Stupid Investors, Rejoice!

What a crazy couple weeks we’ve had in the financial markets….And through it all, how many times I have logged in to see how my investments in the stock market are doing? Zero. That’s right. Zero times — I haven’t checked even once to watch how my index funds are holding up.

That’s because the money I invest in the market is for the long-term. I won’t touch it for many years. So I don’t much care how it goes up and down and up and down because I know, in the long-term, there’s a very good chance it will be up.

Ben Stein has a brilliant mini-essay at the Fortune web site on what to make of the current crisis. Stupid investors, rejoice!

No one is too stupid to make money in the stock market. But there are many who are too smart to make money.

To make money, at least in the postwar world, all you have to do is buy the broad indexes domestically–both in the emerging world and in the developed world–and, to throw in a little certainty about your old age, maybe buy some annuities.

To lose money, pretend you’re really, really clever, and that by reading financial journalism and watching CNBC, you can outguess the market day by day. Along with that, you must have absolutely no sense of proportion about money and the world at large.

The "smart" investor nevertheless reads the papers, bails out, heads for the hills, and stocks up on canned foods. He gets a really big charge out of reading in the press that there are also problems in the mergers and acquisitions market and that some deals will not go through because there are problems raising the funds for the deal. He does not see that the total value of the U.S. major stock markets (the Wilshire 5000) is roughly $18 trillion. The value of the deals that have failed in the private equity world is in the tens of billions or less. The loss to investors–what the merger price was compared with the normalized premerger price–is in the billions. It’s real money, and I could buy my wife some nice jewelry with it, but it’s pennies in the national or global systems.

The "smart" investor also reads that the Fed has injected, say, $100 billion into the banking system in the last week or ten days, and says, "Aha! The whole country is vaporizing. Look how desperate the system is for money!" What he does not see is that the Fed is always either adding or subtracting liquidity and that recent moves are tiny in the context of a nation with a money supply in the range of $12 trillion. No, the "smart" investor is far too busy looking for reasons to run for cover and thinks he can outsmart long-term trends.

The stupid investor knows only a few basic facts: The economy has not had one real depression since 1941, a span of an amazing 66 years. In the roughly 60 rolling-ten-year periods since the end of World War II, the S&P 500’s total return has exceeded the return on "risk-free" Treasury long-term bonds in all but four ten-year periods–the ones ending in 1974, 1977, 1978, and 2002. The first three of these were times of seriously flawed monetary policy that allowed stagflation, and the last one was on the heels of the tech crash and the worst peacetime terrorist attack in the history of the Western world.

The inert, lazy, couch potato investor (to use a phrase from my guru, Phil DeMuth, investment manager and friend par excellence) knows that despite wars, inflation, recession, gasoline shortages, housing crashes in various parts of the nation, riots in the streets, and wage-price controls, the S&P 500, with dividends reinvested, has yielded an average ten-year return of 243%, vs. 86% for the highest-grade bonds. That sounds pretty good to him.

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