Last week the U.S. Congress decided to give trickle-down economics its biggest test ever. They appropriated $700 billion in taxpayer funds so that we could give every mansion owner in Greenwich, Connecticut $1 billion each, with enough money left over to give every Park Avenue townhouse owner $100 million. The result was supposed to be renewed economic vibrancy across the whole U.S. What did we get instead? Another stock market crash, with the S&P 500 losing almost 4 percent of its value. To put this into perspective, this is roughly one year’s return on U.S. stocks, evaporated in a single day. The S&P 500 is now back to where it was in early 1998.
[Had you put money into the U.S. stock market in early 1998 you would have realized approximately 1 percent annual income in the form of dividends and a 0 percent capital gain. In other words, a gal who had diligently saved up $100,000 would have added $1,000 per year to her income by placing her faith in America’s largest companies.]
I’m not sure the money’s made it into the system. According to the text of the bill (http://banking.senate.gov/public/_files/latestversionAYO08C32_xml.pdf), it states:
“Before the earlier of the end of the 2-business-day period beginning on the date of the first purchase of troubled assets pursuant to the authority under this section or the end of the 45-day period beginning on the date of enactment of this Act, the Secretary shall publish program guidelines, including the following:
(1) Mechanisms for purchasing troubled assets.
(2) Methods for pricing and valuing troubled assets.
(3) Procedures for selecting asset managers.
(4) Criteria for identifying troubled assets for purchase.”
I can’t imagine after passing the bill (even with Paulson preparing for this weeks in advance) the Treasury was able to get this program up and running so quickly, especially since the resolution was worded to force Paulson to make sure he had a legitimate plan for executing on it. We’ll know for sure when the money’s flowing into the system after the Treasury releases the guidelines for this plan.
It’s not just the U.S. either. Look at http://en.wikipedia.org/wiki/Financial_crisis_of_2007-2008 for foreign bailout info that doesn’t get reported on the evening news.
I’m not worried, though. Whenever a government “expert” is interviewed in the media, they’re always careful to point out that this is not a $700B gift, it’s the government buying securities. Thus, the government could actually MAKE money. So, I’m sure that in a couple years the government will be making money off these “investments” hand over fist, and we’ll all get nice IRS refund checks, right?
Hi Phil,
Would you be willing to share your own investment philosophies/strategies? This is something a lot of people grapple with, and it’d be great to see how you’ve tackled this challenge.
Thanks! (And if that’s too personal, it’s completely understood.)
Matt:
http://philip.greenspun.com/materialism/money is what I wrote some years ago and it is still pretty much what I do. I have nearly all of my savings in index stock funds, a combination of foreign and domestic with a little bit of specialization in real estate investment trusts and health care. This is an anti-inflation strategy, mostly, because I want to be spending this money 40 years from now. (see also http://philip.greenspun.com/materialism/early-retirement/investing ).
Indexing worked great in the old days when not too many people indexed. I wonder if now it might have a fatal flaw. Suppose that GE’s managers decide to pay themselves $500 million per year, sucking all of the profit out of the company. In the old days investors would sell off all of their GE shares and GE would no longer be able to raise capital. These days funds will continue to hold GE because they are required to hold all of the S&P 500.
Don’t look to me for advice! My track record as an investor is nothing to brag about.
Phil,
Thanks so much for the reply. After reading your early retirement page, I feel a bit better that at least you seem to have identified the same stuff to read that I have (and come to similar conclusions).
http://matt.makalumedia.com/2008/08/14/an-overview-of-personal-investment/
At the bottom of the above, is a link to an article called “The Benefits of Low Correlation”, which suggests equal contributions to seven relatively uncorrelated asset classes and provides some interesting back computations.
Although a diversified investment portfolio seems to be universally recommended for most investors, it’s always intriguing to read how the “best”, like Warren Buffet and Jim Rogers, are completely against diversification.
Two points that you raised that I found particularly interesting (and concerning) are (1) how corporate management is robbing the investor today (Why was that not a problem in the past? Were managers less greedy?) and (2) how such companies are relatively immune to sell offs due to such large holdings by funds and institutional investors.
— Matt
The best overall advice for investing for the long term that I have read is “Yes, You Can Still Retire Comfortably” by Ben Stein and Phil Demuth.
Available at many bookstores, including: http://www.amazon.com/Yes-You-Still-Retire-Comfortably/dp/1401903185
They have co-authored several other books, as well.
Although I don’t agree with most of Stein’s proclaimed personal views on politics and religion, the investment advice in the Stein and Demuth books, especially “Yes You Can Still Retire Comfortably” makes for a very solid foundation.