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The insidiousness of the market; My awakening October 30, 2012

Posted by shaferfinancial in Finance.
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I have often mentioned that in the mid 1990’s, I was awakened to the wrongness of the financial advice being sold to consumers at the time. Not much has changed about the advice since then, just some tweaking around the edges. That in itself it pretty amazing considering how bad that advice has turned out to be. But, I never took the time to lay out how the process took place for me. So I thought I would write a few posts on it starting with today.

It seems counter-intuitive now, but what started me questioning was the great bull market that was at the end of its legs at the time. The market was going up with double digit returns every year, or so it seemed, and it felt really good. That is perhaps one of the insidious things, how good and smart it makes you feel when the market is going up. But, as I looked at my account, and projected into the future the numbers that were coming up seemed to good to be true. So, I started to really look at the history of the market, I mean really look at it. And I realized that there has to be a negative mirror to current results. Reversion to the mean, a mathematical truism would have to rear it’s ugly head at some time.

Now a quick reminder, I had bought into the mutual fund story of diversifying, owning the American economy, etc. So, what the market was doing, was what my accounts were experiencing. Then the tech stocks started their incredible climb into a bubble. People’s expectations were off the chart, sometimes so high as to be laughable. Classic bubble behavior. And then it hit me; variation was the enemy. Not only did the great years mean that lean years were coming, but great years were screwing with your psychology making it difficult to imagine any reversal of fortune. So not only were you betting against a sure thing [reversion to the mean], but when it came you would not be prepared. I noticed old folks of the time were still putting their money into certificates of deposits and always thought they were crazy for doing so. But, I took the time to talk to some. And what I found out was they remembered the great depression and the aftermath. They had seen this behavior before. I started to read about Warren Buffett and his philosophy on investing, which made me question some basic tenets like diversification. I read about great historical figures in investing with their made and lost fortunes. It seem to all came down to how to deal with that enemy, variability.

My first move was to transfer as much of my investments to Warren Buffett as I could at the time [my 401K was tied up with a company I was working for]. I spent several years doing this, cashing in investment, selling real estate, etc. I was convinced that he was the logical person to manage my money at that time, so I bought as much BRKb as I could. Since I had 30 years until retirement age, I hadn’t totally figured out the variability puzzle at that time, but I figured I had time while Warren invested my money to figure it out. Interestingly, I also bought some bank CDs, but I knew that the interest rates were not going to get me anywhere.

So, my first realization was that variability of the market was an insidious and dangerous factor to acquiring an abundant retirement. How I learned to tame it, will come later in my story. First there were some other hard learned lessons described in upcoming posts.

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