Help With Understanding Wall Street/Investments

[Steely_Dan]

My wife and were talking last night about Wall Street. It was your typical discussion that covered the bailouts and how "main street" was not bailed out.

At 57 years old, Im pretty sure that as time has gone on, more and more people have ventured into the stock market with investments. Back when I was young(er) I thought that only those with "money" could actually invest and that it was basically reserved for people with means. It seems to me that over the past twenty years, the opportunity to invest has been something that more and more of the middle class have been able to get involved with.

We all know that so much of our retirement is invested (401K, etc. etc.).

With the increase of the number of people investing, it seems to my wife and I that corporations are under greater and greater pressure to meet stockholder's expectations of a bigger bottom line.

Does this added pressure cause corporations to continue to cut costs as in labor and other overhead in order to continue showing a better bottom line? One example would be the exodus of corporations to foreign countries.

Is this pretty much what has happened?

-P

[DJ13]

1. Corporate execs make most of their money in exercising options given to them

in lieu of a set bonus.

Those options are usually worth millions yearly, and the higher their company stocks go the more they are worth.

That tying of executive personal interest to the stock valuations has distorted the ability of corporations to make long term plans of any kind, as the executives would be forfeiting their own money if they didnt focus solely on the current quarter.

[Steely_Dan]

2. Good Point....Thanks....n/t

[Ruby the Liberal]

3. I think the shift happened back in the 60s and 70s

from the focus on long term goals to short term targets.

Back in the 60s, company leadership were the brains of the operation - the scientists, inventors, engineers, etc...

Starting in the 80s, the finance and business school guys took the helm. Add to this NAFTA in the 90s, and pressure became not on the future of the company or its products but managing the operation based on meeting quarterly targets.

[Steely_Dan]

4. Makes Complete Sense...

I can see where this changed everything.

[DailyGrind51]

6. You are 100% correct! Careers are based on the current quarter, not 5 years down the line!

Executives have no company loyalty, they want a "killer quarter" so they can move diagonally up the ladder in then next company. In my nearly 60 years, I only knew one person who retired from the financial firm she started with!

[USArmyParatrooper]

5. I don't think anything has changed in that department

You are absolutely right that more and more people have money in equities. This is especially true in the internet age, where even people who should not have money on the market are trading stocks via online brokerage accounts. I personally have about 30% of our savings in a combination of individual stocks, a growth mutual fund and a pair of ETFs.

But I don't think this phenomenon has increased pressure for companies to increase their bottom line. That pressure has always been there. It's what companies do - they're not inherently evil. After a company opens their initial public offering they've already received their funds. Perhaps someone more knowledgeable than me can add something, but I can only think of two reasons why a company would give a crap about their stock price. The board of directors, the CEO, CFO, all of the bigwigs - and sometimes the employees can own shares of the company. Also, once in a while if a company is in dire need of funds they will offer more shares of the company to the market - which usually drives the price down some due to dilution.

[metapunditedgy]

7. Here are a few things I've picked up watching the stock market over the last decade.

First, the market is a scam. It may be a necessary component of a 401k these days, but it has a lot more problems than even what we've been reading in the news.

For example, stock shares are becoming increasingly meaningless pieces of paper. As we learned over the last few years, bankruptcy is a serious option for most corporations. And when a corporation goes BK, the stockholders get about zero. The real *owners* of a company are the people that get the pieces after bankruptcy. If you look at the big players, like Buffett, they buy "preferred shares." That means they are ahead of us ordinary stockholders in line for ownership of the company. Stock shares are just pretty printed paper or blips in a computer. They're a means for corporations to print money.

More people are investing because Wall Streeters have figured out how to make money off of common investors. I had a terrible experience with TD Ameritrade (lots of court cases ensued), but the Ricketts family (with its Republican and MLB ties) made big money from screwing Ameritrade investors before they cashed out.

So these days, I see stock prices as something like "currency value" or "poll numbers." They are meaningless in many ways, but useful in others. As you say, one thing they're useful for is keeping employees (who hold stock options) happy in their "golden handcuffs."

[A HERETIC I AM]

8. Your example re: Buffet is flawed and incorrect.

If you look at the big players, like Buffett, they buy "preferred shares." That means they are ahead of us ordinary stockholders in line for ownership of the company.

Absolutely and utterly untrue. You can buy all the preferreds you want but it doesn't give you "ownership" of anything but debt. That debt, BTW is not senior debt, by any means. Holders of preferreds are down the list, with senior bond holders at the top. The overwhelming number of preferreds out there are debt preferreds. They are primarily held as income instruments, and ANYONE can buy them, including you. Preferreds do not typically have voting rights and most of them have a "Par" value of $25.00. They rarely trade much higher than that par, but they can trade much lower.

They are called "Preferred Shares" not because the likes of the Warren Buffets of the world prefer them, but because they receive treatment that common shares do not, such as the payment of dividends, the fact that they may be "cumulative preferreds" or that they may be convertible to common stock. By holding them you give up other things however, such as appreciation potential and voting rights

Berkshire Hathaway does not own a large chunk of Geico Insurance and the other companies they own chunks of because they bought those companies preferreds. BH owns that chunk of Geico because they bought their COMMON stock.

[metapunditedgy]

9. I missed the part where you contradicted anything I said... ? n/t

[A HERETIC I AM]

10. Then read it again.

You said "If you look at the big players, like Buffett, they buy "preferred shares."

You are implying that those are the only types of shares they buy. Not true.

Even if that is not what you think you are implying, why wouldn't someone like Buffet just buy all a companies senior bonds? That puts them in front of the line in a liquidation, not several steps below it.

Your post suggests that the "big players" do not buy common stock. That is simply not true.

[metapunditedgy]

11. Oh, I didn't mean to imply that big players like Buffett don't *also* buy common shares.

For example, here's a piece from Bloomberg that I just googled. (As I understand it, this refers to the warrants Buffett got to buy common shares.)


http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aAvhtiFdLyaQ

The government has received warrants valued at $13.8 billion in the 25 biggest capital injections from TARP, according to Bloomberg data. Under the terms Buffett negotiated for his $5 billion stake in Goldman Sachs, the TARP certificates would have been worth $130.8 billion.

Buffett received 43.5 million Goldman Sachs warrants valued at $82.18 apiece on the date of the transaction, or $3.6 billion, Bloomberg analytics show. Paulson, who served as the New York- based bank’s chief executive officer until 2006, injected twice as much taxpayer money into Goldman Sachs a month later and got 12.2 million warrants worth $72.33 each, or $882 million.

If the Treasury had received the same terms as Buffett, taxpayers would have become the biggest investors in most of the bailed-out banks and existing stakes would have been diluted, Bloomberg data show.

[Ruby the Liberal]

12. So buy bonds

Lower yield in performing companies, but they put you in line ahead of Mr. Buffett.

[Curmudgeoness]

13. I don't think that ordinary people who have now invested

in the market matter one iota to the corporations. I think that they found a way to sucker all of the population to have a stake in Wall Street, so they could have new ways to make money off of us. Their bottom line concerns are aimed at the big investors---and those are the financial houses that buy and sell millions of stocks for mutual funds.

My advise to anyone who has to invest in an IRA or 401(k) is to keep most of it out of the markets. Not that I am an expert, I am just one of the many schmucks who have been burned and wish I would have done it that way.