This Is Why We Can’t Have Nice Things

Morgan Housel

S&P 500 Index Average Equity Fund Investor Inflation

8.21%

4.25%

3.01%

Average Annual Returns, 1992-2012

This Is Why We Can’t Have Nice Things:

2005-2007: $241 billion put into stock funds

2008-2009: $230 billion pulled out of stock funds

2013-2014: $239 billion put into stock funds

Three Terrors of Investing:

•Not realizing how common volatility is

•Not realizing how complicated the world is

•Not giving investing enough time

#1 Not realizing how common volatility is

•$1 invested in stocks worth $1,216

•$1 in Treasuries worth $6.36

•$1 in gold worth $1.42

•$1 in cash worth $0.07

1900-2013

Since 1928 …

• 89 times stocks fell at least 10% — once every 11 months

• 41 times stocks fell at least 15% — once every two years

• 21 times stocks fell at least 20% — once every four years

• 9 times stocks fell at least 30% — once every decade

• 3 times stocks fell at least 50% — a handful of times in your lifetime, if you're lucky

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000-5%

0%

5%

10%

15%

20%

Total Real Annualized Return

Every 5 to 10 years, people forget that

stock crashes happen every 5 to 10 years.

#2 Not realizing how complicated the world is

Clinton State of the Union, 2000

“We begin the new century with over 20 million new jobs; the fastest economic growth in more than 30 years; the lowest unemployment rates in 30 years; the lowest poverty rates in 20 years.

“The first back-to-back budget surpluses in 42 years. And next month, America will achieve the longest period of economic growth in our entire history.”

“Crime down by 20%, to its lowest level in 25 years; teen births down seven years in a row; adoptions up by 30%; welfare rolls cut in half to their lowest levels in 30 years.”

“My fellow Americans, the state of our union is the strongest it has ever been.”

Obama State of the Union, 2010

“One in 10 Americans still cannot find work. Many businesses have shuttered. Home values have declined. Small towns and rural communities have been hit especially hard. “And for those who'd already known poverty, life has become that much harder.

“This recession has also compounded the burdens that America's families have been dealing with for decades — the burden of working harder and longer for less; of being unable to save enough to retire or help kids with college.”

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1= Very strong predictability0= Very weak predictability

Professional Coin-Flippers

William Hamilton was a popular analyst who "had gained a reputation for successful forecasting" made in The Wall Street Journal in the early 1900s.

Among 90 predictions made over a 30-year period, exactly 45 were right and 45 were wrong.

Always Wrong, Never in Doubt

• 2000: Congressional Budget Office projects the government will be debt-free by 2009.

• Newsweek, 2000: Bush win could "help banks, brokers and other investment firms." By the end of second term, the KBW Bank Index had dropped 85%.

• Newsweek, 2008: If Obama wins, sell bank stocks: regulation will kill them. KBW Bank Index up 186% since.

• Newsweek, 2000: Bush wins, buy airlines because “a broad tax cut ... has the tendency to increase discretionary spending." By 2006, four of the six largest airlines were bankrupt.

“The purpose of the margin of safety is to render the forecast unnecessary.”—Benjamin Graham

#3 Not giving investing enough time

There are four ways to invest:

• Unsuccessfully

• Long term (varying degrees of success)

• Short term, successful due to luck

• Short term, successful due to manipulation/fraud

That's the complete list. Numbers 3 and 4 eventually become number 1.

This Is Your Competition ….

“People do not get what they want or what they expect from the markets.

“They get what they deserve.”