Burton Malkiel, author of A Random Walk Down Wall Street, recently wrote an article for the Wall Street Journal arguing that Buy-and-Hold Is Still a Winner. Set forth below is the text of a comment that I posted at the Journal’s web page for the article:
I am grateful for all that I have learned from reading Burton Malkiel’s book (“A Random Walk Down Wall Street”), one of a handful of the most important books ever published on investing, in my assessment. That said, I view the take that Malkiel is putting forward in this article as dangerous in the extreme.
Buy-and-Hold was developed at a time when there was academic support for the Efficient Market Theory (EMT). The EMT was discredited by Yale Professor Robert Shiller’s 1981 research showing that valuations affect long-term returns (overvaluation would be a meaningless concept if the market were efficient). Buy-and-Hold should have been abandoned at that time. If valuations matter, investors MUST lower their stock allocations when prices rise to insanely dangerous levels or they will cause a crash and an economic crisis. Buy-and-Hold posits that there is no need for investors to change their allocations, that rebalancing is acceptable.
In 2000, the market was overvalued by $12 trillion. Even John Bogle, Mr. Buy-and-Hold itself, acknowledges that Reversion to the Mean is an “Iron Law” of stock investing. So even Bogleheads who were paying attention knew in 2000 that our consumer economy would be losing roughly $12 trillion of spending power over the course of the next 10 years or so. And there are people who express surprise that we are today living through the second worst economic crisis in U.S. history?
If the market is indeed efficient, Buy-and-Hold is certainly the way to go. If it is not (there is now a mountain of evidence supporting Shiller’s findings), then Buy-and-Hold is the purest and most dangerous Get Rich Quick scheme every developed by the mind of mortal man. There is nothing wrong with telling the average investor to invest in index funds. There is something very, very, very wrong with telling the average investor that it is “okay” (or — heaven help us all — even a good idea!) not to lower one’s stock allocation when prices rise to insanely dangerous levels. Encouraging Buy-and-Hold investing in a world in which valuations affect long-term returns is akin to encouraging driving at highway speeds in a car without brakes.
Buy-and-Hold has caused more human misery than any earlier idea in the history of personal finance. Shiller has been proven right and we need to get serious as a society about protecting people from this most reckless and dangerous of all investing strategies. The time has come to acknowledge our mistakes and begin again moving forward in our understanding of how stock investing really works. I hope that someday soon we will again have Burton Malkiel’s impressive intellectual skills working on our side!