Note from the CIO: Who to Trust?

person reading newspaper

Take a look at these headlines:

US stocks surge back towards bubble territory (Business Insider)

Why this stock market looks like the tech bubble of 2000 all over again (Business Insider)

Robert Shiller eyes another tech bubble (Yahoo! Finance)

Nobel prize winner warns of US stock market bubble (CNBC)

Time to worry about stock market bubbles (New York Times)

Fears grow over US stock market bubble (Financial Times)

Uh-oh. Is the stock market in a bubble again? (CNN Money)

Is the stock market a bubble? (USA Today)

Disaster is inevitable when America’s stock market bubble bursts (Forbes)

7 ways that 2019 mirrors the dot-com bubble (Investopedia)

A stock market bubble is forming (Morningstar)

A growing number of investors believe the stock market is in a bubble (Business Insider)

It sounds like an overwhelming consensus that the share prices of publicly traded companies (“stocks”) in the United States are in “bubble” territory. Although bubble is an ambiguous term (often used intentionally), these headlines suggest stock prices will drop significantly at any moment and investors should beware. Except, each of these headlines were written in different years — starting in 2010, followed by 2011, 2012, and so on — through 2021. In other words, we have been hearing the same alarm bell for twelve years running. 

Aside from some financial journalists willing to be wrong, what is the intention behind these headlines? The goal is to hook us in by our emotions (“if it bleeds it leads”), get us to click on the bait, and keep us engaging with ads. Why? Because ad revenue keeps financial journalists in business. In particular, the financial media takes advantage of certain behavioral biases that humans have.

Many people suffer from “progressophobia” — meaning that no matter how much progress we see behind us, we still mostly expect deterioration before us. For example, the fact that 60% of the world lived in extreme poverty in 1970 while today only 9% does might as well not exist given how many people perceive human potential going forward. 

This tendency to expect deterioration is partly why “news” that gets reported tends to be a sample of the worst things that happened that day. And when presenting what happened, there will be a bias toward negativity because good things are often things that don’t “happen”. For example, here is a headline you will likely never see: “137,000 people escaped from extreme poverty yesterday, and every day for the last 30 years”. Although it is entirely true — a billion people escaped from extreme poverty over the past three decades — hardly anyone knows about it due to progressophobia and negativity bias.

This kind of news negativity bias also feeds into one of the most powerful cognitive biases, the availability bias: we estimate risk and danger by how easily images come to mind. We read about a shark attack and don’t go into the water, even though the risk is much greater just driving to the beach. We are much more fixated on the fact that 4.8 million people globally have been killed by COVID-19 over the past 18 months than the fact there are 9 million deaths per year from air pollution. Nuclear energy is vastly safer than coal and is arguably the safest source of energy by all metrics (including deaths per unit of energy produced), but few know this due to images of disasters like Chernobyl and Three Mile Island that leap to mind. This is the irrationality that news stokes, and it lodges into our brains by prioritizing images of things gone wrong.

A compounding behavioral trait that many have is: losses hurt more than gains feel good. This bias, known as “loss aversion”, partly explains the obsession of many investors trying to identify when we are in a stock market bubble and agonizing over how severe the drop might be. I have heard many researchers trace this concept back to the idea that we survived in, and evolved out of, the Savannas by fleeing even the hint of a lion hiding in a nearby bush.

Because we can’t always be fleeing from hints, and because none of us can be experts in more than a tiny percentage of all knowledge, we have to trust institutions and experts. But trust has to be earned and we must do our due diligence to confirm the experts are really experts. This means, for example, checking citations that articles often link to and identifying any biases. It’s not about asking “Do they have biases?”, rather it’s asking, “What biases do they have?” Because we all have them, recognizing our biases and the biases of others can help us parse out informative content and disregard the noise.

Noise and news cycles aside, we can be sure there will be “bear markets” in the future, which have occurred every five to six years on average since World War II. During these crises, one-third of the value of publicly traded companies on average appeared to disappear. The next one could be in one month, or it could be in ten years. In any case, there will be a few financial journalists who will seem like market wizards — mostly by lucky timing. 

But what if you do get unlucky timing by investing right before the next significant market drop? Well, I was taught in financial advisor school that the long-term average annual performance of the largest 500 US companies (“S&P 500”) has been about 10%, (therefore timing shouldn’t matter). But I quickly learned from clients that few of us have a 95-year investment horizon that’s used in computing the S&P 500’s long-term performance. 

So instead of that lengthy horizon, let’s suppose you invested at the end of the day on October 9, 2007, the single worst day to invest in the S&P 500 companies since the end of the Second World War. Over the next 17 months, the prices of those companies fell by 57% during the Financial Crisis. If you simply held tight throughout the crisis, and throughout the recovery that started in March 2009, your annual average return through today would be… just about… 10%. In other words, even with the worst historical timing, you would have achieved the long-term average in 14 years. If that is what the worst case looks like historically, I’ll take it, because I would have achieved the long-term average much sooner in a vast number of other scenarios.

Ultimately, every single one of the past market crises, including the Financial Crisis, proved to be temporary. So let’s agree to plan on periodic market crises happening from time to time regardless of what the financial news says, and that the best course of action during future market crises should be doing the same behavior that’s proved best in all past crises. Namely, you should act on a plan rather than reacting to current events and news, and continue to make decisions based on rationality (evidence, facts, and the preponderance of history) rather than on emotions. It may not ever make it as a headline, but then again, good news and solid planning rarely does.


Abacus Wealth Partners, LLC (Abacus) is an SEC registered investment adviser with its principal place of business in the State of California. Abacus may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. The article is for educational purposes only; and contains the opinions of the author, which are subject to change, and should not be considered or interpreted as a recommendation to participate in any particular trading strategy or deemed to provide investment recommendations, and it should not be relied on as such. Any subsequent, direct communication by Abacus with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.

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Investments involve risk and, unless otherwise stated, are not guaranteed. The Information was based on sources we deem to be reliable, but we make no representations as to its accuracy. Past performance is not indicative of future results. Readers of this information should consult their own financial advisor, lawyer, accountant, or other advisor before making any financial decision.


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