I was a Buy-and-Holder for a number of years. I gave it up when I witnessed intensely emotional reactions on the part of my Buy-and-Hold friends in response to my suggestion that those planning to retire might want to take into consideration the valuation level that applies on the day the retirement begins. I became a Buy-and-Holder because it is promoted as a strategy that is rooted in research. The emotional response told me that this is not really a research-based strategy — it is Shiller’s research that showed us why valuations must be considered. I have come to believe that Buy-and-Hold is at root an emotions-based strategy — research is used to rationalize choices made for emotional reasons and research that does not support the emotion-based choices is ignored.
Ever since, I have always been trying to get into the heads of my Buy-and-Hold friends. I want to know what makes them tick. They believe in Buy-and-Hold. They sincerely see it as a rational strategy. I don’t. I see it as a dangerous policy to ignore valuations. So I am always trying to figure out what it is that the Buy-and-Holders — who seem to me to be virtually without exception smart people — think it is okay to ignore valuations despite the Nobel prize that Robert Shiller was awarded for showing that valuations matter.
There are three comments that were made by Buy-and-Holders during the conversations that I have had with them over the years that I believe go a long way toward illuminating the mindset that permits them to believe that ignoring valuations is okay despite the peer-reviewed research showing otherwise.
One was made by a fellow who posted under the screen-name “Earnabuck.” Earnabuck was friendly to me. He does not share my views re how stock investing works and he said so. But, when I was attacked in personal ways by other posters, he often put up words in support of me, arguing that all community members should be able to post their sincere views without being intimidated for doing so. I was of course grateful for that. And thus I always paid special attention to Earnabuck’s words.
One time he advanced a comment that I believe goes a long way toward explaining why Shiller’s research has persuaded so few investors to change their investment strategy during the 37 years since his “revolutionary” (Shiller’s word) research findings were published. Earnabuck said that he listened in on the safe-withdrawal-rate discussions that I had at Motley Fool’s Retire Early board in 2002 (I argued that the safe withdrawal rate is not always 4 percent but is a number that varies with changes in valuation levels). He said that in the early days of those discussions, he agreed with my critics that the safe withdrawal rate is always 4 percent but that in time he came to be persuaded that it is a number that changes depending on the valuation level that applies on the day the retirement begins.
That strikes me as odd. The question of whether a valuation adjustment is needed when calculating the safe withdrawal rate is a simple one. It does not seem to be to be a question that one would need to think over too long before making a decision. Why did Earnabuck struggle with it? And why do so many other Buy-and-Holders struggle with it to this day?
I believe that the answer to the puzzle is that the shift from Buy-and-Hold to Valuation-Informed Indexing represents a paradigm change. Shiller is saying that stock price changes are caused by shifts in investor emotion (irrational exuberance) and that thus investors cannot count on the numbers on their portfolio statements to hold lasting significance while the Buy-and-Holders are saying that stock price changes are caused by economic developments and thus possess lasting significance. The new paradigm represents an entirely different way of thinking about the stock investing project. Thus, it takes time for all of the many implications of Shiller’s research to sink in. Our minds can only integrate so many new ideas in a short amount of time.
Another comment that seemed revealing to me was one made by a fellow who goes by the name “Joe Taxpayer.” Joe is a friend of mine. I talked with him at length at a number of FInancial Blogger Conferences that I attended. One time he wrote a little about me in a report he posted about one of the conferences and his write-up prompted a very long discussion thread in which my critics posted a good number of hostile comments. Joe kept quiet until scores of posts had been filed. At that point he ventured forth with the opinion that, since Shiller has been awarded a Nobel prize, it should be acceptable for people who believe that his research is valid to post their views on investing discussion boards and blogs.
All of that is fine, of course. But there are elements of what Joe said that I also find odd. One, he did not share his own view until scores of posts had been advanced. Why? Two, even when he shared his view that posting on Shiller’s research should be permitted, he did not say whether he personally has been persuaded of the merit of Shiller’s ideas or not. And, three, he did not say what he would need to hear to become convinced that Valuation-Informed Indexing is the future. Are there questions that he needs to have answered before he makes the switch? Are there elements of Shiller’s message that provoke doubts in his mind? Joe has never told me the answers to these questions in our many conversations.
My take is that Shiller really did start a revolution in our understanding of how stock investing works. Joe takes the more conventional view. He is not hotly opposed to hearing Shiller’s ideas explored, as are some of my critics. But he is not nearly as enthusiastic about the project as I am. He is complacent. He is not certain that Buy-and-Hold is the last word in investing analysis. But he does not feel any burning need to find a replacement for it. He is opened-minded about the subject but not intense about it. I think that that’s the view of most Buy-and-Holders and that that is why we will not see Valuation-Informed Indexing become more popular until a price crash causes many more investors to adopt a less complacent attitude.
A third comment that I find illuminating is one that was made by a poster at a Canadian board that was having a debate as to whether or not to ban me. She offered the view that: “Rob is the sweetest and most polite poster that I have encountered on the internet -- and he irritates me to no end!” That gets to the heart of things, in my assessment. This woman liked me as a poster and thus felt mixed feelings about voting to ban me. But I wouldn’t stop suggesting that her portfolio was worth a lot less than the amount that the Buy-and-Holders were telling her it was worth and that she wanted to believe it was worth.
This is why Shiller’s investment ideas have not caught on. The historical return data offers strong support for what he says about how stock investing works. But, for so long as prices remain sky high, buying into his vision means buying into the idea that one’s stock portfolio is worth a lot less than one has been led to believe it is worth. Shiller is trying to take money out of our pockets! Nobel prize or no Nobel prize, who needs him?
Rob’s bio is here.