Bogle On Credit Troubles, Market Timing, And More

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Via the Diehards forum, Businessweek recently posted an interview with John Bogle which covers many of the questions that people are asking about investing right now. As usual, he provides a balanced and big-picture perspective on things. I recommend reading through the whole thing, but here are some excerpts:

[…] if I was going to give advice to an individual investor?and I make a very important distinction here?if they have come into this market and have invested the way people should invest, and that means they have a little bond position if they’re young, and an average bond position if they’re in their middle years, and a substantial bond position in their retirement years, then I would do absolutely nothing. They will be protected by the fact that bonds are going up and bonds generate income. No one will take that income from them. They should just hang in there and do nothing.

Even if I was pretty confident that the decline will continue?and I think it’s more likely than not?you’ve not only got to get out right, you’ve also got to get in right. You must be right twice.
So if you get out now, and the market goes way down another 15 or 20%, which is quite possible, they will be so scared they won’t get in.

[…] It’s not a good idea to time the market. In the long run, investing is not about markets at all. Investing is about enjoying the returns earned by businesses. And the stock market is nothing but a giant distraction in that quest to acquire returns that business earns. It overmagnifies everything. Investors get scared. Their advisors get scared. And you get exactly what we’re having?a bit of a mess.

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  1. Steve Austin says

    Of course one wants to be in the market to enjoy her/his share of corporate earnings.

    But investing is also about exploiting the greed and fear of others. It is difficult to time the entire market, but much easier to time an individual investment (this is called value investing). On the road to owning the market, one is enriched by buying stocks at a discount and selling them at a premium.

    Investing with a blindness to market price is like not clipping coupons or not shopping around for the best deal as a household consumer. Buy cheap, sell dear. It works for the household; it works for the portfolio.

  2. Steve Austin:
    You are describing “trading” not “investing”. VERY different animals.

    To paraphrase Bogle, you are buying a piece of a company and it’s future earnings. The value of the company will increase or decrease because the estimated future earnings are increasing or decreasing. Day to day swings are caused by fear, traders, market makers, terrorism, rumors, etc.

    To illustrate, an analogy might be investing in breadmaking vs being a breadmaker. In one, you are giving you’re money to someone you trust to operate a business – you’re up at night wondering if he knows what he’s doing. In the other, you are making, buying, and selling loaves – things like customer sentiment, the cost of flour, etc keep you up at night.

    In this current market, if you’re a breadmaker, ie trader, you probably wouldn’t be sleeping very. If your an investor, sit back and have some bread and olive oil.


  3. Thanks for your two comments. It’s almost like the two sides of my brain are talking to each other. I like the idea of value investing, the engineering and competitive sides of my brain wants to find that instrinsic value of a company and only buy if the price is cheaper. However, reading Bogle’s recent writings really did calm me down.

    With value investing, I have to be consistently right for the next 40 years about my picks. With investing in the market, I just have to trust that businesses as a whole will continue to make money. I think the former is definitely a risky bet, while the latter is virtually a sure thing with diversified investments.

  4. Jonathan: The value thing seems way too faddish these days…when *everyone* says value outperforms growth then value becomes overpriced. It’s sort of like junk bonds in the 80s, promising “the return of stocks with the risk of bonds” but they didn’t deliver. Any “edge” disappears over time.

    My take-home message from the first 3 messages is to stay with “Core and Explore.” Put 75% to 95% of your money into low-cost indexes, contribute bi-weekly or monthly, rebalance yearly, and do whatever you want with the rest.

    The greed/fear cycle is dead obvious to anyone who follows stocks. Trading blends investing and gambling, so there’s always the chance you could get rich. Just don’t risk so much that it’ll harm your retirement or desired lifestyle. If you enjoy trading keep your old car an extra 2 years and spend the savings on it.

  5. Steve Austin says

    To a question about applying value investing outside of stocks, Buffett once replied that “All investing is about value. What other kind of investing is there?” His astonishment at such questions stems from his education at the Church of Graham & Dodd, where investment is defined as thorough fundamental analysis leading to safety of principal and satisfactory return. (And anything that is not such an investment is speculative.)

    One may wish to entertain that index investing is passive speculation. Bogle will buy you pieces of companies and slivers of earnings streams. But, earnings at what price? Indexing doesn’t care about price, and therefore an indexer is at the mercy of the index as to whether she/he over or underpays for said market-wide corporate earnings.

    Jonathan, you say that with indexing you only have to trust that businesses will continue to make money. But you also must trust that the market players collectively continue to trade at current (or higher!) earnings multiples. I consider that speculation, albeit passive and very well diversified speculation. There is no sure thing in the marketplace, not even virtually.

    One more note for TallWes. I reckon that you may be conflating trading and speculation, or the kind of technical analysis and momentum investing that “day traders” do. To me, trading is a perfectly neutral term, and is something that everyone has to do (even if only indirectly) in order to participate in a marketplace. When a speculator sells a falling stock to an investor who finds that stock undervalued, they are both trading: the speculator’s stock for the investor’s cash. So I hope you find humor in this kind of struggle of vernacular, whereby you call my investing “trading”, and I call your investing “latent speculation”. 😉

    Finally, I should say that I have nothing against Bogle. I love the guy and his quest for the lowest cost products for consumers. I just get concerned when I begin to see indexing taken on faith. Just because Bogle gives us a great product doesn’t mean that we should fail to think carefully about what indexing really is and means for our long-term financial security.

    For example, in the final Bogle quote in the original post, he belies his own big-picture perspective: “the stock market…overmagnifies everything…and you get…a bit of a mess”. In the big picture, there is no mess (not even a bit) in the stock market (or the real estate market, for that matter). Humans are hard-wired for greed and fear for perfectly natural reasons; therefore, what is happening in the stock market right now is perfectly natural. Excesses get squeezed out, and voids get filled. In fact, if this *didn’t* happen, I’d consider that *more* of a mess that what we have now.

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