I believe in market timing. Robert Shiller was awarded a Nobel prize for his “revolutionary” (his word) research showing that valuations affect long-term returns. If that’s so, then equity investing offerd a better value proposition at times when valuations are low than they do at times when valuations are high. So investors who want to keep their risk profile constant over time must be willing to adjust their stock allocation in response to big shifts in stock valuations.
This is very much a minority opinion. Most investors believe that the Buy-and-Holders have the right idea. Investors should identify the best stock allocation for someone with their investment goals and risk profile and then just stick with it. The market will go up and the market will go down. So long as they stay the course, they will end up doing fine.
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
It’s hard to buck popular opinion for as long as I have (over 17 years). I have been called every name in the book. I have been banned at every large investing site on the internet. And I have lost many friendships. It hurts to be a social pariah. And when my views are rejected again and again it causes me to question whether I have gotten something wrong.
I stick to my guns on equity investing, however. For two reasons.
One, there is a group that agrees with me. It is a small group, about 10 percent of the population of investors. But that 10 percent doesn’t just casually agree. People in that 10 percent often endorse my views in intensely enthusiastic ways. I have been told by numerous investors that I am the first person who they have ever heard talk about stock investing in a way that makes complete sense to them. I had one fellow devote eight years of his life to researching my ideas full-time and without getting paid a dime for his work.
An academic researcher saw my posts at a discussion board and asked me if I would work with him to produce research examining whether Buy-and-Hold or Valuation-Informed Indexing is the superior long-term strategy. He concluded at the end of the 16 months that we spent working on that research project that: “Yes, Virginia, Valuation-Informed Indexing works!”
I find that remarkable. I did not study equity investing in school. And I I never managed a big fund. I should not be able to teach experts in this field anything about how stock investing works. But there have been dozens of times in which I have been told that I have done just that. It’s a very strange reality.
Equity investing and buy and hold
This tells me that a good number of people have doubts about the Buy-and-Hold strategy. There is something about it that just doesn’t hold water. But most people cannot put their finger on what that something is. When I articulate reasons why the strategy is a dangerous one, it clicks for a percentage of the population. That percentage is small today. But, when the case against Buy-and-Hold clicks for someone, it often clicks hard.
That tells me that I am on to something important. That tells me that, when prices fall hard, as they will in the not-to-distant future if Shiller is right, support for Buy-and-Hold may diminish very quickly and on a very widespread basis. The intensity of the support for my ideas in the small number of cases in which they are supported tells me that those ideas have the potential to have a big impact down the road a piece.
The other side of the story is that critics of my ideas often hate them with an even greater intensity than that evidenced by the small number of supporters. When people don’t like my ideas, they really, really, really don’t like them.
I don’t see the negative reactions as showing the same thing as the positive reactions. The positive reactions to Valuation-Informed Indexing evidence an excitement over a new understanding of how equity investing works that could change the world in a positive way. The negative reactions evidence defensiveness re the Buy-and-Hold Model.
Buy-and-Hold is the dominant strategy. People really do believe in it. So there is genuine excitement about the Buy-and-Hold concept among its advocates. But there is no good reason why advocates of the strategy should get upset when it is challenged. If they were confident that the strategy is the real thing, they would welcome chances to make the case for it in a civil and reasoned way. Rarely do I come across Buy-and-Hold advocates happy to engage in friendly discussions (there are some exceptions, for which I am grateful). Usually those defending Buy-and-Hold are impatient with questions and anxious to shut them down.
In this case the intensity reveals not an excitement over what could be learned but a concern over what could be discovered. The intensity of the negative reactions to my ideas tells me that even those who follow the Buy-and-Hold equity investing strategy have doubts about its legitimacy that they are trying to suppress. That’s not a good sign. That’s a sign that the strategy has seen its best days and is now on its way to the ash-heap of history.
Rob’s bio is here.