A Rich Life

The Old Ideas on Saving & Investing Don't Work -- Here's What Does

Archives for March 2012

“The Terms “Buy-and-Hold” and “Get Rich Quick” Are Synonymous. Virtually All of the Risk of Stock Investing Comes from the Human Inclination to Be Drawn to a Buy-and-Hold/Get-Rich Quick Strategy”

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Set forth below is the text of a comment that I recently put to the Goon Central board:

Do these concepts look the same to you, idiot?

Yes, Drip Guy. The terms “Buy-and-Hold” and “Get Rich Quick” are synonymous. Virtually all of the risk of stock investing comes from the human inclination to be drawn to a Buy-and-Hold/Get Rich Quick strategy.

I will make an effort to explain why this is so. If you make an effort to listen, I am confident you will get it. If you permit your rage at discovering that there was a time when you did not know everything there is to know about stocks overcome your reason, you obviously will fail to get it yet one more time. I can put forward the explanation. It is necessary for you to put a tiny bit of effort into this too for the back-and-forth to bear good fruit.

Here is your definition of “Buy-and-Hold:

used to describe the activity of investing in something and then keeping it for a period of time

That’s a good definition.

Now —

What’s wrong with the idea of investing in something and then keeping it for a period of time?

What’s wrong is that this definition says nothing about whether the thing invested in offers a strong long-term value proposition or not!

Warren Buffett holds his investments for a long time. But he sure as shootin’ ain’t no Buy-and-Holder in the way that it is practiced by Lindauer and Greaney and Bogle. Buffett buys things worth buying and holds them. Lindauer and Greaney and Bogle buy stocks when they are garbage and then refuse to consider selling no matter how much holding on to garbage depletes their portfolios.

Huh?

I am not overstating things when I say that stocks were garbage in January 2000, Drip Guy.

The most likely annualized long-term return was a negative 1 percent real. TIPS were at the time offering a positive 4 percent real. That’s a return differential of 5 percentage points per year. For 10 years running. That adds up to a total loss of 50 percent of the initial portfolio size.

You are telling me that this is an acceptable investment strategy? If you truly believe that, you are insane.

This is suicide investing.

There are ten different aspects of the Buy-and-Hold package that are pure gold. As you know, I praise these aspects of the Buy-and-Hold package to the sky all the time.

But the Get RIch Quick aspect is so devastatingly bad that it overpowers all that could be good about Buy-and-Hold.

There is not one person on Planet Earth who benefits from the continuance of this 10-year-long cover-up, Drip Guy. Certainly not any Buy-and-Holders.

The Buy-and-Holders should be dancing in the streets today. They are the ones who came up with the idea of rooting one’s strategies in the academic research. The research has now taught us how to reduce the risk of stock investing by 80 percent while delivering long-term returns far higher than most people ever thought possible. We should today be in the Golden Age of Stock Investing and celebrating the Buy-and-Holders for being the ones to have brought it to us.

Where are we instead? We are living through the worst economic crisis in U.S. history, one caused by Wall Street’s relentless promotion of an investing strategy that was originally intended to be research-backed but which became the opposite of that when research was published showing that the Buy-and-Holders got one thing horribly, horribly wrong and the Buy-and-Holders reacted not by fixing the mistake but by adopting a policy of engaging in defamation and death threats and board bannings and smear campaigns to block any of the millions of middle-class people whose lives are in the process of being ruined by this pure Get Rich Quick garbage from learning what they need to know to salvage what is left of their retirement hopes.

That’s brilliant work, Drip Guy. Congratulations! You’ve turned John Bogle into Bernie Madoff! You’re a true Boglehead through and though!

Heaven help us all.

Rob

Beyond Buy-and-Hold #78 — The Crisis That Doesn’t Really Concern Anyone All That Much

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I’ve posted Entry #78 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called The Crisis That Doesn’t Really Concern Anyone All That Much.

Juicy Excerpt: If you were sick and went to a doctor for help and he gave you a diagnosis that vague, you would demand better. If we were seriously concerned about the crisis, we would demand better of those offering explanations for what happened. We’re not really that worked up about it just yet. Or maybe we don’t want to hear what we suspect they would come up with if we asked them to make a serious effort.

“There Was a Day When Old Saint Jack Dreamed of Coming Up With an Investing Strategy of One-Tenth the Power of Valuation-Informed Indexing”

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Set forth below is the text of a comment that I recently put to the Goon Central board:

I think John would have had the decency to attend and just listen to their honored guest like everyone else. I think it’s fair to say at least half of the once DynamicDuo had at least a smidgen of decency. Alas, not the Rob “Hocus” Bennett half!

I would have put Old Saint Jack on the Hot Seat, Yip. You sure got that one right.

If he gave good answers to the questions, I would have applauded him and written it up at my blog.

If he evaded the questions, I would have drilled and demanded clarity. Relentlessly.

If he acknowledged his mistakes, I would have praised him as a Hero to the Middle Class.

The suggestion in your words is that you know darn well that he cannot give good answers to the questions and so you consider it “rude” to ask them. The implication is that he is 100 percent corrupt and we all should be doing what we can to cover up his corruption.

This I do not buy.

There’s a chapter in my book titled “Jack Bogle Started Out as a Little Boy.” There was a day when Old Saint Jack dreamed of coming up with an investing strategy of one-tenth the power of Valuation-Informed Indexing. The man is responsible for dozens of hugely important contributions. I love him enough to think that he is entitled to see that dream come true in his Autumn years.

The guy is not dead yet, Yip. These should be the years of Bogle’s greatest accomplishments, the years he corrects the terrible mistakes he made in his First Draft Effort and sets things right and finally gets to put his name on a strategy that really does make stock investing simple and profitable for the middle-class investor.

I intend to shake him up with some hard and pointed questions. That part is so.

You think he is corrupt. You think he is incapable of caring about the millions of people whose lives he has ruined with his mistakes. That’s 50 times worse.

No. It’s 500 times worse.

I want to shake him up because I want to bring out the good that I know must be inside him for him to have accomplished all the great things he truly has accomplished. You want him to go down in history as the person primarily responsible for putting the United States in the Second Great Depression, an economic collapse that could well end up being bad enough to bring on a third world war.

You’re a great friend, Yip! A true and fine Boglehead! Dues all paid up!

God spare me from friends like you, Yip.

Bogle deserves better than friends like you and the other LIndauerheads, Yip. Lots better. You have delayed my efforts, but I intend to see that he gets lots better.

Here’s Elvis:

If you don’t believe me, baby, why don’t you just count the days that I’m gone?

Mystery Train.

Rob

VII #82 — The Five Most Important Advances in Our Understanding of How Stock Investing Works

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I’ve posted Entry #82 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Five Most Important Advances in Our Understanding of How Stock Investing Works.

Juicy Excerpt: In the days when we thought that the market was efficient, Buy-and-Hold strategies (staying at the same stock allocation at all times) made all the sense in the world. If stock returns cannot be predicted, stocks are equally risky at all times. Thus, it makes sense for an investor to identify the stock allocation best suited to his risk tolerance and maintain it through his investing lifetime.

This logic does not apply in a world in which returns are predictable. In a world in which returns are predictable, the risk associated with stocks changes with changes in valuations (stocks are obviously more risky at times when likely returns are low than they are when likely returns are high). Investors should obviously be aiming to maintain the same risk profile at all times. So in a world in which returns are predictable, Buy-and-Hold is a dangerous and irresponsible strategy.

Financial Highway Column #7 — The Three Deadly Illusions of Stock Investing

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I’ve posted Entry #7 to my monthly column at the Financial Highway site. It’s called The Three Deadly Illusions of Stock Investing.

Juicy Excerpt: We all have 40 years to finance our retirements, presuming that we start investing at age 25 and plan to retire at age 65. Stand still for 12 years and you have lost nearly one-third of the time available to you to achieve your goals.

If you were 30 percent down according to the numbers, you would be panicking today. The reality is that you are 30 percent down. It’s just that you are looking at the wrong number. You are looking at your portfolio value when you should be looking at how many years you have remaining to close the gap between your portfolio value and the amount you need to have saved on your planned retirement date.

ITNT #93 — The Weakness of Human Nature in Investors: Three Reasons for Optimism

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I’ve posted Entry #93 to my weekly Investing: The New Rules column at the Death by 1,000 Papercuts site. It’s titled The Weakness of Human Nature in Investors: Three Reasons for Optimism.

Juicy Excerpt: It is my sense that The Stock-Selling Industry experienced a loss of nerve when it developed Buy-and-Hold. The industry had always pushed Get Rich Quick. That’s what brings in the bucks. But Bogle understood that the industry was going to need to sell to the millions of middle-class people who were forced into the stock market when employers abandoned defined benefit pension plans. My guess is that there was marketing research that showed that the typical middle-class investor was turned off by Get Rich Quick approaches. This is why there was a desire to mix what sells (Get Rich Quick) with what works according to the research (long-term investing). The combination was called“Buy-and-Hold.”

We are all in the process today of learning just how dangerous it is to spin the research to make it appear that it supports Get Rich Quick strategies. Norm seems to think that, as losses grow, people will hold tight to the Get RIch Quick aspects of their Buy-and-Hold strategies. I do not. I think that the next crash will increase demand for a new form of Buy-and-Hold, a form of Buy-and-Hold with the Get Rich Quick element removed, a form of Buy-and-Hold that can work in the long term.