Set forth below is the text of a comment that I recently posted to the discussion thread for one of my columns at the Value Walk site:
It wasn’t a question, Rob. It was reposting a statement made by Dan that highlights some of your nonsense. In fact, you cannot even point to one successful example of anyone using VII.
As to buy and hold, that is just a convenient catch phrase you use as part of your ongoing shtick.
It was not possible for Valuation-Informed Indexing to exist prior to 1981, when Shiller published the peer-reviewed research (for which he was awarded a Nobel prize) providing the piece of the investing puzzle that had been missing until that time (that exercising price discipline when buying stocks is the key to long-term success). And from 1981 through today, the Buy-and-Holders have been brutally abusive in blocking people from learning what the last 36 years of peer-reviewed research says. But we can say that, had we all known in 1870 what we know today, every investor who had ever invested in stocks would have earned far higher returns while taking on only a tiny fraction of the risk that in the real world has always been associated with this asset class because of our regrettable ignorance of the realities. That ain’t bad!
When I use the term “Buy-and-Hold,” I am referring to any strategy in which the investor does not exercise price discipline when buying stocks. A Buy-and-Hold strategy is a strategy in which the investor sticks with the same stock allocation regardless of the price at which stocks as selling at the time, as evidenced by the P/E10 level that applies.
I think it would be fair to say that Buy-and-Hold is an exceedingly counter-intuitive strategy. We all have experience buying lots of things. In every market that has ever existed other than the stock market, we accept that is is absolutely essential to exercise price discipline when making purchases. It is the exercise of price discipline that allows markets to work their magic. If people did not exercise price discipline when buying cars or bananas or sweaters, those markets would collapse. So the natural belief would be that the stock market would collapse if a large number of investors became persuaded that a Buy-and-Hold strategy might work.
That is of course precisely what we have seen happen throughout the history of the market. There have been four times in the history of the stock market for which we have good records of prices in which large numbers of investors have become convinced that a Buy-and-Hold strategy (a strategy in which price considerations are ignored) might work. And we have experienced four economic crises during that time. I don’t think that it’s a coincidence that the four economic crises came about as a result of the huge loss in consumer buying power we saw when stock prices crashed after the promotion of Buy-and-Hold “strategies” pushed them up to obviously unsustainable levels. Our common sense tells us that Get Rich Quick investing strategies are not the answer but in fact are the problem and the entire history of the market confirms that common-sense insight.
The puzzle here is — How did anyone ever come to believe that a Buy-and-Hold strategy might produce good results in the long term?
The answer is that index funds were not widely available until Bogle founded Vanguard in the mid-1970s. Valuation-Informed Indexing only works with index funds. So the strategy that you are finding fault with for not having worked for hundreds of years wasn’t even a practical option for investors until recent years! However, it is of course a completely practical option since the mid-1970s. And the entire historical record shows that, had index funds always been available, Valuation-Informed Indexing would have been BY FAR the best option available to investors going back to the first day on which the market opened for business.
The confusion re whether price discipline is required or not came about because Fama published research in the 1960s showing that short-term timing doesn’t work. Fama did not test long-term timing (price discipline) because index funds did not exist at the time. Soon after Bogle founded Vanguard, Shiller became the first researcher to test long-term timing (price discipline) and the rest is history. Now we know what works and the only remaining task is to get the word out. Unfortunately, Buy-and-Hold came along first and it makes the Buy-and-Holders feel bad to acknowledge having made a mistake back in the days when it was not even possible to perform the tests needed to learn what really works.
There’s one definition of “Buy-and-Hold” in which this strategy becomes the ideal choice. It was from Bogle that I learned the importance of using the peer-reviewed research as a guide to what works. It is by referring to peer-reviewed research that we tap into objective insights not poisoned by our own subjective, emotional predispositions. Had Bogle followed his own advice, he would have incorporated valuations adjustments into every strategic calculation back in 1981, when he learned about Shiller’s “revolutionary” (Shiller’s word) research findings. Had Bogle maintained his belief in the value of peer-reviewed research when the new research was published showing the mistake he had made in earlier days, we would all be Valuation-Informed Indexers today.
What I now refer to as “Valuation-Informed Indexing” I used to refer to as “Buy-and-Hold 2.0” or “The New Buy-and-Hold” because everything in the Valuation-Informed Indexing model comes from the Buy-and-Holders. The only difference between the two models is that Valuation-Informed Indexing incorporates the last 36 years of peer-reviewed research and of course the idea of incorporating new peer-reviewed research into one’s thinking is an idea that I learned about from Bogle. All that Valuation-Informed Indexing is is a fulfillment of Bogle’s original vision for how investing analysis should be conducted!
Of course, Bogle does not follow his original vision today. That’s why we have see the confusion that evidences itself in comments like the ones that you have put to this thread, Sammy. It’s all as simple as simple can be. The stock market works like every other market that ever existed. The confusion stems from the sad reality that we once thought that the stock market was the one big exception and that price discipline was not truly required in only this one odd case. We now know that the stock market is not the one exception, that price discipline is as much required when buying stocks as it is when buying anything else that can be offered for sale. Investors who understand and appreciate this reality are referred to as “Valuation-Informed Indexers’ because those who call themselves “Buy-and-Holders” have not yet been able to let into their consciousness the practical, how-to implications of the last 36 years of peer-reviewed research done in this field.
I hope that helps a small bit, my good friend.
Rob
“The puzzle here is — How did anyone ever come to believe that a Buy-and-Hold strategy might produce good results in the long term?”
Because it has something that VII lacks – a long track record of documented success.
You are wrong about that, Anonymous. The peer-reviewed research paper that I co-authored with Wade Pfau shows that Valuation-Informed Indexing has a FAR superior track record. Going with a Buy-and-Hold strategy dramatically increases risk while also dramatically reducing long-term return. There’s no comparison between the two strategies.
The question that I was trying to address in the words that comprise the blog entry was — Why did many good and smart people come to the conclusion that Buy-and-Hold is the answer? It’s because they never checked whether long-term timing is required. Shiller was the first to do that (in 1981). Shiller showed that long-term timing is always required. And every time anyone has re-examined the matter, they have confirmed Shiller’s “revolutionary” (his word) finding.
Had Shiller’s work come first, there never would have been a Buy-and-Hold. Buy-and-Hold was a mistake. Our difficulty has not been showing that VII is superior. That’s easy to do. Every check ever done has shown that. The difficulty has been persuading those who have already bought into the Buy-and-Hold concept to abandon it. It is very hard to get people to admit mistakes over matters so important. The entire “controversy” came about because of a quirk of fate in which good people came to a hasty conclusion that Buy-and-Hold was the answer before completing all the research that was needed to reach that conclusion.
I hope that helps a small bit.
Rob