An Appeal to Ignorance.
That’s the official name of the logical fallacy that those financial advisors are
channeling who during chaotic markets will flood social media with general statistics,
charts, and graphs of market recoveries from the past and insist that “you don’t need
to worry.”
That “the one thing all these crashes have in common is that the market has always recovered!”
In our last video, I shared with you that every time I see or hear this, that I can’t
help but imagine that advisor sitting out on his front porch, relaxing with his wife,
watching his kids run around in their front yard.
When, all of a sudden, two of their children run across the busy street in front of their
house without paying much attention, narrowly avoiding being hit by the zooming traffic.
His wife yells, standing from her chair, ready to nip this dangerous behavior in the bud,
when … the advisor calmly grabs her arm.
He says, “Don’t worry, honey.
They’ll be just fine.
I’ve seen them run across that busy street dozens of times and nothing bad has ever happened!”
It’s the same logic financial advisors and industry experts are using to try to calm
your nerves during chaotic markets.
Let’s dive deeper…
– Welcome back to my most dedicated subscribers.
Those willing to watch even the potentially more boring subjects in order to better yourselves
and ultimately build out a financial strategy in which you can truly feel confident—you
know, because you haven’t ignored these problems (these concerns I’m exploring with
you; these myths I’m exposing; these realities that are uncomfortable to accept…)—you’re
not ignoring them like most people are inclined to.
You’re fully fleshing them out with me so that you can build a stronger financial foundation.
You guys are awesome!
Keep it up!
– But yeah, that line of reasoning—the “it’s
always done XYZ in the past, so it will again in the future…”—that line of reasoning
that convinces so many otherwise intelligent people, relies on a logical fallacy known
as an Appeal to Ignorance (argumentum ad ignorantiam or arguing from ignorance).
This logical fallacy abounds in everyday conversation, politics, and marketing.
The Oxford University Press explains, “in this fallacy, someone argues that a proposition
is true simply on the grounds that it has not been proven false (or that a proposition
must be false because it has not been proven true).”
You see, you can prove that it’s possible for something to happen, just by one occurrence.
But unfortunately, you can’t do the opposite—you can’t prove that something will never happen
solely because it has never happened in the past … no matter how much time passes without
occurrence.
Here, we can use history (just like we did a few videos back, but this time I’ll even
stick with financial history) to prove the point.
– Before October 1987, the Dow Jones Industrial
Average had never experienced a daily loss greater than 13%.
Can't you imagine advisors and pundits saying that a drop of much more than that would be
impossible?
“There is no way that your investments will lose 15% or more in a single day!”
After all, it had never happened before—there was roughly 90 years’ worth of evidence
that it wouldn’t.
So, surely it couldn't … right?!⠀⠀ …⠀⠀
Wrong.
Way wrong!
On Black Monday, October 19, 1987 , the Dow Jones Industrial Average fell a devastating
22.6% in a single day.
Pundits were blindsided.
Advisors panicked.
The sky was falling—no one knew what to do.
Everyday investors lost big time in the chaos!
They didn't realize an event like this was possible, so they didn't prepare—their portfolios
or themselves (mentally).
Roger Lowenstein explains how unlikely—impossible even—this event truly was when basing one’s
analyses off historical models:
“Economists later figured that on the basis of the market’s historic volatility, had
the market been open every day since the creation of the universe the odds would still have
been against it falling that much on any single day.
In fact, had the life of the universe been repeated one billion times, such a crash would
have been theoretically ‘unlikely.’
But it happened anyway.
Obviously, past volatilities do not prepare investors for shocks that lie in wait—nor
do they signal in advance just when such shocks might choose to occur.”
Just because something has never happened in the market before, that does not mean it
can't or won't.
– Now, in our last video, we explored a warning
from Warren Buffett about being prepared for events—catastrophes—that are worse than
anything we have ever before experienced.
Yet somehow, despite this logic, Buffett’s solution to that “expect the unexpected”
mantra … is surprisingly lacking.
He—like so many others—just blindly looks to the stock market for safety.
(And perhaps it’s because he has a vested interest in doing so—his wealth is almost
entirely tied up in there after all… but anyway, here’s what he says:)
“If my $114.75 had been invested in a no-fee S&P 500 index fund [in 1942], and all dividends
had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January
31, 2019 (the latest data available before the printing of this letter).
That is a gain of 5,288 for 1.
Those who regularly preach doom because of government budget deficits (as I regularly
did myself for many years) might note that our country’s national debt has increased
roughly 400-fold during the last … 77 year[s].
That’s 40,000%!
Suppose you had foreseen this increase and panicked at the prospect of runaway deficits
and a worthless currency.
To ‘protect’ yourself, you might have eschewed stocks …”
He uses these data to suggest that you should obviously be invested in the stock market,
even if you are concerned about things being different today than they were before.
In spite of any unprecedented economic realities causing you to want to find a better way,
Buffett points to the past to “prove” how the future will play out.
The facts he presents here are great lessons for a student of history.
Yes, the national debt has been able to balloon to previously unthinkable levels without causing
the stock market to come crashing down.
But this information—these data from the past—cannot (should not) be used to prove
what will happen in the future.
Life just doesn’t work that way.
Facts, reality, proof … just don’t work that way.
Sidenote: I do still appreciate the perspective that Buffett brings to this reality.
He’s right: if you told me today that the US national debt would increase by 40,000%
over the next 77 years (to roughly $10 quadrillion … that’s a one followed by all these zeros…),
well, I’d say “NO WAY!
Impossible.
Something will break first.”
I think most people would say that.
And he’s probably right: if presented with that same statistic 77 years ago, I might
have thought it outlandishly impossible.
Yet, here we are …
Although I find that fascinating, it is in no way proof that “American mettle” (as
he puts it) can continue at this pace if we finally suffer through the consequences of
that out-of-control national debt.
All his observation about the past does is prove that it is possible for the market to
continue upward in spite of it all.
It does not, however, prove any likelihood of that scenario playing out going forward.
Possible?
Fine.
I’ll give you that.
Highly improbable?
What do you think?
A national debt of $10Qa without any long-lasting negative consequences to the growth of the
US economy or value of the stock market?
Don’t fall for this Appeal to Ignorance—even when it comes from a highly regarded (worthy
of SO much respect) industry authority.
– Following the 2020 coronavirus lockdowns,
Buffett quickly sold all of Berkshire’s massive airline holdings for a loss of billions
of dollars.
By way of explanation, he said that events like that calamity are (quote) on the lower
levels of probabilities that happen.
(end quote)
Whether it’s the national debt or otherwise, a “mega-catastrophe” of which he warns
(in a previous video) could absolutely impact the stock market in ways never before thought
possible by the majority of the investing public.
And you can be sure that “The Big One” (as Buffett puts it) will be one of those
rare events that falls even further down on Buffett’s “levels of probabilities.”
– It is worth your while to fully understand
these concerns and vet out these industry myths I’m presenting to you so that you
can better prepare your financial life for whatever the future might hold for us.
You may be wondering why more advisors or other financial “experts” aren’t talking
about this reality.
And that’s exactly what we’re going to explore in our next video in this series.
Again, this is just one part of the playlist where we’re fully exploring Myth 10 of Stop
Investing Like They Tell You.
I sincerely hope this all helps you.
I wish you all the best.
Take care.