“I Don’t Think I’ve Ever Heard Buy-and-Hold Described As a ‘Get Rich Quick’ Scheme Before”

I described Mike, author of the Quest for Four Pillars blog, as “heroic” in a comment that I put to his blog last Saturday morning.

He banned me from posting further comments on Saturday afternoon.

I didn’t mean it, Mike! I really didn’t mean it! I take it back!

Well, perhaps not.

I certainly do not approve of the ban. As regular readers know, I am the leading critic of the Ban on Honest Internet Posting on safe withdrawal rates and other important investment topics alive on Planet Earth today. I’m a journalist. Bans on honest posting on the numbers that people use to plan their retirements rub my fur the wrong way. Sue me. (I’m kidding, Drip Guy, I’m kidding!)

Here’s the deal.

Mike has long been torn about whether to permit honest posting on investment topics at his board.

He’s a big believer in most of the principles of Buy-and-Hold. I explained to him one time that I was not willing to post dishonestly on a matter that was likely to cause a good number of my friends to suffer failed retirements and asked whether he could see the problem with that. His reply was: “It’s hard to say.” Another time he praised the Canadian Money Forum and I pointed out that they banned honest posting on safe withdrawal rates on the day they opened the forum. He expressed no surprise or concern. On another occasion, he cited the Old School retirement studies at his ABCs of Investing blog and I pointed out that these studies had been discredited by numerous big-name experts years earlier. He deleted my comment and left his endorsement of the discredited studies stand despite the financial harm that it would likely do to readers of his blog.

The other side of the story is that Mike has permitted me to post numerous comments to his Four Pillars blog that point out the realities of stock investing (as revealed by the historical stock-return data and the academic research of the past 30 years) in plain and clear and firm and uncompromising terms. Mike has evidenced the right stuff on numerous occasions. He also has run two Guest Blog Entries that explored the realities in some depth. The one that caused him to adopt the ban was posted last week and was entitled Stock Investing Is a Lot Less Risky Than You Think.

My sense is that Mike really, really, really does not like people discussing the realities of stock investing at his blog; it makes his tummy hurt to learn that ignoring price when buying stocks always brings on financial catastrophe sooner or later. However, Mike also really, really, really (kinda, sorta) believes in freedom of speech. He has probably never had this belief tested to the extent it was when he made a decision to permit honest posting on Buy-and-Hold at his blog and saw the sorts of words that began appearing there as a result.

The final straw came with the posting of last week’s Guest Blog Entry (according to my sense of things — I of course am not able to see into Mike’s mind). Numerous community members expressed a desire to learn more about those yucky (from the perspective of a confirmed Buy-and-Holder) stock investing realities.

A fellow named “Two Cents” said :”At first I thought you were advocating a Buy-and-Hold strategy. I was relieved to read on and discover that that was not the case…. I’m interested in Rob’s strategy. I just haven’t had the time yet to read up on it and wrap my head around it.”

A poster going by the screen-name “Potato” commented: “I don’t think I’ve ever heard Buy-and-Hold described as a Get Rich Quick scheme before”, and linked to the Guest Blog Entry at his own blog.

“Jason” congratulated Mike for hosting an “interesting post and discussion.”  He added that “I am also pleased to see that this is not a Buy-and-Hold forever post.”

Yikes!

It’s one thing to believe in Free Speech when the millions spent by The Stock-Selling Industry promoting Buy-and-Hold have effectively intimidated most of the middle-class investors who see through the gibberish from sharing what they know with others. It’s something else altogether when the gig appears close to being up. At that point this Free Speech business begins looking more than a little threatening to one’s continued ability to pull the wool over one’s own eyes and the eyes of one’s readers.

One of the tricks that has been effectively used against us is the deceptive claim often made that “everyone” accepts that Buy-and-Hold makes sense, that there is some sort of “science” supporting this investing strategy or some sort of “academic research” somewhere that suggests that it might work this time. It gets harder to work these deceptions on people when those who know the realities work up the courage to speak out. And, once a few work up the courage, what’s to stop it from becoming a trend?

Potato’s comment hit it on the head. It’s true that we have rarely heard Buy-and-Hold described as a “Get Rich Quick” scheme in recent decades. Why the heck not?

I think it is fair to say that this “strategy” has the worst track record of any investing “idea” ever concocted by the human mind. It doesn’t take an I.Q. of 140 to see that a model that says that there is no need to change one’s stock allocation when prices go to insane levels is rooted in Get Rich Quick thinking. What other possible explanation is there for such dangerous allocation strategies?

When we get to a point where a large number of people are openly saying what they have suspected but not said about Buy-and-Hold for many years now we will have finally turned the corner on today’s economic crisis. That’s what it is going take — a few caring men and women working up the courage to tell the obvious truths about how we have been destroying both our retirement dreams and our economic system for a good long time now.

Mike was afraid that he was beginning to lose control of his blog community with his posting of that Guest Blog Entry. That’s my take. Buy-and-Hold failed in the academic research nearly 30 years ago. Since the crash, it has more and more come to be seen as failing in the minds of typical middle-class investors (Mike’s readers). And its most fervent advocates sense that, when the fall begins, it is likely to increase in momentum quickly. We are living in the last days of this irrational and degrading and economically destructive “idea.” One good push from an influential name could at this point send it tumbling down the ravine.

I believe that Mike has put himself on the wrong side of the history train with adoption of a Ban on Honest Posting on the Flaws of the Buy-and-Hold Concept at his blog. I also believe that he writes a fine blog and that he really is at least semi-serious in his belief in Free Speech principles. I believe that there will come a day when Mike and I will be working together again to help both Mike and his readers (and me!)  come to a better understanding of the realities of stock investing. Let’s hope so!

I will send Mike a link to this blog entry. In the event that he believes that my report is in any way unfair, I will of course be happy to post his version of events in a follow-up blog entry. I will try to get the Guest Blog Entry placed at another blog. In the event that I am successful, I will post a link to it in a subsequent blog entry here.

Heaven help the boy who won’t reach twenty-one.

Heaven help the man who gave that boy a gun.

Heaven help the people with their backs against the wall.

Oh, heaven help us all!

Comments

  1. Rob says

    Strangely enough, I cannot!

    Mike deleted the blog entry too!

    I had intended to include mention of that fact in the write-up and failed to do so. So thanks for bringing that up, JCL.

    I thought it was one of my best Guest Blog Entries. So I do want people to be able to see it. As noted in the blog entry above, I expect to have it placed elsewhere and then I will link to it here.

    Complications!

    Rob

  2. Rob says

    I thought I’d add something.

    Mike is the person who turned me on to the “Brazen Careerist” blog. That blog is a kick.

    So — Thanks, Mike.

    Rob

  3. Blake says

    I just finished reading your guest post on the Four Pillars blog (I saved it when it first came out and just finished reading it yesterday…sorry to hear that it was deleted).

    I like the idea of changing your stock allocation as the market moves above/below fair value. I read through the comments and noticed that you mentioned that the fair value of the S&P500 is 14. Why 14? Is this the long term avg trend of stock prices relative to earnings? Who’s to say fair value won’t change in the future? What happens if stock investors as a group change (either increase or decrease) how much they are willing to pay for a dollar of earnings? Do you have any links/charts that show how fair value is determined? Also, do you know the fair value of other indices such as the SP/TSX or the MSCI EAFE?

    I look forward to reading your blog and listening to the podcasts.

    Cheers

  4. Rob says

    Welcome to the Financial Freedom Community, Blake. Thanks for posting and thanks for your kind words.

    Yes, 14 is the average P/E10 level (P/E10 is the current price over the average of the last 10 years of earnings).

    There is no magic to the “14.” In fact, there are different ways to identify an average. Reasonable arguments could be made that the average is 15 or 16. It depends on how far back you go and things like that. It was John Walter Russell who determined that the average is 14 (John is the researcher who wrote the material at the http://www.Early-Retirement-Planning-Insights.com site).

    And, yes, the average could change in future days. It could become 16 or 12.

    The point of Valuation-Informed Indexing is — it’s not likely to change that much. The 14 number is based on 140 years of historical performance of the U.S. economy. For that to go a high as 20 or as low as 10 would represent a very big change. It seems reasonable to assume that stocks will continue to perform at least somewhat as they always have in the past. But it is certainly possible that stocks might perform somewhat differently in the future than they have in the past. So the 14 number is not a lock for the future.

    I would suggest that you look at Yale Professor Robert Shiller’s site to gain a sense of how this works. He has a section there where he reports the P/E10 level for every year going back to 1870. If you spend 10 minutes looking at the numbers, you will see that there are times when we go far above 14 and then come back and there are times when we go far below 14 and then come back. The moral is — at times when we are far above 14 (we were at 44 in January 2000), the long-term return is likely to be very poor indeed.

    It’s possible to compute the P/E10 for other indexes. But we don’t have as much data for most other indexes. The important thing to learn is the principle that is learned by studying the S&P 500 — valuations always matter. Once you understand that, you know how to invest in any index, even though you might not have tools like The Stock-Return Predictor to guide you for indexes other than a broad U.S. stock index. The principle always holds. The price you pay for stocks always matters.

    I wish you the best of luck with your investing strategies regardless of which strategies you elect to follow, Blake. And I hope we hear from you again sometime.

    Rob

  5. Blake says

    Rob,

    Thanks for the quick reply…and thanks for the links. I’ll be sure to check out Shiller’s site.

    Cheers

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