Set forth below is the text of a comment that I put to another blog entry at this site:
Stock markets have always been dominated by emotions in the short-term … makes them no different than any other market, of course. I’m having a hard time reconciling the notion that those short-term movements are driven by buy and hold investors. Isn’t a more likely explanation the fact that short-term volatility is caused by short-term investors who are jumping into and out of the market? If I buy and hold X as it goes from 50 to 100 and back to 50, how am I influencing those price changes?
Secondly, I’m not clear what you mean when you say that this “problem” — such as it is — is caused by a lack of information. What is this information, and what’s preventing access to it?
But returning to my original point — I’m still struggling with the process by which buy and hold investors could influence stock valuations. (Leaving aside the assumption that buy and hold investors are a singular entity, all sharing the same risk tolerance, investment goals and time horizon.)
Thanks for asking a very intelligent question, Curious.
The proper way of saying it is that it is an IDEA that is associated with Buy-and-Hold that is killing us, not Buy-and-Hold investors per se.
Our society treats Buy-and-Hold as SUPERIOR to every other strategy. There are hundreds of possible strategies that you can read about in tip sheets and all this sort of thing. Anyone who wants to learn about these things can learn about them on the internet. There is no prohibition or anything like that. I could put forward a strategy based on astrology readings and promote it and, if I happened to make a buck on it, no one would care, you know? You see this sort of thing every day.
I CANNOT promote Valuation-Informed Indexing and not be intimidated with death threats and unjustified board bannings and ten of thousands of acts of defamation and threats to get academic researchers fired from their jobs and all sorts of other ugly stuff. Huh? I can promote an astrology-based strategy and I cannot promote a strategy supported by 33 years of peer-reviewed academic research? That makes no sense. What’s up with that?
The difference is that the astrology-based strategy poses no threat to the only strategy that is viewed in our society as being LEGITIMATE SCIENCE. The research that is thought to support Buy-and-Hold is not just some stuff a guy did in his basement. It is REAL. It is research that was published in peer-reviewed journals. It was performed by people who possess genuine academic credentials, people with Ph.D.s in Economics. In the case of Eugene Fama, it is research that was performed by a fellow who holds a freakin’ Nobel Prize! No astrology-based strategy can make such claims.
My old employer Ernst and Young once paid to have a fellow come to our offices and give a presentation on how to fund our 401(k) accounts. Lots of big employers pay for this sort of thing as a benefit to their employees. They don’t hire people to recommend astrology-based strategies. If they did that, they would probably end up in jail. When you are teaching your employees what to do with their retirement money you have to follow some sort of STANDARDS. As a society we view Buy-and-Hold as having met those standards.
Buy-and-Hold is different in this respect from every other strategy out there. You could say that it is the official strategy of our society. Or that it is dominant among academics, who are the people we turn to to tell us what is genuine and what is fake. You could say that Buy-and-Hold is the only strategy that can make a legitimate claim to being research-based. When a general-interest magazine like Money puts an article on the cover to help people upset by a stock crash figure out what to do, it doesn’t just put up random ideas sent in by uninformed people. The reporters interviews recognized experts to write that story. Recognized experts are generally people who have spent years studying the principles of one particular strategy — Buy-and-Hold.
Buy-and-Hold is king today. Not necessarily with investors. It’s popular with investors. But there are of course lots of investors who fail in all sorts of ways to follow Buy-and-Hold principles. But when someone is trying to speak with authority on how stock investing works, they speak about the principles of Buy-and-Hold. Buy-and-Hold is viewed as being real and legitimate and research-based in ways that no other strategy is.
Buy-and-Hold EARNED that status. That is not under dispute. The research that supports Buy-and-Hold is serious research. The people who performed that research are serious people. The people who teach Buy-and-Hold principles in our schools are good and smart and hard-working people. They teach Buy-and-Hold because they believe in it and because they want to help the people who come to them trying to learn how stock investing works.
The problem that has been at the core of our discussions for 12 years now is not that Buy-and-Holders are stupid people or evil people or anything along those lines. The problem that we have been having for 12 years is that ALL of us (INCLUDING Buy-and-Holders) are human. That means that we are capable of error. We might believe with all our hearts, minds and souls in a particular idea and it might turn out somewhere down the road that that idea is rooted in falsehood. It happens.
Buy-and-Hold is recognized as the only true research-based strategy. That supplies it a huge marketing advantage. There are millions of middle-class people who are worried about what is going to happen to their retirement money and who thus choose to invest their money pursuant to research-based strategies. Those people follow Buy-and-Hold strategies. For good reason. But what if Buy-and-Hold is rooted in error? What if Buy-and-Hold is in reality a very dangerous strategy? That would be a catastrophe. That would mean that millions of people who followed Buy-and-Hold solely because it is research-based and safe were in fact following a strategy that was not research-based and that was not safe. What could be worse?
I obviously support 90 percent of the principles behind Buy-and-Hold. All of those principles have been incorporated into Valuation-Informed Indexing. So none of that is under dispute.
It is one principle that is under dispute. Unfortunately, that one principle is a very big deal. It is the core principle. It is the foundation stone of the model. That principle is the one that is expressed in the phrase that we have all heard 10 millions times — Timing Doesn’t Work.
That’s the question that is under dispute. We can go back into history and learn why Buy-and-Holders believe that timing doesn’t work. There was research showing that short-term timing doesn’t work. That research has stood the test of time. So in an important sense we could say that the Buy-and-Holders have been vindicated even on this point.
But Wade Pfau (who holds a Ph.D. in Economics from Princeton) searched all of the research published in this field and learned that there has never been a single study giving any reason whatsoever to believe that long-term timing doesn’t work. There is zero reason to believe this. The Buy-ad-Holders discovered through research that short-term timing doesn’t work and then JUMPED TO A HASTY CONCLUSION that long-term timing doesn’t work. The claim “Timing Doesn’t Work” is FALSE. There is zero research showing this. There is a mountain of research showing the opposite — LONG-TERM TIMING ALWAYS WORKS AND IN FACT IS REQUIRED FOR ANYONE HOPING TO HAVE ANY REALISTIC CHANCE WHATSOEVER OF LONG-TERM INVESTING SUCCESS.
You say “stock markets have always been dominated by emotions.” That’s so. But has the problem ever been as bad as it is today? Before Buy-and-Hold, we did not have strategies that were given official approval by academics and all this sort of thing. The guy with the astrology-based strategy couldn’t say to millions of middle-class investors “this is real, this is safe, this is the product of research.” The Buy-and-Holders do make that claim and millions have placed their confidence in the claim. WHAT IF THE CLAIM IS FALSE? WHAT IF THE FALSE CLAIM CAUSES THE BIGGEST ECONOMIC CRISIS IN U.S. HISTORY? WHAT IF THE FALSE CLAIM CAUSES THE SECOND GREAT DEPRESSION?
We all need to be careful when making claims about how investing works. But the Buy-and-Holders have to be ESPECIALLY careful. Because the Buy-and-Holders have a special responsibility. They are the ones who say that their claims are rooted in research, the real stuff, the genuine stuff, the serious stuff.
These claims that the Buy-and-Holders make are false and dangerous claims. They didn’t start out intending to make false claims. They started out trying to do something wonderful. But their flawed humanity caused them to make a mistake. And here we are. We MUST fix this mistake.
There are many, many people in this field who want to see the mistake fixed. Bogle sprinkles statements into his writings showing that he thinks Buy-and-Hold (as presently constructed) is a big pile of smelly garbage. He wouldn’t say that Reversion to the Mean is an “Iron Law” of stock investing if he believed in Buy-and-Hold on a deep level. And of course what is true of Bogle is true of just about everybody else. Benrstein doesn’t believe in Buy-and-Hold on a deep level. Swedroe doesn’t believe in Buy-and-Hold on a deep level. Burns doesn’t believe in Buy-and-Hold on a deep level. And on and on and on.
Why don’t they speak out?
They are AFRAID.
Their careers will be destroyed if they say what they believe in public. Our good friend Wade Pfau learned this lesson the hard way.
The Buy-and-Hold Mafia is holding us all hostage. People have built careers advocating Buy-and-Hold. Now they are stuck. If they continue promoting Buy-and-Hold, they risk being held liable following the next crash for promoting stuff that has been discredited for 33 years. If they point out the dangers of Buy-and-Hold, they know from seeing it happen to other people that their careers will be destroyed.
We are as a nation in the process of making the transition from Buy-and-Hold to Valuation-Informed Indexing (which is really just Buy-and-Hold 2.0). We all WANT to do the right thing. We all WANT to see Buy-and-Hold reformed and revised and improved so that it actually works. But how the heck do we pull that off? If any one of us speaks up, he is destroyed. We have to find some means to have a good number of us all speak up at one time so that we are protected from the Buy-and-Hold Mafia. But how do we pull that off when we are afraid even to organize? If the Buy-and-Hold Mafia learns that we are organizing with the intent of getting accurate and honest information on how stock investing works out to millions of middle-class investors, it will see to it that we are destroyed and the story of the past 12 years shows us that they will show precisely zero mercy when doing the job.
Stock markets have always been dominated by emotion. But never like this. How do we know the situation is worse in the Buy-and-Hold Era than it has ever been before? The P/E10 metric tells us. A P/E10 value of 25 tells us that we have caused an economic crisis with our emotional unwillingness to consider price when setting our stock allocations. We have never gone to 25 and not produced an economic crisis as a result. There is one time prior to the 1990s that we went to the low 30s. That time we caused not just an economic crisis but a Great Depression. In the Buy-and-Hold Era, we got so emotional that we went far, far, far beyond 25 or 33. This time we went to 44, a P/E10 value likely to cause a Second Great Depression of twice the depth and length of the first. We have taken investor emotion to places it has never been taken before by telling millions of middle-class people that Get Rich Quick not only works but is research approved!
It is the IDEA that stock investors need not consider price when buying stocks that is the problem, Curious. If some fellow following astrology-based strategies fails to lower his stock allocation when prices reach insanely dangerous levels, he is causing as much economic destruction as the fellow who advocates or follows Buy-and-Hold strategies. But I am not nearly as concerned about the fellow following astrology-based strategies as I am about the fellow following Buy-and-Hold strategies. The difference is that Buy-and-Hold APPEARS legitimate.
Most investors are not aware of the 33 years of peer-reviewed research showing that this smelly Get Rich Quick garbage can never work for even a single long-term investor. They ASSUME that people like Jack Bogle and Bill Bernstein and Larry Swedoe and Scott Burns would tell the truth if they knew that Buy-and-Hold had been discredited for decades now. They don’t know about the Buy-and-Hold Mafia and about the ruthless intimidation tactics they employ on anyone whose conscience provokes him into “crossing” them by telling the truth about the last 33 years of research.
As a society we are working our way through a Paradigm Change. It is a wonderful thing. At the other side of The Big Black Mountain, we have an investing strategy (Valuation-Informed Indexing) that is the strategy that the Buy-and-Hold Pioneers were hoping to build when they started out. We now have all the pieces of the puzzle. We now know how to obtain far higher returns while reducing the risk of stock investing by 70 percent. Investor heaven!
But to get there, we need to work up the courage to take on The Buy-and-Hold Mafia. Lots of people have built high=paying careers promoting Buy-and-Hold strategies and they don’t want to give up that turf, no way, no how. These people are wiling to commit felonies to stop the rest of us from learning what we very, very, very much need to learn. This is why Buy-and-Hold is different. The guys who push astrology-based strategies are not 100th as defensive as the Buy-and-Holders. They don’t employ death threats to stop people promoting other strategies. They follow the laws of the United States. The Buy-and-Holders do not. They have had a dominant position for many years now and they don’t intend to give it up, 33 years of peer-reviewed academic research be darned!
It is the IDEA that price discipline is not required when buying stocks that is killing us, Curious. Every time some Buy-and-Holder says “timing doesn’t work” or “timing is not absolutely required” or “it might be possible to succeed as an investor without timing the market,” it gets worse. The information that people need is information about the 33 years of peer-reviewed academic research showing that price discipline is just as important in the investing realm as it is in any other. The PROBLEM is that the people who have built careers promoting Buy-and-Hold are INSANELY DEFENSIVE about the last 33 years of peer-reviewed academic research in this field.
We need to get everyone to pull together. We are all in the same boat. None of our retirement plans mean a darn if our economic system and our political system collapse. So the first priority is getting honest and accurate information about how stock investing works out to the millions of middle-class investors who have been deceived by the Buy-and-Holders.
That was a super question. Thanks much for asking it.
I wish you well.