There’s a temptation to believe that Buy-and-Hold was just a money making scheme from the start.
Price Discipline Is Key
Common sense tells us that market timing must work. Price discipline is key to the functioning of every market that ever existed. The entire historical record shows that it always has worked. Zero evidence has been presented that it doesn’t work. And it just happens that the relentless promotion of Buy-and-Hold has brought in hundreds of millions in profits for people who work in this field. They take credit for the phony gains generated in a bull market. Then, when the inevitable crash ruins millions of lives, they point the finger at that bad, bad, bad economy, not the investment strategy that told millions that price discipline is not needed when buying stocks.
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It looks like a scam, that’s for sure.
And maybe it really is, you know? I don’t know everything. It could be that it really has all been a scam going back to the first day and that the words that follow arguing otherwise are just the words of an extremely naive fellow.
I believe that there are scam elements to this story. But I don’t believe that scam motivations are the driver motivations.
We should certainly hope that it was not all a scam from the start. If that is so, things are a lot worse than how I have been painting them. If this is all a scam and that comes out after people lose a large portion of their retirement savings, people are going to be mighty unhappy. We are going to have a hard time keeping this country from being ripped apart if that turns out to be the case. If there is a way to see Buy-and-Hold as something other than a pure scam, that’s the way that I want to see it.
Buy-and-Hold Is Not A Pure Scam
The first piece of evidence that Buy-and-Hold is not a pure scam is that the Buy-and-Holders follow their own advice. I have zero doubt re this one. After I am banned from discussion boards, I am usually able to visit them, just not to post. When I have gone back and visited boards from which I am banned, it seems clear that the people posting believe in the Buy-and-Hold strategy and follow it.
So the Buy-and-Holders believe what they are saying. How could they possibly believe? That’s the real question, isn’t it?
One factor is that Buy-and-Hold makes intuitive sense. Your portfolio statement says how much your stocks are worth. The people who put those statements together are serious people. If you say that you want to cash in your account, they will give you the full amount listed on your statement. That’s strong evidence that the amount listed in the statement is real, is it not?
Another factor is that bull markets last so long. If the Buy-and-Holders made their claims and the Valuation-Informed Indexers disputed htem and then six months later things went the way the Valuation-Informed Indexers said, people would lose confidence in Buy-and-Hold, But it doesn’t happen that way. This bull market began in 1982. It is now 2021. That’s nearly 40 years. The human mind assigns credibility to statements that have stood the rest of time.
Another factor is that there are so many experts who endorse Buy-and-Hiold. As noted above, common sense says that market timing must work and all of the evidence available to us confirms that what common sense says must be so really is so. Still, experts rarely make that point. Actually, I cannot recall anyone other than me ever saying things quite that way. Buy-and-Hold appears to be supported by experts. That reality gives the strategy credibility in the minds of millions even though the case does not hang tougher at all well.
Another factor is that we so much want Buy-and-Hold to be real. Say that you have accumulated $500,000 in your stock account over the years and that stocks are today priced at two times their real value (that is so). To believe that Shiller’s research is legitimate would mean depleting the size of your stock account by $250,000. You have a strong incentive to believe that Buy-and-Hold is real. And all of the people telling you that it is real have that same inventive.
Covering-up The Cover-Up
Another factor is the need to cover-up the cover-up. We didn’t just discover that Buy-and-Hold is bogus last week. We discovered it 40 years ago. That’s extremely embarrassing for both the Buy-and-Holders and for everyone who failed to call the Buy-and-Holders out on their questionable claims. For all this time. That’s every last one of us. It’s not quite right to call Buy-and-Hold a scam if that's the reason we keep quiet about the research discrediting it. Humans are capable of tricking themselves into believing things that they know are not so. You know how it works if you ever tried to lose weight and then were tempted by the idea of picking up a pint of mint-chocolate-chip ice cream at the end of a day of office politics.
Finally, please consider the origins of the mistake that we are considering here. The Buy-and-Holders believe that investors are 100 percent rational. That’s why they believe that the market always gets the piece right and that market timing is thus not necessary. Doesn’t it make sense to think that investors are rational? Their money is at risk. You would think that they would not want to behave foolishly in regard to their money.
I don’t think that Buy-and-Hold is at root a scam. I think that it is through market timing that we exercise price discipline when buying stocks and that it is every bit as important that we exercise price discipline in the stock market as in any other market that exists. But I believe that the idea that market timing is not necessary was rooted in a mistaken understanding of how stock investing works that we are as a society in the process of correcting.
Rob’s bio is here.