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Tuesday, 1 April 2008

Go Figure: Gloomy Market Numbers Need Scrutiny

by Ben Stein

My old dad, may he rest in peace, taught me many things. One of the best lessons came in 1956 (yes, in 1956, when I was in the sixth grade) when I brought home some data a teacher had given me. It said that according to a crank named Stuart Chase, the world would run out of oil by 1966. "Figures don't lie" was the final phrase of the article.

I showed it to my father, who scoffed and said we would be using oil for all of my life and my children's lives. "But Pop," said I, "figures don't lie."

"Yes," quoth he, "but liars figure."

The Browning Version

This came back to me like a thunderclap when I read a front-page piece in last Wednesday's Wall Street Journal about how poorly the S&P 500 has done if you count the period from exactly 10 years ago until now. By the reckoning of the author, E.S. Browning, stocks were barely up, and maybe not up at all if you took inflation into account.

The story made my phone light up like a Christmas tree, with newspeople wanting to interview me about this dismal news. My reply: Figures don't lie, but liars figure.

Please don't get me wrong -- Mr. Browning of the Journal is not in any sense a liar. He's a solid reporter. But the data are wildly misleading for a variety of crucial reasons.

Deceptive Data

For one -- as my pal, investment guru Phil DeMuth of Conservative Wealth Management, always reminds me -- everything in investing depends on when your start and end dates are. Yes, if you took at exactly 10 years ago as your start date and today as your end date, you'll see depressing data. That's because 10 years ago we were in the grip of an alarming stock price bubble, with valuations, especially for tech, at staggeringly unrealistic levels. The ensuing correction took the S&P down close to 50 percent.

But if you made your start date late 2002 or early 2003, when the market hit what we now know was its low, and made mid-October 2007 your end date, you would have more than doubled your money, counting dividends.

If you'd been investing in even increments month by month even from the peak in early 2000 until now, instead of plunging everything in at the peak, you would be way, way ahead of the numbers Browning cites. (He alludes to this, to be fair to him.)

Diversity Matters

Much more to the point, over very long periods, any investor wants to be heavily diversified. I, your humble servant, have pointed this out hundreds of times.

The prudent investor wants American large cap; American small cap; REITs (oh, how I love REITs, mostly for their dividends); commodities (I recommend the DBC, the IGE, and the Rogers International Commodity Tracker); foreign developed (EFA); and foreign emerging (VWO or EEM). The prudent investor will want to keep a good chunk in liquid assets such as cash and bonds, and the prudent investor of some means will want a home and probably a vacation home.

If the ordinary investor had owned these assets over the past 10 years, he or she would have wildly outperformed the S&P. Again, to be fair, far down in his story, Browning mentions this. But in fact, the real story is patience, minimum liquidity, and greatest possible diversification. With this, you may have some bad times, but you'll get through them.

Buy Time

Perhaps there's another big story here: It's exactly when things look gloomiest that it's time to buy. My erstwhile colleague from Fox News, Jim Rogers -- by far the smartest investor I ever knew at all well -- used to say that buying when stocks were high was how his mother bought stocks, but buying when they were low was how you made money. By that standard, now is an especially good time to buy the EEM, the VWO, and the EFA.

These foreign emerging and developed markets have been hit way beyond what's rational. They're reacting to fears of a U.S. recession causing a recession in their countries. But they're so cheap by historical standards as a result that they may well qualify as buys. (If you do buy, please don't email me in a month or a year saying they haven't risen or have fallen; my advice is for the long term.)

The more I think about it, E.S. Browning has given us a major gift. He's alerted us to the truth that it's time to buy, in little bites, over a long period. Nice work, Mr. Browning -- you're no liar at all.

1 comment:

William said...

A great post. In my 20 years of watching the truth and how it was twisted to meet the needs of the person writing it I have never seen it written about in such a perfect way.

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