Beyond Buy-and-Hold #69
By Rob Bennett
As we learn more about how stock investing works (and as we permit ourselves to talk over what we have learned), we will need to change the language we use to discuss the subject.
Are you a bull?
Or are you a bear?
If you are a smart investor, you are neither.
The designations “bull” and “bear” were meaningful in the days before there was academic research showing that short-term timing (changing your stock allocation because of a guess as to where stock prices are headed) doesn’t work. In the days when large numbers of investors believed that guessing where prices were headed was the way to buy low and sell high, the most important thing to know about an investor was whether he was a bull or a bear.
”Bull” and “Bear” no longer matter
For educated investors, it doesn’t matter. If you don’t believe that there is any way to tell in which direction stock prices are headed, why would you be a bull or a bear? To indulge in guesses of either type is against your self interest. Why bother?
I have been at a zero stock allocation since the Summer of 1996. I say that stock prices will likely fall another 65 percent over the course of the next few years. I’m the meanest of growling bears. There’s no question about that, is there?
There’s a question.
I’m not a bear. Why not? Because I’m not guessing. When I say that stock prices are headed downward, I am going by what the academic research says. Valuation-Informed Indexing is a research-based approach, not a guessing game approach.
Holy self-contradiction, Batman! Didn’t I say above that timing doesn’t work? Now I’m saying that timing is a research-based concept. It is.
Long-term timing in the stock market always works
The same historical data that shows that there has never in history been a time when short-term timing worked also shows that there has never in history been a time when long-term timing did not work. Long-term timing always works. Investors who understand what the academic research says always engage in long-term timing.
I cannot tell you that stock prices are going to fall this week or this month or even this year. To do that would be to practice short-term timing. It cannot be done. Or at least so says the research.
It’s something different to say that prices are headed down and down hard in years to come. We now have 140 years of historical data showing that those sorts of predictions always work out .
So it’s not right to say that I am a bear. Being a bear has always been about taking guesses. When you say that stock prices are going to fall because of what the academic research says on the subject, you are not a bear. That’s not what the word means.
What are you?
The point of investing is not to be a bull or a bear, but an informed investor
I would say that you are an informed investor. Going by what the research says is smart investing.
How about the bulls and bears? Are they dummies?
I don’t want to insult anyone. Can we say that they are not informed about what the research says, at least according to my assessment? That sounds a little softer.
And how about the Buy-and-Holders? They follow the research showing that short-term timing doesn’t work but ignore the research showing that long-term timing always works. They are partially informed. They know enough about what the research says to be dangerous. But it is to their credit that they care about the research and I believe that in time they will come around to following not only the pre-1981 research that supports Buy-and-Hold but also the post-1981 research showing how dangerous it is to fail to practice long-term timing.
The rules of the investing game are changing. People have a hard time not thinking of those who say prices are headed downward as bears. There were many decades of investing history in which that is what you called people who believed prices were headed downward.
The label doesn’t fit in a day in which informed investors root their assessments of which way prices are headed not in guesses but in research showing how stock investing really works. I am not a bear. I’m just some fellow who thought that the Buy-and-Holders were smart to root their strategies in what the research says and who came over time to believe that those of us who follow data-based strategies should take into consideration not only the research published before Shiller published his breakthrough findings but also in the research published in the three decades since that day.
You can ask me where I think stock prices are headed and I’ll tell you. But I will never engage in any guesswork. It’s not my thing. I’m not a bear any more than I am a bull. I am an investor who informed himself about what Shiller’s research says and who came to believe that the man is on the right track.
Rob Bennett has written extensively on what causes stock price changes. His bio is here.
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