It was some time in 2011 if I remember correctly. I had tuned to my local NPR station at lunch time. A financial advisor couple was getting interviewed. They had just released a new book on financial planning. It was a pleasant discussion. They seemed genuine. They also appeared to know their stuff. That is, until they were asked about investing in stocks. They solemnly declared that they would recommend that clients not own any common stocks. Why? Because stocks were just too volatile to own. That made me sit up and pay attention. While most people back then held negative views on stocks, I wasn’t quite expecting professionals like them to completely disavow stock investing. Unfortunately, I was unable to locate that interview on the NPR web site, so you just have to take my word for it.
It wasn’t that I was affected by their opinion on stock investing. As a rule, I don’t take investing advice from people I don’t know. Nor would I recommend that anyone do. Even from people who might have credentials, wrote well, and otherwise appeared well spoken. I have previously written about how media often get things wrong. Most financial commentators predictably follow popular market sentiments rather than present insightful or unique thoughts.
Consider the following two opinion pieces I read in that same 2010 — 2012 period. At the time, there was prevailing pessimism about the economy and the stock market. People were still reeling from the economic shock of the 2008 financial meltdown. Financial media, as expected, was also projecting negative sentiments about stocks.
Exhibit 1 – Felix Salmon: He is a journalist who regularly publishes his opinions on financial matters. He wrote an opinion piece for Reuters in May 2010 and also did a video warning to individual investors that volatility is too high in the stock market — advising them to get out of the market before it was too late. That piece was picked up by Huffington Post and it immediately made a splash: “Stocks are dangerous things to own”. For a period of time, it was even promoted to the top headline of the site.
The gist of Felix’ argument was that volatility equates risk and staying in stocks was dangerous when risk was so high. At that time, the stock market was just getting out of panic mode and volatility (as measured by VIX) was indeed very high. He considered high volatility to be high risk – something that individual investors could not stomach.
Well, time proved him wrong. Nothing against him personally but I generally find his opinions preposterous and also a bit distasteful. For evidence, see this recent column of his: Spare Us, Warren Buffett.
Exhibit 2 – Auren Hoffman: The second article I want to highlight was written by Auren Hoffman, a venture capitalist and an entrepreneur. It was published by Forbes in March 2012. He argued that stock prices were determined by their supply and demand and since he believed that money would be leaving the market over next 30 years, he wasn’t going to invest in stocks at all. He claimed that he had less than 10% of his portfolio in stocks. You can read his entire argument here: Six reasons why I don’t invest in the US stock market.
We all know how investors would have fared had they followed their advice. But I’m not here to disparage people who write about the stock market. They could be successful people who write their opinions truthfully and believe in them. And they all have their reasons. On the other hand, I as a long-term investor have a responsibility to seek out opinions from people who I trust and respect.
Now contrast those views with opinions and actions, from the same time period, of these four well-known investors:
1. Warren Buffett wrote an opinion piece in the New York Times in October 2008. He said he intended to buy stocks in his personal account because the market in his estimation was unbelievably cheap. I wrote about this in a previous blog post: Beware, the markets go down often! In that column, Buffett predicted this:
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree.
2. Charlie Munger, around the same time, led a newspaper company in California (the Daily Journal Corporation — he is its chairman) to invest all its excess cash in a few common U.S. stocks. The company held on to those investments all these years. Its original investment since then has grown 11 times over last nine years.
3. Ken Fisher, himself a very successful investor, also manages billions of dollars of clients’ money through his investment management company, Fisher Investments. He was convinced that 2009 was the rise of a bull market. In March 2010, he wrote this in his monthly Forbes column: Bull Market, Chapter Two
It’s a year since the bull market began, and I remain firmly bullish… When in doubt I am biased toward owning stocks. Stocks rise more often than not.
He has been steadfastly bullish on stocks since 2009 and very likely made good money for his clients over the period.
4. Howard Marks is also a highly-regarded investment manager. He writes frequent memos on state of investing for his firm: Oaktree Capital Management. These memos are widely circulated in the investment community. In his October 2008 memo (The Limits to Negativism) when we were in the midst of the financial crisis, he wrote this:
There’s no doubt in my mind that the bear market reached the third stage last week. That doesn’t mean it can’t decline further, or that a bull market’s about to start. But it does mean the negatives are on the table, optimism is thoroughly lacking, and the greater long-term risk probably lies in not investing [emphasis mine].
Notice how in his mind the risk was in staying away from investing. At the time he wrote this memo, he was also actively raising funds for his investment fund. Just like Buffett, Munger, and Fisher, he wasn’t just preaching — he was busy following his own advice.
Now consider why Felix Salmon’s opinion piece became headline news in 2010. Why did Ken Fisher’s or Warren Buffett’s columns not get the same coverage? One would think they have far more credibility. It’s probably because fear sells better. Salmon was warning that the market was dangerous, and we all needed to get out before it’d be too late. It was not just about the fear but also the immediacy of fear that caught people’s fancy. Buffett, Fisher, and Marks on the other hand, were saying that they didn’t know where the market would be tomorrow, but investors will be fine in five to ten years. Yawn! That message was not so thrilling and attention-grabbing to merit a headline.
Why I picked these four investors? Could it be that I’ve fallen into the confirmation bias trap — that is, choosing people who conform to my own preconceived ideas? No. In fact, I’d argue it’s the other way around. I follow these four not because they agree with me. I follow them because they are successful well-reasoned investors who have been expressing their opinions in books, columns, and interviews for decades. They all have proven investing track records too.
It is also easy to dismiss all this as hindsight bias. Looking back, we now know with perfect vision what transpired since the 2008 — 2009 recession. So did I choose to highlight opinions of those who looked prescient today but just happened to be lucky? No, not really. They all have long history of publishing investing opinions. It wasn’t the first bear market they encountered — probably won’t be their last either.
When it comes to long-term investing, listening to people’s opinions is fraught with dangers. Everyone has something to say. Most will echo prevailing market sentiments. When the market is in the grips of fear and panic (like it was in 2008 — 2012 period), there were many negative views both on the street and in the media. On the other hand, in today’s market, it appears that people are gradually shedding their pessimism and turning positive.
In any case, I try not to pay attention to random opinions of others. They don’t know me, my investing goals, my risk appetite, and so forth. I try to stay even keel during good times and bad times, and take emotions out of my investing decisions: Be mechanical about your investing approach.
Be wary of the company you keep for they are a reflection of who you are, or who you want to be…