Random Thoughts

Greed, Stupidity and Market Follies

Human nature is a coin that flips between greed on one side and fear on the other side. Unfortunately this coin for most investors lands on the edge most often when flipped and the edge is stupidity. Take a profit making biotech company like Genentech with an innovative edge. Its market capitalization is over 90 billion dollars and yet its annual profit is about one billion dollars. There is always the lure of pie in the sky, but there is no guarantee that it will be fulfilled. If one had 90 billion dollars to spare and put in the relatively safest investment of 30 year US treasury bonds at 4.5%, it would yield an annual return of 4.05 billion dollars. Assume for a moment that the sales of Genentech would grow at 50% per year and the profit margins would be 50%. Assume that its profit margins would grow at 50% too and possibly slightly more. Thus its earnings in five years would be over 8 billion dollars or nearly $8 per share. It is highly unlikely that this would happen and far more unlikely that this astronomical growth rate would continue further on. At today's market price of the company, the 90 billion dollars compounded at 4.5% for five years in treasury bonds without change in interest rates would yield one nearly 22 billion dollars in return. Yet foolish investors buy the stock.

The story is much worse for Sirius Satellite Radio and XMR Satellite Radio which make a loss and are yet priced at a combined market value of nearly 17 billion dollars! How does this irrationality prevail in markets and what does it tell us about the integrity and fairness of markets. There are two major problems with the so-called free market capitalist system which detract from its good points. There are the vested interests of market makers and underwriters, who have an interest in keeping the stock price up, until they have distributed their inventory to foolish mugs. They issue recommendations on stocks that they hold positions in and make a market in.

The Sarbanes-Oxley legislation is a mere band-aid on a fatally hemorrhaging wound. The selfishness of money managers who benefit from fees and incentive contracts, irrespective of prudence compounds the problem of investor ignorance and herd mentality of momentum investors and money managers.. They are rewarded by the market upside at the cost of ignoring reality and rational valuation. It is very clear that no prudent investor interested in preserving capital with the responsibility of avoiding major losses, would not risk his or her own capital in such investments. The abrogation of personal financial responsibility to money managers who are not punished for catastrophic results, leads to a cavalier momentum based investment philosophy to the detriment of fiduciary responsibility. Mutual fund managers do not bear the brunt of poor performance and hedge fund managers are lured to risky investments because of their no lose contracts to treat investor funds with the same casual attitude as casino bettors lulled by thinking that tokens are not real money. It is our greed and abdication of responsibility and sanity that allow the roller coaster gyrations of markets and stocks.

There is also the connivance of accounting firms and regulatory bodies like the SEC, who are not guardians but collaborators in the mis-stated earnings. The silent acquiescence of a suborned financial press keeps the investor ignorant and allows the manipulative gyrations in stock prices. Many articles in so-called respectable financial publications are written by bribed dishonest reporters and there are many free publications in which writers pretending to be honest analysts are financed by vested interests. Undoubtedly our greed is our undoing, but the regulators wink a blind eye to allow this loot, while touting the great benefits of free markets to lull us into foolish investments or speculation.

Why would any rational individual who is not a gambler, park money into a stock with losses currently and a remote hope of profits into the distant future, if not brainwashed by crooked analysts, underwriters and investment banking houses with a clearly biased agenda. Anyone who closely watches the NASDAQ stock prices can clearly see substantial rises and falls in the bid and asked prices of many volatile stocks without a single trade of even one share. This is very suggestive of collusion of market makers without substantive proof. Their previous nolo contendre settlement with the SEC for over a billion dollars proves the point, and confirms the winking eye of colluding supervisory bodies to defraud the public and enrich the powerful.

Until the American public deluded by dreams of making a killing overnight, wises up like the Europeans and transfers assets to obtain a safe return, or demands strict accountability from the cavalier money managers indulging in no lose gambling, our markets are destined to this manipulative impoverishment of the naive and trusting public without understanding of the long-term catastrophe and bankrupting of the republic.

I have refrained from commenting on stocks in which I have an interest, but the entire market is frothy and real estate in a bubble. Greenspan has orchestrated this disaster and needs to be indicted as much as the unconcerned president and irresponsible congress, perhaps even more so, because he is intelligent, while the elected officials are self-serving morons with only a talent capable of fooling an even more idiotic electorate


More by :  Gaurang Bhatt, MD

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