The Downside Of Mindless Investing

High inflection points in life, like high inflection points in the stock market, are both humbling and instructive. One moment you think you’ve got the world by the tail. The next moment the rug’s yanked right out from under you.

Where the stock market’s concerned, several critical factors are revealed following a high inflection point. These factors are not always obvious at first.  But they become apparent over time. Most notably, it’s revealed that the period leading up to the high inflection point was more suspect than previously understood.

The stock market, as represented by the S&P 500, became a sort of money minting machine over the last decade. Quarter after quarter, year after year, investors opened their brokerage statements to the delight of an inflating portfolio. Investing was fun – and easy.

Without much interruption, investors got more out of the market than they put in. They also got more out of the market than the underlying economy warranted. The stock market delivered an illusion of prosperity that many investors mistook for the real thing.

Yes, the economy grew and corporate earnings increased. However, thanks to debt based corporate buybacks propagated by the Fed’s cheap credit, rising share prices greatly outpaced earnings. Stock valuations soared.  And stocks became more and more expensive.

The close of a near decade long bull market brings a new clarity and reflection upon the abundance of mistakes that built up over the agreeable upswing. For example, the reassurance of ever increasing stock returns, over such a lengthy duration, taught a wide spectrum of investors a very dangerous lesson. That one can get rich without using their brain.

Chaos and Catastrophe

Over the past decade, investing was reduced to a thoughtless endeavor. Why bother breaking down a corporate balance sheet when you can buy the market via a passive index fund? Why sift through an extensive list of companies searching for value-laden diamonds in the rough, when the whole rough performs like a diamond?

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