Buy-and-Holders Predict Future Returns Every Day While Claiming That Predictions Don’t Work


Valuation-Informed Indexing #295

by Rob Bennett

Buy-and-Holders don’t believe in return predictions. They say that it is not possible to predict returns effectively. Their cardinal rule is that investors should never engage in market timing and so they object strongly when Valuation-Informed Indexers use return predictions to change their stock allocations. That’s market timing. It doesn’t work. It’s crazy. It’s a mistake.

They believe this stuff. They are sincere in their repulsion for market timing and for return predictions. But the Buy-and-Holders make return predictions themselves!

They don’t know it. They fool themselves into thinking that they are not making return predictions. But it’s not possible to buy stocks without first forming some idea in your mind as to what return you expect to obtain. The Buy-and-Hold idea that it is not a good idea to make return predictions is not only strategically flawed. It is a logical impossibility.

Say that you were thinking of buying a car and that for some odd reason you vowed not to consider price when doing so. Could you do it? You could physically do it. But you couldn’t do it with a clear mind. Human reason demands of us that we consider price when trading money for something that we want to obtain.

It works that way with stocks too. It’s not possible to buy stocks without the thought entering your head that you would like to obtain a return on your money that is greater than the return that you could obtain from buying less risky asset classes. And it’s not possible to go ahead with the purchase without some notion of what return you expect to obtain entering your thought process.

The Buy-and-Holders kid themselves about this. They need to believe that return predictions are not possible or they could not remain Buy-and-Holders (Buy-and-Holders who elect to become clear thinkers are transformed into Valuation-Informed Indexers!). But they are not able to keep themselves entirely in the dark. Common sense intrudes. That’s why Buy-and-Holders become uncomfortable when people like me write on the internet about the implications of the last 35 years of peer-reviewed research in this field.

Buy-and-Holders believe that they are going to obtain a return of 6.5 percent real on their stock investments. That’s the average return. So that’s their default. They compare the 6.5 percent return they expect to obtain from investing in stocks with whatever return they can obtain from less risky asset classes and elect stocks when the expected return from stocks is better. It always is. That’s why Buy-and-Holders invest most of the money that they do not expect to need within a few years in stocks.

Buy-and-Holders of course understand that they are not going to see that 6.5 percent return every year. There are some years in which stocks provide a return of 30 percent and there are some years in which stocks provide a return of a negative 30 percent. But a positive 6.5 percent is the norm. That’s what Buy-and-Holders expect. That’s what Buy-and-Holders predict.

Ask a Buy-and-Holder what he expects his stock return will be after the passage of 10 years. He will say that he expects something in the neighborhood of 6.5 percent. He doesn’t expect precisely that. Of course, Valuation-Informed Indexers don’t expect their predictions to apply precisely either. He view the predictions we make by looking at the valuation level that applies on the day we make our stock purchases as in-the-neighborhood numbers. That’s how Buy-and-Holders view their prediction that the usual 6.5 percent return will establish itself once again.

The reality, of course, is that there is a strong chance the 6.5 percent return will not re-establish itself. It’s reasonable to expect such a return for stocks purchased at fair-value prices. But stocks are frequently sold either at inflated prices or at deflated prices. When stocks are sold at wildly inflated prices or at wildly deflated prices, it is not likely that the 6.5 percent return will apply in 10 years. The likelihood is that a return a good bit lower than 6.5 percent will apply (for stocks purchased at wildly inflated prices) or that a return a good bit higher than 6.5 percent will apply (for stocks purchased at wildly deflated prices.

A poster at the Bogleheads Forum once stated this idea in compelling fashion: “I don’t go into a bank and say ‘I’d like to buy three certificates of deposit’ without first asking what rate of return applies — Why should it be different when I buy stocks?”

It shouldn’t be any different. We cannot know the return we will obtain from stocks with precision. But then we cannot know the return that we will obtain from certificates of deposit with precision either. The inflation rate is unknown at the time of purchase of certificates of deposit and the inflation rate affects the real return obtained. With certificates of deposit, we all do the best we can. We look up the nominal return and we form some reasonable expectation of what inflation rate might apply. We educate ourselves to the best of our ability. This is the step that Buy-and-Holders fail to take when they buy stocks.

Why? Buy-and-Holder want to know the return they will obtain from the certificates of deposit they purchase. Why don’t they want to know the return they will obtain from the stocks they purchase?

They want to believe in bull markets. They want to believe that the 6.5 percent average return is a floor that applies even when prices are insanely high but that returns that exceed the 6.5 average return are real and do not pull future returns down. They want to believe in a fantasy that makes it impossible for them to purchase stocks in as informed a manner as they purchase certificates of deposit.

Rob Bennett’s bio is here.

  • Sammy Soda

    Of course you can believe is silly conspiracy theories. Some people believe that aliens are reading our minds and we need to be wearing tinfoil hats. Reality, based on facts and outcomes is what matters.

    The mystical goons and buy and holders are not responsible for your retirement and investing failures.

    We are each individually responsible for our own outcomes.

  • http://arichlife.passionsaving.com RobBennett

    It’s what I believe, Sammy. So it is what I am going to continue to say.

    And, yes, I do believe that there are going to be prison sentences. It breaks my heart that that is so. We shouldn’t have let that happen. And I say “we” for a reason. You Goons are responsible for your own behavior. But you couldn’t engage in that behavior if all of the good people who have the responsibility to rein you in honored that responsibility. We (that includes me) all need to acknowledge what we have done to make the Goon phenomenon possible. Every single one of us has played some sort of role in this and the way we get the ugly stuff behind us is to be forthright about that reality.

    Once again, I wish you all good things, my old friend. Hang in there, man.


  • Sammy Soda

    Just your typical rant about the mythical goons and buy and holders. The only part you seem to have left out is your continuous threat of prison sentences.

    Facts and outcomes tell the story. Why did your retirement fail, Rob? Why has your investment track record come in short compared to buy, hold and rebalance? Are you blaming these so called goons for your shortcomings?

  • http://arichlife.passionsaving.com RobBennett

    There really are Goons, Sammy. And there is really only one question that a person needs to ask himself to prove to himself that there are.

    Everyone agrees that Shiller’s 1981 finding that valuations affect long-term returns is of huge importance. Shiller was awarded a Nobel prize for his work. Giving the man a Nobel prize is our way as a society of saying “this is huge.” So that point is locked-in certain.

    Another point is locked-in certain. John Bogle made zero changes to his Buy-and-Hold strategy as a result of the hugely important Shiller findings. Anyone can look up what Bogle was saying prior to 1981 and what he says today and see that he is saying exactly the same thing. So Bogle ignores this hugely important finding. Again, there’s zero legitimate controversy re this matter.

    The only possible explanation of these two locked-in certainties is that there has been a 35-year cover-up. The rational human mind cannot come to any other conclusion.

    Now —

    People have a big problem with this conclusion. The Buy-and-Holders are good and smart people. All fair-minded people see this. And they follow Buy-and-Hold themselves. This is beyond dispute. If they were pushing a bad strategy to make money, you sure wouldn’t think they would be following the bad strategy themselves. But there is no question but that they follow it — that’s also a lock-down certainty. And there are thousands and thousands of independent agents involved here. What are we going to believe, that they are all involved in some grand conspiracy. To say that is akin to saying that the moon landing was faked. It’s a pretty darn far out-there proposition.

    So we are left with a number of locked-in certainties that cannot all be so! It’s a conundrum! It’s very hard to figure out how all of these locked-in certainties can all be so. But it is also a logical impossibility for them not to be so. This is tough stuff. I sweated blood trying to figure it out.

    The answer is — cognitive dissonance.

    You have to understand cognitive dissonance to make sense of investing today. If you get cognitive dissonance, all the pieces of the puzzle click. That’s the solution to the riddle.

    The Buy-and-Holders really are good and smart people. I am certain of this. They really do believe in Buy-and-Hold. They could pass lie detector tests. They are not engaged in a conspiracy in the way that the word is normally used. They are not trying to trick people. They are trying to help people.

    But they ARE aware that they are ignoring Shiller’s 1981 finding! It hurts them that this is so. They try to ignore this. They push the reality out of their minds. It causes them to doubt their belief in Buy-and-Hold. And they cannot bear to entertain doubts! It would mean that they messed up for many years. It would mean that they hurt millions of people. They cannot stand to think that that might be so. So they push the idea out of their minds. This is what is going on.

    I LOVE the Buy-and-Holders. You think of me as their enemy. That’s not what I am. I am trying to show how the Buy-and-Holders got all but one point right and changed investing in a very powerful and positive way by doing so. They missed one point — valuations. They missed it for a perfectly understandable reason. Indexing was not available at the time they developed the strategy and long-term timing (price discipline) does not work without indexing. So it was not even possible for them to get it all right at the time they were developing their strategy. They did the best they could given what was available at the time.

    Our problem is that as a society we have to fix the mistake they made. Our economic system will collapse if we don’t do this. So this is not optional. It is 100 percent imperative. The Buy-and-Holders have always wanted to get it right. So we are all on the same side. The only rub here is that we have to fix the mistake 35 years down the road from when it was made and lots of people have been misled re the realities over the course of those 35 years. That’s why this matter has become so “controversial.” It’s hard to acknowledge a mistake that has been doing damage to millions for 35 years.

    As a society we need to do everything we can to make the Buy-and-Holders feel okay about acknowledging the mistake. We owe them that because they have made very important contributions. But we also owe them a correction of the mistake. They don’t want to make mistakes! The mistake is hurting them as much as it is hurting all the rest of us. So we cannot give on that point. We need to insist that there be open debate re these matters and that, once there is widespread acceptance of the idea that valuations must always be considered when making asset allocation decisions, the mistake will be corrected in all of the literature in this field.

    That’s the story. The Buy-and-Holders are good people. But they really did make a mistake. And it really does need to be corrected. They didn’t kill anyone with malicious intent, like O.J. did. But they did make a mistake that has hurt millions of people and that needs to be corrected. We all need to be working together to get this done. We need to be 100 percent honest but we also need to be 100 percent charitable. Both things are imperative given the circumstances that apply here.

    I hope that helps a bit.

    I naturally wish you all good things. It has never been my intent to cause you to feel any discomfort or pain or anguish or upset. I am just trying to help you see that there is another way of thinking about how stock investing works and that it is exciting stuff that I truly believe represents the future in this field.


  • Sammy Soda

    Your first sentence is the only accurate thing you have posted.

    You seem to be like OJ Simpson. OJ talks about searching for the “real killers” and you are telling us all your stories about the nasty “goons” and the “buy and holders” that are causing an economic disaster. Maybe you and OJ can join forces to solve the world’s problems.

  • http://arichlife.passionsaving.com RobBennett

    I do indeed have an agenda, Sammy. My agenda is to make every investor alive today away of the pressing need to always, always, always practice price discipline (long-term timing) when buying stocks.

    That’s the key. The last 35 years of peer-reviewed research shows that price discipline is 80 percent of the stock investing story. Get that one right, and it’s hard to imagine how you could ever do poorly in the long term. Get that one wrong, and it’s hard to imagine how you could ever do well in the long run.

    Given that price discipline is 80 percent of the story of long-term investing success, by rights 80 percent of the advice in this field should be re how to practice price discipline effectively. It’s less than 10 percent today. You have to dig to find good stuff. Why? It’s because there’s so much money in the Get Rich Quick/Buy-and-Hold approach. Buy-and-Hold SELLS. Valuation-Informed Indexing WORKS.

    I hope that helps a bit.

    My best and warmest wishes to you and yours.


  • Sammy Soda

    Hi Dan. Rob doesn’t need it to be relavent. He will take any story he can and just link it to some kind of buy and hold conspiracy because he is purely agenda driven and not fact driven.

    By the way, after you are done with the Google search Rob requested, you can also Google “Rob Bennett retirement failure”. My guess is Rob keeps talking about some mythical buy and hold boogie monster so that he has someone else to blame for his failed retirement strategy.

  • http://arichlife.passionsaving.com RobBennett

    My best and warmest wishes to you and yours, Sammy.

    Thanks for taking time out of your day to share your thoughts with us.

    Please take good care, my old friend.


  • http://arichlife.passionsaving.com RobBennett

    Please run a Google search of the phrase “timing doesn’t work,” Dan. I am confident that you will obtain hundreds of hits. Buy-and-Holders say this all the time. They are relentless about it. This is their core belief.

    Now please ask yourself whether it is possible that long-term timing might not work if in fact valuations affect long-term returns, as Shiller showed to be the case in 1981. It’s not possible. If valuations affect long-term returns, stock risk and stock return are variables, not constants. It is always better to purchase stocks when they are low-priced than to purchase them when they are high-priced. No investors should be going with the same stock allocation at all times. It’s irrational.

    Yes, I very much would like to see all of the implications of Shiller’s “revolutionary” (his word) research taken seriously. The advance from Buy-and-Hold to Valuation-Informed Indexing is the biggest advance in the history of investing analysis. We should be holding a national debate on the wide-ranging implications of Shiller’s breakthrough work.

    The only reason why we haven’t seen this debate is that the Buy-and-Holders are protecting their turf. It’s a money thing. They don’t want to acknowledge that they got an important part of the investing story wrong (while getting many important parts of the story right as well, to be sure). Millions are suffering today as a result of the economic crisis brought on by this turf battle. Could anything be more sad?

    Thanks for stopping by to share your thoughts with us all.


  • Dan V

    Your one link is to a book about buying and holding real estate. Not even remotely relevant. And the post itself has the rambling “they all do this” theme, first made popular by the KKK. One can only conclude that you don’t expect, or even want, to be taken seriously.

  • Sammy Soda

    Some day I would like to meet these mythical buy and holders you keep talking about. Did they force you to retire with only $400k in savings while having 2 kids and a stay at home mom? Did they force you to take your money out of the market and accept a lower outcome versus the buy, hold and rebalance crowd? Let us know how we can find these mysterious buy and hold monsters you keep referring to.