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

“But I do not believe that the market is efficient.”

And it doesn’t matter whether it is efficient or not.

A buy and hold investor will receive the market return (minus very low costs) over any given period.

Investors as a whole will receive the market return (minus higher costs) over any given period.

The buy and hold investor will get a higher investment return than investors as a whole.

If buy and hold doesn’t work then investing doesn’t work.

I was rereading some old posts yesterday and I thought that I should offer a more in-depth response to this one.

The question of whether the market is efficient or not is the entire dispute. The difference between Buy-and-Hold and Valuation-Informed Indexing is that Buy-and-Holders disdain market timing and Valuation-Informed Indexers believe that it is the key to successful long-term stock investing. Market timing is price discipline. We all believe that price discipline is absolutely essential in every other market in which we participate. So how did there ever come to be a widespread belief that the stock market is the sole exception to the otherwise universal rule? The answer is — a mistaken belief in the Efficient Market Theory messed with our minds. If there had never been an Efficient Market Theory, there never would have been a Buy-and-Hold and we all would be Valuation-Informed Indexers today (and of course we all would be living far richer and happier lives).

The point that you make in your comment is that someone who follows a Buy-and-Hold strategy ends up getting the market return and the market return is likely going to be something in the neighborhood of 6.5 percent real, which is very good. So what’s the beef?

The beef is that, when large numbers of investors come to follow Buy-and-Hold (price indifferent) strategies, the stock market becomes an insanely dangerous investment choice. TIPS were paying 4 percent real in 2000. Stocks were offering a likely 10-year return of a negative 1 percent real. It is insane that there could ever be a time when a risk-free asset class could offer a return of 5 percentage points better than stocks. But that’s what Buy-and-Hold/Price Indifference did to us as a people. Buy-and-Hold/Price Indifference is poison.

Now —

Will the people who invested in stocks in 2000 eventually earn a return of 6.5 percent real on their investment? I believe that they will. But it might take them 30 years to get there. There is a time value to money. If stocks had been selling at reasonable prices in 2000 (as they would have been had it not been for the widespread promotion of the Buy-and-Hold “strategy”), people who invested in stocks in 2000 could have realistically expected to see a 6.5 percent return within 10 years. Because of Buy-and-Hold, they could not realistically expect to see that return until 30 years had passed. That’s a big difference. Giving up 20 years of compounding returns is a huge setback. That’s the price that we pay as a society when we fail to speak up about the dangers of this long-discredited “strategy.”

The stock market is great. I have nothing against the stock market at all. A 6.5 percent real return is awesome. What I don’t like is what the widespread promotion of a pure Get Rich Quick approach to stock investing does to the lives of millions of middle-class people. Shiller predicted the 2008 economic crisis in a book published in March 2000. How did he know what was coming? He had seen the 126 percent increase in stock prices in the last four years of the 90s and he knew from his research that irrational exuberance always disappears into the mist in the long term, so he knew that we were going to see losses so big as to bring on an economic crisis. Tens of thousands of entrepreneurs saw their businesses go under in that Buy-and-Hold Crisis. Millions of middle-class people lost their jobs.

Is that a case of Buy-and-Hold “working”?

I say “no.”

When an investment strategy causes that sort of human misery, it is not “working,” in my assessment. I call that “failing.” I say that it is the investment strategy that helps us to avoid economic crises (Valuation-Informed Indexing) that works, not the one that inevitably brings them on.

The wonderful 6.5 percent return is not the product of Buy-and-Hold. That wonderful return is the product of our powerful economic system. Stock investors are simply tapping into that productivity.

Buy-and-Hold and Valuation-Informed Indexing are two alternative ways to tap into that productivity. Buy-and-Hold is the way that pushes risk up to the highest levels possible by urging price indifference. With Buy-and-Hold, you see stocks selling at three times fair value at market peaks and at one-half of fair value at market bottoms. So those who want to tap into that productivity have to endure seeing five-sixths of their accumulated wealth of a lifetime disappear at some point in their lives (in some cases just before retirement!). With Valuation-Informed Indexing, you still get the great returns but price volatility is dramatically reduced (because most investors are practicing price discipline, acting to keep stock prices at reasonable and sustainable levels at all times).

Call me madcap but I prefer the far less risky approach to stock investing, the approach that DOESN’T cause economic crises and all the human misery that goes with them.

Economic-Crises-Avoiding Rob

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 should realize you have a sickness when you can’t even stop posting on a holiday. Get help.

I love honest posting. I love Valuation-Informed Indexing. I love stock investing. I love early financial freedom. I love this new communications medium. Holidays are about kicking your feet up and having fun. Why would I want to pull back on holidays? That would make no sense.

As you know, I am focused nowadays on writing my book. There’s a sentence in Chapter Thirteen where I say: “This is the most important book ever published in the field of personal finance.” I go on to explain that the purpose of the statement is not to brag, it is to tell a story that very, very, very much needs to be told.

The thought that the market is efficient was a mistake. It didn’t have to be such a big deal. We all make mistakes. The trouble is that the mistake has been so destructive to so many human lives that the Buy-and-Holders cannot bear to acknowledge the mistake. And so we are now all stuck in this bizarro world where any crazy idea about how stock investing works can be advanced but the one thing that is absolutely prohibited is honest posting re what the last 38 years of peer-reviewed research teaches us about this important subject. I continue to believe that deep in our hearts we are all united in wanting to find our way to the other side of The Big Black Mountain. We’re all in the same boat. We all need to know how stock investing works in the real world.

I offer no apologies for feeling strong enough in my desire to help millions of people protect their retirement savings to post here even on holidays. Holidays are about spreading love, about shining a light in the darkness. That’s Valuation-Informed Indexing. That’s the first true research-based investment strategy. That’s honest posting. That’s the real turtle soup and not the mock.

My sincere take, Anonymous.

Truly and Deeply Sick (and Proud of It!) Rob

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

Price matters

If I am buying a car today I will buy the model I want at the lowest available price available today.

I will not decide in the mid 90s that all cars are too expensive and wait through 2019 hoping that cars will one day be cheap enough.

The biggest thing that I was working against me in my efforts to persuade people of the merit of Valuation-Informed Indexing is that it can take so long to work. The point that you are making here is rooted in how most people think about these matters. Most people acknowledge that valuations matter. But they find it hard to accept that stock prices could remain at levels that greatly reduce the appeal of stocks for 23 years. That is an exceedingly counter-intuitive idea. I get it.

My view is that what matters is whether price changes are caused by economic realities or by investor emotion. If they are caused by investor emotion, as Shiller claims, that’s a big deal. If that’s so, people need to know that. I don’t have a problem if people say that they are going to maintain their high stock allocations even though there is evidence in the research that high prices are caused by investor emotion. That is for each investor to decide for himself or herself. But I very much think that that issue should be openly discussed at every site. I don’t say that everyone should agree. I say that every person contributing to a discussion should feel 100 percent free to say what he or she truly believes. There should be no intimidation tactics practiced.

You say that you don’t want to wait 23 years. But of course you did not know in 1996 that prices were going to remain high for another 23 years. You have to make your decision re what stock allocation to go with in 1996 at that time. I chose to lower my allocation because of my concern over the risk presented by the CAPE value that applied at that time. Do I have a right to make that choice? I say that I do. And I say that I have a right to tell my friends about that choice and about my reasons for making it. That’s the dispute. Does the fact that Shiller has published peer-reviewed research showing that valuations affect long-term returns give those who believe that valuations affect long-term returns a right to say so on internet discussion boards?

There were people planning to hand in resignations from high-paying jobs in 2000 at the Retire Early board. Greaney was telling them that a 4 percent withdrawal rate was “100 percent safe.” An analysis that considers Shiller’s Nobel-prize-winning research shows that there was only a 30 percent chance that a retirement beginning at that time and calling for a 4 percent withdrawal would work. I think those people needed to hear that. If they choose to take 4 percent anyway, that would have been their business. But they should have been able to hear both sides.

There is not one academically respected model for understanding how stock investing works, there are two. That’s the bottom line re all this. The Buy-and-Holders have a Nobel prize on their side and so do the Valuation-Informed Indexers. Believers in both models have a perfect right to post their honest thoughts on all investing questions.

That’s my strongly held belief, Evidence. I naturally wish you all good things.

One more point. If we permitted honest posting, prices would quickly adjust in the stock market just as they do in all other markets. So you wouldn’t have to wait 23 years. The only reason why it has taken 23 years so far for prices to adjust is that honest posting is not permitted. Prices adjust as the result of market participants acting in their self-interest. Stock investors who have never heard the case for Valuation-Informed Indexing are not able to act in their self-interest because they are not able to become informed of the realities. None of us could become informed of the realities prior to 1981, when Shiller published his”revolutionary” (his word) research. But now they can. Shiller’s work was a ,major advance. We should be grateful for it and we should all be working together to figure out all the details of what it means. Once we do that, you won’t have to wait 23 years for prices to adjust anymore.

Rob