Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
“You need to reflect on what the last 36 years of peer-reviewed research in this field is telling us, Anonymous.”
What research, other than writings by Shiller and Pfau, have you included in your exhaustive review? Who are the”peers” that have provide review and responses to the research you have referenced?
One of you Goons asked this question about two months ago and I responded with a long and detailed answer. I am not going to repeat those words here. If you want to tap into that one, I think you could find it by going through the somewhat recent blog entries.
The short answer is that there is a mountain of stuff. Shiller. Pfau. Russell. Arnott. Smithers. Bernstein. Kitces. And on and on and on and on and on. There’s no shortage of material.
The most important research that has been done is the two months in which Pfau went searching through the literature to determine how many studies there are showing that it is not necessary to exercise price discipline (long-term timing) when buying stocks. He found that there are zero. He was amazed to discover this. He spent years acquiring his Ph.D. and no one had ever told him this. He had heard thousands of times that “timing doesn’t work” and so he assumed that there must be a lot of research showing this. In fact, there is precisely zero research showing this. The claim that timing doesn’t work is 100 percent myth. There is no “there” there.
That’s the story, Anonymous. Given that there is precisely zero support for the key Buy-and-Hold claim, we should all be spending our energies trying to determine how stock investing really does work. If we did that, we would look to that mountain of research showing that the key is to always, always, always practice price discipline (long-term timing). The only reason why we are not all doing that today is that millions of us have a huge emotional investment in Buy-and-Hold. Either we have built out careers around it or we have written books promoting it or we have invested our life savings pursuant to its dictates or we have persuaded our friends that it is the way to go or whatever. We have not been engaged in an intellectual battle over the past 15 years, we have been engaged in a turf fight.
Buy-and-Hold was a MISTAKE. The idea that it is not necessary to practice price discipline was a MISTAKE. Instead of asking me what research supports Valuation-Informed Indexing, you should be asking me what research supports Buy-and-Hold. 100 percent of the research available to us supports Valuation-Informed Indexing. 0 percent of the research available to us supports Buy-and-Hold. This is why things get so nasty on your end. It’s hard to participate in an intellectual debate when you have no ammunition.
The core Buy-and-Hold claim is that timing doesn’t work. It’s that’s not so, the entire thing falls. Buy-and-Hold is a numbers-based system and, if timing works, all of the numbers it generates are wrong. Huh? What good is a numbers-based system that gets all the numbers wrong? A numbers-based system that gets all the numbers wrong is DANGEROUS.
The Buy-and-Holders were sincere when they developed their strategy. They truly believed that timing doesn’t work. They just didn’t have available to them at the time the tools they needed to determine the realities. There were no index funds in 1965. So there was no way to test whether long-term timing works or not. So Fama only tested short-term timing. Short-term timing really does not work. But he concluded falsely that timing in general doesn’t work. Had he been able to test both forms of timing, he would have concluded that “short-term timing doesn’t work but long-term timing always works.”
Shiller was the first to test long-term timing. He changed our understanding of how stock investing works in a fundamental way by showing that long-term timing always works. Research that doesn’t take his findings into consideration just doesn’t count anymore.
If some physicist came out with a study that was rooted in a belief that the earth is flat, reasonable people would just ignore it because it fails to take into account many years of research. That’s what we have with the Buy-and-Hold retirement studies. They are rooted in beliefs that people held prior to 1981. Yes, there are still smart and good people who hold those beliefs today but those people are not proceeding in a scientific manner. To proceed in a scientific manner, you need to take into consideration all the research available to you and there is now 36 years of peer-reviewed research showing that long-term timing always works and 0 years or research showing that there ever might be some alternate universe where it might not.
The short answer is — ALL of the research available to us supports Valuation-Informed Indexing and none of the research available to us supports Buy-and-Hold.
Now we just need to get prison terms announced for you Goons so that all of us who have expressed a desire to engage in civil and reasoned discussions about what the peer-reviewed research in this field really teaches us about how stock investing works can get down to the business of helping each other overcome any remaining thoughts that Buy-and-Hold (AKA/Get Rich Quick!) might be the answer.
I hope that helps a small bit, my long-term Buy-and-Hold friend.