Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Warren Buffet’s favorite holding period is “forever” and suggests buying the S&P 500 and holding it. He is one of the biggest buy and holder proponent.
Buffett has indeed said those things and I rank Buffett as my third favorite investment expert of all time (after Shiller and Bogle). So I think that people should give serious consideration to those words of Buffett.
I also think that, if we opened the entire internet to honest posting re the past 40 years of peer-reviewed research, Buffet would endorse Valuation-Informed Indexing. VII is much more in tune with the logic behind Buffett’s statements than is Buy-and-Hold as it is today practiced by most Buy-and-Holders.
There are two reasons.
One, Buffett picks individual stocks after devoting a great deal of effort to picking the right stocks. That’s the ideal, in my view. When you pick the right stocks, you don’t need to worry about the short-term noise. Your stocks are going to do well over the long term, and most importantly, you possess personal knowledge of WHY they are going to do well — so you have the confidence you need to stick to your plan.
The problem with that approach (in my assessment) is that it takes an amount of talent and energy not possessed by the ordinary investor. To invest effectively like Buffett invests is a full-time job. I greatly prefer the Bogle approach, which is to invest in a broad index fund. And Buffett hinself advises this for the ordinary investor. Index funds are a godsend, in my assessment. One of my catch phrases is that Bogle and Buffett go together like chocolate and peanut butter. Buffett is right that the investor needs to consider the value of the shares he purchases (the reason why he does so much research is to identify value) and Bogle was right that it is not realistic to expect the ordinary investor to be able to do that amount of research and thus index funds are the better choice.
Stocks are today priced for a 60 percent loss of value. A Buffett investor (someone who picks individual stocks intelligently) will not be hurt to the same extent as a Bogle investor. A Buffett investor might see a 30 percent loss of value because his stocks are superior to the average stocks purchased by a Bogle investor. The purpose of Valuation-Informed Indexing is to bring the Bogle investor up to the level of the Buffett investor. By lowering his stock allocation at times of insane prices, the VII investor diminishes the losses suffered at times of insane prices and thereby insures that he will receive lifetime returns somewhat in line with those enjoyed by the Buffett investor (probably not quite as good but as close as one can get without making investment research one’s full-time job).
Buffett’s catch phrase that his favorite holding period is forever reminds me of the Bogle catch phrase to “stay the course.” If the market were efficient, as was believed to be the case at the time Buy-and-Hold was being developed, the best way to Stay the Course would have been to stick with the same stock allocation at all times (to avoid market timing). Of course, Shiller added a critically important piece to the puzzle when he showed with his Nobel-prize-winning research in 1981 that the market is NOT efficient, that in fact valuations affect long-term returns. So the reality is that the investor who failed to engage in market timing when prices get to the levels where they reside today is FAILING to Stay the Course. He is drifting off course by permitting his risk profile to go wildly out of whack for no good reason. To Stay the Course in a meaningful way, investors MUST engage in market timing with the aim of keeping their risk profile roughly constant over time.
Benjamin Graham, who was Buffett’s mentor, was the first Valuation-Informed Indexer. He advised investors to change their stock allocation from 25 percent stocks to 50 percent stocks to 75 percent stocks, depending on valuations. That’s the VII concept. I am highly confident that Buffett would endorse Valuation-Informed Indexing if we elected to bury all the nasty criminal stuff 30 feet in the ground, where it could do no more harm to humans and other living things, and launched the national debate re the far-reaching implications of Shiller’s amazing research findings that we should have launched 40 years ago.
Sticking with the same risk profile at all times is what Buffett really favors. For indexers, that requires market timing.
My sincere take.
And my best and warmest wishes to you, Anonymous.
Rob
feed twitter twitter facebook