By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK
As many readers will know, I am not the greatest fan of stock markets. I consider most activity on such markets to be exploitative because of the asymmetry of the information available to investors. Much of it, from the pay directors take to the actions of most market managers, I consider to be rent seeking. The idea that equities provide strong returns is pretty much an urban myth, in my opinion, based on selective reading of data in those periods between market crashes.
There is quite a lot of evidence to support my view in an article by long-term and highly opinionated equity investor Terry Smith in the FT this morning. As he notes he did this based on ‘a research paper by Hendrik Bessembinder published in the September edition of the Journal of Financial Economics posed the question “Do Stocks Outperform Treasury Bills?” with some rather worrying conclusions for most equity investors.‘ I should make clear that the research is US based. I have no reason to think that performance in the UK is any different.
The main conclusions is that the majority of shares do not perform nearly as well as government bonds. It is an exceptional few that make it look as though shares outperform gilts.
Since 1977 the median new shares issued on the stock exchange has delivered a negative rate of return, even with dividends reinvested.
On average, a quoted security has a life expectancy of just 7.5 years over the 90 year period studied. No wonder short-termism is rife.
And as he notes:
Just five companies out of the universe of 25,967 in the study account for 10 per cent of the total wealth creation over the 90 years, and just over 4 per cent of the companies account for all of the wealth created.
So, what is to be learned?
First, the stock exchange is not a business funding mechanism: it is a business exit strategy for most companies.
Second, most people are fools to take part in this game.
Third, if you insist on taking part only invest in the best stocks.
Fourth, since you have no way of knowing which ones they are, invest in a market tracker.
Or fifth, buy gilts.
But whatever you don’t believe the story that the market deliver higher rates of return than government bonds: 96% of it does not.
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So much for that “invest in the stock market for your retirement wealth” idea. Y’now, the one that justified the 401k …
When 43 pushed the privatization of Social Security through more 401k and similar approaches my immediate thought was that he was rationalizing the transfer of wealth and increased fees to Wall Street. Someday there will be a post-mortem about Neo-Liberalism and that episode merits at least a footnote. To escape the memory hole.
Don’t forget that Clinton had reached a deal with Gingerich to privatize up to half of the Social Security Trust Fund in the stock market, which was only derailed by the Lewinski scandal. Clinton was scheduled to unveil this at the State of the Union address the week after the Lewinski story started to break, and pulled back because he was advised that if he were impeached he’d need the Democrats in the Senate to avoid conviction. Google “Robert Kuttner” “Clinton” and “Social Security” to get the details. There’s also a book called “The Pact” by Steven Gillon that documents the back channel negotiations, which were conducted by Erskine Bowles, Clinton’s last Chief of Staff.
It would have been the ultimate Neo-Liberal betrayal of the party of FDR, but we were saved by a blue dress. Amazing story, not nearly as well known as it should be. We might have been spared the Hillary Clinton phenomenon.
P
It would work if the government guarantees a certain rate of return and guarantees your SS payment thru 0 interest loans when the market goes down.
Your tax payment goes into a market index fund and you get 8%. Govt keeps earnings.
If market goes down and youre receiving payments they are loaned to you at 0%, creating an automatic stimulus for the economy.
When Market fund goes back up, the loan is repaid from earnings.
@Todde
November 8, 2018 at 9:04 pm
——-
I don’t want my Social Security benefits to be any kind of loan that has to be repaid. That just gives the government another way to cut my benefits at some point.
I don’t want Wall Street to get one penny of the contributions I have made to Social Security for the past 50 years. They don’t deserve it!
Your proposal is no more than a neoliberal justification for subjecting the Social Security system to the depredations of the “Market”, allowing the rentiers to get their cut off the top.
No thanks!
Remember that taxes don’t really pay for government expenses in a fiat system; don’t forget MMT.
Accounts are not real wealth any more than the map is the territory (CF Korzibsky and general semantics). The stock market, as well as the bond market, are accounting gizmos, and accounting is not actual wealth creation, and neither does owning stocks or binds produce anything real.
I think youre safe.
But your social security taxes are being borrowed by the general fund right now.
And their still talking about cutting your payments.
Obama had a deal sealed to shut down Medicare and roll it into Obamacare and start a 5 year winddown of Social Security. Then Occupy got rolling and he lost control of the narrative for 90 days and was worried that a real ‘American Spring’ might get rolling.
So one guy with a sign and a tent changed it all
Anyone investing in bonds in the low interest rate environment that has prevailed these past ten years would disagree, I think.
I call rubbish on this article. Not my experience. My investing strategy is to follow the oligarchs. Invest in stocks that make money by destroying the planet. Take profits when things look toppy. Reinvest dividends.
Buy bonds at your own peril. Maybe when rates are in the 6% plus range but we’re a long way from that.
The last 10 years (or any other small set of time) is specifically not the time scale that this article addresses.
Quoting from the article:
“Invest in stocks that make money by destroying the planet.”
Another good reason to not participate, IMHO.
The financial advisors (phonies) would agree with you,
@Valiant; Slim; Koos; oh:
Have it your way – be poor. I’d rather have money than snark.
I have practical experience and have done better in equities.
The time scale of the article is 40 years – in our current economy 40 years ago is ancient history. And they focus only on new issues, which represent a fraction of total market cap. And I doubt many financial advisors would agree with me as I a) don’t employ any of them; and b) find them to be a repository of groupthink and always to miss inflection points.
I dismiss anyone advising bonds in the current interest rate environment. Unless you want to end up with less money than you started out with.
while it’s great that you are succeeding in the market, remember that we have had 10 years of qe and stock buybacks. I hear student loan bonds are very lucrative if you’ve got enough dough to make a position…
And yet I can reasonably anticipate being retired for 30 years. Certainly SOME of the money in my 401(k) will have been there for 50 years.
Jeez, next you’ll be telling us that buying Lotto tickets is not a financially sound investment strategy.
Skip, dissing the lotto is uncool.
After all it’s “America’s Retirement Plan”.
Sorry Tom, I meant no disrespect… on the 1st and 15th of every month it’s the eternal question Alpo or Lotto.
Quote from Econ. prof. circa 1974:
“The stock market is the only form of gambling legal in all 50 states.”
(I doubt he originated that statement, but that’s the 1st time I heard it)
My favorite investing quote is:”The only number from management that I believe is the one on the dividend check.”
This does not mean the average company goes bankrupt in 7.5 years. Acquisitions also remove quoted securities. I don’t see the link between how long a security is traded and whether or not the underlying assets are managed for long or short term.
The dot com bubble sure had it’s share of here today… gone tomorrow stocks but, I’m also wondering if they took into account many of the mergers and aquisitions that occurred during the lead up to the bubble’s popping.
Anyone know the implications for MMT?
I’m thinking, “yup, synchs with MMT…”
But amiright?
Or not?
Richard Murphy is a strong advocate for MMT so it likely syncs closely. His blog is one of my go to sites.
Thx ;-)
Good to know that – at least as of 9:30 am PST – I’ve not yet hit full cray-cray ;-)
However, given your confirmation, the implications of this post are…. epic.
Where do the profits come from for buying and selling stocks: they come from the smucks who pick the wrong stocks.
The issue here is that companies only get money from e events:
1. During the initial IPO
2. If they issue new shares afterwards, which dilutes existing owners
Other than that, you are not, when you buy a share, sending money to the bank account of the firm that you are investing in. What are you doing? Sending money to the person who you bought the share from. It is pretty much speculation. Capitalists hate to admit this idea.
Also, companies that buy back shares or pay dividends are taking money of their cash flows and giving money to the shareholders.
In this regard, capitalism is not a good way to allocate capital. It can be used for various types of manipulation, an example being a share buyback right before executives cash in their stock options.
The social value of this is deeply negative.
Here is the university website
https://wpcarey.asu.edu/department-finance/faculty-research/do-stocks-outperform-treasury-bills
It should be noted that they are discussing individual stocks, as opposed to an index fund.
Years ago I read in Marjorie Kelly’s The Divine Right of Capital that 97% of all stock trades never contribute one direct penny to the Company who’s shares are traded. It’s purely a speculative game.
It was the book that first woke me up 15 years ago to the way our financial system really works. Needless to say, this site has become my ongoing educational resource.
Stock prices are a zero sum game. Every extra dollar the seller of a stock gets is an extra dollar that the purchaser has paid to secure a share of future profits.
IMO stock markets in and of themselves both create and destroy “value” in much the same way that a casino does, including largely hidden social costs. While there is little in the way of public data to support either a pro or con view and setting aside issues of manipulation of market prices, the view that stock markets themselves create value by enabling price discovery is integral to neoliberalism. I agree with the view that the related long-term “financialization” of the economy contributes to recurring speculative asset price bubbles and leads to long-term economic stagnation while enriching a few.
Ding!
Somehow, it feels like this line badly needs my Dumpster Fire emoji.
Indeed.
“price discovery is integral to neoliberalism”
I would have thought it’s the exact opposite ?
(Perhaps your “indeed” was ironic ?)
It’s the inequality of information (ie price discovery) that makes the stock market so profitable for the “right” people.
The Fed’s years of QE is another factor that has made price discovery very difficult.
I believe that the concept of price ‘discovery’ is already an important element of neoliberal framing, and that Chauncey Gardiner has shared a profound insight. Discovery implies that there is a natural price, somehow prior to and independent of human/political intervention. The stock market is a way to embody the collective of individual ‘rational actors’, and give this collective transcendent power over individuals, corporations and nations. It is perhaps more clear when one looks at bond markets and the way they are used to ‘discipline’ nations whose fiscal policies diverge from the neoliberal consensus. The fact that the hand holding the whip is invisible is a feature, not a bug. The whipped feel the lash, les autres hear the crack and see the blood, but there is no recourse imaginable — because Markets.
Your point about information inequality is good, but I think that would be viewed in neoliberal doctrine as a minor flaw in the market, even if, for the main actors, it is the raison d’etre.
Strongly agree that Chauncey Gardiner has shown us a profound insight.
Yup, what the author describes as a flaw — “asymmetry of the information available to investors”, isn’t a bug; it’s a feature. But the real elephant soiling the room is who has access to all that free debt printed by the unaccountable private cartel we refer to as the Federal Reserve. Could you benefit from a zero-interest deferred-payment mortgage?
Even better “our” millionaire legislators are exempt from insider-trading laws and they in turn have immunized their investors. Clearly the most lucrative investment by far is political bribery. The new Wall Street Socialists have redefined capitalism and democracy as Orwellian doublespeak.
I agree — I think this post plays on its words. The stock market price for a stock indicates what speculators are willing to pay and sellers are willing to accept for the stock. These need have very little to do with the ‘value’ of the stock other than its ‘value’ in the stock market. That’s seldom been truer than in the current stock ‘market’. I’m not a very trusting sort so I don’t believe more than half the numbers in corporate reports. Many stocks stocks like Apple or Amazon tend to trade on ‘value’ instead of anything like what used to be called value. At a time when there seems to be no limit on the amount of money finding its way into the hands of the wealthy I’m not sure the selling of stock has anything to do with raising money for investments. Many firms can coin their own money through their many monopolies and monopsonies, and ‘retained earnings’ — a category I believe often labels earnings squeezed from the small sellers, suppliers, and labor thrall to the large firms. To me, asserting “Stock markets do not create value” is shorthand for a much deeper critique of our financialized stock markets.
Westinghouse in the days of George Westinghouse, General Electric in the days of Thomas Edison, Xerox in the days shortly after Chester Carlson … all created value. I like to believe that at least in some periods of the stock market their stocks represented and did not create but “shared” the value these firms invented and developed. I also like to believe at least some of the new issues these and other firms sold did indeed once help fund real investments in productive capital. But all that has become but romantic memory.
I believe the Corporate Management is busily engaged in cashing-out what real value remains within the firms they control and will continue doing so until all that’s left is a hollow shell servicing the bonds and notes the firm created as part of their liquidation process. The stock market is where speculators can bet against each other on the ebb and flow of prices moving toward a great twilight of our stock markets … and our gutted economy.
Strange that value and profits are synonymous here when it’s usually very helpful to differentiate between the two
I think you mean value and price paid — the idea that the Market assigns value through price paid.
ImPORTant distinction, I am standing on my chair clapping. Thank you, Professor Grimm.
This is like saying casinos don’t create value. Crazy talk!
edit: CG beat me to it.
Well, there’s entertainment value, just like casinos and horse racing, but that isn’t what they’re paid for – unlike casinos or race tracks.
An Indiana paper (Indy Star? used to print the stock market numbers facing the horse race results. My father was not amused when I pointed that out, since investing in stocks was part of his job. I thought it was hilarious.
Realistically, financial “markets” are an overhead cost, part of your management system for the economy. Not saying whether it’s MIS- management.
They used to say you can make money if you are right 51% of the time. Such a narrow edge – because the reverse is also true. This is a good argument for not wasting time and money on the cherished institution of the market. Nancy Pelosi was blabbering on about all our sacred institutions (cows) trying to cover her fauxpaux when she tried to defuse the demand for single payer with her stumbling, tooth sucking comment that “this is a capitalist country” and therefore we simply canot have anything so cost effective as single payer. I’m convinced she doesn’t know her capitalism from a hot rock. So now, armed with this simple demonstration of how wasteful the whole idea of a stock market is, I’m thinking the Market is a very questionable institution. Much better to be highly selective and deliberate about stocks and stock companies. Not just in the share-buying but in the whole company concept. If returns on government bonds are the best choice then why would anyone get upset about “the debt”. It’s the best investment. And I am left to assume this is true because that money is spent on valuable things in the first place. I’m also thinking how to do an end-run around Nancy’s new Institution-patriotism with a movement to provide everyone with a medical credit card. Why not? Everything else, including Nancy’s paycheck and percs, are on credit. What a velvet revolution, no?
I went to Richard Murphy’s websites and I’m not sure his new book “The Joy of Tax” will be a big winner here in the US. He may need to give it a new title.
ALSO — the link for Cambridge Econometrics should be updated to:
https://www.camecon.com/
[I guess they got a new webserver program?]
Interesting point. I suppose an easy proxy is using a large fund family benchmark mutual fund.
Since inception in 1976, Vanguard SP 500 had annualized return of 11.17%. Hard to beat that. Symbol is VFINX.
Or choose the Wellington fund offered by Vanguard. Balanced funds for stock & bond exposure.
Yes. And no bond fund even comes close.
@griffen you are a voice of reason on this thread – man these communists just don’t get it.
Yws the stock market is a proven winner.for roi.
The data was pretty selective to get the result it did.
As a wise person once put it. Facts are stubborn things. My capitalist views have taken a beating since 2008 but it’s still a capitalist society.
It’s amazing what is available online, for free, to seek and learn about major asset class investing over long horizons.
Your post supports the paper’s conclusion. In the USA, there are about 4,000 companies listed on exchanges and another 15,000 that trade OTC. Members of the S&P 500 are in fact the “exceptional few.”
Please expound further. This paper above suggests owning govt issued Treasury or Gilt bonds is more exceptional investment.
By the way, penny stocks and pinksheets are OTC for good reason.
The SP 500 is an Index, broadky reflecting the US economy by market weights. I consider it to be indicative of value added.
But please hold your 30 yr bonds.
It comes down to defining the data set. You and the paper’s author define “stocks” differently. Bessembinder uses CRSP data (NYSE, NASDAQ and Amex; so no OTC which would only make the ultimate conclusions even worse). The Wilshire 5000 is a better proxy. The author draws individual selections from CRSP then compares them to equal and market cap weighted versions of the entire data set.
To make a long story short, there’s a lot of junk in the small and micro cap segments of the market. The SP 500 conveniently sidesteps this junk. Furthermore, rebalancing rotates the index into growing companies and out of declining companies. Small cap growth stocks that perform exceptionally well become part of the SP 500. The SP 500 itself is skewed to the mega caps. These are the companies producing the majority of the wealth. 4% of 26k is about 1,000 companies.
The paper goes on to reconcile how the stock market can have a positive risk premium while most individual stocks produce a negative risk premium. The stock market is a pyramid with trillion dollar Apple and Amazon on the top and thousands of doomed small and micro caps on the bottom.
But, but, if this Chapworth Index is accurate, and it ‘smells’ way closer to real life than the ‘official’ CPI, then 11.17% ain’t all that hot.
Seriously. You dont understand what an 11.17% Annualized return really entails. Im questioning my devotion to this site.
I think that stock markets are reflective of value, they don’t in themselves create value. Certainly there is speculation and cheating, but in general, the value of a stock should increase as the value of the underlying business increases. Better to say that the price reflects the expected business in the future.
We’ve done fantastically well investing in stocks and mutual funds over the last 30 years. Not every fund went up. Not every stock went up. But the total gains far outpaced the losses.
Companies take money from the market by going public and by issuing new shares. They also hold some shares from some issues that are used to incentivize employees.
I think the original author sort of tilted the table by talking treating all securities the same. Likely the newcomers to the market are much smaller and have more risk of failure.
I’m also puzzled how they square this claim agains the historical value of something like he Russell 2000 index.
http://www.1stock1.com/1stock1_784.htm
“Since 1977 the median new shares issued on the stock exchange has delivered a negative rate of return, even with dividends reinvested.” If this were true I’d expect to see a lot more red in the historical returns. Maybe the word “median” is doing some heavy lifting?
This data would seem to indicate that corporations have consistently earned money and these profits should be reflected in stock prices. (I don’t know if these are in constant dollars).
https://tradingeconomics.com/united-states/corporate-profits
Its soaks up surplus money.
If we are.going to be the reserve currenxy for the world and run trade deficits evey year, the Stock Market will give you the best roi.
We have lota of cash, if lots if cash goes intonthe bond market, rates drop.
If lots of cash goes intonthe stock market, stock prices go up.
You kust have to time the crash
Hopefully someone can correct me here, if necessary, but hasn’t the stock market risen in a dollar amount roughly equivalent to the amount of QE pumped into the economy ?
No correction from me. The stock-casino representing “free-market capitalism” has risen in lockstep with the Central Cartel’s QE. The evidence, if circumstantial, is overwhelming, with countless charts showing an almost exact correlation. Pretty hard to argue against causation.
The 1980s financial innovation of sheer unadulterated genius that enabled the cartel to buy the market — legalizing stock buybacks — a syringe for mainlining monetary heroin straight into market veins. This is the new efficient-markets theory called “hindsight price discovery”. You will discover the true price and value after insiders dump their pumped holdings
The only “correction” coming is in the market casino.
You forget that equities are a form of money which C-corps can create at will and don’t necessarily have fundamentals underpinning them e.g. Jbonds sold for stock by backs or abuse of risk tools to lower credit weighing and deals between the sell and buy side marry go round.
Don’t know what to make out of the comment about communists e.g. old school classical capitalists likened the financial traders to rats in the back alleys or bars they once traded in. Not to mention the propensity for the financial traders to blow themselves and everyone up with them like clock work. It has only been during the neoliberal period that the FIRE sector gained a veneer of respectability through broad spectrum PR.
Something of a reference point to the Australian experience.
If the general managers of the 12 banks that burst in 1891 and 1893 had kept paid clowns to make fun of the valuations of city and suburban land, made by the old-established auctioneers and valuators of Melbourne in the land boom days, their banks would never have closed their doors.
Every bank should keep a laughing department where absurd valuations and ridiculous securities could be laughed off the premises. The easiest marks as borrowers were the building societies and the land and estate agents, and they had a right royal time asking for and getting advances. In those halcyon days nobody was ever refused a loan by a bank manager. So the banks opened agencies in Scotland, Ireland and England, and borrowed millions on deposit receipts for 18 months and lent them out in Victoria for 30 years, and a great deal of the money, for eternity.
It wasn’t a mad or pessimistic or despondent thing to do. It was one calling for laughter, for merriment, for jocosity.
Why should the good-humoured borrower explain to the dismal bank manager, irritated and worried by Head Office letters and circulars censuring him for not lending money fast enough, that though he had paid £1 a foot for land at Coburg or Glen Iris or Mentone that it was not in his own opinion worth the £10 a foot of his own valuation.
Nobody dared to laugh at these insane transactions, nobody was brave enough to say,
” All this business is frenzied, delusive and pure buffoonery. There must be a smash.
” And there was. Prices of houses and lands jumped higher and higher, day by day, nay, hour by hour, and more and more people were drawn into the maelstrom, into a true Walpurgis ride to sudden wealth.
Rateable property in cities, towns and boroughs went up by leaps and bounds from £53 to £86 million sterling in 5 years, while the rateable property of shire councils jumped from £71 to £108 million in the 5 years 1886-1890. It was all so dashed funny, because there was no solid foundation for all this paper wealth.
Production did not increase part passu, nor overseas trade, nor exports, nor shipping, except that imports increased literally horribly. During 1886 and 1890 in Victoria, railways costing Z8 ,000,000 and 486 new churches and chapels were built. To me it was all so ridiculous and amusing, and the best of the joke was that none of the leaders of the people in Press, Parliament, Church, or on the platform, ever uttered a single word of warning about the coming debacle, The terrible catastrophe so close at hand which brought ruin to tens of thousands of decent people and nearly smashed Victoria.
Bank assets rose from £41m in 86 to £63m in 91.
Deposits grew from £31m in 86 to £40m in 91.
After that they fell away and did not reach £40m until 1907, or 28 years later. I am writing of what I know because I went through that critical period on the inside in a finance company and in a property company as an executive officer, and when the panic stopped I was a member of the Stock Exchange.
“the view that stock markets themselves create value”
Value as determined by who? In terms of which inputs to achieve what outputs? As an example, a company experiencing challenges (or as I call them – problems) may need to hire more people to achieve long-term growth. However, if they do that Wall Street will hammer their stocks which will go down. If they cut their workforce instead, Wall Street will reward them by valuing their stocks even higher though the company has effectively sabotaged their future growth plans. Thus Wall Street is not doing price discovery so much as constructing their own outputs to be achieved by individual companies along some ideological goal. Perhaps they are trying to create the ‘perfect market’ by warping reality which is a neoliberal trait.
One aspect not touched upon is stocks are loans that never get repaid. If I pay $100 of a share and the company thrives. I get paid dividends in perpetuity. Plus, If I buy that share from someone who already had bought it (a trade) I am being paid when I actually provided none of the original loan (like a bank buying the “paper” from another bank). Someone calculated that the dividends paid by Apple have paid off the amount originally tendered by several hundred percent, which would make them the worst bank loans in all of creation.
Would not simple loans make more sense? (Yes I am aware of the abuses of the Japanese uses of banks, but they were abuses of a system, not the system itself that resulted in their decline.)
Risk and reward.
Too risky to get a loan? Then its equity financing.
I am a bit more optimistic than the author on the role of stock markets in raising capital.
I agree with the post-issuance market largely being rent seeking and I think it should be thoroughly regulated and enforced. However, the post issuance market is essential to provide the reason to provide the capital at issuance. Pure rent seeking, such as high frequency traders front-running transactions because they are physically closer to the stock exchange should be banned outright.
However, I think the author is wrong about the stock market being an exit mechanism is generally wrong. Entrepreneurs are inherently optimistic people. I believe most stock issuance, especially by new firms in non-bubble markets, are in the hope and belief that with this capital they can move forward and grow. But as anybody who watches restaurants openings and closing, new businesses are very difficult to make a go of it and a high percentage fail or wallow. But ultimately some do make it work, like Apple, Microsoft, Amazon etc. and go on to grow exponentially.
Our economy has historically grown substantially with a general improvement in everybody’s lives. It should be expected that the overall stock market should provide the financial growth to follow this economic growth in the long run. So people like myself are simply hitching our financial wagon to the belief that things improve over time and the markets will follow in general. That is the underpinning of index investing – if you invest in everything, you don’t need to know who the winners are in advance because you will have them. So over the years I have simply devolved my investing style into a blend of broad index and value index with some bonds and cash to reduce volatility. Since I include international stocks in that, I am simply betting that the world will continue to improve in general so that people who didn’t have toilets and clean water a decade ago will have it 10-20 years from now and then increase their comfort level beyond that over time.