Valuation-Informed Indexing #85

by Rob Bennett

There was a novel that we had to read in ninth grade. That was a long time ago, so I don’t recall much of the story. But the trick ending left an impression. The novel as titled The Hound of the Baskervilles. The trick was that they solved the crime by noting that witnesses didn’t hear a dog barking. That meant that the person committing the crime had to be someone known to the family. When a dog has good reason to bark but doesn’t, there’s funny business going on.

There was an amazing column published in the Wall Street Journal about a year ago. It’s called “The Market Timing Myth.” Here are some words from the column: “For years, the investment industry has tried to scare clients into staying fully invested in the stock market at all times, no matter how high stock go… It’s hooey….. They’re leaving out more than half the story…. Anyone who followed the numbers would have avoided the disaster of the 1929 crash, the 1970s or the past lost decade on Wall Street…. I wonder how many stayed fully invested because their brokers told them you can’t time the market.”

I’ve been telling people about the other half of the story for 10 years now. People often tell me that everything I say about investing makes perfect sense but that they just cannot bring themselves to go along with the ideas I put forward because the “experts” tell a very different story. So I was excited to see this article. The Wall Street Journal is of course a highly respected publication.

I was thinking that following this article we would see lots of publications publishing follow-up pieces. The New York Times would write a ten-part series on how we all were taken in by Buy-and-Hold and run it on the front page. Hundreds of blogs would start helping their readers learn about what the academic research of the past 30 years says about how to invest effectively. We would all agree to work together to bring the economic crisis to an end as soon as possible. That sort of thing.

We didn’t see any of that. Perhaps you’ve noticed.

The silence we have seen in response to the Wall Street Journal article is the story of the dog that didn’t bark. You would expect to see a reaction. The article is saying that we have been taken. The article is saying that there is a far safer way to invest in stocks than the one we hear about on the television and on the radio and at most internet sites. The article is saying that the people we think of as “experts” are “leaving out half the story.”

Surely we all want to know the other half of the story. Surely this article caused an explosion in the Personal Finance Blogosphere.

But it didn’t! There was no explosion!

It’s hard to accept that that is the reality. But it is. And we need to try to understand why that is the reality.

What Arends is saying is right on. But there is a piece of the puzzle that he is missing. it is true that Wall Street is more concerned with its profits than it is with teaching middle-class people how to invest in stocks. But it is not true that all of the fault here lies with wall Street. It is an over-simplication to suggest that only Wall Street is in the wrong.

You, Dear Reader, are in the wrong. And so am I. And so are all our friends. And our neighbors. And our co-workers.

Wall Street worked a con on us. But you know what? There’s an old saying that it is impossible to con an honest man. We were taken because we wanted to be taken. Wall Street exploited our Get Rich Quick impulse. But Wall Street didn’t install the Get Rich Quick impulse. We arrived with one already baked in.

We’re fools. We’re dishonest (both to ourselves and to others). We love those bull market thrills and are willing to jeopardize our long-term hopes for financial freedom to obtain them.

Wall Street just works with that. Wall Street is out to make a buck. We are the ones who make it easy for Wall Street to make a buck off of us by promoting its Get Rich Quick mumbo jumbo.

It won’t always be that way. Things are changing. Very, very. very slowly, far too slowly to suit my tastes.  But things are changing all the same.

When will we know that things are where they need to be?

That darn dog will be barking its fool head off!

Rob Bennett is bored with financial pornography. His bio is here.