I hadn’t heard of Paul Krsek before this NPR segment and a few other NPR pieces about his view of the market and the economy, but I’ll be looking for his name more often from here on out.
Krsek struck me as one of those rare characters who is willing to talk honestly about the nature of his profession. Yes, of course his way of talking is self-interested, since his own investment strategy has been contrarian, and he’s trying to talk up his own approach. Nevertheless, he’s one of the few investment professionals I’ve heard in the media who is willing to admit that the emperor is stark naked, that the perennial repetition of the advice to “buy and hold” or “stay in the market” or “don’t look at your 401k” is bad advice from professionals who have no experience with an economic climate other than that which prevailed from 1981-2004.
Krsek observes in the segment that for people who are already retired or on the cusp of retirement, “staying in” on the premise that it isn’t until you sell or move your holdings that you’ve actually lost money is likely going to lead to further losses. He’s pretty gentle about it but I understand him to be saying that for investors in that position, they need to count that money as gone, lost, and adjust to the new normal, whatever that might be. that the only positive thing they can do now is stop the bleeding.
I also understood him to be arguing that we may be in a market where the bottom is very far away as yet, and that under those circumstances, even staying “in” for the long run may not be a smart thing to do. If you cashed out now and lost 30% from your peak value in your investment portfolio, even if you’re only 35 or 40, and moved that into a safe haven earning 4 or 5%, you might be better off than someone who just holds fast while stocks continue to lose more and more value. Even if we find the bottom in a year or two or three, and things then slowly start to turn around, it might be a decade or more before a stock-heavy portfolio gets anywhere close to its 2005-2006 value. Maybe quite a bit more than a decade.
Most financial advisors who appear in the media advise otherwise not just because of a limited ability to imagine different economic environments than that of the last two decades but because they know that the only hope for their own jobs and their own investments is to continue to entice investors to stay invested, to continue the Ponzi logic that has kept the thing afloat for so long. In this respect, Bernie Madoff isn’t a monstrous aberration of the investment management world, but instead its concentrated essence.
When you look at the long history of economic cycles and speculative bubbles, it starts to become apparent that there are really only three ways to successfully time a market and make more money than everyone else. 1) Create the speculative boom in the first place through price manipulation, cultural persuasion, cartel throttling of supply–and cash out early, as your control over speculators wanes. 2) Have information that other people do not and keep that information concealed for as long as possible. Again, to end up a winner, you have to cash out whenever that privileged access starts to erode (and it inevitably will). 3) Be genuinely smarter in the way you read public trends and information and make prudential, often contrarian, judgments in advance of everyone else. Count me a skeptic about the third category: I think there are people who pull that trick off once or twice, but almost no one in history has pulled it off consistently.
So most investors in most historical cases really fall into a fourth category: desperate scramblers for the last open chair before the music stops. Financial advisors try to keep that chair open by diverting the attention of other scramblers, by delaying the impulse of others to sit down and get out of the game. The tail end of a pyramid scheme is where the knives all come out and the bullshit flies fast and furious, where swindlers desperately try to stave off their losses by convincing their marks that all is well, stay the course, don’t listen to the naysayers, you gotta believe.
If you know of a safe haven earning 4-5% interest per year, please let me know immediately. Looking at CDs and savings accounts, you’re lucky to be topping 2% in this climate it seems, even if you have large amounts of cash and qualify for the super duper platinum account.
It seems that when the stock market crashes so do interest rates, so one’s ability to make money off of money pretty much disappears. It comes down to, sit on a pile of secure cash that is not doing anything (though I guess deflation helps counteract low interest), or lose money in the hopes that some time in the future you can get it back and then some.
Yeah, so I dunno. Seems to me that even money earning almost nothing is better than money bleeding out for another year?
Another insightful perspective from Professor Burke. For the full, sweeping historical scale of the atrocity, however, I would consult another professor – George Bancroft.
Ambassador Bancroft, in case you don’t recognize his name, was more or less the founder of American academic history as we know and love it. Britta, in case you’re still looking for that safe haven, I’m pretty sure what George Bancroft would recommend.
Britta: The current yield of I Savings Bonds is 5.64%. You can purchase up to $10,000 per year, and the income is exempt from state and local taxes.
Prof. Burke: Krsek argued, and rightly, that money one needs to spend within a decade shouldn’t be in stocks. He didn’t suggest, though, that the only way to win at stocks is to time the market. In fact, he pointed out that prices are quite attractive right now for those with a stomach for risk and a 15+ year horizon. He had examples of his own, but here’s another: Coca-Cola is so discounted that the yield alone is 4%. Maybe the Epic Mortgage Fail will sink global demand for addictive sugar syrup, but I’m not betting on it: that dividend has increased every year since 1965, bull or bear.
The stock market isn’t a Ponzi scheme because it deals in actual ownership of actual stuff. If you hold shares of KO, you own factories, a distribution chain, technology and IP, customer/employee/supplier relationships, brand names, growth strategies, and the cash flow that the whole business creates. The quality of the business matters. If you have time enough to filter it, the high-frequency noise in Mr. Market’s price for that business doesn’t.
The problem with investing comes back to the issue of inflation. In an inflation-free environment folks would be happy with probably 1-3% return with relative safety, but if you expect inflation (and so many of the folks in their peak investing years do have memories of inflation though not deflation) know that 1-3 will get destroyed by inflation very quickly, whereas searching for 5-9% is more inflation resistant. These are rough numbers, but that is quandry – safe money often gets destroyed by inflation while risky money is well risky, it can go up enough to escape inflation and it can disappear.