Why should I bother doing anything?

Post #46,171 by ben_tilly 7/19/02 10:37:38 PM 7/20/02 1:54:33 PM Reply	Why should I bother doing anything? You just don't seem to get it. Our economy has decades of showing an average growth of a bit over 10%/year. That growth is what drove the stock market through the early 90's. After that it seemed like everyone learned that stocks were a good thing to do with their money. Not long after that, stocks were a great "investment". As far as I know, that underlying real growth has continued. I have some reason to believe that it will continue to continue for my lifetime. The problem with that is that for stocks to return to that fundamental level, they will have to fall a hell of a lot farther. And by the time it reaches that, people will probably be serious burned, and the market may well keep going down. At that point stocks will (assuming the fundamental engine keeps going) be a good investment. But the more they fall, the better an investment they will be. At that point, why should I hurry? When I buy, I expect to hold on for decades. If waiting a few years results in my getting more bang for my buck, that is fine by me. If the stock market gets as irrationally low as it got high before (which I don't think will happen), I would be left in very good shape. My only real concern (and I admit to being virtually alone in the financial markets in being concerned about it) is that the US government could financially collapse. I will worry about that more if I see it becoming more of a near-term possibility... Cheers, Ben "... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything." --Richard Feynman Edited by ben_tilly July 20, 2002, 01:54:33 PM EDT Why should I bother doing anything? You just don't seem to get it. Our economy has decades of showing an average growth of a bit over 10%/year. That growth is what drove the stock market through the early 90's. After that it seemed like everyone learned that stocks were a good thing to do wit their money. Not long after that, stocks were a great "investment". As far as I know, that underlying real growth has continued. I have some reason to believe that it will continue to continue for my lifetime. The problem with that is that for stocks to return to that fundamental level, they will have to fall a hell of a lot farther. And by the time it reaches that, people will probably be serious burned, and the market may well keep going down. At that point stocks will (assuming the fundamental engine keeps going) be a good investment. But the more they fall, the better an investment they will be. At that point, why should I hurry? When I buy, I expect to hold on for decades. If waiting a few years results in my getting more bang for my buck, that is fine by me. If the stock market gets as irrationally low as it got high before (which I don't think will happen), I would be left in very good shape. My only real concern (and I admit to being virtually alone in the financial markets in being concerned about it) is that the US government could financially collapse. I will worry about that more if I see it becoming more of a near-term possibility... Cheers, Ben "... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything." --Richard Feynman Collapse All History
Post #46,176 by orion 7/19/02 10:57:55 PM Reply	So basically you are saying the air is being let out of the balloon? The balloon being the stock market, and over the years it was slowing blowing up to more than it could handle? Then someone let the cork out of the balloon (or untied it, whatever) when the scandles hit, and people paniced? Now Corps are being hit for cheating on their annual statements, and the market tanks some more? The smart thing then should be to wait until the balloon starts to inflate again? *I am free now, to choose my own destiny.*
Post #46,224 by ben_tilly 7/20/02 2:43:15 PM Reply	You are getting somewhat closer However the balloon didn't slowly blow up to more than it could handle. It was damned quick about it, and the stories of fortunes made caused others to jump onto the bandwagon. Also the scandals aren't what caused the thing to deflate. There were scandals on the way up as well. What caused it to deflate is that enough people got burned that they ran out of suckers. Now people will repeatedly get burned until fantasies get replaced with a more realistic understanding. The scandals now just cause some more people to get burned, and others to get scared. This is good. This is healthy. When people stop asking why the markets don't walk on air, they have a chance to really recover. And finally, your final comment about waiting until the balloon starts to inflate again shows that you still don't get it. If your investment strategy is based on inflation and deflation in speculation, then you are speculating (aka gambling), not investing. It isn't about seeing the market inflate and deflate. It is about the fact that long-term the market tracks the overall country better than any other investment, and long-term that grows. Stop asking how you can make a quick buck, and you might just find yourself making a lot more of them in the end. (Albeit not quick ones.) Cheers, Ben "... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything." --Richard Feynman
Post #46,230 by orion 7/20/02 3:35:37 PM Reply	I am not looking to make a quick buck I just want my investments to grow over the years so that I have enough to live on when I retire in 35 years. I don't want to invest my money, and then lose it all because the whole market has gone to hell. I think I'd be better right now stuffing my money into a matress, at least there I won't be losing any of it unless someone robs my house and steals the mattress or the money. *I am free now, to choose my own destiny.*
Post #46,239 by ben_tilly 7/20/02 7:26:58 PM Reply	There is an old saying... "A bull can make money. A bear can make money. But a hog never will." What that refers to is how fear about your money can lead to bad decisions. People with a decent understanding who are following basically reasonable strategies consistently make money. But people who get emotional about what they have made and lost always make bad decisions and lose. Both Another Scott and I have thought-out courses for long-term investing. I see both of us coming out OK. Neither of us is likely to freak out if we lose a ton of money. (Which it is guaranteed that we will both do.) Neither of us is going to freak out if we miss a killing (which will also happen). If you can get over the fact that it is your money and accept reality with similar equinamity, then it will all average out in the end. (Though the current market may take longer to average out than most. :-) However if you continue with, "Things can't get worse! Oh my God, I have to get out until things turn around! I just want something left in 35 years!" then things aren't likely to turn out so well. Cheers, Ben "... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything." --Richard Feynman
Post #46,262 by orion 7/21/02 1:25:15 AM Reply	I can honestly say that I have no idea what to do. I am totally baffled here. All I ever seem to do is just lose money. I can't seem to get another job right now, not even a low paying one. Everything is stacked against me. *I am free now, to choose my own destiny.*
Post #46,277 by ben_tilly 7/21/02 10:26:03 AM Reply	And I can honestly say... I am not suprised. I have a pretty good idea what is wrong as well. But I don't know how to communicate that. Ben "... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything." --Richard Feynman
Post #46,300 by orion 7/21/02 4:19:13 PM Reply	I can say that I am better off not investing money right now, the only real payoff would be me committing suicide and my wife collecting on the insurance money. Everything else appears to be one big scam and/or a black hole that just sucks in money. I have no idea what to do about my financial situation, it keeps getting worse. No job, investings all going bad, about to lose my house, etc. I just have the most rotten luck of anyone I know. Meanwhile some 18 year old kid starts a rumor on a Yahoo Message board and then dumps his stock in the company when the price goes up due to the rumor. They appear to be the only ones making money. *I am free now, to choose my own destiny.*
Post #46,213 by Another Scott 7/20/02 9:53:36 AM Reply	A couple of things re the market P/E, etc. Hi Ben, The problem with that is that for stocks to return to that fundamental level, they will have to fall a hell of a lot farther. . I'm no expert, so get out your salt shaker... I wouldn't be surprised if the big market averages continue to fall for a while, but I also wouldn't be surprised if the historic P/E ratio doesn't return for a long time. Why? Well for prices to fall further, there must be more volume selling than buying. More people wanting to get their money out to put it somewhere else. These days in the US, inflation is still low (2-3% or so). Interest rates are very low (hard to find 2 year CDs that pay 4%). Gold is a risky crapshoot. The real estate bubble in California has partially burst, and though prices continue to rise in many areas (e.g. around DC), I know that the market has practically stopped and is starting to contract in suburban Boston. So housing is in risk of being at or near a peak. So the usual alternatives to the stock market - bonds, gold, real estate, etc. - aren't terribly appealing now either. If you take money out of the stock market, there are brokerage fees and taxes to worry about. And there's always the issue: when do you get back in? The market can swing 5-10+% in a day or two. Trying to get back in at the "right time" is very difficult. One of my investment books talks about a woman who sold her stocks just before the 1987 crash. She was very pleased with herself for being so visionary. But she never got back in on the way up... At any particular time, stocks are worth what people think they're worth. Over the long haul, their worth is related to the profits and capital gains they generate. With more people in the world having more money to invest, I wouldn't be surprised if P/Es of averages good companies stayed higher than the historical averages in the future. I haven't changed my 401k. (I'm about 30% bonds and 70% S&P-500 and all new investment in going into the S&P. I don't plan on any changes either - dollar cost averaging and all that.) But I don't plan on any withdrawal for another 25 years. YMMV. <cynically>The brokerage firms must be loving commissions from days like these. I'm sure they're rubbing their hands in glee at the though of issuing "buy signals" in the coming weeks/months so they can get huge volumes on the upside too. And don't get me started on how the TV and business press has hyped this stuff!</cynically> Cheers, Scott.
Post #46,227 by ben_tilly 7/20/02 3:04:02 PM Reply	I respect that, but disagree There are lots of places to put money. My 401K is in treasuries. Barring visions of the US government financially collapsing, that is safe. If it doesn't make money, it isn't losing it either. As for the market sustaining itself at historically high levels, I don't buy it. Investors who believe that are IMHO still lost in fantasies from the late 90's. The historic levels were the historic levels because that was a fair valuation of risk/return for stocks. It is still a fair valuation. As for everything else being risky, wake up and smell the coffee. Do you think that bonds were safe in the 80's? How about commodities in the 70's? There is always lots of risk in the world, and more in stocks than elsewhere. After 400 years of having stock markets, that appears to be a given. Unless you tell me something fundamental about the world that has changed, I am going to continue to believe that stocks will return to a more usual valuation within 5 years. Which means that I believe that this train isn't done being wrecked. Finally your timing comment would ordinarily be worth listening to. That is a great way to manage short-term volatility. But we are in what is so far the second largest devaluation of the US market in the last century. The only one larger came after a run-up which has only been exceeded once, which suggests that when all is said and done, we may lose even more this time around. We likely will never again see such a bad time to invest in stocks in our lives. I don't care about missing a few percent, or even a few dozen percent, off of the bottom. I just don't want to be there until I feel confident that the wreck is over. Your mileage apparently does vary. I also note that in 25 years, the question of which of us is right will be ancient history. We will probably both be fine. What is at stake is most of what we have invested so far in our retirement funds. Which isn't all that much in my case because I haven't been working for very long... Cheers, Ben "... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything." --Richard Feynman
Post #46,237 by wharris2 7/20/02 7:05:23 PM Reply	Perhaps I'm crazy but I find treasury funds about as nutty as growth funds. The government's Social Security shenanigans (and other practices that would make an Enron CEO blush with shame) are going to have to come to roost sometime. I try to diversify (as much as our 401K plan allows) between companies that actually make things. GE and P&G may drop 30-40% (pulling numbers out of my ass) but with employer matching and tax benefits that still translates into a net plus. Famous last RPG quotes: "I'll just shoot this fireball down the dungeon passageway..."
Post #46,240 by ben_tilly 7/20/02 7:37:09 PM Reply	Perhaps not so crazy I agree with you about our government. However until there is a sign of something to cause the markets to re-evaluate that, I will act like the textbooks do and consider short-term treasuries to be "riskless" investments. Furthermore with my opinion about where real company valuations and worth stand relative to each other, I prefer the less risky investment for now. Cheers, Ben "... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything." --Richard Feynman
Post #46,263 by Another Scott 7/21/02 1:32:34 AM Reply	You might enjoy Bogle's latest speech. He founded Vanguard - one of the largest mutual fund companies. [link\|http://www.vanguard.com/bogle_site/sp20020612s.html\|Here]. He shares much of your caution. Make no mistake about it, then: It was speculative return that drove the Great Bull Market. The fact is that, based solely on investment return, $1 invested in the S&P 500 at the outset would have grown to $7\ufffda handsome seven-fold enhancement. But the leap in the P/E multiple alone increased that investment return to a market return of $24\ufffdnearly twenty-four times over, 3 \ufffd times (!) the hardly inconsequential investment gain. Yes, we had literally never had it so good. Can it happen again? I can't imagine how. To understand why, let's take Lord Keynes' advice and look at the sources of the past returns on stocks and then apply them to the decade ahead. Today, the S&P 500 Index yields not 5% but 1 \ufffd%, reducing this key contributor to stock returns by fully 3 \ufffd percentage points. When we add an assumed 6% earnings growth (corporate earnings, truth told, grow at about the same pace as our economy), the investment return on stocks would be just 7 \ufffd% per year. Will speculative return add to or detract from this figure? While the 33% decline in the S&P 500 since the March 2000 high has brought the P/E ratio down to 21 (based on "normalized" earnings at that), that's still quite high relative to the long-term norm of 16 times. So, I think the P/E is unlikely to rise, and could easily decline, perhaps to 18 to 20 times. [...] It is hardly farfetched, then, to expect future bond returns that are likely to parallel those of stocks. If so, the traditional 3% equity risk premium\ufffdthe amount by which stock returns have exceeded bond returns over the past century\ufffdmay be far smaller, perhaps even non-existent. There are, of course, those who say that there is some God-given mandate that an equity premium must exist. Yet history tells us that bond returns have exceeded stock returns in one out of every five decades. The reality is that restoring an equity premium to stocks will require either (a) lower interest rates, or (b) some combination of higher earnings growth, higher dividend yields, and lower P/E ratios, which is likely only if there is another downward leg in the stock market. In any event, my view is that we are entering an era of lower returns on financial assets. His book, "Common Sense on Mutual Funds" is excellent. I remember the 1973-1974 recession and the stock doldrums that continued for many years. I remember pre-breakup AT&T at $19 and I remember IBM at $40. Stocks and markets go up and down. You're right that equities are still pricey at these levels, but I feel much better about the US markets than about e.g. Japan's. Perhaps foolishly, I'm willing to ride out the current drop in equity values because I'm basically optimistic about the future and because I know that I won't be able to know when to get back in on the way up. I know you're not a trader, and I know you're not advocating market timing. You're doing what's best for your comfort level and that's what every investor should do. Nobody knows the future and we'll see what happens. :-) Cheers, Scott.
Post #46,276 by ben_tilly 7/21/02 10:20:07 AM Reply	I did, thanks And he corrected me on some facts as well. I had forgotten about the magnitude of the 1970's slide. If only more fund managers felt like he does. Cheers, Ben "... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything." --Richard Feynman
Post #46,290 by a6l6e6x 7/21/02 1:23:51 PM Reply	That was an excellent link. Thanks! Alex "Television: chewing gum for the eyes." -- Frank Lloyd Wright
Post #46,325 by static 7/22/02 12:48:59 AM Reply	So if I'm reading you aright... ... if I indirectly hold any stock - i.e. in a managed investment portfolio -, the right thing to do is to leave it there. Wade. "Ah. One of the difficult questions."
Post #46,436 by ben_tilly 7/22/02 8:16:37 PM Reply	Sorta... I think that right now, not holding stock is a wise idea. Long-term the short-term reasons that I believe that are irrelevant, it doesn't matter which you do. But I would suggest that you read that speech by Bogle. A managed investment portfolio is something that I don't believe is a very good idea for reasons that he explains very well. Cheers, Ben "... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything." --Richard Feynman
Post #46,243 by boxley 7/20/02 8:50:15 PM Reply	what is considered a good return? The company I work at financed their employee buy out with bonds paying 12%. Looking at what they do, expectations in the market place I would consider that money reasonably safe. On the other hand if they go IPO to raise capital I might still hang on to the bonds as opposed to buying stock. A fixed known low return is sometimes better than a crap shoot in the stock market. All in all investing means lots of research. Done yourself not by ananlysts on the tube. thanx, bill ."Once, in the wilds of Afghanistan, I had to subsist on food and water for several weeks." W.C. Fields
Post #46,248 by ben_tilly 7/20/02 9:37:44 PM Reply	A secret about analysts on the tube Analysts will often talk up stocks that important customers of theirs (or they) want to get out of. When dealing with money always ask yourself why the person who you are listening to is talking. Typically motivation matters far more than what is actually said. Cheers, Ben "... I couldn't see how anyone could be educated by this self-propagating system in which people pass exams, teach others to pass exams, but nobody knows anything." --Richard Feynman
Post #46,251 by boxley 7/20/02 11:17:30 PM Reply	remember granville? had a huge following back when and actually swerved the market at one point. Last heard from was running a janitorial business in this area. 1. Does the company sell something needed at a reasonable value? 2. Have they been doing this successfully for a while? 3. What is the long term sales effect for this product? 4. Buy into cheap liquor and those who sell discounted tobacco. Dont forget the basics. 5. People need food. What do poor people eat and what does Government assist on paying? no big bonanzas but steady growth. thanx, Bill thanx, bill ."Once, in the wilds of Afghanistan, I had to subsist on food and water for several weeks." W.C. Fields

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