Why We Hate Sound Investing Strategies Today (But Will Embrace Them Tomorrow)

Beyond Buy-and-Hold #57

By Rob Bennett

People often say to me ?Well, Rob, if Valuation-Informed Indexing is superior to Buy-and-Hold, everyone would already follow it. Why would anyone not choose the superior strategy??

That?s sound logical. I cannot deny it.

The trouble with InvestoWorld isn?t that people who reside in it are not logical enough. It?s that they are too darn logical to make sense of the human investors, who for thousands of years have been behaving in ways that are often not logical at all.

To get a good fix on the realities, you need to step outside the bounds of InvestoWorld and consult someone with some expertise on The Great Unexplored Topic of Stock Investing, the outright perverse behavior that is characteristic of those darn humans. Ladies and gentleman, I give you that well-renowned expert on portfolio diversification strategies —

C.S. Lewis.

Yes, that C.S. Lewis. The fellow who wrote the Narnia books.

He says:

?The worldly man treats certain people kindly because he ?likes? them: the Christian, trying to treat every one kindly, finds himself liking more and more people as he goes on — including people he could not even have imagined liking at the beginning.

?This same spiritual law works terribly in the opposite direction. The Germans, perhaps, at first ill-treated the Jews because they hated them: afterwards, they hated them much more because they had ill-treated them. The more cruel you are, the more you will hate; and the more you hate, the more cruel you will become — and so on in a vicious cycle forever.

?Good and evil increase at compound interest. That is why the little decisions you and I make every day are of such infinite importance. The smallest good act today is the capture of a strategic point from which, a few months later, you may be able to go on to victories you never dreamed of. An apparently trivial indulgence in lust or anger today is the loss of a ridge or railway line or bridge head from which the enemy may launch an attack otherwise impossible.?

Reality?s primary obstacle: Get Rich Quick

Get Rich Quick investing never makes sense. No one ever profits from it. So why do so many fall victim to it?

To follow a Get Rich Quick strategy is an act of self-betrayal. It?s hard for us to convince ourselves that Get RIch Quick can work the first time we try it. But once we have tried it for a time and enjoyed some of the temporary payoffs it really does provide, we come to hate anything that reminds us of what our common sense tells us must be so.

Get RIch Quickers don?t fail to understand the realities of stock investing. They actively oppose consideration of them. Over time they come to embrace their acts of self-destruction and to hate anything that reminds them of the Reality Principle.

If investors were are logical as Buy-and-Holders presume them to be, they would seek out new ideas. Buy-and-Holders hold new ideas in contempt. They don?t want to hear about strategies that work better than Buy-and-Hold. They want to be comforted by promises that Buy-and-Hold really can work in the long run. Over and over again. Because the voice of common sense never entirely dies in any human.

If all investors wanted to obtain the best returns possible, Buy-and-Hold would have been abandoned 30 years ago, when the academic research first showed that it can never work in the long run. Our desire to obtain good returns on our investments is weaker than our desire to be proven right in our initial assessments of what is the best investment strategy.

Can we ever escape the vicious cycle of pride and hate described by Lewis? Yes. Pain is the healer. Buy-and-Hold has become popular four times in U.S. history and Buy-and-Hold has brought on an economic crisis four times in U.S. history. On each of those four occasions, millions of investors were wiped out, their pride was broken and a rebuilding effort was initiated.

Learning is an act of love

Get Rich Quick cannot survive in an atmosphere that tolerates learning. So time-periods in which Get Rich Quick strategies become popular are time-periods in which learning about investing becomes hated. There would be no bull markets if we did not all carry within us the potential to hate both ourselves and others.

But the pain that is caused by hate breaks our pride and causes us to reach out again in love. It?s darkest before the dawn because that it is the way it must be. Periods of great hate are followed by periods of great love. Periods of great wealth destruction are followed by periods of great economic growth.

Don?t get mad at me. I didn?t create the humans. I just report on what I see appear before me on my computer screen each morning. I see a people in pain fumbling to recall how that rebuilding business works.

You just do it. You just swallow your pride and move on to the next thing.

Rob Bennett has ideas for how to make a late-start retirement plan work out well. Rob?s bio is here.


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( Photo from Flickr by Helico )

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