The World Is A Scary Place… Now Give Me Your Money

Scared? Now give me your money!

If you read my 2019 recap post, you will have seen the chart below:

It ain’t pretty out there!

On the x-axis, it plots “Armageddon” stock market predictions made by famous economists, investors and media personalities over the past ten years.

The word “Armageddon” is intentional.  It denotes the kind of dire prediction whereby stock market investors are encouraged to cash out of their investments and run for the hills.  To wait out the inevitable carnage that will leave the streets filled with blood.

In other words, the kind of scary hyperbole the financial media loves these days.

And on the y-axis are the forgone returns by anyone who listened to the predictions and yanked their money out of the market.  As the chart was prepared in early 2019, you can safely add another 25% – 30% to the opportunity cost of listening to the doomsayers.

Regardless of how you cut it, the scale of the opportunity cost is astounding.  The financial crisis gave stock market investors a massive battering – followed by the opportunity to recover all their losses AND double their money.

Long Term S&P performance

S&P 500 performance:  it was scary for a while… until it wasn’t!

Unfortunately, most investors only got the first half of the memo.  They took the battering, then fled to the sidelines as the market roared back.  As a result, we’ve ended up with the most hated bull market ever.

Not a lot of love for one of the best-performing asset classes…

It’s hard to stay the course when you’ve taken a 30%+ loss on your portfolio.  It’s even tougher to ignore all the people who are telling you the world is about to collapse and you better run with whatever you’ve got left.

The interesting part, of course, is that these doomsayers aren’t a bunch of random hobos.  The list above includes a respected economist, a famous activist investor, a billionaire, and many other smart, accomplished people.

In other words, people who know full well that:

  • Predicting short-term stock market movements is impossible
  • In the long run, the stock market always goes up

And yet, here we.  Year after year, these people put themselves, and their reputations on the line, trying to scare people out of the stock market.

What gives?

Everyone Loves Bad News

This might not be intuitive, but it’s true.  Viscerally, humans react in a much more forceful way to predictions of doom, gloom, and disaster than we do to the good news.

It’s called the negativity bias and it’s a big reason why news tend to be dominated by negative headlines.

Even the FT, one of the most reputable financial newspapers out there, isn’t immune from this:

Everyone loves bad news

In other words, telling you that the future is bright doesn’t pay.  You’ll simply turn off the TV or close the browser window.

What brings in the big bucks is telling you it’s all going to go haywire.  Next thing you know, It’s 3 am and you are still glued to the screen, trying to make sense of the upcoming catastrophe.

It also helps that when it comes to stock market predictions, there’s no penalty for being wrong.  In December 2018, the “experts” were trying to outcompete each other in predicting the next bear market.

In the next twelve months, the S&P delivered a 30%+ total return.  That’s the beauty of being in the prediction business – if you are lucky and get it right, you are a star.

And if you don’t – well, no one ever goes back in time and points the finger at you for getting it wrong.  Instead, you are welcome to make another prediction in the hopes of getting lucky.

But there’s more to it than just getting your 15 minutes of fame.   

Show Give Me The Money

As it turns out, if you are in the money management business, predicting doom and gloom can be a very profitable affair.

Think of the messages sent to the audience:

“Things are bad out there.  It’s dangerous.  You will lose money if you try this on your own.”

“But hey – I’m a professional! I can navigate the murky waters.  I’ll do a good job.  Let me manage your money.

That’s right.  No wonder so many of the aforementioned “experts” are usually affiliated with a money management firm of some sort.

Next thing you know, you are paying exorbitant investment fees and your dreams of financial independence remain just that.

In other cases, the self-serving message may be even more sublime.

Jeffrey Gundlach is one of the most prominent permabears on the list above.  Every other week, he’s on TV, predicting yet another stock market meltdown.

Incidentally, Mr. Gundlach also happens to be running a bond fund for a living.  Guess what investors do when they are worried about equity returns?

That’s right, they sell their stock holdings and put the money into bonds.

Ka-ching!

The same applies to gold – which explains why Peter Schiff is never far behind when it comes to predicting yet another horrible calamity in the markets.

Funny how the people who are telling you that the stock market is about to collapse are the same ones who are trying to get their hands on your money as you run for the hills.

It’s Okay To Be Scared

Fear isn’t a bad emotion.  It’s probably one of the key reasons us humans have survived – and prospered for so long.

But there’s absolutely no place for fear in stock market investing.  If you can’t get your head around that simple fact, then please do yourself a favour and cash out now, while the going is still good.  If you don’t, you are bound to muck it up at some point. 

And if you don’t want to muck it up – all while realizing those nice long-term returns, then simply follow the steps below:

  1. Determine your asset allocation – and stick to it no matter what. The younger you are, the more equities you should hold.
  2. Remember that passive investing will always beat active. Buy yourself a low-cost index fund and stick to it.  Don’t give anyone your money.
  3. Keep adding every month. Whatever you do, don’t try to time the market
  4. Prosper

Happy investing!

About Banker On FIRE

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Banker On FIRE is a London-based M&A (mergers and acquisitions) investment banker.  I am passionate about capital markets, behavioural economics, financial independence and living the best life possible.

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1 Comment

  1. This is a really fascinating article! I saw a hl article (https://www.hl.co.uk/feeds/apps/article?id=15708371) which looks into the stock market’s reaction to various drops in history. It makes for a great read – with short lessons written out and some really interesting graphs. I think you’d enjoy it.

    I definitely agree that panic sells. It’s sensational, there’s no real story in life carrying on as it always has – and so the media definitely likes to take things to the extremes. A very insightful post that I really enjoyed!

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