Tuesday, February 24, 2009

The 5 Biggest Lies on Wall Street

Over on MSN Money, Michael Brush has posted about the five biggest lies from Wall Street. I'm very impressed by his willingness to go through all the work of cutting it down to five (I counted 43,257,892 lies in just the last three weeks), but as I was reading through his list, I started to wonder just how...dishonest they actually were. Could it be possible that Wall Street was actually telling...the truth? Let's see what Mr. Brush has to say.

Big Lie 1: The market will take care of everything. This one is pretty obviously false; unfettered capitalism isn't a cure all. Balancing out the good that the markets can do in creating wealth with rules to ensure that people don't get trampled in the rush is an essential part of government, one which has been sadly lacking as of late.

Big Lie 2: The 'experts' will help you. This one I take issue with; not all experts are the same. Yes, there are plenty of false 'advisers' and others who seek to profit off of your naivette, but there is still plenty of good advice out there. Ruling out someone, just because they are an 'expert' makes it hard to find any information at all. (To say nothing of the irony of being told about the untrustworthy nature of experts BY an expert...)

Big Lie 3: Buy and Hold. This is the first one with which I flatly disagree. Mr. Brush talks about changing your investment holding as the risk profile for the investment changes, in other words, timing the market. I admit, perhaps there were signs that the economy was starting to have trouble earlier than most people now admit (at least, the 'expert' Mr. Brush quotes says as much), but knowing when to get out, and more to the point, when to get back in, is all but impossible. And attempting to do so will result in much worse results than simply riding out the market gyrations.

Big Lie 4: Overpaid CEOs are worth the money. I'll second this; at best, quantifying the worth of a CEO is difficult (how much of a gain or loss in a particular stretch of time is directly traceable to the head person is nigh impossible to judge); at worse, there's an aura of inevitability to executive pay, a form of cronyism from top stockholders to keep them in power. Hopefully, one result of this recession will be a readjustment of executive compensation to be more in line with what regular workers are receiving.

Big Lie 5: Buy a flat-screen TV, save the economy. I mostly agree that this is a myth, but it does have an element of truth. If you spend money, you're putting someone, somewhere to work. It used to be that if you were saving in a bank, they'd do the same thing, but given how over-extended many of the national banks are, right now they seem to be gathering up larger amounts of money to add to their ledgers without putting it back into the economy. This isn't a reason to go out on a spending spree, but money added back to the economy does have an effect, beyond just making you poorer.

Overall, I'd say Michael Brush is about half right; a little less harshness for experts, a little more tolerance for buy and hold, and he'd be right on track.


  1. The CEO thing really grinds my gears. It really kills me when the company gives immediate bonuses or even advance bonuses (on future earnings).

    I think a good way to curb #4 would be to tie bonuses to performance 5 years down the line.

    What do you think?

  2. I think there has to be some way to get CEOs to think in longer terms than just quarter to quarter. Tying bonuses to the company's later performance is one option; it will get CEOs to stick with the company for the long term (if they have to be there at least five years to start collecting bonuses, it'll discourage CEO turnover), and focus on making sure the company takes actions to survive for years, rather than aim to make the highest profits possible now regardless of long-term expenses.

    Another option would be to limit CEO's golden parachutes if the company is in worse shape when they leave then when they start. That way, CEOs won't have as much incentive to leave a company that's suffering and 'parachute' into a healthier corporation.

    The problem is implementing these ideas, when corporations have such heavy political influence (read: they make big campaign contributions, to both parties).

  3. I don't see why politics would come into play (or even could come into play?)... this is something that the shareholders should demand.

    If the point of the company is to increase both shareholder and stakeholder value then they need to justify the return on investment that is their salary.

    But that's just a moot point about the politics thing, we seem to agree! :)

  4. I brought up politics, as it seems that too many of the large shareholders are executives themselves, which makes it harder for change to come from the inside. But I do agree; it'd be much better for shareholders to rise up and demand more reasonable salaries (and bonuses, golden parachutes, and all other compensation), especially if the executives do not perform. Good to see agreement on the broader points, at least.