I’ve posted Entry #63 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called Buy-and-Holders Must Sell Their Stocks Before the Economy Can Recover.
Juicy Excerpt: There’s a reason why the market can turn up again only after capitulation has been achieved. The thing that sends prices wildly up in bull markets is investor emotion. The purpose of a bear market is to wash the emotion out of the market. So long as there are still people claiming that Buy-and-Hold can work, capitulation has not been achieved. For our economy to recover, losses must first get bad enough to persuade the last Buy-and-Holder to give up the ghost.
what says
So, if buy and holders sell the market will capitulate?
Do you know how much of the market is owned by buy and holders? How do you expect the selling of this minuscule amount to create market capitulation?
This article is about as misguided as your statements about how middle class investors affect the market.
Rob says
So, if buy and holders sell the market will capitulate?
Yes. Things will have to get very bad for the Buy-and-Holders to sell. To Buy-and-Holders, selling stocks is like a violation of a religious belief. It is only when their losses have reached very high levels that many Buy-and-Holders will even permit themselves to consider selling.
When prices have reached that point (it’s one half of fair value, or a P/E10 value of 7), we call the phenomenon “capitulation.” It means that all of those who had been following Get Rich Quick strategies have given up on their fantasy hopes and the market is priced to permit a long-term recovery.
Do you know how much of the market is owned by buy and holders? How do you expect the selling of this minuscule amount to create market capitulation?
It is a large percentage of today’s investors who believe that it is not necessary to engage in long-term timing. How do I know that? If most investors understood that long-term timing is essential, stock prices could never rise to the levels where they stand today. So we know just by looking at the numbers that most of today’s investors have been influenced by Buy-and-Hold/Get Rich Quick thinking.
This article is about as misguided as your statements about how middle class investors affect the market.
You don’t think the wipeout of the middle-class has caused a cutback in consumer spending? And you don’t think that the cutback in consumer spending has caused an economic crisis? And you don’t think the economic crisis has affected stock prices?
You’re entitled to your opinion, What. I do believe those things.
Are you certain that you are right about all these things? Do you ever entertain doubts? Do you ever read books written by people with different viewpoints? Do you ever talk over such issues in a friendly and warm and civil and reasoned way on discussion boards? It is my view that it would be a plus if you did those things.
I wish you the best of luck in all your future endeavors in any event.
Rob
what says
The wipe out of the middle class and their over consumption affected the stock market but not the other way around as you usually blab on about. The middle class has barely any money in the stock market! They weren’t saving before (negative savings rate, tiny 401k balances), and they are barely saving anything after (401k loans even!).
So what is this large percentage and what numbers are you looking at?
And are you even aware at the amount of turnover occurring in the market? The avg holding period of a stock is very very short – the buy and holders have basically no affect on stock prices.
Rob says
I’m grateful to you for sharing your thoughts, What.
I don’t see how the average holding period matters. The thing that the Buy-and-Holders got wrong is not the idea of holding for the long term. They got that one 100 percent right. That idea is pure gold. The thing they got wrong is the idea that there is no need to sell when prices rise to insanely high levels.
Do you not see that there is an implicit belief present behind the claim that there is no need to sell when prices get high that prices do not matter much? Buy-and-Holders advocate rebalancing. Rebalancing is staying at the same stock allocation at all sorts of price levels. Do you not see how the suggestion there is that price does not matter, that it is okay to stay at the same stock allocation regardless of price?
It is the IDEA that price does not matter that caused the economic crisis. That idea is shared by people who hold the same shares over many years and by people who trade every day. Trading doesn’t help any more than holding the shares helps. It is failing to insist on lower prices that does all the damage. That’s fantasy thinking. That’s Get Rich Quick. That’s the problem.
Do you see?
You are focused on a small group of investors whom you call Buy-and-Holders and who hold their shares for a long time. I am focused on an IDEA of how stock investing works that has caused the biggest economic crisis in our history. We are talking about two different things.
We need to get the word out to all investors that they need to insist on lower prices for stocks when the likely long-term return drops to an unacceptable level. That’s how we end the crisis. That’s how we get our market working properly again.
Now how would you go about doing that? You would tell people what the last 30 years of academic research says. The research shows how stock investing works. So all we need to do is to get the word out. Easy, right?
It’s NOT so easy!
Guess what? If you talk about the realities, the Buy-and-Holders will freak out. They will threaten to kill you. They will demand that you be banned from the board or blog at which you are talking. They will become angry at you. They will hate you. They will ridicule you. Do you get the idea?
We need to persuade the Buy-and-Holders to stop doing these things. To do that we need to help them feel less emotional pain. But it’s a Catch-22. To get them to feel less emotional pain, we would need to help them learn about an approach to investing that does not defy their own common sense. That’s Valuation-Informed Indexing! That’s the thing that causes them to go nuts.
We’ve been in this situation before. This is not the first Depression we have ever experienced, it is the second. If we could have gotten the word out in the late 1920s that stock prices were too dangerous, we could have saved ourselves all that misery. We’re now in an even worse situation. We need to try once again to get the word out. It sounds like it would be an easy thing. But I can tell you based on personal experience that it is not.
The thing we are doing battle with is not a number of investors who are holding a certain number of shares. We are doing battle with an IDEA. The idea causing all the trouble is the idea that stocks are the one thing on Planet Earth that can be bought or sold re which the price that applies on a sale does not matter.
That idea has been popularized by the Buy-and-Holders. They say that there is research supporting this idea but of course there is no such research. That’s marketing mumbo jumbo. Telling this phony baloney story helps to sell stocks because it appeals to the Get Rich Quick impulse within all of us that wants to believe that there is something magical about stocks that makes them immune to the law that price always matters for anything that can be bought or sold.
The battle is with the idea, not with the people, What. It is of course a human reality that it is people who communicate the idea. Those people are called Buy-and-Holders. When you ask them where they got the idea that failing to engage in long-term timing might somehow work out this time even though it never has before, they will point you to some book that recommends Buy-and-Hold strategies. It is the Buy-and-Hold IDEA that we are trying to overcome here. We are not trying to overcome the Buy-and-Hold people. We are trying to help the Buy-and-Hold people by teaching them a better idea.
I hope that helps a bit.
Rob
Rob says
So what is this large percentage and what numbers are you looking at?
I didn’t give any percentages, What.
I’ve worked numerous jobs over the years. At every one of them, there was a 401(k) plan offered. Most of the people I worked with participated in some way.
You seem to be saying that they did not contribute large enough amounts. Fair enough. But that just makes them all the more sensitive to losses. People who have not saved enough are MORE sensitive to losses than are people who have saved enough. So my from point of view you are just highlighting the problem with the point you make.
The problem we face today is that people are not spending money. That’s why businesses are failing. That’s why the unemployment rate has shot up. This is what President Obama has been trying to deal with with his stimulus bills. Do we agree re that much?
The stimulus bills have not worked because people are scared. Do you see that? They weren’t saving enough in the first place, as you note. And then the nominal values of their 401(k) accounts fell. That made them feel worse.
That’s the problem we need to solve if we don’t want this crisis to become the Second Great Depression. How do we solve it?
The next stage is for prices to fall to one-half fair value. Bull markets always cause prices to fall to one-half fair value. There is not one exception in the historical record. That’s 65 percent down from here. Losses of that size on top of what we have already seen will put us in the Second Great Depression.
How can we stop that price drop?
Again it should be easy. We could just tell people that any price levels below fair value are silliness. Stocks are worth what they are worth regardless of the nominal price that applies at a given point in time. So we should just tell people that. Then all our troubles go away. When stock prices are at half of fair value, they need to double the number on their portfolio statements to know the true value. When they do that, they will not be so scared. The less scared they are, the more they spend. The more they spend, the more businesses we will see recover.
There’s only one problem. The Buy-and-Holders have been telling them for years now that the nominal portfolio value is a meaningful number. They believe this! If we start saying something different, they are going to be skeptical. If they are skeptical, they will not spend.
We all need to be reading off the same page, What. We need John Bogle telling people that prices need to be adjusted for valuations. We need Warren Buffett saying that. We need Burton Malkiel saying that. We need to persuade people. The more experts we have saying the same thing, the better our chances are of getting a good result.
Now —
Those people are not going to feel comfortable saying that until they acknowledge that Buy-and-Hold doesn’t work. It’s saying those three magic words “I” and “Was” and “Wrong” that starts all the good stuff happening. Once we have a consensus that Buy-and-Hold was a mistake, we are off to the races. Until we have that, we are stuck spinning our wheels with all these word games.
Buy-and-Hold doesn’t work, What. There is no alternate universe where you don’t need to pay attention to the price of the index funds you are buying. Price always matters. Accepting that is the key to everything.
Did the Buy-and-Holders make huge contributions? They did indeed. And they will get a whole big bunch more credit for those contributions once we bring this economic crisis to an end and people stop being scared to death of their financial futures again. It is not just in the interests of the Valuation-Informed Indexers for the Buy-and-Holders to acknowledge their mistake. It is in the interests of the Buy-and-Holders too that they do so. It is a win/win/win/win/win for them to do so. There is no possible downside.
All investors benefit from knowing how to invest effectively, What. It doesn’t matter how much money they make or how much wealth they possess. We all should want to invest effectively for the long term. This particular Buy-and-Hold Crisis is worse than the three earlier ones because we now have middle-class people participating in the market. You seem fixated on a feeling that there are not as many middle-class people participating as you would like. I would like to see more middle-class people participating too. So we are on the same page re that one.
The reality remains that there are more middle-class people participating in the market today than there were in the days of defined-pension plans. When we told middle-class people that they need to provide for their own retirements, we took on a responsibility to permit them to learn the realities. That means pointing out the dangers of Buy-and-Hold both for the middle-class investors and for any non-middle-class investors who have been taken in (of which there are of course many).
I certainly do not mean to suggest that there are no rich people who have been hurt by Buy-and-Hold. There are obviously many rich people who have been hurt in very serious ways. My particular concern is for the middle-class investors because those are the people to whom my writings are directed and because I am part of the middle-class myself. But I have never meant to suggest that those are the only people being hurt.
Fair enough?
Rob
what says
I didn’t read what you wrote because it just went on and on but I must be right since it takes you 10000 paragraphs to explain why I am not.
In any case, you should get access to real data on money flows between stocks and bonds. The number of people who buy and hold equity are quite low and do not affect stock prices. You are tilting at windmills redefining every term you come across so you are ‘right’ using only the most surface level data without understanding anything underneath.
Rob says
I didn’t read what you wrote because it just went on and on but I must be right since it takes you 10000 paragraphs to explain why I am not.
I can say it in two words, What: Valuations Matter.
That’s the entire story. If you are not changing your stock allocation in response to big price swings, you are investing irrationally. All the rest is details.
I go through each step of the logic chain because I am trying to help you see how it all connects and hangs together. But, if you can’t bear to hear it, you cannot bear to hear it. That applies whether I say it short or long.
The only reason to ignore valuations is an emotional one. And emotions don’t change in response to the presentation of logic chains.
So we are at an impasse.
I care about you. But all I can do here is put forward words. It is my job to make an effort. So I will always try. But I must accept that not all are able to hear the words.
I certainly wish you the best in any event, my old friend.
Rob
Rob says
The number of people who buy and hold equity are quite low and do not affect stock prices.
Whether there are 10 people who hold stocks or 10 million, the way stock investing works is the same.
It is the investors holding stocks who set their price, not any outside forces. This is the fundamental point that you must understand to make progress with this.
If those 10 people want the stocks they hold to be worth $5,000, they can make it so. If they want their stocks to be worth $10,000, they can make it so. If they want their stocks to be worth $15,000, they can make it so. Any number that works emotionally becomes the temporary reality by their electing to price stocks at that level.
But only the temporary reality. Not the permanent reality.
Our Get Rich Quick urge causes us to want to price stocks high. We also have a Common Sense urge. When prices get too high for our Common Sense urge, we bid them down rather than up. The higher we bid them up during the Get Rich Quick years, the more human misery we experience in the post-Get-Rich-Quick years.
So long as we are all free to share our thoughts about stock investing, there can never be a bull market because there are always some among us who do not get caught up in the Get Rich Quick thinking and warn the others that insanely high priced stocks are not worth buying. But when the number of people giving in to the Get Rich Quick urge gets high enough, it is possible to erect a Social Taboo against pointing out the dangers of Buy-and-Hold strategies. Once things reach that point, things never turn out well.
Anyway, it doesn’t matter how many investors there are. What matters is how emotional the investors are. The one way we have to keep investors from becoming too emotional is to report to them what the academic research tells us about how stocks have always performed in the past. This is why Buy-and-Holders feel such contempt for the academic research from 1981 forward (the pre-1981 research supported Buy-and-Hold). I love the post-1981 research. All of my investing beliefs are rooted in things we have learned from the post-1981 research (combined with many important things we learned from the pre-1981 research, to be sure).
Please take care, What.
Rob
Rob says
I must be right since it takes you 10000 paragraphs to explain why I am not.
I remember a time when there were people saying I was wrong about safe withdrawal rates, What. And guess what? They were giving the same reason then for knowing I was wrong about that one as you are giving now for knowing I am wrong about this one.
I wonder why.
Rob
what says
What were you right about SWR that other people weren’t?
If its the fact that 4% might not always work – I think you won the argument with a strawman but not anyone else.
Rob says
I have a funny feeling that the thousands of our fellow community members who will be suffering failed retirements in days to come as a result of the demonstrably false claims put forward in Greaney’s study may end up not agreeing with you re that one, What.
I will continue to report what the historical data says re SWRs accurately and honestly. I will also continue to urge all other community members to do the same.
Getting the numbers right makes a difference. That’s my sincere take, What.
And, yes, I do think it is fair to characterize the idea that getting the numbers right doesn’t matter as Get Rich Quick thinking. It is because most Buy-and-Holders don’t see a need for retirement studies that get the numbers wildly wrong to be corrected that I describe Buy-and-Hold as a pure Get Rich Quick approach.
I oppose that sort of thing. I don’t want anyone thinking that I would ever endorse that sort of thing. My aim is to bring an end to the Get Rich Quick approach to stock investing analysis.
And I think we are getting there. It’s taken a whole big bunch more time to get there than I would have imagined possible on the morning of May 13, 2002. But I do think that we are making gradual progress and that the time will come in the not too distant future when we will begin making much more rapid progress. I sure hope so!
Rob