Who is "the Market?"
One great misconception that I would like to see corrected is the public image of the stock market. There is a romantic idea about the market that it is driven by a lot of individuals who diligently study the business page and talk with their brokers every day. To be sure there are a lot of those people out there, but the amount of money they wield does not produce the wild swings in the market that we have seen so often over the past 8 years. More plain language such as today's op-ed by Lester Thurow of MIT's Sloan School:

• "The first and best solution is to warn all small investors that the game is rigged. No individual investor, no matter how well informed, can play on the same level as the major institutional investors, Wall Street firms and corporate executives, who receive more accurate information more quickly than the average viewer of CNBC. The major players talk all the time, and very little of what they learn becomes known to the general public; that is what the investment banker Herbert Allen's annual summer get-together of media moguls in Idaho is all about. Of course, such meetings are not illegal. But neither do they inspire confidence in the openness and honesty of the system."

The furor over Martha Stewart's actions is exposing the tip of this iceberg. The careers of the entire administration were made on such insider mingling. Despite not being a "stock picker," the president knows, "[t]he price-earnings ratios are improving." Moreover, "[s]ome [investors] have diversified into bonds," he said. "For those who have, their portfolios are better than those who have stayed only in equity." Thanks for the tip W, I'll move my money into bonds. For a man who says he cares so much (or was that his father, the lines are blurring every day) he certainly seems to be staying away from legislation with a ten foot pole. Interestingly, Thurow's op-ed that I quoted stresses that further legislation will not help avert the next crisis. He's in favor of punishing those who violated the laws, but he doesn't think new laws will stop future wrong-doing:

• "All companies want to "hit their numbers" (that is, ensure that their revenues and profits match those predicted by Wall Street analysts). This imperative cascades up and down the corporate pyramid � and it infects not just the organization itself but the individuals within it. Sales representatives, for instance, can get fired if they don't hit their numbers. They don't want to get fired. So they make adjustments. Sooner or later, small adjustments become large adjustments. And then no one wants to look too closely at the numbers and be the one who announces that the good times are over."

While I agree with Thurow that these frauds are not perpetuated all at once and usually not done out of malice for the investor, but out of fear for one's job, I still favor new legislation. Economics dictates that for our markets to run efficiently, the buyer and the seller must have the same information. If not, the seller will abuse the buyer and our markets will be inefficient. Buyers don't usually abuse sellers since it's rare the buyer knows more about the seller's company than the seller. I'm in favor of cracking the nut of corporate information as far open as is reasonable. Companies need to be able to take on risk in order to expand, but they should also be required to explain that risk in plain accounting. The various loopholes in accounting and disclosure rules must be closed. Many rules already exist and are not diligently enforced, or asked about by analysts. This leads to the final question.

What are the lessons for the little guy?

1. Watch your ass. Find a broker you trust and hound him mercelessly over his decisions.
2. Read SEC filings on your own. Speak the language of money.
3. Understand that this is a long-term, inch-by-inch grind and everyone is trying to screw you, especially your broker's firm.

Cynical? Yes, and I could continue, but the point is that wall street is savage and it must be treated as such. We are not on the inside and it would take a lot of work and luck to get there and few would hold on all the way. Things are bad, but they will get better. And around we go in the circle game.
- posted by levinson @ 7/23/2002 07:23:00 AM