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the “long term investing” con – an overview

By Antecedent Insider
2.21.2010
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con (kn) Slang
tr.v. conned, con·ning, cons
To swindle (a victim) by first winning his or her confidence; dupe.
n.-A swindle.
adj.-Of, relating to, or involving a swindle or fraud: a con artist; a con job.

With relentless enthusiasm, the corporate media extol the virtues of  “long term investing” in Wall Street products which range from a simple savings account to impossible to understand concoctions  that exploded like financial derivative death stars going supernova in 2008. The public is told in print, on TV and on the radio by various “experts” whose credentials all came from within the industry, “if you save your money and passively invest it for the long term,  if you don’t engage in market timing and make regular contributions, you will be rewarded”.

This wisdom is coming from a multi-billion dollar industry where everyone has something in common. None of them make any money unless you invest in their warez. Wall Street and all it’s offshoots have something else in common. They are all parasitic in nature. They don’t make anything, they all rely on money flowing into the system in one way, or another. From a financial publication, to a tv network, to a worldwide lobby of pundits, advisors, consultants, and various other parasites, they all either just skim off the top or take a fee directly.

This essay will challenge the claim of long term investing in Wall Streets myriad of products as a “sure thing” as a patently false, even fraudulent statement…. a con perpetrated by people and institutions that require a continued inflow of  money to support their existence.

We will examine the last 97 years, the modern period from when the Federal Reserve Corporation took command of issuing the money on behalf of the US Government.

From 1913 until 2010, the US dollar has lost approximately 95 percent of it’s purchasing power. This is equivalent to a 3% annual return, after taxes. In other words, over this very long term, an investor had to earn 3% after taxes just to break even in terms of maintaining purchasing power. In easy to understand terms, if you could afford to buy a loaf of bread in 1913 and invested the bread money on Wall Street until 2010 earning 3% per annum after taxes, you would still be able to buy a loaf of bread today. Your wealth would not have increased at all, it would have remained constant.

So the investor had to earn an average annualized return over the last 97 years of greater than 3% after taxes, to actually increase their net wealth in terms of purchasing power. We will use that as our baseline. If you could earn 3% after taxes (4.2% before taxes using a 30% tax rate), then you broke even.

Now that we have a baseline standard, lets define “long term”.  Over the very long term the only guarantee that can be made is that you’ll be dead.  So lets define an “investing lifetime” to mean long term. If you start your career out in your 20’s and retire in your 60’s, that’s a period of 40 years and would be the most generous period.

For practical purposes, people are often operating on a 20 year time line from when they start “investing seriously” meaning that they have accumulated any significant savings to invest. With those assumptions, a reasonable time frame to consider the idea of “long term investing” is 20 to 40 years.

So the question now becomes,  can an investor over a period of 20 to 40 years reliably earn a positive return of greater than 4.2% through  “long term” investing? This is the point where people will start to play with statistics.  The entire industry of wall street will play with the statistics so as to conclude that long term investing is the answer, because they require your money to feed the industry. We are going to take an independent look at that claim.

The researched conclusion is stated in advance, and then backed up by a few examples. The conclusion is as follows. There are periods of time, often long periods of time, as much as 20 years or so where blindly investing in stocks, bonds or some combination thereof would have produced positive returns of greater than the baseline 4.2 percent required to maintain your purchasing power. These are the periods often used for “fun with statistics” that end up in glossy brochures.

On the other hand, there have been periods of up to 60 years out of the last 97 where investing in stocks, bonds or some combination thereof was a money losing idea.

The position this overview will take is that since there have been periods of an “investing lifetime” which have produced extremely negative returns, the idea of “long term investing” is essentially a crapshoot.  Since NO ONE has perfect knowledge about the future, your long term investing success will be totally dependent on the luck of the draw…when you were born, at what point you begin your investing, and what happened in the world during the course of your investing lifetime.

THEREFORE, people who blindly accept the tired old “long term investing” canard coming from brick buildings, expensive mahogany desks and Ferrigamo shoes are likely to be disappointed with their results. Not unlike gamblers funding the opulence of  Las Vegas, those brick buildings, expensive furniture and the Ferrigamo shoes on Wall Street were all paid for with savings.

Lets start out by looking at some long time periods.

If you were unlucky enough to have been fully invested in 1929, it took until 1954, 25 years later,  for the market to regain it’s former levels. Long term investing over this reasonable investment lifetime of 25 years was a losing idea.

Again if you were unlucky enough to be fully invested in 1966, you had to wait 18 years, until 1984 for the market to return to it’s former levels. This of course ignores the 4.2% pre tax return necessary just to maintain your purchasing power.

There was a 57 year period from 1929-1986 where a “long term” investment in the index earned but 1.7 percent per annum. Even considering dividends and dollar cost averaging, there would have been long periods within this “greater than an investment lifetime” period where real returns would have been strongly negative.

In Japan, The Nikkei 225 index peaked around 40,000 in late 1989, and here today in 2010,  20 years later, it stands around 10,000…a loss of around 75% for holding for a period of 20 years. Combined with the increase in the cost to live because of inflation, this represents very close to a total loss for a “long term Japanese investor”.

Thousands of well meaning Chinese retirees were sold Lehman Brothers structured notes that were “guaranteed”. In 2008  those investors experienced a total loss of their retirement savings. US investors who had substantial portions of their retirement savings in Lehman Brothers stock, was confiscated. Then there’s Enron, and Bear Stearns, Fannie Mae, and the list goes on, and on and on. None of these were fly by night NASDAQ names. These were supposedly “blue chip” stalwart investments worthy of your lifes savings. Nothing could have been further from the truth. Many “investors” in these issues didn’t have the pleasure of calculating a return, because they lost their principal.

For decades, the “blue chip” companies were touted as safe, reliable ways for investors to save and accumulate wealth. Taking General Motors as another one of those “blue chip” investments, there is no doubt that General Motors made a lot of  automobiles and a lot of money over the course of it’s existence…and those profits all went to whom? If an investor had dollar cost averaged into these shares for an entire investment lifetime, or for that matter, if  regular contributions were made every month for the entire 97 year period we are considering, any way you slice it, they lost nearly all of their money. Forget about a rate of return on the money, these unfortunate investors didn’t even get a return OF their money.  Over the course of the same time period, there were a lot of GM executives and Wall Streeters who got wealthy off of GM. The point here being that even if you or your “investment advisor” are lucky enough to pick the a profitable “blue chip” company for the “long term”, there is no guarantee whatsoever that as a shareholder or bond holder of that company you will be rewarded. To the contrary, there is a risk that you could save and “invest”, only to lose your hard earned savings.

Today, investing in a 10 year government bond will earn about 3.5 percent. So, if you buy those bonds today and hold them to maturity for 10 years, the only thing you are guaranteed is loss of  purchasing power of at least 0.7 percent per annum for 10 years. If we enter a period of high inflation, the results will be much worse.

Citing examples of  “investment lifetimes” which yielded negative real returns or a partial or even total loss on the investment is limited only by the space available to write them down.

It’s a “stock pickers” market. How many times have we all heard that? Let us demystify that claim and expose one of Wall Street’s dirty little secrets. When the market goes up, 9 out of 10 stocks go up. When the market goes down, 9 out of 10 stocks go down.  Statistically speaking, if you own more than one or two stocks, it isn’t a stock pickers market, it’s 9 out of 10 stocks going up or down. If you do own only one or two stocks, lets hope they weren’t Bear Stearns and Enron.

This overview will conclude the entire Wall Street parade ignores everything outside of their realm. The idea is that Wall Street is the only place to “invest”. Nothing could be further from the truth. The truth is that they are good salesmen and they have entire TV Networks to promote their warez. Given the events of the past two years, it is questionable as to whether the term “investing” or “investment” should apply to Wall Street at all. It appears to operate more like a casino where the house always wins and the rules are changed on the fly for the benefit of the house. Interestingly, with gambling still illegal in most places, the Wall Street casino still opens for business 5 days a week thanks to a bailout from the citizens. We are all speculators now.

“There is only one side of the market and it is not the bull side or the bear side, but the right side.” – Jesse Livermore

You can fool some of the people all the time, and those are the ones you want to concentrate on.” – George W. Bush

“The nature of any human being, certainly anyone on Wall Street, is ‘the better deal you give the customer, the worse deal it is for you’. – Bernie Madoff

Dow Jones 100 yearsDJIA chart

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  1. Francois
    March 3, 2010 at 2:04 pm

    Very interesting comment and I agree 110%, but what’s the alternative if you want to invest your money. I think of gold, but what else !We have to think outside the box (Wall Street box), and that’s why is so difficult to find alternative way to invest.
    You should present and/or explore different idea to show that Wall Street is not the only place to invest.

  2. ms. doubtfire
    March 10, 2010 at 7:17 pm

    same question. i like your facts and stats. i earned my money the old fashion was, i inherited it. my parents weren’t filthy rich from the depression and they were kinda like generous grandparents to me. they were heavily invested for the very very long term. always preached don’t sell unless you need to. i always sold everything right away, i needed to. i got out of the stock market with only losing about $500,000. still have it and don’t know what to do with it either. i know the market is rigged, don’t know about buying gold cause i have so much jewelry i never wear, meaningless. i invested in my friends winery and loaned him $100,000. @8% to buy grapes in 2008. now i am going to invest in wine in a keg venture which will be coming soon to a bar or restaurant and special events. it is a sustainable way to serve wine like beer in a keg. the idea is out of germany so i know the engineering will be good. i hope mr earthblog reads these posts because i think he has sound advice and reflection and maybe could comment.

  3. March 10, 2010 at 11:39 pm

    Hello Ms Doubtfire.

    This is Mr Earthblog. I did read your comment. The wine venture sounds interesting but don’t drink all the profits! Out of consideration for my paid subscriber base I don’t comment in public on what I’m doing and why, but I discuss it all every night in the EarthBlog News. If you’re interested, check out “about EarthBlog News”. Thanks for taking the time to comment. I do read them all.

  1. February 21, 2010 at 8:01 pm
  2. February 21, 2010 at 9:50 pm
  3. February 22, 2010 at 12:55 am
  4. February 22, 2010 at 9:53 am
  5. February 23, 2010 at 4:32 am

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