I’ve posted Entry #385 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Confidence in Buy-and-Hold Is Rooted in the Small-Sample-Size Fallacy of Statistical Analysis.
Juicy Excerpt: If you talk to Buy-and-Holders, they will tell you that their strategy has been working for a long time. The annualized real return on stocks from 1982 through today is 8.9 percent. That’s an amazing return. And 36 years is not a short stretch of time. It’s certainly not the sort of time-period that anyone would ordinarily describe as a “Small-Sample-Size.”
I believe that in the stock investing realm it may be just that. I think it may be this odd phenomenon — the way in which a time-period that stretches out for over three decades is in an important sense not a long time-period at all — that causes the subject of stock investing to be so confusing for so many.
Stock prices play out in a hill-and-valley pattern that usually extends for about 35 years (the bull/bear cycle that is nearing an end today is the longest yet seen in the historical record). Valuations move gradually upward during the early years of the cycle. It can take 20 years before they hit the dangerous levels that cause the upward movement to break. And then they can take years either moving gradually downward or remaining at low levels.
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