The Social Taboo on Talking About the Realities of Stock Investing Is Holding Us Back

Beyond Buy-and-Hold #52

I often make reference to something that I call “the Ban on Honest Posting.” Others, even others who share my views on investing, rarely make mention of it. I think we need to change that. I think the ban is a big deal. I will attempt in this column entry to put forward some reasons why I think so.

First, what is it?

The Ban on Honest Posting is a Social Taboo that instructs us that we shall not discuss in public our sincere beliefs about the effects of valuations on long-term returns. Everyone I know, even the most ardent Buy-and-Holders, acknowledges that valuations matter. But few are willing to quantify this effect. Robert Shiller’s investing ideas are Politically Incorrect. It’s not that people think they are wrong. It’s that people believe it is wrong to even think about them or discuss them.

There are five reasons why I view this Social Taboo as a disaster.

1) It Makes it Impossible to Overcome the Economic Crisis.

The numbers say that it was our decision to keep buying stocks even when prices rose to insanely high levels that was the primary cause of the economic crisis. But the Social Taboo instructs us that this may not be said. We’ve wasted trillions of dollars in stimulus spending that could have been put to better uses had we overcome the crisis by helping people to understand its true causes and how to invest more effectively in the future.

We are now seeing political frictions develop as a result of our desire to avoid discussions of the dangers of Buy-and-Hold strategies. We have even seen our credit rating downgraded!

2) It Makes it Impossible to Realize the Benefits of the Most Exciting Advances in Our Understanding of How Stock Investing Works Ever Seen in History.

We couldn’t have picked a worse time to ban honest discussion of stock investing!

The advances that led to development of the Buy-and-Hold Model were highly significant. But the advances achieved by Shiller and those who have followed up on his work are truly incredible. We now know intellectually how to reduce the risk of stock investing by 80 percent while enjoying higher returns. Millions of middle-class people worried about their failing retirement plans would greatly appreciate being filled in. If only there weren’t a taboo standing in the way of our standing in the way of our telling them the realities!

I am joking around a bit, of course. The purpose of the Social Taboo is to prevent embarrassment of the Buy-and-Holders, who feel ashamed to have people hear about investing ideas that are in so many ways superior. So it’s no coincidence that the Social Taboo on forward movement happened to be put in place at this time. Still, it’s a big problem for all of us. We need to work up the courage to take this one on.

3) The Social Taboo Is Not Achieving Its Purpose.

The primary purpose of the Social Taboo is to spare the Buy-and-Holders the embarrassment of having to admit the mistakes they made that caused the economic crisis. It’s not helping!

The best way to avoid embarrassment over a mistake is to acknowledge it and thereby get it behind you. All that we are doing by covering up for the Buy-and-Holders is making them feel worse and worse and worse.

Shiller published his research in 1981. No one would have directed any serious criticism at the Buy-and-Holders had they acknowledged the mistake at that time. The mistake did not cause serious financial losses until the late 1990s, when prices first reached insanely dangerous levels. By May 2002, when I first posted about the errors in the old school retirement studies, there were people who had been seriously hurt by the promotion of Buy-and-Hold but not too many who had suffered large and irreversible losses

Now we have an economic crisis on our hands! One that seems likely to within a few years to bring on the Second Great Depression! One that could even in time lead to a collapse of our political system!

This Social Taboo is not working to the benefit of the Buy-and-Holders, people! It is not. All those who think of themselves as friends of the Buy-and-Holders (I certainly do) need to pitch in and help persuade them to come clean.

4) It Makes It Impossible to Fully Develop the Valuation-Informed Indexing Model.

I have put considerable effort into developing the Valuation-Informed Indexing model on the thinking that, as the economic crisis worsens, we are likely going to see a growing interest in doing whatever it takes to get our economy back on its feet. I believe that I have done good work and hundreds of people have been kind enough to let me know that this is their assessment also. But you know what? Developing a new model for understanding how stock investing works is not a one-man job!

We need John Bogle involved in this project. We need Bill Bernstein. We need lots of top-name bloggers contributing to our discussions. We need feedback from financial journalists at the Wall Street Journal and the New York Times and the big internet sites. We need academics posting their research and economists offering their insights. This is very much a community effort. There is no one person (especially me!) qualified to handle this job by himself or herself. We need lots of people coming to these questions from perspectives rooted in lots of different sets of life circumstances all dropping in their two cents.

5) It’s Emotionally Unhealthy.

The social norms in our country call for free discussion of all sorts of issues. We all feel shame for having gone along with a Social Taboo prohibiting free discussion in this one area for so long. We just won’t feel right about ourselves until the ban is lifted. As I have noted on many occasions throughout the first nine years of discussions, that’s when the real fireworks (the good kind!) begin!

Rob Bennett believes that life itself is a free lunch and that it would be a terrible mistake not to take advantage of it despite what the “experts” say about how such a thing cannot possibly exist. Rob’s bio is here.

( Photo from Flickr by Helico )

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