Set fort below is the text of a comment that I recently posted to another blog entry at this site:
Mark Twain was referring to the Bible. [The reference here is to the quotation in which Twain said that it is not the things that you don’t know that hurt you but the things that you know for certain that just ain’t so.]
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.