Valuation-Informed Indexing #235
by Rob Bennett
The purpose of this and next week’s column is to list 20 dangerous investing myths that developed during the Buy-and-Hold Era because of our belief in the findings of University of Chicago Economics Professor Eugene Fama and that were discredited by the research published by Yale University Economics Professor Robert Shiller but that remain popular today.
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1) The Experts Know What They Are Talking About. Many commented when both Shiller and Fama were awarded the Nobel Prize in 2013 how crazy it was to give the field’s honest honor to two men who have put forward opposite models for understanding how stock investing works. It’s not possible that both Shiller and Fama both got it right. The rarely acknowledged reality is that we are in the primitive days of our systematic study of how stock investing works and none of the experts in this field can afford to be super confident that he or she knows what is going on.
2) Academic Researchers Are Independent Voices. Rob Arnott showed that this is not so when he asked at a conference how many of the researchers attending still believed in the Efficient Market Theory. A tiny number of hands went up. Then Arnott asked how many of the researchers would be doing research rooted in a belief in the Efficient Market Theory when they got back to the office on Monday morning. Nearly every hand in the room shot up. Academic researchers have as much of a desire to be popular as all the rest of us.
3) Buy-and-Hold Is a Safe Strategy. The common belief is that Buy-and-Hold may be flawed in some ways but that, like Democracy, it is probably the best option available to us in this Valley of Tears. The reality is that the constant iteration of the idea that investors do not need to lower their stock allocations when prices get too high caused prices to reach three times fair value in 2000. Following the only time in history in which prices got even nearly that high we saw a Great Depression. If Buy-and-Hold is not right, it is dangerous.
4) If There Were Serious Problems With Buy-and-Hold, We Would All Know About Them. Not necessarily. If the last 34 years of peer-reviewed research showed serious problems with Buy-and-Hold, that would make those who still promote Buy-and-Hold strategies look bad. There is no way to say with absolute certainty that Buy-and-Hold doesn’t work, we will all just have to wait and see. While we are waiting to find out, there are going to be strong pressures applied on all in this field to downplay the concerns they feel over the viability of the dominant strategy.
5) The Awarding of the Nobel Prize to Shiller Reflects His Great Influence in the Field. People obviously like and respect Shiller. But his practical influence on the strategies promoted by the big-name experts has been just about nil. I often ask Buy-and-Holders to tell me one way in which John Bogle has changed his investing advice as a result of what we have learned from Shiller’s research. No one has been able to point me to one change in what Bogle says or in what just about anyone else says that came about because of Shiller’s “revolutionary” (his word) findings.
6) Buy-and-Hold Is a Long-Term Strategy. It depends on what you compare it to. Buy-and-Holders certainly are not investing to do well in one year or in five years or even in ten years. But the typical investing lifetime extends for 60 years (from age 25 to age 85). Few Buy-and-Holders spend much effort thinking through what works best over six decades of investing. Bull markets always bring on bear markets. So long-term investors should disdain bull markets. Buy-and-Holders love them.
7) Stocks Always Are a Good Choice for the Long Run. The most likely 10-year annualized return on stocks when they are selling at the prices that applied in 2000 is a negative 1 percent real. Treasury Inflation-Protected Securities (TIPS) were at the time offering a long-term return of 4 percent real. The investor who moved his money from stocks to TIPS stood to gain 50 percent of his initial portfolio amount by doing so. Stocks are sometimes a downright horrible choice for the long term.
8) To Stay the Course, You Must Stick with the Same Stock Allocation at All Times. Shiller’s research shows that stock investing risk is not static but variable. To Stay the Course in a meaningful way, the investor must be sure to lower his stock allocation when prices reach insanely high levels.
9) Timing Doesn’t Work. Short-term timing (changing your stock allocation because of a belief as to where prices are headed in the next year) really doesn’t work. Long-term timing (changing your stock allocation because of a big shift in valuations with an understanding that you may not see benefits for doing so for as long as 10 years) ALWAYS works and is always 100 percent required. The confusion started because Bogle did not found Vanguard until 1974 and so index funds were generally not available until that time and long-term timing only works with index funds. So Fama never even looked at short-term timing before he declared that “timing doesn’t work.” Shiller showed that one form of timing always works and is the key to achieving long-term success. Most of us are still in the process of incorporating that breakthrough finding into our understanding of how stock investing works.
10) Timing Is Risky. Many of the investors who acknowledge that there is 34 years of peer-reviewed research showing that long-term timing is always required are reluctant to practice it on grounds that there might be risk attached to market timing given how disdained it is by most investing experts. The reality is that timing is risky if the market is efficient and that failing to engage in timing is risky if valuations affect long-term returns. If risk is variable, as Shiller showed, it is failing to engage in timing that is the risky choice.
Rob Bennett has recorded a podcast titled When Stock Losses Are True Losses and When They Are Not. His bio is here.