The Smartest Thing I Read on Bogleheads
While reading the Bogleheads today, I happened to come across a post started on Jul 13, 2011 at 7:37PM titled What is the longest period for stock market to lose money? The thread starts out with the usual naval gazing where posters go back and forth about if it is after taxes and fees, and if they should consider real or nominal yield. There is also discussion if the number encompasses all stocks or only small caps.
Eventually the grownups arrive and a person named John Norstad rolls in and bodyslams the thread by pointing out that as we increase the interval size, the number of independent samples go down and interpretation of the resulting results is nonsensical. He explains it like this:
Suppose you went into a room with three people and measured their heights and got 5’ 5", 5’ 9", and 6’ 4". Would you immediately conclude that everyone in the world must be at least 5’ 5" tall? Take the average and get 5’ 10". Do you conclude that the average height of everyone in the world is this tall? Based on your sample of three, how accurate do you think your estimate of average height for everyone in the world might be?
Sure, inflation-adjusted US stock total returns have never been negative over 20 years. That’s true. But again, how many independent samples do we have? 5 or 6? Same problem.
A few posts later, a poster nicknamed givewell shows up and points out all this navel gazing is stupid because we are a bunch of monkeys typing on a forum trying to predict the future with imperfect knowledge of the past. He goes on to explain that with little influence, the best we can do is to be sensible:
Very Broad diversification in total markets as cap weighted, with a Sensibly chosen asset allocation, is the best any of us can Reasonably do - any who aren’t big enough to influence the activity of what they may invest in, a la Warren Buffet, or George Soros. And, most of what’s what for a sensible AA goes with the idea that, for almost everyone, the decreasing marginal utility of money means a rational nod toward risk aversion.
I think these two conversations pretty much sum up investing. What comes may be similar to what we have seen, or it may be totally different and all we can do is hang on for the ride. The entire thread is a goldmine with much discussion for thought. We go on to find givewell is a Philosopher, you know like with a PhD. He has even written a book about ethics called Living High And Letting Die.