On July 11, 2020, in a column by Jason Zweig, the WSJ asked, “Does Stock-Market Data Really Go Back 200 Years?”

Here are some quotes from this article:

The common stock emperor has no clothes
… brokers and financial planners keep reminding us, there’s almost never been a 30-year period since 1802 when stocks have underperformed bonds.
  …These true believers rely on the gospel of “Stocks for the Long Run”, the book by finance professor Jeremy Siegel of the Wharton School at the University of Pennsylvania …
  Another emperor of the late bull market, it seems, has turned out to have no clothes.

The article points out, what many have known for a long time — it simply is not true that a diversified portfolio of common stocks, if held for the long term, will almost always out-perform bonds.

This is what is called on these pages, The Common Stock Legend — an academic fantasy based on faulty statistics and sloppy reasoning.

Blind faith in the “Common Stock Legend” has led millions of investor-sheep down the road to perdition, culminating in the Crash of 2008 and the wreck of many retirement plans.

A sign of the times

Now, Jason Zweig, the author of this article, is not really a leader in critical investment thinking, but rather a follower — and this is what makes this article all the more interesting.

I regularly read Mr. Zweig’s column to keep informed of commonly-held investment beliefs.

Even Professor Siegel has long had second thoughts about the matter, as indicated in the article, “Common Stock Legend: Professor Siegel’s Epiphany”.

The fact that the Common Stock Legend was based on faulty statistics has long been known.

That the Wall Street Journal would put this in a headline (even followed by a question mark) indicates that the long-held doctrine of blindly holding “Stocks for the Long Run” is not such a good idea after all.

When this trickles down to the least informed of common stock investors, market behavior will change; flows of funds will be altered.

The Crash of 2008 seems, indeed, to have been a cusp of history.


The US SEC is not geared, in any practical sense, to protect investors against fraudsters in the mold of Bernard Madoff.

The SEC sleeps while Bernie fiddles

They will not admit this, and this is a shame, because the public, believing that the SEC is there to protect them, fails to take reasonable precautions themselves.

The SEC would do investors a great service simply by requiring all those in the investment business to post on their office wall or website a notice saying,

“The SEC will not protect you against this firm. The firm and its employees may be fraudsters and steal your money. You’re on your own!”

Why fraud prevention is not in the SEC genetic makeup

I   spent the decade of the 1990s, advising the Indonesian government on securities regulatory practices. During this time, I worked side-by-side with my good friend, the late John Evans, who had been a US SEC commissioner for ten years. Our consulting group, from time-to-time, included experts who had been SEC staffers. A large part of the job consisted of researching SEC administrative cases.

One case, in particular, stuck in my mind:

At one time, the SEC successfully brought charges against an investment advisor for fraud, sending the individual to jail. Having served his time, the convicted fraudster applied to the SEC for a new license as an investment advisor. The SEC turned him down, on the reasonable grounds that he had already served time for defrauding investors in this very calling. However, the fraudster appealed to the court and won. The SEC was forced to grant this individual a license. The court said that just because someone engaged in defrauding investors in the past, he had already paid his debt to society (although perhaps not to the defrauded investors), and the SEC should not deprive a person of his right to earn a living.

This case illustrates the problem that the SEC faces in preventing fraud. It must follow the law, not commonsense.

The SEC can issue rules and as long as an individual follows these rules, the SEC will not act on mere suspicion. SEC staffers do not advance their careers by using resources to investigate possible fraudulent operations. Like the police, they need a body first.

The rule is: “Wait until there is a victim. Then investigate.”

Commissioner Mary Shapiro’s lost opportunity

If the SEC was at all serious about cracking down on securities fraud, the first thing Chairman Shapiro should have done would have been to fire all those even remotely involved in dropping the ball in the Madoff case. This firing should have been public, with great headlines.

The “perps” should have been publicly shamed.

Public shaming has therapeutic value

The Madoff victims should at least have been comforted by the knowledge that careless SEC staffers lost not only their jobs, but also their pensions and their Obama-proof, gold-plated, government health plans. Instead, the SEC drew up its wagons and protected its own. Screw the investors!

If the SEC had taken action against its own people, staffers would be a lot more careful and would take seriously reports from whistle-blowers.

As it is, there is absolutely no penalty imposed upon a SEC official for failing to protect investors by investigating suspicious behavior.

Rather, the opposite is true. Remember, Bernard Madoff was a big shot, with connections. SEC commissioners get phone calls from members of Congress.

Congress can wreck careers, defrauded investors can’t.

Inefficient law enforcement

Law enforcement in the United States has become progressively less effective. According to the FBI, about 40% of all known murder cases are not solved.

This is up from a rate of unsolved murders of 9% in 1963.

40% of US murders are not solved

The reasons for the decline seem obvious. Protection of the “rights of criminals”, vigorously defended by organizations such as the ACLU and by liberal Supreme Court judges, has put victims of crime of all types at a disadvantage.

While the efficiency of law enforcement has declined, the fantasy of effective law enforcement has grown, encouraged by TV programs like “Miami CSI” that portray government law enforcement officials as incredibly efficient with an unbeatable arsenal of scientific crime-fighting tools.

In the case of investment fraud, the disconnect between reality and the fantasy of an all-protective SEC, puts millions of naive investors at risk. In a sense, it would be better to have no SEC at all and investors to realize that they were entirely on their own.

Bernard Madoff is in jail today because he turned himself in, confessed, and pleaded guilty, before his victims even knew they had lost their life savings.

One wonders what would have happened if he had taken the usual course. If he said nothing, waited for investors and the SEC to investigate, and then pleaded innocent, would he be in jail today?

The principle of non-merit regulation

One of the foundations of US securities market law enforcement is the principle of “non-merit regulation”.

What this means, in essence, is that the government should not be in the business of pre-judging investment proposals. The government’s job is to require “full-disclosure”, leaving it to the investor to decide what this disclosure means.

The problem here is two-fold:

  1. What is meant by “full disclosure” is determined by government rules. In the case of Bernard Madoff — a mere investment advisor — the disclosure requirements were minimal, consisting of an obscure form filed once with the SEC and, although available on the SEC website, unlikely to have ever been seen by any of Madoff’s victims. Disclosure requirements always lag the invention of new ways of perpetrating fraud.
  2. Most investors have neither the time, inclination, or skills needed to seek out and decipher SEC disclosure documents. In the case of Madoff, victims could have seen from the SEC website that Madoff was reportedly holding billions of client money in his own custody (not with a bank), managing these huge funds with the help of only a few people, and being audited by a tiny, one-man firm with an office in a strip mall in a New York suburb.

The SEC’s disclosure rule are dummied down by lobbying of industry groups, on the one hand, and by the larding of legal disclaimer boilerplate, on the other.

So here we have the problem of preventing future Madoffs in a nutshell:

  • SEC staffers are not punished for failing to protect investors.
  • SEC staffers may be punished for bothering a fraudster with political connections.
  • The SEC policy is to leave investment decisions entirely up to the investors and not get involved.
  • Law enforcement, in any event, is becoming progressively less efficient in the United States, where thousands, literally “get away with murder”.

Less, rather than more government, may be the solution.


An examination of a typical Standard & Poor’s investment report reveals that it is, in large part, composed not of facts, but of opinion, often from third parties.

A typical stock report

Sites like EarningsWhispers.com and WhisperNumber.com engage in the crowdsourcing of investment opinion, for a fee.

An article in the UK Moneyterms blog recently expressed doubts about “crowdsourcing investing” , as follows:

As for investment research, good research requires opinionated non-conformists. The requirement is to spot what the crowd has missed. This is exactly what crowdsourcing cannot deliver. The work itself does not easily lend itself to loose collaboration: analysing a company cannot be divided up into discrete tasks that can be carried out with little communication — a close knit team can work, but that approach cannot easily be crowdsourced.

I would agree with this in that effective collaborative investment research is something not easily achieved.

However, just because something has not yet been done, doesn’t mean that it is impossible.

Invention and progress always must conquer doubt and the status quo.

In the case of collaborative investment research, the tsunami of unanalyzed information that overwhelmed the market in Q4 2008, leaving so-called “experts” uninformed, is the stimulus that calls for new methods.

New tools, new times, new perspectives


Two things have hampered the development of collaborative investment research:

  1. A lack of tools: Collaborative editing software (i.e., a “wiki”) has only proven to be an outstanding success with Wikipedia in the last four or five years. Wikis are easy to set up but hard to grow. So far, no wiki dedicated to investment research has proven successful. Capital Market Wiki, the first semantic wiki designed for this purpose, is only in the fourth month of its “proof of concept” phase which is scheduled to last five years.
  2. A lack of motivation: Until the Crash of 2008, the US stock market has been driven upwards by the relentless pressure of the share buyback movement. The Efficient Market Hypothesis dominated investment thinking. Fundamental analysis, in the mold of Graham & Dodd, gave way to Modern Portfolio Theory. One should remember that Benjamin Graham’s advice on investment research only began to become popular after the Great Depression, when tape reading went out of fashion.

A new field with new challenges

Collaborative investment research is indeed a new field, yet to be proven. Like any new technique, it goes against the status quo and conventional wisdom. The doubters may prove to be correct. We shall see.


The main challenge is not to devise a system that allows researchers who do not know each other to work effectively together to produce a useful product. Wikipedia has shown that this can be done in the area of general knowledge. Capital Market Wiki has tweaked the Wikipedia system, added a semantic structure and built-in incentives, and has created a tool to do specialized investment research.

The challenge is to attract editors and researchers to an empty wiki in the proof of concept phase. Most people do not want to be be first in anything. Today, Wikipedia attracts a thousand times more editors per month than it did six or seven years ago.

At this stage of development, collaborative investment research is an area for pioneers, especially those who want to help build a better capital market.

For more on this, see:

See: Crowdsourcing investment research: opportunities in OSINT and Free information and the Efficient Market Hypothesis and Crowdsourcing investment research: Capital Market Taxonomy and Innovation in investment research; dealing with free information and Modern technology for institutional investment research

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