Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
“That’s a return of about 6.5 percent real per year.”
It is that sort of comment that convinces me you truly don’t understand how stock investing works.
I have tried to explain this to you before and it hasn’t worked but I will give it one more try.
You mention 6.5% real (that is the historical return), I will use 10% nominal just to keep things simple.
The DJIA has risen at about 5%/year so where does 10% come from (reinvested dividends). The dividend yield on average has been about 5%.
Year 0 $100 stccks
Year 1 $105 stocks $5 div (reinvest div = $110 stocks)
Year 2 $110 * 1.05 = $115.5 stocks $5.50 div (reinvest div = $121 stocks)
and so on
So an individual investor can get the 10% nominal by reinvesting dividends
Now think of investors as a whole (who own 100% of the stocks)
At the end of year 1 the stocks have grown in value by 5% and kicked off 5% in dividends, so far so good.
Now the investors try to reinvest their dividends by buying stock
From who?
They already own 100% of the stock, they can’t buy any more
Now some investors can but stocks from some other investors but collectively they have not increased the shares that they own, it is simply dollars moving one way while stocks move the other way.
Hence they cannot realize the 10% nominal (6.5% real) compound growth that you imagine can happen in some imaginary “honest posting future”
Investors who receive dividends have received a return on their stock investment regardless of whether the dividends are used to purchase more stock or are put into some other investment class. The reality is that there is always going to be some investor selling stocks. So an investor who receives dividends will be able to invest those dividends in stocks if he pleases. The key is that he not overpay. You want to permit honest posting re the last 39 years of peer-reviewed research at every site so that all investors will be aware of the long-term value proposition of stocks and will refuse to overpay. That keeps the irrational exuberance down and permits us all to obtain higher returns while taking on dramatically less risk. Which is a 100 percent good thing.
You say that I do not know how stock investing works. You say that there is no price at which stocks are not worth buying. So I say that it is you who do not know how markets in general work. There has never been a market in which the good being bought and sold was not not worth buying at some price. When you persuade investors that there is no price at which stocks are not worth buying, you take price discipline out of the stock market. It is price discipline that makes markets work. So, when you remove price discipline from the stock market, you make it dysfunctional and we experience price crashes and economic crises. Not good.
Slow Learner Rob
“It is difficult to get a man to understand something when his salary depends upon his not understanding it.” – Upton Sinclair
That’s the story of the investment advice field over the past 39 years, Evidence. We now know what works and we should all be enjoying the benefits of finally knowing what works. But there were years when we didn’t know what works and we built an entire industry telling the story as we understood it then and it is terrifying to think of tearing down that industry and starting over.
I believe that eventually we are going to see that we have no choice but to start over. If only Shiller had published his research before Buy-and-Hold came along, I don’t think that there would be a single dissenter to Valuation-Informed Indexing today. It’s not what we don’t know that is killing us. It’s what we once thought we knew for certain that turned out to just not be so.
Rob
“The greater the ignorance the greater the dogmatism.”
? Sir William Osler
My view is that all humans have a hard time seeing their own ignorance and seeing their own dogmatism. So we have to rely on our friends to call us out on our b.s. Only a true friend will go to the trouble to tell you when you are wrong.
Rob
“So we have to rely on our friends to call us out on our b.s. Only a true friend will go to the trouble to tell you when you are wrong.”
That is what people having been trying to do with you.
The 90 percent has been telling the 10 percent that they are wrong. And the 10 percent has been telling the 90 percent that they are wrong.
The Buy-and-Holders don’t prevail just because they outnumber the Valuation-Informed Indexers. In practical, real-world terms, they have. But, under U.S. law, that’s not how it works.
I think that what U.S. law says is going to make a difference in the end. We’ll see.
We need those laws so that new ideas have a chance to grow. That’s important. It is new ideas that have been fueling U.S. growth for many, many years. So I think that those laws that prohibit the tactics that you have employed are good and necessary laws.
Your views are fine so long as you do not force them on others. Others get to make up their own minds when it comes to their retirement money. Or at least they should be able to.
Buy-and-Hold has become unAmerican. Not because of the ideas. Because of the tactics that have been employed to suppress challenges to the ideas.
Rob
10%??? more like .00001%
http://www.passionsaving.com/investing-discussion-boards.html
Correction:
.000000000000000001%
That’s the problem. That’s obviously not true. Yet you say it to keep the suppression of Buy-and-Hold skeptics in place.
That suppression hurts everyone, Buy-and-Holders and Valuation-Informed Indexers alike. Please mark me down as OPPOSED to continued suppression of the voices raising challenges to the Buy-and-Hold strategy.
Rob
The lack of supportive comments in this website indicate that I was overly generous with my estimate. There is no ability to suppress when people are anonymous.
Oh, yes, there is. The link that I provided in this thread offers 101 supportive comments, many of them extremely supportive. And that was just a tiny sample that I assembled in the very early days of the discussions. There have been THOUSANDS of supportive comments over the past 18 years I even had a big-name academic researcher (Wade Pfau) contact me and ask me if I would work with him to develop research confirming the validity of my criticisms of the Buy-and-Hold strategy. Wade concluded that: “Yes, Virginia, Valuation-Informed Indexing works!”
People are social creatures. People need to hear others criticizing Buy-and-Hold before they will give serious consideration to the doubts forming in their own minds. The suppression strategy has been effective in keeping Buy-and-Hold going a little while longer. But it will prove to be an absolute catastrophe in the event that Shiller’s Nobel-prize-winning research proves to be legitimate and the continued promotion of the Buy-and-Hold approach (Buy-and-Holders tell investors not to practice price discipline when buying stocks!) brings on another economic crisis.
I think it would be fair to characterize me as the most severe critic of Buy-and-Hold alive on the planet today. That will give me a huge marketing edge in the days following the next price crash. I have a funny feeling that we will not see any shortage of comments at this blog in those days!
Rob