Millions of American investors have been brainwashed. Are you one of them but don’t know it? I will help you answer this all-important question later in this article.
First, pause and read this story about the U.S. economy potentially losing its No. 1 ranking next year. This should give you a clue. Let’s get started with the help of three charts.
Charts
Please click here for a chart of the Dow Jones Industrial Average
DJIA, +0.65%
from the 1960s to the 1980s.
Please click here for a chart of the Dow from the early 1900s to the mid-1900s.
Please click here for a chart of Japan’s Nikkei 225 Index
NIK, -0.78%
Please note the following:
• There have been periods in the U.S. stock market when, depending on your starting point, passive investing would not have done well. Two of the three charts, above, are of the Dow Jones Industrial Average, but the conclusions also apply to the present-day popular ETFs such as S&P 500 ETF
SPY, +1.15%
Nasdaq 100 ETF
QQQ, +1.95%
and small-cap ETF
IWM, +0.84%
• If you were passively investing in Japan over 25 years ago, you would still be underwater today.
Brainwashing
Investors have been brainwashed into believing that if they invest in the stock market or other markets, somehow they earn the right to make money over a period of time.
Millions of investors have convinced themselves that somehow the market owes them something; all they have to do is invest in the markets.
Consider paying attention to Arora’s Fourth Law of Investing: “The markets owe you nothing.”
Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
Recency bias
The human condition as it is, most of us suffer from recency bias. That means people remember what has happened to them recently. For our purposes, that means investors erroneously believe what has happened recently will happen in the future.
Do you really know with certainty that the next decade or two will be similar to the past decade or two?
Touted data
Investors cannot be blamed for being inadvertently brainwashed. Investors are constantly bombarded with touted data, such as:
• The average return over the past 100 years has been absolutely fantastic.
• The average return over the past 10 years has been great.
• The stock market has never lost money if the time period is long enough.
The flaw
By accepting the touted data, you are saying that you know that the next 10 to 50 years will be similar to the past 10 to 50 years.
Over the past century, the U.S. has been the dominant power. The article linked above shows that the U.S. is about to lose the top ranking.
Should you be driving by looking through the rearview mirror or should you be looking forward?
Day of reckoning
If the current trajectory of the world economy stays on course, the powerhouses of today, such as Apple
AAPL, +2.05%
Amazon
AMZN, +3.55%
Facebook
FB, +2.45%
and Netflix
NFLX, +6.52%
may not perform anywhere near as well as they have in the past. Companies such as Micron Technology
MU, -1.96%
AMD
AMD, +0.74%
and Boeing
BA, +0.54%
may have an edge.
What to do now
Investors ought to think in terms of probabilities. Once you accept the premise that you do not know with close to 100% probability how the next decade will turn out, you will see the merit of developing more skills and knowledge about the markets and expending your horizons to emerging markets.
The message is to continue to invest but think differently. Going forward, there will be an abundance of investing and trading opportunities — it will likely take a different skill set to be successful.
Don’t attack the messenger
Since I have often written minority opinions over a long period of time, I fully understand why investors get upset when their beliefs are challenged. I am merely a messenger — I have no say in how the economic landscape of the world is going to change. Wouldn’t it be better for investors to pause and challenge their own beliefs by taking a look at what is likely to happen going forward and stop focusing so much on what has happened in the past?
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.
Source : MTV
