How to Stop the Next Bull Market

Beyond Buy-and-Hold # 44

Bull markets cause bear markets. Bear markets cause economic crises. So we need to do all we can to stop bull markets.

But how?

Here are seven ideas.

1) We should encourage the news media to report not only the current level of the Dow and the S&P 500, but also the valuation-adjusted level. At the top of the bull, stocks were priced at three times fair value. That means that, for each $100 we invested in stocks, we obtained $35 of lasting profits-generating stocks and $65 worth of cotton-candy nothingness. Had we known how much of our wealth we were flushing down the toilet with each stock purchase, most of us would have sold some of our stocks and the bull market would have collapsed much sooner.

2) We should open the internet to honest posting on investing topics. Posting on the dangers of Buy-and-Hold is banned today at most large investing sites. The published rules of all the sites permit honest posting but Buy-and-Holders insist on bans because it upsets them to see what the academic research says about the odds of their investing strategies working out. But the additional losses they suffer from not learning the realities ultimately causes them even more emotional pain! Our social norms do not support bans on honest posting. We need to accept the wisdom of those social norms and extend their reach to the discussion of investing topics.

3) Policymakers should educate voters about the damage that bull markets do to our political institutions. Both Republican and Democratic lawmakers often promise to take action to reduce the Federal budget deficit. But the budget deficit is a small matter compared to the debt we incurred to future investors during the bull market of the late 1990s. The entire Federal debt accumulated since the days of George Washington is about $14 trillion. In just a few decades of promotion of Buy-and-Hold Investing, we incurred a debt of $12 trillion and that is a debt that must be paid off within 10 years or so.

4) We should create as many calculators containing valuation adjustments as possible. In my efforts to teach middle-class workers of the dangers of bull markets, I have found the five calculators I provide at my web site to be the most powerful teaching tools available to me. In this field, it is not a picture that tells a thousand words but a number. One of the big contributing factors to the last bull market was the calculators telling investors that they could expect to see gains of 6 percent real on their stock investments even after prices had reached levels where such expectations were wildly unrealistic. People place more confidence in numbers than in words. We need to make an effort to get the numbers right.

5) We should encourage Money magazine to run a series of cover articles by various big names who have promoted Buy-and-Hold exploring the theme of how they were taken in by the spell of Get Rich Quick thinking. How they came to discover their mistakes and what they will do different in the future to make sure that they are not fooled again. No one person caused the bull market. It was a community effort. We need as a community to work through the pain we are feeling as a consequence of it. One way for us to do that is for our ?leaders? to acknowledge their mistakes and thereby generate a national debate on the failure of Buy-and-Hold in which we all can participate.

6) We should encourage more independent thinking among personal finance journalists and bloggers. Too many of today?s money journalists see themselves as stenographers for the stock selling experts. Money topics are serious topics. Middle-class people need to hear the straight story about investing.

7) We should encourage people with less in the way of numbers skills and more in the way of emotional insight to enter the financial advice field. This game is 70 percent a matter of reining in the Get Rich Quick emotions and only 30 percent a game that is won by understanding how numbers add up. There are too many people in the field today who are good with numbers but who possess few of the skills of the detective or the novelist or the psychologist or the teacher.

Rob Bennett believes that the new great depression will not last long. Rob?s bio is here.

( Photo from Flickr by Helico )

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