The stock market has become a casino - a rigged one where the house always wins.
General Electric is no more. The last two divisions were spun off as GE Aerospace and GE Vernova, the former making the iconic GE jet engines and the latter, power systems. GE Health was spun-off last year. What the heck happened to this storied old company and why? The latter part is easier to answer, and many are now pointing the finger at Jack Welch, once lauded as a visionary, but now viewed as a villain. He literally ran the company into the ground chasing the almighty share price.
But how did this happen and why is it happening to companies all across America? Simply stated, Wall Street became obsessed with share price and would do anything to keep the line going up, even if it meant faking it. As a result, a number of poor incentives were created, which in the long run, meant that companies were gutted for short-term gains.
Stock Options were a big part of the problem. Executives were offered huge tranches of shares at fixed prices. If a CEO is offered a million shares at $10 a share, and he can drive the share price up to $20, he ends up with a $10M payday as a result. Bear in mind that share price is based on market perception, which can be driven by real profits and earnings just as easily as it can be by faked-up accounting practices (such as employed by Enron).
Share price, as we have seen with "meme" stocks, can be hyped up on the Internet with a pump-and-dump scheme. Pump-and-dump schemes are illegal, of course, but the fines are laughably small. As I noted before, one famous New Jersey teenager was caught up in one, and when the SEC came knocking, he said, "do you take a check?" as the fine they hit him with was probably 10% of what he made in his scam.
Pump-and-dump involves using someone else's company as a mechanism for fraud. Stock options merely incentivize executives to pump-and-dump their own company's stock. So you hype up the expectation of future profits or future technology, while burying the real truth in boring quarterly and annual statements that most retail investors never read. But those retail investors are the ones causing spikes in share prices.
The executive who has stock options is only incentivized to keep the company solvant until the day their huge stock options actually vest. After that, they don't care - they wait for the Board of Directors to remove them, and get paid in a pre-negotiated "Golden Parachute." It is like playing at a casino where you never lose and take no real risks.
There are other ways to juice the share price. Layoffs are one way to boost the share price as Wall Street looks favorably upon them. Overnight, you have cut your overhead and increased your profitability by the same amount. So if you lay off 10% of your staff, you might cut your overhead by 5%, which in turn makes the balance sheet show a 5% gain in profit. That's a lot. Of course, in the long term, such layoffs may be harmful, not only for employee morale, but for R&D needed to keep the company competitive. You might be able to "float" selling last year's product for a while, but eventually, your competition will steal away your business.
Stock Buy-Backs are a weird way to boost stock price and were once deemed illegal, as they were outright share price manipulation (and still are!). By purchasing back your shares, not only do you increase the share price (momentarily) by making each remaining share worth a larger percentage of the company, but you skew the demand curve for the shares, such that other buyers have to pay more - a lot more - to compete against you. Oddly enough, many companies do buy-backs not when their share price is low, but when it is high. Later on, when the dust settles, people realize what a shitty deal they made - for the shareholders. But timed properly to coincide with their stock option vesting, it helps boost the payday for the CEO.
The problem with stock buy-backs is obvious - the amount of ready cash available for the company to use for expansion or R&D is diminished. The company has fewer reserves to fall back on. Often, the buy-backs are financed by debt - which is the number one killer of old-line companies. Amazon didn't destroy brick-and-mortar, onerous debt did. Stock buy-backs trade long-term stability for short-term gains, for shareholders and those with stock options.
Boosting Profits is one way to boost share price - and an incentive to "cook the books" to make it appear the company is more profitable. This is what destroyed Enron - if the company ever had a real business model to begin with. Techniques like "Mark to Market" can show phantom profits for contracts that have not been executed or investments owned that have gone up in value. But real profits have to be realized to be real. Otherwise, it is just "profit on paper" and that money can't be spent.
Profits can also be boosted in other "legitimate" ways, such as layoffs as discussed above. Or, you can gut the content of an old-line product and keep selling it based on brand awareness before consumers catch on. For at least a few years, you will show a spike in profitability, before the reputation of your product is ruined. By then, you've cashed on on tens of millions of dollars in stock options and moved on.
Jacking Dividends is another way to goose the share price and some companies have been known to increase dividends even as the company is losing money
The problem with chasing share price, particularly by using short-term means, is that the market constantly adjusts share price based on profitability or perception thereof. So, for example, you lay off 10% of your employees, the share price might show an increase of, say, 5% or more, based on the expectation that profits will go up by a corresponding amount. Problem is, you can't do this over and over again. It is a one-time trick, and usually a sign of poor management - either because the company was horrendously overstaffed, or because management is throwing away their brain trust.
Similarly, you can use one-time accounting tricks to make the company appear to be more profitable on paper, but they just raise the expectation for the next fiscal quarter. Gotta keep the line going up! And you can't keep the line going up, forever.
Closely held companies - other than those owned by "Venture Capitalists" - can do things for the long haul and not have to worry about satiating the needs of shareholders and Wall Street. They can concentrate on real profits and long-term viability, and make decisions accordingly. Such a company might endure short-term losses to invest in new technology.
Tesla, as a private company, could invest in EV technology, while other public car companies were afraid to invest. Once they demonstrated the technology worked, they went public and made some shareholders (one in particular) fantastically wealthy, at lest on paper. Only then did the public companies (worldwide) jump on the EV bandwagon, causing the EVglut and price war we see today.
Of course, other privately held companies are taken private by VC firms just to set them up for a subsequent IPO. Juice up the valuation by spinning off divisions, lay off a ton of people, run away from your pension obligations - and then sell the polished turd that remains to Johnny Q. Public in an IPO. There is no shortage of suckers thinking they will get rich this way.
Part of the problem for GE was that Jack Welch went on a buying spree, buying everything from NBC to GE Capital. I once had a lease from GE Capital, when I had to install a new unitary rooftop A/C unit on my office building. I made all the payments for three years and then they sold me the unit for a dollar. I wonder if they would have repossessed if I stopped paying. The cost of removing the unit would have exceeded the remaining payments.
GE Capital got caught up in the same problem - pushing the line up. To keep showing "Mark to Market" profits, they had to keep making deals - deals that looked good on paper, but were actually poor risks. They got caught up in the subprime mortgage mess - loaning money to people who had no intention or means to pay it back. They sold a plethora of long-term care policies for the elderly, not realizing how long the elderly can live and how expensive long-term care can be.
In the short-term, if you count these mortgages as "Paid" and these long-term care polices as profitable, you look like a superstar. But it is just a way of taking credit for profits that might be made in the future, if at all, often after you are long gone or even dead. The whole thing exploded and a storied old-line American company is no more - dragged down (again) by unmanageable debt.
So, what's the point of all of this? Only that stock-picking is for chumps. Yes, you can get lucky once in a while, with a share price that goes up. It is like winning at the casino - it encourages you to keep gambling, and eventually your losses will far exceed those random gains.
Young people - young men in particular - once they get a "good paying" job, are tempted to speculate in the market. And there is no shortage of people online who will encourage you to do this. I've seen this again and again - people touting how such-and-such stock is "going places" - "just last week, it went up 10%! Jump in before the train leaves the station!" And people like to be winners and fantasize about making it big in the market. But like any good casino, the only real winners are the ones controlling the games and that's not you.
The best "luck" I have had in the market has been by leaving money in Equity/Income funds (that comprise stocks that pay dividends and make real profits, not paper ones) and in buying individual stocks that pay dividends and actually make things and real profits. But even with the latter, I was a babe in the woods, not understanding the real fiscal condition of the company I was buying shares in. Were they cooking the books? Buying back stock? Loading up the company with debt? We mere mortals have neither the skills or the time to fully understand these things.
The worst way to invest is based on share price, particularly companies where the share price is shooting up for no apparent reason. The game is fixed, and not in our favor! Never play a rigged game - and all gambling is rigged. Gambling is not investing!
Sadly, when this sort of stuff gets out of hand, eventually something has to give and it all blows up in our faces, much as it did in 2008. The stock market is shooting up, profits are at all-time highs, and yet the average American isn't feeling the joy. A few people are getting very, very rich, while a whole lot of others are stagnating.
Eventually, something has to give.
