Valuation-Informed Indexing #247
by Rob Bennett
The Bedford Park Opportunities Fund returned 13.5% net of all fees and expenses in the second quarter of 2021, bringing its year-to-date return to 27.6%. Q2 2021 hedge fund letters, conferences and more In the fund's second-quarter investor letter, which ValueWalk has been able to review, Jordan Zinberg, the President and CEO of Bedford Read More
It costs a lot of money. People hate the smell. Eventually, it kills you.
But people still do it.
And people eat too many chocolate-chip cookies.
They make you fat. They make you ugly. They make you tired.
But people still do it.
Humans are not the rational animal. We are the rationaliZING animal. We do crazy stuff. Then we make up stories to persuade ourselves that the things we do make sense somehow.
Humans buy stocks.
So there is no hope that the stock market could be a rational place. The stock market is a crazy place. It’s not even possible that anyone could expect stock investing to be a rational endeavor. Unless they were one of those crazy humans telling stories to hide the truth from themselves.
I am the biggest critic of Buy-and-Hold alive on Planet Earth today. Not because I do not admire the many great contributions of all my Buy-and-Hold friends. I do. But the one thing that the Buy-and-Holders got wrong is the most important thing. The Buy-and-Holders believe that stock investing is a rational endeavor. And it’s not. And not acknowledging that reality makes a bad situation worse.
Say that you were one of those people who eat too many chocolate-chip cookies. What do you think your doctor should tell you when you show up for an examination 50 pounds overweight? You like the chocolate-chip cookies. Your doctor would make you happy by telling you that the 50 pounds is not a biggie. He would get even more of your business if he told you that the recent research shows that being 50 pounds overweight is a plus, that you could extend your life by 10 years by shoving even more chocolate chip cookies down your mouth each night.
The other way for your doctor to play it would be to tell you the truth, that you really need to cut back on the chocolate-chip cookies a bit. This is what most doctors do. Doctors could make more money in the short term by telling lies. But a doctor who told his patients that being 50 pounds overweight is a good thing would be made to pay a price for his irresponsibility. Doctors do important work. They have to tell the truth.
It doesn’t work that way in the investing advice field.
Valuations affect long-term returns. The peer-reviewed research has shown this for 34 years now. That means that risk is not a constant but a variable. Stocks are an amazing deal at some prices, a good deal at other prices and a horrible deal at still other prices. Investors who fail to change their stock allocations in response to big valuation shifts thereby permit their risk profiles to get wildly out of whack. They suffer losses that delay their retirements by many years. The collective losses suffered at times when Buy-and-Hold strategies become popular are always large enough to bring on an economic crises. Buy-and-Hold investing strategies are as dangerous as smoking or overeating or lots of other bad, dangerous stuff.
Not too many people in the investing advice field will tell you that. Most say that Buy-and-Hold is just fine. And, when everyone in a field tells the same story, that reality fools a lot of us. We humans tend to believe what most of the other humans tell us. And, when lots of us fall for the Buy-and-Hold story, it makes it even harder for those who have doubts to speak up. The case against Buy-and-Hold is so strong and clear that it makes those who argue for the strategy look bad when someone tells the story straight.
The investing advice field is a big mess today.
I believe that we are on the verge of changing the investing advice field so that it is more like the medical advice field. I believe that in the not too distant future people will be warning investors on a daily basis of the dangers associated with failing to lower their stock allocations when prices rise too high.
That will change everything.
The peer-reviewed research of the past 34 years shows that most of the risk of stock investing comes from our unfortunate attraction to Buy-and-Hold strategies. We should be buying stocks in the way in which we buy computers and bananas and sweaters and gasoline. We should be paying attention to price. Always. No exceptions. Investors who adjust their stock allocations to keep their risk profiles constant always do well in the long term and investors who fail to adjust their stock allocations to keep their risk profiles constant always do poorly in the long term. So we should tell investors that always being certain to practice long-term timing is 80 percent of the stock investing story, the key to winning the long-term stock investing game.
We have seen what happens when we ignore the research and just tell people what they want to hear to make a buck. It doesn’t work. To become professionals investing advisors need to put their desire to turn a short-term buck aside long enough to report accurately what the research in this field says.
Investors are not rational. They cannot become more rational so long as the experts are encouraging them in their irrationality. We overcome irrationality (overvaluation) by coming to appreciate how dangerous it is to our hopes for long-term investing success. We all like chocolate-chip cookies. The true experts are the ones who help us rein in our desire to eat too darn many of them.
Rob Bennett’s bio is here.