Financial crisis—time to panic?

The more things change, the more they stay the same…

  1. Investors are fleeing to gold bullion as they lose faith in the stock markets and in the U.S. currency.  Gold is up 440% in just one year …read more
  2. The U.S. stock market crashes nearly 50% from the previous year’s high point
  3. The price of oil quadruples in a single year …read more  
  4. New York City teeters on the brink of bankruptcy!  …read more  
  5.  The U.S. dollar plunges in value, and even the Canadian dollar eclipses it as the U.S. reels from the debt of a foreign war it could never win …read more
  6. The American people lose faith in their President and he’s impeached for impropriety over a scandal
  7. An adversarial nation as powerful as the U.S. have nuclear weapons targeting all major American cities 

 The year?  It was 1974.
 
Think about those above issues for a moment.  Would you see more pessimism in that era or in our own? 

Greece’s debt might freak you out and Goldman Sachs could terrify you. 

But are things really worse today than they were in 1974?  Ten Goldman Sach’s couldn’t do the damage of one nuclear bomb on New York City.

There’s a saying that Ben Graham, Buffett’s former professor at Columbia University enjoyed waxing:  Plus ça change, plus c’est la même chose 

It means, the more things change, the more they stay the same.

And here’s another wise “Grahamism”:  You pay a high price in the stock market for a rosy consensus. Uncertainty and fear will give us great stock prices, hopefully for years to come. 

What about retirees?  If they’re responsibly allocated, they won’t have a high exposure to the stock market.  Nobody in their golden years should, unless they’re keeping equity investments to bequeath to the next generation.

Are things worse today than they were in 1974?

What do you think? 





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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7 Responses

  1. Andrew Hallam says:

    In case you're curious about the Gold investment mentioned above:

    If you bought $1000 worth of gold in 1975, today it would have grown to $6,034

    If you bought $1000 worth of the DOW Jones industrial stocks in 1975, it would have grown to $35,873 today. Stocks have been nearly 500% more profitable than gold over the past 35 years. And that's despite the lousy recent return on stocks and the great recent return on gold.

    But every time gold spurts, (which it recently has) loads of smart and emotional people come up with great arguments suggesting that this time it's different–gold is going to beat stocks long term. And after 200 years of this, it never comes to fruition. Gold keeps pace with inflation, long term, but not much more, despite the alluring spurts it produces. Do you really think THIS time it's different? If you had lived 200 years, would you be saying that, after everything you've seen?

    From 1802 to 2010, a dollar invested in the U.S. stock market grew to $10.4 million, including dividends.

    From 1802 to 2010, a dollar invested in Gold grew to $81. It paid no dividends. Hmm. $10.4 million by investing in stocks over the past 208 years and $81 by investing in gold over the past 208 years. Ahhhh, but this time it's different, you say? Hmmm.

    The best time to invest in any asset class is when it gives you a sick feeling in your stomach to do so. But the warm fuzzies you get by investing in something that has risen a lot lately, thanks to band-waggoning, "this time it's different" scenarios are….human, but dangerous to your long term pocketbook.

    Stocks give you a sick feeling in your stomach right now? Great, buy them. Gold gives you warm fuzzies. Better sell.

  2. Mich @BTI says:

    Hi Andrew,

    "the more things change, the more they stay the same." This is it right here. The more investors worry, the happier i am taking their stocks at undervalued prices!

    In the end the sky will not be falling, history repeats itself, and right now we have one heck of a good opportunity to profit from Mr Market's anxiety.

  3. Mich, you are exactly right. When the skies have been darkest, massive foundations of wealth have been established. Long term thinking (and keeping your heart out of the game) makes it as easy (long term) as taking candy from children. At least, that's what I've always felt. I hated 9/11, but I sure profited from its fear when I bought upon the market's re-opening. The Iraq war crushed stocks, so I loaded up then too (in 2003) and made a killing. In 2008/2009 I allocated more than $150,000 to the stock market and….again…sweet rewards.

    You're never going to know when you'll get those rewards, (it can take a lot of patience) but if you buy regularly when people are freaking out or scared, you'll make a killing.

    Thanks for the comment Mich! I love hearing from cool-headed people who I know will make large overall fortunes in the stock market over time. May the force (and logic) be with you Mich.

    Cheers,

    Andrew

  4. Interesting stuff… I have often wondered what people back in the late 70s and early 80s thought. Interest rate were sky high, and so was inflation. People also didn't have the luxury of watching youtube or playing video games like they do now.

    The way I think now, is that speculative plays aside, whatever I invest in should be for the long term with an optimistic view. I could go buy guns and ammo and prepare for the worst (ok, since I am Canadian I actually can't, but if I was American I could), but realistically speaking, if the shit does hit the fan, what will a Joe Blow with a shotgun really be able to do?

    I am thinking twice about my metal plays since I have learned that even with the recent huge rise in gold prices that it has still not beaten the market since the late 70s. However, so long as people *see* metals as a good play, due to large government deficits, they will be a good play. The "trick" is to not be the last one left holding the bag, like the early 80s.

  5. Andrew Hallam says:

    Hey Kevin,

    I think people in the late 70s and early 80s were crapping themselves. I remember my dad's friend sealing a deal on his 5 year mortgage at 20% interest. And he felt really fortunate that he got such a good rate, with the belief that interest rates were going to go higher. If you close your eyes and imagine that happening for every home owner today, I think you might (as I might) get a sense of the fear they must have felt. Sure–can you blame them for jumping like lemmings into gold that eventually hit $850 an ounce that year? I would argue that today's fear represents a much lighter touch. Also, taking inflation into consideration, gold was a lot more highly priced in 1980 than it is today. This might be part of your argument for future higher prices before the collapse. But unless history changes, there will eventually be a collapse. I think you're smart not to bet the house on it!

    Cheers,

    Andrew

    Cheers,

    Andrew

  6. Great post Andrew! I enjoy the comparisons and reflections back to other market periods as a tool to calm people's financial nerves, or it should! I believe Buffett had it right all along: "be greedy when others are fearful, be fearful when others are greedy".

    Economically, politically, environmentally, in arts, in sports and in life in general – history always finds a way in repeating itself in some shape or form. I think Mark Twain had the best quote ever about history and the human condition: “It is not worthwhile to try to keep history from repeating itself, for man's character will always make the preventing of the repetitions impossible”.

    Personally, I'm looking forward to this October. And not for another hockey season, although the Senators could use some changes…but markets will probably dip a bit, just before Christmas shopping season, like they always do, and I'll be there to scoop up some more Canadian dividend-payers for my non-registered accounts. Anyone else think the same?

  7. Andrew Hallam says:

    Hey Financial cents:

    Like you, I'm hoping that the markets drop as well. I think Twain also said, "History doesn't repeat itself, but it rhymes"

    I love quoting that guy–even though he was a notoriously terrible investor!

    Andrew

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