Stock investing is a solitary endeavor. The purpose is to finance your personal old-age retirement. It is your job to save enough money to provide for a secure and happy one. And it is your job to decide on a stock allocation. And to tune out all the nonsense that is directed at stock investors and that focuses on short-term considerations rather than matters of long-term significance. And to stick to your plan long enough for the strategic thought underlying it to pay off.
That’s how most people think of things.
Achieving long-term stock investing success
It’s all true, to a point. But I believe that the great undiscovered continent of the stock investing world is valuations. Stocks are a very good investment choice when they are priced properly. They are an amazing investment choice when they are priced on the low side. They are a not-so-great investment choice when prices are at scary high levels. My thought is that paying attention to valuations is 70 percent of what it takes to achieve long-term stock investing success. Appreciate the importance of valuations and it’s hard to see how you could do poorly in the long run. Fail to appreciate the importance of valuations and the odds are high that you will at some point in your investing lifetime suffer devastating losses.
No one investor can have a significant effect on stock valuations. That’s a community thing. The setting of stock prices is a collective enterprise. If you want to be able to buy stocks at reasonable prices, you are going to need to do your bit to educate others as to the benefits of keeping prices at moderate levels and as to the dangers of permitting them to rise to the sorts of levels where they reside today.
You can elect as an individual to go with a higher stock allocation when prices are good than when they are bad, of course. That will provide you with a great deal of protection from the negative effects of price crashes and it does not require you to persuade any Buy-and-Holders of the folly of their way. It’s something that is easy to do and that pays off big time over the course of an investing lifetime. I very much encourage you to put in the little bit of effort it takes to be able to invest in stocks at greatly reduced risk while also enjoying the realistic prospect of earning greatly enhanced returns. Why not? That’s investor heaven.
But….
What everyone else is doing still matters.
Stocks have been overpriced for a long, long time. Prices were so high in 1996 that Shiller published a paper warning investors that, if they failed to lower their stock allocation, they would come to regret that choice within 10 years. Prices did drop hard in late 2008. But they rose again to high levels by the end of 2009 and have remained at various levels of “high” ever since. If you are one of those crazies who lowers your stock allocation by 30 percent when prices rise to dangerously high levels, you have been going with a less-than-ideal stock allocation for a long, long time.
Maybe it will pay off in the end. You will suffer smaller losses in the next price crash. And you will be able to invest the money you save in stocks when they are selling at the sorts of price levels that yield mouth-watering returns over time. If you study the historical record, you will see that this strategy has always paid off in the long term. So perhaps it’s not such a big deal that you have been going with a somewhat lower stock allocation for so many years.
But it’s not a good thing. You shouldn’t have to wait so long to see those benefits materialize. It would be better for you to be able to go with a normal stock allocation and to earn normal returns for doing so. I believe that stocks will continue to perform in the future somewhat as they always have in the past. So I am a big believer in valuation-based market timing. But I very much believe that a world in which market timing was not required because valuations never got too out of hand would be a better world.
Keeping stock prices straight and narrow
They say that no man is an island. We live in communities. I believe that stocks should be priced at their fair-value price. Do you know what it would mean for stock prices to return to those levels from where they reside today? It would mean a loss of so much consumer buying power as to bring on a recession. It would mean an ocean of human misery. I hate that idea. I both want to see stock prices fall and not to see them fall at the same time. I don’t see how anyone could actually wish for a return to reasonable price levels. The intellectual appeal of the idea is strong. But the impact on humans would be devastating. No one longs for hurricane season to arrive.
I would like to see us all become sufficiently educated about how the stock market works that we simply would never again need to worry about bull markets or bear markets or price crashes or the economic collapses that follow from them. Bull market prices are hurricane warnings, in my assessment. I don’t celebrate big stock gains. When I hear the rah-rah stuff that is so common at times when prices are rising by more than 6.5 percent real per year, I shudder. Bull markets are the root cause of everything bad about the stock market, in my book. I vote “no”, you know?
Not just for myself. I can elect out of the dangers of bull markets in a personal way by lowering my stock allocation a bit. But I see the stock market as somewhat akin to the water supply or the oxygen supply. It’s something we all need to be able to provide effectively for our financial future. We shouldn’t want it to become polluted. We should do what we can to help others to come to understand why keeping stock prices on the straight and narrow is a project to which we all should contribute with vigor and good cheer.
Rob’s bio is here.
