The Dangers of Doom-Think

I’ve noted recently the dangers of constructing a narrative to guide your investment decision-making. In addition to the practical danger of getting your portfolio strategy wrong, because your story causes you to misinterpret the data, there is also the less-practical danger of looking like an idiot.

In the latter category, I offer yesterday’s post by Paul Farrell of MarketWatch.  He’s been an uber-bear for years now, and anyone who followed him has entirely missed the market recovery and drive to new highs.

Farrell believes that, because Bill Gross and Mohammed El-Erian of PIMCO do not fully agree, individuals investors should exit the market. If the big boys at the world’s largest bond firm can’t get entirely on the same page, what chance does the small investor have?

His rant reminds me of my old manager at Shearson, back in the days when I was a retail stockbroker. He was a terrible investor, and would probably have lost his clients money even if he wasn’t simply churning their accounts to generate commissions. I bring him up because he was a great promoter of the theory that the game was rigged, because the specialists on the Exchange floor were manipulating the markets. That is why his clients weren’t making money during the great bull market of the 1980s; his own cluelessness had nothing to do with it.

Of course, making money in the 1980s was almost automatic, as long as you bought quality equities, held them patiently, and avoided excesses of fear and greed.  Similarly, investors who did not panic in 2008-2009, and stayed invested, generally have more dollars now than they did at the prior peak in 2007.

Wall Street is a mess, a morass of selfishness, self-dealing, and corruption. Yet an ordinary, retail investor who simply bought a low-cost S&P 500 index fund in early 2009, and held through the present, has more than doubled his money, while the typical wealthy investor in hedge funds has made almost nothing.

If the investment game is rigged, it is not by the rich against the middle class, it is by the smart against the stupid. In that game, sensible strategy remains open to all.

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