Last week I wrote about how amateur stock picks and even random stock picks have outperformed expert stock picks since January 2012. It is one of the reasons I don’t trust the stock market.
I realize this is not a popular opinion. Talk to any financial advisor or even your parents or grand parents, and they will tell you that I’m an idiot and the stock market is not only perfectly safe, but it’s the key to being wealthy.
Of if you don’t want to talk to them, you can talk to Robert.
Robert is a reader of my blog and he laid out his argument for investing in the stock market in the comments. It’s the same argument you’d hear from almost anyone who holds a traditional view of the stock market.
At the end of Robert’s comment, he said “I welcome debate…” and I’d like to take him up on that offer. And just for fun, I’m going to use logical fallacies to demonstrate where his argument doesn’t hold water.
So get out your LSAT prep books and come with me on a journey of logically debunking a stock market traditionalist. All definitions of informal fallacies below come from Wikipedia.
An Argument from Ignorance (We Don’t Know the Future)
If you invest in a diversified portifolio for > 10 years (which is the target audience for this blog) then stock equities are your best way to build wealth as a young person. I agree stock picking is gambling. Market timing is gambling. Investing in the overall health of an entire index (US, international) is NOT gambling. You diversify your risk over a huge number of companies. You WILL see ups and downs, but overall you will see growth over the long term, particularly if dividends are reinvested.
This is a good example of an argument from ignorance. And no, I’m not saying that Robert is ignorant or stupid. An argument from ignorance is assuming that a claim is true because it has not been proven false or cannot be proven false. He says a diversified stock portfolio is best and I can’t prove him wrong because I don’t know the future.
I could say I think investing in Gold is the best way to build wealth as a young person. He would tell me I’m wrong. I could show that GLD is up 216% in the last 10 years and the S&P 500 is only up 75%. He could tell me that was a fluke and won’t happen over the next 10 years.
I could say that I have a friend who needs investors for a start up that I think will make millions, and he could tell me that’s too risky. I could say I think the dollar is going to crash and I need to be in foreign currencies, and he could tell me I’m a wacko bird.
We are all ignorant of the future, so anyone can make a claim about the “best” way to build wealth in the future. It can never be proven wrong today; only when the future comes.
Imagine if we were having this discussion 10 years ago? People who listened to me about gold would be much better off than people who listened to Robert about the stock market. Clearly his “best way to build wealth” wasn’t truly the best way over the last 10 years, and I don’t think it will be in the next 10 years either.
A False Analogy (Paper is Not the Same as Rock)
You do also realize that your “safe” securities of gold and real estate are susceptible to the same market forces and speculation as stocks. They might be “real” things, but so are microsoft and apple and the share of ownership that I own in those companies.
Here is a good example of a false analogy, which is defined as an argument by analogy where the analogy is poorly suited.
Robert claims that because gold and real estate are similar to stocks in some respects, that they are just as “real” as stocks. While I will concede that gold and real estate are susceptible to market forces and speculation, I cannot agree that they are similarly tangible.
A share of stock is essentially a number in your brokerage account. Some people even take possession of stock certificates, but that little piece of paper is as tangible as it gets.
Shareholders have no claim on a company’s physical assets (that’s for bond holders). They have no claim on the company’s intellectual property. They have no claim on the minds of the people who work for the company. They just have a claim to a tiny fraction of a percent of “ownership” in the company, and whatever dividends the company decides to pay out.
A stock certificate is not inherently valuable. If the company goes under, the stock certificate is worth whatever someone is willing to pay for a fancy paper airplane.
On the other hand, a house and land are valuable because they offer someone a place to live. It doesn’t matter what happens to the stock market, the economy, or anything else. A house is valuable because it provides shelter. Land is valuable because it gives you a place to put a house.
Gold, I admit, may not have much practical value. You can’t eat it if you’re hungry and you can’t use it to keep you dry in a thunderstorm or warm in the winter. However, for at least 2,500 years it has been valuable and I haven’t seen anything to change that.
For thousands of years people have been able to use gold and silver to barter for or purchase things with practical value. I could be wrong, but I don’t expect that to change any time soon.
In gold and real estate, you own something tangible that is more valuable than a piece of paper. In stocks, you do not.
A False Dilemma (More than One Way to Skin a Cat)
The author should wholeheartedly acknowledge that this is not sound investment advice. The “thousandaires” this blog advertises to will stay “thousandaires” by following this strategy into their 40s 50s and beyond.
This is a great example of a false dilemma, also known as a false dichotomy. A false dilemma is when two alternative statements are held to be the only possible options, when in reality there are more.
Robert’s view is that thousandaires have two options. They can either invest in the stock market and become millionaires when they get older, or they can avoid the stock market and stay thousandaires.
In reality, there are many more options. You could invest in the stock market and go broke. You could also invest in the stock market and become a billionaire. You could invest 100% in gold and be a millionaire, a billionaire, or penniless. You could invest in Lending Club and get rich, or you could become poor. You could take a few thousand to the casino and leave with $1 million, or more likely you could leave with nothing.
Anyone who tries to scare you into thinking there is only one way to be financially successful is not someone I recommend taking advice from. This world is too complex to be seen in black and white.
Retrospective Determinism (Hindsight is 20/20)
I welcome debate, but “I’m scared of the stock market” is emotional garbage. Data is key. The historical data says investing in a risk designed diversified portfolio over the long term outperforms other investments.
I could take this argument down relatively easily by just comparing the stock market to the price of gold. If you put $10,000 in gold in 1970, you’d have $409,217 today. If you had put $10,000 in the Dow Jones in 1790, you’d have $215,785.
But let’s pretend the stock market had been the best way to generate wealth over the last 43 years, as Robert suggests. That still wouldn’t mean the stock market is the only way to invest.
Retrospective determinism is the argument that because some event has occurred, its occurrence must have been inevitable beforehand. Robert is arguing that because the historical data shows that the stock market has gone up over a long period of time, that it MUST have gone up. Thus, it MUST go up again in the future.
The stock market is not required to go up. In fact, while we are seeing “all time highs” almost every day, these record highs don’t account for inflation. We are well below historical highs when you account for inflation.
The Stock Market Isn’t the Only Way to Build Wealth
After logically refuting all of Robert’s points, I’m ready to defend my position, which is the following:
I’m going to try to get rich by purchasing precious metals, real estate, and investing in my own small business ideas. In the meantime I’m going to work hard at my day job and do everything I can to increase my income.
I strongly believe that I can and will become very wealthy with this method. I also understand that other people may get better returns in the stock market than I can get with my method. I don’t think that will happen, but it is certainly possible.
People can get rich any number of ways, and at Thousandaire I like to write about some more non traditional ways to approaching wealth generation. If you don’t like it then feel free to stop reading, but do not tell me I’m wrong or I’ll lawyer you like I did Robert.
Kevin McKee is an entrepreneur, IT guru, and personal finance leader. In addition to his writing, Kevin is the head of IT at Buildingstars, Co-Founder of Padmission, and organizer of Laravel STL. He is also the creator of www.contributetoopensource.com. When he’s not working, Kevin enjoys podcasting about movies and spending time with his wife and four children.
I did very well with income property and built it into a business. It eventually provided enough income to help me achieve financial freedom in my late thirties. I since cashed out and invested the proceeds into the stock market and have done pretty well in there too.
Congrats. Financial independence in your 30’s is incredible. I can only hope I get there one day.
Kevin: “Talk to any financial advisor or even your parents or grand parents, and they will tell you that I’m an idiot and the stock market is not only perfectly safe, but it’s the key to being wealthy.”
A good example of the straw man fallacy, “an informal fallacy based on misrepresentation of an opponent’s position.” Obviously no one has ever called you an idiot. And no financial advisor has ever called the market “perfectly safe.” Quite the contrary, many financial advisors will stress that no assets are entirely safe: stocks have market volatility risk, bonds have credit risk, foreign investments have currency risk on top of these others, even cash has inflation risk.
Kevin: “Robert is arguing that because the historical data shows that the stock market has gone up over a long period of time, that it MUST have gone up. Thus, it MUST go up again in the future.”
I can’t say if this is Robert’s position, but it certainly isn’t mine or that of any advisor I know. “Past performance is no guarantee of future success” is the constant warning. The paradox is, though, that past performance is the only evidence we have for making choices that affect our future, and it is exactly what Kevin is doing when he buys gold. Not sure offhand if this meets the definition of the “tu quoque” fallacy, i.e., doing what you accuse your opponent of doing, but it might..
Kevin: “The stock market is not required to go up.”
No it isn’t. As I said the other day, the market will do what it does whether Kevin trusts it or not.
You got me Larry. I definitely shouldn’t have said perfectly safe. However, most financial advisors think the market is safe enough to put a large majority of your assets there. I would strongly disagree with that. I should have chosen my words more carefully.
As far as the historical data argument, I have to disagree with you there. I did use data about gold, but that wasn’t my main argument. The thing I like about gold is that it has had a large amount perceived value for over 2,000 years.
And yes, the stock market will do whatever it will do. I certainly hope it goes up. My 401k is depending on it.
I’m not against your argument that there is more than one way to build wealth, but you are comparing the entire market to one investment. What if I did one investment to your one invest? If I had been lucky enough to pick AAPL I would have crushed gold the last 10 years. But I would be taking on high risk to do that just like you are taking on higher risk investing in just gold (for this example). This is just a counter to your counter of the Retrospective Determinism. Anyone can find a way to show their argument is better. What’s the old saying? Figures never lie, but liars always figure.
Like I said above, there are plenty of ways to generate wealth and I applaud you for bring up alternatives.
That’s true. You could pick individual stocks that blew gold out of the water.
The point is that gold is inherently different from any stock, and it is those inherent differences that I like about it as opposed to the 10 year return.
Saw your tweet and thought I’d comment. Just a few things:
First, shareholders do have a claim on the assets once all debt investors have been paid. Assets in excess of debt are the shareholders’. A stock certificate does not have value, but ownership in a business does. .
Gold has zero practical value. The price of gold is not governed by its utility, but what people feel like paying for it. Depending on who you listen to, there’s decades to centuries of overhang in gold, meaning that the supply that exists today is far greater than could ever be used within our probable lifetimes. Interestingly, gold isn’t necessarily scarce when it comes to actually using it for production, but because people feel better having it sit in a vault, it carries a high value. That also explains why it’s so ridiculously volatile.
Real estate and land are in a completely different category than gold because they are productive assets. A home or farmland can generate an income. Gold cannot.
From 1970 to April 2013, the total return on the S&P 500 was 6497.68%, which trounces the return on gold. Also, picking the date 1970 is a little disingenuous, don’t you think? That’s pre-1971, when the price of gold was released from a USD peg at a price way below market value. Looking backwards is silly, anyway, but I had to comment on that.
All in all, I agree with you that the stock market isn’t the only way to build wealth. I also think looking backwards is a very dangerous thing to do. I don’t think there’s anything wrong with doing things differently. I own stocks, but I don’t invest in index/mutual funds, nor do I diversify much at all. Buying the whole market isn’t for me, but I understand why people do it. Likewise, I don’t own real estate, but I see why people find it attractive. The stock market isn’t the only way to build wealth, that’s for sure – and I agree with you 100% on that. I do trust the stock market enough to believe that I can net much higher and more predictable returns from equities than I could from precious metals, though.
Gold has plenty of practical uses. Not enough to justify the current spot price, but there are tons of things that make gold practically valuable. http://www.businessinsider.com/many-uses-of-gold-2012-9?op=1
Also, I picked 1970 because it’s about 40 years ago, which is about how long people have to save for retirement. 🙂
Not a reader of your blog. I just stumbled upon it. I won’t read any more, I promise ☺
Lawyer me? Are you a lawyer? Probably shouldn’t give financial advice then.
Now that I’ve addressed your snarky, brat comments with my own snarky, brat comments, lets be real. Every investment has risk. Gold, real estate, stocks, etc. You invest in multiple things to diversify and hope that all of your eggs are not in one basket. You can’t know what the future will bring. Can’t know which will outperform the other. Historical data can give a good estimate, but isn’t infallible. Glad that’s all over.
The argument I was trying to make is the following:
As a young person you have a defined set of years to build wealth. You get out of college, take three to five years to pay off loans and at 25 really start to try to build wealth. You start at a job making 50,000 a year and sock away 18% if you’re lucky. As a “preserver of wealth” you buy a home and begin to pay down your mortgage. After 5 years of getting a hefty portion payed off you begin looking for a way to use all that equity. So you start looking for rental properties. You pull the money out, play monopoly, and start all over again.
The thing with this strategy, although perfectly sound, is it is another job. And unfortunately your daughter really needs to go ballet tonight and your boss already is breathing down your neck for things that are late. It isn’t practical for most people.
What is practical for most people is to take their 12% savings, get their 6% match, and invest in a diversified portfolio (mostly stocks and bonds, but other vehicles too) over the long haul. Simple and automatic will give the best chance for success. To get rid of one of the most simple and practical ways to build wealth, because of a “feeling” of mistrust is not good advice.
I would just like to finish by saying you should be careful what you recommend. Your original article said you don’t trust the market and that precious metals and real estate are what you’re doing. You’re a very good debater and could convince a lot of people this is logical for them.
The “ignorant” abound and are easily swayed into advice that might work for the extremely determined and intelligent like you, but would likely turn out badly for them.
I would know, I seem to make a lot of arguments based on ignorance. Or so I’ve heard. ☺
Thanks for reading, and thanks for not taking anything personally. I figured since you welcomed debate, I would oblige. Glad to see you came back.
The thing about rental properties is that you don’t have to manage them yourself. You can pay about 10% of the monthly rent to have someone manage the property for you. If you have enough positive cash flow you can pay a management company and still get cash in your pocket every month!
And hopefully if people have found my blog then they are looking for something a little different than “invest in the stock market” and they like my advice. 🙂
I used to think that real estate was the way to go. It hasn’t worked out for me, but that was my experience. I am a landlord today, but I have higher hopes for my stocks than I do for that rental property. Here is why: please use these as points to ponder in your own real estate endevor.
1. Housing prices are free to go up or down, but because most people buy houses with mortgages, the long term price is tied to the income growth of the local community. If it wasn’t, then no one could afford to get a mortgage. To liken this to a stock, looking at a community’s housing prices vs the percentage of an average salary that would be needed to purchase the average house will aide you in determining if they are under/overvalued. Similar concept to P/E for stocks.
2. Rent is never a guarantee, and failure to get it can lead to costly legal battles, and prehaps even damages to the property when a renter leaves.
3. Things always break, so unless you have the equivilant of a triple net lease for your residential property, that “cash in your pocket” will soon be leaving, and probably be brining some of the other cash in your pocket with it.
4. If you hold the property for 30 years, all those tax breaks you were enjoying (ie depreciation) will now be working aganist you when you sell – the entire amount of the sale will be taxable.
5. One piece of real estate ties up a lot of capital. You also cannot sell as easy as you might hope. A stock can be sold in less than a second a house cannot. Real estate agents a pricey, and then there is always that buyer who thinks its a good idea to low ball you with your price. Headaches, all.
Frankly, I know I will do better with stocks then I will with my rental property. I am a 31 year old thousandaire, actually a hundred thousandaire. My networth is up 50% in the last 2 years with stocks.
Wow, what a condescending response. There comes a point where being right is not worth the bad will you foster in your opponent and witnesses. You said you could shoot down his historical data argument with numbers. Why not just do that without pointing out his argument is full of logical fallacies?
And I don’t think you even understood Robert’s arguments. When he was comparing gold and real estate to stocks, he was only presenting those securities as investment vehicles, nothing more. Of course stock is a piece of paper. So is a REIT. There are many factors that control whether a REIT goes up or down, but the fact that it is backed by real things is generally not one of them.
And nowhere does he say that because the stock market has gone up in the past it must go up in the future, you inferred it. That’s basically what this blog post is, additional arguments inserted by the author (possibly accidentally) for the purpose of providing a much larger argument.
I also think you are being condescending to your readers. You could have just presented the facts that you feel refute Robert’s arguments and let your readers decide from themselves, or better yet, do their own research. By wrapping the data in an argument about logical fallacies you are basically telling them that if they entertain Robert’s argument, they are being illogical.
Hmm. Great article, but I have several tips about investing money in the private funds, which lead to the higher incomes than from holding property.
Fairly good analytical article, always enjoy reading such texts – a great help when investing.
Woah! I loved the blog and loved the way you took up the challenge explaining the fallacies.
Moderation is the key…a smart investor diversifies…stocks, bonds, mutual funds, real estate, precious metals, private equity, cd’s, money markets, and don’t forget CASH.
Reason is because liquidity changes throughout one’s life as does risk tolerance. Each person is different…there is no one strategy that is best for everyone…except this…everybody should max their Roth IRA (oops…sorry I already found a hole in this strategy…can’t have a Roth if you make too much earned income) my suggestion would be in a lifecycle fund.
Great entertaining read…just remember…different strokes for different folks!
Thanks for sharing your thoughts about tv. Regards
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