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Commentary

Of Arrogance and Humility

Sometimes a online page pisses me off. Like when I dug into Ajit Dayal in my “Dishonest Truths” post. A little harshly, no doubt. I don’t harbour any enemity for the likes of Ajit, who seems to be honestly trying to help people, but sometimes everyone needs to get off their pedestal.

Some other times, like now, I feel the need to point out where some people have been wrong, both in hindsight and attitude. Today’s focus is Ramit Sethi’s “Chicken Little and Kooks Who Don’t Know What They’re Talking About“, where Ramit exchanges emails with someone who was supposed to be “Chicken Little” – a person who predicts doomsday all the time, and ignores reality.

Now remember this is Feb 2007, a year back and before our entire subprime crisis came to light. The author, a 27 year old woman, is described as Chicken Little for making such statements.

I expect that this coming spring real estate season is going to be very painful for a lot of people, with the median sale price finally dropping as the cash-back lending scam is exposed to the light of day. (It’s already being exposed in AZ, which had one of the worst bubbles in the country in Phoenix.)

Here is a pretty hard-and-fast prediction: food prices are going up. Wheat production has dropped in favor of corn for ethanol, there was a freeze in California and a freeze is coming Florida, ravaging vegetable crops. In the mean time, with the savings rate flat instead of negative, as HELOCs go away, there are going to be a lot of Americans who look at the high price of eating out and just say no (or seek bargains).

Wall street: insiders say that everyone is in lalala denial mode, trying to get another quarter or year of profit before the shit hits the fan. For example, Bernanke right now has the power to unleash a bloodbath in the bond market (which is in bubble mode), but so far has hung back… However, that may be out of his hands by the time 2007 is over if Congress becomes deeply involved in credit tightening due to failed banks and Joe Sixpack anger over liar loans, suicide loans, rising ARMs, etc.

And Ramit Sethi’s response to it, although he seems to be a smart person capable of understanding and probing each of the points above:

PLEASE STOP MAKING STUPID GRAND GEOPOLITICAL ANALYSES THAT YOU THINK WILL AFFECT YOUR MONEY. PLEASE!!!

There are more important things to worry about. Are you saving enough? I’m willing to bet $100 right now that the people who make these handwavy arguments haven’t maxed out their retirement accounts, properly allocated their portfolio, and diversified. In fact, I bet these arguments are simply a misguided excuse to do nothing.

The people who make these kind of broad, sweeping statements (”The looming currency crisis will render retirement accounts worthless!!!”) are so far off base that I don’t even try to educate them. But they’re dangerous because they know enough buzzwords to convince novices that they might possibly be right–so, of course, they better hoard their money and do nothing because it’s too unsafe to invest!!!

If you hear this kind of stupid, kooky reasoning from someone, call them out on it. If they think investing is so risky, what are they doing instead? What evidence do they have that their strategy will work? How do they explain away the last 70+ years of success in the stock market? What about the benefits of tax-free and tax-deferred growth (i.e., through Roth IRAs and 401(k)s?). How about the thousands of peer-reviewed research articles and hard data supporting sensible, long-term investing? Press them hard and watch their arguments fall apart. And remember: You can worry about the world’s political situation and the commodity price of salt in Hong Kong, or you can be constructively concerned with how to maximize your savings rate, how to live below your means, and how to invest for long-term growth to achieve your goals. Which one is more manageable?

Ramit blows his top, but look at the facts. Nearly everything Ms. “Little” said has come true, and her warnings should have been heeded. Especially by someone who says he wants to make you rich.

You see what gets me is the attitude that for heavens sake, stop your bullshit and listen to my bullshit because my bullshit is tested for 70 years. This is such a dumb attitude I don’t know where to begin to take apart. Firstly, there is no tested rule that the stock markets always make money over 70 years compared to inflation, because we don’t have enough of a bloody history to go around. First rule of statistics is to not make assumptions based on not-enough-data-points. Nearly every study that points to this kind of conclusion takes OVERLAPPING years. That’s like saying, every five year period in Indian stock markets makes money because I tested 2000 to 2005, then 2001 to 2006, then 2002 to to 2007.

Second, there were long period of inactivity in the stock markets. In the US, the years of 1974 to 82 were net negative – and had you invested, honestly, nicely, every year from 1966 to 1982, a good 16 years, you would have ended up with A LOSS COMPARED TO INFLATION.

See that? That’s 16 good years of your life that could be wiped out because I’m sorry we forgot to inform you that this is the worst period of that 70 year good stock market theory. 16 years, which are literally most of the saving years of most individuals, and we should keep investing anyway because it worked for some other 70 years.

Third, nearly everything this woman said has come true. Real estate has gone down in the US. Oh, well, everywhere. Banks are hosed. Lending is hosed. Commodities are up. Even if you didn’t like what she said, it made sense to probe and see if there was something in there worth listening to. Telling people to invest anyhow in the stock markets is a ridiculous thing to do. It makes sense to change allocation based on what is happening around you – and it does make sense to stop investing when you know there is a drop coming around.

Having said all of this, Ramit does have a point: that if you only think about this and do not actually invest in anything, that is stupid. But don’t go maxing your retirement account allocation to equity just because someone tells you equity has bloody worked. Because I know one 16 year situation where it has bloody not. And if the situation now looks bleak it might just be the next 16 which are scary. If you don’t keep your eyes open for data points that may spell doom, and make yourself aware of how you would react to such a situation – you are living in a dream.

People who invested in Arvind mills in 1992 are still down 80% from their highs. Gazillion other stocks are extinct since those days. Remember Global Trust Bank, Onida Savak Limited, Parasrampuria Synthetics? Okay, you don’t, because you weren’t there. Sorry but I can’t tell people to keep themselves invested regardless of downside – keep a stop loss, and get the hell out when you’re hit. Remember you can’t predict what the future will hold, but you can definely prepare for your reaction.

It’s always good to admit you’re wrong. So be as arrogant as you want when you get in. And be as humble as you can when you get out.

  • Suresh says:

    >hmm….I cannot agree more. Incidentally, I follow both your blog and ramit’s. I also saw your comment there.

    Cheers

  • Anonymous says:

    >Really wise article at right time.
    I think common people again forget the big fall happened recently and started to go with their speculation upon professional comments and professional people are doing their job rightly what they are suppose to do and obviously they are hired only for that.No one to blame except for ourself.
    I think this article at least makes someone to rethink.
    Nice one.
    Cordially,
    selvan.

    Cordially,
    Selvan.

  • madhavan says:

    >In fact, if you had invested honestly, nicely in the Nikkei index over 16 years with a monthly SIP starting 1990, you would have lost about half your money, NOT COUNTING INFLATION.

    (http://www.chartsrus.com/chart.php?
    image=http://www.sharelynx.com/
    chartstemp/free/chartindCRU.
    php?ticker=^N225)

  • Purush says:

    >Deepak —

    Like your blog, read it quite regularly.

    I have to take slight issue with your take on this…anybody, including professionals in the investment industry, cannot predict with certainty anything with regards to future economic growth or stock market performance. Trying to do so is a shell game…all one can rely on is the available investment literature which states that the best path to asset growth is to allocate a substantial part of your assets to disciplined passive equity investing. Japan’s Nikkei has halved in value over the last 20 years, the US market has had extended periods of negative returns, etc. etc. is all very good, but what alternative does an investor have in these markets (except staying in cash which I think we both agree is not something somebody should risk with his savings), AT THAT PARTICULAR TIME, besides equities, that would have enabled her to have positive asset growth? If wealth destruction is inevitable because of systemic factors, isn’t it wise to be in the one investment asset class that has, HISTORICALLY (though, this outperformance, also has good reasons for being), beaten all other asset classes?

  • Anonymous says:

    >Hi Deepak,
    Great post. However I would like to make a small request — why only delve on the problem? It’s really not possible for a retail investor to decide on a mix of gold etf versus realty stocks versus debt funds etc. What does he do then? Active management is not everyone’s cup of tea. Surely there is some sort of passive management — index investing is one of those. But what you say here is fairly contrary to the passive investing philosophy. What gives then? Neither active nor passive. I think you really need to be more explicit here.

    Arpan

  • Deepak Shenoy says:

    >purush: I’ve always maintained that you can’t predict, but you have to get OUT Of equities if the going isn’t good. And you ask, where is one to invest in such times – there is gold, and commodities – both mentioned by the lady in question.

    You can also invest in gilts, debt, or arbitrage funds, which have a lower risk profile.

    I don’t know about anyone else, bt Nikkei is a solid example of where Equity investments do NOT work for a long time. SO it’s best to say good bye to equities when the going is bad, unless you have the time and effort to devote to it. I do, so I have the ability to get returns even in lousy times. But passive equity investments would practically kill you in the next two years.

    You know what has beaten equity all ends up in the last few years, bull runs notwithstanding? Silver.

  • Deepak Shenoy says:

    >Arpan: I think if one gets passive, one needs to get very serious about understanding asset allocation.

    I’m a fan of more active investing – the only friend you will have in your old age is the money you save now. It’s useful to pay a little attention every once in a while.

    Now for someone who can’t afford to be active, I can’t even say please stay invested in equity. The best thing to do is to understand when to move into different asset classes. Get out of equities when we are in a consolidation, and put money into debt, gilt, gold or other such investments. Move back when the going is better. Sure you will miss the first 10-20% of hte upside and get hit for 10-20% of the downside, but at least you have covered your losses.

    Today, the index is down 25% frm the highs, and I still think it’s expensive. I remember telling someone in Feb – when the Index was around the 5200 levels – that this year, the Index will not even beat your average FD in returns. And I still maintain that it won’t, so there is not much for a passive investor.

    In the US it is much worse, and I don’t even think there are interesting passive equity returns for two -three years! WOuld not advise passive equity for that market at all, but the US has many products that make sense – like commodity ETFs, emerging market funds, t-bill ETFs and so on, so passive investing has a lot of options on the stock markets.

  • Akshay J says:

    >I did a detailed analysis of all investment house recommendations in 2nd week of April 2007 and then compared their performance with April 2008. Most of the investment houses gave -ve returns!!! A couple of them gave excellent recommendations. Taken an average of all the investment recommendations from all houses available, it actually did not even beat Sensex! Can you believe this!! They could not even beat the market.

    Which is why I listen to the broker and others – for information I do not have. But always rely on my own homework. Atleast, if I make a bad investment call it is mine and does not have a bias.

    To back what I have to say, look up today’s recommendation on Infosys. Emkay says a “Accumulate” and India Infoline recommends “Sell”. Follow the investment house, whose name you like best or trust your own analysis and insights.

    In general it is better to be in cash, then to be in equity, if you cannot dissect an investment well enough.

  • Akshay J says:

    >I decided to start my long rambling on stock markets in my blog at
    http://stockmarketfun.blogspot.com/

  • Purush says:

    >”I’ve always maintained that you can’t predict, but you have to get OUT Of equities if the going isn’t good”…that, my friend, is self-contradictory. How can you know the “going isn’t good” without predicting?
    My point about wealth destruction being inevitable in certain markets was about saying that one would find very few investments in, say, Japan in the last 20 years that would have beat inflation, and hence includes bonds. Commodities and precious metals apart, if equities are going to be performing badly, for a long time, then there’s just no place to hide…

  • Deepak Shenoy says:

    >Purush: Prediction is saying the “oncoming is not good”. Going is not good means you have already taken a loss. What I mean is: firstly keep yourself aware of potential problems. Then if those problems occur and you take a hit on your portfolio, get out because further problems will undoubtedly occur.

    In Japan the best thign to do was to invest abroad. And they did,eventually. WE have to figure out what works best for us – commodities now, bonds soon, gold as a stabiliser etc.

    Even now, equities don’t look good to me in India, and definitely not in the US. It’s best to jump out now when the fall hasn’t been great, yet.

    Even in India we are way overvalued compared to expected growth.

  • hari says:

    >Deepak,

    Need a clarification.

    Our Markets maybe overvalued I agree. But how is it that you feel that the equities in India is not good.
    I read an OLM magazine that says that the probability of losing money is zero for a person who has invested in the BSE Sensex. Also The markets I beleive have given a return of about (17-18)% CAGR in the last 20 years or so.

    Being a developing economy I think all of us are aware that the economy is going to grow. I think the only dampener could be a global slowdown especially in the USA.
    Though experts beleive that USA is in slowdown phase it is understood that they will revive themselves as the US economy is resilient.

  • Deepak Shenoy says:

    >hari: Okay I think i must clarify this.

    I don’t believe equities are dead. EVen in a market that is going down, I think there are stocks that make a lot of money. Eg. Orchid Chem, Mudra in the last month or so.

    It’s that passive investment in equities may not make sense. This means large cap mutual funds, or index investing – I believe there arent’ great returns there.

    the long term sensex CAGR is around 12%, dividends not included.

    The US economy may be resilient but it has always been. Even in the 60s and 70s, when there was that huge equity bad period. So good economies may not mean good stock markets.