The Buy-and-Holders made a mistake when they came out with the idea that market timing/price discipline is not required when purchasing stocks. It’s a weird one. Price discipline is of course absolutely critical in every other market that exists.
It’s price discipline that supplies the magic that permits the market to get the price of the thing being sold right, which is the core purpose of a market. So it seems more than a little bit out there to suggest (or to insist!) that it doesn’t work that way at all in the stock market.
But I am extremely reluctant to conclude that the whole thing was a scam from the first day. There are marketing benefits to saying that market timing/price discipline is not required. The Buy-and-Holders brag about how much money they have made for those who follow their strategy at times when prices are unsustainably high. Then, when the inevitable price crash arrives, they blame the economy for it. That’s a nice marketing trick if you can pull it off.
But I don’t believe that the error was deliberate. The people who developed the Buy-and-Hold concept would have had to have been monsters to make a conscious choice to cause so much human misery and my impression of just about all of the Buy-and-Holders who I have gotten to know a little bit well is that they are all smart and good people. I think it was a mistake.
Understanding How Stock Investing Works
The thing that people forget is that the Buy-and-Holders were trying to do a very good thing. The idea was to create the first research-based model for understanding how stock investing works. The trouble they had was that the most important piece of research had not yet been published.
It was in the 1960s when Buy-and-Hold was being put together and it was not until 1981 that Robert Shiller published his Nobel-prize-winning research showing that valuations affect long-term returns (and that, thus, market timing always works and is always required for investors seeking to keep their risk profile constant over time).
So the people developing the Buy-and-Hold concept were shooting in the dark. They had evidence available to them that short-term timing (guessing when price shifts would take place) did not work. I think they just jumped to an unfortunate hasty conclusion that maybe long-term market timing (changing one’s stock allocation because of a change in valuation levels and a desire to keep risk constant with no expectation that the change will pay off in a limited amount of time) was not needed either.
It didn’t help that there were economists saying that the market is efficient, which is another way of saying that investors are engaged in the rational pursuit of their self-interest. That’s wrong. But it sounds plausible. It would make sense for investors to make rational choices given how important it is to make sound financial decisions.
The problem, of course, is that investing is so important and there is so much money to be made by gaining a reputation as an expert in this field that it was very hard for the Buy-and-Holders to acknowledge their mistake when Shiller revealed it with his research findings.
And the longer the mistake has been covered up, the more embarrassing it has become for the Buy-and-Holders to come clean. It has now been 42 years. We are no longer talking about a mistake or even a cover-up. We are now looking at a cover-up of a cover-up of a cover-up of a cover-up. It’s a serious mess.
The Point Where A Mistake Become A Scam
Is there a point at which the mistake becomes an outright scam?
I believe that at some point we are going to have to take that one under consideration as a nation of people. My take is that it is absolutely imperative that we begin talking about the far-reaching how-to implications of Shiller’s research at every internet site. The cover-up is holding us back from achieving a host of major advances in our understanding of how stock investing works in the real world.
I believe that we should try to be as charitable as possible in our assessment of the behavior of the Buy-and-Holders. For one thing, we need their help. For another, there really is a lot of legitimate confusion present in the way they address themselves to the market timing question.
The thing that I see over and over again is that the Buy-and-Holders present contradictory views. The one that makes my brain explode every time I think about it is how William Bernstein wrote in his book “The Four Pillars of Investing” how the safe withdrawal rate studies were off by 2 full percentage points at the top of the bubble (which is correct) while arguing the Buy-and-Hold case in all the other pages of the book.
I thought it was wonderful how he got the safe withdrawal rate question right (I was the only other person I know of saying something similar at the time), But then how could he not see how important it is to practice market timing? In a world in which the safe withdrawal rate drops to as low as 2 percent at some times and rises to as high as 9 percent at others, what sense does it make for investors to always stick with the same stock allocation?
Like Bernstein, lots of other Buy-and-Holders have demonstrated a desire to come clean about what we have learned as a result of Shiller’s research while not wanting to express their new understandings in terms clear enough that they get driven out of their profession. And my strong sense is that the people who advocate Buy-and-Hold strategies follow them themselves. People are trying to come to terms with the new realities and are finding it a real struggle to do so.
My worry is that millions of investors are not going to find the joke a terribly funny one when prices crash and they see a large percentage of their life savings go “Poof!”. I think we should be preparing the scene for that day by giving voice to a bit more doubt re the Buy-and-Hold dogmas than it has become popular to express in these high-CAPE-value days.
Rob’s bio is here.
