The Stock Market Is Not a Democracy

Last year I decided to take the plunge and became a US citizen. What a moment it was knowing that I was now a part of the greatest democracy in the world, or so I thought. My joy of being part of a democratic election process this year has been offset by the undemocratic actions that took place in the stock market. But I am getting ahead of myself. Let me take you back to the beginning of my stock market experience.

In 2006, I saw opportunity in the stock market and purchased Playtex and Mastercard (MA) shares, going along with the philosophy that you should only buy stocks of companies that you are familiar with. My timing was great and I realized good returns, but those returns would have been even better if I had known about charting and identifying trends. However, it seemed like there was no end to making money in the stock market so towards the end of 2007, I purchased shares in Citigroup (C). I was a cardholder and thus thought I had insight into their business model. Unfortunately, this is where my undemocratic experiences began.

Heading into 2008, owning shares of Citigroup lulled me into a sense of false security with the banking industry, so much so that I purchased shares in Lehman which was my first foray into an area of business I knew nothing of. Reports I read indicated that Lehman was a good buy, and their results at the time backed this up. At the end of May I was sitting pretty and thought life couldn’t get better then this. If only I had know about the stock market adage “Sell in May and go away”!

Home prices had finally reached an unsustainable level and the house of cards started to tumble down, exposing all sorts of exotic mortgages. But panic I did not, choosing to ignore advice that it’s not how much you make on the upside, but how much you limit the downside. On the Friday before Lehman (LEHMQ.PK) went belly-up, I purchased more shares with the mistaken belief that Lehman was too big to fail and would be bailed out just as Bear Stearns was. Just my luck that Paulson decided to draw a line in the sand and let Lehman fail, stating that "Moral hazard is something I don't take lightly."

Yet by wiping out investors, he was rewarding speculators who were trying to drive the share prices of financial companies down to zero and thereby put them out of business. Paulson had also tilted the balance of power in the financial markets to a point where it became impossible to say for certain whether any financial institutions would survive.

So having expectations changed from “financial companies will be saved” to “financial companies will not be saved”, I began to question my holdings in Citigroup. Only to see AIG bailed out two days later! I then realized that the stock market was no longer fair game with Paulson deciding which companies he would allow to fail and which ones he would save.

And then I read the third quarter 2008 update issued by Fisher Investments. Under the heading “The Dismantling of Wall Street as We Know It”, The Investment Policy Committee questioned why Lehman was allowed to fail while others were bailed out. The Committee came to the conclusion that Washington acted primarily in the banks' interest, and when the banks would not suffer, as in the case of Lehman, the institution was allowed to fail.

Even more disturbing was the trend The Committee identified with respect to Paulson’s action - raising serious questions of conflict of interest with respect to Goldman.

All of this made me realize that the stock market is not a democracy of any sort. Shareholders are not provided with all the relevant information needed to make informed decisions. The government can step in whenever it so wishes in deciding who survives and who fails. The stock market is effectively high risks blackjack. Invest in it at your peril.

In closing, we now sit here with a bailout plan that has reached $7.7 trillion as calculated by Bloomberg, Citigroup has been saved to the tune of some $300 billion without shareholders being wiped out, and the government has introduced new loan programs to the tune of $800 billion, which will supposedly stabilize the system and support new consumer lending. But how can consumers borrow more when they are already heavily strapped by debt? And when do we say enough to throwing good money after bad?

My goodness, I’ve only been a US citizen for one year yet I have already inherited a huge debt load. This might be the land of the free, but it certainly has now become home to only the brave.

Disclosure: no positions

Comments

[sumosama:]

Feel free to renounce your citizenship and return from whence you came!

2008 Nov 26 02:01 PM

[LCM:]

Ignore the other comment, but you're both right and wrong. Are the rules fair? NO!, but you have the ability to make your own investing decisions. I for one mostly ignore what other investors are talking about and try to figure out what "interests" the big money..,.and yes that is Paulson and his buddies. As you pointed out..there is no way you can beat them, the trick is in figuring out how to "join them"... and yes..all roads lead to Goldman....for now.

2008 Nov 29 02:14 PM