I’ve posted Entry #476 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Buy-and-Holders Accept Credit for Stock Gains Caused By Irrational Exuberance But Blame a Bad Economy for the Losses That Follow.
Juicy Excerpt: There is a saying that, for something to be science, it must be falsifiable. Tautologies are not science. But and-Hold is a tautology. When stock prices zoom, it’s because of the great strategy. When prices collapse, it’s something else that is at fault. The price indifference that caused the zooming is not connected with the collapsing that has followed it every single time in which it has appeared. Buy-and-Hold is not falsifiable. According to the strategy’s advocates, it can never do harm. When investors are horrified by the numbers on their portfolio statement, it is not the strategy that is to blame.
Hmmmm…..sounds familiar. Crash after crash predicted when trying to promote VII. Yet when no crash happens, something else is blamed.
You’re right about the crash predictions. Shiller predicted in 1996 that we would see a crash by 2006. We had one in 2008. But prices remained below fair-value levels for only a short time. So I don’t think that it would be unfair to say that the crash is 14 years overdue.
And, yes, it’s natural to look for something to “blame” when that happens. The human mind longs to make sense of the world around it. So I look to things like the Federal Reserve stepping in and propping stock prices up.
It’s a fair criticism.
But —
What it the alternative?
You would say that the alternative is Buy-and-Hold. But for the 139 years from 1870 to 2009, the market behaved in the manner in which you would expect it to behave if Shiller’s Nobel-prize-winning research is legitimate research. It is only in the past 11 years that things have gone kerplewy. I think that we need to make people aware that things have gone kerplewy, that we have not seen a crash in the amount of time in which the historical return data told us that we should expect one. But I am not willing to say that, because the market has not behaved as Valuation-Informed Indexers expected that it would that we should all turn to a model that failed to explain the market behavior that we saw for the preceding 139 years. If the market were efficient, prices should have played out in the form of a random walk throughout those 139 years. They never did. They always played out in the form of a random walk in the short term but never in the long term.
I think that case for Valuation-Informed Indexing is strong. Not perfectly strong. But pretty darn strong.
I don’t think that a case for Buy-and-Hold even exists. In the psst 11 years, yes, the market has behaved consistent with what the Buy-and-Holders say. But that could end tomorrow. 11 years is just not long enough for me to have any confidence in a model that never offered a good explanation of market behavior up until then. I think that the idea that market timing is not required was just a mistake. It comes from the rational man concept that economists believe in. It was never tested against the historical return data until Shiller came along and it failed that test. So I don’t feel good about it.
I am okay with saying that no one knows for sure how stock investing works. I think I know. But I am one of those flawed humans. I could be wrong.
And I would of course be happy to take a look at some third model that explained both the first 139 years of stock market history since 1870 and the past 11 years as well. If someone comes up with something better than both Buy-and-Hold and Valuation-Informed Indexing, more power to him.
For now, though, Valuation-Informed Indexing is still the model with the most support in the peer-reviewed research. And it is not a terribly close call either. So that’s what I have to go with for now.
All of this is one man’s sincere take, nothing more and nothing less. I ain’t no investing expert. I don’t claim to be one. But I do insist on my right (and the right of everyone else) to post honestly. I honestly believe that Buy-and-Hold is the past and that Valuation-Informed Indexing is the future. For so long as that remains the case, it is my intent to continue to say that that is what I believe.
I naturally wish you all the best that this life has to offer a person, dear Goon friend.
Prediction-Failing Rob
“ I don’t think that a case for Buy-and-Hold even exists. ”
Of course it does, but you never let anyone post the data because it makes you look bad.
I believe in everything that the Buy-and-Holders say except for one thing — their claim that market timing is not required. That is the claim that Wade Pfau researched for 16 months. He found zero support for that claim in the literature. Technically, there was one study that claimed to offer support. But Wade found numerous errors in that study. So the bottom line is that there is nothing. Eugene Fama published research showing that short-term timing does not work. But there is nothing in the literature supporting the Buy-and-Hold claim that long-term market timing does not work or is not required. That one is just a mistake.
It doesn’t exist, Anonymous. This is why our discussions have been so contentious. If there were any research supporting the claim, one of the Buy-and-Holders would have come forward with it many years ago. So there is nothing that you can do but admit the mistake or get abusive. I think you need to admit the mistake. Because, if what Shiller says is so, the truth is going to come out following the next crash. So it is in everyone’s best interest for it just to come out now, before more damage is done. I cannot force you to do anything. All that I can do is to wait for the crash and see how things play out then. But I sincerely believe that it would be best for every single person involved for the truth to come out as soon as possible.
There is no peer-reviewed research supporting the claim that market timing is not required. If people want to avoid market timing anyway, that is of course their choice. But this is not a research-based claim. People should also be free to make the case for market timing and people should be free to accept that claim if they find it persuasive.
When I was a Buy-and-Holder, it was because the strategy was promoted as a research-based approach. It is not that. At least the claim that market timing is not required is not that.
That’s my sincere take.
Research-Oriented Rob
“I believe in everything that the Buy-and-Holders say except for one thing — their claim that market timing is not required. ”
It is not required. If you were timing the market, it would not be called buy and hold. Like I said, you have never allowed the data to be put on your website.
It’s required for those who want to keep their risk profile constant over time. If there are some who don’t care about that and who prefer to stick with the same stock allocation at all times, more power to them, you know? It’s their decision.
If people want to call it Buy-and-Hold, they can call it Buy-and-Hold. The average investor would only have to change his stock allocation once every ten years, on average. To hold for ten years and then to make a change can still be viewed as staying the course. I think that lots of people would have no problem with referring to that as Buy-and-Hold 2.0 or the New Buy-and-Hold or whatever. It’s the same basic concept as Buy-and-Hold, just with one important change to reflect the last 39 years of peer-reviewed research and to make it possible to calculate the safe withdrawal rate accurately and to avoid economic crises and so forth.
And to keep our Goon friends out of prison cells, you know? Each investor gets to make his own choice as to how to invest his money. For each person to be able to make his own choice, we need to enforce the laws against extortion and against threats of physical violence and against financial fraud. Those laws are good and necessary laws. It is those laws that insure that we all get to hear about new research that enhances our lives in dramatic ways. Without those laws, people in an industry who had become known for promoting one thing could become unwilling to permit new ideas to be widely discussed and thereby to deny the benefits of progress to all of us. Huh? What the f? What’s the point of permitting something like that? We should be enforcing the laws of the United States in a reasonable manner in the investment advice field, just as we enforce them in all fields other than the investment advice field.
These are my sincere thoughts we these terribly important matters, in any evnt.
My best and warmest wishes to you and yours.
Progress Enjoying Rob