How do you go about making good investment or tax-planning decisions?
Why do investors and their advisers repeatedly fail to anticipate financial disasters?
What can you do to make better decisions?
These questions occurred to me last week when discussing a number of topics after a two-day conference. Predominately, my fellow tax professionals said they and their clients just didn't see this last round of financial disasters coming. And, they told me, neither did the professional investment advisers and money managers they regularly deal with.
Of course, all the current financial dramas and disasters were perfectly predictable.
Over my years of professional practice representing investors and entrepreneurs, it seems few believe in themselves. Most, excepting the deal junkies, turn to someone else: an authority they think has much greater expertise or the inside track on big opportunities or knows the secrete knowledge to solve problems.
Viewing things as I have, and without having a "dog in that fight," it seems that both investors and their investment advisers decidedly make a lot of bad decisions. They later use such excuses as the events caught them by surprise, were by their nature unpredictable, came out of nowhere, or otherwise they relied in error on somebody else.
But is that what happened?
The recent financial crash not only was predictable, but it was, in fact, predicted.
As an example, in 1983, a book called "The Downwave," by Robert C. Beckman, talked about the real-estate cycle. It also outlined the reasons as to why real estate went up and why it crashes time after time. The book traced the real-estate cycle back to something like 1789 and up to 1983. Based on this historical data, and the analysis of the reasons that explain the cycle, it was apparent that the crash of real estate would occur exactly when it did — and for most of the same reasons that always cause real-estate market crashes.
In another example, Harry E. Figgie (who was a member of the Grace Commission) and Gerald J. Swanson wrote a startling book called "Bankruptcy 1995." The forward was written by Senator Warren Rudman. This was no superficial gloom-and-doom book.
This book detailed the current state of affairs in the economy of the United States, the reasons why it was happening, and what could be done for the United States to avoid bankruptcy.
The Federal Reserve printing money; the Congress spending; it's all there. The book was written in the early 1990s, in plain English, and was available at all bookstores. Few people in government and on Wall Street paid the slightest attention.
We are now in 2012 and the United States is bankrupt, just as Figgie said would happen. And as Figgie pointed out, the bankruptcy was avoidable.
For that matter, Peter Schiff also was right on target. I remember him being on many financial shows where the guest discussed with show's regular "experts" about how confident they were that Schiff was wrong.
Schiff turned out to right and all those experts are still on television, still giving their opinions as though they have some mystical ability to see the future. And tell you how to invest.
There are two things going on.
First, human beings don’t take into account unfamiliar occurrences. While the mind is magnificent, it does tend to jump over ambiguity to reach a conclusion that reconciles divergent facts which are otherwise incoherent. This happens to research analysts, investment advisers, money managers and investors.
Effectively, our minds don’t readily accept information that will be in conflict with our previously held beliefs.
Investment professionals — and also politicians — know that repeating even false information can be successful in compelling people to accept something as true that is, in fact, a lie. Repetition creates familiarity; and familiarity creates beliefs. It isn’t easy to distinguish that which is believed from that which is true.
Second, greed is always around when it comes to money. This particular human frailty is easily preyed upon. Perhaps this is a good explanation of why Wall Street and politicians are so successful – and so unethical.
Future events are unpredictable. But processes already occurring lead to predictable outcomes.
That the Federal Reserve was a horrible idea was well known in 1914. It was well known in 1789. Overspending by government has always had tragic results. Outrageous taxes and oppressive enforcement to pay for unstoppable government spending has always been the cause for virtually every revolution in history. A county engaging in prolonged wars will inevitable fail. They always have.
It seems clear to me that to make better investment decisions you need to break through the illusion that financial professionals or politicians have some sort of special knowledge. They don't.
Most likely, they know less but they wear nicer suits.
You want to make better decisions? Then drill down to get the facts and start thinking for yourself.
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