RE: Questions for Sam Beard:"Investor's License"

[Michael Jones <powderfinger99@yahoo.com>]

<<<<
I have concerns about this. Although I myself have money in a
Vanguard Index Fund, the massive amounts of money from 'private'
accounts going into the market as 'dumb' money could cause problems.
The 'irrational exuberance' that Greenspan spoke of would only be
accelerated. The point of the 'free market' is to reward those
businesses who effectively 'serve' their markets and those investors
who are 'smart' enough to figure out who those businesses will be.
This program appears to reward 'all businesses' equally? Where will
be the financial 'incentive' usually associated with individual
stock prices?
>>>>

If you look at the market very closely, you will see that there
isn't really any exuberance. Most of the gains in the index fund
over the past years have occurred mostly in the top 20-25% of the
stocks. The market is very efficient at finding the winning
companies vs. the losing companies. Maybe at any point in time
the market might be wrong. But over the long term, the market
will determine the correct value for companies.

I wouldn't call it exurberance. I would call it a supply/demand
problem. Everyone wants to buy the winners. Even with a big
stock like Microsoft, there are only so many shares available.
Demand forces the price up. It's that simple.

Fortunately for the index investor, they don't have to pick the
winners/losers. 

<<<
And 'who' will decide when the P/E ratios get to the point where 
the stock market will be a 'bad' investment.
>>>

If you ask me, I don't put as much emphasis on P/E ratios as
the so called experts do. Remember, just like other professionals
the "experts" have their own rules. It doesn't mean that I have
to value a company that way, because I don't need that "expert"
broker to invest.

If you look at how companies are valued today often times it 
has very little to do with traditional P/E ratios. I attribute
this to the wide availability of trading accounts. The traditional
investment broker will be obselete soon. If you get rid of the
brokers, you will find that average investors have their own
criteria for what is a good investment. As we have seen, this
often times has no correlation with what these 'experts' would
call a good investment.

This leads to another point. If you get the experts and the 
government out of the way of people, they will take the 
initative to make their own decisions.

<<<
But of course, your example benefits from hindsight, which none of
us have 'for the future'. If that money had been invested in 1966,
where would you have been 5 years later. Indeed, if a person had
wanted to retire in 1975, that market would have had a significant
impact on the amount of 'monthly annuity' he could afford from his
'private account', compared to somebody retiring in 1990
>>>

Ahh, but you had at least 30 years of compounding before the
last 9 years of a bad market. This is the key. There is a very
simple rule called the 72 rule. If you had an investment that
averaged 7% return/year, divide this into 72 to get the 'doubling'
period. If your averaged 7% return for the previous 30 years,
the return for the initial investment was over 800%. Take it anyway
you like. Nearly all your money would have earned many times your
investment, even if the market went down 50% over the
last 9 years before retirement.

But, you don't have to do this though. As you approach retirement
just move some of the money to fixed income investments.

On the subject hindsight, I could give you investments right now
that will be worth significantly more 5 years from now than they
are today. It's really not hard. There aren't that many great
companies out there. Really. And there is ever increasing amounts
of money put into the market each year wanting to buy them.

<<<<
That is a clear mis-statement of the Clinton plan. The plan calls
for private sector money managers for the stock market component.
The 'gov't bond component' depends on interest payments, not capital
gains, so no active 'mamangement' is necessary. Whether Clinton's
plan is good or bad, it does not 'keep the money' in Washington as
you allege. Indeed, most of the criticism has been directed toward
that part of the plan that
sends part of the 'money and power' elsewhere.
>>>>

But, you forgot about the matching and default components of 
the plan. There will most likely need to be at least a 
thousand bureacrats required to determine who is worthly to 
get the benefit. The match/default contribtuions are government
money. They decide who gets it. If this isn't a power grab, I
don't know what is.

Read the proposal carefully. It says:

"98 million adults would receive an automatic government 
contribution to their Universal Savings Account every year."

"In addition to the automatic contribution, the government 
would match..."

This plan uses money that is not yours! The bureacrats will
take the surplus and determine who gets the benefits. How
is this different from Social Security? There's nothing
personal about these accounts! There is no direct correlation
between your taxes and your contributions.

Michael