I recently read an article titled Fake News Turns 80 that describes how newspapers hyped the hysteria promoted by the radio broadcast of the War of the Worlds program to discredit the new medium. The article states that: “The stories reported that the program had inspired near-riots, traffic jams, and mass hysteria. Most of the stories neglected to mention that four different announcements written into the script reminded the audience that they were listening to a fictional story, not an actual newscast. Admitting this would have crippled the attempts to create a controversy and killed any chance for newspapers to manipulate the crisis to regain financial and moral superiority over the disruptive new medium of radio.” It observes that: “In creating the fantastical story of the War of the Worlds aftermath, newspapers were committed to a goal that mattered more to them than journalistic integrity: They were committed to self-preservation.”The real story is that there was a turf battle going on between the once all-powerful newspaper industry and the young and threatening upstart radio industry. A similar turf battle is being fought in the investment advice field today.
Robert Shiller changed the world of investment advice when he published his Nobel-prize-winning research showing that valuations affect long-term returns. If that’s true, stock investing risk is not a constant but something that changes with changes in valuation levels and investors must be willing to practice long-term timing to keep their risk-profile roughly constant over time. As Brett Arends wrote in his article in the Wall Street Journal titled “The Market Timing Myth”: “For years the investment industry has tried to scare clients into staying fully invested in the stock market at all times, no matter how high stocks go. It’s hooey. They’re leaving out more than half the story.” But try telling investors that there’s 37 years of peer-reviewed research showing that long-term timing always works and see what happens to you. I’ve got scars all over my body that tell the tale.
Advocates of a discredited strategy aren’t willing to make way for the new one just because there is 37 years of peer-reviewed research supporting it. Rob Arnott told me: “I’ve had similar experiences to those you describe. My work has often triggered overt hostility from guardians of the status quo. I’ve also had difficulties getting some of my more controversial articles published. And the journals that published some of my more controversial papers got hate mail.” He added that several researchers who wanted to do research on his ideas about how stock investing works were taken aside by colleagues and told that preparing such research might prove to be a career-limiting move. Turf wars!
I don’t see it. It seems to me that turf wars only delay the inevitable. Was there anything that newspapers could have said about radio programs that would have convinced enough people to put aside their radios to protect the advertising base of the newspapers? I doubt it. It wouldn’t surprise me if it turned out that the exaggerated claims made about the War of the Worlds broadcast served to make radio seem more exciting rather than more dangerous.
The same is true with the Buy-and-Holders. There is a lot that is wonderful about the Buy-and-Hold strategy. Updating it to reflect the last four decades of research would do more to keep the strategy viable in the future than attacking those of us who argue that Shiller’s insights have value as well. Buy-and-Hold doesn’t need to be viewed as incompatible with Valuation-Informed Indexing any more than newspapers had to be considered incompatible with radio. There is room for more than one communications medium and investing strategies developed before all the research was available can continue to offer benefits so long as they are updated. Turf wars are self-destructive time-wasters.
I talk nearly every day to critical Buy-and-Holders who visit my site. I wish that they would be more friendly. But I don’t send them away because I don’t want to pass up opportunities to learn from them. My critics obviously look at things differently from how I do. That means that they see things that I do not see. If they are willing to take time out of their day to fill me in on things that I am missing, why should I reject the offer? There’s plenty of turf for both Buy-and-Holders and Valuation-Informed Indexers to roam around in, in my assessment. It’s not an either/or situation; it’s a this-plus-this-too situation.
If Shiller is right that stock price changes are caused primarily by investor emotion rather than by economic developments, we should be expecting a stock crash to make the irrational exuberance disappear in the next year or two or three. I believe that my Buy-and-Hold friends will realize at that time the benefit of incorporating new research into their model instead of ignoring it or finding fault with it. A model incorporating Shiller’s research findings will make stocks a more appealing asset class to millions who avoid the asset class because of the wild price swings that evidence themselves when large numbers are persuaded of the merit of a Buy-and-Hold strategy. Teaching the new research findings will prove to be good for business once the industry gets over its fear of the new and recognizes that change can be a good thing.
Efforts to block change are futile when the change promises benefits too strong to be denied. Radio couldn’t be stopped. Neither can Shiller’s research findings. The smart way to react to new ideas is to learn enough about them to figure out how they can be melded with the ideas that became dominant in an earlier day so that the customers being served are able to enjoy the best of both worlds.
Valuation-Informed Indexing doesn’t need to be seen as a threat to Buy-and-Hold. It is only the defensiveness of the Buy-and-Holders that has made it seem like that is what it is.
Rob’s bio is here.