How to best prepare for a lifetime of good investing

By: Greenbackd

Greenbackd was honored to be one of the bloggers asked to participate in Abnormal Returns “Finance Blogger Wisdom” series. Tadas asked a range of questions and will publish them on Abnormal Returns over the course of the week. The first question is, “If you had a son or daughter just beginning to invest, what would you tell them to do to best prepare themselves for a lifetime of good investing?

I answered as follows:

Inspired by Michael Pollan’s edict for healthy eating (“Eat food. Not too much. Mostly plants.”), for good investing I’d propose “Buy value. Diversify globally. Stay invested.”

I feel that I should justify the answer a little in the context of the “What to do in sideways markets” post about Vitaliy Katsenelson‘s excellent book “The Little Book of Sideways Markets“. To recap, Vitaliy’s thesis is that equity markets are characterized by periods of valuation expansion (“bull market”) and contraction (“bear market” or “sideways market”). A sideways market is the result of earnings increasing while valuation drops. Historically, they are common:

We’ve clearly been in a sideways market for all of the 2000s, and yet the CAPE presently stands at 21.22. CAPE has in the past typically fallen to a single-digit low following a cyclical peak. The last time a sideways market traded on a CAPE of ~21 (1969) it took ~13 years to bottom (1982). The all-time peak US CAPE of 44.2 occurred in December 1999, all-time low US CAPE of 4.78 occurred in December 1920. The most recent CAPE low of 6.6 occurred in August 1982. I’m fully prepared for another 13 years of sideways market (although, to be fair, I don’t really care what the market does).

If you subscribe to Vitaliy’s thesis – as I do – that the sideways market will persist until we reach a single-digit CAPE, then it might seem odd to suggest staying fully invested. In my defence, I make the following two points:

First, I am assuming a relatively unsophisticated beginner investor.

Second, this chart:

A simple, quantitative, “cheap but good” value strategy has delivered reasonable returns over the last decade in a flat market. I don’t think these returns are worth writing home about, but if my kids can dollar cost average into an ~11-12 percent per year in a flat market, they’ll do fine over the long run.

The other responses are outstanding. See them here.