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

[Michael Jones <powderfinger99@yahoo.com>]

<<<<
What 'top 20-25%'. Are you saying the largest, blue chip stocks?
If so, then we may already be seeing the effects of Index investing,
or risk aversion (staying away from the small companies that many
claim are responsible for most of our growth). If you are just
pointing out that some companies are growing much faster than
others, how do we know that indexing will capture that? And indeed,
indexing will 'reward' those companies NOT AT ALL. It will reward
all in the index equally.
>>>>

The top stocks I was referring to are the high tech growth stocks.
These stocks have accounted for most of the gains in the S&P500
over the past 5 years or so. Here's some of them, listing their
1998 returns:

MSFT: 125%
DELL: 220%
EMC: 120%
INTC: 75%
WMT: 100%

I put Walmart in there even though it's not a high tech growth
stock (we could actually have a good argument about this though -
there are some who think WMT is a high tech company based upon 
its process/inventory management).

As far as rewarding companies in the index, this is worth noting
how this works. The "market" is reported in the media as the
DOW-30 stocks. This index does in fact work as you suggest, all
stocks are weighted equally. (You can buy all 30 stocks in an 
index trust called DIA).

However, modern indices do not weight companies equally anymore.
They weight them based upon market cap. So, Microsoft has the 
largest weight because it has the largest market cap. When you
buy the index fund, the largest chuck goes into Microsoft stock,
in proportion to the market cap of Microsoft. 

So, the growth stocks are rewarded in the index for their success.
Oddly enough, the companies themselves can hedge their own stock
to make money. They have done this very successfully, I might add.

The index itself only returned about 30% last year. So there were
many companies in the index which did not do as well that balance
out the success of the top performers.

<<<<
By your own description, Index investing makes
NO DECISION. It has NO 'market efficiency' to contribute. 
>>>>

Well, this should be explained further. There is a decision
maker: the folks at Standard & Poors who own the index. They
have criteria that they use to determine which companies go
into the index. So they are the decision makers.

<<<<
Microsoft is not a good investment because they have a lot of name
recognition, or are 'cool' or are a 'winner'. They only become a
good investment based on returns. And the bottom line is that, the
higher the stock price is for a given profit, the less the dividend
return. Yes, the assets which help to contribute to future profits
are important, but in the end, how much can an investor afford to
pay for every dollar of profit? The return from increased stock
prices must ultimately be constrained by the underlying earnings.
Otherwise, the market would not be acting efficiently. Bond rates
at some point will look more attractive.
>>>>

As companies go, Microsoft is an unusual animal. They have relatively
little "hard" assets. They do not pay a dividend. Objectively,
Microsoft should not be valued as much as it is based purely
on earnings. But earnings are not the whole picture.

<<<
Are you just smarter than everbody else, or do you have truly
psychic abilities? Please, share some of those
hot tips with those of us who are not quite as smart and 
are psychically challenged.
>>>

Any of the companies listed above are good stocks. They all have
top rate management and good business plans. There just aren't
that many Michael Dell's, Bill Gates, etc. in the business world.

<<<
Beauracrats will not make any decisions, eligibility being
determined by the statute 
>>>

Stop right there. I think I have made my point.

~~~

The discussion here has gotten off track. 

The main point is that I can say with almost certainty what my 
investment return from Social Security will be. It's almost 
"guaranteed" to be negative. There is not risk involved in this
investment. It's going to lose money for sure.

So the question is, should I put my faith in government fixing
this problem.  Or should I put my faith in people like 
Michael Dell to secure my retirement? Who should I trust more?
Who has a better track record?

<<<<
But your initial investment is just your first week's or year's
contribution (5% ?) from your wages. The maximum return (800%) is
on the least amount of money. The 50% decline is on a much bigger
pie. Using your figures, it is easy to see that this person will
have about 1/4 of the money that somebody retiring in more favorable
times would have (the 50% drop on top of the one 'lost 7 year
doubling'). For a low or middle wage worker, this can wipe out
everything above the 'means-tested floor'. And that fact can lead
to the type of disincentives we see in the Chilean system.
>>>>

Taking your advice, it appears that government is the better bet.

Michael