Set forth below is the text of a comment that I recently put to another blog entry at this site:
Most people understand that this gap is the equity risk premium and is compensation for the increased risk of owning equities.
Stocks pay higher returns that most other asset classes. We agree on that.
And it is true that the primary reason is that people PERCEIVE stocks as more risky. We agree on that.
We do NOT agree that stocks are significantly more risky. Stocks are more risky for Buy-and-Holders, but not for Valuation-Informed Indexers. The risk is that you will fall for the arguments of those promoting Buy-and-Hold strategies (people who make a living selling stocks). So long as you buy stocks in the same manner as you buy everything else (ALWAYS taking price into consideration when making purchase decisions) stocks purchased through index funds are a low-risk asset class.
Yet stocks still pay higher returns. Why?
Because most people don’t understand the implications of Shiller’s research.
We need to be spreading the word. We need this stuff written up in every newspaper, on every blog, at every discussion board, on every investing-related television show.
We knew from research that smoking caused cancer a long time before people began cutting back on smoking. Why didn’t we cut back sooner?
Because the people who made money selling cigarettes were happy to see millions of people die from cancer so long as it meant that they made an easy buck. That’s how it is with the Buy-and-Holders today. There has OBVIOUSLY never been a single study showing that Buy-and-Hold can ever work for even a single long-term investor. But so long as the penalties imposed for telling the truth are great enough, you can still get very rich promoting the smelly Buy-and-Hold garbage, no?
Did the people who financed advertising campaigns saying that everyone should be sure to take up smoking because of all the wonderful health benefits enjoyed by smokers “know” that their lies were causing huge amounts of human misery?
They did and they didn’t. They obviously knew that it was all b.s. That’s why they were so defensive when questioned about the “studies” that they said backed up the absurd claims. But they didn’t focus on the millions of deaths. They rationalized. They told themselves “oh, smoking probably isn’t that bad, everyone has to make a buck in this world.” They smoked themselves, you know? They said “I am not trying to persuade anyone to do anything that I don’t do myself!” And that was true.
So it is with the Buy-and-Holders. There obviously has never been a single study published showing that long-term timing is not 100 percent required of all long-term investors. The idea is absurd. It would defy common sense for such a thing to be so. But there sure is a LOT of money to be made pretending that you believe that such a study exists, is there not?
So people say they believe this baloney. And they rationalize. They say “oh, we survived the First Great Depression brought on by the promotion of Buy-and-Hold, who is to say that we will not survive the Second?” And they tell themselves that they follow Buy-and-Hold strategies themselves, so they are not really horrible people. And they do follow Buy-and-Hold strategies themselves. That part really is true.
The problem is that smoking really does cause cancer.
And Buy-and-Hold always brings on a financial wipeout for every investor who comes to believe in it.
And the collective losses caused by the widespread promotion of Buy-and-Hold “strategies” are always large enough to cause an economic crisis in the society that permits the relentless promotion of this Get Rich Quick garbage.
So we have to do something about the b.s..
We need to open the entire interest to honest posting about safe withdrawal rates and many other critically important investment-related topics.
That’s my sincere take in any event, Laugh.
I naturally wish you all the best that this life has to offer a person.
Rob
Curious says
Hi Rob,
That’s a fine analogy. The difference between the two cases is this. There were exhaustive studies that scientifically proved the link between smoking and cancer — studies which were precisely detailed such that they were able to be assessed and even replicated by others. That’s how good science works.
On the other hand, as best I can see we have nothing to prove a linkage between buy and hold and financial crises other than your own words. I’ve read more than my fair share of reading in the investment field over many years and have yet to find any paper or study claiming this link. Just a lot of words from you.
But perhaps I’m mistaken. Can you point me to such a study?
Rob says
Shiller showed that valuations affect long-term returns in 1981. That means that stocks are more risky when returns are higher. That means that investors MUST adjust their stock allocations in response to big shifts in valuations to have any hope of keeping their risk profiles roughly constant.
Buy-and-Holder say the opposite. They say that long-term timing is not required or might not even work. This is an obviously absurd idea. There has obviously never been a single study published showing even a sliver of support for this dangerous and foolish “idea.” The peer-reviewed research paper that I co-authored with Wade Pfau shows that long-term timing has worked for the entire 140-year history of the U.S. stock market and that it has been 100 percent required for every investor hoping to have any realistic chance of seeing long-term success for that entire time-period.
Wade, who hold a Ph.D. in Economics from Princeton, searched and searched and was not able to find a single study offering even a sliver of support for the Buy-and-Hold “idea.” He went to the Bogleheads Forum to see if anyone there knew of one. Jack Bogle has never heard of a single study supporting Buy-and-Hold. Bill Bernstein has never heard of a single study supporting Buy-and-Hold. Larry Swedroe has never heard of a single study supporting Buy-and Hold. Rick Ferri has never heard of a single study supporting Buy-and-Hold.
The response of you Goons was to threaten to send defamatory e-mails to Wade’s employer in an effort to get him fired from his job in the event that he continued publishing honest research. Wade capitulated when he saw that neither Bogle nor Bernstein nor Swedroe nor Ferri nor any of the other Buy-and-Hold advocates intended to lift a finger to help him.
There are now millions of people unemployed as a result of the Buy-and-Hold Crisis. Hundreds of thousands of businesses have been destroyed. There are millions of people facing the prospect of seeing their retirement plans fail in days to come. We are in the worst economic crisis in U.S. history. The next price crash, which is according to the historical data likely to bring on a price drop of 65 percent, will likely put us in the Second Great Depression. We are seeing a loss in confidence in our system of government on both the right (The Tea Party Movement) and the left (the Occupy Wall Street Movement). We have seen numerous top-notch discussion-board and blog communities destroyed as thousands of our fellow community members have expressed a desire that honest posting be permitted and the Buy-and-Hold Mafia has responded with brutally abusive tactics, including death threats, demands for unjustified board bannings, tens of thousands of acts of defamation and threats to get academic researchers fired from their jobs.
Investing analysts have told me that they would love to be able to tell the truth about how stock investing works but that they fear what the Buy-and-Hold Mafia will do to them if they do. Economists have told me that they would love to be able to tell the truth about how stock investing works but that they fear what the Buy-and-Hold Mafia will do to them if they do. Bloggers have told me that they would love to be able to tell the truth about how stock investing works that that they fear what the Buy-and-Hold Mafia will do to them if they do. You Goons worry about your prison terms but don’t know how to get yourselves out of the corner you have painted yourselves into.
The Old School safe-withdrawal-rate studies remain uncorrected to this day, 12 years after the errors in these studies became public knowledge.
Buy-and-Hold is pure science. It is 1oo percent perfect in every way.
I forgot.
Rob
Dementia says
What color shirt are you wearing? (I’m betting the 300-word answer includes “goons”, “Pfau” and “death threats”.)
Rob says
I’m betting the 300-word answer includes “goons”, “Pfau” and “death threats”.)
The Buy-and-Hold Crisis is the biggest economic and political story of any of our lifetimes, Dementia.
And the Goon stuff is the only thing holding us back from bringing the crisis to an end and entering the greatest period of economic growth in U.S. history, a period in which we will all be able to retire five to ten years earlier than we ever before thought possible. We now have 33 years of peer-reviewed academic research showing us the path forward and the most powerful communications medium known to mankind to help us spread the word far and wide. The one thing standing in the way is you Goons and your brutal intimidation tactics.
So, yes, I will continue to make frequent reference to you Goons and to your death threats and to your threats to get Wade Pfau fired from his job for his “crime” of co-authoring the most important research published in this field over the past three decades. You Goons have destroyed the lives of millions of middle-class people and they need to know what was done to them and by whom.
I wish you all good things (given the circumstances that apply).
Rob