Valuation-Informed Indexing #168

by Rob Bennett

Even those who love ObamaCare acknowledge that the rollout has been a mess. I am one of the few who says today that Buy-and-Hold will sometime within the next few years come to be widely perceived as a mess. The purpose of this article is to list five similarities that I see in the two messes.

The first similarity is that both ObamaCare and Buy-and-Hold were rooted in good intentions.

Not everyone agrees that this is so re ObamaCare but I am a non-believer and I very much do believe it. Something had to be done about the many people who have pre-existing conditions and who thus cannot obtain health insurance. I personally would prefer a solution less expansive than ObamaCare. But I don’t find it too hard to understand why many people thought change was needed.

Buy-and-Hold too was rooted in good intentions. I hope that when opinions change on this investing strategy that they will not change so much that this will be put into question (I worry that it will). Millions of middle-class people need a simple way to tap into the power of stock investing. Buy-and-Hold provides it. To ignore valuations when setting your stock allocation is going too far with the simplicity concept. But the basic idea is a good one.

The second similarity is that signs that things were not working out well were ignored for a long time.

None of the revelations we have heard about ObamaCare in the past few weeks were true revelations. All of this stuff had been known for years by those paying close attention. For a variety of reasons, the people responsible for the program ignored the warning signs.

It’s the same story with Buy-and-Hold. I put up my famous post pointing out the errors in the Old School safe withdrawal rate studies on the morning of May 13, 2002. There is now a universal consensus that I was right all along. But you still don’t see people drawing the obvious conclusion that the same errors in thinking that caused the Buy-and-Holders to get the retirement studies wrong caused them to get a lot of other things wrong as well.

The third similarity is that in each case much of the mess was caused by an attempt to mix two things that cannot effectively be mixed.

Free-market health care can work. And government-run health care can work. ObamaCare is a mix of the two that makes things very complicated and hard to manage.

Buy-and-Hold is a mix of independent research and money-making stock-selling operations. The idea is that the independent research will keep the money-making side of things honest. But the power has often worked in the other direction. Most of the people following Buy-and-Hold strategies BELIEVE that there is independent research backing them up. But in more cases than most people can imagine the researchers have been compromised to pretend that there is much more support for Buy-and-Hold in the historical data than is truly the case. The mix is destroying lots of retirement portfolios. People have placed their trust in Buy-and-Hold because they believe there is research supporting it to a degree that they would never have if the ideas were properly attributed to their Wall Street adherents.

The fourth similarity is that both big messes required a Big Lie to sell it.

President Obama was not telling the truth when he said that everyone could keep their health insurance, period. He said that because he didn’t believe it would be possible to get the legislation passed short of saying that.

The Buy-and-Hold advocates were not telling the truth when they said millions of times that “timing doesn’t work.” Long-term timing has worked for the entire 140 years of historical data that are available to us for study. Why did they say it? It would not be possible to persuade large numbers of people to buy stocks when they are selling at insanely inflated prices if you told the truth about what the data tells us.

The fifth similarity is that the messes became real messes only when theoretical problems became concrete problems.

ObamaCare is in trouble today because millions of people have received insurance cancellation notices in recent weeks.

We have known about the theoretical problems with Buy-and-Hold since Yale Economics Professor Robert Shiller published his “revolutionary” (his word) research in 1981. Until 2008, few of us cared. Since 2008, confidence in Buy-and-Hold has grown shaky. Following the next price crash, belief in all of the mumbo jumbo elements of Buy-and-Hold will crash as well.

People don’t get upset when you tell them that the numbers in the studies they used to plan their retirements are wildly off the mark. But people get very upset indeed when their retirement portfolios fail. Too many have drawn the conclusion from the lack of reactions to the errors in the retirement studies that the people who were taken do not care. It’s not that they don’t care. It’s that they don’t truly believe they were taken until their retirements fail. That’s the next chapter in the story of The Big Buy-and-Hold Mess.

Rob Bennett has recorded a podcast titled Why the Stock Market Does Not Set Prices Properly (Even Though Other Markets Do) . His bio is here.