Financial Disinformation Is an All-or-Nothing Proposition

Beyond Buy-and-Hold #81

Here?s a riddle:

Does anyone truly like financial disinformation?

The trick solution to the riddle is —

Only the tens of millions of investors betting their retirement savings on it!

We all hate financial disinformation — in theory. In the real world, it?s the chocolate of the investor?s diet. I doubt that there?s ever been a single investor who never felt a temptation to give financial disinformation ?just one try.? Look at the investing advice you see and hear on television and radio and the internet. It?s Buy-and-Hold for breakfast, Buy-and-Hold for lunch and Buy-and-Hold after supper time. Why? Disinformation sells.

Can things ever change?

I believe so.

But things won?t change because one or two blogs start pointing out the dangers of Buy-and-Hold. Disinformation has the natural advantage over research-backed strategies. Any marketing professional will tell you that the key to making a sale is forming an emotional connection with the potential customer. Buy-and-Hold is pure emotion. Those trying to sell it are four-fifths of the way home before they make their opening statement.

The disinformation merchants can be stopped. One of the good things we have seen come out of the Buy-and-Hold Era is that millions of middle-class people have reacted positively to the marketing pitch that Buy-and-Hold is supported by the historical return data. That tells us that, while we all are drawn to disinformation, we all also have a responsible side. The millions who have bought into the Buy-and-Hold mumbo jumbo on some level of consciousness desire something better. The academic research of the past 30 years has provided us with the something better. My prediction is that it?s all over for Buy-and-Hold once word gets out.

I?ve been leading the effort to get the word out for 10 years now. It?s not been an easy battle. What makes this so difficult is — there?s no possible compromise between research supported strategies and emotion-focused (disinformation) strategies. You cannot like Buy-and-Hold and Valuation-Informed Indexing both. The part of you that is drawn to the idea of using research to inform your strategies is repelled by the part of you that wants to count on a sprinkling of blue pixie dust to make it this time turn out 100 percent different from how it has ever turned out before. And vice versa. What sells doesn?t work and what works doesn?t sell.

What works could sell. But only in an environment in which there was easy and widespread access to accurate reports of what the research says. If we want to rebuild our economy by helping middle-class investors learn what works in stock investing, we are going to need to provide them with books and magazines and web sites that push the real story and not the marketing mumbo jumbo. And how is Buy-and-Hold to survive in such an environment? It cannot.

Is there any room for new ideas in the investment world?

I once introduced my Stock-Return Predictor calculator to a discussion-board community populated largely by Buy-and-Holders. A number of posters expressed enthusiasm re the calculator?s ability to tell them in advance what their long-term return would be for stock purchases made at various valuation levels, assuming that stocks will perform in the future at least somewhat as they always have in the past. That caused some abusive posters to engage in an effort to shut down the discussion.

A fellow named ?Jim? objected. He said: ?I applaud his effort to inject another piece of objectivity into a very complex, highly subjective topic — Making money in the market.?

So it hit me hard when some time later Jim advanced a very different sort of comment. He said: ?If all he thought was that the market is a bit overvalued and we are probably in for a period of below average returns, there would be no controversy. His views go way beyond that. He claims that the entire industry is wrong and he, as founder of the New School, has the ?correct? answers.?

I understand where Jim is coming from. It?s natural to be skeptical when you hear some fellow whose only claim to expertise is that he figured out how to get stuff posted to discussion boards telling you things that you have never heard from any widely recognized expert, things that would revolutionize the field if they were so. If I had been in Jim?s shoes, I might have expressed similar thoughts. I know from the earlier comments that he did not start out with a bias against me.

The difficulty with getting new ideas into the mainstream

But the full truth is — all new ideas first need to be expressed by a single person. There’s no other way for the process to get started. And it?s unlikely that the person expressing the new ideas is going to be someone already widely recognized as an expert in the field. Those who have established themselves in a field are the least inclined to give voice to ideas likely to bring on a revolution in that field.

If I could tell Jim that taking valuations into consideration need not require that he ever make any big changes in the strategies he has been following since he became a Buy-and-Hold, I would be thrilled to tell him that. I can?t do it. It would be dishonest.

The mistake made when Buy-and-Hold was developed turned Buy-and-Hold into a Get Rich Quick scheme. It wasn?t the intent of the the people who developed the strategy that it be a Get Rich Quick scheme; the research that revealed that Buy-and-Hold can never work in the long run had not been published at the time. Still, the effect is the same in any event. Buy-and-Hold is a Get Rich Quick scheme, the purest and most dangerous Get RIch Quick scheme ever concocted by the mind of mortal man.

Valuation-Informed indexing isn?t. Valuation–Informed Indexing is a research-backed strategy. That?s the opposite of a Get Rich Quick approach. Valuation-Informed Indexing is the opposite of Buy-and-Hold in many, many ways. There are many similarities in the two approaches because Buy-and-Hold was intended to be a research-based strategy too. But in an ultimate sense the differences between the two approaches can never be reconciled.

There never can be such a thing as a research-based Get Rich Quick scheme. It?s an either/or.

Rob Bennett describes the practical implications of the investing theories of Robert Shiller. His bio is here .


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( Photo from Flickr by Helico )

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