Beyond Buy-and-Hold # 43
The Personal Finance Blogosphere is in trouble.
But we also have a great opportunity before us to make our blogs ten times as successful and ten times as helpful as they have ever been in the past.
Buy-and-Hold Investing has failed. It tells investors that it is okay to stay at the same stock allocation when stock prices reach insanely dangerous levels and that is just not so. The heavy promotion of Buy-and-Hold strategies was the primary cause of the economic crisis (investors? common sense would have told them to lower their stock allocations in the late 1990s if it hadn?t been for ?experts? making vague references to ?studies? purportedly showing that this is not necessary).
Most financial bloggers participated in the Get Rich Quick madness. Most of those who did not were too cowardly to point out the dangers of Buy-and-Hold in the days when there were no popularity awards to be won by doing so.
That?s the past. Let?s try to let it go and move forward.
What happens next?
There have been three times in U.S. history when Buy-and-Hold/Get-Rich-Quick strategies have become popular. On each of those three occasions the bull market created brought on enough financial devastation to cause stock prices to fall to one-half fair value. That?s a price drop of 65 percent from where we are today. I don?t think that there are too many who would argue with me that a price drop of 65 percent following the Lost Decade for stock investors would put us in the Second Great Depression.
So we are in all likelihood heading into dark economic days.
But that?s not the entire story! That?s only half of the story!
The encouraging story is that we now for the first time in history know how stock investing works. The two most important discoveries in the history of stock investing research both took place over the past 50 years. The first discovery was that short-term timing never works. That one is the basis of Buy-and-Hold. The second discovery is that long-term timing always works and is required for those seeking to have some realistic hope of long-term investing success. Incorporate both discoveries into a single investing strategy and you have Valuation-Informed Indexing, the strategy I advocate in this column.
We do NOT have to watch in dismay as stock prices fall to one-half fair value
Stock prices of one-half fair value are just as insane as the stock prices of two times fair value that we have seen apply from 1996 forward. Those super-high prices were not inevitable. We caused them by falling to speak out against Buy-and-Hold. The super-low prices that are on their way in coming years are not inevitable either. They can also fairly be characterized as the product of Buy-and-Hold thinking. Emotional extremes beget emotional extremes. Insane bull markets beget insane bear markets.
What if we stopped promoting both insane bull markets AND insane bear markets? What if we told the straight story of how stock investing works, as revealed by the investing research of the past three decades?
If we did that, investors could gain access to the knowledge and tools they need to rein in their most self-destructive investor emotions. We could bring on a new day in stock investing, a more emotionally balanced, more profitable and more life-affirming day. Best of all, we could head off that Second Economic Depression before it puts us all in the soup.
The Message of the Stock Selling Industry
The ?experts? employed by The Stock-Selling Industry are not going to do this. It?s a rich boy?s club and those who tell the truth about stock investing are shown the door. As much as I long to see it happen, I am developing a funny hunch that my good friend John Bogle is not going to be standing up in front of a room and saying the Three Magic Words (?I? and ?Was? and ?Wrong?) anytime real soon.
We?re bloggers! We?re not rich boys! The reality is quite to the contrary! We?re poor boys (and girls)! We could do this thing!
This is our chance. Money blogging should not be about rewriting press releases sent our way by our friends in The Stock-Selling Industry. Every personal finance blogger should be engaged in independent thinking, independent research and independent analysis of stock investing questions.
We should all be working hard to bring the Valuation-Informed Indexing story to our readers. Those of us who believe in it should be promoting it. Those of us who have doubts should be explaining the issues and articulating the doubts. We all have different roles to play in this drama. We all have something important to contribute. We all need to get to work.
Is there any downside?
There is none.
If Valuation-Informed Indexing cannot stand up to the scrutiny we bring to it, it will go down and that will be a good thing. If it is Buy-and-Hold that goes down, that too will be a good thing. And we will have been the ones who pulled it off. We will be the ones who will have saved the car from going over the cliff. The tables will be turned in days to come; it will be the stock-selling experts who will be taking direction from us.
But what if they laugh at us???
I have had a lot of bricks thrown at me over the course of the past nine years as a result of my efforts to get this little fire started. If that is what scares you away from taking a leadership role, I urge you to reconsider.
I haven?t been banned anywhere now for more than six months. In the old days, I was lucky if a blogger bothered to send me an e-mail letting me know that he or she could not use my Guest Blog Entry. In recent days, I have had several bloggers ask me to write Guest Blog Entries for them. Valuation-Informed Indexing is not exactly popular today. But things are gradually changing for the better, there?s no question whatsoever about that.
We will be experiencing a changing of the guard in the Personal Finance Blogosphere. Most of the people who are at the top today are at the top because they were one of the firsts in some important category. Perhaps they were one of the firsts to have a money blog or one of the firsts to have audio or one of the firsts to have video or whatever. The internet is a place where being first pays big dividends. Those who wait for a trend to be firmly established are often left fighting over crumbs.
We are today still in the process of laying the groundwork for the widespread promotion of Valuation-Informed Indexing that will be coming within the next few years. Good seats remain available for a limited time. I see big opportunities for those with the courage to take advantage of them before too much more time passes through the hourglass.
The Wave is Building!
According to Rob Bennett?s bear market analysis, we are headed into the Second Great Depression unless we soon pull together and get to work on informing millions of middle-class investors of the realities of stock investing. Rob?s bio is here.