Valuation-Informed Indexing #397
By Rob Bennett
I was at a discussion board once where the topic being considered was whether to ban me from the forum or not. One woman said something that I believe perfectly sums up why it is that Buy-and-Hold remains the dominant investing strategy despite the 37 years of peer-reviewed research showing that valuations affect long-term returns. She said: “Rob is the sweetest and most polite poster that I have ever encountered on the internet — and he irritates me to no end!”
I obviously would like to be friends with this woman. And I believe that that should be possible despite our differences re how stock investing works. Robert Shiller’s family went on vacation with Jeremy Siegel’s family. Shiller was not persuaded that stocks are always best for the long run and Siegel was not persuaded that it is shifts in investor emotion rather than economic realities that drive stock price changes. But everyone joked around with each other and all had a good time. Why can’t it be that way with all investors?
It would be a big plus for all of us if it were that way. I believe strongly that Shiller is right and that Siegel is wrong. That clouds my perspective. When I hear Shiller making a new argument, I am rooting for him to nail another one. When I hear Siegel making a new argument, I am skeptical of his claim as a result of experiences I have had in which he made claims that I found did not stand up to scrutiny. In short, I am biased. Our biases hinder our ability to appreciate realities. They essentially cancel out I.Q. points.
The big problem with self-deception is that we see how it holds others back but we are not aware of it when it is doing its dirty work on us. The only way to become aware of it is to form friendships with people who come at things from a different perspective and to encourage them to point it out to us when we are letting our biases take control of our cognitive abilities. People who agree with us generally make us feel better than people who disagree with is. But it is often people who disagree with us who do more to help us learn new things and who thereby do us more good in the long run.
I am certain that the poster who said that I irritate her to no end was being honest. Most of today’s investors follow some form of Buy-and-Hold strategy. I say that Buy-and-Hold is dangerous. How could that not irritate lots of people? I have been called a “troll” on many hundreds of occasions.
I don’t think I am a troll. A troll has bad intent. A troll says provocative things for the purpose of stirring up trouble. That is not my purpose. My purpose is to expose people to a point of view that I believe should be heard by all investors and that I believe few investors have been exposed to. My words are provocative, I don’t deny that. But as the poster who I irritated kindly noted, I make serious efforts to make my provocative case in as gentle a manner as possible. I don’t think Buy-and-Hold is a good strategy. But I think that the people who came up with it had good intent and got a lot of important things right. I also think it is possible that I am wrong in my criticisms of Buy-and-Hold. I make those points often in an effort to soften the blow when I point out the deficiencies of the strategy.
There aren’t many Buy-and-Holders who appreciate the efforts that I make in that regard. Some do. I know because they have told me. But humans are social creatures and so even the ones who are sympathetic to my efforts to get a different point of view on the table are reluctant to show too much support in a public way. I am banned at every large investing discussion board on the internet.
It’s too bad.
I need to learn from the Buy-and-Holders and they need to learn from me. I know from experience that Buy-and-Holders do learn when they permit me to speak because, again, they have told me. We would all be better off if all investors who have doubts about the Buy-and-Hold strategy felt comfortable speaking their minds in places populated primarily by people following that strategy.
But can it be?
Stocks are today priced at more than two times fair value. If Shiller is right, that’s because today’s investors are irrationally exuberant about their stock holdings. Could they maintain their irrationality if they were regularly exposed to the other point of view? We are experiencing a Catch-22. For Buy-and-Holders to be willing to listen to criticisms of their strategy, they would need to be rational enough to permit the voicing of other points of view. But if they were today capable of that level of rationality, we wouldn’t have the high prices that have made Buy-and-Hold so dangerous in the first place.
Buy-and-Hold is popular because prices are high. It’s the irrationality of the strategy that is the source of its appeal! Irrational investors will not permit themselves to be exposed to rational critiques of their investing beliefs. Shiller’s message is common sense. If Buy-and-Holders were open to hearing him, they would not have needed him to make the arguments, they would have come up with them themselves. It’s all a circle.
The only way that I can see to break the circle is to talk about it. Almost never do I hear experts in this field talk about the emotionalism evidenced by investors on discussion boards. I think we all should be talking about it. Not to make our Buy-and-Hold friends feel bad. Our Buy-and-Hold friends want to become better investors. Their biases are holding them back (as ours hold us back). We should be letting them know about their biases (in as gentle and in as respectful a manner as possible) because they are our friends and because we know that in some good place deep down inside they desperately want to hear the important message that in a surface place they find irritating as all get-out.
Rob’s bio is here.