The Paradigm Shift That Altered The Odds of Investing

The Paradigm Shift That Altered The Odds of Investing

This picture speaks MORE than a thousand words …

Looking at the chart (link at the bottom) of the S & P 500 index from 1960 to 2020, it does not take a rocket scientist to recognize that the early 90's was clearly an inflection point of some new trend-setting phenomenon or paradigm shift relative to investing. In my opinion, this is the point where the rational investing paradigm of old morphed almost overnight into the irrational speculative paradigm we've all witnessed the past 20 years. Over these past two decades, this shift has proved extremely beneficial and profitable for Wall Street, the financial services industry and all those working in it … but unfortunately, not so for investors. We investors that put all the money in, assume all the risk and pay fees for someone to manage our investments, have experienced little if anything in the way of creating, accumulating and more importantly, preserving wealth over the past decade or longer.

So what changed? Did the odds really shift in favor of the financial services industry? Do we as investors stand a chance to achieve our lifetime financial goals if this is the new norm?

In the beginning

Back in the 1980's, a new technology platform began to impact the world in a very different way and quickly found its way into almost every aspect of our lives. The Age of Technology; computers, internet and smart phones were brought to our desks, homes and palms, fundamentally enhancing our work efficiencies / effectiveness, personal lives and forms of communication and entertainment. There were so many benefits to embrace and it was and continues to be almost beyond the realm of comprehension. But, with all good things, there is a down side, those people that take advantage of others and businesses that manipulate the system for their direct benefit.

Play ball

In the mid to late 90's, the vast majority of Baby-Boomers, including myself, and many Gen X investors, got sucked into this initial irrational speculative paradigm chasing every “hot” tech stock, tech fund and / or tech manager that the financial services industry could motorer. It was almost as if we could not lose. Easy wealth seemed to abound all around us and the rationalization was the value provided by this new “tech industry” had forever changed the investment landscape. The financial services industry had convinced us that this rapid and unpresented creation of wealth could never end, even though there were no fundamentals to support that claim, and we as investors required needed to capture our fair share of it … which we all too willingly did. But as we all now know and history teachers us, speculative bubbles of this irrational type burst, and when this irrational tech bubble did, the consequences inflated on investors were quick, harsh, and wiped out massive amounts of personal wealth over a few short years . The investor's wounds were deep, painful and long-lasting … but not for the financial services industry.

Lesson learned by investors, right? Wrong.

“Their Game” Evolves

Take another look at the chart. In 2003, the markets sharply rebounded and soon, the financial services industry and its massive marketing machine were busy selling a whole new set of highly irrational and speculative products to investors, none of which sounded or looked anything like the words stock or bond. Consider some of the products created by this industry and sold to investors from 2003 to 2008; Collateralized Debt Obligations, Auction Rate Securities, Credit Default Swaps, Mortgage Backed Securities and Structured Investment Vehicles to name a few … and all with the same promise of huge returns that we as investors could not afford to invest in, even though no one could explain what these products were, how they worked or what the risks were. That was not important and inevitably investors again got sucked into playing this game of the financial services industry. The irrational speculation paradigm had again reared its ugly head and the financial services industry was laughing all the way to the bank knowing, this new self serving serpent was again working to benefit and reward their industry, Wall Street and those working in it with huge profits and bonuses … all at the expense of all investors.

In his 2012 best-selling book; Markets Never Forget … But People Do, Ken Fisher details how investors never seem to learn from past mistakes and blindly believe the financial services industry when told … “but this time it's different.”

And so in 2008, the irrational speculative Housing Bubble burst and for a second time in less than 10 years, investors lost trillions of dollars in personal net worth and wealth, most losing 50% or more of their life's savings. This bubble has proved a disaster for the Baby boom generation as they were on the verge of retirement when this bubble burst and time is no longer on their side to recover. Now, this generation is facing decisions that never thought possible; working later in life, lowering their standard of retirement, working part-time to supplement their income or … as is evidenced today, taking even greater risks with their limited wealth in more irrational speculative investments.

Time to repackage

Game over? Hardly if the S & P 500 chart and today's market hype / euphoria are any indication. It's as if we're in a new short-term repeating speculative cycle every few years; build wealth only to lose it from 1995-2003, build wealth only to lose it from 2003-2009, and now from 2009 to today, we have seen the markets move to all-time highs for no rational reasons, only irrational. Consider the following; we've been mired since 2009 with a stagnant low-growth economy, high unemployment and the Federal Reserve continuing to pump billions of dollars a month into our economy just to keep our economy afloat while devaluing our dollar … and … Wall St, private-equity firms and hedge funds have once again turned to riskier but more lucrative bets such as leveraged loans, a lightly regulated stepsibling to junk bonds. These leveraged loans became popular before the 2008 collapse, almost disappeared right afterwards, but are now back in vogue and “hot” with volumes exceeding the pre-crisis levels of 2007.

This market run-up, as in past bubbles, has no foundation to sustain itself whatever, but investors are pouring money back into it at a time when the next bubble is most vulnerable to bursting. Just as with the past two bubbles, most investors bought into the markets at or near the highs when Euphoria was greatest and, after the bubbles burst, sold low when the emotional pain of loss overcame them personally. Buy high … sell low is not a winning investment strategy, only a strategy the financial services industry and their marketing machine has successfully leveraged to encourage investors to play.

Are you willing and can you afford to lose 50% of your wealth if you're a first time investor? What if you have been investing for more than five years, can you again afford such a loss for the second or worse yet, a third time?

Are you willing to accept this cycle of feast then famine? Who has been and continues to be the primary beneficiary of this paradigm shift? Is this the best investors can expect? Is there any alternative to revert the paradigm back to rational investing?

“Their game” exposed

Here's what I've learned over my 30 plus years investing and more specifically, the past 18 years and feel compelled to share with my readers. It is my opinion and one based on factual evidence, that this new irrational speculative paradigm shift, or intentional market manipulation as I prefer to call it, is nothing more than a new game that was solely created by the financial services industry, for the direct benefit of the financial services industry and at the sole expense of their clients, we the investors.

I now refer to this new game as “their game.” “Their game” can easily be characterized as follows:

  • Totally self-serving
  • Rife with conflicts-of-interest
  • Higher and more undisclosed fees
  • Providing less value
  • Lack of Risk Management to preserve / protect wealth from massive market meltdowns
  • Legal confiscation of wealth via fees
  • SEC, Finra, State Divisions of Securities, etc. protection
  • Little if any legal fiduciary responsibility
  • A massive and extremely effective marketing machine that preys on investor's emotions

Still alive and well

I've come to realize the following; the paradigm of rational investing that my parents taught me and had worked for decades is still alive and well today but only for those investors with the discipline to tune out the “noise” of Wall Street and that choose to no longer follow blindly the hype of sales reps masquerading as financial professionals with self-serving interests.

The paradigm of investing has indeed shifted and investors now have a choice of playing the game of the financial services industry, which many investment legends like John Bogle, Warren Buffet, Peter Lynch, Larry Swedroe and David Swenson to name a few, consider an absolute loser's game, Egypt, playing a winner's game as an informed self-empowered investor where the odds can easily and simply be lifted back in the favor of we investors.

In next month's article, I'll be focusing on a couple of the above questions; Is this the best investors can expect and is there any alternative to revert the paradigm back to rational investing? The intent will be to define a winner's game and what immediate actions the average investor can take to shift the odds of wealth creation and preservation back in their favor.

S & P Historical Chart link;

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