Risk is something we all take at one time or other, and for that matter, on a daily basis. We take a risk on everything! There is a risk that lightning will hit, an earthquake jar, plumbing burst, power go off, refrigeration cease, heating fail, roof leak, car fail to start, tire go flat, or a thousand kinds of accidents happen, be it in the auto, or a trip over a loose carpet. We are in no way immune from accidents or risk. When we marry or court, there is a huge risk that our intended may not be what he or she appears to be. Ask anyone. We assume that when we pump gasoline or diesel into our vehicles, that the fuel is pure, but many times, there is water or impurities in it. Risk, risk, risk, and all have to wade through them to the best of our abilities.
When we take a risk, and it goes bad, as in a marriage or offspring going the wrong direction, it can disable us mentally as well as financially. If you have ever had a marriage go on the rocks, it can be almost a death blow. But that’s a risk we mostly all take. When we have kids, we risk them behaving as we have raised them, but often they don’t, and it is tragic. So much for that. Now to risks in economics.
Those who bought stocks, or currently buy them, of course are taking a risk. Actually, a rather large risk, if one listens to the current news about World Com Health South, or Enrom, whose executives are now under prosecution. The defendants, of course, say it was all someone else’s fault when their stocks went to zero or thereabouts. Millions of innocent investors bought stocks either on the advice of their broker, or because the stock looked good. Why did it look good? Often because its price went up, and it appeared healthy. Did the stock go up because of manipulation of the books to make it look healthy and profitable? With World Com, according to the news, the president (a former basketball coach), borrowed $400 million, and used his stock as security. The profits weren’t going the way he wanted, and the stock was heading down, which risked the security on his loan. So, he manipulated (cooked) the books, or had his Chief Financial officer (CFO) do it, to make it appear as if all was well. It wasn’t. Millions lost their entire investment in World Com. With Health South currently, the CEO said there wasn’t nearly enough profit, and instructed the accountants to find a couple of million in profits that weren’t there to make it look good, and the stock to go up. They did, are under indictment, and the stockholders suffer.
I bought a stock at 18 cents, and a lot of it, and watched it go to 75 cents. Whoopee! Then a whistle blower exposed the executives of that firm with exaggerating everything about the profits, gross, future, and products. It now sits at a nickel. Fortunately, I sold at 23 cents, so didn’t take a bath, but a friend of mine didn’t, and her financial future has been wrecked. General Motors, the world’s largest maker of automobiles has a nice P/E ratio, which would make it seem to be a good stock. Take a risk and buy it if you wish, but not me. GM is so far behind in contributing to its retirement funds that it is scandalous, and its share of the auto world is shrinking. Both GM and Ford are in the same boat, and it is said that they don’t make a dime selling cars only financing them. How can they make money in finance with zero percent loans? I don’t know, but the CNBC guys say this is so.
The CNBC and like TV channels, always seem to preach that all is well, no matter how bad it is. Stocks have been nose-diving ever since the first of the year, with a couple of exceptions, but did the “experts” on TV tell us that the P/E ratios were bad, profit expectations gloomy, or off-shoring causing unemployment and layoffs? Have they told us that United Airlines is so broke and hopeless, that it is cutting off the pensions of its retired pilots, who served the line faithfully for decades? Why does United Airlines stock still trade at all? Why have stock brokerages been fined hundreds of millions of dollars, if all is well, and risks are slim in stocks? Still, the stock market, in spite of its abysmal record of late, is the risk hundreds of millions take on a daily basis, to the tune of over a billion shares a day traded.
With stated inflation at about 3% ( I believe it to be a lot higher), why do hundreds of millions of investors, still have hundreds of billions of dollars in banks, which are paying maybe a single percent of taxable interest per year? Because they don’t even realize that they are taking a risk? The dollar and banks are supposedly risk free to hundreds of millions of Americans, as are Money Market funds. They are indeed very risky. Money Market funds are not backed or guaranteed by anyone or anything. They can fail anytime, and there is no FDIC to back them. If a bank fails, the FDIC will pay the depositors, but only to $100,000. If they have more on deposit, they will get $100,000, and not a dime more. If the depositor has $100,000 in a savings account, at 1% interest, or even a hair more, as is sometimes the case, they feel extremely safe with dollars in a bank. But the dollar has lost 40% against the euro of late, and this means that their dollars have lost a lot of purchasing power, and especially against imported goods, which are a huge amount of American purchases. If one gets $1,750 interest on $100,000 in a savings account, and even if the dollar didn’t go down against other currencies, there is a direct loss of officially $1,750 in actual purchasing power, (3% inflation), but probably more like $10,000, plus the taxes must be paid on that interest. Why do so many people do this? Because they feel there is little risk, even though there is a lot. They buy stocks, because they feel there is little risk, and especially if a trusted brokerage does it for them.
They haven’t heard about the dart throwers. Every year, a certain company allows the office staff to throw darts at a board with lots of stocks listed on it. They invest in whatever stocks on which the darts land. Then their experts invest in their favorites, which they have researched and investigated. More than half the time, the dart throwers win. Lots of times, investors buy IPO’s or “Initial Public offerings.” This means a stock newly issued to raise capital for a fledgling firm. More than half the time, the IPO’s go down, rather than up. Why buy an IPO? Because it is a risk gamblers like to take. Actually, all stocks are a gamble, because no one knows what will happen tomorrow. If you had bought so called “Blue Chip” stocks 40 years ago, the risk is perhaps negligible, although some of the blue chips are no longer in existence. There is always a risk in the stock market.
If you had bought gold and silver in 1980 and held it, you would be in a negative position today. You would have bought at the top of a market, comparable to buying a NASDAQ stock at 5000, when it is now about 2000. The comparison is a bad one though I think, because there is a certain amount of gold being mined today, and the same with silver. There is a lot of paper from felled trees around though, and the presses are well lubricated. It may be, and is possible for the unscrupulous to manipulate the prices of gold and silver, but remember they are tangibles, not empty promises on a sheet of paper or passbook. Passbooks from banks make your dollars fairly safe, but how safe is a paper currency? Any currency. Of the thousands of paper currencies that have been issued over the course of history, none have ever survived, whereas gold and silver exist forever. They are historic money throughout history, and while the manipulators may do their thing, in the end, what better risk to take? Protect yourself.