Valuation-Informed Indexing #253
by Rob Bennett
I gave a presentation to the Financial Bloggers’ Conference last year (FinCon14) on the merits of Buy-and-Hold vs. Valuation-Informed Indexing. The attendees were financial planners, who generally endorse Buy-and-Hold strategies. The format of the session was that attendees met in groups of 10 to discuss the issues and then a group leader presented thoughts developed by his or her group to all the other groups.
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I had to make some points that I knew the members of my group would not want to hear. I explained how Buy-and-Hold strategies increase risk dramatically and how the losses suffered by investors following Buy-and-Hold strategies played a big role in causing the economic crisis. Not surprisingly, several members of my group were taken aback by these claims. The consensus of the group was that my claims were off the mark. I suggested that the group member who had taken the lead role in criticizing my claims make the presentation because she did a good job of articulating the concerns that were held by most group members.
When it came time for her to make her presentation, I was startled to see how much she softened her criticisms. I didn’t agree with the criticisms but I thought it was important that all the attendees hear them. They were sincerely felt and they were perfectly intelligent. Our group spokesman told the larger group that our group was mixed in its views, with some agreeing with my case for Valuation-Informed Indexing and some raising objections. I felt compelled to interrupt. “Thank you for your kindness,” I said, “but that’s not how it went down — everyone in the group disagreed with me!”
I have taken a lot of heat from a lot of people over the past 13 years. I’ve objected to criticisms that were abusive or overly personal or that intimidated others from saying what they truly believed. But I have also tried to express gratitude to those who offered sincere and thoughtful criticisms. Most people have a hard time accepting much of what I say. People need to express their objections every bit as strongly as they feel them if those trying to enjoy a learning experience are to achieve their goal. Valuation-Informed Indexing is something new and different and it is a natural and healthy thing for it to be met with a good deal of skepticism.
I’m not an investing expert. I am a journalist. I think that I have something important to offer to people trying to develop a better understanding of how stock investing works. But people need to know that I didn’t study investing in school and that I never managed a big fund. I possess a certain expertise. But it is not the expertise that most of those who make a living in this field possess.
I believe that we are living through a transition time from Buy-and-Hold to Valuation-Informed Indexing. Fama published research that seemed to put Buy-and-Hold on a solid footing. Businesses were built around the concept. Then Shiller discredited the beliefs that had become dominant. For 34 years now, we have as a society been trying to come to terms with Shiller’s “revolutionary” (his word) findings and have been making only slow progress.
There’s one thing that a journalist can offer to this effort that those with more typical forms of expertise cannot. The investment advisors in my group at the FinCon event were being polite in presenting a softened version of their criticisms of me. There’s a sense in which that was a great thing. We need more polite people in this world! Those people were being careful not to hurt my feelings and as a general rule the world turns more smoothly when people do that.
But politeness is not the only virtue. Frankness is a virtue. We can make a mistake when we become so polite that we hold back from stating our views frankly. I see too much of the bad form of politeness evidencing itself in the investing realm. People want to get along with each other and they know that those who advance misguided investing advice hurt their listeners in serious ways. So most of us are careful not to be too tough in the criticisms we offer of the investing ideas we hear being put forward by others.
Even I do that. I am generally a polite person. I’ve been told that numerous times on the internet, even sometimes by people who are severe critics of my beliefs. But I make an effort to combine a good measure of frankness with my politeness. I think that’s the journalist in me coming out. Lots of people view friction as a bad thing. Journalists look for friction. We believe that it is when ideas clash that learning experiences take place. We are often blunt and we usually are not apologetic about it.
Blunt is good.
John Bogle is the king of Buy-and-Hold. I criticize his investment advice on a daily basis. Some people interpret my criticism as a lack of respect. Nothing could be further from the truth. I rank Bogle as the second most important investing analyst who ever lived (second only to Shiller). I view my work as work that takes Bogle’s many powerful insights to new places. I would feel that I was being disloyal to my friend Jack if I weren’t sharp in my criticism of the one important thing that he got very wrong (Bogle believes that it is not necessary for investors to lower their stock allocations when stock prices rise to insanely dangerous levels). Why? Because I know that Jack wants his investing advice to work and he counts on his friends to point it out to him when he messes up, as we all do.
Shiller published his peer-reviewed research showing that valuations affect long-term returns in 1981. It amazes me that 34 years later there are still millions of good and smart people who believe that it is possible to “Stay the Course” while sticking with the same stock allocation at times when valuations (and thus risk) have increased dramatically. I’m always trying to figure out why we have as a society been so slow to reap the benefits of Shiller’s powerful insight. I believe that part of the reason is that getting it right in this field is so important that we tread lightly when we hear people saying things that don’t make sense to us.
Straight-talking journalists can be annoying. But they have an important role to play in helping us understand how Shiller’s research changed the world in a very positive way. Journalists can come off as being a bit less polite than most of the rest of us But they are our friends too. They mean their straight talk as a show of respect and affection. They enjoy the battle of ideas and hope to see us all learn from it.
Rob Bennett’s bio is here.