Buy-and-Hold Is Either The Best Strategy of All Time or the Worst

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Beyond Buy-and-Hold #50

I’ve been arguing for nine years now that we should be spreading the word about Valuation-Informed Indexing. This strategy would permit middle-class investors to obtain far higher returns at dramatically diminished risk, according to 30 years of academic research (based on 140 years of historical stock-return data). That’s investor heaven! Who could possibly object?

Buy-and-Holders, that’s who!

Buy-and-Holders have been arguing for those 30 years that it is their investing strategy that is rooted in the academic research and the historical return data. They’re written thousands of books and developed hundreds of calculators promoting this approach.

Now they are to acknowledge that it wasn’t such a good approach all along? Or even that it was the relentless promotion of Buy-and-Hold strategies that was the primary cause of today’s economic crisis? For the confirmed Buy-and-Holder, it’s hard to go there.

The obvious answer is —

Compromise!

Newsflash: compromise doesn’t always work!

That’s what we turn to in other areas of life endeavor when two groups of people come to hold competing visions of how to proceed. Republicans did not get their way in the debt ceiling negotiations and neither did Democrats. They struck a compromise. It’s the American way. Shouldn’t those of us living in the often bizarre realm of Invest-o-World aim to reach a middle-ground position acceptable to both schools of thought too?

If it were possible, we should. Unfortunately, it’s not possible.

The problem is that there is so much common ground between the Buy-and-Holders and the Valuation-Informed Indexers that there is no point on which either side can give a bit in exchange for getting back a bit in some other area. Both camps believe that stocks are a great asset class. Both camps believe that the typical middle-class investor should invest primarily in index funds. Both camps believe that investors need to tune out the short-term noise and focus on long-term goals. Both camps believe that how stocks have always performed in the past is the best guide to how they are likely to perform in the future.

It’s not possible to reach a compromise on points re which both camps are in agreement. Thus, we need to turn to points re which the Buy-and-Holders and the Valuation-Informed Indexers are in disagreement to have any hope of developing a middle-ground position. Unfortunately, there’s only one point of disagreement. And the point of disagreement is a light-switch sort of point; it’s a yes or no matter and it is hard to see how any compromise middle-ground position could be developed.

Alas, Valuations—and timing—DO matter

The one point that divides the two camps is that Valuation-Informed Indexers say that valuations matter and Buy-and-Holders say that they do not. The historical data shows that, if valuations matter, they matter a lot. The valuations factor is roughly 70 percent of the game, according to the data. Those who understand valuations nearly always do well. Those who do not understand valuations nearly always do poorly.

What compromise is possible in such circumstances? Do we suggest that investors give a little bit of consideration to valuations but not enough to make too much difference so that they do not obtain returns good enough to finance their retirements but not so poor as they would obtain if they considered them not at all? That makes no sense. How the heck is anyone going to go about marketing an investing strategy that its own supporters say will deliver poor (but not absolutely horrible) results.

No, there cannot be compromise over a factor of such great influence. Those who truly believe in Buy-and-Hold (and there are millions of good and smart people who truly believe) need to continue advocating just what they have been advocating all along. They would be wrong to do any less for so long as their confidence in Buy-and-Hold remains strong.

And Valuation-Informed Indexers should not hold back from making the case for how huge a breakthrough the research of the past 30 years has provided us. If the Valuation-Informed Indexers are right, this is the first time in history that middle-class people have had available to them a way to obtain high returns from their investments without having to put their money at any significant risk of loss. We shouldn’t be watering down that message out of deference to the hurt feelings of the Buy-and-Holders. We should be shouting the goods news from the rooftops.

A reasonable proposal

But we do all need to figure out a way to get along without the invective that has too often characterized the first nine years of our discussions. I have a proposal.

Instead of offering watered-down versions of our sincere beliefs in an effort to get along with the other fellow, we should present the full-strength case for what we believe while doing so in a manner that evidences as much respect and affection for those on the other side of the table as possible given our disagreements on matters of substance.

I think the Buy-and-Holders are wrong. But you know what? I respect them. And I like them. And I have learned from them. And I am grateful for what I have learned. I hate Buy-and-Hold for the harm it has done to millions of middle-class portfolios. But I love the Buy-and-Holders for the efforts they have put forward to help us all learn how to invest more effectively.

I like to think that a good number of my Buy-and-Hold friends feel the same way about me. In fact, I know they do. A good number have been kind and brave enough to tell me so even in circumstances in which severe penalties were imposed for the “crime” of voicing support for Rob Bennett.

Here’s World-Renowned Portfolio Strategist Sly Stone:

“There is a new man
Who doesn’t like the short man
For being such a rich one
Who will not help the poor one.
It’s different strokes for different folks,
And so on and so on and scooby, dooby, dooby.”

Now that’s a well-informed investing strategy for the long term!

Given the volatility of the stock markets since 2000—and especially the past few weeks—do we need a new investment strategy to replace buy-and-hold?

Rob Bennett believes that the biggest problem with financial infidelity is that it subtracts from financial intimacy. Rob’s bio is here.

( Photo from Flickr by Helico )

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