Monday, December 27, 2004

Bob, Viragen, and Social Security

Bob the security guard is one of the most-loved figures at Kirkland House, where I spent my last three years at Harvard. In 2000, my friend Ed Chen and I found out that Bob had, several years ago, been the victim of an unscrupulous broker who convinced him to put $5000 into a struggling biotech company called Viragen. Bob had bought his shares somewhere around $35 in early 1997, and watched them decline for several years.

Bob really didn't know anything about the stock market. He didn't know that if you get a cold call from a broker you don't know trying to convince you to buy some stock, you should never take the deal. Usually this means that some big holder wants to sell quick and most investors know the stock is overpriced, so nobody wants to buy. Some scammer gets hired to dredge up buyers however possible. Bob just listened to what the broker told him and paid $35 for a stock that's worth less than $1 today. (Fortunately, Bob doesn't still own Viragen. Ed and I got him out of it at about $18 during the 2000 biotech craze. All prices mentioned here are split-adjusted.)

If Social Security gets replaced with a system of private accounts, I imagine that cases like Bob's will be a lot more common. Many people in this country don't have even the most rudimentary investment skills. Forcing them to handle stocks when they have no idea how to invest is a very bad idea. And when you eliminate the old Social Security system that would have taken care of everyone no matter how bad an investor they were, you leave these people with nothing to fall back on if they get scammed out of their retirement money. This is a recipe for disaster.

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