Where I’m Weak, Where I’m Strong

Published in June 24th, 2008

Please don’t come to this site looking for advice on sophisticated investing transactions. I’ve got my hands full changing how the world thinks about the basics!

In all seriousness, I do not study the sophisticated stuff. If there were more hours in the day, I would have a go at it. The basics matter to more people and I happened to discover that there are serious weaknesses in the basic investing advice being offered by most of the “experts” in this field. So that’s where I direct my energies.

I put the word “experts” in quote marks because I don’t view most of the people offering investing advice today to be truly qualified to do so. I don’t intend that as a dig. It’s just a remarkable reality. What I have discovered is that our collective understanding of how stock investing works is primitive. We think we know a lot more than we do, and that’s dangerous. We all need to work on being more humble in the advice we put forward.

The problem is that we have to a large extent ignored the emotional side of the stock investing project. Most of today’s advice is rooted in something called “The Efficient Market Theory.” It posits that the market price is always in some mystical sense “right.” I have come across a great deal of evidence that this is not so. The market price is often wildly wrong. Since most of today’s investing advice is built on a faulty foundation, most of today’s investing advice is flawed in serious ways.

Please do not think that I am saying that I am the only one who knows it all. There are others who know what I know, and I do not come close to knowing it all. I think I know a good bit more than most who today call themselves investing “experts,” however. That’s my sincere belief.

I have in recent years developed some valuable clues as to what is really going on with stocks, thanks to the contributions of thousands of fine members of the Retire Early community and in particular to the amazing research done by John Walter Russell, owner of the www.Early-Retirement-Planning-Insights.com site. I’ve learned pretty much everything I know through my interactions with John and the many others who have helped us out from time to time.

The investing advice that I offer is not the conventional advice. You may take that as a caution or a brag, depending on where you are coming from. It is my belief that as a result of the errors in the conventional advice we now are living through what is likely going to turn out to be the greatest loss of middle-class wealth in the history of the United States. If that statement turns you off, I am probably not the right guy for you. If you have some suspicions along these lines yourself, you might want to check out some of the articles at the site.

My area of expertise is valuations. I say that, when stocks produce the sorts of returns we saw in the 1990s, the money has to come from somewhere. I say that it is borrowed from future returns. That’s why returns have been so poor for the last eight years or so. I use the historical stock-return data to form assessments of how long returns will remain poor. You can check out these assessments by working with the three calculators now available at the site (see the tabs at the left-hand side of the page).

Please do not take anything I say on investing or any other subject on faith. Doing that would hurt you for sure. Even if it turns out that I am right in all I say, you won’t see the benefits unless you check out what I say carefully because you will not have confidence in claims that you did not check out carefully. Knowledge not backed by confidence doesn’t help much in the investing field, in my assessment.

That said, I believe that what I say about valuations is important (I’m confident!) When we use the word “valuations,” what we really are talking about is the effect that human emotions have on stock returns. My assessment is that the effect of human emotions is at least 50 percent of the ballgame, and there is little in the existing literature dealing in an in-depth way with this aspect of the investing project.

So my view is that what you get by coming here is an understanding of the 50 percent of the stock investing project not often addressed elsewhere. Mix what you learn here with what you learn at all the other spots on the internet and you will possess a good understanding of the full realities of stock investing.

I think.

I believe.

I hope.

Today’s Passion: I tell you what my wife thinks is one of my bad traits in the article entitled Rob Bennett’s Weaknesses as a Money Advisor.

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John Walter Russell said, in June 24th, 2008 at 8:56 am

That said, I believe that what I say about valuations is important (I’m confident!) When we use the word “valuations,” what we really are talking about is the effect that human emotions have on stock returns. My assessment is that the effect of human emotions is at least 50 percent of the ballgame, and there is little in the existing literature dealing in an in-depth way with this aspect of the investing project.

I think that emotions account for much more than 50 percent.

For example, consider diversification. Strong arguments can be made for any degree of diversification. I think that the “right” amount depends on the personality of the investor, not on his rationale.

Have fun.

John Walter Russell

Rob said, in June 24th, 2008 at 9:19 am

Strong arguments can be made for any degree of diversification. I think that the “right” amount depends on the personality of the investor, not on his rationale.

That’s a very interesting thought, John.

I certainly agree that diversificatiion can be overdone. And the conventional media rarely lets us know this. If you went solely by what you hear from the “experts,” you could easily be led to believe that an increase in diversification is always a plus.

I get the feeling at times that what they are doing is trying to appeal to the lowest common denominator. Lots of people who have money in stocks have no idea how stock investing works (they just are not terribly interested in the subject). A lot of the advice you hear seems to be aimed at these people, assumes their circumstances, and ignores the reality that lots of other circumstances apply for lots of other people.

It’s like the 10-percent-rule in saving. Most effective savers don’t save 10 percent. It’s not a good saving percentage for most people. But the rule gets repeated all the time because it is so painfully simple. The idea seems to be that maybe people who don’t like to save will get drawn in by the simplicity (this approach has a very bad track record but it seems to hang around all the same).

It seems to me that something similar might be going on with diversification (and with lots of other stuff too). People who don’t know what they are doing should diversify heavily to avoid making big mistakes. That certainly makes sense. But the people who argue for diversification overstate their case. They make it sound like diversification is always good, that everyone should be diversifying heavily. And lots of people assume there must be something to this because these big-name “experts” are saying it.

The reality is that there are times when diversification is a powerful plus and there are times when it is not such a great idea. We need to be more realistic in the investing advice we offer. We need to be careful not to overstate things, to do the best we can to state things accurately.

Accuracy matters. Yes, even in discussions of stock investing. I very strongly believe that, as “controversial” an idea as it has come to be in some quarters.

Rob

John Walter Russell said, in June 24th, 2008 at 11:13 am

Your one actual weakness (from an engineer’s viewpoint) is that you are careless about the precision of numbers.

You should say “a whole lot of people” instead of “(some number) of people.”

Have fun.

John Walter Russell

Rob said, in June 24th, 2008 at 11:17 am

You should say “a whole lot of people” instead of “(some number) of people.”

What makes it worse is that I’ve been called out on this sort of thing before!

You would think that I would in time learn to pay better attention to such matters!

Rob

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