Best of Frank: The Tragedy of Impulse Saving

[I'm off this week, enjoying the waning days of summer and catching up on a few things I promised to finish before September. In the meantime, please enjoy this example of that great American summer tradition, reruns. This post originally ran March 25, 2009.]

 

As any reader of this blog knows, I enjoy nothing more than tweaking the nose of personal finance conventional wisdom. Well, joy of joys, yesterday’s New York Times had an article, in the science section no less, that spits in Reading_glasses Cropconventional wisdom’s face, knees it in the groin and then kicks it as it rolls on the ground.

The piece discussed the work of Ran Kivetz and Anat Keinan, two professors of marketing from Columbia and Harvard Business Schools respectively. (Marketing professor is, incidentally, the same line of work as the authors of The Millionaire Next Door.)  They have discovered a new malady to avoid: saver’s remorse.  It’s just what it sounds like: that sad feeling you get with money in your pocket that you could have spent in some enjoyable way but, in a moment of weakness, chose to save.

This is just so awesome.

The sober professors don’t call it saver’s remorse.  I think John Tierney, The Times’ science guy, came up with that.  They use the term hyperopia, literally excessive farsightedness.  Sufferers of hyperopia “deprive themselves of indulgence and instead overly focus on acquiring and consuming utilitarian necessities, acting responsibly, and doing ‘the right thing.’” (K&K 2006 p.274)

Read more »

Best of Frank: Why Market Timing is Hard

[I'm off this week, enjoying the waning days of summer and catching up on a few things I promised to finish before September. In the meantime, please enjoy this example of that great American summer tradition, reruns. This post originally ran April 7, 2009.]

 

Not long after you convince yourself that buy-and-hold is the best way to invest in the stock market, you start to get doubts.  Sure, owning a well diversified portfolio of stocks through thick and thin is the best way to capture the high long-term average returns that you expect, but couldn’t you do a little better?  Couldn’t you sell your stocks when the market is particularly high and maybe double down when it is particularly cheap?  How hard could that be?

image Pretty darn hard, it turns out.  Only in the clarity of hindsight are those market peaks and bottoms obvious.  The towering heights that the market reached in the spring of 2000 and fall of 2007 now look like great places to exit only because we know what happened next.  Yes, stocks in 2000 were by many measures more expensive than they had ever been in the past, but saying that everybody should have therefore known to sell is unfair, because stocks had been unprecedentedly expensive in each of the four or five years prior to 2000 as well.

Spotting the low points when they happen is no easier.  After its disastrous September, the market was by many objective measures very cheap in the fourth quarter of last year.  And then it went down a lot more.

But even if you did have a useful objective measure that would tell you when the market was too expensive or cheap, actually using it would be a lot harder than it sounds in the abstract.  See that dip on the chart above in early March?  That’s when the market hit its low for the year so far.  It is also when I published this post, making the strong case that the market was then really cheap.  Since that day the S&P is up about 25%.

Did I act on my judgment that the market was a bargain, invest big and reap a much needed profit?  Are you kidding?  Read the post again.  I had thought it was too cheap months before, only to watch it get more cheap every week. I didn’t understand why it had gotten so low, and so had no reason to believe it wouldn’t go lower.

When I was just starting out in the professional investing world, one of the senior guys in the office took me aside and said something like “Frank, what you gotta understand about the market is that it’s really all psychology.”  This guy made roughly a hundred times as much money as I did, so I nodded and smiled, all the while thinking to myself something like “what a pompous and empty platitude.”  It only took me about ten years to understand the wisdom he was trying to pass on to me.  It’s not just that stock  prices move up and down because of the irrational behavior of other investors.  It’s that making money in the market is hard because of your own irrational behavior.

It has been said that the four most dangerous words in investing are “this time is different.”  When the market is very cheap it is nearly impossible to convince yourself that it is a good time to buy, even if in hindsight every other time it was that cheap it had been a great time to buy.  Because when push comes to shove you are sure that this time is different.  You worry that this time the world really is coming to an end, that capitalism is dead, and that your kids better start studying Chinese if they ever want to get a job.  Then the market goes up, the dust settles, and you feel like an idiot.

That it is very difficult to buy at the bottom and sell at the top is not mere coincidence.  You are just like everybody else, irrationally scared at the lows and foolishly confident at the highs.  Widespread fear and confidence is why the market was low and high to begin with.

Which is why you should cast away your doubts about buy-and-hold.

Best of Frank: The Efficient Market Theory Hoax

[I'm off this week, enjoying the waning days of summer and catching up on a few things I promised to finish before September. In the meantime, please enjoy this example of that great American summer tradition, reruns. This post originally ran May 26, 2009.]

 

You may have heard of something called the Efficient Market Theory.  If you did, it was almost certainly in a negative context, some writer or blogger excoriating those egghead finance professors for confusing the world with NYSE-floor their crazy and dismal theories. This is a rant mostly heard from the advocates of investing in individual stocks, but is also found occasionally in the arguments of those in favor of active funds over passive (index) funds and market timing over passive asset allocation.

Apparently, this poisonous heresy has been spread by overly educated academics near and wide for decades.  They convince their innocent students that it is categorically impossible to make money picking stocks, that anybody who does anything other than buy an index fund is a fool.  It’s a viewpoint that is not just wrong, it’s dismally pessimistic and, let’s face it, simply un-American.

Read more »

Best of Frank: Is Owning or Renting Best?

[I'm off this week, enjoying the waning days of summer and catching up on a few things I promised to finish before September. In the meantime, please enjoy this example of that great American summer tradition, reruns. This post originally ran March 23, 2009.]

There was a time when owning the roof over your head was considered an attainable and wholesome mark of prosperity for American families.  See, for example, the higher calling for which George Bailey gives up his youth in It’s a Wonderful Life.  (In retrospect, George was making sub-prime loans from a dangerously over-leveraged and illiquid bank.  It was a simpler time.)  Over the decades conventional wisdom on home ownership morphed from Victorian House wholesome goal to sound idea, then to great idea, and finally to such a great idea that it was practically free money.

Then it all went kablooey, and conventional wisdom started denying that it ever said any such thing.  It’s really not clear what mainstream advice on home ownership is right now.  Big time gurus like Suze Orman and David Bach (author of, among other bestselling titles, The Automatic Millionaire Homeowner) now spend time cautioning people about the dangerous waters of home buying and contradict, without apology or even acknowledgement, advice they gave a few years back to jump in with both feet.  (See excellent article on this at the Wall Street Journal here, and my discussion of Orman’s latest book here.)

Read more »

Best of Frank: Lightbulbs and Lattes

[I'm off this week, enjoying the waning days of summer and catching up on a few things I promised to finish before September. In the meantime, please enjoy this example of that great American summer tradition, reruns. This post originally ran January 25, 2009.]

 

Latte crop Tim BoydSometimes we confuse the number of visible acts we make working at something with the progress we actually make towards our goal. Let me explain what I mean with a story about what our leaders in Washington have been up to.

Did you know that Congress voted to ban the familiar incandescent light bulb? More than a year ago? It’s true. Starting in 2012, no more 100 watt bulbs and  by 2014 none of any wattage. Clever of them to pass something that doesn’t take effect for 5+ years. The small number of folks who really care are happy, and everybody else won’t even notice until after what must seem like an eternity to the guys inside the beltway.

Read more »

WordPress Themes