This doesn't mention E*Trade specifically, but does have indirect implications for the company (and is also is a good illustration of why I've decided to hang on to my current shares of the two companies in my stock portfolio--EGRP and WAVX)...
* Wealth Becoming More Concentrated
Wealth in the U.S. is becoming more concentrated according to several recent
studies. The top 1% of U.S. households hold 39% of the nation's wealth - up
sharply from previous decades. The wealthiest 10% of Americans dominate the
markets, owning 82% of the value of all equities - and capturing a like
percentage of any gain or loss.
Commenting on these studies, a Washington Post article claimed that "the gulf
between the rich and poor is now greater than at any time since the Great
Depression."
Courtland Milloy in another recent Washington Post article noted that Gate's
wealth from securities, stocks and bonds was about $58 billion in 1998. Black
wealth from stocks and bonds was calculated at about $11 billion, and while
incomes are about 60% of whites, the "wealth gap between the races is
enormous." The latest U.S. Census Bureau figures on American wealth showed
that only 614,000 black households, or 5.6%, owned stocks or mutual fund
shares.
Other segments of the population have somewhat higher market participation
rates - Edward Wolff, an economist at New York University, claims in a recent
study that overall 43% of American households own stock - but still this is
far below even one-half of the population. Participation in the market has
increased from around 25% in 1983.
* A New Gilded Age?
The uneven ownership of equities, and the restricted grants of stock options
to a select few is one reason the gap in wealth is widening according to
these studies - and the gap has been enhanced by the explosion of wealth
created by technological advances.
This "may be the single greatest period of wealth creation in American
history" according to Forbes Editor Michael Malone. Forbes notes that the 100
wealthiest individuals in the U.S. technology industry are worth nearly $200
billion, with most of that wealth being created in the last few years. "This
is an extraordinary statement both about the nature of the booming American
economy in the 1990's, and about high technology's central role within it" he
noted.
And those relative few who happen to work for technology related companies
have done very well if they have been granted options in their company's
stock - or participate in the company's 401(k) plan.
* Technology's Role in Creating Wealth
While Bill Gates is the richest man in the world, his wealth can be described
in two words according to a recent London Times article: intellectual
property. Microsoft makes its money from the copyrights and patents that
accompany its computer software. In that article the Times notes that the
distribution of the company's software costs very little. The value derives
from the license to sell or use the software program - a program that has a
very limited physical presence.
And the Times notes that "Microsoft is not alone. Look at any of the growth
industries of the next century and you will see they are underpinned by one
or more forms of intellectual property. Companies working in sectors such as
the Internet, biotechnology, pharmaceuticals, sport and entertainment all
have a heavy dependence on intellectual property rights for their prosperity."
Many of these technology companies have gone public in the last decade and
are growing strongly. And many are in the small and micro cap sector of the
market that is the most inefficient. So individuals have the opportunity to
become part owners of these growing firms.
* The Role of Financial Education
If current trends of wealth concentration continue, at some point it will
become politically popular to address this social "problem." Capitalism has
historically created significant wealth disparities, and governments have
used taxes, laws and regulations to redistribute such wealth.
Intellectual property is somewhat harder for governments to regulate than
physical assets that constituted wealth in the past - it is easily relocated
elsewhere should tax or regulatory policies become onerous.
So how should we address this growing disparity before it becomes a political
issue?
First, for those working, the availability of 401(k) or similar type
retirement plans and IRA's should be expanded, and companies should encourage
active participation in such plans - as well as distributing options on
corporate stock well past the executive and professional suites.
Second, as we move into a technology-based economy education and training
will play a larger role in preparing a party for the workforce. This
training, and access and familiarity with computers, e-mail, and the use of
the Internet, will be critical. The percentage of the U.S. population without
Internet access is still quite large.
Third, it is critical that as we evolve into a technology-based economy and
more parties manage their own finances that they understand the potential and
the risks involved in investing in equities, mutual funds, or any other asset
- and the risks and problems associated with not making such investments.
*************
SHORT TERM TRADERS DOMINATE MARKET
The Internet, and the popularity of trend-following investment styles, have
lead to an explosion in short term trading strategies. In a recent article in
the New York times John Bogle, the founder and senior chairman of the
Vanguard Group, discussed this trend and some of the problems it creates for
investors.
Bogle notes that the annual turnover rate for equities has risen to a
half-century high of 95%, closing in on the all-time high of 119% recorded in
1929. This means the average investor holds a share of stock on average for
only one year. Stock trading over the Internet is now said to account for
more than 20% of all market volume, and on every business day of 1999,
investors have traded some 1.5 billion shares.
In 1960, the turnover rate was just 12% and a longer term outlook was the
norm, with a holding period of six or seven years. Much of the current
trading activity comes from institutional managers according to Bogel, who
noted that "once characterized as long-term investors, most fund managers can
now be fairly described as short-term speculators. "
Liquidity - the ability to buy and sell a reasonable quantity of shares
without impacting the price and with a reasonable "spread" - becomes an
issue for those managers who actively manage their portfolios. For that
reason larger companies are much better suited for those who actively trade
and manage any substantial amount of money. The shares of small companies
have languished.
But the costs of trading, extended over time, are "confiscatory" according to
Bogel. He writes: "Assume a 10% market return over the next 25 years. An
initial $10,000, simply invested in the stock market, would grow to $108,300.
Now assume investment costs of 2.5% and extra taxes of another 1.5%. The
investor accumulates but $42,900, fully $65,000 less than the market. The
investment croupiers rake in 44%, and the government croupiers rake in 16%.
The casinos flourish. But not the investor. Having put up 100% of the capital
and assumed 100% of the risk, the investor would receive barely 40% of the
return. It is not a good deal."
* Longer Term Opportunities
What do intelligent investors do? Bogel wrote "first, they realize that the
key to investment success lies not in trading pieces of paper on a short-term
basis (what most funds do), but in owning shares of businesses and holding
them for the long term."
"Some may do this by retaining investment managers who emphasize a
buy-and-hold strategy. (Warren Buffett's strategy is to buy shares in a small
number of large companies, and his favorite holding period is 'forever.')
Others simply buy their own stocks and hold them for the long term. . . .
investors using such strategies have the best possible opportunity to ride
out any short-term disappointments and enjoy optimal long-term wealth
accumulation."
He concludes that "in the long run, the best way to capture as much of the
stock market's return as is possible is to buy and hold stocks and minimize
the costs of investing. In this way, investors can capture 98% to 99% of the
market's pre-tax annual return, after the deduction of costs." |
