Valuation-Informed Indexing #171
by Rob Bennett
People don’t like it when I talk about “goonishness,” the highly abusive behavior evidenced by many Buy-and-Holders when their investing beliefs are challenged.
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The February 2021 monthly tearsheet for the Roubaix Fund Composite, a fundamental long/short equity strategy focused on small and mid cap U.S. stocks. Q4 2020 hedge fund letters, conferences and more Roubaix Composite Performance Roubaix generated a net return of +7.87% in February relative to the long-only benchmark Russell 2000 Index total return of +6.23% Read More
Buy-and-Holders like to think of themselves as sophisticated, intelligent, informed, rational, research-based investors. I hurt their feelings when I accuse them of goonishness. That of course means that I hurt my chances of persuading them of the merit of my investing ideas. So why do I do it?
The fact that it is hard to hear about is not a sign that we shouldn’t be talking about it. The fact that it is hard to hear about is a sign that we MUST talk about it, that it is the most important investing topic of all.
There are things that I can say to soften the blow. And I do say those things all the time. I say that it is not only Buy-and-Holders who are guilty of goonishness. We all are. Goonishness is irrationality. Goonishness is sin. Goonishness is our inclination to self-destruction. Goonishness is our Get Rich Quick urge.
I often talk about the peer-reviewed research that I co-authored with Wade Pfau that shows investors how to reduce the risk of stock investing by 70 percent. How is that even possible? It’s possible by becoming aware of your goonishness and fighting it rather than giving in to it.
It’s because we rarely talk about goonishness that it has managed to gain so much power over us. It’s because we rarely talk about goonishness that most of us still think of stocks as a risky asset class in the Year 2013.
We say “stocks are overvalued today” rather than “investors are acting goonish today.” It sounds nicer, less confrontational, less inflammatory.
But does it get the job done?
Stock prices have been insanely high for the past 17 years. People have become immune to pronouncements of high P/E10 levels.
When you make the claim more direct and more personal, yes, you increase the odds that people will become angry on hearing it. You also increase the chances that they will indeed hear it. That is, you increase the chances that the pronouncement will do some good.
When someone’s car is headed over a cliff, you don’t say “Oh, see here, my good fellow, you might want to look into the possibility of reducing the speed of that fine vehicle of yours just a tad.” He won’t get it if you say it like that. You scream. You make clear that something must be done.
Goons can’t think.
That’s the point.
When the P/E10 level is above 20 (as it has been for the pat 17 years, except for a few months in early 2009), investors are not thinking. For the past 17 years, our incapacity to engage in thought re investing has been by far the most important story in this field. But few appreciate this reality. Because the story is always presented in such a boring and non-confrontational way.
The first law of stock investing is that investors set prices. Not economic developments. Not political developments. Investors. Since investors are human, they are capable of some doozy mistakes. If we care about them, we should tell them when they wander too far from rationality.
When we say that investors are behaving like Goons, we are not saying that they are dumb. Smart people are capable of goonishness. Logic can aid rationalization as easily as it can reasoning. Goons are people who use their minds to justify high stock prices rather than to figure out how much to lower their stock allocations in response to them.
Some people think that goonishness cannot be overcome. They point out that it has been with us since the first market opened for business.
But I don’t buy the idea that it cannot be overcome. Never before have we had 32 years of peer-reviewed academic research showing us how much better our returns would be and how much less risk we would take on if we would only come to terms with out inner Goons.
We’re in a new day. We’re learning. We’re advancing. We are learning that the one thing we must never do is to ignore our inclination to let prices rise to unsustainable levels. That’s pretty much all that matters in stock investing. If we get our allocations right, we do well in investing, no matter what other mistakes we make. if we adjust our allocations in response to big valuation shifts, its easy to get our allocations right. If we follow Buy-and-Hold strategies, it is impossible.
The trouble is that we are all already aware of our goonishness and ashamed of it. When we hear others talking about it, we feel judged. We don’t like the feeling.
The answer is to talk more about goonishness, not less. If we talked about it when we first saw it, prices would never get that far out of hand and things would never get to a point where we felt so ashamed. We make things harder for everyone by holding off on our comments for too long.
We shouldn’t hate ourselves for being goonish. I am not saying that. Our goonishness is part of our human nature. We have to accept that that is so.
We just shouldn’t let it gain so much power over us. The way to limit the power of our inner Goon is to stay in touch with him all the time, to never let him get away with any of his trickery without calling him out on his foolishness.
We need to talk about this stuff more, not less. It’s because we don’t feel comfortable talking about it that it has become so important a factor in the stock investing game. All reporters know that the things that cannot be talked about are the most important stories of all.
Rob Bennett has recorded a podcast titled The Only Thing Worse Than Short-Term Investing Is Short-Term Investing That Pretends to Be Long-Term Investing . His bio is here.