The English playwright Harold Pinter, well-known for his long mysterious “pregnant pauses,” won the Nobel Prize in Literature a few years ago. A rarity, only the third playwright in a century. Equally rare, a few years earlier Princeton psychologist Daniel Kahneman won the Nobel Prize in economics. What do the two have in common?

Just this: Both are students of human nature, both know that most of the time most of us don’t have a clue what’s going on. We have so little factual information. And what facts we do have are colored by preconceived beliefs. On top of that, our emotions constantly override the few facts we do have. The truth is, we don’t really know what’s going on in the world “out there.” And we know even less about what’s going on in our own heads. So we fake it! Yes, you heard me, investors are masters at of the fine art of faking it, “acting as if” we know. We are masters of disguise. Telling others we’re “certain.” And worse yet, we actually believe what we say. We convince ourselves that we really do know what’s going on—in the world, the economy, the market, and even in our heads.

All the world’s a stage … and you’re an actor

Technically we’re not lying, we actually believe we “know” what going on. But the truth is—we’re faking it. (Admit it, just this once!) I’m not just saying you and me and the rest of America’s Main Street investors don’t have a clue, I’m talking about everyone—amateur and professional—who makes an entrance or exit onto the Wall Street stage—the Morningstar 5-star stage, sound-bites on the CNBC stage, talking heads on the Fox News stage, interviews with Kiplinger’s, quotes in The Journal. We’re all faking it. All clueless. But nobody will admit it’s just a stage play, a big act.

So we all just keep acting like we know something, while smiling and pretending. That’s what I get from these two Nobel prizewinners. Both have the same message about human behavior. Kahneman knows he cannot beat the market: “The idea that I can see what no one else can see is an illusion.”  Pinter is equally blunt: “People fall back on anything they can lay their hands on verbally to keep away from the danger of knowing, and of being known.” Writing in the New York Times, Charles Isherwood says Pinter’s characters “attempt to mask feeling or motive, to avoid communication or connection. And often the characters are themselves blind to the impulses that move them.” Sound familiar? You bet! They accurately describe the behavior of investors on Main Street and professionals on Wall Street … blind, clueless, and faking it.

Broadway and Hollywood … or Wall Street: “That’s Entertainment!”

When I was working on Wall Street at Morgan Stanley, I soon discovered that Wall Street was just one endless staged drama. So I went in search of the real thing: Five years writing scripts at night, acting lessons at the Strasberg Theater, Off-off-Broadway auditions, Soho dance classes. Directed a film in a Television Academy workshop. Won a gold medal at an international film festival. Came close to producing a couple Pinter plays on Broadway.

Pinter was one of the big reasons I left Wall Street for Hollywood. Today, Kahneman is the reason I stick around. Why? Because Kahneman’s brilliant mind articulates some amazingly simple psychological lessons for all investors. His eight lessons were discussed in a Money magazine interview with Jason Zweig before Kahneman was awarded the Nobel Prize in Economic Sciences. Here’s a suggestion: Between reading each of these eight lessons, please stop for a minute and think about the lesson. Take a long ‘pregnant pause’ and sit silently and ask yourself: What can you do differently to improve your awareness as an investor. And if it helps, imagine you’re in a seminar with Pinter and Kahneman co-hosting. Imagine how you’d explain to them why you agree (or disagree) with each of Kahneman’s eight simple lessons on how to become a successful investor:

One. Distrust all data!
Here’s a fast-moving scenario: The Journal quotes a Morgan analyst. Bill Gross is on CNBC. Bloomberg tests Bernanke’s inflation strategy. Your stock-picking software signals a “buy!” Your brain sees a pattern, a trend, an opening. Time to act, before the “window of opportunity closes. Warning: Big mistake! Why? Kahneman doesn’t mean there’s something wrong with the hard data, although there probably is. He means don’t trust what your brain’s doing with the data you have in your head! Brains love seeing things that aren’t there, inventing epic dramas based on minimal facts. They like feeling in control, especially when they feel out-of-control, when feelings are dominating facts.

Two. Cool it, big shot!
Chasing fads and hot investments makes Wall Street’s drama queens feel important, like they’re “in the action!” But even stupid ideas like no-earnings dotcoms win in bull markets. Psychologists warn that overconfidence is our brain’s biggest saboteur. You win some, think you’re a genius, take bigger risks, wind up a loser, deny it, try harder, guess again, double down. It’s just a market cycle. You believe you have the secret. But you really don’t have a clue what’s coming next. Relax and take a deep breath, you’re not really as smart as you think you are.

Three. Distrust all gurus!
All gurus, all the time, all over. In print, cable, online. They’re hustlers selling you something. See every talking head, naked on stage, wearing a big “used-car salesman” nametag. Warning: Their “recommendations,” their “advice,” just self-serving sales pitches. Period. Now notice how your brain still wants to believe in them. Conflicted, your brain insists you’re an independent thinker, yet is still dependent on outside gurus, trapped in a double bind. Why? Pause.

Four. Stop the obsessive counting.
Behavioral psychologists note that investors who check their accounts often are more anxious and, ironically, bigger losers. Kahneman’s blunt on this phenomenon: Looking at your stocks and funds every day is not only dumb, it’s “the worst possible thing you can do” he says. Why so obsessed, so fearful

Five. It’s the portfolio, stupid.
Kahneman calls it “global framing,” focus on the big picture, your whole basket of assets rather than worrying about gains and losses in individual assets. Create a well-balanced portfolio diversified enough so that the losses in one sector are balanced across the returns of the rest of the portfolio. Stop for a minute, a day, stop listening to the anchors, gurus, breaking news, say a prayer.

Six. Autopilot investing.
Sorry folks but your investing brain really is a very bad computer; irrational, clueless, and extremely vulnerable to making mistakes. Junk it! Get an upgrade, what Kahneman calls a “permanent auto-pilot portfolio.” Also, set up your savings so new money is automatically transferred from your paycheck into your portfolio. Get your error-prone brain out of the loop. Pause again.

Seven. Limits on casino betting.
Think about CNBC’s frantic Mad Money program. It works if you’re an investor with a hyperactive teenager’s brain. Next time you have a sane moment, lock up 90% or more of your portfolio. Can’t touch it. And if you insist, give your self-sabotaging gambler’s brain limited access to the other 10%. When that’s gone, you stop, walk off the stage, and enjoy a very long “Pinter pause,” doing nothing with your portfolio. Protect yourself against the gambler. Set limits.

Eight. Trust yourself!
Well, do you? Most don’t, but pretend. They can’t make the big, tough decisions, don’t trust their inner voice, so they rationalize with all kinds of excuses for being dependent on some gurus—so-called experts who are also driven by primal emotions, greed, fear, survival and self-interest.

Whatever your emotions are, they are yours, listen closely, trust them. Besides, in the end, as Jack Schwager put it in The New Market Wizards, “Whether you win or lose, you are responsible for your own results. Even if you lost on your broker’s tip, an advisory service recommendation, or a bad signal from the system you bought, you are responsible, because you made the decision to listen and act … do your own thinking.” No matter what, you’re stuck, lose or win. Trust yourself.

When the curtain falls, when the applause dies down, when the lights dim in that little theater inside your head, when you are stuck alone with the box office receipts, will you walk out into the night with your head high, proud of that you gave it your best, no matter what results, win or lose? What would you say to Pinter and Kahneman about your performance—good show!?

FirstPubDate: Nov’05

First, let’s review Ellis’ famous 10 strategies for winning at Wall Street’s casino: “Never speculate. Your home’s not a stock or piggy bank. Save more money. Your broker’s not your friend. Never trade commodities. Don’t chase hot stocks. Bonds also ride up and down. Don’t invest for tax benefits. Write goals and stick to them. Never trust your emotions.” You probably knew them by heart. What happened? This insider gave you ten rules for beating the Wall Street casinos … and still you lost 20%.

But in your defense, even if you broke all ten of Charlie’s rules the past decade and lost 20%, it still wasn’t your fault. Wall Street was conning, scamming and manipulating you all along, all day, every day for the past decade. And yet I’ll bet you’re still an optimist, gullible, trapped in Wall Street’s seductive pseudo-optimism, one of the majority of Americans who believe the market will go up 20% or more in 2010, “confident better times are ahead.”

Best advice today? Burn Ellis’ book. His next edition should be titled: “Losing the Loser’s Game: How Wall Street Got Rich Between 2000 and 2009 Because Main Street Investors Are So Gullible, Stupid and Predictable Irrational.” You cannot win at Wall Street’s “Loser’s Game.” The past decade proves it. The “house always wins” in Vegas and on Wall Street.

How not to lose 2010-2020? Avoid Wall Street. Don’t play by “their rules.”
So why bet on the house? Why bet with the Wall Street casino for another decade? Why? You’re betting in a rigged casino. Worse, they keep adding powerful new tools, scams and algorithms to their “financial weapons of mass destruction” arsenal, as Buffett calls this mysterious $670 trillion global shadow banking world of derivatives. You cannot win.

Statistically, the odds now predict Wall Street losing another 20% of your money in the next decade. The momentum’s headed down. So why risk it when the odds are you’ll lose another 20%? Why keep gambling when you know the “house always win,” when inflation increases your losses, when Wall Street controls the tables in this “Loser’s Game?” So, what should you do if you believe they’ll lose another 20%? Sell all your stocks, ETFs, bonds funds. Get out of commodities and gold. Sell. You think I’m crazy? Imagine: You’re a 50-year-old boomer. Flash forward to 2020. Retirement time? But you’ve lost another 20%, while those Wall Street fat-cats will be paying themselves record bonuses averaging half-a-million annually for all ten years from 2010 and 2020 … but you can’t retire. They got their bonuses siphoning money out of your accounts. What do you expects some kind of divine intervention will save you? Get real, consider the “Swiss Family Robinson” scenario.

No, you cannot “get back to even,” can’t win the “Loser’s Game”
My guess is you’re still smiling about that 60% short-term gain in 2009. You’re still an optimist. You really believe you can “get back to even,” like Jim Cramer and other hucksters are promoting on the Wall Street propaganda machine. Yes, your portfolio did ride up on the 60% rebound wave in 2009. You’re happy. Short-term gratification. You believe it’ll continue. Wrong. You’re forgetting the massive losses of more than $10 trillion in market cap the last decade since the Dow peaked at 11,722 in 2000. Worse, you’re forgetting the Dow’s still about 30% under the 14,164 peak in 2007.

What if you don’t sell? What if you take the risk and gamble Wall Street will change its evil ways. What if you ignore me? What if you gamble and you lose another inflation-adjusted 20% by 2020, like you did between 2000 and 2009? Or worse, what if you’re close to retiring or putting kids in college, and you lose 40% like so many did in the 2007-2008 meltdown?

Studies prove that nobody—not Wall Street pros nor Main Street amateurs—can predict long-term trends. But we do know Wall Street’s high-frequency quant traders are making thousands of millisecond bets every second gambling on short-term shifts in volatile markets. You got a job all day. They’re 24/7 gamblers. They don’t have a clue what going to happen in a decade. Worse, they don’t give a damn. It’s irrelevant in their 24/7 short-term trading world. Irrelevant to guys making anywhere from 10-times the income of the average American to making more in a single year than you’ll make in a lifetime. Irrelevant in a culture that needs no moral compass and lives by one rule: “Greed is very good!”

Sell. Yes, sell. Why foolishly bet with the Wall Street casinos again? Why trust their endless misleading propaganda? Why bet on a “Loser’s Game” where the odds are high and the momentum virtually guarantees repeating the losses of the last decade. The world of 2010-2020 is far more dangerous for investors than it was in the “Lost Decade,” as many economists now call the years from 2000 to 2009. Listen closely: Here are 8 reasons Wall Street will lose another 20%, why the odds are heavily against you “Winning the Loser’s Game” by 2020:

1.      Foreign Policy and Wars:
The investment world’s far more volatile and dangerous today than in 2000 when Bush was elected. America started a preemptive war-of-civilizations by attacking Iraq under false pretenses, the single biggest foreign policy blunder in American history, a war that’s had the unintended consequences of playing into the hands of our enemies, made them stronger, and unnecessarily costing us trillions, weakening America as a military and economic power, with no end in sight.

2.      Monetary Policy & the Fed:
Your world of investing is also in a far worse condition as a direct result of Chairman Greenspan too-long legacy of free-market Reaganomics ideology funneling endless cheap money to Wall Street banks. Worse, three regional Fed Presidents recently endorsed an indefinite continuation of Bernanke’s cheap money policies, thus accelerating the next bubble. But worse of all, when he had a chance to prove he was a real change-agent, President Obama made the biggest domestic policy blunder in history by reappointing Bernanke, a Greenspan clone, a Reaganomics ideologue and a Trojan Horse protecting Wall Street with trillions in cheap money loans, guarantees and toxic asset takeovers, all hidden from taxpayers.

3.      Dysfunctional Politics and the “Party of No-No:”
America’s unpredictable and hostile political world will also have enormous long-term economic consequences. In this age of online citizen journalism the public is becoming more and more aware of (a) not just the breakdown of Washington politics and the two-party system; (b) the widening cultural gap between the rich and the rest of America; (c) the exploding conflict between Corporate America and Main Street America; and (d) the “GOP Party of No-No’s” scorched-earth defense of all-things-business while fighting everything favoring the masses, including healthcare and financial reforms. Warning: This trend will get far more destructive. The elections of 2010 and 2012 are guaranteed to make your investment world a dangerous no-man’s land.

4.      Statistics Guarantee You Will Lose at the Wall Street Casino:  
Remember: Between 2000 and 2009 Wall Street’s casino was in fact a “Loser’s Game” for Main Street investors. The Dow did in fact drop from 11,722 in 2000 and from a peak of 14,164 in 2007 to the 10,330 range today. The fact is, Wall Street’s lost an inflation-adjusted 20% of your retirement nest egg in the recent “Lost Decade.” And the odds are high they’ll lose more of your hard-earned money in the next decade. The game’s fixed.

5.      Wall Street Has Absolutely No Moral Conscience:
Wall Street’s greed knows no bounds, thanks to (a) the moral hazard endorsed by The Fed and Treasury bailouts; (b) Wall Street’s obsession with mega-bonuses for insiders; and (c) their addiction to the new high-risk, high-leveraged, high-frequency derivatives gambling game that easily generates $100 million trading profit days. Their cultural DNA, their destiny must ignore lending to the little guy, to homeowners, to small businesses, to regional banks, to all the businesses that money center banks used to help before investment bankers took over. Wall Street’s DNA makes them incapable of feeling the pain the rest of America feels in an economic downturn with under-employment near 20%. Wall Streeters have zero moral conscience. Unfortunately, it’s guaranteed to get far worse.

6.      The “Third Meltdown” is Coming, Dead Ahead:
America is again being propelled to the edge of economic cliff, already burdened with an estimated $23.7 trillion debt from the misguided political decisions of the past decade. Endless deficits lie ahead. Yet, politicians, CEOs, bankers and Main Street folks have all failed to learn any lessons here. As Yale’s Robert Shiller put it: “Until we understand and address the psychology that fuels” these bubbles, they will “keep forming. We recently lived through two epidemics of excessive financial optimism, we are close to a third episode.” To another meltdown, to another “Great Depression.”

7.      Lobbyists Fueling America’s New “Capitalist Anarchy:”
America’s becoming a “socialist” nation? No, the real truth is, America’s becoming the world’s first “Capitalist Anarchy,” thanks to the explosion of lobbyists running government. This trend shows no sign of abating. Imagine: 42,000 Washington lobbyists today, versus a handful in 1975. Other experts estimate 261,000 of these selfish special interest “influence peddlers” throughout our nation. And it’s so bad the Center for Public Integrity just reported that “more than 1,750 companies and organizations hired about 4,525 lobbyists, eight for each member of Congress, to influence health reform bills in 2009.” Worse: this emerging “Capitalist Anarchy” is draining the Treasury with endless deficits piling up more killer debt that will negatively impact future market returns.

8.      Taxpayers Cannot Afford Wall Street’s Next Bailout:
’ll bet you’re in total denial about this one. And you can bet Congress will avoid action till it’s too late. But when bomb detonates all hell will break lose. Moral hazard critics warn that Wall Street’s arrogant “too-political-to-fail” bankers actually believe taxpayers will bail them out again when they trigger the new meltdown. Wrong. Even if our politicians are dumb enough, the money won’t be there. That scenario will inevitably trigger a new “Great Depression.” This is our destiny: Wall Street’s insatiable greed is the driving force pushing America into massive annual deficits and long-term debt. The need will soon come, but the resources simply will not be available to fund the next bailout when the bomb goes off and the meltdown ignites. So why listen to the Wall Street casinos, they are croupiers, playing a lethal game of “Liar’s Poker” with America’s future?

In fact, it’s highly doubtful that you, your portfolio, your family, or your America will make it past 2012, let alone into that comfortable retirement you may be planning for 2020. The Wall Street casino’s version of “Liar’s Poker” is a “Loser’s Game,” and the odds high are they’ll lose a lot of your money again in the coming decade. So again I ask you: Do you really want to bet on the market winning for the next decade? Do you really believe that stocks, mutuals, ETFs, commodities and bonds will make a profit in the next decade after Wall Street’s miserable performance the past decade? Trust them, you lose.

original: MarketWatch 3/2/1o

Now, Harvard’s Niall Ferguson, one of the world’s leading financial historians, echoes Diamond’s warning: “Imperial collapse may come much more suddenly than many historians imagine. A combination of fiscal deficits and military overstretch suggests that the United States may be the next empire on the precipice.” Yes, America is on the edge. Dismiss his warning at your peril. Everything you learned, believe, everything driving our political leaders is based on a misleading, outdated theory of history. The “American Empire” is at the edge of a dangerous precipice, at risk of a sudden, rapid collapse.

Ferguson is brilliant, prolific, contrarian. His works include the recent Ascent of Money: A Financial History of the World; The Cash Nexus: Money and Power in the Modern World; Colossus: The Rise and Fall of The American Empire; and The War of the World, a survey of the “savagery of the 20th century” where he highlights a profound “paradox that, though the 20th century was ‘so bloody,’ it was also ‘a time of unparalleled progress’.” Why? Throughout history imperial leaders inevitably emerge and drive their nations into wars for greater glory and “economic progress,” while inevitably leading their nation into collapse. And that happens sudden and swift, within “a decade or two.”

You’ll find Ferguson’s latest work, “Collapse and Complexity: Empires on the Edge of Chaos,” in Foreign Affairs, the journal of the Council of Foreign Relations, a nonpartisan think-tank. His message negates all the happy talk you’re hearing in today’s news about economic recovery and new bull markets, about “hope,” about a return to “American Greatness,” from Washington politicians and Wall Street bankers.

“Collapse of All Empires:” 5 stages repeating through the ages … and in 2010

Ferguson opens with a fascinating metaphor: “There is no better illustration of the life cycle of a great power than The Course of Empire, a series of five paintings by Thomas Cole that hang in the New York Historical Society. Cole was a founder of the Hudson River School and one of the pioneers of nineteenth-century American landscape painting; in The Course of Empire, he beautifully captured a theory of imperial rise and fall to which most people remain in thrall to this day. Each of the five imagined scenes depicts the mouth of a great river beneath a rocky outcrop,” If you’re unable to see them at the Historical Society, they’re all reproduced in Foreign Affairs, underscoring Ferguson’s warnings that the “American Empire on the precipice,” near collapse.

First. The Savage State, before the Empire rises
“In the first, The Savage State, a lush wilderness is populated by a handful of hunter-gatherers eking out a primitive existence at the break of a stormy dawn.” Imagine our history from Columbus’ discovery of America in 1492 on through four more centuries as we savagely expanded across the continent.

Second. The Pastoral State, as the American Empire flourishes
“The second picture, The Arcadian or Pastoral State, is of an agrarian idyll: the inhabitants have cleared the trees, planted fields, and built an elegant Greek temple.” The temple may seem out of place. However, Cole’s paintings were done in 1833-1836, not long after Thomas Jefferson built the University of Virginia using classical Greek and Roman revival architecture. As Ferguson continues the tour you sense you’re actually inside the New York Historical Society, visually reminded of how history’s great cycles do indeed repeat over-and-over. You are also reminded of one of history’s great tragic ironies … that all nations fail to learn the lessons of history … that all nations and their leaders fall prey to their own narcissistic hubris … that all eventually collapse from within.

Third. Consummation of the American Empire
“The third and largest of the paintings is The Consummation of Empire. Now, the landscape is covered by a magnificent marble entrepôt, and the contented farmer-philosophers of the previous tableau have been replaced by a throng of opulently clad merchants, proconsuls, and citizen-consumers. It is midday in the life cycle.” The Consummation of Empire focuses us on Ferguson’s core message: At the very peak of their power, affluence and glory, leaders arise, run amok with imperial visions and sabotage themselves, their people and their nation. They have it all. But more-is-not enough as greed, arrogance and a thirst for power consume them. Back in the early days of the Iraq war, Kevin Phillips, political historian and former Nixon strategist, also captured this inevitable tendency in Wealth and Democracy:

“Most great nations, at the peak of their economic power, become arrogant and wage great world wars at great cost, wasting vast resources, taking on huge debt, and ultimately burning themselves out.” We sense the “consummation” of the American Empire occurred with the leadership handoff from Clinton to Bush. Unfortunately that peak is behind us: Clinton, Bush, Paulson, Bernanke, Palin, Obama, Romney and all future American leaders are merely playing their parts in the greatest of all historical dramas, repeating but never fully grasping the lessons of history in their insatiable drive for “economic progress,” to recapture former glory … while unwittingly pushing our Empire to the edge, into collapse.

Four. Destruction of the Empire
“Then comes Destruction,” the fourth stage in Ferguson’s grand drama about the life-cycle of all empires. In Destruction “the city is ablaze, its citizens fleeing an invading horde that rapes and pillages beneath a brooding evening sky.” Elsewhere in The War of the World, Ferguson described the 20th century as “the bloodiest in history, one hundred years of butchery.” Today’s high-tech relentless news cycle, suggests that our 21st century world is a far bloody return to savagery.

At this point, investors are asking themselves: How can I prepare for the destruction and collapse of the American Empire? There is no solution in the Cole-Ferguson scenario, only an acceptance of fate, of destiny, of history’s inevitable cycles. But there is one in Wealth, War and Wisdom by hedge fund manager Barton Biggs, Morgan Stanley’s former chief global strategist who warns us of the “possibility of a breakdown of the civilized infrastructure,” advising us to buy a farm in the mounains. “Your safe haven must be self-sufficient and capable of growing some kind of food … well-stocked with seed, fertilizer, canned food, wine, medicine, clothes, etc. Think Swiss Family Robinson.” And when they come looting, fire “a few rounds over the approaching brigands’ heads.”

Five. Desolation … after the Empire disappears
“Finally, the moon rises over the fifth painting, Desolation,” says Ferguson. There is not a living soul to be seen, only a few decaying columns and colonnades overgrown by briars and ivy.” No attacking “brigands?” No loveable waste-collecting robots from Wall-E? The good news is the Earth will naturally regenerate itself without savage humans, as we saw in Alan Weisman’s brilliant “The World Without Us:” Steel buildings decay. Microbes eat indestructible plastics. Eons pass. And Earth reemerges in all its glory, a Garden of Eden.

Epilogue: “All Empires … are condemned to decline and fall”

In a LATimes column, Ferguson asks: “America, a Fragile Empire: Here today, gone tomorrow, could the United States fall that fast?” And his answer is clear and emphatic: “For centuries, historians, political theorists, anthropologists and the public have tended to think about the political process in seasonal, cyclical terms … we discern a rhythm to history. Great powers, like great men, are born, rise, reign and then gradually wane. No matter whether civilizations decline culturally, economically or ecologically, their downfalls are protracted.”

We are deceiving ourselves, convinced “the challenges that face the United States are often represented as slow-burning … threats seem very remote. But what if history is not cyclical and slow-moving but arrhythmic,” ask Ferguson. What if history is “at times almost stationary but also capable of accelerating suddenly, like a sports car? What if collapse does not arrive over a number of centuries but comes suddenly, like a thief in the night?” What if the collapse of the American Empire is dead ahead, in the next decade? What if, as with the 2000 dotcom crash, we’re in denial, refusing to prepare?

Ferguson’s final message about America’s destiny comes from Foreign Affairs: “Conceived in the mid-1830s, Cole’s great pentaptych has a clear message: all empires, no matter how magnificent, are condemned to decline and fall.” Throughout history, Empires function “in apparent equilibrium for some unknowable period. And then, quite abruptly … collapse,” a blunt reminder of the sudden, swift, silent, certain timetable in Diamond’s “Collapse” where a “society’s demise may begin only a decade or two after it reaches its peak population, wealth and power.” You are forewarned: If the peak of America’s glory was the leadership hand-off from Clinton to Bush, then we have already triggered the countdown to collapse, the decade from 2010 until 2020 … tick … tick … tick …

Are you an “intelligent investor?” Maybe not. “Would you willingly allow a certifiable lunatic to come by at least five times a week to tell you that you should feel exactly the way he feels? Would you ever agree to be euphoric just because he is, or miserable just because he thinks you should be?” “Of course not,” says Jason Zweig in his commentaries to the updated version of Benjamin Graham’s The Intelligent Investor. “But when it comes to their financial lives, millions of people let the stock market tell them how to feel and what to do, despite the obvious fact that, from time to time it can get nuttier than a fruitcake.”

Today we’re not much different, arguably we’re worse off psychologically. We sure aren’t “intelligent investors.” We’re still letting that “certifiable lunatic,” as Graham affectionately called the stock market, run our lives, even though he’s “nuttier that a fruitcake!” How else can we explain the fact that Wall Street lost over 20% of our money the past decade and still expect to gain 20% in 2010. We should be worried that Wall Street will lose even more of our hard-earned money the next decade, as I wrote recently on MarketWatch: “8 Reasons Wall Street loses another 20% in this decade: Warning, you can’t get back to even, cannot win Wall Street’s ‘loser’s game’.” Here’s Zweig’s latest on the same point in his Wall Street Journal column, The Intelligent Investor, titled, “Why Many Investors Keep Fooling Themselves.”

What are we smoking, and when will we stop? A nationwide survey last year found that investors expect the U.S. stock market to return an annual average of 13.7% over the next 10 years. … We all should be so lucky. Historically, inflation has eaten away three percentage points of return a year. Investment expenses and taxes each have cut returns by roughly one to two percentage points a year. All told, those costs reduce annual returns by five to seven points. So, in order to earn 6% for clients after inflation, fees and taxes, these financial planners will somehow have to pick investments that generate 11% or 13% a year before costs.

Where will they find such huge gains? Since 1926, according to Ibbotson Associates, U.S. stocks have earned an annual average of 9.8%. Their long-term, net-net-net return is under 4%. All other major assets earned even less. If, like most people, you mix in some bonds and cash, your net-net-net is likely to be more like 2%. The faith in fancifully high returns isn’t just a harmless fairy tale. It leads many people to save too little, in hopes that the markets will bail them out. It leaves others to chase hot performance that can’t last. The end result of fairy-tale expectations, whether you invest for yourself or with the help of a financial adviser, will be a huge shortfall in wealth late in life, and more years working rather than putting your feet up in retirement …

I asked several investing experts what guaranteed net-net-net return they would accept to swap out their own assets. William Bernstein of Efficient Frontier Advisors would take 4%. Laurence Siegel, a consultant and former head of investment research at the Ford Foundation: 3%. John C. Bogle, founder of the Vanguard Group of mutual funds: 2.5%. Elroy Dimson of London Business School, an expert on the history of market returns: 0.5%. …

All this suggests a useful reality check. If your financial planner says he can earn you 6% annually, net-net-net, tell him you will take it, right now, upfront. In fact, tell him you will take 5% and he can keep the difference. In exchange, you will sell him your entire portfolio at its current market value. You have just offered him the functional equivalent of what Wall Street calls a total-return swap. Unless he is a fool or a crook, he probably will decline your offer. If he is honest, he should admit that he can’t get sufficient returns to honor the swap.

And still it’s getting worse. Year after year we still turn our portfolios, our investment decisions, our retirement and our family’s future over to that “certifiable lunatic,” we let him run our lives, even though he’s “nuttier that a fruitcake!” This is no “harmless fairytale,” you can’t trust “him.” You’re in denial. Stop making a fool of yourself.