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The Greatest Lie That Was Ever Told Pt 1.
The general
public had stocks foisted on them in the 80s with the introduction of
stock-based retirement plans (401ks and IRAs). They became further enamored by
this asset class with the creation of online discount brokerages, which seduced
the DIY spirit.
Stocks have
become so popular that there are entire peripheral industries have been built
surrounding them: investing books, investing seminars, investing TV shows, etc.
And yet no
one has ever asked whether investing in stocks is actually a good thing.
In reality,
owning stocks isn’t all that great. I don’t mean during bear markets… I mean in
general. When you get done reading the lies detailed in these articles, you’ll
likely come to the conclusion that stocks as an asset class are not only highly
overrated, but that owning stocks can in fact be a colossal waste of time.
Lie #1: Stocks make money from price appreciation.
Just about
everyone talks about investing in stocks from a price appreciation perspective.
“Buy low, sell high” so the saying goes.
Well,
historically dividends have accounted for
70% of all stock market gains.
According to
a study performed by the London Business School, when you remove dividends,
stocks have returned a mere 1.7% in average annual gains over the last 109
years. To put this into perspective,
this is less than you’d make from
owning long-term US Treasury bonds (2.1%) over the same time period.
Indeed, if
you’d invested $1 in stocks in 1900 and reinvested your dividends, by 2009, you’d
have made $582 (adjusted for inflation). Take out dividends and you’d have only
seen $6 from price appreciation. Yes, $6
from 109 years’ worth of capital gains.
Put another
way, by focusing solely on capital gains when it comes to stock investing you’re
only doubling your money about every 18 years (remember, this analysis simply
focuses on the returns generated by the market… which outperforms most
professional and individual investors).
So unless
you’re buying stocks with dividends, you’re likely not making diddly in the
long-term.
Lie #2: A bull market in stocks increases your wealth.
Everyone and
their mother likes to babble about whether we’re in a new bull market. The
reality is it doesn’t matter. There have been ENORMOUS periods of time in which
stocks didn’t make ANY money when you account for inflation… and that INCLUDES
bull markets.
Case in
point, research from the London Business School shows that stocks didn’t make a CENT in purchasing
power in France from 1912 to.. 1977:
a whopping 65 years.
Put another
way, some three generations
of investors in France didn’t actually increase their purchasing power by
owning stocks.
So much for
the wealth effect of a rising stock market.
More to come…
Graham
Summers
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My experience is different, I disagree with his assertion of Stocks make money from price appreciation as Lie #1.
While he cites statistics from 1900 up, I did not live thru the first half of that. My nominal gains have been prominently made thru price appreciation. However the main contributor to this is the devaluation of the dollar value over time. It is also includes a considerable amount of savings made rather consistently over time. But I hazard to guess that dividends played only a minor role in my nominal gains.
What has been very important is my recognition that the US was going to devalue its currency back in late 2002. So I geared my investments towards gold and silver stocks, then other real asset plays like energy, base metals, etc. The biggest gains came thru holding silver stocks over a long time.
As I remain convinced that Obama and the Inkjets will continue with their fiscal irresponsibility to the benefit of their criminal friends, I hope staying with this long term theme is the best way to make stock profits. It also helped very much shifting money out of the limited choices in a 401K and into a self directed IRA account.
Another principle I now use is to spread the risk across a couple dozen stocks that fit my long term themes. If one stock fails me, there is another to make up for it. And some times the stock just needs to regain favoritism to get back on a bullish track.
One more tip: bank stocks are for greater fools. So are tech stocks.
As to the premise that a bull market increases your wealth as lie #2, that's no absolute either. You need to be in the right sectors, consistent with a long term bullish fundamental theme. However again your results may be diminshed by the devaluation of the dollar value.
Nice job!
In discussing 401ks and privatizing social security, vested money interests like to talk about the compounding of returns over a 40 year "event horizon" using something innocuous like 7% as the annual return, but never in these discussions are the effect of a single year of negative return or several years of no net return on those rosy projections.
Better yet is what happens with a bounce. In the last few years a stock I follow, UPS, went from roughly an $85 high to a $50 low and is now back to $75. Used to be that all 401k matching was paid exclusively in UPS stock. Likely most employees never elected to change, why should they, the dividend is great. But what is the net gain? It's damn hard to follow when you $ cost average on a bi-weekly basis. Because the statements are Q-O-Q and Y-O-Y.
But all that is really just statistical noise. After all, all that matters is that by age 65 it is thought that there should be enough to "comfortably" retire on. So, at age 65, if you withdraw about $50,000 a year before 25% taxes and 3% inflation, how much will your account balance need to be to make it to the current actuarial average of 78? According to the attached calculator: Roughly $600,000 at a 6% annual return. (Rough math confirms that 50k * 18 = $900,000).
So split between spouses $600k is $300k and to get to a future value of $300k at age 65 from a contribution start of age 25, with an annual average lifetime salary of $50k you'll need to contribute: 3% with a 3% match and an annual rate of return of 5% (second link).
The BLS Jan 2011 hourly salary is $22.86, nonsupervisor $19.34.
$22.86 = $47,548.80 annually
http://www.bankrate.com/calculators/retirement/retirement-plan-income-calculator.aspx
http://www.bankrate.com/calculators/retirement/401-k-retirement-calculator.aspx
http://www.bls.gov/news.release/empsit.nr0.htm
I read about this experiment some scientists did a while back. They put rats in a cage and kept adding more rats over time. Soon they noticed that the rats started attacking each other when a certain threshold was met.
Everybody is grubbing for more for themselves and there keeps getting to be more of us.
The herd will be culled. Stocks or no stocks.
The hardest thing for me -- a guy who owns a small business -- is reading Zero Hedge for the real Macro news about upcoming economic upheavals that affect "main street" and having to wade through all the bitching from the day-traders (total parasites) about how the game isn't rigged in their favor anymore.
If, as the author of this post says, we all lived like Grampa did -- with a real job that added to the good of the economy -- then we wouldn't have the problems we now face.
Afterall, greed makes you a sucker. If your success is based on money tricks then your days are numbered. The computers (government and/or HFT) can hear you breathing.
Get a necessary skill and make it into a real job.
If people want to buy and sell like mad, chasing returns and selling during slumps, they are not doing themselves any favors. Nobody has a crystal ball.
As noted, dividends are the key to achieving a consistent income stream over time. Sad that regular savings accounts at banks have been all but emasculated, so just move on.
If you trust the government or your local authorities, you are free to buy bonds, but I hardly recommend it.
In such times as these, precious metals are hard to beat, if you can overlook their lack of dividends. Instead, they are infallible stores of value, with much more upside in capital terms than many other alternatives. Paper is vulnerable to too many human-related risks.
I have routinely called this propaganda effort, and it's enabling legislation; "the greatest scam in history", for many, many years. I never convinced one fellow citizen to abandon their ritual investments in the stock market, "which in the long run, always goes up". I knew this for propaganda because I read books and all the real information about stock performance was, and is, readily available.
My worst investment ever was "Stocks for the Long Run" by Jeremy Siegel, in 1997. He convinced me the gold bugs were nuts and thereby steered me away from about 250oz of gold. That's even worse than my investment in 50 hits of Jesus Acid which almost landed me in the loony bin. Cost me about 30oz. gold in shrink fees, happy pills, booze and lost work time.
Usually after I bought stocks they would do the New World Chaos Split (which is when they go to half price without doubling the number of shares). So I switched to dividend stocks, and bought MCI in my Roth IRA right before it blew up. For a while there I thought the CIA was screwing with me. Then I got a 401(k) full of crappy mutual funds which all got burned during the crash of '08. Have a bit of SIL now, that's it. If you own it, beware.
in my opinion it goes back to the P/E ratio. if you buy a business you pay 3x to 5x the value of the company depending on the business, so the P/E of any stock should be around that(roughly). but nobody really talks P/E any more, ur just buying the bigger fool theory and now with hard times not many fools left.
Put all your 401k into PSLV
& yes, I will mention the name ROBERT RUBIN every damn chance I get ........ EXPOSE THIS CRIMINAL. Where's the justice !
.........how about we just go back to banks being a public utility like when i was a kid & my grandpa & grandma saved money for us kids ! ............ it is really a very easy concept : walk into a local bank, place some of your money from your paycheck into a SAVINGS ACCOUNT that EARNS INTEREST (remember how we were all taught about the WONDERS of COMPOUND INTEREST in school ? ) , & JUST SAVE FOR THE FUTURE ! ...........
who's really responsible for messing up the good thing we had during the 1950's & 1960's ?! we all had a little house that was paid off with a 15 year mortgage, we all had savings in a bank savings account, we all had a little job & a little family......
somewhere, someone on WALL ST. didn't like it that AMERICANS had that much wealth, they didn't like it at all, they wanted to siphon it from US to THEM & they were successful ..........
BANKS ARE SUPPOSED TO BE A PUBLIC SERVICE / PUBLIC UTILITY / FOR THE GREATER GOOD ...........NOT CASINOS FOR ROBERT RUBIN TO GET RICH !
Right! And Santa is supposed to come every christmas.
I was having a discussion with a guy just the other day...
Remember "Leave it to Beaver"? Ward went to work each day, June stayed home, and everyone had a decent existence. They had one car, a radio (I can't remember if they had a TV), zero computers or iJunk, no cell phones, etc. But they made it from day to day. Then we got sold on the idea that we need a car for every person in the household (why my six month old needs her own, I don't know...but the Joneses are doing it). They needed several TVs and all the most up to date digital stuff. Amd all the sudden revolving crdit got people in the quicksand.
Now, I say this as one who is in the system- we do have two cars, even though my wife stays home with the kids. One TV, but no cable. Three laptops paid for with cash. And we do have cell phones and the cable modem, not to mention an iPod. But we've tried to pare down to things that aren't as useful.
We all fell for the scam. Digital, glowing items don't make us any happier (unless you really get into WB7's pictures). So, pull the plug on keeping up with the Joneses. We garden, and the kids learn. They've loved the chickens we're raising in the middle of a city, and the fresh eggs would keep us all eating for a long time.
Self-sustainability (and all the gold and silver we can buy) are our little passbook savings account...
Sorry, I didn't have a 109 year time horizon.
Yet is appears as though, given the current climate, dividend paying stocks are a very good bet, especially large-cap stocks. If capital appreciation is a non-starter, and interest rates in savings accounts is zero, and U.S. Treasuries and bonds are about to collapse, why not add dividend paying stocks such as XOM, CHV, KO, JNJ, WMT, PG, CL, MCD, MO, ADM and so forth to your portfolio, especially for the long run?
There are some decent divvy plays out there.. With research you can put together a portfolio that will pay ~6%. There are also some very nice convertible preferreds that pay ~5% but you get the upside of the common given the mandatory conversion rules. For example, how is Hecla Pfd B, paying ~6.5% not a money good investment?
Because the dividends are in the 2 to 3 percent range, which is about half of what a decent passbook savings account used to pay. Plus, you have the risk of the stock price going down, usually at the worst possible time, like when you want to cash some in to pay the kid's tuition. Stagnent price movements coupled with a three percent dividend in a high-inflation environment (like today) equals a significant monetary loss in the long run.
Ever notice how few companies pay dividends? The company announces great results each quarter. The companies pay the executives huge bonuses. Wall Street goes crazy analyzing them and profiting from mergers and spinoffs from the company. And yet, year after year, no dividend, and no stock price rise. Why would any fool invest in such enterprises?
That is the shit that really pisses me off. If you dont have first dibs on an income.stream then what do you really own? But the motherfuckers who run my kids' college savings plans offer me stocks, or a.guaranteed 2 percent. If it werent for the bankruptcy protection it would not be worth it. How about twenty of us.get together and.form our own bottom feeding reit?
remember my GRANDMA JO's words (born 1915, god rest her soul) : NEVER TRUST THE GOVERNMENT & DO NOT GO INTO THE STOCK MARKET.
Your Granny went through the 30's and her pearls of experience was typical of people that went through that period... we're about to do exactly the same and hopefully this time we'll put Govt to the sword once and for all.
PS. is your Caps Lock sticking?
very wise grandma, the wisdom imposed on you is valuable. we all need grandmas like that
biggest scam & fraud ever perpetrated on the American Citizens ....... total scam. Why isn't ROBERT RUBIN behind bars ... ... oh, i forgot, he IS behind bars !! behind the bars of his gated community & his SWISS bank accounts ! .........
When I was a kid growing up, my Grandma & Grandpa were just fine......... they worked hard all their lives, allocated money in their passbook savings accounts which earned interest for them & when they retired, they got a bit of social security & had a savings bank account . AND, when Grandpa & Grandma passed away there was an INHERITANCE to leave to their ADULT CHILDREN !!! ...........
DOES ANYONE REMEMBER THOSE DAYS !!! THE DAYS OF EARNING INTEREST ON YOUR SAVINGS on DEPOSIT @ your local community BANK !!! THE DAYS OF HAVING ENOUGH & LEAVING A HOUSE & SAVINGS ACCOUNT FILLED WITH MONEY TO YOUR ADULT CHILDREN !!
ROBERT RUBIN & GREENSPAN (others) DELIBERATELY RUINED THAT ! THEY SAW THAT AMERICANS HAD TOO MUCH MONEY & IT WAS BEING HANDED FROM ONE GENERATION TO ANOTHER & THEY DID NOT WANT THAT !
RUBIN / GREENSPAN ............. RUINATION OF NORMALCY / RUINATION of the very SOCIAL FABRIC of this COUNTRY. Now, the old people have to fight for jobs with the young people because their houses are worthless, they are earning NOTHING in savings accounts .
I'M STARTING A PUT ROBERT RUBIN IN JAIL CAMPAIGN. ...........
It's not the people (the Bernank or Rubin) it's the institution/system (The FEDERAL RESERVE) that allows these assholes to rob the country blind.
Eliminate the Central Bank and you eliminate all these crooks and the corruption that courses thru the entire market.
Some pretty smart people warned us in the past about letting the Banksters control our currency:
"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."
Thomas Jefferson, (Attributed) 3rd president of US (1743 - 1826)
"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
— Henry Ford
Actually, I think we'd be better off by simply executing Greedscam and Bernokio. Rubin could never have pulled off his scams without free money from Alan Greedscam and Ben Bernokio.
Phoenix capital has it all wrong. The 3 greatest lies that every were told (and continue to be told) are;
"You look beautiful"
"I wasn't in the bathroom last"
"I came" (I keep having to tell women this!)
Stop your prozac for a day and you wont have that problem.
To paraphrase my favorite line from "The Usual Suspects", just as the greatest trick the Devil ever played was to convince us he didn't exist, the greatest trick ever played by Wall Street was convincing average people that the stock market was a good way to save for retirement.
The criminal bankers in the Western World, the U.S., Europe and Canada enlisted their political whores to kill interest paid on savings accounts, then the party began by skimming away the wealth of the middle class by enlisting them into "investments".
Everytime a banker, or "investment" banker tries to entice you into "investing", you may be certain of one thing, they benefit from the skim.
After a generation of theft, we will now be paying the price with a generation of no return on capital.
P.S. I discount the idea of chasing commodities and currencies up and down as investing.