Set forth below is the text of a comment that I recently posted to the discussion thread for one of my columns at the Value Walk site:
You can’t wait until you are 90 for your plan to come through, Rob. Buy and hold has continued to work, while people peddling timing schemes have continued to fail. The record is there for all to see.
Stocks have provided an annualized real return of 2.25 percent real since 2000, Sammy. Is that working?
I had a friend at the big consulting firm that I worked at who used a calculator to determine how many years it would be before he had enough to retire on. The calculator used an assumption that stocks would provide an annual return of 6.5 percent real. He made his asset allocation decisions based on what that calculator told him. He’s obviously far, far, far behind where he expected to be 18 years ago. He’s not the only one. There are millions who in some way or another planned their futures with the thought that stocks would continue to provide normal returns after we pumped prices up to the insanely dangerous levels that we pumped them up to in the late 1990s.
Buy-and-Hold has not continued to work. Buy-and-Hold has never worked. Valuations have been affecting long-term returns since the first stock market opened for business and all evidence is that valuations will be continuing to affect long-term returns for as long as there are humans living on this planet. Saying that Buy-and-Hold has always worked is like saying that drinking heavy has always worked to dispel the emotional problems one faces while working through the struggles of life. Drinking gives TEMPORARY relief. But it makes your problems worse down the road. It’s the same with engaging in the fantasy that you can push prices up to crazy levels by borrowing profits from the future and not pay a price for it down the line.
I love stocks. But I love human reason too. That means that I like to form realistic ideas of what investing in stocks will do for me at different price levels. There’s 36 years of peer-reviewed research showing that the long-term return on stocks depends on the valuation level at which they are purchased. That’s not Buy-and-Hold. That’s Valuation-Informed Indexing.
The record is there for all to see and the level of emotion of those trying to use the record to defend their favored strategies is there for all to see as well. If you want to know where you stand re stocks today, you need to divide your portfolio value by two to reflect the reality that stocks are today priced at two times fair value. If you fail to make that adjustment, you are not interested in forming an accurate assessment of what the record says. The record is telling you what you need to know but you are blocking out the message because you don’t care to hear it.
None of us needs to wait until we are 90 to know whether Buy-and-Hold or Valuation-Informed Indexing is superior. We need to look into our hearts and reach a conclusion as to whether it is true that valuations affect long-term returns. The conclusion that we reach re that question will determine all calculations that we do from that point forward. I have concluded that the last 36 years of peer-reviewed research in this field is legitimate research. I have concluded that Nobel Prize Winner Shiller is right and that Nobel Prize Winner Fama is wrong.
- “At the Very Bare Minimum, We Need to Make It a Practice to Tell Both Sides of the Story. Reasonable People Need to Absolutely Insist on That Much.”
- “Deep Down Inside We All Want the Same Things. We All Want to Know How Stock Investing Really Works. We All Want Our Retirement Plans to Succeed. That Unity of Core Purpose Will Eventually Help Us All to Get to a Very Good Place.”
- Goon Poster to Rob: “Why Do You Continue to Do What You Do? Clearly You Are Not Making Any Money.”
- “The Vast Majority of Buy-and-Holders Did Not Join in With the Ugly Stuff. But the Vast Majority Did Tolerate the Bad Behavior.”
- “Do You Think That a $100,000 Portfolio That Exists at a Time When the P/E10 level Is 8 (1982) Has the Same Value As a $100,000 Portfolio at a Time When the P/E10 Level Is 44 (2000)? I Say That the First Portfolio Is More Than Five Times More Valuable.”
- “I Have Raised the Possibility of an Amnesty for People Who Have Continued to Promote Buy-and-Hold Because They Once Truly Believed in it and Who Are Suffering Cognitive Dissonance re the Last 34 Years of Research Because It Is Just Too Hard for Them to Accept That They Got Something Wrong. But I Can’t Adopt an Amnesty By Myself. We Have to Get Congress Involved. We Need to Have a National Debate.”