The best 2008 investment advice was to stuff all of your money into your mattress.

For some time, including presently, investment advisors warned people about losing ground economically by failing to invest their money.    It was and is still argued by many ‘pros’ that only the foolish or insane who feared the integrity of the markets  would stuff their cash in a mattress for a zero percentage return.

But guess what?

Those crazy folks who stuffed their US dollars into their mattresses did well last year compared to the pros.    And not just “pretty well”, the investment crazies had a spectacular year compared to most of the brilliant minds on wall street, the silly financial reporters on CNBC and CNN (yes I’m talking to YOU Ali Velshi and Michelle CB !) and your local financial advisor all of whom took as gospel the idea that you need to invest your money in the markets and – depending on your age – generally weight that investment towards equities.

I’m not saying all those “pros” could have known this was terrible advice for 2008 but I do hold the financial news reporters, TV pundits, SEC, Wall Street, Democrats and Republicans very accountable for failing to at least *discuss * the many smoking guns that probably would have given us enough insight to create a soft landing scenario rather than what was very close to a global financial catastrophe.

Let’s do the math (for the sake of simplicity I’m avoiding currency issues though they’d also very much favor any international mattress stuffers out there if they used dollars which are generally up compared to most other currencies):

Insane mattress stuffer rate of return in 2008:  0%

S&P Index Rate of return:   -37%

Nasdaq   -42%

DOW  -31%

Thus our insane investors outperformed the DOW by 31%, the S&P by 37% and the Nasdaq by a whopping 42%.

Almost universally the “stuff your money” advice would also have thrashed the advice of the “pros” thanks to commissions, Bernie Madoffs, etc.  My understanding is that those factors generally mean that managed yields are below the index averages though obviously there are some exceptions.    However I think the lesson from the meltdown, the generally “trailing the news” TV pundit advice, Madoff, and everything else is that even though 2008  was hardly a typical year, it’s always been true that you are very unlikely to pick an “expert” who will  outperform the averages over time.    There are such people, but the odds are very much against you picking one because there is little reason to believe that past investment records give much indication of future results.   ie it may not even be possible to identify great stock pickers until … after their records are complete.

I’m increasingly convinced that if you examine most success stories you will find moderately clever folks who were lucky enough to be positioned in the path of opportunity rather than brilliant folks who were the architects of their own fortunes.   I’ve noted that most super successful folks acknowledge this luck factor, where most modestly successful folks give themselves quite a bit of credit for lucky guesses or good fortune coming their way.

Unfortunately most studies of “success” tend to look at successful enterprises and then generalize from that information rather than do the far more interesting and relevant  study which would examine a huge number of successes and failures and look for the factors that seemed to drive each one.

Peter Rip writes a great blog about Venture Capital investing and usually I like his take on things but was surprised to hear his pollyanna optimistic assessments for the coming year in the Technology VC world.   He predicts that:

Many good businesses will be left on the beach as the rest are washed out to sea – the remaining VCs will invest in them and both the entrepreneurs and VCs will get rewarded as the survivors gain market share and become successes in the economic recover.

Although Rip’s  right that there will be *some* companies left standing I think “many” is way too optimistic.  Sure there are always at least a few great opportunities with great challenges, but unless we see more stability and less uncertaintly in the global biz climate I can’t be this optimistic about high potential returns, let alone positive returns on most technology business investments in 2009.      I’d predict that 75% or more of  all the VC funded startups alive now will be dead by Jan 1 2010 unless they are currently turning a profit.  Personally I’m more bullish on residential real estate than technology startups, which increasingly face huge problems from increasingly defective ad-funded business models.

Another factor depressing potential returns is that we will have far, far, far more government money in many business equations than at any time in history and one has to wonder how Government sponsored businesses may turn out as their success increasingly will come from  pleasing bureaucrats (who are often very antagonistic to private wealth) more than shareholders.

But hey, thanks to Peter for a dose of hope for 2009 even though I’ll be happy with anything over 0% for this year.   Last year the crazies had the best investment advice and it was *very good* advice in the sense it outperformed the markets handsomely.    For 2009 who is to say the “experts” will fare any better than the crazies?

9 thoughts on “The best 2008 investment advice was to stuff all of your money into your mattress.

  1. As one of the many humbled pros who did not see this coming (but who was concerned about many of the issues that contributed to it), I think it is important to keep a few things in mind:
    -Market meltdowns of this magnitude, while not unheard of, are exceptionally rare. What caught so many off-guard was this one came so quickly on the heels of the 2000-02 Bear, a debilitating decline of comparable size.
    -Like the manic bubbles that preceded it, this devastating drop occurred when numerous events came together in just the right way at just the right time to create a panic of epic proportions.
    This event will influence investor behavior for many years – if not decades – to come, but in many ways, that could be a good thing.

  2. Thx Paul, all good points. I do think many of the old rules may have to be revised however. People who were unlucky enough to come into the stock market and buy their home in the past 5 years or so may not recover their investment costs for a decade. That … has got to hurt and makes me glad I’m old enough to have paid … less for most of my stuff than it’s currently worth.

  3. You can’t win if you don’t play the game.

    Mattress stuffers will never lose… but they will never win either!

    The “meltdown” seems to have had some aspects reminiscent of the famed Tulip Mania wherein tulip trading made fortunes but the tulip bubble eventually burst, as most bubbles do! Comparisons between the annual income of a skilled tradesman and a tulip broker are probably somewhat similar to the comparisons of today between a “bricks and mortar” business and some over-hyped Social Network Search Optimized Marketing start-up.

    Madoff Mania? Well, he was saying give me your money and I won’t tell you what I’m going to do with it, I’ll just return a profit of ten percent on it. Well, take away the reputation and social connections and you’ve got an obvious con man! It wouldn’t fly in Peoria… so how did all those Palm Beach types get fooled? Adding six zeroes to the dollar amount involved doesn’t change the nature of the con.
    Some ultra hip party in Palm Beach is no different than a street corner in the ghetto: In God We Trust, All Others We Audit.

  4. Rules changed… ??
    Well the rules changed in a great many fields.
    Think back to all those IPOs that initial climbs of a few hundred percent. That would have been a disgrace for an investment banker a generation ago.

    Think of the “generate a mortgage, package it and sell it” industry that replaced the older style “a mortgage is an asset to be held locally” paradigm. Giving mortgages to a sporadically employed lawncare worker never made sense if one took a long term view, but once the industry shifted to collateralizing such mortgages by packaging them and shipping them off to less-alert buyers, the granting of a mortgage became a profitable game.

    Hedge Funds: Give us lots of money and we will do something with it but won’t really tell you what it is and perhaps all we will do is invest in other hedge funds … well, something like that would never fly a generation ago.

    Leveraged Buy Outs: We buy the company then we sell off some of its various parts and use that money to pay off our loan? Thats like buying a car and then trying to pay for it by selling the wheels and the engine.

    Rules change. And constant vigilance is required just for that reason.

  5. Rules change

    Yes indeed! My beef with the current situation is not so much that we’ve had the usual suspects on steroids: Greed, Bad Govt, Bad Advice, etc… What is frustrating me is that there will be very little accountability for all that. Although investors will say they’ll be more cautious and pundits will say they are humbled that won’t last long and we could be off to the races again.

  6. I think some of the problem in getting correct advice is finding the right advisor!!! If you do not get on with the expert that is advising you, and they don’t understand your needs, then that won’t work. That’s why that I feel that there is such an issue with people using banks or the internet looking for advice on money. Face to face in my view should be the only way.

  7. It may be one thing to “stuff your mattress,” but by taking at least a small risk with one’s capital, the dividends may be worth it: Especially if the savings are going into retirement. Thanks for the post.

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