Stocks — Part 1: There’s a major market crash coming!!!! and Dr. Lo can’t save you.

I’m feeling testy today.  I just finished an article in Money Magazine and reading this magazine is, in and of itself, enough to make me testy.

This particular piece is an article on page 87 of the March 2012 edition interviewing Dr. Andrew Lo*.  Dr. Lo is an economist and finance professor at MIT’s Sloan School of Management.  There are a couple of impressive photos of Dr. Lo looking serious and imposing.  Here’s one:

Dr. Andrew Lo

I’m going to tell you what he says and why he’s wrong.  You can see the article here if you’d like:

Oh, and that major market crash that’s coming?  Don’t worry.  I’m also going to tell you why it doesn’t matter.

First, in fairness to Dr. Lo, I have no quarrel with most of his ideas.  In fact, it is very possible the good folks at Money didn’t quite get it right.  Perhaps they simply didn’t put the emphasis correctly.  Maybe someday Dr. Lo and I will have a few laughs over a cup of coffee on this.  Or not.

Basically Dr. Lo contends that the long-held theory of efficient markets is morphing into what he calls the”‘adaptive markets hypothesis.”  The idea is that with new trading technologies the market has become faster moving and more volatile.  That means greater risk.  So far so good.

But he goes on to say this means “buy and hold investing doesn’t work anymore.” Money then points out, and good for them, that even during the “lost decade” of the 2000s buy and hold would have returned 4%.

Dr. Lo responds:  “Think about how that person earned 4%.  He lost 30%, saw a big bounce back, and so on, and the compound rate of return….was 4%.  But most investors did not wait for the dust to settle.  After the first 25% loss, they probably reduced their holdings, and  only got part way back in after the market somewhat recovered.  It’s human behavior.”

Hold the bloody phone!  Correct premise, wrong conclusion.  We’ll come back to this in a moment.

Money:  So what choice do I have instead?

Dr. Lo:  “We’re in an awkward period of our industry where we haven’t developed good alternatives. Your best bet is to hold a variety of mutual funds that have relatively low fees and try to manage the volatility within a reasonable range. You should be diversified not just with stocks and bonds but across the entire spectrum of investment opportunities: stocks, bonds, currencies, commodities, and domestically and internationally.”

Money:  Does the government have a role in preventing these crises?

Dr. Lo:  “It’s not possible to prevent financial crises.”

In the on-line comments a guy named Patrick McGuinness nails it:  “So, markets are efficient except when they’re not. And buy and hold doesn’t work because most people don’t stick to it at the wrong time.  OK wisdom, but is this news?”  Gold star, Mr. McGuinness.

Let me add, Dr. Lo’s recommendation (since he contends “buy and hold” no longer works) is to buy and hold lots of different stuff.  Huh?

Let’s accept Dr. Lo’s premise that markets have gotten more volatile and will likely stay that way.  I’m not sure I buy it, but OK, he’s the credentialed economist.  We can also agree that the typical investor is prone to panic and poor decision-making, especially when all the cable news gurus are lining up on window ledges.  We certainly agree that it is not possible to prevent financial crises.  More are headed our way.

So the question that matters is, how do we best deal with it?

Dr. Lo says:

Treat the symptoms.

He defaults to the all too common canard of Asset Allocation (Some Asset Allocation can be useful and we discuss that in this series here and here).  He would have us invest in everything and hope a couple of those puppies pull thru. To do this properly is going to require a ton of work understanding the asset classes, deciding on percents for each, choosing how to own them, rebalancing and  tracking.  All this to guarantee sub-par performance over time while offering the hope of increased security.  I am reminded of the quote:  “Those who would trade liberty for security deserve neither.”

jlcollinsnh says:

Toughen up bucko and cure your bad behavior.

Take the cure.  Recognize the counterproductive psychology that causes bad investment decisions and correct it in yourself.

To start you need to understand a few things about the stock market:

1.  Market crashes are to be expected. What happened in 2008 was not something unheard.  It has happened before and it will happen again.  And again.  I’ve been investing for almost 40 years.  In that time we’ve had:

  • The great recession of 1974-75.
  • The massive inflation of the late 1970s & early 1980.  Raise your hand if you remember WIN buttons (Whip Inflation Now).  Mortgage rates were pushing 20%.  You could buy 10-year Treasuries paying 15%+.
  • The now infamous 1982 Business Week cover:  “The Death of Equities,” which, as it turned out marked the beginning of the greatest bull market of all time.
  • The Crash of 1987.  Biggest one day drop in history.  Brokers were, literally, on the window ledges and more than a couple took the leap.
  • The recession of the  early ’90s.
  • The  Tech Crash of the late ’90s.
  • 9/11.
  • And that little dust-up in 2008.

2.  The market always recovers.  Always.  And, if someday it really doesn’t, no investment will be safe and none of this financial stuff will matter anyway.

In 1974 the Dow closed at 616. At the end of 2014 it was 17,823. Over that 40 year period it grew at an annualized rate of 8.88%* If you had invested $1,000 then it would have grown to $27,604** as 2015 dawned. An impressive result through all those disasters above.  



All you would have had to do is Toughen up and let it ride.  Take a moment and let that sink in.  This is the most important point I’ll be making today.

3.  The market always goes up.  Always.  Bet no one’s told you that before.  But it’s true.  Understand this is not to say it is a smooth ride.  It’s not.  It is most often a wild and rocky road. But it always, and I mean always, goes up.  Not each year.  Not each month.  Not each week and certainly not each day. But take a moment and look at any chart of the stock market over time.  The trend is relentlessly, thru disaster after disaster, up.

4.  The market is the single best performing investment class over time.  Bar none.

5.  The next 10, 20, 30, 40 years will have just as many collapses, recessions and disasters as in the past.  Like the good Dr. Lo says, it’s not possible to prevent them.  No question, every time your investments will take a hit.  Every time it will be scary as hell.  Every time all the smart guys will be screaming:  Sell!!  And every time the guys with enough nerve will prosper.

6.  This is why you have to toughen up and learn to ignore the noise, stay the course and ride out the storm.  Oh, and Buy!

7.  To do this, you need to know these bad things are coming.  They will happen.  They will hurt.  But like blizzards in winter they should never be a surprise.  And, unless you panic they won’t matter.

8.  There’s a major market crash coming!!  And there’ll be another after that!!  What wonderful buying opportunities they’ll be.

The world isn’t going to end on our watch.

I tell my 20-year-old that during her 60-70 odd years of being an investor she can expect to see 2008 level financial meltdowns every 15-20 years or so.  That’s 3-4 of these economic “end of the world” events coming her, and your, way.  Smaller versions even more often.

Thing is, they are never the end of the world.  They are part of the process.  So is all the panic that surrounds them. So, of course, is all the hype that will surround the 3-4-5 mega bull markets she’ll see over those same years.

About those the financial media will be confidently saying “this time it’s different.”  In this too they will be wrong.

In the next few posts in this series we’ll discuss why the market always goes up, and I’ll tell you exactly how to invest at each stage of your life, wind up rich and stay that way.  You won’t believe how simple it is.  But yer gonna have to be tough.


*Note: In the comments below Robert takes me to task for being too harsh on Dr. Lo and his ideas. If you agree, good news! You can now invest with him. In the Forbes 2015 Investment Guide (December 2014 issue) Dr. Lo is one of four academics featured in an article titled “Profits from the Profs” on page 96. To quote the article directly:

“These days Lo puts some of his theories to work as founder of AlphaSimplex Group, with its $3 billion Natixis ASG Global Alternatives Fund (GAFYX), which invests in a constantly changing menu of securities, including stock index, currency and commodities futures and forwards, dialing the risk up and down according to the volatility of the underlying markets. Returns have been a mediocre 5.1% a year since the fund was launched in September 2008, just half the S&P 500’s return. But Lo argues the fund did its job in the tumultuous final months of 2008, dropping only 3% compared with an 11% loss for hedge funds with similar strategies and a 23% dive in the S&P.”

For this the fund sports a breath-taking expense ratio of 1.33% and 5.75% sales load insuring at least Dr. Lo will be made wealthier.

Note 2: From Kendall Frederick in the the comments below:

“I just re-read this post as I was giving somebody a link to the series. I guess I was sufficiently bored enough to Google Dr. Andrew Lo, and I found this funny: his Alpha Simplex hedge fund you mention above folded last year after underperforming several years in a row. I suspect the good doctor didn’t do badly, however, with the fees and front end load.”

Important Resources:

*These are affiliate links and should you chose to do business with them, this blog will earn a small commission.

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Of course, you don’t want to do this just to enter a contest. That’s not the jlcollinsnh way! :-) But if you are thinking of giving them a try anyway, now is a good time. Good luck!

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  1. Posted April 15, 2012 at 11:47 am | Permalink

    Right On Mr. Collins!
    New Mexico Lobo

  2. JTH
    Posted April 15, 2012 at 11:56 am | Permalink

    Very comforting to read. We’ve experienced exactly what you say. We’ve stayed the course, with a side-dish of panic. What is driving the market anyway? Can’t wait for the next Part. Yo to lobo!

    • Posted April 15, 2012 at 3:33 pm | Permalink

      Hi JTH…

      Staying the course is always served with a side dish of panic (great phrase, BTW!) That’s why ya gotta be tough.

      Great question! and this is the subject of the next post in this series. We’ll look at what it is that drives the market relentlessly upwards over time and why it is such a rough ride along the way.

  3. Fuji
    Posted April 15, 2012 at 12:37 pm | Permalink

    Thank you for this comforting wisdom. I try not to flinch from all the scary headlines, but it is difficult not to freeze up. I have $10,000 cash available for each of my kids (19 and 20) and have been waiting to buy Vanguard Total Stock Mkt for them, but haven’t been able to make the leap. Do you think it matters when I make the purchase – should I do it at one go, or do it in chunks?

    • Posted April 15, 2012 at 3:27 pm | Permalink

      Hi Fuji….

      even the toughest of us flinch. That’s OK as long as we don’t let go. In Part III I’ll be sharing the story of my own nerve failing me.

      Your kids, if they are smart, will be holding that 10k for the next forty years. Take a moment at re-read point #1 above. Thru all the financial turmoil of the last 40 years, 10k would have grown to $668,920. Even if they had never added another dime.

      It is a very safe bet the next 40 years will see an equally rough ride, and yet will produce an equally spectacular return.

      So, I’d invest it tomorrow. I say that having no idea what the market will do on Monday, or next week, or next month, or next year. But with great certainty as to what it will do over 40 years.

      Your toughest problem: Convincing your kids to hold it all that time.

  4. Posted April 15, 2012 at 2:36 pm | Permalink

    Post WW2 industry has relied on 1)finding new markets and 2) utilizing credit to allow purchases not otherwise affordable. the emergence of an interconnected global market and near capacity credit limits witnessed by universal default are new and not repeated events.

    In response governments have become the driving force by purchasing excess capacity and using social programs to prevent desperation. They can only do this by borrowing far in excess of credit limits imposed on non-governments coupled with printing the money to make minimum interest payments.

    At some point a global reset button needs to be pressed, all electronic debt erased and start the process over again. has this happened in history? I love the study of economics but not sure we can see the pattern or future in this one.


    • Posted April 15, 2012 at 3:17 pm | Permalink

      Hi Todd….

      ….and welcome. Just took a look at your blog. Looks interesting and I am planning to spend some time over there checking it out.

      good points.

      “Reset buttons” have been throughout history and will continue to be routinely pressed. Individual stocks come and go. Companies come and go. Countries also come and go, but on a surprisingly slow scale.

      This is all part of the sometimes painful but always healthy process of creative destruction. We’ll take more about this later in this series.

      What won’t happen is a global reset all at once. Too many conflicting interests rise as others fall. We’re going to learn how to win regardless.

      • Jian
        Posted September 21, 2013 at 11:08 pm | Permalink

        Great series! I would venture to say, world wars are actually ‘resets’. WWI and WWII certainly are, and before those, plenty of large scale warfare! Recession are market’s way of resetting things.

        In fact I rather think economic resets are healthy; without them, how are younger generations ever going to have a chance in life? What we need to learn to do as a better way of governance is to mediate the human sufferings that are inevitable after the resets. Sorry off topic a bit, so back to us individuals – we just need to prepare ourselves and be ready to jump in after the resets.

  5. Posted April 15, 2012 at 3:21 pm | Permalink

    Jim, I enjoyed this article. I agree with your reasoning for most part, but I also agree with Dr. Lo somewhat on the fact that market is much more volatile and dynamic due to ease of trading and lower cost of trading. I’ve come up with my box theory to buy and sell top quality stocks with strong fundamental and technical measures. I’ve been generating on average 32% return for past several years. This year is off to a good start as well.

    • Posted April 15, 2012 at 4:42 pm | Permalink

      Thanks Shilpan….

      glad you liked it. And you and I agree on that point of Dr. Lo’s. But, for the long-term case I’m making whether he is correct or not doesn’t matter. Market’s have always been volatile, and if this new technology has made them more so we’ll tough our way thru that as well.

      Thanks for linking to your post on your “box theory.” I encourage my readers to click over and give it a read. For those readers, let me make a few points first:

      1. Shilpan is one of my very favorite bloggers. He brings great insight and wisdom to his posts and I always benefit from reading them.

      2. His “box theory” is a strategy for picking individual stocks with the goal of out-performing the market as represented by Index Funds like VTSAX which I’ll be discussing next time.

      3. An average 32% return is spectacular. I have no idea if he can maintain this pace, but if he does it will put him in a league with Peter Lynch (who he mentions), Michael Price, Warren Buffet and other rarified investment names.

      4. These names are legendary precisely because out pacing the market over time is vanishingly difficult.

      5. Only a fraction of investors that start down the stock picking path outperform. I certainly could not, and that’s not to say I didn’t have some pretty impressive up years along the way.

      6. This blog in general, and this series of posts in particular, are designed to give my readers a winning strategy that over time will outperform roughly 80% of active stock pickers and professional managers.

      7. If you want to try to be in that top 20%, read and absorb first the principles I share here. Then feel free to expand into other strategies. Shilpan’s are a great place to start. But know, the odds are steeply against you and you are signing up for a far more intensive investing experience.

      • Posted April 15, 2012 at 6:43 pm | Permalink

        Jim, I am both humbled and honored for your kind words. I don’t know if I have your wisdom, but I am constantly reminding myself what I don’t know; Socrates was famous for being cognizant about things he didn’t know. And he was a genius of his time. I honestly try to learn what works in life, and avoid mistakes I’ve made in the past. My box theory is one of those life experiments. I will honestly share, in due course, if it works consistently or not.

  6. Jan
    Posted April 16, 2012 at 8:59 pm | Permalink

    I agree with the theory you posited about the stock market. In fact, I often advise my son, an M.D. in his early 30’s, married to an M.D., to each consider maxing out their respective 401k contributions and then investing the rest of their disposable income. That being said, every once in a while, I get this sickening feeling that the stock market is really just some some sort of publicly sanctioned Ponzi scheme!

    • Posted April 16, 2012 at 10:34 pm | Permalink

      Hi Jan….

      ….glad you are reading this and took the time to comment.

      With their “double doc” income you son and his wife should do very well following your advice.

      the biggest risk high income earners face, especially doctors who go from poor interns to mega earners overnight, is lifestyle inflation. If their lifestyle matches or, god forbid exceeds, their income they become no more than a gilded slaves.

      Next time, I’ll be talking about why the market always goes up and why it’s always a wild ride on the way.

  7. Posted April 17, 2012 at 9:36 pm | Permalink

    Just keep some powder dry for those buying opportunities… To expect an endless ride up is to deal in self-delusion.

    • Posted April 17, 2012 at 10:08 pm | Permalink

      Hi 101C…

      Amen to keeping some cash for buying on the pull-backs and/or crashes. The bigger challenge is to have the courage to deploy it when everybody else is in a selling panic.

      In fact the ride is endlessly, relentlessly up. Always. More on this next time.

  8. bluecollarworkman
    Posted April 18, 2012 at 9:01 am | Permalink

    This post is absolutely AWESOME! Can’t say I disagree with anything you said. Doesn’t W. Buffett have a similar thought? Buy when everyone is selling and sell when everyone is buying (i.e., when the market crashes and people freak out, that’s the time to buy buy buy [and not freak out]; and when everyone is living high on the hog and selling, you hold hold hold). This is my first time here actually– I’ll be back!

    • Posted April 18, 2012 at 6:43 pm | Permalink

      Hey BWC….

      …great to see you over here and thanks for the very kind words! Glad the post struck a cord. Hope you subscribe and add your comments to other posts.

  9. Posted April 21, 2012 at 12:30 pm | Permalink

    Awesome insight here from somebody who’s actually been investing for a long period of time. I just don’t know how all the nay-sayers about the stock market can’t understand this simple logic. The proof is in the numbers. Great post. Now I gotta read the next one.

    • Posted April 21, 2012 at 4:03 pm | Permalink

      thanks Matt!

      The problem for many people is that, in fact, most lose money in the market. I’ll be talking about that coming up.

  10. Posted April 21, 2012 at 12:37 pm | Permalink

    Oh.. I also get extremely agitated when I read Money magazine. So much so, that I didn’t even renew my subscription. The thing with reading a printed magazine is that there is no comment section for you to yell at the author when they are blatantly wrong, ignorant, stupid, etc! Reading money blogs is way better and more real. Real advice from real people.

    • Posted April 21, 2012 at 4:07 pm | Permalink

      glad I’m not the only one! by the end of a year’s worth I’m so irritated I tend to let my subscription expire. Then I get curious and sign up again.

      the trouble with Money Mag is that sometimes they get it right but too often they are writing things to tout their advertisers.

      So you get conflicting info that can be very tough for the typical readers to sort out. That makes it worse than useless.

      thanks for your comments!

  11. James Gos
    Posted April 8, 2013 at 6:24 am | Permalink

    “I’ll tell you exactly how to invest at each stage of your life, wind up rich and stay that way. You won’t believe how simple it is. But yer gonna have to be tough.”

    Hey mate.

    I’m 24, in my final year of law school (also have a business degree) and found your blog. At exactly the same time that I realised I need to be in charge of my own financial security long term, not my parents.

    I have a couple of K savings, working hard to put more away this year.

    No debt apart from the student loan which was deferred to tax to get through uni (not significant).

    Where can I find the post on how to invest for my stage of life? I want to have enough to start a family by the time I am 30… If I could meet the right person.

    Cool blog. Even cooler that you put this out for free.

    Cheers mate, from Australia. James

    • jlcollinsnh
      Posted April 9, 2013 at 12:19 pm | Permalink

      Hey James…

      Glad you found your way here. Welcome, and thanks for the kind words.

      Congrats on thinking about this stuff at a young age. It will serve you well.

      If you haven’t already, I urge you to read the entire stock series before you take action. But in Part VI you’ll find the basic answer you’re looking for:

      As you’ll see, I really only consider two stages in one’s investing career:

      1. Wealth Building
      2. Wealth building and preservation.

      Unlike most investing advice you’ll see, these have almost no relationship to your age. More importantly, they relate to where you are in your earnings career. If you retire early, as many readers here plan to do, you’ll shift to #2 sooner. Should you again begin working, you might want to shift back to #1.

      And, you’ll want to fine tune each to your own risk tolerance.

      Hope this helps!

  12. Rich Field
    Posted August 1, 2013 at 6:02 am | Permalink

    Jim, great blog.

    I’ve only read a few posts after I found it through Mr Money Mustache, but I can tell already that there is a lot of good reading here. Hopefully I can learn a thing or two.

    On the whole, your views on index funds reflect mine; I just wish I had started investing in them a long time ago. I was ready to start investing more heavily in them until I read something that led me to doubt that the market up cycles will always counter the down cycles; also, that the market is currently in a down cycle and waiting for it’s next up cycle.

    This was in a book called Aftershockby David Wiedemer. I wonder, have you heard of it or read it? The author predicted the crash of 2008 is predicting a much bigger crash very shortly. The current rally being merely a result of considerable money printing, that is merely delaying the inevitable. This is based on his theory that there are 6 co-linked bubbles, each putting pressure on the next as they fail. The first of the bubbles, being real estate and the last two being the US Dollar and the US Government debt. It is the bursting of these last two that will be the most dramatic.

    One very interesting graph shows how the DOW rose 300% between 1928 and 1981, but 1400% since 1981. Similar graphs exist for house prices. In short the book claims this is unsustainable.

    I just wondered, if you had read this book and what your thoughts may be?

    All the best

    • jlcollinsnh
      Posted August 2, 2013 at 2:48 pm | Permalink

      Thanks Rich and welcome!

      Nope, I haven’t read it.

      The bookshelves are filled with gurus like this predicting disaster, or boom times.

      There is much money to be made doing so as I explain here:

      Certainly I believe there will be future crashes, this is the title of my post after all. But it is a fool’s game to believe you can predict them or when they will occur. Unless, of course, you want to sell books and get on MSNBC.

      I see he claims to have predicted 2008. Maybe so, but usually when you really dig into such claims they prove to be a whole bunch vaguer than touted.

      Even if he did, this is no guarantee that his predictions will be accurate going forward. Elaine Garzarelli — — was lionized for precisely predicting Black Monday in 1987. Her predictions after that? Not so much.

      Alarmism sells. That’s why there is so much of it out there. With an almost endless pack of gurus predicting just about anything that could possibly happen, a few are bound to be right. Or at least close.

      I’d be very cautious in believing this means they have the power to predict the future. For the same reason I don’t believe people who win the lottery have figured out a sure-fire way to pick winning lottery numbers.

  13. Krissie
    Posted August 29, 2013 at 6:38 pm | Permalink

    You are a GOD! I just finished reading your stock series and OMG, Thank You!! I have been wanting to try and understand this stuff for so long. It has been so intimidating. Im embarrassed to say it but I started my Roth with Primerica, yuck. I didn’t know any better and so many others out there don’t either. So sad. You put all this complicated stuff into simple English that anyone can understand. I found you through The mad Fientist who I had found through Million Mile Secrets. What a unique way to network. I’ve loved the few podcasts you have been on. I would love to hear and read MORE. I’m now about to go through the Mr.Mustache blog. Please keep it up and more post and podcasts coming.

    • jlcollinsnh
      Posted September 1, 2013 at 12:01 pm | Permalink

      And you, krissie, know how to pay a compliement! I’m honored you would put me in the same class as MF & MMM.

      Don’t worry too much about the ameritrade misstep. You didn’t mention your age, but it should be early enough to correct.


  14. Robert
    Posted January 20, 2014 at 5:05 pm | Permalink

    I’m new to your blog; tracked here from gocurrycracker. Looking forward to reading the rest of your stock investing series. So far, pretty conventional wisdom but nicely expressed.

    That said, I do think you misrepresent Andrew Lo. You and I both know–and you intimated as much in your comments–that Money magazine is a poor source of investment advice. I’d go so far as to say it is a shill for the Wall Street investment industry and best reserved for toilet paper. (Except that it’s pages are too slick–like it’s advice!). I wouldn’t trust Money to have represented Dr. Lo accurately.

    I encourage you to read some of Dr. Lo’s original scholarly publications (freely available here: ). The adapative market hypothesis recognizes what is well known in academia and the finance literature of the past couple decades. The efficient market hypothesis is not quite the sure thing it was thought to be way back when. There are numerous proven anomalies (seasonal, earnings announcements, etc.). These are the subject of numerous papers by finance students working on their PhD’s! Exploiting them becomes difficult once they are known because they are arbitraged away. Some cannot be fully arbitraged, for a variety of reasons. Additionally, there are indeed “animal spirits” lose in the market. The same fear that drives individual investors out of the market at exactly the wrong time–the reason you advocate they buy and hold (perhaps with periodic rebalancing)–is an example of that. Greed and fear motivate professional investors as well. And as we saw in the 2008 financial crisis, it can even dry up liquidity to the extent that the system is on the verge of collapse. These events can force pseudo-irrational behavior, like selling low because you simply cannot stay in longer due to margin calls or whatever. There is a whole field of behavioral finance that has sprung up to examine the irrational side of market performance.

    To me, Dr. Lo’s adaptive market hypothesis is primarily about recognizing that there is a drive to efficiency but also a dynamic irrational aspect to the market, with exploitable anomalies. The market adapts to these, and they go away. Then once everyone figures they no longer work, they will start working again. Then they can be exploited again. This may continue for a few cycles but the amplitude gets dampened over time. Eventually you’ll reach a point of efficiency where that phenomenon can no longer be arbitraged because the effect is too well known and too small to be profitable. In other words, markets adapt.

    Dr. Lo describes the Adaptive Markets Hypothesis as a synthesis between the Efficient Market Hypothesis and Behavioral hypotheses. The way I read the papers, it is a descriptive theory, not a quantifiable one yet, and while it has some ramifications for investing, it doesn’t offer specific trading schemes. It says that strategies wax and wane, there is seasonality to the markets, there are times when the equity risk premium is high and times when it is low, etc. Remember, if the market ever became so efficient that it encapsulated all information, then how would you ever find someone to take the other side of a trade? The market would collapse if it were 100% efficient.

    Dr. Lo does have a consulting business that complements “buy and hold” type strategies by making small levered bets on the market at times of high and low risk; a company I invest with recently started a couple funds that Dr. Lo does this sort of risk management for. People have been doing that for years with futures/options, and not necessarily with much success. From what I can tell, Dr. Lo’s involvement hasn’t yet led to any breakthroughs in investing performance for the funds he’s involved with. But while the motivation for that may be the AMH, it isn’t the AMH itself, nor do I think AMH should be judged by it. I find AMH simply a good way to describe the reality of the markets we face–they are indeed a blend of efficient and irrational behaviors with one or the other dominating at different times.

    The papers are actually good reading and I encourage you to look them up. A good place to start would be his 2004 paper to portfolio managers, “The Adaptive Markets Hypothesis: Market Efficiency from an Evolutionary Perspective”; it gives a nice introduction that explains the efficient market and behavior schools and how the AMH is a needed synthesis. The other paper I’d recommend is, “Adaptive Markets and the New World Order”, published in 2011. It discusses the 2008 crisis from an AMH perspective. I’m not a finance guy at all but found both these papers quite readable. I challenge you to read them and then decide if you still want to be tough on Dr. Lo. I think you owe it to him for having judged him by a Money magazine article! 😉

  15. Mingtian
    Posted March 13, 2014 at 7:54 pm | Permalink

    I am so happy I have found your blog. It is slowly changing my thinking.

    Have you ever watched/read anything from Michael Maloney such as his series here:

    These are extremely well produced and (I think and would love to hear why you think not) very persuasive. I understand he is someone who could be just selling something (precious metals) but he doesn’t come across that way at all.

    So I am torn. Is what he says right or is it more unreasonable to bet against this country and its economy?

    I would love to hear your thoughts!

    Thanks so much for your blog!

    • jlcollinsnh
      Posted April 10, 2014 at 6:22 am | Permalink

      Welcome Mingtian…

      Glad you are finding value here.

      I am not familiar with Mr. Maloney and unfortunately don’t have the time, or candidly the inclination, to spend with it.

      I will say that one of the reasons I started this blog is because there is so much nonsense out there. Some is simply bad advice. Much is bad advice design to sell you crap.

      I will also say that there are no “Hidden Secrets of Money.” 😉

      As you read thru the blog here you’ll have a clear idea of how I see things. It then shouldn’t be hard then to contrast my ideas with others and decide for yourself.

      Just be careful. And you might want to read this:

  16. Richard
    Posted May 22, 2014 at 4:12 am | Permalink

    “In 1974 the Dow closed at 616. In 2011, 12,217. If you had invested $1,000 then, it would be $66,892 by this past New Year’s Eve. That is a 12% annual return thru all those disasters above.”

    I wasn’t quite sure how you got these numbers at first. Obviously if you invested at end of 1974, the increase from 616 to 12,217 would mean an increase of 19.8 times. This would equate to an average annual return of 8.41%. Which is not the same as 12%!

    Then it occurred to me that the math above didn’t include dividends. So I did some searching and was able to find the annual percentage gain/loss as well as the annual dividends percentage. I put this into a spreadsheet so I could calculate what $1,000 would grow to using the numbers I found, and sure enough it was about $12,217.

    I thought I would add this comment for 2 reasons:
    1) Perhaps it would be helpful for other readers that were also wondering about the calculations.
    2) I was really curious – what approach did you take to come up with those numbers?


    • jlcollinsnh
      Posted May 22, 2014 at 6:41 pm | Permalink

      Hi Richard…

      With this post being over two years old I’m afraid I don’t recall the tool I used. My guess is that it was one of the many online calculators available.

      In later posts I’ve gotten better about posting links to those I use and your comment is a good reminder that some readers are interested.

      • Jan
        Posted May 22, 2014 at 7:02 pm | Permalink

        Since so many people are afraid of a crash, do you recommend EFT’s? I can find a Vanguard one that trends the market fairly closely. Given that a “real correction” is 10% or greater, the “sell point” could be set at, for example, 10% below market share.

  17. Bulls & Bears
    Posted November 20, 2014 at 3:52 am | Permalink

    This is a very bad advice!

    Once the stocks start to drop you should immediately sell and then buy at the dip!!! Even if you take a loss when selling!

    You’ll recover when they start going back up again and you will even make a profit once they reach the selling point!


    It has nothing to do with toughen up! GET SMART!

    • Jone
      Posted November 21, 2014 at 9:37 pm | Permalink

      Bulls & Bears – You advocate a common mantra in investing media: buy low (bear market), sell high (bull market). The problem with that mantra is determining when the market is actually starting to fall and when the market is starting to climb. Lets look to last month (October 2014) as a case in point.

      From October 1 through October 15, 2014 global stock prices tumbled. In hard numbers, global stock markets, as measured by the Investor Shares of Vanguard Total World Index Fund (VTWSX), returned –5.50%. This loss, over the course of two weeks, erased the fund’s entire year-to-date gains for 2014. Some “experts” in the investing media suggested that a global bear market (defined as a loss of 10%) was just around the corner. Sounds like perfect conditions for a “bear market buyer” to start….doing something.

      You advise that, “Once the stocks start to drop you should immediately sell…” Well, OK. How would you have determined what day to buy/sell that fund last month? On October 2nd or the 7th? Perhaps the 8th? How about the 14th? What prompted your decision(s)? In short, how did you know (in advance) when stocks would start to drop or rise? This is the essence of speculation – guessing when stocks have started dropping.

      You then advise, “…buy at the dip!!! Even if you take a loss when selling!” Well, OK. What day last month did you identify (in advance) where the market would settle and when to start buying the fund? On October 2nd or the 7th? Perhaps the 8th? How about the 24th? What prompted your decision? In short, how did you identify the bottom of the dip and know (in advance) that stocks were about to climb? Again, this is the definition of speculation – guessing when stocks will start to climb.

      Investors are not speculators. Rather, investors would have purchased shares in the fund on whatever day they had the spare capacity to do so – generally on a predefined regular basis as new funds become available to them from external sources from, for example, a paycheck.

      On the selling side, investors would have sold shares of the fund when the sale met their individually predefined criteria. These criteria are different for each investor’s personal financial situation. Some investors might sell to harvest a tax loss. Other might sell to withdraw one’s annual required minimum distribution.

      While speculators try to capitalize on short term market gyrations, investors buy and sell in a rational, predefined method using external reference points (e.g., paydays and tax bills) with little regard to what the market might be doing (or the talking heads on television might be screaming) in the short term. Diversification, cost management, tax awareness, and long term commitment to a predefined plan are the “skills” of an investor.

      So, how did last month end? On October 1st, 2014, a $10,000 investment in VTWSX would have been worth – drum roll – exactly $10,000. On October 31st, 2014, that same $10k would have increased in value to – second drum roll – $10,118.22. How could one have predicted (in advance) which day the value of that initial investment would have been worth nearly $600 less?

      I’m curious – what is your prediction for December for VTWSX – or any other publicly traded stock, mutual fund, EFT or other security that we can track? Are you going to buy/sell on December 2nd or the 7th? Perhaps the 8th? How about the 24th? Please let us know in advance….Thanks!

  18. Amanda
    Posted March 18, 2015 at 7:49 pm | Permalink

    I was wondering if you have a tutorial for people in their 20’s on where to start buying or investing or what I should be doing…I was introduced to this website and knowledge by my coworker and I am interested in learning more.

  19. Posted April 15, 2015 at 11:25 am | Permalink

    Yes the market has ups and downs. Maybe this has already been answered but what if you are in the time frame of wanting to pull out your money cause you need it but you are in a downward market spiral at the time? And what if you don’t have 3-4 years or whatever it takes for the market to recover? What is your solution there?

  20. Andy Lomon
    Posted May 15, 2015 at 12:53 pm | Permalink

    Hi Jim, as always, great post!

    I wonder if there is any further suggestion on ‘taking the leap’ to start investing. I mean, people tend to shock and paralyzed with the ‘crash next door’ news and even more if they are looking for short investment periods or trying to time the market. I guess that historical data would be reason enough but perhaps there is some advice on the psychological side…

    Thanks in advance!

  21. Enochraine
    Posted June 8, 2015 at 12:16 am | Permalink

    Hi JL I love the blog man and I have a question. I have been invested since my early twenties my aunt gave me almost $20k in saving bonds that I used to start investing. I invested that money pretty passively and essentially doubled it and used to half to buy a home after I got married. I’m thirty six now and through additional investing I have over $100k in stocks and bonds. However the truth is its just the past few years that I have recently really learned the ins and outs of investing and Im beginning to love it.

    So my questions: Of my investments almost $40k is in a Scottsdale account that through the help of a relative has had an unbelievable return but the more I learn about Vanguard I like and I have a small amount around $4k in some Vanguard etfs. Should I move my scottrade investments to VTSAX at Vanguard or stay with the scottrade?

    • jlcollinsnh
      Posted June 8, 2015 at 11:05 am | Permalink

      Thanks Enochraine…

      As you read thru this series you’ll find my reasons for recommending VTSAX presented in some depth.

      But the short answer is….

      Yes, that is what I would do.

  22. Kendall Frederick
    Posted June 20, 2015 at 8:08 pm | Permalink

    I just re-read this post as I was giving somebody a link to the series. I guess I was sufficiently bored enough to Google Dr. Andrew Lo, and I found this funny: his Alpha Simplex hedge fund you mention above folded last year after underperforming several years in a row. I suspect the good doctor didn’t do badly, however, with the fees and front end load.

    • jlcollinsnh
      Posted June 20, 2015 at 10:48 pm | Permalink

      Thanks Kendall…

      …I hadn’t heard that. I suspect you’re right and he made great money with it while it lasted.

      Meanwhile, those who followed the advice on this blog have profited handsomely and I’ve made not a dime.

      The irony isn’t lost on me. :( :)

  23. Gladys
    Posted December 8, 2015 at 4:38 pm | Permalink

    Hi Jim,

    I’ve been interested in investment for quite some time but found it complicated. I would start to read an article or an e-book to know more about the basics and would just end up getting lost.

    I first read about the Stock Series in I finished up to the second part and completely went off track because…life. Anyway, I’m gearing towards attaining an MBA and researching on management consultancy as my next career path. And browsing through management reading recommendations, I came across your name again and again. So I’m back and happy to be back. And I am now, more than ever, interested about investment (in general, not because of the MBA or management consultancy). I think it’s because I was able to relate to “My Short Attention Span” and “Travels with ‘Esperando un Camino'” that kept me reading your posts.

    Well, I thought you might be interested in knowing a little about one of your readers: a 29 year old, third culture woman who recently moved to Europe from a third world country who is kind of back in square one with her career and is completely lost. So I commented.

    Looking forward to reading this series and your other posts. I really appreciate the way you explain things without using big words or complicated phrases. It’s an “easy read” so far. I’ll get back to you on this as I keep reading. I do have an upcoming long haul flight.

    Anyway, thank you!

    • jlcollinsnh
      Posted December 8, 2015 at 5:14 pm | Permalink

      Hi Gladys…

      …and welcome. I’m pleased you found your way here and have enjoyed some of my posts.

      However, you have me confused with Jim Collins the business book author who has written “Good to Great” among others. This is why I chose to go by jlcollinsnh. :)

      Good luck with your MBA and your investing future!

      • Gladys
        Posted December 9, 2015 at 4:57 am | Permalink

        No no, it’s definitely you as “Stock Series” keep coming up. I’m also aware of that other Jim Collins. So…both!

      • Gladys
        Posted December 9, 2015 at 5:08 am | Permalink

        Well that is embarrassing for me. But I’d rather take it as a sign to go back and read further on investment. Silver lining! :)

  24. Posted January 25, 2016 at 9:25 pm | Permalink

    Loving this series so far! Found you through: Personal Finance- Reading List
    Looking forward to reading the entire series!

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