More Lists

Yesterday was a day for blog lists. In addition to the investing essentials list I posted, Brett Arends post a list of investing cliches that he debunked and Tech Ticker re-ran a list of 23 stats that "prove" the middle class is "being systematically wiped out of existence in America." Brett's article was a little more useful so I'll give that one a little more attention.

Brett debunked ten truisms, as opposed to "myths" suggested in the title of the article. His number 2 was interesting to me; Stocks on average make you about 10% a year.

He picked 10% apart pretty well but I think there is a more useful point to be made with this one. No matter what the real average annual return over some reasonably longer period of time the returns year by year will be very lumpy. In 2008 the S&P 500 was down 38% and in 2009 it was up 25%. That sort of one year to the next difference is probably a very rare thing but given the debunked assumption of the average being 9-10% per year take a look back at the number of years where it was that number plus or minus a couple of percent. It is a very rare thing. The point here is that over a normal bull market cycle (1995-1999 inclusive may not have been normal) most of the return will come from just one year or maybe a little but longer. Check a Trader's Almanac to see for yourself.

Another interesting one was "If you want to earn higher returns, you have to take more risk." There are two things here. One is that in a way this is about confusing beta with alpha. In past posts I've commented that it is pretty easy to make a portfolio more volatile than the broad market. Done even just semi-intelligently should result in going up more in an up market and going down more in a down market. With just this information it is unlikely that true alpha is being generated however knowing when to make the portfolio more volatile than the market and knowing when to ratchet the vol down could be thought of alpha generators.

The other point in debunking this one is the concept of risk adjusted return. I've written a lot of posts on this as it is how I try to manage portfolios. In a typical stock market cycle there might be one year that the market is up a lot, one year it is down a lot and several others that are up or down just a little. In thinking about the entire cycle I've outlined a strategy of not missing the big up year even if you lag it, adding value with dividends in the up a little and down a little years and taking defensive action in the down a lot years by heeding any breach of the 200 DMA by the S&P 500.

One last one I'll mention is that "You can't time the market." Brett says that you don't have to ignore valuations. I believe valuation is a very difficult way to time the market or otherwise assess the market. If you take a look you will see long periods of time where stocks are "cheap" and other long stretches where stocks are "expensive." The predictive value is pretty weak and I would also note that a diversified portfolio would own some cheap stocks and some that are expensive. Certainly any broad based index fund is a mix of cheap and expensive stocks. Favoring cheap over expensive is certainly valid but if every name in a portfolio has a single digit PE it is difficult for me to believe that portfolio could be properly diversified.

As for the article about the middle class I will preface by saying the conclusion might be correct, that the middle class is being "wiped out of existence" but the stats cited are far from compelling or more correctly some of them simply don't support the argument and some other need more context in order to be relevant.

One example of having nothing to do with the point was "In the United States, the average federal worker now earns 60% MORE than the average worker in the private sector." This being true is clearly seven different kinds of FUBAR but has nothing to do with the middle class. As I understand it the vast majority of the salaries in question are between $100,000 and $200,000 which is right in the wheelhouse of middle class in the Washington DC area and other expensive places and upper middle class in less expensive places so if anything increases the middle class albeit in an unhealthy way.

A couple that need more context to add any value are "36 percent of Americans say that they don't contribute anything to retirement savings" and "a staggering 43 percent of Americans have less than $10,000 saved up for retirement." Both numbers are grim but we aren't told how they compare to other years like 1980 or 1990 or some other year deemed relevant.

There has always been some number of Americans not contributing to retirement savings and does 36% include people who are counting on a pension (if so they are taking a gamble but still). If in 1997 there were 35% not saving then today's 36% would seem to be irrelevant. Ditto the 43%. To reiterate, the numbers are bad and obviously it is no secret that a lot of people are looking at huge problems with their retirement plans but the connection has not been made and there are a bunch of other numbers cited that lack context and so don't make a logical connection.

One more non-nonsensical one was "average Wall Street bonuses for 2009 were up 17 percent when compared with 2008." I won't defend bonuses but they were not outlawed so it is not shocking that bonuses went up 17% in a year where most asset classes went up a lot (US equities up 25%) and I would add this has nothing to do with the middle class question because any bonus money not paid out as bonuses would have either been retained by the company, paid to share holders one way or another or repaid to the government (depending on the company) none of which impacts middle class middle class in a meaningful or even noticeable way.

Perhaps selfishly and with a hint of Ayn Rand influence I think the best thing here is for people to pull themselves up by their own bootstraps and get their own affairs in order which would require a willingness to learn by many people and then try to contribute the societal solution if possible (this could mean time volunteering not donating money).