Ben Stein How Not to Ruin Your Life

Years ago, I received a letter that asked a brilliant question. The writer essentially wrote, "I read many business publications including the well known ones like Business Week and The Wall Street Journal. I observe that not only are they often at odds with one another. But they often have columnists within each publication who vehemently disagree. Moreover, they often turn out to be mistaken in their observations and predictions. How then do I know who to believe and what I should read to know the truth?"

The man's question haunts me. The older I get (I am now 63 and feel every hour of it), the more clearly I see that much of what is in the media and in the financial media about investments, in particular, is simply nonsense.

Even quotes from famous names with famous addresses are often nonsense. For example, just today I read a column in a well-known business daily about financial stocks. The writer cited a number of reasons why investment bank and brokerage stocks were tanking. He noted the writedowns of their inventories of certain securities and the effect this was having on their ability to use leverage. He closed by saying that Wall Street stocks and shares of financial companies looked bad for the foreseeable future.

But this young man is missing some basics. For one thing, at some point, the mortgage security assets of the investment banks will start to be written UP not down. The rates of default will slow and then reverse course. This is not a guess. This is inevitable. There is a natural limit to how many mortgages can default.

Once that limit is reached and repayment rates stabilize, the people who construct and value the portfolio indices for investment banks will tell them that their portfolios are going up in value. For a variety of reasons having to do with speculation, this move upward could be large and extremely sudden. Once this happens, the financials will likely rebound powerfully.

Will this happen soon? I think so but I do not know for sure. Will it happen some day? Of course. It has to happen unless we assume endless defaults. Is the time to buy financials precisely when they are being hammered and are at multi-year lows? I do not know for sure, but historically, the time to buy any stock or sector is when it has been clobbered.

It would be surprising if that were not true this time, too. I do not know this for sure because I do not know the future. But I do know the past, and I think this goes to the heart of the question my correspondent raised.  If you know the economic past pretty well, you will also have a pretty good idea of the economic future.

Generally, and with few exceptions, "the past is prologue." Knowledge that the economy and various sectors go through cycles tells you that the time to buy is when securities are beaten down and hated. It tells you that money is made slowly, by patiently investing in widely diversified low-cost indices. It also tells you that there have been so far no endless downtrends and that journalists are not the people to trust for investment wisdom. These are a few small but meaningful steps towards answering the question about where truth lies in investing.