Set forth below is the text of a comment that I recently postedto the discussion thread for another blog entry at this site:
There has to be seller for a buy and holder to keep buying stock. That means the stock market is actually controlled by market timers trying to get in and out. Any crisis, therefore, would be the fault of market timing.
I don’t agree even a tiny bit.
The cause of the crisis is that the demand for stocks is insufficiently flexible. The way that markets work is that demand for the item available for sale waxes and wanes in response to changes in the appeal of that item. We need the demand for stocks to be more flexible. Valuation-Informed Indexers are open to buying more stock or less stocks when the price changes. Buy-and-Holders are not. Their demand is inflexible.
That’s the problem. Prices go up and they don’t do anything about it. They just keep buying the same amount of stocks regardless of changes in price. Huh? The unwillingness of Buy-and-Holders to consider price when making purchases renders the market dysfunctional. There is no market that can continue to function properly once price discipline is taken out of the equation and that’s exactly what Buy-and-Holders do. They encourage investors to stick with the same stock allocation at all price points. That inevitably causes bull markets, which cause bear markets, which cause economic crises.
We all should be taking price into consideration when buying stocks. Buy-and-Hold is a price indifferent strategy. It defies common sense.
Rob
If demand for stock wasn’t flexible we wouldn’t see huge swings in stock prices.
The question is — What is causing those swings?
Shiller showed that it is largely shifts in investor emotion that cause the swings. We should all want to moderate the shifts in investor emotion to the greatest extent possible.
The way to do that is to make investors aware of how much valuation shifts change the value proposition of stocks. You’re not doing that when you tell people that the safe withdrawal rate is the same number at all valuation levels. The suggestion there is that stock investing risk is constant, which is not even a tiny bit true.
Stock prices become self-regulating in a world in which honest posting re the peer-reviewed research is permitted. Stock prices go nutso in a world in which investors are discouraged from practicing valuation-based market timing.
Today’s CAPE value tells the tale on the merit of Buy-and-Hold. Today’s CAPE value is a national scandal. We should never see a CAPE value like that. And we never would if we permitted honest posting re the peer-reviewed research at every site. Buy-and-Hold hurts everyone and helps no one. We all should be Staying the Course re our risk profile, not re our stock allocation.
Rob