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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.

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