I’ve posted Entry #69 to my weekly Investing: The New Rules column at the Death by 1,000 Papercuts site. It’s called Pride Comes Before a Stock Crash.
Juicy Excerpt: A group of my critics put together a web site for the purpose of ridiculing me. I don’t approve. But I do listen in to what they say. You’re more likely to learn about the weaknesses of your ideas bylistening to your critics than you are by listening to people who think you are the tops.
One time these fellows asked a hard question.
They noted that I say that Valuation-Informed Indexing provides far higher returns than Buy-and-Hold. At greatly reduced risk. And that it is backed by 30 years of academic research, based on 140 years of stock market history. And that it is a less stressful way to invest. And that it lets those who follow it retire five to 10 years sooner than otherwise would be possible.
If all that is so, Rob, why aren’t there millions of people beating a path to your door?
azanon says
That question is/was not hard. It is actually a logical fallacy, and a common one at that. It’s called “Appealing to Popularity” See: http://www.nizkor.org/features/fallacies/appeal-to-popularity.html
There was no argument at all in that question, and it shouldn’t have even been dignified with an answer.
Rob says
I understand about the common logical fallacy, Azanon.
But I do think that in this case the question merits examination.
Why wouldn’t advice on how to invest effectively be popular?
Rob
azanon says
“But I do think that in this case the question merits examination.
Why wouldn’t advice on how to invest effectively be popular?”
Perhaps I should have called it what it was, an argument for why you are wrong, not a question. It was only posed from the standpoint of being evidence for you being wrong, it deserved no response. However, the question you’re posing is totally different because it involves no logical fallacies.
To answer your question, perhaps one reason is because there’s only one published, and one unpublished research supporting what you’re advocating here. In science, before you have a theory, you typically have repeated, and overlapping research supporting a claim before it catches the attention of the masses, and before others will be willing to follow it.
A second reason is because you’re at least partially in error in assuming that the method and the idea isn’t already popular. I wonder if the idea of “buying low and selling high” is not, in fact, the most popular and most quoted concept in investing. And is that not what you’re advocating? Further, is there a more popular metric for measuring valuations that price relative to trailing earnings? Discussion on P/E ratios is usually in Chapter 1 of any technical analysis of the stock market.
So to say this stuff is new and/or unpopular would be ignorant, if nothing else.
Rob says
perhaps one reason is because there’s only one published, and one unpublished research supporting what you’re advocating here.
Shiller’s research was published in 1981, Azanon. He is a professor at Yale. His work has been examined by thousands of the smartest people in the field. No one has found a flaw. Nothing is ever 100 percent. We don’t know with 100 percent certainty that the moon is not made of green cheese. But the fact that Shiller’s work has survived 30 years says that it is very strong work.
There has never been a single study, published or unpublished, showing that long-term timing is not required (that is, that Buy-and-Hold can work). Fama’s idea of an efficient market was an hypothesis, not a finding. The thing you do with an hypothesis is that you check it out. That’s what Shiller did. When the check was done, the hypothesis was discredited. That should have been the end of the story.
Can people continue to follow Buy-and-Hold strategies today if they like despite the lack of scientific support for them? Of course they may. It’s up to them. But people may also point out the dangers of this strategy on discussion boards and blogs that have published rules protecting their right to do so.
In practical terms, people cannot today do this at the boards and blogs that have imposed bans on honest posting on safe withdrawal rates and other important topics. But according to the published rules of the boards, they may do this. I think it is fair to say that, as the Buy-and-Hold Crisis worsens, there are going to be more and more people expressing the view that the published rules of these boards and blogs need to be enforced.
Are you able to imagine any possible downside?
Rob
Rob says
you typically have repeated, and overlapping research supporting a claim before it catches the attention of the masses, and before others will be willing to follow it.
If your point here is that we need to get on with the national debate on the realities of stock investing that I have been publicly calling for for several years now, you certainly have my vote, Azanon.
The very first step is lifting the ban on honest posting on safe withdrawal rates and other critically important investment-related topics. I would like to see that accomplished by the close of business yesterday.
Are you with me?
Rob
Rob says
I wonder if the idea of “buying low and selling high” is not, in fact, the most popular and most quoted concept in investing.
It’s not popular among Buy-and-Holders, Azanon. It’s Buy-and-Holders causing all the trouble!
Take the Buy-and-Holders out of the equation and we don’t have a problem. There were hundreds of community members at the Motley Fool board who wanted to permit honest posting going back to the morning of May 13, 2002.
Rob
Rob says
And is that not what you’re advocating?
What I am advocating is a mix of the wisdom in the long-popular phrase “Buy Low, Sell High” and the wisdom advanced by the Buy-and-Holders (based on a mountain of valid research!) that “Short-term timing never works.”
In pre-Buy-and-Hold days, people were trying to buy low and sell high through the use of short-term timing. That never works. The Buy-and-Holders are heroes in my eyes for letting us know this. I am certainly not saying that we should go back to the days of Buy Low/Sell High through the use of short-term timing.
I am saying that we should add to what we learned from the research showing that short-term timing never works what we learned from the research showing that long-term timing is always required. You add those two together and you don’t have Buy Low/Sell High as it has been conventionally been practiced and you don’t have Buy-and-Hold (which replaced Buy Low/Sell How as it has been conventionally practiced). You have something entirely new that provides far higher returns at dramatically reduced risk — Valuation-Informed Indexing.
The mistake of the Buy-and-Holders was thinking that, because they had learned many important things, there was nothing new ever to learn. Their contributions were huge. You have certainly never heard me say different. Their unwillingness to acknowledge the stuff they got wrong has put us in the second worst economic crisis in U.S. history (and we are still in the early years of this crisis). That’s the unfortunate other side of the story.
The Buy-and-Holders are not making themselves look good with the defamation and the death threats and the board bannings. They are making themselves look awful. It’s Rob Bennett who is trying to help them out. I am saying that the Buy-and-Holders laid the foundation for the development of the best investment strategy ever known to mortal man, an investment strategy that reduces the risk of stock investing by 80 percent from what it was in the Buy-and-Hold years.
If you are a Buy-and-Holder, I am your friend, Azanon. If you are a Buy-and-Holder and you support the Ban on Honest Posting, you are your own worst enemy. It is by reforming Buy-and-Hold to make it what it was intended to be all along that we help out the Buy-and-Holders. That’s been my aim going back to the morning of May 13, 2002.
The Buy-and-Holders struck gold when they came up with the idea of following strategies supported by the academic research and the historical data. They went off the rails when they got behind the idea of ignoring new research. Science is a quest for truth. What we know changes over the years. We need to add what we learned from Shiller’s research to what we learned from Fama’s hypothesis to become able to enjoy an investing strategy that truly works for the long-term investor in the real world.
Please think it over, Azanon. It’s all good stuff and zero bad stuff. It is your negative emotional response to the wonderful news that brings ugliness into it. We need to overcome this economic crisis. The joke is less and less funny for more and more people with every passing day.
I of course wish you the best of luck in all your future endeavors regardless of what you decide.
Rob
Rob says
Discussion on P/E ratios is usually in Chapter 1 of any technical analysis of the stock market.
P/E1 doesn’t work, Azanon.
It is this stubborn unwillingness of the Buy-and-Holders to acknowledge years of research showing that, to predict stock returns effectively you must use P/E10 rather than P/E1 that is one of the biggest causes of the confusion so many are suffering from today.
Why not use what works? What possible benefit is gained by using what we know doesn’t work. I mean no personal offense, but this is madness.
I am going to continue to advocate what works and trying to discourage people from doing what does not work. What a wild a crazy guy I am!
Rob
Rob says
So to say this stuff is new and/or unpopular would be ignorant, if nothing else.
Market timing has been given a bad name in the eyes of millions of middle-class investors as a result of the hundreds of millions of marketing dollars spent by The Stock-Selling Industry to persuade people that timing is not necessary or that there is some sort of magical, mystical study somewhere suggesting that timing somehow might not be required in some circumstances.
We have nine years of Post Archives showing this to be so, Azanon. If every one of today’s investors knew how dangerous it was to fail to engage in long-term timing, we never would have seen a single death threat or a single board banning or a single act of defamation. I mean, come on.
Rob