The Simple Dollar Weekly Roundup: Insectary Edition

Lately, my children have been spending their evenings catching insects of various kinds. They run out into the field behind our house, try to catch crickets and grasshoppers with their hands, and run back to show me the things they ve captured.

This has been a wonderful chance to teach them about being kind to living things (they now know to release what they catch), as well as all kinds of lessons about life science.

Their favorite discovery was dried milkweed pods. The other night, they pulled open a few dozen pods and tossed white tufts into the air. It was breezy, so the air was filled with these little white fuzzy floating seeds.

The Benefits of Being an Employee Jobs are stable. They re usually straightforward in terms of what is expected of you. They often pay out benefits, so you don t have to worry about things like health care. Jobs have a lot of advantages. (@ young adult money)

Does Wealth Reduce Compassion? It depends entirely on the person involved. There are wealthy people who really want to use the money to make the world a better place (Bill Gates comes to mind). (@ watson inc.)

Write a Killer Resume This is a very solid guide to resume writing. I have nieces and nephews and cousins who are reaching this stage in their life. (@ this is common cents)

Worth doing We all do things for money, but shouldn t you get some other enjoyment or value out of what you do? (@ seth godin)


How Our Ideas on Stock Investing Got on the Wrong Track

I say controversial things about stock investing.

Most people believe that following a Buy-and-Hold strategy is the way to go. I do not. Buy-and-Hold is rooted in the research of University of Chicago Economics Professor Eugene Fama. I advocate Valuation-Informed Indexing, the investing strategy rooted in the research of Yale Economics Professor Robert Shiller. Shiller s ideas represent a revolutionary (Shiller s word) departure from the conventional wisdom of today.

The big change is that Buy-and-Holders think they are engaging in a neutral act when they rebalance their portfolios. Vanguard Founder John Bogle says that investors should aim to Stay the Course. Staying at the same stock allocation is staying the course, in the eyes of the Buy-and-Holders.

Valuation-Informed Indexers see it as dangerous move for an investor to stay at the same stock allocation at all times. We believe that valuations affects long-term returns. So stocks are far more risky and offer far lower returns when priced high than they do when they are priced low. It is our view that investors MUST change their stock allocations in response to big valuation shifts to have any hope of staying the course in a meaningful way. Investors who rebalance rather than change their stock allocations are permitting their risk profiles to get wildly out of whack by doing so.

If you want to learn more about investing, check out Excess Return and download a great free Investment Guide E-Book!

It is my view that all of the research in this field supports the Valuation-Informed Indexers and that none of it supports the Buy-and-Holders. I do not mean for that claim to be taken as an insult. I view the Buy-and-Holders as good and smart people. My take is that the reason why the Buy-and-Holders believe that the research says something very different from what it really does say is that they made a mistake in the early days that caused their fundamental beliefs about how stock investing works to get seriously off track.

To understand what happened, you need to appreciate the history.

The first point that needs to be made is that the Buy-and-Holders were pioneers. It is common practice today for investment analysts to root their claims in research and data. That was not the case in the days before the publication of A Random Walk Down Wall Street (the book that popularized the Buy-and-Hold concept). In the old days, most investing advice consisted of subjective impressions. We all owe the Buy-and-Holders a debt of gratitude for taking investment analysis out of the dark ages and imposing the accountability that comes with turning the study of investing into a sort of science.

There is a reason why few people long to be pioneers. Pioneering is dangerous. Pioneers often return to camp with arrows piercing all sorts of sensitive body parts.

The Buy-and-Holders got important things wrong because those who go first often get important things wrong. We didn t know it all back in the early 1970s. Research on all of the important questions had not yet been completed in the days when Buy-and-Hold was being developed. So the Buy-and-Holders were forced to take some guesses, and the research that has been done in the 40 years since has shown some of those guesses to have been dangerously off the proper path.

The big mistake was the finding of the Buy-and-Holders that timing doesn t work.

That one is partly true. I rank the partial truth as the second most important insight in the history of investing analysis. It really is so that short-term timing doesn t work and it was an important advance for the Buy-and-Holders to discover this.

Unfortunately, the research showing that short-term timing never works was done at a time when we did not know how important it is to distinguish short-term timing from long-term timing. Shiller taught us the importance of that distinction with research he published in 1981. At the time Buy-and-Hold was being developed, the finding that short-term timing doesn t work was interpreted as a finding that timing doesn t work, period. That s why most of today s investment advisors fail to stress the importance of long-term timing, which ALWAYS works and which reduce the risk of stock investing by 80 percent while dramatically increasing long-term returns.

Is Shiller s work a rejection of Fama s work?

More on Investing

  • What is Value Investing?
  • Successful Investing: 10 Tips for Successful Investing
  • Emotions and Investing: 4 Tips to Keep Emotions Out of Investing

Most Buy-and-Holders see it that way. Most Buy-and-Holders become defensive when the 30 years of research confirming Shiller s findings is mentioned. I think that s unfortunate. My view is that Valuation-Informed Indexing represents a combination of the critical insights of the Buy-and-Holders and the critical correction added by Shiller. I think of Valuation-Informed Indexing as a new approach to Buy-and-Hold Investing, a sort of Buy-and-Hold 2.0.

The Buy-and-Holders made a mistake. That mistake has cost a lot of people a lot of money. That mistake has caused a lot of confusion about how stock investing works both among experts and among regular investors. That mistake has brought on an economic crisis.

Still, the full reality is that our understanding of all areas of life endeavor is achieved in building-block style. We learned a great deal when the Buy-and-Holders showed us that short-term timing doesn t work. Shiller would probably never have achieved his advances had the Buy-and-Holders not laid the foundation for them with their own breakthroughs.

The Buy-and-Holders think that acknowledging their mistake will cause them to lose credit for explaining how stock investing works. I don t think that s right. I think that that acknowledgement of the mistake will permit us to take the genuine insights of the Buy-and-Holders to places we have never been able to take them before. I believe that we will someday look back at the day when the Buy-and-Holders acknowledge their error as one of the most important and exciting days in the history of the core Buy-and-Hold project to learn the truth about how stock investing works.

More Money, More Problems

Jennifer writes in:

I really appreciate the articles you write on frugality. My husband and I are very glad to have simple jobs that we can just walk away from at the end of the day without stress. We don t make a ton of money, but we have everything we need and we don t have the stressful situations that many of your readers encounter. More money equals more problems.

If you actually look into research on the topic, making more than $25,000 a year barely makes you any happier at all. A jump from $25K to $55K in annual salary matches with only a 9% increase in happiness. Beyond that, once you get to $75K and above, happiness actually starts to decline with more income.

This matches almost exactly what Jennifer is saying. However, I don t fully agree with the idea that more money equals more problems. Instead, I d argue that the quest for more money at the expense of other aspects of life equals more problems.

Step back and ask yourself what you have to sacrifice to make a six figure salary. For most people, building a career where they earn a high salary involves quite a lot of sacrifice, mostly in the form of time and energy.

I saw this in my own life. I missed my oldest son s first steps because I was away at a work conference. I remember calling my children on the phone and hearing my son ask when daddy was going to be home again. I remember weekends where I was unable to spend time wih guests because there was some career-related task that was absolutely urgent and had to be resolved.

There were many evenings when I would come home and all I would have the energy to do is kick back on the couch and either play a video game or watch television for a few hours. I remember many mornings where I d tell myself that I was going to do something worthwhile that evening, but when I would arrive home from work, I was just too drained to do it.

When I started The Simple Dollar, it got worse. Most of late 2006 to mid 2008 is a blur to me, because I spent that time giving everything I had to what amounted to two full time jobs (and more).

I was making a good deal of money at the time, but I was sacrificing almost everything else I valued in my life to earn that money.

My relationship with my kids was damaged. My relationship with my wife was damaged. My circle of friends shrunk significantly. Most of my hobbies withered on the vine. I was sick very regularly.

Those costs weren t due to having money. They were due to the effort put into acquiring it.

It wasn t worth it.

I would far rather have a career that didn t damage important aspects of my life and paid poorly than a career that paid me well but ran me through the ringer.

Why not just stop? It seems like an easy way out of the situation, doesn t it? The problem is that many people, once they start earning a significant salary, make financial choices that lock them into that salary. They get under a giant mortgage, multiple car loans, student loans, and credit card debt. They value their perception of success in the community and they can t or won t let go of it.

It s not a matter of more money bringing more problems. It s the chasing of more money and the bad choices that chase sometimes leads to that brings about the problems.

The solution? Live below your means. Don t be the person who is bleeding to get by in a rich neighborhood. Be in a less affluent neighborhood and be secure with your bank account. Don t be the person who has to have the new everything. Instead, enjoy having things that you enjoy and have time to enjoy.

Less money, less problems.