I’ve got troubles so hard, I cannot stand the strain.
I’ve got troubles so hard, I just cannot stand the strain.
Some young lazy slut has charmed away my brains.
–Dylan, “Rollin’ and Tumblin’
Explanation #1 of how common-sense investing became controversial — Experts offering questionable advice won our confidence.
Middle-class workers are not naturally inclined to turn over their money without asking questions. We all respect experts. We are all skeptical of expert claims too. Most of us come to place our confidence in experts only after they have proven themselves.
How does an investing “expert” prove himself? By producing good results. In the wild bull of the 80s and 90s, it was the experts who took wildly pro-stock positions that came off looking best. The more irresponsible the advice from a long-term perspective, the better the results it produced for the length of the wild bull. We have come to place our confidence in many of the worst of the available “experts” while coming to doubt the claims of those who are offering advice that stands the best chance of producing good long-term results.
Explanation #2 of how common-sense investing became controversial — Our desire for security backfired because of our lack of numbers skills.
We all desire financial stability. Once we save money, we don’t like the idea of losing it. So we favor investing advice that is backed by scientific-sounding claims.
Investing claims backed by objective evidence really are better than the stuff that is just the product of a bunch of bored guys sitting around in a room shooting the breeze. Unfortunately, most of us don’t possess the numbers skills needed to distinguish real science from pseudo-science. Much of today’s investing advice is backed by pseudo-science, not the real thing.
We demanded science and we got it. What we got is not what we bargained for. Weak claims backed by pseudo-science are more dangerous than weak claims that don’t purport to be anything more than the product of a bunch of bored guys sitting around in a room shooting the breeze. The pseudo-science claims have a greater power to entice us because they sound as though they come from someplace real.
Explanation #3 of how common-sense investing became controversial — Academics took the easy way out.
Most investors don’t know much about the Efficient Market Theory and don’t care to know more than they do. It even sounds boring, right?
Unfortunately, even boring theories can cost us a lot of money. Just about everything we read about how to invest is influenced by widespread acceptance of the Efficient Market Theory. Common-sense tells us that this theory is wrong. The historical stock-return data confirms what our common sense tells us. The best-informed investing analysts acknowledge that the Efficient Market Theory is a theory that appears to be on the wagon to whatever graveyard it is in which dead academic investing theories are buried. As of today (this article was posted in March 2007), though, this theory still exerts a lot of influence.
When the dust settles, this one will likely have cost middle-class investors more money than any flawed theory ever cooked up by any ivory-tower egghead of the past. There should have been more serious questioning of this one back when it was just gaining steam.
It’s a theory that made it a lot easier to do investing research. Of the factors that affect investing, the emotional factors are the hardest to quantify. This theory does away with them with the flick of an assumption. Nice!
Once the Efficient Market Theory got rolling, there was no stopping it. It just made being an academic doing investing research too darn soft not to have to deal with all that hard-to-figure emotional stuff. Once the theory became fuel for the longest and strongest bull market in U.S. history, it would have taken the power of a locomotive to slow down the rush to do “research” rooted in this theory. It’s mostly Clark Kents who seek tenure-track positions. Robert “Man of Steel” Shiller is very much the exception.
Explanation #4 of how common-sense investing became controversial — Once the bull market illusions became conventional wisdom, the sin of pride caused a lock-in effect.
You’re a self-styled investing “expert.” You create a web site to share your wisdom with the world. Your expertise in the field consists of some ideas you read about in popular investing magazines that you kinda sorta think you understand, which themselves were based on academic studies that the authors of the magazine articles think that they kinda sorta understand, which were in turn based on investing theories that the academics writing the studies think that they kinda sorta understand. You write that stuff up. It works! The people following your fourth-generation musings on how stocks work get rich quick as prices climb and climb and climb.
Then stocks stop acting as they are “supposed” to. For seven years, things just sort of drift. You begin to see articles appearing in those investing magazines that you still read from time to time (but not so often anymore — what investing genius has much time available for such distractions from his core goal of spreading the reach of his insights even farther?) suggesting that perhaps there were some flaws to the ideas in which your advice is rooted. Do you own up to the realities? Or do you cover up the realities?
Explanation #5 of how common-sense investing became controversial — Sally Field Syndrome.
You hate me. You really hate me!
I’ve been looking for an opportunity to use that one. It’s a take-off of the Sally Field acceptance speech at the Oscars where she cried out: “You like me. You really like me!”
We all want to be liked. Things reached a point where I had heard so many deceptions about how stocks perform over the long term that I just had to tell it the way it is, popularity be danged. Boy, was it ever danged! I’ve been getting regular doses of “The Treatment” ever since. No charge!
It hurts.
That’s my problem, not yours. Your problem is that lots of folks other than me know that it hurts. So lots of folks other than me have elected to tell the stock investing story not precisely the way they would tell it if their sole concern were helping you to find the best place to invest your money.
I’m not the only one telling it straight, by any stretch. There are lots of others. But guess what? Those guys and gals get little doses of “The Treatment” too. They don’t get invited to the best parties. Schoolyard bullies bounce basketballs off their heads. They don’t get to see their smiling faces on the cover of the Rolling Stone. There’s a certain appeal to telling it like it is. There’s a certain appeal to resisting the urge too.
It’s a lonely job being the Cassandra of the Retire Early boards. I suppose that someone’s gotta see that the job gets done right and proper, though, eh?
The point here is — we don’t reward straight-shooters. So we don’t get straight talk.
I don’t mean just in Retire Early World. I mean in that gigantic discussion-board called “Reality World” too.
I only hope that The Little Stinkers don’t figure out a way to ban me from that one!
Explanation #6 of how common-sense investing became controversial — We allowed big shots to intimidate us.
My wife can never ban me. It doesn’t matter how much I mess up. We’re Catholic. So that’s that.
Given that she can’t turn the page or hit the “Back” button, I sometimes run my investing stuff past her, just to see. She doesn’t have a problem with the bottom line. She worked as hard as I did to accumulate the financial freedom stash we have and she doesn’t like the idea of seeing large chunks of it go “bye-bye” anymore than I do. I don’t get the sense that this topic puts her on the edge of her seat, however. I don’t get the feeling that she would mind terribly much if I wrote about something else every now and again.
I’ve received e-mails from readers that give me the same sort of feeling. There was one not too long ago, for example, that said something to the effect of: “Listen up, lunkhead! Everybody loves your saving stuff and everybody wants to kill you for writing the investing stuff you do. If you want your site to succeed, you’ll be writing more on saving and less on investing. Hello? Hello? Is anybody home?”
With the Goons, it’s personal. They do not like the idea of acknowledging the possibility that there ever was a time in their lives when they were wrong about something. With the Normals, it’s obviously not personal. Even with the Normals, however, there is not a great deal of excitement about the idea of coming to a better understanding of how to invest for the long term. The Normals are okay with it, they even see it as a good thing in small doses. There aren’t too many who are intense about it. There aren’t too many who are willing to knock down walls to learn about investing (as the Goons are willing to knock down walls to block others from learning about investing).
The Normals think investing is boring. It really isn’t. It’s like so many other things. It seems boring until you learn enough about it to see that it really is exciting. Playing the guitar is boring until you learn how to play a few chords.
Goons (and, remember, it’s not only on discussion boards that goonishness evidences itself — there are lots of big-name experts who have engaged in word games and other forms of petty goonishness from time to time) make investing look boring. They use big words because they haven’t thought things through carefully enough to be able to tell the story in a clear and direct way. They turn to equations to protect themselves from having to deal with the more complicated realities that cannot be reduced to numbers and plus signs and minus signs. They take a topic full of human drama and reduce it to a string of nonsense gibberish catch phrases. Stay the Course! Remain Flexible! Stocks Always Go Up in the Long Run! No One Can Predict the Future! The Historical Data Shows That Short-Term Timing Doesn’t Work! What the Historical Data Shows About Long-Term Timing Doesn’t Matter!
Simple is good. Simpleminded is not good. Much of today’s investing advice is not the good kind of simple that means that it is easy to understand. Much of today’s investing advice is simpleminded.
The primary blame goes to the “experts.” But we play a part in this drama. We don’t insist on better. Our willingness to settle for second-rate efforts from investing experts hurts us financially.
Explanation #7 of how common-sense investing became controversial — We have short memories.
I reread Robert Shiller’s Irrational Exuberance not too long ago. It blew me away when he talked about how there was a version of the Efficient Market Disease — I mean, Theory! — going around in the late 1920s, just before The Great Crash. It’s like a bad guy in a bad horror movie. The good guys keeps killing him and yet he keeps coming back.
We’re falling for the same tricks this time that we fell for in the late 1920s and in the mid-1960s. Most of us weren’t around in those days, of course, so the song sounds new to our ears.
If we’re going to become long-term investors, we need to adopt a long-term perspective. If we’re going to become long-term investors, we need to stop citing results from the last five years as “proof” of the merit of whatever strategy it is that we are infatuated with at the moment. If we are going to become long-term investors, we need to stop getting caught up in the emotions of the bull or the emotions of the bear.
Bulls don’t live forever. Bears don’t live forever. It’s only Dolphins that live forever.
We do live forever, don’t we?
Middle-class investors need to grow up. I don’t mean that to sound harsh for the sake of sounding harsh. I mean to make a serious point.
Explanation #8 of how common-sense investing became controversial — We’re greedy.
You’re greedy.
You’re my reader. I love you dearly. I have zero desire to insult you.
Still, if you want to win financial freedom early in life, you need to learn to take the realities straight up, with no chaser. You’re human, right? Then you’re greedy. That’s the way it is.
You don’t have to give in to your greed. You don’t need to let it ruin you.
You must deal with it. If you don’t deal with it, it will ruin you.
Lots of investing advisors don’t want to mention that you are greedy because they are afraid that you will turn the page or hit the “Back” button or whatever. You can do that. It won’t change things.
I’ve had people hitting the “Back” button on me for close to five years now. I’m still talking about the realities. The realities matter.
Those who possess a sincere desire to win financial freedom early in life enjoy working through the realities. They enjoy it for the fun they experience doing it. And they enjoy it for the financial rewards that follow from it. All of us show up here to work through this stuff together. It’s what we’re all about.
We are greedy. We are warm. We make mistakes. We achieve breakthroughs. We love money. We don’t love only money.
An expert who lacks the courage to tell you that you are greedy lacks one of the most important “credentials” needed to help you learn what it takes to invest successfully for the long term. There are too many out there today who are choosing to downplay this important reality.
Explanation #9 of how common-sense investing became controversial — We process information emotionally.
There’s a reason why I don’t like to be characterized as a “bear.” There are all sorts of negative associations that come to the mind of a middle-class investor when he or she hears the word “bear.” Bears are pessimistic. Bears are weird. Bears are grumpy. Bears dress funny. Bears leave a smell behind in the rooms they happen to pass through on their way to someplace else.
The root problem in a wild bull is that people come to think of stocks as good and of alternative investment classes as bad. Cut that out! Stocks are a tool. You use them to attain higher levels of financial freedom. Stocks are good when buying them helps you achieve your financial freedom goals and stocks are bad when buying them makes it harder for you to achieve your financial freedom goals. It’s financial freedom that is good.
When you form negative impressions of bears, you start walking down a path of emotionalism. That’s a dark path.
I don’t ask you to deny your emotions. Emotions are are not to be denied. You need to manage them.
You can’t just give in to them. When you give in to your emotions too freely, you give up the ability to think clearly. It’s when too many people choose that path that we end up in the sort of fix that we are in today.
Explanation #10 of how common-sense investing became controversial — We underestimated the possibility of ever getting to the price levels where we reside today.
I’ve spent some time trying to understand what the heck John Bogle was thinking when he advised indexers to stick with a single stock allocation even when stock prices change dramatically. Everyone is at risk when prices get high, but indexers are at the greatest risk of all (since they own the market as a whole and there is thus for them no chance of escaping the effects of a big price drop).
I have a hunch that part of it might be something simple — Bogle probably never thought that prices would get this high! Stock prices rarely get to the levels where they reside today. When indexing was being developed, prices were low. The risks associated with high prices might well have been the last thing on Bogle’s mind when he was trying to get people interested in his odd (at the time) approach to investing.
Indexing became more popular and prices went up. Prices going up caused indexing to become even more popular. At some point, all of the reasons cited above came to apply. There came a time when Bogle would have had to sacrifice popularity to tell people the realities of how changes in valuations affect long-term returns. There came a time when talking entirely straight would have required him to have admitted that he had been wrong in earlier times. There came a time when Bogle’s own emotions probably blew a fuse when he considered the idea of saying in clear and direct terms how much more risky it had become to be invested in stocks than it had been at times when prices were so much lower.
We’re all going to be reminded in days to come of how important it is to ensure that common-sense investing not become controversial. This time we need to make a special effort not to “forget” that prices that are low in time find their way to becoming high and prices that are high in time find they way to becoming low.
To everything — Turn! Turn! Turn!
There is a season — Turn! Turn! Turn!
And a time to every purpose under heaven.
–The Byrds (I read in a magazine that they got the idea for this song from some book called “the Bible.” Judging from the song, which has a nice breezy and upbeat quality to it, it sounds like this might be a book worth checking out if time ever permits.)