“If Valuations Affect Long-Term Returns, Then It Is Emotion That Drives Stock Price Changes and Buy-and-Hold Gets Every Single Question It Has Ever Addressed Wrong.”

Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

“scores of other critically important investment-related topics.”

And what would these “scores” of topics be?

This is an intelligent question.

It’s every single issue, Anonymous. The question of whether or not the market is efficient is fundamental. Everything else follows from that. If the market is efficient, then Buy-and-Hold is the ideal strategy, I certainly do not say different. But if valuations affect long-term returns, then it is emotion that drives stock price changes and Buy-and-Hold gets every single question it has ever addressed wrong. I don’t say intentionally. I believe that the Buy-and-Holders once sincerely believed that the market is efficient (and indeed I believe that millions sincerely believe this to this day). But if it is true that valuations affect long-term returns (I believe this strongly and there is 36 years of peer-reviewed research supporting me re this one), then there is zero chance that Buy-and-Hold could get even a single question right.

Everything that Buy-and-Hold says about risk management is wrong if it is true that valuations affect long-term returns. Everything that Buy-and-Hold says about retirement planning is wrong if it is true that valuations affect long-term returns. Everything that Buy-and-Hold says about asset allocation is wrong if it is true that valuations affect long-term returns.

If you get your starting premise wrong, you get everything wrong. I have often made the comparison to race relations. When people look at the fact that, in the 1950s, black people could not drink from the same water fountains as white people, they think it seems crazy. How could any person with a brain ever believe that that made sense? To understand what happened, you have to go back in history to when black people were slaves. They were not thought of as full humans. That’s how you come up with a rule that they cannot drink from the same water fountains as white people. Then you do away with the slavery thing, which is good. But if you don’t think through all the implications of the mistake that caused all the problems, you are still left with the crazy idea that blacks cannot drink out of the same water fountains as whites.

Fundamental mistakes have tremendous staying power because they don’t cause one thing to go wrong, they cause countless things to go wrong. And the more devastating a mistake is, the greater the reluctance is to admitting the mistake. In the investing case, we have thousands and thousands of wealthy and powerful people whose entire careers are rooted in the mistaken belief that the market is efficient. They do not want to admit their mistake. They do not, do not, do not. And they possess the power to destroy the career of anyone who dares to “cross” them by doing honest, research-based work in this field.

That’s why we are all living through an economic crisis today. Every single one of us is affected by the mistake. We all retire much later than we would if we had access to honest, research-based investing advice. And we all take on far more risk than we would need to take on if we all had access to honest research-based investing advice. But who is going to work up the courage to stand up to these Wall Street Con Men? They are powerful people. They don’t like to be crossed. They are used to getting their way. They have a lot of money at stake. They are worried that they will be going to prison for a long time if millions of middle-class investors learn how they have been lied to about what the peer-reviewed research in this field says. It’s a big mess, my friend.

This is why I say that we should all bend over backwards to show as much human charity as we can within the limits of the law to our Buy-and-Hold friends and to our Wall Street Con Men friends and to our Goon friends. They wouldn’t have gone down this road if they had known when they were starting out what we all learned when Shiller published his “revolutionary” (his word) 1981 research findings. Why not cut them all a generous piece of slack and thereby put our economic system and our political system on a much firmer footing? That benefits all of us, no? So I don’t see any downside.

But of course we do need to open every site on the internet to honest posting re the last 36 years of peer-reviewed research. If we don’t do that, we see a Second Great Depression and there are no charitable words that are going to help our Wall Street Con Men friends at that point. The time for teaching millions of people what the last 36 years of peer-reviewed research says is now and, to do that in the age of the internet, we need to open every site on the internet to honest posting. I mean, come on.

The mistake that the Buy-and-Holders made affects every single question relating to investing. Buy-and-Hold is a numbers-based approach. The last 36 years of peer-reviewed research shows that the number that matters most (not by a little bit but by a very big bit) is the valuations number. Calculate numbers without taking into consideration the most important number of all (by a long shot) and all of your calculations are going to be in error. Huh? How does that help anybody?

The Buy-and-Holders should want to get the numbers right. That means that they should be in favor of opening every investing site on the internet to honest posting on safe withdrawal rates and scores of other critically important investment-related topics.

I hope that helps a small bit, my old friend.

Rob