Buy-and-Hold has been a disaster.
I have great respect for what the Buy-and-Holders tried to do. The reason why I was once a Buy-and-Holder myself is that I believe that investment strategies should be rooted in research. The Buy-and-Holders were the first to develop a model for understanding how stock investing works that was rooted in research.
And most of the Buy-and-Hold ideas are solid stuff that have passed the test of time. I incorporated all but one of the core Buy-and-Hold principles into the Valuation-Informed Indexing model, which is intended as its replacement.
Q3 2022 hedge fund letters, conferences and more
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The exception, of course, is the “idea” that market timing is not always required. I place the word “idea” within quotation markets because the thought that market timing is not required is not the product of rational reflection but of an emotional impulse, the Get Rich Quick impulse.
No one has ever advanced research suggesting the market timing might not work (research showing that short-term timing doesn’t work doesn’t count – it’s long-term timing that is required). It’s hard to imagine how anyone ever would.
Long-term timing is price discipline. Price discipline is the thing that makes markets work. A stock market in which market timing/price discipline is not required is a logical absurdity.
The Buy-and-Hold Model
Investors have always wanted to believe that the irrational exuberance that they create by practicing price indifference is real. And so stocks have always been a high-risk asset class at times of sky-high prices.
But the Buy-and-Hold Model, which would have greatly diminished our ability to create irrational exuberance had Shiller’s Nobel-prize-winning research been available at the time it was being developed, made matters much worse than they have ever been before.
Why do I say that? Look at how long the ongoing bull market has lasted. There has never been anything like it before. Stock prices started moving upward in the early 1980s and have resided at sky-high levels since the mid-1990s except for a few months in the immediate wake of the 2008 price crash.
Bull markets don’t just come about for no good reason. It takes a lot of emotional investing to fuel a long-lasting bull market. Buy-and-Hold did that.
And look at the CAPE values we have seen in the days since the Buy-and-Hold Model was advanced as the first research-backed stock investment strategy.
The highest CAPE value ever experienced in U.S. history prior to the development of the Buy-and-Hold Model was the “33” that brought on the Great Depression. In the Buy-and-Hold era, we hit “44.” There have been many years in which we have been at “33” or higher.
We have seen so many sky-high CAPE values in recent decades that a CAPE value of 25 is now widely viewed as unremarkable. I can imagine hearing some stock investors complain if (when?) the CAPE value drops much below 25 and then remains at such levels for an extended period of time.
I believe in research-based strategies and I believe that the Buy-and-Holders sincerely believed that that is what they were developing when they constructed the Buy-and-Hold Model. Unfortunately, they did not have Shiller’s amazing research available to them at the time they were doing their work.
They took note of research showing the short-term timing doesn’t work and jumped to the rash conclusion that perhaps no form of market timing was required.
Given how long discussion of the far-reaching how-to implications of Shiller’s research has been suppressed, it has now come to be viewed as “controversial” to make the simple observation that all stock investors should be lowering their stock allocation when prices get crazy high and increasing them when prices get crazy low.
A Get Rich Quick Impulse
Investors listen to research. That’s the problem. Investors pushed stock prices too high even in the days before Buy-and-Hold, to be sure. We’ve always had a Get Rich Quick impulse residing within us. But it took Buy-and-Hold to make that Get Rich Quick impulse respectable.
In recent decades price indifference has come to be seen in the eyes of many as something of a virtue. We’ve always had an inclination to push stock prices up to unjustified and unsustainable levels. It took the relentless advocacy of Buy-and-Hold strategies to make us feel like it was the responsible thing to give in entirely to those Get Rich Quick urges.
The wonderful thing about research-backed investment advice is that it isn’t just opinion, it is rooted in something real. The scary thing about it is that it has the same persuasive power when the research is in error as it does when the research is legitimate.
The Buy-and-Hold idea that market timing is not required gathered a head of steam in the days before Shiller published the research putting the last essential piece of the stock investing puzzle into place and has been endorsed by so many big names in the field that it has become a sacrilege to question it.
Research did that. It is because Buy-and-Hold is thought to have research behind it that so many good and smart people have become reluctant to point out that the emperor is wearing no clothes.
Research findings are always tentative. There is no such thing as final research findings. When we come to believe that the research has taught us something, we need to be like the journalist who is told that his mother loves him and gets down to the task of finding two solid sources to confirm the story.
Research-based findings are great. But there is nothing more dangerous than a finding that is thought to be based on research but that in reality is entirely invalid because the research in question has been discredited by follow-up research.
The true scientific attitude is a skeptical attitude. When we think we have learned something important about stock investing, we need to dig harder. We are always going to be at risk of getting things wrong.
But we want to do everything we can to avoid repeating the great Buy-and-Hold mistake of treating mistaken tentative findings as rock-hard dogmas that may never be reconsidered. That’s what got us where we are today.
Rob’s bio is here.
