Beyond Buy-and-Hold #55
I put up a guest post at another blog in which I referred to Buy-and-Hold as a Get Rich Quick scheme and a fellow posted a comment containing the words quoted above. ?Exactly!? I cried. ?That?s it! That?s why we are in an economic crisis. That?s why everything is so messed up today.?
I often point out that honest posting on the dangers of Buy-and-Hold is not permitted at most investing discussion boards and at a number of blogs today. Buy-and-Holders often take exception to that claim. ?We permit criticism of Buy-and-Hold,? they say. ?It?s just that you are so extreme — you are the only one saying that it is a Get Rich Quick scheme.?
But what if Buy-and-Hold really is a Get Rich Quick scheme?
Wouldn?t it be better if lots of people were saying that rather than just one?
And given how Buy-and-Holders react to the one person saying it, can we say for sure that the reason why lots of people are not saying it is that they don?t believe it? Could it be that lots of people believe Buy-and-Hold is a Get RIch Quick scheme but don?t say so because they know that the reaction from Buy-and-Holders will be so harsh?
We?re caught in a Catch-22 situation. Few people are willing to point out that the emperor is wearing no clothes even though it is obvious that the emperor is wearing no clothes because so few dare to point out that the emperor is wearing no clothes that those who do point it out can be dismissed as ?crazy.?
The Buy-and-Holders didn?t start out trying to ruin the U.S. economy. So if we could persuade them to calm down long enough to hear out all the reasons why Buy-and-Hold is a Get Rich Quick scheme, we could all begin working together to reform the Buy-and-Hold Model into something that works (Valuation-Informed Indexing). The tough part is that first step. How do we get the Buy-and-Holders to listen? They think Buy-and-Hold is great. Hearing it described as a Get RIch Quick scheme shocks them and causes them to tune out.
Most people try to get along with the Buy-and-Holders by holding back from expressing their sincere views re how dangerous this strategy is to those who follow it and indeed to our entire economic system. That?s not working. I believe that the better approach is to be frank about the dangers of Buy-and-Hold while bending over backwards to describe the circumstances that caused this otherwise promising strategy to fail.
Small errors and the domino affect they can cause
Think back to school days when you were trying to solve an algebra problem. Did you ever have a time when you were told that your answer was wrong and you went over the problem again and again and couldn?t figure out what you did wrong? Ultimately, your teacher pointed out that you failed to copy a negative sign at an early stage of your work. So all the numbers that followed from that point were wildly wrong. You got an easy thing wrong and that meant that, even though you performed lots of difficult calculations properly, all of your answers were wrong.
That?s what happened here.
Buy-and-Hold is based on academic research of the 1960s and 1970s. This research showed that short-term timing doesn?t work. It says nothing about long-term timing because the distinction between short-term timing and long-term timing was not known to be important at the time. Robert Shiller showed in 1981 that long-term timing always works and that those hoping to have any realistic hope of long-term investing success must be willing to time the market.
Valuation Informed Indexing to the rescue
For Buy-and-Hold to work, it must permit and encourage long-term timing. But the strategy that permits and encourages long-term timing is not called ?Buy-and-Hold,? it is called ?Valuation-Informed Indexing.?
We all want to overcome the economic crisis. To do so, we must find a way to get the word out to middle-class investors about the message of the last 30 years of academic research. How can we do that without causing discomfort to the Buy-and-Holders, who have for 30 years been advocating the opposite of what the research supports while claiming to be following a research-backed strategy?
I acknowledge that we need to find a way to help Buy-and-Holders save face. But I am at a loss as to how things could be said that would both smooth the ruffled feathers of the Buy-and-Holders while also giving middle-class investors the information they need to invest effectively from this point forward. If anyone reading these words has any good ideas, I would be grateful if you would share them with me.
Do you believe that buy-and-hold has been a successful investment strategy since 1999? Are there other strategies you prefer?
Rob Bennett?s advice for those seeking to learn how to start saving money is to check out the Multiply-by-25 Rule. Rob?s bio is here.