Beyond Buy-and-Hold #79
By Rob Bennett
I thought you should know.
It does. It breaks my heart. I care about you guys. So talk to me!
I get the silent treatment all the time. I write three weekly columns and two monthly columns and lots of Guest Blog Entries. I can go weeks without seeing a single comment on my stuff. Here at the Out of Your Rut site, I got a good number of comments in my early days. Then people figured out what I am about and stopped commenting.
I sometimes feel that I am suffering from reverse Sally Field syndrome. I may someday blurt out: ?You hate me! You really hate me!?
Except you don?t. Not really. I know from times when I have posted on non-investing topics that you love me as long as I am not doing the special thing I do in investing posts that causes you not to comment. You?ve even gone so far as to tell me what the special thing is and to ask me kindly to knock it off.
You told me: ?Stop saying that Buy-and-Hold doesn?t work, Rob. Say what does work. Tell us about what you like. But don?t put the Buy-and-Holders down.? That?s a sensitive spot with people. I get that loud and clear.
I don?t know precisely why. We all have our roles to play in this drama and I think it would be fair to say that my role is to get the word out. So my inclination is always to say more. I have a hard time letting in the idea that at times it might be better to say less. It?s clear to me, though, that many others feel otherwise. Many feel that I would have a whole big bunch more impact if I said less. They would even be open to commenting if I did so.
I?m not here to announce that I am making the switch. My purpose is to talk things over. My aim is to figure this out.
Why do people want me to say less? Why are people so sensitive to criticisms of Buy-and-Hold? Again, I don?t know precisely. But I need to put some effort into understanding where people are coming from.
A part of it is fear. When I first posted about the errors in the Old School safe withdrawal rate studies at the Motley Fool board, lots of people participated in the discussions in a positive way. People didn?t see anything wrong with doing so in the early days. Then the attacks posts came and the room got real quiet real fast. So I know that?s part of it. People don?t want to be attacked.
That can?t be the entire deal, however. There?s more of us than there are of them. We have rules at every board and blog for dealing with posters who put up attack posts. The majority in all of the communities has elected not to insist that those rules be enforced, thereby empowering the abusive ones. So there is something else going on here.
Another part of the explanation is a lack of knowledge. I?ve had a number of people tell me that they believe that everything I say about investing makes sense but that they feel they need to go with what the ?experts? say all the same. A lot of us don?t think we know enough to feel comfortable challenging the conventional wisdom. I am confident that that is another factor.
Yet another factor is shame. We all went along with Buy-and-Hold for many years. No one held a gun to our heads. I believe that we suspected on some level of consciousness that it was all a big bunch of hooey. Now we worry that we messed up our own retirement plans. We don?t want to face that painful truth.
I think there?s even more than all this at play here.
Valuation-Informed Indexing is a huge advance over Buy-and-Hold. It changes everything. I think we are scared to go there. It all sounds too good to be true. We don?t fully understand this new world (how could we when we have never permitted ourselves to discuss it?). Humans have a natural fear of the unfamiliar. It might be wonderful, but it might be terrible. Who knows? Better safe than sorry. Better not to go there.
This is my take on the reasons why you don?t comment on the articles I post here. I wish you would! It?s by talking things over that we will become familiar with the strange new world and learn that it really is very, very wonderful and not at all terrible. Come in! The water is fine! Really!
Could I stop saying that Buy-and-Hold doesn?t work?
No. It would not be honest for me to say that. Buy-and-Hold is promoted as a research-supported, data-based strategy. That has always been the source of its power to persuade us. Once we learned that the research and the data no longer support it, the strategy died and had to be replaced. It was a terrible mistake for us to put off the burial for so long. It?s that mistake that put us in this mess in the first place. So I obviously don?t want to repeat the mistake.
I believe that a great deal of the hesitation to move forward comes from good motives. People feel for the Buy-and-Holders. People don?t want to blame their friends and their neighbors and their co-workers for causing the economic crisis.
That?s nice. But we have to come to see that by putting this off we are making things worse for the Buy-and-Holders. They didn?t start out with the idea of sinking the U.S. economy. Had we pressed them to fix their mistake when we first learned of it (1981!), it would have been a a case of no harm/no foul. We did the Buy-and-Holders no favor in letting them cause an economic crisis.
And we can make them all feel better about themselves by getting things out in the open. The full truth is that the Buy-and-Holders contributed many powerful insights. There would be no Valuation-Informed Indexing had there not first been Buy-and-Hold. We do our Buy-and-Hold friends right not by patronizing them but by holding them up to standards to which they would hold themselves if they were thinking clearly.
Comment! Talk! Discuss!
Rob Bennett has recorded podcasts on risk, valuations, investment myths and other topics related to understanding stocks. His bio is here.
Hi Rob,
There is probably a much bigger issue, currently, that should be a cause of concern for both buy-and-holders and those subscribing to valuation-index investing.
The integrity of all financial clearinghouses has become suspect since the MF Global fiasco. Allegedly, investor?s cash is routinely swept out of brokerage accounts and played with fast and loose by those who, traditionally, have been entrusted to care for those funds responsibly. Also, it is suspected that investor?s shares are routinely ?borrowed? from account holders without their permission and used as collateral on naked shorting operations by these same fiduciaries. It appears that MF Global was not the exception, but the rule. Outright fraud is running rampant on Wall Street and anyone with money and/or assets in New York, or connected to New York, is playing the patsy. The rule of law, in financial matters, is not honored there. The corruption going on there is threatening the entire financial system because once the rule of law is abandoned trust in the financial system goes out the window. Apparently, the insane level of leverage facilitated by artificially low interest rates isn?t enough to satisfy these miscreants. Their appetite for gambling with the stolen funds and assets of their clients has no self-imposed limit. They want it all and the political/legal system has given them a BIG thumbs-up.
Personally registering one?s shares or taking delivery of stock certificates is vitally important when the financial music stops because there are simply not enough chairs (shares) to go around. There will be far more claims than assets on hand to honor them. If the government was to step in, once again, and provide bailout backstopping, the ultimate buy-and-hold disaster with be those holding large dollar positions.
Thanks much for your comment, Steven and Debra.
What do we do? If we tell the straight story, people tune us out because it is too scary and depressing to look at the realities. If we offer up more happy talk, we become part of the problem and the entire shebang drifts closer to the edge.
The decision that I have reached is just to tell the truth to the best of my ability while never adding anything to unnecessarily alarm people but also never leaving out information essential to coming to a clear understanding of the realities.
Thanks for your efforts. Please take care. I hope we all get to the other side of this thing in one piece and get to share a laugh over what it was like in The Scary Days.
Rob
Hi Rob–I suspect part of the reason for the lack of open discussion is that John Q. Investor is not as sophisticated as we may want to believe. Most people are passive investors so buy-and-hold suits them. Validation comes from the mainstream financial media–stay the course, and keep buying. People like that, passive riches. OR at least that’s the implication.
I think that if most people truly studied the stock market and the forces that drive it, they’d be out of the market much of the time. But ignorance is bliss so they soldier on supported by the faith of the herd. It works when it works, and that provides the reinforcing reference points that keep them in the game.
Right now we have the best of all worlds for buy-and-hold. The market is rising gently and predictably in an environment where there’s little competition for the investors dollar. How long this will go on is anyone’s guess, but when it ends there’ll be plenty of angry, dissolutioned former investors who will be more than happy to consider the alternatives.
Until then the pews in the church will be mostly empty.
John Q. Investor is not as sophisticated as we may want to believe.
Okay. But that’s just because John Q. Investor has more interesting things going on in his life. This isn’t a problem. We can work with this.
I knock the Buy-and-Holders all the time, right? There is another side to the story. Buy-and-Hold is very simple. As your comment suggests, that’s what we need. So Buy-and-Hold comes very close to being what we need. Buy-and-Hold is almost the perfect strategy for the typical middle-class investors. It’s good news that we have come so close.
Buy-and-Hold has only one flaw — the failure to take valuations into consideration. And that flaw came about because the research showing that valuations need to be considered hadn’t been published at the time Buy-and-Hold was developed. So even that was not intentional. If Shiller had published his research 10 years sooner, we all would be Valuation-Informed Indexers today and we would all be living in Investor Heaven.
So we really only have one problem — revising Buy-and-Hold to include a valuations adjustment. There’s more good news. Most financial planners want to make this revision. I know because I have talked to a lot of them. And most investors are perfectly happy to go along. I have had lots of people tell me that they think considering the price of stocks makes all the sense in the world, they just want to hear it from the experts before they begin doing it. So everyone is just about on board.
The hard part is the transition. How do we get from where we are — a very bad place indeed — to where we all in our hearts very much want to be?
We all need to chill out. That’s it. We all need to relax and just let new and better ideas to be placed on the table and discussed opened and in a friendly and warm and honest way.
The great thing about our economic and political system is that it both permits and encourages such advances. So I think we will in time figure out a way to pull it off.
We can’t get too down. The thing that causes stock prices to go to one-half fair value (65 percent down from here) is negative investor psychology. We need to keep hope for the future alive.
I think the key is letting people in on the new research and the new ideas. People love new stuff in this country. How many products do you see that are advertised as :”New and Improved!” That’s Valuation-Informed Indexing. It’s Buy-and-Hold, New and Improved!
We’ll get there. We just need to hang in through the difficult moments, of which there have indeed been a few.
Thanks much for your courage in hosting the column.
Rob