Perhaps true. But the saying doesn’t resonate the way it once did. Chances are, like all of us here at GropeStone, you haven’t been sitting serenely on the 7:02 waiting to leave the platform at Grand Central Station. You have just been caught up in the mother of all financial train wrecks, the ugliest panic in 80 years, watching 40 cents or more of every dollar invested go up in smoke in less than a year.

Why would you ever want to stay on the wreckage? Or, if you were lucky enough not to have been on the train, why would you even think about getting on it now? People are being carried off in stretchers.

Yet stay on the train—or get on it if you aren’t on it already—is exactly what great financial minds would have you do. Of course you’d expect some to be making soothing noises; their very livelihood depends as much on keeping clients as on doing well for clients. But how about people like Warren Buffett? In a “greener” variant of the smoky old Wall Street train saying, his recent op-ed piece in the New York Times argues, “Buy American. I Am… if you wait for the robins, spring will be over.”

Even the “oracle of Omaha” in his seven decades of investing hasn’t seen anything quite like the current financial wreck. Surely luck, not just brains, helped amass his great fortune. But he started out with nothing, had the brains to profit from his luck, has seen plenty of troubles along the way, and knows financial history and human nature. His words deserve attention.

Faithful owners of US stocks, as he points out, have prospered mightily over long periods of time. He cites the Dow Jones average of 30 stocks. But GropeStone’s survey of the broader market suggests the same thing. It’s been a rewarding ride. As described in an earlier post, a dollar invested in the S&P 500 in 1975 is now worth—even after the recent drop—over $35.

The trouble is that along the way the train is prone to terrifying crashes and sudden lurches. It’s only natural to cast faith to the winds and jump off the train before impending crashes, then get back on when the tracks are clear, in time for the next great lurch forward.

It’s not only natural; it’s a winner. Since 1975, all you had to do was jump off the train before each of the 10 worst months and then get immediately back on. If you’d done that, your dollar would have grown to about $145.

Of course that winning strategy is as much a fantasy as the old Westerns where train jumpers hit the ground rolling and unhurt, ready to leap up onto a saddled horse and gallop off. In real life jumpers end up with a lame leg and a fear of trains. If they do get back on, they get back on late.

Suppose since 1975 you’d managed to jump off the train before the 10 worst months but, because of your fear of getting back on, also missed the 10 best months. Your dollar would have grown to about $49. Not bad. But still fantasy for all but the most nimble and lucky.

Most jumpers manage to miss the great lurches forward and get caught by crashes. If you’d done that since 1975, missing the 10 best months and suffering through each of the 10 worst months, your dollar would have grown to about $13. Much worse than just staying on the train.

Buffett is smart enough to say he knows he can’t predict the future. That doesn’t seem to stop many of the rest of us from thinking we can, including Alan Abelson of Barron’s, who argues it’s still too early. And so there will always be jumpers and those who cater to them.

As the Greek philosopher Heraclitus is said to have said, “You can’t step into the same river twice.” Things really might be different this time. Spring may never come, and the great train may never roll again. For all the recent trauma, however, we at GropeStone aren’t counting on that just yet.

Those with a few blocks or a few miles to go are often better off walking. But for those with many years and many thousands of miles to go, getting on the wrecked train and staying on it is still the best bet. Even if it crashes again, as it surely will.

The Economist cover image, October 4th-10th 2008 print

The fear sets in. What is one to do?

Here at GropeStone we drew a picture. One long picture. And stuck it in a prominent place as a reminder.

The chart in the header of the pages on this site goes back to 1975. The gray and red columns show the annual returns of the S&P 500 index including dividends, the blue line the fate of one 1975 dollar invested in that index with all dividends reinvested when received.

Each dollar invested back then would have grown to about $49 at the end of September 2008, even after the recent market plunge.

There is some cheating in this number. It ignores taxes. And a dollar back then is worth about four of today’s dollars. Plus it’s been a rough ride, with long periods of paltry or negative returns.

Even armed with long-term perspective, we find the drops gut-wrenching. Our brains scream at us to escape the danger, especially when others are running. Our ancestors out on the savannah no doubt had to be quick; the long-term dreamers didn’t survive. So we’ve evolved to feel the short-term losses more than we feel the long-term gains, the stuff of behavioral finance.

But still, drawing a picture can help.

We like to think a similar percentage recovery after a given percentage drop gets us back even. But that’s cheating. Technically we need to regain 11.1% to make up, say, a 10% loss.

That may not seem like much of a difference. But consider the larger losses commonplace this year.

A drop of 20%, from 100 to 80, requires a 25% gain just to get back to 100. A 33% drop requires a 50% recovery. Lose 50%, and a 100% gain is needed. The recovery curve steepens from there on its way up to infinity, a mathematical way of saying that future handsome returns are meaningless if too much principal is lost.

No doubt many hedge funds below incentive fee high-water marks this year are acutely conscious of the steepness of the recovery curve.

For US stock markets 30% to 40% drops from peak to trough over a period of weeks and months are not extraordinary. But 8.8% in one day, with some bank stocks plunging 40% to 70%. That hasn’t happened since 1987.

The proximate cause for today’s market sell-off was shock at the failure of the US Congress to agree to inject up to $700 billion into the banking system. But economic stress fractures may run deep.

The loss of investor confidence in the regional banks is particularly worrisome. American history is littered with bank panics featuring dramatic stories of people losing their life savings. In modern times government protects depositors. But the damage to life savings nonetheless can be insidious.

Some $1.1 trillion in value vanished today in the US, much of it pension and 401k retirement plans. Even worse, if banks slip further into trouble, small businesses and individuals across America won’t get loans, not because they aren’t creditworthy, but because their bankers don’t have the money.

At its most benign, this multiplier effect in reverse means that new store won’t open or that new equipment be ordered or that new employee hired. At its worst, economic misery spreads worldwide. This New York evening the fear of the worst has sent Asian markets plunging during their morning.

At least the Chinese markets, down some 60% this year after huge prior gains, can’t fall this week. They’re on holiday.

Recent pronouncements about the storm in the financial markets fathom the complexities little better than our distant ancestors understood why floods raged or rivers dried up. Most, in essence, are variations on the age-old blame game, their targets the usual suspects of modern-day America.

Those greedy Wall Street bankers. Those speculators shorting the stocks. Those quants “playing with fire” with derivatives no one understands. Those clowns in the White House. Those good-for-nothing legislators. Those stupid regulators caught asleep at the switch. Those deregulators who let their cronies party on as the bubble inflated.

But maybe this flurry of finger-pointing obscures an inconvenient truth—that nobody really understood the size and fury of this storm until it was fast upon us.

Maybe derivatives, like fire, can help us when used well. Maybe greed on Wall Street could not have flourished without greed on Main Street fed by politicians wanting their constituents to own homes whether or not they can afford them. (Happy homeowners make good voters.) Maybe the guy in the White House has good people on the case. Maybe a rush to regulate the bad guys will succumb to the law of unintended consequences beyond our shores.

In the words of Walt Kelly’s Pogo, “We have met the enemy, and he is us.” Only when we remember that we live in a complex, intertwined world in which we all have played a part can we cooperate to save ourselves from the storm.

The torrent crashes down the hills. Some stocks give up in a day their gains of a year, and drop 50 per cent in a week. It is so sudden and so awful that, for a while, many investors cannot quite believe it.

So here we are again, four years or so after we started out, half drowned, bones broken, washed out. But if you have kept some reserves intact and know enough to recognize real value when it is being dumped by panicky, uninformed sellers, and have the guts to act, then you can make the buys of a lifetime at these moments.

We have had eight economic storms since the second world war. Each time, investors became convinced that the skies would never clear or the sun shine again. But it always does.

So the media image emerges of Senator John McCain’s choice for running mate, the second American woman ever to run for vice president on a major party ticket. A congenial image if you like that sort of thing. And mostly coherent, except for one oddity: Sarah Palin is said to have fired a male subordinate for refusing to fire her brother-in law.

At first all of us here at GropeStone scratched our heads. What’s that? She stands accused of using her power to have her brother-in-law fired, not hired? If she were going to abuse public power for private gain, couldn’t she have done better than that?

Then it emerged that the gubinatorial brother-in-law is an ex brother-in-law said to have: 1) made death threats against Palin’s father, 2) used a Taser on his stepson, and 3) illegally killed a moose.

Now those first two allegations, even if true, caused little outrage here at GropeStone. Perhaps just some heated words exchanged during a divorce and custody battle. Maybe just a little dose of electronic “tough love.”

But killing a poor innocent Alces alces gigas? Quel scandale! Quelle horreur!

Whether Moosegate will stain Palin’s image is not clear. After all she did all she could for the moose; she ordered its alleged nemesis removed from the state payroll, never an easy thing to do.

One thing is clear. Those fanning the media flames for and against Palin have more in mind than human or animal justice. Perhaps a little revenge by the old-boy network against her clean government reforms. And of course that little matter of the quadrennial power struggle for the greatest office in the land. The world indeed is not the way they tell you it is.

Face before the world...Face behind the voice

Like the great circus, this show relied on illusion, some detectable, some undetectable. Lin Miaoke, the pig-tailed nine-year-old singing the revolutionary anthem, wasn’t actually singing it: she was miming Ode to the Motherland to a recording by seven-year-old Yang Peiyi, deemed not cute enough to appear on television.

Face matters. To the Chinese. To all of us. Even if it requires deception. Still the greatest show on Earth, though.

“Availability cascade” has been coined for the way a proposition can become irresistible simply by the media repeating it; “informational cascade” for the tendency to replace our beliefs with the crowd’s beliefs; and “reputational cascade” for the rational incentive to do so.

Politicians and lobbyists, argues Jenkins, know their prosperity depends on positioning themselves via such cascades. And some scientists “devote their professional lives to seeking evidence for hypotheses (especially well-funded hypotheses) they’ve chosen to believe.”

This is reminiscent of the Limits to Growth hoopla back in the early 70s that echoed the The Population Bomb before it. The imposing mathematical formulas back then have given way to Gore’s fancy graphics and fonts. But the emotional tug is similar.

One GropeStone staffer recalls being convinced back then that the end was nigh and he soon could no longer fill the tank of his VW Beetle. This never came to pass. A fill-up now costs closer to $50 than $3.50. But the gas still flows from the pumps.

Fanning the fear of running out is still useful; it sells books and it helps get out the vote and push more pork through the system.

No wonder the rise of citizen journalism in the blogosphere. More facts. Less ink. Trees saved. More hogwash, too, and more chemicals leaching from millions of discarded computers. But on balance a good thing.