Investor Confidence -- What's Faith
Got to Do, Got to Do With It?
If only you believed in miracles, baby...
So would I.
-- The Jefferson Starship, “Miracles”
Comparison #1 Between Building Faith and Building Investor Confidence -- Experience Is Your Teacher
There are some who put off building faith until their later years on the thinking that that there will be more time for it when the demands of daily life are less pressing. This is a bad idea. Overnight conversions are the exception.
The usual path to advancement is that you develop faith in one area, and that gives you the power to strengthen your faith in other areas. I don’t think it’s entirely so that “you’ve either got faith or you’ve got unbelief and there ain’t no neutral ground” (Dylan made this argument in his song “Precious Angel” -- my sense is that he was in a particularly grumpy mood at the time this song was written, early in his “religious” period). Faith is developed gradually, piece by piece, over time. Many of us have some faith and are hoping someday to have more but need to work at it continuously to get from where we are to where we want to be.
Investor confidence is built gradually too. Saying the words “I’m a buy-and-hold investor” means little. I find those words coming from the mouth of an investor who ignores valuations as convincing as the words “I believe in God” coming from the mouth of an unrepentant sinner. The fact that someone says the words is a sign that her heart is in the right place or at least that she possesses some desire to have it moved to the right place. But actions speak louder. Good actions result from experience making good choices when faced with temptation (to sin or to abandon your buy-and-hold strategy).
There’s a problem with relying on personal experience to develop investor confidence. A bull market can last 20 years (the last one began in 1982 and ended in 2000). So there are many investors who do not personally experience the downside of unrealistic investing strategies until well into the later years of their investing lifetimes. This is why I recommend studying the historical stock-return data. Seeing how stocks have performed in the past gives us a way of gaining indirect “experience” in how stocks work without having to suffer the financial losses associated with learning our lessons the hard way.
Comparison #2 Between Building Faith and Building Investor Confidence -- Pride Can Ruin You
Someone who is certain he is saved probably isn’t. There’s nothing that more delights the devil than to steal a soul who came close to escaping his reach by injecting it with a heavy dose of pride in his own sanctity.
Pride leads to overconfidence among investors too. Say that you made lots of money in stocks in the 1980s and 1990s, so much that you felt safe beginning an early retirement in 2000. The historical data points to that time-period as the worst time-period in history to begin a retirement. But many of those who were making money during the 1980s and 1990s were not inclined to check into the realities before proceeding with plans that sounded reasonable given how stocks had been performing for the prior 18 years.
Were these investors “winners”? Many would say “yes” given the extraordinary returns they experienced for many years. But those who experience busted retirements are not winners; they are losers. Pride causes excessive investor confidence. Those who see the stock gains of the 1980s and 1990s as evidence that valuations don’t matter do not possess a true investor confidence any more than those who boast of their holiness possess a true faith. True investor confidence expresses itself in quiet, not boastful, ways.
Comparison #3 Between Building Faith and Building Investor Confidence -- It Gets Easier
Building your faith is hard work. It gets easier with time, however. The first step -- accepting that there might be a God and that you might want to keep His law in mind when deciding what work to do and what friends to hang out with and what movies to watch and how to converse with your fellow humans -- is a shocker. Those who stick with the project long enough to enjoy some of the rewards that follow from it learn that, while it never gets easy, it does get easier.
There are a lot of people who are afraid to adopt Valuation-Informed Indexing as their investing approach when they first hear about it. It’s not the norm, at least not at times when prices are where they are today. It seems odd, it seems strange. If you become a Valuation-Informed Indexer, you will be following strategies not followed by many of your friends. That’s tough stuff.
I’ve been following this approach for 11 years now and at this point I cannot imagine ever wanting to go back to the dark side. Considering prices comes to make all the sense in the world once you get used to the idea. It no longer seems odd to me to do so. What seems odd to me today is the idea of not considering prices.
If you stick with a realistic investing approach long enough, you will enjoy better returns as the result of doing so. Once that happens, taking a long-term perspective is no longer the hard road. It is the comparatively easy one. What is hard starting out becomes easier with time.
Comparison #4 Between Building Faith and Building Investor Confidence -- It’s All About Believing in the Unseen
There are many intellectual arguments that can be advanced in support of a faith in God. Reading those arguments can help you develop your faith. But they cannot get you all the way there. Doubts can undermine the strongest intellectual arguments. Sooner or later you need to make the leap to believing in the unseen. A purely intellectual faith is not a strong and long-lasting faith.
There are many intellectual arguments that can be advanced in support of buy-and-hold investing. Reading those arguments can help you develop investor confidence. But they cannot get you all the way there. Unexpected short-term price changes can tempt you to buy at bad times to buy or to sell at bad times to sell. Sooner or later you need to make the leap to believing that stocks will perform in reasonable ways in the long term and to using that belief as the cornerstone of your investing strategy.
The long term is “the unseen” in investing. It’s real, as real as God’s country. But the human mind is drawn to consideration of short-term results. I cannot tell you how many times I have had conversations with investors who claim to be following long-term strategies and who point to short-term results as their evidence that it is okay to ignore valuations in setting their stock allocations. The long term is what’s real. The short-term is what seems to be real. Success comes from coming to believe in the long term, the unseen of investing time frames.
Comparison #5 Between Building Faith and Building Investor Confidence -- You Need to Tune Out the Noise
I read somewhere that to be “holy” means to be “set apart.” I don’t particularly want to be set apart, you know? I want to be in the middle of things. I respect the Amish for giving up electricity to keep the temptations of the modern world at bay. I don’t want to follow their lead, however. I like my Dylan albums and I like my DVD player and I like my computer and I like my electric toothbrush.
My run to God is a run made in a potato-sack race, all stumbles and jumbles. My hero is Saint Augustine, who prayed to be made chaste “but not just yet.” To make significant progress on my quest for heaven, I’ll need to tune out the worst of the secular world.
There’s a lot of noise that serves to distract you from your realistic investing goals too. You want to be a buy-and-hold investor but other investors have gotten caught up in the enthusiasms of a wild bull market and are saying that it is okay to ignore valuations. That’s the devil talking. That’s temptation. That’s the big red apple. That’s noise. Tune it out.
Investor confidence comes from being able to distinguish what’s real from what is not. U.S. stocks have been delivering a long-term annualized real return of about 6.5 percent for a long time now. When returns go well above that, know that they are not lasting stuff, not real. The noise won’t hurt you so long as you do not let it influence your investing decisions. Successful investors need to keep themselves “set apart” from the nonsense gibberish being given voice in the newspapers and on the radio and on the television.
Comparison #6 Between Building Faith and Building Investor Confidence -- You Can’t Fake It
Faith will help you know what is the right thing to do. But you can’t fake it. Only a real faith yields inner peace. A false faith leaves you in a grumpy mood, like Dylan was for a few years back in the early 1980s. Faith will offer you comfort during hard times. But a false faith will crumble in hard times. Faith will fill your heart with gratitude. But only a true faith does that. A false faith can leave you angry and isolated and trapped in negativity.
Pretending (even to yourself) to believe in something you don’t really believe in is a strain. The path of faith is a different path from the path of unbelief. As you walk farther down the new path, you are forced to give up more of what you believed while on the old path or to live in contradiction. Faith begins with one simple decision (that there is a God), but it comes to influence every aspect of your life.
Buy-and-hold affects every aspect of your investing plan. It affects your allocation choices. It affects what sort of investing news you listen to and what you make of that news. It affects what sorts of returns you come to expect to receive from your investments. Most investors who today claim to be believers in buy-and-hold have not thought through what is involved in taking that path. It is a good path. But it is a demanding path. The buy-and-hold path is a path that works only for those with a serious commitment to walking it all the way to the end.
For those who lack a serious commitment, buy-and-hold is a dangerous path. There is nothing worse than a buy-and-hold strategy that fails; it is the buy-and-holders who sell last, when prices are at their lowest. You can’t fake buy-and-hold. True buy-and-holders inform themselves of the realities before proceeding down this high-potential but high-risk path.
Buy-and-hold is not a halfway strategy. It requires commitment. Commitment requires true belief. A true buy-and-hold can open to you the juiciest of financial rewards. A faked buy-and-hold can sour you on stocks for life.
Comparison #7 Between Building Faith and Building Investor Confidence -- You Can’t Do It Alone
You won’t grow your faith by sitting in a room concentrating on the task. You’ve got to read books. You’ve got to talk it over with friends. You’ve got to test your faith in real-world situations. You’ve got to mix it up a bit. You’ve got to sing out your faith and twist and shout about your faith and laugh along with your faith. A living faith is not a theory.
Investor confidence too must be lived to be real. It’s not possible to have strong confidence in strategies that are not tested by reading about and exploring and trying to understand competing strategies. It’s not possible to have strong confidence in strategies that have not been discussed with others, lots of others, all sorts of others. It’s not possible to have strong confidence in strategies that have not been tested in real-world dramas.
I don’t believe in short-term timing. I haven’t believed for a long time. Every now and again, I will hear an argument for what is going to happen in the short term that sounds plausible. Sometimes, I make a mental note to check back in a few months to see whether the short-term predictions paid off or not. One of the reasons why I don’t believe in short-term timing is that it so often fails these tests.
I believe in long-term timing. I believe because I have read so many of the best-informed experts say things that tell me that it must work. And because I have looked at the historical data from multiple angles and each new look adds to my confidence. And because I have sought input from so many who do not believe who have been unable to offer reasonable arguments for why they believe that long-term timing does not work. I can proclaim my belief in long-term timing on any stage and know that I will not be shot down because my belief is rooted in public encounters in which long-term timing survived challenges put forward by people who are strongly motivated to smash confidence in it.
My beliefs about investing are not my beliefs alone any more than are my beliefs about God. Lots of people more knowledgeable than I am have contributed to my beliefs, both in God and in Valuation-Informed Indexing. If there is no God, it’s not just me who got that one wrong; lots and lots and lots of smart people got it wrong. If Valuation-Informed Indexing doesn’t work, it’s not just me who got that one wrong; lots and lots and lots of smart people got it wrong.
Comparison #8 Between Building Faith and Building Investor Confidence -- A Testing Can Be a Strengthener
It’s not until your faith has been tested that you know how strong it really is. People often have a hard time understanding why God does bad things to good people. Perhaps sometimes it is to test their faith and thereby to strengthen it (and thereby to increase the odds of a mother and child reunion).
The conventional approach to buy-and-hold (an approach that ignores valuations) has never been tested. It became popular during the wildest and most out-of-control bull market in U.S. history and, while the bull market appears to have come to an end in 2000, we have not yet seen a price drop to anywhere even remotely in the neighborhood of fair prices. What will happen to the conventional approach to buy-and-hold when it faces its first real-world test? My guess is that it will be proven (even in the eyes of those who today are not open to hearing of its flaws) a gravely flawed strategy.
Out of the failure of the old buy-and-hold will come the birth of a new buy-and-hold, a realistic buy-and-hold, one that can stand up to what happens both in bull markets and in bear markets. We appear to be in the early days of a testing of the now-dominant investing model. I believe that this testing will undermine confidence in the phony version of buy-and-hold but will strengthen confidence in a genuine buy-and-hold, the realistic and informed approach to buy-and-hold. The mother and child reunion is only a motion away.
We don’t like to be tested. But we need to be tested if we are to develop truly effective long-term strategies.
Comparison #9 Between Building Faith and Building Investor Confidence -- Ultimately, It Comes from Inside
You need to hear the words of others and learn from the experiences of others to build your faith. You die alone, however. That’s the ultimate test. Do you believe or do you not believe at the last moment, when there is everything to be gained by believing but when doubts have their greatest power because there is no time left to resolve them? At the hour of your death, you can’t kid yourself or anyone else. Either you’re a believer who believes with the fervor of a Mickey Dolenz or you’re a cynical pretender.
You’ll face a moment of truth in your effort to build your faith in buy-and-hold too. The average portfolio loss on the three earlier times when we have been to today’s la-la land prices is 68 percent (that number does not include the effect of earnings on dividends paid during the time the price drop was taking place). Say that some years from today (this article was posted in May 2007) your stock portfolio is worth one-third of what it sells for today. Will you hold? If your investor confidence is a deep one, one that comes from inside, you will (if your investor confidence is deep enough, you will have already moved to a stock allocation that permits you to hold with relative ease).
If it’s not, then you won’t. “There won’t be no God to comfort you, you taught me not to believe that lie.” That’s Randy Newman talking over the disturbing realities of old age with a man of little faith. When you face death, whether the investing kind or the other kind, you do so alone. Your investor friends will all be selling. The media that now tells you to buy will then be telling you to sell. The market, which is the closest thing we have in InvestoWorld to a Devil (Mr. Market always tries to persuade you to do the thing that hurts you in the end), will surely be telling you not to resist the natural inclination. Will you? Will you? Will you?
Whatever you will do, you will do because of whatever structure of investor confidence you have built inside you in the years leading up to that critical investing moment. I’ll say a little prayer for you, internet friend.
Comparison #10 Between Building Faith and Building Investor Confidence -- No Matter How Many Times You Fail, It’s Worth Trying Again
People make fun of Catholics because they go to confession, have their sins forgiven, say their Hails Marys, take a walk around the block, and then get down to the business of committing the same sins all over again. I hate to tell tales on my own kind, but the truth is that it has been known to happen. Don’t ask me how I know. Let’s just say that I have a close friend who calls himself a Catholic and who has occasionally been found to be guilty of this sort of thing, okay?
God knows that you’re going to commit that sin again. He wants you to confess it anyway. The idea is that, by confessing it, you gain some grace that gives you a fighting chance of not committing it as frequently. We humans are good at playing the mess around. Still, we can be redeemed. No?
My guess is that there will come a day when most of the humans reading these words will be humans who committed the sin of putting too high a percentage of their portfolio in stocks when stocks were selling at very high prices and who learned that they should have heeded the words of The Wise But Ignored Old Testament Prophet Shiller. If you are one of those, please hear these words -- the Church will take you back.
Sin is sin. I cannot tell you that it doesn’t matter. It would have worked out better had you stayed to the straight and narrow. Like Johnny Cash did, you should have walked the line. Still, stocks really do offer a long-term return of 6.5 percent real to those who follow reasonable asset-allocation strategies. You cannot get back the money you have lost. You can begin today investing in more realistic ways and thereby gain confidence that you will do a lot better in days to come than you have done in days passed. Think of investor confidence as grace. Grace overcomes the darkest of sins.
Say 10 Our Fathers and 10 Hail Marys.
Sinner, thou art forgiven.
Go in peace.
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