Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
“I don’t buy it, Anonymous.”
Of course not. Like all cranks, your whole identity starts from the assumption that you are the smartest person in the world. But does the world treat you with the enormous respect you are due? Well, no. The world treats you more like a baby treats a diaper. How can that be?
Your answer: Goons. Your towering intellect somehow is incapable of overcoming a couple mentally inferior goons, who aren’t even trying.
Somehow all that doesn’t “logically follow”.
I don’t believe that I possess a towering intellect. And I don’t believe that you Goons are mentally inferior.
My enemy is the Get Rich Quick impulse that resides within all of us. We all are prone to permitting our emotions to overrule our intellects. That’s why stock investing has always been risky. Stocks are the most emotional asset class. Shiller gave us the research we need to gain better control of our emotions and thereby told us what we need to know to take the vast majority of the risk out of the stock investing project.
But our first reaction to hearing what he has told us is to feel insulted. The Buy-and-Holders tell us investors that we are perfectly rational creatures. That’s a flattering message. Shiller tells us that we are highly emotional and that we permit our emotions to hurt us, that we are self-destructive. That message is not so flattering. That message is insulting. That’s why Valuation-Informed Indexing has had a hard time gaining a foothold.
The question that remains to be answered is whether the losses we suffer in the next price crash will humble us enough to cause us to listen to what the last 36 years of peer-reviewed research is telling us. If it does, then we will all live far richer lives from that point forward and none of us will ever look back. If it does not, we will probably see our economic system go down because our need for accurate, honest investing advice is greater today than it has ever been before. We learned the realities of stock investing just in the nick of time. Now it’s a question of whether we want to take advantage of the huge benefits now available to us enough to be willing to consider the possibility that we might have gotten something wrong at an earlier time. I vote for considering that possibility.
You say that the story doesn’t logically follow. In a sense, it doesn’t. There’s a lot of irrationality in evidence in this story. But it is not possible to tell any story involving humans without being willing to examine some irrationality BECAUSE HUMANS ARE EMOTIONAL CREATURES. Acceptance of that core reality is what Shiller added to the mix. The Buy-and-Hiolders started with an ASSUMPTION that humans are 100 percent rational and then just followed the logic chain where it took them. They did a good job of following the logic chain but there is now 36 years of peer-reviewed research showing that their core assumption was in error. Investors are humans and humans are no more rational when buying stocks than they are when doing anything else that humans do.
Shiller added the human element to the stock investing story. He thereby made it possible to get the numbers right because every calculation done in an investing context is affected by the irrational behavior of the humans who buy and sell the stocks. This is why the title of my book is “Investing for Humans.” You cannot get stock investing right without taking into consideration the human element. Shiller’s revolutionary insight was that investors are human and humans are not 100 percent rational and therefore any investing strategy assuming they are cannot possibly work in the long run.
The Buy-and-Holders are flattering themselves when they tell themselves that they are capable of perfect rationality, Anonymous. I don’t say that to hurt the feelings of my Buy-and-Hold friends. I say it because I want my Buy-and-Hold friends to achieve financial success and a big part of that is knowing how stock investing works in the real world.
I hope that helps a small bit.
Rob
Evidence Based Investing says
Buy and Hold does not rely on investors being rational. If I own the Vanguard Total Stock Market Fund then I will get the market return (minus some very low expenses). It doesn’t matter if that market return comes from a completely rational analysis of the stocks to drive the buying and selling or completely irrational, emotion driven buying and selling decisions.
In either case I will get the market return.
Rob says
You’ll get the market return. And the market return will depend on how much investor irrationality is present in the price at the time you make the purchase.
Pro-Rationality Rob
laugh says
Since most people DCA this point is irrelevant.
Rob says
People who dollar-cost-average buy stocks at a variety of valuation levels. They do NOT go to different stock allocations in response to changes in valuation levels. Thus, they do NOT practice price discipline.
People who dollar-cost-average spend as much on stocks when they are selling at three times fair value (when the most likely 10-year average annualized return is a negative 1 percent real) as they do when stocks are selling at one-half fair value (when the most likely 10-year average annualized return is 15 percent real). Huh? What the f?
Not this boy.
I do wish you all good things, my long-time Buy-and-Hold friend.
Rob