Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Most people just go to the grocery and buy whatever is there. So it sounds like you fully support buy and hold.
I’ll make another point that relates to your “buy whatever is there” comment.
People are looking for something when they buy milk. Let’s say that they are looking for something to put on their cereal. When milk prices rise too high, they look for alternatives. Perhaps they buy that powdery stuff that you mix with water to get milk but that is not quite the same thing as milk sold in bottles and which thus might not be affected by the price increase for milk. Or perhaps they give up eating cereal for breakfast and switch to English muffins. Milk sales go down and English muffin sales go up until the price of milk returns to reasonable levels.
That’s how markets work. It is the demand for a good value proposition on the part of people buying a product offered for sale that creates the magic by which the market is able to set the price properly. This is how it works in every market that exists except the stock market. In the stock market, there is no price resistance. The newspapers report that the price of stocks has doubled over the past year and people throw parties to celebrate the good news. A market becomes dysfunctional when the people being hit with increased prices jump for joy about it. When the people buying the product refuse to do their job of looking for alternatives to a product that becomes overpriced, the only way that the market can get prices down is to crash them. And that hurts all of us in very big ways.
People buy milk to have something to put on their cereal. People buy stocks to create an income stream that will support them in their old age, when they can no longer work. When the price of milk rises so high that English muffins offer a better value proposition, people switch from milk and cereal to English muffins. When the price of stocks rises so high that alternative asset classes offer better income streams, people need to switch from stocks to those other asset classes. In January 2000, stocks were offering a likely 10-year real return of a negative 1 percent. IBonds were offering a certain return of 4 percent real. Yet people continued to shove money into stocks and ignored IBonds. What the h?
They did that because of social pressure. Every newspaper they picked up told them how there was some mystical, magical “research” that showed that stocks are worth buying at any price. It was an obvious lie but it was not a lie that many of the people who refer to themselves as “experts” in this field dared to give voice to. The other “experts” (in marketing!) were making millions pushing the smelly Buy-and-Hold garbage. If someone came forward and told the truth about what the peer-reviewed research shows, it would blow their deal. So, to keep our well-paid careers humming, most of us agree either to lie about this stuff or at the least to pull our punches and put forward lots of word-game statements about how “market timing doesn’t work” (without specifying whether we were talking about short-term market timing or long-term market timing).
I don’t play that game, Laugh. I tell it like it us, to the best of my ability. You hate me for it. So be it. I don’t hate you. I love you all the same and I believe that there will come a day when you will love me too. It will happen following the next price crash when you will no longer possess a motive to lie to yourself about the value of your stock portfolio. You won’t need to divide by two to know the accurate numbers in those days; the next price crash will perform that tricky mathematical step for you.
I buy stocks in the same way that I buy everything else I buy. I compare the value proposition being offered with the value proposition being offered by alternative purchases and I go with the best one. That’s what I advise all my friends to do. The Buy-and-Holders say that we should never, never, never do the comparison, that we must always just take it on faith that stocks are best regardless of the price at which they are being sold. This lie has done more harm to human beings than any other lie ever told in the history of personal finance. I want nothing to do with it. I have hopes of going down in history as the one person who did more than any other to EXPOSE this ugly Buy-and-Hold/Get Rich Quick lie.
We all will be free to discuss THOUSANDS of exciting investment-related topics once this Buy-and-Hold Lie has been fully exposed far and wide. I can’t wait, you know? I built the Retire Early board to facilitate discussion of just those sorts of issues and I know from the reaction to my May 13, 2002 post that a good percentage of that board community was as excited about that prospect as I was. It’s not a majority of investors that is interested today, not by a long shot. But it is perhaps 20 percent of the community of investors that has an interest in hearing these issues explored. 20 percent of the community of all investors is millions of people. That’s good enough for me. I am on the side of those millions. I will continue to speak up on behalf of those millions when their right to hear both sides of the story is attacked by the members of Jack Bogle’s various internet Goon squads.
We will see how it all plays out, my good friend.