“No one in this world… has ever lost money by underestimating the intelligence of the great masses of the plain people.”
-H.L. Menken 1926
This quote is usually paraphrased as “no one has ever gone broke underestimating the intelligence of the American public,” and it is no less true today than it was almost 90 years ago. Our apparent inability to turn on our brains has been one of our biggest financial obstacles. Consider the following simple facts:
- Simple Fact 1: Our global economy has grown consistently more valuable throughout recorded history.
- Simple Fact 2: Today, a stock price approximately represents the value of a business.
- Simple Fact 3: In aggregate, the value of all of the stocks in the world is a reasonable approximation of the value of most of the global economy.
- Simple Fact 4: Day to day, stock prices rise and fall.
- Simple Fact 5: Because the economy has always grown the aggregated global stock market has risen more than it has fallen.
Can anyone argue that any of these are facts? They are all measurably true. Given these simple facts, please answer the following question:
If the global stock market has always risen more than it has fallen, and the global economy, that it represents, has always grown is it more likely that:
- Bear (falling) markets are more likely than bull (rising) markets, so I need a long-term strategy to protect my investments.
- Bull (rising) markets are more likely than bear (falling) markets, so it is better to remain invested through falling markets.
- I’m hoping that my investment in survival gear pays off, so I think the global economy will collapse, in my lifetime, setting off a world-wide conflagration that will kill everyone but me, so I can be “King of the World.”
If you picked “3,” please stop reading because you know, as well as I do, that there is no reasoning with “crazy” people.
If you picked “1” you are a very typical (in other words, wrong) investor who probably managed to miss the huge increase in the value of stocks over the past five years because you were “scared” by the stock market decline of 2008 and actually believed that the economy was going to collapse forever (yes, that was a very long sentence). Those who chose “1” face an another problem. If stock prices fall more than they rise, eventually “3” ends up being the right answer. In an environment of steadily falling prices, at some point stocks will have no value and there goes the economy.
Let me share another fun fact: In February 2009, the global stock market began a steady rise that ended up increasing the value of a globally diversified equity portfolio almost 160% over the next five years. Those smart enough to have $100,000 on the global market saw their investment rise to almost $260,000.
Even those who suffered through the previous year’s massive declines would have done well by simply waiting the market out. Even though, they started 2008 with about $177,000, they would have bounced back within three years and seen a profit in five.
Despite the fact that we know that stock prices have risen more than they have fallen, and are likely to continue to do so, even in a rising market, we make bad investment decisions. From late 2008 for months or years to come, here is what many of you must have thought was the future of the stock market:
Based on real investor behavior most people must have feared that stock prices were likely to keep falling almost forever. Ready for one more fact? This one comes from the mutual fund industry’s trade organization, the Investment Company Institute (ICI).
ICI reported that for half of the 60 months, between February 2009 and January 2014, average investors pulled more money out of stock funds than they put in. In other words, they were selling when they should have been buying (or at least staying put).
We are our own worst financial enemies. The amount of money we leave “on the table” through bad investing decisions is huge. If we simply invested based on simple facts, we would all eventually be wealthy. The problems lie with our emotions overriding reason. Until you, or someone you hire to help you, can develop investing discipline based on simple, inescapable facts, you are destined to be one of those whose investing intelligence is worthy of underestimating.