by Rob Bennett

People have had doubts about Buy-and-Hold for a long time. A Random Walk Down Wall Street was popular when it was published. But even then there were voices of skepticism. There are obviously many, many more doubters today.

Buy-and-Hold won over a lot of people during the huge bull market, however. Many of today’s investors swear by it not because they have considered the theoretical arguments pro and con and been convinced by the pro case but because they made money during the bull and attributed those gains not to the fact that stocks were priced well early in the bull market but to the fact that they were following a Buy-and-Hold strategy at the time.

These people do not like to hear Buy-and-Hold challenged. I am a harsh critic and I get a lot of pushback when I make my case at various discussion boards and blogs. Many Buy-and-Holders feel that they have found the answer and do not want to have to reconsider the question of what investing strategy makes the most sense for them.

I favor Valuation-Informed Indexing. Valuation-Informed Indexing offers all the benefits of Buy-and-Hold without the one huge drawback that sooner or later always causes a mass wipeout — the Get Rich Quick idea that there is no need for investors to adjust their stock allocations downward when valuations rise to insanely dangerous levels.

The intellectual case to be made against Buy-and-Hold is today rock solid. But the emotional wall of defense erected by advocates and followers is also pretty darn strong. I’ve experienced a standoff during the first ten years of my efforts to bury Buy-and-Hold and to see it replaced by Valuation-Informed Indexing.

The next big crash is going to be the thing that is going to provide us the momentum we need to move forward. Buy-and-Hold defenders are desperate today. They don’t want to give up, no way, no how. But they are embarrassed by their inability to make a reasoned case. The only thing they are still able to count on to impress listeners is the bull market gains, which are no longer as impressive as they were 12 years ago but are still strong enough to win the day when combined with the power of our natural human aversion to trying out something new. All that changes with another big price drop.

So I believe that the Buy-and-Hold Era will in the not too distant future be coming to an end. Unfortunately, the price crash that it will take to kill it is likely to send us into the Second Great Depression. My worry is that we will see a widespread panic that could undermine the benefits that otherwise would follow from our big chance to teach investors about all of the many powerful findings of the past 30 years that have been ignored out of concern that they conflict with the premises of the Buy-and-Hold model.

Is the next crash going to be our salvation or our doom?

I think it is going to be our salvation (after we experience a big scare).

I say this because of the huge leverage effect we are going to see. I have been put in circumstances that have permitted me to study the Valuation-Informed Indexing model in great depth (and even to develop it to a considerable extent). What I have learned has stunned and amazed and excited me. Stock investing is going to get a whole lot better for a whole lot of people in a whole lot of ways in coming days.

I understand the skepticism with which most people react to such claims. We hear big promises from people selling us stuff all the time. Rarely does the hype match the marketing pitch. So we tune out what strikes our ears as excessively excited claims. We dismiss the possibility of a game-changer without even bothering to give it serious consideration.

I’ll tell you how I believe you should think about this one. Say that some stupid law were passed in 1981 saying that people could continue to develop computer technology in 25 states but that the other 25 states must be walled off and not permitted to know about any of the advances. That’s the equivalent of what has happened in the investing realm during the past three decades. There have been huge advances. But we are living in the dark ages because we have denied ourselves access to them.

Academics have known about the holes in the Buy-and-Hold model for years now. They have also known that they would be putting their careers in jeopardy to talk about them openly. So they have generally kept their mouths shut. That doesn’t mean that they have turned their brains off. They have been thinking about how stock investing really works.

Once Buy-and-Hold dies, they are going to feel free to tell us about all the exciting ideas that have been gradually coming to life in their brains. We are going to see an explosion of knowledge of how stock investing really works once the Buy-and-Hold monster is truly dead and buried and can hold back progress no more.

Did anyone think in 1981 that the day would soon come when we could watch movies on our computers? Or that we could check on weather reports while we are attending little league games by using cell phones to hook up to the internet? Or that there would be a thing called “tweeting” which would win the attention and energies of millions?

People don’t come up with ideas by sitting in a room thinking grand thoughts. They play off of ideas developed by others that appear before their eyes and win their enthusiasm. That process has been killed in the investing realm for 30 years by the worry that the Buy-and-Holders would freak out if we acknowledged that it makes no sense not to consider price when setting our allocations.

But our brains have continued to ponder the realities. The big brains in the field are careful not to speak out of turn. Even Shiller has said that he has never told us all he knows about how stock investing works because he would be branded as “unprofessional” if he did.

When that changes, it will change fast. There’s a lot of pent-up strategizing that we have not been able to tap into for 30 years that is going to come out in a flood once it becomes clear that there is no longer any danger in talking realistically and honestly and accurately about stock investing questions.

Our too easy acceptance of the premises of the Buy-and-Hold model has been holding back progress for a long time. That’s sad.

The good news is that the economic crisis will soon be getting scary enough to bring our three decades of enforced ignorance to an end. I believe that there will come a day when we will all look back at this economic crisis as the best thing that ever happened to us.

Rob Bennett has recorded podcasts on risk, valuations, investment myths and other topics related to understanding stocks. His bio is here.