Two Bad Investments: Stocks, Bonds

by: Gary North

The public has been told that the way to wealth is investing. The way to invest, Ph.D. economists tell the public, is to allocate your portfolio between stocks and bonds. Which stocks? An index of American stocks, preferably the S&P 500. Buy a no-load fund. Same with bonds: a mix of mid-term and long-term AAA-rated corporate and Treasury bonds.

Don’t try to beat the index, efficient market theory warns us. Buy and hold. All will be well.

For fund managers, yes. For investors, no.


On 29 December 1989, Japan’s Nikkei stock index rose to just shy of 39,000. Today, it is under 10,000. Yet for over two decades, the productivity of Japanese workers has risen. They have better televisions, better cars, and better food. They have the World Wide Web. We all do. Our lifestyles are better. Few people would go back to 1989, knowing what they do today – except to short the Nikkei. Our productivity is greater.

Here is an anomaly. The stock market is regarded as a proxy for wealth. Yet it is a lousy proxy for wealth. No stock market in history better reveals this fact than Japan’s over the last two decades. A person who sold all of his stocks on December 29, 1989, and put his money into a Japanese savings account paying basically zero interest for two decades is better off by four to one than the professional who left his money in stocks on the assumption that rising Japanese productivity would raise the Japanese stock market.

The standard defense of stocks is that ownership of those companies that are adding to national productivity will enable investors to ride the wealth curve. This is utter nonsense. While investing in shares creates a liquid market for firms to raise capital, most firms fail to deliver consistently. Most projects fail. Most plans fail.

Investors like Warren Buffett – there are few – who invest in the right companies do get rich. But Buffett is not a man to invest in innovative firms. He invests in old firms with good management, like See’s Candies and the Burlington Northern Railroad.

The free market is not about getting rich by owning a broad index of companies. The free market is about bearing uncertainty in the quest for profit. How? By serving the desires of customers. The customer is king in a free market society. The businessman is his profit-seeking servant.

The way to great wealth is effective service to customers. But few firms prove capable of doing this, decade after decade. Few firms make major breakthroughs more than once. If you invest in such a firm when no one sees the breakthrough coming, then you can get rich. But don’t expect to do this more than twice in your life.

Problem: efficient market theory tells you not to put all of your eggs in one basket. You must diversify. So, you will never hit the big score.

When you think “diversification,” think “Nikkei, 1990–2010.”

Is efficient market theory wrong? Statistically, no. Most people do not beat the market. Most people are average investors. But some are better than others. Efficient market theory says that you cannot beat the market. Maybe you can. Maybe you have a better theory of how markets operate.

First, what if the market is a loser? The Nikkei has been for 20 years. The S&P 500 has been for a decade. If you stick with a loser, you lose.

Second, what if all the smart investors are wrong about investing? How could so many of them be wrong? Because they are Keynesians.

Economists say that you cannot beat the market’s index. They mean that they can’t, and they think the market is smarter than they are. So, they think it is smarter than you are.

Problem: Keynesian theory makes smart people functionally stupid. You don’t have to be smarter than they are. You just have to avoid Keynesianism.

Has anything worked better than a stock market index? Yes: Warren Buffett. How does efficient market theory explain Warren Buffett? It says that what he did was sheer luck – a run of luck like no other in history. Then we are told: “Forget about Warren Buffett. You will not be lucky enough to find the next one.” This is probably true, if you limit yourself to Keynesians.

Who are the developers of efficient market theory? Academic economists who got tenure early, who could not be fired, and whose only good investment in their careers was a heavily mortgaged house purchased in 1965.

Then why invest in the American stock market? If you cannot beat the market, and if the market’s movement goes the opposite of the increase in productivity, which it has been the case of the United States for a decade, then why invest in an American stock market index?

The answer is: “You shouldn’t.”


The experts tell you that the American stock market has been the best place for your money over the last 50 years, or 70 years. Then where are all the retired people who live in luxury because they bought and held an index of American stocks?

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