Buy-and-Holders Are Good and Smart People

Beyond Buy-and-Hold #71

By Rob Bennett

When it comes to Buy-and-Hold investing strategies, I?m tough. I describe Buy-and-Hold as the purest and most dangerous Get Rich Quick strategy ever concocted by the human mind. I say that it was the heavy promotion of Buy-and-Hold that was the primary cause of the economic crisis. I point out that the academic research has been showing for 30 years that there is precisely zero chance that Buy-and-Hold could ever work for any long-term investor.


I must really hate Buy-and-Holders, huh?

No. That?s not even close to being true.

As negative as I am re Buy-and-Hold, I am just that enthusiastic re Valuation-Informed Indexing. I say that we could bring the economic crisis to a quick end by opening up the internet to honest posting re Valuation-Informed Indexing strategies. I often cite research showing that we could all retire five to ten years sooner if only we would make the switch to Valuation-Informed Indexing. I note that the historical stock-return data shows that switching to Valuation-Informed Indexing reduces the risk of stock investing by 80 percent.

Guess which group of investors it was that laid the foundation for the discovery of Valuation-Informed Indexing?

It was the Buy-and-Holders!

The way to financial liberation

Our economic crisis is a tragedy. It?s not just that we have seen so much human misery. it?s that all of that human misery was 100 percent avoidable. We are a blessed people. We have learned more about how stock investing works over the past 30 years than we learned in all the years that came before that time-period. What we have learned promises to liberate millions of us from the chains of paycheck dependence. Lucky, lucky, lucky us!

Our good fortune was the product of years of hard effort on the part of — the Buy-and-Holders! It was the Buy-and-Holders who came up with the idea of using the academic research as a guide to how to invest. Valuation-Informed Indexing is the end result of that powerful idea. It was by following the academic research where it led that we were able to develop the principles of Valuation-Informed Indexing.

But wait.

Didn?t the Buy-and-Holders get it wrong? Wasn?t it their idea that there is no need to lower your stock allocation when prices rise to insanely dangerous levels that caused this mess?

Yes, the Buy-and-Holders did mess up. Big time.

But who hasn?t?

Do you know any field of human endeavor in which the pioneers got it all right on the first try? I can?t think of one. We shouldn?t be surprised that the Buy-and-Holders messed up big time. We should have expected it all along. That?s what usually happens when the humans go about making huge advances in their understanding of some matter of importance. Mess-ups are a part of the process.

Mess-ups are a good thing

I wish we could all start seeing it that way. If we could, we would see the defensiveness that has been holding us back from spreading the word about all of our exciting breakthroughs disappear. If we could just accept that mess-ups are a natural part of the learning process, we could help the Buy-and-Holders come to see that Valuation-Informed Indexing is not so much a refutation of their years of hard work as it is a vindication of them and a fulfillment of them.

The two most important breakthroughs in the history of investing analysis were Fama?s showing that short-term timing never works and Shiller?s showing that long-term timing always works. Put them together and you have the safest and best strategy for investing in stocks ever concocted by the human mind. Had Shiller published his research in 1971 instead of 1981, the book A Random Walk Down Wall Street would have been titled A Valuation-Informed Walk Down Wall Street and we would have spared ourselves all this anguish.

Does it really matter all that much? Does the fact that we achieved the second great breakthrough in 1981, a few years after the defective strategy had been widely publicized, mean that the Buy-and-Holders were all just a bunch of dummies?

I sure don?t see it that way. Shiller would not have done the research he did had the work that at one time seemed to support Buy-and-Hold not been done first. Shiller?s work was a reaction to Fama?s work. Shiller?s work did not do away with the need for Fama?s insights, it amplified them by filling in parts of the story that Fama missed and that we needed to know about to put Fama?s insights to productive use.

The Buy-and-Holders are not dumb people. The Buy-and-Holders are not bad people.

We hurt them when we tolerate the continued promotion of Buy-and-Hold. Each time the economic crisis worsens, the Buy-and-Holders feel worse about themselves and the investors who were ruined by their investing strategy become more angry about what was done to them.

We owe the Buy-and-Holders a big debt. The best way to honor that debt is to help them see that the future is Valuation-Informed Indexing. And that they merit a whole big bunch of credit for developing the insights that over time led us to the magical place at which we now stand.

Rob Bennett is known for his unconventional job search tips. His bio is here.


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Nine Reasons Why Stock Valuations Make a BIG Difference in the Long Run
Risk-Free Stock Investing?

( Photo from Flickr by Helico )

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