Valuation-Informed Indexing #164
by Rob Bennett
I’m always thinking about Valuation-Informed Indexing. When something else is going on in my life, it’s there in the back of my mind.
So when I recently watched an episode of Mad Men on Netflix in which the top executives of tobacco companies were complaining about how people were starting to believe these wild claims that smoking might not actually be good for your health, I instantly saw the connection to our own day and the dangerous marketing tactics we have seen used in support of Buy-and-Hold strategies.
If you are not aware of just how deceptive advertising can get when responsible people don’t call the marketing departments out on their baloney, please take a look at this page showing 12 advertisements that made the claim that you really should be working hard to pick up the smoking habit given how many years it adds to your life. Smoke regularly and you might live to 100 years of age! Doctors smoke Camels! Smoking provides a feeling of well-being! Smoking aids digestion! Smoking is the cure for the common cold! Smoking helps you avoid having a dry throat! Smoking helps you stay slim!
Given the reduction in doctor’s bills we stand to enjoy by taking up smoking, how can any of us afford NOT to pick up the habit? I mean, come on!
The obvious question is -- Did people really believe this stuff?
The true answer (in my opinion!) is -- Yes and no.
I don’t think anyone truly believed that smoking is good for your health. So, in a literal sense, no, no one believed the stupid advertisements.
But it is important to remember that it is not the purpose of an advertisement to persuade through logic. One of the characters on Mad Men did a good job of explaining the purpose of advertising when she said that the idea is to persuade people to do what they want rather than what is expected of them. Advertising attacks the Super-Ego with the aim of making the consumerist Id more powerful.
The advertisements promoting the health benefits were aimed at people who already smoked. Research showed that these people were starting to develop concerns that smoking could kill them. So they were thinking of quitting or cutting back. The aim of these advertisements was to offer reassurance to people who wanted to smoke that it would be okay to continue doing so. The aim was achieved by putting forward absurdly deceptive claims that possessed emotional resonance because they gave people a reason to do something they very much wanted to do but which was beginning to cause pangs of conscience.
It’s the same story with the absurdly deceptive claim of the Buy-and-Holders that there is no need for investors to lower their stock allocations when prices rise to insanely dangerous levels.
Does anyone really believe such nonsense? No. I have spoken with tens of thousands of middle-class investors over the past 11 years. I haven’t found one who believed that valuations do not matter. People know on an intellectual level that Buy-and-Hold is gibberish. Everyone gets that.
The problem is that we humans do not generally operate on an intellectual level. We are capable of doing so and there are times when we put in the effort to actually do so. But more frequently we operate on an emotional level. We do what appeals to us whether it makes sense or not and then we turn to our intellects to rationalize our emotion-driven choices.
That’s the Buy-and-Hold story.
Valuations matter. Big time. Common sense says it must be so. The entire historical record of stock returns confirms what common sense tells us. Not taking valuations into account when setting one’s stock allocations always produces poor long-term results. There has never been a single exception and there never can be one. And everybody knows this on some level of consciousness.
But we don’t like it.
Not one little bit!
We want to believe that those bull market gains are real!
Get Rich Quick thinking has about as much chance of working out in the long run as smoking three packs per day has of helping us live to 100 years of age. But we want to believe all the same.
Wall Street’s relentless promotion of Buy-and-Hold strategies helps us believe what we want to believe. We don’t look at all carefully at the methodologies used in the “studies.” Because we don’t want to know about the weaknesses of the claims. Wall Street is tricking us, sure. But we think of those who promote Buy-and-Hold strategies as friends. We want to be tricked!
There’s one other point that popped into mind while I watched the Mad Men episode. People ask me all the time whether I think that the relentless promotion of Buy-and-Hold is some grand conspiracy. If there really is 32 years of peer-reviewed academic research showing that this stuff doesn’t work, how do “experts” get away with continuing to promote it?
There’s no conspiracy.
The tobacco company executives who made those outrageous (to our eyes!) claims smoked themselves! They are sitting back and taking long drags in the Mad Men episode.
They knew that they were tricking their customers. They knew that intellectually, just as the customers knew intellectually that they were being tricked.
It doesn’t follow from the fact that the executives knew that the advertisements were trickery that they didn’t fall for them as hard as their customers fell for them. The executives wanted to smoke too. The executives let emotion prevail over intellect too. The executives of the tobacco companies fell for their own tricks and died from cancer at the same rate as their customers.
The people who push Buy-and-Hold believe in it.
That’s what makes the problem so hard to solve.
It’s not intellectual arguments that changed our cultural take on smoking. It was the emotional reaction that came about when we saw lots of our friends and neighbors and co-workers die early deaths that caused a good number of us to work up the courage to speak out.
The next stock crash is going to cause a lot of human pain. My Buy-and-Hold friends are going to see the human devastation as much as I do. When that day comes, I will be working side by side with them to create space for much better investing advice than what we have heard in recent years. I just wish that I could spare the many good and smart people who promote Buy-and-Hold strategies today the pain they will be feeling when they see where their deceptions (of themselves as well as of others) lead.