How Wall Street Has Failed the Individual Investor 58 comments
Tim Iacono
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It is not at all clear how (or if) the investing public is going to recover from the 2008 plunge in equity markets following the ongoing plunge in home prices that began in 2006. Many were led to believe that, in a worst case scenario, stock appreciation and real estate appreciation would alternate indefinitely into the future.
If one went down, the other would go up.
If they both went up, well, that was a bonus.
No one thought too much about what it would feel like if they both went down.
About every other day now, another story comes my way about a friend or relative who says, "Yeah, I sold everything in October. I couldn't take it anymore".
It's not difficult to understand that decision making process. There are enough things in life for ordinary citizens to worry about that overcoming the "fight or flight" instinct that makes us all such lousy investors doesn't rise very high on the list. You have to wonder how they're handling it over at Money Magazine. The perma-bull staff has toned down their rhetoric in recent months as it became clear that no quick reversal was forthcoming. Last month's cover story was about keeping your money "safe" while you're waiting for the rebound. Unless somehow we see Dow 14,000 again sometime soon (or at least Dow 10,000), the mainstream financial media and Wall Street firms are going to have a lot to answer for as it becomes increasingly clear that the ownership society that has been thrust upon Americans has not produced the results that were expected. This well-done piece in the Wall Street Journal tells the story of how Wall Street has failed the individual investor, a concept that more and more people are beginning to realize. With retirement accounts tumbling and millions of homeowners struggling to pay their mortgages, a realization is dawning on many Americans: The banks, brokerage firms, insurance companies and other players in the financial-services industry have failed them. Thirty years ago, a typical consumer had a fixed-rate mortgage, a life-insurance policy, a bank account and an employer-paid pension plan. Nowadays, that same consumer may have a payment option adjustable-rate mortgage, a 401(k) retirement-savings plan, a home-equity line of credit and perhaps even a health-savings account instead of traditional employer-sponsored health insurance. In the process, risks previously borne by big banks and employers have been placed squarely on the shoulders of consumers. Individuals increasingly bear the risk of interest-rate fluctuations, rising health-care costs, stock-market gyrations and outliving their retirement savings. Adam Gamradt, 31 years old, of Bloomington, Minn., believes the market slide has created a great opportunity to buy stocks, but he contributes only enough to his employer's retirement-savings plan to get the full company match. That's because he is dismayed by the plan's pricey investment options and lack of information on total plan costs. "If I'm going to buy a BMW for anybody, it should be me," says Mr. Gamradt, an information-technology worker. "I wouldn't exactly say the financial-services industry is at war with your average American consumer, but it's d- close." Adam is not alone. There are a lot of really mad people out there.
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This article has 58 comments:
That said, Wall Street has failed us. Our money managers should (and I think will in the future) insist on a far greater payoff to investors.
The new statistic I'm watching is the Exec Comp / Dividend ratio. Too many companies have been paying hundreds of millions to its executives while paying no dividends to its owners. Heck, the dividend yield on the S&P 500 (supposedly Blue Chip stocks) got down to, what, 1%?
Wall Street money managers should've been demanding more.
> jack
"Long term you're looking at 9 to 11% pa "
" Cash and equivalents will leave you far behind in the race against inflation"
" A mutual fund is the best bet for the average investor and is bound to beat the limited skills and resources of any individual"
I have been a good dog and listened to all the bs.
I am now retiring with about 40% of the money I earned 1 hour at a time with my hands and head.
Mad ? I have never been so enraged.
People like me must stay clear of this game.
The will milk you throughout your working life and then till you die.
Until the criminals are rooted out, prosecuted and punished, no one should return to the stock market. Until investors are protected through meaningful and reasonable regulation under a watchful SEC armed with criminal sanctions against violaters, we should stay the hell out.
depreciaton of home values. Lack of oversite in financial markets caused derivitive cave ins hedge fund melt downs and collapsed finance companies,
Blame the congress that voted on all these regulations. Learn how the system does not work anymore. It is over run with lobbists and action groups with their own agenda. We can't afford to let the country fall off
a cliff because of greed and stupidity.
Our credibilty is now weakened and global financial companies don't trust our "base/bonus pay Mr fuld 500 million to run Lehman into the ground" mentality. The lending markets have frozen.
OUR FAULT
When I told a friend my story I discovered that he had been trading for decades, making money all along. I listened and learned and now trade with a discount broker - IB - and make all my own decisions other than the ones I pay for.with advisory services.
Full service brokerages and 401k managers are in it for THEIR profit, not the customer's. Anyone who's not in charge of his own accounts is a gambler, not an investor.
The logical extension of this course of conduct was Paulson running around like a chicken with its head cut off, nationalizing and/or seizing and dismembering some businesses, propping others up, picking the winners and the losers, totally destabilizing the finacial system.
Wall Street operated with their normal efficiency and greed, what else is new?
But using ordinary rates of return above inflation (safe rate 3%, speculative rate 10%) it takes much longer than a few years to double your money.
With a 3% rate of return it takes about 23 years.
With a 10% rate of return it takes about 7 years.
With a 20% rate of return it takes about 4 years.
www.lazymanandmoney.co.../
Very few sane financial advisers think it is possible to make 20% per year (above inflation) without a lot of risk. Even 10% a year is considered risky.
And yet Treasury Bonds have not provided the safe, risk-free 3% return ABOVE inflation for many years so there has not even been a risk-free 3% above inflation rate available for years.
(In a well functioning economy you are supposed to be able to make no more or LESS than 3% RISK FREE above inflation according to Security Analysis by Graham and Dodd and other technical analysts.)
However, if you started by depositing $12,000 and SAVED $1000 per month for 20 years, at 3% compound monthly, you would have $350,000 at the end of the twenty years.
www.math.com/students/...
If you started with $12,000 and invested $1000 a month at only 6% compounded monthly you would have $500,000 at the end of 20 years.
The fact that for THIRTY YEARS there have NOT been any SAFE yields of 3% above inflation might be a major reason for the lack of savings in America and for the speculative bubbles of the last thirty years.
Americans have forgotten how to save and learned how to speculate for a reason.
If we enter a deflationary period which accompanies a historical decline of the American Empire, long standing habits will have to change but they will probably change slowly and with a lot of pain.
On Nov 30 12:34 PM notsosmart wrote:
> welcome to the wake up.the dumb - dumbs are finally waking up.i got
> out @ 14,000 dj not because im smart but because i got scared. this
> country exists on small print. the smaller the print the worse the
> deal.nobody is in your corner.think for yourself. the anal sts dont
> know anything & all have an agenda.the new motto on our monopoly
> money should be "too big to fail,too many to jail". i started to
> say that wall st was turning into vegas years ago.you lose slower
> & nobody brings you a drink. dumb- dumbs learned nothing from
> the s&l fiasco,the tech bubble,enron & world com.even now
> the scoundrels have their hands in your pocket.but the beer swillers
> are still filling the stadium(like rome long ago) & havent a
> clue. they cant name 3 supreme cout judges but know all the sport
> scores.soon they will be eating their granite counters.no accountability,ethics,...
> ceo's.selfserving boards, & papering the world with phony AAA
> worthless paper.sadly,this country is in decline.
nevertheless i did not diversify from pc related stocks, i never understood the financials. nor ibm/orcl well my p/f has only fallen 15-20 percent as a result.
i listened to Robert Kiyosaki's and made my money active and I listened to the Motley Fool NPR broadcast many times over to learn what was not taught in school
can we fight city hall?
The "Fed" does, to a considerable, stabilize the money supply. Even with no government action, the money supply can shrink and expand, thereby exacerbating changes in the economy.
As for permitting corporate giants to fail, that is an issue which I do not wish to tackle. There are valid arguments on both sides of the issue.
I, for one, would not like to see the "Fed" abolished, even though it is far from perfect.
On Nov 30 08:39 AM Vigilance wrote:
> Good article, but the list of entities that have failed us did not
> include the worst ones of all: the federal government and its illegitimate
> creation, the Fed. Why don't we demand that the Fed stop watering
> down the lemonade by halting the creation of fiat money? In fact,
> why don't we demand that the Fed be abolished altogether. And it's
> about time we started letting unprofitable corporate giants fail
> instead of foisting their problems off on the already overburdened
> taxpayers.
On the bright side, by refusing to follow life's lessons, we now have an opportunity to relearn what so many of our ancestors knew:
<blockquote>You reap what you sow.</blockquote>...
As Stephen Covey asks us: Can you "forget" to plant in the spring, goof off all summer, and then hit the ground real hard in the fall to bring in the harvest?
If you think this wasn't orchestrated think again. Same old tricks, same old outcome. Rich get richer, poor get poorer -- Ask the French.
Mark this post, the United States is now flight 93, only this time the pilot's have hijacked the vehicle under the old fashioned premise, "create the itch so that others pay you to scratch it -- the business may be dirty but the money is always clean -- let's roll.
You do know that vast sums of "money" is being made by those shareholders don't you?
You do know that all the "money" you've ever made isn't even yours don't you?
You do know that those who own the currency own you don't you?
Put the pieces together my friend, you will soon be bludgeoned by the Fed that you speak so highly about -- last place in the soup line.
As long as the markets continue to be rigged as they are, small investors should stay out of stocks, and let the speculator/gamblers and big guys kill each other.
This really ends the idea of privatizing social security and the "ownership society."
What's new is that this is the biggest burn in history for individual investors.
If things happen to recover, there will be a huge wave of selling and purchase of tangibles; precious metals and land.
A LOT more money will be leaving Wall Street.
If they don't fix the wagon, there will be civil unrest for certain.
I know that's difficult to accept, but by now everybody has learned how easy it is to lose when all you are doing is "hopin' and prayin"
1-a house is a place to live[before and after caves]
2-markets are unpredictable[since bartering began]
3-change is inevitable
our ancestors survived, so are we apt to do the same. the human spirit to struggle/survive/impro... has not changed.
all of this history before newspapers, radio, tv, etc.
WHO TOLD US HOW TO GET THIS FAR?
The trust and savings of millions broken but to you it's just another day at the casino?
It's that haughty arrogance that helps form the nooses the mobs put around the heads of the bourgeoisie.
On Nov 30 07:19 PM irondoor91 wrote:
> There are many denials of reality which automatically disqualify
> millions or people from joining the ranks of successful speculators.
> For instance, to moan that “manipulators”, “insiders”, “they”, “the
> big boys”, “program trading”, “hedge funds”, "the Fed" or "the government"
> are to blame for one’s losses is a common fault. Anyone who utters
> such a conviction is doomed before he starts. By my observation,
> after more than twenty years in the business, the biggest obstacle
> to successful investing is the failure to merely even recognize and
> accept the simple fact that losses are part of the game, and they
> must be accommodated. The perfect trading system does not exist.
> Expecting, or even hoping, for perfection is a guarantee of failure.
> Speculation is akin to batting in baseball. A player hitting .300
> is good. A player hitting .400 is great. But even the great player
> fails to hit 60% of the time! He even strikes out often. But he still
> earns seven figures a year, because although not perfect, he has
> approached the best that can be achieved. You don’t have to be perfect
> to win in the markets, either; you “merely” have to be better than
> almost everyone else, and that’s hard enough. If you don't know what
> you are going to do in order to be successful on a daily basis, you
> have no business risking any of your hard-earned money in the markets.
>
>
> I know that's difficult to accept, but by now everybody has learned
> how easy it is to lose when all you are doing is "hopin' and prayin"
But all these other people are in dire straits, and I'm my brother's keeper. All these jobless people are troublesome, and things will be worse before they're better. Today I advised someone to go to the foodbank until he finds a full-time job, and he said he already does.
Around the turn of the century, Joe Average knows absolutely nothing about equities -- the role of earnings, the impact of valuation, the importance of understanding what you're doing with your money, etc. -- but plows ahead anyway to announce himself as the penultimate investment genius while plunging head-first into stocks. Then, when it all goes wrong -- shares of companies that had no earnings, no revenues, etc. plummet .. surprise! surprise! -- he accuses Wall Street of having failed him.
Fast forward: Joe Average jumps into a house he knows he can't afford (he knows this because he hunts down the huckster who'll wrote him a mortgage with little or no down payment and without verifying his income, thereby, in effect, telling Joe it's OK to lie) and binges with credit card spending he can;t afford either, and.. surprise surprise... gets into trouble,and again, he accuses Wall Street of having failed him.
OK. Wall Street is not exactly benevolent. Never was. Never will be. And bankers do have a historic tendency to lend to any sentient or non-sentient being when motivated by bonuses based on loan production. And we have had a political culture that was more tolerant than many to business recklessness. So yes, there was a lot of bad behavior in a lot of places.
But at some point, we need to start pointing a figure at Joe Average as well. Until the individual learns to start taking some responsibility for his/her own welfare (simply by using a bit of common sense), pain will recur again and again and again. The flavor of the crisis will always vary, but the constant will be pain felt by people who are unwilling to behave responsibly.
** BAN SHORT SELLING FOR 6 MONTHS AND WATCH THE MARKET STABILIZE AND MOVE UP!**
The SEC has falled the people it is supposed to protect.
The nation reached a pinnacle peak of those in power that should never been put into power at the local, state and federal level all in the name of Equality. But do not fear, our nation self-adjusts at times the very hard way. I will invest in the markets in 2009 after I see what crop of winners and losers our government picks. That in and of itself, is an investment strategy. No, I prefer fundamental research over this form of investing, but unless you choose to move overseas, it's about all that's out there besides panic gold buying.
On Nov 30 10:45 AM subprimeswami wrote:
> Regulation failed us. This caused the sub prime collapse and on going
>
> depreciaton of home values. Lack of oversite in financial markets
> caused derivitive cave ins hedge fund melt downs and collapsed finance
> companies,
> Blame the congress that voted on all these regulations. Learn how
> the system does not work anymore. It is over run with lobbists and
> action groups with their own agenda. We can't afford to let the country
> fall off
> a cliff because of greed and stupidity.
> Our credibilty is now weakened and global financial companies don't
> trust our "base/bonus pay Mr fuld 500 million to run Lehman into
> the ground" mentality. The lending markets have frozen.
> OUR FAULT
The individual can, and most likely HAS, done everything as they're supposed to. The issue is the lobbied government taking a blind eye to the casino known as Wall Street.
The issue isn't HOW Wall Street has failed the individual investor, it's WHAT THE F*CK DO WE DO ABOUT IT, AND NOW. We need CEO's in prison, fined, assets seized, end of story.
On Nov 30 11:17 AM axelrod608 wrote:
> Like most "individual investors" I started with a full service broker,
> who advised me to buy the funds that made HIM the biggest commissions.
> The longer I stayed with him, the "broker" I got. When I complained
> to management, the Asst Mgr took over my account and sold me proprietary
> funds that the Brokerage was selling off because they knew the bottom
> was about to fall out. I again got "broker".
>
> When I told a friend my story I discovered that he had been trading
> for decades, making money all along. I listened and learned and now
> trade with a discount broker - IB - and make all my own decisions
> other than the ones I pay for.with advisory services.
>
> Full service brokerages and 401k managers are in it for THEIR profit,
> not the customer's. Anyone who's not in charge of his own accounts
> is a gambler, not an investor.
Once the US went into war - it needed money; lots and lots of money taken from the economy and diverted to military in order to sustain the global war against terrorism.
It is necessary to declare war against terrorism and it's elimination.
What is wrong is to use excessive expenditure against the size of the opponent. Uncontrolled expenditure that crippled the economy.
What do you expect when the govt needed a lot of cash?
Where will the govt get those trillions of dollars needed to sustain the global elimination of terrorism in the shortest possible time using aircraft carriers, long-range bombers, high-tech armaments, and anything and everything our soldiers will need to fight a war as if the USA was fighting an all-out invasion from Mars.
The govt needed the extra income tax from the financial firms.
Likewise, the govt turned a blind eye to whatever the investment and commercial banks were doing and in fact encouraged more and more home loans even to financially incapable borrowers in order for the banks to be able to generate more profits.
Consumers were also encouraged to keep on spending even beyond their means in order for retailers to be able to generate more profits and hence more tax collection for the government.
More profits from the banks and retailers = More tax collection for the government = More money to sustain a global war against terrorism that seemed to kept on getting bigger and bigger.
No wonder the US is getting bankcrupt or is already bankcrupt.
Big investors knew what was happening since 9/11 in the financial world and US consumerism. Govt promise of a short war became a prolonged war with additional promises of sustaining the war indefinitely into the next 100 years.
Govt balance sheet, however, showed the global war against terrorism was not sustainable as the housing bubble started to contract.
Investors pulled the plug on banks as early as 2006. Retailers likewise suffered death spiral sell-off since 2007 long before the consumers started tightening their belts.
What is needed is a strong economy in order to be able to sustain a war. The US economy was already suffering from the Tech meltdown of 2001 before 9/11 happened.
Likewise, economic recovery emphasis was on housing instead of business entrepreneurship from 2002 to 2006. Housing is an expense generating asset instead of profit generating.
Most business investments outside of financials and retailers went to China, India and other developing countries.
Nobody thinks for them self.
Blame Bush, Blame Wall Street
Nobody blames themselves
Nobody teaches their children about money
Schools don't teach financial basics
The advice on TV is generally a joke
Every week there is a new "Get Rich" book.
ugh
On Dec 01 09:57 AM Focus Advisory wrote:
> Americans failed themselves. Only half of America saves and the one
> half that do have no concept of what they are investing in. They
> spend their entire lives working, but spend virtually no time learning
> to protect and grow their money in the markets. If their financial
> advisor failed them, then they failed to find the right advisor and
> or monitor that advisor properly. This is America...educate yourself
> and take responsibility for your own failures. Particulalry today...the
> Internet gives everyone equal access to information.
On Nov 30 11:53 AM TomArmistead wrote:
> I regard the situation as the natural outcome of a total lack of
> regulatory oversight, a laissez faire ideology carried to its logical
> extreme. CDS were exempt from regulation. The credit rating agencies
> received no meaningful oversight, yet the impact of their findings
> was hardwired into swaths of the financial system. Mark to market
> accounting was endorsed as gospel and has had a destructive effect
> on regulatory capital. Marth Stewart and Mark Cuban were pilloried
> for insider trading, but naked short-sellers and CDS manipulators
> were coddled.
>
> The logical extension of this course of conduct was Paulson running
> around like a chicken with its head cut off, nationalizing and/or
> seizing and dismembering some businesses, propping others up, picking
> the winners and the losers, totally destabilizing the finacial system.
>
>
> Wall Street operated with their normal efficiency and greed, what
> else is new?
On Nov 30 10:21 PM redrobin wrote:
> Yes. we individulas were "set up" by the the government . They messed
> up. They were misled by the Wal St geniuses....They admitt it.....We
> all should..We all make mistakes.... It was not a conspiracy...It
> was a gigantic "bubble".. We all messed up... Its was one HUGE mistake
> by all concerned.. Lets get up and move foreward...
It wasn't the lcds or furnishings or your brokers commission or ceo pay. Look at the tax structure- Congress never considered a deduction for a family to rent instead of buy. Free interstate highways system to everywhere promoting massive travel and public employees getting 1.2 million aligned for themselves for pensions without saving it themselves but the private sector gets 2000 IRA deduction.
Ceo pay, middleman and the rich are always targets because it sells in all countries but look at what politicians have done -not promised
To:ted@maxoutsavings.c...
Subject:did you hear cramer?
Date:Monday, December 01, 2008 3:57:31 PM
Ted
Did you hear cramer
www.cnbc.com/id/158402...
before or after you wrote.
Insurance Companies
We have received a number of questions on the insurance companies’ financial problems. The problems with the insurance companies appear to be the result of selling annuity contracts with guarantees attached to them. Now that the stock market has plunged, some companies are in financial trouble and need to raise capital. When I listened to the Hartford Insurance 3rd quarter earnings conference call the other day, I was amazed at how many times Wall Street analysts used the words “do not understand” in regards to their finances and annuity problems. Subsequent to the conference all, the stock quickly sold off from $20 to under $10 per share then to under $5. This has resulted in the absurd situation of Hartford buying a very small bank in Florida for $10 million so they could qualify for the TARP government bailout money. Lincoln National Life and Genworth Financial Insurance Company quickly followed suit so they could get Federal bailout money as well.
We believe that some insurance company annuity guarantees will fail and customers will have losses. We believe that most of the problems in the insurance companies reside in the annuity units. Most insurance companies are regulated by the states. If we have a failure of an insurance company, state regulators will move in quickly to protect policy holders in other units such as life and property casualty. When AIG had problems recently, the Federal Reserve stepped in with a bailout of over $100 billion. If that had not occurred, the states would have stepped in to protect the policy holders of the insurance units from the mistakes made in the financial and derivatives units. The bottom line is that if your insurance company fails, the states will move in to protect the policy holders. Where annuities could have a problem is that the money could be restricted from withdrawal and any guarantees could be lost. If an insurance company fails, your assets with the life insurance firm could be guaranteed up to a maximum of $100,000 protection; this applies to the cash value. The guarantee does not include annuity guarantees with the policy. Therefore, only the present value of a variable annuity is protected and only up to $100,000.
Regards
www.prosefights.org/nm...
1. The SEC's repeal of the uptick rule has helped to destroy confidence as market makers and manipulators can pummel stocks at will.
2. Failure of the SEC to regulate "dark pools".
3. Failure of the SEC to regulate leverage as leveraged ETFS bring in fast money causing a rise in volatility ( a rise in volatility always favors a bear market.)
4. Failure of the SEC to regulate leverage of investment bankers.
5. Failure of the CFTC to regulate derivatives including CDS.
6. Failure of the FASB accountants to understand the negative impact of FAS on bankers' lending behavior.
On Nov 30 11:53 AM TomArmistead wrote:
> I regard the situation as the natural outcome of a total lack of
> regulatory oversight, a laissez faire ideology carried to its logical
> extreme. CDS were exempt from regulation. The credit rating agencies
> received no meaningful oversight, yet the impact of their findings
> was hardwired into swaths of the financial system. Mark to market
> accounting was endorsed as gospel and has had a destructive effect
> on regulatory capital. Marth Stewart and Mark Cuban were pilloried
> for insider trading, but naked short-sellers and CDS manipulators
> were coddled.
>
> The logical extension of this course of conduct was Paulson running
> around like a chicken with its head cut off, nationalizing and/or
> seizing and dismembering some businesses, propping others up, picking
> the winners and the losers, totally destabilizing the finacial system.
>
>
> Wall Street operated with their normal efficiency and greed, what
> else is new?
Although I exaggerate the draconian measures that COULD be imposed, we definitely need some formal outside regulation to prevent these public companies from continuing to fleece the investing public.