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.

11 comments on “Stupid Investors, Rejoice!
  • Although I have to admit to checking my portfolio a few times each day through all the ups and downs, and I even considered pulling some money out, I thought better of it and decided to stand pat. I’m glad I did. Friday was a big up day all around. If you are constantly in and out of the markets, you can miss a lot of the upward movement. Some people can’t afford this luxury, but those of us who are young and investing with a 20-50 year horizon certainly can just leave our money and forget about it – to us these blips don’t matter one bit.

    On the other hand, from what I’ve read, it seems that broad-based index funds don’t deliver the high risk/high reward opportunities that can be extremely beneficial to young people. We can certainly seek this risk through investing time in entrepreneurship, but it seems to me that those of us under 30 or 40 may want to take on more risk in our investments as well. What do you think?

  • Personally, I think that having an emergency food and water stash is a good idea. Reason: Disasters can and do happen. It’s best to be prepared.

    After all, as many Katrina survivors learned, the government may not be around to help for a while.

  • I must say you’ve behaved like a mature investor, since most investors have a temptation to touch and feel their profit – not let it remain just on paper.

    Hold out as long as you can. It’s not possible when mortgages and family responsibilities catch up, when you have to plan for periodic liquidity. It often turns out that the market is at its worst, when you need your funds the most. That’s what makes investors cash out during a rally.

  • Ben, I am continuously amazed by how informative and exciting your posts are. Keep up the good work!

    When you are investing in the long run, of course it makes little sense to check your stocks or mutual funds. Especially if you aren’t going to trade them in and out your portfolio. I havent logged in to my IRA account for six months now.

  • Dollar Cost Averaging… buys more when it’s low and less when it’s high.

    I do the 333 a month for the Roth and 15% into my 401k bi-weekly. You’ve got a 4 year head start on me though. 🙂

    Just remember the rule of 72. Take the return you get on your money and divide it into 72. So at 3% your money doubles every 24 years. But at 12% it’l double roughly every 6 years!

    I’ve got more 6 year periods in my life than 24.

  • Other recent events include my grandma’ s 95 th birthday party. It also doubled as the family Christmas party. My mom was really excited about the gifts that she was giving to my younger cousins (actually, they are my cousin’ s kids). She took a bunch of 10 bills and folded them origami style into shirts, frogs, and butterflies. I’ m not sure that the little ones really knew what to make of the shapes but the little two- year- old’ s first response was“ Money, money, money.” He’ s the one Dana is feeding…

Leave A Comment

Your email address will not be published. Required fields are marked *