I’ve posted Entry #318 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Price Discipline Is What Makes Markets Work.
Juicy Excerpt: I believe that it is the regular, quick feedback that changed my eating behavior. I have always had a sincere intent to avoid foods that make me fat. But you know how we humans do. We rationalize. We say “this one exception won’t make too much of a difference” or “I can do better tomorrow” or whatever. Someday never comes and the weight remains. But the blood glucose reader has been calling me out on my self-deceptions for one year now. If I want that darn machine to report good numbers, I have to avoid the sugar and the carbs. I can fool myself with my lies but I cannot fool that darn machine.
So it is with stock investing. Fail to exercise price discipline (that is, fail to adjust your stock allocation in response to big changes in valuations) and you will not see bad results for 10 years or perhaps even a bit longer. The feedback mechanism is too slow to influence human behavior in an effective way. Most of us practice Buy-and-Hold strategies for years before we pay a big price for it and then of course it is too late.
What if investing advisors discouraged self-destructive investing behaviors in the way that my blood glucose reader discourages me from eating foods that are not good for me? What if there were calculators at every investing site that told investors the true value of their portfolios when valuations are factored in? That would change everything. Investors would no longer be taken in by the happy talk of the Buy-and-Holders. They would stop rooting for price increases that had to be paid for by losses down the road and only get excited by the real ones supported by genuine economic growth (the ones that provide only a boring 6.5 percent real annual return).