Beyond Buy-and-Hold #28
Do you remember Eeyore?
He was the donkey in the Winnie the Pooh stories. He looked at the dark side of everything. If someone said “Happy Birthday!” he would respond: “Thanks for remembering. No one ever does. I don’t want any presents. Not that I would get any if I did. You probably were thinking of someone else. It’s okay. I can pretend this rock is a birthday present and have a blast on my birthday that way.”
The Buy-and-Holders remind me of Eeyore.
They take a far darker view of the realities than is required by the evidence. And they win followers because they take such a pessimistic view that those of us who fear getting our hopes up that anything good could ever happen to us take comfort in the safety of never entertaining dreams of a better future.
It’s an investing strategy for scared donkeys. I think that we humans can do a whole big bunch better.
The Achilles Heal of the investing universe
What’s the one thing about stock investing you don’t like? It’s the risk, right? Everybody is happy with the returns provided by stocks. But the risk is a big pain. If only there were a way to invest in stocks without taking on so much risk.
The Eeyores say it is not possible.
It is because stocks are risky that they provide such great returns. If anyone found a way to reduce the risk of stock investing, stocks would no longer provide good returns. We’re doomed. There’s no hope. It will rain every day from now on. If it ever looks sunny, it’s a trick! The rain will be starting again soon.
Why higher risk doesn’t tranlate into higher stock returns
This Tigger says “No!” Tigger laughs at stock risk because he knows it is easily avoided. Tigger bounces to the beat of hot, new investing ideas.
Stocks don’t provide high returns because they are risky. Stocks provide high returns because those who own stocks own shares in U.S. business enterprises and U.S. business enterprises have for as far back as we have records generated enough profits to support an average annual return of 6.5 percent real.
Risk has nothing to do with it. Forget that junk!
If you invest in an individual stock, you might get more than 6.5 percent real or you might get less. Some individual companies do better than average and some do worse. Duh!
If you have lots of bouncing to do and just don’t have time to investigate individual stocks, you can invest in index funds instead. A broad index fund is going to earn the average return of 6.5 percent real. So you’re covered! Big return, no risk. Bounce, bounce, bounce!
Actually, there’s one little bit of risk of which you need to be wary. If you overpay for those index fund shares, you obviously cannot expect to earn that average 6.5 percent return. Pay double what your shares are worth, and you’re going to get maybe half of the average return. Pay triple, and you might get one-third of the average return. Like that.
“I knew there had to be a catch,” says Eeyore. “There always is.”
Oh, shut up, Eeyore. There’s no catch!
With index funds timing is EVERYTHING
Just don’t buy the darn index funds when they are priced at two or three times fair value. Buy them when they are priced well and all of this risk business goes “Poof!”
“I should only be so lucky,” sighs Eeyore. “As if.”
That’s how it works. Buy stocks when they are priced reasonably and the risk is insignificant. I’ve looked at the historical data and I know how many times stocks provided a frighteningly poor 10-year return starting from a time of moderate or low valuations.
Prepare yourself, Eeyore. This one is going to come as a shock.
The number of times this has happened is — Zero.
“Now you tell me, after I’ve lost all my money,” says Eeyore.
Tigger says: “I’ve been saying it all along. You wouldn’t listen!”
“How could I hear you over all that bouncing?” asks Eeyore.
“It doesn’t matter, though. I knew all along that I would end up losing everything. I always do.”
Rob Bennett says that the Efficient Market Hypothesis is a big bunch of hooey. His bio is here.