Monday, March 24, 2008

"The Clueless Investor"

The stocks go up, the stocks go down; bonds go up, and bonds go down. I’m in that stuff. And, since those well-paying writing jobs have gone away, it’s not a theoretical situation. We’re living off our investments. That and medical reimbursements from the Writers’ Guild Health Fund. (It’s kind of comforting. Whenever I get sick, I know there’s gonna be money coming in.)

Okay, so last month, our bonds went in the toilet. Really bad. Now, I’m not a Nervous Nellie; my investments have to tank big-time before I pick up the phone.

They did, so I did. I called my investment guy, who’s been helping me for fifteen years. I try not whimper or sound scared. I fail in both regards.

“What’s going on.” my voice a barely controlled stammer of quivering desperation.

Hey, this is my money. My lifeline to food, lodging and comestibles. And I have no control over it whatsoever.

As usual, my investment guy calms me by giving me a persuasive explanation of why things went bad, ending with a prediction of a happy tomorrow.

“In time, you’ll make it all back and more.”

This prediction is based on the verifiable fact that, over time, the stock market has always gone up. In the long run, you always end up making money. But there’s this saying I have, which goes:

In the long run, you die in the short run.

Whatever my reservations, the conversation with my investment guy, as it always does, made me feel considerably reassured. But did I have any tangible reason to feel reassured? I’m not so sure.

Hiring a highly regarded expert to take care of my investments. That’s an entirely sensible thing to do. I should feel totally reassured, shouldn’t I? So why didn’t I?

Is it a trust issue? Not in the least. There’s no question my investment guy is smart, and absolutely no question that he’s honest – we’re not talking about fools and miscreants here. (I rarely get to use the word “miscreants.” It’s nice to have the chance.)

What exactly does my investment guy do? Let’s talk about stocks. My investment guy, a prestigiously-schooled, highly experienced professional, extensively researches Blue Chip companies, investing only in those that demonstrate the most solid – as he calls them – “fundamentals.” Though I support this conscientious approach, reservations still remain. If things go as predicted, my wife and I will be cruising comfortably through our Golden Years; if they don’t, it’s cat food and begging on the street. (I may be exaggerating here, but the dread of losing everything tends to fire the imagination.)

My investment guy’s reassurances assuage my darkest concerns. What troubles me is the awareness that people in the business of finance appear to have the answer for everything. Whatever happens, they can explain it. Persuasively. You listen and you say, “That’s right.”

Considering this further, it then occurs to me that these money mavens’ success at explanation only applies when they’re explaining situations that have already happened. To paraphrase, without permission, a quote of my brother’s

“Money investors have a remarkable facility for predicting the past.”

Let’s make up an example:

HEADLINE: CONCERN RISING OVER THE FALLING VALUE OF THE DOLLAR

The stock prices go down. You get scared, you call your investment guy…

“Why are stock prices going down?”

“Because concern is rising over the falling value of the dollar.”

You say, “Thank you” and you hang up. They’re right. That explanation makes perfect sense.

Except…

You’re aware that, under the same circumstances, the stock market doesn’t go down. It stays the same.

Investment guys have an answer for that too.

“The investment community shrugged off the rising concerns over the falling value of the dollar.”

That sounds right too. It explains why the stock market didn’t go down. The investment community shrugged off the concerns.

Good answer.

And yet…

I’m also aware of situations when, again, under the exact same circumstances, with rising concerns over the falling value of the dollar, the stock market has gone up!

Same concerns, and the damn thing went up! Can you explain that to me?

Of course, they can.

“Healthy inflation figures offset the rising fears concerning the falling value of the dollar.”

Well, of course. The concerns were offset.

Right once again.

And what do we learn from this little experiment?

“When concerns are rising over the falling value of the dollar, stock prices can go down, stay the same or go up.”

Are you guys kiddin’ me?!

What does that mean for my Blue Chip investments with their solid “fundamentals”? If the rise and fall of a company’s stock can result from factors having nothing to do with the company itself, what good is all my investment guy’s extensive research? I could be paying big fees to a guy who’s basing his investing decisions on information that doesn’t really matter. And the information does matter – information about the future – neither he nor anyone else in that business can possibly predict!

I know the money-investing people will scoff at these observations. They’ll say I’m na├»ve, untutored in the subtleties of the game. They’ll remind me, once again – they’ll re-remind me – that in the long run, the stock market always goes up. The best thing, they’ll advise, is to leave things to the professionals. And of course, they’re right.

The problem is, they’re always right.


If, for any reason, you'd like to read this story again somewhere else, check it out on Huffingtonpost.com I’m told it will be there.

No comments: