An Excuse for Bad Advice

This chart has been used primarily as an excuse for bad investment advice:

Source: Marketwatch

Why an excuse? It builds in an out for the advice giver: See, you just have to hold onto stocks long enough . . . then you will outperform other asset classes.

Now all we need to do is figure out how to have a 200 year lifespan.

Why brings this up now? Yesterday, Wharton Prof Jeremy Siegel (whom I have appeared on several shows with and is a genuinely nice fellow) had a WSJ op/ed. The chart above is straight out of Siegel’s 1998 book Stocks for the Long Run. It sits on my bookshelf (gently mocking realists with its idealistic platitudes). Siegel’s newest book, The Future for Investors, is in my queue.

Both of his books are thoroughly researched, well written — and of little value to most Humans.

Yes, stocks go higher in the long run, but only if you have enough time — occasionally decades — to ride out the normal cyclical shudders. Yes, if you dollar cost averaged post 1929 crash, you might have made money. Of course, without index funds back then, there is a built-in survivorship bias, and it assumes you didn’t buy dogs which went belly up. (Recall what happened to most of the original Dow stocks).

And that’s before we get to the very Human foible behavior of not buying into the teeth of a miserable Bear market. So that aspect of Siegel’s advice is terrific, if you happen to be from Mars. Most of the investing inhabitants of this rock, however, will find it quite uncomfortable to follow. Ask yourself this: How many people dollar cost averaged after 1929? How about after 2000? Except for people who set up an automatic salary w/d, most Humans didn’t.

On the above chart, you will note it is in a logarithmic scale. That makes the 1929 and 2000 crashes  mere squiggles. I find the scale very misleading — If you bought in 1929, you did not get back to breakeven until 1954. Lets consider an unlucky 40 year old investor, pre-crash. By the time he hits 65, his retirement investments would have returned back to where he started — exactly 0% per year (Mazel Tov!).

A similar situation occured in 1966, following the post WWII rally. That’s when the Dow first kissed 1,000. This time, it took a mere 16 years to return to breakeven. So our unlucky 40 year old investor had the same 0% annual returns for 16 years — and he hit breakeven on his 56th birthday, instead of his 65th (post ’29 crash).

Now, lets consider someone born in 1960, who put a lot of money to work in early 2000. I suspect that this investor will hit that breakeven point sooner than either of the prior example. Unless he was heavily invested in the Nasdaq. Anyone in the financial business knows all too many investors in that situation.

Siegel is out shilling for his new book, which I am sure is full of terrific advice that human beings will probably not be able to live with. Hence, it will ultimately do more harm than good. (DISCLOSURE: I have skimmed, but not fully read the new book).

That’s the difference between profs and traders:  Behavioral economics in the real world, versus neat, lovely unrealistic theories in academia . . .


The Next Great Wave of Growth
March 23, 2005; Page A14,,SB111153988480887131,00.html

Charting the long run
By Peter Brimelow & Edwin S. Rubenstein,
Marketwatch April 14, 2003

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What's been said:

Discussions found on the web:
  1. anne commented on Mar 24

    Precisely the needed post. I watched Jeremy Siegel on Wall Street Week, and came to same conclusion about the new book. After wondering whether the old book could be effectively used, and long ago realizing not.

  2. anne commented on Mar 24

    Remind me not to write incomplete sentences, even when tired. Good grief.

  3. anne commented on Mar 24

    Finally, you really are interesting. I, on the other hand, can not even spell “good.”

  4. Barry Ritholtz commented on Mar 24

    you embarass me with your kind words . . . won’t you come out from behind the nom de plume, Anne? How about a real email address?

  5. fred krueger commented on Mar 24

    The idea of a 2000 year time perspective is itself insane. Anyone using a chart with the x-axis starting in 1800 has very little credibility offering financial advice.

    As an aside, I wonder if Mr Siegel would share with us his own stellar financial portfolio results? Well, since he’s busy hawking books — I am sure there is no need to ask. Those who can’t do — teach, and those who can’t teach, teach gym.


  6. John Kuran commented on Mar 25

    Here’s something buy and hold people should consider, something mainstream Wall Street brokerage firms don’t want you to know:

    From 1926-1993, a capitalization weighted index of U.S. stocks gained an average of 12.02% annually. An initial investment of $1.00 in 1926 would have earned a cumulative $637.30. If an investor missed the market’s best 12 of the 816 months, the annual return falls to 8.07% and the cumulative earnings to $65.00. Missing the best 48 months, or 5.9% of all months, reduces the annual return to 2.86% and the cumulative gain to $1.60.

    Avoiding months when the market plummets can, of course, greatly improve performance. Excluding the single worst month raises the average annual return to 12.51% and the cumulative return to $898.00. Eliminating the 48 worst months lifts the annual return to 23.0% and the cumulative amount to $270,592.80.

  7. fred krueger commented on Mar 25

    You know, another group that frequently uses super-long term time scales are “gold bugs”. I don’t know why though, because gold has a terrible long term track record: it has lost 99% of its purchasing power over the last 500 years. If you don’t believe it read here .

    Of course, the gold bugs’ spin on this is that gold is massively undervalued. Go figure…

  8. Karmakin commented on Mar 25

    The one thing that I really don’t see with these people, is the assumption that given another market correction, which will happen (is anybody really doubting that?), the assumption that people will afterwards keep on investing their money in the market. That’s not a given. It fits the economic therories, of course, that then investments won’t be overvalued, blah blah blah. But the economics of it ignores the cultural and social ramifications of it all.

    People just won’t trust Wall Street.

    In the past, after corrections there have been basically massive PR campaigns to restore confidence. As well, over the last 20 years, the increasing focus on investments for baby boomer retirement as well has inflated things. Will it happen again? With a more interconnected society and more information sources?

    I have my doubts.

  9. bhaim commented on Mar 25

    Good point Barry. It’s obvious but a tenured faculty member faces very limited career risk so they can afford to wait out the inevitable bear markets. For everyone else career risk and investement risk may be correlated – think of how many tech workers had S&P 500 funds in their 401(k)s at the height of the Nasdaq bubble.

  10. Reynold commented on Mar 27

    These examples of the miserable results of certain initial investments are tilted towards worst-possible-case scenarios. Anyone who puts a large portion of his/her assets into one vehicle at one time, and doing nothing thereafter, is not an investor but a gambler, and deserves to be impoverished. Real-world investing requires (1) allocating funds broadly across uncorreleated asset classes, (2) annual or biennial rebalancing of assets to return to the original allocation percentages, and (3) if income is coming in, saving regularly and adding to the portfolio. Siegel’s chart is correct, that stocks long-term have an upward bias. So what? By itself the chart is merely information, not investment advice.

  11. Dave DasGupta commented on Mar 29

    The simple fact is that a stock, just like any other commodity, goes up as the demand increases and approaches a top when the majority is buying and only a minority is selling. Conversely, it also approaches a bottom when the reverse is happening, i.e., the majority is selling and only a minority is buying.

    From this the mathematical, if unpalatable, truth emerges that the majority will ALWAYS buy high and sell low, i.e., lose money and its loss will be the minority’s gain. There is no way the market will be near its lows when the majority is buying and vice versa, a fact that seems to elude most economists.

    This, in turn, leads to the incontrovertible conclusion that the market is a gigantic machine for a guaranteed transfer of wealth from the majority to the minority and, in effect, behaves just like a giant casino.

  12. Alex Patterson commented on Nov 2

    I just finished reading “The Future for Investors”, on a recomondation from my Maco Econ Proff. This was my first book of its kind, and i was eager to start my own investing. However it seems like there are so many different opinons, and i would take years to sort through it all. What is a college student to do if he wants to start investing (long term) with only a few thousand dollars

  13. Barry Ritholtz commented on Nov 2

    Hi Alex,

    here’s some free advice, worth what it costs you

    1) Educate Yourself on investing> There are many good books, but recognize it takes a long time — 10 years or so — to really learn how to invest and trade.

    2) Until you become proficient at trading, stick with indexing. Its cheaper, more tax effecient, and less likely to have bad results.

    3) Patience is key: Historically, long bull markets are followed by periods where the market does very little. We may be in one of those periods right now.

    4) Let me humbly suggest my own series, the Apprenticed Investor
    (Start from the oldest item, and work forward)

    5) If I had to pick just 3 books to recommend, they would be:

    Jack Schwager’s Market Wizards

    How We Know What Isn’t So

    The Investor’s Anthology

    I reread the first one every 5 years;
    The 2nd reveals to you how unsuited the human brain is for investing (but knowing this is an advantage);
    The last one contains snippets from many other sources — interesting reading that can point you in other directions .

Read this next.

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