People think of investing as a private matter. The goal is to finance your personal retirement. You make your choices and you live with the results. It’s not the place of the larger community to protect you from making bad decisions or to encourage you to make good ones. When you invest, you are on your own.
When large numbers of people invest ineffectively, our entire society suffers. We all need to begin seeing the social dimension of the investing question. Our unwillingness to do so is killing us.
Yale Professor Robert Shiller briefly argues this point in his widely praised book Irrational Exuberance. Here are some words he puts forward in the beginning of Chapter 11:
“It is a serious mistake for public figures to acquiesce in the stock market valuations we have seen recently, to remain silent about the implications of such high valuations, and to leave all commentary to the market analysts who specialize in the nearly impossible task of forecasting the market over the short term and who share interests with investment banks or brokerage firms. The valuation of the stock market is an important national—indeed international—issue. All of our plans for the future, as individuals and as a society, hinge on our perceived wealth, and plans can be thrown into disarray if much of that wealth evaporates tomorrow. The tendency for speculative bubbles to grow and then contract can make for very uneven distribution of wealth. It may even cause many of us, at times, to question the very viability of our capitalist and free market institutions.”
- The overvalued market of the late 1990s was the primary cause of the economic crisis. Stocks were priced at three times fair value in January 2000. That translates into $12 trillion of funny money that was fated to disappear from the economy over the course of the next 10 or 15 years. Given that reality, how could an economic crisis have been avoided?
- The shock of the economic crisis caused us to spend huge amounts of money on bailouts and on economic stimulus legislation. If we had warned investors of the dangers of overvaluation and thereby avoided the shock, our national debt would today be more manageable.
- Bull markets cause the Invisible Hand of our free market economy to reward and punish businesses that otherwise would not be so rewarded or punished. For the time that investors believed that their accumulated wealth was far greater than what it was in reality, businesses selling luxury goods possessed a great edge over businesses selling reasonably priced goods.
- Millions of today’s retirees are likely going to suffer failed retirements in the event that stocks perform in the future anything at all as they always have in the past. Today’s retirement studies get the numbers wrong because during the wild bull the correct numbers had come to be “information most people [didn’t] want to hear.” Taxpayer money is going to be needed to help these millions of people when their retirements fail.
- The success or failure of entire presidencies is often determined by the valuation level that applies on the day the president is inaugurated. President Reagan took on the job at a time when stock valuations were so low that they were almost certain to go up dramatically over the next eight years, putting a wind at the back of his efforts of pleasing the millions of voters concerned about the economy above all else. President Bush (the one who preceded President Obama) came in at the time when stock valuations were at the highest point they had ever been in history, virtually assuring an economic crisis by the end of an eight-year term (the wonder is that it came so late in the Bush presidency).
- Investors are worried today about their futures because of their stock losses. It is these worries that lie behind the growth of the Tea Party Movement. Feelings of economic insecurity diminish the confidence we feel in our political leaders.
- Political compromises become harder to negotiate at times of economic turmoil caused by stock overvaluation. Polls showed that much of the public’s antagonism toward President Obama’s health reform initiative was due to a strong belief that his focus on it showed an indifference to the more widespread alarm over the failing economy.
- As Shiller suggests in the comments quoted above, volatile stock prices cause unjustified inequalities in wealth. Investors who happened to lower their stock allocations before prices crashed (perhaps because they were ready to retire) have been permanently put in better circumstances because they enjoyed the benefits of high valuations and avoided the downside. This is an unavoidable outcome if stock prices are unpredictable, as is posited by the Buy-and-Hold Model. But if Shiller is right that valuations predict long-term returns, educating investors to the realities of investing would have greatly limited the overvaluation and thereby greatly diminished the extent of the inequality of the outcomes experienced by millions of investors because of the time at which they happened to reach retirement age.
- The young workers who only began investing from 2000 forward are in the opposite of the circumstances that apply for those older investors who were born at the right time to be lowering their stock allocations just prior to the crash. The young investors have seen only the downside of the stock market and none of its upside. They will likely remain behind financially for many years to come, and this may cause them to feel less enthusiasm for our free market system than they would have felt had stock valuations not ever traveled to such insane levels and if the stock market’s rewards had thus been more evenly and more equitably distributed.
The stock market is a national resource, like the forests and the oceans. It makes our free-market economy work. We all should be protective of it. We all should want investors to learn what they need to learn to invest in ways that will keep runaway bull markets from developing in the future.
Rob Bennett writes a weekly column at the Death by 1,000 Papercuts site entitled Investing: The New Rules.