Beyond Buy-and-Hold #13: Calorie Counting for Stock Investors
I’ve posted Entry #13 for my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called Calorie Counting for Stock Investors.
Juicy Excerpt:
It’s the things that affect investing that most of us don’t acknowledge have much to do with investing that are killing investors today. We need to begin talking about this human stuff. All investors are humans. So it applies.
Humans are cheaters, mess-ups, self-deceivers. Investors are humans, so investors are all those things too. That’s why the last decade turned out to be The Lost Decade. Another way of saying it is that the 1990s were The Cheesecake Decade and we had to endure the rigors of a Lost Decade to get even somewhat back in shape.
Beyond Buy-and-Hold #7 — You Invest Poorly for the Same Reason You Spend Too Much
I’ve posted entry #7 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called You Invest Poorly for the Same Reason You Spend Too Much.
Juicy Excerpt #1: We’re human. We are affected by advertising. The people who develop marketing campaigns know what they are doing. They appeal to the emotions and they repeat their message thousands of times. That’s what works (for them, not for us). Long-term market timing is what works for us. Market timing is required for long-term investing success. But most of us invest in the way that the industry marketing campaigns tell us to invest. This needs to change. We need to start talking about this sort of thing more frankly than we ever have before.
Juicy Excerpt #2: I’ve only heard of long-term market timing within the last 2 years, and I studied investing pretty regularly (both in school and on my own). So I think people need to learn that you can time the market based on valuations and not just on a tip from a guy who knows a guy.
Juicy Excerpt #3: The average investor listens to the media and is fearful when others are fearful and greedy when others are greedy. The very opposite of what Warren Buffet would suggest – and we all know his track record!
“This Is So Big That Our Brains Are Not Capable of Taking It In All At Once”
Recent blog entries have set forth the texts of e-mail correspondence between a community member named “Larry” and me. Set forth below is one that Larry sent on November 4, 2009, and one that I sent in response that same day.
Rob,
I’m now a 100% believer. I am sure that you have this chart from Ed Easterling but it is awesome and supports your position on valuation investing.
http://www.crestmontresearch.com/pdfs/Stock%2020%20Yr%20Returns.pdf
I came across this on another site. I think I may be matching your passion on this subject!
Larry:
That’s good news.
Yes, Ed Easterling puts out fine stuff. He came out very hard on the errors in the Old School SWR studies in an article at his site, saying that many people will be spending their declining years working as greeters in WalMart because of the demonstrably false retirement-planning claims.
Several years back, John Russell and I invited Ed to a special event at the SWR Research Group board at which he fielded questions from us in real time for about an hour or so. He had agreed to field questions from the entire community at the NoFeeBoards.com site, but the Goon element there insisted that the discussion be banned (John and I ignored the ban and were later removed from the site because we continued to post honestly).
I link to Ed’ s site in an article that I am announcing at my blog tomorrow. The article links to 20 studies showing that valuations affect long-term returns. I have not cleaned it up yet (there may some typos and I have not double-checked that all the links are in working order). But you might want to take a look at some of the research that is rarely played up by The Stock-Selling Industry:
http://www.passionsaving.com/buy-and-hold-is-dead-part-one.html
http://www.passionsaving.com/buy-and-hold-is-dead-part-two.html
What I believe you will find in coming days is that more and more implications of the reality that valuations affect long-term returns will hit you. The implications reach in a hundred directions. This is so big that our brains are not capable of taking it in all at once. I’ve been thinking about this stuff 24/7 for over seven years now and I still learn something new almost every day. I have recorded 184 podcasts of over an hour each exploring the implications and I have a list of over 100 more than I will record in coming days if time becomes available.
An important issue that comes up over and over again in this debate relates to how it is that human learn about a subject of interest. We are NOT logic machines. We do not learn solely by processing evidence. We have filters that “protect” us from information bits that “do not compute” according to our accepted paradigm. Learning is a gradual process. We take one idea in and acceptance of that one leads to another and acceptance of that one leads to yet another. It takes a lot of these small changes to bring about a paradigm shift in our thinking.
This is why I feel so strongly that we need to have a place on the internet where people interested in investing can congregate and post honestly. People are not going to come around to these ideas unless they are permitted to ask questions and bit by bit come to a new understanding. We have found thousands of people who are interested in doing so. The rub has been that there is a much smaller number that is determined to block the learning process and this group is about 50 times as intense as the group that favors the idea of allowing the learning process to mover forward.
Once we get to a point where honest posting is permitted, I believe that Passive Investing is finished. There is not one person alive who benefits from it (this includes The Stock-Selling Industry, in my assessment). It will all fall down once it can be questioned effectively. So my belief is that the key is figuring out a way that questions may be raised as part of reasoned and civil discussions.
Rob
Investing: The New Rules #12 — The Godfather Visits InvestoWorld
I’ve posted Entry #12 in my Investing: The New Rules column at the Death by 1,000 Papercuts site. It’s called The Godfather Visits InvestoWorld.
Juicy Excerpt: If you can accept that you are a liar (we all face temptations to lie every day and give in to them on at least an occasional basis), you can become a highly effective investor. If you cannot bear hearing anything but the most oily forms of flattery, John Bogle is your guy.
Podcast #129 — Are Middle-Class Investors Too Dumb to Invest Effectively?
I’ve posted Podcast #129 to the “RobCasts” section of the site. it’s called Are Middle-Class Investors Too Dumb to Invest Effectively?
The “experts” insult us with this explanation for their promotion of the Passive Investing model. Yes, we’re highly emotional about our investing choices today. That’s because our heads are filled with the Passive Investing gibberish and we are not able to develop any confidence that our strategies are going to work out long-term as a result. Their suggestion that we are “dumb” is a case of Blaming the Victim. We’re not dumb. We’re confused (and largely because the investing advice they have been pushing for three decades now doesn’t add up).
Podcast #118 — The Angry Investor
I’ve posted Podcast #118 to the “RobCasts” section of the site. It’s called The Angry Investor.
I have seen lots of people who believe in Passive Investing become angry on learning of the grave flaws of this investing strategy. That’s not a good sign. Any investing strategy that causes so much anger is a bad investing strategy. Investing strategies that inspire confidence would not give rise to such negative emotions.
Podcast #96 — It’s All Schroeder’s Fault!
I’ve added Podcast #96 to the “RobCasts” section of the site. It’s called It’s All Schroeder’s Fault!
Don’t blame the bankers. Don’t blame subprime mortgages. Don’t blame the experts. Don’t blame Bernie Madoff. Don’t even blame Passive Investing.
Blame Schroeder!
And millions of other middle-class investors who went along with the Passive Investing concept despite the warning bells in their heads that doing so could not possibly turn out well in the long run.
“Do We Like What Comes from Telling Lies to Ourselves re What Our Stock Portfolios are Worth?”
Set forth below is the text of an e-mail that I sent last week to my friend Brian. Brian and I became friends during my days as a Capitol Hill reporter. We have stayed in touch in the years since. Brian asked: “If everyone (or the vast majority) has lost money, are we really any poorer?”
Brian:
You’re asking a penetrating question. I wish that everyone would take some time and think this one through. If they did, that would help a lot.
The full reality is that there has been no loss. The money that was “lost” was pretend money. It was cotton candy that has now been blown away in the wind. It never existed in the first place. So of course it was not possible to “lose” it. One cannot lose something that does not exist in the first place.
However, we ARE poorer as a result of our decision to entertain the illusion of being richer for a time:
1) People who believed that the illusory wealth was real started businesses because of that belief and now have seen those businesses fail when the illusory wealth was taken away. The years of effort devoted to building those businesses is lost. That’s a loss for the entire society because those years could have been put to more constructive use;
2) People who believed that the illusory wealth was real spent far larger sums on houses and cars and vacations than they would have had they known that most of the stock market gains of the 1990s were comprised of funny money;
3) People have failed to properly plan for their retirements because they believed that the numbers they saw on the bottom line of their portfolio statements were reasonably accurate;
4) Businesses that would have done better in an environment in which people didn’t think they were as rich as we had come for a time to believe we were failed in earlier years because they were trying to compete with businesses that gained an unfair advantage because of the belief in the funny money. For example, companies selling luxury homes moved ahead of companies selling modest homes because luxury homes seemed to make more sense for a time than they would have had we known the real numbers;
5) Lawmakers have directed huge amounts of money to stimulus projects that would not have been devoted to those projects had we been talking straight with each other about the true level of wealth in our society.
The money that came from the overvaluation of stocks was pretend money. We’ve lost nothing in returning to fair-value prices. But we have caused millions of unfortunate economic choices to take place by telling people for 13 years (1995 through 2008) that they possessed far more in the way of accumulated wealth than they in fact possessed. It’s a tragedy.
The good news is that we could turn it around by making a decision as a society to begin talking straight about how stocks work. If we did that, the economic growth that would result in the following years would be huge. All of the negatives would be turned into positives. My hope is that this crisis is going to cause so much pain that it will cause people to ask the fundamental questions that need to be asked to get things on a much better track.
It’s a gut check for our society. Do we like what comes from telling lies to ourselves about what our stock portfolios are worth? Or can we reach down deep and transform an unfortunate set of circumstances into something that ends up generating lots of wonderful, wonderful advances in years to come?
Learning how stock investing works is like learning how to cure cancer or how to fly or how to build a computer. There are thousands of implications that affect every aspect of human life that follow from it.
Rob
“The Prospector Would Still Be At That Same Spot Still Digging With His Even-More-Callused Fingers”
Today’s blog entry is a guest post by Arty, one of the best contributors to the Retire Early and Indexing discussion-board communities in recent years. I’ve read hundreds of articles about our economic crisis. Few have made the key point about the cause of the crash as clearly and succinctly as the words below.
Arty put forward the words as a comment to the blog entry entitled “This Month’s Permanent Portfolio,” where he also offered dozens of other comments also worth checking out.
Rob,
Was listening to your podcast on “attitude”. And how investors can remain emotionally “invested” in doing the wrong thing. Reminded me of a story I kept (written I think, by Arthur Jones, who pioneered a far more rational approach to strength training than had existed in the mainstream–and, sadly, still exists as the dominant model, though people are slowly learning:
Imagine you are on a hiking trip through some rugged desert terrain. You see a figure in the distance. It’s an old man, bearded and half-naked, on hands and knees, with his fingers clawing at the hard, sandy earth.
“You ask, ‘What are you doing?’
” ‘I’m digging for gold.’
” ‘How long have you been at it?’
” ‘Weeks — months maybe. It’s painfully slow work.’
“You notice the old man’s bloody fingers, his raw and callused knuckles. You say, ‘But listen, man! Digging with your bare hands is a pretty inefficient way to prospect for gold. That hole’s only a couple of feet deep. Let me loan you my shovel.’
“You reach into your backpack, pull out a lightweight, tempered-edge spade, and drive it into the ground. Then, you show the man how he can break and scoop the hard sand much more efficiently. In less than five minutes you have demonstrated to the old fellow that he can make more progress in a few moments than he could in a month of using his bare hands.
“Then, an amazing thing happens,”. “That old man’s eyes fill with hate and his face flushes angrily. He charges at you and grabs the shovel from your hands. He’s now preparing to throw the shovel, or perhaps even try to beat you with it.
“You quickly retreat, and get the hell out of the old man’s range, as the shovel comes crashing down behind you on the hard sand.”
That’s not the end of the story.
“If you return to that rugged location in the desert a year later, what would you expect to see that old man doing? Would he be using the shovel properly and have holes as big as school buses spread over the immediate and adjacent surroundings?
“No, absolutely not! Instead, the prospector would be at that same spot — with a somewhat bigger hole — still digging with his even-more-callused fingers. And there, in plain sight, only a few yards away . . . would be the unused, and now rusty, shovel.”
Arty
Set forth below is the text of a comment that I put today to a discussion thread at the Free Money Finance blog on the topic of the merits or lack thereof of market timing:
Thanks for your kind words and thanks for indeed adding some thoughts that those listening in here very much need to take into consideration, MBTN There’s no question (at least in my mind, but I believe that I probably speak for a lot of people re this one) that you are making an important point.
Stock prices can be affected by either rational/economic factors or by irrational/emotional factors. I think we are in agreement re that. And I think we are also in agreement in a belief that we can never know for certain which it is that is having the dominant effect. So we don’t know everything that we would like to know.
The question is — What do we do about this unfortunate reality? There is no neutral ground. We either report the nominal stock price as if it is real (which is what we have been doing during the Buy-and-Hold Era). Or we let people know that there is good reason (but not 100 percent compelling evidence) that the nominal price is heavily affected by emotional inputs. The key message that I want to get across is that THERE IS NO NEUTRAL GROUND. Both of the two possible choices (ignoring the emotional inputs that we believe are there or incorporating the emotional inputs into a price adjustment) carry risks.
Consider the situation in January 2000. The P/E10 valuation metric (the metric used by most of the people who are best informed about valuation questions) indicated that stocks were priced at three times fair value. Say that there is an individual who has a nominal portfolio value of $600,000. If we ignore valuations (which is what we did during the Buy-and-Hold Era), we send him a portfolio statement saying that he possesses $600,000 in stock wealth. If we incorporate a valuation adjustment into our reporting of his stock value, we send him a portfolio statement saying that he possesses $200,000 in stock wealth.
You are right when you say that we do not know with certainty that the true metaphysical value of his portfolio is $200,000. But I am right that we do not know with certainty that the true metaphysical value of his portfolio is $600,000. And getting the number wrong in either direction is going to have horrible consequences for the economy. If you tell someone that he possesses $600,000 in wealth when he really possesses only $200,000, he is going to spend money on houses and cars and vacations that he cannot afford to spend. Then a few years later he is going to regret having overspent for all those years and is going to pull back on his spending and cause an economic crisis. I believe strongly that the crisis we are living through today is the consequence of 30 years of promotion of Buy-and-Hold Investing.
I think that a lot of people experience unease with the thought of putting any number on that portfolio statement other than 600,000. In people’s minds, the $600,000 is a hard number while the $200,000 number is just sort of a guess. So people say “it’s okay to mention that there might be some overvaluation present, but you have to report the $600,000 number on the portfolio statement.” This is where I get off the Buy-and-Hold reservation.
I acknowledge that the $200,000 number is not 100 percent solid. If you asked informed people, some would say a better number is $250,000 and some would say a better number is $150,000. But I really don’t think that there is any reasonable person who would say that the best number is $600,000, that there was zero overvaluation present in the market in January 2000. In January 2000 we were reporting numbers that we all knew to be wildly wrong on millions of portfolio statements because we were not as a society willing to look at these difficult questions squarely and come up with REASONABLE AND BALANCED solutions to them.
My claim is not that there is a perfect way to do things and that the Buy-and-Holders won’t go along. My claim is that there is a better way than the Buy-and-Hold way and that the Buy-and-Holders are using a demand for absolute 100 percent perfection that they apply only to non-Buy-and-Hold approaches get in the way of consideration of approaches that are better than Buy-and-Hold but something short of perfect. Using $600,000 as the portfolio number was no more “right” than using $200,000 (my personal view is that it was far less right). So why did all of our portfolios use the $600,000 number? Why was there not even a DEBATE about this at the time?
The consequences of avoiding the debate are huge. I discussed above the retirement question. I have a retirement calculator that includes a valuation adjustment. If this debate were proceeding as it should, that calculator would be getting linked at thousands of web sites where people could check it out and DECIDE FOR THEMSElVES whether they want to use valuation-adjusted numbers in planning their retirements or not. The reality is that the calculator is linked at only a tiny number of sites. Not because it does not add something important to the debate. Because Buy-and-Holders feel that it makes them look bad for people to see how far off their numbers turn out to be if a valuation adjustment is employed.
When there is not even a debate about these questions, there is no brake on the car. People have a natural tendency to want to see stocks overvalued — overvaluation makes for bigger numbers on our portfolio statements and we all want to be prepared for retirement as soon as possible. All humans have an inclination for self-deception and the only thing that can rein this in is a voicing of the dangers. But for so long as we do not permit the debate (because it embarrasses Buy-and-Holders), there can be no voicing of the dangers! And the worse the problem goes, the greater the embarrassment becomes!
We left the market no way to correct prices except through a huge crash. We did that by cutting off the only way that overvaluation steam can be released outside of a crash — HONEST and REASONED DISCUSSION of the risks of overvaluation. I am proposing a sea change in how investing analysis is performed. I am NOT disputing the point you are making, MBTN. I see it as an important and legitimate point and I consider you a friend for being willing to go to the trouble to advance it here. The sea change that I am proposing is in asking/insisting that in future days the Buy-and-Holders extend that same hand of friendship to Valuation-Informed Indexers, that we all think of each other as friends engaged in a mutual effort to overcome our personal flaws and come to the best overall answers we can come to.
I am biased. I have been invested solely in super-safe asset classes for 14 years. That inevitably biases me against stocks. But the Buy-and-Holders are also inevitably biased in favor of stocks. If we want our boards and blogs to work, we need to acknowledge these biases and make an effort to work together to give ourselves and others the best possible discussions of the issues possible. When all of the people on one side of the table are not participating because it has been made clear to them that their comments will be dismissed as “rude” if they state their honest views, the discussions become misleading and dangerous and irresponsible. None of us really want that. So we all need to make a greater effort to try to put ourselves in the shoes of the other fellow and treat him as we would want to be treated if we held his viewpoint.
That’s my strongly held belief re all this, in any event. It is possible that I am wrong on the substance. I am certainly sincere in what I am saying (my record shows this beyond any reasonable doubt whatsoever). Again, I need to say that I am grateful to FMF for providing the forum for this discussion and I offer to do anything that it is in my power to do to see that it proceeds to a good place for every single person involved in it or affected by it.
Rob