
Megan McArdle: The Great Stock Market Myth - cwan
http://www.theatlantic.com/magazine/archive/2010/09/the-great-stock-myth/8178/
======
aspiringsensei
There's a bright side in this: seriously.

If we don't live our lives with the expectation that we will _finally_ begin
enjoying them when we retire, we might begin living our lives to our more
short-term satisfaction.

Not that saving for retirement is stupid - it isn't - but working at a job you
hate because it will provide retirement benefits is.

Take vacations now, go skiing now, spend time with your kids now...those are
the takeaways. I hope the "countdown to retirement" mentality ends as a
casualty of future uncertainty.

~~~
roc
I don't know anyone who's slaving away with the expectation of retiring to a
permanent vacation. If that was a pervasive mentality, it must have been a
regional, industry, or generational thing, because I've never even encountered
it.

In fact, when my peers/friends/colleagues do talk about retirement, that
conversation usually begins and ends with a quip along the lines of "what
retirement?".

There's 1. almost no expectation that any of us will be _able_ to stop working
until we're physically sidelined, short of making 'fuck you' money. And 2.
almost no _desire_ to stop building things, even if we _get_ 'fuck you' money.

After all, it's not like we're retiring from the factory floor. We might not
be mountain biking on the weekends during retirement, but it'd take teams of
orderlies to keep us from writing software.

I sometimes wonder about the first wave of digerati that hit 'retirement'.
Things like a World of Warcraft for the fixed income set seem guaranteed.

But what about the code they _write_? Will the elderly coders follow tradition
and dismiss new technology and just support "old school" projects to the end?
Will they keep on the edge but churn out solutions more geared to their
current situation (less motor control, less faculty to waste on cryptic
commands, etc)? Or will their code and goals not be notably different than the
new generation at all?

~~~
run4yourlives
_I don't know anyone who's slaving away with the expectation of retiring to a
permanent vacation._

No offence, this is probably because you are generation Y, well educated and
surrounded by start-up mentality or in college.

Consider yourself lucky, but don't consider yourself the norm (yet at least).

~~~
roc
I never claimed my experiences were normal. I just questioned how widespread
belief in the Boomers' retirement myth could be in the rest of the populace,
if I'd never so much as _met_ a believer. (I didn't mean to suggest Boomers
who were 5 years out didn't believe or weren't still banking on the myth. I
was talking about the younger generations.[1])

My circles do contain a disproportionate number of creatives and the self-
employed/start-up types - but you're off by a generation. And maybe half have
degrees; if that.

The biggest de-normative aspect is surely that my family/friends/colleagues
are all in and around Detroit: where high unemployment and essentially no
economic growth has been _normal_ for a decade.

[1] You know the boomers sure complain a lot about the 'attitude of
entitlement' among the younger generations. But who was it that _actually_
mortgaged our future for their present?

~~~
run4yourlives
I'm not even going to attempt to argue anything in favour of the boomers. As a
gen X that's against my DNA and I fear I may spontaneously combust if I
entertain such thoughts.

The point is this however: the boomers _are_ the norm. By literal definition.
We (that's you and me both) are not, and we wont be for a while.

------
rada
I really feel that the article missed the biggest reason why "the stock market
may never recover", i.e. accounting fraud.

Today's case in point, Cisco (CSCO).

First, this early morning post from a respected financial/economic blog:

 _Reading headlines alone, one might wonder if two headlines from today on
Cisco were from the same quarter. Bloomberg reports Cisco Misses Estimates on
Sluggish Corporate Spending. Meanwhile, the Wall Street Journal reports Cisco
Profit Jumps 79%._

Sounds like a great opportunity to go long Cisco, right? It's trading down 9%
on the missed estimates news while in reality, having your profits up 79% and
same-quarter sales up 20% over last year, especially in this economy, is not a
bad thing.

But wait, here is a later post from another equally respected blog:

 _The book cooking continues. CISCO comes out with "great" earnings but hidden
in there is the fact that they're writing their own financing - and holding it
off-book. Better hope $21 holds, because if it doesn't it's a LONG way down._

Wait a second - so those supposedly realized profits are really just an I-owe-
you note from Cisco to itself? Ok then.

Here is my point. _Almost every company out there is hiding assets and
liabilities off balance sheet where nobody can see them._ It's fun to talk
about complex economic theories but come on, the biggest reason the average
investor can't get performance out of the stock market is the book cooking.
Had the banking industry not held all that subprime risk off their books, the
market would _not_ have seen all that volatility, and we _would_ have seen
real Dow growth.

As things stand, value investors short of a team of private investigator-style
analysts simply cannot afford to trust their own judgement. When the SEC stops
focusing on Martha Stuart's insider trading and start going after the real
issues, the stock market will recover, democratization or not.

~~~
cynicalkane
There's all kinds of things wrong with what you said, but I'll focus on the
off balance sheet asset claim.

Sure, almost every company "hides" assets and liabilities off balance sheet
because it's _standard accounting practice_. There's lots of rules about it
and it's perfectly reasonable to do in many situations. For instance,
securitized risk is held off balance sheet because it effectively isn't an
asset, liability or risk to the company that securitized it anymore. (That's
the whole point of securitizing risk.) It is in general not true that "nobody
can see them", since stuff like this generally has to be declared in financial
reports. Yeah, you can't see it... if you're a lazy investor who just reads
the quarterly financial statements and thinks that constitutes responsible
investing.

There are some companies that try to cook the books and game the rules.
Surprise. Whenever there are rules people will try to game them. All this tin-
foil hat nonsense about "book cooking" as reported in "respected blogs"
leading to the ruin of "almost every company" and the entire stock market
seems too silly be true.

~~~
rada
I think you are making some very valid arguments however I disagree with the
principle of your position.

1\. Status quo.

Yes, it's standard accounting practice to move huge amounts of liabilities off
the balance sheet. Yes, whenever there are rules, people will try to game
them. So what? It's wrong, and the status quo doesn't make it less so. When
people like me call it out, it's not because we were born yesterday and have
somehow missed the big bad world in front of our collective face. It's because
we recognize that complexity (as applied to this situation) is made up to
maintain the above mentioned status quo. When I had my startup, I chose to
book profits on a cash basis instead of an accrual basis because I felt it was
the sane thing to do. Would it have been perfectly legal for me to choose the
accrual basis? Of course. Would it make any sense to pretend that I've made
thousands of dollars where I've made zero? I don't think so. I am not
comparing myself to Cisco but I don't think it's right for Cisco to pretend
that their fantom profits are real either. Lucent did that and they are now
bankrupt.

2\. Lazy investor.

My apologies for the dramatic comparison, but the "lazy investor" argument is
a bit like the rape victim argument. First you are going to say that the
investors who do not pore over financial disclosure documents deserve being
"misled" because they are lazy. Then you are going to say that the Nigerian
scam victims deserve it because they are gullible. How long before you say
that a young woman is "asking for it" when she goes to a bad neighborhood at
night, alone? I am not saying you personally would subscribe to that argument
of course, I am just pointing out that if you take that logic to its
conclusion, only the strong survive, and that excludes all of us. It's no more
realistic to keep up with miles and miles of financial disclosures and other
assorted small print than to keep out of bad neighborhoods at all times.

3\. Tinfoil hat nonsense.

I am not the biggest authority on the stock market but is there not a clear
consensus that the current devaluation was caused by the financial firms'
failure to recognize mind-boggling amounts of liability on their balance
sheets? Perhaps I am misunderstanding what you are trying to say but it seems
to me your last point was that that's just a wacky conspiracy theory. What do
you attribute the devaluation to then?

~~~
cynicalkane
Your post reads like it belongs on Seeking Alpha, with its mixture of bizarre
rhetoric and utter misunderstanding of the stock market.

I won't bother with responding to your whole post, but let's address one
particularly wrong statement of yours, as an exemplar of what's wrong with
everything you write:

"I am not the biggest authority on the stock market but is there not a clear
consensus that the current devaluation was caused by the financial firms'
failure to recognize mind-boggling amounts of liability on their balance
sheets"

No, this isn't true at all. First, the current "devaluation"--by which I
assume you mean recession, because it's not obvious what else it could be--was
caused by a number of things. Second, there is no "clear consensus". Third, in
general, banks were brought down by on-balance-sheet liabilities. In
particular, I recall reading dozens of news items on write-off after write-off
of subprime debt, _which must be on the balance sheet to count as a loss_ ,
else the financial statements don't add up. Fourth, you seem to be confusing
the technical accounting meaning of liability with the general meaning, but
let's not get into that.

One more thing--the role of capitalism is not to provide capital owners with
free money; people who expect returns must put in the time and effort ensuring
the capital is going to good use, market economics dictates that this will in
general be hard, and it is utterly bizarre that you compare _not getting free
money_ to _rape_. I find it befuddling and sickening that you would dare to
say such a thing. Put aside your e-rage and think about it for a second.

~~~
rada
Whoa, dude. What a case of a kettle calling the pot black. You've just said
that: you are befuddled and sickened by my post, everything I write is wrong,
my post is bizarre, my opinions are tinfoil hat and too silly to be true, I
have an utter misunderstanding of the stock market, I am confused about basic
accounting concepts, and finally, how dare I express my opinion.

Add to that how you open your posts. I started my response to you with, _I
think you are making some very valid arguments however I disagree with the
principle of your position._ You started your 2 responses to me with, _There's
all kinds of things wrong with what you said_ , and _Your post reads like it
belongs on Seeking Alpha, with its mixture of bizarre rhetoric and utter
misunderstanding of the stock market._

Do you see the difference? I acknowledged, even complimented, your arguments,
and expressed a personal difference of opinion. You on the other hand, started
both responses with a categorical judgement that I am ignorant, wrong about
everything, and crazy to boot.

And you think _I_ have e-rage? For real?

Ok, on to more reasonable conversation.

First, I did not mean "recession" when I said "devaluation". Why would you
take a word I actually used and say that I meant a different word? What I
wrote was, _I am not the biggest authority on the stock market but is there
not a clear consensus that the current devaluation was caused by..._. Which
part of "stock market" was "not obvious"?

Second, of course I did not compare not getting free money to rape. Again,
you've completely twisted my words (especially since I apologized for the
dramatic comparison ahead of time). My point was, blaming investors who become
victims of accounting fraud is similar to blaming rape victims. In both cases,
the focus is shifted from the crime onto the carelessness of the victim and I
think that that's wrong.

~~~
cynicalkane
The thing is, I'm not really interested in a blow-by-blow pseudo-discussion
with someone who's convinced himself of some strange alternate view of events
and refuses to acknowledge any challenge to this world view. I tried to cut
things short and attack the sweeping, fundamental fallacy, but you insist on
sticking to surface disagreements, perhaps as a way of shielding yourself.

"Well," you say, "you make a good point, but you see my view of what
constitutes 'widespread accounting fraud' is different from the standard view,
but my uninformed view is right and everyone else's is wrong, so you're wrong,
too. Also, I'm being _civil_." I'm not really interested in talking to someone
who thinks like that, so I'm done.

------
chrismealy
Assuming McArdle isn't secretly worried about Marx's declining rate of profit
in capitalism, then maybe returns to capital are falling because returns to
labor are increasing. That should be good news for people who work for a
living -- unless the only workers capturing those gains are in the boardroom.
Uh oh.

BTW, average (geometric) returns for the US have been around 6% after
inflation. The global average is about 5%. No country has averaged as high as
8%.

[http://chrismealy.blogspot.com/2009/08/real-return-on-
stocks...](http://chrismealy.blogspot.com/2009/08/real-return-on-stocks.html)

In the old days (before the 1970s), with expensive brokers, expensive
commissions, no index funds, and taxes incurred from rebalancing, just getting
the average market return easily could have eaten up 2% of your return. It
shouldn't surprise people that stock returns would fall as costs fell. The
after-expenses return was never as high as those historical charts suggested.

~~~
brazzy
_maybe returns to capital are falling because returns to labor are
increasing._

From everything I see, the opposite is the case, at least in the USA and
Europe. Maybe it's the Chinese labor that's getting a bigger share of the
returns.

But I suspect that most of the "missing returns" go to those that exploit
weaknesses in the financial system and know how to hide their profits, i.e.
investment banks, hedge funds etc.

------
gamble
It seems strange to me that the comments on this thread are so dismissive of
retirement. Retirement is FU money for the average man. Planning for
retirement doesn't have to mean ignoring the present, or wasting away on a
beach in Boca when you hit 65. What it _does_ mean is having the ability to do
or work on whatever you want. By the time you hit sixty and realize you've
only got another ten or so good years left on this earth, that kind of freedom
is going to seem like the most precious thing in the world.

------
api
I have never believed in retirement, nor have I ever thought that I would get
social security or that any magical financial system would allow me to
"retire."

I would like, in my later life, to maybe step down into more scholarly
pursuits. But I'm sure I'll still be doing something for revenue.

~~~
hyperbovine
Isn't it funny? The idea that you could spend you entire professional career
at, say, GM, retire at 65, and live out your years on a comfortable pension +
social security, seems so amazingly quaint and outdated. I can hardly believe
that that was the universal expectation in this country just a few short
decades ago, but my elders insist it was true. _Nobody_ in my peer group
(millenials, I think we're called) seriously thinks they are going to see any
of the money we are paying into social security. Pension? What's that again?

On the other hand, the expectation that we are going to be working forever
seems to have made us dwell a lot more on what job fulfillment actually means,
which is probably a good thing--not too many people I know are willing to put
up with the sort of "deferred happiness" model that prevailed in earlier
generations.

~~~
kiddo
I hope this attitude about not expecting to see any of the money you're paying
into social security ends soon. You're paying money in and so you should get
it back when you're older. If this young generation gives up on getting their
money back then their fears will come true. It's politics. You get what you
collectively ask for. Bottom line: don't lower your expectations. Demand, and
you should get.

~~~
robryan
And where exactly will this money come from without making it even worse for
the next generation?

~~~
brazzy
In the end, money is a fiction. It's all about allocating the benefits from
current production.

Social security schemes and government-guaranteed pensions mean that the
government (=the voters) decides how much each currently productive worker has
to give away, and how much each retiree gets.

Private retirement funds mean that for each retiree, the amount of money
earned from their own former productivity which they relinquished into their
retirements fund AND the amount of money they acquired otherwise and put there
AND the management of the fund AND other economical factors influencing it
decide how much that retiree is allowed to take away from those currently
productive.

Finally, the millenia-old "retirement plan=loving children" means that how
much each retiree gets depends on how many children they were able to have,
how many of those survived, how productive they are, and how much they're
willing to give up according to their character, how much they love their
parents or how much social pressure towards supporting your parents there is.

------
joezydeco
Remember back during the Bush II era when we all thought we could put all that
Social Security money into the stock market? Didn't we all have fun back then?

~~~
lrm242
Yes. I feel much better right now knowing that Social Security is bankrupt and
its obligations will only ever be met through the federal government's
printing presses. Aren't we all having fun now?

~~~
lutorm
Social Security is not bankrupt. It has massive assets, and is fiscally sound
until sometime in the 2040s. The problem is that the government has borrowed
that money and used it for other stuff. It now needs to start paying it back,
but that's no different than any other loan you make.

~~~
anamax
> [SS] has massive assets

Those "massive assets" are T-bills.

If push comes to shove, who do you think will get shafted - SS or China?

More to the point - how much are you personally willing to pay to maintain the
SS benefits for folks 10-20 years older than you? How much do you think that
folks who are 10-20 years younger than you are willing to pay to maintain your
SS benefits?

~~~
jbooth
What happens if we put it all into the stock market and the baby boomers
retire?

I really don't want to see a stock market that has 3x the money coming out as
is coming in.

~~~
anamax
The stock market is ownership of various kinds of assets. The demand for those
assets will change. However, it is world-wide. And, there are income producing
assets. Folks are saying "I'd rather have an iPad than $400 even though I know
that that ipad costs only $35 to make".

T bills are a claim on future US tax revenue. That's very different.

~~~
jbooth
You didn't even begin to address my question, you just threw out a bunch of
hand-wavey silliness about how "ownership" and "assets" makes everything ok.

What happens to the prices of those assets when the baby boomers retire and
are pulling out more money than there are young workers putting in? You have
the same problems as SS. What if we had all of that SS money in the market?
It'd be a disaster.

~~~
anamax
The whole world didn't have a baby boom at the same time.

WRT companies that produce stuff, the critical time is not when boomers
retire, it's when they stop spending money. Fortunately, many will stop when
they die, which reduces demand and the "load" on both the stock market and SS.
Again, the whole world thing is relevant.

And, since boomer spending is income for later generations....

Do you really think that money invested in the stock market is like SS
obligations? (Here's another difference - Congress can repeal SS whenever it
feels like it.)

------
mbateman
> But regulation hasn’t stopped the [pension] plans from being underfunded, in
> part because the regulators, who worried that companies would use pensions
> as a slush fund to smooth their earnings, kept them from overcontributing in
> flusher times.

Why would this sort of smoothing need to be regulated away?

~~~
brazzy
My guess: because it could be used to evade taxes.

------
hop
You have to take the much longer view when you talk about the merits of
investing pensions or SS in stocks. The compounding affects of a broad S&P
portfolio will destroy an all bond portfolio in a 20-30 time frame.

And now that we are printing all this money and have massive unfunded
liabilities, there will be serious inflation in the next 20 years - I have no
idea when, but bond yields will drop or become negative at some point while
equities will perform much better. And this is Charlie Munger and Warren
Buffett's view as well.

~~~
fr0sty
> there will be serious inflation in the next 20 years - I have no idea when,
> but bond yields will drop or become negative at some point.

These two statements are contradictory. Bond yields will skyrocket in the face
of inflation. If you meant bond prices (which move inversely to yields) then
you would be correct but your assertion, as presented, is false.

Also, please pick a 20-30 year timeframe in the last century where investment
in bonds (for the entire period) would have underperformed (be destroyed, in
your words) the S&P 500 for the same period.

------
maukdaddy
I wish this article had spent more time talking about dividends in addition to
price appreciation in stocks. If the equity premium is indeed going to be
lower for the next few decades, then you should start to see increasing
dividends to reward stockholders.

We might have to get out of the "holy shit I gained 400% on this stock in 6
months" mentality and instead start learning that an income producing basket
of dividend stocks at 6% is the way to save for retirement.

------
stretchwithme
Consider the gold versus dow ratio:

    
    
      http://seekingalpha.com/article/141811-the-importance-of-the-dow-gold-ratio

------
hristov
It is a standard operating procedure for republicans after they fuck up to get
philosophical and start talking about overall trends in the economy and
generally treat the whole economy like some kind of force of nature that ebbs
and flows on its own and that we cannot do anything about.

While there is an economic cycle its effects can be rather mild if properly
managed.

The fact of the matter is that the dismal performance of the stock market in
the last 10 years just matches the dismal performance of the overall economy
in the last 10 years and is simply the result of terrible leadership.

Yes, it is mostly the fault of George Bush, and Alan Greenspan and Bernake and
the new brand of "conservatism" that got popular in America in the later
Clinton years (and that includes a lot of conservative democrats). I put
conservatism in quotes because this is a type of conservatism that is foreign
to many actual honest conservatives.

I do not have the time to list all the fuckups, but let me just list the
important ones: rampant financial deregulation while still ensuring that the
government will guarantee the banks, incredibly expensive wars all over the
world without honestly taking the expense into account, a policy ensuring high
oil prices for a country that is the greatest importer of oil in the world,
trying to fix the effects of wars and high gas prices with low interest rates,
when any economist will tell you that these are not things you can fix with
low interest rates, support of outsourcing and all kinds of policies that
destroy the earning potential of the middle class, refusal to invest in
infrastructure, etc. etc.

So the stock market is doing badly because the economic policies we had in the
last 10 years failed. That is pretty much it.

------
bsandbox
Along with 8% return, the other big constant in retirement planning is
retirement age of 65. Over time, this is going to be seen much more as a
variable than a constant. If markets don't perform, retirement age is going to
rise pretty dramatically.

------
predictibility
Don't worry! Planned War World III by the elites, who by the way were
beneficiaries of this retirement scam, will solve all problems. Now when
peasants are no needed, they will rid off most of them. The Iran war drums are
beating.

------
amh
To arrive at the scary 40% required savings rate, the article assumes an
accumulation period (working lifetime) of 30 years. How many people do you
know who started working at 30 and retired at 60?

~~~
roc
Accumulation period is distinct from employment period.

How many people do you know under 35 who were seriously saving 10% toward
retirement?

~~~
robryan
People should be realistic, if they want to retire with a decent income then
they should save. If they don't save then get angry about it later then they
don't deserve much sympathy.

