I’ve posted Article #5 in my series of articles on the realities of stock investing at the Financial Highway site. It’s called For-Fee Financial Planning Solves the Wrong Problem.
Juicy Excerpt: the bias here is so big that people aren’t even comfortable talking about it. We can imagine a world in which financial planners recommend only goods and services in which they truly believe because they are compensated in such a way that the need for commissions doesn’t compromise them. We cannot imagine a world in which financial planners tell the truth about when stocks are worth buying and when they are not. That would be so big a change in the history of investing that it seems beyond us.
If there were advisors who monitored client portfolios with valuations in mind—a valuations-informed strategy—and then helped those clients to “stay-that-course”, so to speak, by shifting allocations when necessary, that might be worth paying a fair fee for some investors.
I say this because many investors might know what to do intellectually, but can’t implement due to emotions, and so might find such a service valuable.
Of course, the best of these advisors would also be helping with other aspects of financial planning that have nothing to do with investing per se.
The one snag I see with what you are saying is that the investor who is not able emotionally to do the right thing himself is probably not going to be able to permit his advisor to do the right thing either. If the advisor sticks to his guns and does the right thing against the client’s wishes, the investor will fire him.
I think the advisor has to actually persuade the investor of the merit of setting his allocation properly. That’s a hard thing to do if you are the only advisor following this course because the investor can point to lots of other advisors urging an opposite course.
But what if lots of advisors all at the same time adopt a policy of telling the truth re what the last 30 years of academic research says (perhaps because we became concerned as a nation about the deepening economic crisis). Then it would be easy. Each time an investor challenged an advisor for doing the right thing, the advisor could point to all the other advisors urging the same course of action to make his case.
We would then be using peer pressure not to make us all worse investors but to make us all better investors. This is what I would like to see.
Rob
What a good advisor can do is hand-hold and help manage the client’s fears through hard times. Of course, the client always would have to OK a decision, either at the moment or prior.
Sometimes clients do what some advisors call— reaching their GMOP (Get Me Out Point); thus, they would go to cash rather than buy yet more equities at better valuations.
There is no perfect science to this. But much can be avoided by a good advisor who effectively teaches the concepts a priori, before they accept client assets.
You are accurately describing things as they are today, Arty.
I am looking forward to a new world. We now have academic research that reveals the realities of stock investing. Once we gain the ability to share what we have learned with others, all the rules of stock investing change. We don’t have to remain stuck in the dark ages.
People want to invest effectively. If we tell them how to do so, why should we think they will not do it? People say “oh, they have never done it before.” True enough. But we have never known the true story before and so we have never told people the true story before. Now we do and so now we can.
There’s not going to be such a need for hand-holding in the future because there is not going to be the same amount of volatility in the future. We now know what we need to know to reduce volatility to a fraction of what it is today. The only thing holding us back is the ban.
Rob
Rob wrote: “People want to invest effectively. If we tell them how to do so, why should we think they will not do it? ”
Because [good] investing is simple but it is not easy.
I think Buffet, who clearly regards valuations as important, said that. He said so because emotions can overwhelm even bright minds.
All one can do is teach what they believe good investing strategies are. An advisor who teaches the same (say, valuations-informed investing) might help a few more folks manage their emotions, providing folks are willing to pay for that guidance.
I don’t see it, Arty.
Today, honest posting on what the academic research of the past 30 years says is banned at every large investing board and blog on the internet. The “experts” in this field are tireless in promoting the purest and most dangerous Get Rich Quick approach ever concocted by the human mind. Millions of investors believe these people are telling the straight story. I know this because I have spoken to them.
Are you saying that you do not think it would make a difference if The Stock-Selling Industry spent its hundreds of millions promoting Valuation-Informed Indexing rather than Buy-and-Hold? It seems to me it would make a HUGE difference.
It sure seems to me to be worth giving the idea a try, in any event. If telling the straight story doesn’t work, we could always try something else. But why not at least try it? How can we have any reason to think it will not work until we give it a try?
Rob
All I am saying is that even good investing can, at times, be difficult to implement. I clearly can’t claim to have invented that (Buffet did, I think), though I do claim to have experienced that effect.
I think if valuations-informed investing were vigorously promoted by the “stock-selling industry” (it can never be due to competing interests to rob folks) then many more investors would do better.
But that does not render the first proposition incorrect, even for the successful ones.
Buffett is talking about Value Investing, Arty. That’s for sophisticated investors. Average people can invest in index funds. What’s hard about that? I don’t see why this has to be even a tiny bit hard.
The one thing that is hard is that we all have a Get RIch Quick urge that causes us to mess up and The Stock-Selling Industry spends hundreds of millions trying to persuade us to give in to that urge. I am suggesting that we play it the other way, that we encourage people to avoid Get Rich Quick. It seems to me that would make all the difference.
I don’t really agree with the part where you say the industry will never promote VII “due to competing interests to rob folks.” My personal view is that that statement is a little too cynical. Do you really think the industry got behind Buy-and-Hold out of a desire to rob folks? I do not. I think it was a mistake. The research had not all been completed in the early 1970s, when Buy-and-Hold was being developed and popularized.
I believe that, had Shiller’s research been available in 1971 rather than 1981, the name of the book published in 1974 would have been “A Valuation-Informed Walk Down Wall Street,” and we would all be Valuation-Informed Indexers today. It was just an unfortunate turn of events that caused things to get so mixed up.
It’s not like the industry cannot make tons of money promoting VII. If middle-class people came to see how easy and risk-free stock investing can be, MORE people would invest in stocks than ever before. In the end, the industry would love it. The hard part is making the transition from Buy-and-Hold to VII because they are built on opposite premises and it sounds funny to all of a sudden start telling people that the research says the opposite of what you have been saying it says for 30 years now.
I do not think the people in the industry are bad, Arty. I think they have painted themselves into a corner. I think they would love to be giving effective and responsible advice. I think we all should be helping them out of the corner into which they have painted themselves.
I do agree that stock investing has been hard in the past. But I don’t see why that needs to remain true in the future. The purpose of doing research is to advance our knowledge and thereby make our lives better. Well, we’ve done it! The research has taught us amazing things, things amazing enough as to take 80 percent of the risk and complexity out of stock investing.
Now we just need to get about the business of spreading the word to all our friends and neighbors and co-workers and fellow community members!
I am grateful for your willingness to participate in the back and forth, Arty. It’s not my intent to be insulting or difficult. I just see things that others do not appear to see and it is hard not to want to push the ball forward when I can see so many wonderful things for all of us on the other side of the Big Black Mountain.
I do not believe that there is one soul on Planet Earth who obtains any benefit from us all remaining back in the dark ages re our understanding of how stock investing works. I see the idea of moving forward as a win/win/win/win/win, with no possible downside. Others feel that I am pushing. I just see it as me wanting to spread the good news to as many of my fellow middle-class investors as possible.
Rob
The act of investing in Index Funds is easy and anyone can do it. I get that. That isn’t what I am talking about.
I’m talking about valuations-informed investing as being *emotionally challenging to do at times* (as per PE/10, buy more stocks when the market tanks, and things appear scary; sell stocks when the market is roaring and life seems good). In that sense, it is indeed similar to what Buffet is suggesting when he also says “be greedy when others are fearful,” etc.
Now, when you say “stock selling industry,” that includes lots of types.
The “stock selling industry” (which also really implies your “get rich quick” folk), also includes a very different sort than the buy-and-holders you rail against. It clearly includes the machine that is Wall Street and CNBC—with all the individual selection and short-term timing this implies.
Those guys are all about “right now investing”. Those are some of the dominant people that will never get behind what you are suggesting for the obvious reasons that it makes them less money—across many venues and advertisers.
And it isn’t all about selling stocks. The “industry” still makes money if you are in their fixed income securities too.
And that doesn’t make them “bad”—just focused on their own wants and needs.
And I agree about spreading the good news to as many as possible.
I understand the distinction you are making between those who advocate short-term timing and the Buy-and-Holders. I feel more kinship with the Buy-and-Holders because we agree on so many things. But I actually think the Buy-and-Holders have done more harm.
Failing to engage in long-term timing is a bigger mistake than engaging in short-term timing (in my view!). And the Buy-and-Holders really do come off as responsible (in large part because that is what they are trying to be!). So I think they take in more people. Lots of people who can see through the short-term timers think the Buy-and-Holders are telling the straight story.
Lifting the ban would not help with the short-term timers. But I think it would represent a huge change if all the people today pushing Buy-and-Hold were instead pushing Valuation-Informed Indexing. Things would just keep getting better and better and over time we would be learning more and more. That’s a big deal because the learning process has been on hold for 30 years now.
I don’t think Valuation-Informed Indexing would be hard to do if those trying to do it were encouraged every day by write-ups in the newspapers and magazines and web sites and all this sort of thing. What makes it so hard today is that those doing it are acting outside the norm. But, once we lift the ban, the norm changes.
Now —
Will there even be bull markets after we give ourselves permission to talk about what the academic research says?
I do not think there will be. I think we have seen the last bull market. And that means we today are living through the last bear market. And there is even reason to believe that we are living through the last economic crisis.
Learning permits us to overcome these bad things. That is what I am saying.
I feel that you (and many others, to be sure) are looking at things as if the world is static — there never can be advances in knowledge of how to invest. But what if there can be advances? We have done away with certain diseases because of advances achieved in the field of medicine, have we not? Why can’t we do away with bull markets and bear markets and economic crises as a result of the advances we have achieved in the field of stock investing research?
To me this is all as clear as could be. I acknowledge that many smart and good people don’t see it. It mystifies me why they don’t see it. I get the impression that it mystifies them why I am so optimistic. I just see things moving in a very, very positive way once we get over this little rough patch we are living through today. To me, it all follows logically — A leads to B and B leads to C and C leads to D, and — Bam! — there we are, in the golden age of stock investing.
It’s all just up around the bend! You can see it from here!
At least I can!
Rob
Rob wrote: “Will there even be bull markets after we give ourselves permission to talk about what the academic research says?”
I do have less faith than you that innate fear and greed will ever be modified thus.
But if I were to fantasize and posit an investing universe where most who buy the S&P 500 would implement a solid, valuations-informed approach, I think we’d see a smoother returns curve—less of a dispersion of returns outcomes—a reduction in fat tails—a broader middle, so to speak.
Now, you’d still get unpredictable global events that would effect markets (wars, accidents, contagions, even unexpected great news, etc.), and they might still call the highs “bull markets” and the lows “bears,” but they would be less marked and of shorter duration.
Here’s to a broad middle!
To a broad middle!
Rob