Greed, Part 1: The Truth About Investment Risk

by: John Lohr

Summary

The overpowering drive to get more shapes the investing world from investors to product innovators.

Our economy and its related investment businesses are built on the principle that investor psychology is highly influenced by greed.

Look at JP Morgan as just one example of big business running the economy. I'll bet you have other war stories.

In the 1987 film Wall Street, financial fraudster Gordon Gecko gave what might as well be the mantra of that age. Greed, we are told, is good. Greed, some say, might as well be god: The ancient Carthaginians, they say, used to throw babies into a fire dedicated to the Phoenician wealth god Mammon. Some preachers say that if you are a good person God will find a way to make you super rich, with the logical corollary being that if you are poor then obviously you are a bad person and deserve it. Well that's not exactly the way I heard it in Sunday school a few decades back, but that is certainly an opinion. Good or bad, greed is a fact, and a powerful source of human motivation.

Now in our capitalist economy you can't get something for nothing. Workers contribute to the economy with their labor and are compensated with salary and benefits. Entrepreneurs contribute with their vision and decision-making skills, and are compensated (sometimes quite substantially, sometimes not at all) with salary and benefits. Investors contribute with their money. The investor does not work or plan, and is paid no salary or benefits (some but not all securities pay a dividend but that's not the point I'm trying to make here) but they are compensated for undertaking the risk of investing.

Without risk, there is no economy. Understand this about investment risk. It is created by greed. The financial world has used fancy algorithms like standard deviation (basically volatility) to define risk, but that's not it. I prefer a simple definition like "investment risk is the likelihood of losing your money." Risk is the mechanism that drives the market and greed is the mechanism that incents risk.

Why do we buy stocks instead of keeping money in safe, protected, federally insured CDs or federally guaranteed (low paying) Treasury bills? Why not just stick it in a bank or your mattress? Greed. That's why. We're not satisfied with keeping what we started with, or a nominal return on our money, but want more. Greed. But greed can be an intoxicating mistress, leading you down a rabbit hole of wishful thinking, false promises, big talk and bad ideas. The prospect of using what we have to make a little bit more than the next guy leads us to make investments that have a higher likelihood of trashing all our money.

That's why we buy unregulated private placements or hedge funds. That's why, if some folks need to buy stocks, they buy foreign stocks. That's why, if folks have to buy foreign stocks they buy those in "emerging markets." Keep going as we go further out on the limb of risk. Chase the white rabbit. Don't lose your head. Eventually you get to the point where billions of dollars are looted by fraudsters every year. Why do you think people still fall for the old "too good to be true" frauds.

Investor enthusiasm for regions with rapid economic growth drives us to emerging markets, and risk. The thing is modifiers like "rapid" growth and "emerging" markets should trigger a caution light on our road to retirement. But greed takes over the wheel.

In a follow-up a couple of years ago, the now out of jail fictional Gecko said "In 1987 I said 'Greed is good;' now it seems like that's the way Wall Street does business."

You know, he's right. Look at who runs our country (USA). No, not that guy, it's greed, expressed in the drive for higher and higher profits at the "Bigs" - Big Banks, Big Pharma, Big Insurance, Big Broker, Big Oil, Billionaires and Wall Street overpaid executives. Drive the profits up, pay the executives at the top obscene bonuses and maybe the share prices will go up enough to mollify the shareholder, so nobody complains. That's what drives this country. It is what drives Washington, and it has at least since 1932. Politicians, senators, congresspersons and presidents don't run this country, the Bigs do. What, you think that's cynical? Maybe, but somebody has to be cynical. Let's look at one example: JP Morgan.

JP Morgan started 2016 at $57.41 per share. On December 30, 2016 it was at $86.29.

That's a 50% increase. If you bought 10,000 shares of JPM on Jan. 1, 2016 and sold it on Dec. 30, 2016, you made a profit of $2,888. That's pretty cool. Jamie Dimon is the CEO of JP Morgan. His compensation in 2016 was $28 million. And, the JPM Board didn't think he did a good job. He only made 4% more than he did in 2015. So we did better, right? Take off the rose-colored glasses, Joe.

Dimon owned 6.75 million shares which benefited from the 50% run-up in 2016. Plus on February 11, 2016 after a rout on bank stocks, he bought 500,000 more shares of JPM at its low of $53.07. On February 12, 2016 (the next day) the stock price rose to $57.49, up 8.3%. A cool $158,000 profit that day. Coincidence? Maybe more like a self-fulfilling prophecy. Forget about the percentages. Percentages don't matter; real dollars matter. Them that has, gets. There's some homily that says, "The rich get richer, while the poor suck eggs." Or something like that.

Highly respected former Wyoming Senator, Alan K. Simpson ( R., WY Senator, 1979-1997) in a speech for election reform on January 23, 2017 said:

"Money's dominance over politics is the number one problem our nation faces. It is a growing crisis that prevents us from tackling anything else. We have now reached a turning point: Either we are a country that makes decisions based on the common good, or one where the size of your wallet determines the worth of your ideas. Either we uphold the values of a representative democracy, or we allow greed and wealth to destroy the great American experiment in self-governance…"

"The Supreme Court states that money to buy political influence is the same as freedom of speech. The Supreme Court decrees that the largest, most powerful corporations have the same Constitutional rights as we human beings to spend money to influence our elections."

"But the Supreme Court is wrong. No one has the right to drown out the freedom of others to speak, or to deny the rights of all Americans by corrupting our political process. And no corporation can take over the fundamental, inherent rights of human beings."

"Since equality in the enjoyment of natural and civil rights is only made sure through political equality, the laws of this state affecting the political rights and privileges of its citizens shall be without distinction of race, color, sex, or any circumstance or condition whatsoever…."

"What right and privilege could be more important than one person-one vote: being able to stand up as an equal citizen to have your say in our political system, knowing that the political game is not rigged to favor concentrated wealth?"

Throughout history there have been two classes, the ruling class and the peasants. And it's still true today. "Wait, what about the middle class" you say? There is no middle class, you're either the Gotrocks (a Warren Buffett term) or you ain't. I ain't. And, the Gotrocks run our businesses, economics, politics, professions, you name it. They control what we make and what we pay for things. Do not for a minute think that we, the people, are in control. We ain't either.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: John Lohr's original writings are found on somebodyelsesmoney.com, his subscription site.
This article is part one. Part two, , GREED, PART 2: WHITHER OIL will appear next week.