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The Intelligent Investor
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Tiger, Tiger, Burning Bright
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Good morning, and welcome to February—and to a new year in the Chinese calendar.
Growth stocks seem to have celebrated the advent of the Year of the Tiger one day early, growling back to life as the Nasdaq-100 index rose more than 3% yesterday. Recent losers Tesla Inc. and Robinhood Markets Inc. each roared upward by more than 10% on Monday.
As my colleague Brenda Cronin wrote in 2010, the previous Year of the Tiger:
Traditional beliefs about the Chinese zodiac symbol say the coming months will be auspicious and action-packed—and yield a host of leaders, or at least bossy, impassioned personalities....
In Chinese fairytales, the tiger is a magical figure, dethroning the lion as king of the jungle. That translates, Ms. Wu said, into the notion that the year of the tiger is a singularly productive one—and that people born during the year have passionate temperaments and leadership acumen.
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"Figure of a tiger," China (date undetermined), National Museum of Asian Art
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To be sure, leading growth stocks are still down at least 20% for 2022 even after yesterday's gains -- and many have fallen by more than half since their peak last year. More pain could lie ahead.
Jeremy Grantham, the respected co-founder of the asset manager GMO in Boston, recently wrote:
We are in the fourth superbubble of the last hundred years....
The final feature of the great superbubbles has been a sustained narrowing of the market and unique underperformance of speculative stocks, many of which fall as the blue chip market rises. This occurred in 1929, in 2000, and it is occurring now.... at the end of the great bubbles it seems as if the confidence termites attack the most speculative and vulnerable first and work their way up, sometimes quite slowly, to the blue chips.... When pessimism returns to markets, we face the largest potential markdown of perceived wealth in U.S. history.
Johann Colloredo-Mansfeld and Dan Rasmussen of Verdad Advisers are a little more reserved:
Once the trend gets broken, once the magic of the rising stock prices disappears, it’s a long way down until valuation becomes the justification for buying. And the Bubble 500 stocks still trade at wild valuations: FuelCell trades at 16.8x revenues, Blink Charging trades at 44.3x revenues, and MicroVision trades at 161.3x revenues.... It’s not hard to imagine a scenario where this rout becomes a replay of the early 2000s tech bubble bursting, all of which would suggest highly valued growth stocks could have a ways further to fall.
I think investors need to understand two things:
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The timing of such a reversal is unknown and unknowable.
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To defend against it, diversify. Don't let high-priced growth stocks crowd everything else out of your portfolio. Own some cheap value stocks; own some non-U.S. stocks; hoard some cash you can use to buy bargains when they materialize.
The Year of the Tiger could catch many investors unawares. Don't be one of them.
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"Tiger Under Snowy Pines," Ming dynasty (1368-1644), National Museum of Asian Art
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The Seven Virtues of Great Investors
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A couple of issues ago, we talked about the first of the seven investing virtues: curiosity. And my first column of 2022 talked about the most important of them: discipline.
This time, let's talk about the next virtue of great investors: skepticism.
If I've learned anything in decades of reporting on investing, it's that the main product of the financial industry isn't portfolios; it's propaganda.
And propaganda with numbers, cloaked in jargon, can hit investors like general anesthesia: You just drift off to sleep while financial professionals surgically remove your money.
Why settle for average, when you can rely on our proprietary quantitative stock-picking algorithms based on Nobel Prize-winning research? We have almost 75 years of data showing that it works!
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(Turn your phone or tablet sideways for easier viewing of this amazing opportunity!)
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Numbing investors with numbers is a standard marketing tactic in the financial industry. That's why skepticism is one of the seven virtues of great investors.
And it's a lifesaver in down markets, when your emotions will prompt you to extrapolate bad news into doom. You have to be skeptical about yourself, too. (See my column from this past weekend, The Two Things to Do When the Stock Market Gets Crazy.)
As reader Charlie Groover of Katy, Texas, emailed me:
I try to ask myself whether the world is really ending for this company, industry, etc. when thinking about whether it's being valued correctly after a large fall in value.
Investors should take nothing on faith.
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Caravaggio, "Doubting Thomas" (1601-02), Picture Gallery of Sanssouci
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Here are a few techniques for sharpening your skepticism that I've learned over the years:
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When someone says, "Studies have shown that...," ask the names of the studies, where they were published and whether this person has read them in full.
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When someone describes a "strategy," ask how that differs from a tactic.
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When asset managers talk about "sell discipline," ask if they measure how the stocks they sell do after being sold. If the firm doesn't know that, how does it know its sell discipline works?
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Are these past results based on a backtest? Then read this.
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What do the results look like after trading costs, fees and taxes?
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Do these numbers account for survivorship bias?
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Who's on the other side of this trade, and why would they let you make so much money?
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Is there data on the average performance of people who have tried this in the past? How did they do, and what makes me or you so special that we should believe we can do better?
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Always read the footnotes. Read financial disclosures from back to front, as if they were written in Hebrew or Arabic. The stuff you really need to know is almost always near the back.
A few books I love can help you hone your skepticism:
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Darrell Huff, How to Lie with Statistics
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Carl Sagan, The Demon-Haunted World
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Bertrand Russell, Sceptical Essays
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Richard P. Feynman, Surely You’re Joking, Mr. Feynman!
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Say no, and prove it.
Theatrical poster (ca. 1909), Library of Congress
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Only 45 years ago this week, The Wall Street Journal ran this article on Page One:
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The Wall Street Journal, Feb. 4, 1977, p. 1.
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The trend was picking up steam, we reported, startling even industry insiders by how fast it was catching on:
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And, you might have asked at the time, what on earth would anybody ever use a computer for? The Journal explained patiently:
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One Computer Warehouse Store in the Boston area opened in July 1976, doing $5,000 in sales its first month. By early 1977 it was selling more than $40,000 in computers monthly. Presumably some of the customers were like James Geiser:
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Note that if, in early 1977, you had correctly foreseen that this computer thing might be a lasting trend, you probably wouldn't have been able to pick the long-term winners. Apple didn't go public until 1980; Microsoft was private until 1986, and dozens of companies came and went, taking the early lead and then fading away.
Quickly spotting innovation is a lot easier than durably profiting from it.
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In the last issue, I chose an Indian print to illustrate an item about Wall Street analysts groveling in the presence of corporate management. I didn't fully understand the sacred context of the image, which depicted an act of sincere reverence and devotion. I meant no offense; I love Indian art, and I hope my many Hindu readers will forgive me for my misinterpretation. Thank you to Subbarayudu Darisipudi, Rajesh Kamdar, Chris Lee and Anand Ramachandran for pointing it out.
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Mary Cassatt, "The Letter" (ca. 1890), Art Institute of Chicago
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Have a question you'd like me to answer?
Want to weigh in on what you just read? Got a tip on something that I or my colleagues should investigate? Itching to tell me I'm wrong about something?
Just reply to this email and I'll see your note. Don't forget to include your name and city.
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Q:
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I am now retired...but I am amazed to discover there are very few resources that lay out how best to position a portfolio for the long run, especially when one is the nervous, conservative investor such as myself...my underlying medical conditions suggest I have a 50:50 chance of dying by age 75. So, I want to spend now, and it is extremely difficult to turn around the habit of saving every penny...but it seems like there should be a solid retirement spending computer program somewhere that I could use. I need permission to spend, and guidelines for how much.
Ideas?
— F. Hansen, Baltimore, Md.
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A:
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Wade Pfau, professor of retirement income at the American College of Financial Services and author of the Retirement Planning Guidebook, says a good, free online calculator for the sort of analysis you're looking for is FIREcalc.
I'd also suggest having a look at The Bogleheads' Guide to Retirement Planning (an outline is here). Mike Piper's Oblivious Investor blog covers some aspects of retirement spending, too.
If you're concerned that your remaining time may be short, though, a computer program might not be all you need.
Thrifty people can learn to open their wallets by reframing an expense as an investment.
One way to do that is to stop worrying about how much you are spending and focus instead on what you are spending it on.
If you feel your time is running out, invest in creating memories with family and friends: celebrations, birthdays, anniversaries, graduations, vacations, family reunions. (Yes, you can still do this, even amid Covid.)
Unlike money you spend on material things, which will depreciate over time, the money you invest in shared experiences will appreciate in your memory for years to come -- and will be treasured by your loved ones even after you are gone.
Which, I hope, will be many, many years from now.
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Be well and invest well,
Jason
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Joaquín Sorolla, "Portrait of Dr. Simarro at the Microscope" (1897), Wikimedia Commons
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Science requires the most vigorous and uncompromising skepticism, because the vast majority of ideas are simply wrong, and the only way to winnow the wheat from the chaff is by critical experiment and analysis…. Uncritically accepting every proffered notion, idea, and hypothesis is tantamount to knowing nothing. Ideas contradict one another; only through skeptical scrutiny can we decide among them. Some ideas really are better than others.
—Carl Sagan
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