“When the Buy-and-Holders Persuade Most Investors to Disdain the Exercise of Price Discipline, It Becomes Impossible for Prices to Be Set Right Through Normal Market Operations. That’s When You See a Crash. When a Crash Is the Only Means By Which the Market Can Get Prices Right, the Market Crashes Prices. It Is the Closing Off of Other Options for Getting the Price Right (That Is, It Is Buy-and-Hold) That Is the True Cause of Crashes.”

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

See this:

http://www.city-data.com/forum/economics/3044226-hbo-documentary-2008-meltdown.html

I thought you said that buy and hold caused the Great Recession.

I did not watch that video because it is 90 minutes long.

Yes, I do believe that it was the relentless promotion of Buy-and-Hold strategies that served as the primary cause of the 2008 economic crisis. I do not say that there were no secondary causes. I say that there is always going to be something that is going to cause an economic crisis once valuation levels go to insanely high levels.

If honest posting were permitted, stock prices would be self-regulating. High stock prices make stocks less appealing because they bring long-term returns down. So high prices bring on sales, which lower prices. It all works out. However, when there is a Ban on Honest Posting, investors cannot gain access to the information they need to invest rationally. It is the market’s core job to get prices right. When the Buy-and-Holders persuade most investors to disdain the exercise of price discipline, it becomes impossible for prices to be set right through normal market operations. That’s when you see a crash. When a crash is the only means by which the market can get prices right, the market crashes prices. It is the closing off of other options for getting the price right (that is, it is Buy-and-Hold) that is the true cause of crashes. Markets in which price discipline is widely practiced do not crash.

There are always secondary causes for an economic crisis. But those factors would not cause nearly the same amount of human misery if they evidenced themselves at a time when prices were moderate or low. The true, real, deep cause of stock crashes is price indifference (Buy-and-Hold), in my assessment.

Rob