Set forth below is the text of a comment that I recently posted to another blog entry at this site:
The price of apples fluctuates based on many factors. If today’s price is $1, I have an asset worth $1, and can sell it for that price. There’s no pretend money at all.
If today’s fair price for an apple is $1 and someone tries to sell an apple for $3, there are ways to find out that that person is overcharging. People do that. They compare prices. Then they refuse to buy apples that are being sold at insanely inflated prices. It is that process of comparing prices that is the magic that makes free markets work. Price discipline is the magic that permits markets to get prices right. Deny the participants in a market the information that they need to act in their own self-interests and you destroy that market.
The stock market is just like any other market. The market participants are naturally drawn to correcting mispricings because it is in their self interest to buy more stocks when prices are good and to buy fewer stocks when prices are insanely inflated. The difference in the stock market as it has come to operate in the Buy-and-Hold Era is that the Wall Street Con Men and their Internet Goon Squads have made it impossible for market participants to obtain the information they need to act in their self-interests and thereby to exercise price discipline and set prices properly. It is because of the massive act of financial fraud that we have seen in the 33 years since Shiller published his research showing that there is precisely zero chance that a Buy-and-Hold strategy could ever work for even a single long-term investor that we are in an economic crisis today and that we have millions of people on the way to experiencing failed retirements.
It is not reasonable to compare the stock market with any other markets until we work up the courage as a society to enforce the laws against financial fraud. Once your prison sentence is announced, “Buy-and-Hold” will become an obscene phrase among investors. Investors who are able to engage in discussions of what the last 33 years of peer-reviewed research tells us about how stock investing works in the real work will act in their self-interests and will see that mispricings are corrected.
Was there no Pretend Money in the Madoff fund?
The only difference between the Madoff fund and Buy-and-Hold is that in the promotion of Buy-and-Hold we have seen financial fraud on a scale 5,000 times bigger. Madoff’s lies causes thousands of failed retirements. The Lindauer/Greaney/Bogle lies are in the process of causing MILLIONS of failed retirements. There is no comparison re the scope of the two acts of financial fraud. But the core principle — a mountain of deceptions that aims to exploit the Get Rich Quick impulse that resides within us all — is identical.