Valuation-Informed Indexing #114
by Rob Bennett
I don’t believe in Buy-and-Hold Investing. I argue that stocks are more dangerous when overpriced and less dangerous when underpriced, so investors must adjust their stock allocations in response to price shifts to have any hope of maintaining their desired risk profile. I further argue that investors willing to change their stock allocations are likely to earn far higher returns at greatly diminished risk as a result.
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A small number love the idea. Most do not. Most investors are indifferent to my advocacy of the Valuation-Informed Indexing strategy. A not insignificant number are downright hostile. Huh? Obtaining higher returns at greatly diminished risk is investor heaven. How could anyone be indifferent or hostile to an investing strategy rooted in such a promise (one backed by 30 years of academic research)?
The Buy-and-Holders have a powerful weapon in their arsenal of persuasion. Stocks were overpriced to the tune of $12 trillion in January 2000. The money wasn’t real. The 12 trillion dollars were cotton-candy gains fated to be blown away in the wind in time and we are living through the blowing-away process today. Still, $12 trillion in funny money wins a lot of short-term loyalty.
Say that you headed a film company and that you wanted as many people as possible to go to your films rather than the films produced by your competition. Say that you were handed $12 trillion in marketing dollars to help out the effort. How well do you think your company would do compared to the competition?
You would rule.
We live in a society in which all sorts of ideas compete with each other for the hearts and minds of the people in a position to determine which ideas come to dominate and which come to be viewed as failures. I don’t like it that Valuation-Informed Indexing can properly be termed a failure in marketing terms for the ten years for which I have been pushing it. The full reality, though, is that $12 trillion is a lot of money. $12 trillion wins over a lot of hearts and minds.
The $12 trillion is not exactly marketing money, of course. It’s not as if The Stock-Selling Industry was handed $12 trillion in cash that it could use to finance television commercials touting the benefits of Buy-and-Hold strategies. A case can be made, though, that the manner in which the $12 trillion was temporarily brought into existence, with no indication to the people gaining it that it was temporary wealth, generated a more effective persuasion campaign than would have been generated by the use of more conventional marketing techniques.
The $12 trillion wasn’t used to pay for television commercials. It was added to the portfolio statements of millions of investors following Buy-and-Hold strategies. The money appeared to be real. Investors knew that, if they cashed in their funds, they would receive the amount indicated on the portfolio statements. That’s powerfully persuasive stuff.
The Buy-and-Hold investors didn’t get use of that money for only a short trial period. The money remained in their accounts for 13 years (overvaluation reached crazy levels in 1996 and did not begin to disappear in a serious way until late 2008). When you see a big portfolio number appear on your statement every month for 13 years running, you come to have confidence in it. You come to feel affection for the investing strategy that produced that number. That’s effective marketing!
People don’t trust conventional marketing campaigns today. They trust their friends and neighbors and co-workers. So the best kind of marketing is word-of-mouth praise. Buy-and-Hold generated tons of word-of-mouth praise. Investors told their friends and neighbors and co-workers that this Buy-and-Hold stuff really works. And the friends and neighbors and co-worked gave it a spin and soon found bigger numbers showing up on their portfolio statements too. It was true! It certainly seemed to be true.
People began to lose confidence in Buy-and-Hold following the 2008 crash. But most still believe. It’s hard to accept that you gave your friends and neighbors and co-workers a bum steer. Millions are enthusiastic Buy-and-Holders to this day. I believe that the next crash may change that. But even then it is not going to be easy for some to make the move to a new investing strategy. People become emotionally attached to a strategy after putting their reputations on the line by endorsing it to numerous others.
How about the experts? How about the academics?
They were marketed too.
Investing experts care about their clients and their readers. They were excited to find a simple investing strategy that produced not only the gains that U.S. stocks have been generating for many years now but $12 trillion more than that. They believed. They still believe (although they are beginning to entertain doubts). The 30 years of academic research showing that Buy-and-Hold can never work in the long run has not been enough to overcome the effect of the $12 trillion.
The academics try to be fair and objective and independent. But the $12 trillion influenced them too. Would you like to be the guy or gal who writes the research paper telling people that the $12 trillion is Pretend Money? I know a fellow who did that. He was very excited to do the research. When he saw the reaction people gave to it, he pulled back. Now he says that research showing the dangers of Buy-and-Hold is too “controversial” for our time.
$12 trillion in marketing dollars can generate a lot of controversy.
Rob Bennett argues that P/E10 Is an Investor’s Best Friend. His bio is here.