Valuation-Informed Indexing #153 — Five Reasons Why Valuation-Informed Indexing Always Beats Buy-and-Hold in the Long Run

I’ve posted Entry #153 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Five Reasons Why Valuation-Informed Indexing Always Beats Buy-and-Hold in the Long Run.

Juicy Excerpt: Three, the compounding returns phenomenon grows the edge gained by going with a low stock allocation at a time of high prices into a very large number over time. It is hard for people who have not studied the numbers to get their heads around this one. I have seen the power of compounding work its magic so many times that I now can predict how a 30-year returns sequence is going to turn out in Year 10 or 12 or 15. Often, the Buy-and-Holder will go ahead of me for a few years at times of high valuations (when I go with a low stock allocation but a bull market pushes crazy prices to even crazier levels). Then there will be a price crash that will put me ahead by a modest amount. Then, with prices back at reasonable levels, I will return to a high stock allocation matching the one held by the 80-percent-stocks Buy-and-Holder. But compounding will cause my differential to get bigger and bigger over the years and I will end up with a far larger portfolio amount at the end of 30 years.



  1. Evidence Based Investing says

    But at all other times — that is, at MOST times — I go with a stock allocation of 70 percent or 80 percent. So the Buy-and-Holder rarely has a chance to catch up with me once I go ahead. If I am able to gain an edge during the limited number of years when stocks do not offer a strong value proposition, I am likely to gain an edge that I will never give up.

    Could you give us some idea of how long you have gone “with a stock allocation of 70 percent or 80 percent”?

  2. Rob says

    As is typical of you Goons, you are playing a stupid game here, Evidence. It is clear from the words of the article that when I say that at most times I go with a 70 percent or 80 percent stock allocation, I am talking about my experiences running The Investor’s Scenario Surfer. High stock allocations are usually best. The entire historical record shows that.

    You are pretending that you “don’t understand” why that general rule has not applied from 1996 forward. But you do understand. Stocks have been insanely overpriced from 1996 forward. At times when stocks have been priced as they have from 1996, investing in stocks has ALWAYS proven to be an unmitigated disaster for the long-term investor.

    The very fact that you feel a need to play such stupid games shows that you lack confidence in your Buy-and-Hold strategy. If you had confidence, you would try to make a reasoned case for the strategy. Why don’t you? Because you know as well as I do what common sense tells us must be so and that the entire 140 years of historical data confirms that what common sense says must be so really is so.

    You have an emotional desire to see the purest and most dangerous Get RIch Quick scheme ever concocted by the human mind work out, Evidence. I get that loud and clear. I hope for your sake it DOES work out. But I ain’t gonna invest my retirement money on such a long-shot fantasy. And I ain’t gonna tell my friends that I believe it is a good idea for them to do so either.

    My warmest wishes for your health and wealth and life success, my old friend.

    Rob the Non-Gambler

  3. The Pink Unicorn says

    In sort, Rob, you have missed the market since 1996, while many of us have done MUCH better than you.

  4. Rob says

    I “missed” participating in a Get Rich Quick scheme, Pink.

    Not interested. Please try to find someone else.

    There were people who tried to warn the investors in the Madoff fund that they were going to lose all their retirement money. The Madoff investors told themselves that they were just jealous because the Madoff fund was paying them such a huge return.

    Get Rich Quick is for losers, Pink. I mean no personal offense. I am saying what I truly believe and I believe that I owe that much to my friends.

    I wish you the best of luck with whatever investing strategies you elect to pursue, in any event.

    Rob the Prudent and Kind Friend

  5. The Pink Unicorn says

    I also missed the part how buying stock is like what Bernie Madoff did. Bernie was not buying the stock. He was running a Ponzie scheme.

  6. Rob says

    Is a bull market not a Ponzi scheme, Pink? What the F do you think a bull market is?

    How many times have I heard you Goons say “Oh, I know Buy-and-Hold works because I made so much money? Did you divide by three when stocks were temporarily priced at three times fair value? If not, why not?”


    Just like the Madoff investors.

    It’s the same thing, Pink. A Ponzi scheme has to make you feel good for a time or else you wouldn’t fall for it. But it has to let you down in the end because it is not rooted in anything real.

    The difference between Bernie Madoff and Jack Bogle is that Jack built a Ponzi scheme 500 times bigger. And, thus, The Ponzi Scheme that Jack Built Caused 500 times the human misery.

    Oh! But Jack tells himself that he was trying to help people!

    So does Madoff! He said exactly that when New York Magazine interviewed him in his prison cell.

    Here’s a clue: If an investing strategy cannot be “defended” without resort to death threats and board bannings and tens of thousands of acts of defamation and threats to get academic researchers fired from their jobs, it is a Ponzi scheme.

    I mean, come on.

    Please don’t tell me that the fake gains made you feel like a big shot for a time. That’s the friggin’ idea. That’s how they catch the fish!

    Don’t let the bad guys get you down, man.


  7. The Pink Unicorn says

    No Rob, when you buy stock, you own part of a company. In a Ponzi scheme, nothing was purchased.

  8. Rob says

    No Rob, when you buy stock, you own part of a company. In a Ponzi scheme, nothing was purchased.

    At times when stocks are priced at three times fair value, one third of your money represents a share in companies, and two thirds represent cotton-candy nothingness, Pink.

    It’s not my intent to insult your intelligence, Pink. But that’s what the word “Overvaluation” means. At times when the entire price represents something real, there is no overvaluation.

    You were taken, Pink.

    Not by me.

    By the other guy.

    I wish you well.

    Rob, the Fellow Who Offers Investment Advice That Is Not Rooted in a Con

  9. The Pink Unicorn says

    Deleting comments again, I see Rob.

    Perhaps you would like to tell us the amount of profits generated by companies from 1996 as compared to today. See anything?

  10. Rob says

    You are missing the point, Pink.

    Stocks were overpriced by $12 trillion in 2000.

    Please take a moment to consider what that signifies.

    It means that there was $12 trillion of Pretend Money sloshing through the economy.

    That was an extra $12 trillion being spent on goods and services.

    That pumped up profits.


    You cannot consider any of these numbers out of context and take comfort in them.

    To know what profits really are, you need to know how much of the money being spent on goods and services is real money and how much is Pretend Money. There is no other way.

    Take Buy-and-Hold out of the equation and we are doing just fine. That’s the good news.

    The bad news is –

    We have not yet taken Buy-and-Hold out of the equation.

    We have 32 years of Peer-Reviewed academic research showing why we must do this. That’s more good news.

    But we have not acted on that research yet. That’s more bad news.

    Once we do what we know deep in our hearts we must do, it’s all blue skies.

    But ditching Buy-and-Hold is not an optional step.

    Opening the internet up to honest posting on what the last 32 years of peer-reviewed academic research tells us about how stock investing really works is the key to overcoming the economic crisis and turning Pretend Profits into Real Profits.

    My warmest wishes to you and yours, my old friend.

    Rob the Economist

  11. The Pink Unicorn says


    You have totally left out productivity from the equation. Secondly, if you buy and hold, you are not selling stock to buy goods and services. Seems you are talking out of both sides of your mouth. You can’t have it both ways.

    Finally, you are admitting that companies have been cranking out record profits and that has built massive wealth for many of us, yet you have no idea as to what each individual has done with that wealth.

  12. Rob says

    I am not leaving productivity out of the equation, Pink.

    I am saying that, if we want our economy to be productive, We need to permit economists to report numbers accurately.

    We need to know how we are doing to achieve our full potential.

    My take.

    Rob the Productivity Guru

  13. Rob says

    if you buy and hold, you are not selling stock to buy goods and services.

    Stocks were priced at three times fair value in 2000. That means that someone with $300,000 of real wealth in his portfolio was led to believe that he had $900,000 of real wealth in his portfolio.

    Using numbers that are $600,000 off affects your decision-making, Pink.

    I believe people should use accurate numbers. Call me madcap.


  14. The Pink Unicorn says

    If a company is generating 3 times the profit versus when it was purchased, it is not over valued.

  15. Rob says

    If those profits aren’t real, it is!

    If the profits are supported by Pretend Money, what good are they? They are Pretend Profits!

    You have to stop and consider where stock gains come from, Pink.

    You are working on the assumption that they are rooted in some economic reality. This is not necessarily so.

    It could be so. It is so in some cases. But not in all cases.

    We see stock gains when investors bid up stock prices.

    Sometimes investors bid up stock prices because profits are up. Those stock gains are real. In those cases, things work just as you believe.

    But investors have the power to bid stock prices up for 100 percent fantasy reasons. Investors can just say “Hey! I’d like to have more money in my portfolio and so I will bid prices up and get it!” There is not a thing in the world to stop them. So they do this thing from time to time.

    Those gains are not real.

    And the extra money that those gains put in consumers’ pockets isn’t real either.

    And the profits that the companies “earn” from sales financed by those phony gains aren’t real either.

    You are saying that we cannot question the fantasy of Buy-and-Hold because that fantasy generates fantasy profits. Of course the fantasy generates fantasy profits! What the heck would you expect?

    Fantasy profits are not the same as real profits.

    You need to distinguish the two.

    Valuation-Informed Indexing does that. Buy-and-Hold does not.

    Hence — Our economic crisis.

    My best wishes to you.

    Rob the Teacher

  16. The Pink Unicorn says


    The profits are real, but you don’t like to admit it. Do you know what are also driving those record profits? First, companies are more efficient. They have learned that they can do more with fewer employees (lower expense). Jack Welch spoke eloquently on this subject after the unemployment surge in 2008/2009. Secondly, foreign markets now account for about half of the S&P profits. This is a global economy and the growing middle class in the emerging markets, Latin America, etc are hungry for Western goods and services.

  17. Rob says

    By the way Rob, deleting posts doesn’t change history.


    Take good care, man.


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