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Ben Stein How Not to Ruin Your Life

Ben Stein, How Not to Ruin Your Life

The Long and the Short of Down-Market Investing

by Ben Stein

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Posted on Friday, March 16, 2007, 12:00AM

I was going to write about how to give a good job interview, and maybe I will someday soon. But right now I'm moved by the stock market's continued gyrations downward to say a few deathless words on that subject.

In brief, be of good cheer.

A Bank or a Casino?

Let me explain a few basic things about the stock market. It exists for a variety of reasons. For one thing, it allows entrepreneurs and established companies to raise money for factories and laboratories and mills and mines.

It also allows small and large investors like you and me to purchase stocks to place long-term bets on the economy. We buy into America's industrial growth, and help it propel us into retirement and prosperity. The stock market allows this.

But the stock market is also a vast casino for the people who work in it. They play feverishly, trying to make a dollar or two (or a million or a billion) via short-term trades. They sell short, buy and sell options, use trades so complex they break computers -- all to make a quick buck.

In particular, they can make money by selling short and using "sell programs." These allow traders to make money as markets fall, just as we long-term investors make money by holding on for the long run.

Take Advantage of the Sale

These trades should be totally irrelevant to us long-term investors, except for one thing: Sometimes, when the traders and gunslingers drive down the price, they give us a chance to buy into long-term growth on the cheap.

As I've said before, if the market sells itself down a few percent or more, why not take advantage of the sale the same way you would a sale on paper towels or a washing machine? It's the same market, and eventually the traders will decide to start their manipulations to make the market go up. And there we'll be, with our stocks.

Ultimately, when the trading frenzies die down, stocks are priced according to earnings and interest rates, not according to who has the quickest finger on the sell-program trigger. And again, there we'll be with our stocks. (I learned this from Warren Buffett, so it has to be true... and it is true.)

Now, here's a key point: When the markets go nuts and traders sell short and trigger sell programs, they don't ever just say, "Hey, we're doing this to make a fast buck and profit from fear." They always have some supposedly legitimate, "statesmanlike" reason.

Barely Blip-worthy

Today, the reason is supposedly terror in the subprime mortgage market. To put this as frankly as possible, this is just nonsense.

Even if subprime delinquencies and defaults are up, they're a tiny portion of total mortgages. Suppose 13 percent of subprime mortgages are in default. Subprime itself is less than 15 percent of total mortgage debt, so that means that roughly 2 percent of mortgage debt is delinquent or in default.

Yes, that's more than it used to be, and is a disaster for the subprime mortgage companies.

But when a mortgage defaults, the lender takes back the house or condo, sells it, and usually recovers about 75 percent of the loan value or more. That means the real loss would be about 25 percent of 2 percent, or 1/2 of 1 percent.

In the context of a market as huge as the nation's mortgage market, that's not a lot. A few companies will go bankrupt, and someone will make a killing buying their bonds and portfolios at a huge discount as they turn out to be worth a lot more than people thought in March 2007. But it won't mean a lot to a roughly $14 trillion economy, of which the subprime mortgage market is a tiny blip.

Buy and Hang On

It's all a fig leaf for unscrupulous traders to spook other traders and try to scalp them. Please don't let it scare you. Keep holding on, and add to broad indexes like the SPY and the VTI.

There's also the supposed terror of a tiny rise -- .25 percent -- in Japanese interest rates. This will make speculators' easy-money-borrowing in Japan and subsequent re-lending in New York at a much higher rate a tiny little bit more difficult. But you and I have nothing to do with the carry trade, and the carry trade has nothing to do with the long-run level of the stock market.

Meanwhile, the economy is strong. Employment is very, very strong, and corporate profits are great. It's a good time to buy -- especially because traders and speculators have driven prices down.

That's good news for you, if you're patient. I know this is counterintuitive; it always feels a lot better to buy when the market is going up. But you make more money buying when the market is going down. Let the traders and gunslingers kill each other. Buy when it's low and just be happy -- and, as always, be patient.

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191 Comments

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  • A N - Wednesday, July 25, 2007, 11:08AM ET  Report Abuse

    • Overall: 5/5

    Rock on Ben. You have a talent for proper perspective. Read you regularly.

  • Kenneth - Sunday, April 1, 2007, 10:29PM ET  Report Abuse

    • Overall: 5/5

    Excellant, practical, and usefull!!!!

  • Yahoo! Finance User - Friday, March 30, 2007, 1:42PM ET  Report Abuse

    • Overall: 5/5

    i like stein's honesty and integery.next his knowledge,his associates,his sources and his common sense aappraisals.

  • Steven - Thursday, March 29, 2007, 6:07PM ET  Report Abuse

    • Overall: 5/5

    Excellent article. Its always good to hear someone place things in their proper perspective.

  • Bruce M - Tuesday, March 27, 2007, 5:33PM ET  Report Abuse

    • Overall: 5/5

    To allow for long periods of market "flatness" only buy and hold stocks which pay ever increasing dividends.

  • ԣɽ - Monday, March 26, 2007, 12:58AM ET  Report Abuse

    • Overall: 5/5

    I agree with him.

  • Yahoo! Finance User - Monday, March 26, 2007, 12:47AM ET  Report Abuse

    • Overall: 5/5

    This is a very practical wonderful insight into stock market behaviour.

  • Yahoo! Finance User - Sunday, March 25, 2007, 10:07PM ET  Report Abuse

    • Overall: 5/5

    Thanks Ben! You and Jeremy are the best.

  • Octopus - Sunday, March 25, 2007, 5:41PM ET  Report Abuse

    • Overall: 3/5

    Why is he a long term investor? Wouldn't one want to sell anytime something hits its peak whether it happens in one month, one year or ten years?

  • Yahoo! Finance User - Sunday, March 25, 2007, 4:35PM ET  Report Abuse

    • Overall: 1/5

    If you did the "buy and hold" thing in Japan 15 years ago, you would still be in the hole today. The US markets has demonstrated longer down periods in the past. How many people are rich enough to stick it out 20-50 years to benefit from the eventual recovery? The markets has shot up for the last 25 years, so if history continue to repeat itself, we're due for a long period of under-performance.

  • Yahoo! Finance User - Sunday, March 25, 2007, 3:31PM ET  Report Abuse

    • Overall: 5/5

    Those of you rating this story 1-2 stars probably provide the rest of us with the opportunity to buy stocks on sale every now and again. Thanks and keep it. There's a reason Ben has so much money!

  • Chris1 - Sunday, March 25, 2007, 11:04AM ET  Report Abuse

    • Overall: 2/5

    Wow. Ben has always appeared to be one of the smartest of the Yahoo financial guru buffoons, but he is REALLY missing the boat here. We are experiencing these current subprime default problems at a time when the economy is strong, and we have full employment. It represents much more than a "blip" in our economy when Americans are swamped in more debt than they can handle. When our economy breaks from what has been an unprecedented period of expansion, which it will, people won't have the options of borrowing to finance their lifestyles anymore. They'll curtail spending. Jobs will be lost. People will try to sell their homes, but will find no buyers at anywhere near the prices they need to break even after making purchases and refi's in recent years. We will have the early '90's again, where you can drive down streets and see a "FOR SALE" sign on every other house - with no takers. Somehow trying to justify current real estate and lending worries on "unscrupulous market traders" is absurd. I think that only when people once again experience a bad economy and poor employment conditions that they will wake up to the fact that they are in over their heads. In some cases, way over their heads. I gave this article a two-star rating because at least he has one thing right: Buy and hang on. Whether it be real estate or long stock positions. The people who buy homes only to live in should come out of this impending down cycle just fine - so long as they haven't succumbed to these latest and greatest creative financing deals to qualify. And as for stocks, look at the Japanese markets. We are looking at probably 20 years of relative stagnation there overall. If you are 60 and gearing up for retirement, and you are planning to have a certain amount of growth with your stock portfolio in order that your money outlasts you in retirement, what happends when your effective return is zero? Or with inflation, negative? Ben, we've got some SERIOUS problems here, and you are ultimately giving BAD ADVICE for people to ignore these initial subprime mortgage problems. As someone who works in the financial/mortgage industries, real estate related problems will be widespread - and people will sell off stock and retirement accounts holding stock in an effort to sustain current levels of living. The only thing amazing to me is that real estate and stocks in general are still as high as they are today!

  • RR - Saturday, March 24, 2007, 11:52PM ET  Report Abuse

    • Overall: 1/5

    Ben, you usually make good investing sense and what you say over the long, long haul is true if you have a 20 year horizon but any fool can see we are in a serious housing problem the likes of which we have never seen before. This is not a tiny selloff buying opportunity. This is a market about to crash. The pattern is setting up just like the internet boom/crash. We have extreme down days/weeks and then just this week we have a record up. Can you say volatility? This is not healthy. Ben, why don't you just tell everyone to buy as many houses as they can right now while the price is down? Oh, you don't think that's good advice since prices on condos in some markets will eventually be down 50 percent from the peak and houses down up to 30 percent from the peak of the last two years. Have you studied the fact that NEVER in the history or tracking housing price rises we never saw prices rise this much so we have to have an at least 50 percent correction and NO ONE can know how long it will take; the same is true of the stock market. Of course you don't load up in a down market unless there are signs of it putting in a bottom and this is obviously just the beginning. Just ask your buddy Greenspan who can't keep his mouth shut. You can tell people to consistently invest but not to load up in this scenario. Anyone knows this. Ben, you are starting to sound like Suze Orman, talking from your ivory tower. You are another multimillionaire who can afford to gamble and that is the advice you are giving. I HOPE everyone loads up on stocks just like they have done on houses because I am building my cash so I can buy both your stocks and your houses at a fire sale. Ben, this article should be saved for advice to gambler's in Vegas.

  • Mister - Saturday, March 24, 2007, 11:54AM ET  Report Abuse

    • Overall: 2/5

    We are in the beginning of a real estate meltdown, and it is too early to assess the extent and duration of its unravelling. All we can say is this: real estate is going down. Will properties reach lows of 50% of purchase prices, as they did in some parts of the countries in the early 1990's? Who knows. In 2007, we now have things that didnt exist to the extent they did in 1989: mortgage speculation and derivitaves such as the aforementioned subprime, interest only mortgages which convert to traditional mortgages, and ARM's to contend with. In addition, we have created a whole financial industry of "mortgage backed assets", investors who buy and sell mortgages to add to the equation. Billions of leveraged dollars are invested in these funds, which rely on the stability of the mortgage industry. As for the "buy and hold" mentality: newsflash, you CAN convert stocks into money markets in your 401K if you think the market is overpriced. You can then convert back to equities at a later time if you think they are underpriced. The problem is that the financial industry does not like this entropic thinking, because it creates extra work and instability for them. Think for yourself, and make your own decisions. Do not be paralyzed by fear and pseudo-authoritative advice from actor and lawyer Ben and ride the market down. I like Ben and enjoy his articles, but where do YOU think the market is headed?

  • HOTLATIN - Saturday, March 24, 2007, 10:15AM ET  Report Abuse

    • Overall: 1/5

    this is crazy, hold, and keep buying! this is the only way to see your value drop in the short term, which does not improve your self esteem. What you should do is, sell emediatly, then buy back when it starts coming back up. this is how you preserve your capital and grow your money.

  • Yahoo! Finance User - Friday, March 23, 2007, 8:57AM ET  Report Abuse

    • Overall: 4/5

    I agree with much of Ben's comments. However, the bull market is tiring and the risks are increasing. Just as dollar cost averaging is a good way to enter the market especially via 401k plans, now may be the time to lighten up a bit while the market is at historic highs.

  • Yahoo! Finance User - Thursday, March 22, 2007, 4:03AM ET  Report Abuse

    • Overall: 5/5

    I would have to agree. Being patient is key although not always easy.

  • Yahoo! Finance User - Thursday, March 22, 2007, 3:36AM ET  Report Abuse

    • Overall: 1/5

    Just roll over and go back to sleep. The traders and market makers are always at work. Be proactive or be left behind.

  • JeffreyP - Wednesday, March 21, 2007, 9:03PM ET  Report Abuse

    • Overall: 2/5

    While buying when the market is low is a good long-term technique, I think Ben is severely downplaying the effects of the unwinding of the carry trade and the subprime market. We have too many houses on the market now, so when the market gets a flood of foreclosures, the prices of houses are going to drop, making a bunch of people upside-down on their mortgages (especially if they've been taking out HELOCs and the like to finance their lifestyle). The carry trade provides 'cheap money', which has driven equity prices higher than their reasonable valuation -- this is a similar effect to the low mortgage interest rates causing the currently collapsing housing bubble. When it is cheap to borrow money, people can pay higher prices for income-producing assets because they are paying less interest on that borrowed money. If the cost of borrowing goes up, those prices have to come down, absent any external factors. Don't get me wrong, I generally like Ben, and I think his point of buying when the market takes a dive is a great one that everybody should pay attention to. But I think he is underestimating the challenges ahead. I believe the market is much more likely to drop 10% than to rise 3%...and with that view, I should be in cash waiting for the market to finish it's decline and start rising again before I buy back into my positions. And, if I'm wrong, maybe I miss out on a little gain in the meantime. Buying now is still buying at the top, not at the bottom.

  • Lixin - Wednesday, March 21, 2007, 9:00PM ET  Report Abuse

    • Overall: 1/5

    How long? 30 years?

  • happyguy - Wednesday, March 21, 2007, 7:02PM ET  Report Abuse

    • Overall: 4/5

    Mr. Stein always has rational data to back up his reasoning. More of him, less of the vapor guys please.

  • Yahoo! Finance User - Wednesday, March 21, 2007, 5:20PM ET  Report Abuse

    • Overall: 5/5

    This is an excellent article, despite some negative comments from short-term day-traders who think they have a much better understanding of the markets and investing than Ben Stein. What they fail to realize is that Stein is interested mainly in long-term investing, and strategies to profit from a variety of market conditions. This can be accomplished generally only over periods of at least five years; 25 years would be much better. Many people want immediate results from their investments; the best way to do that is to invest in training that will result in a high-paying real job--not day-trading. I am using Ben's advice to build my portfolio for meeting long-term needs and goals; I use income from a real job to meet my immediate needs. I have invested regularly, mainly in mutual funds, for over 20 years; I know that Ben Stein's advice works over the long-haul. If you need money quickly, and you're able, then get a job. If you have a job but you still don't have enough money, either get a higher paying one or cut your expenses. If you are nearing retirement, and haven't saved adequately, then consider working longer, cutting your expenses, and saving every dollar you can while you are still working. All of the above strategies (including Ben's) work. If you can't implement one of more of them, then you have a serious problem that can't be fixed here.

  • Scott - Wednesday, March 21, 2007, 4:51PM ET  Report Abuse

    • Overall: 5/5

    Ben is a very smart man. Not only is he smart, he possess much wisdom. To these ends his stance is as calm and cool as his demeanor. The market tracks up and down in the short term, but the fact still remains that owning solid comapnies for the long term is the most sound investing approach there is, bar none. I read recently that some market traders rated MO (Altria) as over-valued b/c the multiple had risen in recent years. What they failed to note was that MO is 1. recession proof, 2. seeing more and more reduced risk in the way of less litigation against the company and rulings in favor of big tobacco, and, 3. The company makes money! They pay a dividend, and no signs are evident that profits are eroding, quite the opposite. This is some pragmatic advice that I think Ben would share based on what he's written here. The numbers are just numbers, best-in-class performance, and a solid earnings will always be the things you are looking for in your investments.

  • Michael - Wednesday, March 21, 2007, 4:28PM ET  Report Abuse

    • Overall: 5/5

    great article

  • roger - Wednesday, March 21, 2007, 4:15PM ET  Report Abuse

    • Overall: 4/5

    wright way for perseverence

  • Kenneth - Wednesday, March 21, 2007, 4:09PM ET  Report Abuse

    • Overall: 5/5

    Great advice for the average investor. The US stock market has averaged approximately 8% over the long-term, but within that you'll find booms and recessions. Buy and hold is the best play for a novice investor with 10 or more years until retirement. The market is irrational in the short-term, but you will be rewarded for holdings great companies long term. Look at the past few weeks for an idea of the irrational nature of the market: The fed is worried about inflation (which means the economy is growing too fast), while CNBC and all the know-it alls in the financial press are worried about a recession because the Shanghai Index dropped 3 percent. The two events are complete opposites and mutually exclusive!!! As Warren Buffett said, "In the short-term the stock market is a popularity contest, over the long-term it is a weighing machine." So, go out and buy great companies and put them away.

  • the Great One - Wednesday, March 21, 2007, 4:02PM ET  Report Abuse

    • Overall: 5/5

    You can take this advice to the bank. As an investment advisor for 20 years I can assert that the average investor buys high and sells low, while the successful investor does the exact opposite. Ask youself why John Templeton went to Japan in 1946- he bought everything in sight. Someone else remarked "the stock market doesnt always go up". check your 20 year averages my friend- 10% everytime- even the 20 year period ending 2002. The lower the price, the lower the risk.

  • Yahoo! Finance User - Wednesday, March 21, 2007, 3:42PM ET  Report Abuse

    • Overall: 1/5

    A smug, Bush-loving Neocon propagandist. Doles out retarded 'buy and hold' advice to poor working mom and pops while he most likely keeps his millions in the aforementioned hedge funds. The stock market does not always go up, and may have real problems going forward.

  • Yahoo! Finance User - Wednesday, March 21, 2007, 3:21PM ET  Report Abuse

    • Overall: 5/5

    Excellent advice, but it's no wonder Ferris ditched your class.

  • Yahoo! Finance User - Wednesday, March 21, 2007, 3:21PM ET  Report Abuse

    • Overall: 1/5

    Can't believe how naive and almost propagandistic this note was. If Stein were right, you could only buy. When the others sell, you buy. When the others buy, you hold (possibly buy some more?). Doesn't that sound a little too easy and asymmetric? What if you were going to retire around 2001? I'm saying this as a long-term holder of low-cost index funds; but that doesn't mean I treat my stock investment as a treasury bond! (Why would anyone buy them if Stein were right?). And, yes, Buffet did say stocks are overpriced right now.

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