The Little Guy is Back

Discussion of the Stock portion of the Permanent Portfolio

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Lone Wolf
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The Little Guy is Back

Post by Lone Wolf » Wed Mar 09, 2011 10:42 am

Two Years After Market Low, the Little Guy is Back
As a historic bull market reaches its second birthday, everyday investors are piling back into stocks, finally ready for more risk and hoping the rally has further to go.

The Standard & Poor's 500 index has almost doubled since March 9, 2009, when it hit a 12-year low after the financial crisis. And the Dow Jones industrials are back above 12,000, about 2,000 points shy of their all-time high.

Little-guy investors appear to be on board. Since the beginning of the year, investors have put $24.2 billion into U.S. stock mutual funds, according to the Investment Company Institute. They withdrew $96.7 billion in 2010.

"It didn't feel right to be back in until now," says Richard Dukas, who heads a public relations firm in New York City. "I still don't want to put all my money in the market, but I believe we've come through the worst of it."

After the 2008 financial meltdown, Dukas and his wife converted their 401(k) retirement accounts into cash. They had been burned during the bubble in technology stocks a decade ago, and Dukas says he has been "extremely skittish" ever since.

Now Dukas, 48, says 85 percent of his portfolio is back in mutual funds, although he maintains a small cushion of cash.
So here we have an investor that sold everything after the crash of 2008 to cower in cash and is now, after an historic stock market run-up (a doubling!) jumping back in to stocks.  I don't claim to be able to time the market or foretell where stocks are headed, but I know financially self-destructive behavior when I see it.

The money quote: "It didn't feel right to be back in until now."

There are a few points about this.  First, any time I'm tempted to market time based on what "everybody knows", I'll just remember how this poor guy sounds.  (Like cannon fodder, to be frank.)

Second, it seems that many people are very, very poorly equipped to handle investing.  To invest well, you have to understand things not only about the markets but about yourself and your mind that I think a lot of people just do not grasp.  This means that "investing well" is not going to necessarily be the same formula for every person of every mindset in every financial situation.

Third, this is another cruelty that artificially low interest rates inflict.  Achieving safe but reasonable yields becomes difficult.  People that just do not know what they are doing find themselves coaxed away from the safety of CDs, Treasuries, and savings accounts into the waiting arms of the stock market.  (Or Sri Lankan bonds.)
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Re: The Little Guy is Back

Post by craigr » Wed Mar 09, 2011 10:46 am

Thanks for the article.

I just recommend, as always when I see these things, to make sure your rebalancing bands are still within bounds. If they are not, rebalance. That's the only way to control risk in a non-emotional way. I suspect most people holding the Permanent Portfolio since 2008 are probably pretty close to their upper stock band (I need to check myself now come to think of it).
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Re: The Little Guy is Back

Post by MediumTex » Wed Mar 09, 2011 11:04 am

Lone Wolf wrote: It seems that many people are very, very poorly equipped to handle investing.  To invest well, you have to understand things not only about the markets but about yourself and your mind that I think a lot of people just do not grasp.  This means that "investing well" is not going to necessarily be the same formula for every person of every mindset in every financial situation.
After studying the markets and my own personality for many years, here is what I have concluded:

A successful investor must have two traits that rarely travel together--(1) a high level of self-confidence and willingness to trust and rely on his own judgment, and (2) a deep sense of humility when it comes to the way he perceives the world.

Based upon these concepts, the permanent portfolio allows me to invest with both confidence and humility.

I think it is very common for investors to have a lot of self-confidence; I think it is less common for them to also have a lot of humility.  Often, when the lessons arrive that could potentially teach humility (e.g., getting burned on a speculation), the effect of the experience is frequently just frustration, anger, disappointment and a general blow to the self-confidence.  The quieter lesson in humility that lingers in the background is very often overlooked, and as the investor regains his self-confidence, the pattern repeats. 

I think what is happening right now (and as the article implicitly touches on) is that people are beginning to re-gain their self-confidence that was so badly bruised in 2008 and 2009, but I don't sense a newfound humility accompanying this self-confidence, which means little of real value may have been learned by many investors over the last few years.
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Re: The Little Guy is Back

Post by Lone Wolf » Wed Mar 09, 2011 1:13 pm

craigr wrote: I just recommend, as always when I see these things, to make sure your rebalancing bands are still within bounds. If they are not, rebalance. That's the only way to control risk in a non-emotional way. I suspect most people holding the Permanent Portfolio since 2008 are probably pretty close to their upper stock band (I need to check myself now come to think of it).
I completely agree.  And the reason we are selling when "the little guy" is buying is not because we know some secret about the future that he doesn't.  It's to grab the safety that diversification brings.  When people are stampeding for the safety\yield\inflation-resistance of asset X, you want to already be there.  Not trailing along behind.
MediumTex wrote: I think what is happening right now (and as the article implicitly touches on) is that people are beginning to re-gain their self-confidence that was so badly bruised in 2008 and 2009, but I don't sense a newfound humility accompanying this self-confidence, which means little of real value may have been learned by many investors over the last few years.
Genuinely thought-provoking.  This is a very simple idea but I'd never thought of it like that.  I've had this big built-in assumption that 2008 made everyone better investors long-term, but... did it?

To me, 2008 feels like it was just yesterday (if not earlier this morning.)  How can anyone who cares about their wealth watch it lose big double digits in only a few short weeks and not have their view of investing altered forever?

I often sort out what I view as strange human behavior by reminding myself that evolution has shaped our brains for survival rather than truth-seeking.  In this case, though, they ought to be one in the same.
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Re: The Little Guy is Back

Post by moda0306 » Wed Mar 09, 2011 1:34 pm

2008 said so many things about the PP and HB's philosophy.  The following were somewhat untested but well-thought-out theories of HB:

1) Yes, we can have a deflationary recession & near depression
2) Stocks can drop extremely hard and fast (not that we didn't know this, but people tend to forget)
3) Trends can reverse quickly... Everyone was talking inflation in early 2008.
4) Gold, being a monetary metal, behaved very differently from other commodities... this is HUGE when you look at a 2008 comparison.  I will never take this point lightly again.
5) Non-treasury money market accounts DO indeed have risk.
6) Owning treasury LT bonds instead of other types and durations offers amazing protection when you need it most.  This was also huge when you look at a bond return comparison during 2008.  
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Re: The Little Guy is Back

Post by MediumTex » Wed Mar 09, 2011 2:42 pm

Lone Wolf wrote: Genuinely thought-provoking.  This is a very simple idea but I'd never thought of it like that.  I've had this big built-in assumption that 2008 made everyone better investors long-term, but... did it?

To me, 2008 feels like it was just yesterday (if not earlier this morning.)  How can anyone who cares about their wealth watch it lose big double digits in only a few short weeks and not have their view of investing altered forever?

I often sort out what I view as strange human behavior by reminding myself that evolution has shaped our brains for survival rather than truth-seeking.  In this case, though, they ought to be one in the same.
Consider the following:

If I am a mean person and I beat my dog with a broom, my dog may learn to hate both me and brooms.

Later in the dog's life, wonderful opportunities may arise, but if there is a broom anywhere around, he will not be able to see the good opportunity right in front of him. 

This response is perfectly rational from an evolutionary perspective--since it's impossible to say for sure that the broom wasn't somehow involved in the planning of the beatings, from a survival perspective it's probably just better to avoid the whole package of me and brooms.

From a higher brain function perspective, however, we would like to be able to separate out the brooms from the dog beaters and only fear the dog beaters and overcome our fear of brooms.  This is hard to do, though. 

I think that 2008 for many investors was like being savagely beaten with a broom, but one of the mistaken lessons they took away from it was to fear all brooms, rather than understanding that the cause of their pain wasn't the broom (i.e., the stock market or any other asset that didn't behave as expected), but rather the way they had configured their portfolios in the first place

I think that humility is what allows one to see that the person swinging the broom in 2008 in many cases was the investor's own faulty approach to managing his portfolio.  In other words, he was inflicting pain on himself and the tool (i.e., the broom) he was using was all of the Wall Street tomfoolery, but ultimately he was the one making the decisions that would ultimately result in so much pain.

Rather than draw the lesson I describe above (i.e., find a more appropriate fundamental investment strategy), I think that people have decided instead that they hate brooms (i.e., the Wall Street purveyors of so much noise, dumb ideas and high fees) without taking a harder look at what they might have been doing wrong all along (e.g., listening to fortune tellers, taking a gambler's approach to managing their retirement assets and basically mistaking good returns in a bull market for real investment skill).

What we are seeing now--retail investors tiptoeing back into the water without any apparent revisions to their overall casino investing mentaility--makes me think that little of real value has been learned.
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Re: The Little Guy is Back

Post by TBV » Wed Mar 09, 2011 3:07 pm

Very insightful.
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Re: The Little Guy is Back

Post by Lone Wolf » Wed Mar 09, 2011 3:27 pm

Great analogy.  The part I can't figure out is why these returning investors don't view equities the same way that our mistreated dog views brooms.

It's almost like the dog watched brooms for a bit, saw them doing a lot of good, and decided that he must have been wrong about the whole broom-master pairing.  Rover didn't just decide that brooms can be good.  He has decided that the beatings never really happened or didn't hurt as badly as he remembered.

Believe me, Rover, you didn't sell your 401ks into cash near the market bottom because the beatings didn't hurt.
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Re: The Little Guy is Back

Post by MediumTex » Wed Mar 09, 2011 4:02 pm

Lone Wolf wrote: Great analogy.  The part I can't figure out is why these returning investors don't view equities the same way that our mistreated dog views brooms.

It's almost like the dog watched brooms for a bit, saw them doing a lot of good, and decided that he must have been wrong about the whole broom-master pairing.  Rover didn't just decide that brooms can be good.  He has decided that the beatings never really happened or didn't hurt as badly as he remembered.
It's a confused approach, to be sure.

I'm sure that the Wall Street machine will find all sorts of ways of validating this return to the scene of the crime.  I just feel bad for all of the people who paid so dearly for a lesson and still didn't seem to learn much.
Last edited by MediumTex on Thu Mar 10, 2011 2:42 pm, edited 1 time in total.
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Re: The Little Guy is Back

Post by fnord123 » Thu Mar 10, 2011 1:40 pm

To me that article is both very sad and also a very contrarian signal on equities.  When the stupid money starts getting bullish, that often is a bad sign.
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Re: The Little Guy is Back

Post by moda0306 » Thu Mar 10, 2011 1:58 pm

I wonder if by "Little-Guy" they mean the guy shining our shoes telling you the hot stock picks of the day.
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Re: The Little Guy is Back

Post by dualstow » Fri Mar 11, 2011 4:31 pm

A very good analogy, mediumtex.

I know a few people who are afraid to get back into the stock market altogether. They remind me of the dogs who have walked into screen doors and who are now hesitant to go through the doorway. It's an imperfect simile, but basically they are giving up any chance of a gain (the great outdoors) by staying inside and making sure they are never hurt again.

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Re: The Little Guy is Back

Post by AdamA » Sat Mar 12, 2011 12:50 am

Why did they interview the head of PR firm for this article?
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