Vanity is probably responsible for more crack-ups than any other character flaw.
The Greek tragedies almost always follow the same plot. Driven by some sort of vanity, a man challenges the gods. He is then humbled…usually in a gruesome or terrifying way. Prometheus, who stole fire from the gods to give it to human beings, was chained to Mount Olympus where eagles set to work plucking out his entrails. If that wasn’t bad enough, the poor man miraculously recovered every night… so the birds could come back and do it again, over and over, for all eternity.
Vanity gets investors into trouble too.
“There is record brokerage margin money out. There is record insider selling in the U.S. since 2000. There is record corporate buyout activity and mergers. Half of all corporate buyouts are for companies that are not profitable! Did you know that?” asks one commentator.
For confirmation, we turn to today’s International Herald Tribune, where we get more details on the Blackstone IPO. The article notes that the private equity firm’s founders, Stephen Schwarzman and Peter Peterson, will walk away with $2.3 billion of the $4.7 billion IPO. Peterson is retiring. He earned $213 million last year. So, the $1.88 billion he will get from selling his stake in Blackstone will help supplement his Social Security payments. Even at $213 million in last year’s pay envelope, he must have felt a little light in the wallet. The average pay of 25 top hedge fund managers was more than twice that much last year – $570 million.
But now Schwarzman and Peterson have hit pay dirt… along with the rest of the Blackstone team. The insiders are being taken out by the outsiders.
Let us pause a second to draw breath. We turn our heads upwards to marvel at the monumental vanity…the outrageous arrogance… of these poor outsiders… the retail investors who are buying Blackstone’s shares.
You will recall that every investor needs a certain amount of arrogance. Mr. Market sets a price – taking into account all that is known about an asset. No one knows the future, of course, but Mr. Market has a million eyes…and he sees all that can be seen. He factors the future, as he sees it, as well as the past, into his price.
Then, along comes an investor from Salem or Seattle or Sun City who says to himself: “I think Mr. Market has miscalculated. This share is more valuable than he thinks. It’s going up.”
What arrogance! The investor is making a remarkable wager – that he can outsmart all the rest of the investing public all put together.
But now think about the poor lames who are buying Blackstone IPO shares. Think of the Chinese government. When it comes to capitalism, these guys were born yesterday; they are still pink and soft. Out on the streets of Shanghai, Moms and Pops fresh off the farm line up to open brokerage accounts. And in the boardrooms of the Peoples’ Bank of China, the baby hacks – still wet behind the ears – who guard the people’s money have decided to buy Blackstone shares!
Of course, China is a special case. The billions the Chinese spend on Blackstone is chicken feed to them. They’ve got a trillion more where that came from. They can write it off as cheap tuition – part of the cost of learning how the market system works.
But other investors are merely playing make-believe in Disney World. Money from the Blackstone IPO will not be used to expand the firm and make it more profitable. Instead, it will go directly into the pockets of the people who know it best. In fact, today’s report tells us that the company is likely to show a loss for several years – because of the cost of the IPO itself. So, the investors who pick up Blackstone shares are betting not only that they can outsmart the entire market, but that they can outsmart Mr. Market’s smartest lieutenants. Schwarzman and Peterson started the firm with $400,000. Twenty years and nearly 200 deals later, it is worth $32 billion. How can an ordinary retail investor hope to put one over on this dynamic duo?
Well… good luck to him.
The real problem is that most investors completely misunderstand what business Wall Street and the City here in London are in. A baker trades his bread for money; but what does a Wall Street financier trade? His expertise is at making money. If he sells you a share of a stock, he must believe that he can make more money selling it to you than holding onto it. His offer to sell must be weighed against the gravity of his professional ability. The heavier his expertise, the more the offer is suspect. In other words, the more able your financial advisor, the more cautious you should be when taking his advice.
Wall Street is fundamentally in the business of selling things it doesn’t want to hold. Blackstone founders held onto their shares for many years, as the company rose to astounding heights. Now, they are selling as Blackstone IPO’s. Draw your own conclusion.
Our conclusion is that the financial industry makes money for itself by unloading investments to the retail public, after they’ve been stripped down as close to the bone as you’ll see outside a video containing a certain “hotel heiress”.
The assets are squeezed, picked over, packaged, marked up, advertised, promoted, and then unloaded at retail prices. Often, the best parts are held off the market for themselves, until the insiders choose a time, place and method of dumping them on the public for the maximum profit.
In other words, the financial industry doesn’t create wealth; it redistributes it – from investors to itself. And now, in the midst of this Great Global Bubble, business has never been better.
Markets and Money