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Stock Market: Leveling Playing Field by Destroying Wealth

Fred Wilson and Howard Lindzon - both investors - have some interesting points to make about the fact that the major stock indices are now where they were ten years ago.  From a macro perspective, indeed, if you would have invested $1 ten years ago, you’d have $1 today.  Adjusted for inflation and the time value of money, you’d be worst off.  Truth is, this is an overly simplified macro perspective.  At the micro level, I’d argue that a lot of the people who had $1 in the market ten years ago were shellshocked by the Nasdaq crash of 2000 and lost a lot of money.  Those who are in the market as of now probably got in at the higher 2003-2007 levels and are now in a panic mode.

I began investing in 2003 and got fully out in May 2008 after selling my last shares of Yahoo! at $29.  When Yahoo! management violated its fiduciary duty, I remembered why I started a company: to be in control of my own destiny.

When you invest in a company’s stock, you invest in the management.  Warren Buffett - whom I suspect is actually being bloodied by the market’s gyrations (rememebr, Berkshire Hathaway is largely a diversified financial holding company with some consumer plays) - looks for candor in management.

Buffett referred to the stock market as the great wealth equalizer, giving the “average citizen” the opportunity to invest in companies and create wealth for themselves, eventually becoming as wealthy as well-paid executives and other successful investors.

This is - in principle - the most democratic thing about capitalistic societies.  However, due to a very near-sighted fiscal policy and a disastrous foreign policy, the stock market won’t go down as having leveled the playing field between citizens in creating wealth, but perhaps, in having leveled the playing field by destroying wealth.

From a recent article by economist Joseph Stiglitz in Vanity Fair:

Our tax policies need to be changed. There is something deeply peculiar about having rich individuals who make their money speculating on real estate or stocks paying lower taxes than middle-class Americans, whose income is derived from wages and salaries; something peculiar and indeed offensive about having those whose income is derived from inherited stocks paying lower taxes than those who put in a 50-hour workweek. Skewing the tax rates in the other direction would provide better incentives where they count and would more effectively stimulate the economy, with more revenues and lower deficits.

Indeed.  We screwed over the dream of the average investor and killed the wealth creation process in the process.  As a result, we’re now in a period of wealth destruction like none we have ever seen.  I am thirty years old, I surely haven’t seen anything like this: no confidence in security prices, no confidence in the people who draft the laws and regulations that create the mechanisms of the system.

Worst, we’ve eliminated the ability for the Average citizen to even buy stocks.  I really wonder, outside of 401Ks and RRSP in Canada, how many regular folks can afford stocks.  That’s right: by skewing fiscal policy to favor the rich, we’ve eliminated the purchasing power of average people not just to buy goods, but stocks as well.  Maybe this explains why there are no buyers in sight: we killed an entire class of them.

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Posted By: Ashkan Karbasfrooshan | Nov 23rd

One Response to “Stock Market: Leveling Playing Field by Destroying Wealth”

  1. Stockmarketbasics Says:
    November 24th, 2008 at 12:34 am

    It is equally important to limit the investment risk to your money. The subject of risk is relative to every person, and greatly depends on your financial circumstances and your understanding of the Stockmarket. Your aim for any investment should be to achieve a high growth with minimal investment risk to money. Ideally, you should be investing your money for the medium to long term. Short-term investing is inherently risky as it exposes you to fluctuations in the Stockmarket.

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