A Rich Life

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

Clusterfuck Nation: “To Discuss Buy-&-Hold In Relation to Financial Businesses Is Pure Abstraction”

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I recently wrote to James Howard Kuntsler, author of the Clusterfuck Nation blog and of the book The Long Emergency to ask that he take a look at my Google Knol entitled The Bull Market Caused the Economic Crisis.

In response to my assertion that “much of the public responded negatively to President Obama’s health reform initiative largely because of a resentment that our political leaders are failing to address the more serious problem,” Jim responded by saying “that’s an astute observation.”

In response to my assertion that  “The question ‘How precisely did the bankers do this to us?’ has never been answered by those seeking to make the bankers the fall guys,” Jim responded by saying “This does not persuade me. The mischief within-and-without the banks is well known, e.g. the Magnetar case and the GS case… as well as the bailouts, the ZIRP carry trade, the Repo 105 shenanigans, the FASB rule 157, AIG’s  swaps division, etc etc etc. Essentially, what the bankers did was divert the deployment of capital from productive activity to rackets, swindles, and frauds. One could also say that oil cheapening through the 90s caused the bull market. (Energy inputs to the economy.) It seems to me that you are talking about markets in purely technical trading terms without application to the question of whether our business activity produces real things of value.  To discuss “buy-and-hold” in relation to financial businesses is pure abstraction.”

I told Jim that “I’m grateful for your feedback.” I added that: “I still believe what I believe. But I am going to make an effort to reflect on your feedback and the feedback that I hear from others and perhaps over time I will be pulled closer to your views. In any event, your being willing to take the time to let me know your thinking on all this was obviously a kindness on your part.”

Google Knol #2 — The Bull Market Caused the Economic Crisis

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I’ve posted my second Google Knol. This one is called The Bull Market Caused the Economic Crisis.

Juicy Excerpt: There is a simple and compelling explanation for our troubles that is rarely discussed. The bull market of the late 1990s pushed stock prices to three times fair value. That translates into $12 trillion of funny money. Presuming that stock prices were always fated to revert to the mean (Vanguard Founder John Bogle describes Reversion to the Mean as an “Iron Law” of stock investing), we set ourselves up for the loss of $12 trillion in spending power once the bull market came to an end. It’s not hard to understand why that would bring on an economic crisis. So why not pay heed to Occam’s Razor and accept the obvious explanation as the most likely one?

A strong case gets stronger when you take into account the message of the historical stock-return data. Yale Professor Robert Shiller reports in his book Irrational Exuberance that there have been four times in the history of the U.S. market when stocks reached insanely dangerous price levels: (1) the early 1900s; (2) the late 1920s; (3) the mid-1960s; and (4) the late 1990s. On each of those occasions, we experienced a stock crash. We have never experienced a stock crash of lasting significance starting from a time when stock prices had not gone to insanely dangerous levels. And on each of those occasions (and not on any other occasion) we also experienced an economic crisis. The correlation is perfect.

Get Rich Slowly Forum Discusses How Buy-and-Hold Caused the Economic Crisis

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I recently initiated a thread at the Get Rich Slowly Forum at which we discussed how the reckless promotion of Buy-and-Hold Investing served as the primary cause of the economic crisis. Well, actually, that was just my take. Believe it or not, there were one or two community members who did not buy into this idea. Imagine!

Juicy Excerpt #1: Buy-and-Holders are going against the herd by being net sellers in bull markets and net buyers in bear markets. So how can they be blamed for the problem of stock bubbles?

Juicy Excerpt #2: It was institutional investors that presented the systemic risk. Individual investors had nothing to do with it.

Juicy Excerpt #3:  I see no evidence that Buy-and-Holder took all the oxygen out of the room and thereby made it impossible for people with other viewpoints to present their case effectively. 

Juicy Excerpt #4: There simply is no such thing as an objectively “fair” valuation for stocks, any more than there is an objectively “fair” valuation for houses, concert tickets, or William Shatner coffee mugs on eBay. The values are entirely subjective.

Juicy Excerpt #5: Rob, this isn’t the first time you’ve suggested that one of the reasons for the persistence of Buy-And-Hold investing is the profit for the “Stock Selling Industry.” I just wanted to ask you something about this: Wouldn’t your approach be even more profitable for the “Stock Selling Industry?”

Juicy Excerpt #6: I’m left to conclude you are either sincere, or insane. I’m on the fence, but I’m leaning toward sincere.

Podcast #186 — The Biggest Mistake Ever Made in the History of Personal Finance

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I’ve posted Podcast #186 to the “RobCasts” section of the site. It’s called The Biggest Mistake Ever Made in the History of Personal Finance.

The people who developed the Buy-and-Hold model did something important and valuable. But they made one fundamental mistake — they made an assumption that market efficiency kicks in immediately while the evidence revealed over the past 30 years is that it is achieved only gradually over time. That mistake is the primary cause of today’s economic crisis.

Podcast #126 — When Government Spending Can Solve a Problem and When It Cannot

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I’ve added Podcast #126 to the “RobCasts” section of the site. It’s called When Government Spending Can Solve a Problem and When It Cannot.

We cannot buy our way our of this economic crisis. It’s the result of a loss of trust in the stock market. We need to do the sorts of things that help people regain a lost trust.

Spending money doesn’t do it.