A Rich Life

The Old Ideas on Saving & Investing Don't Work -- Here's What Does

Beyond Buy-and-Hold #47 — The Stock Market Makes Fools of Us Over and Over Again

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I’ve posted Entry #47 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called The Stock Market Makes Fools of Us Over and Over Again.

Juicy Excerpt: The reality is that stocks are not one asset class, but three. Stocks being sold at a fair price are nothing at all like stocks being sold at an insanely high price and stocks being sold at an insanely high price are nothing at all like stocks being sold at a fair price or stocks being sold at an insanely low price.

To get smart about stock investing, we are going to need to start distinguishing between the different kinds of stocks. The reason why you did well with the stocks you purchased in 1990 is that stocks were selling at reasonable prices in 1990. Stocks selling at reasonable prices always do well. The reason why you did poorly with the stocks you purchased in 2000 is that stocks selling at insanely high prices always do poorly.

You cannot apply the experience you gained investing in reasonably priced stocks and expect it to apply for stocks you purchase at insanely high prices. When stock prices reached insanely high levels in early 1996, a new investment class came into existence, an insanely dangerous one with little in common with the investment class you invested in with such happy results in 1990.

Beyond Buy-and-Hold #46 — Predicting Stock Returns for Fun and Profit

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I’ve posted Entry #46 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called Predicting Stock Returns for Fun and Profit.

Juicy Excerpt: The reason why I take a different view about long-term stock prices (the prices that will apply 10 years from now) is that predicting long-term stock prices calls for the use of an entirely different sort of skill. I’ve been predicting long-term stock prices since 1996 and I’ve never gotten one wrong yet. Historical stock-return data is available on the internet going back to 1870. I’ve made year-by-year predictions from 1870 forward and, again, I’ve never gotten one wrong. You could do the same if you cared to. It’s not even a little bit difficult.

Long-term stock prices are not determined by unpredictable day-to-day events. They are determined by mathematics. Numbers are highly predictable. You can check them over and over and over again and they always turn out the same. I am more of a words guy than a numbers guy. But this is one quality of numbers that I greatly appreciate. Numbers, calculated properly, do not surprise us. Numbers are predictable.

Say that instead of asking you to predict who will win the Republican presidential nomination I asked you to predict whether the casinos in Atlantic City will turn a profit on their slot machines next year. Do you think you could offer a prediction with a good chance of coming through for you?

Beyond Buy-and-Hold #45 — Fear of Admitting Investing Mistakes Can Lead to Bigger Investing Mistakes

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I’ve posted Entry #45 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called Fear of Admitting Investing Mistakes Can Lead to Bigger Investing Mistakes.

Juicy Excerpt: Buy-and-Holders don’t blame their strategy when it performs poorly. They blame the economy. They argue that stock crashes just happen randomly, that there is no correlation between the insane prices that were brought on by the massive promotion of Buy-and-Hold and the economic crisis that followed. So Buy-and-Holders feel displeased about the results they have obtained but do not accept personal fault for having caused those poor returns. It’s an emotionally less painful way to cope with things.

It’s also less honest. And less enriching in the long run. If Buy-and-Holders could accept that they caused their own financial destruction, they could become far better investors in the future than they have ever been in the past.

By blaming the economy, Buy-and-Holders diminish the pressure they would otherwise feel to consider new strategies. By sticking with discredited strategies, they cause their financial pain to increase. In the long run, they feel more emotional pain than they would have if they were more honest with themselves about the mistake they made when they bought into a strategy with such a poor historical track record.

Beyond Buy-and-Hold #44 — How to Stop the Next Bull Market

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I’ve posted Entry #44 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called How to Stop the Next Bull Market.

Juicy Excerpt: Policymakers should educate voters about the damage that bull markets do to our political institutions. Both Republican and Democratic lawmakers often promise to take action to reduce the Federal budget deficit. But the budget deficit is a small matter compared to the debt we incurred to future investors during the bull market of the late 1990s. The entire Federal debt accumulated since the days of George Washington is about $14 trillion. In just a few decades of promotion of Buy-and-Hold Investing, we incurred a debt of $12 trillion and that is a debt that must be paid off within 10 years or so.

Beyond Buy-and-Hold #43: A Big Opportunity for Personal Finance Bloggers

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I’ve posted Entry #43 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called A Big Opportunity for Personal Finance Bloggers.

Juicy Excerpt: We’re bloggers! We’re not rich boys! The reality is quite to the contrary! We’re poor boys (and girls)! We could do this thing!

No?

This is our chance. Money blogging should not be about rewriting press releases sent our way by our friends in The Stock-Selling Industry. Every personal finance blogger should be engaged in independent thinking, independent research and independent analysis of stock investing questions.

We should all be working hard to bring the Valuation-Informed Indexing story to our readers. Those of us who believe in it should be promoting it. Those of us who have doubts should be explaining the issues and articulating the doubts. We all have different roles to play in this drama. We all have something important to contribute. We all need to get to work.

Beyond Buy-and-Hold #42 — Are You Emotionally Invested in Stocks?

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I’ve posted Entry #42 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called Are You Emotionally Invested in Stocks?

Juicy Excerpt: There’s your wife. She doesn’t bother with investing stuff. So when she said that stock prices just seemed too darn high to her — “What goes up must come down,” she would say — you told her she was being silly. You read Money magazine. You read books by John Bogle. You visit web sites that teach you how stocks are always best for the long run and that there is no such thing as a free lunch and that timing never works. What could she possibly know about the subject that you don’t know about it?

So it annoys you to see the case that she was right all along grow stronger and stronger.

Beyond Buy-and-Hold #41 — Robert Shiller Pulls His Punches

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I’ve posted Entry #41 in my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called Robert Shiller Pulls His Punches.

Juicy Excerpt: My claim to fame on the internet is that I am the person who discovered the analytical errors in the Old School safe withdrawal rate studies. I helped lots of people out with that one. But it wasn’t the word “thanks” that I heard most often in response.

I had people threaten to kill me. I had people say my parents are alcoholics. I had people say my children don’t respect me. I had people say that my wife has left me. I had people tells lies about my financial circumstances. In short, I had people trying to plant an impression in other people’s minds that I am something less than “professional.” I’ve been Shillered!

Beyond Buy-and-Hold #40 — You Should Be Rooting for Stock Prices to Fall

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I’ve posted Entry #40 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called You Should Be Rooting for Stock Prices to Fall.

Juicy Excerpt: Small changes in the patterns by which stock returns play out can make all the difference. Few of today’s investors know this and it is in my view one of the most important realities of stock investing.

In 1980, we saw a return of 15.76 percent. In 2008, we saw a return of a negative 39.29 percent. What if the returns for those two years were switched? What effect do you think that would have had on your goal of accumulating $1 million in assets before you turned 65?

Such a change wouldn’t have any effect on the 30-year annualized return at all. That number is 7.39 percent in both scenarios.

But experience the big loss in the early days of the 30-year time-period rather than in the later days of the 30-year time-period and you meet your $1 million portfolio goal easily rather than coming up $100,000 short. $1,611,164. That’s the final portfolio balance in the scenario where you take your big loss -early and one of your many nice gain years late.

Beyond Buy-and-Hold #39 — A Clash of Investing Faiths

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I’ve posted Entry #39 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called A Clash of Investing Faiths.

Juicy Excerpt: Bill Sholar is a friend of mine (I met him at a Motley Fool discussion board a good number of years back) who created the FIRECalc retirement calculator. I view FIRECalc as analytically invalid because it does not contain an adjustment for the stock valuation level that applies on the day the retirement begins.

There were often fireworks when I posted at a discussion board that Bill founded (the board is called the Early Retirement Forum; Bill no longer owns it) because most community members there were using Bill’s calculator to plan their retirements and I would argue that the calculator is going to cause many failed retirements among those who use it. Bill once said something about this controversy that I think was wise.

He said: “Folks, we have a good bit of disruption in the ranks. Some of the disruption is in the form of a Baptist running occasionally into Methodist services, and claiming that some of their beliefs are heresy. This seems to generate (a) almost zero real dialog about the merits and demerits of the beliefs, and (b) a strange combination of ad hominem attacks and defensiveness.”

He is saying that the differences that we have seen evidence themselves over how stock investing works are differences of faith.

He’s right.

Beyond Buy-and-Hold #38 — What Should You Invest in If You Are Afraid to Invest in Stocks?

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I’ve posted Entry #38 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called What Should You Invest in If You Are Afraid to Invest in Stocks?

Juicy Excerpt: Say that it takes three years for the next crash to take place and that that crash will bring stock prices down 65 percent from where they are today, down to the P/E10 level of 8 that has applied at the bottom of every major bear market we have seen in U.S. history. Do you know what the most likely 10-year annualized return is for an index fund purchase when the P/E10 value is 8? 15 percent real.

I am not saying that you will likely get a 15 percent return on your money one time. I am saying that you will likely get an average return of 15 percent every year for 10 years running. Your retirement account is going to grow by big bunches in a short amount of time. You want to be there for that number.

You won’t be there if you keep most of your money in stocks at today’s prices. If you experience the 65 percent crash in a personal way, you are likely going to swear off stocks forever. That’s what happened to most of those who followed Buy-and-Hold strategies in earlier bear markets. You want to protect your money in some super-safe asset class paying 2 percent real until stocks again offer a decent long-term return and then move the money into stocks.

If you earn 2 percent real for three years and then 15 percent real for seven years, is your 10-year return 2 percent real? It is not. It is not quite 15 percent real. But it is a number a good bit closer to 15 percent real than it is to 2 percent real.