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How the 18 year bull market fools the so called “financial experts.” August 24, 2009

Posted by shaferfinancial in Uncategorized.

Look at this chart.  There have been 15 bear stock markets since the great depression [80 years].  Taking out the 1982-2000 bull market the longest bull market was 8 years long.  So the 18 year bull market from 1982-2000 was a serious anomaly lasting over twice as long as the second longest.  Here is the problem.  Most of the thinking and financial planning is based on thinking that 18 year bull market is normative.  Look at what people invest in, for example, and when they started to invest in these products.  The vast majority of folks that invest in the stock market do it with mutual funds.  And this  strategy gained a foothold in the 1990s.  I have mentioned the social forces encouraging mutual fund investing several times before so I won’t go over it again.  But it is important to note that all those nice little charts the mutual fund industry uses, and that average rate of return for the market it uses are dominated by the data from that 18 year period.  Even the asset allocation models, where you invest in both stocks and bonds [and now international stocks and REITs] at varying proportions depending upon your risk tolerance and your age are built upon what happened in that time period.  Basically, what I am pointing out is that these strategies are all built upon faulty data.  Garbage in, Garbage out as they like to say!  The mutual fund industry has existed on the back of this lie and has had exponential growth as a result of gullible folks who believed the lie.

I know this is quite the statement, but let’s be honest, and look at what the real investing community does?  I’m not talking about the retail investor that dominates the internet.  Nor am I talking about the professional mutual fund managers because they have very different set of investing problems.  It might surprise you that most research has pointed out that hedge funds on average out perform the market, but of course hedge funds aren’t available to the average investor.  [Academics like Malkiel have attempted to disprove this, but has to resort to  questionable assumptions] Pension fund managers also tend to out perform the market over the long run, but perhaps the best money managers are the folks who run the endowments for the large institutions.  Outperforming the market when you are managing billions of dollars is a real feat [don’t get fooled by recency bias looking at 2008 returns].

Warren Buffett has mentioned several times if he only had a  billion dollars to invest he could get a 30% return, but that it gets harder the more money you have to invest.  What he and other money managers tell us is that the individual investor has a tremendous advantage in investing because we are investing small amounts.

Where does all this leave the individual investor?  Well, first one needs to look at active investing strategies that have worked over the long run.  I mean really look…….value investing…..real estate investing…….trend following….etc.  Decide which of these strategies work best for her/his lifestyle/proclivities.  That means throwing out the strategies that have failed like mutual fund buy and hold investing [including asset allocation], flipping real estate,  gold, etc.  Pay attention to transfers like taxes.  Have  a plan that is both based on what has worked over the long run and is flexible enough to allow changes as the environment changes.  And quit paying attention to all those internet experts [real irony here!], economists,  politicians,  ideologues, etc. that don’t have a track record of real investing returns you can see.  You know the scary part?  Warren Buffett’s strategies can be found in The Buffett Way, and to a smaller degree Snowball or look at Joel Greenblatt’s The Little Book that Beats the Market. Why wouldn’t you learn from the most successful investor, Warren Buffett, over the “internet investing experts?”  Or the literally thousands of folks out there that have demonstrated success in other types of investing strategies?

Have a great investing week!



1. Srinivas Rao - September 16, 2009

The concept of value investing has encouraged me to start a portal of value investing on the Indian stock markets. I am doing analysis of Low PE, High dividend yields, Low PB and Low PB with high returns. I would love to share anything which is common. I really appreciate the effort you have put in your blog.

2. PG - December 2, 2009

THERE ARE NO FINANCIAL EXPERTS around in this world , it has been proved for the Nth time , either that or they are all crooks .
Its not the first financial crisis , yet nobody sees it coming ( or so they say) , experts would see things coming and make warning noises .
The current financial models and ideas are flawed , the people working in Finance and a lot of businesses are not competent or honest , and the system has to be changed and unfortunately has to be controlled .
Linked to this is the world climate and pollution problems , if things don’t change the financial , business and political leaders will have a lot to answer for . And people may take things into their own hands , so be warned.

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