Friday, January 22, 2010

Investing or Infesting?

According to a recent Bloomberg poll, 77% of U.S. investors see President Obama as “anti-business”. (Source)


According to the article, it’s because of his “efforts to trim bonuses and earnings, make health care his top priority over jobs and plans to tax ‘the rich or advantaged’”, and the fact that he “has been in a “constant war” with the banking system, using ‘fat-cat bankers’ and other misnomers to describe a business model which supports a large portion of America.”

Should we be concerned about the views of this 77%? Well, yes and no.

Certainly investors are essentially to capitalism. They are needed.

If, for example, I had a great business idea that I wanted to put into action, I would need money to start it, and odds are that I wouldn’t be able to come up with the money by myself. Finding someone who shared my vision and would invest some of their own money to help start it would be the only way for me to get my business off the ground.

If my enterprise is successful, the investor is rewarded for their risk by sharing in that success. If it’s a failure, they share that too. Fair enough.

The question I have to ask though, is at what point has the investor been fully compensated for their investment? Is there a point at which their investment has been repaid in full, or is the investor entitled to continue to make money from my labor in perpetuity?

If you buy a house with a 30-year mortgage, for instance, some entity has essentially “invested” in you to allow you to purchase the house. They’re taking a risk in lending you the money with your promise to pay it back. The interest that you pay is that entity’s reward for taking the risk.

As a general rule of thumb, by the time you finish paying back the loan over that 30-year period, you will have paid 3 times the actual purchase price of the house. So if your home cost $150,000, you will actually pay roughly $450,000 for it by the time the smoke clears, with $300,000 of that being free & clear profit to the lender.

I would think that tripling your money on a single investment would be more than a reasonable return, especially when you consider that the lender isn’t actually doing anything except cashing checks. Whether you consider a 3x profit to be fair or not, the point here is that there is an endpoint to the profit taking.

With Wall Street investing, however, there is no endpoint. “Investors” are invited to attach themselves like a remora to a business and ride it forever if they so choose. They add no value to the business; they do no work. They merely make a profit from the labor, ideas, and initiative of others, and in doing so they deny those same profits to the ones who have actually earned them.

Certainly the investment of their money is essential. Certainly they should be rewarded for the risk when their gambles pay off, just as they should be liable for the loss when it doesn’t.

But should their rewards be allowed to go on forever, or should there be a point where the rewards shift to the people doing the actual work instead?

I believe that this is the underlying cause of dissent from that 77% of investors – they are simply unhappy that there might be limits placed on their profit taking.

Should we care?

I don’t think so. It would only matter if they suddenly stopped investing entirely, but I don’t think they will. Like spoiled children they’ll be unhappy that they can’t make as much, but they’ll still invest, because money for nothing is still money for nothing.


Arthur2Sheds said...

There's a flaw in your analogies, though.

With stocks, you only make or lose money when you sell. How long you hold on to it is up to you.

In the mortgage example, the loan is front-end loaded so that if you follow the 30-year amortization schedule, you pay the lender their profit before you pay off the principle.

I'm just saying the examples aren't exactly comparing apples to apples.

I don't think it's an unfair deal however you look at it, since it takes two parties to agree to the details.

Blaine Staat said...

I agree, the analogies aren't very good; I really don't know that much about the stock market. I probably should have just said that I don't feel the pain of wealthy investors and left it at that! :-)

Arthur2Sheds said...

I'd agree with you on that, since the reverse of my point about the agreement works against the investors. They know the laws and rules, and agree to do business in compliance with these regulations. So griping isn't called for on their part, either. Thanks for responding.

Catherine said...

What is that expression down here in the South? God, Gold, Guns, Ground, I think. All I know is that we took out some stock money from my portfolio to buy some land here three years ago: I was really apprehensive about doing so. But that same investment would have lost half its value in the past year had it stayed in the market. Land is always a better option, to me, than stocks–it can also become a more emotionally driven investment but ultimately it is a better one long term, whether you live on it or not.