The biggest problem that I face in persuading investors of the dangers of Buy-and-Hold strategies is the long delay in the feedback mechanism by which investors assess whether their strategies have been proven successful or not. Buy-and-Hold strategies appear to be performing acceptably today because valuations remain at sky-high levels. Those of us who believe that Shiller is right believe that today’s stock price numbers need to be adjusted for valuations before a realistic assessment can be made as to whether those numbers indicate success for the investor following a Buy-and-Hold strategy. But the Buy-and-Holders see no need for such adjustments! Looking at things from their perspective, the success of their strategy is self-evident. I think it would be fair to say that Buy-and-Holders and Valuation-Informed Indexers speak different languages.
This is why I am such a strong believer in the merit of using peer-reviewed research to guide one’s investment choices. Shiller showed that stock prices do not play out in the pattern of a random walk, as Buy-and-Holders believe, but in a hill-and-valley pattern that takes between 35 years and 40 years to complete. Since most investing lifetimes extend for perhaps 60 years (from age 25 to age 65), most of us only witness one full bull/bear cycle and a portion of a second. That’s not enough personal experience to help us understand the dangers of bull markets, that they inevitably bring on devastating bear markets. It is only by looking at peer-reviewed research which examines the entire historical record that we can come to appreciate the ephemeral nature of stock prices that rise too high above the long-term average return.
I think that Shiller was right in the warning he advanced about high stock prices in 1996. I think that my Buy-and-Hold friends are mistaken to think that the danger has passed because high stock prices have not yet brought on the crash that will do lasting damage to their retirement hopes. They see things differently. They draw comfort from the numbers they see on their portfolio statements today and think that I am crazy to insist that Shiller was saying something important.
I am biased. I don’t say different. But it is my strongly held view that they are biased too. The two schools of thought begin from different core beliefs re the cause of stock price changes. We pursue logic chains beginning at those very different starting points to very different ending points. One school of thought is on the right track and one is on the wrong track. Only the passage of time will tell which point of view will ultimately prevail.
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