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TCFP81: Smallpox and investing

by | Apr 2, 2022 | Investment News

For many centuries smallpox was one of the world’s biggest killers. In the 20th century alone an estimated 300 million died from smallpox. The last known case of smallpox was recorded in 1978.

According to experts, to this day, there are no treatments for smallpox that are proven, tried and tested. Smallpox was eradicated solely through vaccination.

The first successful smallpox vaccination* was developed by Edward Jenner in 1796. He noticed that milkmaids who previously had caught cowpox did not catch smallpox. He used some fresh cowpox lesions to inoculate an eight-year-old boy. He then used matter from some fresh smallpox lesions on the boy two months later, but no disease developed. Jenner concluded that the boy had been protected from smallpox. (*The Latin word for cow is vacca, and cowpox is vaccinia; Jenner decided to call this new procedure vaccination.)

What has this to do with investing?

Every month I read financial planning and investment newsletters and blogs. Some are chosen because they do not conform to my beliefs – particularly as it relates to trying to time investment markets, which is trying to sell always at the top and buy always at the bottom.

I deliberately chose to read things I do not agree with as a form of vaccination – it inoculates me against poor thinking and decisions. But I am careful not to overdose myself lest I catch the disease I am trying to avoid. If I am vaccinated, it means you are vaccinated.

Most of these articles I dismiss in a heartbeat but a recent one got me thinking.

Apparently the % of total wealth held by US households in the stock market is at an all time high. The author notes that after previous such highs in 2000, 2007 and 2018 falls soon followed. The article infers that this will happen again soon.

I was perplexed, I understood that investors had been leaving the stock market for years. I took a step back and I referred to an expert, a gnarly, blunt New Yorker, who said:

“Stocks (shares/equities/stock market) as a percentage of total household financial assets is not directly related to inflows/outflows in any way I understand.

If stocks compounded at 24% for the last three calendar years — and they did — while bonds and cash had basically no return, then of course stocks as a percentage of household financial assets shot up.

What does that prove?

If he is saying that the public is too bullish, I don’t know what planet he’s on, but (sic) since November the public has been jumping out of windows. Investor sentiment here on Planet Earth — fuelled by media screaming about stagflation and Putin’s nukes — is about as bad as it gets.”

That made perfect sense to me, the author is using the one set of statistics to try to prove another point. Perhaps it’s an innocent mistake on his behalf, perhaps not, either way it doesn’t put him in a great light.

This particular newsletter is misleading at best, downright dangerous at worst – if you did as inferred you would be making an investment decision based on a false picture.

It took my own expert to point this out to me, what hope do non-professionals have avoiding such mistakes?

That got me thinking further, I reviewed previous newsletters from the same source. Over the last three years all of them start with a horror story about how everything could be about to go horribly wrong. There is not a positive story amongst them. He relentlessly encourages investors to try to time the markets.

It appears to me he has covered every base possible. He makes string, seemingly cogent arguments in every missive. Yet not a single potential catastrophe he has warned of has happened.

Here’s the thing though, with that sort of scatter gun approach he will be right one day, and spectacularly so. I’ve no doubt, when that day comes, his prescience will be lauded. But that should not distract from the times he has been wrong, should it?

What would have happened if we had we taken his warning three years ago? Firstly, we would still be waiting for him to tell us we should invest in the stock market again. As far as I recall, in those three, years he has yet to say, “it’s time to buy company shares”.

That is a big problem. Let’s use the S&P500 – the US stock market – as a proxy. Over three years it is up 60% or 40% more than inflation. And those figures include the massive -30% “Covid Crash” in 2020 – the “Covid Crash”.

So, in following his advice in 2019, your 100 might still be a hundred but could have been 160. How would that feel?

And now, if you are at 160, it requires a monumental 37.5% drop to get back to 100. That would be a bigger crash than the actual Covid Crash his sage wisdom would have avoided.

That 60% gain was easily earned, you just had to sit on your hands, as you did as a TCFP client. The alternative was to stress and worry about getting out and then getting back in. As this particular guru is yet to give you the green light to do so he’s cost you 60% of your invested wealth.

The difference between him and us is that we are just a little bit right every day. It is underappreciated and takes years to show.

Thank goodness for vaccinations.

Boring But Effective | Truthful, Helpful, Kind

advice@townclosefp.co.uk 

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