Beyond Buy-and-Hold #14
I am the world’s #1 Boglehead.
I am also the world’s leading critic of Buy-and-Hold, the investing strategy advocated by Bogle.
It’s entirely possible to be both at the same time. The big-picture perspective is that Bogle is going someday to be known as the figure that led middle-class investing out of the dark ages. The Bogle Revolution is an extremely powerful force, one that will one day permit us all to obtain far higher returns at far less risk and one that may even do much to stabilize our free market economy.
Before we get to that wonderful place where we all long to be, Bogle will need to face the music re the mistakes he made in his initial version of the Buy-and-Hold strategy, mistakes that were the primary cause of the economic crisis and that are likely to cause millions of failed retirements in days to come.
My strong sense is that even Bogle himself does not appreciate the implications of his most powerful insight — the need for investors to switch from a short-term perspective to a long-term one. I recall seeing Bogle interviewed one time in which a question was put to him as to how he thought stocks were going to do over the next year or so and his first reaction was to laugh. Perfect! The question really is silly. Short-term returns are unpredictable, long term returns are highly predictable. So why would anyone focus his energies on trying to guess what is going to happen in the short-term? It is indeed to laugh.
Or to cry.
Even in the financial markets, habit is an irresistible force
The reality here is that most investing analysis to this day is focused on the short-term. Bogle has been advising people for decades to take a long-term focus and they just do not get it.
It’s not that they are dumb. People are not dumb. It’s that stock investors have been focusing on the short-term for a long, long time. Yes, they get it that Bogle (and all other Buy-and-Holders) say that that’s wrong. But there is no force with a greater influence on human behavior than habit. It will take many years, perhaps decades, before we will all be able to truly focus on the long term in the real world. Bogle’s big idea represents so big a change that we have not been able to fully incorporate it into our thinking in the few decades since Bogle founded Vanguard in the 1970s.
We’ll be reaping the benefits of Bogle’s genius for decades to come. That’s the uplifting side of the story.
The Bogle Revolution, Take Two
There’s a dark side to today’s story too. You need to know about that side too.
The dark side is — Bogle himself doesn’t fully get it!
Bogle says the words “invest for the long term” all the time. He means it. What he doesn’t get is how big a change this represents. What he doesn’t get is on how fundamental a level this idea changes the nature of the investing project.
Please read the column that I wrote titled Stocks Are a Lot Less Risky Than You Think to gain a sense of what I am getting at here. John Walter Russell, the former owner of the Early Retirement Investing Insights site (John died in October 2009 and the site was transferred to me), once did a statistical analysis to determine how predictable the 20-year stock return is for those who invest in indexes and who check valuation levels before making their allocation decisions. He found that those following a Valuation-Informed Indexing strategy can put their money into stocks knowing at the time they make a purchase 78 percent of what they need to know to identify the annualized return they will receive at Year 20.
That’s not a risky asset class! Bond investors are not able to know in advance 78 percent of what they need to know to identify their 20-year real return. Stocks are now less risky than bonds for those willing to follow valuation-informed strategies. That’s never been so before. This is a big, big change. We have Bogle (and Russell!) to thank for this.
But Bogle doesn’t get it. Bogle properly urges investors to give up their short-term focus and to adopt a long-term one. But he is too close to all this to see how important a change he is advocating. When it does hit him (and other Buy-and-Hold advocates), we are going to see some wonderful things happen in this field.
Bogle doesn’t miss these things because he is dumb. Have you ever climbed a mountain and noted how more and more and more of the view you are going to take in when you get to the top gradually comes into focus? Bogle was the pioneer. He saw farther than anyone else of his time, but there are limits to how far into the future any human can see.
Bogle was too influenced by the limitations of the investing worldview he was taught when he was learning the ABCs to be able to see how far his own revolution would someday take things. We now are getting close to the days when lots of us (including Bogle, I very much hope!) will be taking the next big leap forward.
Once again, it’s back to history to find our way forward
Valuation-Informed Indexing is the opposite of Buy-and-Hold. It posits that investors must take valuations into account when setting their stock allocations while Buy-and-Hold posits that it is okay (or — heaven help us all! — even a good idea) not to do so. But by no stretch of the imagination does Valuation-Informed Indexing repudiate the core Bogle insights.
Valuation-Informed Indexing is the fulfillment of Bogle’s initial vision. It is what Buy-and-Hold would have been from the first day had Bogle known in the early 1970s what the best-informed investors know today (the academic research showing that Buy-and-Hold cannot work was not published until 1981 and its implications are of course not widely acknowledged even today).
Buy-and-Hold was the initial draft, Valuation-Informed Indexing is Version 2.0, the embodiment of Bogle’s revolutionary idea (to focus on the long-term) that actually works. There would be no Valuation-Informed Indexing without the huge contributions of our good and trusty (and humanly flawed) friend John C. Bogle.
Rob Bennett often writes about basic money management strategies. His bio is bio is here.