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[P]
The truth about corporate profits

By Blarney in Op-Ed
Fri Jun 14, 2002 at 10:20:41 AM EST
Tags: Politics (all tags)
Politics

Why do corporate executives make immense salaries for almost no actual work while working people of the United States and elsewhere do not find their own wages increasing? Why is wealth increasingly becoming concentrated into the hands of a few persons, although many millions of people are saving money and investing it in "shares" of productive enterprises? What does this have to do with the stock market, and the economy in general? The answers may surprise you.


The economies of most developed countries operate within a system commonly known as "capitalism". A main principle of capitalism is that "A thing is worth whatever somebody else is willing to pay for it", in contrast to other systems where the worth of things is determined by government, or by philosophical considerations of "Surplus Value" and "Labor Days". Therefore, a valuable object in capitalism is one which people are willing to pay for - and a thing which people are willing to pay for is, by definition, valuable. Another feature of capitalism is that the same money which people use to purchase the necessities of life is also capital - wealth that can be used in the production of more wealth.

Suppose that you are fortunate enough to be engaged in paid employment, producing goods and services of some sort. You return home with your pay, and you purchase goods and services for your own use. However, suppose also that you wish to convert some of your money into capital by a process known as "investment" so that it will create more money for you. If you are like many other people, you might use some of your money to purchase stocks - "shares" of a corporation. While there are many types of stock, most people prefer to invest in "common stock" which are considered to convey partial ownership of the issuer to the purchaser. When you buy a share of Microsoft Corporation, for example, you now own a small piece of MS. A share of Microsoft corporation currently costs a bit over $50 - it is quite valuable, indeed! It represents approximately 185 trillionths of Microsoft. Microsoft made a profit last year of approximately 6.2 billion dollars, which works out to $1.15 per share. MSFT also has about $7.15 of cash in its accounts per share.

So can you go to MSFT, show them your share, and demand your $1.15 earnings and the $7.15 that they have in the bank? Of course not! The management of MSFT decides how much money to pay to shareholders every year, known as a "dividend". Last year, for MSFT again, the dividend was precisely zero. Not a single dime was paid to shareholders. Instead, the money was reinvested so that the shareholders would own a piece of a bigger, even more profitable company in the future. Besides, if the money was paid to the shareholders the shareholders would have to pay taxes on it - but if the money stays in the company, shareholders do not have to pay taxes until such time as they sell their stocks. Furthermore, sale of stocks is taxed at a lower rate than dividends, which are taxed at ordinary income tax rates. Microsoft is not unique in keeping all or most of its profits, rather than distributing them to the shareholders. Most large corporations behave this way these days - such as Tyco, which has paid 5 cents per share as a dividend throughout its entire existence. A share of Tyco is currently worth about $10, and has been worth over $50 in the past. Yet the shareholder only receives 5 cents! The rest of the profits - some $1.07 per share last year - are reinvested to make Tyco a more valuable corporation and to allow the shareholders to own shares which increase in value over time. In the case of TYC, the shares actually seem to have grown less valuable by a factor of 6 or so over the past year. However, this policy of reinvestment is supposed to make the company more valuable in the long run, many years from now.

Why are these stocks valuable at all, anyway? You "own" a piece of the company, which is becoming a bigger and richer company every day, but you are not entitled to any of the profits the company makes - you are not entitled to any of the money the company has in the bank - you are not entitled to any of the goods and services produced by the company. What value on Earth could such a pseudo-ownership of a company have? Why $50, $10, or even $5? Why not $0.05 or $0? The answer is that ownership of a stock conveys voting rights. A stockholder can vote and determine the policies of the company. The more stocks held, the more votes the shareholder has - and should he/she own a substantial amount of stock, he/she can politically decide what the company does with its money. This is truly where the value of the stock comes from.

Now, the newspapers and Internet are currently full of reports of corporate shenanigans involving transfers of absolutely enormous amounts of money to "executives" and "partners". Chief Executive Officers are stealing and defrauding their companies out of amounts of money almost too large for an ordinary working person to even imagine. This is only the tip of the iceberg - companies engage in all sorts of "partnerships", loaning money to shell entities, in order to get the profits out of the company. Most of the time, they manage to do this without being criminally prosecuted - perhaps even without breaking any laws! Executive salaries alone can range into hundreds of millions of dollars - those aren't US dollars in the linked table, those are thousands. These aren't really "salaries" like working people might earn - companies ruthlessly pay their workers as little money as possible for as much work as they can - they don't do this because they're evil, but because they need to make a profit. Yet these "executives" are paid more money than they could possibly be worth! This is not wages paid for work done - it is a deliberate transfer of wealth out of the company. People with opinions all over the political spectrum agree that something must be done to end this looting.

But the looting is the only thing that makes your stocks valuable at all! Your share of MSFT or TYC is valuable only because some billionaire somewhere might decide to purchase an enormous amount of stocks and use his powers to vote on policy and siphon millions, billions of dollars from the corporation into his own pocket. If you're a small investor, most of the time you're not really a capitalist - you're a gambler. If you make $10,000 from selling stock, that money has come from another small investor who just lost $10,000 and hopes to make it back by selling the same stock to yet another person for $15,000 later. You might as well be speculating in Magic: The Gathering cards. The ONLY way that corporate profits ever make it down to small investors like you is if some rich man buys your stock in order to take a place at the feeding trough - to loot the company legally and illegally, for all the billions of dollars that are not paid in dividends to people like you.

We work for these corporations, we produce things, and when we go home we buy things. Profits get skimmed off the top of every transaction, and they are granted to a favored few. Even if you have $500,000 in stocks and imagine yourself a "capitalist", you are merely gambling against your fellow investors and rarely if ever share in actual profits yourself. And if the looting ever gets stopped - if the big boys don't get to skim - your stocks won't be worth a damn thing. The rich get richer, the poor get screwed, and the small investors swap money between each other and don't get anything from the corporations they think they "own". The system is broken. How can we fix it? We can't fix it by mob action - we have to understand what's going on. Even if every billionaire was lined up against a wall and shot and his wealth was confiscated tomorrow, new ones would spring up immediately - the stock market demands it. The problem isn't evil people, the problem is a bad system. The only solution is to restore the stock market so that profits are shared with investors, and capitalism will truly exist. Here's some suggestions for now:

  • For the liberals: High progressive income tax, say a 95% marginal rate on income over $50 million per year.
  • For the conservatives: Tax cuts - dividends should be treated at the lower capital-gains rate, rather than as ordinary income. This would end the tax incentive for these non-dividend paying stocks and consequent looting.
  • For investors: Stop buying these awful stocks that, not only are deferring dividends for growth, but that have no intention of ever paying any share of their profits to their investors! You think somebody will buy them from you for more - but probably they won't. There's a storm coming, and things will get worse before they get better. Buy stocks that pay dividends or can reasonably be expected to pay them at some future time - invest in companies that share the profits with you. Quit gambling against your fellow man and try real capitalism.

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Poll
A $100 million US CEO salary is
o Fair payment for work done 8%
o Inflated, but necessary to obtain proper talent 8%
o Good Ol' Boy back scratching, paid for in kind 58%
o Part of a deliberate plan to take profits out of the company 20%
o Simple generosity 2%

Votes: 182
Results | Other Polls

Related Links
o "Surplus Value" and "Labor Days"
o capital
o Microsoft Corporation
o $1.15 per share
o zero
o Tyco
o TYC
o shenanigan s
o stealing and defrauding
o tip
o hundreds of millions of dollars
o as little money as possible
o all
o over
o Magic: The Gathering
o favored few
o mob action
o Also by Blarney


Display: Sort:
The truth about corporate profits | 426 comments (390 topical, 36 editorial, 1 hidden)
Sorry (4.33 / 9) (#2)
by Little Miss Ahjunee on Thu Jun 13, 2002 at 01:58:42 AM EST

" High progressive income tax, say a 95% marginal rate on income over $50 million per year. "

This will not work. You forget the lobbyists who bring about these new laws in goverment also work for the good 'ol boys. Also, this is punitive. Why should anyone who makes that type of money pay 95% in taxes? Sure, to a poor person that seems just, but a flat tax is fairer still (and i'm not in favor of that either). You pay 95% in taxes and i will too!

Ideally, we'd never collect it..... (2.60 / 5) (#3)
by Blarney on Thu Jun 13, 2002 at 02:00:49 AM EST

Ideally, nobody would EVER pay taxes on a personal income of over $50 millions dollars, because nobody would ever pay themselves that much money. They would leave the money in the corporation, and use it for expansion of business (creating jobs and providing more stuff at cheaper prices to the consumer) or distribution to the shareholders (the rightful owners of the company).

The whole point of being "punitive" is that you will deter certain behavior. Ideally, nobody would EVER serve a prison sentence because nobody would commit a crime.

[ Parent ]

Job creation is not good (3.00 / 6) (#7)
by Fyndalf on Thu Jun 13, 2002 at 02:17:47 AM EST

Less jobs = less work.
Less work means more free time.
Just have to organise it right so that we all pitch in the minimal amount of effort to maintain our quality of life, then we can do inane stuff like post to Kuro5hin and such with our new-found leisure time.

But really, if a job only exists for the sake of employing someone, how is that anything but a waste of the huge chunk of their life's work they sink into it?  Human potential should not be thrown away like that.

If you only have the people in your company that need to be there, you end up with something with proportionally few people to its profits, such as Id Software.

[ Parent ]

A little off (4.00 / 1) (#395)
by sean23007 on Sat Jun 15, 2002 at 10:17:45 PM EST

Your logic is somewhat skewed. Yes, on a very wide scale, less jobs == less work. But less work == more free time only on a small, personal scale. It may seem like a good thing to you that someone would have more free time to spend their time posting to a nice site like kuro5hin, but what if they had no job to waste their free time? Would they still be able to post their ideas if they had no job? Would they have a computer? Would they be able to afford an internet connection? If they desire these things, someone has them to provide, for a price. Such is capitalism. Jobs do not exist solely to employ someone, they exist so that the employer can extract work from the worker, and so that the employee can extract wages from the employer so that that same employee could pay for things that might give him pleasure. A person does not get more free time by being unemployed, he just gets less food. Nothing will ruin a person's potential like starvation...

Lack of eloquence does not denote lack of intelligence, though they often coincide.
[ Parent ]
CEOs are shareholders. (3.85 / 7) (#10)
by bitgeek on Thu Jun 13, 2002 at 02:42:44 AM EST


The way CEOs make $50 million in a year is thru stock options-- they ARE the shareholders to whom this money "rightfully belongs".

These CEOs who make this money are not stealing from the shareholders.  They are participating - ALONG WITH THE SHAREHOLDERS- in the increased value of the company.

An example is Steve Jobs, who for the last 4 years has made $4 in salary as CEO of Apple.  Not $4 a year, $1 a year, four times.  He also (After doing this for three years and earnign the shareholders a tripling of the stock price) was compensated with a large chunk of Apple stock (I think 100 million shares) and a Gulfstream V.  Ok, so he got $50 mill in the jet and $0 in the stock-- these are OPTIONS.

If he raises the value of Apple stock by $20, then he makes $2 billion.  (It may be 10 million shares, not 100 million.)  But the thing is, everyone else who owns apple stock will have made the same amount, per share in capital gain.

This is fair compensation-- it aligns CEO income with the shareholders best interests.

The thing this article totally misses is that these huge payouts to CEOs are from stock appreciation, not salary.  No CEO makes $50 million a year in salary....

So, to put it another way, you're trying to solve a problem that doesn't exist.

Stock options align CEO compensation with shreholder value which is as it should be.
-- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
[ Parent ]

Stock shares and options which they're GIVEN (2.75 / 4) (#12)
by Blarney on Thu Jun 13, 2002 at 02:47:28 AM EST

If I want a share of Apple computer, I have to go and buy it. And if I want options, I have to go and buy those too. They're just being GIVEN these shares of stock. Of course if our shares become more "valuable", so do theirs. But regular people have to BUY their shares of stock.

This is fair compensation-- it aligns CEO income with the shareholders best interests.

No, FAIR compensation is however much it would cost to hire an equally capable person to perform the various duties - managerial and ceremonial.

[ Parent ]

Speaking of Apple Computer... (4.25 / 4) (#19)
by 90X Double Side on Thu Jun 13, 2002 at 03:12:13 AM EST

They're just being GIVEN these shares of stock.

They're being given options. You just said it in your last sentence, how could you forget so quickly? They don't get free shares, which they could just sell and leave, they get free options, which have value if they get the company's stock to appreciate, which is what the shareholders want. This may not be fair compensation by the definition you give, but your definition ignores supply/demand of leaders and assumes that the company should instantaneously switch leadership if someone will do it slightly cheaper. Givng options takes the realistic approach of capitalism that incentives make people do things, and therefore giving the CEO money if the stock goes up will cause him to try to make the stock go up. I don't know if your fair compensation means that pay should be pure salary and not merit-based, in which case you lose the incentive completely, or only that the CEO should be given less options, in which case we don't really disagree.

“Reality is just a convenient measure of complexity”
—Alvy Ray Smith
[ Parent ]

Options cost money too. (2.80 / 5) (#27)
by Blarney on Thu Jun 13, 2002 at 03:36:33 AM EST

And if I want options, I have to go and buy those too.

Perhaps you do not understand what I am trying to say. IF the company can REASONABLY be expected to rise in stock price, THEN an option which is underwater now might STILL be worth money.

In fact, you can buy options yourself. There's a whole market in "puts" and "calls". An option to buy MSFT at $58 isn't completely worthless, even though MSFT traded at $55 at the end of today, because there is a chance that MSFT stock might be worth more than $58 before the option expires. If you want such an option, you can buy one - it won't be free.

So don't try to pretend that it isn't compensation. Money is compensation. So is a free company car, or a big screen TV, or options, or a brick of gold every now and then, or anything else which is valuable.

the company should instantaneously switch leadership if someone will do it slightly cheaper.

Why the hell not? They do that to working people all the time - not because they're evil, but because it is profitable. Therefore, they should do the same to their executives, as it will be still more profitable. It is their duty to their shareholders.

[ Parent ]

and they tell me i'm crazy (3.00 / 4) (#36)
by Rhino in Rehab on Thu Jun 13, 2002 at 04:09:09 AM EST

If you think it's that simple to replace the CEO of a company, you belong in some sort of mental hospital. It's far easier to replace some account analyst or helpdesk technician than the manager of a million dollar business unit.


But the message Elmo seems to send out is that it is OK to never grow up, to always act like a screaming, annoying baby with a speach impediment. Hrm. - Grover
[ Parent ]
Yet they do it all the time... (2.50 / 2) (#110)
by bitgeek on Thu Jun 13, 2002 at 01:32:56 PM EST

I'm not disagreeing with you-- its difficult and dangerous to change the head of a company.

Its hard to find someone with the capabilities necessary as well.

Yet any CEO who does not perform not only doesn't get his options, he gets the boot.

So, Blarny is on one hand ignoring the fact that Options are worhtless if the CEO doesn't increase shareholder valeu, and on the other hand ignoring the fact that every CEO has his job on the line (along with his net worth) as he may well get the boot before his plans have had time to come to fruition.

Its a very difficult position.

But apparently, difficulty shouldn't be an issue in compensation, under Blarney's plan? (%95 taxaction.)
-- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
[ Parent ]

Why? (4.50 / 2) (#156)
by phliar on Thu Jun 13, 2002 at 07:26:07 PM EST

If you think it's that simple to replace the CEO of a company, you belong in some sort of mental hospital.
Why the ad hominem attack?

Please explain why it is not simple, don't just hurl invective. I have worked for companies where you could have replaced the CEO with a sack of coals and the company would have been just fine. (Actually it would have been good for the company.)


Faster, faster, until the thrill of...
[ Parent ]

You're both forgetting one important thing (none / 0) (#396)
by sean23007 on Sat Jun 15, 2002 at 10:32:55 PM EST

There is something more important floating around here, unsaid and unrealized. Companies fire their employees often, to find someone who will do an equivalent job for less compensation. Executives get fired less often, but usually not in favor of someone who will do an equivalent job for less, but will do a better job for more. Everyday workers are, for some reason, not seen this way. Not every company fires its workers in order to replace them with someone who will do the same job for less; rather, some of them prefer the better job. They might replace a worker with someone who will do a better job, or they might hold on to someone they already have who does the job better than someone who might replace them.

The better companies prefer quality workers, but the majority of companies prefer cheaper ones. All companis prefer better executives, but the best, most expensive executive is lessened in value if he is surrounded by nothing but the cheapest workers. Get all the best workers, and the executive has a much easier job, doesn't need to be as good, and doesn't need to be paid as much (though the results he will be able to achieve will garner him more compensation).

Lack of eloquence does not denote lack of intelligence, though they often coincide.
[ Parent ]
No denying that options arent compensation (5.00 / 1) (#259)
by Fayvren on Fri Jun 14, 2002 at 02:24:07 PM EST

But its a far cry from calling it someone salary. The main difference? Salary you are guaranteed to earn. Options are iffy. You cant say that someone has X amount of options and claim that as their pay, much like you cant claim that someone that puts a quarter in a slot machine is getting paid 100,000 dollars. Secondly, while options have value, I do believe that CEOs dont buy and sell the options that are packaged as compensation. In fact Im sure that they are not allowed to sell the options at all. What they are allowed to do is EXERCISE the options. This makes a huge difference in terms of linking compensation to performance. Yes, if you could sell the options themselves for money then what you are saying is true. But, restricting to exercise only, the options themselve only have value to the owner IF AND ONLY IF the executive can manage to raise stock price, which benefits all current shareholders.

[ Parent ]
What he said (none / 0) (#371)
by 90X Double Side on Sat Jun 15, 2002 at 01:24:09 AM EST

no need for me to reply, that hit every point on the head.;)

“Reality is just a convenient measure of complexity”
—Alvy Ray Smith
[ Parent ]
You lost me (none / 0) (#359)
by Paul Murdock on Fri Jun 14, 2002 at 10:02:23 PM EST

Right about the point where you launched into a tirade on how shares that don't pay dividends are valueless, but options on those shares given to executives aren't, but nobody will by your shares, but there's a huge market in options. What are you trying to say, if I may ask?

[ Parent ]
Its not always options. (none / 0) (#358)
by kelp on Fri Jun 14, 2002 at 09:48:16 PM EST

I don't know how it is at Apple, but several months ago my employer GAVE most employees stock.  These were not options to buy at a set price.  These were free shares of the companies stock.  Of course the executives got much much larger grants, on the order of 100 times larger than what I got.

I'm sure my employer is not the only one who does this. They gave these shares out (I think they may have issues new shares to do it, or they may have come from a stock buy back) because it was cheaper than giving raises and we have been running in the red for some time.

I think its not at all uncommon for companies to do these types of things, especialy for their executives.  Then there are other nice perks like interest free loans insured with the company stock and other such things.

[ Parent ]

given for a reason (4.66 / 3) (#57)
by boschke on Thu Jun 13, 2002 at 08:42:17 AM EST

CEO's are given this stock as a result of the so-called 'principal agent' problem. The shareholders (ultimately the owners) want revenue.
If you put someone in charge of a company who does not have any incentive to return money to investors, he will want to make the company bigger, by taking the profit and reinvesting in the company. (This is what happened to Philips, for example)
By giving the CEO a comparitively smaller salary, and some stock (or stock options), the owners ensure that they will see revenue for themselves, because it will now be in the CEO's best interests to return money to the stockholders.

The only reason CEO's are given bonusses/stock/stock options is that the shareholders WILL SEE RETURN ON THEIR INVESTMENT in shares, exactly what you say does not happen. If it doesn't happen, IMHO the board of directors (major shareholders) has given the CEO an inappropriate payment plan.

Let me also add to this that for the average CEO taking stock as payment may be a big risk. I do know someone who was asked to be CEO of a dotcom company that ultimately went belly-up. Needless to say he had worked long hours trying to save the company - and his and his shareholders' stock - for what turned out to be peanuts...

[ Parent ]

Compensation is not a Gift (3.00 / 1) (#108)
by bitgeek on Thu Jun 13, 2002 at 01:27:18 PM EST

They're just being GIVEN these shares of stock. Of course if our shares become more "valuable", so do theirs. But regular people have to BUY their shares of stock.

They aren't "Given" it, they have to BUY it just like you and I do. They buy it by trading their labor directly for the compensation. Its only a gift if you think their efforts are valueless -- and if their efforts are valueless, then their stock options will be valuless as well!

No, FAIR compensation is however much it would cost to hire an equally capable person to perform the various duties - managerial and ceremonial.

Yes, it would require the same amount to hire an equally capable person to perform the duties. It is fair compensation.

Unfortunately, I suspect you don't understand what a CEO does, what capabilities are necessary, and so you think that any idiot could do the job. After all, didn't you describe CEOs as people who sit around and do nothing in your origninal article?

But as I pointed out, if they sat around and did nothing, their compensation from stock options would be ZERO.

Jobs worked for three years creating a great increase in shareholder value for those $4, and a gulfstream, which he got *after* he did the job. If he wants to make any money going forward, he has to increase the value of the company for the shareholders. If he does nothing-- he'll make nothing.
-- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
[ Parent ]

ISO (4.00 / 1) (#154)
by Ressev on Thu Jun 13, 2002 at 06:55:04 PM EST

Incentive Stock Options are interesting. You are given the "Option" of purchasing the share at the price you are offered the share. Thus, if Mr. Jobs was given the option of 100 Million shares at $10 a share and he wanted to walk away with $1,000,000,000, he would have to see the stock double in value to $20 a share (assuming he sold 100% of the stock). Plus, he would still have to pay taxes on the sale (at least 25%).

It is simple to figure: take current share value less the value the ISO was offered at and multiply the result by the number of shares. You can ONLY make money if the value increases over what you were offered the shares at. Thus, if Apple's stock drops to $9, Mr. Jobs only has $4 to show for his 4 years of work at Apple.
"Even a wise man can learn from a fool."
"There is something fascinating about science. One gets such wholesale returns of conjecture out of such a trifling investment of fact." - Mark Twain
[ Parent ]

An idea to fix CEO corporate pillaging. (5.00 / 1) (#272)
by libertine on Fri Jun 14, 2002 at 02:57:25 PM EST

Stock options align CEO compensation with shreholder value which is as it should be.

I think that the solution would be to continue granting stock options, or stock grants, as the various boards of directors have always done.

However, when this happens now, it sets a timer for the CEO to make cash on the options. Their "long term planning" takes effect up to the point that they get their shares, and after that, the company usually starts to tank (plenty of examples out there). This knowledge comes from personal experience of knowing non-founder corporate execs, and personal experience applied to watching the same patterns in other corporations.

The best solution I can think of is this- enforce long term planning with a goal for future lifetime corporate viability. A corporate officer who takes options or grants does so under one condition; all stocks (with the exception of enough sold to vest and hold the remainder of options) MUST be held for one decade upon being exercised, and in the case of grants, must be held for 10 years from the time of leaving the company.

That would end the pillaging right quick. If some exec has to start living on dividends instead of sales, attitudes would change pretty quick. You would also see a movement to a more stable stock market and probably much less sack-the-company-and-run happening in upper management.


"Live for lust. Lust for life."
[ Parent ]

Progressive taxes (none / 0) (#410)
by drsmithy on Sun Jun 16, 2002 at 07:43:49 PM EST

The reason the "if you pay 95% tax and I will" argument is broken is because if I earn $35k/year and you earn $1m/year, after taxes that means I would have $1750 to take home for the whole year and you would have $50k.
How is that even remotely fair ?  $50k will allow someone to live comfortably anywhere in Australia - $1750 would barely cover a year's worth of food.
(I'm talking in AU dollars, but that doesn't really matter).

[ Parent ]
What does this has to do with anything? (none / 0) (#421)
by tekue on Mon Jun 17, 2002 at 04:44:24 AM EST

I make (USD) $6000/year, which means that after taxes I get to take home something in the range of $300. Are you willing to pay a 95% tax on everything you make above $6000/year? The point is, life is not fair, so at least taxes could be.

Also, if taxes are higher for people who make a lot of money, then what's the incentive to be as good as you can at what you do? With "proportional" taxes, if you're a lot better, you will make a little more money. Little incentive, little effort.

If anything, I'd say that taxes should be inversly linear, so that people who make more money pay smaller (percentage-wise) taxes. They will still pay a lot more money than an average worker, but at least not that much. I'm not expecting this to be a popular idea, though.
--
Humanity has advanced, when it has advanced, not because it has been sober, responsible, and cautious, but because it has been playful, rebellious, and immature. --Tom Robbins
[ Parent ]

That's $300/month [n/t] (none / 0) (#422)
by tekue on Mon Jun 17, 2002 at 04:50:11 AM EST


--
Humanity has advanced, when it has advanced, not because it has been sober, responsible, and cautious, but because it has been playful, rebellious, and immature. --Tom Robbins
[ Parent ]
You miss an important point. (3.18 / 11) (#9)
by bitgeek on Thu Jun 13, 2002 at 02:35:11 AM EST

Companies that reinvest their earnings are not "Stealing" from their owners. They are managing their owners money efficiently. As long as there are income taxes that take away this money-- when a company gives a divident, the investor has to reinvest that money at a rate that returns %33-%50 before they can get back to value of the earnines that were given in the dividend. On the other hand, if a company has business that it can grow, it can reinvest that money *tax free* and grow it more effectively than the investor. This is why companies that are growing don't pay dividends-- they get accelerated growth by investing those earnings-- and that accelerated growth pays the investor back *more* in capital appreciation than they would have gotten from the dividends. And companies that are in mature businesses that don't have so much opportunity to grow *do* tend to pay dividends. The really good companies are making so much money that they can invest a lot of it and still pay a dividend-- like Phillip Morris. At any rate, there is no moral justification for requiring companies to distribute earnings to shareholders-- as, in fact, that would be requiring companies to go out of business or essentially make bad business decisions. Earnings are needed to fund growth- otherwise there is no money to grow with (by definition) unless the company borrows money. And of course, the cost of money means that a dollar in your pocket earned is worth a lot more than a dollar borrowed. Finally, its important to note that no CEO runs a company by themself, unless they own it (And if they own it,, they can pay themselves whatever they want.) Public companies- that is C corps- have boards of directors, and a boards job is to decide what is fair compensation for the CEO. The board is answerable to shareholders and board members are liable if they act against shareholder interests. Most of the stories about CEOs making off with big money while the company does poorly are dishonest-- they ignore that the money being "made off with" is money that was earned while the company was doing great-- and that the CEOs did in fact earn it. Most people think that CEOs do nothing, but that is because most people are ignorant of what a CEO does. This comes from the long socialist tradition of claiming that labor is valuable but managmenet is worthless. However, anyone who's worked in a poorly managed company knows that management can be extremely valuable-- and CEOs are managers. Ones who can be fired at a moments notice and must make a hundred decisions a day-- the vast majority of which must be right. The idea of the non-working CEO who makes millions a year is the fantasy of the socialist who wants to eliminate all wealth and make everyone poor. The claim that they are non-working is the excuse used to justify taking their money-- but it is patently false on the face of it. IT is political rhetoric, and dishonest at best. Capitalism has issues-- mostly due to the poor judicial system we have. But nobody has proposed a better solution yet-- and the commonly proposed solution has failed time and again (and even to *work* requires a brutal dictatorship.) If you want to form a socialist society, there's nothing to stop you from froming your own collective on some land somewhere. Capitalism allows that. But those who want socialism aren't after the freedom to live in a socialist community, they are after our money. From each according to his ability, to each according to his desire and political correctness. Read Atlas Shrugged to see the inevitable result when this is applied in a situation that isn't a brutal dictatorship. Look at USSR history to see it when it is. BitGeek
-- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
Black or white (3.66 / 6) (#15)
by marx on Thu Jun 13, 2002 at 02:59:00 AM EST

Capitalism has issues-- mostly due to the poor judicial system we have. But nobody has proposed a better solution yet
This is not a black or white argument. No one is interested in arguing if capitalism or socialism is better, because it's an argument which has no connection with reality. All countries have elements of both socialism and capitalism, it's essentially a balance to achieve what most people consider to be an acceptable spectrum of life in society.

China has several stock markets, so is China capitalist or socialist? The US has imposed protectionist tariffs on its steel industry, does this mean the US is socialist? This kind of argumentation is meaningless.

The article writer did not suggest dismantling the capitalist system to solve this problem. He offered solutions which would dampen some of the bad sides of the capitalist system. I think it would be more fruitful to argue the efficiency of such solutions instead of going into fundamentalist-mode.

Join me in the War on Torture: help eradicate torture from the world by holding torturers accountable.
[ Parent ]

Fundamentalism (2.00 / 1) (#106)
by bitgeek on Thu Jun 13, 2002 at 01:20:53 PM EST


I wasn't going into fundamentalist mode-- I was pointing the merits of the solution.

As you point out Capitalism and Socialism are not all or nothing situations- china has some capitalism in it, the US engages in protectionism.

And this is why what I'm talking about *is* connected to reality-- the more a country acts in a capitalist way, the more efficeint, productive and and fair their system is, when compared to socialism.

If there's a way that's even better than capitalism, great, lets see it.

Unfortunately, the author apparenetly doesn't understand some fundamental aspects of the system he wants to rectify.
-- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
[ Parent ]

Other possible reforms (4.12 / 16) (#11)
by Anonymous 242 on Thu Jun 13, 2002 at 02:46:57 AM EST

  1. Stricter accounting standards. For example, get rid of not having to list employee stock options as an expence.
  2. Personal liability of key executives for actions of the corporation. If CEOs, CTOs, chairpersons of the board, etc., are to get ridiculous salaries, they really ought to have a personal vested interest in the company they server.
  3. Personal liability of shareholders proportional to the value of holdings in a corporation for actions taken by a corporation. Shareholders in Enron would have taken a much more active role if they could be sued collectively for Enron's misdeeds.


Good ideas..... (4.00 / 3) (#48)
by Blarney on Thu Jun 13, 2002 at 06:37:00 AM EST

I totally agree that employee stock options should be shown as an expense. The official word seems to be that it is impossible to value the options, as the true value won't be known if and until they are exercised. However, as it is quite possible to purchase "put" and "call" options and market prices for these do exist, it almost certainly is possible to value outstanding options the same way.

I do wonder about the liability thing, though. It does seem intuitive that, should I own 100 shares of Microsoft, that any liability for MS's actions should not fall on me - especially as the doctrine of joint and several liability means that I might end up paying all my assets should MS be found to have committed a tort and I share the liability. It also seems intuitive that, should the directors and majority stockholders of a large company deliberately commit a tort or a crime, they should be personally responsible for their actions.

However, a corporation is defined as a body which limits the liability of investors to the amount of money invested and no more. Your proposal of liabilities might defeat the purpose of even having corporations. Suppose, for example, that I want to go into business selling software or something. I incorporate.... get sued for some phony patent infringement and go broke with legal fees. The business goes under, it owes $100,000 in rent and distributor fees and whatnot.... but I keep my car and computer, I keep my personal credit rating, I don't end up homeless and hungry, because I formed a corporation and am only liable to lose the money I put into that corporation in the first place. A lot of the risk of running a business is removed, making entrepreneurship a possibility for people who otherwise wouldn't bear that sort of risk.

I guess there are no easy answers.

[ Parent ]

and meanwhaile you earnt good money (none / 0) (#277)
by svampa on Fri Jun 14, 2002 at 03:09:33 PM EST

Stockholder have lost their money, I you've got a very good fees.

Let's start up another company. Don't worry, none will remember you were in the middle of a bankruptcy



[ Parent ]
Think Ma and Pa Trucker (4.00 / 1) (#344)
by Blarney on Fri Jun 14, 2002 at 07:16:53 PM EST

Many big rigs are owned by a corporation with two stockholders - a man and his wife who share the work of driving and maintaining their truck, as well as collecting payments for the stuff they ship. They generally incorporate so that if they get into a major accident causing loss of life and/or cargo exceeding the limits of their insurance, they and their children will not find themselves completely impovershed. This is a corporation - and it's used to shield from liability.

Would you really do away with this? Or do you think that an independant trucker DESERVES to lose his house if a latch fails and he drops a load of TVs on the highway?

[ Parent ]

Yes (none / 0) (#381)
by Arkaein on Sat Jun 15, 2002 at 02:19:49 PM EST

The problem with corporations is that they serve as a shield for responsibility. It seems obvious to me that the trucker is the one responsible for his actions, who else should be?

A corporation should limit liablility by spreading it evenly amoungst shareholders or by dividing it up among the top executives, i.e. the ones most responsible for the actions of the corporation. In your example either way would correctly hold the trucker and his wife responsible for an accident due to their own negligence. It would be a pity if their family was impoverished, but having kids never excluded anyone from responsibilty.

----
The ultimate plays for Madden 2003-2006
[ Parent ]

Software (none / 0) (#408)
by Blarney on Sun Jun 16, 2002 at 04:12:37 PM EST

I'm writing a program now. If it ever works, it'll be amazing. Maybe I'll even want to sell it. I have no clue how to turn a piece of software into those elegant decorated CDs that line store bins nationwide, or how to promote web sales, but I suppose I might get the chance to learn it.

If I had to worry about being sued for some phony patent (like "Fat lines" or "XOR cursor"), I'd never dare do this. Incorporating might make it possible for me to go into business. I'm not at all sure that abolishing corporations would be a good idea for the economy.

[ Parent ]

1 and 2 are happening (4.50 / 2) (#62)
by wiredog on Thu Jun 13, 2002 at 09:02:52 AM EST

The SEC has proposed rules to implement 1 and strengthen 2.

On 3. The investors do have a liability. Talk to anyone who had major investments in Enron about that.

"one masturbation reference per 13 K5ers" --Rusty
[ Parent ]

Grandma's Liable! (3.50 / 2) (#130)
by bitgeek on Thu Jun 13, 2002 at 03:07:52 PM EST

I think item three is silly. My grandma isn't liable for the Valdez Oil Spill. She couldnt' do anything about it, and had all reasonable expectatiosn that Exxon was being prudent in its management of shipping.

You can't hold people accountable for actions they did not take. Buying stock in a company is not the same as managing the company.


-- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
[ Parent ]

She should be liable (4.00 / 1) (#173)
by Anonymous 242 on Thu Jun 13, 2002 at 09:48:42 PM EST

But only in proportion to her holdings. People would be much more diligent about who they elect chairperson of the board if the person they elect does something extremely criminal every shareholder has to pony up fifty to a hundred dollars to pay for criminal damages.

[ Parent ]
One more idea (4.00 / 1) (#141)
by cyberformer on Thu Jun 13, 2002 at 05:17:19 PM EST

Give stockholders real control over how their money is spent. The CEO's and directors' compensation packages should be put to a vote of all shareholders, with block-voting by pension funds, unions, other publicly corporations, etc. disallowed (to prevent "good ol' boy back-scratching"). I'd say the same about political donations.

[ Parent ]
No Special Rights (1.00 / 1) (#174)
by bitgeek on Thu Jun 13, 2002 at 09:56:35 PM EST

with block-voting by pension funds, unions, other publicly corporations, etc. disallowed

Why do I get special rights for buying the stock directly, while my grandma, who's pension fund bougth the stock should have her rights restricted?

Again the problem you're trying to solve doesn't exist, and this whole thread is much ado about nothing.

There is no good-old boy network because most large corporations are owned by the public... and when hey *aren't* then the owners have the *right* to decide how the company is run.
-- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
[ Parent ]

1 and 2, not 3 (none / 0) (#314)
by RandomPeon on Fri Jun 14, 2002 at 04:23:34 PM EST

Your first two suggestions are on the mark. #1 is being worked on by the powers that be, although not to the extent normal people would like.

#2 needs to be - no personal consequences for bad behavior is invitation for trouble as we've seen time and time again in many walks of life (police and priests come to mind....)

#3 is no good. Shareholders already have limited liability - if a company I own goes belly up, I get $0 for my stock. Investors are at the end of the creditors' line. Unlimited liability would kill the joint-stock corporation - the risks of investing would be infinite while the rewards would still have an upper bound.

[ Parent ]
So why do people buy, then? (4.92 / 13) (#13)
by gbroiles on Thu Jun 13, 2002 at 02:51:50 AM EST

If stocks that don't pay a dividend are such an awful ripoff, why do people buy them? It's not like their lack of dividends is a secret - most of them make it quite clear in their S1's and their quarterly/yearly statements that they've never paid a dividend, and don't anticipate doing so in the future.

I'd be really pissed off if I invested in a growing company and it started paying dividends - you don't grow a business by sucking all of the profit out of it, any more than kids or plants or anything else can grow without a surplus of resources. (And, likewise, I'd be pissed off if I invested in a growing company and it paid ridiculous salaries to management - that's just a different way of wasting money.)

A lot of the big compensation that people get jealous^H^H^H^H^H^H^Hangry about isn't cash, it's stock options - and while those can have a negative effect on shareholders (by diluting their fractional ownership of the company), they don't have the same cash-flow effect on the company.

Also, dividends are taxed twice - once at the corporate level, and again when they show up on an individual's tax return. If that money is retained or paid out for deductible expenses (like salaries), it's not taxed at the corporate level. So, in order to put $1 in your pocket (post-tax), the corporation is going to be out of pocket something in the neighborhood of $1.60, which makes dividends a pretty inefficient means for transferring value. Corporations are taxed aggressively on retained earnings that don't have a business purpose - so you can bet that Microsoft and other big companies who have a lot of money in the bank have spent some time coming up with plausible explanations for their bank balances.

One more point re taxation - capital gains are only taxed at a more favorable rate for individuals if they're held long-term - either > 1 year or > 5 years. Short-term capital gains are taxed at the regular income rate, just like wages or dividends. Also, corporations which have capital gains (corporations can buy & sell stock in other corporations) pay taxes at their regular rate, they don't get a special long-term capital gain rate discount like individuals do.

Ripoff (3.40 / 10) (#16)
by marx on Thu Jun 13, 2002 at 03:01:30 AM EST

If stocks that don't pay a dividend are such an awful ripoff, why do people buy them?
If pyramid games don't work, why do so many people join them?

Join me in the War on Torture: help eradicate torture from the world by holding torturers accountable.
[ Parent ]

that would be an interesting comparison .. (4.00 / 4) (#23)
by gbroiles on Thu Jun 13, 2002 at 03:25:18 AM EST

if there were pyramid games that continued to run month after month, year after year in a semi-public fashion.

Yeah, people do put together corporate scams that aren't really more than pyramid schemes. No, that's not good. But that's not what's going on in the majority of cases, and using extreme examples to stand in for the average case is silly.

I'm not going to play some sort of silly "I can think up crazier shit than you" game with this - for all I know you're happy to spout wacko leftist gobbledygook for days, and moderate responses which try to take actual experience & reality into account are going to get lost in BS. Have a great time.

[ Parent ]

Pyramid games (3.12 / 8) (#30)
by marx on Thu Jun 13, 2002 at 03:47:52 AM EST

if there were pyramid games that continued to run month after month, year after year in a semi-public fashion.
A stock market without dividends is exactly such a game though (i.e. if the only way to make money is to find some other people who will buy your stocks for more than you bought them). It's a pretty complex implementation of such a game, but it satisfies all the conditions.

In reality, stock markets do have dividends, but the assumption here was that even without dividends, investing in stock would be a good way to make money.

or all I know you're happy to spout wacko leftist gobbledygook for days
Thanks for the confidence, but all I was saying is that just because people are willing to do something doesn't mean it's smart.

Join me in the War on Torture: help eradicate torture from the world by holding torturers accountable.
[ Parent ]

what are you talking about, "scam" ? (4.16 / 6) (#38)
by eLuddite on Thu Jun 13, 2002 at 05:13:29 AM EST

Was the internet bubble a scam? Without dividends stock value is based on the future availability of buyers who will pay more than the sellers did in their past. Money is siphoned off by brokers, fund managers etc while new money fuels an increasingly larger price-base at the bottom and old money bails out at the top. What, then, besides "stock market", is your name for this confidence game?

---
God hates human rights.
[ Parent ]

No (4.37 / 8) (#44)
by gbroiles on Thu Jun 13, 2002 at 05:52:57 AM EST

No, for the most part, the internet bubble was not a scam, in the sense of a deliberate trick or swindle - some dotcoms were, or were pretty close, but most were not wildly different in kind (just in scale) from the thousands of other small businesses that fail every year.

What, exactly, is a "price-base"?

If you're trying to describe market capitalization, you should remember that you're talking about a very volatile measurement - e.g., 999 people buy 1 share each of a company for $1 per share - the company's got a market cap of $999. Now the company signs a new deal or releases a neat product or gets a new patent or whatever .. and one more guy buys a share of the company, but he pays $3 for that share, because the company's future looks brigher now. The company's market cap is now $3000 - but it's not like the extra $2001 of value that now exists came out of anyone's pocket. And it's not like the company received it, either - they only got (maybe) the $3 paid for the additional share, and that's in a very contrived hypothetical direct offering. I realize that it's stressful to see apparently vast sums of money appear and disappear based only on abstract expectations of future value, but that's how it works.

The stock market is not a zero-sum game, because people hold stock, not cash, at the end of each trading day, and on into the future.

If it were a zero sum game (like a pyramid scheme), then, sure, these hysterical critiques would be meaningful. But it's not. Value is created and destroyed without corresponding creation and destruction of cash.

What's so controversial about assigning value in the present to expected returns in the future? We do that all the time with things like employment, apartment rentals, mortgages, relationships, etc - those things aren't immoral or "scams" because sometimes they don't work out as expected, or because we can't predict perfectly what's going to happen, or because different people assign different values to the same things.

At the most basic level, even cash and money themselves are just concrete representations of an expectation of receiving value in the future - they're a little more familiar to most people than shares of stock, but they're not really different - in Marxist terms, they're all exchange value and no use value. The only reason I'm willing to do work in exchange for dollars is that I expect (here's that "greater fool" thing) that someone else will be willing to give me some things or services in exchange for those same dollars later on. If you really want to follow this to its logical end, you shouldn't just avoid the stock market, but all currency and money itself, and exchange only useful things and services directly for other useful things and services, and avoid the notion that value can be stored or represented separately from utility.

[ Parent ]

Zero-sum game (3.45 / 11) (#45)
by marx on Thu Jun 13, 2002 at 06:18:43 AM EST

The stock market is not a zero-sum game
Bah, don't spread misinformation. A stock market without dividends is a zero-sum game. The only transaction which can happen is a buy or sell of a stock, which gives the seller x units of cash and removes x units of cash from the buyer.

Join me in the War on Torture: help eradicate torture from the world by holding torturers accountable.
[ Parent ]

A stock market without dividends (4.00 / 5) (#61)
by wiredog on Thu Jun 13, 2002 at 08:55:43 AM EST

There is no such thing. There may be stocks that don't pay dividends, but no market where none of the stocks pay dividends.

The closest to that is the commodities markets.

"one masturbation reference per 13 K5ers" --Rusty
[ Parent ]

Dividends (2.83 / 6) (#82)
by marx on Thu Jun 13, 2002 at 10:42:03 AM EST

You're absolutely right. But it then has to be clearly stated that if it were not for the dividends, then the stock market would be a pyramid game. I don't think many investors are aware of that.

There is also a trend in the stock market to not pay any dividends at all, or to pay an insignificant amount in dividends, and to maintain this behavior indefinitely. Thus the stock market is converging to a pyramid game.

I find this remarkable, but it seems many people do not want to accept this.

Join me in the War on Torture: help eradicate torture from the world by holding torturers accountable.
[ Parent ]

Which market? (4.66 / 3) (#85)
by wiredog on Thu Jun 13, 2002 at 10:48:43 AM EST

Not this one.

"one masturbation reference per 13 K5ers" --Rusty
[ Parent ]
Trends (3.50 / 4) (#91)
by marx on Thu Jun 13, 2002 at 11:24:55 AM EST

Very good link. I have to say that I really hate financial news, so when I say "trends", I'm probably a few months or even years behind.

What you show in this link is that the trend today, or at least as predicted by the people interviewed, is to invest in high-dividend stocks. The trend before March 2000 was to diregard the dividend completely.

What I would like though is to hear this statement from a stock analyst on for example the CNN business news (from the article):

If you own a stock that doesn't pay a dividend, it's nothing more than speculation.
For example Microsoft doesn't pay any dividends, so investing in Microsoft is pure speculation. Unfortunately I don't think we're going to hear these kinds of statements in that context.

You disproved my statement that the stock market is converging to a pyramid game though, and actually made me regain some trust in the stock market.

Join me in the War on Torture: help eradicate torture from the world by holding torturers accountable.
[ Parent ]

Definitions (none / 0) (#340)
by galazi on Fri Jun 14, 2002 at 06:41:46 PM EST

The statement you quote is not quite complete. It should read:

If you own a stock that doesn't pay a dividend, and will never pay a dividend, it's nothing more than speculation.

I have not read all your comments, so I may be understanding you poorly, but your earlier comments that the stock market, without dividends is a zero sum game must be correct (assuming you are also including other returns to shareholders such as share buy-backs and capital returns). This is because since the value of a stock is the expected value of its future returns to shareholders, in a "no return" world the value of each stock would be zero, assuming shareholders never received any return.

If there were no dividends (or other returns to shareholders) profits would either be paid to employees/suppliers/entertainment or reinvested (to create more money to be paid to employees/suppliers/entertainment). No money would go to shareholders, so they should be prepared to pay nothing for a stock. Again, the qualifying condition would be that this would have to continue forever.

In the real stock market, there is an expectation that something will be returned to shareholders at some point - even companies that pay no dividends are implicitly promising to pay something later. However, that's where management psychology/greed come in.

Take Microsoft. For many years it was a high growth stock, paying no dividends & reinvesting profits on the promise that this would lead to ever growing profits (although it does have a share buuy-back program, which means it is returning some cash to shareholders). This is rational behaviour for companies that are growing strongly and that expect to continue to grow and why, despite not returning money to shareholders, they tend to be valued at a high multiple of their current earnings.

Today it is arguable that the years of super-growth at Microsoft are over, therefore the expectation should be that it would make a return to shareholders (they have a cash pile of about $40bn and could take on a similar amoount of debt quite comfortably, so could afford to pay out say $80bn as of today!). The reason they do not is because they don't want to: first, they think they are still a growth stock, so psychologically they don't believe they should make a return to shareholders because that's not what high growth companies do; and, second, if they make a return to shareholders then everyone will assume that Management believe that the company has gone ex-growth & will value it as a boring cash generating machine (so, a lower share price for all those management shares). Microsoft could be seen as a speculative stock today because people are betting on the future growth of the company - is it still a star, or is it a "cash cow" - not because it will never everreturn cash to shareholders.

This has got a bit longer than I planned (!), (and on a re-reading seems quite dull!) but to summarise:

Your comment about a non-dividend paying stock market being a zero sum game is correct, but has to be qualified by assuming that there are never any dividends (or other returns to shareholders), which investors believe is unlikely to be the case; and

Microsoft will have to return money to shareholders one day - at the moment it does not because it refuses to accept that its days as a growth stock are drawing to a close, but once it comes to terms with its fate it will be able to make quite a significant one-off return to shareholders (eg. through a massive share buy back to keep things tax efficient) and to make other returns thereafter.

[ Parent ]

Which link? (2.50 / 4) (#96)
by eLuddite on Thu Jun 13, 2002 at 11:58:49 AM EST

Not that one, not if it's intended to counter the claim "there is also a trend in the stock market not to pay any dividends." Maybe you're right, I dont know, but that link is no less banal than any other How to Beat the Stock Market newsletter. There's also the matter of state intervention (lowering interest rates) whenever the "natural" market threatens to click its heels three times and speculate the lot of us to the Land of Oz.

---
God hates human rights.
[ Parent ]

silly (2.60 / 5) (#77)
by tps12 on Thu Jun 13, 2002 at 10:18:46 AM EST

A stock market without dividends could only occur where companies have the opportunity for unlimited growth, which is absurd.

[ Parent ]
No, it's still not a zero sum game (4.50 / 4) (#126)
by gbroiles on Thu Jun 13, 2002 at 02:41:00 PM EST

.. look, in a traditional zero-sum game, there's an ending point, or at least a period-ending point, where wins and losses are tallied up.

There is no such thing for the stock market. (or, really, for the economy as a whole, which isn't that different.)

Given that the stock market (a) doesn't have nice easy stopping places for fixing value and (b) doesn't have a nice easy way to fix value*, if we had a stopping place, how can you possibly say that it's a zero sum game?

Your only other alternative is to say that it's a zero-sum game across long stretches of time, where someone's retired grandma who's been holding 100 shares of AT&T for 20 years is playing against a daytrader who's going to buy them and sell them again before he finishes his current cup of coffee. That doesn't make much sense either - frankly, I don't see how you're going to decide who the winner is, and who the loser is, and by how much, because they've exchanged different things (money and stock) whose relative value is uncertain at the time the trade is placed.

Sure, if you want, you can re-evaluate the trade periodically every few hours and minutes and days, and decide over and over again who was the winner of that "zero-sum game" based on the present value of the two things exchanged .. but the only way you'll ever get a final answer to that question is if the value of one of the things goes to zero permanently.

(* Yeah, it's traditional to value a portfolio by looking at the most recent trade price for each security or instrument, and multiplying that by the number held .. but that's almost certainly not the cash value which could be realized by closing those positions, because of price movements, and because closing out a significant position changes the price. The reported trade price isn't even the currest asking or offering price for a stock, just the most recent point where a buyer and seller agreed on the dollar value of the shares. If Bill Gates or Larry Ellison woke up tomorrow morning and sold all of their holdings of their respective companies' shares, they wouldn't be worth anything near the published values. Markets are closed more than they're open, and the value of a stock when the market is closed is hard to fix, especially if there's interesting news which affects the company or the economy.)

[ Parent ]

No, I was quite explicit with language. (3.00 / 5) (#140)
by eLuddite on Thu Jun 13, 2002 at 05:12:26 PM EST

I resent having to repeat myself just so that you can ignore the point. The point is hardly contentious. Speculating on capital gains alone is trading in a commodity market for liquidity. Like all commodity futures, it *is* a zero-sum game. I'm sorry, I must insist according to the usual formal definitions of such things. Whether or not such trading has utility in the economic sense, perhaps by enhancing efficiency in the capital market, trading risk, discovering price, keeping commodity brokers in Gucci etc, is the subject of capitalist pettifoggery.

frankly, I don't see how you're going to decide who the winner is, and who the loser is, and by how much, because they've exchanged different things (money and stock) whose relative value is uncertain at the time the trade is placed.

Deciding who the winner is is an interesting if impractical challenge with an interesting if practical answer: if it werent a zero sum game, sophisticated traders would do better than darts thrown at a board. They do not.

---
God hates human rights.
[ Parent ]

You don't even know what a zero-sum game is (3.75 / 8) (#144)
by Sethamin on Thu Jun 13, 2002 at 05:39:20 PM EST

Like all commodity futures, it *is* a zero-sum game.

As the previous person also already said, it is a zero sum game in exactly the same way that currency and money are a zero-sum game. So you might as well be attacking those as ridiculous notions, because they both exist on the same principle; the commodity you hold, be it money, stock, or anything else, will be exchangable at any point in the future. You might as well say that money is a joke and we should not participate in that sham.

Deciding who the winner is is an interesting if impractical challenge with an interesting if practical answer: if it werent a zero sum game, sophisticated traders would do better than darts thrown at a board.

Zero sum games which continue indefinitely are not "games", because they never end. This is far different than not being able to determine the end point of a game. If you have studied game theory you would know that knowing the ending point in a zero-sum game is an absolutely crucial part of the equation which can change everything. However, if the end never comes (or not in our lifetime, which for all intents and purposes is the same for us) then it cannot be analyzed as a game.

And your last part about sophisticated traders is gibberish and has no relevance to it being a zero sum game or not.

A society should not be judged by its output of junk, but by what it thinks is significant. -Neil Postman
[ Parent ]

good grief (3.50 / 4) (#147)
by eLuddite on Thu Jun 13, 2002 at 06:00:04 PM EST

And your last part about sophisticated traders is gibberish and has no relevance to it being a zero sum game or not.

Let me help you out, here. If commodity brokers did better than darts, there would be a transfer of money from the darts to the brokers. Since that isnt the case, monetary wealth is exchanging hands without being created or destroyed. Okay?

Zero sum games which continue indefinitely are not "games", because they never end.

Did I say they never end? They do end. These contracts are settled at net zero with whatever money made by X lost by Y when they expire or mature.

---
God hates human rights.
[ Parent ]

one other thing (4.00 / 2) (#157)
by eLuddite on Thu Jun 13, 2002 at 07:35:11 PM EST

Your entire first paragraph does not represent my views. Take care not to invent too many strawmen or read too much in your attributions.

---
God hates human rights.
[ Parent ]

ok, great. (4.00 / 1) (#159)
by gbroiles on Thu Jun 13, 2002 at 07:57:22 PM EST

point me to your formal definition of a zero-sum game and we'll see how it turns out. I don't know of a helpful one but I'm happy to be educated.

[ Parent ]
if you can't tell who the winner is (4.00 / 3) (#161)
by gbroiles on Thu Jun 13, 2002 at 08:35:07 PM EST

why are you so sure you've got a zero sum game?

And, plenty of sophisticated traders do better than darts - the Wall Street Journal has fun running that feature every few months to make fun of financial workers, but there are lot of traders and companies and mutual funds who've made a lot of money successfully trading over the course of decades - much too often, and for too long, for random chance to be a satisfying explanation.

Yeah, there are a bunch of goofballs who work for brokerages who can't pick stocks - but that doesn't mean stocks can't be picked, just that they're not good choices for advisors.

[ Parent ]

ok (4.25 / 4) (#163)
by eLuddite on Thu Jun 13, 2002 at 09:03:51 PM EST

why are you so sure you've got a zero sum game?

By writing "but the only way you'll ever get a final answer to that question is if the value of one of the things goes to zero permanently," you acknowledge that you yourself cannot be sure you havent got a zero sum game. If you were sure, you'd reference the certain positive or negative figures. Had you written "we'll" instead of "you'll", I wouldnt have replied.

You know very well zero-sum is an outcome in which any advantage gained by one side is matched by a disadvantage on the other. Without arguing the marginal utility of such transactions, our point of contention seems to be your refusal to to recognize examples of capital speculation such as the dot com bubble for a form of futures betting where the commodity is liquidity. Can we at least agree that futures is zero-sum? (Indeed, negative after margins.)

Look, you may be right, but it isnt obvious that you must be right and my major malfunction when people discuss the market is the overarching claims of merit and rationality in the process. There is no incontrovertible evidence for any of that.

---
God hates human rights.
[ Parent ]

Ever growing Zero Sum (1.75 / 4) (#175)
by bitgeek on Thu Jun 13, 2002 at 10:21:56 PM EST

Its getting amusing this constant insistance that the stock market is a zero sum game.

Even a cursory look at the history of the market and market valuation, will show that it has increased over the last 100 years at a great rate-- far outpacing inflation.

In fact, these analysis usually take no stock picking into accout. If you just look at the Dow or the larger market, even with the bankruptcies and down years, investing in all the companies without any judgement, produces a positive return over the long haul.

Otherwise, how could the market be on a 100+ year speculative bubble? If you go back to the times of the tulip mania, the market has gone for hundreds of years and increased in value on average.

And this isn't even counting the returns from dividends.

To say the market is a zero sum game is to ignore the blatent facts right in front of you.
-- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
[ Parent ]

what does that have to do with the thread? (4.50 / 4) (#178)
by eLuddite on Thu Jun 13, 2002 at 11:10:15 PM EST

If you want to indulge your confusion by changing the subject, insinuate your internal monologue in a new thread. Thanks.

---
God hates human rights.
[ Parent ]

Special Zero (1.75 / 4) (#191)
by bitgeek on Fri Jun 14, 2002 at 04:08:40 AM EST

Yes, when you have your own special definition of "zero sum game" you get to decide what's on topic and what's off, and what you *really* mean by what you said.

The reality is, in a zero sum game for one person to win, another has to loose.

The stock market does not work this way, and has never worked this way.

A company sells part of itself to the public in an IPO. It gets some money for the slice it sold. That stock then goes up in value (or down, but more often than not, it goes up). The company gets money to use to invest in capital equipment and grow its earnings.

The shareholder gets stock that is increasing in value. Because the earnings grow, the value of the share grows.

So, over 20 years, the company wins because the stock it didn't sell goes up in value due to the investment, and the shareholder wins because the stock they bought goes up in value due to the investment.

How can it be a zero sum game when both parties won?

If the company had not made its initial sale, it wouldn't have gotten the cash to invest in its business to grow, so it clearly won, even though it sold stock for less than it was eventually worth.

There, I've provided an example which proves you wrong. Not that you ever made a case other than to claim it was a zero sum game-- but here's a case where all parties win, and not only that, its the dominant case.

You probably operate under the delusion that whoever sold you the stock was selling at a loss-- but that's silly given that over time, on average, the market goes up. On average the person selling to you and the person buying both sell at a higher price than they paid.

How can it be a zero sum game when everyone who participates rationally always wins?
-- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
[ Parent ]

No. You are describing a positive game... (3.40 / 5) (#199)
by eLuddite on Fri Jun 14, 2002 at 05:13:21 AM EST

of negative outcome. Think rigorously, please.

Not that you ever made a case other than to claim it was a zero sum game

That's the only on-topic thing you said. But you still got it wrong: (1) Capital speculation is a form of futures betting where the commodity is liquidity. (2) In futures markets, trades at the end of the day must balance out to zero.

But that's neither here nor there. Surely you realize liberty loving nations (their actual plural is sorely disputed) prosper and grow only by dint of decisive government intervention on behalf of the proletariat and its unctuous, complacent, self-loathing envy for diminishing marginal utility? If the government didnt "steal" from the envied rich to give to the hapless poor, the vitality of the burgeoning middle stock investing class would be replaced in its entirety, the Alpha and Omega, length and breadth, eventually, sooner rather than later, by the two technofascists Bill Gates and Larry Ellison. Can you imagine a stock "market" of two companies? Dont be ridiculous! Gates and Ellison sitting around in their doting old age playing strip poker and reminiscing about the time they purchased the repeal of the Second Amendment is not a stock market.

Not hardly, anyway. Look here:

<MathML>
Euler equation for risk premium = covariance between the rate of return of asset and market portfolios
</MathML>
In other words, modulo intertemporal and intratemporal fluctuations in stochastic volatility, insurance contracts.

You sorely need, my little itty bitty geek friend, to stare down a copy of Murray Rothbard's Critique of Great Society: The Fallacy of the So-Called Private Sector.

---
God hates human rights.
[ Parent ]

No arguments. (1.00 / 2) (#310)
by bitgeek on Fri Jun 14, 2002 at 04:11:25 PM EST


In other words, you have nothing to say but to repeate your unsupported, and obviously factless claims.

I've provided proof. Deal with it.
-- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
[ Parent ]

I do not believe in factual claims. (5.00 / 1) (#346)
by eLuddite on Fri Jun 14, 2002 at 07:22:35 PM EST

I prefer quality claims instead.

I've provided proof.

Of what? Oh, that. Yes, you provided proof of that a long time ago. You havent called me back, you beastly man. Was I just another strumpet on your paper route?

Deal with it.

How many more tears will I have to shed before I've "dealt with it" to your satisfaction, you brutish swain. Will my face wrinkle like dry parchment before you stem the tears and share a kind and sentimental word with me? Talk to me, you force of nature!

---
God hates human rights.
[ Parent ]

no, I don't agree - (3.50 / 2) (#183)
by gbroiles on Fri Jun 14, 2002 at 02:25:11 AM EST

I agree that you can look at the stock market as a futures market for liquidity - but I disagree that it's a zero sum game, because there are multiple payoffs and costs which are expressed as different measures (e.g., risk, liquidity, dollars) which have different values to different people (or even the same person at different times), so I don't think it's even reasonable to talk about "winning" or "losing". Individual investors can say that they gained or lost dollars on a buy/sell pair of transactions, and in retrospect can decide that they think that they were or were not good decisions, but that's a process that's subject to a lot of second-guessing.

[ Parent ]
well, we were talking xchange of... (4.25 / 4) (#186)
by eLuddite on Fri Jun 14, 2002 at 03:31:15 AM EST

monetary wealth, or at least I was when made the point once or twice about ignoring utility (for good reason but for another time...)

---
God hates human rights.
[ Parent ]

stock market: random noise or music? (4.25 / 4) (#168)
by eLuddite on Thu Jun 13, 2002 at 09:23:00 PM EST

I learnt everything I know from kuro5hin. Quoting the relevent bit re: the subject line and your last paragraph
Bouchaud and Mézard try and explain this universal trend starting from the simplest of assumptions: life is unpredictable. Returns on investment are random. Profit and loss are unpredictable. Trading networks and connections are built up at random. This, as Bouchaud says, is a model consisting of little more than pure noise.
I find that agreeable.

---
God hates human rights.
[ Parent ]

Zero Sum Game (1.80 / 5) (#128)
by bitgeek on Thu Jun 13, 2002 at 02:46:18 PM EST

Bah, don't spread misinformation. A stock market without dividends is a zero-sum game.

The only possible explanation for a statement like this is ignorance, or deliberate evasion.

Trust me, and the dozen other people who have said this- educate yourself. Learn about the stock market and how it works. Learn about capitalistic economics.

We've seen the result of thinking like marx.
-- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
[ Parent ]

speaking of zeros (2.80 / 5) (#142)
by eLuddite on Thu Jun 13, 2002 at 05:26:58 PM EST

The only possible explanation for a statement like this is ignorance, or deliberate evasion.

Well, that's showing him! Thank you for standing up in front of the anonymous crowd to announce your displeasure and denounce your opposition. Congratulations, you had absolutely nothing to say, no argument to offer. I see that you are a new account; you'll fit in here and do well.

Trust me,

Trust you? Trust you?

---
God hates human rights.
[ Parent ]

[ot] oh brother. (none / 0) (#303)
by wrffr on Fri Jun 14, 2002 at 04:01:29 PM EST

Jenin has not been forgotten.

You might want to look into the actual events surrounding the Jenin refugee camp.

You might be surprised.

[ Parent ]
Jenin (5.00 / 1) (#328)
by marx on Fri Jun 14, 2002 at 05:24:24 PM EST

Why do you assume I think there was a massacre in Jenin? I don't know what happened there, and probably very few do.

What I know is this:

  • Israel knowingly violated security council resolutions.
  • Israel went into Jenin.
  • Several blocks were completely pulverized.
  • Israel blocked the UN from investigating whether any crimes against humanity had been committed.
  • A short while after Jenin, Likud, the party of Ariel Sharon, forbid the strive for a Palestinian state.

If a massacre did happen in Jenin, then that would be very bad indeed. A massacre is not necessary for my standpoint though. Jenin has come to symbolize what kind of nation Israel has become, and the current state of international politics and warfare.

Join me in the War on Torture: help eradicate torture from the world by holding torturers accountable.
[ Parent ]

jenin. (4.00 / 1) (#425)
by wrffr on Wed Jun 19, 2002 at 06:59:21 PM EST

Israel knowingly violated security council resolutions.
When the whole world tells you to lie down and die when you're being attacked, it's stupid to listen to the world.

If you honestly believe that the UN is impartial anymore, you need to check your history. Here might be a good place to start.

Israel went into Jenin.
They definitely should have done that.

Something worth looking into is how a refugee camp run by the UN turned into a terrorist training camp that even the other Palestinians referred to as "the city of bombers" and where even the women and children knew where the booby-traps were.

Several blocks were completely pulverized.
Because they were concerned with trying to keep innocent civilians from getting hurt, the Israeli army did the much harder and much more dangerous (for them) thing of door-to-door fighting instead of just steping back and dropping bombs like the US did in Afghanistan.
Israel blocked the UN from investigating whether any crimes against humanity had been committed.
Israel took issue with the people who were going to be sent and wanted more people with military knowledge/experience on the team instead of just political people who wouldn't know what they were looking at. You don't send the secretary from a veterinarian office to perform an autopsy.

Also, one of the people on the team had previously compared the Israelis to Nazis. If you're serious about objectively looking for facts, you need to offer to send more objective people who have a chance of analyzing what actually happened instead of just dealing with political posturing.

The UN backpedalled and canceled the trip when it became clear that they wouldn't get the smoking gun they were looking for.

A short while after Jenin, Likud, the party of Ariel Sharon, forbid the strive for a Palestinian state.
Which was against Sharon's wishes. Plus, it's a dumb idea to reward terrorism by appeasement. It only makes you look weak and like an even more appealing target.

If anything, Jenin is an indication of war crimes committed by the Palestinians and backed by the UN.

[ Parent ]

No (none / 0) (#334)
by Simon Kinahan on Fri Jun 14, 2002 at 06:27:55 PM EST

Two points:

1. We're not talking about a stock market entirely without dividends. Firms in mature industries pay dividends. Even firms that do not, still often repurchase their own stock, which has the same effect.

2. If you had a stock market that was a closed system, and where there were no dividends, it would be zero sum. However, money flows in and out of the stock market from the rest of the economy, which makes it non-zero sum even without dividends.

Simon

If you disagree, post, don't moderate
[ Parent ]

no one said it isnt *complex* (3.20 / 5) (#50)
by eLuddite on Thu Jun 13, 2002 at 06:57:54 AM EST

A dividendless market is a futures market in liquidity; it trades liquidity. Like all commodity markets, it is a zero-sum game. Whether or not there is a gain in utility (welfare) doesnt, I dont think, diminish the fact that trading just for capital gains is playing a zero-sum game. The "increasingly larger price-base" of exuberant markets I spoke of encapsulates this information in the concept of price basis: the difference between a cash price at a specific location and the price of a particular futures contract.

What's so controversial about assigning value in the present to expected returns in the future?

Nothing.

---
God hates human rights.
[ Parent ]

i should qualify my last opinion (2.80 / 5) (#75)
by eLuddite on Thu Jun 13, 2002 at 10:01:04 AM EST

Nothing.

It's neither controversial nor wrong in principle, it simply is; but I certainly would not entrust public goods like Doctors Inc. to the care of ideologues and snake-oil salesmen for capitalism. But hey, what do I know except that Americans have one of the most expensive healthcare systems for the least amount of human coverage.

---
God hates human rights.
[ Parent ]

Basic Math (1.85 / 7) (#127)
by bitgeek on Thu Jun 13, 2002 at 02:42:51 PM EST

Really, I think all liberalism is based on a lack of basic math skills.

There's no point in arguing with luddite, because he's convinces that the stock market is a scam, and that he's an oppressed poor person in a world controlled by rich people, and there's nothing he can do about it. Same thing with Blarney.

They ignore the facts, they ignore the logic. They have an agenda and they won't let such trivialities get in their way!

Its unfortunate, I really didn't think this article was a troll when I started responding.
-- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
[ Parent ]

fuck off, git (2.20 / 5) (#145)
by eLuddite on Thu Jun 13, 2002 at 05:42:31 PM EST

Why bother demonstrating what a clueless, incoherent cranks you are by pulling 3 windy paragraphs out of your ass about "liberalism", "logic", "oppression" and "agenda" when you can profit by three little, economical words: (1) fuck (2) off, (3) git. Ad ad hominum doesnt isnt convincing at the expense of brevity, you doorknob. That would make it a zero-sum game, and trust me, your transparent ignorance is no game.

---
God hates human rights.
[ Parent ]

Approaches. (1.66 / 3) (#171)
by bitgeek on Thu Jun 13, 2002 at 09:36:30 PM EST

Its interesting the way this topic always goes. On one side you've got people spouting a little nonesense and insisting that those who disagree are "ignorant" and on the other you have people who patiently, time and again, explain, using objective facts, logic, and easily verifiable evidence where the person is wrong.

And the response is "you're so ignorant".

Yeah, you're screaming at the top of your lungs calling me names for pointing people to information that will educate them, and I'm the one who's ignorant?

whatever.
-- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
[ Parent ]

You must enjoy being told to fuck off. (3.75 / 4) (#177)
by eLuddite on Thu Jun 13, 2002 at 10:54:29 PM EST

on the other you have people who patiently, time and again, explain,

First, your contribution to this thread has been a "patient" zero. Can you understand this? It doesnt matter how hard or how often you pat yourself on the back for your convictions, I am unimpressed by the force and frequency of your badly articulated false certainties, OK?

using objective facts, logic, and easily verifiable evidence where the person is wrong

Second, I had no idea capitalism was such a well understood science. Pay attention, this is important: Until such time as you learn that no such thing as "objective facts, logic, and easily verifiable evidence" has ever escaped from anyone's mouth, much less Buffet or Rand's, your powers of analysis and claim to learning will remain severely retarded. You can have the last word if you promise to stop following me around.

---
God hates human rights.
[ Parent ]

Reality Exists (2.40 / 5) (#189)
by bitgeek on Fri Jun 14, 2002 at 03:52:27 AM EST

When I read Rand's stuff for the first time, I was incredulous. I could not accept that there might be people who deny the existence of reality. I thought she was being silly. But since then, I've started to see them. More startlingly, I've occasionally seen them declare it outloud, as you just did.

I know my explanations are lost on you-- you clearly, and proudly state that you are in denial. But there are others who think like you who read what I write and learn from it.

But I do find it very interesting, people such as yourself. You have provided not even a single argument to back up your conclusions. And you have given us a lot of non-sensical, barely english. My apologies if English is your second language. Yet, between asserting that the stock market is a zero sum game, ignoring all the evidence presented to the contrary, while providing none to support your special definition of zero sum, you've been going on and on accusiung me of providing nothing but insults.

You accuse me of the very thing you have done. Do you really think that even for a second I'm goign to believe you? OR consider that you might be right?

Before I realized this whole thing was a troll, I invested a fair bit of time trying to educate Blarney and you. Those posts are there for everyone to see. Others have posted very long, detailed, logical explanations as well.

Yet you, and it seems marx and Blarney, just repeat in every post your unsupported claims along with personal insults-- in your case your insult is to claim that I do nothing but make personal insults.

I refuse to accept that you think people are going to believe you, and you know that I know the truth, so what possible motive could you have for taking such a line of attack?

I could understand if you tried to back up your notions with an explanation, no matter how flawed, of why you beleive them-- that I could even respect.

But you're not even trying. And thats, well,

sad.
-- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
[ Parent ]

Do you find me attractive? (3.00 / 2) (#248)
by eLuddite on Fri Jun 14, 2002 at 12:52:21 PM EST

Oh I dont mean physically, everyone finds me physically attractive, even Mormons. I mean magnetically.

---
God hates human rights.
[ Parent ]

Attraction. (2.25 / 4) (#309)
by bitgeek on Fri Jun 14, 2002 at 04:10:02 PM EST

You represent all that is lazy, unproductive and stupid in our society.

Fortunately, darwin has a reward coming for you.
-- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
[ Parent ]

you dissapoint me (4.50 / 2) (#335)
by eLuddite on Fri Jun 14, 2002 at 06:27:58 PM EST

I was expecting you to write another stirring novel instead of a death threat. Wait a minute! This is your way of playing coy, isnt it? You're cybering me your inimitable, inept geek way, arent you? You're touching yourself right now, arent you? Why, you want to throw me on a dirty mattress and rape me like Roark raped Dominique Francon, dont you?
Her eyes became two narrow slits of gray; gray as the gray of the quarry granite. "You want something, don't you? What do you want?"

"I want to take you sexually by force. Okay with you? I know you're the type of dame who won't put out for just anyone."

"Goddamn you," she hissed. "Submit the appropriate forms to the Ministry of Romantic Foreplay."

She wants it, Roark thought: she wants to be "taken by force," so to speak, or she wouldn't have asked me to file application with the Ministry of Romantic Foreplay when I mentioned my intention to do precisely that.

STOP IT! This will get you nowhere! You're no Roark. I'm no Dominique Francon. My father doesnt own a quarry, he's a plumber. There shall be no nibbling and slapping of pudgy geek flesh in my future. I have to wash my hair tonight. I do, I do, I do, I do!

Oh, bother. Take me now. Yes, take me now, take me swift, I cannot resist your facts, your logic and your thrift. Dont be kind, dont change your mind, drop behind and peel me like an orange rind.

Fudge.

---
God hates human rights.
[ Parent ]

Pyramid Schemes (2.00 / 2) (#125)
by bitgeek on Thu Jun 13, 2002 at 02:40:21 PM EST

Are people really that ignorant of the stock market that they think its a pyramid scheme?

Seriously?
-- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
[ Parent ]

re; Pyramid Schemes (3.66 / 3) (#206)
by Rogerborg on Fri Jun 14, 2002 at 09:18:52 AM EST

    Are people really that ignorant of the stock market that they think its a pyramid scheme?

I wouldn't say that it is a pyramid scheme, merely that it was used as a pyramid scheme up until the last slump by a significant number of investors.

I have no problem with the market in theory, but in practice it always seems to be the most calm, rational and patient investors who get the shitty end of the stick from twitchy speculators indulging in bouts of panic selling on the spurious but compelling and self fulfilling rationale that bad news leads to panic selling leads to bad news...

The biggest practical issue that I can see is that it's more important to be first to trade (rather than right to trade) when the price starts moving. Fractions of a second count. Now, we already have a situation where trading can and is suspended to prevent panic selling, so what would be wrong with building brakes into the system to prevent the necessity for taking such drastic action? I'm thinking of limiting the amount of stock that can be traded by a given trader, or in a given company each day, and/or traders being able to either buy or sell at (e.g.) at the daily (or lunch or hourly) closing price, rather than scrabbling to be milliseconds ahead of the game on the spot price. That might lead to (gosh) rational trading, rather than flurries of twitching and following the herd.

Not that I'm really that bothered. I'd no more "invest" in stocks than I'd take out a second mortgage and bet it all on red.


"Exterminate all rational thought." - W.S. Burroughs
[ Parent ]

Tulips (3.88 / 9) (#17)
by Blarney on Thu Jun 13, 2002 at 03:02:12 AM EST

If stocks that don't pay a dividend are such an awful ripoff, why do people buy them?

Because they think somebody out there is even crazier than they are, and will pay even more for the same non-dividend paying stock. Also because they know that some rich guy might come in and buy a large voting block someday and give himself and his friends and kids and country club members cushy jobs and unaccountable options.

Also, dividends are taxed twice - once at the corporate level, and again when they show up on an individual's tax return.

As mentioned above, I'd like to see that changed someday.

I'd be really pissed off if I invested in a growing company and it started paying dividends - you don't grow a business by sucking all of the profit out of it, any more than kids or plants or anything else can grow without a surplus of resources.

Who cares how much it grows, if you never get any reward from the growth? There's only two ways for the growth to make it to your pocket - you can sell out to a rich guy who is taking over a big interest in the company, or you can sell out to some idiot who thinks it's worth even more than you think it is.

[ Parent ]

rich guys & idiots (3.50 / 4) (#26)
by gbroiles on Thu Jun 13, 2002 at 03:35:06 AM EST

Well, I guess that's really your whole arugment right there - two kinds of people buy & sell stocks, rich guys and idiots.

If you think that's a helpful analysis, well, I guess it takes all kinds.

You know, information on this sort of thing is available - it's very rare for some "rich guy" to buy a significant piece of a public company - even as little as 5% is considered a big stake. And, given that companies trade at (generally) multiples of their yearly earnings - that's the P/E ratio you hear people talking about - it doesn't make much sense to think that someone's going to spend somewhere between 5 and 50 times what a corporation earns in a year just so they can turn around and (assuming your story was even plausible) take their money back out slowly .. which would take years, assuming they took for themselves every penny of earnings, which is wildly unrealistic. That's just silly. It would make more sense to just leave their money in a savings account.

I get the impression you just want to rant about how "rich guys" rip everyone off but aren't especially interested in whether or not your claims have any basis in fact.

I understand if you're not interested in reading any Rand (I can't say I'd be real excited about it either) but you really ought to take a look at Warren Buffet's stuff - he's very readable, and down-to-earth, and the closest thing there is to these evil "rich guys" who buy companies like Matchbox cars that you seem to imagine .. but he (and Berkshire Hathaway) is nothing like your caricature presented here.



[ Parent ]

Coalitions (2.60 / 5) (#28)
by Blarney on Thu Jun 13, 2002 at 03:38:31 AM EST

even as little as 5% is considered a big stake

As well it might be, if you got together with some like-minded people. Coalition politics! How amusing.

[ Parent ]

not in your example (4.20 / 5) (#32)
by gbroiles on Thu Jun 13, 2002 at 03:51:49 AM EST

.. because you said that some billionaire somewhere might decide to purchase an enormous amount of stocks and use his powers to vote on policy and siphon millions, billions of dollars from the corporation into his own pocket after you talk (*in error) about salaries in the hundreds of millions of dollars for executives.

You can't round up a bunch of guys who each have a 5% stake in a company and make them all CEO and give them all stock options worth hundreds of millions of dollars - there aren't enough executive positions, the boards (and especially the compensation committees) need to have outside (e.g., nonmanagement) directors, and the simultaneous exercise of that many stock options would make them all worthless.

Face it, your conspiracy theory is a baseless fantasy dreamed up to justify your pre-existing ideas about money and fairness.

Yes, lots of people make lots of money. Many of them don't work as hard as the average cleaning lady or drywall installer .. but they're not doing it the way that you say they are.

(* You report long-term compensation (e.g., stock options) from a 3-year old survey as if it were salary. Stock options are not salary from a tax or accounting perspective - even the table you cite makes that differentiation. Not one of the entries in the table shows a salary in the hundreds of millions of dollars. Do those people still make a shitload of money? Yes. Is your understanding and reporting of the contents of that table wrong? Yes.)

[ Parent ]

Rich guys and idiots (3.75 / 4) (#67)
by rdskutter on Thu Jun 13, 2002 at 09:26:24 AM EST

Well, I guess that's really your whole arugment right there - two kinds of people buy & sell stocks, rich guys and idiots.

The number of idiots in the game is vastly greater than the number of rich guys. But if the idiots didn't play the game then the rich guys wouldn't be able to play either.

The moral of the story: Don't be an idiot


If you're a jock, inflict some pain / If you're a nerd then use your brain - DAPHNE AND CELESTE
[ Parent ]

re: Rich guys and idiots (none / 0) (#231)
by Rogerborg on Fri Jun 14, 2002 at 11:43:11 AM EST

    The number of idiots in the game is vastly greater than the number of rich guys

And of course, every idiot thinks that they know something that the other idiots don't, and it's only a matter of time before they become one of the rich guys.


"Exterminate all rational thought." - W.S. Burroughs
[ Parent ]

voting (none / 0) (#267)
by mattw on Fri Jun 14, 2002 at 02:40:41 PM EST

If the shareholders ever get tired of not being paid, they can simply insist on it. The board of directors is elected by shareholder votes. If more than 50% of the shares wanted to, say, dissolve the company and distribute its assets, they could do it. You do get a reward from the growth -- your shares are worth more. Your entire argument is based on an absurd assumption -- that the actual value of shares is only derived from a bunch of crazed loonies who will pay more than you will for a share. It isn't. Stocks are valued, fundamentally, on the future cash flows of a company. If people stopped paying for shares of company's whose cash flows justified a price, then the existing shareholders could just start distributing the money instead of reinvesting it.


[Scrapbooking Supplies]
[ Parent ]
people buy hoping they can sell for more (3.42 / 7) (#25)
by NFW on Thu Jun 13, 2002 at 03:32:44 AM EST

If stocks that don't pay a dividend are such an awful ripoff, why do people buy them?

It's called the "greater fool theory." You buy hoping that you'll be able to find someone dumb enough to pay even more.


--
Got birds?


[ Parent ]

Greater Fool Theory (2.00 / 2) (#124)
by bitgeek on Thu Jun 13, 2002 at 02:37:22 PM EST

Its very unfortunate that so many people think that this is all the stock market is

Its as if they believed investing doesn't exist.

When the truth is that %99 of the people investing are not doing so based on the greater fool theory.

They're actually investing. You should try it.
-- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
[ Parent ]

Relax. (5.00 / 1) (#150)
by NFW on Thu Jun 13, 2002 at 06:14:55 PM EST

It was a joke.

It's unfortunate that so many people take everything so seriously. It's as if their sense of humor doesn't exist.

Humor is good. You should try it. :-)


--
Got birds?


[ Parent ]

Humor (1.00 / 1) (#172)
by bitgeek on Thu Jun 13, 2002 at 09:44:13 PM EST

Hey, didn't catch the humor. Actually, still don't see how you were making a joke, as the topic is rife with people who have said this seriously. So it goes. I do get serious when it comes ot this topic- liberty.

Anyway, I have a good sense of humor in real life. And live in the same area as you.

Want to start a company? (Yeah, still serious.)
-- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
[ Parent ]

Contact me directly. (none / 0) (#176)
by NFW on Thu Jun 13, 2002 at 10:38:37 PM EST

Want to start a company?

Maybe. Tell me more and I'll give you a better answer.


--
Got birds?


[ Parent ]

value - but not enough (none / 0) (#333)
by the womble on Fri Jun 14, 2002 at 06:24:49 PM EST

If stocks that don't pay a dividend are such an awful ripoff, why do people buy them?

I agree with you that the fact that people buying stocks demonstrates that they have value. This does not, however mean that they have as much value as they should

Shareholders in practice are not treated by mangement as though they have full ownership.

If you want empirical evidence take a look at this academic studyl. For theoretical background the classic Jensen and Meckling paper (Michael C. Jenson and William M. Meckling, Theory of the firm: agency costs and ownership structure, Journal of Financial Economics) is my favourite.

There is also plenty of evidence that mergers and acquisitions rarely benefit the shareholders of the acquiring company - it is certainly generally accepted by bankers and analysts (although we may not say so too often so as not to annoy clients!).

Executive comepnsation is not only generous but frequently not linked to shareholders interestes. Two recent UK examples are the repricing of Marconi's share options, and directors bonuses at Vodafone conditional on completing the takeover of Mannesman (very telling when considered in conjuntion with my last point)

[ Parent ]

Some reading. (4.14 / 21) (#14)
by bitgeek on Thu Jun 13, 2002 at 02:52:20 AM EST

To rectify your misunderstanding of corporate profits, please read some of the following:

Warren Buffets "Letters to stockholders"  Berkshire hathaway has never paid a dividend.  Repeatedly Buffett has explained why it would be unwise to do so.  His shareholders are very happy that he's never done it.   This is a great example of a well run company that grows and reinvests for growth.  He argues that stock options are a bad idea for compensation, and he's wrong there, but everywhere else he's right.

"Common stocks, uncommon profits" by Philip Fisher-- one of the seminal books on individual investing, Buffett has said that he's %75 Graham and %25 Fisher.

"Securities Analysis" by Ben(?) Graham.  Written in 1925 this was the book that created the concept of "value" investing.  (A misnomer becuase Value stocks are also Growth stocks.)

If you had to read one-- I'd read the last 3-4 years of Buffets letter to shareholders (downloadable from their website) and then I'd read Common Stocks, Uncommon Profits.

The "little guy" is not only trading amongst themselves-- the little guy can get very rich with prudent investing, and has all the rights of other common shareholders.

Warren Buffett, by the way, bought Berkshire Hathaway with the returns on investing his paper route money.  He's never had a regular job-- just invested the piddling money of that time wisely and grown it from there.  Now he's rare in that he's become a billionaire from it, but there are plentiful examples of people who have become merely millionaires from it.

What you earn is yours-- it is the result of the time of your life you traded for the value paid in return.  that money is not the property of the government or anyone else.  Where you invest it is your business- and what you buy with it is yours as well.  Therefore when you buy a business (whether it be a single share or the whole thing) you own it-- and its earnings are yours as well.  

Any plan that requires you to give away your earnings to the government or any other entity, is  a plan of looting.  It is theft.  And it is slavery-- if you do not own the results of your labors, you are laboring for another.  And what is a slave but someone who works not for themselves, but for the benefit of another?

And if you don't understand that, read Atlas Shrugged.  There's a great speech in there about what money really is.
-- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.

oh brother (2.12 / 8) (#20)
by dr k on Thu Jun 13, 2002 at 03:12:20 AM EST

not again.


Destroy all trusted users!
[ Parent ]

Objectivism (3.28 / 7) (#21)
by Blarney on Thu Jun 13, 2002 at 03:20:42 AM EST

The "little guy" is not only trading amongst themselves-- the little guy can get very rich with prudent investing, and has all the rights of other common shareholders.

He can get rich. People got rich in the Dutch Tulipmania also. But not everybody can get rich unless profits come into the system. Are you disputing the fact that if a bunch of stock owners have in total $1,000,000 and they trade stocks with each other, and if no profits are distributed to any of them from the company they own a piece of, that they will still have $1,000,000 less the broker's cut? A is A.

Therefore when you buy a business (whether it be a single share or the whole thing) you own it-- and its earnings are yours as well.

OK, go and buy a share of MSFT. Go to Redmond and ask for "your" $1.15 of earnings and "your" $7.15 of cash. See how they react! Hey, why not ask for 10 lines of Windows XP while you're at it?

And if you don't understand that, read Atlas Shrugged. There's a great speech in there about what money really is.

That's got to be 3 times you've bragged about reading that book in the past 30 minutes. Don't bother. You can go ahead and believe that Ken Lay and Chainsaw Al and Carly are Hank Rearden and Dagny Taggart if you like, but I believe they're Wesley Mouch.

[ Parent ]

The additional value of the stock... (3.20 / 5) (#34)
by lucius on Thu Jun 13, 2002 at 03:57:43 AM EST

comes from the increase in value of the company.

For example, if a company reinvests all of its profits to increase market share then the increase of value of its stock is the increase in value of its assets (both tangible and intangible) as percieved by an observer.

On the other hand, if a company reinvests all of its profits in a rapidly depreciating commodity (eg top of the range computers) that produces no tangible or intangible gain (say they sit in a storeroom or something), then its value will decrease.

The problem you seem to have here is that you're considering the stockmarket to be a closed system, when in fact the listed companies are doing business in a larger economy - the extra value of stocks comes from the increase in value of the company due to its actions in the economy at large.

Having said all this though, I still don't understand how the global economy can be growing, unless it is some function of population growth or something, but that's slightly offtopic I guess.

[ Parent ]

Global Economic Growth (3.50 / 2) (#129)
by bitgeek on Thu Jun 13, 2002 at 03:00:59 PM EST

The global economy grows for multiple reasons. Even on the global scale, its not a zero sum game.

First off, the number of people is growing, so that means more people to feed, clothe, house and sell TVs to. That creates growth.

The food, TVs, etc do not come from other people, they come from natural resources. These resources are the source of growth.

Furthermore, even more growth comes not from the use of the resources, but the *better* use of the resources. Innovation increases value (as the cotton gin increased the value for all concerned, even in a "closed" system)

And finally, one of the significant resources that is turned into money is energy. The source of this energy has billions of years left in it-- so on the trillion year scale, it may be a zero sum game, because eventually the sun will be finished... but on even tens of thousands of years, its a system with a constant supply of the most essential resource one could want: energy. And so if managed right, it will grow.
-- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
[ Parent ]

An example... (4.25 / 4) (#105)
by bitgeek on Thu Jun 13, 2002 at 01:15:04 PM EST

People got rich in the Dutch Tulipmania also.

How is a short term mania relevant to stock market investing? Its only relevant as an example of a type of investing to avoid.

Apparently you think that's all investing is, and in that case you're sorely mistaken.

Which is why I pointed you to the writings of Graham, Fisher and Buffett--- not exactly Tulip Mania types!

Are you disputing the fact that if a bunch of stock owners have in total $1,000,000 and they trade stocks with each other, and if no profits are distributed to any of them from the company they own a piece of, that they will still have $1,000,000 less the broker's cut?

Yes, that is not a fact. That is an explicit description of your misunderstanding.

Maybe it comes from you not understanding what stock is. Stock (or shares) are ownership in a company. When you own part of that company, you own part of everything that company owns.

So, lets say you have a small company that has a pinball machine. The pinball machine cost $50 to buy, and makes $10 a week in revenue. You have to pay the owner of the sho where the machine lives %50 of your revenue. You can't afford the $50 out of pocket, so you get your sister to loan you $25 for %50 of the business.

You keep this pinball machine for 100 weeks- two years. You never give any money to your sister. Instead, you take the $500 you got from the earnings of that one pinball machine (%50 of $10 a week for 100 weeks) and you go out and buy 10 more machines. You wait another 100 weeks.

At the end of this period you have 11 machines and $5,500 in retained earnings. You put those retained earnings into government TBills.

You've never paid your sister any of the earnings of the company. Has she been defrauded? Has she lost you? You'd say yes.

But the answer is no. Her stock is worth $3,025. (No depreciation on the pinball machines in this simple example.) Which means her $25 investment has grown to $3,025. She can sell her stock to you for that amount, or sell it to someone else.

And that's just the book value of her stock. If, instead of buying TBill after 200 weeks, you bought more pinball machines, the value would continue to grow rapidly.

This is what happens when a company retains and invests earnings.

OK, go and buy a share of MSFT. Go to Redmond and ask for "your" $1.15 of earnings and "your" $7.15 of cash. See how they react!

I'm sure if I did this I could find someone who gavem e $50 for my shares. If not, there is always the market.

It is yours, you do *own* it, but you don't have rights over all the rest of the shareholders to determine how the earnings are spent, or to demand that they liquidate their assets to pay you the $7.15 in book value.

That's got to be 3 times you've bragged about reading that book in the past 30 minutes. ... but I believe they're Wesley Mouch.

I don't remember bragging about it. But you seem to have a fundamental lack of understanding as to what stock ownership is.

It would be a good book for you to read, or read again if you were very young when you read it.

But reading the shareholder letters (and actually, I mean the ones in the annual reports) for Berkshire Hathaway in recent years, or any of the books that talk about Buffetts investing style will give you a tool for valuation of a company.

If you read one, such a "buffettology" (I know, stupid name) you'd see that the value of your sisters stock in the above example is actually much higher than $3,000. Which is the real reason microsoft trades at $50 when its book value is only $7.15.

There's no ideology in this-- it is just a question of Math. Valuing companies must take into account the amount of money they will generate over time for their owners, not just the book value. Some liberals I've run into cannot understand that the future earnings of the company have a present day value and think everything between $50 and the $7 is speculation. If you feel that way, I've have some loans I'd love to make with you.
-- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
[ Parent ]

valuation (4.00 / 1) (#148)
by NFW on Thu Jun 13, 2002 at 06:09:38 PM EST

There's no ideology in this-- it is just a question of Math. Valuing companies must take into account the amount of money they will generate over time for their owners, not just the book value. Some liberals I've run into cannot understand that the future earnings of the company have a present day value and think everything between $50 [MSFT's trading price] and the $7 [MSFT's book value] is speculation. If you feel that way, I've have some loans I'd love to make with you.

Thing is, it's impossible to "know" a company's future profits. You can only speculate on what they will make. I'm not saying that's a bad thing, just saying that if your math is based on speculative variables, then your results are also inherently speculative. There are instruments in which the future value is known (and typically not very large), but common stock isn't one of them.

Also note that about a year ago, MSFT was trading around $75 / share. Assuming for a moment that "everything between and $50 and $7" is not speculation, then what do you call "everything between $50 and $75?"


--
Got birds?


[ Parent ]

Risk (3.50 / 2) (#169)
by bitgeek on Thu Jun 13, 2002 at 09:29:22 PM EST

math is based on speculative variables, then your results are also inherently speculative

I never said investing was risk free. But you can account ofr the variability of future profits in a couple ways. One is to but companies for which the future is more certain than for others (don't worry, a lot of investors will go based on momentum, so these predictable companies can usually be had for a good price.).

The other way is to discount for risk. Risk can be quanitified, and you can discount the price you'll pay for this risk.

Also note that about a year ago, MSFT was trading around $75 / share. Assuming for a moment that "everything between and $50 and $7" is not speculation, then what do you call "everything between $50 and $75?"

A buying opportunity. If you're looking for a short term investment, stocks are not it. They aren't meant for it, and it would be foolish to buy expecting to hold for a year, rather than 10.

As Buffett once said "When you're buying beef, do you want the price to be high or low?" The current price of Microsoft is irrelevant to the economic value it will return in the future-- all it tells you is what *others* think its worth. Do your own analysis, and you will end up with a current, risk adjusted, cost of capital adjusted value, and if the current price at the market is less than that, buy. If its a lot less, and you're sure of your investigation, buy lots.
-- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
[ Parent ]

those are all fine books (2.25 / 8) (#51)
by eLuddite on Thu Jun 13, 2002 at 08:18:30 AM EST

Here's a few more:

  • Escaping the Chaos Within. This book will help you overcome the personal demons obstructing your path to health, happiness and financial prosperity.

  • A Map of the G-Spot. This book shatters, once and for all, they myth that no one has ever spotted a woman's g-spot anywhere except at the bottom of an empty tequila bottle.

  • How I Made a Fortune Selling X-Ray Specs. Not strictly a book, per se, but a collection of Marvel Comic ads. Comes with a box of Bazooka Joe bubble gum wrappers.

  • Hand Writing Analysis: A Complete Guide. One of a kind collectible, order now we're selling them as fast as we can rescue them from family physician book burning conventions.

  • The Linux Programmer's Manual of User Interface Design. This book provides an easy to read blueprint for achieving world domination.

  • The Hacker's Guide to Xtreme Weight Loss. This book provides an easy to read blueprint for achieving chick domination.

    ---
    God hates human rights.
    [ Parent ]

  • What's your point? (2.00 / 1) (#103)
    by bitgeek on Thu Jun 13, 2002 at 12:55:52 PM EST

    I don't see how providing references to investing, company valuation and the nature of money is irrelevant.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]
    Buy low, sell high, (2.60 / 5) (#104)
    by eLuddite on Thu Jun 13, 2002 at 01:11:53 PM EST

    bathe daily, work hard, and worship the chairman of the Federal Reserve on earth as you do the Lord in Heaven. What's your point? I suppose you know all there is to know about Ayn Rand's G-Spot? If not, and I hardly think you do, take my references in the same spirit yours were intended.

    ---
    God hates human rights.
    [ Parent ]

    The sauce. (1.00 / 2) (#123)
    by bitgeek on Thu Jun 13, 2002 at 02:34:34 PM EST

    Son, you need to cut down on the sauce.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]
    Nonsense. (3.66 / 3) (#137)
    by eLuddite on Thu Jun 13, 2002 at 04:28:31 PM EST

    You need to rate more of my comments out of spite (how rational! Have you heard of Ayn?) and to stop thinking you know fuck all about Capital ideas. I'm being kind to the evidence, you stammering cunt.

    ---
    God hates human rights.
    [ Parent ]

    Coherence (1.00 / 1) (#170)
    by bitgeek on Thu Jun 13, 2002 at 09:31:00 PM EST

    You're not making any more sense. You remind me a of a long haired ex-dotcom worker I know who's currently in Utah. He never made any sense either.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]
    I remind you of shoeboy?! (4.00 / 2) (#190)
    by eLuddite on Fri Jun 14, 2002 at 04:01:08 AM EST

    You remind me of bc.

    ---
    God hates human rights.
    [ Parent ]

    dividends (4.00 / 1) (#135)
    by khallow on Thu Jun 13, 2002 at 03:37:49 PM EST

    Warren Buffets "Letters to stockholders" Berkshire hathaway has never paid a dividend. Repeatedly Buffett has explained why it would be unwise to do so. His shareholders are very happy that he's never done it. This is a great example of a well run company that grows and reinvests for growth. He argues that stock options are a bad idea for compensation, and he's wrong there, but everywhere else he's right.

    I disagree here. Berkshire is an unusual company. It is managed and controlled by someone who has a huge investment in the company. For most companies, being able to pay a dividend does several things. One, it doesn't require the company to grow.

    This may seem treasonous to say, but there are companies that shouldn't be growing or should even be shrinking. For example, how do you grow a commodity company (eg, copper mining)? These guys pay dividends. Second, a company that pays a dividend has at least sufficient cash to do so - a sign of financial health. Finally, you get something back now rather than later. In the investing world, there is something to be said for continuous, moderate gratification.

    When I invest in companies that don't pay a dividend, it's ultimately because I expect that they will do well enough to pay a dividend down the road.

    Stating the obvious since 1969.
    [ Parent ]

    Sure... (1.50 / 2) (#167)
    by bitgeek on Thu Jun 13, 2002 at 09:22:35 PM EST

    I'm not saying dividends are always wrong, paying them makes sense for some companies.

    But even for companies that aren't growing, buying back their stock on the open market is a better way to go than paying dividends.

    There are certainly companies that have shareholderrs who expect the dividends and are structured that way. But from a tax viewpoint, buy back the stock on the open market is the better way.

    There's nothing special about Berkshire Hathaway- except that it is generally very well run. the principles are the same for all companies...
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    Buffetology (none / 0) (#213)
    by streetlawyer on Fri Jun 14, 2002 at 10:45:21 AM EST

    Warren Buffett, by the way, bought Berkshire Hathaway with the returns on investing his paper route money

    Of course he didn't by the way, and I'm sure that nobody believed you when you said he did. He "bought" Berkshire Hathaway by putting together a syndicate of wealthy investors in Omaha to take over an underperforming textiles company with a significant cash balance, whereby they put up the money and he did the legwork. It's a very common way of getting a leg up, but it's not the Horatio Alger story you're trying to tell.

    --
    Just because things have been nonergodic so far, doesn't mean that they'll be nonergodic forever
    [ Parent ]

    Please don't lie. (1.00 / 1) (#306)
    by bitgeek on Fri Jun 14, 2002 at 04:07:06 PM EST

    You said:
    It's a very common way of getting a leg up, but it's not the Horatio Alger story you're trying to tell.

    But it is.  This is easily referenced history.

    He saved his paper route money.  He invested it.  He worked as a runner for a brokerage house.  He saved that money, and invested it.  He went to college.  He continued to invest the money he had.

    Eventually he was a wealthy person- just from investing these small sums, starting with his paper route money.  Others liked his style and wanted him to manage their money too, so he did.  He formed a syndicate, as you said, and it did very well.  Eventually it bought berkshire hathaway.

    He leveraged his paper route money to buy berkshire hathaway.

    This is the truth.  He didn't ahve rich people come and shower him with moeny to buy it.  He borrowed money and promised a return on investement to those in the syndicate. (Which is different from a typical money manager.)  this makes it more of a loan than, and it certainly wasn't a gift.

    At any rate, the size of his personal fortune was big enoguh that he could have bought BH out of his own pocket- the syndicate owned parts of a large number of companies.

    Warren Buffets had a paper route and stockboy job, and ever since then, he's been investing.

    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    fuck off (5.00 / 1) (#390)
    by streetlawyer on Sat Jun 15, 2002 at 05:07:53 PM EST

    by that logic, Lou Reed bought a house in London last year with money he earned giving blowjobs to cops in the 1960s.

    --
    Just because things have been nonergodic so far, doesn't mean that they'll be nonergodic forever
    [ Parent ]
    It all makes sense... (4.81 / 22) (#18)
    by 90X Double Side on Thu Jun 13, 2002 at 03:02:21 AM EST

    until the second-to-last paragraph.

    Your share of MSFT or TYC is valuable only because some billionaire somewhere might decide to purchase an enormous amount of stocks and use his powers to vote on policy and siphon millions, billions of dollars from the corporation into his own pocket.

    This assumes that control of the corporation for ethical purposes is worthless.

    If you're a small investor, most of the time you're not really a capitalist - you're a gambler.

    They are both gambling in so much as there is an element of risk, but the extensive historical evidence shows that a casino gambler has a 2-3% disadvantage, whereas and investor has a 9-11% advantage, making it a very different beast (although admittantly less fun).

    If you make $10,000 from selling stock, that money has come from another small investor who just lost $10,000 and hopes to make it back by selling the same stock to yet another person for $15,000 later.

    The person who acquired the shares definitely hopes they will appreciate in value (unless they're short selling them), but why must it be an investor who just lost that precise sum of money and not someone simply looking to make more money?

    You might as well be speculating in Magic: The Gathering cards.

    Collectables generally do not appreciate as fast as stocks and/or require vastly more specialized knowledge (you can learn fairly quickly how to screen most any kind of stock, but it would take much more time to learn, for example, the fair market value of any given antique Spanish coin).

    The ONLY way that corporate profits ever make it down to small investors like you is if some rich man buys your stock in order to take a place at the feeding trough - to loot the company legally and illegally, for all the billions of dollars that are not paid in dividends to people like you.

    And here is the main conclusion of the argument: that all companies that don't pay dividends exist only because the CEO is taking all the money (after he bought a majority share) and not because the company is expanding at a rate where its investments are greater than returns, or that it has large R&D costs because it is in a new industry, or for any other remotely legitimate reason at all.

    There have been quite a few scandals lately, and there is no doubt that investors need to be much more weary of the analysts and executives, but this article flat out says that you should never buy a stock for capital appreciation (and even stocks that do pay dividends have at least some, and usually most, of there value from perception of capital appreciation)! There are many valid points here, but the generalizations at the end blow them all. There are many companies whose leadership works for reasonable rates, and some whose leadership have earned their salaries. There are many speactacular examples to the contrary, but this shouldn't lead to a damnation of all companies.

    Pointing out recent illegal business practices is one thing, extending it to the entire stock market is laughable, and telling John Q. k5 Reader to dump his IRA into companies that have their value determined to the largest extent he can find by dividend yield is irresponsible advice.

    “Reality is just a convenient measure of complexity”
    —Alvy Ray Smith

    Deferred dividends are fine (3.33 / 6) (#22)
    by Blarney on Thu Jun 13, 2002 at 03:24:05 AM EST

    Perhaps I should hurry up and make that clear - I don't have a problem with buying a company that pays no dividend this year, but plans to pay them once they've reached their full growth potential.

    However, what's the point of buying a company that cannot reasonably be expected EVER to pay out the profits to it's investors? Only to sell it to a fellow gambler, or to sell it to a looter. Nobody else would want it.

    [ Parent ]

    Who is that? (3.40 / 5) (#29)
    by 90X Double Side on Thu Jun 13, 2002 at 03:47:10 AM EST

    An example, please. And not a company that will continue growing at a rate where it should reinvest during our lifetimes, but forever?

    The only companies that we never expect to see anything from are those that start to fail to make money.

    “Reality is just a convenient measure of complexity”
    —Alvy Ray Smith
    [ Parent ]

    Example (3.60 / 5) (#54)
    by dennis on Thu Jun 13, 2002 at 08:34:48 AM EST

    Hmmm...let's see, a company with 90% share of a fairly mature market, with $40 billion in the bank, which has never paid dividends, might conceivably qualify...

    [ Parent ]
    what the hell? (3.50 / 2) (#79)
    by tps12 on Thu Jun 13, 2002 at 10:28:26 AM EST

    Dominating a market != infinite growth potential. You are saying that Microsoft will eventually purchase every business on Earth, and then what? I guess if we have contacted other beings, then Microsoft will start purchasing alien businesses. And when it owns the entire Universe? Then, like it or not, it will have to start paying dividends.

    In short, no, it most likely does not "conceivably qualify."

    [ Parent ]

    Not what I mean (5.00 / 2) (#83)
    by dennis on Thu Jun 13, 2002 at 10:46:04 AM EST

    I'm not saying Microsoft will continue to grow. I'm saying that they won't.

    It's legitimate for a new company with lots of growth potential to avoid dividends, investing in their future. But Microsoft is unlikely (imo) to keep growing, and they have plenty of cash to invest anyway, so they certainly should pay dividends. But they don't. For whatever reason, they have a policy against paying dividends, probably in part because they have to maintain the impression of a company with dramatic growth potential, to keep their price/earnings of 46 from crashing to earth. Same reason they're trying all this "service model" pricing, and trying to move into new markets - if they don't find some way to grow revenues, or at least convince people they're going to grow revenues, sooner or later their P/E drops to about 15.

    [ Parent ]

    You miss the point (2.66 / 3) (#84)
    by dark on Thu Jun 13, 2002 at 10:46:49 AM EST

    Then, like it or not, it will have to start paying dividends.

    Why would it have to? It's not paying them now, even though it has a $40 billion cash reserve. Why would it pay dividends in the future? What reasons would apply that don't already apply today?



    [ Parent ]
    I just editted (3.16 / 6) (#24)
    by Blarney on Thu Jun 13, 2002 at 03:26:34 AM EST

    You do have a good point. I'm not complaining about companies that are deferring dividends - I'm really slamming companies that don't pay any profits out and NEVER INTEND TO.

    [ Parent ]
    Dividends... (3.50 / 2) (#122)
    by bitgeek on Thu Jun 13, 2002 at 02:31:16 PM EST

    really slamming companies that don't pay any profits out and NEVER INTEND TO

    And you still don't understand some fundamental things. Here's why a company shouldn't pay dividends:

    1. Dividends are taxed. If the company can invest the money to grow the business, it would be a better investmeent for their shareholders to just do so tax free.

    2. IF the company can't practically invest the money well, then it would be better to use those profits to buy its own stock on the open market. By doing so, they cut the number of shares outstanding, increasing the value of each share. They can give their shareholders their return without causing them to be taxed immediately as they would be with dividends.

    You seem to be under the delusion that retained earnings are paid to the CEO as income-- which may be true if the CEO owns the whole company (and which case it is his right) but are absolutely not true for public companies.

    Retained earnings are always either put to imidiate use in capital investment, used to purchase back the companies stock, or saved against future capital needs or corporate trouble.

    This is why Microsoft has been saving a bunch of money aside, it needs a war chest for its battle with the feds.

    Really, there is no moral authority for forcing a company to pay out profits.

    Any investor who doesn't like the way the company is being managed can sell its stock.

    And there are many good reasons to never pay a dividend.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    There is a problem (3.00 / 1) (#225)
    by gotak on Fri Jun 14, 2002 at 11:31:27 AM EST

    With how much CEOs are paid. Are they really worth the kind of money that's paid to them?

    I mean yes huge responsibility in term of what happens to the company. But I don't recall ever hearing of a CEO that gets a sour deal because he/she screwed up the company. No they get kick out with a severence package and some other expensive CEO get hired.

    What i would like to know if how much on average is big highly valued company's executives paid if translated into hourly rates.

    [ Parent ]

    True (none / 0) (#307)
    by 90X Double Side on Fri Jun 14, 2002 at 04:07:13 PM EST

    Yes there is, but the article makes a silly connection between executive pay and not paying dividends. The amount that CEOs and othere execs make cuts into profits, but it has absolutely nothing to do with whether the comany decides to reinvest or dispurse the profits it does make. It does often make sense to buy stock in companies that pay their CEOs a reasonable amount, but there is no reason to not to buy stock in companies that do not pay dividends.

    For example, I own stock in Apple Computer, Pixar Animation Studios, and Salton Housewares. Steve Jobs makes $1 as the CEO of Apple, he makes $1 as the CEO of Pixar, and Leonhard Dreimann makes $601,000 as the CEO of Salton.

    “Reality is just a convenient measure of complexity”
    —Alvy Ray Smith
    [ Parent ]

    Uh, what? (3.33 / 6) (#31)
    by blacklite on Thu Jun 13, 2002 at 03:48:16 AM EST

    I don't know anything about economics.

    But I figured that the idea was, even if your stocks are in a company, they're all still clearly worth money. Which can be used as assets to get loans for more money and thus and such. Assets in general make the world go 'round, it seems, more than cold hard cash you have in your hand. Cash seems to have been relegated to the everyday boring transaction, and clearly stocks are not in the same category. Dividends just seem like bonuses for coming along on the ride.
    If you'd like to e-mail me, don't laugh.

    Pervertion of the system (3.00 / 5) (#41)
    by Betcour on Thu Jun 13, 2002 at 05:29:34 AM EST

    But the system is perverted. Corporations are built so that they generate profits, and so that this profits can go back to the people who invested their money and time into building the company. There's no point to building a company that will forever grow but will never return 1 cent of profit for its builders. The fluidity of the stock market has perverted the system, where people make companies just to sell them to somebody else, not to make profits. The dotcom craze was just that : peoples started business to sell them, not to make money by generating profits. We all know how successful this system end-up being...

    [ Parent ]
    Investing is not speculating (4.00 / 1) (#121)
    by bitgeek on Thu Jun 13, 2002 at 02:24:24 PM EST

    The dotcom craze was just that : peoples started business to sell them, not to make money by generating profits.

    And we all saw how succesful that was, right!

    Why is it so many people think that because people speculate in the stock market there is no such thing as investing?

    That all investing is also speculation, when in reality they are opposite concepts?

    Anyway, if you don't want to invest, don't. Just don't tell me that I'm not allowed to.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    Needs focus. (4.06 / 15) (#35)
    by NFW on Thu Jun 13, 2002 at 03:58:22 AM EST

    Why do corporate executives make immense salaries for almost no actual work while working people of the United States and elsewhere do not find their own wages increasing?

    First of all, I've never known a CEO to do "almost no actual work" and make any money at all. The CEOs I have met have been people who worked hard, and who worked long hours.

    Second, I don't see where you provided an answer to that question in the body of your story.

    Why is wealth increasingly becoming concentrated into the hands of a few persons, although many millions of people are saving money and investing it in "shares" of productive enterprises?

    You seem to believe that wealth concentration is the result of CEOs looting their companies. I disagree with that characterization, but at least you offered a theory. But what's the point of everything after "although" in that question? What do common stockholders have to do with wealth concentration?

    It sounds like you've got three stories in mind: marxism vs. capitalism, overpaid CEOs, and the nature of the stock market (investment vs. gambling). You could probably write an interesting story about any one of these. Attempting to deal with all three at once just makes for a disjointed rant.

    If you're going to rail against capitalism, do it after you've described a better system. You didn't, so strike the Marxist stuff.

    If you're going to rant about overpaid CEOs, first ask a few people what CEOs do. Ask why some people reach CEO positions and why others do not. As you said, "the answers may surprise you." You seem to have no idea what CEOs do and what drives their pay, so strike that part.

    Polish what's left (explain how taxes affect divident decisions), and you could have an interesting article about the workings of the stock market.

    Or do a four-part series... first, stock market analysis; then CEO compensation; then alternatives to capitalism. Then tie it all together. But trying to put all three into one article didn't work... you did fine with the stock market stuff, but you need to give much more space your ideas about the other two topics if you want people to take you seriously.

    If this flops, I hope you'll at least resubmit an article on dividends vs. interest vs. speculation.


    --
    Got birds?


    Suggestion for you (3.71 / 7) (#37)
    by Blarney on Thu Jun 13, 2002 at 04:48:43 AM EST

    The CEOs I have met have been people who worked hard, and who worked long hours.

    If you happen to be acquainted with CEOs of large corporations, perhaps you should write an article: "A day in the life of a CEO" or something, to counteract the socialist theory that high managers do very little work and make very few decisions.

    I'm not being sarcastic, either. I really WOULD love to find out what they do all day. Even one who makes a puny million a year in compensation ought to be doing something PRETTY INTERESTING to justify that. However, I have no idea what it is: if you want me to let go of my Marxist fantasies of golf games, boozing, and firing people for fun, the best way is to give me some ideas to replace them.

    [ Parent ]

    The Working CEO.. (none / 0) (#252)
    by Kwil on Fri Jun 14, 2002 at 01:16:30 PM EST

    ..is often working because s/he's on many company boards.

    Check out this site for an interesting view of how the control of many of the most major companies - companies making decisions that wind up affecting all of us - are held in relatively few hands.

    It's interesting to see that some of the fiercest competitors have common board members, or board members who meet regularly at a third table.

    That Jesus Christ guy is getting some terrible lag... it took him 3 days to respawn! -NJ CoolBreeze


    [ Parent ]
    CEOs (4.00 / 7) (#39)
    by Betcour on Thu Jun 13, 2002 at 05:18:08 AM EST

    While CEOs are definitely grossly overpaid, I wouldn't go as far as saying they have nothing to do. Most serious CEOs work way longer than the average factory worker. Being a CEO is not just attending business lunch and drinking champagne.

    CEO and work (2.00 / 3) (#60)
    by boschke on Thu Jun 13, 2002 at 08:49:24 AM EST

    I agree.

    The CEO has an enourmous burden of responsibility placed upon him. If a normal factory worker makes a mistake or doesn't work hard enough, worst that could happen is that he can get fired.

    [ Parent ]

    Fired (4.00 / 4) (#63)
    by wiredog on Thu Jun 13, 2002 at 09:07:00 AM EST

    If a normal factory worker makes a mistake ... worst ...is that he can get fired.

    That depends on the place he works at. I saw a person make a stupid mistake that put him in the hospital with permanent disabling injuries.

    After he got out he was fired for violating the safety rules.

    "one masturbation reference per 13 K5ers" --Rusty
    [ Parent ]

    Utter crap. (3.00 / 7) (#69)
    by Rocky on Thu Jun 13, 2002 at 09:41:11 AM EST

    So the CEO has a big responsibility to the company placed upon him.  He screws up, is fired by the board, and received a "golden parachute". He vacations in Bali while his execute search firm finds him another "loot-and-scoot" job.

    The normal factory worker is responsible for one machine and a wife and five kids.  He is fired, receives little or no compensation, and is forced to foreclose on this house and live in a trailer.

    So clueless.

    If we knew what it was we were doing, it would not be called research, would it?
    - Albert Einstein (1879 - 1955)
    [ Parent ]

    Boo Hoo Hoo (1.80 / 5) (#118)
    by bitgeek on Thu Jun 13, 2002 at 02:19:08 PM EST

    Those who do not understand economics are destined to fail to profit from a capitalistic system.

    Your position is one of "well, they're rich, and we get nothing, lets take it by force."

    Therefore your moral equivilent is that of a mugger.

    If that factory worker wanted to have a better financial life, he probably shouldn't have had as many kids, (5 is way above average) and shouldn't have gotten such a risky house loan. Clearly he was paying more than he should have.

    The facts bear this out-- in the 90s people earned more and went further in debt.

    If they want to waste their money on consumer goods, then fine for them.

    But they don't get to cry on my shoulder when they squandered the money that would tide them over while being unemployed.

    I hated a CEO once. Still do. Thought he was an asshole. Was marginally competant.

    But he put in a lot of time. He worked as many hours as I did, often 80 a week.

    He put in his own money into the company, and his father's money.

    He tried to keep the company alive when the investors wanted to pull the plug. He traded effort for money in keeping the company going.

    Eventually the company sold and I think he made a couple million on it-- but he had it all on the line, all at risk. And he put in the hours.

    He earned the money.

    And from what I've seen of the CEOs I've worked with, he's not atypical.

    That factory worker should have lived in a trailer to begin with. Instead of buying a house, I bought the equivilent of a mobile home. And I make six figures, when I'm working. But I didn't get a mortgage because I knew the bubble would/might burst. Now that it has, my quality of life is much better.

    People who want to waste money deserve what they get. Stealing it from those who are successful is not morally superior-- they don't owe them a dime.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    Still utter crap. (3.80 / 5) (#133)
    by Rocky on Thu Jun 13, 2002 at 03:25:12 PM EST

    > Those who do not understand economics are destined to fail to profit from a capitalistic system.
    > Your position is one of "well, they're rich, and we get nothing, lets take it by force."
    > Therefore your moral equivilent is that of a mugger.

    Bullshit.  My position is that if most people screw up in a job, they are put on the street with a pittance.  This does not happen to executives.  I was simply pointing out that there is an inequity, not advocating force.  

    Where do you think this stuff up?

    > If that factory worker wanted to have a better financial life, he probably shouldn't have had as many kids, (5 is way above average) and shouldn't have gotten such a risky house loan. Clearly he was paying more than he should have.

    Nice darwinistic view.  I notice that you are picking on the fictional statistics in my argument because you lack an adequate response.

    [snip - inconsequential drivel]

    > I hated a CEO once. Still do. Thought he was an asshole. Was marginally competant.
    > But he put in a lot of time. He worked as many hours as I did, often 80 a week.

    BFD.  Many people do this.  It doesn't make him special.

    [snip - hero CEO story]

    Congratulations.  You've managed to completely miss my point.  Most CEO's of large companies (they were to whom I was referring, incidentally) do NOT have a personal stake in the company (i.e. will not be bankrupted if the company expires), serve as a figurehead for the rest of the corporation (where the actual work gets done), and receive massive compensation for failing.  

    You see, I'll let you in on a little secret that you might have missed.  Publicly-traded companies are not owned by the CEOs, they are owned by the shareholders.  Who does the CEO report to?  The board of directors.  Who's on the board of directors?  Very often its the majority shareholders and CEOs of other companies.  Who are the majority shareholders?  The CEO, the board, other big companies, and other CEOs.  It's a shell game, and everyone who is not an executive loses.

    >That factory worker should have lived in a trailer to begin with. Instead of buying a house, I bought the equivilent of a mobile home. And I make six figures, when I'm working. But I didn't get a mortgage because I knew the bubble would/might burst. Now that it has, my quality of life is much better.

    Go buy yourself a cookie.  Looks like you've earned it.

    > People who want to waste money deserve what they get. Stealing it from those who are successful is not morally superior-- they don't owe them a dime.

    So if I'm a shareholder for a company whose CEO was fired for incompetence or criminal activity and received a huge package, he isn't stealing from me?

    SO bad, it's not even wrong.

    If we knew what it was we were doing, it would not be called research, would it?
    - Albert Einstein (1879 - 1955)
    [ Parent ]

    Fantasyland (2.33 / 3) (#165)
    by bitgeek on Thu Jun 13, 2002 at 09:13:18 PM EST

    My position is that if most people screw up in a job, they are put on the street with a pittance. This does not happen to executives.

    Someone who screws up enough to loose their job has screwed up- I don't understand how getting a "pittance" is relevant. CEOs are valuable enough that they negotiate seperation clauses - they are not trivially replaceable, and they take a risk by going to the company. If the board changes its mind, they've earned thir parachutte.

    Going back to the Apple example, look at the series of CEOs who preceeded Jobs. One could even argue that a number of them didn't screw up-- they just didn't rectify the problems fast enough.

    By the way, you provided the example, I showed how wrong it is. That doesn't represent lack of strength in my position! Someone who mismanages their money, deserves what they get. Your assertion that this attitude is somehow bad, only makes sense if you think people deserve something for nothing- the mugging I was talking about.

    Most CEO's of large companies (they were to whom I was referring, incidentally) do NOT have a personal stake in the company (i.e. will not be bankrupted if the company expires), serve as a figurehead for the rest of the corporation (where the actual work gets done), and receive massive compensation for failing.

    The really ironic statement is that you could make it in defense of an argument who's topic is CEOs who *DO* have a personal stake in the company. That's where the $100M in compensation comes from, its not salary.

    That you think the "Actual work" is done by others, and not the CEO (and we can assume managmenet) simply shows you have no clue how companies work, what it takes to run them, etc.

    Of course if you see no value in the works someone does, you're going to think they're overpaid... But the fact of the matter is you are wrong. Only a bullheaded denial of obvious and easily observable reality could let you think that CEOs get big pay for doing nothing.

    It's a shell game, and everyone who is not an executive loses.

    (Now lets notice that at one point you say CEOs have no stake, then you say between them and the board they controll all the stock. Hmmm. An arugment that isn't even internally consistant shouldn't deserve my time invested in response.)

    The above is spoken like someone who wants to be poor all your life.

    Feel free to think its a shell game and sit it out... meanwhile, the rest of us are doing quite well.

    You can easily prove yourself wrong, if you maintain the fantasy that you're objective. Just go to Yahoo and look at the pages for some big company and see how much of the ownership is insider ownership.

    Now, note that you said "large corporations" so those are the examples I'm going to give:

    Intel - %7
    This means that the "CEO and board of directors" you talk about in this shell game own *less* than %7 of the stock. That isn't a controlling interst at all. Remember, also, that employees are insiders, so a tech company like intel would have vested a lot of its "insider" stock in employees... so maybe this "Cabal" of old boys that you think own it all, own less than %5. you could check their annual report to get a breakdown. (http://biz.yahoo.com/p/i/intc.html)

    Apple: Also %7 http://biz.yahoo.com/p/A/AAPL.html

    Cisco: %2 http://biz.yahoo.com/p/C/CSCO.html

    Microsoft: %17, in large part because Bill Gates, its effective CEO, still owns a lot. http://biz.yahoo.com/p/C/CSCO.html

    Ok, so your basic case has been easily disproven. How is it that so many of you can continue to propagate these blatently false and easily disproven conspiracy theories?

    CEOs are answerable to shareholders by the board. Shareholders are usually thousands of individuals and institutions- who in turn represent even more thousands of indivuduals.

    If they didn't have shareholders interests at heart, and act like it, they would loose out.

    And its worth repeating, YET AGAIN, that all this "excessive pay" to CEOs is from their ownship of stock options-- no performance, no pay.

    Nobody owes anyone a job. You waste your money, as the average american does, you deserve what you get.

    Crying about it will get no sympathy from those of ability.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    Brilliant counterexample. Oops. (2.50 / 2) (#181)
    by haflinger on Thu Jun 13, 2002 at 11:40:39 PM EST

    Going back to the Apple example, look at the series of CEOs who preceeded Jobs. One could even argue that a number of them didn't screw up-- they just didn't rectify the problems fast enough.
    Apple is not a large corporation; they have, what a few billion in market cap? Now Enron. Arthur Andersen. Those are (oh sorry, were) megacorps. But putting aside Mr. Lay and his crew for a moment... let's look at Mr. Jobs' executive compensation. It's a dollar, and he has no golden parachute. Is it a coincidence that his income depends on his stock options, and he's been very good for Apple's stock?

    One wonders what would happen to Mr. Lay if Enron's losses were taken out of his assets. Even a portion of them.

    That's the big lesson that Lay & co. want to avoid: You want to make the big bucks, you take risks. Personal risks. Shareholders need to realize this, and not give their money to companies whose CEOs have already planned for failure.

    Did people from the future send George Carlin back in time to save rusty and K5? - leviramsey
    [ Parent ]

    Somewhat large hole in your argument (4.00 / 2) (#184)
    by cafeman on Fri Jun 14, 2002 at 02:25:23 AM EST

    Arthur Andersen is a partnership, not a company. Big difference. I'm not going to explain why - if you don't know, you should look it up. In fact, up until recently, most large consulting firms were. Enron was a publically traded company, Arthur Andersen was run by a collection of partners. You can't give them your money.

    There's sound logic behind the existing system - do you think boards aren't aware of incentive based remuneration? There's reams of material about governance and incentives. Also, the only reason CEOs can get the amount they ask for is because the number of people with the skill set needed is very small. You may think you can do it, but you probably can't. If the number of people who have the needed skills is small, they can negotiate for whatever they want. Think about it - anyone can be a janitor or a bus driver, but not everyone can build the financial skills, industry knowledge, management skills, and confidence needed to be a CEO.

    Despite what you may believe, the people at the top are generally not dumb. I've met a few of them, and I have yet to meet one that wasn't *highly* cluey. I personally think that a lot of CEO bashing comes from either misunderstanding or envy. Only my personal opinion, you're welcome to your own - please don't flame me for having an opinion.



    --------------------
    "No Silicon heaven? But where would all the calculators go?"


    [ Parent ]
    Interesting claims. (2.00 / 1) (#207)
    by haflinger on Fri Jun 14, 2002 at 09:32:23 AM EST

    Think about it - anyone can be a janitor or a bus driver, but not everyone can build the financial skills, industry knowledge, management skills, and confidence needed to be a CEO.
    Janitor, yeah, prolly. Bus driver? No. You need special licensing. Truck drivers even more so, BTW. That's why they get paid so well. (Well, plus the long hours.)

    And as for whether the people at the top are dumb: I never said they were. I said investors were. That's a huge difference. I never suggested that, for example, Ken Lay was stupid. It'd be hard for me to, as he's done so well. The thing was, he took advantage of investor stupidity, and a lot of people lost their shirts. He ought to be held accountable for his company's performance.

    And ... when it comes to people at the top, I've met more than a few of them. I tend to have more respect for CAs than MBAs, though: MBAs are usually pretty bright, but often forget good management principles in favour of looking flashy. Still, at my last Real Job, I got along much better with the MBA who ran my department than with my direct boss, who had the same kind of master's that I do (now; back then I was just a grad student).

    Oh and BTW, you can stop handing out 1s to everyone you disagree with. Read the moderation guidelines. This isn't /.

    Did people from the future send George Carlin back in time to save rusty and K5? - leviramsey
    [ Parent ]

    OT:ratings (none / 0) (#342)
    by cafeman on Fri Jun 14, 2002 at 06:47:37 PM EST

    FWIW, have a look at the context around the articles that I rated. With few exceptions, they're all either insults or ranting with no content. The exceptions are normally trolls - if you really care, keep reading further into the threads, where the original posters admit it (eg Ray Megard's post). Interestingly, it seems most people agree with me - have a look at the average ratings. I only tend to rate articles 1 or 5 because they're the only ones that motivate me to vote - I'm on a dialup, and it takes a while to refresh.

    Thanks for pointing out this isn't /. - I never would have realised. If you really care enough to judge my ratings, you should probably read the entire threads and articles surrounding them. Otherwise, why bother to throw an ad hominem attack in there?

    I don't know whether investors are dumb - I think they are irrational though. Fundamentals have gone out the windows for quick gains. I don't have the energy at the moment to get into a big discussion about it unfortunately.



    --------------------
    "No Silicon heaven? But where would all the calculators go?"


    [ Parent ]
    Sorry, I was talking about bitgeek. (none / 0) (#365)
    by haflinger on Fri Jun 14, 2002 at 10:48:00 PM EST

    My apologies. You write quite a lot like him. He's been trolling this whole discussion. Check his moderation here. Oh, I see he's finally discovered numbers other than 1 and 5. How kind of him. (He has rated 102 comments: 8 are not either a 1 or a 5. However, 4 of those are in his last 6 ratings. Perhaps he's finally getting a clue.)

    I'm no longer a Trusted User or I'd have zeroed some of his posts. (I'm not a Trusted User not because of moderation, but lack of posting. Getting my master's was more important than maintaining a presence on k5. ;)

    Did people from the future send George Carlin back in time to save rusty and K5? - leviramsey
    [ Parent ]

    Why a partnership? (none / 0) (#242)
    by Ken Pompadour on Fri Jun 14, 2002 at 12:25:24 PM EST

    I'll tell you why - it meant that you're not allowed to give out stock options. In the dot bomb years, when consulting firms were big business, this was a huge deal.

    ...The target is countrymen, friends and family... they have to die too. - candid trhurler
    [ Parent ]
    Full "Shell Game" quote (1.00 / 1) (#166)
    by bitgeek on Thu Jun 13, 2002 at 09:18:34 PM EST

    I clipped the quote I was responding to, including only the "shell game" part of it. In full its this. Clearly you know that CEOs are reportable to Boards who are anwswerable to shareholders... I've proven that the Board and CEO aren't the shareholders, thousands of people are. For any company, you can go look in the annual report and see who owns a significant share of the company and how many shareholders there are-- usually less than 4 entities own more than %5 of a company, and there are tens, or hundreds of thousands of shareholders- not even counting retirement funds who represent in turn, thousands of shareholders.

    You see, I'll let you in on a little secret that you might have missed. Publicly-traded companies are not owned by the CEOs, they are owned by the shareholders. Who does the CEO report to? The board of directors. Who's on the board of directors? Very often its the majority shareholders and CEOs of other companies. Who are the majority shareholders? The CEO, the board, other big companies, and other CEOs. It's a shell game, and everyone who is not an executive loses.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    And do they release voting/election records ? (5.00 / 1) (#214)
    by sasquatchan on Fri Jun 14, 2002 at 11:01:59 AM EST

    I have the (mis) fortune of having owned ATT stock before the split. Now I have some 40-200 shares in about a freaking bazillion spin offs, baby bells, and all sorts of other related companies.

    I get the yearly report and the proxy voting. For years, I didn't give a crap and just pitched it. But I started reading them recently. It's amazing how self-referential many of the board members are. Read the Bio's for most of the board members, and they cover a large (fairly similar)spectrum. It's pretty easy to see why folks accuse them of being a "good ol'e boys network".

    Heck, I'd like to know how one gets on those boards. The only answer I ever got was from someone you'd label as a "rich hater", and that person said 'you had to of gone to harvard/yale/princeton with someone who'll recruit you'. Being on a board is a stepping stone to a CEO position.

    And as for voting. I'm sure most folks do what I did -- toss the report and proxy in the trash. That means you just voted as the board suggests. I've never seen a real report of how the voting went (actual returns versus the default). But from reading over the support for past stock-holder initiatives (where some activist type buys a few shares inorder to make resolutions and other company-influencing bylaws/whatnot), most fail on a 85/15 vote (or worse). This means no less than 15% of the folks voted, but I really doubt the 85% were direct votes. This gives the board much leeway in how the conduct their business and elect other members. This lends much creedence to the shell game thesis the previous poster put out.

    Further, the "major" share holders are often institutional funds (mutual funds et al) and, on occasion, individual stock holders. I dunno how the institutional guys vote, but I doubt they poll the individual investors in the mutual fund. This further lends itself to the perception of a insider network.
    -- The internet is not here for your personal therapy.
    [ Parent ]

    Proxy voting forms (5.00 / 2) (#249)
    by hatshepsut on Fri Jun 14, 2002 at 12:57:21 PM EST

    Actually, if you toss your proxy voting form in the trash, your shares don't vote at all. You have to mark on most proxies how you want to vote (Aye/Nay for whatever proposals are before the board) or designate a proxy (on the board or someone named at your discression) who will vote your shares for you.

    Your way, you have no say in what the company is doing, if you at least read the proxy and the proposals and vote, you have some say (the amount permitted by the number of shares you own). No one can vote your shares for you without your express permission.

    [ Parent ]

    I'll have to pay more attention (5.00 / 1) (#250)
    by sasquatchan on Fri Jun 14, 2002 at 01:10:32 PM EST

    to any other proxies I get then. I'm certain that for some companies (ATT spin offs or Mariott spin offs) they say not voting by the card/internet/phone or attending the annual meeting means you are allowing the board of directors to act as your agent/proxy and vote accordingly.

    Surprisingly, the ATT one I have says what you say. Unfortunately, most of my other proxies came several months ago, and I don't expect any anytime soon.

    Still, it'd be interesting to see in either case, how many shareholders actually voted (IE, is the voter turn out like that for general US elections?)

    -- The internet is not here for your personal therapy.
    [ Parent ]

    If a CEO makes a mistake (4.28 / 7) (#72)
    by abdera on Thu Jun 13, 2002 at 09:52:00 AM EST

    He gets a 7 or 8 figure golden parachute on the way out the door while the thousands of workers that he put out of a job by running his company into the ground. And he knows this up-front. Man, that has to be a tough burden to live with. Fortunately, some have enough gumption not to take it.

    #224 [deft-:deft@98A9C369.ipt.aol.com] at least i don't go on aol
    [ Parent ]

    Oops, forgot... (2.50 / 2) (#74)
    by abdera on Thu Jun 13, 2002 at 10:00:48 AM EST

    while the thousands of workers that he put out of a job by running his company into the ground are standing in the unemployment line.

    #224 [deft-:deft@98A9C369.ipt.aol.com] at least i don't go on aol
    [ Parent ]

    Stock is valuable (4.33 / 6) (#40)
    by eyeflare on Thu Jun 13, 2002 at 05:27:36 AM EST

    The more stocks held, the more votes the shareholder has - and should he/she own a substantial amount of stock, he/she can politically decide what the company does with its money. This is truly where the value of the stock comes from.

    Stock is valuable because it is an instrument which carries the potential of future returns. The above is also true, but that is not how the modern stock market operates for the VAST majority of shareholders.


    "There is no way to peace; peace is the way." -A. J. Muste. Go: www.eyeflare.com
    Value (3.25 / 4) (#43)
    by marx on Thu Jun 13, 2002 at 05:36:09 AM EST

    Stock is valuable because it is an instrument which carries the potential of future returns.
    A lottery ticket is also such an instrument. What the author was looking for was a concrete value, not a potential value.
    that is not how the modern stock market operates for the VAST majority of shareholders.
    True, the vast amount of shareholders use it as a kind of lottery system.

    Join me in the War on Torture: help eradicate torture from the world by holding torturers accountable.
    [ Parent ]

    "Concrete" Value (4.66 / 3) (#68)
    by Lord of the Wasteland on Thu Jun 13, 2002 at 09:30:20 AM EST

    Very few things have "concrete" value. U.S. federal reserve notes certainly don't. Neither do commodities like gold. However, unlike a lottery ticket, their potential value is close to their face value. Many stocks, even those that pay no dividends, are the same way. Sure, there is always the chance that you've bought an Enron, and the stock is going to turn out to be worthless. The same thing happened to anyone with Brazillian currency during the 80s.

    For the vast majority of stocks, you will be able to sell your share to someone when you want to liquadate. If the company is worth more when you sell than when you bought, you make money. If the stock has paid dividends, to make the most money you reinvest them. If the stock doesn't pay dividends, you are assuming the management is competent enought to grow the company by the amount they would have paid in dividends.

    [ Parent ]

    What do people do with all that money? (4.21 / 14) (#42)
    by Spork on Thu Jun 13, 2002 at 05:33:24 AM EST

    I'm not trying to be provocative or anything, but the sums you mention got me thinking. I'm pretty poor and I would certainly know what to do with, say, $500K, (if someone would care to make a donation). I'd buy a dual Athlon box, some musical instruments, killer speakers, a decent car and a house.

    But I have no idea what I would do with $100M. I'm serious. No idea! Would I buy an apartment building in NY or SF and convert it into a huge party house for my friends? That seems stupid... I might take some vacations with them, but that would put no dent in $100M. Well, I really can't guess what I would do... I'd probably give a lot of the money away to various good causes.

    One thing I can't imagine, though, is having that much money and then thinking that I need more. Now, I've never been rich, and I've never been around people who were super-rich, so maybe when you're actually in that situation, you suddenly find yourself needing a set of ivory backscratchers or $1000 cigars, even if you never expected to need such things. But that sort of weirds me out.

    More seriously, I think everybody acknowledges this phenomenon called the decreasing marginal utility of money. Basically, it just states the obvious fact that when you are super-rich, each additional unit of currency improves your well-being less than it would if you were poor. So yeah, it pisses me off that I live in a country where so much of the wealth is so concentrated, because these bigwigs hardly notice a 100K here and there. But for someone like me, this sort of sum could drasrically improve my life. Old-school socialitst always draw the distinction between how much wealth a society has and how much utility that wealth is bringing to the people of the society. I think this really makes sense--I think a country as wealthy as the USA should simply mot have this many people in economic hardship.

    What I would do with 100M.. (4.57 / 7) (#53)
    by cvou on Thu Jun 13, 2002 at 08:32:27 AM EST

    .. two chicks at the same time, dude.

    [ Parent ]
    they only come out at Easter and go "peep, pe (3.00 / 1) (#58)
    by eLuddite on Thu Jun 13, 2002 at 08:46:52 AM EST

    What would you eat during the rest of the year?

    ---
    God hates human rights.
    [ Parent ]

    Much cheaper than you think! (4.00 / 3) (#71)
    by Spork on Thu Jun 13, 2002 at 09:45:22 AM EST

    I don't know about where you are, but around here, very hot prostitutes cost about $200 each. Even I, someone who has an inflated opinion of my potency, would be worn out if I had to get rid of $100M this way.

    [ Parent ]
    Reference (4.33 / 3) (#98)
    by MikeyLikesIt on Thu Jun 13, 2002 at 12:11:18 PM EST

    That comment was a reference to the movie "Office Space":

    PETERMAN: Lawrence, what would you do if you had a million dollars?

    LAWRENCE: I'll tell you what I'd do, man. Two chicks at the same time, man.

    PETERMAN: [Laughs]

    LAWRENCE: [Deadly serious]

    PETERMAN: That's it? If you had a million dollars, you'd do two chicks at the same time?

    LAWRENCE: Damn straight, I always wanted to do that, man. And I think that if I were a millionaire, I could hook that up too, 'cause chicks dig dudes with money.

    PETERMAN: Well, not all chicks.

    LAWRENCE: The kind of chicks that would double up on a dude like me do.

    PETERMAN: Good point.



    [ Parent ]
    Just be careful (4.50 / 2) (#90)
    by acceleriter on Thu Jun 13, 2002 at 11:18:26 AM EST

    that in the process of getting the money, you don't wind up in Federal pound-me-in-the-ass prison.

    [ Parent ]
    Bill and Melinda Gates Foundation (4.00 / 2) (#59)
    by wiredog on Thu Jun 13, 2002 at 08:47:20 AM EST

    Charities benefit (eventually) from the high salaries. Andrew Carnegie built libraries across the country. Bill Gates (well, his charity) works on global public health issues.

    "one masturbation reference per 13 K5ers" --Rusty
    [ Parent ]
    My favourite quote (4.00 / 1) (#81)
    by dark on Thu Jun 13, 2002 at 10:38:34 AM EST

    "All this wheeling and dealing, it's not for money, it's for fun! Money is just the way we keep score."

    I can't remember where it's from, though.



    [ Parent ]
    Henry Tyroon, use google (n/t) (4.00 / 2) (#88)
    by Stereo on Thu Jun 13, 2002 at 11:11:54 AM EST


    kuro5hin - Artes technicae et humaniores, a fossis


    [ Parent ]
    Better ways to keep score (none / 0) (#337)
    by Spork on Fri Jun 14, 2002 at 06:40:15 PM EST

    I think you're right, in the sense that the quote correctly describes some of the motivations of the ultra-rich. But it also makes them sound a bit loony. I mean, what if I told you that what I work for in life is to earn more experience points for my D&D character? I mean, once you make a game out of money-earning, then it's on par with every other game.

    [ Parent ]
    Yes it is. (none / 0) (#354)
    by acronos on Fri Jun 14, 2002 at 08:45:05 PM EST

    But you cant use your D&D Exp points to to buy a nicer house or a trip to outer space or create a research facility to research your pet project(mine is robotics), or fly your girlfriend on a private jet to NY for dinner and a broadway play. The money game is more fun because it has more perks. It just really sucks when you loose, and really rich people loose a lot. It really helps to think of it as a game when you loose. Then you know there will always be another round.

    [ Parent ]
    You don't buy stuff (4.66 / 3) (#100)
    by epepke on Thu Jun 13, 2002 at 12:17:44 PM EST

    You're thinking like a consumer. If you have $100M, you don't buy stuff, you make things happen. You make a brewery happen, or a chain or restaurants happen, or some hotels happen. Stuff doesn't just magically come out of nowhere.


    The truth may be out there, but lies are inside your head.--Terry Pratchett


    [ Parent ]
    But that would employ people!!! (1.00 / 1) (#117)
    by bitgeek on Thu Jun 13, 2002 at 02:09:14 PM EST

    Even if I just invest that money in other companies, rather than starting my own, I'd end up causing people to be hired for the brewery, to staff the restaurants, or to make the widgets!

    But being super rich, I want it all for myself!

    So, I'd never do something like that-- I'll keep it all in my mattress-- thats the only way (other than giving it to the government) that I can remove it from the economy!


    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    Yeah, but why would you want that? (5.00 / 1) (#336)
    by Spork on Fri Jun 14, 2002 at 06:36:02 PM EST

    Well, that's just what I don't get. Sure, I can understand the pull of making (good) things happen--you know, vaccination for poor children, that sort of stuff. And like I said, if I had $100M, that's the sort of cause my money would probably go to. But as far as starting a brewery and or a chain of restaurants, why would someone want to do that? The vanity of having their name on a chain of restaurants? (No, I assume the answer is investment... but why invest when you already have more money than you know what to do with?)

    I love beer and I love breweries, but I don't see what I would contribute if I were to own one. I don't want a stinky brewery, I just want beer, and even on my present measely salary, I can already buy as much as I am willing to drink (and it's probably better than what my brewery would be able to make).

    So while I think you're right that very rich people think this way, I still can't put myself into their shoes.

    [ Parent ]

    more importantly (5.00 / 1) (#347)
    by Phantros on Fri Jun 14, 2002 at 07:31:06 PM EST

    More importantly, you make things happen that benefit you, if you are at all intelligent about spending your $100M. For instance, is there a chance that you'll get cancer within the next few decades? Pay for cancer research. Have you always wanted a certain prestigious position? Buy influence and popularity (hmm, that sounds bad but you know what I mean).

    There are diminishing returns with increasing wealth, but there is never a point where you run out of things to spend it on. Example: Would world peace be of benefit to me? I think so. How much would it cost? A hell of a lot I think.

    4Literature - 2,000 books online and Scoop to discuss them with
    [ Parent ]

    I read an article once (4.00 / 1) (#102)
    by BushidoCoder on Thu Jun 13, 2002 at 12:48:49 PM EST

    ... that said that if Bill Gates lost all of his money except $100M, his lifestyle wouldn't change. That seems to be the magic number where its hard to spend it faster than simple interest can earn it back.

    \bc

    [ Parent ]

    $1 is worth ONE DOLLAR. (2.00 / 6) (#116)
    by bitgeek on Thu Jun 13, 2002 at 02:05:23 PM EST

    Basically, it just states the obvious fact that when you are super-rich, each additional unit of currency improves your well-being less than it would if you were poor.

    This is not an "obvious fact", it is not even a fact. IT is a bit of propaganda to justify stealing money from those who are hated (namely the rich.)

    As someone who is in the top %10 of wage earners in this country, buying a house is still something I cannot afford. Yet liberals would call me rich and say I should be taxed even more! (Despite the fact that when sales taxes are included and other fees, I pay %50 to the government.)

    Of course, I could *finance* a house and many of my contemporaries have, even huge houses. But because I am careful with my money, I am not going to go out and take on that much debt.

    What does this matter, you ask? Well, by being careful, I have more money to invest.

    And investing that money means I'll have more money coming in in the future.

    The "marginal value" theory says that the more successful I am, the more I should be progressively taxed. After all, I don't *need* the money, do I?

    Which is another way of saying, the government provides financial incentives to be poor-- cause it punishes you if you save your money and invest it wisely.

    Is poverty what you really want?

    Whenever you start thinking along the lines of "From each according to his ability, to each according to his needs" you end up moving in the direction of a brutal dictatorship, and widespread poverty.

    Dictatorship because thats the only way you'll get people to be slaves (which is what a %50 or largert tax bracket constitutes)

    And widespread poverty because you've removed the incentive to do anything that fights poverty- such as create jobs, and pay people well.

    So, check that budding hatred of the rich.

    Don't fall into the trap of being jealous because someone else has more money than you. Odds are they earned it.

    And odds are they are also doing more to fight poverty (without giving a cent away) than you or I will ever do.

    The REASON a country as wealthy as the US has this many people in hardship is socialism / progressive taxation.

    It is a constant battle with those who have not learned the lesson of the soviet union.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    streetlawyer summary service (3.28 / 7) (#211)
    by streetlawyer on Fri Jun 14, 2002 at 10:39:21 AM EST

    As someone who is in the top %10 of wage earners in this country, buying a house is still something I cannot afford. Yet liberals would call me rich and say I should be taxed even more! (Despite the fact that when sales taxes are included and other fees, I pay %50 to the government.)

    Of course, I could *finance* a house and many of my contemporaries have, even huge houses. But because I am careful with my money, I am not going to go out and take on that much debt.

    I'm an idiot, and it's the liberals' fault.

    --
    Just because things have been nonergodic so far, doesn't mean that they'll be nonergodic forever
    [ Parent ]

    Utility Functions (3.66 / 3) (#237)
    by pexatus on Fri Jun 14, 2002 at 12:06:34 PM EST

    There's no jealousy of the rich going on with the statement that $1 means less to a rich person than a poor person.  It just means that most rational people (the people who like money because they can buy things with it, rather than wanting it for its own sake) have a concave utility function (if you graph the amount of money you have on the x-axis versus its utility to the person on the y-axis).  It's also not an incentive to be poor.  A concave utility function is still monotonically increasing (it's always better to have more money).

    The example I first saw to demonstrate this was a question: which of two lotteries would you rather invest in?

  • A lottery that pays out $500,000 with probability 100%

  • A lottery that pays out $1,000,000 with probability 50% and $0 with probability 50%
  • If you would rather go with the first lottery, then you have a concave utility function, assuming that your utility function is monotonically increasing.  If your goal as an investor is to maximize expected utility, the concavity of your utiliity function can be shown mathematically by Jensen's Inequality. Intuitively, it means that when you have $500,000, another $500,000 is worth less to you than if you had no money.

    [ Parent ]

    Intuitively? (1.00 / 1) (#301)
    by bitgeek on Fri Jun 14, 2002 at 03:58:48 PM EST

    You said:
    Intuitively, it means that when you have $500,000, another $500,000 is worth less to you than if you had no money.

    Earlier you said this was based on rationality.  

    A rational person recognizes that $500,000 is worth the same whether they already have it or not.

    The fallacy starts with your premise. You define rational as someone who uses money to buy things, and irrational as someone who uses money for money's sake.  Near as I can tell, this second group of people are very small.  The few I've met were relatively poor.

    A person with $500,000 is going  to look at that second $500,000 as the ability to buy things.  Its just the things that will be different.

    Since this argument has been used consistently to claim that rich should be punantively taxed, because they don't "need" the money, I attribute it to jealousy.

    That the objective, factual, value of $500,000 is the same whether you have another one is not in dispute.

    That a wealthy person will recognize the value of that $500,000 is obvious.

    In my experience, wealthy people know the value of a dollar more than poor people.

    People are poor because they wasted all their money buying things they don't need with credit cards.

    People are rich because they saved their money and put it to work.  To a wealthy person, that $500,000's *practical* value (ie:  value in use) is closer to the million he'll have made with it in 10 years.

    To a poor person, that $500,000's practical value is the $0, negative net worth bankruptcy that it will give him enough rope to create in 10 years.

    A great example of this is the guy in the other thread talking about what he'd do with $500,000- all the things he'd buy.  He named at least half a million in stuff.

    A rich person might buy $100,000 worth of "Stuff" after such a windfall, but would invest the rest.

    He knows the real value of that money.

    Objectively $1 is always worht $1.

    Subjectively, $1 is worth what you will do with it.

    Bashing rich people because they don't need them money is advocating the killing of the goose giving you golden eggs.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    Spurious assertion (5.00 / 1) (#239)
    by Rogerborg on Fri Jun 14, 2002 at 12:23:51 PM EST

      Dictatorship because thats the only way you'll get people to be slaves (which is what a %50 or largert tax bracket constitutes)

    Remind us, what's the part of your slavery contract that forces you to keep earning that much? Or the part that stops you moving to a lower taxed country?

    I do take your point, I just believe that with high population density, little opportunity for self sufficiency, and the easy availability of firearms, there's an extremely pragmatic argument to be made for welfare payouts. Sure, let's cut all welfare tonight. While you and I debate the philosophical ramifications, about fifty million citizens with nothing left to lose will start looting and burning.

    Consider our taxes as insurance. We're paying more towards welfare, law enforcement and the judicial and prison system to protect our ability to hold on to and enjoy the money we make, without it being taken from us by someone to whom hard cash is the difference between eating and starving.


    "Exterminate all rational thought." - W.S. Burroughs
    [ Parent ]

    Phased approach. (1.00 / 2) (#298)
    by bitgeek on Fri Jun 14, 2002 at 03:50:53 PM EST

    Going from the current situation to liberty instantaneously would be foolish, as you point out.

    The correct approach is a phased one.

    Without welfare the people on it would get jobs.

    Without the waste of the government the economy would support more jobs.

    And, at its root, the value of the services I get from the government are about a tenth of what I pay for them.  So, %90 of that money is wasted on beuracracy.

    Hell, in a liberty situation there would still be welfare, it would just be private welfare designed to help people in periods of transition and get them jobs-- not government soicalism designed to get people breeding and keep them unemployed.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    You DO know.... (4.00 / 1) (#368)
    by Blarney on Sat Jun 15, 2002 at 12:08:57 AM EST

    That welfare cash assistance has time limits these days, right? Mr. Clinton signed them into law.

    [ Parent ]
    an interesting nuance in psychology (4.00 / 1) (#120)
    by JanusAurelius on Thu Jun 13, 2002 at 02:23:11 PM EST

    Yes, the notes on marginal utility are true. The ironic thing is it seems that people do not behave logically in this sense.

    I remember one of my teachers telling me a while back that having a lot of something simply makes you want to have more of it. If you think about it, this nuance is simply an elaboration of the principle of greed, extendable to non-capitalistic value systems--systems are not necessarily marked with such a negative connotation as that of "greed."

    If you think about it, this principle is remarkably good at explaining why it is that some people hog the spotlight, and why others obsess over certain collectibles (i.e. cars). Sure, the case could be made that those people are just bored, or that they're "investing" in status symbols. But why would they obsess over any specific item, rather than a broad range of items? (especially in the case of the really bored fanatic collector?)

    Seriously though, how else do you explain CEOs going for these job that no one else in their right minds would ever take on?



    [ Parent ]
    What does he want? (none / 0) (#240)
    by kuran42 on Fri Jun 14, 2002 at 12:24:41 PM EST

    I'll tell you what he wants. He wants more!

    --
    kuran42? genius? Nary a difference betwixt the two. -- Defect
    [ Parent ]
    Pick me! (3.66 / 3) (#158)
    by phliar on Thu Jun 13, 2002 at 07:48:19 PM EST

    with $100M ... Would I buy an apartment building in NY or SF and convert it into a huge party house for my friends?
    Excellent plan! In San Francisco, please; and I'd like to be your friend.
    I think this really makes sense--I think a country as wealthy as the USA should simply not have this many people in economic hardship.
    Not people like us who have computers and read K5, but the ones getting evicted and not being able to feed their children or have health-care.


    Faster, faster, until the thrill of...
    [ Parent ]

    100 M would mean (3.00 / 1) (#234)
    by gotak on Fri Jun 14, 2002 at 11:52:50 AM EST

    A nice turbo prop light plane so I can play around flying from places to places.

    Plus some really huge fiber pipes to my house so i can run CS servers, neverwinter nights servers and god knows what.

    A BMW X5 and a nice 4 bedroom house.

    OR maybe i'll just put it all back into investments to get even more.

    [ Parent ]

    Serious Factual Error (4.55 / 18) (#55)
    by wiredog on Thu Jun 13, 2002 at 08:37:08 AM EST

    In the intro, no less.

    working people of the United States and elsewhere do not find their own wages increasing

    From The Washington Post:

    the prosperity of the 1990s had a broad, positive effect. Lower-income counties posted greater gains than richer ones, and the proportion of households at the low end, with less than $15,000 a year, shrank as those people brought in more money.

    Since the truth conflicts with the apparent worldview of the author, and many other people reading the story, the story will be posted regardless of factual errors.

    "one masturbation reference per 13 K5ers" --Rusty

    Is that so ? (3.00 / 1) (#93)
    by sien on Thu Jun 13, 2002 at 11:31:04 AM EST

    I can't find a link for it, but I believe over a longer period, from about 1973 to today you find that in the US the lower wages have not increased beyond inflation. I could be wrong but I think also that since about 1973 the US has seen greater concentration of wealth. Either way the percentage changes haven't been that great but it is interesting to contrast with a number of European countries where wealth distribution has actually become more even.

    From the Post article also:
    It is also impossible to answer whether income disparities between groups have worsened over the past decade, although other research indicates that the gap between the rich and the poor is wider than it was two decades ago.

    [ Parent ]

    Well (4.50 / 4) (#107)
    by wiredog on Thu Jun 13, 2002 at 01:21:37 PM EST

    I was responding to "do not find their own wages increasing" which is a factual error. Just because BillG makes more than I do, and his income has increased faster than mine, doesn't make me poorer than I was 10 years ago.

    Federal minimum wage hasn't increased as fast as inflation, which is why localities are beginning to mandate a living wage. But then, few companies around here start people off at minimum wage anyway. Bag boys at the local supermarket start at around $10/hr.

    That said, income disparity is an important issue, and one that is being noticed.

    "one masturbation reference per 13 K5ers" --Rusty
    [ Parent ]

    And a related surprise (3.50 / 2) (#138)
    by thebrix on Thu Jun 13, 2002 at 04:29:07 PM EST

    Inequality in the US has remained largely static over the past twenty years, whereas that in Sweden and the UK has at least doubled (although the Swedish level is less than half that of the US, and the UK level roughly two-thirds).

    Although the UK and Swedish situations are no surprise to me the US one most certainly is; I can't find any obvious holes in the argument made.

    (Paper and BBC News Online summary)

    [ Parent ]

    The US has remained on a steady economic plan. (3.66 / 3) (#179)
    by haflinger on Thu Jun 13, 2002 at 11:26:22 PM EST

    Reaganomics, whatever; the US has pretty much followed the same basic economic idea since JFK or thereabouts.

    However, both the UK and Sweden turned their economies upside down in the '80s, swinging to the right. This is the difference.

    Did people from the future send George Carlin back in time to save rusty and K5? - leviramsey
    [ Parent ]

    The boom of the late 90s (3.00 / 3) (#164)
    by myshka on Thu Jun 13, 2002 at 09:04:37 PM EST

    Taking the economic boom of the late 90s in a vacuum is rather dishonest. Please contrast the statistics provided by the Washington Post with these.

    The stagnation of the hourly wage is particularly telling, in that the constant increase in working hours is to a large extent responsible for increases in absolute wages. It is a pity that wage and productivity figure offerred by the government and business advocates and quoted in the mainstream media are usually presented without the context of increasing working hours, lower benefits and diminishing job security.

    [ Parent ]

    Irrelevant (3.00 / 2) (#195)
    by Dest on Fri Jun 14, 2002 at 04:50:00 AM EST

    The market cares not for long hours, benefits and job security. These are forms of non-price competition that arise in situations where price-competition in the labour market is no longer practical to attract employees. For example, if you're a telephone repairman there's very few companies competing for your labour, and therefore will engage in non-price competition to save the bottom line. If anything these facts that you state offer up to us that the condition of the market is improving -- more buyers and sellers -- leading to greater efficiency, and therefore lower costs (or reduced inflation depending on economic policies of particular governments) which appreciates the wages earned in and of itself. In fact the facts you offer indicate to the astute economist that the labour market is closer to optimum price than ever, benefitting the worker (by forcing greater price competition), the consumer (by forcing greater efficiency of the company), but no longer specific companies (super-normal profits are being purged from the system).

    ----
    Dest

    "Bah. You have no taste, you won't be getting better than tofurkey bukkake." -- Ni
    [ Parent ]
    Irrelevant (3.00 / 3) (#203)
    by myshka on Fri Jun 14, 2002 at 08:01:55 AM EST

    The market cares not for long hours, benefits and job security.

    The worker does.

    [ Parent ]

    Yes, but... (3.00 / 1) (#208)
    by Dest on Fri Jun 14, 2002 at 09:50:08 AM EST

    these are things companies offer in situations where paying the fair market wage is not necessary due to lack of competition. This is a bad situation for everyone (including the worker) except the company. The worker gets screwed out of higher wages. The consumer gets screwed on high prices. The company makes more profit than the market says it should.

    ----
    Dest

    "Bah. You have no taste, you won't be getting better than tofurkey bukkake." -- Ni
    [ Parent ]
    The disclaimer tells the tail. (2.33 / 3) (#294)
    by bitgeek on Fri Jun 14, 2002 at 03:45:23 PM EST

    From your link:
    "This is public domain data massaged by LBO."

    At least they are honest about it.  Most leftists "massage" numbers to the point of making them up, and act as if they were facts.

    I saw a great chart once that showed an instant %40 drop in "real worker income" between Dec 2000 and January 2001.  Contrasted with who was president, of course.  Which would mean that about a month before Bush took office he had a huge impact on what companies were going to pay their workers?  

    "Bush got elected, here's your paycut!"

    Sheesh.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    Care to provide some numbers? (3.00 / 2) (#361)
    by myshka on Fri Jun 14, 2002 at 10:06:55 PM EST

    Or should I reject your ramblings as the amusing but tiring misgivings of an impressionable mind who took Ayn Rand a little more seriously than most?

    [ Parent ]
    Investors are really, really dumb. (3.30 / 10) (#56)
    by haflinger on Thu Jun 13, 2002 at 08:40:24 AM EST

    This is the whole problem. During the dot-com boom, investors bought tons of stocks they knew nothing about. That's a huge mistake. Next, when the bubble burst, investors jumped from technology stocks to anything else. Do you think they picked stocks they understood?

    No. They just bought what Fortune or whoever told them to buy. But the fact is, you don't need brains to invest. You just need money.

    Investment bankers and the like are similar. Do you think VCs generally understand the business plans of their clients? I certainly don't.

    This, too, is not a new problem. For historical parallels to the Internet bubble, look at, say, the South Sea Bubble.

    To my mind, there are exactly three reasons for buying stock.

    1. It pays a good dividend: eg AOL before AOL Time Warner appeared.
    2. It is likely to be bought out. Takeovers heavily inflate the price of stock. They are good for investors.
    3. You really like the company, and wish to help it succeed, for if it dies, your life will be poorer in a non-monetary way.
    Does Microsoft have devotees? Certainly the first two do not apply to it. But MS is not alone. Investors are dumb.

    Did people from the future send George Carlin back in time to save rusty and K5? - leviramsey
    Yeah... but... (4.25 / 4) (#87)
    by jmzero on Thu Jun 13, 2002 at 11:10:22 AM EST

    Does Microsoft have devotees? Certainly the first two do not apply to it. But MS is not alone. Investors are dumb

    A lot of investors have made good money on MS stocks.  Real money.  That they use to buy things.

    I agree that MS stock should be a horrible buy.  Their capitalization is way out of proportion with the value of their business.  However, everyone knows that that isn't how everyone else is going to evaluate the stock.  

    So the question remains:  If you buy this stock now, are you at the bottom, the middle, or the top of the pyramid scheme?

    I'd rather buy hog futures myself.  Worst case is you end up with a lot of hogs.  Of course, there are limits on how many hogs you can keep in your apartment.  But maybe there won't be in the future!

    .
    "Let's not stir that bag of worms." - my lovely wife
    [ Parent ]

    Futures (5.00 / 2) (#113)
    by wiredog on Thu Jun 13, 2002 at 01:50:11 PM EST

    About 20 years ago, in the spring, a friends parents invested in potato futures. One fine fall day they got a call from the railyard. There was a fully loaded boxcar down there for them. Oops.

    "one masturbation reference per 13 K5ers" --Rusty
    [ Parent ]
    Mmmmm, potatoes. (nt) (none / 0) (#288)
    by Kaki Nix Sain on Fri Jun 14, 2002 at 03:36:05 PM EST



    [ Parent ]
    Investors are not dumb (4.00 / 6) (#92)
    by sien on Thu Jun 13, 2002 at 11:25:04 AM EST

    Investors can be dumb. But they are not always. The stat that brokers will always trot out is that if you held an index fund over any 10 year period in the twentieth century your investment did better than anything else. Of course stocks suffer from the fact that you can't live in them or eat them, so it's more complex than that, but still.

    But, there are bubbles. There is a great quote in the book dot con from the Economist John Maynard Keynes which is: Successful investing is anticipating the anticipations of others. . This has huge implications for bubbles. Of course, the catch is that anyone with some common sense is playing the same game, leading to herd behaviour.

    I totally agree that fund managers and managers in general are rarely, if ever that smart. Work out how many fund managers there are. Then say that half of them do well, the other half do badly. On the half that do well then repeat the process. Repeat this 10 times. Then you will have a bunch of managers who have done incredibly well, by sheer chance !

    But finally, from family experience. You are silly not to have some stocks. They are part of a balanced portfolio.

    [ Parent ]

    The role of capital (4.73 / 19) (#65)
    by jolly st nick on Thu Jun 13, 2002 at 09:13:20 AM EST

    It simply isn't the case that big companies don't pay dividends. I have a lot of my nest egg in large-cap stocks where paying dividends is practically a religion.

    Microsoft and Tyco can get away without paying dividends because they are companies whose strategy is extreme near-term growth. If we looked back to 1985, it would make no sense for Microsoft to pay dividends, since the PC market was growing so rapidly, the best use of the money was to invest it in itself. However, the situation is apt to be very different in 2015. Microsoft at some point will have to transition over to paying dividends just like GM does. That point will be when the growth slows to long term sustainable levels. If they end up being a huge company with modest growth and large cash reserves, the stockholders will demand dividends or they will hire a board that will liquidate its assets.

    I think one of the misconceptions in this article is that profits are somehow skimmed from the fruits of labor. One of the great strengths of capitalism is that capital gets paid, just like any other factor of production. Under a system where only labor is paid, capital is not handled as efficiently; or rather it is handled even less efficiently -- let us not overestimate the brilliance of capitalists. As irrationally exuberent or depressed as capital's controllers may be, it is virtually certain that capital will be used more efficiently in a system in which it is paid versus one in which it is not.

    This is a matter of concern for labor. Capital magnifies the productivity of labor. You cannot sustain high wages for labor unless the financial productivity of labor is high; you cannot keep the productivity of labor high unless labor is supplied with facilities, equipment and training. Nobody has developed a way of efficiently obtaining and distributing these things without paying capital.

    Where I part company with many advocates of capitalism is the idea that the interests of capital and capitalists should be placed above labor or should be the chief end of our society's organization. The business of America isn't business, but the welfare of the people. It's important to recognize the importance of the contribution of capital to this. I don't frankly care much about the capitalists as a class, except that nobody has found an effective way to pay capital without them. They should be allowed, as far as possible, to perform their function in society with a minimum of interference. However I don't believe the welfare of capitalists should take precedence over the welfare of the people in general.

    MSFT (4.25 / 4) (#78)
    by Betcour on Thu Jun 13, 2002 at 10:19:04 AM EST

    Microsoft and Tyco can get away without paying dividends because they are companies whose strategy is extreme near-term growth. If we looked back to 1985, it would make no sense for Microsoft to pay dividends, since the PC market was growing so rapidly, the best use of the money was to invest it in itself. However, the situation is apt to be very different in 2015.

    While I agree with you on the idea, I think Microsoft is a very bad illustration of it. They, nowadays, have dozen of billions of dollars sitting in bank accounts doing nothing but generating interests. Microsoft clearly got over the point where they could reinvest into their own business whatever money they could find. They have more money than they could possibly ever need to expand NOW, so they should have already started to distribute dividends. How much more of the operating system market share do you really think they can get ?

    [ Parent ]
    How much more of the operating system market share (4.50 / 6) (#80)
    by jolly st nick on Thu Jun 13, 2002 at 10:34:02 AM EST

    How much more of the operating system market share do you really think they can get ?

    Potentially? Quite a bit. Just not on the desktop or workgroup server segments, where their share is pretty much optimal (enough competition to argue that people do have choices but just don't want them). However there are large scale servers and datacenters. There are embedded computers, game consoles and set-top boxes.

    Plus this ignores the fact that MS business strategy is based on synergy using their desktop and office tools monopoloy to conquer existing markets like database management systems and enter new ones like content.



    [ Parent ]

    Money might be needed for lawsuits (3.00 / 1) (#230)
    by dipierro on Fri Jun 14, 2002 at 11:40:37 AM EST

    Yes, they have dozens of billions ($47,827,000,000) in the bank, but they also have <a href="http://www.wired.com/news/politics/0,1283,32728,00.html">$10 billion lawsuits</a> against them.
    In capitalism, man exploits man. In socialism, it's the other way around.
    [ Parent ]
    Not a probelm (none / 0) (#389)
    by Betcour on Sat Jun 15, 2002 at 04:58:17 PM EST

    47M-10M=37M, more than enough for any corporation. Even if Microsoft loose the trial, they will still be on top of the world of commercial software. It will just be a mosquito bite on an elephant : anoying, but mostly harmless.

    [ Parent ]
    a problem (none / 0) (#406)
    by dipierro on Sun Jun 16, 2002 at 12:10:13 PM EST

    That 10 million was only one state. There are several other states which are also suing the company.
    In capitalism, man exploits man. In socialism, it's the other way around.
    [ Parent ]
    Holding cash (none / 0) (#376)
    by Simon Kinahan on Sat Jun 15, 2002 at 07:02:42 AM EST

    There are a number of reasons why shareholders might prefer a firm to hold cash, rather than pay it out in dividends. I'm not in a position to say which one (if any) applies to MSFT, but:

    1. Cash provides an ability to respond to events. If shareholders believe a firm's market is fast changing, they might prefer it to have decent cash reserves.

    2. Cash makes scquisitions easier, and means they do not have to be made for stock. Shareholders generally prefer cach acquisitions, because stock acquisitions dilute the stock, and rarely recover the full cost of the acquired firm. Actually there's a good question as to why shareholders tolerate acquisitions at all.

    3. There might be anticipated running costs, or risks (such as lawsuits), that will eat into the money.

    Of course, most shareholders are probably just happy to hold onto their shares as long as they keep going up, and don't know about the cash at all. You can be sure the professional investors know, though.

    I don't think MSFT considers its market to be the market for operating systems: Windows is essentially a loss leader and always has been. Most of their money historically comes from Office. If asked to name their market, their answer, stripped of bullshit, would be "everything anyone ever runs on a computer system". Defined in that way, they still have plenty of scope to expand.  

    Simon

    If you disagree, post, don't moderate
    [ Parent ]

    Dividends? (4.50 / 4) (#233)
    by x31eq on Fri Jun 14, 2002 at 11:50:26 AM EST

    There was an interesting article in The Economist about this a while back. In summary: there's no obvious reason why companies have to pay dividends. Investing in the company or buying back shares will increase the value of all shares -- distributing the same money to the same shareholders.

    I think it's something to do with peacocks' tails. As long as a share's value is judged according to the size of dividends paid out, those dividends have to be paid. Also, being able to run a successful company and still give away money to your shareholders shows that you must be in a really sound position to start with. A company that can survive such a handicap must be worth investing it.



    [ Parent ]
    More reasons for not paying dividends (3.00 / 1) (#312)
    by mckwant on Fri Jun 14, 2002 at 04:20:55 PM EST

    Although this is a little sketchy, given the current state of stock prices, it used to be that some stockholders preferred that no dividends be paid.

    Basically, reinvesting the cash that would've been paid out in dividends drove the price of the stock up.  After the stock price went up, you were subject to capital gains tax upon the sale of that stock, as opposed to income taxes on the dividend payment.

    Capital gains tax is usually lower than income taxes, IIRC.

    Obviously, there are also problems with this strategy, including:

    a)  How long a company can reinvest in itself without "jumping the shark" (to borrow a term)
    b)  The fact that some stock holders actually WANT income back off their holdings (i.e. retirees, who are in low income brackets)

    and so on.

    [ Parent ]

    Great response, but there are inefficiencies (5.00 / 1) (#398)
    by dachshund on Sat Jun 15, 2002 at 11:17:49 PM EST

    I'm glad somebody got around to making this very obvious set of points. It says nothing particularly good that there are three or four higher-rated posts that completely failed to address this.

    I think one of the misconceptions in this article is that profits are somehow skimmed from the fruits of labor. One of the great strengths of capitalism is that capital gets paid, just like any other factor of production. Under a system where only labor is paid, capital is not handled as efficiently; or rather it is handled even less efficiently

    However, I would like to point out that the theoretical efficiency of Capitalism does not mean that the actual implementation is efficient. Currently we have a system of strong managers and fairly weak owners, which is exacerbated by a lack of transparency in the reporting process. The people who run the shop, coincidentally, able to give themselves a better break than the people who work there. And of course, this happens, because it's just human nature (processed through a chain of justification.)

    Over the long term, the system is designed to be self-correcting. But of course, correction requires transparency, and it takes time. Transparency is hindered not only through deliberate acts of obfuscation (aka Arthur Andersen), but through other processes. For instance, if you hire a CEO who is talented, but doesn't know the right people, didn't go to the right school, or play the right game of golf, you can hurt your company's prospects. Or if you don't pay your executives a certain salary, executives at other companies will try to steal them away. I'm not saying that there's a secret "club" of executive-illuminati out there, but highly-paid executives will tend to act in their own personal interest. Sometimes this sort of thing is beneficial to business. Other times it represents an enormous inefficiency, that is hidden by the fact that everybody else is doing it too (and who's going to notice your slightly diminished growth, when everybody else's growth is similarly limited.)

    There is also the issue of time and inertia. It takes one hell of a disaster to drive a company's stockholders to override management. Keep this sort of mess at bay, and you can do a lot of things that are slightly against the company's interest.

    [ Parent ]

    insanity (4.47 / 34) (#73)
    by tps12 on Thu Jun 13, 2002 at 10:00:04 AM EST

    This article is completely insane, and demonstrates misunderstanding of just about everything I learned in Principles of Economics in college.
    A main principle of capitalism is that "A thing is worth whatever somebody else is willing to pay for it", in contrast to other systems where the worth of things is determined by government, or by philosophical considerations of "Surplus Value" and "Labor Days".

    You make it sound like this is some arbitrary definition of value. In fact, attempts to dictate value are mathematically doomed to failure; in the best case, they match the prices as determined in a perfect free market. Suppose the government dictates that the value of a slice of pizza is always $10. Then pizza companies will all go out of business, as everyone flocks to other food sources. On the other hand, if they say it must cost 10¢, then pizza companies will go out of business because they lose money on every slice.
    While there are many types of stock, most people prefer to invest in "common stock" which are considered to convey partial ownership of the issuer to the purchaser.

    This is not true. Common stock is a very volatile investment. Many, many people invest in mutual funds, real estate, and all types of bonds. Also, common stock is my definition partial ownership of a company. There is no interpretation going on here.
    So can you go to MSFT, show them your share, and demand your $1.15 earnings and the $7.15 that they have in the bank? Of course not! The management of MSFT decides how much money to pay to shareholders every year, known as a "dividend".

    Yes, the same management that answers to the Board of Directors that is elected by the shareholders.
    Not a single dime was paid to shareholders. Instead, the money was reinvested so that the shareholders would own a piece of a bigger, even more profitable company in the future.

    What is the problem here? MSFT has been a solid investment for a long time and has made many people very wealthy, especially its shareholders.
    companies ruthlessly pay their workers as little money as possible for as much work as they can

    And I ruthlessly pay as little money as possible for as many french fries as I can, thanks to the evil tax dodge known as "Super Sizing." Seriously, labor is a market like any other (modulo government-protected unions), and wages are determined by supply and demand.
    People with opinions all over the political spectrum agree that something must be done to end this looting.

    Greenspan (in your link) calls for disclosure of stock option grants as expenses. Expenses do affect reported profits, but since most healthy companies reinvest all of their profits anyway, this does not matter much. In any case, your truncated political spectrum at least doesn't include those who believe the government should not regulate businesses at all.
    You might as well be speculating in Magic: The Gathering cards.

    This isn't true. If Wizards of the Coast decides to print an assload of duplicate cards, then your investment becomes worthless (or worth less, at least). Corporations can split their stock or sell more of it, if it is not completely public. Either way, investors don't get screwed.
    The rich get richer, the poor get screwed, and the small investors swap money between each other and don't get anything from the corporations they think they "own".

    Actually, the rich and the poor both get richer. Smart investors make money while not-smart ones lose it. Just like any market.
    The only solution is to restore the stock market so that profits are shared with investors, and capitalism will truly exist.

    ??????
    There's a storm coming, and things will get worse before they get better.

    Given your knowledge of economics, capitalism, and the stock market, I would be very surprised if anyone took this advice.
    Quit gambling against your fellow man and try real capitalism.

    ???????

    You are wearing out my question mark key.

    The long and the short of it is, some stocks pay dividends and some don't. This information is freely available to potential investors, so no one is getting surprised here. If you are proposing that someone (i.e., the government) step in and prevent transactions between informed individuals, and you call this "real capitalism," then you are woefully unaware of the true definition of capitalism.

    Please, for the love of all that is reasonable, invest (ha ha) in a college intro Economics text. When you have digested that, an intro Finance text would not hurt, either. And for your own sake, stay away from the stock market!

    thanks (2.25 / 4) (#89)
    by MMcP on Thu Jun 13, 2002 at 11:17:06 AM EST

    Gracias for ripping this story apart - I knew it was fishy but I didn't quite know why.

    [ Parent ]
    Gold... (2.60 / 5) (#109)
    by garrepi on Thu Jun 13, 2002 at 01:30:32 PM EST

    ... pure gold.
    "And I ruthlessly pay as little money as possible for as many french fries as I can, thanks to the evil tax dodge known as 'Super Sizing.' "



    meh.
    [ Parent ]
    Consider the source (3.00 / 1) (#238)
    by Rogerborg on Fri Jun 14, 2002 at 12:08:27 PM EST

      This article is completely insane, and demonstrates misunderstanding of just about everything I learned in Principles of Economics in college [...] labor is a market like any other, and wages are determined by supply and demand

    So, given how little educators are paid compared to fund managers, you're arguing that you were taught economics by people who are extremely bad at it?

    What, in theory or practice, is the difference between an economics professor, and a guy selling one of those "Learn my stock market secrets! Make millions! Never work again!" books. They're both preaching the "do as I say, not as I do" mantra.


    "Exterminate all rational thought." - W.S. Burroughs
    [ Parent ]

    my Econ prof ruled (3.00 / 1) (#246)
    by tps12 on Fri Jun 14, 2002 at 12:36:08 PM EST

    My Econ professor started out his first lecture by saying that he believed in capitalism, but really stunk as a capitalist. Fortunately, his wife was really good at it, so they got by. He didn't get tenured, so he gave a multiple-choice final (20 minutes) and gave the entire class B's.

    But, yeah, the point is that managing funds and researching/lecturing are two completely different careers that happen to require a lot of the same knowledge. Trying to place them on some kind of scale of ability makes little sense.

    [ Parent ]

    perpetuating lousy myths (4.73 / 30) (#95)
    by trhurler on Thu Jun 13, 2002 at 11:56:42 AM EST

    First off, as far as I'm aware(as of sometime last year,) nobody is making anywhere close to $100,000,000 a year in salary. Some people take in that much in a year? Maybe, but only if you include non-salary income, not all of which is even necessarily related to their jobs(rich people invest money too, you know.) Your poll is nonsense.

    Second, the notion that your average corporate executive doesn't do anything is proof of one thing: you don't know any corporate executives. Between their day jobs(which are not as insignificant as people think,) their PR role(which is quite substantial and generally an absolute requirement if they want to keep their jobs, and usually comes out of non-job time,) and their position as "the guy who takes the fall if anything gets fucked up," really being a CEO is probably one of the stupidest things a lover of the good life could possibly want. It is a job for someone to whom work and working is more important than anything else in life, or else it is a lousy job.

    Voting is not worth anything to 99% of shareholders. You're just dead wrong on that. The value of a stock, while it may fluctuate for many reasons, fundamentally derives from the fact that, like cash, you know it is worth X amount to someone else, who values it for the same reason. Sounds nuts? So does cash. Fortunately, most people never think about that, so it works out ok.

    Furthermore, failure to pay out dividends makes perfect sense for a company that needs to maintain a double digit growth rate to stay atop the market. Notice that utilities pay out handsome dividends. This is because they can. Microsoft would be a nobody today if it had done so over the last 20 years.

    The looting you describe is not the origin of value of stock. You need to get it through your head: stock is like less liquid cash. It has value for no sensible reason whatsoever, except that people think it has value. Is owning some chunk of Exxon really worth anything? Of course not, unless you own something on the order of half, which you don't. And yet, people will pay for it. They believe.

    Your solutions suck too. The 95% progressive tax on high incomes would just cause people to structure their finances so that most of their wealth never left various investments, in hopes that the law would change eventually. The capital gains on dividends isn't a bad idea, but it won't actually change corporate behavior; Microsoft isn't keeping its money out of some charitable sense towards poor taxpayers, contrary to your belief. And finally, depending on the markets, "these awful stocks" can be the most profitable ones to buy. Why on earth shouldn't people buy them? Just because you don't like them? That's stupid; it means you will never buy a seriously growing company!

    --
    'God dammit, your posts make me hard.' --LilDebbie

    I made it through the first sentece of the article (4.11 / 9) (#99)
    by shoeboy on Thu Jun 13, 2002 at 12:12:58 PM EST

    and realized that life was just too short. Allow me to congratulate you on not only managing to read the submission, but critique it as well.

    --Shoeboy
    No more trolls!
    [ Parent ]

    Short half-lives (3.00 / 3) (#143)
    by axafluff on Thu Jun 13, 2002 at 05:34:42 PM EST

    Another person whose life was too short was the 18th century french mathematician Galois. He died in a duel over a petty issue. The night before he frenetically scribbled the results of his study of fifth-degree equations, interspersing the text with "I don't have time...I don't have time".

    Hopefully you won't meet the same fate, but rather finish whatever made you think your life is/will be too short.

    (Loosely from memory of Robert Mankiewicz, "The story of mathematics", 2000)

    [ Parent ]
    correction: 19th century mathematician (n/t) (none / 0) (#146)
    by axafluff on Thu Jun 13, 2002 at 05:46:56 PM EST



    [ Parent ]
    omg! divedent re-envestment is a giant consperacy (2.60 / 5) (#119)
    by nodsmasher on Thu Jun 13, 2002 at 02:19:30 PM EST

    enron ruined every thing, first the scandals became lame, now the consperacy theory's have become lame

    there are 2 types of companys you can invest in (in general): companys that are not going to increace in value much, but will give you divedends, or companys that will increace in value but will not give much dividends, tyco and microsoft happen to be the latter, if you think divendends are such a must then invest in one of the former
    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
    Most people don't realise just how funny cannibalism can actually be.
    -Tatarigami
    Read the article before you knee-jerk. Reread it. (2.60 / 5) (#139)
    by BuddasEvilTwin on Thu Jun 13, 2002 at 04:30:36 PM EST

      Read the article again, he's plainly pointing out that dividen re-investment is being exploited and he's suggesting we fix the system.

      As a matter of fact, it seems he's gone out of his way not to suggest conspiracies, only for his efforts to be twarted by obtuse people, who can't distinguish the details.

      The part that really pisses me off, is that impressionable people will believe you and dismiss the article, resulting in the inadventant dismissal of having a conversation about fixing exploited holes in our economic system.

      You seem to be pretty confident with your opinions regarding capitalism and investments.  Why don't you take a little time to explain to us why you think dividen re-investment isn't being exploited.

      Maybe you can point out the problems with the author's proposal.  What would you do to fix the problem?

    [ Parent ]

    problem (3.33 / 3) (#155)
    by nodsmasher on Thu Jun 13, 2002 at 07:16:23 PM EST

    When you buy microsoft your not looking for dividends, your looking for an increaced value in the stock. If you wanted dividends you'd buy a more mature company. There really isn't a problem, here. If you want dividends, buy a utility company, if you want capital gains growth buy microsoft.
    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
    Most people don't realise just how funny cannibalism can actually be.
    -Tatarigami
    [ Parent ]
    There is no hole... (4.00 / 4) (#160)
    by bitgeek on Thu Jun 13, 2002 at 08:34:33 PM EST

    dismissal of having a conversation about fixing exploited holes in our economic system.

    Except that the point is, there is no hole. There are problems with capitalism, sure, but this article doesn't even get close to them.

    Here's why:

    1. The author doesn't realize that retained earnings are not kept by the CEO

    2. The author doesn't realize that these $100 Million payouts from stock options require the CEO to bust his butt to increase the shareholder value enough that his small share is worth that much-- that billions upon billions in shareholder value are created for him to get that $100M.

    3. The author doesn't understand that retained earnings increase the value of the shares outstanding to a greater extent in a growing company, or one that does buybacks... and instead thinks that shareholders are being ripped off.

    5. Most importantly, the author refuses to recognize these factual errors and correct them. He's clearly only interested in bashing "lazy" CEOs despite the fact that numerous people have pointed out that their first hand experience shows that CEOs aren't lazy-- and of course, if you look at the decisions of boards and the way they treat CEOs, they make him earn his money.

    Basically, this article is comes from a false assumption-- the "Theft" in question doesn't exist- and therefore there is nothing to discuss.

    Its just capitalism bashing, pure and simple.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    A $100 million US CEO salary is... (3.41 / 12) (#132)
    by bitgeek on Thu Jun 13, 2002 at 03:17:22 PM EST

    Nonexistant. That %37 of the people who have voted (At this point in time) think that such a salary exists and is "good old boy back slapping" shows just how clueless so many people are.

    And making a distinction between salary and options is not quibbling.

    The ignorance of economics, capitalism and reality that this represents is a shame.

    And the fact that attempts to point the author to books that would educate him has resulted in refusal, shows that this position is one that doesn't care what the facts are.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.

    CEO salary (3.00 / 2) (#182)
    by marx on Fri Jun 14, 2002 at 01:25:20 AM EST

    A $100 million US CEO salary is nonexistent.
    The NY Times has an article about CEO salaries. They report that the average salary of the top 10 US CEOs is $154 million.
    The ignorance of economics, capitalism and reality that this represents is a shame.
    Your self-description is completely accurate.

    Join me in the War on Torture: help eradicate torture from the world by holding torturers accountable.
    [ Parent ]

    Perfect example! (4.50 / 4) (#188)
    by bitgeek on Fri Jun 14, 2002 at 03:38:46 AM EST

    Just as I write that people will misrepresent "pay" as salary, Marx does exactly that: A $100 million US CEO salary is nonexistent. The NY Times has an article about CEO salaries. They report that the average salary of the top 10 US CEOs is $154 million.

    Of course, that is NOT what they reported. These figures are compensation that comes from STOCK OPTIONS, not SALARY. In other words, money that was earned between 1990 and 2000 (since the standard Option plan has a 10 year expiry- meaning that they were forced to exercise their options in 2000 that they got in 1990.)

    The ignorance of economics, capitalism and reality that this represents is a shame. Your self-description is completely accurate.

    At some point I'm going to have to stop giving you the benefit of the doubt and decide that you know you are telling lies. That these "salaries" are actually stock options was pointed out by me yesterday... for you to claim again that they are salaries is pretty stupid.

    Its a shame.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    Abuse of language (3.40 / 5) (#201)
    by Betcour on Fri Jun 14, 2002 at 06:59:18 AM EST

    Whether the money comes from straight "regular" salary or thru the exercise of options that were included in said salary doesn't change anything. Whatever financial gain they get out of their work can be considered their pay for the job, no matter what form it takes (and you also have to include perks like private jets, housing and other non-financial salaries that translate into savings for them).

    If I get a 100 pigs for doing a job, the pigs still count as my salary. And in my country, they'd have to be declared to the IRS as well...

    [ Parent ]
    Abuse of language is to lie. (2.33 / 3) (#290)
    by bitgeek on Fri Jun 14, 2002 at 03:39:10 PM EST

    <i>Whether the money comes from straight "regular" salary or thru the exercise of options that were included in said salary doesn't change anything</i><p>

    Of course it does.  <p>There's a reason they are discussed differently- they are two differnet things.<p>Stock options are granted with a 10 year life.  At the end of the life you have to exercise them or loose them.<p>the 90s were a period of great growth, so in 2000, a LOT of the stock options exercised were granted in the early 90s as compensation and were about to expire, so they were exercised.<p> To say that this represents compensation earned only in 2000 is a lie.<p> To say this is "salary" earned in 2000 is an egregious lie.<p> Salary has a specific meaning, and when you use that word, people reading your article think these guys get paid this every year.<p> if you mean general compensation, use the word compensation.<p>Continuing to misrepresent this information and defending the misrepresentation of this information in this way calls into question your ethics.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    Missing the forest for the trees (4.00 / 2) (#317)
    by Fantastic Lad on Fri Jun 14, 2002 at 04:30:50 PM EST

    Your command of detailed trivia concerning the stock market is indeed advanced, but it seems as though you have gotten lost among the details.

    This isn't about the correct definition of "Salary" versus "Stock Option".

    The point of the article was that a very small set of privilaged individuals are taking an amount of wealth from corporate bodies completely out of proportion to the amount of work they put in. In short, they are not playing 'fair', and this upsets people.

    No amount of symantic haggling is going to change the fact that such individuals are essentially going to be seen as thieves and con artists.

    Further, this concern goes beyond mere envy, since entire corporations have been seen to collapse and cause society-wide misery as a direct result of such thievery. Enron is an excellent example.

    -Fantastic Lad

    [ Parent ]

    Not paying any attention to the foliage at all (3.00 / 1) (#357)
    by Paul Murdock on Fri Jun 14, 2002 at 09:35:29 PM EST

    If your view is taken, then the entire article is self-contradictory. Consider first, the claim made in the article that stock options are essentially worthless. Since this view is stressed in the conclusion, it seems important to keep it in mind. Since the bulk of executive earnings came from these allegedely worthless stock options, it hardly seems fair to accuse their recipients of looting the company. According to the article, they aren't taking anything of value. That they are making a lot of money for themselves by exercising those stock options is neither here nor there. All they are doing, according to the article, is taking money from people who are to greedy to know when they've been had. Morally questionable perhaps, but not corporate looting.

    [ Parent ]
    Salary != compensation... (4.00 / 1) (#299)
    by Skywise on Fri Jun 14, 2002 at 03:55:26 PM EST

    Best Buy sales people are paid minimum wage (~$5/hour), but they also get a commission based on the number of extended warranties they can sell, let's say they get $1 for every warranty they sell.  If one enterprising Best Buy sales guy who's only worked 40 hours manages to get some company to buy 100,000 mice WITH extended warranties, his paycheck will be $100,200.  While his co-worker who worked 40 hours will get $200.

    It's the same thing with stocks.  CEO's are granted stock options to give the CEO incentive to actually do good things for the company and not just do enough to get by.

    If the CEO screws up and the company collapses, the CEO only gets his SALARY.  Not his COMPENSATION.

    Now, is that fair to the $5/hour janitor who stopped the company from throwing away a $2 billion legal contract, because he found it in the garbage?  No.  But what is.

    [ Parent ]

    Dictionary troll (3.50 / 2) (#313)
    by marx on Fri Jun 14, 2002 at 04:22:41 PM EST

    It's useless to argue like this, because there are an almost infinite number of terms which are closely related.

    So if we were to accept this new definition, then I could point you to this table, where we see that yes indeed, there are many CEOs, even if we only restrict our search to Silicon Valley, who receive around $100 million in what you've claimed is "salary". For example, we have Gregory P. Dougherty who received $121,374,949 in cash.

    But oh, what's this? In this table we see that it wasn't salary at all, he received $121,271,346 in bonus, and only something like $100,000 in salary. A bonus, just like stock options, is not fixed, but is usually related to some kind of performance metric.

    So we're back to square one, but now we have 3 different kinds of payment, and no real hope of keeping that number there either.

    So I'm not going to accept your new definition.

    What I suggest is for you to stop mutating the terms and stick to what is reported in the statistics and newspapers. If you look at the top of the first table, it says:

    Chart: Top 100 Silicon Valley executive salaries
    And the definition is this:
    Their total compensation includes salary, bonuses, commissions, the dollar value of restricted stock awards and gains form exercising stock options. It also included other financial compensation, such as payments on insurance policies, contributions to retirement plans, automobile expenses, housing allowances, mortgage assistance, tax reimbursement, forgiveness of loans, relocation expenses and severance payments, and gains on exercises of options during the fiscal year, based on the difference between the option strike price and the market value of the stock on the date of exercise.
    If you want to keep all these terms separate and have a different argument about every single one, then you're free to do so, but I don't think anyone else would want to participate.

    Join me in the War on Torture: help eradicate torture from the world by holding torturers accountable.
    [ Parent ]

    +1 FP (3.44 / 9) (#134)
    by Fon2d2 on Thu Jun 13, 2002 at 03:33:25 PM EST

    This is editorial but I'm making it topical so it will be visible in the unlikely chance this story makes it. I'm voting +1 not because I like the article but because there is much to learn in the replies debunking this article.

    where is the scoop? (3.80 / 5) (#151)
    by Jevesus on Thu Jun 13, 2002 at 06:23:37 PM EST

    to quote:
    What does this have to do with the stock market, and the economy in general? The answers may surprise you.

    where is the scoop?

    - Jevesus

    The article is incorrect (4.33 / 9) (#152)
    by cameldrv on Thu Jun 13, 2002 at 06:36:35 PM EST

    Just because a stock does not pay dividends does not mean that the profits aren't going to the shareholders. When a company buys back its stock, it is giving money to certain shareholders who it buys the stock from, and the price goes up for everyone else. This is because there are now less shares outstanding, so each is worth more. Another way to think of this is: suppose the company buys back 10% of its stock. Each shareholder could theoretically sell 10% of their own stock to the company, get cash for the stock, and still own the same fraction of the company. The reason many companies do this is because the shareholders now are taxed on the profit as a capital gain instead of dividend income. Furthermore, they are not forced to sell to the company, so they can profit from the appreciation without realising a gain.

    CEO's paid over $100 million (3.41 / 12) (#180)
    by arthurpsmith on Thu Jun 13, 2002 at 11:29:50 PM EST

    Paul Krugman's latest NY Times article mentions some statistics. In 2000 the average annual pay of the top 10 CEO's in the US was $154 million, up 4300% from 1981. During the same period ordinary workers pay increased by 100%. And that the US public is somehow in denial on this. Time to look at the facts, look at some of the criminality that's been exposed the last few years, and start wondering what exactly in our laws has been causing these problems...

    Energy - our most critical problem; the solution may be in space.


    This is false. (3.62 / 8) (#187)
    by bitgeek on Fri Jun 14, 2002 at 03:33:59 AM EST

    There are two possibilities. Either the reporter (and you) erronously reported this statistic, or you are deliberately misrepresenting the facts.

    It is flat out false to claim that these CEOs were paid this for work in 2000.

    The reason is that this compensation was almost all in the form of stock options that were exercised in 2000-- in other words, the pay was for increase in shareholder value that occured between 1990 and 2000-- quite possibly 10 years worth of work.

    Also, its quite disingenuous to use the word "pay" when what you really mean is total compensation-- *not* salary.

    Whether this is deliberate misinformation or just plain not thinking is irrelevant-- these bogus "facts" are constantly bandied about until people who don't do any fact checking start making abusrd claims.

    As to criminality, unfortunately, to some people making a lot of money by definition means you broke the law... and that's what people often mean when they say criminality. If you wnat ot get specific, then get specific... but these vague claims, based on misrepresented data makes me suspicious.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    Your straw men are too easy. (2.20 / 5) (#210)
    by haflinger on Fri Jun 14, 2002 at 10:16:57 AM EST

    Either the reporter (and you) erronously reported this statistic, or you are deliberately misrepresenting the facts.
    Incorrect. The source for the statistic is Wealth and Democracy: How Great Fortunes and Government Created America's Aristocracy by Kevin Phillips, a Republican Party strategist. You can find a review of it in that noted left-wing socialist rag, Business Week, here. You can probably find a copy of this book in your university's library. You are a first year B.Comm. student, aren't you? A second year student would have actually read the Times article, and realized that it was a book review.

    Did people from the future send George Carlin back in time to save rusty and K5? - leviramsey
    [ Parent ]
    Correct. (2.50 / 2) (#287)
    by bitgeek on Fri Jun 14, 2002 at 03:35:30 PM EST

    <i>Incorrect. </i>

    You have shown nothing to dispute my point.

    It stands.  The author of that article and this post are misrepresentign the source of this income as salary when it is really stock options or stock.

    And misrepresenting it as 2000 income when it really represents moeny earned over as much as 10 years.

    Please, if you're going to "call me on" something, post evidence or proof.  Don't just assert the same thing I showed to be wrong.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    Actually, he said "pay." (3.50 / 2) (#366)
    by haflinger on Fri Jun 14, 2002 at 10:50:36 PM EST

    Pay is a vague term. It's often equated to salary, but it doesn't have to be. It's you who leapt to that conclusion.

    I think counting income derived from your position is fair game for the "pay" term.

    Did people from the future send George Carlin back in time to save rusty and K5? - leviramsey
    [ Parent ]

    Bad Comparison (4.00 / 3) (#243)
    by stuffappens on Fri Jun 14, 2002 at 12:29:45 PM EST

    A-Hemmmmm

    This is a very good example of how to make an erroneous comparison to prove a unsubstantiated point.

    By comparing to Top 10 CEOs to EVERY worker, they are trying to show how unfair this distribution is. That must be because if you compared every CEO to every worker or even the Top 10 CEO's to the Top 10 Workers --- The difference must just disappear and they could no longer make the point.

    This makes me suspect of the rest of the Book ....

    [ Parent ]
    Maybe Not (3.00 / 1) (#260)
    by Dolohov on Fri Jun 14, 2002 at 02:28:33 PM EST

    Obviously, the nature of their point is going to be somewhat inflated, but I don't think that they're all that inaccurate to make such a comparison. After all, they are going after the worst-case examples, the ones that they think will really open peoples' eyes.

    Now, why not compare to the Top Ten workers? Well, the top ten workers could work for any given company, and besides, we're selecting now from a FAR larger pool, and are likely to get even more ridiculous results. Besides, hiring and salaries are actually pretty even across the United States. Variations are more likely to occur by region than by company, due in part to labor unions, minimum wage laws, and industry norms. Thus, the workers at Foo CEO's company are likely to average the same as at Bar CEO's company. Thus, if Bar CEO is one of the Top Ten, it is accurate and probably appropriate to compare her salary to the average worker.

    I'm glad someone asked that question, though!

    [ Parent ]

    The Top Ten Workers. (3.00 / 1) (#283)
    by bitgeek on Fri Jun 14, 2002 at 03:32:36 PM EST


    The incomes of the Top Ten Workers are EXACTLY the same as the incomes of the Top Ten CEOs at a given point in time.

    This is because the Top Ten Earning Workers are Those CEOs.

    OK, actually, Bill Gates earned more cause his ownership in MS is so large.

    But the point is that "worker" verses "CEO" is a false dichotomy.  CEOs are workers, and have bosses just like everyone else.

    Might as well be using the terms "proletariat" and "capitalists".
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    Zero Sum Game Fallacy (4.70 / 20) (#193)
    by bitgeek on Fri Jun 14, 2002 at 04:22:38 AM EST

    A lot of the poor thinking that gets thrown around is based on the idea that life is a zero sum game. For Gates to be as rich as he is, a lot of poor people must have gotten poorer, people seem to think.

    Periodically you'll get people saying such things about the stock market, and the author of this article seems to think that this is the case (after all if the earnings are never paid out in dividends, then its zero sum, right?)

    This might be true if the economy were fixed.  But it isn't.  Every year, the average company goes up in value.  Some go up faster than others, but on average, they go up every year.  This is because the economy grows.  When the economy grows there is more value in it-- in other words, there is more wealth for everybody.

    This is why Bill Gates doesn't have to take poor people's money to be rich-- if he creates software that makes it cheaper for a company to produce a given amount of productivity, he gets some of the money, the company gets some of the money (in cheaper productivity) and the employees get some of it (both of Microsoft and the company that bought MS software.)  Now, I'm not a fan of MS for a lot of reasons, but their software on average, does increase produtivity.  So, in the end, everyone benefited-- the purchaser of the software, the writer of it, the user of it, and the owner of the company that sells it.

    This is a difficult concept for people who have their mind wrapped around a hatred of the rich to grasp-- after all, who then can they spend their time going after?  The ultimate answer to this explains the real reason they hate the rich so much.

    Anyway, the purpose of this post is to provide proof.  The stock market represents a subset of the total economic activity-- it is merely the market for securities in some of the companies in the economy.  Looking at the economy, you see the larger picture.  I could post the DOW for the past 100 years, or the larger indexes for not quite as long and show the same thing.  But this shows the whole economy since 1929-- the US GDP.  Its taken from a spreadsheet downloaded from one of the first couple of linkes on google when I typed in "us GDP" (it was a government site.)

    These are in millions of 2001 dollars:

    1929    103.7
    1930    91.3
    1931    76.6
    1932    58.8
    1933    56.4
    1934    66.0
    1935    73.3
    1936    83.7
    1937    91.9
    1938    86.1
    1939    92.0
    1940    101.3
    1941    126.7
    1942    161.8
    1943    198.4
    1944    219.7
    1945    223.0
    1946    222.3
    1947    244.4
    1948    269.6
    1949    267.7
    1950    294.3
    1951    339.5
    1952    358.6
    1953    379.9
    1954    381.1
    1955    415.2
    1956    438.0
    1957    461.5
    1958    467.9
    1959    507.4
    1960    527.4
    1961    545.7
    1962    586.5
    1963    618.7
    1964    664.4
    1965    720.1
    1966    789.3
    1967    834.1
    1968    911.5
    1969    985.3
    1970    1,039.7
    1971    1,128.6
    1972    1,240.4
    1973    1,385.5
    1974    1,501.0
    1975    1,635.2
    1976    1,823.9
    1977    2,031.4
    1978    2,295.9
    1979    2,566.4
    1980    2,795.6
    1981    3,131.3
    1982    3,259.2
    1983    3,534.9
    1984    3,932.7
    1985    4,213.0
    1986    4,452.9
    1987    4,742.5
    1988    5,108.3
    1989    5,489.1
    1990    5,803.2
    1991    5,986.2
    1992    6,318.9
    1993    6,642.3
    1994    7,054.3
    1995    7,400.5
    1996    7,813.2
    1997    8,318.4
    1998    8,781.5
    1999    9,268.6
    2000    9,872.9
    2001    10,208.1

    The economy is not a zero sum game.  The pie gets bigger almost every year.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.

    Citation (4.50 / 4) (#194)
    by bitgeek on Fri Jun 14, 2002 at 04:26:14 AM EST


    The data was taken from:
    http://www.bea.doc.gov/bea/dn1.htm
    The Bureau of Economic Analysis.

    About midway down the page there is a link to a spreadsheet with the 1929-2001 data.  I used the first two columns (year and 2001 dollars).
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    Billions, not millions (3.33 / 3) (#196)
    by salsaman on Fri Jun 14, 2002 at 04:56:00 AM EST

    I think.

    [ Parent ]
    This is why (4.00 / 3) (#209)
    by Fon2d2 on Fri Jun 14, 2002 at 10:08:03 AM EST

    I invest in a Market Index Mutual Fund.

    [ Parent ]
    Funds (4.00 / 3) (#215)
    by vambo rool on Fri Jun 14, 2002 at 11:05:06 AM EST

    I like index trusts better than index funds. Trusts behave like stocks so you only get hit with gains when you sell rather than getting hit every year like you do with funds. DIA QQQ SPY, for example. More on SPY, QQQ, and DIA. They also come in sector tracking trusts.

    [ Parent ]
    Unless you have an IRA (4.00 / 2) (#219)
    by pexatus on Fri Jun 14, 2002 at 11:17:24 AM EST

    In an IRA, your profits are tax-sheltered.  Some brokers will charge no transactions fee to invest in certain funds, so then it's cheaper to get the fund.

    Outside of an IRA, though, I like trusts better.

    [ Parent ]

    Oh yes (4.00 / 2) (#221)
    by vambo rool on Fri Jun 14, 2002 at 11:19:25 AM EST

    An IRA. Forgot about that.

    [ Parent ]
    Does this chart... (2.16 / 6) (#216)
    by losthalo on Fri Jun 14, 2002 at 11:06:50 AM EST

    ...in any way reflect changes in buying power due to inflation? A dime in 1929 is certainly not the same dime by 2001.  If you can'y buy the same goods with the money in 2001, then the economy as a whole hasn't grown in a way that means anything (or, at the least, the chart needs a facelift before we derive our impression of the economy's growth from it).

    Furthermore, the number of jobs which pay appreciably more than minimum wage (which is not enough for one person to live on comfortably in many areas) seems to be shrinking all the time.  This would tend to support the author's thesis that more money is being concentrated into the hands of the wealthy, leaving less for the working class.

    Losthalo

    [ Parent ]

    My Mistake (3.00 / 3) (#218)
    by losthalo on Fri Jun 14, 2002 at 11:09:41 AM EST

    I did somehow miss the "in 2001 dollars".

    However, the question of the division of wealth (and availability of jobs that will support you in more than poverty conditions) stands.

    Losthalo

    [ Parent ]

    Division of Wealth (4.00 / 1) (#282)
    by bitgeek on Fri Jun 14, 2002 at 03:29:39 PM EST

    I'm sure if you believe CEOs do nothing to deserve their pay, you'll be unhappy with the division of wealth.

    But when the GDP grows, the poorest people make more money as well.

    I just recently posted growth for GDP and income for India since 1950.  When the average person's income in india *triples* you know that while the tiny minority who are rich may have gotten richer, that there are almost a billion poor people who have also gotten richer as well.

    At any rate, if you're going to make the argument that *all* of this growth is in the wealthy people's pockets, and the poor have gotten poorer, Please try ot provide numbers to show that.

    I've never seen anyone try (and I haven't tried to prove it isn't so either, though I have seen lots of evidence to the contrary.) ... so if you go thru this exercise you'll likely end up with a valuable bit of research to support your hypothesis, or you may recognize that your hypothesis is wrong and have your question answered.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    IFF... (none / 0) (#382)
    by losthalo on Sat Jun 15, 2002 at 02:34:39 PM EST

    ...the distribution (percentage-wise) remains the same.  In many instances, those at the top of the economic food chain are in a position to claim more of the profits of businesses.

    Or, to put it another way:  Why do my fiancee and I both have to work full-time jobs in order to maintain a lifestyle lower than that enjoyed by my parents when I was a kid, with only my father working?  Wealth is only going to trickle down when it benefits someone in a position to do some trickling.  When exactly would that be?  Most jobs I or those I've known have had have used very slow pay-increase systems, and the expectations for the 'good' increases were enormous.  If we consider the benefits employees actually receive, as opposed to what are 'offered' in return for part of the employees' paycheck, it looks even worse.  Sure, plenty of people are better off, but they're not the ones at the bottom.  

    And just to be clear: I'm not saying that *all* of the growth money is going into the pockets of the wealthy.  Most of it *is* going into the pockets of the 'upper' middle class, and the 'lower' upper class.  The middle class is now struggling to have health care that does something for them, and still afford a home, be able to raise their kids and the like.

    Management sees no benefit to rewarding those at the bottom in the same ways as middle and upper management, thus there is no incentive to give more of the GDP to employees at the bottom.  Are you trying to say either that the corporate executives are giving magnanimously, for no return, or is there some other motivation I've missed?  Do companies give employees money for no reason at all?  

    I received 'bonus checks' from Wal-Mart that amounted to a penny or two per hour for the year.  I worked for a small factory full-time, with no benefits whatsoever, doing things which were nothing like the job description I was given when I was hired.  I've been lied to by managers who said if we met certain goals there would be raises for the hourly staff.  I've been patted on the back (and nothing more) for working a twelve hour day to save my boss' ass before a visit by management.  I paid out of my own paycheck for health insurance whose deductible kept rising, and whose cost per paycheck kept going up.  My father was treated better than this when he first went to work. Things have changed.  You can't get that sort of job any more, they don't happen.  Jobs where employees are treated well, appreciated, and most importantly *paid* *well* for doing good work have ceased to exist.  The last several jobs I've had produced incentive by complaining and threats rather than by rewarding good work.  And I've known plenty of people who have been treated worse than I have by their employer, because labor is cheap, you can be replaced, labor is cheap.  Rebutt that with numbers.

    Money is not trickling down very far, at least not money that will buy very much.

    Losthalo

    [ Parent ]

    No (3.00 / 1) (#338)
    by Simon Kinahan on Fri Jun 14, 2002 at 06:40:48 PM EST

    According to most analysts, the value of wages at all levels in society has been increasing steadily since the great depression. There are a few dissenters who say that at the very bottom - meaning the poorest in the third world - purchasing power has been falling, but measurement at this level is really hard.

    Simon

    If you disagree, post, don't moderate
    [ Parent ]
    Fascinating. (none / 0) (#383)
    by losthalo on Sat Jun 15, 2002 at 02:49:15 PM EST

    To say that the value of wages has been increasing since the Great Depression is like saying that safety at Ground Zero of the World Trade Center has been increasing since Sept. 11th.  

    I would be more curious to know how the value of wages now compares to the entire U.S. history, or at least the entire 20th century; to get a better sample, if you will...

    Losthalo

    [ Parent ]

    Easy One (none / 0) (#391)
    by Simon Kinahan on Sat Jun 15, 2002 at 05:21:01 PM EST

    The trend is upward. I just picked a time period for which it is particularly obvious to make my point. If you doubt it consider the average standard of living pre-depression and compare it with your own. There are occasional periods of downward movement, but they are few and far between. This is not just true in the US, but for for the whole world for the period for which such statistics make sense. That is, from the point where free wage labour came to dominate the economy onwards. I imagine that if it where possible to measure, statistics would also show that the overall level of human wellbeing has been improving since the invention of agriculture (which in itself was a disaster for wellbeing, for reasons too complex to cover here).

    Why am I so confident of that ? Because the underlyinng driver of standards of living is technological change, and technology tends to improve. Even during the dark ages in Europe, they invented the modern horse bridle.  There are temporary phenemema that are bad for particular groups, but in general the trend has always been upward.  

    Simon

    If you disagree, post, don't moderate
    [ Parent ]

    dangerous comment (3.00 / 4) (#220)
    by mimon on Fri Jun 14, 2002 at 11:18:57 AM EST

    >I'm not a fan of MS for a lot of reasons, but
    >their software on average, does increase
    >produtivity

    That's a dangerous sentiment to espouse in a place like this ... I would like to go on the record to say the MS's senseless inclusion of freecell and solitaire in windows has had a negative impacy on my productivity many times over my exposure with that OS (sad though that is)

    ~~~~~
    i'm thinking about creating a pro-MS discussion site ... maybe I'll call it \.
    [ Parent ]

    Whatever you do (4.00 / 3) (#227)
    by pexatus on Fri Jun 14, 2002 at 11:33:48 AM EST

    Don't install the latest Java.  It comes with a strategy game called simply "MilitaryGame" that I continue to play for 30-60 minutes at a time, despite having solved it weeks ago (it's always winnable if you move first).

    [ Parent ]
    So let me get this straight (2.00 / 8) (#222)
    by synaesthesia on Fri Jun 14, 2002 at 11:21:31 AM EST

    You have posted some numbers representing the US economy, and stated this to demonstrate that there is more wealth for everybody?

    I have three points for you:

    • Numbers don't represent wealth. Ever heard of inflation?
    • The US is not the world. Other countries are becoming poorer.
    • Go back to adequacy.org


    Sausages or cheese?
    [ Parent ]
    Faux pas (3.50 / 4) (#229)
    by synaesthesia on Fri Jun 14, 2002 at 11:39:29 AM EST

    I'm just replying to my own comment to acknowledge that my point 1 was based on my not reading bitgeek's post properly.

    I'd still like to see a global GDP to see if my point 2 still stands. Not that I think that GDP is necessarily a good measure of wealth (I'm a member of the Green Party) but I'd be interested anyway.

    And I'd also like to apologise for point 3!


    Sausages or cheese?
    [ Parent ]

    Global GDP (4.60 / 5) (#255)
    by Dolohov on Fri Jun 14, 2002 at 01:34:52 PM EST

    Well, according to this article at ananova the global GDP is expected to rise by 2.6% this year, by the UK's National Institute for Economic and Social Research. More tellingly, it predicts the United State's GDP to rise by only 2.4% this year, and the European Union's by only 1.4%. Japan's is expected to shrink! In order for the global GDP to rise faster than that of its three largest economies, the majority of the individual GDPs must be rising even faster than ours.

    In short, not only is the rest of the world getting richer, they're getting richer faster than we are. Now yes, that does require you to accept the GDP as a good measure of economic growth. Certainly, this says nothing about standards of living, political freedom, and general well-being, all of which are arguably better indicators of the real "richness" of a population. But maybe I'd better stick to the terms of the debate ;)

    [ Parent ]

    Inflation versus growth (4.20 / 5) (#235)
    by Rogerborg on Fri Jun 14, 2002 at 11:53:28 AM EST

      Numbers don't represent wealth. Ever heard of inflation?

    Yeah, I've heard of that, and so (apparently unlike you) I went and checked. The top google hit for the single word "inflation" is this inflation calculator, which tells us that 103.7 in 1929 is worth 1033.14 in 2001. Compare with 103.7 versus 10,208.1 from the GDP, or growth outstripping inflation by a factor of ten.

    But don't let that ruin your hobby of making trite knee jerk points without doing thirty seconds worth of research.


    "Exterminate all rational thought." - W.S. Burroughs
    [ Parent ]

    Inflation (4.60 / 5) (#251)
    by Dolohov on Fri Jun 14, 2002 at 01:14:16 PM EST

    Actually, inflation is accounted for: the top of the chart specifically says 2001 dollars.

    As for other countries getting poorer, I don't buy that. Let me turn it around for you: During the Great Depression, the US and all of Europe were hit by crippling economic losses. These countries, as you would put it, got poorer. By your rationale, one or more countries must have gotten correspondingly richer. Which countries, pray tell, were those?

    The fact is, very few countries are getting poorer, and the reasons for those problems do not lie in the fact that other countries (even their neighbors) are getting richer. Most of the afflicted countries are seeing problems from poor leadership (North Korea, for example) or from massive drought or illness (portions of Africa, but by not by any means all of Africa). Now, many people much smarter than me will tell you that the "more developed" countries have caused some, all, or none of these problems, but none of them are suggesting that our economic growth is the culprit.

    [ Parent ]

    World GDP (4.00 / 1) (#280)
    by bitgeek on Fri Jun 14, 2002 at 03:22:39 PM EST

    You claim other countries are getting poorer.

    Would you mind posting the last 50 or 70 years of world GDP growth to support this claim?

    I suspect you'll find its close to, or faster than the US's growth.

    And, given the tendency of other countries to experiment with central planning, its not surprising that in the early to mid 1900s their economies may not have been growing-- but that is directly a result of the liberal/socialist ideologies that they followed.

    A good example of this would be India.  India experimented wit central planning.  I wonder what its GDP's growth has been like since it gave it up?

    Well, currently its growing faster than the US:
    http://www.indiaonestop.com/economy-macro-view.htm
    And if you read that summary, its because of non-centrally planned industries.  Agriculture can be centrally planned by the government, but software development is, and that's the type of industry that is driving indias growth.

    Lets see, since the 50s its been growing, both GNP and GDP and per-capita (ie: its not all coming from more people.)
    http://www.indiainfoline.com/econ/andb/nia/nia1.html

    According to that, the average indian worker has earned almost three times as much as they did in the 50s.  And if you'll also notice, a lot of this growth has come since the 80s.

    Soon after India gained independance, they went thru a period of central planning.  The 60s and 70s were liberal/socialist planning years.  In the 80s and 90s, they went off of it, and the economy accelerated.

    Again and again you see that central planning and socialism cause slow growth and relative poverty, but capitalism and freedom cause everyone to get richer.

    A country with, what, a billion people in it doesn't show an average per capita tripling in income wihout a LOT of poor people being better off.

    As to your other point, yes, these numbers have all been inlfation adjusted.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    Not zero sum, but not necessarily rational either. (4.25 / 8) (#226)
    by jolly st nick on Fri Jun 14, 2002 at 11:33:00 AM EST

    I agree that it is not just a zero sum game; even when it comes to distribution. While Bill Gates created almost none of the software the MS has ever sold, he helped the people who did become rich on their stock options.

    On the other hand, does he deserve to be the richest man in the world? Are his unique contributions to society's productivity so significant that he should be rich beyond the dreams of avarice? Would society be that much less productive if he had been struck by a bus before he founded Microsoft?

    Personally, I think Mr. Gates as an individual has had nearly zero effect on society's net productivity (although would-be-Gates as a class are a different story).

    To take an extreme example, lets take a situation where we have two identical persons who buy apprently identical plots of land. Later prospecting finds oil under one person's land but not another. Is it "fair" that one person becomes rich, and the other does not, if , as we supposed, the persons were, and the land appeared to be, identical? We accept the difference in outcomes because it's the only way we know how to pay capital; if fortunate individuals aren't compensated for their luck, then the substance of the luck (in this case oil) will not be exploited efficiently.

    Of course, that was an extreme example. Gate's business acumen is a sine qua non of his success. Less shrewd or competitive businessmen would not have achieved his level of success. However lucky timing and fortunate miscalculations of his enemies and business partners were equally a sine qua non of his current, unique position in the world. Had he not had an inclination towards computers when they were poised for tremendous growth, had IBM not been sloppy with its licensing of PC-DOS, then Bill Gates would no doubt have been very successful, but not the commercial emporer that he is.

    Life is not fair, and neither should business be fair. I believe it is important to recognize these fundamental facts, rather than paper them over. A shrewd businessman is entitled to some respect and admiration, but that admiration and respect should not be boundless.While smarter and more industrious people should be and tend to be compensated more highly, some inequality of compensation is not a desirable end itself so much as it is an unavoidable side effect, like heat losses in an engine.



    [ Parent ]

    I think (2.60 / 5) (#232)
    by gotak on Fri Jun 14, 2002 at 11:47:45 AM EST

    That people over estimate Gates as a business man.

    The truth is if you look back at Microsoft's history and actually at many other successful companies. It's more luck then anything else.

    Afterall this is the guy who said 640k should be enough for anyone.

    Really look at it. Where did MS get it's market share from? Ok it partnered with IBM smart idea there. But IBM could well have ended MS when they parted ways if not for the Clones market. And that was not due to Microsoft's action. IT was a by product of IBM's actions and their lack of action agaist the clones market (thank God for that).

    The internet. Microsoft almost missed the boat. They scrambled to catch up with IE and IIS the reuslt of which you can still see in the latest number of security bugs that have came out.

    With windows NT/2000/XP well those things are "neat" in some ways ( I don't use windows except for games ). But Microsoft was a UNIX shop at the beginning! SCO used to be developed by Microsoft. Everyone at MS including Gates used UNIX workstations.

    As far as I can tell Micsoft has always been rectionary instead of the actual cause of industry changing shifts.

    If you want to look at companies that actually did well because they were visonary don't look at microsoft. They are a good competitive company but the credit shouldn't goes to Gates for coming up with great business ideas.

    [ Parent ]

    Micrososft was never technically visionary (4.00 / 4) (#236)
    by PTBear on Fri Jun 14, 2002 at 11:58:25 AM EST

    but they did make the IBM clones a lot more user friendly. Before Windows, the only PC a regular user could understand was a Mac - which were very expensive because of no competition (Just like MS today). When Windows came out, all of a sudden, more people could afford a PC that they could actually use. That was Bill Gates' genius, he saw an opening an went for it. Now, of course we're paying for other company's (Apple, IBM) lack of foresight in the power of the mass market.

    I don't like MS (or Bill Gates) either. But right now, there is no other real option for regular people.

    [ Parent ]

    lack of foresight (3.00 / 1) (#247)
    by wiredog on Fri Jun 14, 2002 at 12:40:24 PM EST

    That's why MS is so successful. Companies that competed directly with MS had a tendency to shoot themselves in the head. IBM and OS2 being the classic example.

    Can't sleep. The clowns will get me.
    [ Parent ]
    This is SO true (3.00 / 1) (#332)
    by jolly st nick on Fri Jun 14, 2002 at 06:22:30 PM EST

    Companies that competed directly with MS had a tendency to shoot themselves in the head.

    Do you think MS may be spiking the competition's water?

    [ Parent ]

    It was better than the other way. (none / 0) (#414)
    by DavidTC on Mon Jun 17, 2002 at 12:32:36 AM EST

    Where Microsoft shoots you in the head. ;)

    -David T. C.
    Yes, my email address is real.
    [ Parent ]
    Umm (2.00 / 2) (#355)
    by gotak on Fri Jun 14, 2002 at 09:03:24 PM EST

    Windows didn't make PC cheap. A large competitive market where many companies make the same produce did. And Gates didn't invent or saw the GUI and though it was a good idea and was the first to introduce it. No he saw it was good on someone else's system so he copied it. What he and his company is good at is copying what others did. Now whether or not that is genius or just catching up people can decide for themselves. I personally think it's not really genius. Afterall it's not hard to do what others already proof is a good idea. I don't think microsoft ever came up with a good idea itself. Think about it who invented the stupid paper clip in office? Wouldn't suprise me if on day MS adopts opensource itself and make it work really well.

    [ Parent ]
    What about the failed 1920's Dow companies? (3.60 / 5) (#254)
    by highfreq on Fri Jun 14, 2002 at 01:28:18 PM EST

    I think it is erroneous to interpret the stock indexes as a measure of the growth of the economy. When a Dow company starts to falter, it is replaced on the index. So that company's eventual total, or nearly total decline in value is not reflected by the index.

    I would be interested to see what the numbers are if someone held on to the stocks that composed the 1929 DOW, through all of the mergers, acquisitions, and break-ups (voluntary and otherwise). How much would those shares be worth today? Anyone know?

    Now, assuming I'm entirely wrong and the stock market is really growing at say 15%. Meanwhile, the entire US economy is chugging always at more like 2%. What happens when the stock market saturates, and the publicly traded companies represent as much of the economy as is possible. Does the stock market slow to a 2% growth? Or, does the entire economy finally get off its rear and start growing at a healthy 10-15%? I do realize that this is a very fanciful scenario, for exactly the reason I mention above. I don't believe there is a consistent and sizable portion of our economy that has continuously grown at 10-15%

    Of course, IANAE (economist), just an engineer. My analysis is all very naive, but it is interesting to me at least.

    [ Parent ]
    Dow (4.00 / 5) (#256)
    by Dolohov on Fri Jun 14, 2002 at 01:49:27 PM EST

    Yeah, that always seemed like a phony way to measure the growth of our companies, until I took a step back and looked at it. If the Dow were to sink along with individual companies, then it would be highly vulnerable to individual mismanagement, and would be in fact quite meaningless -- essentially the rise and fall of a couple Good Ol' Boys.

    As it is, though, it tracks all of the major industries in the US economy, and does so by selecting the leaders in each industry. Thus, if a whole industry (Like steel production) falters then that is reflected in the Dow's value. This allows for individual "flagship" companies to rise and fall, while still keeping a reasonably accurate tally of the general field.

    At least, that's the way I understand the Dow, and it's made sense whenever I watch CNN's economists, so I think I'm pretty close.

    [ Parent ]

    Relative growth rates. (4.00 / 1) (#276)
    by bitgeek on Fri Jun 14, 2002 at 03:07:26 PM EST


    The stock market is always going to represent a subset of the economy, right?  Probably most businesses will never be listed on the stock market because they are too small.

    So, when the overall economy grows by %2, that may well be sufficient to support an %12 growth in the stock market.  (%12 is the long term total market growth since 1945, %11 since 1900)  

    Remember, also that when I say "growth" I'm talking about total value returned- including earnings.

    Anyway the overall economy doesn't always grow at only %2.  Sometimes it grows faster, and in theory it could consistently grow much faster.  (I said in theory.  Some people think it will enver grow faster than a long term average of 2 or 3 percent, but there are theories that seem reasonable that say that there isn't a growth limit assuming the economy has shaken out the issues that come with growth.  Growth acceleration may be difficult, and if the acceleration of the growth is slow (unlike recent history) long term larger growth rates may be sustainable.)
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    Eventually: market growth ~= GDP growth. (4.50 / 2) (#321)
    by highfreq on Fri Jun 14, 2002 at 04:41:23 PM EST

    If the total value of publicly traded stocks is growing at 12%, and the overall economy is growing at 2-3%, then it eventually must saturate. The market growth rate must decline, and/or the overall growth rate must increase.

    A slightly flawed analogy would be population growth in a world with infinite resources (given a perfectly spherical engineer...). If a small part of a population is growing at 12% (Group A), and the overall population were growing at 2%(Group A + Group B). There could be a number of things happening
      Group B is much larger than A and experiencing slow growth.
      B is larger than A and experiencing no growth.
      B is either larger or smaller than A and is declining in population to offset A's growth.
      B is 12% the size of A and over the measured period have all been killed off.
    In all of these scenarios if A's growth rate remains constant, eventually the entire populations growth rate will approach 12%, and population B will either have become marginalized or increased its growth rate.

    Of course, with the stock market it is not so clean--companies can IPO, or be de-listed. Plus, the stock market value isn't strictly a subset of the GDP. But it would still seem that the only way for the total value of the stock market to maintain a 15% growth rate over the "long" run is for the GDP growth rate to eventually reach 15%.

    Let's suppose though that the GDP maintains a 2% growth rate, and the market a 12% growth rate. Then eventually the stock market value will be greater than the total value produced by the economy in the history of the United States, i.e. the integral of the GDP. [Integral(e^(ax)) = e^(ax) / a].

    And people thought the market was inflated during the dot com boom.

    I don't understand the total interplay between the market and the overal economy, but it would seem there are eventually some hard limits.

    [ Parent ]
    Problem (3.00 / 1) (#322)
    by RandomPeon on Fri Jun 14, 2002 at 04:43:13 PM EST

    First off, I agree with your point. Wealth, however you measure it, is not a zero-sum game.

    The stock market is always going to represent a subset of the economy, right? Probably most businesses will never be listed on the stock market because they are too small.

    However, the total fraction of the economy represented by the stock market has persistently risen for two reasons. Consolidation has produced a larger number of large business which are publicly traded. Wal-Mart is publicly traded, but the thousands of Mom-and-Pop stores it replaced were not. Furthermore, the threshold for a firm to become publicly traded has dropped substantially as well. So the stock market grows far faster the economy as a whole.

    Fascinatingly, the first prominent economist to write on the first trend was... Karl Marx. One of the few things he got right.

    [ Parent ]
    this makes no sense (2.66 / 3) (#264)
    by crayz on Fri Jun 14, 2002 at 02:35:11 PM EST

    The per capita GDP today would calculate out to a bit less than $40,000. OK, whatever.

    The per capita GDP in 1933, assuming that the population was less than half the size it is today(125 million say) would be $448. Now if that's inflation-adjusted and reflects the real buying-power of money, how in the fuck did anyone back then live on $448/year?

    You couldn't even buy food for that kind of money. Look at your spreadsheet and try again. I'm not arguing your point necessarily, but your numbers are not 2001 dollars(BTW I used billions not millions, cause you're wrong about that too).

    [ Parent ]

    So the government lies? (5.00 / 1) (#274)
    by bitgeek on Fri Jun 14, 2002 at 03:03:03 PM EST

    Interesting, the basis of your argument is that the government is making up these numbers?  Would you mind backing that up a bit?

    I think you're right that I wrote millions instead of billions.

    But these are the official US GDP numbers.  The total economy may well be larger- as its impossible to track everything.  But this is a good yardstick from a reputable source.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    umm no (2.33 / 3) (#364)
    by crayz on Fri Jun 14, 2002 at 10:45:14 PM EST

    The basis of my argument is that you looked at the wrong column in the spreadsheet. You said that the column you looked at was in constant 2001 dollars which the spreadsheet itself never claims. The column one over from the one you used is in constant dollars(1996 in that case). The column you used was in current(i.e. non-adjusted dollars).

    Oh and thanks for the "1" dcodea, you idiot.

    [ Parent ]

    You've GOT to be kidding me... (3.00 / 1) (#293)
    by Skywise on Fri Jun 14, 2002 at 03:43:33 PM EST

    But Ok...

    448/52 = ~$9 week

    1933 - load of bread = ~.05
    Apartment rent = ~2.50/week
    carton of milk = .10
    movie = .25

    Do I need to go on?

    [ Parent ]

    Ooh... never mind... (3.00 / 1) (#300)
    by Skywise on Fri Jun 14, 2002 at 03:58:45 PM EST

    I zenned past the "in 2001 dollars".  Kuro5hin really needs a "take back" option... ;>

    [ Parent ]
    you miss the point (2.00 / 1) (#343)
    by fhotg on Fri Jun 14, 2002 at 06:54:10 PM EST

    The increase of the GDP (setting aside all the questionmarks sourrounding this number as an indicator for wealth and value generation. Questionmarks, because 'wealth' and 'value' ask for a proper definition, which, if you put some thinking into it, will likely have not so much to do with 'the market value of goods and services produced within a nation') says nothing about the income distribution and therefore does nothing to disprove the articles hypothesis that wealth and income disparities are getting larger due to the current economic setup.

    Numbers describing the income distribution are not so easy to come by, and this is for a reason. It is widely believed, that large groups of the population (in the US) are getting poorer. While a very small group gets wealthier. On the global scale, that's particularly obvious. As you correctly point out, this cannot be explained by a zero-sum argument. However, just because this argument fails, it does not mean that there is no causal relationship between some getting richer and many getting poorer.

    [ Parent ]

    Silly and naiive (4.08 / 12) (#212)
    by dipierro on Fri Jun 14, 2002 at 10:45:20 AM EST

    Very little of the value of a stock is based on voting rights. If it was, then call options would be exercised prematurely whenever there was a shareholder meeting. If you don't understand that, then you shouldn't be spouting out nonsense about the worth of a stock. Take an Economics class and get back to us.
    In capitalism, man exploits man. In socialism, it's the other way around.
    Value? (1.00 / 7) (#223)
    by wurp on Fri Jun 14, 2002 at 11:27:14 AM EST

    This post has little to no value. Please contribute a fact, rather than unsupported bitching and insults.
    ---
    Buy my stuff
    [ Parent ]
    Fact (4.60 / 5) (#224)
    by dipierro on Fri Jun 14, 2002 at 11:31:13 AM EST

    Fact: If the value of a stock was based on voting rights, then call options would be exercised prematurely whenever there was a shareholder meeting.
    In capitalism, man exploits man. In socialism, it's the other way around.
    [ Parent ]
    Value of a stock? (3.50 / 2) (#278)
    by wurp on Fri Jun 14, 2002 at 03:19:15 PM EST

    Without dividends, what value does a stock have other than
    a) pyramid scheme
    b) voting rights
    ?

    I'm sure there is something huge that I'm missing, but I sure as hell don't know what it is.
    ---
    Buy my stuff
    [ Parent ]

    That is a good question. (3.00 / 1) (#311)
    by NFW on Fri Jun 14, 2002 at 04:18:31 PM EST

    Unfortunately this margin is too small to contain the answer.

    More seriously, the number of people in this discussion saying things like "go take an economics class" or "go read this book about investing," is high for a reason. These are places to find the answer.

    Sure, the scheme is subject to abuse and fraud, but unlike a pyramid scheme, there IS an underlying mechanism that can (and often does) sustain itself over the long term.


    --
    Got birds?


    [ Parent ]

    Stock value (none / 0) (#404)
    by dipierro on Sun Jun 16, 2002 at 11:45:44 AM EST

    The same value my bank account has if I don't withdraw any money from it. Which is to say, these companies may not be paying dividends today, but they will eventually either be bought out, dissolved, or pay dividends.

    Voting rights are actually not very useful, because a director who acts in his own interests rather than the interests of the company is committing a federal crime.


    In capitalism, man exploits man. In socialism, it's the other way around.
    [ Parent ]
    Fact? (1.50 / 2) (#281)
    by wurp on Fri Jun 14, 2002 at 03:28:28 PM EST

    The voting value is most valuable to the people with tons of stock, who can vote to steal money from the corporation.  That value is not exercised until those people decide to collect enough stock together to use it.

    Blarney isn't saying that your right to vote with your stock is what gives it value; it's the fact that you have stock that someone else will need in the future to get value out of the company.  You are speculating that someday someone will want your stock to make some money enough to pay more than you did for it.

    ---
    Buy my stuff
    [ Parent ]

    re (4.00 / 1) (#405)
    by dipierro on Sun Jun 16, 2002 at 12:09:02 PM EST

    It's illegal to "steal money from the corporation".

    Compare and contrast stocks which never pay dividends with zero-coupon bonds. With the bonds, you might get value by their dissolution, or you might get it by selling it to someone else. Likewise, with a stock which doesn't pay dividends, you may get value by the companies dissolution (You'd get about $10/share if Microsoft dissolved today), or you may get value by selling to someone else. Or, maybe Microsoft will start paying dividends some time in the future. Maybe this will be during the time that you hold the stock, or maybe it will be after you've sold it.

    Underlying Blarney's argument are some good points. But his argument ignores basic economic principles that have been developed over long periods of time and have shown themselves to be highly accurate.


    In capitalism, man exploits man. In socialism, it's the other way around.
    [ Parent ]
    I don't believe that's what was meant by "val (3.00 / 1) (#305)
    by Fantastic Lad on Fri Jun 14, 2002 at 04:05:40 PM EST

    Thar be Semantics.

    The perceived value of a stock, (as in the Magic: The Gathering card speculating analogy), while it can be a motivating factor in an ecconomy, clearly bugs the author because such value is so largely based on pretend factors, and as such, makes the traders look like a bunch of comic shop gamers scrambling about for crumbs in a most undignified manner which they don't even seem to be aware of. Heck, this bugs me as well!

    So yes, while a stock has "value" in the same way a 'rare' piece of printed cardboard can have value, the other kind of power behind a stock comes into force only when it is collected together with enough other shares of the same company to give the holder significant voting/ownership privilages which allow actual profit to be siphoned away from the corporate body into personal bank accounts. --That's what the author means here by "Value"; voting power.

    You see? Two different kinds of value. Because the author wasn't focusing on the kind you were thinking of, doesn't necessarily mean he had nothing of 'value' to 'share'.

    -Fantastic Lad --Is it wiser to pretend that an ugly thing is pretty, or to fix it?

    [ Parent ]

    dividends (none / 0) (#403)
    by dipierro on Sun Jun 16, 2002 at 11:39:50 AM EST

    The vast majority of the value of a stock is the present discounted value of the expected future dividends. Just because dividends aren't paid in the present, they must eventually be paid in the future. Voting power is a tiny portion of the value of a stock in almost all cases.

    Your assertion that stock has value in the same way as "a 'rare' piece of printed cardboard" is simply not true. Would you say the same thing about bonds? What about zero-coupon bonds, which don't pay "dividends"?


    In capitalism, man exploits man. In socialism, it's the other way around.
    [ Parent ]
    Hm. . . (none / 0) (#411)
    by Fantastic Lad on Sun Jun 16, 2002 at 11:28:01 PM EST

    Your assertion that stock has value in the same way as "a 'rare' piece of printed cardboard" is simply not true. Would you say the same thing about bonds? What about zero-coupon bonds, which don't pay "dividends"?

    Hm. How do I explain this. . ?

    The fine details of how 'value' is connected to a stock, (or a printed piece of cardboard), are not relevant to what I or the author were trying to illustrate. Stocks and Bonds, and Money in general, are only valuable if everybody agrees them to be, and if they are subsequently willing to structure their lives and activities around this shared decision.

    That's the thinking I was coming from in comparing Magic Cards to Stocks, and in as much, the statement was entirely accurate. Now, voting power based on amassing many stocks is another variety of shared agreement of value, except it works differently, enabling the holder of vast numbers of shares to direct, and if one so wishes, to plunder a corporation. This was the matter being discussed, and which you seemed to miss by focusing exclusively on the fine detail symantics. This presents a danger, in that one can easily miss the big picture.

    -Fantastic Lad

    [ Parent ]

    Plundering a corporation (none / 0) (#416)
    by dipierro on Mon Jun 17, 2002 at 01:32:52 AM EST

    I believe you are the one who is playing the game of semantics. Shares of stock allow one to vote. At least, some of them do. But they also allow one to collect dividends. Both of these benefits are equally tangible.

    Your assertion that shareholders are permitted to plunder a corporation is false. That is illegal.

    Further, your assertion that the ability to vote is a large part of the value of stock ignores tons of evidence to the contrary. As I already pointed out, options contracts do not give voting rights. Neither do certain shares of preferred stock. When I buy stock through a mutual company, I give up my voting rights. The fact that options contracts, preferred stock, and mutual funds all have value disproves your theory that the ability to vote is the only underlying value of a share of stock, and you have not addressed those facts in the slightest.


    In capitalism, man exploits man. In socialism, it's the other way around.
    [ Parent ]
    Dividends do not exist (none / 0) (#413)
    by DavidTC on Mon Jun 17, 2002 at 12:27:17 AM EST

    Or at least, they don't exist for some stocks. EVER. It's not some 'We're investing money this year back into the company', many stocks have never paid dividends, even during their most boom seasons.

    Pretending these stocks are valued based on their future dividends is fairly silly.

    -David T. C.
    Yes, my email address is real.
    [ Parent ]

    Silliness (none / 0) (#415)
    by dipierro on Mon Jun 17, 2002 at 01:22:37 AM EST

    Just because something has never happened in the past does not mean it will never happen in the future.
    In capitalism, man exploits man. In socialism, it's the other way around.
    [ Parent ]
    i couldn't help but notice (2.50 / 4) (#217)
    by puxud on Fri Jun 14, 2002 at 11:09:16 AM EST

    that the author of this article is "Blarney"

    indeed

    i am not mrgoat

    Spiritual battlefield is the "war on terror&q (1.44 / 9) (#228)
    by Benjaman McFree on Fri Jun 14, 2002 at 11:37:34 AM EST

    My meat is to do the will of him that sent me, and to finish his work. 35. Say not ye, There are yet four months, and then cometh harvest? behold, I say unto you, Lift up your eyes, and look on the fields; for they are white already to harvest. 36. And he that reapeth receiveth wages, and gathereth fruit unto life eternal: that both he that soweth and he that reapeth may rejoice together. 37. And herein is that saying true, One soweth, and another reapeth. 38. I sent you to reap that whereon ye bestowed no labour: other men laboured, and ye are entered into their labours.

    I told you, and ye believed not: the works that I do in my Father's name, they bear witness of me. 26. But ye believe not, because ye are not of my sheep, as I said unto you. 27. My sheep hear my voice, and I know them, and they follow me: 28. And I give unto them eternal life; and they shall never perish, neither shall any man pluck them out of my hand. 29. My Father, which gave them me, is greater than all; and no man is able to pluck them out of my Father's hand. 30. I and my Father are one.



    Howl. . . (none / 0) (#244)
    by IHCOYC on Fri Jun 14, 2002 at 12:32:17 PM EST

    James 5

    1. Go to now, ye rich men, weep and howl for your miseries that shall come upon you.

    2 Your riches are corrupted, and your garments are motheaten.

    3 Your gold and silver is cankered; and the rust of them shall be a witness against you, and shall eat your flesh as it were fire. Ye have heaped treasure together for the last days.

    4 Behold, the hire of the labourers who have reaped down your fields, which is of you kept back by fraud, crieth: and the cries of them which have reaped are entered into the ears of the Lord of sabaoth.

    5 Ye have lived in pleasure on the earth, and been wanton; ye have nourished your hearts, as in a day of slaughter.

    6 Ye have condemned and killed the just; and he doth not resist you.

    7 Be patient therefore, brethren, unto the coming of the Lord. Behold, the husbandman waiteth for the precious fruit of the earth, and hath long patience for it, until he receive the early and latter rain.

    8 Be ye also patient; stablish your hearts: for the coming of the Lord draweth nigh.


    --
    "Complecti antecessores tuos in spelæis stygiis Tartari appara," eructavit miles primus.
    "Vix dum basiavisti vicarium velocem Mortis," rediit Grignr.
    --- Livy
    [ Parent ]

    The Tares are Ripening (5.00 / 1) (#291)
    by tbc on Fri Jun 14, 2002 at 03:42:06 PM EST

    24 Another parable put he forth unto them, saying, The kingdom of heaven is likened unto a man which sowed good seed in his field:
    25 But while men slept, his enemy came and sowed tares among the wheat, and went his way.
    26 But when the blade was sprung up, and brought forth fruit, then appeared the tares also.
    27 So the servants of the householder came and said unto him, Sir, didst not thou sow good seed in thy field? from whence then hath it tares?
    28 He said unto them, An enemy hath done this. The servants said unto him, Wilt thou then that we go and gather them up?
    29 But he said, Nay; lest while ye gather up the tares, ye root up also the wheat with them.
    30 Let both grow together until the harvest: and in the time of harvest I will say to the reapers, Gather ye together first the tares, and bind them in bundles to burn them: but gather the wheat into my barn.

    The tares are ripening.



    [ Parent ]
    It's not even wrong. (4.16 / 12) (#241)
    by seebs on Fri Jun 14, 2002 at 12:25:20 PM EST

    In the end, this article's thesis isn't even wrong, it's just incoherent.  It starts with the mistaken impression that CEO's don't do any work, and gets sillier from there.

    Economics isn't that easy.


    Intent vs clarity (3.00 / 1) (#325)
    by pla on Fri Jun 14, 2002 at 04:59:28 PM EST

    Economics isn't that easy.

    Then I think he made his point. Whether or not his conculusion follows from the facts he presented (Which, although he drifted a bit, I believe they more or less did), he *did* bring to light a lot of general misunderstandings about how capitalism actually "works".

    Ideas about inflated CEO salaries and the growing economic rift between classes aside, one point alone justifies the article: Small scale stock trading has the same connection to capitalism as blowing a few bucks in Las Vegas - It may fund the system, but it doesn't convey any of the actual benefits of existing as *part* of the system. All just flashing lights and sounds and free drinks, while the machine patiently keeps taking its one-half-of-one-percent-over-time until the player has nothing left.


    [ Parent ]
    I don't think he made his point... (none / 0) (#370)
    by seebs on Sat Jun 15, 2002 at 12:55:01 AM EST

    I think you already knew that, and you just read your own meaning into the article.  :)

    I was going to agree with you about the small scale stock trading, but in retrospect, that's not correct; investment is based on the anticipation of profit from large scale stock trading, which is based in no small part on the assumption that small scale stock traders will be keeping the market relatively active.

    Meanwhile, I know a lot of people who have done a good job of building up a sizeable nest egg by investing carefully over a period of many years - faster than they would have with bank interest rates.


    [ Parent ]

    Bad Logic (4.11 / 9) (#245)
    by William Rees on Fri Jun 14, 2002 at 12:35:43 PM EST

    The argument defeats its own conclusions.

    Therefore, a valuable object in capitalism is one which people are willing to pay for - and a thing which people are willing to pay for is, by definition, valuable.

    Then, further down:

    Why are these stocks valuable at all, anyway? ... The answer is that ownership of a stock conveys voting rights. ... But the looting is the only thing that makes your stocks valuable at all! Your share of MSFT or TYC is valuable only because some billionaire somewhere might decide to purchase an enormous amount of stocks and use his powers to vote on policy and siphon millions, billions of dollars from the corporation into his own pocket.

    So, which is it? Is my stock valuable because other "people are willing to pay for" it? Or, is my stock valuable because "ownership of a stock conveys voting rights?" If "looting is the only thing that makes [my] stocks valuable at all," then that goes against the very defination of capitalism that you states at the beginning of your argument.

    Will

    Stock Valuation (4.00 / 1) (#273)
    by bitgeek on Fri Jun 14, 2002 at 02:58:28 PM EST

    The author doesn't understand, apparently, stock valuation, and in discussions, doesn't seem interested in learning.

    The basic fallacy is the assumption that if a company doesn't pay out dividends, then the investor never makes any money.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    Valid, but hair is now spit. (3.00 / 1) (#284)
    by Fantastic Lad on Fri Jun 14, 2002 at 03:33:47 PM EST

    Yeah, I tripped over that as well.

    Bad logic, however, didn't detract from his illustration of how profits behave in a corporation, and how culture today includes two 'classes' of investor; The small fry stock trading speculators, and the wealthy manipulators who have sole direct access to actual profits. --A point of view which I have not before seen quite so clearly explained. For this reason, I think this was a useful article.

    In other words, "Don't toss the Baby with the Bathwater."

    -Fantastic Lad

    [ Parent ]

    One difference (none / 0) (#424)
    by phorkyn on Tue Jun 18, 2002 at 02:25:41 PM EST

    What the author is trying to identify is the intrinsic value of stock. The price that people are willing to pay for it is considered an assigned value. There's a big difference between the two.

    -p

    [ Parent ]

    As far as I can tell, (1.66 / 15) (#253)
    by E r i c on Fri Jun 14, 2002 at 01:21:47 PM EST

    I'm the only member of this site who actually has a job and makes money, so this article is probably a bit off-topic.

    I blame my past transgressions on Eminem's music. Reform number five is currently in progress.
    dumbshit (1.00 / 2) (#265)
    by Jevesus on Fri Jun 14, 2002 at 02:35:32 PM EST

    this aint slashdot, moron.

    - Jevesus
    [ Parent ]
    Paraphrased (4.00 / 2) (#275)
    by democrap on Fri Jun 14, 2002 at 03:03:46 PM EST

    Check out my 2003 Mitsubishi Eclipse, my girl, & my school

    In other words:

    Check out my giant phallic symbol, my trophy, & where I learned to be such a dipshit.

    [ Parent ]
    Hmmm (none / 0) (#393)
    by NDPTAL85 on Sat Jun 15, 2002 at 08:12:56 PM EST

    Whats wrong with having a giant phallic symbol, a trophy and being a dipshit? What do you have thats better than that?

    [ Parent ]
    CEO pay is ludicrous (2.57 / 7) (#257)
    by CarryTheZero on Fri Jun 14, 2002 at 01:56:22 PM EST

    The average US worker was paid $35,000 in 2000. The CEO who took home $150 million in compensation was paid 4,250 times as much. How can anyone claim with a straight face that the CEO was 4,250 times smarter than the average person, or worked 4,250 times as hard, or had skills 4,250 times as difficult to obtain? There is no way to make such a claim without wearing some serious ideological blinders. The only reasonable explanation is that executive pay structure is a way for the rich to get richer, not a rational way to reward performance. As other posters have pointed out, the CEO of company A will likely sit on the board of companies B, C, and D. Is it surprising, then, that CEO salaries are inflated? It's just a matter of doing favors for your friends, who likewise do favors for you.
    Oh, and to anyone who claims that executive compensation is mostly stock, not money, I say that the distinction is negligible. I can sell stock, I can borrow against it, so for all intents and purposes it is money. Sure, if the CEO does a terrible job and the stock takes a nosedive, he might be in trouble, but for the average CEO doing an average job, that's not really a concern.

    --
    You said I'd wake up dead drunk / alone in the park / I called you a liar / but how right you were
    iTunes users: want to download album artwork automatically? Now you can.
    pay is, by definition, justified (5.00 / 3) (#262)
    by mattw on Fri Jun 14, 2002 at 02:32:14 PM EST

    Although some existing pay scales can be due to entrenchment, it is simply this way: if they did not provide value, they would not be hired. The board of directors is generally a set of people with a stake only in the success of the company. It is typical for a board member to either own or be paid in shares of a company, never in cash. Therefore, their goal is to enhance shareholder value. If they spend $200M/year on a CEO, they do it because they believe that CEO provides value that is equal or greater than that.

    Are there grossly overpaid CEOs? Yes, and as investors, we should avoid companies which are poor economic performers because they overpay their CEOs. But complaining about CEO salaries is like complaining about sports star salaries: they're being chosen and valued by economic forces. This is a far cry from, say, members of congress voting themselves a pay raise. Average CEOs doing average jobs very rarely make huge sums of money. They make tons, sure -- millions, but not hundreds of millions. CEOs who fail to perform in line with their salary often make little from their options (because their compensation is not stock, but stock OPTIONS) and then are fired (excuse me, they resign).


    [Scrapbooking Supplies]
    [ Parent ]
    In a perfect market, that's true (3.00 / 1) (#286)
    by CarryTheZero on Fri Jun 14, 2002 at 03:34:02 PM EST

    In real life, executive pay packages are often designed by a small committee of board members. Often the people on this committee have ties to the CEO (e.g. he is on their company's board). This situation does not make for reasonable CEO pay packages, as we can see. This is because the benefits of cronyism outweigh the costs of overpaying your CEO, that is, the favor he owes you is worth your share of the $200M you overspent (which is not that significant, given the overall operating expenses of a large corporation.)

    --
    You said I'd wake up dead drunk / alone in the park / I called you a liar / but how right you were
    iTunes users: want to download album artwork automatically? Now you can.
    [ Parent ]
    indeed (4.50 / 2) (#304)
    by mattw on Fri Jun 14, 2002 at 04:02:22 PM EST

    Of course, this is true, and there's a larger system which will hopefully keep this in check: pay is disclosed, and if shareholders judge it to be wrong, they can replace the board or sell the stock (or just not buy it in the first place). That's no perfect answer; certainly, there are plenty of overpaid CEOs. My last company the CEO made $100M off the company stock before diriving it into the ground. Worth it? Of course not. But by the same token, some employees at ground level get paid $60k and year and spend most of their work day on their embezzlement scheme. Same effect, different scale, all wrong.


    [Scrapbooking Supplies]
    [ Parent ]
    I hope so (3.00 / 1) (#362)
    by CarryTheZero on Fri Jun 14, 2002 at 10:22:14 PM EST

    It's certainly possible; another poster pointed out that European CEO pay is nowhere near US levels. However, I'm not optimistic about the situation here, because extravagant CEO pay regardless of performance seems to be the norm rather than the exception, leaving the average investor with little way to avoid companies that overpay their executives. I guess the reason that I object more to the grossly overpaid CEO than the embezzler who makes $60K is that the embezzler isn't in the position to put thousands out of work because he's an incompetent.

    --
    You said I'd wake up dead drunk / alone in the park / I called you a liar / but how right you were
    iTunes users: want to download album artwork automatically? Now you can.
    [ Parent ]
    Tautologies (1.00 / 2) (#292)
    by marx on Fri Jun 14, 2002 at 03:43:27 PM EST

    If they spend $200M/year on a CEO, they do it because they believe that CEO provides value that is equal or greater than that.
    And Enron did what they did because they thought would provide the most value.

    What kind of nonsensical argument is this? A is A because it's A. You're just spouting tautologies.

    Nothing in your argument is addressing the issue of whether the system is not just a scam to make the rich richer at the expense of average people (which would be a natural aim for the people in that position, according to economic theory).

    Join me in the War on Torture: help eradicate torture from the world by holding torturers accountable.
    [ Parent ]

    you're misapplying a tautology to what I said (4.50 / 2) (#302)
    by mattw on Fri Jun 14, 2002 at 03:59:51 PM EST

    I didn't say, "They paid them because they paid them." I said, "They paid them because they believed that they provided value equivalent to their pay." When you shop, or pick out a place to live, buy a car, or upgrade your computer, when you spend money, you do so because you believe it is in your best interests. Likewise, a company's board of directors chooses a CEO they believe will be in the company's best interests.

    Comparing a typical company to Enron in the context of the quote is absurd. You may as well say, "And Ted Bundy did what he did because he thought it would provide the most value." Enron was criminally deceptive, which made it so that the shareholders and probably even the board were not aware of the true state of the company. The cure for this is more open and timely disclosure.

    I wasn't attempting to address whether it was a scam; I was addressing whether or not CEO pay is "absurd" or unjustified.

    As for the natural aim of rich people trying to get richer at the expense of average people, that's a laughably tendentious misrepresentation of economic motivation, spouted from a bitter disciple of a failed system.


    [Scrapbooking Supplies]
    [ Parent ]
    Greed (1.00 / 1) (#323)
    by marx on Fri Jun 14, 2002 at 04:53:04 PM EST

    The original statement was this:
    The only reasonable explanation is that executive pay structure is a way for the rich to get richer, not a rational way to reward performance.
    Your explanation was this:
    If they spend $200M/year on a CEO, they do it because they believe that CEO provides value that is equal or greater than that.
    So what you're saying is that "no, the executive pay structure is not a way for the rich to get richer, it's there to maximize the wealth of the executives".

    So it's worse, it's not a tautology, it's a self-contradiction.

    As for the natural aim of rich people trying to get richer at the expense of average people, that's a laughably tendentious misrepresentation of economic motivation, spouted from a bitter disciple of a failed system.
    Hah, so when you run out of useful things to say you come up with the Commie attack. Sorry Mr. McCarthy, but it's pathetic.

    Greed is the driving force in capitalism. Most Americans feel pride when they make that statement. So why is taking advantage of a corruptible system now suddenly wrong?

    Join me in the War on Torture: help eradicate torture from the world by holding torturers accountable.
    [ Parent ]

    it's called capitalism (3.50 / 2) (#263)
    by Jevesus on Fri Jun 14, 2002 at 02:32:54 PM EST

    "A thing is worth whatever somebody else is willing to pay for it"

    - Jevesus
    [ Parent ]
    true (3.00 / 1) (#268)
    by dipierro on Fri Jun 14, 2002 at 02:47:07 PM EST

    but what happens when the wealth of those somebody elses are controlled by the somebodys getting paid.


    In capitalism, man exploits man. In socialism, it's the other way around.
    [ Parent ]
    King of the Hill (3.00 / 1) (#271)
    by Malachi on Fri Jun 14, 2002 at 02:55:27 PM EST

    Thats what I was thinking, too, however as in, "King of the Hill"

    Its my hill, and if you want to knock me from the top bring it on.

    I hope my businesses make me rich one day, however my partners and I already agreed that once our lifestyle was comfortable, we didn't need to be greedy, return profits would be reinvested in the company.

    -M-
    We know nothing but to ask more questions.
    [ Parent ]

    Sheesh (4.00 / 1) (#270)
    by bitgeek on Fri Jun 14, 2002 at 02:55:22 PM EST

    You're comparing the *AVERAGE* income to the *TOP* income of CEOS.

    And, of course you're comparing SALARY to COMPENSATION.  

    Without the stock options,the CEO compensation, even the TOP 10, would be much lower.

    And its not *stock* but *stock options* that caused those incomes to be so high.

    To summarize, you're comparing the average salary recieved in one year to the top ten incomes including salary, ten years of stock options and bonus for CEOs.

    And the reason CEOs get paid more is they deliver more value.  In other words, they earn it.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    See above re: ideological blinders (1.50 / 2) (#279)
    by CarryTheZero on Fri Jun 14, 2002 at 03:22:36 PM EST

    You're comparing the AVERAGE income to the TOP income of CEOS.

    And, of course you're comparing SALARY to COMPENSATION.

    Without the stock options,the CEO compensation, even the TOP 10, would be much lower.



    That's exactly my point: are the top CEOs really that much more valuable than the average worker? And I explicitly addressed salary vs. compensation: that is a semantic dodge. Money is money.

    And its not stock but stock options that caused those incomes to be so high.

    Right you are. Sloppy mistake on my part, but see above under "money is money".

    To summarize, you're comparing the average salary recieved in one year to the top ten incomes including salary, ten years of stock options and bonus for CEOs.

    You know very well that you pulled that "10 years" part out of your ass.

    And the reason CEOs get paid more is they deliver more value.  In other words, they earn it.

    You are just begging the question that CEO compensation is rational. You can't just claim "CEOs earn what they make" to try to prove that CEO compensation is rational, because your argument presupposes its conclusion.

    --
    You said I'd wake up dead drunk / alone in the park / I called you a liar / but how right you were
    iTunes users: want to download album artwork automatically? Now you can.
    [ Parent ]
    Options Ignorance (2.00 / 3) (#318)
    by bitgeek on Fri Jun 14, 2002 at 04:32:39 PM EST

    You said:
    You know very well that you pulled that "10 years" part out of your ass.

    It gets tiresome having to constantly educate the ignorant here.  If you'd read any of the other dozen  refutations of that same info you posted, you'd know that what I say is true.

    Stock option plans have a grant, and that grant of options has an expiration date.  If you were CEO of a company in 1990, and you got granted 100,000 options in your company, come 2000, you'd have to ahve already exercised those options, or they would expire.

    10 years is the usual period, some companies its 7 years.  Rarely is it more than 10 years because 10 years worth grants to thousands of employees is difficult enough to keep track of.

    so, if the company was doing well in the 90s, as many companies were, you wouldn't have exercised your options-- becuase when you do, you incur a tax liability.

    But come 2000, your options are expiring, its better to incur the tax liability, than loose all the money.  So you exercise them.

    This is why its bullshit to compare these options exercises in 2000 to one years salary and claim that these people made all that money in 2000.

    They *realized* the money in 2000, but they earned it thruout the nineties.

    Shame on you for spreading misinformation based on your ignorance.  That you don't understand stock option plans means you shouldn't criticize them, not you have a license to claim whatever untruths you wish.

    Your comparison has been shown to be so abusrd as to be pointless.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    big assumption (3.50 / 2) (#360)
    by CarryTheZero on Fri Jun 14, 2002 at 10:05:00 PM EST

    Your claim that most executives hold options until just before the expiration date before exercising is dubious at best, and nowhere do you substantiate this assertion. In fact, many executives cash in options when they vest. See here for more details.
    What I don't understand is these ad-hominem attacks on me. Frankly, they just make you look kind of weird and desperate.

    --
    You said I'd wake up dead drunk / alone in the park / I called you a liar / but how right you were
    iTunes users: want to download album artwork automatically? Now you can.
    [ Parent ]
    Ad Hominum attacks? (1.00 / 1) (#388)
    by bitgeek on Sat Jun 15, 2002 at 04:43:59 PM EST


    Hey, don't make them if you don't want the quality of your thinking to be questioned.

    You don't get to assert I lied and then expect me to treat you nicely when I prove you wrong.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    You misread (none / 0) (#399)
    by CarryTheZero on Sat Jun 15, 2002 at 11:44:11 PM EST

    You don't get to assert I lied and then expect me to treat you nicely when I prove you wrong.

    I didn't. I just stated that some of your arguments need more justification. I see from your comment history that you're relatively new here. In general, well supported argument is the norm on K5, as opposed to slashdot-style flames (or maybe I'm just being optimistic).

    --
    You said I'd wake up dead drunk / alone in the park / I called you a liar / but how right you were
    iTunes users: want to download album artwork automatically? Now you can.
    [ Parent ]
    The grants are annual....... (5.00 / 1) (#377)
    by galazi on Sat Jun 15, 2002 at 07:42:12 AM EST

    I have generally been sympathetic when reading your posts on this topic, but I have to make one comment on this post. You state:

    They *realized* the money in 2000, but they earned it thruout the nineties.

    This is not really true, as option grants are generally made annually. The CEO would not get granted options only in 1990, but in 91, 92, etc. This seems to me to be annual remuneration, and it is not correct to say "the CEO earned his grant over 10 years". His actual return from his 1990 grant will depend on the 10 year stock performance (assuming he still has the stock in 2000), but I don't think that leads to the conclusion that the 1990 grant was remuneration for 10 years of work - you need to take into account the other 9 annual option grants to correctly calculate his 10 year total compensation.

    [ Parent ]

    Options aren't real (2.00 / 1) (#326)
    by RandomPeon on Fri Jun 14, 2002 at 05:00:19 PM EST

    And, of course you're comparing SALARY to COMPENSATION.

    Without the stock options,the CEO compensation, even the TOP 10, would be much lower.

    And its not *stock* but *stock options* that caused those incomes to be so high.


    In theory this works. In practice it doesn't. If the the company does badly the options are normally re-priced to keep them from going underwater. The little guy with options doesn't get this perk. See this NYT story on executive compensation. It provides a case study of SBC's CEO, who despite doing a mediocre job at best was rewarded with repeated offers of ridiculous compensation. He's the rule, not the exception.

    And the reason CEOs get paid more is they deliver more value. In other words, they earn it.

    Again, not so much true. See the above story. It's largely a result of a crooked system where Jack sits on Jill's board and vice-versa. See above story. European CEOs are all *compensated* far less than $1 mil/yr and are at least as competent as their US counterparts.



    [ Parent ]
    You are right. (4.00 / 1) (#363)
    by acronos on Fri Jun 14, 2002 at 10:27:48 PM EST

    There is a reason for this. When five people compete in a track race, only one wins. Only one gets all the prize. When five companies compete only one gets each sale. One company gets 100% of the profit from that sale, the other companies get 0%. On a sales force it is consistently documented that 80% of the sales will be generated by 20% of the sales force. Go back and reread the previous sentence because it has huge implications. When 500 graduating Management students start their first job, only one of them gets to the very top of the ladder. What does all this mean?

    It means that it is debatable if capitalism is completely fair. The other four people who were in the race or competition got nothing. The one who was the very best got everything. This is the nature of competition. A little effort gets you nothing. A lot of effort gets you a little. Exceptional effort gets you almost everything. It would be more fair, in my view, if each was actually compensated for the real effort that was put forth. The competitor who came in second with a 45 second lap got almost as much reward as the competitor who came in first with a 46 second lap. I am unaware of a way to do this without causing many more problems than I fix. Lots of solutions have been tried. They all resulted in a lower standard of living than capitalism. Even if my more fair solution could be implimented then it would result in a lower net standard of living for everyone. I explain why in a second.

    The most effective system man has invented so far is capitalism. If you really study your choices and the tradeoffs involved then you should come to the same conclusion because the evidence is overwhelming. Capitalism is even fair in a way. It is certainly just as fair as a track race. Everyone knows the rules at the start of the game. If you want to make that money, you have a shot at it. You just have to be one of the elite athletes, CEOs, musicians, or actors who wins all the way to the very top of the pyramid. These people are disproportionately paid, but they really did win the race. It is that potential to win that motivates people such that capitalism creates the most real wealth of any other system. When the stakes are so high, people will take huge risks and they will go to incredible lengths to win. On their way to the top they will drag the rest of society up with them because their extra effort benefits everyone. Their creativity allows their company to succeed when dozens of others fail. The ones that succeed really did win the race and probably are the most beneficial to society of any of the rest that failed. That is why they won. If they weren't the best then their customers would have purchased from someone else. That is why capitalism is the best even with it's weakness. It offers more incentive to perform at an exceptional level than anything else. The net level of exceptionalism is directly proportional to the net wealth of an economy. Capitalism is so effective that not only does the average wealth increase, even the wealth of the poor increases. Take a sample of countries in the developed world (compairing apples to apples as the state of development a country is in matters more than than the distribution of wealth) and you will find that consistantly the bigger the spread between the rich and the poor, the richer the poor are. I know most here will disagree with this, but it is true nonetheless. Maybe someday a better system will be invented, until then capitalism is where it's at :)

    [ Parent ]

    wow (none / 0) (#369)
    by Lord Snott on Sat Jun 15, 2002 at 12:17:32 AM EST

    I hadn't thought of it like that.

    I have trouble taking off my socialist cap sometimes.

    ~~~~~~~~~~~~~~~~~~~~~~~~
    This sig in violation of U.S. trademark
    registration number 2,347,676.
    Bummer :-(

    [ Parent ]

    Just a point about capitalism. (1.50 / 4) (#258)
    by reduz on Fri Jun 14, 2002 at 02:05:17 PM EST

    If, for the economy of a country to be profitable, exports must be greater than imports (Colbert's philosophy). How can ALL countries be profitable at the same time?. This never made any sense to me.

    Spread your exports. (2.50 / 2) (#266)
    by Kintanon on Fri Jun 14, 2002 at 02:36:43 PM EST

    If you are importing 95% of the value of your exports, then you are profitable. Your exports are spread amongst almost all of the countries in the world, such that each country only takes a small percentage of your exports. We'll assume .5% for the sake of thes excersise and assume there are 200 countries. Now, say you import goods for 95 of those countries, (1% of your imports per country you import from) if all of the countries do this, they are all exporting more than they are importing and it works out.  Because it's not a direct exchange between only 2 countries.

    Kintanon

    [ Parent ]

    Go back to math class (4.00 / 2) (#269)
    by democrap on Fri Jun 14, 2002 at 02:54:20 PM EST

    Suppose, just for the sake of an example, that all countries are exporting 1 billion USD of goods, and importing 950 million, and that there are 200 countries.

    Total goods exported by all countries: 200 billion USD

    Total goods imported by all countries: 190 billion USD

    What happens to the other 10 billion? It doesn't matter how you split it up, and it doesn't matter if it's an exchange between 2 countries or between 200; if something is being exported then someone is importing it. The total global import and export figures should be equal.

    [ Parent ]
    Go back to economics class (4.00 / 2) (#285)
    by Skywise on Fri Jun 14, 2002 at 03:33:48 PM EST

    Cash flow is not a zero-sum game.  There's this thing called wealth generation.

    2 gazillion dollars (GZ) = 2 gazillion dollars (GZ).  However, each country utilizes their money in different ways, and with different efficiencies.  For instance, it costs much more to make Nike's in America than it does in China.  But the effective sales cost is the same.

    Let's expand that to say that everybody swaps Nike shoes and they cost 1 GZ a pair and 1 GZ a pair to make in the US and .5 GZ a pair to make in China.  (They're gold plated and signed by Michael Jordan)  The US spends its 2 GZ and buys 2 pairs.  China spends 1 of its GZ to make the shoes and gets back 2 GZ.  China now has 3 GZ.  And there are story would end except that we also trade this thing called Food.  Food production in China is very expensive.  Food production in the US is very cheap... So the US sells China rice for 3 GZ and gets its money back with interest... and has the shoes...

    Cash flow is temporal and transient...  Because you have to play a losing game for awhile (cut back on expenses and acquire cash) to gain leverage over your competition.  So even though one guy/country might be on top for awhile, eventually they'll drain their reserves and have to fall back to a conservative position.

    [ Parent ]

    See above reply to NFW [n/t] (none / 0) (#320)
    by democrap on Fri Jun 14, 2002 at 04:35:28 PM EST



    [ Parent ]
    accurate arithmetic doesn't guarantee useful math (4.50 / 2) (#308)
    by NFW on Fri Jun 14, 2002 at 04:08:14 PM EST

    Your arithmetic is accurate, but your math is incomplete. You ignore a significiant source of value: work. You're looking at it through the "conservation of mass" paradigm, but that would only be reasonable if mass had a fixed value. You can increase the value of the same mass of materials by putting work into it.

    Suppose I make stereos for a living. With each stereo, I buy $100 worth of stuff from the Republic or Rawmateria (metal, plastic, eletronic components, etc), and produce something that I sell to the Audiophilian Empire for $500.

    Or, a non-hypothetical example.... Some years ago my roommate and I bought a floppy disk for perhaps $0.25 and sold it a week later for $1500. That might sound silly, but we spent the intervening week arranging the magnetic stuff on the disk very, very carefully. That took a some work. The guy who bought the disk from us wasn't just paying us for the raw materials with which the disk was made, he was paying us for the value of the work we put into the disk.

    Every nation's exports can exceed imports if every nation works to add value to what it imports. Economics is not a zero-sum game.


    --
    Got birds?


    [ Parent ]

    Agreed (3.00 / 1) (#319)
    by democrap on Fri Jun 14, 2002 at 04:34:14 PM EST

    I have no doubt that you are correct. My intent was only to point out that the "divide your exports" theory doesn't explain anything.

    [ Parent ]
    read Ricardo. (3.00 / 1) (#295)
    by mckwant on Fri Jun 14, 2002 at 03:46:30 PM EST

    Comparative Advantage. There are limits, or it's a good chapter (20 minute read) in Heilbroner's "The Worldly Philosophers."

    [ Parent ]
    Dividends. (3.50 / 6) (#261)
    by /dev/trash on Fri Jun 14, 2002 at 02:30:10 PM EST

    When I buy a stock I'm in it for the profit when I sell, not for a penny or two of dividens here and there.

    Like you said dividends are taxed differently, so why would I want a $2/per share dividend check taxed at a higher rate than if I sold at $2/per share over what I paid?

    ---
    Updated 02/20/2004
    New Site

    Gambling (1.00 / 2) (#297)
    by Kintanon on Fri Jun 14, 2002 at 03:47:42 PM EST

    Because your stock doesn't always go up. With dividends you always get the money. If the stock price drops a little, it doesn't affect you. As long as the company is making money, you make money. It's the difference between low risk, low profit investing and higher risk, higher profit investing. A matter of personal taste.

    Kintanon

    [ Parent ]

    Overgeneralization (4.00 / 1) (#315)
    by bitgeek on Fri Jun 14, 2002 at 04:23:39 PM EST

    Intel pays a dividend, and it is a growth stock.

    Dividends aren't always paid, if the company is in trouble, they cut the dividend.

    The real difference between investing and gambling is exactly the difference between buying on investigation and buying on hope.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    well. (3.00 / 1) (#330)
    by /dev/trash on Fri Jun 14, 2002 at 06:00:43 PM EST

    If the company is making money the stock should go up as well.

    ---
    Updated 02/20/2004
    New Site
    [ Parent ]
    Coincidence ... (2.00 / 4) (#289)
    by jtra on Fri Jun 14, 2002 at 03:38:22 PM EST

    KPNQwest (major provider for internet services in Europe) has filled bankruptcy. Read more what were the reasons: Ebone fraud suit could taint KPNQwest (on Yahoo). Related story on slashdot.

    --Get textmode user interface for Ruby, http://klokan.sh.cvut.cz/~jtra/

    More reasons not to buy stock (2.70 / 10) (#296)
    by MickLinux on Fri Jun 14, 2002 at 03:47:38 PM EST

    I like this piece.  It ends up by not criticizing capitalism -- rather, it ends up by saying if you like capitalism, practice real capitalism.  If you will, this article doesn't condemn capitalism.  It condemns the modern version of it (sometimes called "neoliberal capitalism") that uses a combination of capitalism, fraud, force, and government laws to direct economies and help the wealthy benefit themselves at the expense of the poor.

    My own experience matches the indication of the author:  true capitalism means investing my money back into our own small business -- not "investing" in stock.

    But here are some other reasons not to touch stock:

    (1) Trading is not truly free.  You aren't allowed to go set up your own stock market.  As a result, skimming happens on every sale or purchase.

    (2) Trading is not necessarily honest.  Remember the sweetheart deal that Lady Clinton got from Tyson?  There are many ways that this can happen -- and does happen.  But every $1 that she makes is $1 that was essentially stolen from a stock-market investor.

    (3) Trading won't necessarily give you what you ask for.  At one point, I -- a new investor -- a new, STUPID investor, went to my local "My Ol' Lunch" broker [name has been changed to protect the guilty] to purchase a market index fund.  The wonderful broker told me that index funds did not exist, and would I like to buy a nice dog (dogs being slightly better than blue chips, and all.)  So anyhow...  Now, you might point out that I was a stupid investor.  But if you have to be smart to do business with a government-mandated shyster without losing your shirt, then that is probably not somewhere that you should be.

    (4) Trading doesn't follow capitalism principles--it follows crooked gambling principles.  Specifically, if the supply of iridium dries up because of a civil war in Rhodesia, the cost of Iridium should go up, correct?  But no -- it suddenly drops 12%, and then goes up.  Why?  Because of market dumping that was there in order to relieve small investors of their futures, via the government-mandated short protection.

    (5) Holding stock in a smart, stable company doesn't protect you.  We bought into IOMEGA when they were plowing all their money into a new device following their "Bernoulli Box".  I have every reason to suspect that this new device was a ZIP disk, but about 5 years ahead of the time when the ZIP disk actually came out.  Of course, big investors purchased in, demanded high dividends, and -- when they didn't get them [because voting placed other management in there] sued the company for lost PROFITS, and won.  So the research stopped for about 2-3 years while the company dug itself out of a hole.

    Anyhow, as far as I can tell, the stock market is not a place for investors.  The best stock market tip I ever got was to purchase "The Incredible Secret Money Machine" by Don Lancaster -- and that tip really was a description on how to start your own microbusiness.  The payback on microbusinesses far exceeds the payback on stock -- BUT you have to put in your time and skill as well.

    If you disagree, don't post, moderate!


    Failure is hardly original... (4.33 / 6) (#316)
    by Skywise on Fri Jun 14, 2002 at 04:29:22 PM EST

    Do you understand the reason why company stock increases?  It's not because people "value the stock higher", that's sheer lunacy... (like the latter half of the 90's)

    The stock value stays close to the value that the company would pay out dividends at, if and when the company does.  So if the company grows its capital base (like MSFT) and has the potential of paying out a large dividend, then the stock price will follow.

    Now, there are 2 modifiers to this.  If the public feels that the company may fail, or never get to a point where it will pay out dividends, this will cause the price to fall below the dividend level, because now there's RISK in the stock.  The second modifier is if the public thinks the company is onto something that doesn't have hard figures (say a potential cure for cancer) that would greatly increase the value/income of the company.  This will cause the price to rise above the dividend level.

    That's what drives the value of the stock.  That's it.  There's no magic, and no conspiracy.

    What Enron did was "cook the books", they formed fake shell companies that bought Enron's debt.  This made Enron look like it had more money than it did, AND made the company look trust worthy because all these companies were buying their debt.  Make no mistake about it.  This.  Is.  Illegal.

    Dividend re-investment is LEGAL, and NECESSARY to the life blood of a company.  The company needs that capital to develop new technologies, grow the business, or expand into new markets.

    And on top of that, it has 0 to do with CEO salaries.

    This is a topic that invites emotional responses (2.33 / 3) (#327)
    by cdupree on Fri Jun 14, 2002 at 05:13:44 PM EST

    The stock value stays close to the value that the company would pay out dividends at, if and when the company does.

    Which doesn't explain, for example, Amazon. Or Micros~1.

    Bertrand Russell pointed out that the degree to which an argument is based on emotion is often a measure of the lack of confidence the arguer has in the intellectual underpinnings of the argument. If there is a good logical basis for the argument, it will usually be presented; if the logical basis is suspect, an appeal to emotion takes over. Arguments about money, and about whether Michael Dell actually earns the half-billion bucks with which he was "compensated" last year, often seem to me to end up at this point. I tend to flash on the beat-up pickup trucks one saw a few years back with the inevitable "Perot" sticker. I mean, if those billionaires can't be trusted to care about the little guy, who can?

    "Criminal: A person with predatory instincts who has not sufficient capital to form a corporation." --Clarence Darrow
    [ Parent ]

    Yes it does... (4.50 / 2) (#349)
    by Skywise on Fri Jun 14, 2002 at 07:40:01 PM EST

    And your snappy logical retort to my "emotional" outburst was?

    Oh yeah, you didn't have a point, but quoted Berrand Russell on a non-sequitir...

    The stock will go up if the public feels that the future growth potential for the company far outweighs its current dividend return.

    Amazon.  Potentially BILLIONS of customers one click away.  No real-estate, thus no real-estate taxes and large capital outlays.  Thousands of computers replacing hundreds of workers = diminished labor costs (less benefits, less taxes, less salaries, etc).  IF it worked, it had the ability to revolutionize marketing and obtain billions of dollars in sells.  There was nothing but pure capital conversion from sales and very little overhead.

    The problem was that everyone got dollar signs in their eyes and bet the entire farm and didn't READ THE FINANCIAL REPORTS, which pointed out that this was all highly speculative, very radical, and highly prone to failure.

    But that's the FREE MARKET.  You are allowed to spend your money how you see fit.  That's called "freedom".

    As for salaries... have you looked at Bezos salary?  $92,000 for the year 2000.

    Bill Gates made $623,000 for the same year.

    Michael Dell did NOT make half-a-billion in salary.  He sold stock in HIS company.

    All 3 sold stock in THEIR company.  And do you know why they got that much?  Because THEY started a company.  They sweated the details, worked 24-7, killed themselves, gave up family and friends, and developed new concepts and ideas.  And like the mother hen who sowed the seed, ground the flour, and baked the bread... they get to eat their earnings, too.

    [ Parent ]

    Blaming the economy is no excuse for being lazy (4.66 / 3) (#324)
    by willpost on Fri Jun 14, 2002 at 04:53:17 PM EST

      How many of those dot-com investors do you think actually got past the photos in the annual statements and crunched the numbers?  What about investigating the company, the markets, the competitors, and future trends.  Do you think they formulated their own opinion?  It's more likely they jumped on a quick rally or believed in an analyst who most likely has other motives.

      While it might be foolish to charge headfirst into something you know nothing about, it's because the investor has chosen to do so.  Even if you were lucky once or twice with a startup on opening day, I feel it will negatively reinforce bad habits.  Success also involves planning and executing exit strategies in any event, money management to limit your risks, and some kind of estimate of the percent return expected.

      It takes a lot of dedication to consistently bring in a profit and an enormous amount to learn how.

      Daytrading is very expensive.  Real time live quote systems (Quote.com) can easily cost $80 per month and fast execution trading platforms can take a significant chunk.  Mytrack.com has good executions but it's still $26 for a round trip (buy and sell).  You may be able to start with $5-10 grand if you know what you're doing but it will cost $50 grand to learn.

      Research, planning, and long term buy and holds are the most reliable way to produce wealth in the stock market.
    I'd recommend reading:
    Lessons from the Legends of Wall Street
    http://www.amazon.com/exec/obidos/ASIN/0793137152/qid=1024084639/sr=8-1/ref=sr_8_1/103-4738998-3819862

      If an investor doesn't have time to learn about stocks and mutual funds, i'd recommend a monthly buy and hold of the Vanguard S&P 500 fund, but it will take many years to grow into anything substantial.  Any method of investing will always require discipline and saving.

      While the original article is incorrect in many points, it's partially true with the idea that the working class are different from the self-made wealthy.  However the real difference is that while most of the working class want the goods and services that money provides, the wealthy want money more than anything else.


    Re: Blaming the economy... (none / 0) (#367)
    by reflective recursion on Sat Jun 15, 2002 at 12:01:35 AM EST

    However the real difference is that while most of the working class want the goods and services that money provides, the wealthy want money more than anything else.

    I'd say that for the majority of the working class this is indeed true. I'm sure you know plenty of people living paycheck to paycheck when they make enough that the shouldn't have to. They simply have poor spending habits and don't know how to stop impulse purchasing. Now the wealthy, on the other hand, do want money I believe. But, I don't think that is their sole purpose. I think they want success. In America success is defined almost enitrely by how much money a person makes. An interesting thing to note is that without something to sell there is no money to be made. To make more money you need something very good to sell. If you see where I'm going here then you should see that if a person focuses entirely on "money = success" equation, then they leave the product out entirely, and therefore do not make huge piles of money because nobody is buying.

    The wealthy want money, but, IMO, the money actually comes indirectly from their need for success. I don't think wealthy have a need for money more than the poor. The wealthy simply think about money more and can grow it. The poor think money should be no concern and often times think of money as evil (because money has been tight their entire life and they never see money in a positive light). The middle-class tend to have an attitude of working hard for the money and have no concept of thinking about growing their money. The poor have no desire for success, they tend to be "happy" with their desperation (the typical downward-spiral). The middle-class are entirely concerned with keeping up with the Joneses and acting "normal." They see money as something their boss pays them and something they use to pay the bills. As long as they have enough money to look and act like their neighbors, they are happy. You also see this trend with the inherited rich. The snobby people overly concerned with their possessions. In both these cases money is given to the person and the person never becomes a part of capitalism and never sees how money truely functions. On the other ends of the spectrum, the poor and wealthy are very much alike. The only real difference is that the poor are cynical about money and do everything they can to avoid the conversation (and ultimately end up with jobs that pay little). The wealthy see money as a vehicle and are optimistic. Both know what money can or cannot do for them, though. A poor person may haggle with a shop owner while the wealthy person will negotiate a business deal--the only difference is in formality. Something the middle-class never really struggles with. These are my observations and opinions, of course..

    [ Parent ]
    I'm not an expert (4.00 / 3) (#329)
    by jnemo131 on Fri Jun 14, 2002 at 05:29:47 PM EST

    on economic systems, at all. In fact, I have little to no knowledge, but isn't the primary theory behind "capitalism" that the economy, given enough time, will even out to an equal level, assuming the government doesn't intervene? In which case, wouldn't these policies be contradictory to the capitilistic system that the author of this article assums is in place? I realize that by this definition capitilism does not exist in today's economy, but nonetheless, if we assume this a proper system, should we not stick to the principles behind the theory?

    "I heard the droning in the shrine of the sea-monkey"
    -The Pixies
    Economics 101 (4.12 / 8) (#331)
    by Simon Kinahan on Fri Jun 14, 2002 at 06:16:46 PM EST

    This article horribly misrepresents how the stockmarket actually works. The author is hopelessly confused about how stocks are valued. It has got almost nothing to do with voting rights. The voting rights attached to a share only become relevant when a takeover looms, which is why the price rises at that time.

    In a normal market, shares get their value from the anticipated future profits of the company. Professional investors actually have sophisticated mathematical methods for estimating the "proper" price of a share. The fact dividends are not paid immediately is irrelevant. Investors, for obvious reasons, prefer the management to invest the money, and to take their dividends later. Small investors buy stocks because of their short-term price, but large investors buy them because of anticipated profits, it is them that drive the market. Potential owners comprise only a tiny number of investors: most investors, but value, are professional, long term investors, such as pension companies.

    Now, admittedly, we've just come out of a very abnormal market. Such bubbles quite typically follow the introduction of important technologies: it happened with the railways and with air trable, and it happened with the internet. This too shall pass. They are also an invitation to corruption and extravagance on the part of executives: shareholders confident in every-inflating prices don't rock the boat, and executives, taking much their pay in stock and profit-related bonuses, are happy to keep on lying. Its become quite clear that in some firms in the hi-tech sector executives, analysts and accountants were conspiring to inflate share values and line their own pockets. I would expect more fallout yet.

    However, this corruption is quite different from the problem of ordinary executive compensation, which is also a real problem, but quite unrelated to stock market valuations. This is basically a systemic problem, like the problem of auditors becoming too close to management: executive compensation is decided by major shareholders, who are largely pension companies, whose decisions are also made by overcompenated senior executives. The ultimate shareholders - that is you and me - should not tolerate this crap, but there's not a hell of a lot we can do.

    However, none of this affects my basic point: executive compensation, and (much rarer) corruption do not drive stock prices. Stock prices are driven by anticipated future profits.
    This is not to mention the myriad minor throw-away errors of fact: declining wealth for the majority (not true), most of us working for corporations (not true), the stock market as zero sum game (normally not true), and so on. Why the hell is this crap on the front page ?

    Simon

    If you disagree, post, don't moderate

    It's on the front page because it's not crap. (1.00 / 3) (#350)
    by Sesquipundalian on Fri Jun 14, 2002 at 07:44:17 PM EST

    He's saying that the prisoner's dilemma gives lie to the notion that the stock market is anything close to a fair, well regulated public market. The fact that it has become slightly more regulated than it used to be is not all that relevant. The fact that is sold to people as a sane way for middle class individuals to earn retirement money is an obscene lie. The people doing the selling (investment brokers and councillors mostly) sure wont be around to help out in twenty years or so, when I have to walk the streets of my city, elbowing my way through crowds of homeless elderly people as I make my way to the grocery store to spend what'll probably be several thousand dollars on a weeks worth of food.

    And yes, the thought makes me a little tense.


    Did you know that gullible is not actually an english word?
    [ Parent ]
    What are you talking about ? (5.00 / 2) (#353)
    by Simon Kinahan on Fri Jun 14, 2002 at 08:36:08 PM EST

    The author of the article seems to want to talk about corporate corruption, and seems to believe that it drives stock prices. This is clearly bollocks, although coporate corruption (and executive overcompensation) does exist and is a serious problem, it has little relation to stock pricing, apart from a few examples of boom-time shennanigans.

    Now, I have even more trouble figuring out what you think you're talking about that the I did with the original article, so before I try to deal with your first sentence, please explain what prisoners dilemna has to do with anything here (I know what it is, thanks, I just don't see the connection), and what you think a "well regulated public market" is ?

    You seem to actually want to make some point about retirement savings, which you do not substantiate, and which the original author did not mention at all, and to have a very dim view of the future of food production, which is probably unwarranted, and anyway has no connection at all with the issue at hand.

    Simon

    If you disagree, post, don't moderate
    [ Parent ]

    Also.... (5.00 / 1) (#374)
    by galazi on Sat Jun 15, 2002 at 04:48:16 AM EST

    I think your comment is pretty good, but you may want to note:

    1. You can get a feel for what voting rights on stock are valued at in the market by looking at a few (and there are only a few) instances where a company has both ordinary stock and listed non-voting stock which also pays ordinary dividends (this is usually preferred stock issued by the company to maintain control for existing shareholders, family say - it's identical to ordinary stock, just without the votes (or with limited votes)). In the long term, the non-voting stock usually trades at values of about 10-20% below that of the voting stock, so you could argue that the votes are worth 10-20% of a stock's value.

    2. Executive compensation is usually decided by a remuneration committee of 'outside' Board directors. Management usually retains a compensation consultant to write a report to 'help' this committee. Since the consultants are hired by management and the directors on the Committee are usually running companies which have executives from the original company as outside directors on their own remuneration committee, there is little incentive to keep pay in check. Major shareholders sometimes complain when egregious compensationawards become public, but as far as I am aware they have limited input into initial compensatin decisions.

    3. Prices rise when there is a takeover, first, because the takeover price is usually pitched at a premium to the price the stock was trading at prior to the takeover and prices rise to this level and, second, they can rise above the takeover price if the market thinks that the bidder may have to increase its price to win the takeover. This increase in value has nothing to do with voting rights.

    [ Parent ]

    Interesting points (none / 0) (#375)
    by Simon Kinahan on Sat Jun 15, 2002 at 06:48:05 AM EST

    Thank you. A couple of remarks:

    1. That's interesting. Might part of the price difference also be becase the non-voting stock is less liquid ?

    2. I was under the impression that non-exec directors are usually representatives of major shareholders. VCs, pension companies, etc, usually put "their people" on the board. Hence my comment about major shareholders deciding executive compensation. Are you saying non-execs are more commonly "swapped" between major firms ? and thus not really representative of anyone ?

    3. I don't agree that the price rise on a takeover has nothing to do with the voting rights. The buyer is buying the voting rights, and does not care about the dividends. In principle the amount they're prepared to pay should represent the value of those rights, which in turn is determined by the aniticipated profits from the firm's capital under different mangement, which is presumably greater than the current stock price because the current management presumably is doing a less than perfect job.

    Simon

    If you disagree, post, don't moderate
    [ Parent ]

    Reply (5.00 / 1) (#392)
    by galazi on Sat Jun 15, 2002 at 07:32:17 PM EST

    1. Yes

    2. VCs do put their people on Boards (Sun has John Doerr & another VC), but I think that it is rare for Pension funds to have representatives on the board as shareholders (CEOs of the big banks & insurance companies will probably be on other Boards, but in their capacity as 'great and good' rather than shareholder). However, for most major, well established companies (ie. where the VC funds have either never been in or have taken their cash) they do tend to be "swapped".

    For example, Microsoft has 3 members on its compensation committee:

    Raymond V. Gilmartin, the Chairman & CEO of Merck

    Ann McLaughlin Korologos, on the Boards of AMR Corporation (and its subsidiary, American Airlines), Fannie Mae, Harman International Industries, Inc., Kellogg Company, Vulcan Materials Company, and Host Marriott Corporation.

    Wm. G. Reed, Jr., on the board of the privately-held Simpson Investment Company (he is the ex-CEO of Simpson Timber, which I assume this position is related to), he is a director of PACCAR, Inc., SAFECO Corporation, the Seattle Times Company, and Washington Mutual Savings Bank (looks like Seattle 'mafia'!).

    3. I'm not sure we really disagree. The acquirer needs the voting rights to win, but it should value the expected cash flow (under its supposed excellent future management) in calculating the price it can afford to pay. You are correct that it does not care about the dividends, because it will have direct access to the cash flow of the target if it wins.

    However, the initial point of yours I commented on was (I think) that voting rights are (partly?) what drives the price rise at the time of a takeover - my point is that the price rise in the market during a takeover is driven by what the buyer is offering. On the one hand the buyer will not offer more than the future cash flows are worth to it, but only what it needs to pay to secure 50% of the votes; on the other, the price in the market will be driven by the buyers offer. For each constituent individually the votes are not assessed, although a large shareholder is of course in a position to talk to the bidder & let them know what price they woud be happy with or that the current offer is not enough to 'secure its votes'.

    Securing the votes is important, but I would suggest that when valuations are being done the buyer doesn't look at the equation as x for the cash flow plus y for the votes.

    [ Parent ]

    Two arguements (4.25 / 4) (#339)
    by godix on Fri Jun 14, 2002 at 06:41:25 PM EST

    CEOs get most of their income through stock options. This fact alone causes almost all the problems I see with large companies. If a CEO did not own stock or options then they'd just be an employee of the owners, the stockholders. I figure a guy with no financial stake in the company will do what's needed to make the owners happy but he probably isn't going to lie, cheat, and totally screw other workers for them. Once you give the guy a financal incentive to screw other people then you end up with situations like Enrons flagerent illegalities or totally legal but really nasty things like unnecessary layoffs to boost stock prives. For this reason I firmly believe that companies should not be able to offer employees stock options. A more draconian arguement would be not allowing employees to own stock in the company they work at period, but this causes a lot more problems then it would fix.

    As for the stock market itself, it represents different things to different people. The people very active in the market are buying perception. The only issue with them is if they think other people will pay them more for this piece of paper later than they're paying now. What the company is, what is makes, or how profitable it is are all secondary issues. For the vast majority of stock holders the issue isn't short term, it's long term. That's when things like the companies health and profit comes into play. A third segment of the stock market is people buying for dividends or voting rights. Unlike what you claim, this is much MUCH smaller than either of the other segments I mentioned. Take a look at the # of shares traded. Compare to the total # of shares on the market. The vast majority of shares are kept in retirement funds and not traded for years, if not decades.

    I see little that needs to be modified in the stock market. It basically works now, we've had around a century of the stock market in it's current form to work out any major kinks it had (the most notable being the reforms right after the 1929 crash). The only major reform I see that needs to be done is to stop stock options. As with anything dealing with large amounts of money, a person should become informed of at least the basics of the stock market before investing. The stock market is still the best way to make your money grow over the long term, even if you factor in the crashes in the 20's, 80's, and 2000.

    You didn't go far enough (3.00 / 1) (#348)
    by 0xA on Fri Jun 14, 2002 at 07:33:29 PM EST

    figure a guy with no financial stake in the company will do what's needed to make the owners happy but he probably isn't going to lie, cheat, and totally screw other workers for them.

    Oh yes he will. The shareholders (his boses) will only be happy if the stock price climbs. Srewing you employees is a good way to raise your stock price.

    Now if the people with the power in a company, the shareholders, only rewarded resposible actions of executives then yes, that would work. Of course shareholders don't do this, they don't care. In fact most people who own mutual funds don't know what parts of what companies they own, nevermind knowing anything at all about the actions of that company. Fund managers don't care either, they get paid on comision.

    Corporations are democratic, people saying they don't have anything to do with the way a company they own stock in behave are just like people who say they don't hold any resposibility for the actions of thier government. Nobody votes at anual meetings either.

    Please note: We are getting screwed but (again) we are screwing ourselves.

    [ Parent ]

    Interesting that you mention stock options. (none / 0) (#385)
    by jugglhed on Sat Jun 15, 2002 at 04:22:26 PM EST

    One of the many controversies raging around the stock market (now that the bubble burst and people are no longer looking the other way) is the way options are handled.

    Stock options granted don't count against a company's earnings (right now), so they are a good way to provide the very very high compensation executives get. In the 90's there was something of an explosion of the use of stock options as a means of compensating employees, which, during the happy days of the tech bubble, was welcomed by the employees.

    One problem w/ this is, as I mentioned, the 'cost' of stock options doesn't really appear when you consider a companies earnings. It's not really simple to account for these costs, so this is not a problem with a simple solution, but most aware of it agree something needs to be done. Most corporations seem to have taken advantage of this complexity by doing nothing whatsoever to record the cost.

    Another problem is that, according to a nice write up on this at Wall Street Wish List:

    ...increased stock option issuance threatens to dilute the number of outstanding shares that many companies have (as stock options are excercised these new shares permanently dilute the total number of shares by which earnings are calculated upon).

    Interestingly enough, a reason many analysts continue to be down on the stock market is that so many stocks have ridiculously high P/E ratios, still far above the observed historical average of about 13.5.

    On the other hand, the dilution problem can be managed with buy-backs. This is funny because buybacks are usually sold by corporations as being done 'dependent on market conditions' and (even funnier) 'for the benefit of shareholders'. Really they seem to be done as a way to pay for multi million dollar CEO bonuses.

    Well, that's enough from me. I was a bit disappointed this issue wasn't touched on at all in the article. I have been enjoying reading about this stuff recently, because it looks like even the well-to-do conservative set is losing their patience fast with corporate America's bullshit.

    [ Parent ]

    On retrospect, P/E ratio thing was non-sequitur (none / 0) (#386)
    by jugglhed on Sat Jun 15, 2002 at 04:26:51 PM EST

    But bloated P/E ratios are still a good reason to avoid a stock.

    [ Parent ]
    That is simply not true (4.66 / 12) (#345)
    by acronos on Fri Jun 14, 2002 at 07:21:07 PM EST

    But the looting is the only thing that makes your stocks valuable at all!

    That is simply not true. Anyone who thinks so has not done the math.

    A company that earns $10 million/year in profit is worth more than a company that earns $5/year. Management for both companies have decided not to pay dividends. Lets say the price of both companies drops to $1 because everyone lost faith in the "stock market bubble." If there is no value in companies beyond the "greater fool theory" then this should not be a problem. Now I purchase the entire value of the $10 million/year company for $1, and I purchase the $5/year for $1. I now have a company that could be earning me $10 million/year and I have a company that could be earning me $5/year. Which was the better deal? Clearly the higher profit company.

    Now I have several choices available with my $10 million/year company that for some stupid reason the stock market valued at $1. I obviously made one heck of an investment with this one because in the first year I have a return on my investment of 10 million. I have several choices at this point.

    First, I can order the current managers to start paying dividends or fire them. This would allow me to earn $10 million/year. If I put the money in a savings account at 7% interest then I make $700,000/year in interest.

    Second, I can liquidate the company. My fathers manufacturing company made about $7 million in sales and $700,000 in profit last year. It would have about $600,000 in physical assets if the company were liquidated. If we apply the same proportion to the $10 million/year company then I would probably get about $8 million if I liquidate the company. If I then put this money in a savings account I might get 7% per year in a return. So now I am earning an additional $500,000/year. Remember that the company before I liquidated it could have been earning me $10 million/year, so, I just made a stupid decision to liquidate the company.

    Third, I could try to sell the company. This is stupid because the market just put a value on it of $1. I would only get my dollar back - a very lousy investment when I could have had $10 million.

    Fourth, I could leave the money in the company. My fathers company has had a growth rate of between 10-30% over the last 20 years. (He may hit %50 this year which is killing him because he is so cash strapped.) So, if I leave the money in the company then it will earn 10-30%. This means that next year I will make ~$12 million rather than $10 million. This is by far my best option, even excluding the tax benefits, because a 20% return of 2 million beats a 7% return of $700,000. However, if the company is not growing then it makes more sense to pay the dividend.

    To sum up:

  • Company pays dividends - 10 million + $700,000 in interest.
  • liquidate - $8 million + $500,000 in interest.
  • sell - $1 + 7 cents in interest because of the "greater fool theory" of the pyramid scheme collapsing.
  • Leave money in company - 10 million + $2 million in compounding interest.

    All scenerios assume I am investing the money. If I just spend it then there is no interest and I get $10 million in the best case.

    The above options are exactly the same whether I completely own the stock as an individual or a million people own the stock at $100/share.

    It is clear to me that even companies that never pay dividends have a value. It is completely incorrect to say that the only value in a company is the dividends that it pays. It IS correct to say that the only value of a company is it's potential to pay dividends or be liquidated or sold. My fathers company has never paid a dividend. He and two others are the only shareholders. If dividends are the only way to go then he is robbing himself. You don't know what you are talking about. But, sadly, there are many people who believe the stupidity you are writing. Their lack of understanding causes stupid laws to be passed that have a tremendous impact on everyone's standard of living.

  • You forgot stock buyback... (1.00 / 1) (#402)
    by dachshund on Sun Jun 16, 2002 at 10:32:32 AM EST

    Which is basically another way to distribute money to stockholders.

    [ Parent ]
    I left out more than that. (none / 0) (#407)
    by acronos on Sun Jun 16, 2002 at 03:19:49 PM EST

    There was no need to include it to make my point.  It would only have made my already complicated post more complicated.

    [ Parent ]
    No Ethics in the Stock Market (3.66 / 6) (#352)
    by MuglyWumple on Fri Jun 14, 2002 at 08:30:59 PM EST

    One of the main measurements of a stock's attractiveness is the Price to Earnings ratio. For stocks that do not pay dividends the only way to make money is to "buy low, sell high." Now, if a company wishes to keep its stock attractive it will try to keep its P/E ratio stable. Thus, the only way for a stock to increase in value is for earnings to increase - i.e., growth.

    I reject the idea that continued growth is healthy. I mean, how much bigger can Microsoft get? At some point, there must be a limit, and growth becomes more and more difficult as that limit is reached. It also becomes more damaging to the earth and to society.

    Stockholders are an impatient and fickle bunch. They look for short term gain. Any company that announces that for the next 5 years they are going to retool instead of grow will see stockholders bail in droves. The stock market favors short term gain over long term planning.

    Money is a powerful tool, ye most investors show no ethical behavior. For many corporations it is almost impossible to discover where they are investing there money. What other companies do they hold majority stock in? What other boards are their board members on? In many cases this information is purposely obfuscated.
    br> I know of a study (personal correspondence) that attempted to measure and compare a person's ethical behavior in personal vs. business relationships. In almost every case, even the highest personal standards were wipe aside when it came to business.

    I want to invest my money where I know it will do good, ...and well. There are very few opportunities.

    Speculation v. Investing (3.50 / 2) (#387)
    by bitgeek on Sat Jun 15, 2002 at 04:39:44 PM EST

    I reject the idea that continued growth is healthy.

    Then you show a lack of understanding of some basic economic principles. Unless you have saturated your market, if you do not continue to grow, you will not be able to compete. Growth means increased economies of scale, price competitiveness, and ultimately, consumer benefits.

    Stockholders are an impatient and fickle bunch. They look for short term gain. This is flat out false when you use the term "stockholders" - a broad one. Most stock is held for the long term.

    Its important to distinguish between speculators- who cause the "froth" in the market- and investors, who hold for the long term.

    Investors do not look for short term gain.

    There will be people who use the stock market to gamble, and they will loose. but there is nothing wrong with this-- it is their right.

    Money is a powerful tool, ye most investors show no ethical behavior. For many corporations it is almost impossible to discover where they are investing there money. What other companies do they hold majority stock in? What other boards are their board members on? In many cases this information is purposely obfuscated.

    This is factually untrue. Every public corporation is required to disclose major investments in its annual report.

    In almost every case, even the highest personal standards were wipe aside when it came to business.

    Not surprising that you would make such a slur on businessmen. Your bigotry and hatred is obvious.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]

    A challenge (5.00 / 1) (#394)
    by MuglyWumple on Sat Jun 15, 2002 at 09:40:52 PM EST

    I said: For many corporations it is almost impossible to discover where they are investing there money.

    You said: This is factually untrue. Every public corporation is required to disclose major investments in its annual report.

    If it is so easy then I challenge you to connect Nokia to dirty coltan mining and the ousting of President Mobutu by Laurent Kabila in Zaire.

    I had it easy. I started from the coltan mining end.

    Robert F.W. van Oordt has a seat on the board of both Nokia and Umicore.

    Umicore has an interest in America Mineral Fields Inc.(AMF) In return Eteinne Denis shares a seat on the board of AMF as well as one at Umicore.

    AMF signed a billion dollar deal with Laurent Kabila, who seized control of Zaire the following month.

    In return, AMF is allowed to deal with illigitimate suppliers (read rebels and warlords) for the coltan mined by slave labor.

    Nokia needs cheap coltan.

    Granted that this is a bit of a leap. Mr. van Oordt is on many boards and Nokia does not have any other direct connection (that I could find) to AMF or Umicore. It does however demonstrate the byzantine relationships of one company to another and the difficulty of discovering them.

    I'd post the myriad links, but then that would take all the fun out of it.

    As for my bigotry and hatred....oh never mind. Just stick your head back into your balance sheet and continue to believe that it represents every cost of doing business.

    [ Parent ]
    Loopholes (3.50 / 2) (#397)
    by NFW on Sat Jun 15, 2002 at 10:43:11 PM EST

    > > In many cases this information is
    > > purposely obfuscated.
    >
    > This is factually untrue. Every public
    > corporation is required to disclose
    > major investments in its annual report.

    There are loopholes though, and there are hordes of people employed to drive huge amounts of money through those loopholes. Check out FIASCO, by Frank Partnoy. It's fun reading besides.


    --
    Got birds?


    [ Parent ]

    Problems foreseen and unforeseen by Adam Smith (4.20 / 5) (#356)
    by IHCOYC on Fri Jun 14, 2002 at 09:31:47 PM EST

    One of the moral problems of the corporation was recognised in part by Adam Smith in The Wealth of Nations years ago. Basically, in any public corporation, business ownership is at least partially divorced from business decisionmaking. This tempts the employees of the corporation --- including, ultimately, the CEO's --- to be both prodigal with spending, and prodigal with risk. After all, it's all "other people's money," which was Adam Smith's own phrase. There's always a hidden incentive to grant themselves perks at the expense of the company they don't really own, and to neglect the firm's business for personal gain. Smith called it "negligence" and "profusion," and put it this way:
    The directors of such companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own .... Negligence and profusion, therefore, must always prevail, more or less in the management of the affairs of such a company?
    To the drawbacks noted by Adam Smith, another must be added, that he probably had not foreseen. Very simply, liquidity is corrosive of ethics. Stock markets and similar devices create artificial "markets" where all of the stocks are easily convertible, one into another. They grease the path of money from one firm to another.

    If there is some improvident or morally questionable act that will bring some profit, then, the liquidity of the market erodes the bulwarks of conscience against doing it yourself, by practically guaranteeing that if you do not reach for the tainted gold, someone else will, and they will reap the rewards rather than yourself.

    This temptation always exists. Still, the problem is amplified by the existence of one-stop shopping for interests in corporate firms. If moving your investment from company A to company B was a chore that required you to sell in Philadelphia, then write a cheque to someplace in Seattle; and if each company decided for itself on what terms it would be bought or sold, the migration of capital would be checked, at least a little. Unfortunately, it's possible to move out of company A and into B with a single phone call. The terms and conditions of both purchase and sale are fixed by the government and the rules of the exchange, not by the firms themselves. Institutions like this simply did not exist in Adam Smith's day. It seems fairly obvious how these mechanisms influence corporate decisionmaking, and in general I do not believe this influence is favourable to the kind of society we ought to strive for.
    --
    "Complecti antecessores tuos in spelæis stygiis Tartari appara," eructavit miles primus.
    "Vix dum basiavisti vicarium velocem Mortis," rediit Grignr.
    --- Livy

    a share gives you vote (3.25 / 4) (#372)
    by Rainy on Sat Jun 15, 2002 at 01:25:01 AM EST

    Shareholders decided that they don't want dividents, otherwise they'd change directors who set dividends at 0. Here's the thing: there are companies that churn out predictable levels of income; they work in well-established fields where there's no big surprises left most of the time. For microsoft, situation is quite different - they're like conquistadors that jumped into aztec land and have to find gold before netherlands and england and france get their dicks in the pie. You don't bother them about peasants' lowly copper coins, they're after the really big gold mine: capturing the big slice of the industry in the making. Once *that* is done, you can be sure there'll be dividends. You may say that it's done, but no - industry is still moving fast. People say that um linux is threatening MS on one side, gov't on the other, sony, palm, on the other sides. MS investors are like citizen of a country at war - when US were fighting japan, nobody said "hey, why don't we build disney lands instead of invading iwo jima?"
    --
    Rainy "Collect all zero" Day
    Why the Stock Market is not Zero Sum (4.40 / 5) (#373)
    by harryh on Sat Jun 15, 2002 at 03:30:47 AM EST

    The Stock Market is not a Zero Sum game.
    The reason for this is quite simple: there is new money entering into the system every day.

    Here is a simple example.

    I found XYZ Corp and fund it with $1000. There are 1000 shares each worth $1.

    I take that $1000 and create a bunch of wigidts which I sell for a total of $2000. XYZ Corp now has assets of $2000 so just looking at the book value of my company each share should be worth $2. However, since I have proven my ability to create a profit by selling my wigidts chances are the market value of XYX stock will be over $2. Perhaps $3, perhaps $5..this is what the market will determine based on the populations future assesment of my ability to sell widgits.

    Make sense?

    Now stop spouting nonsense about the stock market being zero sum. How silly.

    -Harry

    An elaboration... (none / 0) (#384)
    by bitgeek on Sat Jun 15, 2002 at 03:39:56 PM EST


    Its not just the new money from investors, its the new money from profits that enter "the market" and justify the market value.
    -- Between 1982 and 1988 US Income tax revenues doubled from approx. $500 Billion to $1 trillion due to Reagans tax cuts.
    [ Parent ]
    In other words... (none / 0) (#417)
    by Chronos Tachyon on Mon Jun 17, 2002 at 01:36:41 AM EST

    If everybody claps their hands and believes in fairies, Tinkerbell can live?



    [ Parent ]
    what new money? (none / 0) (#418)
    by ryochiji on Mon Jun 17, 2002 at 02:10:46 AM EST

    > there is new money entering into the system every day

    Really, where from? If you look at the system at large, there is no new money coming in. There's finite wealth in the system, which means, when the rich get richer the poor get poorer. The middle class acts as the stabilizer, and is the reason why this faulty system continues to work.

    ---
    IlohaMail: Webmail that works.
    [ Parent ]

    New Wealth (none / 0) (#419)
    by harryh on Mon Jun 17, 2002 at 03:29:39 AM EST

    This is also a commenly held, but incorrect, viewpoint. New wealth is created every day. This is what new technology is all about. Figureing out ways to use our resources in more efficient ways.

    Think about it. If, for example, I come up with a way of growing more corn per acre using the same amount of seeds/fertalizer/labor/etc then I have created something from nothing and CREATED WEALTH.

    By your logic since the population of the world is growing at a pretty constant rate (and has been basically forever) we should all constantly be getting poorer. I think it's pretty clear that this isn't an accurate protrayal of the state of things.

    -Harry

    [ Parent ]
    New Wealth Through Trade (none / 0) (#420)
    by harryh on Mon Jun 17, 2002 at 03:36:46 AM EST

    Also another (and even more common) way that wealth is created is by trading goods and services.

    Let's not think about money at the moment, let's just think about barter.

    You are a farmer and have lots of food. I make clothing and have a whole stack of shirts.

    So you give me some of your food, and I give you some of my shirts. Both of us are happier after the transaction since we gave away something that we had too much of, and received something we needed.

    Both of us are wealthier!

    I strongly urge you to really think about that statement until you understand it, because it is a somewhat deep concept. There is still the same amount of stuff in the system as a whole, but since it is now allocated better the system is using it's resources more efficintly and has, in effect, become wealther.

    Something from nothing through trade.

    Deep huh?

    -Harry

    [ Parent ]
    How Broken? (3.00 / 3) (#378)
    by moonpolysoft on Sat Jun 15, 2002 at 09:00:57 AM EST

    I agree that the current system is broken. However, how do you propose we start a new system where the rich do not get richer. The solutions proposed in the article would work perfectly if the rich weren't so damn.... rich.

    Implementation of these changes would be a real problem as well. Seeing as how the rich are sickeningly wealthy and powerful, instituting a policy change that would keep them from being so rich and powerful is not going to happen. The only way to implement such a sweeping reform would be violent revolution.

    This brings us back to the class-war cycles pointed out in 1984. The middle class convinces the poor to revolt, promising that they won't be so damn poor. The rich are taken out of power, and the middle class becomes the upper class. The poor stay poor; all promises forgotten.

    So it comes down to a question of which system is "least broken." It is a fact that the rich will try and remain rich, leveraging their considerable resources to amass more resources. However, it is not so out of hand that the middle classes cannot live comfortably. That is why communism is such an abominable failure, it allows the rich to become so damn rich that the middle class and the poor are not that far off from each other.

    Almost no work? (3.37 / 8) (#379)
    by rempost on Sat Jun 15, 2002 at 09:44:49 AM EST

    Almost no work? Not to pick at a point but apparently the author of this article isnt or has never lived with a corporate executive. Trust me, I lived with one for 10 years. They work more and odder hours than anyone else I've ever met. Maybe you belive that all of the travel is fun. Again trust me, continous jet lag is not fun. Yes executives make a lot of money. But they earn it.
    /troll

    I agree, however (4.00 / 3) (#400)
    by techwolf on Sun Jun 16, 2002 at 01:51:12 AM EST

    Just because they earn what they are getting (not always true in some cases) that doesn't stop the system from being broken.


    "The strongest reason for the people to retain the right to keep and bear arms is, as a last resort, to protect themselves against tyranny in government." - Thomas Jefferson
    [ Parent ]

    They must be vastly overvalued then (4.20 / 5) (#409)
    by drsmithy on Sun Jun 16, 2002 at 07:00:03 PM EST

    No CEO is "earning" hundreds - or even tens - of millions of dollars a year.  No-one can be doing that much work - particularly when taking into account the pitiful wages people like nurses and teachers are paid.
    People who are really "earning" their wages are the grunts working the same 10 hour days whilst also trying to see their families, pay their mortgages and maybe even fit a bit of leisure time in there.  And, "trust me", not many of these people have personal assistants to deal with their mundane tasks, can easily afford babysitters and/or live-in nannies to raise their children and regularly get flown all over the place to eat $100 meals and discuss something most normal people would pick up a telephone to do.  Normal people get to deal with all the stress, frustration and life-difficulties of a CEO and receieve few, if any, benefits that are even remotely comparable.
    The wages of CEOs, much like those of actors and professional sportspeople, are so obscenely (and there really is no other word for it) out of scale with the amount of work they have to perform (and it's relative usefullness to society as a whole) that they should be ashamed of themselves.

    [ Parent ]
    Dammit (2.20 / 5) (#380)
    by MMcP on Sat Jun 15, 2002 at 10:16:30 AM EST

    I thought that the general ignorance of this post might be picked up by kuroshin readers.  This isn't slashdot, after all...

    General ignorance (1.00 / 2) (#401)
    by marx on Sun Jun 16, 2002 at 02:08:23 AM EST

    We did pick up on the general ignorance of your post.

    Join me in the War on Torture: help eradicate torture from the world by holding torturers accountable.
    [ Parent ]

    wait (none / 0) (#412)
    by MMcP on Mon Jun 17, 2002 at 12:10:41 AM EST

    But did I pick up the general ignorance of my post about the general ignorance of the post?  

    I'd have to think about that one...

    [ Parent ]

    the article in spanish (5.00 / 2) (#423)
    by Buenaventura Durruti on Tue Jun 18, 2002 at 01:47:46 PM EST

    Greetings

    I've found this article pretty interesting,  although I do not agree the whole, I've translated it and publish the translation at my tiny weblog.

    I hope Blarney will be glad with the "internacionalization" of his article.

    In Defense of Executives (none / 0) (#426)
    by copo on Wed Jun 19, 2002 at 06:59:34 PM EST

    You say that executives are paid more than they're actually worth; I don't know if I agree with that. While it is true that they get paid an obscene amount, I do see some justification for it.

    Take, for example, the imaginary company of XYZ. XYZ is a publicly traded company with 200 million outstanding shares, and each of those shares is currently valued at $20 a share. So, we're looking at a $4 billion market cap (200M * 20), which is essentially what the market says the company is worth.

    Now let's say that the CEO of this company commits suicide one morning. No one knows why, but there is tons of speculation and so major investors get worried. By the end of the day, the share price of that company is down $2 to $18. Something like that would lower the capitalization of the company by $400 million dollars (200M * (20 - 18)). That is just one day's loss, and there'd surely be plenty more of those due to investor confidence issues.

    This example isn't so absurd in light of what has happened with the El Paso Corporation lately. They've lost nearly $10 billion in capitalization in the past few months, and a large reason for that is that their Treasurer committed suicide, making investors think there was an Enron type situation going on there.

    I think the answer is obvious then as to why executives get paid so much. Essentially, they get paid so well because they are personifications of the business to investors; they are perhaps the one entity whose actions can result in a billion dollar swing in a company's valuation. When your CEO is really well respected and thought of as a man of a blinding genius, then stock price (and thus capitalization) goes up because investors see a bright future, as was the case of GE with Jack Welch. When your CEO is indicted for sales tax evasion (a la Tyco), then stock price goes down because no one has faith in who is running the ship. Maybe they don't actually do anything, but investors think they do, and by reaffirming those beliefs, they certainly contribute at least their salaries back to the company each year.

    The truth about corporate profits | 426 comments (390 topical, 36 editorial, 1 hidden)
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