Set forth below is the text of a comment that I recently posted to another blog entry at this site:
You’ve already agreed that nobody actually uses these strategies as you define them. Instead, everyone makes individual allocation decisions based on their unique situations. So why keep talking about two imaginary strategies?
You overstate things as is the usual Goon practice, Anonymous.
You are right (and it is an important point) that few investors follow Buy-and-Hold dogmatically or Valuation-Informed Indexing dogmatically. Some do. But they are in the minority.
But there are many investors who follow a somewhat softer version of Buy-and-Hold (what I call Strategy C). And there are a good number (but a much smaller number) who follow a somewhat softer version of Valuation-Informed Indexing (what I call Strategy D).
Neither of the two strategies are “imaginary.” Both have had great influence. Buy-and-Hold has had far more influence than Valuation-Informed Indexing thus far. But it is my belief that Valuation-Informed Indexing will have more influence in the future. It was the intent of the people who developed both strategies to develop a research-based strategy. That is a huge advance. So both strategies are of huge historical importance. Both increased our knowledge of how stock investing works. I don’t see how it is fair to refer to either strategy as “imaginary.”
I DO think it would be fair to say that the vast majority of investors find limited appeal in theory. Most investors live in the practical realm. They want to know what works, not what the research says. I think it is a mistake to ignore the theoretical. I think that the research can be a great guide to learning what works in the long term and that placing too much focus on what works can cause one to place too much focus on short-term results. But I do think that it is fair to say that most investors do not focus too much on the theoretical appeal of either of the two models.
Even investors who focus on the practical are unknowingly influenced by the theoretical. You believe with all your heart, mind and soul that the numbers on your portfolio statement are real. That is probably largely because you are drawn to the practical and accepting a number on a portfolio statement as real is a practical thing to do. But the bigger reality is that, if all the experts in this field told you that you need to make an adjustment to those numbers to obtain accurate numbers suitable for serving as the basis of your financial planning efforts, you would come to view the idea of making the adjustments as a practical thing to do and would begin doing it.
The line between the practical and the theoretical is not a thick, bold line. The one realm bleeds into the other. Even people who think of themselves as not interested in theory are influenced by it because they are influenced by the teachings of others who are influenced by theory in a more direct way.
I mentioned the other day that there was a time when physicians used bleeding as a cure for all sorts of illnesses for which it is not an appropriate remedy. Say that you were a doctor in those days and that you had developed an effective cure not involving bleeding for an illness conventionally addressed with bleeding. If you tried to apply that cure, you would have been attacked by those using the bleeding cure. You would be viewed as a threat by them. It would be said that your treatment was “dangerous.” Patients who didn’t care at all for theory and just wanted to be cured would run from you because they would view your methods as “dangerous” from a practical standpoint even though your methods were the proper ones. The continued reliance on the discredited theory would be holding back progress by holding back acceptance of a perfectly practical course of treatment by causing it to be perceived as less than practical.
That’s where we stand in the investing realm today. The theory behind the Buy-and-Hold strategy has long been discredited. But in the practical realm Buy-and-Hold remains dominant. There are few pure Buy-and-Holders. But the vast majority of investors follow stock allocation strategies more in line with the theory behind Buy-and-Hold than in line with the theory behind Valuation-Informed Indexing.
That’s what I want to see change. I want people to follow the strategies that appeal to them. But I want them to be able to hear about the strengths and weaknesses of both theories before making a choice. So it is important to me that I and all other community members who believe in Valuation-Informed Indexing be permitted to post honestly. If we all post honestly, I believe that knowledge of how the VII theory works will spread over time and stock allocation choices that are at least somewhat influenced by that theory will become more popular. For so long as we defer to the intimidation tactics of the Buy-and-Holders and hold back from giving complete and clear explanations of why we favor the theory behind VII, Buy-and-Hold will remain dominant and VII will not experience the growth that I want to see it experience.
I hope that helps a bit.