Stock Market Basics

I was listening to the Rush Limbaugh talk show today. It is disturbing that I find myself doing that more often lately. I used to listen to him back in the 90's and thought he was a guru. Then as I grew in Christ, I concluded he was a raving lunatic and not worthy of my time. But it seems there are many like him --- Michael Medved and others. They get on talk radio to rant and rave and insult all the public officials and desecrate so many people groups ... and they get paid tens of millions to do it. But I digress.

So Rush Limbaugh was trying to explain the American stock market. He said that when people purchase stock, the companies receive those funds. Rush went on to explain that the companies then invest those funds in research, growth, and other job-generating activities that are good for America. It seemed plausible enough. Until I thought about it.

Actually I don't know of too many stock transactions where the funds spent to purchase the stock were plowed back into the activities of the company. Look at all the Internet billionaires. Most of them started their companies, did an IPO and walked away with personal wealth beyond what common people can fathom. Their companies didn't "receive the money," and it certainly wasn't spent on job-creating activities within those companies.

So what does happen to the money that is spent to buy stock in a company? Well, I find it more commonly spent on things like yachts, furs, vacation homes, Colorado or Montana ranches, Pacific beachfronts, very expensive cars and other such things. The owners buy things that do nothing for their companies. Take for example, Mark Cuban, who sold his company to Yahoo! He bought the largest, most expensive house ever built in Dallas. Then he bought the Dallas Mavericks. He got married. Where are the jobs? Where's the R&D?

As it happens, I have come in contact with quite a few very wealthy people. Most of them got their wealth in this generation. It was a massive transfer of wealth too. It went from the pension funds, mutual funds and 401K's that average people depend on --- right into the pockets of the entrepreneur who started the company and led the IPO. Oh sure, some of it went into the pockets of the individual executives they hired to run their companies too. Meg Whitman at ebay, for example. She did handsomely, walked away a multi-millionaire and never will have to work again.

I used to work for EDS. It was owned by GM for several years. GM spun it off in the 90's and made a handsome profit on it. (When they'd bought it, they made Ross Perot a billionaire.) The money that GM was paid for EDS didn't go into EDS. It subsidized the dying Detroit auto industry --- which is still dying and even closer to death than it was back then! Many of us bought stock in EDS. Again, the pension funds, mutual funds, 401K's and other investment vehicles of common people. When HP recently bought EDS, we were paid for it. Nearly all of us lost a lot of money. HP paid us much less than what we had paid for the stock. But again, no R&D --- and HP/EDS now announce the elimination of thousands of jobs.

So, Mr. Rush Limbaugh, I beg to differ with you. Buying stock in a company may have been a noble cause at one time in American history. For the most part, it isn't today. Most people who buy stock aren't seeing that money turned around to grow the economic engines of America. Instead, it typically turns out to be a massive transfer of wealth, from my pocket to yours!