In my professional day life I’m an investment advisor. By way of disclaimer, this post is not intended as investment advice in any way shape or form. Past performance is not indicative of future success, blah, blah, blah, etc.
“Ive said a lot of this before. The stock market is by definition a ponzi scheme. As long as money keeps on coming in, then there is someone to take the stocks from the sellers. If the amount of money coming in is reduced, the stocks, indexes, et al go down. What if, for who knows whatever reason, the amount of money going into stocks declined significantly ? Who would buy stock from the sellers. I mean goodness gracious, you could see something disastrous happen. Like the Nasdaq dropping from 5000, to under 2000 in just a few years. Its happened before, it can happen again.”
Mark Cuban, January 3, 2006
Two years ago in post titled “The Stock Market is for Suckers,” Mark Cuban responded to comments I’d made suggesting that over long periods of time the stock market was a superior investment to cash equivalents. 100% of my long-term retirement plan assets are invested in buy and hold equities.
More from Cuban: “Wall Street has done an AMAZING job of creating conventional wisdom . “Buy and Hold ” is the 2nd most misleading marketing slogan ever, after the brilliant “rinse and repeat” message on every shampoo bottle. We as a country have fallen for it. Every message from every marketer of stocks tell us. Young or old, if you can hold for the long term, things will work out for you.
That is total bullshit. Its for suckers.”
So in the spirit of agreeing to disagree, two years ago I decided to keep track of how two investors who followed Cuban’s advice or didn’t follow his advice would have faired. Each year I’m going to continue doing a recap of how a hypothetical $100,000 investment would have faired between Cuban’s advised cash investing vs. investing your money in the Vanguard Total Stock Market Index, a low cost no load equity mutual fund.
Mark, if you don’t think the stock market is for suckers anymore let me know.
Last year was my first annual recap. For last year I tracked how a 100,000 investment would have faired in the Vanguard Prime Money Market fund vs. The Vanguard Total Stock Market Index. The results for 2006? 100,000 invested in cash (as Cuban advised) would have grown to $104,882.60. $100,000 invested in the Vanguard Total Stock Market Index would have grown to $113,890.00.
So what happened in 2007?
Well, assuming you continued using the same two funds (i.e. buy and hold). The ending value from January 2, 2006 to December 21, 2007 using the Vanguard Prime Money Market Fund (VMMXX) would have returned $110,280. Not a bad return for your $100,000 in two years… perhaps….
Had you invested the same $100,000 in the Vanguard Total Stock Market Index (VITSX) over the same time period you would have grown your $100,000 into $122,130.
So the question is, if for the last two years you’d dismissed Cuban’s “stock market is for suckers” advice and netted an extra $11,850 on your investment does that still make you a sucker?
Cuban says that by skipping the stock market you’d have slept like a baby. But at what cost? Is it worth $11,850 over the past two years to have slept like a baby. Personally 100% of my retirement assets are in stocks (I’m 39 and have a long time until retirement) and I slept just fine the past two years.
Another part of Cuban’s argument seems to rest on the fact that investing is confusing and Wall Street only makes it more so. But following a simple strategy of buying low cost diversified index funds does not have to be confusing at all.
Will 2008 be the year that vindicates Cuban in his great “stock market is for suckers” post of 2006? Who knows. But let’s come back here in January 2009 and check it out. Between now and then with a historically low P/E ratio on the Standard and Poor’s 500 of 17.53, I’m sticking with my long term buy and hold strategy.
Of course what do I know, Mark Cuban’s a billionaire and I’m not.