Set forth below is the text of a comment posted to another blog thread by a site visitor:
“…only unforeseen economic developments affect price, price changes are random. That’s by definition. That’s why the book was given the name it was given. This is the core principle of the Buy-and-Hold strategy. ”
Rob, “he who defines the question, wins the argument.” I certainly do not subscribe to YOUR definition(s) of Buy and Hold, nor of the reason one might apply it. To me, as a self-described ACTUAL Buy-n-holder, it’s this simple:
* Markets tend to go up over time. Ownership of common stocks have proven to be the best way for an average person to participate in, and profit from this ongoing economic growth.
* It has proven impossible to determine which particular stocks will outperform, or when they might do so.
* Buying, and then holding a market-basket of ALL stocks that constitute the market, on a regular and recurring basis, without respect to ‘timing,’ removes the uncertainty of guessing which particular stocks will be best, or which is the best time to purchase them.
That’s it.
People can refine, add gimmicks, accessories, etc, or even purposefully misconstrue (AHEM, looking at YOU, Rob!) but to me, THIS is the essence of buying and holding. So, for you to go on a decades long intense daily public jihad against those principles, and the people who espouse, and apply them, seems frankly… well, insane.
You are free to use whatever market timing scheme, or other method you chose to invest, or course. But for you to characterize the above technique as “Get Rich Quick,” just to irk people and to hopefully draw attention to yourself, shows how both intellectually feeble, and also morally challenged you are. (I dare you to publish this.)
Anonymous says
Rob said: “I was talking to one of my priests the other day about this stuff (we had him out to the house). He said: “Why don’t you write Shiller and ask him to help you out?” Good question, Father! I’ve written Shiller. When I wrote him seeking help with you Goons, he did not reply. Shiller does not want to get involved! That says a lot about why we are in this situation.”
Yes. Yes, it does.
Rob says
At least we agree on that much, Anonymous.
Thanks for taking time out of your day to stop by.
Rob
Laugh says
“If Buy-and-Hold were proven, smart people would stop doing things that Buy-and-Hold says cannot be done.”
The statement above is the crux of your problem. Define ‘things’ and show where buy and hold shows they cannot be done. What part of buy and hold needs to be proven? All it says is if you hold the market portfolio you will get the market return (minus small expenses).
Rob says
The statement that “if you hold the market portfolio, you will get the market return” is a tautology. It’s obviously true. And it doesn’t tell us anything of significance.
The reason why people respond well to that claim is that the average market return is 6.5 percent real. Brett Arends of the Wall Street Journal pointed out that the Buy-and-Holders “leave out half the story.” The half that they leave out is that you only get that 6.5 percent return if you buy an index fund when valuations are at fair-value levels. Buy when they are selling at the prices that applied at the top of the bubble and the most likely 10-year annualized return is a negative number. Big Difference!
Most investors have about 40 years of investing (from age 25 to age 65) to finance their retirements. Giving up 10 years sets them back in a huge way. The part that the Buy-and-Holders leave out is a pretty darn big part! Buy-and-Hold is a con. It’s a Get Rich Quick scheme. It’s a Ponzi scheme. It’s a marketing gimmick. It’s financial fraud. It’s a felony. It’s prison time. There is no “there” there. That’s why you Goons “defend” it with death threats and demands for unjustified board bannings and tens of thousands of acts of defamation and threats to get academic researchers removed from their jobs. There is no way to defend Buy-and-Hold in clean and rational debate. Not with 34 years of peer-reviewed research showing that it is a scam!
The Buy-and-Holders need to prove their outrageous claim that there is some alternate universe where it might not be necessary for all investors to practice price discipline (long-term timing). Price discipline is what makes markets work. In all other markets, those participating in the market practice price discipline. The stock market is the only exception. That’s because of the scam being worked by the Wall Street Con Men and their Internet Goon Squads.
You cannot prove this outrageous and preposterous claim because there is zero truth to it. The entire 140 years of historical return data available to us shows us that not only is pure Get Rich Quick not the answer but that pure Get Rich Quick is actually the problem!
Who’d a thunk it?
Take care, man.
Rob
Laugh says
You are wrong. Once you get to the 40 year time period the historical returns are in a fairly tight band. Let’s pick horrific starting years on purpose and see.
For example starting in 1970 one of the worst decades for stocks still leaves you with higher than 6% cagr real. Starting in 1928 gives you even higher 40 year returns – over 7% real.
Finally the metric you use ‘pe10’ loses its predictive value immensely as time periods exceed 20 years. You are wrong all over. It really is sad.
Rob says
In a 40-year time-period, you will experience both great times to own stocks and horrible times to own stocks. The overall effect will be that you will earn a return somewhere near the average return of 6.5 percent real. If you invest more heavily in stocks in the years in which stocks offer an amazing value proposition and less heavily in stocks in the years when stocks offer a horrible value proposition, you will be far, far ahead. There’s no comparison. Your risk will be reduced by 70 percent and you will be able to retire five to ten years sooner. Investor Heaven!
P/E never loses its predictive value. It just predicts something different over time-periods of more than 20 years for the reason described above. Check out the Return Predictor and you will see this clearly.
There’s nothing even a tiny bit sad about it. This is the biggest advance in the history of investing analysis. Using the peer-reviewed research of the past 34 years to guide your stock allocation decisions is a win/win/win/win/win with no possible downside.
My best and warmest wishes to you, Laugh.
Rob
Anonymous says
“Most investors have about 40 years of investing (from age 25 to age 65) to finance their retirements. Giving up 10 years sets them back in a huge way.”
Right, and you’ve willingly given up almost twice that.
Rob says
Buy-and-Holders have been earning 2 percent real since 2000. I’ve been earning 3.5 percent real. I’m ahead.
The Buy-and-Holders are ahead if you count from 1996 forward. But not by much. And my risk has been far lower. On a risk-adjusted basis, I’m ahead even counting from 1996.
And on top of all that, the market is priced for a 65 percent price drop. Which will put me far, far, far ahead.
Then I will get decades of compounding on the differential, putting me still farther and farther and farther ahead.
And of course that’s just the way it has been working for 145 years now.
Can I “give up” some more? Is there a way to go even farther ahead by exercising even more price discipline?
Hang in there, old friend.
Rob
laugh says
The plain facts are that you said an investor’s retirement is typically 40 years and I demonstrated that over this time period that buy and hold achieves the market return within a tight band of 6.5% real. Therefore, there is no real issue with buy and hold in the retirement scenario. It is also very hard to make sense of you calling a 40 year investment strategy ‘get rich quick’.
You are also wrong about 1996. The real return up to the end of 2014 is more than 6.1% so you have given up considerable return.
The 2000 date is irrelevant as your strategy would have you out of equities in the 90s. I did not bother to dig into that data but I assume there are some times where a massive lump sum into stocks would have been a bad idea and produced a bad outcome (2% equity returns). Good idea following buy and hold / dollar cost average strategies eliminate this risk.
Rob says
We agree that after 40 years a Buy-and-Holder would earn an annualized return of about 6.5 percent real. But there is very much a real problem with Buy-and-Hold all the same.
First, only a tiny percentage of investors would be able to hold to their high stock allocations through the crash produced by Buy-and-Hold. The research shows that we will be going down 65 percent from where we are today before this secular bear market comes to an end and that we will be staying at the low point for perhaps five years. How many Buy-and-Holders do you expect will be sticking with their high stock allocations through that? Taylor Larimore is the author of a book on Buy-and-Hold and he couldn’t stick through the turmoil of 2008/2009 even though that price drop did not remain in effect long. Huge price drops shake people up. They cannot stick. In fact, it is not even POSSIBLE that most Buy-and-Holders would stick through such a price drop. If most Buy-and-Holders stuck, PRICES COULDN’T GO DOWN. It is the Buy-and-Holders selling their stocks that brings prices down to such insanely low levels.
I don’t call Buy-and-Hold “Get Rich Quick” because of what happens after 40 years. I call it “Get Rich Quick” because of how Buy-and-Holders treat Pretend Gains of one year. In the late 1990s, we had years where the nominal return on stocks was 20 percent or some other absurd number. Those Pretend Gains are produced by investors collectively borrowing returns from the future, returns that must in future years be paid back (producing returns of far less than 6.5 percent for numerous years). To earn 6.5 percent real on your investment and count that in your financial planning as a return of 20 percent is to engage in Get Rich Quick thinking. It is its encouragement of Get Rich Quick thinking that is the entire appeal of Buy-and-Hold. If it were not for the emotional appeal of Get Rich Quick strategies, not one of the Wall Street Con Men would push this garbage. Buy-and-Hold sells. Valuation-Informed Indexing works.
My return since 1996 has been 3.5 percent real. The rule of thumb that I use to adjust for risk is that stocks need to produce 2 additional points of real return to justify the risk associated with them. So you’re not talking about a significant difference. And of course these numbers won’t apply following the next crash and the decades of compounding that will follow.. Valuation-Informed Indexing will then be so far ahead that the numbers won’t be in the same ballpark.
The numbers that matter are the numbers reported in the peer-reviewed research that I co-authored with Wade Pfau. We showed that over 30 years VII ALWAYS beats BH soundly. In one out of ten 30-year periods, Buy-and-Hold had better nominal numbers. But it never had better risk-adjusted numbers. And the difference between the two strategies in the 90 percent of cases in which VII prevailed was often huge. In some cases, the difference in portfolio value was over $1 million. That’s rare. But the difference is USUALLY in the hundreds of thousands of dollars.
Wade presented those results at the Bogleheads Forum. He received a VERY positive response. Investors there was excited to learn what really works. And then you Goons threatened to send defamatory e-mails to get him fired from his job unless he agreed to stop doing honest work. Jack Bogle was fine with that. Bogle knows what happened and he did nothing in response. To this day Bogle permits his name to be used at that board. What does that tell you about Bogle, who is the lead advocate of Buy-and-Hold? All of you Goons and all those who failed to speak up are Buy-and-Holders. What does that tell you about Buy-and-Hold? Buy-and-Hold is a con. The Buy-and-Holders recognize that it cannot survive without threats of physical violence and demands for unjustified board bannings and tens of thousands of acts of defamation and threats to get academic researchers fired from their jobs. Yuck! I want no part of it.
The 2000 date is very relevant. Buy-and-Hold has produced a poor return for nearly 16 years running. If you told investors in 2000 that that was going to happen, they would have said that you were out of your mind. Only Shiller was telling us in 2000 that that was going to happen. That’s because his model works and the Buy-and-Hold Model does not work. There are calculators on the internet that tell people how much they need to save to have enough to retire on when they turn 65. These calculators all assume a 6.5 percent real return, the historical average return. But stocks don’t earn the historical average return going forward from a time when they are insanely overpriced. So all those calculations produced wildly wrong numbers. Its not good for us to have millions of people engaging in poor financial planning. Sound financial planning will remain an impossibility for most for so long as the Wall Street Con Men continue to cover up their mistake and push the purest and most dangerous Get Rich Quick scheme ever concocted by the human mind.
Buy-and-Hold takes price discipline out of the market. Price discipline is what makes markets work. No market can function indefinitely without price discipline. Markets in which price discipline has been severely damaged crash. Always. There has never been an exception. The benefit of using peer-reviewed research to guide our strategies is that it helps us see through scams like this.
I’m not buying what you’re selling, Laugh.
That said, I do wish you the best of luck in all your future life endeavors.
Rob
Anonymous says
“My return since 1996 has been 3.5 percent real.”
Even if true (extremely doubtful), so what? TIPS at 3.5% real was a short term opportunity. You keep trotting out your taking advantage of that anomaly as proof of VII. No. A strategy has to be reproducible. Tell me how to get risk-free 3.5% real TODAY and I’ll listen. Otherwise you’re nothing but hot air.
Rob says
The return on risk-free asset classes changes just as the return on the high-risk asset classes changes. And these changes are often correlated. Stocks were insanely popular in 2000. So the risk-free asset classes had to offer insanely high returns to attract investors. Lots of people are scared to be in stocks today. So it is possible to attract investors to risk-free asset classes with much lower returns. That’s just the way it works.
It does not follow that the risk-free asset classes are not a great buy today. Sure, the 4 percent real return that was available in 2000 was amazing. But we are a lot closer today to the price crash that will pull stock valuations down to one-half of fair value. So stocks are a lot more dangerous today. It follows that in relative terms the risk-free asset classes are an even better buy today than they were in 2000.
We are one or two years away from the next price crash, one in which Buy-and-Holders will be losing two-thirds of their life savings. In return for accepting a low return for those one or two years, Valuation-Informed Indexers avoid that crushing hit. That leaves them with far more assets to invest in stocks when the most likely annualized return on stocks jumps up to 15 percent real. Then they see compounding returns on those huge gains for the rest of their lives.
That’s a questionable deal. Huh? The benefits here are just amazing. You are getting FAR MORE than 3.5 percent real when you consider the gains that you will get from stocks for many years to come that will not be available to the Buy-and-Holders.
Shiller’s “revolutionary” (his word) finding of 1981 is the biggest advance in the history of personal finance. There is nothing else even remotely close. We have spent hundreds of millions promoting the purest and most dangerous GRQ scheme ever concocted by the human mind. Now we need to acknowledge the mistake uncovered 34 years ago by the peer-reviewed research in this field and spend hundreds of millions promoting the first true research-backed strategy.
Peer-reviewed research is not hot air. No way, no how. The best insight that the Buy-and-Holders ever came up with was their idea that we should all use the peer-reviewed research in this field as our guide to how to invest. The Buy-and-Holders were right the first time. They should have stuck with their original core idea when Shiller published his revolutionary research of 1981.
That’s my sincere take re these terribly important matters, in any event.
Rob
Anonymous says
“We are one or two years away from the next price crash, one in which Buy-and-Holders will be losing two-thirds of their life savings”
You’ve been predicting this crash for at least five years. In that time the S&P 500 has nearly doubled.
Rob says
Short-term predictions don’t work, Anonymous.
The peer-reviewed research in this field shows that only long-term predictions work.
So, yes, that’s what I go with.
To see your portfolio double means nothing if you lose all that plus more in the following years. I mean, come on. What matters is how you do in THE LONG RUN. GRQ strategies NEVER work in the long run. There has never been a single exception.
You should do some runs on The Scenario Surfer. You will see that it is common for Buy-and-Hold strategies to go ahead for a time. What we are seeing in recent years is nothing new. It would be shockingly new if this turned out to be the first time in history that a Buy-and-Hold strategy worked in the long term.
I can’t say that it is impossible. Nothing is truly impossible in this mixed-up world of ours. But I feel comfortable saying that it is the longest of all possible long shots.
Not this boy.
Anyway, don’t let the bad guys get you down, old friend.
Rob
Anonymous says
“Short-term predictions don’t work” (short term, in this context, being five years)
“We are one or two years away from the next price crash”
Amazing display of cognitive dissonance.
Rob says
No.
That prediction goes back to September 2008, when we saw the first crash of this secular bear market. If you count 10 years forward from September 2008, you get to September 2018. We should see the next crash by September 2018, according to the peer-reviewed research in this field. That’s not a short-term prediction, that’s a long-term prediction.
It could of course come sooner. That’s why my personal prediction is that we will see the crash by the end of 2016. The safer prediction is that we will see it by the end of 2018. But when you Goons asked me to give a date, you were seeking accountability. I think that’s a fair thing to seek. And I don’t think it would be entirely fair for me to use the farther-out and safest date in response. When the research shows that we will have a crash by the end of 2018, the odds are strong that we will see it by the end of 2016 (eight years out). So that’s the date I used for my personal prediction.
It’s not a short-term prediction. It’s a long-term prediction for which most of the years have already passed.
Rob