Stop Preparing for the Last War: Arm Yourself for the New One

Today, the average retail investor is still hopelessly under-invested in stocks, ludicrously over-weighted in overvalued bonds: fighting the last war of falling stock prices, while absolutely blind to the looming danger ahead in the form of inflation.
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All Nippon Airways' (ANA) share price is flashed on a share prices board in Tokyo on January 16, 2013. Japan's share prices fell 278.64 points to close at 10,600.44 points at the Tokyo Stock Exchange as the yen rebounded, while Boeing Dreamliner suppliers fell after two Japanese airlines grounded their fleets of the troubled next-generation aircraft. AFP PHOTO / Yoshikazu TSUNO (Photo credit should read YOSHIKAZU TSUNO/AFP/Getty Images)
All Nippon Airways' (ANA) share price is flashed on a share prices board in Tokyo on January 16, 2013. Japan's share prices fell 278.64 points to close at 10,600.44 points at the Tokyo Stock Exchange as the yen rebounded, while Boeing Dreamliner suppliers fell after two Japanese airlines grounded their fleets of the troubled next-generation aircraft. AFP PHOTO / Yoshikazu TSUNO (Photo credit should read YOSHIKAZU TSUNO/AFP/Getty Images)

In the annals of all strategic thinking, the most common error is to "fight the last war," preparing uselessly for old challenges, rather than girding effectively for the future.

As early as 1929, Lieutenant Colonel J. L. Schley, of the Corps of Engineers wrote in The Military Engineer: "It has been said critically that there is a tendency in many armies to spend the peace time studying how to fight the last war," a sentiment repeated by the Dallas Morning News in 1937: "There is a partly justified criticism that peacetime generals are always fighting the last war instead of the next one."

Of course, the institutional imperative is understandable and hardly confined to the military. People often only react to what they know. What they know is what has happened. Strategic planning is usually the ugly stepchild of groupthink, a dumbed-down, lowest common denominator which appears safe when viewed through the bureaucratic rearview mirror by which all consensus is judged -- but is all the more dangerous for the same reason.

Every war, whether physical or metaphorical, has produced its own backward-looking buffoonery disguised as institutional prudence. From the seizure of shampoo bottles at airports after 9/11, to the mistimed austerity that prematurely forced Europe into grinding economic depression, this classic, all-too-human and ubiquitous mistake is so common that it has spawned more cliches than your average cognitive foible. Whether we call it "closing the barn door after the horse has bolted" or something else, the desire to see the present and the future in terms of the recent past is often a form of collective delusion.

And so it is with investments. According to Bloomberg, Americans have missed $200 billion in gains, the biggest rally in a generation by closing the barn door and selling at the bottom, after the bear market had already bolted. Typically, most people do exactly this: buy high, sell low and then repeat. This is why most investors don't get rich. I posted here in March of 2009 when the Dow was at 6,547 advocating strongly for the extraordinary value in stocks. Most readers castigated my view, illustrating the power of hallucinatory group-think and the way in which people allow recent events to distort logic.

Today, the average retail investor is still hopelessly under-invested in stocks, ludicrously over-weighted in overvalued bonds: fighting the last war of falling stock prices, while absolutely blind to the looming danger ahead in the form of inflation. When inflation arrives, along with its exterminator, higher interest rates, bonds will be decimated and stocks with pricing power will look like nirvana. By then it will be too late, of course, because the new war will be long over. And the useless cycle of planning for it will begin.

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