Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Here’s an interesting article: https://www.washingtonpost.com/business/get-there/what-history-tells-us-about-your-investments-in-2017/2016/12/30/1e4c5714-cc4d-11e6-a87f-b917067331bb_story.html
Juicy excerpt: “Since 1990, the S&P 500 has traded above the average CAPE ratio in 307 of 324 months — that’s 95 percent of the time. If you abandoned U.S. equities when the CAPE ratio was overvalued (like Rob) you would have missed gains of more than a 1,000 percent over that time (like Rob.) In fact, had you only invested when the CAPE was 25 percent overvalued — i.e., when stocks were simply “expensive” — your total returns since 1990 would have been 650 percent. This is one of many reasons it is ill-advised to use valuation as a timing mechanism.”
Let me anticipate your brilliantly insightful response: “I obviously disagree.”
This is another one of those cases in which you have done us all a service by bringing a relevant and helpful article to our attention, Anonymous. I was not able to read the entire article because I have hit my limit on Post articles for the month. But I will read the rest when I am able and consider this one as fodder for a possible future column. My comments below are based only on the excerpt that you have provided.
Yes, I do indeed “disagree” if the point of the column (when read in its entirety) is to suggest that long-term timing is a bad idea. The phrase “if you abandoned U.S. equities” jumps out at one. You see that to abandon equities is an extreme position, right? Why would one test the value of exercising price discipline by looking at what happens when one takes the most extreme position possible?
Aiming to pay a fair price for a car is a good idea, right? If you determine that a particular year and make of a car is properly priced at $30,000, you might make a decision not to pay more than $30,000 for that car. You have a number of options open to you in the event that the dealer quotes a price of $35,000. You could come back with an offer of $25,000, hoping to meet in the middle. Or you could make an offer of $30,000, saying that you know that that is the true value of the car and saying that you just are going to refuse to pay more than that figure no matter what. Or you could walk out saying that you are insulted by the offer and vowing never to come back.
The last option is a poor strategic choice. It is common for dealers to quote prices in excess of the price at which they are willing to sell a car. Walking out every time this happens makes it likely that you are never going to own a car and forsaking cars is a bad idea. Extreme acts often bring bad consequences. It does not follow that potential car purchasers should accept every price ever requested by a dealer. What follows is that potential car purchases should avoid extremism.
So it is with stock buyers. Exercising price discipline is always a good idea. Never once in 145 years of stock market history has it not produced good long-term results. But, no, extremism in the exercise of price discipline is not a good idea. Engage in extreme behavior when exercising price discipline and you can mess up even the great concept of price discipline.
The flaw in the article is that in the real world no one would choose to exercise price discipline in the crazy way examined in this article. How about checking to see whether price discipline exercised in a more reasonable way works or not? That always works. Is there some reason why you are not open to doing it that way? Is there some reason why the article does not explore what happens to investors who do it that way?
It is a horrible, horrible idea to fail to exercise price discipline (to fail to, in the words used in the article, “use valuation as a timing mechanism.) So, yes, I disagree. The words you use in your comment — “Let me anticipate your brilliantly insightful response” — convey sarcasm and hostility. This is where things become goonish.
Say that you disagree with me 100 percent. Say that you are highly confident that it is a bad idea to exercise price discipline when buying stocks. Okay. That would mean that we have a difference of opinion. A common occurrence in this world, right? Is hostility the usual response to the evidencing of a difference of opinion? It is not. Outside of the investing realm, people have differences of opinion all the time and they do not feel hostile toward each other. In the investing realm, people go freakin’ nuts when someone expresses a different point of view.
But only followers of one particular strategy do that. Buy-and-Holders do that. I have never in our 14 years of discussion seen a time when a Valuation-Informed Indexer became hostile solely because a Buy-and-Holder expressed a different point of view. But I have seen it from Buy-and-Hold Goons hundreds of thousands of times. Why? What is it about the Buy-and-Hold strategy that makes you Goons go so freakin’ nuts every time your ideas are challenged?
I think the problem is that the core Buy-and-Hold idea (that it is not necessary to exercise price discipline when buying stocks) defies common sense. Exercising price discipline works in every other market that exists and there is now 35 years of peer-reviewed research showing that it works in the stock market as well. That simple and obvious reality drives you Buy-and-Holders out of your freakin’ minds.
You see one one level of consciousness that Buy-and-Hold just does not make sense and you cannot bear to entertain the possibility that you have for a long time been mistaken in your investing beliefs. And so you lose it. You jump for all sorts of means to block out the knowledge that is causing you pain. You give in to feelings of hostility toward those bringing reports of what the last 35 years of peer-reviewed research says because you want them to shut the hell up before their comments cause you to experience any more anguish.
I believe that you are better off feeling that anguish now. The anguish is going to be more painful if you put it off until after the next price crash.
And I believe that that is not your choice to make re the millions of middle-class investors who have a desire to learn today what the research says. If you choose to ignore the last 35 years of peer-reviewed research, so be it, it’s your life. You do not have the right to make that decision for millions of others. When you engage in behavior contrary to U.S. law to block those millions from gaining access to the information that they need to gain access to to protect themselves from feeling great anguish following the next crash, you place yourself outside the laws of this country. That’s bad news.
And that bad news tells us something bad about Buy-and-Hold. It tells us that it is pure emotion, that it is a very, very, very bad strategy.
Please note that I did not say that the article is bad. The article examines an important question. I don’t know everything. I could be wrong. People need to read articles like this to appreciate how I might be going wrong.
But people also need to see articles like this challenged by people like me. People need to see Buy-and-Hold CRITICIZED on a daily basis, as often as it is promoted. You Goons intimidate people into either not criticizing Buy-and-Hold at all or into holding back their punches when they criticize Buy-and-Hold. That’s bad news. That’s why I call you “Goons.” You have hindered our debate in a very serious way by engaging in this sort of behavior. You need to knock it the heck off. You need to do that by the close of business today.
I am not a Buy-and-Holder. I am the most severe critic of Buy-and-Hold alive on Planet Earth today. I am a gift to those who possess confidence in the Buy-and-Hold strategy. That’s not you. People who possess confidence in a strategy are happy to see it criticized. Criticism helps us strengthen our beliefs as part of the process in which we develop responses to the criticism. You lack confidence in your investing strategy. That’s not good.
Does ANYONE possess confidence in Buy-and-Hold?
It appears that just about no one possesses confidence in this strategy. Not all Buy-and-Holders are Goons. Most are not. But the Buy-and-Holders who do not personally engage in Goon behavior would criticize the Goon behavior when they saw it if they possessed confidence in the strategy. And just about no one does this. For so long as prices remain high, most non-Goon Buy-and-Holders TOLERATE the hostile or even abusive or even criminal behavior of Goons like you. What the h?
Buy-and-Hold is messed up, Anonymous. That’s my sincere take re this terribly important matter in any event.
Once again, I do appreciate that you took time out of your day to bring the article to my attention. Considered by itself, that was the action of friend. If I am wrong about investing, I want to find that out as soon as possible. By bringing the article to my attention, you did something that could potentially help me to learn something important that as of this morning I had not learned.
But then you crossed the line and included that hostile language. That is the part that I wish you could knock off. Leave out that part and we (and millions of others) have a great debate that we all learn from. Include that part of some of us end up in prison cells following the next price crash. Yucko Deluxe!
Please take good care, my dear friend.