by Rob Bennett
The appeal of Buy-and-Hold is that it is believed to be science. It is believed to be the product of academic research based on the 140 years of historical stock-return data available to us today.
Is it?
I say “no.
Scientific claims can be tested. There is no way to test Buy-and-Hold. Whatever happens, its proponents blame something other than their investing strategy for the problem. That’s not the sign of a strategy rooted in science. That’s the sign of a strategy rooted in emotion.
If Buy-and-Hold were science, its proponents could supply the URL for the study that shows that Buy-and-Hold works. I’ve asked Buy-and-Holders for a link to that study many times and for many years. No link has ever been provided. Why? Why the need for secrecy?
I don’t think there is a study.
I’ll tell you what the Buy-and-Holders do when I ask for a study. They provide me links to studies showing that short-term timing doesn’t work. Taylor Larimore (the co-author of The Bogleheads Guide to Investing) and I used to engage in a comedy routine re this question when we posted together at the Vanguard Diehards forum at Morningstar.com.
I would say: “Taylor, can you point me to a study showing that long-term timing does not work?”
And he would say, “Sure, Rob, here are 20 statements from leading figures in the field indicating their belief that timing doesn’t work.”
And I would say: “Thanks so much, Taylor. But I see that all of those statements relate to short-term timing. I agree that short-term timing doesn’t work. Do you know of anything relating to long-term timing? That’s the one re which I have doubts.”
And he would say: “Boy, you reporter types sure are skeptics! You are a hard man to please, Rob. But think I can give you what you need. Forget the 20 statements. Here are 50 statements indicating that timing doesn’t work.”
And I would say: “That’s amazing, Taylor. Thanks for putting in all the time it took to collect those 50 statements. Now here’s the thing. I cannot help but notice again that all 50 statements relate to short-term timing. As you know, I agree that short-term timing doesn’t work and always have believed that. Do you think that you might be able to come up with just one statement showing that there is any reason to believe that long-term timing doesn’t work?”
And it would go on an on like that.
There’s no evidence that long-term timing doesn’t work. It doesn’t exist.
All of the studies of long-term timing show that long-term timing always works. So the claim that “timing never works” is false. The more accurate statement is that “timing always works.”
None of this matters much to the Buy-and-Holders. People believe in Buy-and-Hold for emotional reasons. Those talking about studies and data and reasons and science are using a different language. The words they are saying do not make an impression on the minds of those who believe in Buy-and-Hold because they want to believe in Buy-and-Hold.
The historical data shows that Buy-and-Hold has been tried by large numbers of investors four times in history and that it has caused a financial wipeout of those investors on each of those four occasions. It doesn’t matter to the Buy-and-Holders.
Shiller showed that valuations affect long-term returns. If valuations affect long-term returns, it is not possible that the market is efficient. An efficient market is one in which all factors affecting price are taken into consideration by the investors setting the price. If all factors were taken into consideration, stocks could never be overpriced or underpriced. But, if valuations affect long-term returns, overvaluation and undervaluation are obviously real phenomena. It doesn’t matter to the Buy-and-Holders.
The Valuation-Informed Indexers predicted the economic crisis. The Buy-and-Holders were shocked by it. That reality suggests that the Valuation-Informed Indexers know things about how stock investing works that the Buy-and-Holders do not. It doesn’t matter to the Buy-and-Holders.
The Buy-and-Holders blame the economy for their troubles, Or they say that there could never be a better way to invest after refusing to give a hearing to any better ways that others try to present to them. Or they say that things will change soon, that Buy-and-Hold will start working again in the not-too-distant future.
It’s always something.
If it were science, there would be a way to disprove it, a way to show once and for all that Buy-and-Hold is not what it has been purported to be. Is there anything you can think of that could happen that would convince the Buy-and-Holders to try something else?
I’ve given up trying to come up with things. I have concluded that it is an emotional matter and that no argument rooted in reason can have an impact.
Rob Bennett has written extensively on what causes stock price changes. His bio is here.
