Megan McArdle: The Great Stock Market Myth
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If we don't live our lives with the expectation that we will finally begin enjoying them when we retire, we might begin living our lives to our more short-term satisfaction.
Not that saving for retirement is stupid - it isn't - but working at a job you hate because it will provide retirement benefits is.
Take vacations now, go skiing now, spend time with your kids now...those are the takeaways. I hope the "countdown to retirement" mentality ends as a casualty of future uncertainty.
In fact, when my peers/friends/colleagues do talk about retirement, that conversation usually begins and ends with a quip along the lines of "what retirement?".
There's 1. almost no expectation that any of us will be able to stop working until we're physically sidelined, short of making 'fuck you' money. And 2. almost no desire to stop building things, even if we get 'fuck you' money.
After all, it's not like we're retiring from the factory floor. We might not be mountain biking on the weekends during retirement, but it'd take teams of orderlies to keep us from writing software.
I sometimes wonder about the first wave of digerati that hit 'retirement'. Things like a World of Warcraft for the fixed income set seem guaranteed.
But what about the code they write? Will the elderly coders follow tradition and dismiss new technology and just support "old school" projects to the end? Will they keep on the edge but churn out solutions more geared to their current situation (less motor control, less faculty to waste on cryptic commands, etc)? Or will their code and goals not be notably different than the new generation at all?
I know quite a few people like that. However, they are all in "traditional" professions (law, medicine, accounting) or executives/fund-manager types working for huge organizations.
It's not something that appeals to me.
No offence, this is probably because you are generation Y, well educated and surrounded by start-up mentality or in college.
Consider yourself lucky, but don't consider yourself the norm (yet at least).
My circles do contain a disproportionate number of creatives and the self-employed/start-up types - but you're off by a generation. And maybe half have degrees; if that.
The biggest de-normative aspect is surely that my family/friends/colleagues are all in and around Detroit: where high unemployment and essentially no economic growth has been normal for a decade.
[1] You know the boomers sure complain a lot about the 'attitude of entitlement' among the younger generations. But who was it that actually mortgaged our future for their present?
The point is this however: the boomers are the norm. By literal definition. We (that's you and me both) are not, and we wont be for a while.
The thing is, if I was able to quit working today I would still look for problems to solve. Sure they may be different problems, but I would still be working even in retirement.
I think you're going to see a lot of people work their entire lives because a) they really do enjoy it and b) as long as you have your brain you can keep doing knowledge work. It's not like any of us are digging coal out the ground to the point where our bodies break down.
He died at 57.
Life is too short. My attitude is to live now, work now and build something of my own.
Pensions are all but gone anyway. Stocks are flat. The one real way I've seen to wealth is by building equity in one's own business.
One positive to my father's reasonably frugal ways: half that pension and all the investments are now keeping my mom from living in my basement. :-)
Today's case in point, Cisco (CSCO).
First, this early morning post from a respected financial/economic blog:
Reading headlines alone, one might wonder if two headlines from today on Cisco were from the same quarter. Bloomberg reports Cisco Misses Estimates on Sluggish Corporate Spending. Meanwhile, the Wall Street Journal reports Cisco Profit Jumps 79%.
Sounds like a great opportunity to go long Cisco, right? It's trading down 9% on the missed estimates news while in reality, having your profits up 79% and same-quarter sales up 20% over last year, especially in this economy, is not a bad thing.
But wait, here is a later post from another equally respected blog:
The book cooking continues. CISCO comes out with "great" earnings but hidden in there is the fact that they're writing their own financing - and holding it off-book. Better hope $21 holds, because if it doesn't it's a LONG way down.
Wait a second - so those supposedly realized profits are really just an I-owe-you note from Cisco to itself? Ok then.
Here is my point. Almost every company out there is hiding assets and liabilities off balance sheet where nobody can see them. It's fun to talk about complex economic theories but come on, the biggest reason the average investor can't get performance out of the stock market is the book cooking. Had the banking industry not held all that subprime risk off their books, the market would not have seen all that volatility, and we would have seen real Dow growth.
As things stand, value investors short of a team of private investigator-style analysts simply cannot afford to trust their own judgement. When the SEC stops focusing on Martha Stuart's insider trading and start going after the real issues, the stock market will recover, democratization or not.
Sure, almost every company "hides" assets and liabilities off balance sheet because it's standard accounting practice. There's lots of rules about it and it's perfectly reasonable to do in many situations. For instance, securitized risk is held off balance sheet because it effectively isn't an asset, liability or risk to the company that securitized it anymore. (That's the whole point of securitizing risk.) It is in general not true that "nobody can see them", since stuff like this generally has to be declared in financial reports. Yeah, you can't see it... if you're a lazy investor who just reads the quarterly financial statements and thinks that constitutes responsible investing.
There are some companies that try to cook the books and game the rules. Surprise. Whenever there are rules people will try to game them. All this tin-foil hat nonsense about "book cooking" as reported in "respected blogs" leading to the ruin of "almost every company" and the entire stock market seems too silly be true.
1. Status quo.
Yes, it's standard accounting practice to move huge amounts of liabilities off the balance sheet. Yes, whenever there are rules, people will try to game them. So what? It's wrong, and the status quo doesn't make it less so. When people like me call it out, it's not because we were born yesterday and have somehow missed the big bad world in front of our collective face. It's because we recognize that complexity (as applied to this situation) is made up to maintain the above mentioned status quo. When I had my startup, I chose to book profits on a cash basis instead of an accrual basis because I felt it was the sane thing to do. Would it have been perfectly legal for me to choose the accrual basis? Of course. Would it make any sense to pretend that I've made thousands of dollars where I've made zero? I don't think so. I am not comparing myself to Cisco but I don't think it's right for Cisco to pretend that their fantom profits are real either. Lucent did that and they are now bankrupt.
2. Lazy investor.
My apologies for the dramatic comparison, but the "lazy investor" argument is a bit like the rape victim argument. First you are going to say that the investors who do not pore over financial disclosure documents deserve being "misled" because they are lazy. Then you are going to say that the Nigerian scam victims deserve it because they are gullible. How long before you say that a young woman is "asking for it" when she goes to a bad neighborhood at night, alone? I am not saying you personally would subscribe to that argument of course, I am just pointing out that if you take that logic to its conclusion, only the strong survive, and that excludes all of us. It's no more realistic to keep up with miles and miles of financial disclosures and other assorted small print than to keep out of bad neighborhoods at all times.
3. Tinfoil hat nonsense.
I am not the biggest authority on the stock market but is there not a clear consensus that the current devaluation was caused by the financial firms' failure to recognize mind-boggling amounts of liability on their balance sheets? Perhaps I am misunderstanding what you are trying to say but it seems to me your last point was that that's just a wacky conspiracy theory. What do you attribute the devaluation to then?
You're defining "wrong" to mean something other than "against the rules". If you can't get the rules changed, it doesn't matter what you wish they were.
> First you are going to say that the investors who do not pore over financial disclosure documents deserve being "misled" because they are lazy
I'm not the OP, but I wouldn't have said "lazy". However, intelligent investing takes time and skill that most people don't have. If you don't read the financial reports, why do you think you have enough information to decide whether to invest in a company? Reading WSJ headlines does not make an informed investor.
The rest of your paragraph is a hyperbolic effort to put words in another's mouth.
2. If you can't get the rules changed, it doesn't matter what you wish they were.
Are you serious? It matters very much. Public opinion changes both the rules and interpretation of the rules all the time, through voting, legislative action and general intellectual osmosis. Just this week, we got ourselves gay marriage and iPhone jailbreaking. I am especially surprised to see such an ultra conservative opinion on a hacker/startup community.
3. I totally agree with you that intelligent investing takes time and skill. I dedicate maybe a half hour of my workday to investing, and I would guess that your average investor doesn't spend even that much time. Yes, it is terribly inadequate. So what are you doing to do about that? We do not live in an ideal world - we do not have medical insurance only for those who exercise constantly, avoid stress, and never eat anything with sugar in it; or driver's licenses only for those with perfect vision; etc. The rules must work for the real world, not some hypothetical ideal.
3. The rest of your paragraph is a hyperbolic effort to put words in another's mouth.
Actually, I explicitly refrained from putting words into op's mouth: "I am not saying you personally would subscribe to that argument of course". Sorry if that was unclear.
> Public opinion changes both the rules [...]
If the systemic change is a result of a change to the rules, then it's not a counter-example to what you're quoting. If you re-read what I wrote, I think you'll find we're closer to agreement than you think.
I won't bother with responding to your whole post, but let's address one particularly wrong statement of yours, as an exemplar of what's wrong with everything you write:
"I am not the biggest authority on the stock market but is there not a clear consensus that the current devaluation was caused by the financial firms' failure to recognize mind-boggling amounts of liability on their balance sheets"
No, this isn't true at all. First, the current "devaluation"--by which I assume you mean recession, because it's not obvious what else it could be--was caused by a number of things. Second, there is no "clear consensus". Third, in general, banks were brought down by on-balance-sheet liabilities. In particular, I recall reading dozens of news items on write-off after write-off of subprime debt, which must be on the balance sheet to count as a loss, else the financial statements don't add up. Fourth, you seem to be confusing the technical accounting meaning of liability with the general meaning, but let's not get into that.
One more thing--the role of capitalism is not to provide capital owners with free money; people who expect returns must put in the time and effort ensuring the capital is going to good use, market economics dictates that this will in general be hard, and it is utterly bizarre that you compare not getting free money to rape. I find it befuddling and sickening that you would dare to say such a thing. Put aside your e-rage and think about it for a second.
Add to that how you open your posts. I started my response to you with, I think you are making some very valid arguments however I disagree with the principle of your position. You started your 2 responses to me with, There's all kinds of things wrong with what you said, and Your post reads like it belongs on Seeking Alpha, with its mixture of bizarre rhetoric and utter misunderstanding of the stock market.
Do you see the difference? I acknowledged, even complimented, your arguments, and expressed a personal difference of opinion. You on the other hand, started both responses with a categorical judgement that I am ignorant, wrong about everything, and crazy to boot.
And you think I have e-rage? For real?
Ok, on to more reasonable conversation.
First, I did not mean "recession" when I said "devaluation". Why would you take a word I actually used and say that I meant a different word? What I wrote was, I am not the biggest authority on the stock market but is there not a clear consensus that the current devaluation was caused by.... Which part of "stock market" was "not obvious"?
Second, of course I did not compare not getting free money to rape. Again, you've completely twisted my words (especially since I apologized for the dramatic comparison ahead of time). My point was, blaming investors who become victims of accounting fraud is similar to blaming rape victims. In both cases, the focus is shifted from the crime onto the carelessness of the victim and I think that that's wrong.
"Well," you say, "you make a good point, but you see my view of what constitutes 'widespread accounting fraud' is different from the standard view, but my uninformed view is right and everyone else's is wrong, so you're wrong, too. Also, I'm being civil." I'm not really interested in talking to someone who thinks like that, so I'm done.
As I recall, many claims of a historical equities premium vanished when the listing and de-listing of stocks was taken into account.
BTW, average (geometric) returns for the US have been around 6% after inflation. The global average is about 5%. No country has averaged as high as 8%.
http://chrismealy.blogspot.com/2009/08/real-return-on-stocks...
In the old days (before the 1970s), with expensive brokers, expensive commissions, no index funds, and taxes incurred from rebalancing, just getting the average market return easily could have eaten up 2% of your return. It shouldn't surprise people that stock returns would fall as costs fell. The after-expenses return was never as high as those historical charts suggested.
From everything I see, the opposite is the case, at least in the USA and Europe. Maybe it's the Chinese labor that's getting a bigger share of the returns.
But I suspect that most of the "missing returns" go to those that exploit weaknesses in the financial system and know how to hide their profits, i.e. investment banks, hedge funds etc.
I would like, in my later life, to maybe step down into more scholarly pursuits. But I'm sure I'll still be doing something for revenue.
On the other hand, the expectation that we are going to be working forever seems to have made us dwell a lot more on what job fulfillment actually means, which is probably a good thing--not too many people I know are willing to put up with the sort of "deferred happiness" model that prevailed in earlier generations.
To be honest, though, I think things are not as bleak as we think. We are fantastically, fantastically wealthy, overflowing with technology and the tech keeps coming and growing. We are not poorer than our parents; we are substantially wealthier but we have accumulated a proportionally greater load of parasitic loss and bad commitments, and a proportionally greater idea of what we "should" be able to afford. (It is no win to be twice as wealthy as your parents if you try to spend three times as much.) Defined-benefit plans will have to come to be seen as a peculiarly-20th-century delusion, as will the idea that the government is an unlimited charge card.
The mentality of a mugger.
The difference is that the government's actions are based on laws, which were passed by elected representatives and thus indirectly by the public. Not "forking over" to the government is the same as not paying a debt and claiming that you didn't personally agree to contracts being actually binding.
Maybe you're one of those idiots who actually believe you can have a functioning society without rules that everyone has to adher to even if they personally don't agree with all of them, but that belief does not make it true.
I usually don't bother responding to this sort of tripe, but it's so easy to prove you wrong that I couldn't resist.
The difference is that, if you really feel that taxes are such an injustice, you are free to leave. Voila, end of problem. Would that I had had that option when I was robbed at gunpoint at couple years ago.
Seriously, put your money where your mouth is and light out for that splendid anarchic paradise you and your ilk dream of so fervently. No one is stopping you and you wouldn't be missed.
What's that? There's no WalMart or fire department in Mogadishu? Bummer...
Social security schemes and government-guaranteed pensions mean that the government (=the voters) decides how much each currently productive worker has to give away, and how much each retiree gets.
Private retirement funds mean that for each retiree, the amount of money earned from their own former productivity which they relinquished into their retirements fund AND the amount of money they acquired otherwise and put there AND the management of the fund AND other economical factors influencing it decide how much that retiree is allowed to take away from those currently productive.
Finally, the millenia-old "retirement plan=loving children" means that how much each retiree gets depends on how many children they were able to have, how many of those survived, how productive they are, and how much they're willing to give up according to their character, how much they love their parents or how much social pressure towards supporting your parents there is.
I acknowledge that there are some other concepts involved. For example, Social Security has limited transferability--one's spouse and children may see some benefit but they can't inherit the face value of your contributions from you. This is a bug and a feature. If enough people die early enough, the unused and un-transferred amount can be used to pay for people who live longer and so withdraw more than their contributions. Without means-testing, there seems to be little social-justice in that.
In my mind, money is an acceptable enough fiction that I can convince someone to allocate me a hamburger for lunch today. The fictional aspect of it is very handy in performing the time-travel of paying my future self part of my wages of today.
Times change and in the future a hamburger may require more or less money as it did today. My bet is that in the long run, that hamburger will be mostly the same or a functional equivalent will cost less because human ingenuity is an unlimited resource.
The fundamental problem is that any mechanism of retirement savings is a claim on the productive output of workers. When the retiree/worker ratio gets too high (which will happen), pain ensues.
[1] If SS were eliminated, stock/bond performance would become worse as SS money chases returns on stocks/bonds. It would still be better than SS today, but would be worse than stock/bond performance today.
(*) Infinite, that is, until the Chinese and other foreign nations stop purchasing our debt.
Going forward, in general, the Federal Government will not be able to rely on the Social Security Trust fund purchasing the bonds it issues. It can cut spending, raise taxes, or find other buyers who want to purchase bonds.
There is no particular reason to be concerned about the ability of the Social Security system, for years to come, to support it's obligations to the workers who have paid into the system. Unless, of course, you fear that wealthy elites will manufacture a bogus social security "crisis" to dispossess the savings of workers and continue to enjoy (federal spending/tax cuts) that can not otherwise be sustained.
I think some people here don't grasp the seriousness of the US government's financial situation, and how much it worsens the longer the recent status quo is maintained.
Those "massive assets" are T-bills.
If push comes to shove, who do you think will get shafted - SS or China?
More to the point - how much are you personally willing to pay to maintain the SS benefits for folks 10-20 years older than you? How much do you think that folks who are 10-20 years younger than you are willing to pay to maintain your SS benefits?
I really don't want to see a stock market that has 3x the money coming out as is coming in.
T bills are a claim on future US tax revenue. That's very different.
What happens to the prices of those assets when the baby boomers retire and are pulling out more money than there are young workers putting in? You have the same problems as SS. What if we had all of that SS money in the market? It'd be a disaster.
WRT companies that produce stuff, the critical time is not when boomers retire, it's when they stop spending money. Fortunately, many will stop when they die, which reduces demand and the "load" on both the stock market and SS. Again, the whole world thing is relevant.
And, since boomer spending is income for later generations....
Do you really think that money invested in the stock market is like SS obligations? (Here's another difference - Congress can repeal SS whenever it feels like it.)
What worries me the most about privatization is the likelihood that the dumb money moving into the markets would induce a Wall Street feeding frenzy, followed by another bubble and subsequent crash. Tens of millions of destitute seniors would demand that the gov't make good on their losses, which would be shouldered by the rest of us.
Why would this sort of smoothing need to be regulated away?
And now that we are printing all this money and have massive unfunded liabilities, there will be serious inflation in the next 20 years - I have no idea when, but bond yields will drop or become negative at some point while equities will perform much better. And this is Charlie Munger and Warren Buffett's view as well.
These two statements are contradictory. Bond yields will skyrocket in the face of inflation. If you meant bond prices (which move inversely to yields) then you would be correct but your assertion, as presented, is false.
Also, please pick a 20-30 year timeframe in the last century where investment in bonds (for the entire period) would have underperformed (be destroyed, in your words) the S&P 500 for the same period.
We might have to get out of the "holy shit I gained 400% on this stock in 6 months" mentality and instead start learning that an income producing basket of dividend stocks at 6% is the way to save for retirement.
http://seekingalpha.com/article/141811-the-importance-of-the-dow-gold-ratioWhile there is an economic cycle its effects can be rather mild if properly managed.
The fact of the matter is that the dismal performance of the stock market in the last 10 years just matches the dismal performance of the overall economy in the last 10 years and is simply the result of terrible leadership.
Yes, it is mostly the fault of George Bush, and Alan Greenspan and Bernake and the new brand of "conservatism" that got popular in America in the later Clinton years (and that includes a lot of conservative democrats). I put conservatism in quotes because this is a type of conservatism that is foreign to many actual honest conservatives.
I do not have the time to list all the fuckups, but let me just list the important ones: rampant financial deregulation while still ensuring that the government will guarantee the banks, incredibly expensive wars all over the world without honestly taking the expense into account, a policy ensuring high oil prices for a country that is the greatest importer of oil in the world, trying to fix the effects of wars and high gas prices with low interest rates, when any economist will tell you that these are not things you can fix with low interest rates, support of outsourcing and all kinds of policies that destroy the earning potential of the middle class, refusal to invest in infrastructure, etc. etc.
So the stock market is doing badly because the economic policies we had in the last 10 years failed. That is pretty much it.
Saving early is more important than saving a lot. That's the magic of compound interest.
Even during the recent recession, inflation has been very much under control. So I'm not sure what "stagnant wages" have to do with anything.
The people who got those ridiculous mortgages were snookered in a shell game. If a person can't trust his mortgage broker, who can he trust?
But, all that good financial education they got in school should have prepared them for that.
Wait, it didn't? NO WAY!
As for mortgages, what's the saying? You can't con an honest man?
People pay more money for take-out coffee than it costs to make a decent and nutritious meal, and this is considered perfectly normal. It's not impossible to be fiscally responsible, just unfashionable.
This was for a one time surgical operation. Long term ongoing care, as you've noticed, is gonna be a lot worse. That's what insurance is supposed to be for, not small shit like doctor's appointments, or manageable shit like surgeries. (Assuming you aren't covered by your employer or the government.)
The down payments, all told, were somewhat over $1000, $1200 or $1300 as I recall, and that's for anesthesiologist + surgeon after some amount of negotiation. The hospital had an assistance program that covered their end of the costs, which would have easily matched or exceeded the surgeon's bill otherwise.
The price for my sinus surgery was $40k.
Hell, when I went to the ER because I had pneumonia, and no insurance, I paid $700.
Where are you finding these prices for surgery - Tijuana?
But I think you are giving the consumer way too much of a free pass for their own misbehavior. I'm not completely without sympathy for people who are honestly having a hard time paying for the essentials of life. But what about the people who finance a new car because a 10 year old used econo-box would be beneath them? The people who buy expensive packaged foods instead of cooking from cheaper raw ingredients? People who have a satellite dish on their doublewide? As evidenced by the recent increase in savings rates, US consumers have the ability to cut back when they need to.
As for getting "snookered" into mortgages, who the hell makes the biggest purchase of their lives based on a 5 minute sales pitch without doing any research or considering what happens when the ARM resets? I'll give a 90 year old grandma a pass for getting snookered by fraud, but some people are just plain careless with their money and mostly deserve the consequences for making bad decisions. That's not a popular viewpoint in the current environment, but the alternative leads straight to "too big to fail" and taxpayer funded corporate losses.
Keep the personal debt out of the equation for now. The fact remains that while inflation is "under control", it's not zero. And the costs of other necessary things (esp energy and healthcare) have continued to rise well beyond the "under control" range.
(in other words, exactly what you said)
How many people do you know under 35 who were seriously saving 10% toward retirement?
Although to be fair it only reached 10% after 401k matching kicked in, if I recall correctly. Can't pass up free money.