Value Investing

Confidence in Buy-and-Hold Is a Mile Wide and an Inch Deep

Valuation-Informed Indexing #156

by Rob Bennett

I have engaged in a long e-mail conversation on the merits of Buy-and-Hold with Robert Savickas, an Associate Professor of Finance at the George Washington University School of Business. I enjoyed the conversation very much. Robert is a smart, hard-working, caring, open-minded and fun fellow. I believe that sharing some of his reactions may help you to see how confidence in Buy-and-Hold is today a mile wide and an inch deep.

Robert argued in his first response to me (I initiated the conversation with an e-mail describing my 11-year effort to get the word out about how Yale Economics Professor Robert Shiller’s research has discredited the Buy-and-Hold claim that it is okay or even a good idea to fail to make changes in your stock allocation in response to big shifts in valuation levels) that: “I thought that Buy-and-Hold had been challenged a long time ago and many academics don’t believe it. The efficient market hypothesis has also been challenged a bunch of times.”

That’s so. But the obvious question in response is — Why don’t the millions of middle-class investors who have their retirement savings invested in the stock market know this? If the academic community has serious doubts about the strategy that millions are following to finance their retirements, shouldn’t we be telling them about it?

That comment led to a discussion of all the craziness that follows when one points out the 32 years of peer-reviewed academic research showing that a Buy-and-Hold strategy cannot work in the long run. Savickas, to his credit, brought up the issue that most are afraid to refer to because they worry that it would be impolite to say the words out loud: Am I a nut?

My new friend wrote: “I suggest that you really try to moderate your tone; you could get much further that way. I read your article, and I can see how many readers would be put off by the somewhat sensational/scandalist tone and would not persevere to read, thinking you are losing your mind. I knew to look past the tone.”

He’s not the only one who feels that way! The hard part for me is that most of my readers are not bold enough to be so blunt. Because Robert was blunt re his concerns, I was able to address them. Most of my readers who experience those sorts of concerns (and it is more than one or two who are in this camp) find another web site to visit without going to the trouble of letting me know why.

First, I tried to demonstrate that I haven’t completely lost the thread by making light of his comment. I wrote: “Re the issue of being labeled a nut, I’m afraid that it’s a bit late to help me out re that one!”

Then I pointed a bit more soberly to the 140 endorsements (from both big names in the field and ordinary investors whose lives have been changed for the better as a result of their discovery of the Valuation-Informed Indexing concept) of my work. Robert told me: “Wow, I did not realize you achieved this  much success and have many devoted believers/followers. That’s great. Then ignore the opposition. It’s great to have opposition: That means you are doing something right.”

Savickas asked me to provide more details about the Valuation-Informed Indexing strategy and about the peer-reviewed research that I did with Wade Pfau that shows investors how to reduce the risk of stock investing by 70 percent. I did so. He commented: “This sounds like a real thing. If it is and I can thoroughly understand it, then it will end up in my classrooms and in my students’ minds (of course, with references to you and Wade).”

I told you this guy was a straight-shooter.

What I find remarkable about the exchange is the speed with which Robert achieved a pretty darn big transformation in his point of view. One minute, he was reluctantly revealing to me that he could easily see how most of my readers would come to conclude that I was more than a little bit off my rocker. A few moments later, he was changing his course syllabus to make room for discussion of the investing strategies that I have been developing and perfecting for the past 11 years.

This fellow teaches this stuff. It shouldn’t be possible to surprise him with something entirely new and real. But it was possible. Why?

It’s because the shift from Buy-and-Hold to Valuation-Informed Indexing is so big. Our human minds are constructed to be skeptical of such big advances.

But the full reality here is that we all have for a long time been entertaining ideas that Buy-and-Hold is not all it has been cracked up to be while generally keeping those heretical thoughts to ourselves.

At some point, something will happen to cause us to let those long-silenced thoughts rise to the surface. Then we will find our investing views being transformed overnight.

It’s real.

And there ain’t nothing like the real thing, baby.

Rob Bennett has recorded a podcast titled “Today’s Understanding of How Investing Works Is Primitive.” His bio is here.