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Ben Stein How Not to Ruin Your Life

Ben Stein, How Not to Ruin Your Life

Lessons from a Very Bad Year

by Ben Stein

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Posted on Monday, December 22, 2008, 12:00AM

At last, this horrible year is almost behind us. Let's hope we never see another one like it.

If someone had told me that the market -- adjusted for inflation -- would be down by more than it was in the Great Depression while most Americans still basically had high prosperity, I wouldn't have believed it possible. It goes to show what stupendously bad Treasury stewardship can do.

If someone had told me Treasury and the Fed would allow the fourth- or fifth-biggest investment bank in America to fail, I would've scoffed. But they did it, and we got a stock market crash, a severe recession, and national fear as the result. The night Paulson and Bernanke let Lehman fail was the night they drove old American investors down.

Theoretical Failings

Meanwhile, we look to the future. And we try to learn from the past. What have we learned?

1. Efficient market theory is extremely limited as a market predictor in times like these. Efficient market theory says that at any given moment, the market price of all stocks reflects all that is known about them -- the price at any given moment is the best estimate of future price.

This is true as far as it goes. And, again, in most times, it goes very far. But in times when what is not known lurks below the waterline like the bottom of an iceberg, dwarfing what lies above and can be seen, efficient market theory is not only limited in effectiveness but downright dangerous.

It turned out that what lay waiting unknown to most of us -- and to the market -- was a wild miscalculation about the true liabilities associated with credit in this country. The true liability on subprime included staggering amounts of derivatives, a high multiple of subprime itself. Ditto for credit card debt, and now, as we're seeing, ditto for commercial mortgage debt.

Not only was that debt questionable, but players had added super-sized bets so big that the markets simply couldn't adjust to them without a serious correction.

Mr. Market Gets It Wrong

So efficient market theory is sunk. The problem is that we have nothing else to replace it except the predictions of many different analysts. Some are right and some are wrong, and they're usually not even close to being as helpful as Mr. Market.

But as my pal Jim Grant notes in his masterful new book, "Mr. Market Miscalculates: The Bubble Years and Beyond," the market is far from infallible and can lead the investor to disaster. Efficient market theory is highly fallible, but it may still be better than anything else.

Bye-Bye, Buy and Hold?

Another lesson to be drawn from this year:

2. Buy and hold as a strategy is very questionable, as my pal Robert Lobban says. It's worked in the past, but in times of severe market stress it just doesn't work. We've now gone 10 years -- many of which were banner years for profits -- without a gain in the broad indices. In some areas, such as REITs and commodities and energy and autos, the losses have been breathtaking.

But trading doesn't work well for most investors either. Even for the best hedge fund geniuses (and actually I don't consider them geniuses at all), trading has often been a catastrophe in the last 15 months.

So, what's the solution? Ben Graham, a real genius who mentored Warren Buffett, concluded near the end of his life that stocks were simply too risky and investors should only be in Treasury bonds.

My pal, Phil DeMuth, along with many others, has long said that investors should have half in bonds. He's right, but even bonds, except for Treasuries, have been whacked this year. But his approach is definitely the right one. Ray Lucia, a super-smart investment guru, says you should have seven years of expenses in cash or near-cash to ride out events like this if you're retired or close to retirement. This turns out to be a simply brilliant suggestion. Ray has a lot of them.

What we're left with is maybe that buy and hold is far from perfect, but if we have enough cash to get us through the bad times we might yet see it work. If not, one hardly knows what to suggest.

Historical Ignorance

The final lesson from 2008:

3. We can't count on the people who rule us to have learned a darned thing from past history. "Those who do not know the past are condemned to repeat it," said the famous Harvard philosopher George Santayana.

Of course, that's a cliche by now and has been for decades. But it is true of Henry Paulson, our pitiful Secretary of the Treasury and, very, very sadly, of Ben Bernanke, our Fed chairman.

Paulson is simply an ignorant, bullying fraud. I never expected much from him. But Bernanke is a scholar, or so I thought, and should've known better than to destroy confidence by allowing Lehman to fail. That was a mistake that no real student of the Great Depression, as Bernanke is, should've made. I would never have thought it could happen, but it did.

It makes me wonder what other mistakes and foolishness our rulers have in mind, and it scares me plenty.

Only Human

In the meantime, please don't blame yourself for your losses. We all make mistakes, yours truly especially. My hat is off to those like Doug Kass who saw it all coming. My hat is not off to those who claimed afterward to have seen it coming. I have met so many people who tell me they sold out in October 2007 that I think I must be the only person left in this country with any stock. (That would make me by far the richest man on the planet, and I guarantee that I'm not.)

We're just human beings with human failings. Efficient market theory fooled us. Buy and hold fooled us. Trust in government fooled us. My own failings fooled me. Something else will fool us next time. As my grandmother used to say when her children made a mistake, "Don't worry, you'll do it again." If we learn even a little from what's happened, we're far ahead of Henry Paulson.

In that spirit, have a Merry Christmas, Happy Hanukkah, and Happy New Year.

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452 Comments

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  • PaulS - Friday, January 2, 2009, 3:43PM ET  Report Abuse

    • Overall: 5/5

    Honesty is very rare in political commentary today. Facts and figures are even rarer -- the government has caused this meltdown and now they deny it. This does not speak well for the future and "HOPE".

  • Yahoo! Finance User - Friday, January 2, 2009, 2:26AM ET  Report Abuse

    • Overall: 1/5

    Happy Hanukkah? It's Merry Christmas. Buy and hold huh.

  • Yahoo! Finance User - Thursday, January 1, 2009, 3:13PM ET  Report Abuse

    • Overall: 5/5

    Though I don't necessarily agree with his comments about Lehman Brothers, I think Ben Stein is one true voice of reason among all the financial chaos of the past year. Anyone who was fully-invested in equities through the market plunge learned a valuable lesson which they'll hopefully never forget. Likewise, Stein's advice to hold up to seven years of expenses in cash is very sound counsel for everyone, especially retirees. Ben Stein and Phil DeMuth have strongly altered my thinking about investing over the years, in particular their book about market timing. This book gave me the confidence to dump all my equities in 2007. Trust yourself if you want to get ahead!

  • The Joker - Tuesday, December 30, 2008, 5:58PM ET  Report Abuse

    • Overall: 2/5

    Paulson is a "bullying fraud". That's some strong words. Ben, you can disagree with his policies but there's no need to inflict a personal attack. If someone used this term on me publicly, I would consider calling my lawyer and see if I got a case for defamation of character. How many companies can the government afford to rescue? Why set a precedence where investors can assume that they can fall back on government funds when their investments fail? If investors make money, they win, if they lose, the government (i.e. taxpayers) assume the risk. Something is not right here. The whole idea is to get money circulating again. Capital is out there. Pumping more money in the system won't help if people won't spend and banks won't lend. Japan is still struggling after setting their interest rate at 0%. Monetary policies are effective at slowing down an overheating economy. Fiscal policy will do wonders (relative to monetary policies) in stimulating a cooling economy. Obama's on the right track.

  • Mr D - Tuesday, December 30, 2008, 1:08PM ET  Report Abuse

    • Overall: 1/5

    When even Ben Stein has lost his nuggets you know it is time to buy. Do the math on after taxes and inflation returns on bonds or fixed dollar investments and you are barely above zero in ANY 10 period. A flood of dollars will be coming out of Washington and will that help the value of bonds? Buy equities.

  • John - Tuesday, December 30, 2008, 12:38PM ET  Report Abuse

    • Overall: 3/5

    Ben - normally you're a pretty astute person. However, Lehman going under was the right thing to do. All those arrogant SOBs that ran Lehman should in reality be in jail and all their assests confiscated. Their shinanigans with CDS's and associated leverage they worked with was way over the top. How in the world did they manage to pay out $40 Billion in bonuses in one year? Why didn't they retain this money to backup all the leverage in CDS derivatives? Just pure greed - that's what. For Lehman employess it was better than hitting the lottery and did any of the ill-gotten gains get reflected in dividends for their stock holders? Absolutely NOT! Lehman was not an investment bank at all. It was a gigantic CON that unfortunately took down a lot of other innocent people with it! Congress needs to pass REGULATIONS, REGULATIONS, and more REGULATIONS to make what happened illegal and get the financial crooks under legal control! The hedge funds need some of this also!

  • Yahoo! Finance User - Tuesday, December 30, 2008, 9:46AM ET  Report Abuse

    • Overall: 1/5

    Is it too much to ask from Yahoo to have him fired as a writer??? I like the part about the iceberg Ben. Exactly. You had no idea the American ship was scraping the tip of a massive iceberg this year.....What a dope. Anyone that takes one world seriously from this Stein should be hit in the head with a tack hammer.

  • Yahoo! Finance User - Monday, December 29, 2008, 11:13PM ET  Report Abuse

    • Overall: 5/5

    Ben's insight is right on. We need leaders that have a respect for history, and that they are to learn from it. Our country needs to get back to a conservative, common sense approach.

  • Yahoo! Finance User - Monday, December 29, 2008, 8:56PM ET  Report Abuse

    • Overall: 5/5

    Citi sponsors the Rose Bowl. Everybody tune in because you're paying for the ticket.

  • Yahoo! Finance User - Monday, December 29, 2008, 8:10PM ET  Report Abuse

    • Overall: 3/5

    Yes, our government has let us down again. Let's not forget the absolute stupidity of George W. Bush. His spoiled rotten kid arrogance surely fed fuel to the bitter fire. We also listened to schill con artists like Jim Cramer who wouldn't know a good longterm stock to hold from dead crabs.

  • GERRIT - Monday, December 29, 2008, 12:34PM ET  Report Abuse

    • Overall: 5/5

    RIGHT ON THE MONEY

  • Dan - Monday, December 29, 2008, 12:12PM ET  Report Abuse

    • Overall: 1/5

    Ben's Buy, Buy, and Hold philosophy is like Guy Lombardo playing "Auld Lang Syne"....a worn out recording. What dope at this time is even thinking that this is the time to buy stocks? The Christmas numbers with retailers tanked, unemployment tanked, and we still have foreclosures and other problems hanging onto the economy like a lead albatross around this country's collective neck. His idea that trust in government got us into this mess is only partially right. Thanks to the economic destruction firm of Bush, Paulson, Bernanke and Greenspan, we got our economic butt kicked this year, but we ALLOWED the financial/mortgage firms a freehand at policing their industries, and look at what we got for it. A collapsed economy. Who is going to clean up this mess? Are we supposed to believe that government should take a blind eye again, and everything is going to be just fine? If one believes that misnomer, then we deserve to bend over and get booted again for the last time. Governments APATHY got us here, it's INVOLVEMENT is necessary, because the taxpayers deserve more than what it got, and their survival in the coming years is depends on government action. I am counting the hours to the end of the Bush Administration, and looking forward to the end of it...once and for ALL! Too bad Ben Stein can't go with him...

  • JamesD - Monday, December 29, 2008, 10:42AM ET  Report Abuse

    • Overall: 1/5

    (Everybody sing this to the tune of "We Wish you a Merry Christmas") Ben Stein is a bloody moron, Ben Stein is a friggin' idiot, Ben Stein is a pompous know nothing, so don't listen to him. Ben Stein pimps annuities, Ben Stein just parrots Larry Kudrow, Ben Stein always says "buy more" What good advice is that? His Grandma even knows that he'll repeat his mistakes, just like a fool who never learns from them, so why listen to him? Any bozo who agrees with him deserves what he gets! Ben Stein is a clueless idiot, Ben Stein should be pulled from Yahoo, Ben Stein know less than Penelope and that's saying a lot!!! Happy Holidays everyone!!!

  • Meister - Monday, December 29, 2008, 10:08AM ET  Report Abuse

    • Overall: 3/5

    I agree with everything that Mr. Stein has said except for the failure of Lehmen. If banks make bad financial decisions, they need to fail. Their failure will serve as textbook examples to others. Bad decisions deserve bad consequences. The jems here are 1) 5-7 years cash for retirees. 2) Buy & Hold doesn't work any more. Happy Hanukkah to you, Mr. Stein.

  • Pete - Monday, December 29, 2008, 9:27AM ET  Report Abuse

    • Overall: 5/5

    Mr. Stein is "right on" with his opinion of our leaders. Their continued lack of vision and oversight is amazing. Being the other guy who was was stuck in the hold position, I have no choice but to hang on until things improve.

  • Gary B - Monday, December 29, 2008, 9:07AM ET  Report Abuse

    • Overall: 5/5

    Maybe the Obama administration will investigate Henry Paulson. Why was Henry Paulson's Goldman Sachs selling short the very same toxic mortgage securities it was injecting into the market?

  • anna - Monday, December 29, 2008, 3:47AM ET  Report Abuse

    • Overall: 3/5

    How could the average investor have every anticipated the level of fraud, crooks, and government corruption we have experienced. It will be a long time before trust returns if ever. I'll never trust the markets again.

  • MZZZZ - Monday, December 29, 2008, 12:22AM ET  Report Abuse

    • Overall: 1/5

    LOL. wow Ben Stein capitulates. I am now officially bullish on the market.

  • GeraldK - Sunday, December 28, 2008, 7:26PM ET  Report Abuse

    • Overall: 4/5

    It's gonna be 6-10 years before any of us REALLY feels somewhat comfortable with our finances again. I got out of the "market" in June '08 before it all tanked and put my money in CASH. At least I can sleep a bit more fitfully at night. I'm gonna save and SAVE a bit more! Unless one has the resources to handle big losses in the "market", I think stocks are the biggest SCAM in history. I don't care if my savings earn very little interest; it's in a bank with FDIC backing and at least I won't lose much if anything. Boring, yes; SMART, YES!

  • Hans - Sunday, December 28, 2008, 12:45AM ET  Report Abuse

    • Overall: 1/5

    The only statement I agree on, is the one from your grandmother. "Don't worry, you'll do it again" Corporate greed and arrogance will appear again and the rat race for the average guy will continue as well. As soon as some good news will show up, the Dow will head north immediately and we all will be sitting again on the same wagon. Fair enough the US has lost some ground in many areas but I am equally sure that the US has the capability to turn this around. I would not be surprised at all if the next generation of REAL innovative technology will come from the US. There are many top companies (Big or small) that merit to be on the front page instead of Wall Street collapse stories. When you switch your News channel on, what do you see? More bad News. And where are all the good and solid companies and emerging ones? Yes you can dig them up, if you have time, but why are they not in front of you. I would not blame Paulson, that's a cheap excuse. We simply have to start to use common sense more often instead of listening to the so called Gurus, advisers, experts. Most of it is biased to achieve a reaction or to guide you in a certain direction. They appear to be neutral but most of them are not. If you do not perform your own research, you will always depend on some regurgitated analysis. One fundamental problem of the average US citizen as well as some Giants (GM) is not to look beyond its borders. (Its called arrogance) This is one of the reasons why periodically the US gets in a mess like this. However due to US ingenuity it will emerge ever stronger without a shadow of a doubt. My prediction, Dow at 14'000 end of 2009. Would that bring me up to Expert status.......? just kidding

  • Jason - Saturday, December 27, 2008, 9:55PM ET  Report Abuse

    • Overall: 2/5

    Ben, your comments that the Government should not have let Lehman fail seem have no merit. They are all based on what is best for American Investors/savers, etc. But instead, it should be based upon what is right. Is it right to bail out private companies when things go wrong? I don't think so.

  • Peter G - Saturday, December 27, 2008, 9:00PM ET  Report Abuse

    • Overall: 1/5

    Ben, Hang onto your hat. You are going to be wishing soon that 2009 will be only as bad as 2008. 2009: The year of the Second Great Depression. Just as all the pundits were saying we were not going to have a Recession and were proven wrong, so will those that say this will not end up in a world-wide Depression. It is sad, but true, that President Obama will go down in history as the second Hoover. I can't believe that more did not see this coming. I left the market when the Dow was 14,000 . Perhaps you should be getting your investment advice from me.

  • martin b - Saturday, December 27, 2008, 8:02PM ET  Report Abuse

    • Overall: 2/5

    i agree with ben and others that have said of late, that buy and hold is no longer an effective strategy. an investment vehicle should not come equipped with a rear view mirror.

  • Warmcamp - Saturday, December 27, 2008, 7:07PM ET  Report Abuse

    • Overall: 1/5

    Yeah, right. Don't blame yourself for your losses, blame Paulson. Cheap demagoguery. Lehman should not be allowed to fail (i.e. bailed out as zillion others) and everything would be fine. How simple.

  • Eric J - Saturday, December 27, 2008, 6:27PM ET  Report Abuse

    • Overall: 1/5

    At least Ben knows he was wrong. I saw one of the smart guy analysts on CNN try say people who got out of stocks before they crashed were not thinking correctly. Then the host said you could invest your IRA in any stock or bond that is governmentally regulated. Aside from begging that question. (are any stocks or bonds regulated e.g. Madoff). Makes one wonder if there is not a propaganda campaign in progress. I suggest researching what a truly self-regulated IRA is. Yahoo could even find someone to write about it.

  • wavb2 - Saturday, December 27, 2008, 4:46PM ET  Report Abuse

    • Overall: 1/5

    Geez, this contiunes to be the absolute worst finance column ever written. First off, Ben, NO - that is NOT what the efficient market hypothesis says, please google it and get educated (it doesn't purport to predict future price, it hypothesizes the relevance of the CURRENT price. Also, see strong, semi-strong and weak forms. Finance 101. Also see Burton Malkiel's random walk theory). Oh, and while you're ripping Bernanke and Paulson (indeed, fair enough game) please see your own earlier columns and your amateurish and utterly off-base rantings, not to mention your .000 batting average in the prognostication dept. IF you're new to all this, avoid this guy like the plague, regardless of what approach you're researching. No one's "advice" is more dangerous than his. He gets concepts wrong, uses inept analogy, makes the most ill-founded predictions I've ever seen and thus his columns are loaded with bad advice, both explicit and implicit. EGADS!!!!

  • Yahoo! Finance User - Saturday, December 27, 2008, 4:41PM ET  Report Abuse

    • Overall: 2/5

    Ben, bonds are for chumps, especially now. 30 year treasury for 2.6% sounds like a bad deal to me. Bonds are almost always for chumps. Lots of downside risk for so little upside. You also fail to mention the other big culprits in this mess -- high oil prices, community reinvestment act, loans made by companies with no intention to keep and service the loans themselves, mark to market rules, cronie boards of directors, stupid management (you need look no farther than GM, banks, or your favorite guy - Paulson). We will never have a stable economy without booms and crashes so long as we do not have a stable, and stably priced, source of energy. Government interference is usually bad (see community reinvestment act, encouragement to make stupid loans, etc.) but it may be the only way to a long term energy policy. I'm no Obama man, but if Obama only gets energy right a lot of good will follow. It would be more than Bush ever did. So Lehman failed -- big deal. So long as depositors are made whole and investor account holdings are theirs to take elsewhere, who cares if the failed managements and boards are out on the streets as a result of their own stupidity. Really, so long as depositors are made whole (not stockholders of the firm and I am a stockholder) who cares if any bank or any other business fails. The biggest problem with the bank and auto bailouts is the stupid managements and stupid boards that already failed are still in place. You want a stable and sound economy, get a good long term energy policy that can keep energy prices stable, give company control to the shareholders who own the companies instead of management and crony boards, and get government out of the way. Right on about Paulson though.

  • frank777 - Saturday, December 27, 2008, 3:54PM ET  Report Abuse

    • Overall: 2/5

    Ben, before you make the statement that buy and hold is a questionable strategy, you need to take a good look at the history of the Dow. Secular bull and bear markets COMMONLY last more than 10 years. Buy and hold should continue to work just fine, but on a 30 year scale, not 10 years. It has never been a good short-term strategy, and probably never will be.

  • Navodaya - Saturday, December 27, 2008, 2:22PM ET  Report Abuse

    • Overall: 1/5

    How can you expect a govt to help private sector stupidity. If you have made some stupid decisions market is supposed to kill you, but we have govt interventions trying to put there weight behind the failures, giving them a new life. Now the risk has shifted from private sector to govt and clearly the CDS on US govt shows that. It used to cost $2000 to protect $1 million US govt debt default, now it costs more than $60000. Good luck with transferring risk. I would be looking forward for people like Ben who are going to say, we just messed up the system by saving these private companies, and people would be depressed and they would promise themselves that they would never invest in stock market again... and that moment would be the market bottom and right price to buy.

  • Stephen - Saturday, December 27, 2008, 1:53PM ET  Report Abuse

    • Overall: 2/5

    Ben seems to think Lehmans failure caused everything after it. Its like saying one small breakwater can stop the tidal wave. While Im not glad Lehman is gone, they were clearly a victim of their own ignorance. I dont see how saving them can be put in the catagory with saving Freddie and Fannie. Ben is still trying to blame someone for not understanding the power of the lack of transparancy we all helped create.

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