Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Uh oh, Rob. Mike Piper said that market timing, like VII, doesn’t work. Does that mean he is a goon and part of the conspiracy? Is he guilty of fraud? You better set him straight.
I like that article a lot, Anonymous. Thanks much for pointing it out.
I have the topic that Mike explores in that article on my list of “Possible Ideas for Future Columns.” Now that I have seen the article, I may try to use Mike’s article as the jumping-off point for the column.
As you know, I like Buy-and-Holders a lot. They are almost universally smart. And the vast majority are good people aiming to help people by spreading the word about their Buy-and-Hold strategy. And I think it would be fair for me to describe myself as the most severe critic of Buy-and-Hold alive on the planet today. So I frequently find myself trying to figure out why Buy-and-Holders are so reluctant to consider Valuation-Informed Indexing strategies. There’s a puzzle there.
I think that Mike does a decent job of answering that question in this article. He makes a rational case for sticking with Buy-and-Hold despite the research pointing toward Valuation-Informed Indexing. There are obviously lots of people who have chosen to stick with BH. I think Mike does as good a job as I have seen explaining why that is the case.
I am not persuaded by his two arguments.
I reject Argument One because the Buy-and-Holders have never explained why BH should be the default choice. He is saying that we don’t have enough years available for testing to be certain that VII works. That’s fair. But the same shortage of years for examination affects the case for BH too. Given that we don’t have enough years to completely prove the case for either strategy, the logical thing is to go with the one that meets the common-sense test. Price matters in every market that exists other than the stock market. So why assume that things work out in just the opposite way in only this one market? In the absence of the 145 years of historical data available to us for review (a lot but not nearly as much as we would like to have available), VII prevails over BH (in my view!).
Argument Two is that you can’t choose the alternative strategy (VII) and still realize the benefits of the dominant strategy (BH), it’s an either-or choice. I think this is the primary reason why so many are reluctant to switch to VII. People see the logic. But Mike is right that an investor has to choose one or the other without knowing for certain which is the right choice and then is stuck with the results he obtains with no hope of a do-over if he happens to guess wrong. Most people feel safer going with the more popular strategy. I do not. I have to feel comfortable with the logic supporting a strategy to go with it. The history of the development of these ideas tells me that VII has the stronger logical case behind it (BH became dominant only because index funds were not available in 1965 and thus there was no way to test whether long-term timing is required) and the behavior of the Buy-and-Holders over the past 14 years tells me that even those who follow the dominant strategy feel grave doubts over their choice, doubts that they cannot acknowledge to themselves because they are too scary for them to entertain.
I like it that Mike made the case he made. I used to “set him straight”, as you put it, on a regular basis. I used to post comments at his blog two or three times a week. Mike loved those comments. He told me so. He eventually threatened to ban me because my comments were so powerful they were frightening his readers (who wanted to hear only rah-rah comments re Buy-and-Hold). That’s one of the things that worries me so much about this strategy. If it is wrong, the relentless promotion of it is going to cause millions of lives to be destroyed. To hold off on a debate re such a matter is scandalously irresponsible. We should be having that debate. If the Buy-and-Holders cannot bear it, they should be looking for another strategy. The very fact that such discussions cause Buy-and-Holders to experience such pain tells me that the primary appeal of BH is emotional, not intellectual.
Mike is helping with this article by articulating some points that I believe really do drive the behavior of those who follow BH strategies. It really is true that investors need to choose one strategy or the other and that we don’t have as much data as would be ideal. These are legitimate points that all investors need to consider. So I am grateful that Mike wrote the article and that you brought it to my attention.
Hang in there, old friend.
Rob
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