Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
“match the overall performance of the market and not beat it”
is the exact definition of buy-and-hold. It is the exact opposite of all market timing strategies.
As you well know.
No. Buy-and-Holders CLAIM that their strategy is not aiming to beat the market. That’s why I once found appeal in Buy-and-Hold. That’s why I became a Buy-and-Holder myself.
But this claim is fallacious. The P/E10 value is produced by the market. The Buy-and-Holders do not take the P/E10 value into consideration in any of their calculations. If they did, they would divide their portfolio values by two when prices are where they are today. The Buy-and-Holders IGNORE a key component of the market’s message.
If in Year One, the P/E10 is at fair value, all investors know the true value of their portfolios and are able to invest effectively and rationally. Now, say that prices are pushed up to two times fair value in Year Two. The Valuation-Informed Indexers continue to invest effectively and rationally. Their portfolio statements provide a number two times what they provided one year earlier. But the P/E10 value tells them to divide by two. So they are still using accurate numbers.
The Buy-and-Holders only listen to one part of what the market is saying. They listen to the price increase. They change all of their plans because of the phony change in that number. But they tune out the part of the market’s message where the market says that they need to divide by two to know the true value of their portfolios. They do this so that they can take a false comfort in the phony price message. They are trying to beat the market by using phony numbers to fool themselves re where they stand.
Why are the Buy-and-Holders not happy with a return of 6.5 percent real if they are not trying to beat the market? If the nominal market price goes up 30 percent in one year, the real gain is 6.5 percent real and the rest is cotton-candy nothingness, right? Why do the Buy-and-Holders count the cotton-candy nothingness as if it were real? They want to beat the market and refusing to do the calculations properly permits them to do so (at least in their own minds).
This is why we have crashes, Anonymous. There is no economic explanation for crashes. Crashes are emotional events. We have crashes when Buy-and-Holders realize that their phony numbers are not rooted in anything real, that they are the product of exercises in self-deception. The stock crash phenomenon is similar to what you see when a spouse who has been cheated on for years finally gets a clue about realities that his or her friends have known about for many years. He or she always “knew” what was going on but lied to himself or herself until the point when it became impossible to maintain the fantasy belief. At that point, the illusion “crashes.”
If you are not trying to beat the market, why do you refuse to adjust your portfolio value for the amount of overvaluation that applies today? Why do you not divide by two? The market produced that P/E10 value. Do you think you know better than the market what the P/E10 value should be?
We are as a people working through a transition in which we become self-aware of our stock investing illusions and thereby become able to rein them in so that they cannot do as much damage to us. That’s why Shiller’s 1981 findings were so “revolutionary” (his word). That’s why the man was awarded a Nobel prize for his work.
P/E10 is produced by the market. It is not something outside the market. Anyone who ignores P/E10 when doing stock-related calculations cannot claim to accept the market. Buy-and-Holders ignore an important part of what the market has produced.
Buy-and-Holders count the numbers that support their illusions and then refuse to count the ones that do not. That’s trying to beat the market, not acceptance of the market’s verdict re how much money you have to retire on. Buy-and-Hold is an exercise in self-delusion for so long as it ignores the effect of valuations on long-term returns. No Buy-and-Holder has ever been able to explain why he ignores valuations. He does so because it is by ignoring valuations that he is able to delude himself into believing that he has done the impossible, he has beaten the market in a convincing way, he has done what has never been done before. Yeah, sure he has.
All investors who claim to be able to beat the market have some rationalization that they put forward as their “proof” that they were the first in history to develop this amazing power. The Buy-and-Holders are no different than any of the others in this respect. Buy-and-Hold just happens to be the Get Rich Quick strategy that is most popular at this point in time (because it has been pushed so relentlessly by the Wall Street Con Men, who just happen by sheer coincidence to have become multi-millionaires by doing so).
Valuation-Informed Indexers ACCEPT that the economic realities permit an annual return of 6.5 percent real, nothing more and nothing less. We don’t have to delude ourselves that there are years when our portfolio values increase by 20 percent or 30 percent or 40 percent because we know that the 6.5 percent real return is enough to finance our retirements JUST FINE. We don’t feel a need to beat the market, just to match it. And we know that accepting the delusions that the Buy-and-Holders accept to permit us to fool ourselves into thinking that we are beating the market makes effective financial planning impossible and that we are far better off just not going there.
If you are not trying to beat the market, why do discussions of the last 36 years of peer-reviewed research cause you such intense emotional pain, Anonymous? All of your abusive posting is rooted in your intense emotional need to keep the illusion that you and you alone have figured out the way to beat the market. I am seeking to disabuse you of this foolish and dangerous illusion by pointing you to the 36 years of peer-reviewed research showing that a belief that valuations do not affect long-term returns is a fantasy.
I don’t need to beat the market for my plan to work. A 6.5 percent annual real return works JUST FINE for me.