intolerant.  That makes us look like a nation of fragmented and suspicious sects.

Is the idea of god all we have in common?

What Does It Take?

JPMorgen’s recent loss of two billion dollars embarrassed a bank that has been vigorously claiming that rules to restrict trading are not needed.  But it also casts doubt on a settled conviction in the financial industry that risk can be managed.

“Even at a bank as ostensibly well-run as JPMorgan, the incentives still exist for giant, risky bets to be made that can go very wrong,” wrote Joe Nocera, a business reporter for The New York Times.  It’s significant that he used the adjective “risky,” suggesting that risk is a condition to be explored not a thing, ”risk,” to be understood.  Any bet has some degree of risk, and requires constant vigilance and self-scrutiny to assess when that condition may arise.  (See, “When Will They Learn?”)

Some of the more objective factors that make for risky bets can be quantified.  Previous performance of comparable investments can be tracked.  Volatile markets can be measured.  But there is also an irreducible element of subjectivity in making such judgments, and to be vigilant about subjective error requires, among other things, a kind of skepticism about one’s motives.  If you want something a lot, you will want to believe that it is possible to get it, and that desire will inevitably skew your judgment.

And competition and pride may well be driving you to want it, as well as ambition and the craving for self-esteem and status.

In general, banks are not that good at scrutinizing their motives, reflecting does not come naturally to them.  We learned that during the credit crisis of 2008, when they got caught up in the mania of the credit bubble.  That’s why rules are essential.

Returning from the Trojan War, the Greek hero Odysseus knew that he would be sailing near the treacherous rocks where the fabled Sirens sang.  Eager to hear the beautiful and seductive songs that had lured countless ships to their destruction, he had his sailors lash him to the mast with instructions not to untie him, no matter how much he thrashed about or cajoled them.  He filled their ears with wax so they would not be tempted themselves, and so they would not hear the pleas and threats he knew he would resort to in order to get closer to the alluring music.  They obeyed the rule he imposed, he got to hear the Siren’s songs – and they all survived.

“Wily Odysseus,” as he was known, was smart enough to know the limits of his own judgment, smart enough to know when he himself could not be trusted to follow it.  Jamie Dimon, the CEO of JPMorgan has been cajoling, wheedling and pushing to remove the rules that would have prevented their two billion dollar loss.  He doesn’t seem to have changed his mind.

We don’t need to go back 3,000 years to find compelling examples of good judgment.  But our history does not offer many examples of leaders who willingly embrace their own limits.

 

 

 

 

 

A New Way to Unite!

One slight gesture towards economic reform in the U.S. has been the provision that shareholders can vote on executive pay, and, last week, Citigroup shareholders rejected its CEO, Vikram Pandit’s 14.9 million package.

That’s news!  Since WW II, owners of corporate stocks have been the largely invisible partners in our economic system.  Before that, the exchange of shares was the province of those dealmakers and bankers who used their power to gain control of markets.  Most Americans distrusted Wall Street, with the exception of the frenzy of investment that drove up prices before Black Friday, the 1929 crash the preceded the Great Depression.  That experience, if anything, reinforced the skepticism and mistrust of the average investor.

With the advent of Investor Capitalism about 40 years ago, when vast numbers of ordinary citizens become invested in stocks, shareholders began to approach the market to park their savings and discretionary funds, to build their nest eggs, to acquire the down payment on a house, to prepare for retirement and their children’s education.  Their aim was and still is, by and large, to get a better return, not to influence corporate policy.  Shareholders were still technically the owners or our corporations, but, without significant holdings, they have been largely passive and invisible.   They became mere investors, looking for the best deal.

Hedge funds have used their concentrated power of ownership to gain financial concessions from corporations.  A few pension funds, pressured by their beneficiaries, have sought to exercise their social conscience in divesting themselves of stocks in companies that pollute the environment or exploit workers.  But for the most part, such activism has been infrequent and limited.  People still largely want to make money from their stock holdings.

But now that investors have been reminded that their shares give them a stake in management, we may be on the cusp of change.

A financial correspondent for The New York Times recently received the following message from an irate reader about the vote of Citigroup shareholders:  “I’m about to vote my proxies and I’m going to vote against everything they want. . . . They all get too much money.”  She called it, a “shareholder revolt.”  (See, “Is Citi Just the Beginning?”)

And this morning’s ­Times noted that investors seem to be deserting the stock market.  A senior VP at Ameritrade, commenting on the fact that their trades are down 16%, attributed the decline to wariness following the 2008 debacle. (See, “Stock Trading Is Still Falling After ’08 Crisis.”)  This echoes the skepticism that followed the crash of ’29, now heightened by insider trading scandals and high-speed computer trading programs.  The small investor has less and less a chance to profit in this environment.

The “Occupy” and “Tea Party” movements have exposed the depth of resentment about our financial system.  The rights that go along with investor ownership stand a chance, now, of giving investors a new way to vent their frustration.  The sleeping giant of small investors may be aroused, and that may give our financial markets a jolt.

 

 

 

 

 

 

 

Opposite Strategies in Europe and America

Two radically different solutions to a common problem are being proposed in Europe and America – or so it seems.  All our economies are in trouble:  massive indebtedness and credit shortages, on the one hand, while housing, employment, and growth are stalled.  In America the answer is, by and large, stimulus.  In Europe it’s austerity.  How to make sense of this?

To be sure, this is an oversimplification, but the difference in emphasis is striking.  While in the U.S. some far out Republicans oppose government programs in the name of “free markets,” and make political capital about deficits, there is a rough consensus in the U.S. that the economy needs stimulation.  On the other hand, as The New York Times noted disapprovingly:  “Europe’s leaders, masters of denial, are still insisting on destructive austerity.” (See, “The Global Economy at Risk.”)

But maybe the problems just seem the same.  They look like economic problems on the surface, but maybe they are really radically different political problems.

Europe is struggling with unification.  A common market and currency have obscured profound cultural and political differences forced to the surface by the Great Recession.  It was a nice idea to bring together Germany and Greece, for example.  The great German poets Goethe and Schiller worshipped ancient Greek culture, and you can see the influence of the Athenian acropolis all over Berlin.  But what do they actually have in common?  Do they understand or care about each other?  Do they even need each other?

The idea of “Europe” consolidated the influence of the Enlightenment, but that did not prevent two world wars from decimating the continent.  Now again, different ideas of government, different attitudes towards corruption, different habits of work are proving difficult to reconcile.

Austerity is being promoted as a means of creating a shared base line of fiscal prudence and social policy, a potential common denominator for a real European community.  If there is no common culture at a deeper level of shared assumptions and habits, can one be created as a solution to this crisis?

America, on the other hand, is being torn apart by an emerging new class system, fueled by dramatic income inequality.  Corporate pay is reaching shocking levels, even in the face of indifferent corporate performances, and shareholders are beginning to rebel.  Employment is still anemic.   The middle class is beginning to feel that the deck is stacked, that America is no longer the land of opportunity.  As a result, the political problem is to shore up the economy without worsening the gap between the rich and the poor.  Can it be done?

Hostility to the welfare state has left the poor exposed, with few safety nets left to cut.  Austerity here would be yet another way of illustrating the indifference of the rich.  In the current election campaign, Obama is promoting the “Buffet rule” to ensure that those making more than a million dollars a year pay increased taxes, while Romney, labeled as “wealthy,” is struggling to overcome the perception that he is out of touch.

Bound together globally, Europe and America both struggle to revive their economies, but do we really have anything to say to each other?  Our different answers may be because we are actually asking different questions.