Stock Bandwagon Rolling Again

Feb 13, 2013 by

stock salesmanOnce again I’m pleased to laud my favorite investing professional, Danielle Park, and her blog Juggling Dynamite. I found there the CNBC clip below, accompanied by Ms. Park’s always pithy commentary. The piece found in me a receptive audience because I’ve been watching closely the past few months as the high-powered Wall Street marketing machine and its cheerleading accomplice, CNBC, once again shift into high gear. And why shouldn’t they? After all, stocks are way up, right? Well, no.

As Usual, the Facts are Illuminating

The S&P 500 Index closed yesterday at 1519.43. Based on the froth bubbling lately from the mouths of the stock punditry, you’d think equity markets had reached unprecedented and astonishing elevations. Here’s a chart of the S&P 500 Index since 1950:

S&P 500 Index chart

S&P 500 Index 1950-2013

I don’t practice the black art impenetrably named “technical analysis,” but I do believe I detect a pattern:

From about 1995 to 2000, the Wall Street marketing machine succeeded in running the S&P 500 Index to approximately today’s level. Then the Wall Street-manufactured “dot com bubble” burst, crashing stock values by about half. The “retail investor” (that’s the current Wall Street euphemism for suckers like you and me) took a beating.

Just seven short years later the Wall Street marketing machine again pushed the S&P 500 Index over 1500. Then the real estate bubble burst and the vaporization of the value of the investment vehicles Wall Street’s geniuses invented to rake in billions on hyper-elevated housing prices crushed stock values, again by about half, and induced the Great Recession. The retail investor took another beating.

Now just five years later the S&P 500 Index again has surpassed 1500 and from the Wall Street bandwagon blasts the same happy tune, which should be titled something like “You’re Missing Out on Getting Rich!” The retail investor seems to be capitulating once again as greed inevitably takes over: Equity mutual fund inflows have skyrocketed since New Year’s. Might a third retail investor beating in 15 years be in the offing?

What’s All the Celebrating About?

I’m fascinated that stock touters find achieving a zero return (excluding dividends) over the past thirteen years reason to crow and call attention to the object of their affection: Stock investing. “Woohoo! We’re nearly back to where we were thirteen years ago! See how equity investing is crucial for your nest egg!?!”

Thirteen years is about a fifth of the average human’s adult lifetime, so failure to achieve a positive investment return over this time span is no trivial matter.

If you’ve followed Wall Street groupies’ advice and put the lion’s share of your savings in stocks, you’ll have made virtually no gain on that investment since 2000 (assuming you also followed the other “professional” stock manager tenets: buy & hold, don’t try to time the market, don’t stock pick).

What’s Wall Street’s answer to those rebellious enough to point out this inconvenient truth about stocks? “What else are you going to do with your money? Put it in a bank account paying 1%?” [you idiot, the sneering tone implies]

Now, I’m not nearly as good at math as the bright boys who love stocks. But if my trusty HP 12C still computes, if in 2000 I’d put $10,000 in a risk-free FDIC-insured bank account paying 1%, I’d have $11,381 today. If I’d put the same $10,000 in a S&P 500 Index fund in 2000, I’d have maybe $10,500 today, assuming I reinvested dividends and netting out the fund manager’s fee. And I would have seen a year or two subtracted from my life expectancy due to the stress of having watched powerlessly as my $10,000 shrank to $5,500 in 2008-09. If I’d lost my nerve (or needed cash to buy groceries during my retirement) and sold out after the meltdown, I’d have about $5,800 today left from the $10,000 I invested in 2000.

Sure, you could highlight any number of periods of similar length during which stock returns have blown away every other asset class. The point is: Stocks are risky, my friends, especially since the explosion in Wall Street’s “creativity” the past couple of decades.

I know I’m an apostate for saying so, but I think the proposition that you must invest most of your nest egg in equities to have a hope of putting food on the table during your retirement years is nothing more than a myth invented by Wall Street’s marketers.

Much like casino gambling, there’s only one certainty with stock investing: Some players will win and some will lose, but the guys who run the game are sure to get rich, no matter what.

The More Things Change the More They Stay the Same

This brings me back to the CNBC clip I found on Juggling Dynamite. Though from a February 2007 broadcast, it could have been excerpted from the useless and ideology-driven Larry Kudlow show today. Check it out:

We all know what happened soon after high-tech used car salesmen Kudlow and CNBC’s Bob Pisani expressed confidence in 2007 in an indestructible global bull market in stocks: The S&P 500 Index peaked near 1560 in October 2007, then plummeted a nauseating 45% to about 870 in December 2008.

Is a Stock Market Crash Coming?

I’m not a “gloom & doomer.” I don’t know what stock prices will do tomorrow or next month or over the next thirteen years. I can guarantee you, however, that anyone predicting in 2000 that the S&P 500 Index would achieve no net gain over the next thirteen years would have been exiled to crank-ville. If you refuse blindly to slurp Wall Street’s marketing Kool Aid, you’re a wingnut.

The Takeaway

The guys in the video, and the thousands of charlatans like them, also have no idea what stock prices are going to do, as history repeatedly and invariably has demonstrated. But they pretend they do know the near and long term future of stock prices, purely because they’re well paid to do so.

Think about it: If you could reliably forecast stock prices, would you be

A. Lounging by the pool, iPad in hand, at your home situated in the tropical latitudes, or

B. Appearing on CNBC sharing your stock price forecast

I suspect all but those among us with Donald Trump-sized egos would choose A. Ergo, the parade of stock price forecasters that comprise CNBC’s lifeblood have failed at their so-called profession. Their income derives from running their mouths, not from picking stocks.

The Moral

Be very cautious about taking advice from anyone whose livelihood depends on whether you take their advice, not on whether their advice proves correct.

 

Disclosure: Money Counselor received no compensation in connection with this article.

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  • Time to sell? I think stock is still a good investment if you have a long horizon. But if you need to withdraw for retirement or other reasons, then it would be prudent to have more in other more stable investments.

    • Thanks RB40. Few could go wrong by following your stellar example!

      The S&P 500 chart surely suggests that stock investing has paid off for many in the long run. However, since about 1990, things seemed to have changed on Wall Street, as even a cursory glance at the chart makes clear. The wild volatility of stocks over the past 2+ decades I think reflects the ratcheting up in shenanigans by stock sellers and traders and ‘money managers,’ which has greatly boosted the risk of stock investing, in my view. This ain’t your father’s stock market.

      I’m not suggesting it’s “time to sell.” I haven’t any idea where stock prices will be in a week, a month, a year, or a decade. I do think many small investors vastly underestimate the risks of stock investing, mainly because of misinformation from the ‘investing professionals,’ like those in the Kudlow video.

  • Brick By Brick Investing

    I completely understand your reasoning and rationale. From a quick view I came to the same conclusion, however if you look at the valuation of stocks from 2000, 2007 and today you will find that prior to each crash the stock valuations were absolutely absurd. The P/E ratios were hovering around 25-30 where as today the P/E ratios are around 17. Not to mention we have had a ridiculous amount of money pumped into the economy from QE 1,2, and 3.

    • Thanks B by B for adding this astute comment. I probably did a poor job of this in the post, but I don’t mean to be predicting an imminent crash. I’ve tried, and I’m not able to forecast stock prices. In fact, based on my track record, I’m pretty good at buying and selling at exactly the wrong time. :-/

      Since about 1990, the equity markets seem to have become characterized by bubbling, then crashing. In my opinion, this is in part attributable to more aggressive marketing by stock sellers and money managers and to Wall Street’s ‘creativity’ in inventing new ways to gamble I mean invest one’s money. To my way of thinking, that makes stock investing far riskier than it was 20+ years ago. My point is to encourage Money Counselor’s readers to consider that possibility when they’re being assaulted by the sort of hooey spouted continually by the Kudlows and Pisanis of the world and being told they’ll retire on a cat food diet unless they invest the lion’s share of their savings in stocks. I don’t buy it.

      • Brick By Brick Investing

        I agree! Loved the post.

  • It’s hard to predict stock returns – if we could, we’d be doing something other than what we’re doing today! Having said that, I think that this concept applies to some people who work for a living discussing stocks. Again, if they were so astute, they’d be lounging at their 3rd vacation home in some far flung resort locale instead of peddling stock tips!
    My very amateur view on things is that we’ve seen quite a run up in the short-term. Sure, it’s back to prior levels, but it’s still been a very high rate of return in recent times. But again, I’m not a pro 🙂

    • I wonder it there’s a website out there that tracks the forecasts of the more prominent stock prognosticators vs. what really happened. My guess is that, collectively, this esteemed group is right 50% of the time and wrong 50% of the time.

  • William_Drop_Dead_Money

    If there’s one thing that’s for sure, it’s that there’s another crash coming. Since forever, there have always been crashes. The million dollar question is: when?

    I may be wrong (wouldn’t be the first time) but I believe the current rally still has somewhere to go before it hits the wall, so to speak.

    Two reasons for saying that:

    1. The Fed is flooding the economy with $85 billion per month. The economy is not growing fast enough to absorb all of that money, so a portion of it’s going to the stock market.

    2. Earnings are increasing. The ferocious cost cutting of the recession has left companies leaner (and meaner to their employees) so minor upticks in their revenues result in higher earnings. The average PE of the S&P 500 is still well below the levels it reached just prior to its previous crashes.

    That’s why I believe we’ll probably see the stock market rise for at least another year before the next crash, which, as always, is inevitable.

    I remember the froth of the dot com and housing bubbles, and I think we’re still a ways off yet before we get there…

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