Wanna Be Rich?

By Robert M. Liu


Working Americans who put money in Social Security get an annual return of less than two percent (2%) on their investments. If you are one of those who want to be rich, you know that kind of meager return on Social Security investments won't carry you all the way to the realm of the rich and famous. And what's more, according to experts, America's popular Social Security program if not reformed will be broke going forward because the working population is not big enough to generate sufficient payroll tax revenue to meet the needs of the large numbers of retiring baby-boomers in the coming years. Hence, the Bush administration has a Social Security reform plan which would allow young working Americans to put a small part of their Social Security money in private investment accounts for a better return under certain guidelines.

Make no mistake that the obstructionists of the Democratic Party's left wing (i.e. the so- called "liberals") will employ all the demagogic scare tactics in their play book to ensure that the administration's Social Security reform plan will be dead before it is even born. In fact, they are already telling the public: (1) Social Security will remain solvent for many years to come; (2) to allow young working Americans to invest their Social Security money in stocks and shares will bankrupt Social Security because the stock market is a very risky place. They say: Look at the stock market. Look at the Nasdaq. Look at those technology stocks. They are all down sharply. Why should we encourage working Americans to risk their Social Security money in the stock market?

Sounds plausible, but strangely, in their eagerness to block whatever Social Security reform the Bush administration may propose, the liberals (read the left-wing Socialists) appear oblivious of what their great leader Bill Clinton had to say about Social Security during his second term in the White House: "Save Social Security first." At the time, as a fast-growing economy in peace time generated super tax revenues, enabling the United States not only to eliminate budget deficits but to come up with budget surpluses, he knew that his Republican opponents would demand that the tax burden weighing on the American people be reduced. "Save Social Security first" was his excuse for vetoing Congressional tax cut bills.

At one point during the 1990s bull run, Bill Clinton also commented on securities investment in a TV interview, saying over the long term, corporate stocks would yield better returns than treasury bonds. He proposed to let a government-controlled fund invest Social Security money in corporate stocks and shares. Apparently, he was not as much concerned about securities investment risks as his liberal followers currently want the public to be. He was looking at the superior long-term return on stock investment and was certainly correct in his comment about stock investment.

Yet, in a Congressional hearing, Federal Reserve chairman Alan Greenspan said government involvement in the purchasing of stocks and shares in private-sector corporations would negatively affect the integrity of America's free-market system. Couldn't agree more. At least to me, Bill Clinton's proposal sounded like a Socialist nationalization scheme to control corporate America — a rehash of Karl Marx's concept of Socialist public ownership of the means of production. Once established, such a government fund would enable any future administration controlled by the Democratic Party's left wing to become the largest shareholder of corporate America, allowing government bureaucrats to manipulate or interfere with the business operations of private-sector corporations. During the 2000 presidential election, Democratic candidate Al Gore made a similar proposal. Are Americans ready for the emergence of a Socialist United States of America on the Western Hemisphere?

Let's look at Bill Clinton's slogan ("Save Social Security first") again and see what it implies. Although it was used to justify his veto on Congressional tax cut bills, the slogan was an indication that Bill Clinton knew Social Security was not in good shape and so had to be "saved". We don't say "save something" or "rescue something" unless it is in jeopardy. In other words, Bill Clinton knew Social Security was in trouble. Now experts from both parties have pointed out that Social Security will go bankrupt if not reformed. For all the expert warnings, the liberals insist, "Social Security will remain solvent for many years to come." Really? The problem is: whoever guarantees Social Security solvency today may not be around at the end of those "many years to come" to bear accountability for his guarantee.

Now, the scary part of the story. "Oh, risky, very risky. To allow young workers to invest Social Security money in the stock market is an irresponsible approach toward Social Security reform." That's what the liberals want the public to believe. True, there are many risks in the stock market, but then, life itself is a very risky business. Every day, if we are not careful, something bad could happen to us, but that doesn't mean we don't want to live our lives. Every day, if we are not careful while driving, we could get hurt or even killed, but that doesn't mean we must not drive. In fact, many of us must drive in order to go to work and make a living. The point is we must know where risks might be and learn how to limit risks according to certain guidelines.

The same principle applies to corporate securities investment. The Bush Social Security reform package says it will allow young working Americans to invest a small part of their Social Security money in private investment accounts under certain guidelines. Look at such terms as "a small part of" and "under guidelines". These are devices to limit investment risks. "Guidelines" is the key word. If we drive under the influence of alcohol in violation of traffic rules, the risk of accident must be very high. By the same token, if we do day-trading in Internet dot com stocks in contravention of investment guidelines, we could be much worse off at the end of the day. The Bush Social Security reform package has nothing to do with day-trading. It is a long-term investment plan with safeguards (i.e. guidelines) designed to limit risks.

When 19th-century social philosopher and economist Karl Marx (1818-1883) saw injustice under capitalism, he decided that free enterprise would lead to many evils such as inflation and the exploitation of the working class by the owners of the means of productions (i.e. businesses that employed workers at low wages but sold their products at high profits). He suggested that in order to cure social injustice, society should own the means of production and a political party that represented the interests of the working class (i.e. a Communist party) should run the government. His theory sounded attractive to many left-wing intellectuals in the 19th century and the 20th century, because it served their interests very well, offering them an opportunity to get something (such as government power) for nothing (other than left-wing demagogic lip service designed to fool the ignorant).

In practice, it doesn't work for the economy. The history of nearly one hundred years of Marxist social experiment in Russia, the former East Block countries, China, North Korea, Vietnam and Cuba plus its disastrous social and economic consequences proves Karl Marx absolutely wrong in his concept of "Socialist public ownership of the means of production". The reason: once a business is controlled by government bureaucrats (i.e. political appointees), its nature as a profit-oriented organization dies. In its place, rises a bureaucratic entity which responds to bureaucratic commands, rather than to the demands and signals of the marketplace. Soon, profits vaporize. Where there is no "exploitation", there is no profit. Financially, the private sector is always far more efficient than the public sector.

Without private-sector free enterprise, nobody would have the incentive to create wealth. The resulting lack of capital reinvestment would lead to the ageing of factory equipment and the total loss of competitiveness. Today, because of long consecutive years of heavy losses, China's state-owned Socialist enterprises can no longer feed "the proletariat" (i.e. the working class). They have already laid off millions of workers and will have to lay off more. In short, China's Socialist dinosaurs simply cannot survive without Western investments. Besides, Chinese companies must export their products to America — the largest market for Chinese goods. For all the criticism of U.S. imperialist "paper tiger" and U.S. capitalism, Chinese leaders want to make friends with America, because this "U.S. paper tiger" is covered with paper money. After all, cash is King. Rhetoric about the virtues of Socialist Utopia and the evils of capitalist society is not worth a penny in the face of economic reality.

However, Karl Mark was right in his belief that "ownership of the means of production" is important to the well-being of the individual, because "the means of production" (e.g. corporate America) is a wealth-creating machine. If you own a piece of the wealth-creating machine, you have a chance to become rich. Of course, you can launch a business of your own to create wealth for yourself. But that way, you become part of corporate America, no matter how small your company may be. Anyway, in order to become rich, you have to own a piece of corporate America, either by purchasing stocks and shares or by launching a company of your own. If you have no money to buy a piece of corporate America, you have to work hard and save up until you have a certain amount of capital — start money. In order to become rich, one has to use money to make money. Karl Marx knew that. Bill Clinton knows that. You know that too.

Wall Street professional William J. O'Neil says: "Success in a free country is simple. Get a job, get an education, and learn to save and invest wisely. Anyone can do it. You can do it." Mr. O'Neil is a smart securities trader who knows when to buy what stocks and when to sell them. His trading techniques are not easy to learn. But the message in his advice is clear: if you want to be rich, you must work, you must save, and you must learn to invest properly.

If we compare Mr. O'Neil's advice with the Bush administration's Social Security reform proposal, we will see something in common. Where Mr. O'Neil says "invest wisely", the Bush administration says "put a small part of Social Security money in private investment accounts under guidelines". Both Mr. O'Neil and the Bush administration see securities investment as a way for the individual to become better-off. Honestly, if you don't have a business of your own, if you don't have a rich uncle to bequeath you a fortune, what else can you do to become better-off than investing "a small part of Social Security money in a private investment account under guidelines"? You must take personal responsibility for your own well-being.

For all the talk about securities investment risks, there is no denying that thanks to the stellar performances of many U.S. blue chip stocks since 1984, there are quite a few 401k millionaires in America today. They are ordinary working Americans who have simply held their portfolios for years without much trading. This type of investment strategy is called "buy and hold". It is different from William J. O'Neil's trading methods, but it works for those who only invest in quality stocks with proven track records of earnings growth performance. America's best-known investor Warren Buffett is a believer in "buy and hold". If the risks in the stock market are as unmanageable as the liberals suggest, why is Mr. Buffett doing so well? How many 401k millionaires have filed for bankruptcy protection in the past year of sharp stock market falls? I would say none. Apparently, there are ways to limit investment risks. But the liberals want the public to think otherwise; they want a public that is unable to see the wood for the trees about securities investment, because their job is to oppose anything that comes from the Bush administration.

In 1991 when the economy was in a severe recession with a lifeless stock market and a Dow stuck around 3000, I asked an experienced investor why he didn't sell his U.S. blue chips even though they were going nowhere. He replied, "To keep money in the bank for a small interest income is the stupidest thing to do. If one lives long enough, one will see 4000 on the Dow down the line." He didn't explain why. I guess he was speaking from experience, but as time went by, he proved to be right. By autumn of 1994, the Dow was poised to break through the 4000 mark. In November of that year, Congress came under Republican control, sparking off hopes of restrained federal spending and smaller budget deficits. Later, the Dow broke out above 4000. It never turned back. The problem with new investors is they are impatient. They want to see the prices of their stocks double in short order, but quality stocks often consolidate at certain levels for long periods of time before appreciating in value as their earnings per share increase.

Suffice it to say if "to keep money in the bank for a small interest income is the stupidest thing to do," then, to put money in Social Security for a less-than-two-percent return may not be the smartest thing to do. A casual look at the multi-year chart of the Dow Jones Industrial Average would tell you that in spring of 1982 when the economy was also in a severe recession, the Dow was barely above 800. Friday (August 3rd 2001), it closed at 10512. Since 1984, many long-term buy-and-hold-type investors (ordinary and common people) have become millionaires or at least much better-off. They normally keep a low profile. But during the recent economic and market downturn, some of them came out to say, "I've lost money; all my friends have lost money." Don't take such protestations of financial misfortune seriously. Yes, they have suffered some setbacks, but would they be as rich as they are today if they hadn't invested in stocks in the first place?

That said, I hope the guidelines of the Bush Social Security reform package will prevent young working Americans from purchasing any speculative issues with no proven track records of earnings performance but encourage them to invest in America's reliable, best-quality, blue chip multinational corporate giants which hold dominant positions in their respective industries with strong competitive edge and strong capacity to ensure their long-term earnings growth potential. In my view, the Bush Social Security reform program with its prudently designed guidelines for asset allocation and diversification will have profound social implications, because it shall mark the beginning of an era when millions of America's working-class families become the owners of corporate America (i.e. America's means of production, America's wealth-creating machine) through a process that is in line with the spirit of free enterprise and free society — not Marxist demagoguery. No wonder America's political left doesn't like the plan. When working-class families become well-informed blue-chip portfolio holders, will they vote for populist left-wing demagogues? Probably not. The better informed a man becomes about how money works, the less likely he is to be fooled by demagogic leftism.

The End (August 6th, 2001)