“The public is right during the trends, but wrong at both ends.” — Humphrey Neill (“Maxims of Wall Street,” p. 47)
I’ve had the privilege of meeting and learning from some of the best and brightest in my lifetime — politicians Ronald Reagan and Bill Clinton… economists Milton Friedman and Friedrich Hayek… and financial gurus Burt Malkiel and Jeremy Siegel.
I’ve known and corresponded with the latter two for 30 years. They are both academic economists with real-world experience. Both of them deserve to win the Nobel Prize.
Burt Malkiel is a professor of economics at Princeton University, and the author of the classic book, “A Random Walk Down Wall Street.” He just released the 50th-anniversary edition, which can be found here.
Jeremy Siegel is the “Wizard of Wharton” at the University of Pennsylvania and author of “Stocks for the Long Run.” His sixth edition came out a few months ago and can be found here.
Both textbooks are required in my Financial Economics class at Chapman University; they are the Alpha and Omega of sound investment advice. They are totally accessible to the average investor. You can’t find a better source regarding money and investing.
‘Buy and Hold’ Outperforms Most Actively Managed Funds
Malkiel and Siegel have something in common: They discovered long ago that “buy and hold” and “dollar cost averaging” are the simplest and best strategies for most investors to maximize returns on Wall Street. They endorse buying stock index funds for the long term.
Malkiel points out how controversial this passive “efficient market” strategy was when it was first proposed in the early 1970s. Critics called it “guaranteed mediocrity,” and another reviewer called it, “one of the most remarkable errors in the history of economic thought.”
But Malkiel and Siegel had the last laugh. Study after study has shown that only a fraction of money managers, stockbrokers and active mutual funds can beat the market over the long term.
As Jack Bogle, who started the Vanguard S&P 500 Index Fund in 1976, once said, “Don’t struggle to find the needle in the haystack. Just buy the haystack.” (“Maxims,” p. 161)
I like to play the market, but half of my portfolio is in the S&P Index Fund (SPY), so I can check to see if I can beat the market with my individual stock selections. It’s fun to try to beat the market. Sometimes I’m successful, sometimes I’m not.
By the way, my personal initials are MAS — you can see why I’m attracted to the works of Malkiel And Siegel!
Two Unforgettable Stories
Let me tell you two stories that show you why both Malkiel and Siegel are worth reading. One gave a “sell” signal for the stock market in December 1999, near the height of the Nasdaq bubble, and another gave a “buy” signal in February 2009, near the bottom of a severe bear market.
The Nasdaq Stock Index, 1970-2020.
Here’s the story:
Calling the Top of the Nasdaq Bubble in Late 1999
In late 1999, I visited Burt Malkiel in his office in Princeton, New Jersey. On his desk was a chart of the U.S. stock market. It was hyperbolic!
Even though I was a bull, and had predicted in 1995, “The Nasdaq will double and then double again,” we looked at each other and said, “SELL.”
Mind you, Malkiel is known for avoiding predictions. He famously wrote in his book, “short-term changes in stock prices cannot be predicted.” He’s been a firm believer in “buy and hold” and “dollar cost averaging.”
In the introduction to his latest 50th-anniversary edition, he writes, “There is no way anyone could have predicted how much the bubble would expand and when it was likely to pop….We now know (after the fact) that market prices were at peak bubble levels in early 2000. But no one was able accurately to identify the timing of the bubble in advance.”
But Burt Malkiel came darn close!
Calling the Bottom of the Bear Market on Valentine’s Day 2009!
My second story took place in Philadelphia, Pennsylvania. My wife and I had a date with Jeremy Siegel and his wife on Valentine’s Day in 2009. Before we went out to dinner, he wanted to show me something in his office. He showed me his big chart of the U.S. stock market index since 1802, which forms the basis of his book “Stocks for the Long Run.” He noted that every time the index dropped 50%, it was the bottom of the bear market. There was one exception — the 1929-33 crash during the Great Depression.
Then he turned to me and asked, “Are we headed for another Great Depression in 2009?”
I said, “No, because the Federal Reserve is aggressively cutting interest rates and injecting liquidity into the market.”
He and I agreed. “There will be no Great Depression.”
His conclusion: “Stocks are a screaming buy!”
In my March 2009 issue, I quoted him and recommended buying stocks. It turned out to be the bottom of the market.
Is Wall Street a Random Walk or a Dance?
Several years ago, I wrote an investment book, “A Viennese Waltz Down Wall Street,” offering an alternative to Burt Malkiel’s title, suggesting that investing in the stock market is more a dance than a random walk.
My wife and I love to dance (see photo above on a cruise ship). I see the stock market more as a dance, where the dancers — the buyers and the sellers — move freely up and down the dance floor within the set patterns or rules, not like some drunken sailors who stumble unpredictably along Broadway.
Dancers engage in purposeful action and the rhythm and genre of the music guides them. They have the freedom to choose their direction on the dance floor, and which of the many patterns and steps they will take. They can even create a new step or direction.
But to be successful, dancers always have to match the rhythm of the music in the air around them. If they get out of step, they are likely to make mistakes and cause other dancers to falter, as well. Similarly, the rhythm of the markets controls investors. To be successful, they need to be alert to the atmosphere of the economy and the other investors around them.
Hence, the behavior of the stock market is more like a waltz, not a random walk. Of course, a Viennese waltz is not for everyone. Some may prefer a slower Tennessee waltz. A Viennese waltz is fast-paced and, when performed well, can be exhilarating. But it is also fraught with peril and can be exhausting. Dancers have to be in sync with the music and with each other, or they will falter. But when everything is in sync, it is glorious.
I sent a copy of my book to Burt Malkiel, and he likes it.
The book is a 256-page, quality paperback with chapters on each of the great Austrian economists, including Carl Menger, Ludwig von Mises, Friedrich Hayek, Joseph Schumpeter and Murray Rothbard.
It has chapters on the financial crisis of 2008, Keynes as a speculator, who predicted the 1929 crash, and the benefits of investing in gold and silver.
To purchase a copy for only $20, go to www.skousenbooks.com. I autograph each copy and date it “Valentine’s Day 2023.” And postage is free if mailed inside the US. I will do the same for my other books, such as “The Maxims of Wall Street” and “The Making of Modern Economics.”
As Dr. Lawrence Hayek, son of Friedrich Hayek wrote, “Skousen is the only economist I know who I can understand. He writes for the common man!” See for yourself.
P.S. I will be holding a subscribers-only teleconference entitled “Fall in Love with Home Run Stocks Again” on Feb. 14 at 1 p.m. EST. The event is free, but you have to register here to be able to attend. Don’t miss out!
Good investing, AEIOU,
You Blew It!
Biden and Democrats Attack Stock Buybacks
“Corporations ought to do the right thing. I propose we quadruple the tax on corporate stock buybacks and encourage long-term investments.” — President Joe Biden
In the State of the Union Address, President Joe Biden continued his anti-investor rhetoric by proposing that the 1% tax on stock buybacks should be increased to 4%.
Democrats like Biden complain that stock buybacks are nothing more than corporate greed to artificially enhance stock prices and enrich shareholders. One could make the same argument for paying dividends.
Instead, shouldn’t companies use the money to improve employee welfare, expand the business or invest in innovation?
They often do, but as Warren Buffett, a big fan of buybacks, argues, buybacks can be “the best use of a company’s capital” when the stock is priced below its true value. His own company, Berkshire Hathaway, has been buying back over $7 billion in stock in the past year.
In the past year, publicly traded companies bought back more than $1 trillion in corporate stock. By reducing the number of outstanding shares, buybacks tend to boost stock prices.
Buybacks are a popular alternative to paying dividends, which are double taxed, first by the corporation and second by shareholders.
Harvard Business Review recently concluded, “Employees of S&P 500 firms are unlikely to be systematically hurt by either dividends or buybacks. There is little evidence that buybacks and dividends by the S&P 500 are hurting the economy by depriving firms of capital they would otherwise use for investment and paying workers.”
Buybacks are generally good for shareholders. Middle- and working-class Americans own an enormous amount of stock through pension and retirement accounts.
According to the Tax Foundation, public funds like those that benefit teachers and police officers held 41% of the assets in the top 1,000 retirement funds.
These funds — and the ordinary people who invest in them — are some of the largest beneficiaries of stock buybacks.
Thankfully, there is no chance of passing a 4% tax on buybacks in the Republican-controlled House, but it does reflect the anti-capitalist mentality of the Democrats in power.