A Rich Life

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

Valuation-Informed Indexing #138 — Will It Be Okay to Say “I Told You So!” After the Next Crash?

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I’ve posted Entry #138 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Will It Be Okay to Say “I Told You So!” After the Next Crash?

Juicy Excerpt: Predictions are a way of testing the merit of competing theories. Shiller’s theory permitted him to predict events that actually did play out. The Buy-and-Holders did not predict the crisis. To the contrary, they were shocked and amazed and stunned by the crisis. That should tell us something about the merit of their model for understanding the markets. It does not by itself tell us they are wrong in all that they say. But the fact that they failed so spectacularly re this one issue suggests that we should evidence greater skepticism toward other ideas being put forward by people from that school of thought.

Even more importantly, a full discussion of the research findings behind Shiller’s prediction would go a long way toward helping us overcome the crisis. The first thing that a doctor does when trying to cure an ailment is to form a diagnosis. Get the diagnosis wrong and you are likely to get the treatment wrong. Have we gotten the diagnosis for our economic troubles wrong? It sure seems so to me.

Valuation-Informed Indexing #117 — Market Crash Inevitable, Regardless of Who Wins the Elections

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I’ve posted Entry #117 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Market Crash Inevitable, Regardless of Who Wins Elections.

Juicy Excerpt: What if it is Obama that wins? Then the other half of the population gives up its illusions! The Romney people have been feeling mighty discouraged during the past four years. They get through each day by telling themselves that Obama won’t be reelected, that Romney will be coming in soon. An Barack Obama win would make this half of the population feel as bad about the future as the Obama supporters will feel in response to a Romney win.

It gets worse.

You might think that the saving grace from a hope perspective if Barack Obama wins is that the Barack Obama voters will feel renewed hope. They will. For a time. But if the theory behind the Valuation-Informed Indexing model is on the mark, it is not economic conditions that are causing our troubles — it is the largely ignored reality that we borrowed $12 trillion from future investors to pay for the bull markets of the late 1990s and that we now need to pay that money back. Obama’s policies cannot make up for the $12 trillion in lost wealth we caused by letting the bull market get so out of hand. So the hopes of the Obama supporters that Barack Obama will turn things around in a second turn will not be vindicated.

Valuation-Informed Indexing #115 — Leading Figures in the Investing Field Should Be Planning Their Response to the Next Price Crash

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I’ve posted Entry #115 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Leading Figures in the Investing Field Should Be Planning Their Response to the Next Price Crash.

Juicy Excerpt: Another big mistake was the failure of the leading figures in the field to let people know that stocks would likely be performing poorly for a good number of years to come. We have never recovered from a bull market by living through a single price crash. The P/E10 value has in the wake of every earlier secular bull market fallen to 7 or 8, a 65 percent price drop from where we stand today. How many of today’s investors know this?

I of course understand that the primary goal in the minds of those who were speaking out was to avoid panic. I presume that their motivation in presenting a rosy picture of the future was to offer reassurance. I don’t think that is at all a smart idea to overdo the reassuring words, however. To tell investors in 2008 that the worst of the bear market was over was akin to a doctor telling a patient with a cancer that has not been cured that the future is bright. That’s the message that the patient wants to hear and that’s the message that the doctor wants to tell but that’s not at all the right message to send. Truth matters.

It matters a lot. Why? Because people don’t seek reassurance only one time in a secular bear market (there are always multiple price crashes in secular bears). People are going to need to hear soothing words when prices crash again. And it is going to be harder to get them to believe the soothing words offered when they recall that the soothing words offered in 2008 did not prove out.

I am not suggesting that we should have filled people’s minds with visions of doom and gloom. The aim should be the opposite of that. The aim should be to build within people a real confidence in the future. That can be achieved with words that are 100 percent true. Yes, we are likely to see another crash. But the long-term value proposition of stocks really did improve dramatically with the 2008 crash. And the long-term value proposition of stocks will soar in the wake of the next crash. We could have told investors what to expect and reassured them in a lasting and real way.

Beyond Buy-and-Hold #108 — How Bad Will the Next Stock Crash Be and When Will It Arrive?

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I’ve posted Entry #108 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s titled How Bad Will the Next Stock Crash Be and When Will it Arrive?

Juicy Excerpt: Trying to guess precisely when the next price crash will come or how deep it will be is a stupid parlor game that smart investors should avoid playing. Still, for purposes of this column… I am going to play the stupid parlor game!

What’s the Best Age at Which to Experience a Stock Crash?

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I’ve posted a Guest Blog Entry at the Barbara Friedberg Personal Finance blog. It’s called What’s the Best Age at Which to Experience a Stock Crash?

Juicy Excerpt: For young investors who have established themselves in good careers before a crash hits, the crash can actually be a big plus. Stock valuations always go to one-half of fair value before the bear market comes to an end. When stocks are priced at one-half fair value, the most likely annualized 10-year return is 15 percent real. Young investors experience small dollar losses in a crash and are then positioned to experience huge gains in the years when they are earning enough to invest heavily in the market.

Beyond Buy-and-Hold #68 — How Our Stock Addiction Grew Gradually Worse Over Time

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I’ve posted Entry #68 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called How Our Stock Addiction Grew Gradually Worse Over Time.

Juicy Excerpt: It happened gradually and without me taking much notice of it. Once I had a habit of drinking one cup per day, going to two cups per day did not seem like a big deal. Once I had a habit of drinking two cups per day, going to three cups per day did not seem like a big deal. You get the idea.

This is how it works with stock valuations. Stocks were priced insanely low in 1982. Then valuations went up a bit. But it didn’t matter because prices were so low. Then valuations went up a bit more. But it still didn’t matter because prices were at fair value. Then valuations went up a bit more. But it still didn’t matter because stocks offer a strong value proposition even when they are selling at prices a bit above fair value. Then there came a day when stocks were priced at three times fair value.

Stock Crashes and Recessions Often Hurt Young Investors Most

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I’ve written a Guest Blog Entry for the Own the Dollar blog titled Stock Crashes and Recessions Often Hurt Young Investors Most.

Juicy Excerpt: The young investor may well have lost close to 20 years of compounding returns because of the bull market of the 1990s before the consequences of the huge bull are behind us. But he did not personally experience any of the gains! Older investors frontloaded their gains. Younger investors have never experienced any gains.

Podcast #112 — All Who Purchased Overpriced Stocks Caused the Stock Crash

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I’ve posted Podcast #112 to the “RobCasts” section of the site. It’s called If Government Regulation of the Finance Sector Were What It Would Need to Be to Stop Stock Crashes, Anyone Who Bought One Share of Stock from 1995 Through 2008 Would Be in Jail.

The government cannot regulate us if we cannot regulate ourselves. We need to look within and deal with the dark human impulses that caused us to do what it took to bring on the stock crash.

The Curse of Pretend Money

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I recently wrote a guest blog entry for the Four Pillars blog entitled The Curse of Pretend Money.

Juicy Excerpt: The reality is that your stock portfolio was never worth $1.5 million. The portfolio statement that led you to believe it was had been sent to you in January 2000, when stocks were priced at three times fair value. The real value of your stock portfolio on that day was $500,000, not $1.5 million. The extra $1 million was pretend money.

Lots of comments.

Some making solid points.

Juicy Excerpt: I don’t think there are too many places where a vacation home has dropped 70%. I think 40-50% is the max right now. And for a stock portfolio to drop 50% means it was far too heavily invested in equities, which would not make sense for someone at 60-65 with less than 5 yrs to retirement.

Some not so much.

Juicy Excerpt: Why are you so against providing some details so we can have a better understanding of your approach and a more enlightened discussion?

Some offering depressing thoughts (which may turn out to be on the mark all the same).

Juicy Excerpt: If you think that there is “something very close to zero chance” of “us ever again going to the valuation levels that applied in 1995 if we make it a practice to inform middle-class investors of what the historical data tells us about the effect of valuations on long-term returns” then you have a lot to learn about human nature. Man is an emotional beast, always has been, always will be. No explanation of “what the historical data tells us” will change that.

Some offering uplifting ones (which may turn out not to be on the mark all the same).

Juicy Excerpt: I understand that there is always going to be a dark emotional impulse within us all to invest passively. I am questioning whether it is a good idea for us as a society to direct hundreds of millions of dollars of advertising money to the job of encouraging us to give in to that dark emotional impulse….Things change for the better in this world all the time. It happens when people get sufficiently fed up about a situation to do the work it takes to bring on the change.

Podcast #81 — Why Stocks Let You Down, and How to Make Sure It Never Happens Again

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I’ve added Podcast #81 to the “RobCasts” section of the site. It’s called Why Stocks Let You Down, and How to Make Sure It Never Happens Again.

You should have been more skeptical when the “experts” told you that it was okay to ignore price when buying stocks. That’s an idea with a long history of causing huge amounts of human misery.