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Sunday, Nov 8, 2009
aynatt wrote:
Historically, the stock market (which has been in place for well over a century now) has paid investors an average of about 10% a year. That is, if you put your money there and LEAVE it there
That's one of the biggest canards going. There is, in truth, no such thing as this 'average investor' earning 10% a year such that this can be applied to any given REAL investor. The reason is because all the hundreds of dips and corrections are averaged out, and one may have to pull out (e.g. to retire) when a dip makes a huge impact.
In terms of REAL individual investors, hardly any will earn this mythical 10%, and certainly not after taxes, expenses etc. T. Rowe Price did a study in 2003 for an investor cashing into his IRAs starting in 1995 and another in 2001. The latter over his life was found to have nearly $180k less than the former. The difference? When each decided to retire. (And bear in mind this decision may be out of one's hands, as when a company lets a worker go or ealry retires her for age-related reasons)
The moral of the story is to look at the 10% as kind of an aggregate statistical average. In reality, when the inevitable dips and corrections are factored in, this becomes 6% and maybe even less. Check out the WSJ article from Nov. 2003, 'A Harsh Fact - Most of Your Investments Won't Earn Much over A Lifetime'
Our VERSUS musical political parody website's Parody of the Week addresses the market turmoil in "BEARISH" (to the Terry Kirkman song "Cherish"). "BEARISH" is on VERSUS at http://versusplus.com, and on YouTube at http://youtube.com/watch?v=37pal-PYTUQ.
I'm gonna have to weigh in here with the writers who point out how misleading this article is. The betting-on-football analogy is totally wrong: it doesn't explain anything about CMO's or derivatives that can't honestly be said about any other form of investment security. The problem here isn't fatcat Wall Street investment bankers, from New York City no less, writing opaque disclosure documents (to be honest: in my youth I helped write disclosure for mortgage-backed securities). The problem is more that dishonest salesmen were writing loans to equally dishonest borrowers. There's no amount of disclosure on earth that can compensate for the fact that a borrower who claimed an income of $175k actually only earns $50K. What makes these securities worthless is the fact that people were encouraged to fib just a little to qualify for the loan -- and they went along with it. If enough people do that, the little fibs add up to one giant fraud.
The difference between investing in derivatives and outright betting is the same as the difference between taking medicine and doing recreational drugs. A derivative is no more a "bet" than any investment in any company. If you know that in any given geographical area there is a five percent chance that a $100,000 mortgage will default, you probably won't buy that mortgage off the bank, because most of us aren't willing to risk $100,000 that has a 1-in-20 chance of being lost. But, if you pool that mortgage with a hundred other identical mortgages, you suddenly have something that a hundred different investors can afford to buy in for $100,000 apiece -- because even with that 5% default rate, the accumulated mortgages are generating, say, 12% (interest, late fees, points, blah blah blah) which means a net return of 7% per year, plus whatever gets paid down from proceeds of foreclosure, maybe another 2-3%, and that's easier to stomach. The risk is no longer all-or-nothing; it's something you can quantify. It makes it easier for people who are honest to get access to lenders who are honest.
Selling in tranches doesn't diffuse anything. The high-risk tranches are always sold to institutional investors who are well able to bear the loss and fend for themselves.
The problem came in because some astonishingly high percentage of these borrowers apparently falsified their incomes -- in collusion with agents working on commission.
I remember during the do-com era, listening to those so-called expert suggesting this stock was gold and that stock was silver and realizing how wrong they were. It was a great lesson to learn knowing that when people (Wall Street people) having their own agenda (or their self-interest) in mind, we should not trust their words.
As a bystander, I feel lucky that I am not part of any of this mess which is going on now, but I cannot help but realize again how greed can make people (the mortgage brokers, the rating agencies, the Wall Street household name banks, and the hedge fund managers) so irresponsible almost to the point of being criminal.
This so-called subprime mortgage banked security, to me, is a dishonest scheme and its perpetrators should be held accountable and be prosecuted in front of law.
I have to say the do-com bust made me realize I cannot trust some of the Wall Street professionals, and this time around the entire Wall Street community has lost its credibility with me. I don't see any integrity and public good out of their money making games. I almost want to generalize that they are bad people whose only concern is profit and nothing else.
I see the need to regulate them.
No wonder most of these business people always advocate small government. To them, small government means they can freely pursue their profits even at the expense of the public good. To me, their way is just so disgusting.
I read some people here trying to defend the subprime mortgage backed security as a viable investment instrument or a viable way to spread risks. I disagree.
Simply I don't believe to provide mortgage loans or to lure people to take the loans they don't qualify for is a RIGHT THING to do. Furthermore, try to package and rate those loans as viable investment instrument again is not a RIGHT THING to do.
I think those bankers were eager to provide those loans to mortgage lenders because they knew they would sell those loans to investors, as a result they didn't need to bear much of the risk.
Long time ago, when a mortgage was a mortgage, not a derative investment instrument, did we see any of the bank was willing to loan money to people with questionable credit or without a steady income? They would not do it because they didn't want to take a stupid risk.
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