Set forth below is the text of a comment that I recently poster to another blog entry at this site:
Perhaps you feel your VII is superior but in that case shouldn’t buy and hold simply be seen as sub-optimal not broken and never capable of working.
I believe that Valuation-Informed Indexing is superior to Buy–and-Hold. It always either increases return or decreases risk.
This can be tested with The Investor’s Scenario Surfer. In the hundreds of tests I have run, VII ha produced higher 30-year returns in 90 percent of the cases. In the other 10 percent, Buy-and-Hold produced higher returns. But there is obviously more risk with a strategy that only works in 10 percent of the possible scenarios. So I think it is fair to say that VII always produces better risk-adjusted returns.
You say that some people have been able to retire using Buy-and-Hold. Stocks are an amazing asset class. It’s hard to come up with a strategy that is so bad that not one person using it would be able to retire. There are people who put all their money in lottery tickets who end up being able to retire. I see that as too low a bar. If one strategy ALWAYS produces lower long-term risk-adjusted returns than another, I think it is fair to say that it never works. The aim of an investing strategy is to produce HIGHER returns with LESS risk. Buy-and-Hold hurts you in both departments.
I of course have zero objection to the idea of people USING Buy-and-Hold because they personally find appeal in it. Those who like it should of course use it. But they should not make exaggerated claims for it. They should just use it and be happy that they have something they like to use.
If they know what they are getting into, there is no reason why they should be angry that others use other strategies. That’s what I see with you Goons — you are ANGRY that others use Valuation-Informed Indexing. That’s a very bad sign, in my assessment. Anger is a negative emotion. If using Buy-and-Hold is making people angry, there is something very wrong with Buy-and-Hold.
I pick up from your comments that Buy-and-Hold is being pushed for MARKETING reasons. The idea seems to be — This is good enough for all the investors who are not capable of gaining sufficient control over their emotions to follow a Valuation-Informed Indexing strategy. I see this as a chicken-and-egg thing. EVERYONE is capable of following VII strategies successfully so long as they hear about them frequently. It’s because they don’t hear about them often that the ideas cause confusion.
In any event, no one has a right to use abusive strategies to stop people from learning about a strategy they might like. If people want to push Buy-and-Hold as the strategy that is good enough for people who would have a hard time following a VII strategy, that’s fine. But it is up to the investors to decide for themselves which category they fit in. Everyone has a right to promote VII strategies at every discussion board and blog on the internet. Just as everyone has a right to promote BH strategies at every discussion board and blog on the internet.
Rob
“I of course have zero objection to the idea of people USING Buy-and-Hold because they personally find appeal in it. Those who like it should of course use it. They should just use it and be happy that they have something they like to use.”
So King Rob might allow me to use it in private, just as long as I don’t talk about it. Gee, whatever happened to “Honest Posting on Planet Innerwebz”?
The first rule of Buy-n-Hold club is….
No.
I believe that you believe in Buy-and-Hold, Anonymous. So it is my view that you are helping us all out when you post in support of Buy-and-Hold with as much energy and intelligence and determination that you can bring to the effort. I don’t say just that you have a right to post in support of Buy-and-Hold. I say that you have a RESPONSIBILITY to do so.
And I should recognize that you are helping expose me to another point of view by doing so and be grateful to you for your efforts. One of the reasons why I look on you as a friend is that you work so hard to make the case for Buy-and-Hold investing strategies.
Rob
So, where ARE the rules for posting here, Rob?
BTW, Rob,
You are wrong. (Again.) *I* pretty much never make the case for Buy and Hold when I speak to you. You have long ago proven unwilling and/or unable to process the truth. What I do is poke fun at your own obvious overt lies, silly omissions, gross misstatements, laughable duplicity, ridiculous hyperbole, and mouth-dropping level of hypocrisy.
Trying to have a serious discussion of investing methodologies with you would truly be throwing pearls before swine at this late date of your decline. I don’t bother.
None of your calculators have advised owning 0% stock since 1996, as you have done. You preach VII, but your actions are those of a doomsday perma-bear. Hypocrisy doesn’t lead to credibility.
So, where ARE the rules for posting here, Rob?
The rules here are the same as everywhere else in civilized society, Anonymou, You know the drill.
My favorite statement of those rules was the one set forth at the Motley Fool site. That was year ago, It is possible that there have been changes in how they state things in the years since.
Rob
What I do is poke fun at your own obvious overt lies, silly omissions, gross misstatements, laughable duplicity, ridiculous hyperbole, and mouth-dropping level of hypocrisy.
Yeah, yeah.
Rob
You preach VII, but your actions are those of a doomsday perma-bear.
Most investors should continue to hold a stock allocation of 25 percent to 30 percent, even at times of insane overvaluation. If that’s your point, we agree 100 percent.
But there is nothing “bearish” about my choice to go with a stock allocation of zero from 1996 forward. Even Bogle acknowledges that each investor must take his personal circumstances into account when setting his allocation. My personal circumstances call for an allocation of about 30 percent less than the typical investor. Subtract 30 percent from 30 percent and you get zero percent. My allocation is 100 percent in accord with the principles of VII.
The word “bearish” has no meaning to a Valuation-Informed Indexer. Bears are people who expect stock prices to go down over the next year or two, just as bulls are people who expect stock prices to go up over the next year or two. Valuation-Informed Indexing is rooted in the peer-reviewed academic research, which shows that it is impossible to know in which direction stock prices are headed over the next year or two. So it is impossible for someone who believes in Valuation-Informed Indexing ever to be bearish or bullish. Those concepts have been outdated by the academic research.
Rob
“Most investors should continue to hold a stock allocation of 25 percent to 30 percent, even at times of insane overvaluation. If that’s your point, we agree 100 percent.”
Wait a minute.
If the price of a 1/4 to 1/3 ownership stake (25% — 33%) of an aircraft, or of an automobile, was at a price that is “insanely overvalued”, you’d still suggest making that purchase? Really? How bizarre.
How does that advice fit with your supposed philosophy of checking for the price on everything, just as you would do pants and groceries and telephones, etc?
If steaks are “insanely overvalued”, I think I’d buy chicken, or turkey or just cereal. If pants are “insanely overvalued” I think I would mend my old ones, buy shorts, or look for ‘vintage’ (used) stuff. If a car was “insanely overvalued’, likewise I would have to buy a motorcycle, use public transport, walk or bike.
Bottom line: If something is “insanely overpriced,” then by definition, sane people don’t buy.
So why would you decide that it’s okay to buy a lot of something if the price is a bargain or ‘normal valued’, and still advise people to buy a little less of it, but still buy, if it is literally ‘insanely overvalued”?
You make no sense at all, Rob, and I think it’s time even you admitted it.
Even at a price of “free,” financial advice from you is….well…. insanely overvalued.
The research shows that short-term timing never works.
And the research shows that long-term timing always works.
When you buy stocks, you get both short-term results and long-term results.
When the long-term result is going to be poor, you are right that logic might at first seem to suggest not buying at all. But you have to live through the short term to get to the long term. In some return sequences, you might be better owning stocks because the payoff for doing so is strong enough in the short term and the shift to the long-term result takes a long time.
We are not able to say in advance which return scenario is going to come up. In some of them, you want to own some stocks. In some, you don’t. In some, you might want to own a lot of stocks.
So what you have to do is to assess the possibilities that apply and choose the stock allocation that has the best probability of working out.
If we knew everything, we could play it differently. The aim here is just to take advantage of what we have learned from the research to play it as well as it is possible to play it.
Your defensive attitude is holding you back in a major way, my old friend.
Rob
To repeat: If something is “insanely overpriced,” then by definition, sane people don’t buy.
You don’t have to buy when stocks become insanely overpriced, Anonymous.
If you are going with a 90 percent stock allocation at a time when prices are low, you SELL down to a 60 percent allocation when prices rise to fair-value levels. Then you SELL down to 30 percent when prices rise to insanely dangerous levels.
The goal is to always keep your risk profile roughly constant. You obviously cannot do that if you are not willing to change your stock allocation in response to big price swings. Do you want to “Stay the Course” by always staying at the same stock allocation or do you want to “Stay the Course” by always maintaining the same risk profile? That’s the choice you face in choosing between Buy-and-Hold and Valuation-Informed Indexing.
Rob
But Rob, you said that our stock isn’t worth that much so the 30% is only a fantasy, right?
It’s a fantasy if you fool yourself into thinking that overpriced stocks are going to pay the returns you obtain when you buy stocks at fair-value prices. That’s on you.
There’s no law that says that you have to fool yourself and thereby turn stock buying into a fantasy exercise.
If you know the likely return on the stocks you buy and you go with the stock allocation that makes sense given that return, you do better than if you ignore price when setting your stock allocation. Always. There’s never been an exception in 140 years. There’s no fantasy unless you supply one by trying to follow a Buy-and-Hold strategy. And then that’s on you. It’s not the research’s fault.
You should be investing for you, Anonymous. You. Not the Wall Street Con Men. You earned the money. You have every right in the world to choose the strategy that works best for YOU.
Rob
Rob,
Suppose I give you a magic wand, and all investors are now lowering their stock allocations as valuations increase.
To whom are they selling their stocks?
Thanks for asking an intelligent question, Curious.
It doesn’t matter to whom they sell their stocks. It could be to exactly the same group of people or it could be to an entirely different group of people. That part makes no difference.
What matters is the PRICE that is paid.
If all investors have access to a tool like The Return Predictor, the price that people are going to be willing to pay is going to be lower.
WE set the price at which stocks sell. Investors do. We have the power collectively to set the price wherever we want. We need to be fully informed to seek the price that is in our best interest.
Prior to Shiller’s research, it was not possible for us to be fully informed. We just didn’t know. The Buy-and Hold Pioneers were not bad people. They were very good people. But, like all the rest of us, they didn’t know it all. It’s not their fault. No one did.
We need to spread knowledge of what we have learned. That’s the thing that is holding us all back.
Buy-and-Hold is a model using impeccable logic. That part is good in itself. The problem is that stocks are bought and sold by PEOPLE and people are NOT entirely logical, they are often irrational. We all want to make the people who set stock prices more rational. To do that, we have to teach them the things we didn’t know when we were as a society building the Buy-and-Hold Model but that we know today as a result of Shiller’s research.
We could have all exactly the same transactions that we have now and have no overvaluation if only people were informed as to what is in their best interests. Markets work the way Fama says IF the participants are informed as to what is in their best interests. That is not the case today re stocks. Not because anyone wanted it to be that way. Because the human race didn’t start out knowing everything and we only learned about a key piece of the puzzle about 30 years ago.
Say that you are skeptical re what I am saying. That’s fine. That’s healthy.
What you want to do is to encourage rational, civilized discussion of all these points. We should get all kinds of people that you respect involved — Bogle, Bernstein, Swedroe, Burns, whoever you want. See what these people say in discussions in which there is none of the nastiness that has poisoned things for 12 years now. These are smart people If I and the other Valuation-Informed Indexers are full of it, these people are going to be able to see that and explain why to everyone listening in. So there is zero risk that I or anyone else is going to get away with saying things that do not stand up to scrutiny.
But if Bogle and Bernstein and Swedroe and Burns come around either in part or in full, then you have learned something important, no? Is that not a much better use of your time than what you are doing today?
We all want the same things out of this. There are no two sides. Once you see that, we are going to do amazing things together.
Rob
Thanks. But isn’t it your thesis that all investors should lower their stock allocations at certain valuation thresholds?
In order to do that, they need to sell their stocks to …. other investors.
So some investors would have to be willing to raise their allocations at those valuation levels.
As a group all investors cannot raise or lower their stock allocation. It’s a zero sum game in which you lowering your allocation is me raising mine.
Rob,
I agree that the nastiness must stop. Can you let us know when we can expect to see cessation of the prison talk and lawsuit threats?
It’s not a zero sum game, Curious. I believe that you believe that. I know that millions of people believe that. But that’s not the way it works.
Say that there are 1 million shares of ABC Company outstanding.
And say that the price of a share is $3. So the total value of ABC stock is $3 million.
Now say that one investor makes a bid for ABC stock at $4. What happens to the total value of the company?
It increases by $1 million. The price of every share is increased by $1, even though only one bid showing a $1 increase was made.
The price by which stock prices are set is SUBJECTIVE, not objective.
There’s always an equal number of buyers and sellers. There can never be an exception to that rule. But the price is always set subjectively. The only way to keep prices right is to supply investors with the information they need to know what to bid. There is no other way.
That means supplying investors with tools like The Return Predictor. When there is a tool like the Return Predictor at every investing site on the internet, we will never again see dramatic levels of overvaluation or undervaluation. On that day, Fama’s vision will become reality. The Fama vision CANNOT become a reality until we agree a a society that it is okay for investors to know the realities.
Rob
Can you let us know when we can expect to see cessation of the prison talk and lawsuit threats?
If there is a bag containing $500 million delivered to my doorstep, that frees me from the need to file paperwork re the civil suits.
If you come clean today re the criminal acts, I would presume that those cases would go to juries. I am happy to put in a good word to the extent I can do so without posting dishonestly.
If you don’t come clean, my expectation is that the criminal trials would come following the next price crash.
I hope that helps a bit.
Rob
So what is the mechanism by which investors adjust prices to the correct level of ABC corporation? And how do we determine the correct level for ABC corporation? What information do those investors need today that they do not have?
We can never determine the correct price for a single company with precision. The research doesn’t permit that.
The information we need to get to investors is the information contained in The Stock-Return Predictor. Of course, that needs to be supplemented with thousands of books and articles relating to what the numbers mean and how to make use of them and all that sort of thing.
Each time that the price of the market as a whole goes up, the value proposition of stocks goes down. So the mechanism by which prices need to be set is already in place. The part lacking is knowledge. Most of today’s investors believe that Buy-and-Hold strategies can work. They don’t know that there are permitting their risk profiles to get wildly out of whack by failing to adjust their stock allocations in response to price changes. We need to teach them that. There are hundreds of far-reaching implications that follow from the core Shiller insight. Those need to be discussed in depth on a daily basis at every investing board and blog.
In short, we need to open the entire internet to honest posting on the last 33 years of peer-reviewed academic research. That’s how we make magic happen. That’s how we move from the Dark Ages of this economic crisis to the greatest period of economic growth in U.S. history.
Rob
You have every right in the world to choose the strategy that works best for YOU.
So based on objective results, that leaves Lucky Seven out of the picture. I think we are done here.
Okay, Anonymous.
Rob
Thanks. That, I believe, brings me back to my original question. When the value proposition of stocks goes down and investors need to sell in order to adjust those prices, who are they selling to? And why are the buyers interested in owning stocks with a low value proposition?
There’s always going to be people who will buy once the price drops enough, Curious.
As the price drops, the value proposition improves. So the problem solves itself.
The reason why stock prices are so volatile today is that investors are acting out of emotion. They are trying to persuade themselves that Buy-and-Hold strategies can work but they are not able to settle the anxiety that results from acting as if price doesn’t matter. When we move to a world in which investors have access to accurate and honest information re the last 33 years of research, prices will stabilize somewhere near fair value. All the problems go away once investors have some means of informing themselves as to what is in their best interests.
The problem today is that the Buy-and-Holders made a mistake that they are too embarrassed to correct. We need to get the mistake corrected. That’s pretty much it. It SHOULD be easy. But you’d be surprised!
Rob
Stock markets have always been dominated by emotions in the short-term … makes them no different than any other market, of course. I’m having a hard time reconciling the notion that those short-term movements are driven by buy and hold investors. Isn’t a more likely explanation the fact that short-term volatility is caused by short-term investors who are jumping into and out of the market? If I buy and hold X as it goes from 50 to 100 and back to 50, how am I influencing those price changes?
Secondly, I’m not clear what you mean when you say that this “problem” — such as it is — is caused by a lack of information. What is this information, and what’s preventing access to it?
But returning to my original point — I’m still struggling with the process by which buy and hold investors could influence stock valuations. (Leaving aside the assumption that buy and hold investors are a singular entity, all sharing the same risk tolerance, investment goals and time horizon.)
Thanks for asking a very intelligent question, Curious.
The proper way of saying it is that it is an IDEA that is associated with Buy-and-Hold that is killing us, not Buy-and-Hold investors per se.
Our society treats Buy-and-Hold as SUPERIOR to every other strategy. There are hundreds of possible strategies that you can read about in tip sheets and all this sort of thing. Anyone who wants to learn about these things can learn about them on the internet. There is no prohibition or anything like that. I could put forward a strategy based on astrology readings and promote it and, if I happened to make a buck on it, no one would care, you know? You see this sort of thing every day.
I CANNOT promote Valuation-Informed Indexing and not be intimidated with death threats and unjustified board bannings and ten of thousands of acts of defamation and threats to get academic researchers fired from their jobs and all sorts of other ugly stuff. Huh? I can promote an astrology-based strategy and I cannot promote a strategy supported by 33 years of peer-reviewed academic research? That makes no sense. What’s up with that?
The difference is that the astrology-based strategy poses no threat to the only strategy that is viewed in our society as being LEGITIMATE SCIENCE. The research that is thought to support Buy-and-Hold is not just some stuff a guy did in his basement. It is REAL. It is research that was published in peer-reviewed journals. It was performed by people who possess genuine academic credentials, people with Ph.D.s in Economics. In the case of Eugene Fama, it is research that was performed by a fellow who holds a freakin’ Nobel Prize! No astrology-based strategy can make such claims.
My old employer Ernst and Young once paid to have a fellow come to our offices and give a presentation on how to fund our 401(k) accounts. Lots of big employers pay for this sort of thing as a benefit to their employees. They don’t hire people to recommend astrology-based strategies. If they did that, they would probably end up in jail. When you are teaching your employees what to do with their retirement money you have to follow some sort of STANDARDS. As a society we view Buy-and-Hold as having met those standards.
Buy-and-Hold is different in this respect from every other strategy out there. You could say that it is the official strategy of our society. Or that it is dominant among academics, who are the people we turn to to tell us what is genuine and what is fake. You could say that Buy-and-Hold is the only strategy that can make a legitimate claim to being research-based. When a general-interest magazine like Money puts an article on the cover to help people upset by a stock crash figure out what to do, it doesn’t just put up random ideas sent in by uninformed people. The reporters interviews recognized experts to write that story. Recognized experts are generally people who have spent years studying the principles of one particular strategy — Buy-and-Hold.
Buy-and-Hold is king today. Not necessarily with investors. It’s popular with investors. But there are of course lots of investors who fail in all sorts of ways to follow Buy-and-Hold principles. But when someone is trying to speak with authority on how stock investing works, they speak about the principles of Buy-and-Hold. Buy-and-Hold is viewed as being real and legitimate and research-based in ways that no other strategy is.
Buy-and-Hold EARNED that status. That is not under dispute. The research that supports Buy-and-Hold is serious research. The people who performed that research are serious people. The people who teach Buy-and-Hold principles in our schools are good and smart and hard-working people. They teach Buy-and-Hold because they believe in it and because they want to help the people who come to them trying to learn how stock investing works.
The problem that has been at the core of our discussions for 12 years now is not that Buy-and-Holders are stupid people or evil people or anything along those lines. The problem that we have been having for 12 years is that ALL of us (INCLUDING Buy-and-Holders) are human. That means that we are capable of error. We might believe with all our hearts, minds and souls in a particular idea and it might turn out somewhere down the road that that idea is rooted in falsehood. It happens.
Buy-and-Hold is recognized as the only true research-based strategy. That supplies it a huge marketing advantage. There are millions of middle-class people who are worried about what is going to happen to their retirement money and who thus choose to invest their money pursuant to research-based strategies. Those people follow Buy-and-Hold strategies. For good reason. But what if Buy-and-Hold is rooted in error? What if Buy-and-Hold is in reality a very dangerous strategy? That would be a catastrophe. That would mean that millions of people who followed Buy-and-Hold solely because it is research-based and safe were in fact following a strategy that was not research-based and that was not safe. What could be worse?
I obviously support 90 percent of the principles behind Buy-and-Hold. All of those principles have been incorporated into Valuation-Informed Indexing. So none of that is under dispute.
It is one principle that is under dispute. Unfortunately, that one principle is a very big deal. It is the core principle. It is the foundation stone of the model. That principle is the one that is expressed in the phrase that we have all heard 10 millions times — Timing Doesn’t Work.
That’s the question that is under dispute. We can go back into history and learn why Buy-and-Holders believe that timing doesn’t work. There was research showing that short-term timing doesn’t work. That research has stood the test of time. So in an important sense we could say that the Buy-and-Holders have been vindicated even on this point.
But Wade Pfau (who holds a Ph.D. in Economics from Princeton) searched all of the research published in this field and learned that there has never been a single study giving any reason whatsoever to believe that long-term timing doesn’t work. There is zero reason to believe this. The Buy-ad-Holders discovered through research that short-term timing doesn’t work and then JUMPED TO A HASTY CONCLUSION that long-term timing doesn’t work. The claim “Timing Doesn’t Work” is FALSE. There is zero research showing this. There is a mountain of research showing the opposite — LONG-TERM TIMING ALWAYS WORKS AND IN FACT IS REQUIRED FOR ANYONE HOPING TO HAVE ANY REALISTIC CHANCE WHATSOEVER OF LONG-TERM INVESTING SUCCESS.
You say “stock markets have always been dominated by emotions.” That’s so. But has the problem ever been as bad as it is today? Before Buy-and-Hold, we did not have strategies that were given official approval by academics and all this sort of thing. The guy with the astrology-based strategy couldn’t say to millions of middle-class investors “this is real, this is safe, this is the product of research.” The Buy-and-Holders do make that claim and millions have placed their confidence in the claim. WHAT IF THE CLAIM IS FALSE? WHAT IF THE FALSE CLAIM CAUSES THE BIGGEST ECONOMIC CRISIS IN U.S. HISTORY? WHAT IF THE FALSE CLAIM CAUSES THE SECOND GREAT DEPRESSION?
We all need to be careful when making claims about how investing works. But the Buy-and-Holders have to be ESPECIALLY careful. Because the Buy-and-Holders have a special responsibility. They are the ones who say that their claims are rooted in research, the real stuff, the genuine stuff, the serious stuff.
These claims that the Buy-and-Holders make are false and dangerous claims. They didn’t start out intending to make false claims. They started out trying to do something wonderful. But their flawed humanity caused them to make a mistake. And here we are. We MUST fix this mistake.
There are many, many people in this field who want to see the mistake fixed. Bogle sprinkles statements into his writings showing that he thinks Buy-and-Hold (as presently constructed) is a big pile of smelly garbage. He wouldn’t say that Reversion to the Mean is an “Iron Law” of stock investing if he believed in Buy-and-Hold on a deep level. And of course what is true of Bogle is true of just about everybody else. Benrstein doesn’t believe in Buy-and-Hold on a deep level. Swedroe doesn’t believe in Buy-and-Hold on a deep level. Burns doesn’t believe in Buy-and-Hold on a deep level. And on and on and on.
Why don’t they speak out?
They are AFRAID.
Their careers will be destroyed if they say what they believe in public. Our good friend Wade Pfau learned this lesson the hard way.
The Buy-and-Hold Mafia is holding us all hostage. People have built careers advocating Buy-and-Hold. Now they are stuck. If they continue promoting Buy-and-Hold, they risk being held liable following the next crash for promoting stuff that has been discredited for 33 years. If they point out the dangers of Buy-and-Hold, they know from seeing it happen to other people that their careers will be destroyed.
We are as a nation in the process of making the transition from Buy-and-Hold to Valuation-Informed Indexing (which is really just Buy-and-Hold 2.0). We all WANT to do the right thing. We all WANT to see Buy-and-Hold reformed and revised and improved so that it actually works. But how the heck do we pull that off? If any one of us speaks up, he is destroyed. We have to find some means to have a good number of us all speak up at one time so that we are protected from the Buy-and-Hold Mafia. But how do we pull that off when we are afraid even to organize? If the Buy-and-Hold Mafia learns that we are organizing with the intent of getting accurate and honest information on how stock investing works out to millions of middle-class investors, they will see to it that we are destroyed and the story of the past 12 years shows us that they will show precisely zero mercy when doing the job.
Stock markets have always been dominated by emotion. But never like this. How do we know the situation is worse in the Buy-and-Hold Era than it has ever been before? The P/E10 metric tells us. A P/E10 value of 25 tells us that we have caused an economic crisis with our emotional unwillingness to consider price when setting our stock allocations. We have never gone to 25 and not produced an economic crisis as a result. There is one time prior to the 1990s that we went to the low 30s. That time we caused not just an economic crisis but a Great Depression. In the Buy-and-Hold Era, we got so emotional that we went far, far, far beyond 25 or 33. This time we went to 44, a P/E10 value likely to cause a Second Great Depression of twice the depth and length of the first. We have taken investor emotion to places it has never been taken before by telling millions of middle-class people that Get Rich Quick not only works but is research approved!
It is the IDEA that stock investors need not consider price when buying stocks that is the problem, Curious. If some fellow following astrology-based strategies fails to lower his stock allocation when prices reach insanely dangerous levels, he is causing as much economic destruction as the fellow who advocates or follows Buy-and-Hold strategies. But I am not nearly as concerned about the fellow following astrology-based strategies as I am about the fellow following Buy-and-Hold strategies. The difference is that Buy-and-Hold APPEARS legitimate.
Most investors are not aware of the 33 years of peer-reviewed research showing that this smelly Get Rich Quick garbage can never work for even a single long-term investor. They ASSUME that people like Jack Bogle and Bill Bernstein and Larry Swedoe and Scott Burns would tell the truth if they knew that Buy-and-Hold had been discredited for decades now. They don’t know about the Buy-and-Hold Mafia and about the ruthless intimidation tactics they employ on anyone whose conscience provokes him into “crossing” them by telling the truth about the last 33 years of research.
As a society we are working our way through a Paradigm Change. It is a wonderful thing. At the other side of The Big Black Mountain, we have an investing strategy (Valuation-Informed Indexing) that is the strategy that the Buy-and-Hold Pioneers were hoping to build when they started out. We now have all the pieces of the puzzle. We now know how to obtain far higher returns while reducing the risk of stock investing by 70 percent. Investor heaven!
But to get there, we need to work up the courage to take on The Buy-and-Hold Mafia. Lots of people have built high=paying careers promoting Buy-and-Hold strategies and they don’t want to give up that turf, no way, no how. These people are wiling to commit felonies to stop the rest of us from learning what we very, very, very much need to learn. This is why Buy-and-Hold is different. The guys who push astrology-based strategies are not 100th as defensive as the Buy-and-Holders. They don’t employ death threats to stop people promoting other strategies. They follow the laws of the United States. The Buy-and-Holders do not. They have had a dominant position for many years now and they don’t intend to give it up, 33 years of peer-reviewed academic research be darned!
It is the IDEA that price discipline is not required when buying stocks that is killing us, Curious. Every time some Buy-and-Holder says “timing doesn’t work” or “timing is not absolutely required” or “it might be possible to succeed as an investor without timing the market,” it gets worse. The information that people need is information about the 33 years of peer-reviewed academic research showing that price discipline is just as important in the investing realm as it is in any other. The PROBLEM is that the people who have built careers promoting Buy-and-Hold are INSANELY DEFENSIVE about the last 33 years of peer-reviewed academic research in this field.
We need to get everyone to pull together. We are all in the same boat. None of our retirement plans mean a darn if our economic system and our political system collapse. So the first priority is getting honest and accurate information about how stock investing works out to the millions of middle-class investors who have been deceived by the Buy-and-Holders.
That was a super question. Thanks much for asking it.
I wish you well.
Rob
I’m still struggling with the process by which buy and hold investors could influence stock valuations.
The short answer to this one is that the promotion of Buy-and-Hold strategies removes price discipline from the market.
Investors are naturally inclined to consider price when buying stocks. We all consider price when buying all other goods and services. But the Buy-and-Holders tell us over and over and over again that there is no need to consider price when buying stocks, that there is some mystical, magical research showing that there might be a chance of obtaining good long-term results without being willing to change one’s stock allocation in response to big price swings.
No, it doesn’t make even a tiny bit of sense. But we humans are social creatures. When we see the same “idea” repeated over and over and over again by recognized “experts” we come to believe that there might be something to it.
Buy-and-Hold affects price by telling people that price doesn’t matter. The entire 140 years of historical data shows that it does. Big time.
Rob
That was a lot. I’ll just add a quick comment. For any timing strategy that works, there has to be a group of investors who are losing for those who are winning. If you’ve found one that works, by definition the benefits of it will be arbitraged away as more and more investors embrace it.
Also, I’m sure you recognize that all investors as a group cannot increase or decrease their stock allocation … that amount is fixed. So when you refer to “investors” increasing or decreasing such, you are of course referring to a subset, and another would be pursuing the opposite strategy. How does that comport with your theory?
For any timing strategy that works, there has to be a group of investors who are losing for those who are winning. If you’ve found one that works, by definition the benefits of it will be arbitraged away as more and more investors embrace it.
This is all false, Curious.
Shiller’s “revolutionary” (his word) finding (that valuations affect long-term return) is an ADVANCE in our understanding of how stock investing works. There are no losers, only winners. If every investor on the planet becomes a Valuation-Informed Indexer, we are all far, far, far better off. If all investors became Valuation-Informed Indexers, stocks would always be priced at fair value. Stock return would be HIGHLY predictable and the risk of stock investing would fall to something close to zero. It is not even possible for the rational human mind to imagine how there could be any downside to an advance of this magnitude.
When we discovered medicines to treat diseases that caused huge amounts of human misery, were there an equal number of people who suffered as a result of this advance? No. Advances are good. Advances help all of us. There is no downside to correcting old errors and learning how stock investing works. Learning how stock investing works is A GOOD THING.
When people benefitted from the discovery of Buy-and-Hold, were there any equal number who suffered worse results? If so, why did Bogle ever bother advocating Buy-and-Hold? If every possible good thing that is done in this world causes as much in the way of suffering as it does in the way of making things better, why do any of us bother to wake up in the morning?
Shiller’s finding is the most important advance in the history of personal finance. He supplied the missing piece to our understanding of how stock investing works. 90 percent of Bogle’s ideas are solid gold but they bring only financial devastation today because they are incorporated into a model poisoned by the inclusion of false claims that have been discredited by 33 years of peer-reviewed academic research, My work makes Bogle’s ideas workable in the real world for the first time. There is no downside to making those ideas work for the first time. Valuation-Informed Indexing is good stuff piled on top of good stuff piled on top of good stuff piled on top of good stuff.
The other side of the story is that there is NO UPSIDE to death threats and demands for unjustified board bannings and tens of thousands of acts of defamation and threats to get academic researchers fired from their jobs. Intimidation tactics are pure evil with no redeeming value whatsoever. Learning is a plus and intimidation tactic hinder the learning process in a very serious way. That’s why the people of the United States have elected to make it a felony to engage in the types of tactics we have seen practices by those posting in “defense” of Mel Linduaer and John Greaney.
Rob
Also, I’m sure you recognize that all investors as a group cannot increase or decrease their stock allocation … that amount is fixed. So when you refer to “investors” increasing or decreasing such, you are of course referring to a subset, and another would be pursuing the opposite strategy. How does that comport with your theory?
What matters is that the market be able to set prices properly.
So long as honest posting is prohibited, millions of investors are incapable of acting in their own self-interest.
Once we permit honest posting, we will all learn what the past 33 years of peer-reviewed academic research says and we will all be far better investors as a result. Once we are able to act in our own self-interests, market prices will be self-correcting.
The only thing holding us back today is the brutally vicious tactics that the Buy-and-Hold Mafia has employed to protect its turf. Those tactics have brought on the worst economic crisis in U.S. history. We need to move on. We need to move forward.
Rob
Sorry Rob, but that is not false. Any timing strategy is based upon one investor selling their shares to another. To the extent the timing was correct, one wins and the other loses that transaction. There is simply no way around that tautology in a closed system such as the stock market. Comparisons to medicine and the like are irrelevant.
You ask if the same holds true for a buy and hold approach. Of course it does. If all investors adopted a bit and hold approach they would earn the market’s return before costs, just as all investors today do. The difference lies in those who decide to depart from that approach and time in some form or fashion. If only two investors time the market once, one wins that bet and the other loses. But as a group the total return remains the same. How could it not?
Finally, you allude to some state in which stock returns become highly predictable and nearly risk free. Given that long term returns are driven by macro economic factors which are unknowable and unpredictable I can’t imagine how this is possible nor have I ever read of anyone providing as scenario where it was possible. We of course already have an asset class whose returns are somewhat predictable and very low risk. They’re called t-bills. The reason stocks have provided a higher historic return that t-bills is precisely because of the risk they entail.
There is simply no way around that tautology in a closed system such as the stock market.
It’s not a closed system, Curious.
The collective value of the U.S. stock market can be whatever the investors who hold the shares choose for it to be. We can value those shares at x. Or we can value those shares at 2x. Or we can value those shares at 3x. Or we can value those shares at .5x. It is 100 percent up to us.
It is in our best interests to value them at “x” if “x” is defined as fair value. But it is NOT in the short-term best interests of the people who provide investing advice for a living for us to value them at “x”. If we value them at 3x, we have hundreds of thousands of dollars more in all of our portfolios and the people who provide investing advice for a living can take credit for putting those hundreds of thousands of dollars in our pockets. There is a HUGE incentive for the people who provide investing advice for a living to promote Get Rich Quick strategies, Buy-and-Hold strategies.
The ONLY flaw with Get Rich Quick/Buy-and-Hold is that it always leads to an economic crisis that leaves every single investor and every single investing-advice provider busted in the end. We need to have something to balance that short-term incentive for investing advisors to favor Buy-and-Hold/Get Rich Quick. That magical something is called “peer-reviewed academic research.”
It’s not an accident that there has never been a sliver of support in the peer-reviewed academic research for the pure GRQ/BH approach. That’s how common sense says it MUST turn out. That’s how it always will turn out.
There is nothing even a tiny bit closed about a pure GRQ approach. The promotion of Buy-and-Hold led to an overpricing of stocks of $12 trillion in 2000. If the system were closed, there wouldn’t be $12 trillion of Funny Money sloshing around in it.
VII is a closed system. VII is real. There is no overpricing possible in a market in which it is possible for investors to inform themselves of the realities. There is no Funny Money in a market in which investors are acting in their own self interests.
You are describing the market to come, not the market we have today. Without knowledge, we are not capable of closing the giant hole in the Buy-and-Hold Market. Without honest posting, we are not able to spread the knowledge we have acquired via the last 33 years of peer-reviewed academic research.
Rob
If only two investors time the market once, one wins that bet and the other loses.
No.
Timing affects prices.
If two investors engage in long-term timing, that pulls the price closer to where it should be. Every investor in the market benefits from that. Two investors time, but millions benefit.
To engage in long-term timing is to exercise price discipline. That’s always a huge plus. It is impossible that there could ever be any negative associated with it.
You are ignoring the effect that timing has on prices. That is huge. That is the entire point. We have to exercise price discipline for the market to have any chance of getting the price right. So we MUST engage in long-term timing. All of us. Always.
Rob
But as a group the total return remains the same. How could it not?
The total return remains the same. That much is so.
But the payment of the returns is shifted in time under the Buy-and-Hold Model in a way that causes huge financial destruction for all of us.
Say that you had a job that pays you $80 per year. But your boss decides to hold back all payments for 10 years and then, ten years from now, make the back payments. Is that just as good?
It’s not. You will starve while waiting for the payments to begin.
That’s what we are seeing in the market today. The economy is still producing what it needs to produce for all stock investors to enjoy annual returns of 6.5 percent real. But we have seen very, very low returns from 2000 forward. That’s because we borrowed trillions of dollars in returns from our future selves in the late 1990s. Now we are paying off that huge debt.
Following Buy-and-Hold strategies is like living on credit-card debt. Yes, you could say that living on credit-card debt works out in the end because you have to pay back all the money you borrowed. But most sensible people say that it is better to learn how to live on what you earn and cut out all the funny business.
So it is with stocks. Stocks produce a perfectly acceptable return of 6.5 percent real without all the funny Buy-and-Hold business. Why not just accept that? When we pump up the returns way, way beyond that, we have to pay back the debt and that means that tens of thousands of businesses fail and millions of people are left unemployed and millions see their retirements fail. Why not just be honest about things?
What does all the Get Rich Quick mumbo jumbo get us in the end? As you point out, it doesn’t increase our returns by one penny. The Funny Money doesn’t last. Why encourage people to build their financial futures around Funny Money monkey business? Greaney could have given accurate retirement planning numbers. There are now thousands of our fellow community members who will be suffering failed retirements because he wanted to be a Big Shot and encourage people in their Get Rich Quick fantasies.
I say “no.” When I hand in a resignation to a high-paying job, I want to feel that there is a realistic chance that that retirement will survive. I want to use accurate numbers. When the SWR is 1.6 percent, I don’t want to be telling my friends that it is 4.0 percent. Why would I want to hurt my friends in that way? I believe that honesty has a place in the stock-investing realm.
You are right that the total return remains the same. But there are millions of people suffering very serious pain today because the Buy-and-Holders misled them so outrageously. I would like to be able to offer HONEST investing advice and not have people threatening to kill my wife and children because I have done so. The very fact that the Buy-and-Holders feel a need to make such threats tell me that they don’t believe any more than I do that there is any way to “defend” this GRQ mumbo jumbo in civilized discussions.
Rob
Given that long term returns are driven by macro economic factors which are unknowable and unpredictable
Long-term returns are HIGHLY knowable and predictable in a stable economy like the United States.
The U.S. market has been providing a long-term return of 6.5 percent for 140 years now.
If you believe that it is going to be different going forward, you can of course adjust for that. Subtract half a point if you believe that returns will be worse in the future than they have ever been in the past. Add half a point if you believe that returns will be better in the future than they have ever been in the past.
You’ll be far, far. far closer to the mark doing that than you will be going with the Buy-and-Hold mumbo jumbo. The Buy-and-Holders were pricing stocks at THREE TIMES their fair value in 2000. They were off the mark by 300 percent!
I think it is fair to characterize Buy-and-Hold as the purest and most dangerous Get Rich Quick scheme ever concocted by the human mind. Is there any earlier GRQ scheme that got things wrong by 300 percent, that was off by $12 trillion in its reports of how much people had in their retirement accounts?
Millions of people are suffering in the economic crisis brought on by the reckless and relentless and ruthless promotion of Buy-and-Hold. It’s truly foul-smelling stuff.
Rob
The reason stocks have provided a higher historic return that t-bills is precisely because of the risk they entail.
That’s marketing b.s.
Stocks provide a high return because the underlying companies generate profits large enough to support such a return.
The peer-reviewed research that I co-authored with Wade Pfau shows us how to reduce the riskiness of stocks by 70 percent. Stocks will continue to provide high returns after their riskiness has been reduced to the level that applies for CDs and other super-safe asset classes. The Buy-and-Holders bring in all this “you have to take on huge risks to be able to earn high returns” garbage because they don’t want people learning what the last 33 years of peer-reviewed academic research says on the subject.
Stocks were the riskiest they have ever been in January 2000. And their likely going forward return was a negative number. So much for return being correlated with risk!
Risk is something to avoid, not something to take on deliberately. The Buy-and-Holders have done harm to millions of investors with their constant injunctions to take on more and more and more risk. That might help the Wall Street Con Men. It is killing the middle class of this nation.
Rob