Flawed Financial Thinking-Part 1

<!–[if !vml]–><!–[endif]–>Y2K: 10 Years After

Ten years ago was January 2000. It was the beginning of a new year, a new decade, a new century, and a new millennium.

Hard to believe it was 10 years ago, isn’t it? What do you remember about that momentous date in history? Do you remember…

<!–[if !supportLists]–>· <!–[endif]–>The price of gas? (National average was 1.51/gal.)

<!–[if !supportLists]–>· <!–[endif]–>Who was president?
(Bill Clinton was wrapping up his second term)

<!–[if !supportLists]–>· <!–[endif]–>The predictions for the future?
(Ah yes, the predictions…)

Apocalyptic, optimistic…& completely wrong

You do remember Y2K, don’t you? The need to change the date format in computers from “1999” to “2000” was going to wreak havoc on society. The prospect of damage was so great, in the words of one computer programmer,

“We must also prepare ourselves for the very real possibility that the outcome of this situation might well be the total extinction of the

entire human race. It really could be worse than
I am predicting and I really am being optimistic…”

But it wasn’t just the Y2K problem that was a cause for concern…

Richard W. Noone, author of “5/5/2000: Ice: The Ultimate Disaster” (Crown, 1997), claimed that May 5, 2000 was when Mercury, Venus, Mars, Jupiter and Saturn would be aligned with the Earth for the first time in 6,000 years. On that day, he predicted an ice buildup at the South Pole would upset Earth’s axis and send “trillions of tons” of ice and debris “toppling into our oceans, flooding the planet and destroying all known forms of life.”

Not every prediction for the new millennium was apocalyptic. Some people were incredibly optimistic.

In 2000, Harry Dent, a financial analyst and author of several books on investing, predicted the Dow Jones Industrial Average would exceed 40,000 during the next decade. 40,000 would represent a huge increase since the DJIA was just below 11,500 on January 1, 2000.

Uh, just to review…The Y2K problem was a non-issue. And while global warming may cause climate

change, there was not a natural disaster caused by ice (and a book written by “Noone” might actually be “no one,” even if it is available on Amazon). The DJIA index peaked at 14,164 on October 9, 2007 and then retreated, falling as low as 6,547 on March 9, 2009, a decline of 53% in 17 months. As of December 15, 2009, the DJIA recovered to stand at 10,501, but nobody thinks the Dow will reach 40,000 by December 31, 2009. Like a lot of other prognostications, both fearful and exciting, these guesses were way off target.

There were, however, some momentous and unexpected events during the decade, both apocalyptic and optimistic. There was a contested presidential election, the 9-11 terrorist attacks, the war in Iraq, and the mortgage and financial failures that led to the deepest recession since the Great Depression. After being shut out for 86 years, the Red Sox won the World Series twice in the past decade! Gold rose to more than $1,200/oz. and gasoline passed $4.00/gal. And what about Blackberries and iPhones and Wii Fit? Who could have imagined, right?

No one sees the future, but everyone keeps looking.

<!–[if !vml]–><!–[endif]–>Y2K: 10 Years After

Ten years ago was January 2000. It was the beginning of a new year, a new decade, a new century, and a new millennium.

Hard to believe it was 10 years ago, isn’t it? What do you remember about that momentous date in history? Do you remember…

<!–[if !supportLists]–>· <!–[endif]–>The price of gas? (National average was 1.51/gal.)

<!–[if !supportLists]–>· <!–[endif]–>Who was president?
(Bill Clinton was wrapping up his second term)

<!–[if !supportLists]–>· <!–[endif]–>The predictions for the future?
(Ah yes, the predictions…)

Apocalyptic, optimistic…& completely wrong

You do remember Y2K, don’t you? The need to change the date format in computers from “1999” to “2000” was going to wreak havoc on society. The prospect of damage was so great, in the words of one computer programmer,

“We must also prepare ourselves for the very real possibility that the outcome of this situation might well be the total extinction of the

entire human race. It really could be worse than
I am predicting and I really am being optimistic…”

But it wasn’t just the Y2K problem that was a cause for concern…

Richard W. Noone, author of “5/5/2000: Ice: The Ultimate Disaster” (Crown, 1997), claimed that May 5, 2000 was when Mercury, Venus, Mars, Jupiter and Saturn would be aligned with the Earth for the first time in 6,000 years. On that day, he predicted an ice buildup at the South Pole would upset Earth’s axis and send “trillions of tons” of ice and debris “toppling into our oceans, flooding the planet and destroying all known forms of life.”

Not every prediction for the new millennium was apocalyptic. Some people were incredibly optimistic.

In 2000, Harry Dent, a financial analyst and author of several books on investing, predicted the Dow Jones Industrial Average would exceed 40,000 during the next decade. 40,000 would represent a huge increase since the DJIA was just below 11,500 on January 1, 2000.

Uh, just to review…The Y2K problem was a non-issue. And while global warming may cause climate

change, there was not a natural disaster caused by ice (and a book written by “Noone” might actually be “no one,” even if it is available on Amazon). The DJIA index peaked at 14,164 on October 9, 2007 and then retreated, falling as low as 6,547 on March 9, 2009, a decline of 53% in 17 months. As of December 15, 2009, the DJIA recovered to stand at 10,501, but nobody thinks the Dow will reach 40,000 by December 31, 2009. Like a lot of other prognostications, both fearful and exciting, these guesses were way off target.

There were, however, some momentous and unexpected events during the decade, both apocalyptic and optimistic. There was a contested presidential election, the 9-11 terrorist attacks, the war in Iraq, and the mortgage and financial failures that led to the deepest recession since the Great Depression. After being shut out for 86 years, the Red Sox won the World Series twice in the past decade! Gold rose to more than $1,200/oz. and gasoline passed $4.00/gal. And what about Blackberries and iPhones and Wii Fit? Who could have imagined, right?

No one sees the future, but everyone keeps looking.

<!–[if !vml]–><!–[endif]–>The truth is we are constantly surprised by what comes next. In hindsight, we may be able to see how things took place, but rarely can we see clearly what’s ahead. Most of the time, the historically significant changes are the ones that no one recognizes at the time. When the first transistors, computer chips, and fiber optics were developed, how could anyone have the insight to see them as the building blocks for cell phones, laptop computers, and the Internet?

Yet because we are intensely interested in the future, particularly as it relates to us, our inability to accurately predict it doesn’t deter people from trying – or from making outrageous predictions. People still read horoscopes, still pay for a psychic hotline, and still subscribe to financial newsletters claiming “insider information” about the stock market. Whether it’s a vision of impending disaster or great financial opportunity, there’s an almost irresistible attraction to a message with a TEOTWAWKI element, i.e., the-end-of-the-world-as-we-know-it. Or as one marketing campaign put it “this changes everything.”

Resisting the Prediction Impulse

There are two practical ways to blunt the impact of predictions on your financial life.

First, follow the money. Remember, there is often a profit motive attached to the prediction. If someone wants to charge you for an exclusive look at the future, it should give you pause. One Y2K doom-and-gloom futurist who has moved on to predicting other end-of-civilization scenarios has the nickname “Scary Gary,” because he constantly promotes the next “big problem.” Not surprisingly, he also has the next answer – for a price. If the prediction is coupled with an inducement to make a financial decision that enriches the predictor, be careful.  

Second, sound principles for present circum-stances usually trump unique predictions and strategies for the future. There are time-tested financial principles with a track record of success, and there are “special situations” that supposedly require a unique approach because “this is a once-in-a-lifetime” occurrence. No-money-down, no-documentation mortgages were made because both borrowers and lenders believed the predictions that housing values would always increase. When the prediction proved false, both parties were stuck. On the other hand, if everyone had insisted on sound financial principles (demonstrated by a substantial down payment), both borrowers and lenders might have been able to weather the storm of depressed housing prices.

<!–[if !supportLists]–>· <!–[endif]–>HOW MANY OF YOUR FINANCIAL DECISIONS ARE BASED ON PREDICTIONS?

<!–[if !supportLists]–>· <!–[endif]–>DO THE PEOPLE WHO INFLUENCE YOU PROVIDE PREDICTIONS OR PRINCIPLES?

REMEMBER: SOUND FINANCIAL PRINCIPLES DELIVER PROVEN RESULTS. PREDICTIONS MAY ENTERTAIN, BUT THEY DON’T ALWAYS WORK.

 ________________________________

Leave a Reply