Reminds me of this:

http://news.bbc.co.uk/2/hi/health/7263476.stm

“The report, which examines how banking crises have affected health in the last 40 years, is one of the first to look at the relationship between the two. When a financial crisis hit a developed country, heart attacks rose by 6.4%. This figure was even higher in the developing world, the Globalization and Health journal study suggested.”

I was asking to get whacked. I stuck my nose in someone else’s conversation. And even though the guy looked like a trainer, he talked like an equity saleman (the retail, not institutional variety) which may have explained the reaction. (I do have a bad tendency to give people form pointers if I see them doing things that are likely to lead to injuries, but I’ve mastered how and when to do that without looking out of line, and people are usually appreciative. So the gym injury prevention mission got extended to the wrong context. But it was instructive nevertheless).

That’s a very persuasive line of argument. I’ll have to remember that if I ever need to dissuade someone who has taken a shine to a risky opportunity.

Anon of 11:59 PM,

I’ve found my attempts at humor or irony on line are sometimes misunderstood. It is easy to misread tone. Apologies.

I had a similar discussion (although much more civilized than yours, it sounds like with a friend who just last month was thinking about putting some money in a hedge fund. He literally stopped me in my tracks when he said this. He said he had been talking to some person who was working in a hedge fund who was talking about consistent 30% gains, etc. etc.

I told him the data shows that hedge funds rarely beat the S&P (especially given their high expenses) even before you take into account the high degree of survivorship bias and unreliable reporting.

What’s interesting though is that I turned the question around and said he should decide on an asset class not based on expected return, but how much risk he could stomach. I asked him if he could stomach losing 50% of his lifesavings at one point, even if in the end things worked out okay? He said sure, and I replied “Congratulations. You have the risk tolerance to be investing in plain old stocks and index funds. And nothing more.” People forget that the definition of a bear market is at least a 20% decline. You’ll experience at least several of these over a lifetime of investing. The 1987 crash saw a 22% decline in one day. The 2002 tech bubble bursting saw the NASDAQ lose 78% percent of its value. We’re closing in on a 20% decline right now, with no end in sight just yet.

While 20% sounds like a middling number, people (like my friend) who haven’t seen 20% of their life savings go up in flames don’t understand what it does to you viscerally and emotionally. Indeed, I recently saw a study that while the aggregate returns of the S&P over the past 40 years is >10%/yr, the return of the average investor was something like 4%/yr (barely beating treasuries). The difference is that retail investors don’t have the stomach to tolerate big declines, and so they get out during bear markets, losing out on the recovery (before coming in just at the peak again…)

At any rate, my friend is holding off on hedge funds for right now. But I’m sure he’s itching to get into commodities right about now

I’ve been hearing all day about the PPT keeping the Dow up just so that Joe 6pack would overlook the Fed bailing out a major investment bank. Most average joes pay attention to the Dow, and they certainly don’t care what happens intraday.

BTW, Yves, my comment about crashing was in response to the the first comment, not your post. Keep up the good work.

I was kidding, and it was an excuse to get that tidbit out to see if anyone had heard anything similar either back then or more recently.

But that was a generation ago. And the money management business has exploded in the last 25 years. Which means an awful lot of people managing money can’t conceive what can happen over a 10-year period. They might see it on a long-term chart, and they might have heard us old farts talk about it, but they haven’t experienced it themselves. So not real at a deep visceral, intuitive level, like it is with us.

Since 1987 it’s been the same refrain with the stock market. A crisis from somewhere shakes the market. The fed acts. The market rallies to new highs. That “reality” won’t change until one or two instances where the fed acts and people lose money in the market.

That’s going to take some time. Hence, a great trader’s market lies dead ahead for at least a year or two.

TomD

If you want to get into conspiracy theory mode. I heard in 2000 from someone I consider credible that the Fed (aka “The Turk”) would trade the S&P…..

The word “crash” appears nowhere in this post. But per Lune and in the intro to the Bloomberg material, a price fall of this magnitude on a day when the dollar was down sharply is the converse of what you’d expect.

And per Lune, the Dow being up is weirdest of all. although it spend most of the day in pretty serious negative territory. The foreign markets consistently have taken the credit mess more seriously that we have (there have been lots of days when 2%+ falls in the rest of the world have been followed either by a vastly smaller decline here or even a modestly up day). I’d like to understand that too.

A hedgie who writes sometime said he was expecting a double digit down week and mentioned some others who shared his views.

I got in an argument in the gym yesterday (never a good idea, on a par with trying to teach pigs to fly) with a guy no older than 35 who was telling a buddy that now was the time to buy stocks. Thanks to the blogging, I had all the facts (typical bear market pattern, the Reinhart/Rogoff stuff about GDP performance in housing market declines, our balance of trade deficit). He disputed my facts and argued that the consensus was that the market was going to go lower, ergo, there is a buying opportunity (and then started on an ad hominem attack, that if I was so down on the economy, I should go live in Singapore…it went on from there).

That says to me that one factor may be that the Greenspan conditioning to buy on dips is still alive and well. When people get angry in the way he did, it’s usually because you’ve somehow threatened their value system. There are those out there with a near religious belief in stocks as an investment.

I’m old enough to remember that stocks were once regarded as speculative. Peter Lynch in one of his book said when stocks were regarded as safe was when they were the most risky, and when they were seen as dubious was the time to buy. I don’t think people have doubted the merit of stocks since the mid 1980s.

I’d love to hear other views.