There’s a social tendency, easily documented, following all bear markets to continue to think all the problems newly emerged and envisioned in the previous bear market mean stocks can’t ever rise again—or at least not for a long, long time, usually defined as “the next decade.” Usually, folks then think we’re in a period where “it’s different this time”—Sir John Templeton’s famous “four most dangerous words in investing.” Actually, this concept is normal after every big bear market, and not “different this time” at all. The bigger the bear market, the more people are likely to remain dour and fearful for a long time afterward. And fear particularly makes people turn to the safety of “common wisdom” or follow those rules of thumb that “everyone knows.” Of course, it’s often “wisdom du jour.” But in Debunkery, I show that very often “common wisdom” isn’t so wise and is in fact a harmful myth. Doing debunkery helps you see more clearly what the harmful myths are so you can better avoid making long-term costly errors. Many people worry now that consumers won’t spend enough to help the economy recover, but you say consumers aren’t as important to GDP as people think. Is that right?
This is an easy one to see right with debunkery because a lot of data exists around GDP and consumer spending. Consumer spending is over 70% of GDP—so it is very important! But consumer spending is also very stable—almost infinitely more so than people believe. It doesn’t fall much during recessions, so it needn’t come roaring back. I walk through the history of this in Debunkery. Most of what we buy is boring—toothpaste, health care services, rent, etc. We keep doing that even in bad times. The biggest part of spending is services—which is huge and relatively stable. The smallest part of consumer spending are the big ticket, discretionary items you read about in headlines—like cars, appliances, vacations. And spending on those things does fall in recessions, but more stable spending on services and staples simply swamps falling spending on more discretionary items. In fact, in the last five recessions, consumer spending as a percent of GDP actually jumped, because consumer spending remained relatively stable while other parts of the economy—like trade and business spending—fell much more. Consumer spending doesn’t fall much, so it doesn’t have to bounce much. You can see that easily with Debunkery. Amazingly, you also say stocks can and should rise on high unemployment. Is that right?
Almost everyone gets this wrong, even though vast amounts of data are publicly available going back a long way, as I show in Debunkery. In every single recession since 1929, unemployment stays high and rises even after the recession ends. And stocks rise before recessions end—almost always—basic rule. Stocks lead the economy by a good notch, jobs lag by a huge notch. This seems counterintuitive but isn’t. Think like a CEO would. You don’t want to hire before sales and profitability have recovered. You want to hire after you are confident you see a clear pick-up. And sales and profitability don’t recover clearly until the economic recovery gets underway. Plus, you probably had productivity gains through the recession, thanks to cost-cutting and just simply figuring out how to do more with less because you had to—so you may be able to handle increasing sales with a smaller staff. Then too, the unemployment number is wonky—it’s perfectly normal to see rising payrolls alongside rising or plateauing unemployment as people who had given up on their job search come flooding back to the job market, inflating unemployment numbers. All this adds to unemployment being a lagging, not a leading, market and economic indicator. As I show in Debunkery, it would be weird, perverse, and inconsistent with all of history for unemployment to rise before the economy recovers. Your time would be better spent worrying about almost anything else—maybe reruns of the Beverly Hillbillies. You encourage investors to do better with mutual funds by sending their spouse on a spending spree?
Yes! Many investors think their “no-load” mutual funds (i.e., mutual funds without a sales charge) are a cheap way to diversify. I have no issue with no-load mutual funds versus load funds. But it’s a proven fact that, on average, no-load fund investors do much worse than the funds themselves and they badly lag the S&P 500—and even lag investors who invest in funds with heavy loads. Why? Because no-load funds are convenient to trade, so they do it—much too often. They make moves at the wrong times, and that seriously hurts. The fee load fund investors pay up front—sometimes as much as 5%—serves as a behavioral spine. They trade far less, hold their funds much longer—don’t in-and-out at all the wrong times, buying high and selling low—so their performance over time is much better even including those outrageous load fund fees. No-load fund investors on average hold their funds way too short a time for their own good because they trade them whenever they feel the urge, not having that behavioral “spine” the load fund investor feels. What no-load mutual fund investors need is an artificial “spine” as a barrier to get them to trade less and hold longer. So, my point is, buy no-load funds but set up a contract with your spouse first. Every time you trade them you must forfeit 5% to your spouse that he or she can do whatever they want with—to be blown on whatever frivolous (or non-frivolous) thing they want. The threat of a punitive spousal shopping spree can be just the discipline you need to trade less. And even over a period as short as 5 years, the benefit of sitting tight should easily outweigh the cost of creating your 5% artificial spine. It also motivates you to pick your funds more carefully.