Why Buy and Hold Investing Can Never Work

Stock valuations matter. Stocks obviously offer a stronger value proposition at fair or low prices than they do at insanely high prices. But the Buy-and-Hold concept calls for investors to ignore valuations when setting their stock allocations. The purpose of a market is to set prices properly. If a large number of investors becomes determined to ignore value propositions, the market is not able to perform this function except by bringing on price crashes and the economic crises that follow from them.


A) The Dominant Model for Understanding How Stock Investing Works


The Buy-and-Hold Model for understanding stock investing is the dominant model of today. The lead advocate is John Bogle, founder of the Vanguard group of mutual funds. Other big-name advocates include: (1) William Bernstein, author of The Four Pillars of Investing; Larry Swedroe, author of The Only Guide to Winning Investing Strategy You’ll Ever Need, and Dallas Morning News Columnist Scott Burns. Money magazine has promoted Buy-and-Hold strategies aggressively since its founding in the mid-1970s. Even the U.S. Securities Commission has published materials suggesting a belief that Buy-and-Hold is a responsible investing strategy.

The history of the strategy can be traced back to the mid-1500s, when the idea of an “efficient” market first surfaced. University of Chicago Finance Professor Eugene Fama and others did extensive research supporting the model in the 1960s. Burton Malkiel then popularized the idea in his bestselling investing guide A Random Walk Down Wall Street, published in 1973. The runaway U.S. bull market of the 1980s and 1990s confirmed the merit of Buy-and-Hold in the minds of millions of middle-class investors.

There have always been doubters. Yale Professor Robert Shiller published research showing that valuations affect long-term returns (a finding in direct conflict with the idea that the market is “efficient” and thus sets prices properly) in 1981. Shiller’s book Irrational Exuberance (the subtitle is “The National Bestseller That Revolutionized the Way We Think About the Stock Market”) was published when tech stocks were crashing in early 2000 and received numerous positive reviews in highly regarded publications despite its rejection of the conventional investing wisdom of the time. Other thought leaders who have long expressed grave doubts regarding the merit of the Buy-and-Hold model include: (1) Cliff Asness; (2) Rob Arnott; (3) Ed Easterling; (4) Jeremy Grantham; (5) Andrew Smithers; (6) Peter Bernstein; and (7) John Walter Russell.


B) The Economic Crisis Raises Doubts


It was the stock crash and economic panic of late 2008, however, that ignited the fire that has led to more widespread and more sustained criticism of the long-dominant model for understanding how stock investing works. Justin Fox published The Myth of the Rational Market in June 2009. Rob Arnott declared in that year that the conventional investing wisdom of today is largely the product of “myth and urban legend.” Famed Value Investor Warren Buffett dismissed much of the thinking on which 90 percent of today’s “experts” base their strategic recommendations as “nutty.” And Peter Bernstein observed that, given the mountain of evidence that has accumulated over time that Buy-and-Hold simply does not stand up to scrutiny: “Everything has collapsed.”

In one sense, that is indeed so. There is no logical case that can be made in defense of the Buy-and-Hold concept today. Even its most adamant adherents have given up defending the model, as is evidenced by the Ban on Honest Posting that has been imposed at numerous investment discussion boards and blogs. There is another sense, however, in which Buy-and-Hold remains dominant. Investing experts have been highly reluctant to acknowledge the mistakes they have made in recent decades in clear and frank and plain and understandable terms. The result is that most middle-class investors continue to believe that Buy-and–Hold makes sense or even that it is the most prudent strategy available to them. Indeed, Fox argues that, while the Efficient Market Theory (the intellectual framework supporting Buy-and-Hold) has been discredited, the idea of sticking to the same stock allocation at all times remains a realistic strategy.


C) How Buy-and-Hold Became Popular


The key to making sense of this confused state of affairs is understanding where the Buy-and-Hold idea came from and why it once seemed to hold so much promise.

Throughout most of the history of investing knowledge, strategic analysis has been subjective and focused on short-term results. Those who favored stocks have been referred to as “bulls” and those who dissented have been referred to as “bears.” Both bulls and bears have of course always offered rationales for their beliefs. But until the 1970s it could not be said that the general public’s understanding of how to invest was scientific. That changed with the development of the Buy-and-Hold model. This model was rooted in academic research. Thus, its insights were not the product of subjective impressions — they were the product of objective testings of the historical stock-return data. Moreover, the then-new Buy-and-Hold model achieved a breakthrough in its focus on what works in stock investing not for a year or two or three but in the long term. Buy-and-Hold was in a number of important respects something new.

This was one key to the popularity it achieved in recent decades. The U.S. middle-class was at this time acquiring sufficient wealth to permit it to invest in stocks and employers were shifting the responsibility for the funding of their retirements to the workers, giving middle-class workers little choice but to learn something about equities. Most middle-class workers have long had a fear of investing in stocks because of the big losses associated with this asset class at times of stock crashes. The promise of a scientific, long-term approach held great appeal. Few middle-class workers studied Buy-and-Hold to the extent needed to understand where the ideas came from or why they were supposed to work. But most quickly grasped the essential point being promoted — this was responsible investing. Buy-and-Hold became popular because it was viewed as being a rejection of the Get Rich Quick thinking that had given much investment commentary a bad name.

A second reason why Buy-and-Hold won the confidence of millions is that its fundamental tenet is that markets work. Buy-and-Hold is Adam Smith Economics applied to the world of investing. Most middle-class workers feel no need to beat the market. Their aim is merely to earn their share of the rewards generated by the market. The slogans popularized by the Buy-and-Hold advocates — “It’s Not Timing the Market But Time In the Market That Matters,” “There’s No Such Thing As a Free Lunch,” “Stay the Course,” “Stock for the Long Run” — speak to an proudly practical and properly skeptical and generally optimistic people. The Buy-and-Hold marketing slogans hit emotional hot buttons (and for entirely good and encouraging reasons).

Finally, Buy-and-Hold became popular because of the low stock valuations that applied in the days when the middle-class was first learning about it via A Random Walk Down Wall Street and the marketing efforts of Bogle’s Vanguard Group. Stocks were selling at rock-bottom prices in the late 1970s and early 1980s. When stocks are selling at low prices, the most likely 10-year annualized return is 15 percent real. Buy-and-Hold did not cause the amazing returns experienced by stock investors from 1975 through 1995. But our knowledge of the effect of valuations on long-term returns was far less developed in those days and so Buy-and-Hold was often given credit for those returns. Stocks would have done well regardless of whether Buy-and-Hold had been developed or not, but, since Buy-and-Hold was the new thing and appeared to be an entirely plausible and prudent model for understanding how stock investing works, Buy-and-Hold got the credit in the minds of millions of middle-class investors.


D) The Greatest Mistake in the History of Personal Finance


It’s easy today to explain why Buy-and-Hold can never work. The root idea is preposterous (but not obviously so to those who have not yet seen through it — there are many smart and good people who possess a strong confidence in the concept). For Buy-and-Hold to work, valuations would have to have zero effect on long-term returns. Stocks would have to be the only asset class on the face of Planet Earth of which it could be said that the price paid for the asset has no effect on the value proposition provided. This cannot be. Price must matter. And if price matters, investors should not be going with the same stock allocation at times when valuations are insanely high as they do when stocks are fairly priced or low priced. Buy-and-Hold defies common sense.

Why, then, did so many experts come to believe?

The academics responsible for the Buy-and-Hold concept discovered something of critical importance in their studies of the historical data. They learned that short-term timing does not work. That is, those who predict where stock prices will be in a year or two are no more successful than what would be expected if their predictions were random rather than informed by intelligent study of the market. This was breakthrough stuff. This changed the history of stock investing. No longer was stock investing about bulls and bears making guesses as to when to buy or sell stocks. The science of investing showed that short-term forecasting does not work and that a long-term focus is needed. The science appeared at the time to suggest that a Buy-and-Hold strategy (sticking to the same stock allocation at all times) makes sense.

The science did not prove that Buy-and-Hold works. The Greatest Mistake in the History of Personal Finance took place when the academics jumped to the hasty conclusion that the fact that short-term timing does not work necessarily leads to a conclusion that Buy-and-Hold is the only rational strategy.

There is not one possible explanation for why short-term timing does not work. There are two. The explanation adopted by Fama and the other academics was that short-term timing does not work because the market always set prices properly and it is therefore impossible for even the smartest individual investor to do a better job than the market at determining the proper price for stocks. There is an alternate explanation that offers every bit as satisfactory an explanation. It could be that the market does such a poor job of setting prices that there is no way for even the smartest investor to make sense of what the market is going to do. It could be that the reason why short-term timing does not work is not that the market is efficient but because it is wildly inefficient. It could be that stock prices do not reflect a rational collective assessment of the true value of stocks but an almost entirely emotional assessment that signifies just about nothing meaningful about the proper price of the stock market. Irrational markets cannot be timed because irrationality cannot be predicted.

There is a way to test which of the two explanations is the right one. If the market is efficient, the concept of overvaluation is silliness. An efficient market is a market that sets prices properly. But Shiller’s 1981 research (confirmed by a mountain of research done since then) shows that overvaluation is a meaningful concept. Shiller showed that stocks offer better long-term returns starting from times of fair or low prices than they do starting from times of insanely high prices. Even many Buy-and-Hold advocates acknowledge today that valuations matter. William Bernstein says that valuations affect long-term returns as a matter of “mathematical certitude.”

The further reality is that the market must in an ultimate sense be efficient. The purpose of a market is to set prices properly. If investor emotions were the sole influence on market prices, stock prices would go to the moon and stay there; what could ever persuade investors not to vote themselves raises by pushing stock prices higher and higher and higher yet? The market must ultimately be efficient, as the academics responsible for the Buy-and-Hold concept claimed. Yet the academic research of the past three decades shows conclusively that the market is not immediately efficient. What, then, is the full reality?

The full reality appears to be that the market is gradually efficient, not immediately efficient. It is investor emotions that determine market prices in the short term. But it is economic realities that determine stock prices in the long term (after the completion of 10 years of market gyrations or so). If the stock price rises too much higher than the price justified by the economic realities, opportunities open up for competing businesses to obtain the same assets on the cheap (relative to the market price assigned to them) and thereby to create a new business with the same profit potential as the overvalued one and thereby to pull the value assigned to it by the stock market down to reasonable levels. The market does indeed insure that stocks are priced properly. But it does not do this in an instant. The process can drag out for 10 years or even a bit longer.


E) Long-Term Market Timing Is Required


The strategic implications are earth-shaking. It turns out that we have been telling millions of middle-class investors precisely the opposite of what really works in stock investing. Since the market sets the price improperly in the short term and properly in the long term, successful long-term investing requires market timing (not the discredited approach of short-term timing, but long-term timing, which the historical data shows has always worked). The key to long-term success is to disdain the idea of sticking with the same stock allocation but instead always to be certain to adjust one’s stock allocation as required by changes in the valuations assigned to the broad market indexes (only one allocation change every 10 years is required on average but it is essential that long-term investors make this change — Buy-and-Hold never works in the long run because it argues that this change is not necessary or even that it is a good idea not to make the allocation change).

Consider the investor debating whether to buy the S&P Index or Treasury Inflation-Protected Securities (TIPS)  in January 2000. TIPS were paying a 10-year return of 4 percent real. The most likely annualized 10-year return on the S&P Index (according to a regression analysis of the historical data showing the effect of valuations on long-term returns) was a negative 1 percent real. That’s a difference of 5 percentage points of return for 10 years running. The investor with a portfolio of $100,000 was likely to lose 50 percent of that amount ($50,000) over the course of the next 10 years by following the advice of the Buy-and-Hold advocates to invest in stocks rather than TIPS “for the long run.” An investor with a portfolio of $500,000 was likely to pay a price of $250,000 for following the “expert” guidance. An investor with a portfolio of $1,000,000 was likely to be $500,000 less wealthy at the end of a decade as a result of his decision to place his confidence in the “scientific” approach to stock investing.

Tens of thousands of investing experts recommended Buy-and-Hold investing during the years of insane stock prices (January 1996 through September 2008). Millions of middle-class investors lost sums of $50,000 or $250,000 or $500,000 as a result. The combined effect is that we are in the process of seeing millions of failed retirements, millions of failed businesses and millions of failed marriages play out before our eyes. Buy-and-Hold has caused the greatest economic crisis since the Great Depression and we are still in the early years of our attempt to overcome this tsunami of financial mismanagement. Our political system is feeling the strain. Our misguided and arrogant advocacy of Buy-and-Hold has left millions of middle-class workers in a frightened and confused state and anger at the economic and political leaders on whose watch this epic disaster took place is steadily growing.


F) Rational Investing Is the Answer


We’ve got a huge mess on our hands. Fortunately, an inviting solution to the problem readily presents itself. Buy-and-Hold is rooted in a huge mistake. We have been urging people to invest their money pursuant to that mistake for many years now. What if we stopped?

If we stopped, we would be removing a ball and chain from the leg of the U.S. economy. We would be setting the U.S. economy free to achieve things it has never achieved before. We would no longer be misallocating resources to the tune of trillions of dollars. We would be freeing the market to allocate resources where they can do the most good, freeing middle-class workers to achieve financial freedom years sooner than was possible during the Buy-and-Hold Era, possibly freeing our economy of the threat of economic crisis for many decades to come (each of the four economic crises we have seen since 1900 was preceded by a time in which the Buy-and-Hold Idea [that stock prices do not matter] became insanely popular, popular enough to send stock prices to double their fair value [prices went to three times fair value in the late 1990s]). The Golden Age of Middle-Class Investing is awaiting us, if we are able to win the help of the few brave and civic-minded people of influence needed to usher it in.


G) A Wall of Resistance


There is one step required before the transition from the Buy-and-Hold Era to the Rational Investing Era (The Rational Investing Model is the alternative to the Buy-and-Hold Investing Model — it is described in some depth in articles and podcasts available at the www.PassionSaving.com site) can begin in earnest. We need to persuade the many experts who advocated Buy-and-Hold to acknowledge the mistake and to thereby launch a national debate on what really works in stock investing. As of today, an institutional interest in preserving the status quo and avoiding the need to acknowledge mistakes has worsened the economic crisis and threatened to bring on a Second Great Depression.

I put a post to a Motley Fool discussion board on May 13, 2002, noting that valuations affect long-term returns and that the studies that financial planners use to help us plan our retirements (which in deference to the Buy-and-Hold Model include no valuation adjustments) therefore get the numbers wildly wrong. Several big names in the field have confirmed my findings. For example, William Bernstein said that any aspiring retiree giving thought to making use of the conventional retirement studies to plan a retirement would be well-advised to “FuhGedaBouDit!” Swedroe said in a post to the Bogleheads.org board community that the conventional retirement studies (the Old School Safe-Withdrawal-Rate Studies) constitute “Garbage-In/Garbage-Out” research. I have led an effort on the internet for nearly eight years now to get these studies corrected and to bring to the attention of middle-class investors the flaws in the Buy-and-Hold Model responsible for the demonstrably false retirement claims which are likely to cause millions of failed retirements in days to come.

These efforts have been unsuccessful because of a wall of resistance put up by The Stock-Selling Industry to the idea of sharing with middle-class investors why Buy-and-Hold has failed and what the academic research of today says is most likely to work for the long-term investor. Two comments by Burns sum up the resistance that has been offered by many. In a June 2005 column, Burns explained why the media has failed to inform investors of what they need to know to protect themselves from the dangers of following a Buy-and-Hold strategy: “It’s information that most people don’t want to hear,” Burns explained. Investing experts see it as their job not to tell us what we need to hear about stocks but what we want to hear about stocks at times when we are insanely overinvested in them because of their earlier bad advice. In e-mail correspondence with me, Burns offered the view that my efforts to help middle-class investors learn the realities would prove to be “catastrophically unproductive,” presumably because they were at odds with the interests of The Stock-Selling Industry to keep the research findings of the past 30 years bottled up.

Bans on honest posting on the matters discussed in this Knol have been adopted at the discussion boards hosted at www.Morningtar.com, at www.IndexUniverse.com, at www.Bogleheads.com, at www.Fool.com and at a number of personal finance blogs (the Oblivious Investor blog, the Behavior Gap blog, and others). Numerous other blog owners (the owners of the Get Rich Slowly blog and the Frugal Dad blog, among others) have elected not to report on these matters after learning about them (while not banning honest posting in the comments sections of their blogs).

We are at an impasse. We know that Buy-and-Hold does not work. Even its most ardent advocates are so lacking in confidence in this model today that they insist on bans on discussion of its flaws at discussion boards or blogs at which they participate. But The Stock-Selling Industry feels strongly that it is not in its best interest to let the cat out of the bag. And most middle-class investors so lack confidence in their own ability to understand the realities of stock investing that they have placed their confidence in the very experts working hard to deny them access to what they need to know! One poster on the Vanguard Diehards board told me that all that I said about investing made sense to her but added that she did not have time to partake in a personal quest to discover “the Hold Grail of Investing” and thus felt compelled to invest her money according to what the many experts advocating Buy-and-Hold were telling her. Her number is in the millions.


H) A National Debate Is Needed


We need a national debate on what works in stock investing. Buy-and-Hold advocates should of course be part of that debate. Buy-and-Hold advocates are smart and good people and have developed many rich insights despite the mistake they made about the core Buy-and-Hold claim (that changing one’s stock allocation in response to big price changes is not necessary for long-term investing success). But we need a debate in which Buy-and-Hold advocates drop the pose of perfect understanding that has kept us from exploring new insights for so many years now. We need to see an openness to new investing ideas if our economic and political systems are to survive today’s crisis. We need to rebuild optimism for the future by partaking in a fresh start in our effort to discover how stock investing works, We need to put aside those of the old rules that no longer work and replace them with better-informed new rules that do.

I believe that it is going to take a populist uprising to get us there. My experience of the past eight years tells me that The Stock-Selling Industry is dead-set opposed to the idea of permitting middle-class investors to learn about the failure of the Buy-and-Hold Model. It is an industry’s dream to have millions of customers who have come to believe that there is no price at which its product does not offer a compelling value proposition. And this field is a field in which a perception of expertise is critical for success; acknowledging mistakes is viewed by most in this field as a career-limiting move. Most of today’s investing experts possess more expertise in salesmanship and in politics and in the construction of pointless word games than they do in how to invest effectively for the long run. Many have lost sight of the point of investing analysis — to help middle-class people finance their retirements. All this needs to change if our way of life is to survive the inevitable collapse of the Buy-and-Hold Model.

Our hope lies in coming to see the move from the Buy-and-Hold Investing Model to the Rational Investing Model (the Rational Model says that investors must consider price when setting their stock allocations) not as an investing question or an economics question but as a political question. We have a long tradition in this country of free speech. Free speech is permitted in our discussions of baseball and novels and nutrition and fashions. It should be permitted in discussions of the flaws of the Buy-and-Hold Model as well.

Once the internet is opened to honest posting on important investment topics, the Buy-and-Hold Era can quickly be brought to an end. There is obviously no one who obtains a benefit by investing ineffectively. So, if investors are permitted to learn about the realities as revealed by the academic research of the past three decades, the percentage of investors who understand that valuations affect long-term returns will gradually increase to the point at which Buy-and-Hold will no longer maintain enough support to be able to do further damage to the U.S. economy. I believe that all who have received benefits under the U.S. economic and political systems should be working hard to bring about that day as quickly as possible.

Buy-and-Hold can never work. But many of the insights developed by the smart and good people who brought us the Buy-and-Hold Model can do wonderful things to help millions when incorporated into a model that does work — the Rational Investing Model, a model that encourages investors to take valuations into consideration when setting their stock allocations.


I) Learning Together



January 2010


The Get Rich Slowly forum held two extensive discussions of the arguments put forward in this Google Knol in January 2010. The first focused on the question of whether Buy-and-Hold can work. The second focused on whether the promotion of Buy-and-Hold was the primary cause of the economic crisis.

I’ve recorded two podcasts that make the case for political action to open the internet up to honest posting on the flaws of the Buy-and-Hold Model. One is entitled Why Liberals Should Oppose the Continued Promotion of Buy-and-Hold Investing and the other is entitled Why Conservatives Should Oppose the Continued Promotion of Buy-and-Hold Investing.


February 2010


The Motley Fool (UK) Community examined this Google Knol in a discussion held in February 2010. A great point raised in that conversation is that this Knol discusses the problem with today’s investing advice but does not offer a detailed solution. I plan in coming days to put forward a Knol that will describe the Valuation-Informed Indexing strategy, which I believe is a more realistic strategy for those investors looking for a safe and effective long-term approach to stock investing.

The Wall Street Bear Discussion Board gives us the perspective of those who do not trust the conventional investing advice. The objection here is that I am naive to believe that any of the ideas developed by the Buy-and-Holders are even well-intentioned (I believe that Buy-and-Hold is gold except for the failure to account for valuations, which poisons everything).

Discussions started at the Hot Air and Free Republic sites, two conservative discussion-board communities, did not take off. There seemed to be skepticism in these communities about my intent in raising questions about Buy-and-Hold, although the grounds for the skepticism were not spelled out.

Steve Pavlina deleted a thread that generated some good discussion at his Personal Development for Smart People Forums. There was no abusiveness on the thread at all, just some good questions. I sent Pavlina an e-mail asking for an explanation for why the thread was deleted, but he did not respond.

I’ve been sending numerous e-mails about the flaws in the Buy-and-Hold model to journalists, bloggers, and investing experts and expect to send many more over the course of 2010. If you would like to read the full text of the e-mail sent to any particular person, please go to my blog (A Rich Life) and enter the name of the person into the search box; that will pull up the blog entry setting forth the text of that e-mail. E-mails have been sent to: (1) Vanguard Funds Group Founder John Bogle; (2) Keith Hennessey, Member of the Financial Crisis Inquiry Commission; (3) Yale Professor and Irrational Exuberance Author Robert Shiller; (4) Jonathan Curiel, Author of the True Slant Blog; (5) John Hayword, Author of the Doctor Zero Blog; (6) William Jacobson, Author of the Legal Insurrection Blog; (7) the HillBuzz.com Web Site; (8) Cassy FIano, Author of the Cassy Fiano Blog; (9) Jane Hamsher, Owner of the FireDogLake.com Site; (10) Washington Post Columnist E.J. Dionne; (11) New York Times Columnist Paul Krugman; (12) Patrick Courrielche, Journalist at www.BigHollywood.Breitbart.com; (13) Jason Zweig, Author of the Intelligent Investor Column in the Wall Street Journal; (14) Justin Fox, Author of The Myth of the Rational Market; (15) Bill Schultheis, Author of The New Coffeehouse Portfolio; (16) Dallas Morning News Columnist Scott Burns; (17) Former Wall Street Journal Columnist Jonathan Clements; (18) Money Magazine Editor Pat Regnier; (19) Maryland Financial Planner Michael Kitces; and (20) Jim Wiandt, Publisher of the www.IndexUniverse.com site.

Three recent blog entries explore the questions examined in this Google Knol:

Forbes published an article entitled How to Profit from an Inefficient Market. It states that: “We humans are so consistently illogical that our illogic itself is very predictable. For attentive investors, that’s good news. By studying other investors’ recurring patterns of irrational behavior, it is possible to build an investment strategy that profits from the inherent lack of efficiency in markets that are driven by humans.” Have you noticed that it’s always those darn humans that muck up all the wonderful theories of the investing “experts”? We need to figure out a way to create a market that would not require the participation of the darn humans. Then Buy-and-Hold would be aces! Oh, my!

The Pop Economics blog offers “Rob Bait” in a post entitled “Resistance Is Futile: Why Buy-and-Hold Beats Value Investing.” I don’t entirely agree with all of the arguments advanced, but I feel that I can say that my friend Pop has put forward one of the best reasoned and most emotionally balanced cases for the Buy-and-Hold strategy that I have come across. Good job, Pop!

I get the feeling that the stars are shifting in the skies (slowly but surely). I received a warm welcome at the www.BearForum.com board when I introduced the community there to the ideas set forth in this Google Knol.
(There is a charge to view this discussion board.)

Rajiv Sethi, a Professor of Economics at Barnard College, Columbia University, says: “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 claim empirically but it is consistent with Shiller’s analysis and I can see how it could be true.”

Schroeder (a regular at the Goon Central board) put a (perfectly reasonable) post to Rajiv Sethi’s blog and I responded by pointing to a calculator at my web site (“The Investor’s Scenario Surfer”) that shows that Valuation-Informed Indexing is always superior on a risk-adjusted basis to Buy-and-Hold over 30-year time-periods. Rajiv raised some reasonable skepticism about how the calculator is set up. He said: “Rob, I don’t think that randomly generated returns (regardless of the distribution you are using) can provide a convincing test of your claim. What you would need to do is to use historical data (as Schroeder has done) with multiple starting points and horizons. But even this is not enough: the P/E thresholds you choose for switching portfolio composition must be such as to generate on average over time the same asset allocation as the buy and hold strategy. In other words, you can’t pick the critical P/E thresholds (12/20) and the asset allocations (25/50/75) independently: they have to be selected jointly to match the buy and hold asset allocation over long horizons.” My response (too lengthy to post here) is at Rajiv’s blog.

Rajiv Sethi posted an update to his blog post (see above) linking to the Pop Economics blog post (see above) and saying: “For a sober assessment of why passive investing remains the best strategy for most investors despite modest violations of informational efficiency, see this post at Pop Economics.” I posted a comment praising the Pop Economics post for offering a non-dogmatic defense of the Buy-and-Hold Model and offering to write a Guest Blog Entry responding to the points made in it either at the Pop Economics blog or at the Rajiv Sethi blog. I then sent an e-mail to Pop telling him that I was grateful for his efforts to take things in a more constructive and productive and life-affirming direction and asking him to let me know if he has an interest in hosting a Guest Blog Entry.


March 2010


Andrew Smithers has written a fantastic summary of the points explored in this Google Knol entitled The Efficient Market Theory Must Be Discarded. Juicy Excerpt: “When tested, however, the EMH failed, as real equity returns do not follow a “random walk with drift” but exhibit negative serial correlation. This meant that sustained periods of real returns, which were above the very long-term average, were followed by below average returns and vice versa.  This evidence obviously meant that the EMH, as applied to the stock market in aggregate, must be discarded or modified. Attempts at modification have failed. No one has yet produced a version of the EMH which can be tested and fits the evidence. Thus, the EMH must logically be discarded, as a valid hypothesis must be testable. The simplest explanation of the observed behaviour of returns is that equity markets are moderately or imperfectly rather than perfectly efficient, and rotate around fair value…. It is therefore possible, contrary to the EMH, to know whether markets are overvalued. It is not, however, possible to know when they will crash as, if this could be done, arbitrage would ensure that markets never became misvalued…. It is not correct to claim that no one forecast the financial crisis, as I and others did so. What we did not and could not do is forecast its timing.” That’s the good stuff.

On March 10, the owner of the Monevator blog imposed a ban on honest posting on the flaws of the Buy-and-Hold Model. He said: ” Rob Bennett – I have deleted your comment and my patience has finally run out on allowing you to post your opinions about conspiracy in the markets on my blog. Your comments are misleading and dangerous, and I don’t spend 3-4 hours writing articles to have you append your mantra at the end of every post. There is no conspiracy about valuation in the stock market. This very article mentions valuation…. Everyone knows about valuation. It is discussed non-stop…. He [referring to Benjamin Graham] wrote about valuation in 1935. Yes, this ‘conspiracy’ you see didn’t even exist in 1935. Enough is enough.” I posted a comment saying: “And yet there are many who advocate Buy-and-Hold Investing (failing to adjust your stock allocation in response to big price swings) to this day, Monevator. Why? For what purpose?” The comment was deleted within a few minutes of the time at which it was posted.

We had a friendly and illuminating discussion of the ideas raised in this Google Knol at the Budgets Are Sexy blog, at which I posted a Guest Blog Entry entitled When Stock Prices Crash, Where Does the Money Go? I think that the reason why the discussion went so well is that this particular blog appeals to young readers and so we did not have any Know-It-All Buy-and-Hold Dogmatics in attendance. Discussions of investing are so much more pleasant without the defensiveness that comes into play when a significant number are so concerned with insuring that they never have to admit having gotten something wrong that they see new ideas as a threat.


April 2010


The owner of the Monevator blog posted a comment (Comment #35) to a thread at the Budgets Are Sexy blog explaining his decision to ban posting on the flaws of the Buy-and-Hold Model at his site. He assured me that “I have no ill-feelings” and proved the point by reporting that “if you look at my Twitter stream just the other day I suggested someone read your blog for more on valuation informed strategies” (I of course thanked Monevator for the kindness). His explanation is that: “Since I stopped allowing your comments, my blood pressure has subsided and I even had some readers thank me. Nobody has asked for them back.” This is by no means an atypical reaction to my writings on the flaws of the Buy-and-Hold Model. I have seen similar reactions from tens of thousands of Buy-and-Holders and even from a good number of big names in the field. I argued in my response that we need to explore why it is that challenges to the validity of the Buy-and-Hold Model prompt such emotional reactions on the part of those promoting or following this model.


May 2010


Pop Economics posted my long-awaited response to his “Rob Bait” article defending Buy-and-Hold (please see the February updates for background). His introduction to my Guest Blog Entry contained an extremely helpful statement: “Many of Rob’s arguments in favor of value investing actually make a lot of sense—in a way that should make any rational buy-and-holder uncomfortable…. Trust me, it’s worth questioning your assumptions every once in a while.” That’s precisely what needs to be heard from those arguing the pro-Buy-and-Hold position (Pop is making a reasonable case for Buy-and-Hold, he is not endorsing Valuation-Informed Indexing). The blog entry also contains an exclusive Pop-designed psychedelic head shot of me, news which will come as a relief to the thouands who have for too long now been frustrated in their efforts to get their hands on such a thing. The only downer here is that Pop let the Lindauer/Greaney Goons run wild in the Comments section of the blog and they intimidated him into shutting down the thread. Stop letting the 10 percent Goons determine what the 90 percent Normals get to talk about, Blog Owners of America!

Edwin Ivansaukas, the blogger who owns the Finantage blog, learned about our wee little “controversy” by reading the Pop Economics Guest Blog Entry and promised to explore the topic at his own blog. Edwin told me in an e-mail that he is planning a series of articles looking at various aspects of the question. He expressed grave doubts about the claim I make in my Google Knol entitled “The Bull Market Caused the Economic Crisis.” I told Edwin that I think he is proceeding in precisely the right way. We need to make Buy-and-Hold critics feel safe about expressing their sincere views. But we also need to encourage those who believe in the Buy-and-Hold strategy to take on their critics in constructive ways. It is when all community members are putting forward their sincere beliefs that we all enjoy a rich learning experience together. I much look forward to seeing what Edwin comes up with.

Brett Steenbarger, author of The Psyhology of Trading, said that I offer an “interesting view” in my Google Knol entitled The Bull Market Caused the Economic Crisis (please see link just above). I am proud of the work I did on that Knol. I think of it as my Blood on the Tracks.

The Death by 1,000 Papercuts Site has begun running a weekly column in which I explore Investing: The New Rules. They made me promise to only say laudatory things about the “experts” who advocate Buy-and-Hold. Just kidding!


June 2010


I have published two articles at the Daily Caller site exploring themes relating to the ideas examined in this Google Knol: (1) Can We Handle the Truth About Stock Investing?: and (2) How We Invest Is a Political Question.

Doug Brady writes at the Conservatives for Palin site that: “Rob Bennett, who usually writes about investment strategies, has a piece today in which he predicts that a return to living within our means and personal responsibility, as emphasized by Governor Palin, is what will ultimately put the U.S. economy back on track.” Josh Painter, at  the Texas for Sarah Palin site, expresses skepticism re my prediction that Palin may bring the economic crisis to an end by letting middle-class investors know about the Big Fail of Buy-and-Hold and the need for us all to move to more realistic investment strategies. He says: Despite Bennett’s astonishing prediction, Gov. Palin has never claimed to be able to single-handedly solve the nation’s economic problems. While her common sense recommendations for turning the nation’s economy around are prudent, Bennett’s prediction is less so. If he wants to climb onto a limb and saw it off, as DBKP’s editors suggest, it’s not fair to the governor for him to drag her out there with him.”


July 2010


The Financial Uproar blog posted an article (“Rob Bennett: Crazy? Or Crazy Like a Fox?) seeking to make sense of the smear campaigns that have been directed at me as punishment for my “crime” of being the first person to report accurate (that is, valuation-adjusted) safe withdrawal rates. Uproar stated: “I’ve always liked what Rob had to say. He has well thought-out opinions about everything he writes. He’s clearly a very intelligent guy. So I decided to click through to his blog (“A Rich Life”) to see what he writes about. Turns out that Rob is just a little crazy.” Uproar invited me to write a Guest Blog Entry about the New School safe withdrawal rate research and I wrote an article entitled “It’s Impossible to Plan a Retirement Without Looking at Valuations.” Uproar described it in a preface as “another guest post by everybody’s crazy personal finance guy Rob Bennett.” He commented that: “I really like this post. It’s short and to the point. It does a good job of giving us all a decent primer to what the heck he’s talking about.” The Wave is building!

Brent Arends reports (accurately) at the Wall Street Journal that the claim that “timing doesn’t work” is a “myth” that The Stock-Selling Industry continues to promote for marketing reasons. He writes (in an article entitled “Ten Stock Market Myths That Just Won’t Die”): “This hoary old chestnut keeps the clients fully invested. Certainly it’s a fool’s errand to try to catch the market’s twists and turns. But that doesn’t mean you have to suspend judgment about overall valuations.” That says it.


August 2010


The Value Walk site has begun running a weekly column called Valuation-Informed Indexing in which I explain why Buy-and-Hold is a failed model and make the case for Valuation-Informed Indexing as the investing model of the future. Column entries, plus eight introductory articles describing the four unique investment calculators available at my site, are here.


September 2010


The Daily Caller site has posted ten of my articles relating to the political aspects of the struggle to begin a national debate on the Big Fail of Buy-and-Hold and its role in causing the economic struggle. The titles of the 10 articles are: (1) Can We Handle the Truth about Stock Investing?: (2) How We Invest Is a Political Question; (3) The Economic Crisis Is Trying to Tell Us Something (and We’re Not Listening); (4) Facts Don’t Matter; (5) Going Google Stupid; (6) How Much Transparency Can We Handle?; (7) Confessions of an Internet Troll; (8) Conservatives Fall Into a Trap by Blaming Obama for the Bad Economy; (9) Meet the New Media, Same as the Old Media; and (10) How Restoring Honor Will End the Economic Crisis. They are available here.


October 2010


I have begun writing a third weekly column on the Big Fail of the Buy-and-Hold Model and the role it played in causing the U.S. economic crisis. It appears Wednesday mornings at the Out of Your Rut site and is called Beyond Buy-and-Hold. The column entries can he found here.





Thanks for being specific about market timing


Thanks for pointing out the difference between long-term and short-term market timing. That is done way too little.

An argument that is often used against (long-term) market timing and in favor of buy-and-hold is that most investors won’t have the nerves to buy (when many have fear) and sell (when many have greed) at the right time. Objective market timing signals are a better solution for that, I may think, than to put your head in the sand with a blind buy-and-hold.

The term “market timing” seems to have got a negative sound to it. Investors, authors and analysts rather speak about buying when P/E’s are low and selling when they are historically high. Isn’t that just talking about an indicator for market timing without using the term itself?

Since you mentioned a post about “Rational Investing System” but didn’t see a link to it, I will Google it to read more about it. I think I will like it.

Trend Investing – Mar 27, 2011


We are in complete agreement, Stock Trend Investing. There are good forms of market timing and bad forms of market timing, just as there are good and bad forms of lots of other things. The thing to do is to be clear about what forms of market timing work and what forms do not rather than to make “time” a dirty word. If you’re not timing the market, you’re not paying attention to price. And, if you’re not paying attention to price, you’re lost.

I now use the term “Valuation-Informed Indexing” to refer to what I used to refer to as “Rational Investing.” I’ve written many articles on how Valuation-Informed Indexing works. So you’ll find lots of stuff if you put that term in a Google search engine. Here’s an article that provides a survey of the work I have done in this field, with links to the most important materials:


Thanks much for stopping by and for taking time out of your day to help us all out.


Rob Bennett – Mar 27, 2011


Strawman Argument?


I’m not sure I agree with the general theme here, because I think you’ve constructed a bit of a strawman argument. Buy-and-hold is not, like you claim, based on ignoring valuations. It’s also not meant to be practiced mindlessly. It’s buy-and-hold, not buy-and-forget. The fundamental premise of buy-and-hold, at least the way I interpret it, is to purchase only stocks that you are comfortable holding in the long-term, and to refrain from short-term trading in an attempt to game the short-term fluctuations in the market.

An intelligent investor, however, practices systematic rebalancing. Even the simple act of rebalancing between cash and a single stock will enable an investor who practices buy-and-hold to benefit from the ups and downs of a market. When managing a larger portfolio, rebalancing will automatically allow the investor to ease out of over-valued stocks and accumulate their holdings of undervalued ones, thus beating the market.

It’s also possible to utilize your own special knowledge and intuition in order to guide both entry- and exit-points when you practice buy-and-hold. Buy-and-hold investors are in it for the long haul, and they typically sell stocks only in response to major events, such as paying for their children’s education, their own retirement, or major purchases like a car or down-payment on a house. These events can be anticipated, and you can use your knowledge to make a judgment call on timing — sell a bit early, or sell now?

I also think that this article is riddled with repeated assertions and opinions presented as fact. You say: “We know that buy and hold does not work.” Really? Who is “we”? I think that what you really mean to say is that “I believe that buy-and-hold does not work.”

While I think it’s good to offer a novel and critical perspective, I think that you would do well to either step up your level of rigor in this article, or to present it as an opinion piece and not a factual article. It’s too much opinion presented as fact, and, perhaps more importantly, you don’t accurately depict the investment philosophy that you’re trying to tear down. No one advocates a blind “buy-and-hold” philosophy without being tempered with common sense.

Alex Zorach – Jan 29, 2011


That’s a super comment, Alex.

We’re obviously not in agreement on the substantive points. But you made your case well and I think you add some balance to a Knol that is otherwise all too one-sided (I think it would be fair to characterize me as the most severe critic of Buy-and-Hold alive on Planet Earth today).

I promise to go back and read your comment from time to time to see if over time some of the points made click with me enough to make me feel that I should make changes in the text of the Knol (rather than just having your comment here to let people know that there is another way of looking at things).

One statement that I can definitely sign onto today is a statement that more agree with your take than with mine. I don’t feel that I can quite characterize this as a mere difference of opinion as there is data and research involved and it is not just my opinion that the data shows that valuations affect long-term returns; that’s an objective fact (at least in my opinion!). But there is no question but that my take (whether opinion or fact) is today a minority take.

My take is that the difference here is that some still believe in University of Chicago Professor Eugene Fama’s research showing that the market is efficient (these are the Buy-and-Holders) and some believe that the research of Yale Economics Professor Robert Shiller showing that valuations affect long-term returns discredits the Efficient Market “finding” (we would say that it was never really a finding but merely an interpretation of the finding that short-term timing doesn’t work). I am not able to see how both things can be true. If the market is efficient, overvaluation is a logical impossibility. If overvaluation is real, the market is not efficient. Or at least so it seems to Rob Bennett.

In any event, you have helped us all out by being willing to take time out of your day to share your thinking re these matters with us. I wish you the best in all of your future endeavors!


Rob Bennett - Jan 28, 2011


After sleeping on this, I feel that I owe you a better response re your question about how I define “Buy-and-Hold,” Alex.

I define Buy-and-Hold as “a model for understanding how stock investing works that posits that it is not necessary for investors to engage in market timing to enjoy long-term investing success.”

The problem is the claim that timing is not required (many Buy-and-Holders go so far as to claim that “timing doesn’t work,” which is of course even worse). I try in the Knol to explain how the misunderstanding about timing came about. Research in the 1960s showed that short-term timing doesn’t work. That prompted University of Chicago Economics Professor Eugene Fama to put forward an <i>explanation</i> of this finding. Fama’s explanation was that the market is “efficient,” that is, always priced properly. Yale Economics Professor Robert Shiller showed in 1981 that valuations affect long-term returns and that the market is thus<i>not</i> efficient. If valuations affect long-term returns, stocks are more risky at times of high valuations than they are at times of moderate or low valuations and investors <i>must</i> engage in market timing (long-term timing, the form of timing that works, rather than short-term timing, which of course doesn’t) to have any realistic hope of long-term success. If you don’t time (change your allocation in response to big price swings), you are sooner or later going to be going with a stock allocation that is wildly inappropriate for someone with your risk tolerance. How could that ever work?

I love everything about the Buy-and-Hold Model other than its mistaken claim that timing is not required (or, even worse, the claim you often hear from Buy-and-Holders that timing is a bad idea!). I propose Valuation-Informed Indexing, which is Buy-and-Hold with the Get Rich Quick element (it is Get Rich Quick thinking that persuades many that going with a wildly inappropriate stock allocation might work out somehow) removed.

Is this all just my opinion? I say “no,” because it is the 140 years of historical stock-return data that shows that valuations affect long-term returns. The academic research of the past 30 years and the historical data going back as far as we have records <i>support</i> this particular opinion of mine while all that I know of that supports the idea that timing is not required is the unfortunate reality that the marketing departments of the big funds have found it profitable to persuade investors that stocks are a good thing to buy regardless of how insanely high they are priced.

All that said, there are many smart and good people who believe strongly that I am wrong about all this. Nothing could be more clear.

I thank you again for your helpful comment, Alex. Take care, my new friend.


Rob Bennett – Jan 29, 2011



Useful Knowledge


Very useful knol edge. I look forward to learn more. Thank you.

James Austin – Oct 8, 2010


Thanks for those kind words, James.


Rob Bennett – Oct 8, 2010






2nd para, first sentence: “The history of the strategy can be traced back to the mid-1500s, when the idea of an “efficient” market first surfaced. ”

Did you intend to jump from the mid-1500s to the 1960s? Did you mean the mid-1950s?

Just checking. Otherwise– helpful, informative and I’ll be passing it along, thanks.

Anonymous – Jan 16, 2010


Thanks for taking the time to post your comment, TinLizzie.

No, that’s not a typo. I certainly do acknowledge that it’s a strange fact, however. It’s a strange fact that points to something important; that’s why I put it in. Please click on the link that appears where those words appear to view the documentation of this fact.

Most people think of the Efficient Market Theory as something new. Most people think of Buy-and-Hold as something new. I don’t think of either of these things as being new. They are really very, very old ideas dressed up in modern clothes. Since the first market opened for business, there has been a struggle between the idea of investing rationally (taking price into consideration when making allocation decisions) and investing emotionally (not taking price into consideration when making allocation decisions).

It is foolish not to take price into consideration. It never works. It’s not even possible for the rational human mind to imagine circumstances in which it ever could work. But yet we return to this “idea” again and again. There must be something that gives this idea great appeal. What is it?

The key to understanding this is appreciating that WE are the market. When we say that the market is efficient, we are saying that WE are efficient. When we say that the market is rational, we are saying that WE are rational. When we say that the market is perfect, we are saying that WE are perfect. Believing in Buy-and-Hold Investing is an exercise in flattery.

Have you ever met a person who was full of himself, who was so arrogant that he or she could not admit being wrong about anything? That’s what the investing public becomes as a collective entity when it becomes entranced with the Buy-and-Hold idea. One of the slogans that Buy-and-Holders love is “You can’t beat the market!” Again, WE are the market. What they are saying is — You can’t beat us — we are just so amazingly wonderful that nothing could ever be better!

What we need when we get caught up in the Buy-and-Hold “logic” is a dose of humility. That’s why God invented stock crashes. Once Buy-and-Hold becomes popular enough, there is only one way to bring it to can end — through a price crash that destroys so much wealth that it brings some humility to the arrogant proponents of the idea that this particular day’s investors have become so perfect that they can never be “beat.”

I am hoping that we can change this dynamic. The name of the book that I am working on is “Investing for Humans.” My argument is that humans are indeed drawn to excessive pride and thus investors are always going to feel temptations to yield to social pressures to go along with Buy-and-Hold “strategies.” But humans ALSO have learned to care for each other and to help each other practice humility. What if we focused more on these attributes rather than the attributes that cause us to promote Buy-and-Hold? We could develop the intelligence and compassion and fortitude to IGNORE the temptations to give in to desires to follow Get Rich Quick approaches.

I see this as being 70 percent of the investing project. The first job of anyone who chooses to become an investing expert is to develop the skills needed to convince others not to give in to the desire to believe in Buy-and-Hold approaches. The numbers stuff (which is indeed important) is secondary. There are smart people who say that people have been falling into the Buy-and-Hold trap ever since the first market opened for business and that this will always be the case. I don’t buy it. I think it’s a question of how hard you work it. I believe that the pain that comes with following Buy-and-Hold strategies has become so great now that the middle-class needs to finance its own retirements that we have no choice but to DO SOMETHING about this problem.

Anyway, the point of the reference to the mid-1500s was to show that the Buy-and-Hold problem has been around for a long, long time. This is something that has roots deep in human nature. We are all drawn to fantasies that we are perfect and cannot make mistakes. The entire point of Buy-and-Hold is to develop an indifference to evidence that we are making mistakes as investors (mistakes evidence themselves in overvaluation or undervaluation). The entire point of Rational Investing is to develop a desire to want to protect oneself from mistakes, which requires being aware of them, which requires being willing to look at the price of the stocks we buy before putting money down on the table.

Thanks again for helping out, TinLizzie. And thanks for your kind words as well.


Rob Bennett – Jan 26, 2010



  1. [...] The The Big Picture Blog recently posted a lengthy article (“Buy-and-Hold Is Dead — And Never Worked in the First Place”) telling the story of my ten years of work developing the Valuation-Informed Indexing concept with the help of the hundreds of my fellow community members who dared to “cross” the Buy-and-Holders by engaging in original research or discussing the implications of research already published (the VII concept is rooted in the 1981 finding of Yale University Economics Professor Robert Shiller that valuations affect long-term returns — Shiller has said in published interviews that he has never dared to tell us all that he knows about stock investing because he fears that he would be branded “unprofessional” if he were to do so). Site Owner Barry Ritholtz separately linked to an article of mine titled Why Buy-and-Holder Investing Can Never Work. [...]

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Comments links could be nofollow free.