Set forth below is the text of a comment that I recently posted to another blog entry at this site:
if you make a wild causal claim like this, you must back it up with evidence. Can you point to any academic studies showing, or even trying to show this is true?
There is no direct evidence one way or the other. We cannot ask the market to sit down on the coach and respond to our questions.
The Buy-and-Holders BELIEVE that bad economic news caused low stock prices. They do not KNOW this. There is no study that SHOWS this. They arrive at this conclusion by following the logic of their theory, which is exactly what I do. Different theories lead to different beliefs about all sorts of questions.
If the Buy-and-Hold theory were correct, price changes would be random. They are not. So I throw the ideas that follow from Buy-and-Hold out and go looking for ideas that make sense given what the last 33 years of research tells us.
The research shows that the primary cause of price changes is changes in investor emotion. If that’s so, the best time to buy stocks is when investor emotion can only move in an upward direction. That’s when prices are low. When prices are low, there is zero risk because there is only one direction in which emotion (and prices) can move.
Do you not agree that, when prices fall hard, trillions of dollars of spending power leave the economy? Is there some doubt about this point?
If trillions of dollars of spending power leave the economy, would you not expect the economy to collapse? What else could it possibly do?
The point that I am making here is self-evident, Anonymous.
It is not self-evident to someone who believes in Buy-and-Hold. Buy-and-Hold posits that it is economic developments that cause price changes. But to someone who has given up on that idea because the last 33 years of research discredits it, what I am saying here is self-evident.
It’s as clear as clear can be. We once thought that things worked one way. Now we know that we were wrong. We are in the process of determining how things REALLY work. All of the work that I do at this site is part of an effort to explore the IMPLICATIONS of Shiller’s revolutionary finding of 1981.
The amazing thing is that no one had done this work before I came on the scene. Is that my fault? I am trying to get more people involved. I think it would be fair to say that, if you Goons stopped the attack stuff, I would be more successful doing that. It is very, very important work. And once Buy-and-Hold falls, it is going to be very, very financially rewarding work. My personal thought is that anyone who possesses the qualifications to do the job and who holds off on taking advantage of the opportunity is a fool.
Anyway — I certainly have as much proof to offer in support of what I say as the Buy-and-Holders have to offer in support of what they say. Please show me the study showing that it is economic developments that cause stock prices to drop. You believe it. I can give you that one. But you cannot provide a URL for a study because no such study exists.
I face this problem in lots of different areas. Buy-and-Holders act as if they are 100 percent sure of everything they say. But rarely do they have any evidence to point to in support of what they say. They just argue that “Everyone agrees about this” or some such thing. If what everyone thought was right, you wouldn’t see “revolutionary” findings like what we saw in 1981 from Shiller and in 2012 from Bennett/Pfau.
Mark Twain said that it is not the things you don’t know that hurt you the most but the things that you know for certain that just ain’t so!
Rob
Anonymous says
Big market drops, Rob. Where are the announced prison sentences and your $500 million windfall you have been talking about?
Rob says
Patience is a virtue, grasshopper.
Rob
Anonymous says
12 years is a long time to wait.
Rob says
It is.
But how long has humankind been trying to solve the puzzle of how stock investing works, Anonymous?
My preference would have been if we all decided to work together beginning on the afternoon of May 13, 2002.
You can’t always get what you want.
Is that not so?
It takes what it takes.
Something this good and this positive is worth whatever amount of time it takes to pull off.
That’s my sincere take re this terribly important, in any event.
I naturally wish you the best of luck in all your future endeavors regardless of what investing strategies you elect to pursue, old friend.
Rob
Anonymous says
“But how long has humankind been trying to solve the puzzle of how stock investing works, Anonymous?”
We already know how it works.
critter says
Mark Twain was referring to the Bible.
Rob says
His point is well taken regardless of what he was referring to, Critter.
When people come to believe strongly in something, it is difficult for them to give up that belief. That’s a reality of human life.
So you have to be careful about what you believe. We are imperfect creatures. We make mistakes. When we come to believe something that isn’t so, we place ourselves in a tough spot. We then have to go through whatever efforts it takes to unbelieve that thing. And that can be a tough business.
It is a very, very, very tough business when the thing that we are trying to unbelieve is our core belief about how stock investing works. The particular thing that we got wrong here (Buy-and-Holders reject the reality that price discipline is REQUIRED when buying stocks just as it is when buying anything else) doesn’t produce bad results for a long period of time and then produces massive amounts of human misery. That combination produces incentives for covering up the mistake that have proven to be very difficult to overcome.
With most mistakes, you get negative feedback in a short amount of time. If someone said that it is a good idea to drive a car while drunk, we would see negative effects from that advice quickly and we would warn people of the dangers of following that advice. In this case, Fama made a mistake in 1965. It wasn’t discovered until 1981. And then, since stocks were at rock-bottom lows in 1981, the mistake did not even have any practical effect until 1996 (when prices had reached the insanely dangerous level). But even when prices reach insanely dangerous levels, it can take 10 years or a little bit more to see serious negative effects (we had a slow-leak crash that began in 2000 but that did not upset too many people given how big the gains had been in earlier years). People began to realize that something was seriously wrong in 2008. But even the onset of the economic crisis wasn’t enough to shake a lot of people from their belief in Buy-and-Hold, given how great was their emotional investment in it. I believe that the next price crash will do it. But we are today a long ways off from 1981, when the peer-reviewed research was published showing that there is zero chance that this strategy could ever work for even a single long-term investor.
If the human misery caused by this mistake were not so vast, it would have been corrected following the 2008 price crash. That was a development that affected millions. Shiller predicted the economic crisis in his book. How could a people not sober up and acknowledge that pure Get Rich Quick is not the way to go in stock investing following an event of that magnitude?
The problem is that the pain was TOO great. If we acknowledge that Buy-and-Hold caused the economic crisis, we are acknowledging that our universities failed us and that our investment advisors failed us and that our journalists failed us and that our bloggers failed us and that our economists failed us and that our policymakers failed us. We had a warning that the investing strategy that is pushed 24/7 on all media outlets was 100 percent false, 100 percent dangerous, that it had caused three earlier economic crises, that there was not a grain of truth to it. It was all written up in a book that was a best-seller and that was written up in all the major publications. And we did nothing. Huh? How could we do nothing when a book told us the simple truth about stock investing, a truth that would have stopped the economic crisis if only we had heeded the message?
It’s very, very, very, very, very painful stuff.
The good stuff that comes from permitting discussion of the last 33 years of peer-reviewed research is 50 more times good than the bad stuff is bad. But the bad stuff is very, very, very hard to hear. So, 33 years after the mistake was uncovered, as a society we continue to pretend that it might not really be a mistake. We have no logic to offer in support of that proposition and we have no research to offer in support of that proposition and we have no common sense to offer in support of that proposition. But we have threats of violence, we have threats to destroy people’s careers. So Buy-and-Hold soldiers on. Barely. By the skin of its teeth. But it’s still there. There are still people who can overlook all the human misery that the pure Get Rich Quick approach has caused and pretend that there might be some alternate universe where everything would work the opposite of how the last 33 years of peer-reviewed research shows that it always works. Hey! Nobody has a crystal ball. It COULD turn out that way! Anything is possible. No?
We’ll see, Critter.
I love my country and I think we were smart to adopt laws against financial fraud and I believe that following the next price crash there will be lots of good and smart people (including many of my Buy-and-Hold friends!) who will demanding prompt enforcement of those laws.
You don’t see it. Or at least you say publicly that you don’t see it even if you do worry that you bet on the wrong horse.
We cannot click on the remote and get to a channel that permits us to see how the future plays out.
I am not capable of committing financial fraud under the laws of the United States. So I am going to continue playing it the way I have always played it.
All signs are that you are going to do the same from your end.
Someday in the not-too-distant future, we will all find out for sure.
I certainly wish you the best of luck with it, my old Goon friend.
As more sand runs through the hourglass, we will all see how things go. My focus today is on making sure that, when that day comes, there will be thousands and thousands and thousands of post in the Archives showing that I spoke up in the strongest and firmest and most non-compromising terms possible in support of the idea of permitting honest posting on safe withdrawal rates and scores of other critically important investment-related topics. I can do no more and I can do no less.
My best and warmest wishes to you and yours.
Rob
Rob says
We already know how it works.
So you say.
Are you sure?
What if you are wrong?
What happens then?
Are you able to cover everyone’s losses if it turns out that you are mistaken in what you believe?
Rob