A Rich Life

The Old Ideas on Saving & Investing Don't Work -- Here's What Does

“Buy-and-Hold Is Promoted As Being Rooted in the Academic Research”

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Set forth below is the text of a comment by Drip Guy and my response, both taken from a recent thread at this blog.

Rob,

Your attempted analysis of me is wrong in about every way! But you believe what you want to believe; it’s no skin off my nose.

BTW, you say: “I have never seen this sort of behavior from people following any other investing strategy. ”

Well, I suspect that is becasue you simply have not imposed yourself other places. So, let’s wait until your market timing ideas lead you some where else, like a Quant analysis or TA forum or other ‘pet approach’, and then just be your usual self, Rob, and let’s watch to determine how those investors of other persuasions respond to you. Should be fun to observe from the sidelines!

The real reason you get heat from buy-n-holders, is because you for some reason have chosen to single out that very tame, baseline approach to rail against.

Go tell any other forum that they are all “doin’ it wrong” and I’m sure you will get similar replies to what you got when you were banned at those prior 15 finance forums! (laugh)

 

The real reason you get heat from buy-n-holders, is because you for some reason have chosen to single out that very tame, baseline approach to rail against.

I think you are making a reasonable point here, Drip Guy. But you are also leaving out an important part of the story.

Buy-and-Hold is not just any old “pet approach” (the phrase is from elsewhere in your comment). Buy-and-Hold is promoted as being rooted in the academic research.

But it is not!

There is now 30 years of academic research that shows that Buy-and-Hold is the purest and most dangerous Get Rich Quick scheme ever concocted by the human mind, one so dangerous that it is sure to wipe out most of the wealth that the middle-class has accumulated in recent decades and one so pure that it is likely to bring on an economic crisis that will take us all to the Second Great Depression.

All investing strategies are marketed. That’s part of the game. But Buy-and-Hold is special in this regard. Buy-and-Hold’s big marketing edge is the claim that it is rooted in academic research. And this is a demonstrably false claim. That’s over the line, Drip Guy. There are responsibilities taken on when you claim in your marketing materials to be following the academic research. The Buy-and-Holders have failed to honor these responsibilities.

An investing strategy that causes an economic and political collapse cannot fairly be referred to as a “very tame, baseline approach.” This Get Rich Quick garbage is pure poison. It has taken in millions of investors. It has delayed millions of retirements. It has caused huge unemployment numbers. It has caused the destruction of numerous blogs and discussion boards.

It is this claim that Buy-and-Hold is rooted in academic research that makes it different. Buy-and-Hold would not have 1/50th of the power to persuade that it today possesses if not for that claim. And that claim is demonstrably false. Shiller’s research is publicly available on the internet to anyone who cares to look for it.

Once the Buy-and-Holders learned that the entire historical record discredits their claims that there is no need to change one’s stock allocation in response to big valuation swings, they should have stopped making those claims. I did not cause this problem. I reported the safe withdrawal rate accurately. The reason why people were shocked to hear the accurate numbers is that The Stock-Selling Industry has directed hundreds of millions in marketing dollars promoting precisely the opposite of what the last 30 years of academic research says.

The boards that I have posted at are not even boards that were set up solely for Buy-and-Holders. The Motley Fool board was a Retire Early board. Accurate retirement numbers are obviously in place there. So the Buy-and-Holders had no right to burn that board to the ground. The Morningstar rules state clearly that all posters are permitted to post honestly on what the academic research says. Again, the Buy-and-Holders were 100 percent off base to destroy the integrity of that board with their abusive posting.

Why did they do it? Because it makes the Buy-and-Holders look absolutely horrible for people to learn that it is all a con, that there is no research showing that there is no need for investors to engage in long-term timing.

The problem needs to be fixed. We need to provide a means for middle-class investors to hear accurate and honest reports of what the academic research says re stock investing. I am happy to work with the Buy-and-Holders to make this happen so long as they are willing to honor the behavioral norms that apply in our society in discussions of every subject other than stock investing. I am not willing to post dishonestly on safe withdrawal rates or any other topic. The very fact that a good number of Buy-and-Holders demand this as a condition of posting to “their” boards illustrates how deep the problems go with this investing “strategy.”

Marketing tricks and claims of support in the academic research do not mix, Drip Guy. Valuation-Informed Indexing is what Buy-and-Hold started out being. Valuation-Informed Indexers report what the academic research says accurately and honestly. People need to know that and people need to know that the claims of Buy-and-Holders that they do that have been demonstrably false for 30 years now. Help me spread the word re that, and we will be best friends. Stand in my way and I think it would be fair to say that we will find ourselves working at cross purposes.

Rob

Beyond Buy-and-Hold #70 — Why I Don’t Pull Punches in My Discussions With Buy-and-Holders

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I’ve posted Entry #70 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called Why I Don’t Pull Punches in My Discussions With Buy-and-Holders.

Juicy Excerpt: But my goal is to bury Buy-and-Hold 30 feet in the ground, where it can do no further harm to humans and other living things. I would like to see all of the experts in this field endorsing Valuation-Informed Indexing, which I view as the investing strategy of the future. I look forward to the day when The Stock-Selling Industry is spending hundreds of millions of dollars promoting investing strategies that work.

What are the chances that those things are going to happen if I stop speaking out strongly in opposition to Buy-and-Hold or do so less frequently? I think it is safe to say that the chances are pretty darn small. If I follow the advice of my Buy-and-Hold friends, I will be more popular. But I will also be ineffectual! I will not achieve my goals. I can see how that sounds good from their point of view but I am not able to see how it could be seen as a good thing from mine.

VII #72 — What Would It Take to Persuade Buy-and-Holders That Their Strategy Has Failed?

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I’ve posted Entry #72 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called What Would It Take to Persuade Buy-and-Holders That Their Strategy Has Failed?

Juicy Excerpt:  I would say: “Taylor, can you point me to a study showing that long-term timing does not work?”

And he would say, “Sure, Rob, here are 20 statements from leading figures in the field indicating their belief that timing doesn’t work.”

And I would say: “Thanks so much, Taylor. But I see that all of those statements relate to short-term timing. I agree that short-term timing doesn’t work. Do you know of anything relating to long-term timing? That’s the one re which I have doubts.”

And he would say: “Boy, you reporter types sure are skeptics! You are a hard man to please, Rob. But  think I can give you what you need. Forget the 20 statements. Here are 50 statements indicating that timing doesn’t work.”

And I would say: “That’s amazing, Taylor. Thanks for putting in all the time it took to collect those 50 statements. Now here’s the thing. I cannot help but notice again that all 50 statements relate to short-term timing. As you know, I agree that short-term timing doesn’t work and always have believed that. Do you think that you might be able to come up with just one statement showing that there is any reason to believe that long-term timing doesn’t work?”

 

Beyond Buy-and-Hold #63 — Buy-and-Holders Must Sell Their Stocks Before the Economy Can Recover

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I’ve posted Entry #63 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called Buy-and-Holders Must Sell Their Stocks Before the Economy Can Recover.

Juicy Excerpt: There’s a reason why the market can turn up again only after capitulation has been achieved. The thing that sends prices wildly up in bull markets is investor emotion. The purpose of a bear market is to wash the emotion out of the market. So long as there are still people claiming that Buy-and-Hold can work, capitulation has not been achieved. For our economy to recover, losses must first get bad enough to persuade the last Buy-and-Holder to give up the ghost.

Beyond Buy-and-Hold #62 — Nine Reasons Why Buy-and-Hold Can Never Work

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I’ve posted Entry #62 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called Nine Reasons Why Buy-and-Hold Can Never Work.

Juicy Excerpt: The key to success in many types of life endeavor is learning from feedback. Because Buy-and-Holders don’t adjust their portfolio values to show the effect of valuations, the feedback they receive is often misleading.

I was warning people back in 2002 that going with a high stock allocation at the price levels that applied at the time was a terrible mistake. The usual response I received from Buy-and-Holders was “I’m doing just fine.” Huh? Buy-and-Hold was a disaster in the late 1990s. It took stock prices to the most insanely high levels ever seen in history. Yet Buy-and-Holders were not aware of the problem because they were viewing the numbers on their portfolio statements as legitimate.

ITNR #73 — Why It’s So Hard to Repeal Buy-and-Hold

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I’ve posted Entry #73 to my weekly Investing: The New Rules column at the Death by 1,000 Papercuts site. It’s called Why It’s So Hard to Repeal Buy-and-Hold.

Juicy Excerpt: There was a day when Buy-and-Hold was a genuine advance and when the academic research really supported this approach to investing. Then Shiller published his research showing that it never can work.

And the people who had written books making the case for Buy-and-Hold ignored it.

And the people who has developed calculators rooted in Buy-and-Hold principles ignored it.

And the investing experts who had made names for themselves promoting Buy-and-Hold ignored it.

For so long as nobody mentions that the emperor is wearing no clothes, it’s just as if he really were looking fine, no?

ITNR #71 — I’m Extreme! That’s Good!

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I’ve posted Entry #71 to my weekly Investing: The New Rules column at the Death by 1,000 Papercuts site. It’s called I’m Extreme! That’s Good!

Juicy Excerpt: None of the studies have been corrected. Why? Because everyone in the field understands that the day we all openly acknowledge that Buy-and-Hold caused millions of failed retirements is the day Buy-and-Hold dies. And, like Spokane Al, many see that as an “extreme” event.

It is an extreme event. Buy-and-Hold has been the dominant model for close to 40 years.

But it is not an extremely bad event. It is an extremely good event.

“Buy-and-Hold Took Us Out of the Dark Ages…. Buy-and-Hold Has Killed Itself”

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Set forth below is the text of a comment that I put to the discussion thread for a Guest Blog Entry I recently wrote for the Invest It Wisely site:

But no matter what you tell people, there will always be run-away bear and bull markets–no matter what. You can’t change human emotions, after all, no matter what analyzing tool you try to convince them with.

There’s a mountain of historical evidence supporting what you are saying here, Andrew. I am just idealistic enough to believe that you are wrong.

Before man learned how to fly, there were people who said “man has never known how to fly and never will.” Before man learned how to harness the power of electricity, there were people who said “man has never overcome darkness with light and never will.” Before man began listening to the Beatles, there were people who said “man will always listen to Perry Como and there’s nothing that four moptops playing in German bars are ever going to be able to do about it.” Things change. Sometimes a lot. Sometimes for the better.

I take the other view. I say that there is zero chance that we will not make this change. The reason is that it is more important today to know how stock investing works than it has ever been in any earlier time in U.S. history. The same thing that caused today’s economic crisis caused the Great Depression — insanely overpriced stocks. But what we saw in the Depression was a small thing compared to what we have ahead of us if we don’t make this change within the next few years.

In the late 1920s, most stockholders were rich people. Few middle-class people invested in stocks. That wipeout of the rich did great damage to our economic system. But think how much worse it is going to be in day when middle-class people are required to invest in stocks to have any hope of being able to retire someday.

We have passed the point of no return with this thing. We either fix stock investing or we watch our entire economic and political system crumble to the ground. My bet is that, as conditions continue to worsen, there are going to be brave people who are going to step forward and make the case for fixing stock investing. And sooner or later the pain that the rest of us are experiencing will become great enough that we will gladly go along. Why wouldn’t we?

The Great Paradox is that Buy-and-Hold became impossible with the development of Buy-and-Hold. Buy-and-Hold took us out of the dark ages. It is the Buy-and-Holders who said that we should root our strategies in the historical data and the academic research. Once you do that, you have a way of testing whether strategies work or not. We are in the process of making stock investing a scientific enterprise.

So strategies that fail scientifically fail, period. Buy-and-Hold as put forward in its first draft incarnation is in the process of has failing scientifically. Buy-and-Hold has killed itself. The people who came up with the idea will be very happy about that when they gain some emotional distance and are able to think clearly about these things.

We are going to move from Buy-and-Hold to something better. The Buy-and-Holders are going to get credit for their huge contributions, contributions which made this forward movement possible. But we are going to move forward. Stocks are not going to be a risky asset class in the future. We are all going to be earning far higher returns at greatly diminished risk. We are going to see the greatest period of economic growth ever experienced in our history. And we are going to someday look back at the quarrels some of us are engaging in today and wonder whatever could we have been thinking?

The only thing that has held back this advance for 30 years is that the advance is so huge that it frightens people. There are lots of people who have grown accustomed to the old way of thinking about stock investing and it scares them to consider moving forward into a future so much brighter than anything we have ever seen before.

They’ll get over it. If you look at our history, you’ll see that people have resisted all such major advances. But we always get over our feelings of resistance. We always choose the light over the darkness, after lots of fretting and stammering and questioning and shyness and hesitation.

We are working our way through a process. Things need to get very, very, very bad before they can get very, very, very good. That’s because it is experiencing the bad that gives us the courage to accept the need to move forward into the good. It’s not an accident that it’s always darkest before the dawn. There’s a reason why it always plays out that way, why that is the only way it ever can play out.

Humans were created in such a way as to resist major change, even wonderful change, until things reach a point where they have absolutely no choice but to accept their good fortune. Look around you and you can see evidence everywhere you turn that conditions are getting to a point where we will soon have no choice remaining open to us but the one that makes all our lives better and richer and more fulfilled than we ever in earlier days imaged was possible. Such a fate! Why did this have to happen to us?

But I could be wrong, right? I’m biased. I never went to investing school. I never managed any multi-million-dollar fund. Im just some guy who figured out how to get stuff posted on the internet sharing with you what I have come over the first nine years of our discussions to believe about where all this stuff is headed. The true and complete answer is that we will all decide where this takes us by the decisions we make on a day-by-day basis. Maybe I am right, maybe I am wrong. We’ll see. It’s not knowing for absolute sure that gives living life its kick.

My bet is on the humans. I’ve come to know quite a few of them over the course of my 54 years and the encouraging truth is that, despite some truly horrifying flaws (Perry Como!), a good percentage of the humans end up not being such bad eggs in the final analysis.

Rob

The Biggest Unknown Risk of Stock Investing

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I have posted a Guest Blog Entry at the Invest It Wisely site called The Biggest Unknown Risk of Stock Investing.

Juicy Excerpt: My strong sense is that most investors have not thought through carefully what it means to stick with stocks for the long run. To try to stick with stocks for the long run and fail to do so is the worst of all possible worlds. The possibility of becoming a failed Buy-and-Hold investor is the biggest unknown risk of stock investing.

Juicy Comment #1: I agree that investors should think through these numbers. One problem is that it is extremely difficult to carry out the approach. When P/Es are high it looks like the world has changed and it is by definition following a period where it has been very easy to make money in stocks. 2000 is a perfect example.

Juicy Comment #2: Could you please share the code for your regression analysis? I would like to replicate/critique it.

Juicy Comment #3: I buy when the stock market is down and I buy when it is high. I tend to follow Buffet’s approach.

Juicy Comment #4: Times of high pessimism make for great long-term returns. Times when euphoria is running high means lower future returns.

Juicy Comment #5: So it isn’t buying and holding that you are against it is the common eduction piece that goes along with it?

How Has Buy-and-Hold Survived So Long?

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I’ve posted a Guest Blog Entry at the Hope to Prosper site called How Has Buy-and-Hold Survived So Long?

Juicy Excerpt:  There are now thousands of books promoting Buy-and-Hold. There are hundreds of calculators promoting Buy-and-Hold. There are thousands of experts who made their reputations promoting Buy-and-Hold. In short, there are lots of powerful people and institutions with a strong financial interest in promoting the failed strategy rather than its replacement.