Is normal something that is static – never changing or does it evolve over time? For example TV shows, movies, and clothes that may be the norm today would have been considered risqué, unacceptable or even obscene thirty years ago.
I bring this up because, human nature is what it is, and as such, there will always be individuals trying to scam the system. Greed is an addictive drug, and it has been making its way through society since the dawn of man. In the early 1900′s it was Charles Ponzi, the inventor of the “Ponzi Scheme.” In the 1980′s it was Michael Milken and his manipulation of the junk bond market. Most recently it is Bernie Madoff and his huge investment scandal.
As we’ve seen recently, scandals lead to losses, which lead to increased public distrust and eventually greater government intervention and regulation. It is no different than what I experience as a parent. When one of my kids does something I consider inappropriate, I ask why they did it, why it was inappropriate and discuss what the consequence (i.e., punishment) is for their actions. As a result, I am probably more sensitive and scrutinize their actions even closer (for the short-term).
However, these instances are very infrequent and are not representative of their true character. In addition, these inappropriate moments are overshadowed by the joy, love they bring my wife and I, along with the overwhelming pride we get from their accomplishments and seeing them make good decisions and mature.
Trust me; my kids’ indiscretions in no way compare to the enormous pre-meditated greed and ultimate damages inflicted by the previously mentioned examples. However, there is a connection. In both cases there is bad or inappropriate behavior and a suitable punishment needs to occur.
Long-term results vs. short-term fears and over-reactions
That being said, when I meet with a parent or a grandparent with grown children, they will not hesitate to tell me about their kids or grandkids and their accomplishments. It is as if someone has flipped the “I’m proud” switch. Ironically, they can just as easily tell me stories of the frustrating times they encountered while raising them.
The same can be said of the stock market. In the long run, the stock market has rewarded investors – it is a fact. But in the short-term, it can be very frustrating and when some hear of a new scandal, they want to toss in the towel and give up. Ironically, this is exactly what happened recently to an elderly Israeli woman. It is being reported that this woman had “traumatic experiences with banks” in the past. As such, she felt stuffing her mattress with her life savings was a much safer place. Unfortunately, this woman’s daughter had purchased her a new bed as a surprise and threw the old one out. It was a day later that the elderly woman realized that her life savings had been hauled to the dump in the discarded mattress, and now the dump is being guarded while staff rummages through the trash in search of her old mattress and life savings.
Currently, much of the general public and the investment community seriously questions the governments’ actions (both the previous and current administrations) as it relates to stimulus spending, bailouts, and its ownership and influence over many of the banks and two of the three big U.S. automakers. Recent headlines state that Bank of America’s (BAC) CEO Ken Lewis was threatened by Fed Chairman Ben Bernanke and at the time Treasury Secretary Henry Paulson, if he tried to pull out buying Merrill Lynch. If it is found that Merrill Lynch’s financial situation was much worse than reported to the public and the government forced BAC to buy the firm so as to calm the markets or the general public, then we have a real concern.
Whether it is the previously mentioned situation or the GM and Chrysler prepackaged bankruptcies, all of them cause investors to pause. Is the new norm that companies will be bailed out for their gross negligence or bad business practices? Is the new norm that bondholders’ rights and contractual agreements will be ignored in the future? Is the new norm that government can make strategic business decisions and command greater influence over publicly traded companies? I sincerely hope not.
If there is a true need for regulation, then regulate. However, let’s start by enforcing all the rules, laws and regulations currently on the books before knee-jerking and piling on more. Secondly, let’s not paint all companies and professionals with the same brush. For example, just because some surgeon in say Illinois scams Medicare for millions of dollars in false claims or performs several botched procedures, does this mean all surgeons are not trustworthy? As a result, should we avoid surgery and additionally raise the level of regulation of all surgeons and the costs for them to be in compliance? No, of course not.
Regulating profits = stifling innovation and hurts investors
Whether you know it or not, many utility companies are regulated as to how much they can charge for their services and the amount of profits they can earn. As such, most utility companies are not in the headlines for their new advancements or technological achievements. However, Apple has been the poster child for technological achievement over the last several years. The iPod and iPhone have been smashing commercial successes. Who would have thought that you could surf the internet, make purchases, get directions or do any of the myriad of things you can now do on a phone. Additionally, new advancements are taking place at an astonishing pace.
However, if we tell Apple or companies like it that they will only be allowed to make so much profit per iPod or iPhone, then we will see innovation come to a screeching halt and you the investor will bear the brunt of it. Companies take risks and sometimes they are successful (i.e., Apple) and sometimes they fail (i.e., Chrysler and GM). Investment professionals are always scouring for the winners and have been rewarded for buying and holding them. Unfortunately, if the new norm is to subsidize the failed companies, by regulating and adding additional burdens on all the others, then innovation suffers; profits decline and investors see much lower returns. The norm has been the United States, for all its faults, is the world leader in innovation and entrepreneurism. If we put policies in place that make either or both of these harder to succeed at, then we will see investor capital go elsewhere to find a better return.
Believe me, I am not Dr. Doom, Chicken Little or some extreme Libertarian. I’m just sharing some thoughts, insights and frustration that I believe you need to consider as they relate to your investments and your financial security and future. Given a chance, the United States and its entrepreneurial spirit can continue to create new treatments, products, services and advancements that will allow our country and the rest of the world to benefit and grow economically as a result. As such, let’s hope the new norm is more of the old norm.
Events
Debra Kunz will have a Strategic Life Planning workshop on June 17th. If you feel like you’re spinning your wheels and need some focus, call her for a session or more information. For more details on this or other upcoming events, please visit our web site at http://iia-kc.com/events/
Quotes
“He who graduates today, and stops learning tomorrow, is uneducated the day after.”
Newton D. Baker, politician
“Be able to overcome the adversity and obstacles that will come along. You’ve got to get up one more time than you fall down.”
Homer Drew, college baseball coach
Tony Moeller, President
Integrity Investment Advisors, LLC
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