RE: Investing, was Living Below Your Means

From: altamira (altamira@ecpi.com)
Date: Wed Jun 07 2000 - 09:19:54 MDT


Here's the stock market piece I referred to earlier, from Lee Flier, copied
with her permission. She's working on a book and would appreciate feedback.
Her e-mail addy's at the bottom of this quote. She asked me to include it
in case any of you want to yell at her :-)

Bonnie

A question had been asked (by Gene) about the relative merits of land vs.
the stock market as investments.

"Well, that all depends whether you are looking at the small picture or the
big picture. I am something of a radical when it comes to the stock market.
That is, I don't believe in it and support it as little as humanly possible.
I often even wish it weren't such a hassle not to have a bank account,
considering that banks invest their money in stocks, not to mention in
companies whose activities I abhor. But we can't live in a vacuum. So - I
simply refuse to invest in stock in publicly held companies, and try very
hard to avoid working for public companies. I'll try to summarize why:

When a company goes public, what it is basically doing is opening up its
ownership to anyone who wants to invest in it. There are benefits to doing
this both for the company and the investor, and this is the "side" of
investing that we always see presented: the company benefits because it gets
a large influx of capital to further its research, development and growth;
and the investor benefits of course by earning a nice return on the
company's profits should it succeed, with a minimum of hassle, liability or
involvement in the company's day to day affairs.

However, there are huge downsides to public companies, which are rarely
discussed. How many times have you complained that a company you used to
frequent and trust as a customer has suddenly begun producing lower quality
products, or has stopped caring about customer service? How many of you
have ever been employed by a company who used to treat workers fairly but
bit by bit begins to expect too much work for too little pay, to downgrade
working conditions, and to hire less and less competent new people as the
competent ones are laid off or quit in disgust? Or has a business who once
served your community well just up and moved somewhere else in order to cut
corners, leaving a huge void of jobs, goods or services?

All of these things are almost inevitable when a company goes public.
Generally, the negative effects will not begin to make themselves felt until
the corporation has been publicly held for at least 10 to 20 years, by which
time the founders of the company may well have retired with a fat bank
account. That is why we usually don't connect the company's going public
with its downslide.

Some of the reasons that being owned by the public is the beginning of the
end for a successful business are basically the same reasons that a
socialist economy doesn't work: 1) eventually no one person has much control
of the company, not even its CEO, and 2) there are now many people who DO
have control of the company but do not have a clue about its operations and
care little about anything other than how the stock is performing.

Then too, for a stock to be any "good" it has to increase in value. That
means the company's profits MUST grow, to look good on the stock market.
There are a few exceptions, like utility companies for example, but those
are considered "stodgy" stocks - stocks that are always "safe" investments
but will never make you rich. By and large though, if a public company
doesn't continually increase its profits it will lose stockholders. So the
things that must be done to increase profitability become more and more
despicable as time goes on.

At first, there are generally majority shareholders in a public company -
the founder(s) and their families, perhaps some key employees, and maybe
some other corporations who have a vested interest in the company's success.
So control is still maintained by a reasonable number of individuals all of
whom know and care something about the business. But if a company becomes
hugely successful on the public market, it's inevitable that the
professional investors will move in and begin buying up large amounts of
stock, until after some period of years (especially after the founder
retires), most of the stock is owned by people having nothing to do with the
business and probably not even living in the same community, maybe not even
the same country. Furthermore, if you're the CEO of a public company and
your stock is not performing well, your financial and operational records
are open to the public. If your shareholders can see that you have left
some stone unturned in squeezing some more profitability out of your company
(even if at the expense of workers, the environment, the customer, or the
quality of the product or service), they can sue you for not acting in their
interests. So most companies within 20 years of offering public stock are
merely trading on their past reputations.

Anyone could think of a few exceptions to this "rule", but it happens often
enough that I think the stock market needs to be "called out" as being the
scourge on society that it is for all concerned. I think that if you do
want to invest in a company that you believe in, a wiser choice would be to
either become a limited partner (in which case you are a PRIVATE shareholder
and have a vested interest in the company's success), or to buy bonds.
Bonds are more conservative in their returns than stocks, but they don't
have the same drawbacks as stocks because their term is finite. That is,
you are still helping the company raise capital in return for a share of its
profits, but when the bond matures the company no longer is beholden to the
bondholder. Thus a company can keep control over its resources and is not
obligated to keep increasing its growth beyond all limits of reason.

Nearly all companies have a natural "curve" of growth - like living things,
they MUST grow until they reach a certain level of maturity and stability.
Every company will have a point at which they find themselves making a
healthy profit while still treating workers fairly, engaging in fair
competition without coercion or hostile takeovers, providing quality goods
and service at reasonable prices, and being a good corporate citizen in the
communities where they operate. But the missing directive is: once this
critical mass has been reached, the company needs to STOP growing. This
idea is almost unheard of in business schools, and what's more, it's nigh
impossible to stop growing if your company is public. Unless a huge degree
of awareness exists in the majority shareholders (which is almost never the
case, and even if it is the case now, the shares will probably eventually
fall into the hands of someone less aware), it becomes like a monster whose
only directive is to grow and which has no conscience because no one really
controls it.

Soooo.... however tempting stocks may look to an individual, we all pay for
our investments many times over - in loss of quality in our lives due to
corporate needs being placed before human needs. The only choice I feel
that I can make therefore is not to serve this particular beast. In any
case, growth cannot continue indefinitely, and it's only growth at any cost
that keeps the beast strong. The stock market is basically like a giant
pyramid scheme, each investor betting he'll get his before it all falls
down. So, Gene, I think that the "old" paradigm is still as true as ever:
land has intrinsic value, stocks do not, and we should give careful
consideration to what we are really investing in when we buy either."

--Lee

***********************************
Lee A. Flier
lflier@mindspring.com
Atlanta, Georgia, USA
http://lflier.home.mindspring.com



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