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The Best Thing George W. Bush Ever Said
No, this isn’t going to be satire. It’s a serious article about a genuine good idea that W had, and that for various reasons never came to fruition. The idea is this: the Ownership Society. W said he wanted more Americans to have a stake in the future of the country, and that the best way to do that would be for more Americans to own stakes in the companies that drive our economy. This is a great idea. The problem is that instead of removing the various barriers between people of modest means and meaningful stock ownership, he and his team used the “Ownership Society” as a smokescreen for their efforts to privatize (that is, destroy) Social Security and other government programs.
But the concept of the ownership society—a real one, that is—has great potential. Here are some ideas on how we might be able to achieve it. We need to remove a few barriers.
This ad was code for "I want to dismantle pretty much all government social programs," but what if he'd actually tried to make it easier for Americans to buy stock in American companies?
Most People Simply Can’t Afford to Invest
You know how a lot of conservative commentators like to remind us that about half the people pay no income tax? Yeah, most of those people live paycheck-to-paycheck. That is to say, their day-to-day expenses (rent, utilities, transportation, food, clothing, etc.) eat up almost all of their income. These folks find it difficult to put ten or twenty bucks aside for a rainy day, never mind scraping together enough cash to make a stock purchase. But even if they manage to accumulate fifty or a hundred dollars, they’re going to have a hard time turning that cash into dividend-paying stock.
Not Many Brokers Want to Bother with Micro Investors
I say “micro-investors” instead of “small” investors because a “small” investor is generally a middle-class person who can relatively easily afford relatively frequent stock purchases of over a hundred dollars each. The folks we’re talking about are going to want to buy in something like twenty-dollar increments. Investopedia tells us that “most brokers will process a trade for a few shares of common stock.” That’s fine, but consider: at the time of this writing, shares of common stock in Ford Motor Company were trading at $12.26. A “few” shares would cost anywhere between $36.78 and $73.56, well above the twenty-dollar threshold for our hypothetical micro-investor. It’s possible that you could find a broker willing to buy one share of Ford for you. Maybe he’s betting that you’ll become a regular investor and will make more trades for larger amounts in the future. But that broker is not going to be easy to find. Even if you can find him, there’s still a pretty important reason not to buy that one share of Ford.
The Brokerage Fee Eats Your Capital
Recall that brokers usually charge commissions or transaction fees (that’s one of the ways they make money), and a typical transaction fee is in the neighborhood just north of our twenty-dollar threshold. So if you want to buy one share of Ford at $12.26 a share, you’ll actually have to cough up $37.26 (the price of one share of Ford plus a brokerage fee of $25). No doubt you’ve seen why practically nobody wants to buy stock one share at a time: most of your wealth gets eaten by the brokerage fee. Sure, now you’ve got your share of Ford, but it cost you three times its current value. You don’t have to be Warren Buffet to figure out that this isn’t such a hot deal.
Even the Banks are Against You
You’d think that banks would be in favor of people saving their money, right? I mean, that’s kind of what they’re for, isn’t it? Well, try this experiment. Walk into any random bank and ask to open a savings account with a $20 deposit and no direct deposit agreement. The bank will probably want nothing to do with your measley twenty bucks. If they do agree to open an account with a twenty dollar deposit, there will probably be a monthly maintenance fee. Unless you’re able to set up an automatic direct deposit, or are able to deposit more than about $500 at once, they’re going to charge you for the privilege of looking after your money. Put twenty dollars into a bank, and in four to six months, it will be gone. Living paycheck-to-paycheck, with maybe ten spare dollars per week, how will you be able to save up enough to make a stock purchase that makes financial sense? Short answer? Can’t.
So how do we make it easier for those of us who can usually only scrape together about twenty bucks at a time to become investors?
Here’s a few ideas.
Minimum Balance Requirements: Kill ‘Em.
No, really. Yes, I understand that it’s hard for banks to make money on tiny accounts like this, but does it really cost five dollars to mail a statement? I don’t think so; not in this modern electronic age. Rather than charge people to keep small balances in their savings, why don’t the banks just not pay interest on balances below the minimum? They’ve still got the money, and are still making money by lending it out. They make significantly more income by lending money than they pay in interest on savings accounts. At the moment, the interest rate on a 30-year, fixed-rate mortgage is 3.75%. The typical savings account pays a bit less than 1%. So not paying interest will earn the bank an extra almost 1%, and the banks will probably get more money to look after if they stop taking it away from people with small balances. How many people decide against putting their money in a bank because the bank will eventually take it all? I’m betting lots. How many of those people would put their money in a bank if they knew that it would all still be there the next time they had some extra cash to put into their savings accounts? I’m betting lots. It would be even easier for the bank to make money on micro-savings accounts if they were not required to send a monthly statement for accounts containing less than the minimum balance requirement. If someone wants to check their balance, they can look it up online (if they're able) or come down to the bank and check in person.
If banks would stop penalizing people who try to save small amounts, more people would try to save. And they’d eventually accumulate enough savings to invest.
Brokerage Fees: Couple Ideas about Those
First idea: Charging someone $25 to invest $20 means nobody will want to make that twenty-dollar investment. So perhaps brokers should charge a lesser fee for investments less than or equal to triple the standard fee. How do we encourage brokers to do that? Let the waived portion of the fee be tax-deductable. How do we keep wealthy people from taking advantage of this loophole by making two hundred twenty-dollar stock buys rather than a single four-thousand-dollar buy? Well, this might not be a problem, because that’s a lot of trouble to go through to save twenty-five bucks. Someone who can afford to make a four-thousand-dollar investment probably won’t bother. But hey, someone might decide that it was worth filling out the same form twenty times to save $25. We can stop them by letting the rule be that only one waived fee per investor per month is tax deductable. The broker will not want to waive nineteen twenty-five-dollar fees without some incentive: he’d lose $475.
Second idea: Maybe we don’t send any incentives to the brokers: maybe we send them directly to the micro-investor. What if we make brokerage fees for investments less than $100 double-tax-deductable? What I mean is, if you invest less than $100 at once, your fee of $25 gets you a tax credit of $50. We want to reward people for investing, right? An investment of less than $100 will not earn enough dividend income for the lower capital gains tax rate to be an attractive incentive. Of course, this micro-investor tax credit is open to abuse, too. Perhaps we place a twelve-purchase per annum, one purchase per month limit on the micro-investor tax credit. That way, the investor with $1200 to invest (and who probably wants to invest it all at once) will be forced to spread his purchases out over the course of the year if he wants to take advantage of the credit. Sure, everyone could make one $99 purchase per month and get the credit, but large investors probably won’t bother. Small investors investing more is something we want to encourage, isn’t it? And micro-investors will have a real incentive to invest.
Realistically, double-credit is too much, but the credit needs to be greater than the expense for it to be an effective incentive.
Here’s an important caveat: we want Americans to invest, yes, but we want them to invest in American companies. These discounts and incentives should apply only to investments in US-based companies. We can create incentives for companies to keep jobs in the US by requiring the companies in question to have at least 51% of their workforce employed in the US for the incentives to apply. Of course, this adds a layer of complexity to the investment process: for the incentives to be worth anything, the micro-investor will need to easily be able to find out if his chosen company meets the 51% requirement. That information ought to be available in a company's quarterly report, if it isn't already.
What Do We Get? A Nation of Investors
Or at least, more investors in our nation’s industries. Yes, I know that it will be a bit of a job to convince conservatives that it’s a good idea to create new regulations just so a bunch of people who haven’t got much money will be able to invest. Generally, conservatives are against regulation on principle, and balk at government programs that benefit the working poor. But this program won’t benefit only the working poor. More capital will also flow toward corporations, which supposedly means more jobs will be created, right? Sure, the capital will merely trickle in, in increments less than a hundred bucks at a time, but trickling is acceptable to conservatives when the flow is downwards. Why shouldn’t it be equally good when funds trickle up? Plus, if ten thousand Americans (that’s less than .003% of the population, remember) all invest $50 in Ford, Ford gets a cash infusion of $500K. This month. In a year, they'll have an extra $6 million. Not bad, eh? And if ten thousand different Americans do this every month, that's 120,000 new investors, who each own about four shares of Ford, and will get a share in Ford's profits at the end of the year. Not much, but it’s a start.
Some Related Reading
The Motley Fool has been making the stock market more accessible to the rest of us for a long time now.
The best take-away from this book: the difference between an asset and a liability. (Hint: you home is almost certainly not an asset.)
My personal advice: treat a down market like a sale, and stock up (heh, see what I did there?) on bargain shares of solid companies. Of course, this advice is only useful if you have spare cash to invest....
So What do you Think?
I’m not a broker, a banker, or a financial advisor, just a guy with a few ideas. If you know a thing or two about stock-broking or banking, I’d love to see your constructive criticism in the comments below.
If you think these ideas won't work, the important question is this: Why won't they work? A more important question is this: How can they be made to work? Or if my ideas are hopelessly flawed, perhaps, "Here's an idea that will work."
If you would rather share your ideas in a hub of your own (and why wouldn't you?), please let me know. If your hub is well-written and useful, I'll probably link to it.