Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Was your ex-wife a drug addict, gambling addict or sex addict. Just asking since you brought it up and made the claim.
My claim was that we all have the potential to become such things. It is in our nature to engage in self-destructive behavior.
The nistake that the Buy-and-Holders made was to assume the oppotiste, that we are all always 100 percent rational when buying stocks. If that really were so, market timing/price discipline really would not be required becase stocks would always be priced properly. It was a huge advance when Shiller showed with uis Nobel-prizr-winning research that none of that is even a tiny bit true, that irrational exuberance is a very real thing. So of course market timing is always 100 percent required to combat it.
One of the things that helps us all not to become drug addicts or gambling addicts or sex addicts is that it is common for people to point out the negatives of these sorts of self-destructive behavior. The problem in the investment advice realm is that the Buy-and-Holders go nuts whenever anyone points out how destructive it is to create a mountain of irrational exuberance. The Buy-and-Holders count irrational exuberance gains as if they were real. So they don;t like it when people like me tell invesors that they need to subtract their irrational gains when calculating the safe withdrawal rate.
Think how many more drug addicts we would have if there were a time when people had come to believe that a drug addiction is a very good thing — that it makes you feel good or some such nonsense. Then, when it was discovered through subsequent study that drug addiction is actually a bad thing, these people sent out goon squads to threaten to murder the loved ones of those who pointed out the realities, Drug addiction is a bad thing and should be discovered. Just as failing to pratice market timing/price discipline is a bad thing and should be discouraged.
If we all practiced market timing, there could never be another bull market. If there never was another bull market, there could never be another bear maarket, If there never was another bear market, there could never be another Buy-and-Hold Crisis. It all ties together. We should be permitting honest posting re the peer-reviewed reserch at every site, without a single exception.
Rob
No one wants to be a drug addict, so rational people avoid drugs. No one wants to be an alcoholic, so a rational person avoids consuming excess alcohol. No one wants to be broke, so a rational person avoids market timing schemes so that they are not broke like you.
Most alcoholics and drug addict are rational, intelligent people. The same is true of most of the people who fail to engage in market timing/price discipline when buying stocks.
We shuuld be trying to help people tune out the Get Rich Quick/Buy-and-Hold noise. That’s the primary job of an investment advisor.
My best wishes to you.
Rob
“ Most alcoholics and drug addict are rational, intelligent people.”
No they are not. Rational people know the dangers of addictions and avoid substances that would cause addictions. Same goes for market timers. A rational person doesn’t want to go broke with a silly market timing scheme.
Okay, Anonymous. We disagree on this point. I suppose that that is not too terribly surprising.
My view is that the rational thing is to practice price discipline when buying stocks, just as it is the rational thing to practice price discipine when buying anything else. I believe that it is irrational to fail to practice price discipline when buying stocks. But I wouldn’t say that the Buy-and-Holders are generally irrational. If anything, they embrace it too tightly. The Buy-and-Holders put such value on rationality that they cannot bear to consider how irrational it is fail to consider price when buying stocks. That’s how we end up with the CAPE value that applies today and that’s why we always end up enduring another Buy-and-Hold Crisis in the days after the “strategy” becomes popular. We would all be better off if the Buy-and-Holders could acknowledge their own capacity for irrationality and the capacity of millions of other investors for irratiomality and to work with the Valuation-Informed Indexers to keep the CAPE value at a reasonable level at all times. Through market timing!
That’s Valuation-Informed Indexing, Thats the first truly rational way to invest in stocks.
Rob
So you think drug addicts and alcoholics are rational people, but those of us that don’t want to go broke like you are irrational. Got it.
Yes, people who suffer from addictions do not behave in a rational manner. They behave in a self-destructive manner. But it is not that they lack the capacity for reason. Addicts often evidence rationality in many other areas of life. The problem is that the addiction cancels out rationality in the area where the addiction takes hold.
If Buy-and-Holders were capable of thinking clearly, they would be happy to see discussions of what the peer-reviewed research says. If you look at statements by Buy-and-Holders, you will see that they often recommend taking the peer-reviewed research into consideration. It was their focus on the peer-reviewed research that drew me to the Buy-and-Hold strategy in the days when I was a Buy-and-Holder. If only the Buy-and-Holders had listened to themselves!
Rob
So drug addicts and alcoholics are rational, but people that have saved millions by successful buy and hold strategies and wives that think their husbands should get a job to pay the bills are irrational people. Got it.
The Bennett/Pfau research shows that anyone who accumulated millions by following a Buy-and-Hold strategy would have accumulated more than that by following a Valuation-Informed Indexing strategy. That’s been so for as far back as we have good records of stock prices. Practicing market timing/price discipline is always a plus. It always reduces risk and it always increases long-term returns. There’s never been an exception to that rule and it is not possible for the rational human mind to imagine a circumstance in which there could be an exception. The thing that makes markets work is price discipline. Take price discipline (market timing!) out of the equation and you hurt investos in very serious ways.
Is it possible for Buy-and-Holders to enjoy good returns for a time even though they are faiing to practice market timing? It is indeed. Stocks are an amazing asset class. Going with a poor strategy doesn’t make ut impossible that you will earn good returns for a time. But there is no good reason to go with a strategy that is certain to increase risk and lower your long-term return. The sensible thing is to permit honest posting re the peer-reviewed research at evey site and to keep your mind open to better strategies than the one that was developed before we had Shiller’s Nobel-prize-winning research available to us.
It’s a mistake not to practice market timing/price discipline at all times. It’s an irrational choice. It doesn’t follow that Buy-and-Holderds are irrational in all the choices they make in life. People who smoke can make rational choices in many areas of life, The thing that you need to address with a smoker is the addictive behavor, It’s the same with Buy-and-Holders. Buy-and-Holders are addicted to the idea of getting something for nothing. They have a need to believe that the irrational ecxuberance in their portfolio is real, that they can count on the pretend money to finance their retirement. That’s what needs to change.
It’s a good thing that we learned in 1981 that Get Rich Quick/Buy-and-Hold doesn’t work. We should be happy about our good fortune in making that discovery, not desperate to suppress the most important 42 years of peer-reviewed research in the history of investment analysis.
My sincere take.
Rob