“We Are Able to Develop General Rules That Have Always Applied in the Past and Base Our Strategies on a Belief That Those Rules or Something Not Too Terribly Far Different From Them Are Likely to Work in the Future As Well. The Entire Historical Record Shows That That Is a Far Better Approach Than Refusing to Exercise Price Discipline at All. Just Because We Don’t Know Everything Doesn’t Mean That We Do Not Know Anything.”

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

Of course valuations matter. But as Rob has so painfully proven – the timing matters too. And this is why buy and hold is generally better.

It’s so remarkably simple it is hard to fathom how rob could be on this ridiculous crusade for so long.

I agree with you that valuations matter, Laugh.

I presume that what you mean when you say that “timing matters too” is that the time it takes for prices to revert to fair-value levels matters. I don’t agree with you re that one, at least not entirely.

The time it takes for prices to revert to fair-value levels affects the result obtained. So it certainly can be said that in one sense the timing matters. But what can we do with this information? We can choose not to time the market at all — that’s what Buy-and-Holders do. Or we can choose to look at what has happened in the past, form some parameters for how we will adjust our stock allocations in moderate ways, and then compare the results of that approach with the results we would obtain if we followed the Buy-and-Hold approach. Wade Pfau and I compared those two possibilities in the peer-reviewed research study that we co-authored. We found that Valuation-Informed Indexing — doing the best that we can do with the limited knowledge available to us — has far out-performed Buy-and-Hold for the entire 150 years of stock market history available to us.

The time at which mean reversion occurs matters. But it is not known. We would like to be able to engage in short-term timing as well as long-term timing. That would be ideal. But the world in which that is possible just does not exist. So that one is out.

But we are able to develop general rules that have always applied in the past and base our strategies on a belief that those rules or something not too terribly far different from them are likely to work in the future as well. The entire historical record shows that that is a far better approach than refusing to exercise price discipline at all. Just because we don’t know everything doesn’t mean that we do not know anything. The reality that we don’t know everything that we would like to know about how stock investing works doesn’t prove that we haven’t learned a great deal indeed from the last 36 years of peer-reviewed research. We know a lot more today than we knew when the Buy-and-Hold strategy was developed and we should take all that we now know into consideration when developing our investing strategies.

My sincere take.

Rob