WHAT DO WALL STREET analysts, magazine editors, economists and academics have in common? They’ve all found it virtually impossible to make accurate market forecasts. That’s why Vanguard Group founder Jack Bogle gave this advice to investors: When markets go haywire, “Don’t do something. Just stand there.”
Warren Buffett has given the same advice. In 2008, here’s how he explained it: “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” In the years since, we’ve endured additional political turmoil, another pandemic and another recession, and yet the Dow Jones Industrial Average now stands at 34,000.
The “just stand there” approach is supported by years of data. Study after study has found that investors do better, on average, when they avoid reacting to their investments’ periodic ups and downs, and instead just stand there. I share that view, but this is sometimes easier said than done. That’s because—despite all the data—it just doesn’t feel like a satisfying strategy to submit to the whims of the market. What can you do to square that circle? Below are some suggestions.
Permanence. Technology commentator Tom Goodwin has pointed out how difficult it is to make predictions in the business world. Consider the music industry. After suffering a nearly 50% revenue decline due to the introduction of online music streaming, the industry defied expectations and bounced back. Revenue is now at an all-time high.
The newspaper industry appeared to be in a similarly tough spot after the internet made lots of news available for free online. Many newspapers did indeed fail. But some found new ways to make money. The New York Times, for example, is seeing revenue hit new records after several difficult years.
The lesson: Prognosticators don’t know the future. They don’t know which way industries, companies or individual stocks are going. But that, in a way, is a good thing. It means you can safely tune out these folks and avoid reacting to their (flawed) predictions.
Resilience. As I’ve noted before, we shouldn’t expect stocks to rise in the future simply because they’ve always risen in the past. Rather, we should expect stocks to rise because share prices, more or less, follow corporate profits.
While the pandemic years were unpleasant, they also revealed something important for investors. Whether it was restaurants setting up seating outdoors or companies adapting to work-from-home technologies, we all found a way to move forward. People are resilient and, as a result, so too is the economy.
That, I think, should give investors confidence in the future. If companies were able to persevere—and even thrive, in many cases—despite the challenges of the past three years, that should reassure you that profits, and thus share prices, will continue to rise, despite periodic downturns.
The media. It’s well understood that social media algorithms create unhealthy echo chambers for their users. But it turns out that Facebook, Twitter and other social media aren’t the only problem. Even traditional media organizations have strayed.
On a recent episode of Michael Lewis’s podcast, Against the Rules, Lewis interviewed a young scientist named Mallory Harris, who was involved in some of the earliest research on the COVID-19 virus. She observed that, during the early days of the pandemic, the media weren’t interested in presenting a balanced view. Instead, reporters sought out scientists who were making “the most sensational” claims—those who were at one extreme or the other, arguing either that COVID was totally harmless or that it was as bad as Ebola. That was despite the reality that most researchers saw it—correctly—as being somewhere in between.
The same preference for sensational claims applies to business and financial news. The more dramatic the prognostication, the more likely it is to get airtime. That means investors hear less from commentators with more balanced views. It’s not a great situation. But as individual investors, we can use this to our advantage. By recognizing that a lot of financial news is really just entertainment, it’s easier to tune it out.
Statistics. In another episode of Against the Rules, Lewis interviewed Bill James, the creator of the statistical approach to baseball that Lewis made famous in his book Moneyball. James’s technique allowed baseball’s general managers to field teams more effectively by identifying players’ hidden talents. But James laments that he’s also created a sort of monster. Baseball fans, in his view, now rely too heavily on statistics, and that can lead them astray.
Lewis, who got his start on Wall Street, draws a parallel to the use of statistics in finance. In baseball, for example, there’s a statistic called wins above replacement (WAR). It’s supposed to provide a shorthand summary of a player’s overall value to a team. It turns out to have a close cousin in finance, a measure called value at risk (VAR), which aims to provide a shorthand summary of an investment bank’s overall risk level. But WAR and VAR have both proven to be overly simplistic.
Turn on the financial news, and you’re likely to hear various market statistics, along with pundits’ conclusions. But as James says, and Lewis agrees, it’s dangerous to rely too heavily on any one figure in any domain, especially finance. Do statistics have some value? Yes. But as Lewis says, none should be interpreted as providing “the answer.” Feel free to listen to market updates. But never let them worry you too much.
Your DNA. A final, perhaps surprising, reason to take Bogle’s “just stand there” approach: your health. Research has identified a phenomenon known as headline stress disorder.
As you might guess, it’s the detrimental result of our always-on media culture. By now, it’s not news that “doomscrolling” on social media impacts our mental health. But research has found that it may even be affecting our physical health—at the DNA level. To be sure, this research is evolving. But in combination with all of the other factors, I see this as another compelling reason to take Bogle’s advice. When those around you are losing their heads, there’s no need to join them.