What A Dream. What a Nightmare.

Earlier this year (in February) I wrote an article for this site titled “What About A Down Market". (Please refer to Past Articles) I was wondering about the excess in the market, and I asked the questions: “What if the unthinkable happens? Can the market really keep going up and up? If the market retreats, can technology stocks be insulated like they have shown during the last month-and-a-half?". I then made the comment that " Such complacency is commonplace, and is quite alarming." I wish I could say that I had accurately predicted the current downturn in the market — I had not. But at the end of the article I quoted a passage from Proverbs 23:4-5 which says “Do not wear yourself out to get rich; have the wisdom to show restraint. Cast but a glance at riches, and they are gone, for they will surely sprout wings and fly off to the sky like an eagle." These days surely many people will empathize with the analogy of riches taking wings and flying off like an eagle!

I was speaking with a financial planner this afternoon. He works with many executives in the Silicon Valley. He said for many this is like a dream – wealth comes easily and disappears easily. While for his clients it is like a dream, for many others what has happened is more like a terrible nightmare. Consider the following real cases:

  • A “stock trader" who made nearly a million dollars last year from the stock market. This April he had to pay taxes on these short-term gains at his ordinary income tax rate of about 45%. He put his gains back into the market. Before he sent out the check to the IRS, the market crashed. He suffered severe losses to the tune of nearly a million dollars. Since he made a million last year, and now lost a million, was it just a wash? Sadly, no way. He still had to pay his taxes on last year’s gain, but his losses can only be deducted up to $3,000 a year if he does not have any future capital gains. Indeed his prospects for future gain is dim, because including taxes he is out close to $1.5 million. He simply has no more capital left to continue trading! As for his loss write-off, at $3,000 a year it will take 333.3 years to write off the entire loss. I don’t think he will live that long.
  • An executive who had exercised a large amount of Incentive Stock Options last year. The market value of his shares had appreciated considerably, so he had a sizable gain on paper. Although he did not need to report his gains on his regular income tax return, he was caught by the Alternative Minimum Tax (AMT). So this April he wrote out a large check to the IRS. While still holding onto his shares, the market price dived from $150 to $18 a share. Within months most of his net worth was wiped out. Although when he ultimately sells his shares he would get back most or all of the AMT he previously paid, this is no solace for the disappearance of his net worth, particularly when he has already made plans to buy a more luxurious home.
  • A novice “investor" who trusted an unscrupulous broker who invested his life savings in “naked put options", one of the riskiest type of investments. This broker sold put option contracts on small high-tech company stocks and earned option premium for the account. Happy with the instant income and unaware of the huge risks lying ahead, this investor thought he had found a broker who held the key to instant wealth. When the market came down, the option contract holders exercised the rights under the contracts and sold him shares at the strike price. Suddenly he found himself paying $70 for shares which now had a current market value of only $10, and still falling fast. Then came the margin calls, since the whole scheme was based on leverage financing. He earned fifty thousand dollars in nine months and proceeded to lose two hundred thousand dollars in a matter of one month. The family’s finance is ruined, and his wife now threatens to walk out on him.
  • A retired person put nearly his entire retirement savings into a number of high tech stocks when his friends gave him “tips" about how great these companies are going to be. He did no research on these companies. He knew nothing about their products, management, profitability, etc. In fact, he did not even know the full names of these companies. To him, they are just a bunch of symbols, like the alphabet soup. His broker also taught him to use the power of leverage, so he was deep in margin debts. 80% of his retirement savings was wiped out in just a few weeks. He is now seeking employment in the hope of rebuilding his nest egg. He knows this is exceedingly difficult, since the most scarce resource – time – is not on his side.

I could go on and on citing examples of real nightmares like the above. It is easy for us to point fingers at these unfortunate ones and tell them “that’s what you get for being greedy". I have seen even Christians falling into these nightmares. But I hope something good would come out of the market debacle. I recall when the severe recessions hit Southern California in the early 90’s, the lives of many Christians were changed for the better – when they suddenly face financial ruins and personal bankruptcies, they are forced to confront their value system and their dependency on their business, professional career, net worth, etc.. For some of them, their biggest nightmare turned out to be blessing in disguise, as many had re-dedicated their lives to Jesus Christ. Jesus said " For where your treasure is, there your heart will be also." Earthly treasure is but shifting sand, and if our heart rests on these ephemeral and temporal things which have a tendency to fly away like eagles, we are definitely on shaky ground. Will you spend some time to seek out what is eternal and everlasting, which only comes from the one who is eternal and everlasting?

Dec 2000