My name is Rob Bennett. My bio is here. You can also get a good idea about my background by reading the 80-plus quotes about me and my work that appear at the “People Are Talking” section of the home page of my blog (please look to the left-hand side of the page).
The story is that the true cause of the economic crisis was the reckless promotion of Buy-and-Hold Investing for 30 years after the academic research showed that there is zero chance that it can ever work in the long term. I wrote a Google Knol titled Why Buy-and-Hold Investing Can Never Work and another titled The Bull Market Caused the Economic Crisis. I also wrote an article titled The True Cause of the Current Financial Crisis Is Buy-and-Hold Investing.
The short form of the story is that the stock market was overvalued by $12 trillion in 2000. This is public information. All in the field acknowledge that stock prices over time revert to the mean (John Bogle calls this an “Iron Law” of stock investing). So those who were paying attention to valuations knew in 2000 that within 10 years or so close to $12 trillion of spending power would disappear from our consumer economy. An economic crisis became inevitable once we permitted stock prices to rise so high. We should tell people to lower their stock allocations when prices rise to insanely high levels both to protect their own retirements and to protect the general economy from collapse. We should encourage Valuation-Informed Indexing, described in a Guest Blog Entry I wrote for the Free From Broke site titled A Better and Less Risky Way to Invest in Stocks.
The real puzzle here is why there are not lots of good and smart people speaking up in strong opposition to Buy-and-Hold, given its dangers. The answer to that one is revealed in an article at my site in which I quote from 101 of my fellow community members who expressed a desire that honest posting on important investing-related topics be permitted at investing boards and blogs. Discussion of Valuation-Informed Indexing, the alternative to Buy-and-Hold, has been banned at every major board and at a good number of the most influential personal finance blogs. The bans came about as the result of brutally abusive smear campaigns (including death threats) led by people who have published studies or calculators rooted in the Buy-and-Hold Model. Most of the people who are aware of the dangers of Buy-and-Hold are afraid to speak up and self-censor themselves when talking about investing in public places. Thus, those who otherwise might be skeptical have wrongly come to conclude that there is no serious opposition to the concept.
Dallas Morning News Columnist Scott Burns spilled the beans in a June 2005 column he wrote about my showing that the numbers used by most financial planners to help us plan our retirements are wildly wrong. Burns observed that the reason why we see few media reports about the errors in the retirement studies even though they will cause millions of middle-class people to suffer failed retirements in days to come if they are not corrected is that: “It is information most people don’t want to hear.” The “experts” (who see themselves as being in the business of selling stocks, not of giving independent and accurate investing advice) encourage us to follow dangerous strategies, and, once we do so, we become so emotionally invested in the strategies that we become hostile to hearing the realities.
Many big names have seen the merit of the new investing ideas. Carl Richards, owner of Clearwater Asset Management and author of the Behavior Gap blog, told me: “I have read everything I can about Valuation-Informed Indexing, and I agree with you that Buy-and-Hold Passive Investing is extremely problematic… I value and respect the passion, hard work and research that you have put into this very important issue…. I think what you are doing has huge value.” Rahiv Sethie, a professor of economics at Barnard College, Columbia University said of me: “Rob Bennett makes the claim that market timing based on aggregate P/E ratios can be a far more effective strategy than Passive Investing over long horizons (ten years or more). I am not in a position to evaluate this empirically but it is consistent with Shiller’s analysis and I can see how it could be true.” Wade Pfau, Associate Professor of Economics at the National Graduate Institute for Policy Studies in Tokyo, Japan, researched the question and learned that “Valuation-Informed Indexing provides more wealth for 102 of the 110 30-year periods” in the historical record. Bill Schultheis, author of The New Coffeehouse Portfolio exclaimed upon discovery of my web site: “Holy Toledo! This is great stuff!”
A calculator at my site called The Stock-Return Predictor will let you see with numbers why Buy-and-Hold is so dangerous. The calculator runs a regression analysis of the historical stock-return data to show the most likely 10-year annualized return starting from any of the various possible starting-point valuation levels. In 1982, the most likely 10-year annualized return was 15 percent real. In 2000, it was a negative 1 percent real. Given that the value proposition of stocks changes dramatically with big price changes, there is obviously no one stock allocation that can work for any investor at all times. Investors need tools like this to learn when they need to change their allocations.
I don’t think it should be too hard to understand why The Stock-Selling Industry desperately wants to keep tools like this out of the hands of middle-class investors. All industries would like their customers to believe that their product is worth buying at any possible price. But when too many become convinced that Buy-and-Hold can work, the insane level of overvaluation that follows causes an economic crisis (this has happened four times in U.S. history now — we have not since 1900 had an economic crisis that was not preceded by a time of insane stock overvaluation and we have not had a time of insane overvaluation that did not produce an economic crisis). There comes a point when marketing considerations need to take a back seat to preservation of our free market economic system, which cannot survive if all middle-class investors see their retirement savings wiped out (the historical data shows that we are likely to see another 65 percent price drop from where we stand today in the event that stocks continue to perform in the future anything at all as they always have in the past).
You also might want to check out a recent Wall Street Journal column in which Brett Arends says: “For years, the investment industry has tried to scare clients into staying fully invested in the stock market at all times, no matter how high stocks go…. It’s hooey…. They’re leaving out more than half the story.”
The tool that is used by those informed about valuations to predict long-term returns (short-term returns cannot be predicted — it is true that short-term timing does not work) is “P/E10”. The P/E10 value is the price of the S&P index over the average of the last 10 years of earnings. Yale Economics Professor Robert Shiller (author of Irrational Exuberance) has been showing with research for 30 years now that P/E10 can be used to effectively predict long-term returns. Arends pointed out in an earlier article that: “This ratio [P/E10] has been a powerful predictor of long-term returns” and that “valuations is by far the most important issue for investors.”
A graphic that compares the Year 20 Annualized, Real, Total Return v. the P/E10 that applied on the day the index fund was purchased is here. The same graphic for 10 years out is here. A graphic comparing how investors following a Buy-and-Hold strategy would have fared over the entire historical record compared with those following a Valuation-Informed Indexing strategy is here. Norbert Schenkler, the financial planner who prepared the graphic, concluded that: “The evidence is pretty incontrovertible. Valuation-Informed Indexing…is everywhere superior to Buy-and-Hold over 10-year periods.” The one exception found by Schenkler, the late 1990s, no longer applies since the onset of the stock crash (the graphic was prepared prior to the crash).
Shiller used the P/E10 tool to warn us of the economic crisis that began in 2008 in his book (published in March 2000). He said that in the event that stocks performed from 2000 forward as they always have in the past: “The real losses could be comparable to the total destruction of all the schools in the country, or all the farms in the country, or possibly even all the homes in the country.”
I’ve collected a number of quotes from leading experts in the field who have expressed grave doubts about Buy-and-Hold here. I’ve collected 20 studies showing that valuations affect long-term returns and that thus Buy-and-Hold can never work in the long term here. If you prefer taking in information by listening rather than by reading, I have recorded 200 podcasts addressing various aspects of the question. They are available for downloading here. I post updates on developments relating to this story daily at my twitter feed here.
Please contact me with questions or thoughts about how best to get the word out to millions of our fellow middle-class investors by sending me an e-mail at firstname.lastname@example.org or by giving me a call at 540-751-0685. I look forward to hearing from you, my new friend!