I’ve posted Entry #374 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called What Buy-and-Holders Really Believe.
Juicy Excerpt: Stock returns have been dramatically subpar for 18 years running now. But Buy-and-Holders are not unhappy with them. When they assess the merit of their strategy, they consider the time-period from 1982 (the beginning of the last bull cycle) through 1999 as well, years when Buy-and-Hold performed very well indeed. Over the last 35 years, Buy-and-Hold has been a good strategy. That’s what counts for most Buy-and-Holders.
The trouble is that stocks are today priced at two times fair value, and, if those who are happy with Buy-and-Hold today saw their portfolio value reduced by 50 percent, they would not be so happy any longer. It can take a long time for the downside of the Buy-and-Hold concept to evidence itself. I believe that the minds of many Buy-and-Holders will open to new ideas following the next price crash.
Presuming that the next price crash takes valuations to fair-value levels or lower and that they remain there for some time, that will be the first time since Shiller published his research showing that valuations affect long-term returns that investors will be able to consider its implications without the bias that comes from enjoying years of good stock returns. I believe that we will see the launching of a national debate on the meaning of Shiller’s research findings at that time.
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