Saturday, February 16, 2008

Recession and investing

It seems a recession is coming in the western world. 
But is it time to panic? Maybe not

By the way, it's interesting to me how, if you go to Motley Fool UK, you're met with a host of ideas about how to manage your economy. And if you go to Motley Fool US, you're met with a host of ideas about how to buy and sell stocks. I wonder if this is a reflection of any major difference in mentality between the US and Europe? Like for instance that Americans are more interested in making it big and preferably yesterday, whereas Europeans are more interested in staying with the safer and slower options?

All that being as it may, I used to wonder why it was that so many people are investing in the stock market, people who really don't have the money to invest...
Then I realized that it's simply a form of gambling. Which is alien to me (I'm too chicken), so I did not recognize it. 
And like gambling, the "mark" always believes he has a better chance than others. He always has a System, or a Hot Tip or something, that makes it a Sure Thing. He is sure he will make 50% a year easy. 

But he won't, unless he is as lucky as the next lottery winner. Even the world's most successful investor, Warren Buffet, has only made about 20% over the long range. And he has obviously been both lucky and has used all his time and skill studying the markets. And by the way, he has not generally invested in dark horses, he invested in big solid companies like IBM and AT&T. 

After years of study, what I have grudgingly come to acknowledge, on advice from the world's most knowledgeable people is: there is no market where you can know what is going to happen. And if there is, then everybody else knows it too, and the price is already pushed up. 

One of my sources for this is the book Fail-safe Investing by Harry Browne (recommended by TTL). And Browne was one of the greatest investors and advisors ever. 


Cliff Prince said...

It's been suggested by many commentators that the USA's financial markets are much more prone to "panic" (whether in the upwards or downwards direction) than the European ones. The USA is full of speculators, and in fact we look to the stock market to "get rich quick" in general, at least in so far as it's fair to ever make that sort of cultural generalization. I think Europeans are generally better at "accepting their place" -- with all the good and bad which that expression entails -- than citizens of the USA. There's great hope, here; but also great disappointment when that hope never really seems to come to fruition.

The typical American story of rags-to-riches is epitomized by the pulp-fiction titles of the turn of the last century with a main character named Horatio Alger. Always his pluck, determination, and strength of will lead him to financial success. As though money income were somehow an indication of personal moral worth.

Or, so the theory goes. I closer reading of these Victorian-esque titles indicates that, quite often, Horatio makes his fortune more through the patronage of an already-heeled member of the aristocracy, than because of his smart use of the financial indicators of his day.

The myths go further. Often we are exhorted to follow the examples of Andrew Carnegie, or Nelson Rockefeller, or J. P. Morgan, or even modern day "greats" such as Bill Gates and the like. But again, a closer reading punctures the myth. Nearly all success stories have behind them a hint of "insider trading." Carnegie's tactics would be illegal today. Gates is the grandson of the founder of a major national bank -- sure, he put in the extra hous, founding Microsoft in the heady days of software development. But so did plenty of other people; those competitors, however, didn't have Gates' advantage, of being able to call up mommy in order to speak to a member of IBM's board of directors. She was on it at the time.

So we often feel guilty, here in the USA, for having failed to put in requisite effort for reward. But often the truth is, we've put in the effort, but luck wasn't with us. It isn't always the case that things work out for the best ONLY because of hard work. That's a necessary condition, yes; but not a sufficient one. We're "supposed" to make it quite rich here, and if we don't, then something's "wrong" with us. In Europe, so I perceive, it's rather more considered "OK" to disdain worldly success, and even develop a moral and ethical core that's independent of (or even contradictory to) the rise and fall of the stock market.

Anonymous said...

Once again final is trying to sound like he knows what he's talking about - and once again he's relying on the ignorance of most readers of this blog. He's hoping he won't be called out. The loser that he is, he's always got to try to rationalize the success of others, especially Bill Gates.

Cliff Prince said...

I don't understand what it is I've done to offend. Perhaps specifics would be helpful.