How Big An Advance Is Valuation-Informed Indexing Investing?

Beyond Buy-and-Hold #77

By Rob Bennett

Wanna know a secret? Valuation-Informed Indexing is works BETTER than Buy-and-Hold.

Not a little bit.

A lot.

I have come to believe that that?s one of the biggest problems I face in my effort to bring the Buy-and-Hold Era to a close. Say that Valuation-Informed Indexing represented just a small advance?in that case I think the Buy-and-Holders would be happy to make the change. Everyone wants to learn how to invest more effectively.

The problem we face is that Valuation-Informed Indexing is so much better in so many different ways that discussion of it is perceived as a threat by the Buy-and-Holders. When one strategy is so clearly superior to another, the idea of compromise goes out the window.

I cannot change the realities. We are stuck with the fact that we now know about a way to invest that will permit us all to earn far higher returns while taking on far less risk. Woe is us! What a terrible fate we have been asked to suffer!

Spreading the word about Valuation-Informed Indexing

My purpose this week will be to try to explain how it is that we were presented the opportunity to achieve such a huge step forward in our understanding of how stock investing works all at once.

Most learning is achieved in building-block fashion. First you learn addition. Knowing addition, you move on to subtraction. Knowing addition and subtraction, you are prepared to take on multiplication and division. Once you have mastered all of those, you might be ready to learn the elementary concepts of algebra.

Learning is a journey. You take a step, and then another step, and then another step. We are all accustomed to seeing things proceed in this way. We are suspicious of sudden jolts forward because sudden jolts forward are not our normal experience.

Advances that relate to fundamental questions are different than the rest.

Challenging the ?conventional? investment wisdom with VII

When we invent the wheel, we see something different from what we see when we move one step forward at a time. Inventing the wheel changes our understanding of what is possible in the fields of travel and motion. So the one advance leads over time to thousands upon thousands of others. The invention of the wheel was a a game-changer, a paradigm-buster.

So it was with our discovery of fire. And with the invention of television (for good or for ill!). And with our discovery that the earth revolves around the sun rather than the other way around. And with the invention of the car. And with a great number of medical advances. And with the invention of the computer chip.

Most advances in knowledge are of the building block type. But not all! We have been fooled into thinking that huge steps forward are not possible in the investing field. We need to rearrange our perceptions. We need to at least consider the possibility that those of us kicking around today are living through the days in which the greatest advances in investing history will be achieved. We should be excited! Skeptical, yes. But excited too.

I struggle to understand why it is that so many good and smart people have such a hard time with this one. We have seen how advances in other fields have made our lives better in ways unimaginable at the time the advances were being achieved. Why are we so reluctant to acknowledge that this is what we are seeing when we see Buy-and-Hold ideas challenged and Valuation-Informed Indexing ideas brought in to fill the void?

Building a Better Investment Strategy

I believe that we have overestimated the extent of our knowledge of how investing works. We think we know a lot. We think people have been studying investing for a long time and that it is therefore unlikely that we would today discover too many new and exciting things.

We are wrong to think that. The reality is that the state of knowledge of how investing works is primitive.

Do you know how long people have been studying investing in a serious, systematic way? Since the 1960s. Before that, most of what was said about investing was speculative junk. This is a new field of study. This is the sort of field in which you should expect to see breakthroughs achieved.

I wish that the Buy-and-Holders could let that into their hearts. People think of me as anti-Buy-and-Hold. The reality is that I fully and gratefully acknowledge that the Buy-and-Holders generated some amazing insights. I used those insights in my development of the Valuation-Informed Indexing concept! So I obviously am not anti-Buy-and-Hold in any final sense. There wouldn?t be any Valuation-Informed Indexing if not for the many powerful insights I picked up from my Buy-and-Hold friends.

The Buy-and-Holders built the foundation Thank you, Buy-and-Holders!

The Valuation-Informed Indexers took it to the next step, to the place where the Buy-and-Holders would have taken it if only the research needed to take it to that place had been available in the days when Buy-and-Hold was being developed.

Valuation-Informed Indexing is Buy-and-Hold 2.0. It?s the new Buy-and-Hold. It is Buy-and-Hold, New and Improved. That?s all it is.

It was the Buy-and-Holders who came up with the idea of using academic research to develop an effective investing strategy. It?s their fault! All I and the hundreds of community members who helped me did was to permit ourselves to become convinced that what they were saying made an awful lot of sense.

It was the idea of using academic research as a guide to how to invest that made all the wonderful stuff we have come up with over the past 10 years possible. Now — let?s all get about the business of enjoying the fruits of our hard and smart and good labor!

Rob Bennett recently posted a review of the book The Myth of the Rational Market. His bio is here.


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( Photo from Flickr by Helico )

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