The John Mauldin Classics Collection E-Book

John Mauldin

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 1616

Veröffentlichungsjahr: 2012

Beschreibung

Three bestselling works from noted investment advisor John Mauldin in one handy e-book collection Renowned investment advisor and New York Times bestselling author John Mauldin is one of the most well-known and admired economic observers anywhere and a trusted name for millions of investors. In this all-in-one e-book collection, three of Mauldin's biggest selling and most important titles are available together for the first time. * In Bull's Eye Investing, Mauldin uses six different perspectives on the markets to prepare investors for a profitable future * In Just One Thing, Mauldin offers a shortcut to prosperity with personal guidance from a selection of highly-regarded financial experts, each of whom provide their single most useful piece of advice * In Endgame, Mauldin argues that rather than slowly recovering from the current financial crisis, the world economy is entering a period in which governments, rather than households, will experience extreme financial "restructuring"

Leseprobe

Contents

Foreword

Bull's Eye Investing: Targeting Real Returns in a Smoke and Mirrors Market

Just One Thing: Twelve of the World's Best Investors Reveal the One Strategy You Can't Overlook

Endgame: The End of the Debt SuperCycle and How It Changes Everything

FOREWORD

Those of you who have been reading Thoughts from the Frontline, the weekly newsletter I have been publishing for more than a decade, know that I am a constant observer of the global economy, sorting through a massive amount of information each week. Over the decades, I have watched stock markets rise and fall, interest rates climb and decline, housing markets reach unprecedented highs and lows, and more recently, debt crises threaten the financial stability of entire countries. And not only do I write about these events in my newsletter, I have also penned five books on finance and investing, often predicting the ebb and flow of the tide before major events and detailing how I came to my conclusions.

In today’s increasingly complex and interconnected world, you need to have a broad perspective on the financial markets. You should pay attention to what is happening in China or Greece or Brazil because global events can impact the performance not only of the stock market, but also of every part of your investment portfolio. To make more informed investment choices, you must understand the global markets—where they were, where they are, and where they’re likely to head.

Making sense of all the available economic and other data can be daunting. I hope that my analysis is lucid enough to provide you with a solid perspective so that you can be a shrewder investor, whether you’re investing on your own or with the guidance of an advisor.

John Wiley & Sons, my publisher, has assembled this e-Book set of three of my best-selling books. Included here are Bull’s Eye Investing: Targeting Real Returns in a Smoke and Mirrors Market; Just One Thing: Twelve of the World’s Best Investors Reveal the One Strategy You Can’t Overlook; and Endgame: The End of the Debt SuperCycle and How It Changes Everything, which I co-authored with Jonathan Tepper.

Endgame was published in 2011 and focuses more closely on the collapsing economies around the world. The two other books were first published more than five years ago, but the information and insights in them are timeless and still valuable for anyone interested in the world of finance.

I’m fortunate enough to have worked and interacted with some of the best minds in business today and they have helped me shape my views. And you—my readers—have responded with both enthusiasm and skepticism, calling me out when you disagree with my views and correcting me when my calculations have errors. But most of all, you have asked me to continue to speak and write on what is happening around the world.

Whether you’re sitting in your backyard in La Jolla, California, flying to Singapore, or riding the subway in New York, these three e-Books will provide you with a mix of history, investment knowledge, and hopefully, some humor along the way.

John Mauldin

May 2012

Contents

Acknowledgments

Introduction

Chapter 1: Car Wreck, Traffic Jam, or Freeway?

Secular Bear Markets

Rules of Engagement

Jumping Ahead

Positively, Absolutely Relative

The Correlations Change

It’s All about Assumptions

Lies, Damned Lies, and Statistics

Mean Lean Reversion Machine

The Missing Link: Investor Sentiment

Don’t Worry! Be Happy!

The Real Link between Age and the Markets

The Predictability of Randomness

Sideways to Down for 20 Years?

Chapter 2: Faith versus History

Secular Bear Markets

Blind Dogs and Janus Managers

Phony Analysis

Are We at the Bottom?

Faith versus History

Chapter 3: The Trend Is Your Friend (Until It Isn’t)

Investing by Committee

Take a Risk, You Get Fired

Bull versus Bear, Siegel versus Grantham

Cooking the Data Books

How to Spot a Market Cheerleader

What Will the Stock Market Return over 10 Years?

Chapter 4: Catching the Next Wave

Stock Market Cycles

Understanding Stock Market Behavior

Growing Pains

Expansions and Expectations

Long Waves Explained (Finally)

Something New This Way Comes!

Chapter 5: Into the Matrix: History’s Guide to Realistic Expectations

Secular Bear Markets by the Numbers

The 20-Year Horizon

The Volatility Gremlins

The Investment Matrix: The Real Truth about Stock Market Returns

The Investment Matrix Revelations

When Can We Make Long-Term Money in Stocks Again?

Death and Taxes

What Are Expected Stock Returns for Next 20 Years?

Slip-Sliding Away

Sequences over Time: Cycles

They Almost Got It Right

It’s Not the (Stupid) Economy

The Opportunity for Current Graduates

Chapter 6: Financial Physics: Interconnected Relationships

A + B = C: It’s All Connected

Predicting Earnings

Applying Financial Physics

What Does It Mean?

Chapter 7: Risky Expectations

Risk Premiums

Predicting a 50 Percent Drop

“Hopeful” Outcomes

Chapter 8: Plausible Expectations: A Realistic Appraisal of the Prospects for Earnings Growth

The Glass Ceiling

Earnings Deflation

April Fools Investing

How Hidden Options Expenses Will Actually Affect Earnings

Earnings before Interest and Hype

How Far Away Is the Bottom?

NASDAQ Prediction

Pension Fund Woes

The Wendy Gramm Factor

Plausible Expectations and Irrational Exuberance

The 2 Percent Dilution Factor

Nash-Kelvinator, Studebaker, and Other U.S. Giants

Summing Up Our Learning about Earnings

The Earnings Road Just Got Steeper

Chapter 9: Pension Fund Problems in Your Backyard

Nightmare on Pension Fund Street

Can It Get Worse?

Chapter 10: The Issue of Retirement in an Aging World: Is It Something in the Water?

Is Retirement in Your Future?

Fantasy Island

Supply and Demand Is the Main Culprit

Health Care Pressures

Take an Aspirin and Call Me in the Morning

Who Really Owns GM and Ford?

What Happens If You Don’t Compound at 10 Percent over the Next 10 Years?

What Could Make a Difference?

Social Security Solutions?

Be Honest with Yourself

How to Lose 20 Percent in Five Years—Guaranteed

Chapter 11: Demography Is Destiny

Age Vulnerability: Your Pension or Your Life

Demography Is Destiny

Chapter 12: King Dollar and the Guillotine

The Kindness of Strangers

The Artificial Dollar

Why the Dollar Rose

The Competitive Devaluation Raceway

The Law of One Price

An Uncomfortable Adjustment

The Artificial Dollar and Deflation

Can You Focus the Picture, Please?

Chapter 13: The Muddle Through Economy

Déjà Vu All Over Again

The Good News

The Unsustainable Trend—The Trade Deficit

The U.S. Government Deficit

The Demographic Conundrum

The Jobless Recovery, Productivity, and the International Labor Arbitrage

The Steroid Economy

The Unsustainable Trend, Part Two

Bulls to the Left of Me, Bears to the Right of Me, Here I Am Stuck in the Muddle Through Middle with You

Chapter 14: Chairman Greenspan and the Shoot-Out at the OK Corral

The Famous Fed Printing Press Speech

A Very Clear Fed Speech

Stimulating Demand

The Greenspan Uncertainty Principle

Monetary Policy under Uncertainty

Real-World Central Banking

Greenspan Says, “Trust Me”

The End Game

Chapter 15: Why Investors Fail: Analyzing Risk

Investors Behaving Badly

Analyze This: Analysts Are Useless

Tails You Lose, Heads I Win

Ergodicity

Why Investors Fail

I’ve Got a Secret System

When Will the Next Bull (or Bear) Market Run Begin?

Analyzing a Fund

Becoming a Top 20 Percent Investor

Investors Behaving Badly

Chapter 16: Taking Stock: The Fundamental Nature of Bull’s Eye Investing

The Home Field Advantage

Home Field Bias

Familiarity Breeds (Over)Confidence

Evidence for Investor Overreaction

Stock Prices Are in Our Heads, Or Maybe Investors Are Just Head Cases

The French/Fama Connection

Value Is Where You Find It

Chapter 17: Bringing Out Your Inner Spock

A Litany of Mistakes

What a Tangled Web We Weave, When First We Practice to Deceive

The Problem with Assumptions

Addicted to Growth

Chapter 18: The Value in Stocks

Value, Value, Value

The Small Investor Advantage

Get Some Help

A Few Ground Rules for Bull’s Eye Investing in Stocks

Too Much Work and Not Enough Time

Where Are the Funds?

Suffering Along with Warren

Investing in Stocks for Income

Trading Away

Chapter 19: Investing in Bonds: Or the Sisyphus Syndrome

Chapter 20: Hedge Funds 101: The Basics

The Technical Beginning

The Jones Model—The Birth of Hedge Funds

Plus Ça Change, Plus C’est le Même Chose

Legal Structure and Restrictions

Business Model

Management Fees

Investment Minimums

The Most Important Factor

Hedge Funds: Strategies and Returns

The Index Dilemma

Hedge Fund Strategies

Convertible Arbitrage

Fixed Income Arbitrage Funds

Long/Short Equity Funds

Event-Driven Funds

Fund of Hedge Funds

A Modest Proposal

The Hedge Fund Investment Company

Finding Hedge Funds

Hedge Fund Indexes and the Investment Process

Chapter 21: Investing in a Fund of Hedge Funds

Access

Liquidity

Diversification, Risk, and Returns

Taking Charge or Along for the Ride?

Choosing a Fund of Funds Manager

Rydex SPhinX

A Few More Facts

A Few Thoughts on the Risk in a Fund of Funds

Chapter 22: Doing Your Due Diligence

The Due Diligence Process

Chapter 23: All That Glitters, Etc.

Taking Stock of Gold

Your Basic Commodities

So Why Even Write about It?

What Are Global Macro Funds?

Volatility, Volatility, Everything Is Volatility

Risks and More Risks

How Do You Choose a Fund?

Getting Real

A Few Thoughts on Starting a New Business

Chapter 24: Bull’s Eye Investing

The Nature of Change

Appendix A: Suggested Reading Material

Appendix B: Bond Information

Appendix C: Hedge Fund Industry Resources

Appendix D: Hedge Fund Net Worth Requirements: Why a Million Isn’t Always Enough

Bibliography

About the Author

Index

Insert

To Eunice, who keeps me on target

Copyright © 2004 by John F. Mauldin. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax [phone], or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax [phone].

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax [phone].

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books.

For more information about Wiley products, visit our web site at www.wiley.com.

ISBN 0-471-65543-0

Acknowledgments

There are so many people who have been a big part of making this book possible. Words cannot express my gratitude to those who graciously allowed me to intrude upon their busy schedules when I needed data, statistics, feedback, and comments. A work of this size and scope is clearly not from just my own limited resources.

There were a number of people whose ideas directly contributed to significant parts of this book. Rob Arnott, Ed Easterling, James Montier, and Michael Alexander all contributed important ideas and in some cases the basic ideas for whole chapters and sections.

I regularly read a number of writers whose ideas permeate this book as they have helped shape my thinking. I am especially grateful to my friends and fellow analysts Bill Bonner, Art Cashin, Dennis Gartman, Bill King, Richard Russell, and Greg Weldon for their daily commentaries.

I regularly read and should note the work and writings of Martin Barnes, Peter Bernstein, Lord Alex Bridport and Roy Damary in Geneva, Chuck Butler, Mark Faber, Bill Gross, Gary Halbert, Michael Lewitt, Paul McCulley, Gary North, Barry Ritholtz, Stephen Roach, Gary Shilling, Steve Sjuggerud, and Porter Stansberry.

I should note that none of these writers is responsible for any of the errors, wrong notions, or failed forecasts in the book. Those are all mine.

I mention a number of important books and newsletters in Appendix A that have helped me in my thinking and may be of value to you.

Thanks to my editor at Wiley, Debra Englander, for bearing with me through busted deadlines and working with me even when the book came in at twice the size. I have to mention my associate Harry Ward, who helped with the research, writing, and all the hard work of doing graphs, checking facts, getting permission for quotes, and so on. Thanks to Wayne Anderson for his editing help and to my daughter and assistant Tiffani for handling the details, and even more so to my bride (and favorite Canadian export) Eunice who keeps the operations flowing.

Many thanks to Jon Sundt, Matt Osborne, and Bob Amedeo at Altegris Investments, with whom I partner on the investment business side of my life, for letting me be absent for long periods, which probably cost them far more money than I will ever get in royalties.

Mike Casson, my e-letter publisher at Investor Insights, gets a special thanks as his hard work has made it possible for me to have such a large Internet readership and exposure.

Many readers offered thoughtful comments, suggestions, and criticisms, and I am grateful to all of you.

Introduction

“Would you tell me, please, which way I ought to go from here?”

“That depends a good deal on where you want to get to,” said the Cheshire Cat.

“I don’t much care where—” said Alice.

“Then it doesn’t matter which way you go,” said the Cat.

“—so long as I get somewhere,” Alice added as an explanation.

“Oh, you’re sure to do that,” said the Cat, “if you only walk long enough.”

—Lewis Carroll, Alice’s Adventures in Wonderland

Every hunter knows that you don’t shoot where the duck is, but where the duck is going to be. You’ve got to “lead the duck.” If you aim where the duck is at the moment you shoot, you will miss your target (unless the duck is flying very slowly or is very close!).

Bull’s Eye Investing simply attempts to apply that same principle to investing. In this book, I hope to give you an idea of the broad trends that will be evident for the remainder of the decade and help you target your investments to take advantage of these trends.

Successful investing for the period 2004 through 2010 will require you to do things differently than you did in the 1980s and 1990s. We started the last bull market with high interest rates, very high inflation, and low stock market valuations. All the elements were in place to launch the greatest bull market in history.

Now we’re in the opposite environment. The stock market has high valuations, interest rates have nowhere to go but up, the dollar is dropping, and the twin deficits of trade imbalance and government debt stare us in the face.

Which way is the stock market going? Which way are bonds going? Gold? Real estate? Where should I invest?

Wall Street and the mutual fund industry say, “The market is going up; you should buy stocks and now is the time to buy. You can’t time the markets, so you should buy and hold for the long term. Don’t worry about the short-term drops. And my best advice is to buy my fund.”

The folks on Wall Street are in the business of selling stocks because that is how they make their real money. Whether the shares are sold directly or are packaged in mutual funds or as initial public offerings (IPOs) or in wrap accounts or in variable annuities or in derivatives, these folks primarily want to sell you some type of equity (stock), preferably today. Unfortunately, the vast majority of investors believe these pitches and don’t know there are better investment alternatives.

Their advice—buy what they sell—has been the same every year for a century. And it has been wrong about half the time. There are long periods of time when stock markets go up or sideways and long periods of time when markets go down or sideways.

These cycles are called secular bull and bear markets. (“Secular” as used in this sense is from the Latin word saeculum, which means a long period of time.) Each cycle has different types of good investment opportunities. We are currently in just the first few innings of a secular bear market. The problem for Wall Street is that the products brokers primarily sell do not do well in secular bear markets. So they have to tell you that things will get better so you should buy now. Or they advise you to “have patience, and please give us more of your money.”

In secular bull markets investors should focus on investments that offer relative returns. By that I mean we should look for stocks and funds that will perform better than the market averages. The benchmark by which you measure your investment strategy is the broad stock market. If you “beat the market,” you are doing well. Even though there will be losing years, staying invested in quality stocks will be a long-term winner.

In secular bear markets, that strategy is a prescription for disaster. If the market goes down 20 percent and you go down only 15 percent, Wall Street proclaims your performance to be “winning.” But you are still down 15 percent.

In markets like those we face today, the essence of Bull’s Eye Investing is to focus on absolute returns. Your benchmark is a money market fund. Success is measured in terms of how much you make above Treasury bills. In secular bear markets, success is all about controlling risk and carefully and methodically compounding your assets.

Some will say, as they say each year, that the bear market is over: that this book is writing about ancient history. But history teaches us that is not the case. Secular bear markets can have drops much bigger than we have already seen, and last for up to 17 years. The shortest has been eight years. They have never been over when valuations have been as high as they are today.

Investors who continue to listen to the siren song of Wall Street will be frustrated at best, in my opinion, as the research I present clearly shows we have a long way to go in this bear market cycle. For those who plan to depend on their stock market investments for retirement within a decade, the results could be particularly devastating.

Bull’s Eye Investing is not, however, some gloom and doom book. Despite what Wall Street wants you to believe, there is no connection between how the economy will do and how the stock market will perform. As we will see, the economy should be fine, with just the usual corrections sandwiched between periods of growth. The world as we know it is not coming to an end. It is merely changing, as it always has. There are numerous possibilities for investment growth in a secular bear market. They just don’t happen to be in the standard Wall Street fare.

What I hope to do is give you a road map to the future by looking at how and why markets have behaved in the past. We will debunk many of the myths and “scientific studies” used by Wall Street to entice investors into putting their money into buy-and-hold, relative return investments. The Wall Street insiders, not surprisingly, use theories, statistics, and so-called facts that are blatantly biased and in many cases just plain wrong. When the market goes down, they just shrug their shoulders like Chicago Cubs (or my own Texas Rangers) fans and say, “Wait till next year. And buy some more, please.”

Basically, in the first half of the book I am going to teach you how to fish, and in the second half I am going to tell you where the fish are. I would politely suggest that you not skip the first half of the book—do not turn to the last part simply looking for the quick investment fix. If you don’t understand what is happening in the economy and world markets, you will not have confidence in your investment strategy and you’ll end up chasing the latest hot investment, which is usually a prescription for pain in any type of market.

Here’s how this book is organized:

First, we look at what history teaches us about the potential for stock market returns over the rest of this decade. We examine six major (and very different) ways to look at the stock market. As a quick preview, the evidence is heavily weighted to suggest that at the end of this cycle the stock market will not be too far from where it is today. The historical and mathematical analysis of bubbles also suggests that we could see the stock market drop much further before beginning the next bull market. We examine several of Wall Street’s favorite sales tools, the famous Ibbot-son study,a Jeremy Siegel’s Stocks for the Long Run, and Modern Portfolio Theory (MPT), and see why you should exercise extreme caution when they are used in a sales presentation.

We then look at why the economy can do just fine and stock markets still can fall: It all has to do with the expectation for earnings and the value investors put on those future earnings.

Most analysts track a simple bear market from peak to trough (top to bottom). Bear markets (or 20 percent plus corrections) can happen in secular bull periods (think 1987 or 1998), just as bull markets (20 percent plus up reversals) can happen in secular bear markets (think 2000, 2001, 2002, 2003). Analysts also view a secular bear market as the lengthy period over which the market makes a top, enters into a decisive down phase, and then once again returns to the old high.

I suggest that we view a secular bear market a little differently, as the period in which the price-earnings (P/E) ratio goes from very high to quite low. It is in these periods of low valuation that we can once again begin to confidently put our money back into stocks, as the rubber band is getting ready to snap back. Of course, Wall Street folks will trot out all sorts of studies that show that stocks are always undervalued and you should buy today. They did so in 2000, 2001, and 2002, and 2003. They are doing so as this book is written and published. They are wrong, and we will examine why they’re wrong.

That means earnings are important, and thus a few chapters focus on earnings. We see why Wall Street analysts are so consistently wrong (by about 50 percent per year too much), what the prospects for real earnings growth are, and how to put it all into perspective.

Next, we look at risk. As I’ve said, investing in secular bear markets is all about controlling risk. I believe this chapter is one of the most important in the book, but it may also be the most fun.

We discuss the most common mistakes investors make and how to avoid them. Statistics show that investors do not do as well as the funds or stocks they invest in, and we look at the causes. We examine why today’s hot fund is likely to be tomorrow’s loser, and what types of funds you should be looking for in this market.

We look at the future, including the demographics of the baby boomer generation, and how it will impact our investment potential. We analyze the direction of interest rates, deflation, and inflation. Then we examine the world economy and the dollar and see if we can find a potential winning theme (we do!).

The consequences of these economic problems will require some painful adjustments from those who do not make the effort to protect themselves. I show you where and how to turn problems into opportunities by seeking absolute returns in turbulent markets.

After the first section, the book focuses on specific types of investments. After telling you why we are in a secular bear market for stocks, Chapters 16 through 18 explain precisely how to invest in stocks today. Ironically, in a secular bear market, the little guy has a big advantage over the larger institutions and funds. There are great opportunities in the stock market if you know where to look. During the last secular bear market, companies like Microsoft and Intel were launched. I show you a simple way to find the hidden gems sought after by the savviest investors.

Then we look at the world of fixed income investments. The rules are changing, and what worked in the 1980s and 1990s will in all likelihood be a losing proposition for the remainder of this decade.

We then analyze what are, in my opinion, some of the better potential sources of absolute returns: certain types of hedge fund styles. We look at how Wall Street has rigged the market against small investors getting the best deals. The richest investors and largest institutions with the best-paid advisors choose these high-fee, unregulated private investments because they deliver better risk-adjusted performance than oneway buy-and-hold mutual funds. We show you how to find and gain access to these private funds, and how to use some of their strategies in your own portfolios.

Finally, we take a more thorough look at the future, and why you should be optimistic. In 1974, only a few people saw the changes and opportunities that computers, telecommunications, and the Internet would bring. The world was bemoaning the losses of basic American industry as jobs were being lost to world competition.

Today, we find ourselves once again faced with serious competition for American jobs. Our core seems to be slipping away, as the market doesn’t respond. The world sees us in a much different light than just a few years ago. Few notice the new revolutions that are happening in small firms and research departments that will form the basis for the next wave of American prosperity because we haven’t even begun to imagine the ways in which the next waves of change will affect us.

Will there be winners and losers in this process? Of course. Anytime there are periods of upheaval and great change, there are always those who benefit from the change and those who suffer. I will try to show you how you can position yourself to be a winner.

There is a centuries-long, if not millennia-long, pattern to these cycles. Good markets are followed by bad markets, which are again followed by good markets. They are as predictable as winter and summer. These cycles have been happening since the Medes were trading with the Persians. While no one can predict the exact day winter weather will arrive, it is a pretty good bet that winter will come. You can prepare for winter just as you plan for summer. As investors, you can be successful if you understand the economic and investment seasons we are in and plan your investments accordingly.

So, let’s get you started on your way to successful Bull’s Eye Investing.

aRoger G. Ibbotson and Rex A. Singuefield, “Stocks, Bonds, Bills, and Inflation: Simulations of the Future (1976–2000),” Journal of Business, Vol. 49, Issue 3 (1976), pp. 313–338.

Chapter 1

Car Wreck, Traffic Jam, or Freeway?

New Era economists, mutual fund managers, and sell-side investment advisors constantly argue that the stock market freeway is now finally wide open, with more lanes being built daily! Today is always a good time to buy (and hold!), and besides, the market always goes up over the long run. Don’t worry about the short term!

These avant-garde investors throw out a wide range of reasons reassuring us that this time the apparently high valuations in the stock market are really different from the past high valuations, which always ended in serious corrections and decade-long secular bear markets. Furthermore, they contend all recessions in the future will be mild and short, such as the one we experienced in 2001. Therefore, the bull market of the 1990s should soon resume.

Investors are presented with so-called facts and convincing studies that interpret them. Armed with this analysis, it is easy to contend that the Dow Jones Industrial Average is going to reach 36,000 or 100,000 in the next few years, as soon as it catches its breath. The primary reasoning of these New Era cheerleaders, it seems to me, is circular logic. They tell us that investors should now see the stock market to be as safe as bonds. This means more and more investors will continue to invest in the stock market, driving up stock prices until the returns approach those of bonds. Because earnings will soon resume growing as fast as they did in the last decade (any quarter now!), we will see continued high growth in the markets even after we have driven the markets to these new bondlike valuations. This is because Peter Lynch tells us that earnings drive the stock market. Presumably ever-increasing earnings will drive the stock market to ever-increasing new highs.

These same people thought we would avoid a recession in 2001 because Alan Greenspan was lowering interest rates. These people are cheerleaders who can pose a serious danger to your investment portfolio. I will teach you how to detect and avoid cheerleaders in later chapters.

Their circular logic is enticing. It seemed to be true throughout the 1990s. We want it to be true because if it were we would have a clear road to riches. Simply save 10 to 15 percent per year, let it compound in a Roth IRA or annuity earning 15 percent, and you’ll be on your way to retiring at a beachfront haven for the good life. If you save more, you can retire early.

But it flies in the face of centuries of human experience and the preceding century of modern stock market investing. I think it has the potential to be a siren song that lures hopeful investors onto a very rocky shore. Please understand me: I am not simply spreading doom and gloom. I think it is possible to save and invest and retire happily. The trick is to make sure you have the right approach. To say this as directly as possible: The recent era of profitable buy-and-hold stock market investing, using index funds and chasing high-growth large-cap stocks, has ended, and will not come our way again for many years. Until then, we need to change our investment habits to adjust with the times.

As we look at dozens of studies, reports, and essays, you will see that the evidence is overwhelming. Achieving your retirement dreams is possible, but not by using the stock market freeway of the cheerleading crowd.

The road less traveled is safer and far more certain. Let me give you the map.

Secular Bear Markets

The next few chapters make the case that we are in something called a secular bear market. As mentioned, a secular bear market is loosely defined as a long period of years or even decades when stock prices are either flat or falling (think Japan today or the United States from 1966 to 1982). Historically and classically defined, secular bear markets are as short as eight years or as long as 17.