I have been sending e-mails to numerous people letting them know about my article on The Silencing of Academic Researcher Wade Pfau by the Buy-and-Hold Mafia. Marcelle Chauvet wrote in response: “I like it and I totally agree. The market goes through cycles and if we want to or need to sell in the wrong cycle phase all bets are off. The only thing is the cost of obtaining information as opposed to Buy-and-Hold. This would be a good research topic. Why would your job be jeopardized by such a sensible claim?”
The text of my reply e-mail follows:
You are asking the $64,000 question.
There is a clear answer. Once people get it, it sticks. But a person needs to be open to hearing it for it to get through. Getting people to hear the answer to this question is the solution to our economic troubles.
Bull markets are Ponzi schemes.
Shiller says just that in his book. In fact, he goes farther. He says that, since bull markets possess every characteristic of Ponzi schemes, we should assume they are Ponzi schemes until we come into possession of some evidence that they are NOT Ponzi schemes. Of course there has never been any such evidence. Bull markets are Ponzi schemes.
Think about how many groups in our society benefit from this particular type of Ponzi scheme.
Wall Street benefits. But it is not just Wall Street. Newspapers benefit. Policymakers benefit (people vote for incumbents during bull markets because they are happy with their circumstances). Economists benefit (people want to learn more about how our economic system works when it is booming). Researchers benefit (people want to know more about how to benefit from the booming economy). Airlines benefit (more people can afford travel when their portfolio values are temporarily high). Car manufacturers benefit (more can buy second and third cars). The construction industry benefits (people can afford bigger houses). And on and on.
At the top of the bull, we had $12 trillion in Funny Money sloshing around our economy.
Did we know it was funny money? We did. We all possess common sense. No one really believes on a deep level that their retirement accounts can increase by 20 percent or 30 percent in a year for no good reason. We all knew all along that there was some sort of funny business going on and that we should look into it. BUT WE DIDN”T WANT TO KNOW. So we silenced the voice within us telling us “this is wrong.”
If you tell an alcoholic that he has a problem, does he acknowledge it? He does not. That’s not because he doesn’t know. He knows better than anyone. He SUPPRESSES the information. Until the consequences become so bad that he can suppress no more. It is when we can suppress no more the voice telling us that our bull market gains are not real that we have a stock crash or a series of stock crashes. It’s what alcoholics call “hitting bottom.”
Please do not be discouraged by this report. The other side of the story is wonderful indeed.
Every economic crisis we have experienced from 1870 forward (that’s as far back as we have records of stock returns) was started by a bull market in stocks. There is not a single exception. So, if we learned how stock investing really works, we could stop experiencing economic crises. Following the three earlier Buy-and-Hold crises, we went right back to committing the mistakes that caused them. This time we will not do that. Because this time we have 30 years of peer-reviewed academic research telling us how the stock market really works.
The market really is “efficient” in a sense. Investors truly want to act in their self-interest. The problem until now is that the research was not sufficiently developed for us to know what our self-interest was. Now we know. Now we have 30 years of research telling us. Because of the pain we feel when hearing the news, we have not yet permitted ourselves to discuss the new research. But that will end with the next price crash.
We just have to be sure to have means put in place in advance to help us get the word out about what the research says immediately following that next crash. Otherwise, the losses will be great enough to cause the Second Great Depression. That won’t be so if we get the word out. If we get the word out, we will fall only to fair-value price levels. If we do not get the word out, we will see a negative emotional reaction as strong as the positive emotional reaction we saw in the bull years. That will bring us down to one-half of fair value, which is where every earlier Buy-and-Hold crisis ended.
People’s jobs have been jeopardized because those who still believe in Buy-and-Hold (they number in the millions and they are good and smart and hard-working people) are in great emotional pain today. They are suffering from cognitive dissonance on a massive scale. We all should be doing what we can to help them out and thereby to help all the rest of us out too.
All this is my sincere belief re where things stand today, in any event. I am grateful to you for listening and for your kind words. Hang in there!
Note: I received a comment (see below) on August 2, 2014, in which Marcelle expressed a concern that readers might pick up the impression that she endorsed all of my views on investing. She has never said any such thing and I do not believe any such thing.