Can Buy-and-Hold And Valuation-Informed Indexing Co-Exist?

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It has long been my dream that Buy-and-Hold and Valuation-Informed Indexing could co-exist. Buy-and-Holders are smart and good people. I like hearing their input. I think that we could all enjoy great learning experiences if the implications of Shiller's research findings were debated at every investing site on the internet.

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When investors are looking for a hedge fund to invest their money with, they usually look at returns. Of course, the larger the positive return, the better, but what about during major market selloffs? It may be easy to discount a hedge fund's negative return when everyone else lost a lot of money. However, hedge Read More

I no longer have much hope that that dream will ever come true. Buy-and-Holders see the idea that market timing is a good thing (if irrational exuberance is a real thing, we need to fight it and the only way to do it is through market timing) as too much of a threat to their world view. The two models are academic constructs. But these are academic constructs that hit people in highly personal ways. People cannot stand to think that they have been getting stock investing wrong for many years now. So most Buy-and-Holders ignore Shiller rather than argue against his ideas.

I believe that it will be much harder to ignore Shiller in the days following the next price crash. We will all be able to see up close and personal how much damage irrational exuberance can do to us and why we should have been engaging in market timing all along to keep it under control. I very much doubt that everyone will be converted overnight. But I doubt that there is going to be extended debate.

The reality is that the case that market timing is not needed is very weak. It's a strange reality that that idea ever caught on. There obviously is research showing that short-term timing doesn't work. So I don't expect to see any change in the conventional view re that one. But the claim that market timing isn't needed is not rooted in a research finding. It is rooted in an assumption, nothing more.

The assumption was that investors should want to pursue their self-interest in a rational way. That certainly makes sense. But the assumption is not in accord with how humans behave when participating in any activity other than stock investing. If humans were 100 percent rational, there would be no traffic tickets and no 12-step programs and no gambling casinos and no divorces and diabetes would be much less common than it is. Humans ain't rational. I am sure.

Shiller is the fellow who showed that what is true of human behavior in every other field of human endeavor is true in the stock investing realm as well. That was his contribution. If Buy-and-Hold were the real thing, there would be no irrational exuberance. So there would be no need for market timing. And there would be no economic crises when too many of us opted out of the market timing imperative.

I believe that the idea that market timing is required will begin to spread in the days following the next price crash. There is already about 10 percent of the population that believes in it. The destruction done to all of us will cause that number to inch up. The higher number of people speaking up for Shiller's ideas will help even more to work up the courage to express doubts about the dogmas of today re which they have long bit their tongue. And, if the arguments that those people make go unanswered, a new round of speaking up will take place. Support for Buy-and-Hold is today a mile wide and an inch deep.

It is a rare Buy-and-Holder who can advance a good case for the prohibition on market timing. They believe that it is a bad thing. The conviction is real. But there is not much behind the conviction. People believe that market timing doesn't work because other people believe that market timing doesn't work. When they see that not engaging in market timing doesn't work either, they will be forced to ask questions both of themselves and of others.

They will find that there are no answers out there. Market timing is the third rail of investment analysis. Touch it and you suffer career death. But there are lots of people who hold doubts and have for a long time wished that they could feel safe giving voice to them. When signs appear that the taboo on discussion of this terribly important subject has been lifted, there will be a great outpouring of once-but-no-longer-taboo takes.

The market timing emperor is wearing no clothes. That's what it comes down to. People don't say it because there are consequences attached to saying it. But, if the pain of the next economic crisis gets serious enough, some will speak anyway. And then others will. And then others will. The idea that market timing does not work or is not required is not popular because the intellectual case for it is strong. It's popular because people are afraid to say that the emperor is wearing no clothes. When that changes, all bets are off.

We will go from a situation where just about everyone agrees that market timing is a bad thing to a situation where just about everyone agrees that market timing is a good thing in a short amount of time. That's my prediction. I don't get them all right. But that is what I expect to see happen in days to come, in any event.

Rob's bio is here .

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