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Abusing Investor Confidence

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As if over a decade of historically poor returns and a massive financially led recession weren't enough, Nasdaq OMX Group's (NASDAQ: NDAQ) recent initial public offering (IPO) blunders continue to make investors wonder if stocks are safe investments. Mistakes made on the Facebook (NASDAQ: FB) IPO were big news because of the company's size, but a half a day delay in the opening for tiny WhiteHorse Finance just seems to add more gasoline to the fire. The stock market needs investor confidence to thrive, let alone work at all.

Facebook Blows Up
The trading delays surround the much anticipated Facebook IPO was front page news on Wall Street and, unfortunately, on Main Street. While Nasdaq's failure to handle the trading launch smoothly was the first issue, the perceived overpricing of the shares quickly took center stage. Indeed, the shares fell sharply in the days and weeks following its debut. There were accusations of inappropriate sharing of information that quickly brought back images of the technology bubble and insider trading. It was a public black eye for Nasdaq and the entire investment industry.

At the end of the day, however, it was probably one of the most successful IPOs in history, from a company point of view, because Facebook received more money than it probably should have based on the price decline. This may seem counter intuitive to investors who expect IPOs to rocket in value, but the process is really intended to get the company the most money possible—not earn an investor a quick buck. This is why it is best when a new issue trades just about where it was priced, as it means the bankers were able to find the equilibrium price.

Near the Brink
Knight Capital Group (NYSE: KCG) was another recent high profile explosion that further tainted confidence. This company, once a highly respected floor trader, nearly went bankrupt when “trading malfunctions” cost the company millions and required it to be bailed out. Now this once proud company is the subject of takeover speculation. What Main Street saw, however, was another major blunder in the finance industry.

Of course such issues can't be discussed without bringing up the financial meltdown that was so integral to the 2007 to 2009 recession. While it is hard to pin the blame on anyone or any company, specifically, the finance industry was clearly a main target of all of the public hearings and news. The government bailouts of such giant industry participants as Bank of America (BOA) and Citi (C), among so many others, made the image of greedy Wall Street that much worse.

Then there's the whole Bernie Madoff Ponzi scheme that captivates the public to this day. Of course every con artist that has come afterward has been compared in some way to Madoff, which does nothing but drudge up old garbage.

Psychology Matters
Since the tech bubble burst in the early days of this century, investors have suffered through a litany of troubles. While it hasn't been a knockout punch of, say, Mike Tyson, it is certainly comparable to the claimed “No Mas” cry from Roberto Duran when he fought Sugar Ray Leonard and simply grew tired of the beating. This is a horrible thing for the market.

We now have a generation of employees entering the work force who believe that the stock market is a bad place to put their money. I've heard this time and time again from people who are 10 years or more my junior. It saddens me that a few mistakes have tainted such a valuable savings tool. More important, though, is the fact that the market needs people to believe in a better future or the next cyclical bull market is going to be a long and painful time in the making.

WhiteHorse Finance
For those who have read the bible, the fact that the recent trading issues surround a company called WhiteHorse could take on a larger significance. However, truth be told, the IPO was a small one and, when compared to the other blunders and abuses noted above, it's pretty inconsequential, too. That said, every time you put another straw on the camel's back, you risk breaking it. It would be nice to see some big things go right for a while, if just to fortify the belief in what capitalism can and, more often than not, does achieve.

Yours,


ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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