“Buy-and-Hold Is Rooted in Price Indifference. Valuation-Informed Indexing Is Rooted in Price Discipline. Price Indifference Possesses Great Emotional Appeal Because It Permits Investors to Set Prices Wherever They Please. Price Discipline has Great Long-Term Appeal Because It Permits Greater Returns at Lower Risk.”

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

Going the purely emotional route (Buy-and-Hold) permits you to feel better for a time (when prices are at unjustifiably high levels) and then worse for a time (when prices crash to fair-value levels and then even lower). I think it is better for every single investor and for the economic system as a whole for us always to remain as close to fair-value price levels as possible. There’s less jumping around that way. And that way you always know where you stand. You can plan your future effectively because you are living in reality, not in an emotional fantasy world.

Buy-and-Hold is the emotional approach. It has the emotional highs and it has the emotional lows. I don’t like emotional lows. Which means that I don’t like emotional highs either because it is emotional highs that bring on emotional lows.

The difference is price discipline. Price discipline COUNTERS the emotional highs brought on by price indifference (Buy-and-Hold). Buy-and-Hold is rooted in price indifference. Valuation-Informed Indexing is rooted in price discipline. Price indifference possesses great emotional appeal because it permits investors to set prices wherever they please. Price discipline has great long-term appeal because it permits greater returns at lower risk.

The purpose of investment research is to reveal to us what works, not what sells. Shiller is right, Fama is wrong. Fama made great contributions. He deserves his Nobel prize. But he dropped the ball re the importance of all investors practicing price discipline when buying stocks.

Price-Discipline Advocate Rob