Returning to Earth

James Pope |

DIS and DAT - Returning to Earth - August 2021

Our periodic communication that reminds you to ask, “Should I react to those headlines?”

Most of American life consists of driving somewhere and then returning home, wondering why the hell you went.   John Updike

                A recent Jason Zweig article titled “When a 59% Annual Return Just Isn’t Enough” in the Wall Street Journal caught my attention. The author referenced a small survey where 750 U.S. individual investors expected to earn 17.3% this year, after inflation.

                If you have read our Dis and Dat’s very long, you know that we believe price predictions are worthless to a true investor.  You will also know that a lot of investors determine their future expectations based on recent past price performance.  It will probably not surprise you to hear that last year the sp500 had a return of 18.4%.

                On October 16th, 2008 Warren Buffett wrote an Article in New York Times, titled “Buy American. I Am”.  He was writing about the gloomy outlook for stocks, and how people who hold cash feel comfortable.

For our own sanity, let’s review the reality of returns currently available in the beginning of July 2021:

                Earnings yield of the SP 500 2.51%

                Ten year us treasury yield 1.44%

                30 yr mortgage rate 3.02%

                12 month us inflation rate 4.99%

And one more reality, it’s not likely that those individual investors who participated in the study are all above average investors.  According to past Dalbar studies investors have a tough time even keeping up with inflation on average.

Suffice it to say it is highly likely that these investors expectations for their future investment results are too high.

What can we do to avoid drinking the Kool-Aid ?

The first item that I would tackle is mindset adjustment. Amateur investors tend to believe that investing is only about “smarts”.  Naturally after a good period of investment returns, they begin to label themselves as “smart”. This, however, can be a faulty and dangerous mindset. More of the old, surviving investors refer to successful investing as having more of a patience requirement. I prefer to take instructions from the old surviving investors.

As investors we want to avoid predicting future returns.  Predicting future returns fall more under the gambler or speculator’s job responsibilities.  I am not trying to predict future returns here.  I am sharing that it is my experience average investors have alternated between optimism and pessimism.  If we want to behave as investors, we should avoid these high expectations.

WHY, what harm could come from such a popular activity, one may ask?

My belief is that expectations this high can distort the view of RISK. It can make novice investors believe there is no risk; And taking risk too lightly can be a deadly investment experience.

Focus instead on the realistic risk and returns of investing.  Focus on YOUR unique situation. Tune out the noise of speculators, gamblers, and those media outlets who receive their ad revenue from such sources.

As investors, we must patiently wait for speculators and gamblers’ return to earth. Instead of joining their ranks, we can review the last point of our investor’s mindset

We are not seeking outperformance of all investments at all times. If a popular momentum-driven pricing environment in any area of investments occurs, underperformance of that area is expected.

Thanks for your attention, and

                I hope this helps.  Be safe,



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