Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Well, since you have been sitting out of the market for a couple decades, you don’t have to worry about those “bad” gains.
No. That’s not even a tiny bit true, Anonymous. I have done what I could do to avoid the negative effects of the bad gains. But they have still hurt me in a very serious way.
Stocks were priced at the top of the bubble to provide an annualized long-term return of a negative 1 percent real. I bought IBonds paying 3.5 percent real. So I did good, right? In a way. But had stocks been selling at fair-value prices, I would have been able to purchase an asset class paying an annual return of 6.5 percent real. That would have been a whole big bunch better. That’s almost double the return. I have been hurt in a serious way. Just not as badly as my Buy-and-Hold friends have been hurt.
And of course I have been hurt by all the damage that has been done to our economic system and to our political system as the result of the continued promotion of the Buy-and-Hold strategy. My biggest fear is that the next price crash will push us into the Second Great Depression. How much good do you think my IBonds are going to do me if our economic system collapses or if our political system collapses? I would be willing to take far less in the way of return to be living in a society with a stable economic system and with a stable political system.
The bad gains hurt all of us. Buy-and-Hold is poison. Please don’t think that I am saying that it was intended to be poison. I don’t believe that. I believe that Buy-and-Hold was intended to be a positive. I believe that the vast majority of Buy-and-Holders believe to this day that it is a positive. But I don’t believe that. I believe that it is a huge negative. And I believe that I need to say what I sincerely believe when I post at discussion boards and blogs.
I believe that we all should be saying what we sincerely believe. That’s the American way. The learning experiences that develop when we all say what we sincerely believe enrich us all. I don’t believe that there should even by any controversy re the question as to whether we should all be permitted to post honestly or not.
There IS controversy. Mountains of it. I don’t deny the reality. But I view it as a highly unfortunate reality. I believe that every last one of us would be better off if we all pulled together to insure that the possibility of honest posting re the last 37 years of peer-reviewed research were opened up for every last one of us. My feeble human brain is not even able to imagine any possible downside.
The question that you are raising here is the question that makes Shiller’s 1981 research findings so “revolutionary” (his word). If the market were efficient, all gains would be rooted in economic realities and thus all gains would be good. But, if valuations affect long-term returns, as Shiller showed, then it must be investor emotion that causes stock price changes. If that’s so, then all gains not supported by the economic realities are bad gains, gains that hurt us all in the long run. Shiller changed how we understand how stock investing works in a fundamental way. We used to believe that all stock market gains were good. Now, those of us who believe that his Nobel-prize-winning research is legitimate research know better.
My best wishes to you, dear friend.
Rob
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