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Pastimes : Clown-Free Zone... sorry, no clowns allowed -- Ignore unavailable to you. Want to Upgrade?

To: Mark Adams who wrote (264872)	10/28/2003 9:55:10 AM
From: GraceZ	Read Replies (3) \| Respond to of 436258

rather I meant to convey the beginning of an impression that the US share market & mutual funds are a negative rather than positive sum game. Such a view is disheartening, to say the least... Ordinary people might be feeling poor in that their 401s and pensions may not be anywhere near their highs and some may even be below contributions if they only started a couple years before the top, but we just had one hell of a year in the market and if they've been in for the last twenty then they still have a pile. The people who lost the most weren't the indexers, it was those who got sucked into trading in the tech boom. I'm always suspicious when someone suggests that there are a fixed number of dollars and the only way one set of people gets rich is if they siphon money off another set of people. If you trade this is the case. Trading doesn't add a dime, it just shifts the money from one group to another. Investing on the other hand benefits from the growth of the underlying enterprises. To make an assertion that people can no longer benefit from investing in the stock market you'd have to make the assertion that we will no longer see growth. Maybe you can make the argument that enterprise will contract here in this country, but people aren't limited in their investments to this country. This I wonder about. I wonder if 'private equity', or venture/vulture capital might yield higher returns than you're thinking of. Say 45% per annum? I know if I am going to put money into a private enterprise, I want a return in excess of 45%. Wouldn't you? Yes, there appears to be mucho liquidity chasing returns. The basis for my assertion that there isn't enough debt, therefore global savings depressing real yields worldwide. Good grief guy, this goes against what every bear on this thread has been saying for years, that we're drowning in a sea of debt. I'm theorizing that by default a large (and growing) portion of that liquidity targets a narrow universe of stocks/bonds. This was true back in 1995-2000 and the money flow into large names has continued to be strong, with a few notable exceptions where the flow out has been going on for years now. Do I have to name names? We've had some pretty big names that have been a steady waterfall out. Don't confuse price with money flow, the two are frequently inversely correlated for long periods of time. The biggest gains this past year were in small caps and midcaps even after money flow went negative. The large caps haven't kept up price-wise even while money flow in didn't even blip on some of them. In this sense, it is the banker who intermediates funds from the savers to the small/midsize enterprises that allow for what I believe to be the bulk of growth. Without the bankers, and low yield CD's, what channels exist between 401k/pension/insurance money and you? Hedge funds? Small businesses make money directly and indirectly from companies that receive the majority of the capital flow. Like I said before, big businesses farm out their work to little guys like me. Right now I can trace a quarter of my revenues back to a guy who can trace half of his income to Ryland Homes, which if you notice has received quite a bit of that pension money both directly and indirectly. Pensions and banks seeking yield have piled into Ginnie Mae securities driving down mortgage rates and fueling the big home builder's growth. In the past I worked indirectly for a large number of tech high flyers and I still do jobs from time to time for companies looking to do an IPO. If you are a business that does work for business you benefit indirectly from all the money put into the capital markets. My husband works in construction. Most of what he worked on the last few years were buildings for hospitals and colleges. Schools get a lot of the money for their expansion either from their endowments which are directly invested in the market or from wealthy individuals who have benefited from their market activities. The hospitals get money directly from the capital markets and indirectly. It's all connected, you can't make an investment without that money moving around to other people, some of which are relatively invisible. I'll take your word for it that capital availability isn't a problem for small business. I don't have a way to monitor or measure such, so I'm left to speculate... C&I has been dropping for years now. It's not that money isn't available, it's that companies aren't borrowing it and they are paying off debt at a high rate than they are borrowing. Borrowing for small businesses has never been easier. I have people lined up to lend me money, yet back in 1988 when I wanted to borrow 15k for my first big piece of machinery I had to practically promise my first born. Now one can borrow an amount like that on a signature at a rate far below what I paid. Meanwhile, I've seen a lot of borrowing from the capital markets on some of the smaller companies I follow. There are lots of convertible securities and preferred shares being thrown out there, lots of companies going to the well just not going to the bank for it. That fits slightly with the earlier idea, that WallStreet, in conjunction with MegaCorps, may actually destroy rather than create wealth. If so, then the 401k system is dysfunctional in that it channels savings into the areas of investment potential least likely to generate substantial positive returns. Return is related to risk. A 401 in a broad index carries low risk and lower return than a narrow portfolio of individual names or a sector fund. In some periods, the premium paid to reduce risk can lower your return to a negative figure. People, on the whole, are risk averse and high returns are always wrestled from the jaws of risk. In the past large numbers of people got spectacular returns by holding almost 100% of their retirement funds in their own company stock. Most advisors would agree this is an incredibly risky way to operate but you can't ignore the fact that some people with fairly ordinary incomes got rich doing exactly that. Most people need to be somewhere between these two extremes, the low risk takers need to take on more risk and the high risk gamblers need to reign in their enthusiasm a bit and account for the fact that they may be wrong. 401s aren't the best system mostly because most people have fairly limited options in their 401s and they tend to treat 401 money differently than they would money outside of the fund. The days of the mutual fund being the best place to put money may be over. It will take a while, but I think that many companies are exploring expanded options in their plans for no other reason than they don't want the liability that comes from limiting their employees choices. Indexing this year would have given you a great return, few mutual fund managers could beat their respective indices. Only sector funds did better than say an index that invested in the Naz 100 or the Russell 3000 or the S&P midcap or small cap. In the previous two years, bond funds and gold funds were great returns. Some 401s don't even have a PM fund as an option and have very limited bond fund offerings. Most people don't actively manage their 401 or they simply don't know how, they do all the wrong things in that they go into the last best place to put money, they chase performance insuring that they get left holding the bag. The days of simply throwing money in the market or a select group of investment grade issues is behind us. I know lots of people who inherited stocks that their parents inherited from their parents. The days of being able to hold stocks for a few generations are over. But this isn't because of the 401 system or the market, it is because we are going through an enormous shift in the way businesses make money. Those companies that made money in the past may not be able to shift. Indexes on the other hand are dynamic, they are adjusted to include the new successful and throw out the failures. They are self healing. A good active (and lucky) manager can do better with individual names, but the public on the whole, can rarely do better than spreading out their money into a range of indices and asset classes (including foreign securities).