Yesterday’s blog entry reported on Financial Philosopher Blog Author Kent Thune’s thoughts on my article reporting on The Silencing of Academic Researcher Wade Pfau. Set forth below are the words that I fired back to Kent in reply:
Thanks for your helpful and informed and intelligent and kind response. I wish that I could figure out how to get lots of others to respond in this way!
I certainly do not claim to know all the answers. What I believe is that the people who came up with Buy-and-Hold achieved many breakthroughs but made an entirely understandable mistake on one point. It’s the failure to correct that mistake that has been holding us back. My aim is to get people talking about this so that we can determine as a society whether there really is something to what I am saying or whether I got on the wrong track in my thinking somehow.
You bring up a great point re the definitions. I LOVE most of what Buy-and-Hold stands for. The one thing I disagree on is the idea that it is okay for investors to stay at the same stock allocation at all times. My view is that investors should be aiming to stay at the same RISK PROFILE at all times. If Shiller is right that valuations affect long-term returns, then the risk associated with stock investing is ever-changing (with changes in valuation levels). People do not need to change their stock allocations frequently because most changes in valuation levels are small. But they MUST respond to big changes in valuation levels or their failure to act will cause their risk profiles to get wildly out of whack and that dooms their chances of long-term success.
Everything else follows from that. Buy-and-Hold was developed at a time when people thought that the market was efficient. If the market were efficient, Buy-and-Hold would be ideal. I acknowledge that. My take is that the market is NOT efficient, that valuations affect long-term returns and that the risk associated with stock investing is thus much greater at times of high prices. It is my belief that the entire Buy-and-Hold thing was just a mistake. Index funds were not available at the time the early research was being done. Long-term timing works only with indexes. So the early researchers did not bother looking at long-term timing. If Bogle had founded Vanguard in 1966 rather than 1976, I believe that the name of the book published in 1974 would have been “A Valuation-Informed Walk Down Wall Street.”
I think that the most revealing comment that Wade Pfau made to me was his statement that: “I must wonder …did I make a mistake somewhere? Why haven’t academics already published research about this?” Wade is a very smart fellow. He just had never thought about these things from the perspective that I suggested. I think that is what is happening with just about everybody on the Buy-and-Hold side. It was the foundational belief (that timing isn’t required) that was wrong. We tend not to reexamine our foundational beliefs frequently.
We move on to other things. I think what happened is that people failed to distinguish short-term timing from long-term timing (because long-term timing was a physical impossibility at the time), found (correctly) that short-term timing never works, and concluded mistakenly and tragically that “timing never works.” Now we need to persuade people to reconsider that false step made 40-some years ago.
If you want to read about the false step, you might want to read the book “The Myth of the Rational Market.” It goes into detail on the history of the mistake. Unfortunately , the book does not say how we need to change the investing advice we give people now that we know that the idea that the market is rational/efficient has been discredited. That’s the question I try to answer at my site. My premise is that Shiller is right with his “revolutionary” (his work) new understanding of how stock investing works. Building on that premise, I try to tell people how they should invest differently PRESUMING that Shiller is right.
Your e-mail brought a good bit of cheer to my Monday morning. I am most grateful for your willingness to give the ideas a hearing.
Kent replied by saying: Perhaps you might call yourself a “tactical asset allocator?” I’m more of a philosopher than anything else. Rather than asking “What is the best way to make money?” I ask “What is the meaning of life?” and allow financial decisions to branch out from there. I believe that financial pursuits have a way of drawing people away from their life purpose. This is not necessarily the “life planning” idea that is popular now but somewhat close to it. I believe we both agree, at a minimum, that conventional wisdom is not something an individual should mindlessly accept or adopt as their own. This article I wrote for The Big Picture sums up my thoughts here (and align with yours): http://www.ritholtz.com/blog/2009/12/the-greatest-deception-in-the-history-of-finance/ On a similar note, I’ve recently entered the MarketWatch “World’s Next Great Investing Columnist” competition. Thus far, I’ve advanced to the second round! I’ll e-mail you a link to my Round 2 article once it is published. Have a great week…”
I wrote back to Kent a message stating: “Please do that. You are doing important work and making important points that people need to hear.” Kent did indeed send me his Round Two article and I gave it my vote of confidence.