Valuation-Informed Indexers believe that valuations affect long-term returns, as Robert Shiller showed in peer-reviewed research published in 1981. Thus, we believe that stock investing risk is not static but variable. Not only do we believe that long-term timing works (the entire historical record of stock price changes supports this belief), we also believe that long-term timing is required for investors seeking to keep their risk profiles roughly stable over time. We believe that stock prices are self-regulating; so long as most investors understand that stocks offer a stronger value proposition when prices are low than they do when they are high, investors will sell shares when prices get too high and thereby cause prices to return to more reasonable levels. So we make an effort to inform investors of the danger of investing heavily in stocks at times of high prices.
What does value investing really mean? Q1 2021 hedge fund letters, conferences and more Some investors might argue value investing means buying stocks trading at a discount to net asset value or book value. This is the sort of value investing Benjamin Graham pioneered in the early 1920s and 1930s. Other investors might argue value Read More
What’s wrong with any of that?
Most investors do not agree. My sense from years of talking these matters over on the internet is that perhaps 10 percent of today’s investors believe in the claims I advanced in that first paragraph. The vast majority of investors believe in some form of the Buy-and-Hold story. Most investors believe that it is not possible to predict future returns and that therefore it is not possible to time the market effectively. Most investors believe that the numbers on their portfolio statements reflect properly the value of their holdings (while Valuation-Informed Indexers believe that an investor must adjust for the effect of overvaluation or undervaluation to know the true, lasting value of his portfolio).
But so what?
There are people who believe that foreign-made cars are better than U.S.-made cars and they get along fine with people who believe that U.S.-made cars are better. There are people who believe that the designated-hitter rule in baseball is an advance and there are people who believe it is an abomination. There are people who like comedies and there are people who like dramas. There is room in this world for all sorts of beliefs re all sorts of questions. We all manage to get along with lots of people holding different views. It’s the natural state of affairs for different people to hold different views and yet to remain friendly with each other.
It doesn’t work that way in the investing advice realm. If you hold minority views on how stock investing works and you express those views in clear and firm and bold terms, you will be ostracized at every place at which a significant number of Buy-and-Holders congregate to discuss stock investing. Buy-and-Holders don’t just disagree with Valuation-Informed Indexers. They are intolerant of them.
I think there are two reasons. One, investing issues are important -- come to believe in the wrong ideas about how stock investing works and you will likely undermine your financial future. And, two, any claim in support of Valuation-Informed Indexing is a claim that Buy-and-Hold doesn’t work. One model for understanding how stock investing works is valid and one is dangerous. It is a logical impossibility that both are rooted in reality. So it is hard for Buy-and-Holders not to take the claims made by Valuation-Informed Indexers personally. When Valuation-Informed Indexers say what they believe to be true, they are implicitly dismissing what Buy-and-Holders believe to be true.
There’s an old injunction that it’s a bad idea to discuss politics or religion. Discuss baseball, discuss the weather, discuss the latest movies. But don’t discuss the things that really matter. Why? It’s hard for people not to get upset when their views on politics or religion are dismissed. So it is with stock investing. If your ideas about stock investing turn out to be wrong, you may not be able to retire when you want to. That makes it all the more important that you learn that you are wrong. But it also makes it all the more difficult to sit and listen to the words telling you that that is the case.
And it’s hard for Buy-and-Holders and Valuation-Informed Indexers to offer compromise views as a means of papering over their differences. Both strategies are numbers-based strategies. But the numbers generated by the two strategies are very different because it makes a big difference whether valuations are taken into consideration in the calculations or not. It would be nice if I could split the difference with my Buy-and-Hold friends, tell them that I am sure that they are right about a lot of what they say. Actually, I do believe that. But the hard reality is that, if valuations affect long-term returns, the Buy-and-Holders are in an ultimate sense wrong about just about everything. If valuations matter, all of their calculations are wrong even though they are right about many non-valuation-related matters.
We’ve left it to the next price crash to show millions of investors that Buy-and-Hold doesn’t work. I think that’s the harshest way of all of sending the message. I think that we should struggle to engage in constructive back-and-forth discussions with investors sitting on the other side of the table because that’s how we all learn and because we show respect to those who hold different views by letting them know how we happened to come to very different conclusions.
Rob’s bio is here.