Valuation-Informd Indexing #248
by Rob Bennett
Investors should focus on the long-term and resist impulses to react to short-term developments.
The Electron Global Fund was up 2% for September, bringing its third-quarter return to -1.7% and its year-to-date return to 8.5%. Meanwhile, the MSCI World Utilities Index was down 7.2% for September, 1.7% for the third quarter and 3.3% year to date. The S&P 500 was down 4.8% for September, up 0.2% for the third Read More
That’s research-based advice, right?
Yes and no.
There is indeed research showing that investors should ignore short-term developments and focus on obtaining good long-term results. But the reality is that marketing considerations play a big role in what investing advisors tell their clients and that the injunction to focus on the long-term is advanced in a way very different from the way in which it would be advanced if marketing considerations were not present.
What’s “long-term”? Rarely do the advisors recommending a focus on the long-term define the phrase.
It’s good advice to ignore how stocks did the past week and the past month and the past year when deciding where to set your allocation. When the Buy-and-Holders tell you to do that, they are giving solid, research-based advice. But they inevitably fail to mention how important it is to consider valuation levels when planning for what will happen in 10 years, 15 years, and 20 years. Looking at those time frames is taking the “focus on the long term” idea too far. The marketing imperative for people who sell stocks for a living is to tell people that stocks are always worth buying no matter how insanely overpriced they are. The research shows that it would help investors a lot to focus on those sorts of time frames. But marketing considerations argue against making the recommendation and most advisors never mention this critically important reality.
Is it possible to pick stocks effectively?
Buy-and-Holders will tell you that it is not and that the research proves that it is not.
Yet investors who perform the research needed to gain an edge have been picking stocks effectively for as long as the market has been in existence. Why not tell people that? It would hurt marketing efforts to do so. Indexing is a great option for the majority of investors. But it would make those investors feel bad to know that they could be earning better returns if only they were willing to put in the research effort needed to do so. So Buy-and-Holders tell them that they give up nothing by becoming indexers. Marketing considerations trump research-based realities.
It’s important to be highly invested in stocks at all times because prices can rise quickly and those who are out of stocks at those times permanently miss out on big gains. That’s another marketing-motivated claim that is falsely perceived as being rooted in the research.
It’s true that big price jumps often take place over short periods of time. But the research-based reality is that the kinds of price jumps that help investors — those that provide permanent rather than only temporary gains — take place only when valuations are at low or moderate levels. Price jumps that take place at times of insanely dangerous valuations don’t last. So investors who “miss out” on those sorts of gains in reality miss out on nothing at all.
You can’t time the market. That’s the most important research-based claim of all. There must be THOUSANDS of studies showing that that one is so.
Well, actually — the number of studies showing that to be so is zero.
If you feel suspicious enough about the marketing claim to check things out for yourself, you will find lots of studies showing that short-term timing doesn’t work and zero studies showing that long-term timing doesn’t work. Oops! The claim that long-term market timing doesn’t work has great marketing appeal because it suggests to investors that their bull market gains are real. The endlessly reiterated claim that “timing doesn’t work” is the OPPOSITE of what the research shows (the research shows that long-term timing ALWAYS works and is ALWAYS 100 percent required). But the claim is close enough to a true one for the marketing departments to get away with it and it sure is a money-maker.
It’s dangerous to mix marketing and research. Marketers tell people what they want to hear to make a sale. Researchers tell people what is to help them learn about a subject. Marketing appeals to the emotions. Research is objective; it makes its appeal to logic. Millions of investors think they are hearing research-based claims when they listen to investment analysts when in reality they are being sold something. Those people will not be happy when the next price crash causes a large portion of their live savings to disappear. They will not appreciate the little joke that has been played on them.
You often hear investment advisors say that investors are compensated for taking on risk. It sounds like a reasonable idea, Is it so?
Stocks were virtually risk-free in the early 1980s. Prices were at rock-bottom lows. There was only one direction in which prices could go — up. And yet the long-term return for those who invested in stocks was amazing.
In contrast, risk was off the charts in the early 2000s. Stock prices had never in U.S. history risen so high, so it was impossible to imagine them not coming down and coming down hard in days to come.Which they did. Since January 2000, stocks have provided an annualized return of about 2 percent real. Some compensation!
The research-based reality is that stocks provide amazing returns when risk is low and poor returns when risk is sky-high. iIt’s the opposite of the claim repeated endlessly by the “experts” in this field. Guess which claim possesses the greater appeal from a marketing standpoint?
I believe that in the future it will be true marketing-based claims that will win the day. Following the next price crash lots of people in this field will see that helping investors invest their money effectively is the best marketing approach of all!
Rob Bennett’s bio is here.