The SEC was formed in the aftermath of the stock market crash (Black Tuesday) that kicked off the Great Depression to protect the investing public and restore confidence in the market by providing investors with more reliable information and complete disclosures.
So if the SEC is charged with protecting the investing public, why does it let companies sell a worthless stock?
WALL STREET’S DIRTY LITTLE SECRET IS THAT AS LONG AS IT SLAPS A WARNING STICKER ON ITS STOCK, IT CAN SELL ANYTHING IT WANTS.
Here’s the latest example:
Last week Hertz filed with the SEC to sell $500 million of its common stock (the offering has since been withdrawn).
In its filing, it included the following disclosures:
- Hertz said that equity holders won’t see a recovery unless those with higher priority, such as the company’s debtholders, are paid in full.
- And that, the company said, would only happen if there is an astounding change in the progress of COVID-19 and a significant turnaround in travel trends.
Incredibly, Hertz warned potential buyers in its offering that it’s almost certain that the shares will become worthless.
So why does the SEC permit companies like Hertz to sell a worthless stock? Because its disclosure rules permit companies to sell securities as long as they’re truthful.
Hertz was truthful. They said that if you bought their stock, it was going to be worthless at some point.
So why would investors buy worthless stock? Because nobody reads the prospectus. Many investors will never know about the nitty-gritty details of what they’re buying.
Even as news of the stock sale was splashed across the Internet and Jim Cramer talked about it on CNBC, there were certainly going to be enough investors – who would never hear about the details or if they did hear about them would choose to ignore them – that would snap up all $500 million in shares. Most will see the low price and assume they’re buying at bargain prices.
$500 million in worthless shares would have sold in one day.
That’s because most mainstream investors don’t think long-term. They’re not thinking about when the stock becomes worthless. They’re hoping to flip it in a couple of days if the price jumps.
That’s the problem with Wall Street and why it lacks integrity.
Wall Street doesn’t think about any investor’s long-term financial health. All they care about is getting money in their coffers to keep the sham going today. Meanwhile, the SEC shrugs its shoulders. “Well, they warned you in the prospectus.”
Nobody reads a prospectus and that’s why worthless companies can and do sell a worthless stock.
There are always going to be enough suckers to fill a capital need. And that is one of the biggest problems with Wall Street.
The companies raising capital are a bunch of snake oil salesmen and the investing public is a bunch of speculators. That right there should tell you everything you need to know about Wall Street volatility.
If nobody is investing for the long-term, investors will jump on and off the bandwagon at the drop of a hat. Before you know it, a specific stock will be worthless, or worse yet, the entire market will be down 30, 40, 50%.
Why play in the Wall Street sandbox where there’s no integrity?
WALL STREET DOESN’T CARE IF YOU MAKE MONEY OR NOT.
IT JUST WANTS TO MOVE MONEY FROM YOUR POCKET TO THEIRS AND AS LONG AS THEY SLAP A WARNING STICKER ON IT, THE SEC WILL ALLOW IT.
The SEC allowing companies to sell a worthless stock is like the FDA allowing pharmaceutical companies to sell death-inducing drugs as long as the appropriate warnings are on the label.
Why not avoid all this and just invest in something where the company you’re trusting your capital with has your welfare in mind?
Savvy investors prefer the private markets over public markets because most investors in the private markets invest for the long-term.
Moreover, alternative cash flowing assets such as real estate have long lockup periods that prevent the type of runs that crash markets.
Not only are private investments resistant to market volatility, but credible private investments will put the investor first and the managers will make themselves available to investors before they commit to giving them confidence in what they’re investing.
The private markets are not like Wall Street where the investor is last in line.
The right private investments will provide transparency and more importantly, put their money where their mouth is by taking care of the investor first by giving first dollar profits to the investors through preferred returns.
Then when the preferred returns are satisfied, next dollar profits are split between the investors and the managers.
Finally, when assets are liquidated, the investors are once again first in line when profits are first distributed to them until their capital accounts are zeroed out – in other words, when the investors have gotten all their investment capital back. Only then do the managers see any profits.
Protect yourself against Wall Street’s lack of integrity.
Rethink your investment strategy by considering the following:
- Seek out private alternative investments.
- Seek out experts in their alternative asset segment in specific geographic locations to maximize returns and achieve true diversification.
- Seek out private investment opportunities that put the investor first.