by Rob Bennett
Valuation-Informed Indexing #131
I describe Buy-and-Hold as “the purest and most dangerous Get Rich Quick scheme” ever concocted by the human mind.”
Since the financial crisis, Warren Buffett's Berkshire Hathaway has had significant exposure to financial stocks in its portfolio. Q1 2021 hedge fund letters, conferences and more At the end of March this year, Bank of America accounted for nearly 15% of the conglomerate's vast equity portfolio. Until very recently, Wells Fargo was also a prominent Read More
I say that the relentless promotion of Buy-and-Hold strategies was the primary cause of the economic crisis.
I say that Buy-and-Hold has never worked for a single long-term investor, that Buy-and-Hold cannot ever work for a single long-term investor.
Former Financial Analysts Journal Editor Rob Arnott has told me that “your ideas are strong” and that “I would strongly urge you to NOT abandon your ideas.” But he has also admonished me to avoid a “stridency” that he sees in my work and that he believes is “unhelpful to your cause.”
Strident! Me! That’s what the man said.
I don’t think that I am strident. But there obviously is something going on here that causes Rob (and lots of other good and smart people) to come to believe that I am.
A strident message is a loud and harsh message. I do not deliver my investing message in a loud and harsh manner. But it is indeed perceived to be a loud and harsh message. Why? Because the content of the message is so hard to take. It is not possible to deliver this important message in a manner that does not hurt the feelings of a large number of investors.
I’ve give an example.
Buy-and-Holders believe that stocks always offer a strong long-term value proposition. The argument is that, if prices ever got so far off the mark that the value proposition was not strong, smart people would jump in to exploit the inefficiency and set things right again. So stocks always offer a strong long-term value proposition, stocks are always best for the long run.
The post-1981 academic research does not support this belief. The post-1981 academic research shows that valuations affect long-term returns. The math indicates that stocks purchased at the top of the bull were likely to provide a negative 10-year return. If people had known this and shifted to TIPS or IBonds in the late 1990s, they could be planning their early retirements today. It hurts people to realize that they passed up such a wonderful opportunity.
Why did they? It’s not as if there is not a market for information on how to retire early. And it’s not as if the math needed to show that stocks have been offering a poor long-term value proposition from 1996 forward is hard to perform. Why haven’t investors been flooded with articles showing them how to engage in long-term timing effectively?
They don’t want to hear it.
Experts and researchers and article writers are like everybody else, they want to be liked. Investors want to believe that the phony pumped-up prices we see in bull markets are real because they are counting on those phony pumped-up prices to finance their retirements. So the experts and researchers and article writers learn to keep their mouths shut. They do more than that. To be able to live with themselves, they need to persuade themselves that failing to tell people about the need to engage in long-term timing is not such a bad thing. To be able to persuade themselves of that, they need to close their minds as well as their mouths.
But no one is ever able to really put the thought that price matters out of his or her head. All of the experts and researchers and article writers who are trying to ignore this basic reality face a struggle doing so. So do all the investors listening to the experts and researchers and article writers.
What happens when some fellow comes forward with the numbers?
He hurts people’s feelings. He forces people to hear things they don’t want to hear. He causes people to experience feelings of anger and fear and shame. He delivers a message that comes to be perceived as strident.
Stridency is a bad thing. As a general rule, when a large number of good and smart people is telling you that you are strident, you need to reexamine how you are crafting your message. In this case, I don’t think the general rule applies. We need to help people learn the realities of stock investing before their belief in Buy-and-Hold strategies causes them more harm. The fact that it hurts them to hear the message is evidence not that we should ease up on transmission of the message but that we must redouble our efforts to spread it far and wide. Investing advice should not cause people such discomfort. When it is doing so, that’s a sign that the advice that has become conventional is very much off the right track.
Doctors hurt people. They tell them to swallow medicines that taste yucky. They administer tests that cause discomfort. They even cut into skin and make their patients bleed and scar.
Doctors don’t do this because they are mean. They do it because they want to help. Sometimes it is better to feel the pain of an incision than the far longer lasting pain that would come from a doctor’s reluctance to cut in a case where cutting is appropriate.
Our investing beliefs went haywire in the 1990s. We permitted stock prices to reach insanely dangerous levels. There is inevitably going to be some pain as we work our way back to sane investing beliefs. We are going to have to hurt some people’s feelings to get from the awful place where we all are today to the better place where we all deep inside very much want to be tomorrow.
It’s not stridency or meanness that causes me to report what the research says plainly and clearly and accurately and firmly. It is a desire to help. The true meanness would be letting Buy-and-Hold investors continue living with the illusions that are in the process of causing them such great financial misery.
Rob Bennett believes that Buy-and-Hold investing strategies can never work. His bio is here.