PassionSaving.com Home Page : The Financial Freedom Blog : May 2007
May 1, 2007 08:33 – Save the Way You Spend
Sacrifice Saving–that’s my name for the conventional approach to money management–encourages a mindset in which you view your desires to spend and to save as forces pulling you in opposite directions. This approach is rooted in the presumption that, to realize your desire to save, you need to inhibit your desire to spend. It rarely produces much in the way of saving because, for most people most of the time, the urge to spend wins the tug of war.
There’s a good reason why. The urge to spend is a strong and constructive urge. The urge to spend is an urge to use money to enhance your enjoyment of life, and that’s a perfectly reasonable thing to want to do. Sacrifice Saving doesn’t work because its strategies all follow from the idea that the spending impulse needs to be defeated or diminished or held in check. It doesn’t. It needs to be encouraged and strengthened and sometimes redirected.
Spending and saving are not opposites. They are two sides of a single coin, alternative means of achieving the same general purpose. You save for the same reason you spend, to achieve your life goals. Saving doesn’t come from holding your spending drive in check. It comes from seeing how that drive can in some circumstances be better realized by putting off spending for another time. The purpose of saving is to permit future spending.
The aim of money management is not to spend less. It is to maximize the life enhancement obtained from the money available to you. That means combining decisions to spend immediately with decisions to save (and thereby to spend later) to achieve the perfect mix of these two money allocation options, the mix that provides you the greatest possible value from each dollar you earn.
In some circumstances, spending offers the greater benefit, and in others, saving does. How do you know which to do in a given circumstance? By comparing the extent to which each option advances your personal vision of the good life. You need that life-enhancement drive, that relentless desire for more fun and more freedom and more fulfillment, working on your side in your battle to manage your money well. Don’t suppress it; redirect its energies. Your desire to enjoy life more, the desire that now drives you to spend, can be put to use driving you to save too. To save effectively, you need to harness the motivational power behind that desire, not overcome it.
The conventional saving advice is rooted in the idea that saving must be forced, that it is hard to do, and that an assertion of will is required to achieve results. But spending is fun. If saving is another way of achieving the same purpose as spending, shouldn’t saving be fun too? If saving is fun, you shouldn’t need to force yourself to do it, should you? You should not. Done right, saving is fun, as much fun as spending. More on This Topic
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May 2, 2007 12:39 – Say It Loud — “I’m a Realistic Investor and I’m Proud!”
There was a guy at the Early Retirement Forum named “Mikey” who once directed a post to me in which he chastised me for coming on like too much of an expert. He said that there have been lots of people before me who have understood the importance of valuations and that I sometimes sound like I think I “discovered” that the price paid for stocks always affects the long-term return obtained from owning them.
I certainly agree with Mikey that most of my investing ideas are ideas that have been around for a long. long time. My investing take is the oldest investing take in the world — remember the injunction to “buy low, sell high?” That’s Valuation-Informed Indexing in a nutshell, is it not? So, to a large extent, I think Mikey’s comment is right on.
Where he loses me is with the suggestion that I claim to have “discovered” the idea of looking at the price of stocks as part of the effort to determine whether they are a good buy or not. I of course claim no such thing. My claim is that it is common sense to look at the price of stocks before you buy them and to buy only when the price permits you a realistic expectation of obtaining a good long-term return. The fact that I frequently refer to this insight as a common-sense insight should let everyone reading my stuff know that I suffer no illusions that I was the first human to come up with this insight.
I believe that what made Mikey feel the way he does was not anything that I said, but things that my critics say over and over and over again. It is my critics who say that my investing approach is different or strange or crazy or whatever. It isn’t. Not by any stretch. The idea that prices need to be taken into consideration is the most obvious insight imaginable. It’s an obvious insight that becomes extremely controversial when prices get to the levels where they reside today, however. Common-sense becomes “special” when a good number of investors have gone temporarily mad.
I’ll let you in on a little secret. I don’t worry all that much about the ones who have gone temporarily mad. Those who flat-out deny that valuations have an effect on long-term returns are consumed with greed. There is obviously no rational case that can be made for this position. So it is hard for me to imagine what it could be other than greed that causes people to place their confidence in this sort of argument. I don’t enjoy seeing even the truly greedy suffer the life setbacks that this group will likely be suffering in days to come, of course. But given the large number of things that there are to worry about on this troubled planet of ours, I cannot waste emotional energy getting too worked up over what is likely to happen to truly greedy investors.
I am deeply concerned about another group, a group that in my estimation is likely many times the size of the truly greedy group. This is the group that I refer to as the “Normals.” These people are influenced to some extent by greed; we all are. But greed is not the primary reason they are overinvested in stocks today. This group is comprised of people who do not have the time or inclination to study stocks in depth. They have money that must be invested somewhere and they are doing their best to invest it responsibly. They have placed their trust in experts and the experts have done them wrong. This group may well suffer as much as the Greedheads will for their bad decisions, but I see the Normals as being far less blameworthy.
The root problem with Normals is that they just do not understand how stock investing works. Their common sense tells them that the stock market cannot quite be what it is made out to be by the Greedheads, but there are few experts who they can turn to for the straight story. So they keep on doing what seems to them to be the reasonable thing. They feel some concern that they may be overinvested in stocks, but they don’t know how to go about determining whether they are overinvested or not. In most cases, they keep their stock allocations a bit lower than what the experts say is right. Given today’s valuations, that still leaves them with stock allocations far higher than what they would have if someone explained to them the basics of how stock investing works.
I worry about the Normals because I believe that what is being done to them is wrong. I don’t have any problem with people who knowingly want to take on big risks. They might score big as the result of doing so, you know? It’s their business, not mine. However, I don’t think it is at all right for experts to dramatically understate the risks inherent in stock investing when we get to the sorts of prices that apply today. Where money is involved, a reasonable level of accuracy should be expected and required. I think it is fair to say that most of today’s experts are not speaking with reasonable accuracy of the risks of going with high stock allocations when we are at the sorts of prices that apply today.
Here’s a statement that I saw in Ric Edelman’s (author of The Truth About Investing) e-mail newsletter this morning: “One-third of Baby Boomers say they don’t invest in the stock market because doing so would make them feel uncomfortable, according to a survey by the Association for Insured Retirement Solutions…. If you are uncomfortable investing in the stock market, invest in it anyway. And see a therapist who can help you deal with your feelings.”
Yuck!
And double yuck!
I agree with Edelman that just about everybody should have something invested in stocks; stock investing is the surest route to long-term wealth. I also agree with Edelman that it is unfortunate that many do not feel comfortable investing in stocks. However, I am repulsed by his suggestion that the blame lies with the middle-class workers who do not feel comfortable investing in this asset class.
There are perfectly good reasons why many do not feel comfortable investing in stocks. The primary reason is that Edelman and his fellow “experts” talk about stocks in ways that make little sense. The model used most frequently today to describe how stock investing works (the Efficient Market Theory) is nonsense. Most people don’t think it through to the point where they can see that. Most people have never even heard the phrase “Efficient Market Theory.” But lots and lots of middle-class Normals are smart enough to get it that the story being told about stocks today just flat-out does not add up. So they stay away.
I don’t like to see them stay away. But I certainly do not see any grounds for insulting them for doing so. If you don’t understand stocks, you should stay away; the risks for those who do not possess a strong grasp of the fundamentals are huge. And I can’t blame the Normals for not possessing a strong grasp of the fundamentals when I consider the nonsense gibberish regularly put forward by some of the best names in the field (the stuff put forward by those who do not have the best names is of course a good bit worse). The Investing Establishment has failed today’s middle-class investor. Big time.
The single biggest problem we face in overcoming this problem is our own inferiority complex. Those of us with a desire to invest in realistic and sensible and reasonable ways often act as if we ourselves think we are to blame for our lack of understanding of the fundamentals. We hesitate to find fault with the experts because we presume that they must be experts for a good reason. We know so little that we presume that they must know a lot.
This needs to stop! If the experts knew so much, they would be able to explain stock investing in clear and accurate and reasonable ways. If they cannot (and we discovered during The Great SWR Debate that a good number of the big names indeed cannot), what kind of experts are they really? A good number of them are experts in marketing, not in stock investing. We need to call them on their nonsense. That’s the only way we are going to move the ball forward in a significant way, in my view.
I was looking through some old posts this morning and I came across one from “BenSolar” in which he said something amazing about me: “Hocus is the only person I know (if only via message boards who has completely opted out of participation in the stock market bubble. And you know what? He has benefited immensely from doing so.” That’s some kind of crazy, isn’t it?
Recall Mikey’s comment described up above. Mikey says that I ain’t no expert, that everything I say about stock investing is pretty much common sense. I agree. Yet BenSolar says that I am the only person he knows who opted not to buy stocks for the length of time at which they could only be purchased at dangerous bubble-level prices. The combined message of those two posts is that I am one of few walking Planet Earth today who possesses common sense when it comes to investing. No?
It sounds like an arrogant statement. That’s what Mikey is getting at. But it is not an arrogant statement. It is a statement of plain fact and it is a statement of a plain fact of obvious importance. When I say that I am one of few walking Planet Earth today who possesses common sense when it comes to investing, I am saying something that very much needs to be said.
The point is not to pat myself on the back. The point is to offer comfort to those whose common sense is telling them to lighten up on stocks but who have been reluctant to take action because of the misplaced confidence they put in experts who are more concerned with promoting stocks than with explaining properly how they work.
Those who refrain from investing in stocks because they do not understand them need to devote some time to informing themselves of the basics. Edelman is right about that much. But they need to inform themselves about the realities, not the goo-goo land stuff put forward by most of today’s experts. Stocks are a fine investment class when you invest in them realistically. Stocks are a poor investment class indeed when you permit yourself to get swept up in the craziness and ugliness of a wild bull-market psychology and its aftermath.
Please stop apologizing for the doubts you hold about today’s conventional wisdom on stock investing. It’s not you who needs to see a therapist, it’s all the ones telling you to put your life savings at risk on an asset class that at today’s prices offers little upside potential and an ocean of pain as the downside possibility.
It’s those who already have doubts about the Efficient Market Theory who will be leading us to the development of more realistic models in days to come. Say it Loud — “I’m a Realistic Investor and I’m Proud!” More on This Topic
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May 3, 2007 14:24 – I’ll Share with You One of My Favorite Jokes
A monk-in-training goes to see the head monk and asks: “Father, would it be permissible for me to smoke while I say prayers?” The head monk responds violently. “Absolutely not!” he says. “Never! The idea!”
The monk-in-training comes back a few days later with a new question: “Father, would it be permissible for me to say prayers while I smoke?” The response comes back: “Oh, my son, such a wonderful idea! Of course! Please be sure to let your fellow monks know of your exciting new idea!”
Sometimes the direction at which you come at things makes all the difference. It’s that way with the popular saving maxim to aim to “Pay Yourself First.”
Pay-Yourself-First saving is forced saving. Is it good to force saving? If you presume that without force you are likely to save nothing, forcing the issue insures that you will save at least a bit. The Pay-Yourself-First maxim does indeed place a floor on saving, and, when the alternative is no saving at all, that’s good-
But why presume that without force you will save nothing? People presume this because that’s the usual experience with the conventional Sacrifice Saving approach. Passion Saving is motivated saving, saving generated by the saver’s desire to enjoy the many benefits of winning ever higher levels of financial freedom as he or she progresses through the stages of his or her life.
For Passion Savers, assigning a specified percentage of income to savings rather than deciding how much to save by comparing the value propositions of spending and saving would often result in a lowering of the saving percentage. For us, the Pay-Yourself-First maxim would create a ceiling on the amount saved rather than a floor.
Properly understood, saving is fun, as much fun as spending. We Passion Savers don’t need to force the issue. We think about the benefits of saving all the time, even when we smoke. Even when we pray (forgive me, Father….). More on This Topic
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May 4, 2007 14:53 – Community Comments on Using Stock Data to Diminish Retirement Risks
I’ve added an article to the “Risk Evaluator” section of the site entitled Community Comments on Using Stock Data to Diminish Retirement Risks.
Juicy Excerpt: The 4% number has worked at every valuation level and sequence of returns which have happened in the U.S. stock market (#1 in the world)…. These SWR numbers are just rates that survived in the past, we don’t know that they were safe. U.S. stocks have had a relatively lucky sequence of returns in the past, even starting from periods of high valuations, other countries were not so lucky. It has not worked with sequences of returns from the #2 stock market (Japan) and #3 (U.K.). — Adrian2, Vanguard Diehards board, October 12, 2005
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May 7, 2007 13:01 – Mixing the Blues and the Whites
I was raised in a blue-collar neighborhood. My parents put a heavy stress on education, and I liked school, so I ended up mostly in white-collar jobs myself. I had a few blue-collar jobs when I was young, including a job in a steel-processing factory. It was hard work, and I didn’t last long.
My heart in many ways is still in the neighborhood I grew up in. I believe that people there interacted with each other in more authentic ways. I don’t want to romanticize blue-collar life. There are many ways in which it is difficult, and in many ways it is not as “pretty” or “ordered” as white-collar life. I don’t think it is as “fake,” though.
I don’t feel at all good about the many ways in which blue-collar workers and white-collar workers are segregated in our society. When I got a job out of school in a government relations department of a large company, I quickly became friends with several of the secretaries. No one ever directly told me that this was prohibited. But peers and higher-ups would make little facial expressions telling me that this was a mistake if I expected to climb the corporate ladder. I hated this restriction then and I hate it now.
The downside of blue-collar work is obvious. There’s an upside. Blue-collar workers (in many cases) actually do things that have value. At the end of the day, they can point to something and know they made a difference. This is frequently not the case in the white-collar world. And I believe that a person’s inner belief about the value of the work he or she does has a significant influence on whether that person is happy at the end of the day.
Blue-collar workers have been pulled by advertising and easy credit into the same self-destructive status-spending that white-collar workers have engaged in for years. The difference is that blue-collar workers are taking even larger risks in going down this road because it will take them more years to accumulate capital once they realize the need to do so. This is something over which I believe we all should be concerned.
There are some who believe that the Retire Early idea is reserved for Yuppies who become bored with their cushy jobs. I do not believe this to be the case. I’m happy to see Yuppies escape wage slavery if they want to do so. But I’d be uneasy being too involved in a project with appeal to such a narrow slice of the population. I hope that the Financial Freedom Community becomes known as one place where it is considered okay to mix the blues and the whites. More on This Topic
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May 8, 2007 15:38 – Why a Woman Shouldn’t Necessarily Want to Be More Like a Man
The Salary Reporter Blog recently ran an article on the pay obtained by women versus the pay obtained by men. Set forth below is the text of the comment that I filed to that blog entry:
I know far too many women who think it is somehow unseemly in the workplace to promote themselves, or demand more money.
I understand the point being made here (the words quoted above are from the Business Week article). I worry, though, about a bit of a suggestion that woman should try to become more like men. I don’t think that’s the answer. The better solution is for employers to make an effort to reward not just those who promote themselves heavily, but also those who show their worth through the work they do rather than through their self-promotion.
It’s not just a men vs. woman issue either, of course. There are men who are reluctant to engage in self-promotion. And there are women who are masters at it. It probably is fair to say that as a generalization there are more women than men who fail to self-promote adequately.
There are reasons why some are reluctant to self-promote. We shouldn’t overlook that and force all workers to feel that they need to fit into the same model of behavior. Those who fail to self-promote at all should work to do more of it. But those who self-promote too much should work to do less of it.
My point here is that I feel there is a hint in the comments quoted that those who fail to self-promote are the only ones who need to make changes. I do think it’s good to push people to do what they refrain from doing solely because it does not come naturally. But we need to be careful not to push too far. We need all sorts of personalities in the workplace (and in the world at large too, of course). More on This Topic
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May 9, 2007 17:12 – It’s a Thin Line Between Fear and Excitement
There will come a time when you won’t have any worries. The downside is that you’ll be dead.
To live is to worry. The trick is to worry just enough to make the whole thing feel like a big roller-coaster ride. You want to be screaming and laughing at the same time.
The Wall Street Journal ran an article last Friday by a woman who left Dow Jones a year ago for early retirement (at age 55) and agreed to write an article on how things were going one year later.
The bad news is that she has found that she does not have enough money coming in to live the life she wants to live without working. She views her early retirement as a “failure.” In fact, she says that she is now working longer hours than she did when she was earning the regular paycheck.
Does this story sound at all familiar to regular readers of this blog?
The good news is that she loves the work she is doing. She feels more alive now than she did when she was earning that regular paycheck. She even goes so far as to advise some early retirees who have complained to her of boredom to take on some work (not regular corporate employment, though).
In the right circumstances, I think that what she is saying makes sense.
There are a lot of things to be said in favor of a steady corporate paycheck. It is not something to be mocked. Please don’t ever give up a steady corporate paycheck without carefully thinking over the downside about 50 times. Try to talk yourself out of the idea. If you can, it probably isn’t the right path for you.
That said, there are a lot of things to be said for taking some chances with your life. Do you know how they sometimes argue that those who choose only safe investments are taking a big risk without knowing it because safe investments don’t generate strong enough returns over time? I think that’s right; you’ve got to take on some risks in investing to get anyplace good. The same is true with your career. Sometimes you’ve just got to stick your neck out. Sometimes you need to give up the steady paycheck without knowing for sure what awaits you on the other side of the river.
The old career advancement rules don’t work anymore. There was a day when it really did not make much sense to leave a good job voluntarily. Today, however, good jobs do not necessarily remain good jobs for long. When you see an opening to move to a better good job, one with more staying power, you need to give at least some thought to taking the jump, even if the opportunity comes with a risk of falling into the river.
The woman who left Dow Jones may end up thinking that her decision to retire early was the best choice she ever made. She may end up thinking it was the worst choice she ever made. Both assessments are potential future realities. That’s risk. You can fall flat on your can or you can make a great leap forward.
The purpose of the material at this site is not to encourage you to make the jump or not to do so. There are too many factors that need to be considered for anyone other than you to make that call. The purpose of the material here is to help inform the decision you make.
You should be taking risks. Staying at the corporate job involves risk too, the risk of becoming so discouraged that you lose the courage to make good use of the talents you possess that need to be given a test to become moneymakers. The idea is to avoid crazy risks and to avoid the false security of taking no risks and instead take calculated and reasonable risks.
Those who hate work are generally not good candidates for early retirement, in my assessment. I’ve seen lots of people who hate work tell themselves fairy tales to rationalize early retirements that do not make financial or emotional sense. The most successful early retirees in my assessment are those who love work, those who love it enough that they want to take what they learned by doing it for a corporation and do it for themselves (in some cases for money, in some cases not for money).
But is it really proper to refer to that sort of thing as “retirement”? I say that it is. It’s not your father’s idea of retirement, to be sure. It’s very much a newfangled version of the concept. It’s a newfangled version of the concept that many middle-class workers very much need to be looking into at this stage of our transition to the New Economy.
Retire Different! More on This Topic
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May 10, 2007 15:33 – Don’t Worry About Valuations
That’s what Jeremy Siegel (author of Stocks for the Long Run) says, anyway. Siegel argues in a recent article at Yahoo Finance that stocks are not overvalued today.
That’s not what I say. I say that stock prices are at the red-alert danger level. I say that most investors should be limiting their stock allocation to about 30 percent of their total portfolio. I don’t believe in short-term timing. So I don’t rule out the possibility that for a time we could see stock prices head much higher. But I say that the long-term value proposition for U.S. stocks is poor. Those following buy-and-hold strategies need to take something off the table, if they have not already done so.
I suggest you check out the Siegel article. Not because I find it convincing. There are four reasons why I believe that the Siegel article is worth reading.
The first reason is that it will strengthen your belief that stocks are overvalued today to read the argument that they are not and to find yourself able to respond effectively to it. The key to successful investing is developing confidence in your long-term strategies. You don’t want to see your strategies tested in the real world prior to testing them yourself by checking out analysts who hold contrary views and seeing whether they are able to shake your beliefs when they hit them with their best shot.
The second reason is that it is possible that I am wrong. If I have persuaded you that Valuation-Informed Indexing is a good approach, I am grateful for your confidence in me. If you have confidence that I know what I am talking about in criticizing the dominant investing theory of today (The Efficient Market Disease), I ask that you also have confidence that I know what I am talking about in saying that I could be wrong about some things. Never put too much faith in a single investing advisor. It’s not an emotionally healthy thing to do, and it is emotions that count most in this game in the long run.
The third reason is that I might be right but you might be persuaded at some point that I am wrong anyway. If that is going to happen, you want it to happen as soon as possible; you don’t want to reach a conclusion that I am wrong when you have lost money following my suggestions. Check out what I say against what Siegel says today and see whether for you what I say stands up to scrutiny.
The fourth reason is that Siegel puts forward generally reasonable (but not convincing) data-based arguments. The more you learn about what the historical stock-return data tells us (and you will learn more by looking at the data from multiple perspectives), the better you will understand how stock investing really works. You want deep knowledge, not surface knowledge. Surface knowledge is dangerous. Deep knowledge pays big dividends in the long term.
Read Siegel’s article. But don’t just read it — scrutinize it.
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At 10:40 AM on Sunday morning, we begin Year Six of The Great Safe Withdrawal Rate Debate. Set forth below are brief descriptions of five topics that I hope to explore in more depth during the next 12 months of our investing discussions.
How to Develop a Healthy Emotional Take on Investing Questions
Intelligence is not the key to successful investing. It appears to me that it is as often as not a hindrance. Those with high intelligence are most skilled at rationalization. Rationalization is often employed in support of investing decisions rooted in the negative emotions of fear and greed. Our goal is to get beyond all that.
Humility is a plus. A sense of humor is a plus. A positive mental outlook is a plus. A generous spirit is a plus. A curious mind is a plus. A sense of responsibility for one’s loved ones is a plus. An informed appreciation of Bob Dylan’s music is a plus.
I’m reaching on that last one. But you get the idea. As a general rule, whatever makes you a better human also makes you a better investor.
We need to come up with practical tips that people can use to develop positive investing emotions. One thing that I try to do is to include jokes and references to song lyrics and stuff like that in my investing posts and articles. Does that really help? Why does it help? What is the process by which investors who want to use what they learned about life while being a human to inform their investing decisions can most effectively do so?
How to Attract People Who Are Intimidated by Investing Discussions to an Investing Site
The Goons are a small percentage of the population even at the discussion-board communities they have come to dominate. It is clear that a significant percentage of middle-class investors likes the idea of learning about an investing approach that makes sense but feels intimidated by the jargon used by those who want it thought that they know a lot so that they will not be questioned about the little that they really do know. The Know-It-Alls are not going to change. Their advocacy of the Efficient Market Disease is motivated by personal pride, the pride they feel over the gains they “earned” during the runaway bull market.
The Normals, a far larger group, have open minds. Our biggest investing problem is a marketing problem. How do we get the Normals to speak up more? How do we get them to ask questions and to share observations? They’re smarter (in a real sense) than the Know-It-Alls. But they don’t see it. Even when we tell them so, they don’t believe it’s possible. It’s hard for them to accept that the Know-It-Alls could use so many big words and have so limited an understanding of what they mean.
One idea I have in this regard is to create audio files in which I would talk about what works in investing rather than write about it. It might be that audio presentations would come across as less intimidating.
How Do Emotions and Numbers Work Together in the Formation of an Emotionally Healthy Perspective on Investing?
I often argue that emotions trump numbers. I believe that. I also believe that the numbers generated by objective research are of great significance. The reality is that emotions and numbers work together. It’s hard to have confidence in what your common sense tells you without numbers backing it up. And it’s hard to have confidence in what the numbers tell you without your common sense backing it up. I would like to firm up my thinking on how we should be using numbers to correct our emotional deficiencies and using emotions to correct our numerical deficiencies.
How Can the Natural Human Inclination to Turn to Others for Guidance Be Put to a Positive Use?
The saddest thing about wild bull markets is that they create an environment in which friends do harm to friends, neighbors do harm to neighbors, co-workers do harm to co-workers, and family members do harm to family members. We’re all sticking the knife into our buddies (as well as into ourselves, of course) when the insanity of a major bull market causes us to take temporary leave of our senses.
Humans are social animals. There’s no getting around it. I don’t think that we can advise large numbers of people to become “contrarians” and to pay heed only to their own independently developed counsel. People who love people are the luckiest people in the world, according to a Barbara Streisand, a well-regarded analyst. People are going to go on loving people and listening to people regardless of how much money they stand to lose as a result of listening to the advice of the people they love.
I think there is a way to put this people-loving-people business to constructive use. Something that I very much like about the Vanguard Diehards board is the way in which it serves as a way for community members there to gain support and reinforcement from fellow community members when their confidence is beginning to waver. The advice offered there is terribly flawed, so the support in that case is not serving an entirely good purpose. But it could serve a positive purpose on a board at which advice that is in accord with the message of the historical data were permitted. I would like to explore in some depth the practical details of what would be needed to make such an investing community a success.
To What Extent Can the Problems of Investing in Stocks at Times of High Valuations be Overcome by Investing in Stocks that Pay High Dividends?
John Walter Russell has done a good bit of research on this question. I need to spend more time studying it and asking questions about it. I am persuaded that investing in companies paying high dividends is a good idea. I am not clear today on whether it makes sense to go with a high stock allocation at times of high valuations so long as the stocks are stocks that pay high dividends.
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May 14, 2007 13:54 – The Five Stages of Career Satisfactiion
The May 2007 issue of HR Magazine, the publication of the Society for Human Resource Management, contains an article entitled Leveraging Long Tenure. Non-members can view the text of the article at the site of Citizens First National Bank.
A sidebar to the article sets forth my list of five stages of career satisfaction that many employees go through as they learn about a new job and eventually come to master it: (1) Overwhelmed; (2) Happily Challenged; (3) Smooth Sailing; (4) Bored; and (5) Indifferent.
The strategic challenge for many employees is that it is not uncommon for a job that pays well to offer little challenge. If you are seeking to obtain financial freedom early in life, is it better to remain at a less-than-challenging job that permits you to save a good bit of money without incurring too much stress or to move on in quest of greater challenges that may lead to learning experiences that generate more money for you down the road?
I see this as a balancing act. There’s such a thing as experiencing too much challenge. Too much challenge can leave you overly stressed. I would be inclined not to leave a job too soon after I mastered it. I would instead try to enjoy a year or two of smooth sailing.
Unfortunately, the smooth-sailing stage does not last. A job that is great fun at one time can generate boredom or even indifference a year or two down the road. When things reach that point, it’s usually best to be looking for a change no matter how good the money is. A bored or indifferent worker is an ineffective worker. An ineffective worker sooner or later is going to find himself out of a job.
It’s important to be honest with yourself as to whether you are advancing in your career, not just financially but in terms of skills development too. It’s often even worth taking a cut in pay to move to a more challenging position, in my view. Challenging work is more fun. And challenging work teaches you new skills. Down the road those skills will translate into the greater pay that you need to realize your goal of moving steadily to ever higher levels of financial freedom.
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May 15, 2007 15:10 – Covering Second
My wife and I just paid for a group photo of my boy’s first little-league team.
The price was too high. We declined the package deal that included wallet photos and photo-stands and all that sort of thing. We considered saying “no” to the idea of paying for an official group photo and just asking the boys to line up for a photo taken by our own camera.
We ultimately agreed to swallow hard and pay for the group photo. We have enough pictures of Timothy already. But my guess is that there will come a day when he will enjoy looking at the group photo and recalling to mind the boys that he came to know from his first adventure in team sports.
My impression is that none of the other parents even considered not paying for the group photo. The price paid is not that big a deal in the grand scheme of things. The boys will never be seven again. Paying for a photo is way of buying nice memories.
All that is so. The other thing that is so is that this is an expense that few middle-class people incurred in an earlier day. Buying a group photo of a little-league team is discretionary spending. If you are looking to win financial freedom early in life, it is toward this sort of spending item that you should be directing your attention. It’s true that the cost of this one particular photo is no big deal in the grand scheme of things. However, if you add up all the expenses that middle-class people didn’t incur in earlier days but do today, it’s a big number.
The nature of spending has changed over the past 60 years. Most of the income of a middle-class worker used to go to things he needed to buy. Today, most of the income of a middle-class worker goes to things that he does not need to buy.
It does not follow that most spending today is wasteful. That is not at all so. Much of the spending we do today provides an exciting value proposition. As a rule, we are not inclined to go forward with spending that we do not need to engage in unless we are persuaded that the value proposition is strong.
The problem is not that we are wasting our money. The problem is that there are so many exciting things to spend money on that it is hard to save. Since there is an unlimited number of exciting value propositions available through spending, that’s so regardless of how much we earn.
When we spent most of what we made on things we had to buy to keep body and soul joined, there was not so much of a need for us to keep budgets. Most of our money was accounted for before we earned it. Today, we have more choices. We earn enough to save a lot if we care to do so. There’s enough good stuff to spend on that, unless we construct a spending plan, there’s a good chance that we will save nothing.
If the purchase of a team photo were a dumb idea, there wouldn’t be so many parents lining up to spend money in this way. It’s a perfectly fine idea. But we cannot realize our potential if we go along with every perfectly fine spending idea that comes before us. We need to make informed choices. We need Life Plans (budgets).
My son’s coach is always instructing him to be sure to cover second base as soon as he sees the ball has not been hit to him. Writing a Life Plan is the personal finance equivalent of covering second. It might not seem like such a big deal in the moment. The players who learn to do it win games for their teams, however. Those who cover second end up with more opportunities to win games than those who stand around waiting for something good to happen to them. More on This Topic
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May 16, 2007 17:01 – Janine Bolon’s 60/40 Rule for Spending
I’ve added an item on Janine Bolon’s 60/40 rule for allocating spending to the “Talking Numbers” section of the site.
Juicy Excerpt: She recommends that 60 percent of your spending be directed to covering living expenses, that 10 percent be directed to a tithe, that 10 percent be directed to philanthropy, that 10 percent be directed to short-term savings (to cover emergencies) and that 10 percent be directed to long-term savings. More on This Topic
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May 17, 2007 15:29 – Paul McCartney Sounds Off on Our Investing Troubles
I had to bring the Volvo (a 1991 model, with 200,000 miles on it, thank you very much) in for an inspection this morning. On the way, I stopped in a grocery store and saw that the latest Rolling Stone has an interview with Dylan. While turning to that page, I happened across an interview with Paul McCartney in which some words were said that got me to thinking about our investing troubles.
The interviewer asked McCartney something about whether the world is headed in a good direction or not and McCartney offered a derogatory comment about President Bush. So far, so good. The purpose of interviews is to tell us what the person being interviewed thinks about various issues. McCartney was telling us what he thinks about Bush. Following that were some words that I thought were strange and that I think point to something that I believe is in part the cause of our investing troubles.
What I found odd was that the interviewer then offered his opinion that, yes indeed, Bush has to go. When the interviewer gives his opinion, the impression created is that he is speaking on behalf of the magazine that employs him. Is Rolling Stone anti-Bush? Apparently so. It’s my view that taking note of that reality may provide some clues as to the root cause of our investing troubles.
Rolling Stone is a music magazine. Why do its editors want to get tied up in political controversies? There are lots of Bush supporters who enjoy rock music. Why offend them? For the same reason that some have made such a fuss in response to our safe withdrawal rate (SWR) findings of recent years and thereby caused our investing troubles.
It used to be that people aimed to avoid discussions of religion and politics in mixed company. The idea was that these topics were just too explosive because people were dogmatic in their beliefs about religion and politics. It seems to me that dogmatism is spreading. The Rolling Stone editor was injecting dogma into an interview with a musician. Opponents of the New School SWR studies have injected dogma into the discussion of investing realities, taking the focus away from our exciting findings and shifting it to the ugliness that became common as we struggled together to deal with our investing troubles.
Dogma has its place. I am not entirely anti-dogma. There’s great risk in becoming excessively dogmatic, however. I have been shocked to discover how dogmatic many are over investing issues. This is an area in which people should want to learn as much as possible from adherents of as many viewpoints as possible. This is an area where you stand to lose money by closing yourself off to new ideas. Become dogmatic about investing, and you can needlessly cause yourself a whole big bunch of investing troubles!
And they say Paul McCartney isn’t deep.
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May 18, 2007 17:39 – Memories Come Tumbling from Her Purse
Why do you keep dumb stuff in your purse?
You won’t find “rational” explanations. The key here is looking to the emotions and how emotions exert their influence on our behavior (which is different from how reasoning does).
We are emotionally wired to resist change. Change is associated with danger. So even in cases where our reason would tell us that the downside of making a change is small and the upside is potentially large, we are reluctant to go forward. I see this with investing strategies all the time. There is almost a taboo about making a change. People will hold on and hold on until all is lost rather than acknowledge a mistake.
To discard something from your purse is to acknowledge that it was a mistake to put it in there in the first place. Our emotions will search for any justification for the initial decision and focus on that. It’s far harder to take something out of your purse than it is to stop yourself from putting it into it in the first place. Once it’s there, the inclination is to let it stay there.
The other thing to consider is the power of the emotion behind the decision to put the item in your purse. Why do you still have in your purse a note you wrote three years ago describing an idea you once had for a children’s book you wanted to write? The note itself is of little consequence and could be discarded without a significant loss. But the dream of writing that book is important to you. To remove the note is in an emotional sense to reject the dream. That makes it a difficult step to take.
The same analysis applies to other items where the connection to a dream is not so obviously there. You won’t want to discard a pen that is somehow associated in your mind with a time of your life in which you experienced happiness. The pen can become symbolically attached in your mind with activities you enjoyed or with people you liked. You don’t want to even in a small way reject those activities or those people. So you hold onto a pen that doesn’t work.
Does it make sense? It does not make rational sense, but it makes emotional sense. Some will argue that a cluttered purse suggests a cluttered mind. Not so. It suggests a balanced mind, one that is in part oriented toward reason and in part oriented toward emotion. We are humans, not computers with legs. Human life is cluttered (you just don’t want to let the clutter get too much out of hand). More on This Topic
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May 21, 2007 09:05 – How Low Will Stock Prices Go?
I have on numerous occasions cited Robert Shiller’s finding in his book Irrational Exuberance that, on the three earlier times when U.S. stocks have gone to the price levels that apply today, stock investors have experienced an average loss of 68 percent. The claim is shocking. I cite it in the hope of provoking a reaction. I believe that most middle-class investors should today be going with a stock allocation of about 25 percent lower than what they determined was appropriate when more reasonable prices applied.
John Walter Russell recently added an article to his site that puts matters in a somewhat less troubling light. To be sure, I still believe that you should be lowering your stock allocation if you have not done so already. However, I don’t think you need to be too concerned about losing two-thirds of the money you have invested in stocks. That could happen, according to John’s research. But it’s not too likely. The more likely scenario (presuming that stocks perform in the future somewhat as they always have in the past) is a loss in the purchasing power of the money you have invested in stocks of about 40 percent.
The difference between the Shiller number and the Russell number is that Russell is accounting for the increase in purchasing power the stock investor experiences with the reinvestment of dividends. I think that’s the more realistic way to explore the question at issue here — what sort of hit is someone who invests in stocks at today’s prices likely to take as a result of doing so? Please note that Shiller includes dividends when he reports on the returns earned by stock investors in the years following earlier times when we reached sky-high valuations in the same section of the book in which he reports the percentage losses that average out to 68 percent; he just does not account for the effect of reinvested dividends in his report of the percentage stock-price drop.
I am going to make it a practice to cite the Russell number when pointing out to investors the risk they take by ignoring valuations when they get this high. In cases in which I cite the Shiller number, I will note that it does not take into consideration the positive effect of dividends paid to shareholders.
Another thing that I like about Russell’s analysis is that he does not stop at reporting a single most-likely-loss percentage, but provides us with a range of possibilities and assigns probabilities to them based on what the historical stock-return data reveals. The odds are about 80 percent that stockowners will see a loss in buying power of at least 25 percent in coming years. The odds are less than 20 percent that they will see a loss of greater than 55 percent in buying power (including dividends).
I find this fascinating stuff. I believe that by making this sort of information widely available we can over time make stock investing a more rational endeavor than it is today. Thanks for straightening us all out on this matter, John! More on This Topic
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May 22, 2007 16:16 – Does a Strong Economy Require Wasteful Spending?
It seems to be a commonly held belief that people must engage in wasteful spending for our economy to thrive. I don’t buy it. To my way of thinking, wasteful spending can never be a good thing.
Let’s say that 80 percent of the population decided tomorrow to stop ordering take-out pizza and instead to make their pizzas at home. What would happen to the economy? There would be fewer take-out pizza joints, that’s true. But I don’t see that that would be a bad thing. It would just be a case of consumers voting with their feet (or mouths) for fewer take-out pizza joints, and the market economy responding by giving them what they wanted.
Those jobs wouldn’t just disappear into thin air. All the people who used to be employed at pizza joints would seek work in other fields, fields where the market economy was telling them their services would be more highly valued. Perhaps they would become kindergarten teachers or pottery-making instructors. Perhaps that would leave us all better off.
Of course, if enough people began saving large amounts of money, that group would become eligible to give up working in the paid economy altogether. But again, I don’t see that that necessarily would be a bad thing. These people would still be alive. They would still be doing things. And they would have the money to do things. If they golfed, they will would help the golf supplies industry. If they planted gardens, they would help the seed companies.
Where would the damage to the economy that many say would follow from widespread frugality be coming from? The advertising industry might get hurt. But if advertising is causing poor money-management decisions, wouldn’t it be a good thing for the economy for the resources being devoted to advertising to be redirected into something of greater perceived value?
The idea seems to be that the economy requires an artificial stimulus. Why? I view this argument as a rationalization for wasteful spending. More on This Topic
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May 23, 2007 12:52 – Our “Dumb Ass” Community Soldiers On
John Greaney describes me as a “dumb ass.” His argument is that, had I not spent years making the argument for the New School of safe-withdrawal-rate (SWR) analysis on the various Retire Early boards, I could have opened my web site much sooner and would have made a lot more progress in building my own community by now.
He’s got a point.
It takes a long time to attract enough visitors to a web site to bring it up to critical mass. Moreover, the Campaign of Terror has been a pain and a drain. There must be 600 things that I could have been doing with my life that I would have preferred doing in the time that I spent pointing out the word games and deceptions of Goon posters.
I’m a human like all the other humans. I make mistakes. It may be that there were things that I could have done to get our investing discussions back on the right track more quickly. I believe that I probably did as well as any other human could have done under the circumstances. But I am confident that I made errors in judgment from time to time. To the extent that that qualifies me as a dumb ass, I am indeed a dumb ass.
There’s another side to the story.
Our community has done important work over the first seven years of its existence. In the eyes of some, the harm done by the false claims put forward in the Old School SWR studies is likely to negate much of the constructive work we have done. I see it as a good thing that there are hundreds of us who have put ourselves on record as having doubts about the Old School claims.
There are a good number who have elected to put their trust in those studies regardless and also to employ abusive posting to protect them from challenge. That’s highly unfortunate. But it’s a point in our community’s favor that there was a group that tried to set the record straight at a time when it would have done lots of people lots of good. I see the fact that we made the case despite intense opposition as a reality that we will be able to look to with pride after the funny business comes to be widely perceived as being not so terribly funny afterall.
This goes beyond just our small (but quickly growing!) community, however. I believe that the work we have done showing the errors of the Old School methodology will in days to come revolutionize the world’s understanding of how to invest successfully for the long run.
Big claim. I know. I believe this all the same.
It won’t happen all at once. The change will take place gradually. And things won’t change solely because of the work done at the various Retire Early boards. There are many good and smart people making the case for a more realistic approach to investing. You have to work it a bit to learn about what they say, but they are out there. Overhauling the conventional understanding of how stocks work is very much a group project. Our community played an important role in getting the much-needed revolution started. Good for us.
Consider four accomplishments already recorded on the books as of May 2007.
One, we have pointed out the flaws of the Old School SWR studies and replaced the conventional methodology with a methodology that does the job that aspiring early retirees (and old-age retirees too, for that matter) need to have done for them. That alone is huge. The Old School findings have been referenced in thousands of media reports on how to plan a retirement. We have provided those seeking to help retirees plan effectively the means to develop an accurate understanding of what the historical stock-return data says about safe withdrawal rates. Click on the tab to the left marked “Risk Evaluator” for background.
Two, we took what we learned about SWRs (that the effect of changes in valuations is huge) and applied it to the accumulation stage of the investing life-cycle (SWRs apply only to the distribution phase). Click on the tab to the left marked “Return Predictor” for background on that one. The Stock-Return Predictor permits investors to know in advance whether their stock purchases offer a strong long-term value proposition or not. There is no similar tool available outside of our community. That’s breakthrough stuff.
Three, our SWR discussions brought John Walter Russell into our community, and what he learned about the message of the historical data when doing his initial SWR work led him over time to creation of his amazing web site (Early-Retirement-Planning-Insight.com). There are now hundreds of articles reporting on original research at that site. Those articles show that taking valuations into account changes our understanding of what works for the long-term investor in scores of ways. John shows no signs of slowing down, and my strong hunch is that there will be many other researchers picking up on John’s lead and incorporating consideration of the effect of valuations into their own research in days and weeks and months and years to come. Who can say how far this wheel will roll once it really begin picking up speed?
Four, we have generated a wealth of insights into how emotions influence investing decisions. The Behavioral Finance school has been looking into this question for some time now. I think it would be fair to say that there has never before been a communications medium that permitted the testing of Behavioral Finance theories to the extent that the internet discussion-board does so. Our discussions were raucous and nasty and unpleasant and demoralizing and degrading and embarrassing to humans and other smart and good-natured and fun-loving mammals. They were also highly rewarding to those seeking to discover something about the extent to which investors are capable of reining in their most negative emotional impulses at times when stock prices reach truly frightening levels. It will be decades before we have mined all the insights we have generated through our investing discussions of recent years.
The Great Debate has been hard work. That much is fair to say. The Great Debate has been frustrating work. That much is fair to say. The Great Debate has been extremely unpleasant work. That much is fair to say.
The Great Debate has been highly rewarding work. That much is also fair to say. The Great Debate is likely to provide us with even greater rewards as time passes. That much is also fair to say. There is no telling how far the Great Debate will take us in days to come. That much is also fair to say.
Are all of us who participated in it dumb asses for having done so? Perhaps, from some ways of looking at it. Perhaps not, from some other ways of looking at it.
I know this much for sure — Dumb asses like us, baby, we were born to run!
That line brings to mind something else that I believe needs to be said about our future work together. As Springstein put it in another of the many fine posts he offered for the edification of readers of the various Retire Early boards — “No retreat, baby, and no surrender!”
Please do not be alarmed by the assertive tone of those words. As BenSolar put it in one of the funniest lines from our investing discussions of recent years, “this is just another case of hocus being hocus.”
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May 24, 2007 13:57 – Judgment Day for Non-Savers
Someday you will appear before your Maker and He will ask you to make an accounting. If you are not able to produce written documentation that you put 10 percent of your pay into a tax-deferred saving vehicle, it’s into the fires with you! Saving is a moral issue.
I’m joking.
I get the idea at times that some really do believe that, though. It’s a pet peeve of mine that those who have learned how to save well can often be heard moralizing about those who have not.
What makes it tricky is that there truly are moral questions in play in the decision to save or not. I believe that we all have been called to make the best of the life that has been given us. Those who don’t save waste opportunities to do better for themselves, their families, and their brothers and their sisters all over this land. It if is a good thing to save (and it is), then it follows that it is a bad thing not to save.
However, in most cases, it’s a venial sin, in my estimation. Most of us don’t know how to save. Those of us who try often find it difficult to pull off in this Consumer Wonderland of ours. These realities don’t entirely excuse non-savers. I think it is fair to point to them as mitigating circumstances, however.
Those who manage to accumulate large amounts of wealth often seem to find it hard to accept that some don’t manage to accumulate hardly any at all. They worry that they will be stuck with the bill when the non-savers are not able to provide for their own retirements. I understand the concern. I’d rather see these concerns serve as an impetus to help more people learn what it takes to save effectively than as a cause for moralizing.
Are non-savers wrong not to save? They’re wrong. But they’re not wrong in the way that those who lie are wrong or in the way that those who steal are wrong. The cards are stacked against savers in the modern world. To save you need to swim against the tide. Some are too caught up in other priorities to put up the fight needed to learn what it takes to save effectively. Time passes, and it gets even harder for them to acknowledge the hole they are in. Just as saving begets saving, non-saving begets non-saving.
Savers have more fun than non-savers. That should be reward enough. Savers are not necessarily better people than non-savers. I would like to see us make more of an effort to help non-savers learn to enjoy what we have learned to enjoy and to turn the knob on the moralizing volume control a notch or two to the left. More on This Topic
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May 25, 2007 16:18 – What’s Faith Got to Do, Got to Do With It?
I’ve added an article to the “Investing for Humans” section of the site entitled Investor Confidence — What’s Faith Got to Do, Got to Do With It?
Juicy Excerpt: 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.
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May 29, 2007 13:09 – Hamlet’s Money Management Problem
One of the themes of Hamlet is that man created new problems for himself when he became modern. Hamlet demonstrates the problem each time he calls for a stop in the action to deliver a long talk to himself (in verse!).
Modern man is intensely self-conscious. He doesn’t worry as much as those who came before him did about whether he is going to have anything to eat for dinner. But let’s face it, a guy making lists of the merits of “to be” versus the merits of “not to be” is not experiencing the Miller High Life every waking moment.
Hamlet’s issue is what we refer to in our community as “The Purpose Question.” Capitalism makes The Purpose Question more complicated. It does this by offering thousands of distractions from our natural desire to identify the meaning of our life on earth and then to pursue what we come up with with great vigor. The distractions fill up our time and use up our energy, but the inner voice is still there, ruining our fun. The conflicts we feel between the deep drives and the distraction drives give rise to all sorts of self-destructive behavior.
Corporate work is purpose-driven in some cases, but not in others. In cases in which it is not purpose-driven, achieving financial freedom early in life is a boon. So those who aim to retire early need not be concerned that this step is a move away from solving the problem of giving meaning to life. But after retiring, then what? One has to do something. Whatever the something is, the early retiree will need to come to terms with his or her natural desire to seek meaning.
Happiness is not a what question, it is a how question. You could be happy, or miserable, doing just about anything. It is the spirit in which you do whatever it is you do that makes the difference.
Some will research books on philosophy to answer The Purpose Question, but will do this as a means of creating a really complex distraction from the real issues (one sophisticated enough to fool their learned, modern selves). Others will turn over ideas in their minds and hearts while salting fries at McDonalds, and make more progress.
Retiring early won’t solve modern man’s quest-for-meaning problem. But it offers the opportunity to do more about it by removing one of the biggest distractions — dependence on a paycheck to cover the daily costs of living. In some cases, doing away with that distraction makes the early retiree relieved and content and satisfied and happy. In other cases, it makes him feel the longing for meaning all the more because he no longer can point to the distraction as the cause of his feeling of emptiness.
It’s not just about managing your money, it’s about managing your life. A budget, properly understood, is not a spending plan; it is a Life Plan. The fault lies not in our stars, Horatio; it lies in our Old School early retirement plans.
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May 30, 2007 14:50 – Spending on Education
I’ve added an article to the “The Turned-On Budget” section of the site entitled Spending on Education.
Juicy Excerpt: Make sure that you are really learning something important in every liberal arts course you take. It is easier to b.s. your way through a liberal arts course than it is to b.s. your way through most other types of courses. Many schools today seem happy to take the money of students who are not doing much more than taking up space and sending in checks. If you pay for a course and learn little, you have hurt yourself big time.
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May 31, 2007 14:59 – Buffett Disappoints
Warren Buffett is the Jedi Master of investing. It’s not just that he’s smart. Lots of investing analysts are smart (not me so much, but lots of the others — I try to make up for the deficiency with jokes and song lyrics). What makes Buffett so great is that he talks straight. When he is asked a question, you can usually figure out what he is saying in his answer. In other fields, that might not be such a big deal. In the investing field, that makes you special indeed. You can’t go wrong listening to Buffett.
Except for sometimes.
He’s one of those darned humans, that’s the thing. It always comes back to that, I’ve noticed. Investing is done by humans and investing is explained by humans. And that just messes everything up. Those humans will do it to you every time!
I caught Buffett being human in his response to one of the questions directed at him during the recent Berkshire-Hathaway annual meeting. I thought I would share so that you would know that, even when listening to the Jedi Master, you need to listen with care.
A participant at the meeting asking a question of Buffett noted that he has seen comments from Buffett suggesting that Buffett is “worried” about where stocks are headed in days to come. Buffett said: “Over a 20-year period, I could choose an index fund or 20-year bonds, [but] it would not be a close decision — I’d buy the stocks. I’d rather buy cheaply, but I’d also prefer long bonds with higher yield. We don’t predict where markets will be.”
There are some good things to be said about those comments.
One is that, by pointing to what is likely to happen over a 20-year time-period rather than a 5-year time-period or a 10-year time-period or a 15-year time-period, Buffett is suggesting that he is not confident that stocks will do well over the shorter time-periods. That’s a message that needs to be heard.
Another is that he says: “I’d rather buy cheaply.” Buffett obviously believes that stocks are overvalued and obviously does not believe in the Efficient Market Story. His partner Charlie Munger, in my favorite straight-talk assessment of all time, once referred to the Efficient Market Story as “asinine.” And so it is.
Yet another is that Buffett is making a comparison of stock returns and bond returns to determine whether it is worth investing in stocks. Not everyone does this. Some start with an assumption that stocks are always best for the majority of a portfolio. By making the comparison, Buffett is implicitly acknowledging that he can imagine circumstances in which he would elect not to be heavily in stocks. In fact, there are times when he has lowered his stock allocation because of valuation concerns.
Even the comment that “we don’t predict where markets will be” has its good side. I think that what Buffett means by this is that he does not engage in short-term timing. I very much agree with his rejection of short-term timing.
The reality, though, is that many will hear in his comment that “we don’t predict where the markets will be” a rejection not only of short-term timing but of long-term timing too. It’s hard for me to imagine that Buffett does not believe in long-term timing. His approach is called “Value Investing.” Long-term timing is an approach to the purchasing of stocks that takes cognizance of the change in the value proposition of stocks that follows from a change in price levels.
Actually, it’s a bit odd for Buffett to begin a sentence with the words “we don’t predict.” All that Buffett does is predict. That’s why he studies all of those annual reports, to inform his predictions of how the companies he invests in are going to do. Buffett’s investing approach is a prediction-oriented approach.
He of course understands that precise investing predictions are not possible. But he aims to get the probabilities on his side. What investing approach does that sound like to your ears? I hope that the response of regular readers is: “Valuation-Informed Indexing.” The approach to investing advocated at this site is Buffett’s approach, tailored to those who prefer buying index funds over individual stocks.
In that distinction may lie the explanation of why Buffett said what he said in the way he said it. Buffett is a master at picking individual stocks. It may well be that Buffett is so skilled at this task that, even at today’s prices, he can pick stocks confidently of obtaining a better payoff that what is available through bonds if he is willing to wait 20 years to see things work out.
What concerns me is that many of those who listen to Buffett’s words are not as skilled at stock selection as he is (and please note that in his comments he refers to purchasing an index). And many of those who listen to Buffett’s words are not able to wait 20 years to watch stock prices first fall dramatically and then return eventually to reasonable levels again. And the 20-year number is a push. The historical stock-return data shows that stock prices have gotten so out of kilter this go-around that it could well take 25 years for today’s stockholders to see their bet pay off.
Coming from someone other than Buffett, I would take the comments he put forward as well-informed and even generally helpful. Coming from the Jedi Master’s mouth, they send the wrong signal.
I agree with the fellow who asked the question that Buffett’s comments in recent years suggest that he is worried about stocks and the tales that middle-class investors have been told about stocks. The question presented Buffett with a teaching opportunity. By being a little less cautious about rocking the boat and by employing a bit more of the straight talk for which he is justly famous, the Jedi Master could have scared some people.
That would have been a very good thing, in my assessment.
So who are you going to listen to? The man who is widely perceived as the smartest investor who ever lived? Or the guy who posts stuff on the internet and who needs to rely on jokes and song lyrics to make up for the ground he loses because of his deficiencies in the I.Q. department?
You make the call. More on This Topic
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