April 2, 1998

Complaining is usually considered a negative thing, however, if complaining results in taking action to solve a problem, complaining can really be a good thing.

Here's a list of my biggest complaints about Wall Street. Also, some of the articles found on Inside the Stock Market will be on these subjects.

• Wall Street (mutual fund companies, brokerage houses, insurance companies, pension funds, and banks) selling their so-called advice to the public at a premium when for the most part, they don't know anymore about where the market is going than the average Joe on the street. For example, virtually all of these so-called experts said that the nineties, were in no way, going to out-pace the eighties when it came to stock market returns. They were completely wrong. The fact is, if the market does well, so to will most brokerage houses and mutual fund companies, if the market does not do well, neither will most brokerage houses or mutual fund companies.

  Related stories:

  A Plea to Make Wall Street Accountable
  The Truth About Broker Recommendations and Consensus Earnings Estimates
  If You Own Stock Mutual Funds Read This
  What Caused the Correction of October 1997?

• The idea that individual companies care about their stock prices and small shareholders. There is absolutely no reason why the executives of any company care about their company's current stock price except for two reasons: 1) the company is planning a secondary offering to raise more capital and 2) executives have stock options. As far as #1 goes, this happens every few years, if at all. The executives will worry about it when it happens and other than that they could care less (where the current stock price is). And #2, this is like telling somebody who is starving to death that they can go to Safeway and take anything they want to feed their faces and if that isn't enough, they can go to Lucky's. Since a CEO makes so much money from their salary and bonuses there is really no pressure to make additional money from stock options. Sure, it's great for them if they do, but if they don't, they still have millions to spend. Short-term swings in stock prices that can be up to 60-80% losses, have very little impact on upper management (I'm not saying they like it, what I am saying is that it doesn't really affect them financially one way or the other... in the short-term, and if the stock does stay down, it's guaranteed that the compensation board will lower the strike price for the CEO's stock options at their very next opportunity.). However, small shareholders can be severely impacted. And to make matters worse the small shareholders don't know if what they are being told is true or not, that is, is the 50% loss they have seen in the share price due to one bad quarter or is the problem really worse than what the company is owning up to, meaning, the stock could lose even more?

  Related stories:

  Barrons: Do Companies Care About Their Small Shareholders, NOT

• Executive compensation-executives are being paid millions, for the most part, for just doing their jobs. There is tons of evidence out there (Annual Notice of Shareholder Meeting Report for one source) that shows CEOs are given raises in salary and bonuses even when company performance is nill and in many cases negative. In the cases where company performance improved, the CEOs were given 98% of the credit, whereas the rest of the employees were given 2%, and the CEOs received the vast majority of monetary compensation that was given out for the performance improvement.

  Related stories:

  President Clinton: A Candid Interview with a CEO

• Social Security-you and the company you work for, pay into this system for up to 47 years to receive full benefits. The average person will only live about 7-9 years after reaching full benefit retirement age which means they will only receive benefits for about 7-9 years. Due to the time value of money, the fact that you start given the government money up to 47 years before you receive benefits, makes this a poor investment for the vast majority of Americans. I personally would rather have an option of keeping my Social Security money in my own personal account, making my own investment choices, and maintaining disability and life insurance plans, then to have no choice at all in the matter and have to give the money to the government. And if anybody wanted to discuss who's more responsible with their money, me or the government? I would simply reply, I have no debt, but my mortgage, the government has over $5 trillion in debt and they didn't buy a darn thing with it, I spent no money on useless interest payments, the government spent about $200 billion on interest expense for that $5 trillion and that's just last year alone, I have no future financial obligations, the government has $trillions of future financial obligations.

  Related stories:

  Business Week: An Opinion on the Social Security System

• The financial news media-what I look for from the media is factual information, opinion which is clearly stated as such, and the responsibility to uncover those that deal in corruption, those that use poor business practices, and those that use unethical business practices. The financial news media's primary source of revenue comes directly from the companies they are monitoring. Because of this, what you get from them (the financial news media) is so biased, that for the most part, what they offer is useless.

  Related stories:

  A Plea to Make Wall Street Accountable
  What Caused the Correction of October 1997
  Inside the Stock Market's Introduction

• Insider trading-once you own a stock that loses 30% or more of its value in one day only to see the company report a negative news story after the market closes or the next day, you to will know all about insider trading on Wall Street. You are told that you, even though you are a small shareholder, will be given the same public information, at the same time, as all the investors including the institutional investors, however, once you start trading, you will soon learn that is not the case.

  Related stories:

  Business Week: Cyber Postings and the Spread of False Information
  Business Week: Wall Street and Insider Trading
  SEC: How does the SEC Enforce Insider Trading Laws?
  SEC: More on Insider Trading
  SEC: Is it Inside Information or a Rumor?

• Slow service from brokers-volume levels change so much that it is very difficult for brokers to maintain the same degree of service or speed on every trading day. However, instead of simply admitting that, and trying to find an equalibrium point that fits their staff and hardware with their customer base, many brokerages are putting most of their efforts into getting more customers and not into getting more hardware or personnel. Sure they are adding more hardware and personnel, but only enough to handle the additional customers. This is why as a customer of Schwab and E-Trade I haven't seen any improvements with service or speed in the last year. It seems like the only way to get above average service on most trading days is to go with a little guy. I just heard today from a friend that "My Discount Broker" has been great. I don't know if they are big or small, but I think I will give them a try next.

  Related stories:

  Charles Schwab

• NASDAQ spreads-when I first started buying individual stocks in 1989, many of the stocks that I traded had spreads of greater than 10% of the stock price. I wrote the SEC, the NASD, market makers, and the companies themselves. No one admitted to the large spreads, nor was anybody going to do anything about them. Finally, in 1994 someone at a college did a report on the "huge spreads of NASDAQ stocks" and since then, spreads have gotten smaller. Even though spreads are smaller, I am still somewhat annoyed with a personal belief that the only reason that spreads are smaller is because the volume is so much higher now then before. That is, market makers are still making great profits with the smaller spreads because they are more than making up for the smaller spreads with higher volume. Also, many brokers will still execute trades through a market maker who pays the broker for order flow, that is, there is a term called "payment for order flow" which is where a market maker agrees to pay the broker money or something else to get your broker to direct your order to them even if they are not currently offering the best price (addentum: On July 26, 2000, CNBC reported the SEC stated that 85% of the time, investors didn't get the best price available when they traded on NASDAQ).

  Related stories:

  Business Week: NASDAQ Spreads Haven't Changed Much
  NASD: Why do some Companies Listed on NASDAQ have Huge Spreads?

Maybe someday, if enough people care and complain about these issues something will be done.

Return to: Inside the Stock Market