“Modern Portfolio Theory Assumes That Investors Are Always Rational. Investors Are Humans. Do You Know Any Humans Who Are Rational? There Have Been Hundreds of Thousands of Novels Written Showing That Humans Are Not Rational. Is This Really an Idea That Needs to Be debated at This Point? All of the Evidence Is on One Side. There Is No Evidence Supporting the Core Idea of Modern Portfolio Theory.”

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

You still think that buying stock is the same as buying a car or a banana, right?

In the sense that you need to take price into consideration when making a purchase, 100 percent. That’s the entire deal. Buy-and-Holders say that you don’t need to take price into consideration, that it is okay to stick with the same stock allocation at all times (that is, to fail to engage in market timing). Valuation-Informed Indexers say that that is crazy, that price discipline is what makes markets work, that there is zero chance that the stock market can function properly once large numbers of investors comes to believe that it is not necessary to engage in market timing.

All of the craziness is rooted in Modern Portfolio Theory. Just do a Google search for “Is Modern Portfolio Theory Outdated?” and the following words will appear on your computer screen: “For one, MPT assumes that investors are always rational.” Investors are humans. Do you know any humans who are rational? There have been hundreds of thousands of novels written showing that humans are not rational. Is this really an idea that needs to be debated at this point? All of the evidence is on one side. There is no evidence supporting the core idea of Modern Portfolio Theory.

The only reason why we haven’t dumped the theory in the year 2020 is that Fama published his research (which showed that short-term timing doesn’t work) before Shiller published his research (showing that long-term timing always works and is always required) and an entire industry was built around the project of telling investors that timing doesn’t work and isn’t required (Buy-and-Hold). That industry is populated with lots of wealthy and powerful and well-connected people and those people are willing to engage in a lot of unscrupulous behavior to keep millions of investors from learning what the last 39 years of peer-reviewed research teaches us all about how stock investing works. So here we are.

But the idea that U.S. laws will not apply in this field just doesn’t seem even remotely possible to me. For a time, yes. For a time, that has been so. But a 70 percent price crash is going to cause a lot of human misery. I think that when we all see that human misery taking place before our eyes a larger number of us are going to work up the courage to speak up against you Goons. And then we are off to the races. From that day forward, we will all be able to live far richer and fuller lives. It’s not even possible to imagine any reason why we would ever go back to believing what we believed in the days before Shiller published his Nobel-prize-winning research.

That’s my sincere take, in any event. Market timing is always 100 percent required. It always works. Price discipline is every bit as much required in the stock market as it is in the car market or in the banana market. Or so the last 39 years of peer-reviewed research in this field teaches us. Buy-and-Hold is a Get Rich Quick scheme. A dangerous Get Rich Quick scheme. That’s why we see criminal behavior used to “defend” it. It is a huge money-maker. But it was discredited by the peer-reviewed research a long, long time ago.

My best wishes to you.

Stock Market Reformer Rob