Martha's Mess
Homemaking
icon Martha Stewart is dominating headlines currently as she struggles
for acquittal in her stock trading case in New York. Ms. Stewart has
not been charged with insider trading. Technically, she is not an
"insider" as she was not employed by ImClone. However, she allegedly
took advantage of inside information. She has been charged with
obstruction of justice and making false statements concerning her sale
of ImClone stock. After she sold her shares at a price of $60, they
subsequently fell to $6 per share in the summer of 2002. Ironically,
since then, the price has bounced back to around $41 at press time.
It is
astounding to contemplate the magnitude that this suspected crime has
had on Ms. Stewart’s fortune. In comparison to the 10-digit wealth she
had before the incident, this transaction seems insignificant. Yet,
this overwhelming desire to "get an edge" in the securities markets is
common among investors. When the fact is weighed that Ms. Stewart
started her professional life as a stockbroker, her actions seem
inconceivable. This could have all been avoided if Ms. Stewart had
employed a passive approach to her portfolio management vs. the
active tactics that her broker was engaged in. To put it
another way, she should have been an investor instead of a
speculator. Let us explore this further.
Active
management promotes emotional behavior and is a danger to all
investors. Its pillars are market timing and stock
picking. Far more money has been lost because of these culprits
than all the accounting and mutual fund scandals combined. At the
heart of the matter is the systemic training of brokers that cling to
this futile structure and pass the often flawed information on to
clients. It is truly amazing to see the power of this system when even
Martha Stewart – who was trained as a broker – cannot escape its
allure. While there are many brokers and investment managers who would
admit that timing the market is a fools game, they almost all still
subscribe to this theory that winning stocks can be picked
successfully and provide a profit therein.
The fundamental fallacy with this assumption
is that this means someone else – namely most everyone else (i.e. the
market) – must be wrong. We must ask ourselves: What are the chances
of that being the case? (Absent inside information of course.)
This entire concept is
known as speculating. This is not investing.
There is an important distinction that needs to be made.
Investing
involves understanding the concept of capitalism and that everyone
can be a winner. Yes, that means everyone can have a piece of
the proverbial pie. Every investor can have a successful
investing experience. With capitalism, capital market returns are
there for the taking. It is not a Zero Sum game. How can we make this
claim of "everybody wins"? Consider this.
There is
something greater than all of us can fully comprehend at work which is
great cause for optimism - a phenomenon that Abraham Lincoln, Theodore
Roosevelt, and Ronald Reagan all understood as they possessed undying
faith in the people and ideals of this country. Free markets work.
Adam Smith
discovered this upon analyzing the reasons behind the affluence of his
nation – England in the late 1700’s. His book, The Wealth of
Nations, titled after his research, is perhaps the single greatest
tome of economics ever written. Since that time others, among them men
like F.A. Hayek and Harry Markowitz, all taught a very important
truth: Capitalism which promotes the free setting of prices based on
the decisions and values of the entire economy, is the reason our way
of life and thus our economy have always ultimately prevailed. There
are hundreds of millions of factors at work at any time. Individuals
and business entities make continuous decisions all affecting the
system in different ways – some good, some bad. But the system works.
Not just for Americans with our indomitable pioneer spirit, but in
other cultures as well. To prove this, one would need only to examine
three of the most profound economic experiments of the last 60 years.
They are: West Germany vs. East Germany, North Korea vs. South Korea
and mainland China vs. Hong Kong. In these examples we see a stark
contrast between what government intervention in the form of
regulation of prices, both for goods and markets can do vs. what
allowing the markets to find their own way in setting prices can do.
This non-intervention provides opportunities for individuals which
ultimately drive economic growth.
Will we
always experience difficult markets periodically? Count on it.
When? Who knows? And furthermore who cares? As long as we have the
system that allows prices to seek their own way, then economic growth
will occur. Shouldn’t we be most afraid of not being in the
market when it goes to 20,000 rather than being in the market if it
goes down to 2000? One is certain to happen, the other is not.
We can make this statement confidently because economies – and thus
securities markets - continually expand over time. The challenge as an
investor is simply to harness this growth in a consistent fashion
without using the futile methods of stock picking, and his evil
brother – market timing. Market return is attainable without
these ineffective active management tools. (Stay tuned for the details
of just how this happens in the next newsletter.)
As for
Martha, just think of the mess she could have avoided if she had
simply allowed herself to avoid relying on a broker to outguess – or
perhaps even cheat – the market.
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Click here to read excerpts from Wealth Without Worry
©2007 JWA Financial Group, Inc. All rights reserved
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