In Spite of What You´ve Heard, the Stock Market Can Still Make You Rich
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you ask the average citizen for an opinion about the stock market, you will likely hear that Wall Street is a nest of greedy and corrupt rats. At the risk of offending rats, there are good reasons for such a statement. But make no mistake, the fact that the stock market needs an urgent transformation doesn´t mean that investors should stay away from stocks until that happens. In fact, all this distrust and uncertainty may be you strongest ally in the search for superior long term returns.
The rise and – almost – fall of the greedy corporations
Corporations like Goldman Sachs (NYSE: GS) made tremendous amounts of money during the credit bubble, distributing gigantic bonuses for their senior management and taking undue risks to increase their profitability when general conditions were considered favorable.
A rising tide lifts all boats. It's not until the tide goes out that you realize who's swimming naked, said Warren Buffett. But when the tide came down, and these institutions were exposed in all their naked ugliness for everyone to see, they just couldn´t be made responsible for their own financial mistakes.
They were considered “too big to fall”; the global economy couldn´t face the added uncertainty generated by the collapse of the biggest financial institutions in the planet. So governments in the US, and then in Europe, used the public´s money to avoid an even more catastrophic economic scenario.
Not learning their lesson
Investors and the general public have every right to expect a more ethical behavior from these big Wall Street players after being saved from their excesses with taxpayer´s money. But unfortunately, these kinds of people don´t seem very committed to change their actions on their own will, if they are allowed to, they will continue calling their clients “Muppets” while trying to squeeze every penny out of them.
The Facebook (NASDAQ: FB) IPO scandal was one of the biggest blows delivered by Wall Street to retail investors lately. The stock has lost an almost 50% of its value since it went public a few months ago, and there is no sign of a bottom yet. What is happening with Facebook is not only related to the company itself, which has its own shares of problems, Wall Street banks decided to profit from investor´s anxious interest in the social network to bring it to the market at an exorbitant valuation and without a realistic analysis of the risks involved.
There are some signs of higher scrutiny from investors regarding corporate practices at these institutions: a 55% of Citigroup (NYSE: C) shareholders said no to the bank´s executive pay package this year. Although it was a bit of a surprise, this decision seems clearly rational and justified considering the lackluster returns investors in the company have received over the last years and the fact that Vikram Pandit, the company´s CEO, received almost $15 million last year in compensation.
Change is possible if we all start demanding better corporate governance, more transparent practices and higher ethical standards for Wall Street. It won´t be easy, and it certainly won´t be fast considering all the lobbying dollars and political connections Wall Street has. But the good news is you don´t have to wait for reform to happen to benefit from the stock market.
Making Money in an Unfriendly Environment
One easy way to avoid falling victim of unfriendly advice and biased recommendations is to simply ignore the noise coming from sources which don´t deserve to be trusted. Simply make a list of the best high quality companies to hold for the long term, and capitalize the chance to buy at low prices when the market gives you one.
Companies like Nike (NYSE: NKE) and IBM (NYSE: IBM) operate in very different industries, but they have many similarities when it comes to their fundamental attributes. For example, they both have rock solid leadership positions in their industries, supported by invaluable brands and unparalleled global scale.
Also, when it comes to their financial statements, both Nike and IBM have enough financial resources to go through any economic hurdles and a track record of growing dividends and share buy backs to reward their shareholders with cash distributions. It terms of qualitative merits and financial strength, Nike and IBM are unquestionable leaders in their respective industries.
As we can see in the charts, investors who bought shares of these two companies during the last recession, when their P/E ratios were at historical lows, could have achieved spectacular returns. This strategy has worked since the stock market exists, and there is no reason to believe it will stop working in the future.
There is a lot of truth in the widely held belief that investors cannot trust Wall Street to protect their money and help them to achieve their financial goals. But all this mistrust and uncertainty sometimes creates fabulous buying opportunities, and that´s why investors with a solid long term strategy can still benefit from the stock market and walk the road to richness over the years.
acardenal owns shares of IBM. The Motley Fool owns shares of Citigroup Inc , Facebook, and International Business Machines. Motley Fool newsletter services recommend Facebook, Goldman Sachs Group, and Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.