Ben Stein says, don't panic (a year ago)

Reprinted from Fortune.com... Note the date. I bet Ben Stein would say some of the same things today.
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"STUPID" INVESTORS, REJOICE!

Ben Stein. Fortune. New York: Sep 3, 2007. Vol. 156, Iss. 5; pg. 59

Copyright (c) 2007 Time Inc. All rights reserved. No part of this material may be duplicated or redisseminated without permission.

No one is too stupid to make money in the stock market. But there are many who are too smart to make money.

To make money, at least in the postwar world, all you have to do is buy the broad indexes domestically--both in the emerging world and in the developed world--and, to throw in a little certainty about your old age, maybe buy some annuities.

To lose money, pretend you're really, really clever, and that by reading financial journalism and watching CNBC, you can outguess the market day by day. Along with that, you must have absolutely no sense of proportion about money and the world at large.

For example, right now we are stewing over what everyone calls "the subprime mess" and going crazy, mourning all day and into the night--falling over ourselves to get all of the misery right, to paraphrase Evita. I'm writing this on Aug. 13, 2007, and in the past four or five weeks, the markets of the U.S. have lost some 7% of their value, or about $1 trillion.

But read on: The subprime mortgage world is about 15% of all mortgages, or $1.5 trillion worth, very roughly. About 10%--approximately $150 billion--is in arrears. Of that, something like half is in default and will likely be seized in foreclosure and sold. That comes to about $75 billion. Roughly half to two-thirds of that will be realized on liquidation, leaving a loss of maybe $37 billion. Not chump change by any means--but one-thirtieth, more or less, of what has been knocked off the stock market.

The "smart" investor nevertheless reads the papers, bails out, heads for the hills, and stocks up on canned foods. He gets a really big charge out of reading in the press that there are also problems in the mergers and acquisitions market and that some deals will not go through because there are problems raising the funds for the deal. He does not see that the total value of the U.S. major stock markets (the Wilshire 5000) is roughly $18 trillion. The value of the deals that have failed in the private equity world is in the tens of billions or less. The loss to investors--what the merger price was compared with the normalized premerger price--is in the billions. It's real money, and I could buy my wife some nice jewelry with it, but it's pennies in the national or global systems.

The "smart" investor also reads that the Fed has injected, say, $100 billion into the banking system in the last week or ten days, and says, "Aha! The whole country is vaporizing. Look how desperate the system is for money!" What he does not see is that the Fed is always either adding or subtracting liquidity and that recent moves are tiny in the context of a nation with a money supply in the range of $12 trillion. No, the "smart" investor is far too busy looking for reasons to run for cover and thinks he can outsmart long-term trends.

The stupid investor knows only a few basic facts: The economy has not had one real depression since 1941, a span of an amazing 66 years. In the roughly 60 rolling-ten-year periods since the end of World War II, the S&P 500's total return has exceeded the return on "risk-free" Treasury long-term bonds in all but four ten-year periods--the ones ending in 1974, 1977, 1978, and 2002. The first three of these were times of seriously flawed monetary policy that allowed stagflation, and the last one was on the heels of the tech crash and the worst peacetime terrorist attack in the history of the Western world.

The inert, lazy, couch potato investor (to use a phrase from my guru, Phil DeMuth, investment manager and friend par excellence) knows that despite wars, inflation, recession, gasoline shortages, housing crashes in various parts of the nation, riots in the streets, and wage-price controls, the S&P 500, with dividends reinvested, has yielded an average ten-year return of 243%, vs. 86% for the highest-grade bonds. That sounds pretty good to him.

The "smart" investor, in a bunker in the Montana wilderness, keeps his money in gold bullion. After all, he's heard that home prices are falling slightly nationwide and a lot in some areas (he ignores areas of rising prices like San Francisco and New York City). He says that this will discourage the consumer and lead to a severe, bottomless recession. He even has bald people on TV telling him he's right to worry.

The stupid investor, the guy who just lies on his couch, knows that the consumer is always about to stop buying and never quite does. Maybe someone in his bowling club has told him there has only been one year since 1959 when consumer spending fell--and that was barely, in 1980. Somehow, if the consumer could keep spending after the bursting of the tech bubble wiped out $7 trillion or so of wealth, maybe the consumer can keep spending even if the subprime "mess" wipes out roughly half of 1% of that tech-bubble loss and the stock market has a fit. And maybe he knows that, even if there is a recession, recessions rarely last more than two quarters, and the economy and the stock market revive mightily after that--and that buying stocks in a recession is a good idea, not a bad idea.

Now, the alert reader may at this point be saying, "Hey, that 'stupid' guy who's really smart is a long-term investor. That's why he's doing so well." Correctamundo, alert reader. There used to be a saying: "Bulls make money and bears make money, but hogs get slaughtered." I am not sure that was ever true, but it sure ain't now. The real story is that long-term investors who have some sense of proportion make money. Short-term investors who live and die by the sweep-second hand of the $300,000 watch get rich fast and poor fast and sometimes are slaughtered faster. I have no advice for them except that the next train may be bringing in someone a little younger who's a little faster on the draw and a lot hungrier, so they'd better enjoy their Gulfstream while they have it.

For the rest of us, the stock market is cheap on a price-earnings basis, profits are fabulous, Mrs. Clinton and Mr. Giuliani are far from being socialists and in the long run, both here and abroad, stocks are a lovely place to be. I have no idea what the S&P will be ten days from now, but I am confident it will be a lot higher ten years from now, and for most Americans, that's what we need to think about. The subprime and private equity and hedge fund dogs may bark, but the stock market caravan moves on.

A serious topic

Pregnancy and Infant Loss Remembrance Day: Take Action

October 15th is National Pregnancy and Infant Loss Remembrance Day in the United States. More than 25,000 children are stillborn in the United States every year leaving mothers, entire families and communities devastated. Estimates of the rate of occurrence of stillbirth make it at least as common as autism.

Stillbirth is not an intractable problem. Greater research would likely significantly reduce its incidence, but good research requires good data.

H.R. 5979: Stillbirth Awareness and Research Act is under consideration by Congress. This proposed bill would standardize stillbirth investigation and diagnosis, thus providing more data for the needed research. Better research means fewer children born still.

On October 15th, remember the thousands of unfinished children lost and the families who remain to grieve them. Honor them by taking action. Let's help pass H.R. 5979. Write to your congressman!!

I'm with Gigglechick - an undecided voter

The one blog I read on a regular basis, http://www.gigglechick.com/erin/blog/index.htm, is a personal blog of a woman my age who lives in NJ. She lives with/takes care of her chronically ill mother while also trying to work at home, doing web design for comedians (hence the "giggle" part of her blog's name). She has a pretty interesting and social life, and every day struggles that she is brave enough to post out there for all to see. So maybe I am nosy, bored, or I'm just trying to live vicariously through her single life, I don't know.

Anyway, as I fell asleep last night I thought I had mostly made up my mind about who to vote for. But there are definitely limitations on each of the candidates and what they will actually be able to accomplish in Washington, and I'm not sure I agree on their stands on several issues. (I guess that is how most of the Presidential elections have gone the past few years -- vote the lesser of the two evils and hope for the best.)

So I thought I would check in with the Giggle blog today and see where she stood on this. She's been a pretty fervent Hillary supporter, and I decided a while back that I would just agree to disagree with her politics... up to this point. Surprisingly, today Giggle says this on her blog, and I am in complete agreement:

"I hope that Palin does well tonight, not because I am rooting for her, but, because if she looks like a complete moron and gets devoured by Biden tonight, it just sets women back. I am a woman without a party at the moment."

Palin seems to me, and has from her introduction to the election campaign, a loose cannon. She doesn't know what she doesn't know and that is a dangerous place to be in for a second-in-command political candidate. She can prep all she wants for this debate tonight, but until I hear her respond to a question with a straight answer, and I can tell it's coming from her and not some talking point she memorized, I just can't be impressed. I saw a few minutes of one of her interviews with Katie Couric last night. When Katie asked her to give some examples of Supreme Court decisions besides Roe v. Wade that she disagreed with, her eyes literally GLAZED OVER and you could tell she had no idea what to say. Then her response was some non-answer about how not all the decisions of the Supreme Court are going to be popular with everyone... no shit.

I just hope tonight that she uses her charm and wit and smile as a backdrop for a showcase of some real knowledge and analysis of issues; in other words, I hope she speaks intelligently. Not that that alone would convince me to vote for her ticket. I'd also have to hear some concrete plans on how her administration could get our domestic problems taken care of, and not just in the short-term. I want her to do well tonight because I don't want our gender to be embarrassed. We have finally made some headway as professional women in this country and I hope she doesn't send us back 30 years by talking like a moron in front of 70 million people.