For a long time now, I've been trying to put in to words what it is about this US financial environment that troubles me. I think I've finally put my finger on it. We're all chasing 'coin' but what we haven't recognized (or perhaps, what we don't want to recognize) is that there is just one coin but its two sides face opposite directions and the goals of the one side are diametrically opposed to those of the other side. So for the one side to 'win', the other side must 'lose'. The end result is that someone is always going to feel like they're getting the short end of the stick. Maybe someone always will.
As investors, we all want the highest possible rate of return. That's what we want. We don't much concern ourselves with how the rates of return are achieved, we just know what we want. We invest with folk who tell us they can get 10% (and more) returns year over year, even if we know or have heard that the average is 5 or 6%. We're not overly concerned about how our investment guru is going to generate these numbers because we're quite comfortable pretending that his prognostications are somehow reliable. Plus, he sends us these pretty brochures and annual statements that apart from being very pretty, allay any fears we might have about the veracity of the claims being made.
As employees, we want jobs that pay well. Then once we get jobs, we'd like them to have benefits and decent pay checks. We don't much concern ourselves with how the benefits we want will be paid for, we just know what we want. We sign on as employees with organizations that seem to be on an upward growth trajectory, though we have no real understanding of the business of our business or the market in which our business is operating. That lack of knowledge of the business environment puts us at a distinct disadvantage as employees, but we have mortgages to pay, insurance to hold on to and often, flat screen tvs or other consumables that we really want to buy. We don't have time to worry about the 'business environment'. Who cares about that stuff? Just pay us on time and we're happy.
Unfortunately, our two personas - investor & employee - are inextricably linked and until we understand the linkage we run the risk of acting in ways that are inimical to our own best interests. So we want high rates of return, as the author of a recent BusinessWeek article says, we have bought the "snake oil" that the finance people have been selling. At the same time, we have failed to realize that a necessary corollary to the insane returns is low wages, stagnant hiring and loss of benefits for those lucky enough to be employed. The money we want in our portfolios has to come from somewhere. What we have failed to realize is that it's coming from our very pockets!
In a recent BusinessWeek article on the Peter Principle's 40th anniversary, the writer opined that "[w]e are now struggling to stay afloat in a river of snake oil ..... Many of us didn't want to see the lies, exaggerations, and arrogance that pumped up our portfolios. Instead we showered huge rewards on the false financial heroes who fed our delusions. This is the Bernie Madoff story, too. People may have suspected that something wasn't quite right about the huge returns on their investments with Madoff. But few wanted to look closely enough to see the Ponzi scheme."
More than just looking closely, we need also to start looking critically. We need to look at what we're being told and sold. If we stop for a moment and think about the perennially growing earnings figures we might realize that they aren't realistic. Having come to that conclusion, we might as investors stop demanding those crazy earnings projections of public companies. I'm not for a moment suggesting that a change in investor behavior will instanteously result in a change of business behavior, but one hopes that once rational behavior begins in one quarter, it will spread to others. We can only hope.
It is said that investors are irrational. They're like sheep. Every time an investor sneezes somewhere, investors everywhere get the cold and start investing in Alka-Seltzer. Maybe now is a good time to start thinking rationally and let everyone catch the rational thinking bug. Seems like a good idea to me.
As investors, we all want the highest possible rate of return. That's what we want. We don't much concern ourselves with how the rates of return are achieved, we just know what we want. We invest with folk who tell us they can get 10% (and more) returns year over year, even if we know or have heard that the average is 5 or 6%. We're not overly concerned about how our investment guru is going to generate these numbers because we're quite comfortable pretending that his prognostications are somehow reliable. Plus, he sends us these pretty brochures and annual statements that apart from being very pretty, allay any fears we might have about the veracity of the claims being made.
As employees, we want jobs that pay well. Then once we get jobs, we'd like them to have benefits and decent pay checks. We don't much concern ourselves with how the benefits we want will be paid for, we just know what we want. We sign on as employees with organizations that seem to be on an upward growth trajectory, though we have no real understanding of the business of our business or the market in which our business is operating. That lack of knowledge of the business environment puts us at a distinct disadvantage as employees, but we have mortgages to pay, insurance to hold on to and often, flat screen tvs or other consumables that we really want to buy. We don't have time to worry about the 'business environment'. Who cares about that stuff? Just pay us on time and we're happy.
Unfortunately, our two personas - investor & employee - are inextricably linked and until we understand the linkage we run the risk of acting in ways that are inimical to our own best interests. So we want high rates of return, as the author of a recent BusinessWeek article says, we have bought the "snake oil" that the finance people have been selling. At the same time, we have failed to realize that a necessary corollary to the insane returns is low wages, stagnant hiring and loss of benefits for those lucky enough to be employed. The money we want in our portfolios has to come from somewhere. What we have failed to realize is that it's coming from our very pockets!
In a recent BusinessWeek article on the Peter Principle's 40th anniversary, the writer opined that "[w]e are now struggling to stay afloat in a river of snake oil ..... Many of us didn't want to see the lies, exaggerations, and arrogance that pumped up our portfolios. Instead we showered huge rewards on the false financial heroes who fed our delusions. This is the Bernie Madoff story, too. People may have suspected that something wasn't quite right about the huge returns on their investments with Madoff. But few wanted to look closely enough to see the Ponzi scheme."
More than just looking closely, we need also to start looking critically. We need to look at what we're being told and sold. If we stop for a moment and think about the perennially growing earnings figures we might realize that they aren't realistic. Having come to that conclusion, we might as investors stop demanding those crazy earnings projections of public companies. I'm not for a moment suggesting that a change in investor behavior will instanteously result in a change of business behavior, but one hopes that once rational behavior begins in one quarter, it will spread to others. We can only hope.
It is said that investors are irrational. They're like sheep. Every time an investor sneezes somewhere, investors everywhere get the cold and start investing in Alka-Seltzer. Maybe now is a good time to start thinking rationally and let everyone catch the rational thinking bug. Seems like a good idea to me.
