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A claim about investors who remembered the Depression - Input Junkie
November 21st, 2011
07:43 am

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A claim about investors who remembered the Depression
On facebook, Stephen Simmons said:
Anyone my age or older here, folks whose parents were born during the Depression? If so, think back. think back to any extended-clan gatherings you found yourself at prior to 1974. Did you ever listen to our grandparents talk about money? The difference between them and us are instrumental in understanding this crisis.

Our grandparents didn't "have money". But, having raised families during the Depression, they had learend the value of saving up against future need. So, they all had spent a lifetime squirreling-away a few bucks here and there. Most of them had a little of that money -- probably only a few thousand dollars, if that much -- in some corporate stock or other. And if you *listened* to them when they got together, they talked about what the companies they owned were doing. Because they paid attention. And they voted those proxies, every year. And they wrote letters to the Board, if the company did something they didn't approve of. Sure, my grandmother's letter only represented a couple hundred shares. But so did each of the thousands of *other* such letters the Board received. The Boards listened.

And he followed it with a claim that we're all guilty for the financial crisis because we delegated thought about our investments to mutual funds and money market accounts.

I suspect this is an over-generalization (if nothing else, some people remained active investors, and some people never had money to invest), but I thought I'd check with my favorite non-random sample. What do you know about investment habits of people who remembered the Depression?

I consider it possible that putting so much emphasis on environmentalism and the treatment of employees combined with thinking of corporations as naturally evil caused people to loose track of the idea that there's some virtue in reliably producing an ordinary honest product, but I also think this was, at most, a minor contributing factor.

A bit more from Simmons-- something I find more plausible:\
Meanwhile, take a moment to wonder about the handful of folks who owned the other 20%-ish of those institutions. Who were they? Well, thanks to the stock-options that became a standard part of executive compensation as a way around the Clinton-Gingrich tax reforms, they were generally the executives themselves. Since they were the only ones who actually VOTED their shares, a system evolved in which a very small group of people were essentially voting the controlling votes on each other's salaries. With predictable results ...

I've also heard that basing most of executive compensation on stock prices was a result of people thinking that those executives weren't doing much of anything to get their (moderately high) salaries, and getting them to focus on stock prices would get them to do something. It seemed like a good idea at the time.

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From:gwendally
Date:November 21st, 2011 01:04 pm (UTC)
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He nailed. He got it EXACTLY right.

Before mutual funds, the owners of stocks were paying attention and would show up at board meetings and ream management out for doing stupid shit and attempting to vote themselves stupid raises.

Once everyone started investing their retirement money in stocks via mutual funds (in their 401(k) and IRA accounts) they all became absentee owners and management ran amok.
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From:sinboy
Date:November 21st, 2011 02:41 pm (UTC)
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My grandfather, born during the depression, and owner of a successful business, owned stock in a number of companies. He also had a broker. So far as I know, he never showed up at a board meeting.
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From:gwendally
Date:November 21st, 2011 03:08 pm (UTC)
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Edit: oops, put comment in wrong place!

Edited at 2011-11-21 03:08 pm (UTC)
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From:wcg
Date:November 21st, 2011 01:53 pm (UTC)
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I'm not sure my grandmother is a typical example, but she definitely knew what was going on with the companies she owned stock in. She once had a rooming house in Butte, MT, and had accepted stock shares in Anaconda copper in lieu of cash from the miners. This resulted in her owning enough of Anaconda copper that the Board took her opinions very seriously.

After my grandparents moved to Detroit, she continued to rent out rooms. Between this and lending out little bits of cash here and there, or buying stock certificates from down on their luck people, she accumulated a fair amount of Ford, GM, and Chrysler stock too. My mother liked to tell the story of how Mr. Edsel Ford would send a black Lincoln to Mrs. Ryan's house to bring her to the annual shareholders meetings.

So, the gist of all that is that she definitely paid attention to the goings-on of the companies whose stock she owned.
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From:fengi
Date:November 21st, 2011 02:45 pm (UTC)
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Wow, that's just spectacularly ignorant.

It's one of those blame the victim rants which conveniently ignores how the current crash occurred. Does he even understand that the stock market was only indirectly involved in this current crisis? That it resulted from mortgage bonds, derivatives and other financial products designed to avoid oversight, and the losses impacted large investors like pension and municipal funds in which individuals had little to no say in the day to day operations. That manipulated debt and over-leveraged large financial institutions essentially drained away the economy.

By both accident and intent, most people invest in wall street by means over which they have minimal control. Those who do invest directly are, in fact, directly involved. In addition the entire system, including the location and timing of shareholder meetings, is set up to pressure investors into proxy voting.

Also when his grandparents earned off their investments the post-New Deal regulation and structure of finance was in place - all that stuff which has been stripped away by Reagan and all who came after.

In short he's like a guy looking at a bus crash at an intersection where the stop signs were removed and saying to the passengers, "My grandparents knew how the breaks worked, what's your problem?"
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From:fengi
Date:November 21st, 2011 02:55 pm (UTC)
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Also, his Grandparents generation benefitted from pension plans and robust savings at banks, structured financial reward systems built which were a result of strong unions, a robust economy and a well regulated market. Stock investing was done in groups with trustworthy, regulated firms.

Funny how he doesn't remember any of that.
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From:anton_p_nym
Date:November 21st, 2011 04:07 pm (UTC)
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I agree. Without the existance of mutual funds I wouldn't own any equities at all; my portfolio was too small, and didn't grow quickly enough, to buy stock directly.

It's also forgetting the number of people who lost their life savings because they were tied up in shares in a company that went under. Mutual funds allow the 99%ers to diversify their holdings in a way that before was only available to the rich.

-- Steve definitely thinks that tying CEO compensation to share price was a colossal mistake... it promotes too much in the way of "end of quarter circus" antics to create a false perception of progress.
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From:nancylebov
Date:November 21st, 2011 05:18 pm (UTC)
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Tying CEO compensation to stock prices with a five or ten year delay might work, or at least work better than what we've got now.
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From:anton_p_nym
Date:November 21st, 2011 11:46 pm (UTC)
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I'm rather partial to doing it on a 5-year delay and basing compensation on the mean dividend issued in that 5-year period... and not allowing any CEO compensation to be in the form of shares to discourage 'em from playing elaborate games of pump-'n-dump.

-- Steve's fully prepared to hear long lists of deficits in this plan, as he really hasn't considered it in depth, but at least it acts somewhat to encourage long-term (rather than quarter-by-quarter) planning.
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From:bruceb
Date:November 22nd, 2011 05:18 am (UTC)
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Furthermore, he doesn't seem to have much to say about just how aggressively the people profiting from the current situation started selling it in the late '70s and '80s. I remember Dad and Mom - Depression-generation folks - declining to jump on the hype about exciting fun risk and big return rather than boring old reliable returns and getting some serious flak for it. For a good long while there it seemed like everybody with a clue and direct experience was sure that gambling big was the way to go, and it was a real act of personal faith to think that the reliability of small but very secure returns was in fact a better long-term choice.

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From:dr_zrfq
Date:November 23rd, 2011 04:57 am (UTC)
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I often wonder how much of that was also related to the high inflation rates of the mid to late 1970s (and the USA was hardly the worst case of hyperinflation at the time).
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From:fengi
Date:November 21st, 2011 03:06 pm (UTC)
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I mean seriously this guy is operating in a fantasy. There's a Will Ferrel movie (The Other Guys) which displays more understanding of the modern financial crisis than this.
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From:richardthe23rd
Date:November 21st, 2011 05:47 pm (UTC)
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What he said. The stock market is, except for the brief blip where it peaked at around 14,000, historically as high as it has ever been, including today's slide. (If I'd taken the advice I gave to all my co-workers and diversified like crazy in my 401(k), I'd be a rich man today. Well, relatively speaking.)
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From:sethg_prime
Date:November 21st, 2011 03:48 pm (UTC)
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One of the opening chapters of A Random Walk Down Wall Street has a historical catalog of market manias. The book has been in print for decades, so every once in a while, the author issues a new edition updated with the latest silliness.

Anyway, the bubble of the 1960s and early 1970s was the “Nifty Fifty”, a bunch of blue-chip stocks which were widely believed to be solid “buy and hold” companies. (IIRC this was a backlash against a previous bubble in small electronics-related companies.) So investors bought... and bought... and bought... and the favored stocks went up and up and up until, well, they went down.

Mutual funds have all sorts of problems, but before they existed, the only way to get involved in the stock market was to buy individual stocks, and brokers’ fees were higher in the pre-Internet era, and if you didn’t buy your stocks in 100-share chunks, the fees would be even higher. So if you wanted to play the stock market and you wanted to actually have a balanced portfolio, you would need to have at least $50K, and probably more like $100K, of money you could afford to put at risk. What proportion of Americans in the 1970s had that kind of capital on hand?
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From:chaosdancer
Date:November 21st, 2011 08:22 pm (UTC)
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My grandparents were more the sock-under-the-mattress type; they never had many stocks. But my grandmother had a few and as far as I know, my mother still has them. And they're worth approximately what they were when she bought them, the ones where the businesses didn't fold altogether. They didn't move much at all. Strange, when we were in the second motor city (Toledo) and there was good stuff all around to be invested in.
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