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It's not Easy Being Green
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Trying to do your own thing with respect to your
investments is not easy these days. We are lamenting like Kermit the
Frog that our individual, different attitudes make us feel
uncomfortable.
The media plays a huge role in how we feel about our investment choices
and directions. One minute Garth Turner will be expounding the mantra of
"investing long term" in the stock market, and then, like a cool summer
breeze, he completely changes direction and boosts real estate,
something that is solid and tangible -- a new flavour of the day for
Garth. These days, most people do not open their quarterly or monthly
statements that account for their investments. They know it's down, and
they don't really want to know exactly how bad the news is. Compare that
to 1999 when we feverishly poured over the stock market pages because
every day everything was up. That's quite a wide range of emotion.
So how did we get from there to here? Our need to save and to invest is
real. Retirement comes to everyone; children need to be educated in a
changing educational funding environment. Now health care looms as a
certain future cost, which our politicians promised would be looked
after.
Many of us maintain our investment pools in RRSP's or in corporations
that have built-up retained earnings that are surplus to our company's
needs. The fact that we can deduct our investment cost from our taxable
income, when it is contributed to an RRSP, has provided a huge incentive
to save. Canadians have embraced RRSP's even though there remains
billions of dollars of unused contribution room. So the "saving" thing
has been made easier for us.
When interest rates on relatively risk-free investments, like government
bonds and CDIC guaranteed bank deposit certificates, were substantially
higher than they are now (I remember 19% Canada Savings Bonds) they
provided a very real option for all of us. Provided that a tax-free
environment was utilized (i.e., an RRSP) a 9% interest bearing
investment would double in eight years. Not bad!
Two things emerged that caused us all to re-evaluate our investment
strategies. The first is that once we had got our little nest egg to
exceed a certain number of, say, $50,000, we become of interest to the
investment community. This was either a direct confrontation with an
investment dealer, a mutual fund salesperson or a financial planner who
could quite easily talk us into a "review".
It's no secret that the investment community earns its income by
employing capital in areas that pay commissions. Their objectives and
our objectives as investors were aligned provided that they could
generate returns that were higher than we could make through bank
investments plus their commissions. For much of the nineties, interest
rates plummeted and stock market returns soared. Mutual funds were
marketed by sector. It was not unusual to see certain narrow sectors
like technology, Health Sciences and Telecom, deliver annual returns
ranging from 30% to 70%. Indeed our RRSP's fattened up nicely to the
extent that we were fully invested in these areas.
Our greed was fuelled by the press, our friends' stories and our
advisors. The latter group was enhanced by the research reports that
many of their employers sent out to us extolling specific stock picks or
investment sectors. In the late 1990's, it was certainly anything Tech
or Telecom.
Little did we know that there was shenanigans going on and, sadly to
say, my profession has been implicated. First of all our collective
greed is the thing that is most responsible for the insane expectations
that evolved in the stock market up to March of 2000.
But this greed fuelled even greedier behaviour on the part of banks,
investment banks, stock brokerage houses, legal firms and, yes,
accounting firms.
The central arena for this gladiator-style greed fest was the U.S. and,
particularly, Manhattan. I don't think Jefferson and Franklin had this
kind of society in mind when they developed their vision of freedom and
a legal framework for America. There is no doubt that their vision
created a environment that sparked the greatest economic engine of all
time, with all of its impressive innovations, such as lights in the
heels of sneakers, and cell phones that play "Charge of the Light
Brigade" when there is an incoming call.
However, the morals and ethics of business executives, their advisors
and financiers have evaporated behind a screen of freedom and let the
marketplace determine everything. I personally believe in these things,
but only in the context that the people in the marketplace are truthful,
forthright and have a respect for other people.
After the great depression, which was caused by our last bout of greed,
F.D.R., as part of his New Deal, segregated the investment banking
function from the retail stock brokerages because they couldn't be
trusted if they performed both functions. In other words, how could you
expect someone to be evenhanded if they stood to lose fees and
commissions when they were truthful about the investment attributes of
their client's stock offering? Sound familiar? Over the last 20 years,
the segregation of duties has been washed away by successive tinkering
by alternative Democratic and Republican regimes and our misplaced faith
in the SEC and the Fed, particularly under the guidance of Alan
Greenspan. Greenspan is no friend of ours as he knew what was going on
and he should have pressed the "unbridled exuberance" button years
earlier.
In large financing, many people get very rich, very quickly, and it is
average investors, through mutual funds, pension plans, etc., who take
what they think is a risk. The WorldCom debacle is a great example of
many transactions that blew away trillions of dollars of market value.
Banks and investment brokers would generate fees of, say, $400 million
on multi-billion dollar financing. Their legal and accounting advisors
might generate fees of, say, $20 million. Executives would be granted
huge allotments of stock options that in many cases would garner them
$300 to $400 million.
Everyone had to do the dance if they wanted to cash in on this gravy
train. Everyone had to give favourable, legal, tax, accounting and
investment opinions so that this multi-billion dollar financing would be
a success. These securities would then find their way into mutual funds,
pension plans and individual retirement accounts.
To keep the merry-go-round moving, everyone involved had to continue the
dance by participating in incorrect audits, false press releases and, in
some cases, illegal acts. I don't know what these people were thinking,
as they had to know that they had created a house of cards that could
only end one way. The people and institutions involved in these many
scams were educated, influential, and thought to be ethical in how they
conducted themselves. People who have attended professional schools such
as medicine, law and accounting take mandatory courses in ethics. The
business schools do not. Not that any of this seems to have made any
difference as there did not seem to be any ethics displayed by anyone
ever.
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