The Hundredth Monkey Effect

According to Wikipedia, The Hundredth Monkey Effect generally describes the instant, paranormal spreading of an idea or ability to the remainder of a population once a certain portion of that population has heard of the new idea or learned the new ability. However, for those of you that don't know the origin of this phenomenal Effect, you're not only going to get excited you're going to instantly re-realize how freaking similar we are, as today's modern civilization, to this wonderfully wild species.

The year was 1952. The setting was an island somewhere in the south seas. A few anthropologists were studying the behavior of the macaques, a Japanese Monkey native to the islands with a diet consisting primarily of sweet potatoes. By routine, the monkeys would dig up a potato, break it in half and eat only from the center in order to avoid the potato's sandy coat, discarding the rest. After one potato, the monkey would go back to dig another. One insightful afternoon, a pioneering monkey decided to rinse his potato, allowing him to eat it whole, and dig for fewer potatoes. Consequently, he not only began enjoying a cleaner habit, he instantly created more free time to enjoy the things he loved to do. Was he praised immediately? Just the opposite. His family and friends just couldn't understand why he was doing something so different! Despite this, some of the onlooking monkeys became privy to the transition and began washing their potatoes too. Slowly but surely, many more of the surrounding monkeys shared in the innovation. Hundreds of monkeys continued to hold fast to their comfortable method even though they began to notice the abundance the other monkeys were enjoying at the beach. Now, supposedly when the hundredth monkey took the leap of faith, all the rest followed. Most remarkably and due to an evident mass consciousness, the paradigm immediately shifted amongst the monkeys inhabiting the neighboring islands too!

How does this apply to our modern business world? By opening up to healthier methods of living and working, you will effectively create more time and space to enjoy life, including relaxation, hobbies, service, family, etc. Not to mention the fact that just like that courageous monkey, you will inspire others to do the same.

Oh yeah...when it comes to business, listen to your heart as opposed to the others around you - especially the ones who love you the most! Your friends and family never want to see you let down, or for heaven's sake, fail. That's why they generally want you to take the highly predictable and extremely cautious route. Aikido their energy to prove them all wrong! Chances are they will be the first people to complement you on your new boat should you invite them aboard for a sail. Gangway!

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Warren Buffett Invests Like a Girl

For as long as I can remember, adding the phrase "like a girl" to the end of whatever you were saying was a put-down, an insult, something to come to fisticuffs over. Little boys the world over hated being told that they, for example, "threw like a girl." I'm not defending the statement, and as a member of the fairer sex, I certainly don't agree with its intent, but hey, that's been the case from the playground on up.

When it comes to investing, though, you could do a whole lot worse than learning to "invest like a girl." And that's why I'd bet Warren Buffett, chairman of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), wouldn't get offended if I told him to his face that he invests like a girl. In fact, he'd probably thank me (and perhaps slip me a box of See's Candies). Hang on to see why -- and stay tuned for our soon-to-be published book on this very topic.

What makes Buffett Buffett
What is it that makes Warren Buffett such a consistently phenomenal investor? Is it that he's zigging and zagging along with the market's every move? Is he trading all the time, buying this and selling that, racking up taxes and commissions all the while?

No, no -- what makes Warren Buffett the investor whom every investor wants to be like is that he approaches investing differently from the way most men do. He's patient and does thorough research. He waits for the right price to buy. He seeks to never sell the companies he invests in. He's the anti-trader, if you will.

Yep, you heard it here -- Warren Buffett invests like a girl. And that's a very good thing.

Women and investing
So how exactly do women invest? Check out these characteristics of female investors that distinguish them from their male counterparts.

• Women spend more time researching their investment choices than men do. This prevents them from chasing "hot" tips and trading on whims -- behavior that tends to weaken men's portfolios.
• Men trade 45% more often than women do, and although men are more confident investors, they tend to be overconfident. By trading more often -- and without enough research -- men reduce their net returns. But by trading less often, women get better returns and also save on transaction costs and capital gains taxes.
• A study by the University of California at Davis found that women's portfolios gained 1.4% more than men's portfolios did. What's more, single women did even better than single men, with 2.3% greater gains.
• Women tend to look at more than just numbers when deciding whether to invest in a company. They invest in companies they feel good about ethically and personally. And companies with good products, good services, and ethics tend to have better long-term prospects -- and face fewer lawsuits.

These are some of the traits that make female investors more like Buffett and less like frazzled, frenetic day traders, with their ties askew, hair on end, and eyes bleary. Patience and good decision-making help set women apart here.

Trend-spotting
Women also have a keen eye when it comes to identifying companies poised for greatness. They typically look beyond the shiniest, newest bio-techno-gadget and focus instead on retailers meeting their needs, on products that they can't live without, and on consumer goods they buy in their day-to-day lives. And that type of insight can pay off. Buffett's long-standing investments in Coca-Cola (NYSE: KO) and Gillette (now owned by Procter & Gamble (NYSE: PG)) meet this standard of easy-to-understand investments with competitive advantages.

Legendary fund manager Peter Lynch has famously credited his wife with discovering pantyhose maker Hanes, which at one point was Fidelity Magellan's largest holding. And he's also written about watching the shopping habits of his then-teenage daughters to discover investment ideas.

Shoot, even our own Bill Mann has told us that his wife shone the light on Swedish clothing phenom Hennes & Mauritz (OTC BB: HMRZF), better known as H&M, which went on to be a great performer for him.

Look at a company like recent Motley Fool Stock Advisor recommendation Coach (NYSE: COH), which started turning around several years ago thanks to fresh designs that drew customers in like moths to a flame. The stock's stumbled over the past year and remains beaten down today because of ongoing fears about the economy and the "strength of the consumer," but the fact remains that it's a solid, well-run business with desirable products and a growing market. I'll bet you could have talked to any number of female shoppers early on who could have clued you in that the company's products were much improved -- and that the financials couldn't be far behind.

So what if you're not a girl?
It's possible, dear reader, that you're of the male persuasion, but don't fret. By focusing on the traits that created superinvestor Warren Buffett -- patience, the willingness to dig deep, the ability to wait for the right price, and the desire to buy and hold instead of trade, trade, trade -- you can awaken the feminine side of your investment psyche. Consider it. Your portfolio will thank you for it.

For further Foolishness on all things Buffett, check out:

• Buffett's Words of Wisdom
• The Optimistic Prediction of Warren Buffett
• What Could Warren Buffett Have Been Thinking?!

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Berkshire Hathaway's B shares are recommended in both Motley Fool Inside Value and Motley Fool Stock Advisor. Coca-Cola is an Inside Value recommendation. And, as mentioned earlier, Coach is a Stock Advisor pick. Check out either service absolutely free for 30 days.

Fool Online Managing Editor LouAnn DiCosmo can't wait for the day when "You invest like a boy" is an insult. She owns shares of Berkshire Hathaway but of no other company mentioned here. The Motley Fool also owns shares of Berkshire Hathaway. The Fool's disclosure policy considers itself a value investor.

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Stocks Tarnished

Over the past 200 years, the stock market's steady upward march occasionally has been disrupted for long stretches, most recently during the Great Depression and the inflation-plagued 1970s. The current market turmoil suggests that we may be in another lost decade.

The stock market is trading right where it was nine years ago. Stocks, long touted as the best investment for the long term, have been one of the worst investments over the nine-year period, trounced even by lowly Treasury bonds.

A look at stocks during downturns

The Standard & Poor's 500-stock index, the basis for about half of the $1 trillion invested in U.S. index funds, finished at 1352.99 on Tuesday, below the 1362.80 it hit in April 1999. When dividends and inflation are factored into returns, the S&P 500 has risen an average of just 1.3% a year over the past 10 years, well below the historical norm, according to Morningstar Inc. For the past nine years, it has fallen 0.37% a year, and for the past eight, it is off 1.4% a year. In light of the current wobbly market, some economists and market analysts worry that the era of disappointing returns may not be over.

Until last fall, many investors had viewed the bursting of the tech-stock bubble as a nasty but short-term setback. The market had resumed its upward march, reaching new highs in October.

NYU Stern School of Business professor Richard Sylla discusses his research on historical stock-market booms and busts and offers advice on where to invest your money these days.

Then the credit crisis began weighing on stocks, as did the possibility of a recession. By March 10, the S&P 500 was down 18.6% from its Oct. 9 record close, nearing the 20% decline that signals a bear market. It has rebounded since then amid the Federal Reserve's efforts to stabilize the financial system, but it remains 13.3% below its October record.

Conventional stock-market wisdom holds that if investors buy a broad range of stocks and hold them, they will do better than they would in other investments. But that rule hasn't held up for stocks bought in the late 1990s or 2000.

Over the past nine years, the S&P 500 is the worst-performing of nine different investment vehicles tracked by Morningstar, including commodities, real-estate investment trusts, gold and foreign stocks. Big U.S. stocks were outrun even by Treasury bonds, which historically perform much less well than stocks. Adjusted for inflation, Treasurys are up 4.7% a year over the past nine years, and up 5.8% a year since the March 2000 stock peak. An index of commodities has shown about twice the annual gains of bonds, as have real-estate investment trusts.

Stocks also underperformed other investments during the 1930s and the 1970s. During both of those periods, stocks would rally strongly, only to fade. It took well over a decade in each case for stocks to move lastingly upward.

Righting the Ship

So far, the current decade hasn't featured the high inflation of the 1970s or the high unemployment of the 1930s. That makes some analysts and economists hopeful that the stock troubles won't be as bad or last as long as they did back then, despite the housing crisis and the breakdown in parts of the mortgage and lending businesses. Many of them hope that the Federal Reserve will do a better job of righting the ship than it did in those prior decades.

Finance professor Jeremy Siegel at the University of Pennsylvania's Wharton School has written about stock behavior back into the 19th century. During the past decade, he points out, the worst years were from 2000 through 2002, when stocks fell sharply. Although the S&P 500 has been inconsistent since then -- rising strongly in 2003, then registering single-digit gains in 2004, 2005 and 2007 -- he considers the bad times largely past. Other optimists agree.

The Pessimistic View

But Yale economist Robert Shiller, who predicted the market trouble in his 2000 book "Irrational Exuberance," warns that the market still hasn't shaken off its excesses. He and some other analysts think the latest volatility is a symptom of more trouble to come.

"I have to say that this isn't a great time to be in the stock market," says Prof. Shiller. "The housing crisis that we are going through is going to put a damper on the economy that is longer than a recession. I don't see the stock troubles ending as quickly as many people are imagining."

Historically, stocks rise about two years out of every three, for an average gain of 7% a year when controlled for inflation, according to Prof. Siegel. Stocks have shown gains for almost every 10-year period since 1925 -- 98.6% of the time, according to Ned Davis Research.

But when stock investing becomes a mania, as it did in the 1920s, the 1960s and the 1990s, it leads to prolonged periods of subpar performance, according to financial historian Richard Sylla of New York University's Stern School of Business.

Prof. Sylla has examined stock booms and busts back to 1800. He found periods of exceptional strength in the late 1810s and early 1820s, the 1840s, the 1860s and the early 1900s. Those periods were followed by lengthy weakness in the 1830s, the 1850s, the 1870s and before 1920. In a 2001 paper, he forecast a 10-year period of stock weakness.

"When you have extraordinary returns, as we did from 1982 through 1999, then usually the next 10 years aren't very good," says Prof. Sylla. His research suggests that exceptional booms steal gains from the future. When the booms end, returns become subpar, so that average returns over the longer term fall back to the 7% norm. Economists call this "reversion to the mean," the idea that exceptional performance can't last forever.

Bullish investors believed that the bad days were over late in 2002, when stocks rebounded following the technology-stock wreck, the Sept. 11 terrorist attacks and the collapse of Enron Corp.

The S&P 500 rose 26% in 2003, amid hopes for a quick victory in Iraq. In 2004, the S&P 500 rose only 9%. It was up 3% in 2005, 14% in 2006 and 3.5% in 2007. The index is down 7.9% so far this year. Those numbers are not adjusted for inflation, which would lower annual returns by a few percentage points.

The Dow Jones Industrial Average, which had fewer technology stocks than the S&P 500 and suffered less in the bear market from 2000 to 2002, has held up better, but not a lot better. It has risen less than 1% a year since January 2000.

Role of Individuals

Prof. Sylla expects to see stocks turn more lastingly upward some time in the next two years. The market's direction will depend partly on the individual investor. The 1990s stock bubble and the bear market that followed came at a time when more individuals were managing their own retirement savings through 401(k) accounts, individual retirement accounts and the like.

Individual investors helped create bubbles in the markets for technology stocks and for real estate. In recent years, investors have been putting far less money into U.S. stocks than they did during the stock-investing boom. In 2000, at the height of that boom, Americans added $260 billion to U.S.-stock mutual funds, according to the Investment Company Institute, a trade group. Last year, investors took more money out of those funds than they put in -- a net outflow of $46.4 billion.

America's shift toward self-managed retirement could soften some of the stock-market volatility. People appear to be much less likely to move money around in retirement accounts than in other investment accounts, according to economist John Ameriks at mutual-fund company Vanguard Group.

Many 401(k) participants leave their allocations alone for long periods of time, says Mr. Ameriks. If they set up their accounts to send money into stocks each month, those accounts tend to keep doing so through bull and bear markets alike. That may provide some support to stocks.

Some investment advisers say passive contributions like that actually make some sense. People whose retirement accounts have bought stocks each month, year in and year out, haven't done nearly as badly as those who bought in the late 1990s and stopped buying, Prof. Sylla says. While the S&P 500 is down since 1999, it is up since mid-2001, meaning that most stock purchased since then by retirement accounts shows a gain.

Stock Fundamentals

A big problem for the market right now is what analysts call stock fundamentals. Strong corporate-profit gains and low inflation have supported stocks since 2002, but they are becoming harder to sustain.

In a typical year, Prof. Sylla says, corporate profits run at about 5% or 6% of total economic output, after tax. In 2006, that number was 9%, a record. Historically, this number tends to revert to the mean, suggesting that profits now could weaken. "Profits may fall to 3% or 4%" of economic output, Prof. Sylla says.

Spending by ordinary people could have an effect on those profits. Consumer borrowing and spending kept the economy afloat after the stock bubble popped in 2000. Emboldened by high home values, people borrowed at levels rarely seen, pushing down the national savings rate to zero.

That's what worries Prof. Shiller. After studying the housing market, he sees home values continuing to weaken for years. He expects consumers to borrow and spend less, and to rebuild their savings.

A consumer pullback would hold back economic growth and corporate profits, putting a damper on U.S. stock gains and giving investors an incentive to continue putting money into commodities or stocks in Brazil, Russia, India and China. Baby boomers concerned about retirement income could look for safer investments with guaranteed returns, such as Treasury bonds and bond-like products offered by mutual-fund companies.

On the Horizon

"We have to accept that this is no longer a nation of 4% real economic growth. This is a mature nation that no longer has a strong manufacturing base," says Steve Leuthold, chairman of Leuthold Weeden Research in Minneapolis. He believes that another bull market is on the horizon, perhaps following some additional stock declines. But that future bull market, he contends, could be followed by another bear market that could bring stocks back close to where they are today.

Before another lengthy bull run can begin, stocks need to overcome two problems: the hangover from the high prices of the late 1990s, and the continuing effects of the exceptionally low interest rates instituted by the Federal Reserve in 2001 and again today. Those low interest rates helped push corporate profits higher, but also fueled borrowing excesses that led to today's economic problems.

To some analysts, stock prices still look inflated. Prof. Shiller calculates that the S&P 500 traded in the late 1990s at more than 40 times its component companies' profits -- far above the historical norm of 16. (To avoid distortions, he uses average profits over a 10-year period.) Today, the S&P 500 still trades at more than 20 times profits -- still far above average.

"The S&P 500 never got back down to its long-term trend line" after the 1990s, says Jeremy Grantham of Boston money-management firm Grantham, Mayo, Van Otterloo & Co. Mr. Grantham, who has long warned of a prolonged period of subpar stock performance, says exceptionally low interest rates temporarily propped up the indexes.

There are reasons to hope that things won't be as ugly this time as they were either in the 1970s or in the 1990s in Japan, which went into a prolonged slump after bubbles in its housing and stock markets.

For one thing, although inflation has been running above 4% this year, it remains well below the double-digit rates of the 1970s. That's made it easier for the Fed to stimulate the economy without worrying about sparking runaway inflation.

One big question is how much worse investor confidence will get. The bearish Mr. Grantham expects investors to become gloomier, but not as pessimistic as they were during past bad stretches.

"I think the global economy will stay, on balance, not so bad," he says. "There is no reason for people to become as pessimistic as they did even in Japan, and certainly not as pessimistic as in the Depression."

Write to E.S. Browning at jim.browning@wsj.com

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