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Ben Stein How Not to Ruin Your Life

Ben Stein, How Not to Ruin Your Life

More Lessons From the Financial Crisis

by Ben Stein

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Posted on Monday, January 5, 2009, 12:00AM

Because the past 15 months have been by far the most upsetting time period of many investors' lives -- including mine -- I am continuing to examine the lessons learned from this crisis. 

First, we have learned that even the most rigorous back testing of portfolios did not work during this period. The reason was simple -- no back test allowed for as much stress as markets were under from late 2007 to fall 2008. There simply was no postwar historic precedent for markets to be as volatile on the downside as they were in 2007-08. Thus, back testing (very similar to stress testing) that called for maximum falls of, say, 33 percent simply did not work when markets fell as far and fast as they did in 2007-08.

To be sure, there have been other times when the markets fell as far -- the early and mid-1970s are an example. But the daily volatility and unprecedented decline after the failure of the Treasury to rescue Lehman Brothers were simply not on most radar screens.

We Weren't Prepared 

That meant investors were not prepared, in terms of volatility, for what happened.
Nor were we prepared in terms of modern investment theory for a time when almost all categories of investment collapsed simultaneously: US large cap, US small cap, US value, US growth, foreign developed, foreign emerging, foreign growth, foreign value -- all collapsed. At the same time, corporate and municipal bonds fell sharply, as did nearly every commodity.

Real estate, both commercial and residential, also fell dramatically. No amount of diversification worked to preserve capital, other than having short- and medium-term Treasuries and insured cash.

This was not supposed to happen.

The back testing and portfolio propositions did not foresee a massive loss of confidence thanks to catastrophically wrong government moves. Thank you, Henry Paulson, for teaching us humility. Those disastrous moves told us we need to rethink our whole investment approach. It is indeed possible for us to have an investment world that mimics that of The Great Depression, even though most of us had thought that impossible.

There is still a lot of ignorance in the ruling class.

The Dangers of Useless Hedging

We also were caught off guard (or at least I was) by the amount of volume on the sell side that the hedge funds and investment banks could put into the market as they had to meet requests for redemptions and sell to meet demands of lenders. The amount of capital that these entities had to put into cash was truly prodigious and meant swings to the downside that could not have been imagined 10 or 20 years ago, once portfolio insurance largely disappeared.

Portfolio insurance is a scheme to hedge gains in portfolios by selling stock index futures short or buying put options. Once employed on a large scale, it led to a nuclear chain reaction of sales of cash versus options that dragged the market down roughly 25 percent in one day on October 19, 1987. Only extremely agile action by Alan Greenspan and the New York Fed to manipulate the options market kept the crash from becoming doomsday for capitalism. We should have learned from this about the dangers of unrestrained and totally useless "hedging" -- as in hedge funds -- but we did not.

So, again, we got hysterical moves to the downside from actions that were supposed to protect investors from just such moves.

What does all of this tell us? That, while the market can be our friend, it can also be a beast. The market can get things wildly wrong, as the extremely clever Jim Grant told us recently in his book, "Mr. Market Gets It Wrong." (Note: Jim is a hard money man, and I am not.)

Fighting the Last War

But what it mostly tells us is that we have to do even more hedging than we thought we did -- and in very basic ways. We investors, as the saying goes, are always fighting the last war. So now that we have learned to protect ourselves from volatility, we may not need to for a while.

Still, I have learned a bit of a lesson. I was wrong to have as little as I did in cash and Treasuries. I was wrong to be as sanguine as I was about my stocks and real estate in terms of their volatility. It was, in fact, possible for almost everything to collapse at once -- and it did. "The market trades to cause maximum pain" is a fine adage for investors then, now, and in the future.

Toward the end of his life, Ben Graham, Warren Buffett's brilliant teacher on value investing, told his friends that he had decided the stock market was simply too dangerous for him; he would keep all of his money in Treasuries. He was much smarter than I am; I am still foolish enough to think I should have a good chunk in stocks, especially at the current marked-down prices. Mr. Graham, by the way, died in the mid 1970s -- a terrible time to own either bonds or stocks.

The Plan Going Forward

But, although I will keep money in stocks, I will keep more than I did in insured cash and Treasuries. I will follow the advice of author and speaker Raymond J. Lucia, a dear friend and authority on financial planning, to keep many years worth of spending needs in cash or near cash. I will, in a word, hedge myself more in US government bonds and cash than I previously did.

I shake when I think of this because I feel sure inflation will eventually come back in a big way. But I am hedged on that -- I hope -- by my real estate, which I did not -- cannot -- sell.

In any event, I will take some comfort in knowing that even Warren Buffett's stock fell by about 45 percent in the 2007-2008 debacle; if the father of value investing could feel he had made mistakes, and if the gurus of value investing got clobbered, then I will not torture myself too much about the horrible year and a quarter just passed.

After all, my wife has not lost value. My dogs have not lost value. My son has gained greatly in value by getting engaged to a fabulous young woman. My friends have not lost value (but, sadly, there are fewer and fewer of them). The sunshine outside my house in Rancho Mirage, Calif., has not lost value, and every year I have left has greater value because of scarcity.

In my remaining years as an investor, I will just do the best I can -- and then go eat sushi. I recommend that you do the same.

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  • ImOwnedByGod - Saturday, January 17, 2009, 9:09AM ET  Report Abuse

    • Overall: 5/5

    Ben your best advice yet is "go eat sushi" People need to quit worrying as this is an economic cycle that will rebound...the govt. of course has really messed it up, but when the cycle goes back up everything will be fine (in a few years). Right now, I am sitting on my investments and buying as much stock as I can. Buy low sell high. Real Estate is also getting better for the buy low sell high.

  • Yahoo! Finance User - Friday, January 16, 2009, 10:43PM ET  Report Abuse

    • Overall: 1/5

    Simple fact: You are entirely missing the fact that this is a DEBT bubble. It is the torpedo about to hit the ship from the other side. Average Debt/GDP=2 Current Debt/GDP=3.6 Debt/GDP before the great depression=3.0 We have historic levels of debt. This will work its way out of the system for the next few years. The market will perform poorly. Corporate earnings are plunging. P/E multiples are falling. The market is the worst place to put your money for the next few years. Cash and safe bonds are the way to go. Ben, your a great writer, but have bought into the propaganda. Debt destruction=reduced demand=asset prices crumble. What I would like to see is something on bonds, and dividends

  • Yahoo! Finance User - Thursday, January 15, 2009, 9:19PM ET  Report Abuse

    • Overall: 2/5

    thanks for the tip Ben. I just had some sushi. what should i eat next? i am still kinda hungry.

  • Tom - Wednesday, January 14, 2009, 6:55PM ET  Report Abuse

    • Overall: 3/5

    Always fighting the last war, indeed. Cash and Treasuries will be your ruin, as inflation will absolutely come back with a vengeance after all of this quantitative easing. Real estate is not liquid. You need to be invested in liquid hard assets -- silver, gold.

  • Bill - Tuesday, January 13, 2009, 11:14PM ET  Report Abuse

    • Overall: 1/5

    Quaint piece but Ben teaches us little with this article. His point of emphasis for blame is Hank Paulson and the government. Fine. Hank Paulson, Barney Franks, Chris Cox, George Bush, Alan Greenspan and the rest of the laissez fair free market morons deserve their fair share of blame. But Ben fails to mention the culpability of the criminals in suits on Wall Street disguised as bankers that bundled dog poop and sold it around the world as investment grade paper with the help of the ratings agencies. No mention of the culpability of corporate criminals doing double duty as CEOs of publicly traded companies that cooked their books and fabricated earnings to "earn" multi million dollar bonuses. No mention of the Greenspan's role in liberalizing his interpretations of and ultimately helping abolish the Glass Steigal Act for his buddies John Reid and Sandy Weil. No mention of the rampant moral bankruptcy of the folks on Wall Street and in corporate board rooms the disasterous results on the market of this universal distrust. The bottom line of this whole mess is that when a majority of investors reach the conclusion the finanical statements of publicly traded companies can't be trusted you can't give stocks away. The majority of NYC bankers are clearly inept. Many CEOs and top executives of publicly traded companies are inept, over paid and morally bankrupt. I have no need to entrust my retirement money to these criminals when I can buy real estate, hard assets and other investments I can trust and manage myself.

  • Gary B - Tuesday, January 13, 2009, 10:18AM ET  Report Abuse

    • Overall: 3/5

    This is the result of corporations running the country and our government. They accept bailout money, and then turnaround and offshore high-value jobs. Onshore bailout. Offshore jobs.

  • Yahoo! Finance User - Monday, January 12, 2009, 5:26PM ET  Report Abuse

    • Overall: 1/5

    There is a guy named Mike Shedlock (mish) he has a blog called..MISH'S Global Economic Trend Analysis and he is partners in Sitka Pacific Capital. He was up 12 points last year. Ben laughed at Peter Schiff who has EuroPacific Capital. Listen to Schiff and Mish, these two guys, they will tell you how its going to be.

  • Yahoo! Finance User - Monday, January 12, 2009, 2:54AM ET  Report Abuse

    • Overall: 4/5

    Talk about throwing in the towel. The current financial crisis has certainly wiped out trillions of dollars of individual wealth. This is why everyone is now DEPRESSED. If I didn't know any better I'd say you are giving up Ben. The most depressing fact over the past few years is that the Democrats in Congress continue to make the wrong economic decisions and are making the problem worse. Now Obama wants to undermine the funding mechanism for social security by reducing payroll tax receipts. He is part of the Democratic plan to wipe out corporate profits and the wealth they create for all retirement accounts. The stock market decline was caused by the relentless campaign of Obama, Clinton,and Edwards against the corporations that pay all of the health care costs and retirement benefits for the American workforce. The Democrats are so selfish that they imposed nonsense energy policies designed to bankrupt the automotive industry. Now they plan to make social security completely insolvent. It is apalling that the media continues to cover up and conceal the fraud being perpetrated on the American workforce by Pelosi and Reid. The Democrats impose tax laws designed to transfer American jobs overseas. Their goal to completely socialize the American economy under government controls requires them to bankrupt everything first. They are now going to pilfer the social security trust fund and waste the money on extremely expensive inefficient energy systems designed to drive up electricity rates across America with windmills and solar panels. Neither one of those alternative energy sources is efficient or economical. They also don't provide fuel for the transportation industry, chemicals, fertilizer, or plastics. Stay depressed Ben. The fact that there is no one in the country who is standing up and telling the truth about the global warming fraud/climate change economic hoax/expensive alternative energy inefficiencies is the reason for this economic disaster. Do you realize they are teaching this nonsense in the public school system. Many people actually believe that the internal combustion engine is obsolete. It is the most efficient technology for the energy industry bar none. Yet Obama and the Democrats want to scrap it for technology that is not even on the drawing board yet. Global Warming is the most devastating economic hoax ever in the history of this nation. It is a product of foreign interest groups who are using our own media and government to undermine our ability to compete for the jobs of this world. The Democrats have sold out the people they serve and plan to destroy American jobs, retirement accounts, and social security for the baby boomers. Add this to the fact that the Federal Reserve wiped out subprime borrowers with a bait and switch plan that jacked up interest rates 17 straight times to fight 2%inflation when the entire real estate market was collapsing, a Congress who is more concerned about the temperature of the planet thousands of years from now than they are about the baby boomers retirement safety net, and regulations such as Sarbannes Oxley which did nothing to route out a $50 billion ponzi scheme but instead imposed excessive costly regulations that did nothing to prevent the excessive leverage that destroyed the mortgage banking industry. The American economy survived 911 and the Iraq war, but it has been wiped out by the idiots in Congress who willingly have sold out to foreign interest groups.

  • Elmer - Sunday, January 11, 2009, 7:21PM ET  Report Abuse

    • Overall: 5/5

    I have never been the Biggest Bush fan in the world, However I have to say that he was 10 times the president that Clinton was and 100 times the president that Carter was. This mess was caused by the subprime market with the encouragement of the Democrats like Clinton, Frank and Dodd. Now Obama is promising a massive spending package that will make our Grandchildren poor.

  • Yahoo! Finance User - Sunday, January 11, 2009, 2:25PM ET  Report Abuse

    • Overall: 1/5

    There were people who saw this coming. Peter Schiff told this guy in August 2007 this was coming. He laughed him off... cuz he was blind and deaf to the message. Last December, he said Happy Hannaka. It's Merry Christmas. Don't try to link your holiday with Christmas. Was Hannaka celebrated for 2000 years? Go tell Madoff Happy Hannaka cuz noone cares.

  • Yahoo! Finance User - Sunday, January 11, 2009, 1:08PM ET  Report Abuse

    • Overall: 5/5

    Biggest lesson? Never, EVER vote another Bush into office. Good riddance Dubya, happy trails pahtna.

  • Missouri Mike - Sunday, January 11, 2009, 1:23AM ET  Report Abuse

    • Overall: 5/5

    I have to say I enjoy reading Ben's articles and look forward to his columns all the time. He is the main reason I keep coming back to Yahoo Finance. Cheers Ben!

  • Love2Fly - Sunday, January 11, 2009, 12:15AM ET  Report Abuse

    • Overall: 1/5

    Best lesson I learned: "Sell Short and Buy to Cover" during Republican Administration; "Buy and Sell" during Democrat.

  • erikh - Saturday, January 10, 2009, 6:50PM ET  Report Abuse

    • Overall: 1/5

    I can NOT afford sushi, BS!!! Why does Yahoo pay this wrong-headed clown when excellent columnists like Harold Maas (and his 'Best of Today's Business') are cut loose. CUT LOOSE BEN STEIN! He deserves to suffer in the massive ranks of the unemployed, selling his beloved real estate holdings, one by one, into an ever-depreciating, deleveraging market.

  • Yahoo! Finance User - Saturday, January 10, 2009, 2:36PM ET  Report Abuse

    • Overall: 1/5

    Bad economic essay. Ben ,please spare yourself the trouble of writing such things Go hide your empty head in mud ,ostrich. you were wrong,sent people into the abyss and have no right to advice others now. Enjoy retirement with your valued dog ,I'm sure you have your savings in dubai

  • jimsmename - Saturday, January 10, 2009, 1:35PM ET  Report Abuse

    • Overall: 1/5

    "I will follow the advice of author and speaker Raymond J. Lucia, a dear friend and authority on financial planning, to keep many years worth of spending needs in cash or near cash." Dam it to hell Ben, why do you keep repeating this? Do you not understand that VERY FEW OF US have this luxury?? Your last article said we should keep "7 years" of cash on hand! I would like to shake you so hard your false teeth would rattle like castanets.

  • Douglas - Friday, January 9, 2009, 2:53PM ET  Report Abuse

    • Overall: 4/5

    I always enjoy reading the negative reviews of these columns, because the writers are always so vitriolic. What have they got against guys like Ben Stein anyway? I mean, personally? To me, that just gets in the way of learning from these columnists. For example, this column hits on Stein's mistakes. Better to learn from his than mine, right?

  • Brown - Friday, January 9, 2009, 2:24PM ET  Report Abuse

    • Overall: 1/5

    Ben has entertainment value, but has no investment savvy. His whole school of thought has been discredited.

  • HR Dir - Friday, January 9, 2009, 2:02PM ET  Report Abuse

    • Overall: 5/5

    Where is Anya to tell the young investors to take advantage while we can??? even you boomers who have YEARS until you can retire? Don't loose hope. Don't over leverage and invest in the future.

  • Rob J - Friday, January 9, 2009, 11:04AM ET  Report Abuse

    • Overall: 4/5

    I am shocked and sickened by the revelations in the investment community in 2008 and likely more to come in 2009. I will continue to remove my money from this venue and find legitimate ways to grow what’s left. This entire financial and monetary system is corrupt and must be blown up and reconfigured. Who is best equipped and qualified to oversee this process? Certainly not the government. How will the system ever recover? I can’t imagine how it can repair itself.

  • milkdog69 - Friday, January 9, 2009, 9:42AM ET  Report Abuse

    • Overall: 2/5

    Yes, we need crusty the clown ASAP !!!

  • Randy - Friday, January 9, 2009, 8:23AM ET  Report Abuse

    • Overall: 5/5

    I give Ben a five star click for his good comments throught the years as well as today. Ben conceeds he focused too much on backtesting. I would have to confess I am not a backtester and give (undeserved) value to the news, selling stocks where the news is bad and buying where...well, you know where! I believe I can add an expanded point to Ben's article. I was heavy in CD's as a percent of my portfolio when the market started racing downward. Good shape, right? Being heavy in CD's gave me a comfort level to own stocks with the touted potential for higher than average returns. This false comfort level coupled with holding through the ten percent drop earlier in the year when the market marched right back set me up to hold my positions while the market went down, and down, and down. There are indeed many senarios to loosing 40% in one year!

  • Scott - Friday, January 9, 2009, 2:01AM ET  Report Abuse

    • Overall: 2/5

    I still remember him cheering on the markets saying how good things actually were. Based on Ben's advice, buy stocks now; do the opposite of what he suggests.

  • KarlP - Friday, January 9, 2009, 1:30AM ET  Report Abuse

    • Overall: 1/5

    Why does Yahoo still use Stein, when Krusty the Clown has so much more credibility?

  • erwin - Thursday, January 8, 2009, 10:33PM ET  Report Abuse

    • Overall: 2/5

    I highly recommend to Mr. Ben to eat pogo fish rather than sushi.

  • Cogitus - Thursday, January 8, 2009, 10:17PM ET  Report Abuse

    • Overall: 2/5

    Well, I've been in mostly cash for a long time now (thank goodness!), but have continued to monitor the opinions of the investment gurus anyhow, mostly as a matter of curiosity. It never hurts to know what the lemmings are saying and doing. Like most of them, BS tends to pretty much spout whatever is the pat, contemporary version of conventional wisdom. Pretty uninspired. It always brings to mind the old quote: "A little learning is a dangerous thing; Drink deep, or taste not the Pierian spring", which has at least "papal" infallibility going for it. BS does occasionally correct the nitwits who base their "in depth" analyses on time horizons spanning an extensive experience of all of 20 years or so. Given his age though you'd think he'd know better, about the wages of mania, "irrational exuberance", and the constantly resurging idea that the lessons of history no longer matter for "us". However, I think one has to keep in mind that all of these guys make their livings slaved to the market and its shorter term trends ... how long would they last if they opted to just sit things out quietly on the sidelines for a couple of years? If you want some real insights into the lessons of what just happened (and will continue to play out, probably over the next couple of years at least) you might try Galbraith's book: The Great Crash: 1929" ... it reads like a novel and you won't be able to miss the parallels between 1929, 1987, and now.

  • Yahoo! Finance User - Thursday, January 8, 2009, 9:31PM ET  Report Abuse

    • Overall: 1/5

    You've always been wrong as far back as I can remember. Now I know NOT to buy treasuries!! What a useless insight.

  • Andrew - Thursday, January 8, 2009, 9:20PM ET  Report Abuse

    • Overall: 1/5

    Thanks, Ben!! You've been 100% wrong as far back as I can remember. Now I know NOT to buy treasuries!!

  • eugene - Thursday, January 8, 2009, 9:20PM ET  Report Abuse

    • Overall: 1/5

    I cannot understand why Ben and all of the other "Talking Heads" did not recognize many years ago that Wall Street has become Las Vegas - East. They should have known of the dangers of the effects of derivities, hedge funds, credit swaps, etc. to a market where the average Joe saves his money, and reported on those dangers by "Shouting from the roof tops". He and they did not. Ben's solution seem to be that the average snook should hedge their investments by selling puts, and other forms of hedging. Ben, you have gone nuts. The average investor in the stock market does not have the savy to do that. For them the stock market is "the only game in town". Unfortunately Ben does not have a clue about how to put sanity back into the stock market, which is only sell stock that you own, and use cash to buy stock that you want. The sharpies that want to set up hedge funds, buy and sell derivities, and swaps, etc., should be denied access to the Wall Street. If they wish to play those games they should go to Vegas and do it.

  • a a - Thursday, January 8, 2009, 7:58PM ET  Report Abuse

    • Overall: 3/5

    The consumers are not getting anywhere near 0 to 1/4%. On the contrary, the real estate tax has been increased, as the city needs more real estate tax revenue to make up for its lessened intake from other sources. The credit card companies stopped offering 3 and 4 percent for life (after an initial 3%) offers. Where are the 1/4% mortgages? There is none as it cannot go lower than 3%. Shut down the banks that have to rip off the consumers to make up for their past losses. Create new banks that can lend at 1/4 percent to consumers and home owners, and the economy will start to boom again.

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