What do you get when you cross a plummeting stock market (with no end in sight) with countless “new” investors (with unrealistic expectations) with a litigious society (in which no one ever takes any responsibilities for their own actions)? Well, you’re about to find out. Over the past year, the NASDAQ has fallen over 60% from its high and devastated investors from virtually all walks of life are looking for someone to blame. Retirees were feeling comfortable with their nest eggs and their abilities to live those twilight years off of their portfolios of high yielding, high risk “new economy” stocks. Today, many are thinking about taking that behind-the-counter job at McDonalds (if they’re still hiring). Professionals turned day traders had grown accustomed to that new life style of staring at CNBC all day in their pajamas, while executing winning trades from the comfort of their home offices. Today, many are heading back to the daily grind of that old “nine to five” (if they’re still hiring). College students had been shunning high paying offers from “boring” professions like public accounting, manufacturing, education, and consulting, while seeking out those readily available opportunities to be “dot.com” millionaires by age 28. Today, graduate school doesn’t sound so bad. Yes, their worlds have been turned completely upside down over the course of a year and someone (anyone, but themselves) must be held responsible.
Investment Analysts (high tech): Just a short time ago, these folks were considered gurus, geniuses, the toasts of the town (or at least, “the Street”). They recognized the promise of the new economy and devised truly “innovative” methods to determine the appropriate target prices for these high tech companies. They scoffed at price-to-earnings ratios, cashflow projections, and future profitability; such techniques had gone by way of the dinosaur. Instead new important measures like “web site traffic,” “engaged shoppers,” and “customer share of mind” (whatever that means) became keys to future performances. They often made their buy recommendations with an eye toward future investment banking fees. Even today, many “experts” refuse to accept responsibility, despite watching some of their picks fall in excess of 90%.
Brokers, Money Managers, Financial Planners: Just a short time ago, these “knowledgeable” professionals were touting their superior investment performances to all who would listen. Happy clients were so pleased with their double digit returns that they did not recognize (or care about) the commissions generated from the often high level of transactions. Top analyst recommendations were considered golden; pullbacks in the market were viewed as buying opportunities. Use of margin debt enabled their clients to purchase additional positions and brought a greater likelihood for higher returns. An ability to get their clients a few shares of that hot new IPO was always viewed quite favorably. In their opinions, being on the sidelines offered a greater risk than any potential downturn in the markets. Today, they stand accused of failing to disclose such risks and devising strategies that were not appropriate given the life situations of their clients.
Company Management: Just a short time ago, these pioneers of business were making all the right decisions to steer their companies (and the economy) into the bright future. Though many had yet to turn 30 and lacked any real professional experiences, their business models were structured to take advantage of the information age and the new economy. Despite showing no profits for the foreseeable future, they invested heavily in technology, advertising, and employee compensation packages (often filled with stock options). Now that those earnings have failed to materialize, they are cutting expenses, laying off employees right and left, and begging for much needed financing. Investors are crying foul over materially false and misleading statements concerning financial conditions and business prospects, particularly when certain corporate insiders sold shares at or near the stocks’ highs.
Alan Greenspan: Just a short time ago, the Chairman of the Federal Reserve was considered by many to be the smartest, most powerful man in the world. He was navigating the country through the greatest economic boom in history. He “bailed out” the global financial system from a potentially devastating crisis that was threatening the world economies. And now, in some circles, he is simply the pessimistic bum who brought negativism to the markets with his “irrational exuberance” comments of a few years ago; the “idiot” who raised rates way too much last year and waited too long to cut them this year (and by not enough). Wall Street, politicos, and small investors alike are now criticizing his policies in unison. (Most of them have no idea about the true role of the Federal Reserve, but somehow “know” he must be to blame.)
The Man (Woman) in the Mirror: It is certainly well within our human nature to pass the buck, shirk responsibilities, and blame others for any misfortunes we have encountered. However, in most cases, we had the final decisions over the investment strategies we implemented. We were the ones who became so caught up in the market euphoria that we acquired stocks based on tips heard on airplanes, at ballgames, and around the office water cooler. We listened to the pundits (glorified actors) on CNBC and other market related programs and believed the business had passed by the likes of Warren Buffett. We saw our friends and neighbors getting rich off of stocks we never heard of and followed their leads like a herd of sheep. We forgot the old adage, “If something seems too good to be true, IT IS.” And now we’re badmouthing every market analyst, investment broker, corporate exec, and even Alan Greenspan for guiding us astray.
So to be consistent with our society, let the litigation begin. Brokers will be heading to arbitration for not fully informing their clients of the risks of investing/speculating. Investors will claim they did not know the difference between a market order and a limit order; they never fully grasped the concept of margin; they thought they owned CD’s when they were really “naked put options.” Wall Street firms may be sued over the recommendations of highly compensated analysts. Suits may claim a conflict of interest existed when analysts issued buy recommendations for companies that generated large investment banking fees for these firms. Management at public companies will be sued for misleading investors, while taking profits themselves. The concept of “strength in numbers” will emerge as classes of “innocent” investors pool their interests to tackle the mighty corporations. Companies will fight back by suing individuals who attempted to manipulate stock prices for personal gain by posting false or misleading information in chat rooms and bulletin boards. In the end, the only true winners may turn out to be the lawyers who pursue these cases.
Now, I’m not suggesting that litigation is unwarranted in every situation regarding the stock market collapse. Certainly, some very appropriate suits will be filed. However, perhaps we can all look in the mirror, accept certain levels of responsibility, hold off on the blame game, and learn some valuable lessons about investing for the future. Then again, the Federal Reserve has some pretty deep pockets. Is it possible to sue Alan Greenspan?