Valuation-Informed Indexing #157

by Rob Bennett

What makes you more angry than anything else?

For me, it’s not when I am tricked. It obviously makes me angry to see that I have been tricked. But there’s something even worse than that.

The worse experience is when you learn that you have been tricked on a matter re which you suspected that you were being tricked all along.

There’s something exquisitely painful about not only being out a lot of money but also experiencing the added anguish of knowing that you could have stepped away — if only you had acted on your better instincts.

There are a lot of people who built internet businesses who are feeling that way today. For years, Google encouraged certain practices that we all knew were a bit shady. People would exchange links with friends, leading the search engine to believe their sites were being endorsed by others when in reality the endorsement had been purchased rather than earned. People would write phony articles on topics re which they possessed no expertise because those topics were heavily searched. There were all sorts of things like that going on.

A lot of the funny business came to an end with Google’s Panda and Penguin search updates. Now people are angry. Sometimes irrationally so.

I know of a company that was the toast of the town for helping lots of people build successful sites in earlier days. If you entered that company’s name into the Google search engine, you would see positive review upon positive review. It’s a very different story today. You cannot mention the company’s name without seeing dissatisfied customers filing reports about how the company is a “scam.” That obviously hinders the company’s efforts to attract new recruits for its site-building concept.

The company didn’t know that Google was going to change the rules. It obviously didn’t intend for these businesses to fail. The people with the failed businesses knew that some of the strategies they were employing were dubious. But now they are mad. Not a little mad. Very mad.

People don’t blame themselves when their plans go awry. They look for others to blame. That’s human nature.

Buy-and-Hold is a dubious investing strategy. Throughout history, it has always provided great results for the length of bull markets and then very, very poor results in the bear markets that inevitably follow. That’s just the way that Buy-and-Hold works.

Telling people that stocks are always worth buying causes prices to go to the moon and people are happy so long as prices are on the moon. But sending prices to the moon insures that prices will next crash very hard. And people don’t tend to think that the joke is so funny when their Buy-and-Hold experience enters its crashing–hard stage.

We are not far from the day when we will see the next crash. In every earlier bear market, we have seen the P/E10 value drop to 7 or 8. That’s a 65 percent drop from where we are today. People who lose 65 percent of their life savings on top of what they lost in 2008 are not going to be laughing at the funny joke. They are going to be angry.

They are going to be angry at the people who advocated Buy-and-Hold strategies.

Going by what I have seen follow from Google’s Panda/Penguin initiative, I am worried about how this anger is going to play out.

We saw political unrest following the 2008 crash and the economic crisis it brought on. On the right, we saw the Tea Party Movement. On the left, we saw the Occupy Wall Street Movement. Large portions of the population are losing confidence in the ability of our political system to do something about their economic woes. Lots of people resisted these movements because they believe that the system still works. Will they continue to think so following another price crash?

We are looking at a major social problem. Consider just the millions of failed retirements we are going to see as a result of the failure of the experts in this field to correct the errors in the safe withdrawal rate studies that I brought to their attention in May 2002. The data shows that those who used the retirement studies to plan retirements that began at the top of the bubble have only a one in three chance of seeing their portfolios survive 30 years. These people did nothing wrong. They checked with the experts before handing in their resignations. What do we do about them when their retirements fail, throw them on the streets?

We cannot throw them on the streets. But we cannot afford to cover their losses either. We are in a fix.

There is one bit of light trying to break through all the dark clouds.

Shiller’s research showed us how to reduce the risk of stock investing by 70 percent. It also shows us how to greatly reduce the chance that we will ever see another economic crisis brought on by a massive price crash (all four economic crises seen since 1870 fall into this category). It also shows us how we can see to it that capital is allocated far more effectively than it ever has been before. So we may be on our way to the greatest period of economic growth in our nation’s history.

If we can survive the anger brought on by our reluctance to acknowledge the mistakes we made in our early efforts to come to an understanding of how this stock investing business really works.

Rob Bennett has recorded a podcast titled “The Good Form of Capitulation (No Depression Required!).” His bio is here. 

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