Valuation-Informed Indexing #151
by Rob Bennett
The ongoing shift from the Buy-and-Hold Model for understanding how the stock market works to the Valuation-Informed Indexing Model for understanding how stock investing works has big political implications.
Since its inception in January 2012, the long book of the Voss Value Fund, Voss Capital's flagship offering, has substantially outperformed the market. The long/short equity fund has turned every $1 invested into an estimated $13.37. Over the same time frame, every $1 invested in the S&P 500 has become $3.66. Q1 2021 hedge fund Read More
If Shiller is right that valuations affect long-term returns, it was the heavy promotion of Buy-and-Hold that served as the primary cause of the economic crisis. Stabilizing the economy is a political imperative.
If Shiller is right, Buy-and-Hold exacerbates the problem of income inequality. Addressing that problem is a political imperative
If Shiller is right, our economy could produce far more wealth if we made the shift to Valuation-Informed Indexing. Taking steps to make the economy more productive is a political imperative.
Given the political importance of the shift, you would think that the political party that stands to benefit would be pushing hard for it. Unfortunately, neither conservatives nor liberals have made it a priority to help workers learn how to invest more effectively. Political benefits are there to be had for either ideology. But it is not clear which camp would obtain the greater benefit from the move. So this is an issue that has been almost entirely ignored in the political realm.
Consider the economic crisis issue. This is huge. The ongoing economic crisis is the top political issue of our day. If conservatives could be sure to score points by pinning the blame for the crisis on liberals by focusing on the role played by the promotion of Buy-and-Hold strategies, they would be doing it. And of course the opposite is true as well. The case that Buy-and-Hold caused the crisis is strong. But the case that it is either liberals or conservatives who are primarily to blame is weak. So there’s not much interest on either side in pushing the idea.
Is it mostly liberals who find fault with Buy-and-Hold? Or mostly conservatives?
Shiller is a liberal.
But Jeremy Grantham, who is a harsh critic of Buy-and-Hold, is a conservative.
John Bogle, who is the lead advocate of Buy-and-Hold, is a moderate Republican (he said that he changed his registration in 2008 so that he could vote for President Obama).
Buy-and-Hold is the product of Wall Street and Wall Street is generally viewed as conservative. And more anguish over the job losses suffered in the economic crisis comes from the liberal side of the political spectrum, suggesting that it is liberals who should favor a move to Valuation-Informed Indexing.
However, conservatives tend to be more concerned with the damage that the crisis has done to millions of small businesses. And conservatives tend to be more concerned about the ability of individuals to acquire wealth. In those respects, it is conservatives who we should expect to seek a change in how the markets operate.
Or consider the issue of income inequality.
The promotion of Buy-and-Hold strategies causes market instability. Workers living in a society in which Buy-and-Hold is popular can lose a large portion of the accumulated savings of a lifetime in a small amount of time. You might expect liberals to become upset over this aspect of the Buy-and-Hold experience.
There’s another way to look at the matter. A lot of the investors who lose money in the price crashes brought on by the promotion of Buy-and-Hold strategies are high-income earners. A good number of liberals don’t see it as their place to worry about investment losses suffered by the wealthy. And moderate-income workers who suffer losses may become more supportive of an enlarged government presence following the experience of devastating losses. It is possible to see how the liberal ideology could gain supporters in the years following massive stock-price crashes.
Finally, consider the issue of wealth creation. Liberals like wealth creation. Most liberal programs were adopted at times when economic times were good. People don’t resent paying higher taxes at times when they feel that they are getting ahead economically.
Conservatives like wealth creation even more. Conservatives like to see individuals rather than government empowered. Good economic times further conservatives goals in a direct way.
It would be wonderful if both conservatives and liberals would look at the benefits that would flow to them as a result of a shift to Valuation-Informed Indexing. Unfortunately, things have been working just the other way around. When liberals don’t see a particular benefit for liberals following from the shift, they lose interest in advancing it. Conservatives do the same. Valuation-Informed Indexing is a political stepchild.
I believe this will change following the next price crash.
At that point, conservatives will have no choice but to embrace the change if they want to preserve confidence in our free-market economic system. And liberals will have no choice but to take serious action to help the millions of middle-class people who will be devastated by another round of big losses.
The good news is that an issue that offers benefits for those on both sides of the political spectrum may serve to unite us at a time when we will very much need uniting. I view Valuation-Informed Indexing as a sleeper political issue. When it stops sleeping, it will go a long way to helping us to heal the wounds that are being opened by our ongoing economic crisis.
Rob Bennett has recorded a podcast titled “P/E10 Rocks!” His bio is here.