Why investing seems so hard these days

A look back at the past 30 years of investing tells us something about what it takes to be a successful investor in today's market. And why, in a bubble-free market, it seems so hard.

By Bill_Fleckenstein Sep 14, 2012 2:01PM

After reading a Tuesday article in the Financial Times headlined "End to 'alpha' spells trouble for fund managers," by Dan McCrum (registration required), I found myself writing so many comments in the margin that I thought it might be worthwhile to step away from market minutia a bit and subject readers to some of my broader thinking on investing.


What the article seems to say is that, for some reason, it has become vastly harder in the past decade, and most especially in the past few years, to make money as an investor.


It has become harder, because we have been in a secular bear market. But McCrum puts the blame elsewhere: "The skills needed to select securities that worked as stocks and bonds rose in value for much of the preceding three decades have become out-of-date." While McCrum has put his finger on something, he is not correct, for several reasons.


The right place at the wrong time . . .

First of all, the past three decades were not one homogeneous period. Skill was required for the 1980s, but not really the 1990s, while the 2000-2010 period required a mixture of skill and luck. By that I mean, in the 1990s, as the stock bubble was inflated by former Federal Reserve Chairman Alan Greenspan, all you needed to do was conclude that you should be long, and the longer and riskier the security, the better.


(In essence, folks confused "alpha" with "leveraged beta." That is, investors thought their success was because they were managing risk intelligently, when in fact they were benefiting from inflated stock prices, as well as increased risk tolerance, which were both consequences of the Fed's easy-money policies.)


Obviously, that did not work in the early part of the new millennium after the stock bubble burst, until the Fed managed to inflate the real-estate bubble. Thus, until that bubble burst in 2008, there had essentially been a period of almost 20 years where the Fed was basically driving stock prices higher (excluding, of course, those immediately following the collapse of the stock bubble).


Thus, not much skill was called for over these two decades. You just needed to be in the investment business.


. . . or vice versa

What McCrum should have said is that the lack of required skills that allowed folks to do well in that period no longer applies. In other words, the investment business is more difficult now than it was for much of the past 20 years, but not because certain investing skills are now obsolete. It is more difficult now because that period was an anomaly, driven essentially by the stock and housing bubbles.


The other point that the article attempts to get at, but doesn't quite reach, is the role of the top-down, macro viewpoint (as contrasted with the bottom-up, micro approach): "Much of the blame for this (poor performance over the last couple of years) tends to be attributed to the fact that markets now move to a drumbeat of statements from politicians and central bankers, such as the head of the US Federal Reserve. 'All 500 S&P companies have the same chairman and his name is Ben Bernanke,' says Jurrien Timmer of the Fidelity Global Strategies Fund."


While that is a clever and correct assessment of the Fed's impact on markets, it is a slight to the important component of macro analysis in investing. Again, for almost the entire decade of the 1990s, as well as from about 2003-2008, macro analysis didn't matter, as the Fed's easy money drove stock prices higher. However, it certainly has mattered since 2008, and prior to the Greenspan era, it mattered a great deal.


Thus, those who aren't able to analyze macro developments are now at a severe disadvantage versus those who can, with the former complaining that the environment is now "all macro all the time." Of course, it isn't. Different periods are driven by different factors, and while sometimes macro analysis matters more, at other times bottom-up details are more relevant. But both are always important.


So many bad habits were created in the 1990s and over a chunk of the past decade that a lot of people have learned the wrong lessons and have no real understanding of how the investment business works, even though they might be in it.


Data points

The author also seems to suggest one reason managers have done poorly is the proliferation of facts and figures that "have made it far easier to analyse asset prices, but harder to gain an edge over peers by acting faster, or more smartly."


What he fails to realize is that it is not necessarily the volume of information or data that makes one a successful manager, it is knowing what to ignore and what to focus on. All information isn't created equal, and many people fall victim to the problem of knowing the price of everything and the value of nothing. There is no more "real," actionable intelligence nowadays than there used to be; it is just easier to slice and dice mountains of it. Most data are still useless, and therefore should be ignored. (Of course, knowing what matters requires experience.)


What the headline of the article completely misses is that, for the most part, stocks have been in a secular bear market since the equity bubble burst in 2000. Even though there have been a couple of big declines and multiyear rallies, the fact of the matter is that, in the aggregate, stocks have gone nowhere for a decade; also, in the past several years valuations have compressed, therefore making it much more difficult for folks to make money.


The author does seem to arrive at the right conclusion: that the skills to be really successful are "held by perhaps 5 to 10 percent of the current investor universe." I don't know if that is the right percentage, but it doesn't much matter. It is more important that folks realize it is not easy to make money, nor should they expect it to be. It requires discipline, yet flexibility (especially when speculating, as opposed to investing) plus top-down as well as bottom-up analysis. And lastly, one must know how to combine these various factors.


The errors of our ways

One of my personal mottoes is "Often wrong, never in doubt," so lest my criticism lead to the impression that I think I am "always right," let me be clear: One of the crucial elements of being successful as an investor or speculator is dealing with your errors.


When I mentioned that one had to be disciplined yet flexible, my point was that what often happens is you put on, say, a short position, but then come to find out that your timing is wrong. (For those who don't know, short selling, or betting a stock will fall in price, is about timing: when to put positions on, add to them or take them off. Yes, research is important, but managing your positions is far more so, at least in my opinion.) Having the ability to get away from a "great hand," to steal a term from poker, is absolutely critical on the short side.


When one is long, betting a stock will rise, it also sometimes turns out you have made a mistake, but you need to be able to figure out the difference between those instances and random investment noise. That is just as important as timing is on the short side, but far easier said than done. That is why, when a position is small, I will sometimes average down, for example, by buying more of a stock I am long after it has declined from my original purchase price. But if I already have a big position in a certain stock, I usually refuse to average down.


There are no hard-and-fast rules to determining when you are wrong or early, or when the market is just being noisy. But how you deal with those cases is a big determinant of how successful you will be. You learn from your mistakes. That, of course, costs money, but it is the tuition we must pay to Mr. Market to gain the knowledge ("experience") that we need to be successful in the long run.


Sep 16, 2012 11:02AM
Here's a simple rule, buy large blue chip companies with stock prices that are relatively stable, and gives plenty of dividends. You still make money even if the stock doesn't rise in price, and your chances of losing money is small because these companies are leaders in their sectors. Examples include Coca-Cola (KO), Exxon-Mobile (XOM), Chevron (CVX), Abbott Labs (ABT), AT&T (T), Verizon Wireless (VZ). This is the lazy way to invest, and it works!
Sep 17, 2012 9:44AM

The problem is the WallStreet "Big Boys" have fundamentally rigged the game...


The average investor with  "TD Ameritrade stock analyzer software" doesn't stand a chance against the institutuions with their insider information and networks, etc.  

Sep 16, 2012 1:04AM
Greedy politicians and lawyers have screwed this country up!
Sep 17, 2012 9:12AM

Macro vs. Micro.  It is a global economy with influences coming from all directions, Information overload from a new age of technology, and market reactions you can’t predict.  It has been coming for some time,  starting with the demise of the Glass-Steagall act  allowing  banking, investing, insurance all under one roof, Thereby allowing five very large, very powerful,  banks to form (too big to fail or too big to be allowed to exist?)  Banks with the power to invent new investment instruments (CDOs with subprime mortgage-backed bonds), which Global investors began to stop funding CDOs in 2007,  Banks with power to influence sovereign debt,  Banks with the power to decide which big money clients get the information first.

And now the stock exchange (embracing new technology) decides what speed you will receive your information, (fined by the SEC) but they have a new very large warehouse next door for big money servers.  Now distance will decide the speed.

The stock price of a company, with a good earnings report, goes down because the release of the earnings report coincided with bad news from some other part of the world.

Making the right trades is harder, so it become more important than ever to do your homework and plan your trade to limit loss, and trade the plan.

Sep 17, 2012 5:21AM
Wake, up it's never been easy, it only appears easy, but look how  many lost their  shirts on easy.  It's simple you either have the money or you don't and expecting to get some for nothing is a fantasy that crooks like you to bet on, that's why we are in this depression,  some call it recession.   We have been conned and don't like it so we go out and look for someone to blame because we can't see we made the error a mistake and we need to correct our selves our own way of thinking how to "make a buck"  namely the old fashion,  work, save and spend on what you can afford.  I  heard a story of a farm that's been in the works for  over  a 100 years in the midwest.  That's facing storms, tornadoes, droughts etc.   How did they do it, they knew what to expect and not to assume.  Their house from what was described is 100 years old, some antiques but mostly because things stopped working.  But, what was most interesting about the story is that  they loved what they did.  They knew it was  hard work but their  description wasn't gripping about the weather or  lack of it, but some of the wonders they found in doing the work that gave them meaning and inspiration.  We have been taught  through our great educational system that meaning is productivity, money, bank on how much your worth, not whether you find interest love, personal meaning in what  you do, and instrinsic love for it that comes from deep within  somewhere and you just love to do it because you do, not because it's productive, will get you a grade or some other external bs.  And from that you may be rewarded by some money or maybe not that much compared to what those external measures think you should have, but you eat, sleep, have a roof and get up every morning happy
Sep 17, 2012 9:38AM
Too many overseas imports lining their pockets.  The boat is always on rough seas going 100pts one day and another hundred in the other direction the next.  All of our tax money going toward a war that doesn't even involve us instead of rebuilding the infrastructure of our own country.  We need our own foreign aid money, and not giving it to Oil Companies who are making record profits to turn around and spike us again at the pump.  Its too hot, oh the Hurricane shut the Gulf down for two days.  When they put the fire out in their pants and start telling us the truth alot can happen, but they're just spending it on electing a person who will give them our hard earned money to play with as they want and then not have to account for it. 
Sep 15, 2012 10:58AM
Why investing seems so hard these days?

Do we believe the numbers that come out of Washington?  Example:  unemployment numbers?
How many people thought is was a great idea to use their house as a ATM machine?
Just how many people file for bankruptcy more than once in a lifetime?  The answer should be 0.
How many people bought more house than they could afford, thinking they could flip it?
How many people are tapping into their 401K plan just to pay off credit card bills?

It all boils down to greed.  How do you tell a alcoholic just to have one drink. 

Don't use credit cards unless you can pay off the balance every month.
Don't invest/gamble more than you can afford to lose.
Don't buy or lease a car you cannot afford.
Most of all, be honest with yourself and everyone around you.  Don't spend what you don't have.

How can you invest in a house, condo, stock market, if you don't know if you are going to have a job tomorrow or the next day? 

Why are the savers getting screwed?  Answer:  Because that is where the money is!

Sep 16, 2012 5:20AM
I guess I just haven't seen this investing period to be any harder or more difficult than the last decade, I just left my money alone, in the right type of investments, wasnt very stressfull, I dont use "money management advice" from anyone, I trust myself more.
Sep 14, 2012 6:59PM
****.  The market is rigged by the filthy rich.  Experience won't give you better information.
Sep 16, 2012 10:41AM
The current market is just the greater fool theory in actual practice.  You can confidently buy as long as you know that your money will exit the market ahead of the masses, should the market suffer a quick reversal.  My retirement plan, like that of most small investors, doesn't  allow me to be nimble and quick.  Which is why Joe Q. Public has exited the market.  We can't time or escape the bubble bursts, so we have to exit the market well in advance of market tops.
Sep 14, 2012 7:25PM
Id say theyve sucked every cent outta everyone they could, cant squeeze blood out of a turnip.
Sep 16, 2012 8:41AM

You didn't need skill in the 80s.  Or the 90s.  Or any other time.


All you needed to do was buy and hold the averages and some 30-year treasuries - that's investing 101.  You could read about it in any half-decent book on "investing". Heck, even MSNBC could probably figure it out, but then they wouldn't have anything to write about.


Now if you were trading, getting in and out of the market, or who knows what, life was probably pretty tough.  If you read these posts, you're most likely to buy high and sell low.  Furthermore, every time you buy or sell, you're paying the Wall Street boys for the privilege.  You're gambling with the big boys and you're their rightful prey.


Here's a challenge:  Run the math on what would have happened had you put a fixed amount of money into the averages every month.  Start today and run it backwards for any length of time to any starting date you like.  You can't find a single starting date in which you would not have made money.  None.  Not one.


"You could look it up."  - Casey Stengel

Sep 17, 2012 12:33PM

Hey 919 - get a clue; IT'S BOTH PARTIES!  Just a few examples of the Dems contributing to this mess:

Clinton/Rubin repealed Glass-Steagall, Barney Frank repeatedly blocked efforts to reign in Fannie and Freddie lending, promising that they would NEVER cost taxpayers; Eric Holder spending the  years between his work with the Clinton and Obama Admins. over at Covington Burling LLP defending Wall Street and now name ONE wall Street insider the Justice Dept. has indicted over the last 4 years- oh yeah-one guy who sat on Goldman's Board and leaked info to an outside trader; Jon Corzine, (Goldman CEO, Dem. Senator and Dem. NJ Gov.) who illegally sent 1.2 billion dollars of MFGlobal's client funds overseas to try and cover a 6+ billion bet gone bad and he's still walking around a free man while thousands of hard working ranchers and farmers who used MF Global to hedge their herds and crops have been hung out to dry.


Bottom line: as long as Wall Street can keep the Repubs and Dems at each other's thoats and each thinking the other party if the problem , Wall Street will continue to clean-up at the expense of the rest of us....

Sep 14, 2012 7:49PM
OH ****!  This stock market is a HUGE bubble and everyone knows it!  Only an idiot would be buying these overpriced fake securities that these newsletter writers are trying to sell off.
Sep 15, 2012 12:31AM

The robber barons have come back from the grave and vote Republican.  The market has been rigged for a long time so the average person has little chance of making a killing in the market but more likely killed by the market.


Bubbles are a sign that a part of the market is rigged and we have seen quite a few economic bubbles in the last thirty years. 

Sep 17, 2012 7:53AM

Perhaps this is where the 40 billion a month will be pupmed, funneled, and ripped of. Not one dime will be seen on mainstreet..I have no sympathy for wall street, Your all crooks and deserve what comes your way.

Sep 15, 2012 2:04AM
I was heavily invested in Target stock and T Rowe Price Blue Chip Growth on January 21, 2009.
Tgt went from $32 that day to $64+ today and TRBCX went from $21 that day to $47+ today. Hey folks, maybe you should have invested more heavily in American big companies and the success of the new President.  Many of my friends sat on the sidelines and hid their retirement money or watched Oil or Gold move up and down. In 2012, Tgt is bringing in 28% year to date. Even blue chip anything is performing. Pay attention, buy and hold, reinvest your dividends. I can only imagine how much the real big players made during this time,  but I am very satisfied with my simple portfolio returns. Good luck and keep looking for long term growth. 
Sep 15, 2012 1:31AM
Why investing seems so hard these days?

The World gets wiser. And wise people never do business with Al-Qaeda.
The real Al-Qaeda, works on Wall Street (robbing 99% of investors)

I hope that'  the entire Wall Street will starve to death! :D  =)) =)) lol fucckkers!
Sep 14, 2012 7:26PM
Its another scheme cooked up by wallstreet. Soooooooooooooo greedy.
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Image: Bill Fleckenstein, MSN money

This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.



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