There Is No Rational Case To Be Made For Buy-And-Hold

(MENAFN- ValueWalk) I love what the people who developed the Buy-and-Hold strategy for buying Stocks were trying to do. The aim was to make the stock-buying process more scientific and to root it in peer-reviewed research. That's exactly what I believe is needed, and it was because I heard Buy-and-Holders emphasizing the importance of peer-reviewed research that I became a Buy-and-Holder myself for a time.

Financing one's retirement is a serious business. People shouldn't be guessing what to do or being taken in by marketing pitches or following trends. Research is real. learning what the research says should be core to one's thinking about how stock investing works.

I'm no longer a Buy-and-Holder. Today, I am the farthest thing that one can be from being that. I am an anti-Buy-and-Holder. All of my writings are aimed at helping people understand why following a Buy-and-Hold strategy is a bad idea.

Today, it is the opposite of what the people who developed it intended it to be. Robert Shiller's Nobel-prize-winning research showing that valuations affect long-term returns was not available when Buy-and-Hold was being developed in the 1960s. So, the people who were developing the strategy had to take a wild stab in the dark when determining whether investors needed to engage in valuation-based market timing (lowering one's stock allocation when prices are high and increasing one's stock allocation when prices are low for the purpose of keeping one's risk profile constant over time). Their wild stab in the dark proved to be off the mark when Shiller's research was published in 1981, and the buy-and-holders have proven to be highly, highly, highly unwilling to acknowledge the error for years.

These are smart people. I believe that these are generally good people. But I believe that their unwillingness to acknowledge their error has been holding our nation's understanding of how stock investing works back for a long, long time. We have already paid a big price for it and that price will rise much higher in the event that we see a price crash and an economic collapse in the not-too-distant future, as seems likely in the event that Shiller's Nobel-prize-winning research turns out to be legitimate research (today's CAPE level is a scary 36, more than two times the fair-value CAPE level of 17).

It's irrational. There's no rational case that can be made for Buy-and-Hold. I think that that's the primary reason why the people who developed and promoted the strategy have been so reluctant to acknowledge their error in the 43 years since it was revealed by peer-reviewed research. These people place a great deal of value on rationality, and it blows their minds for them to think of themselves as having made such a basic and terrible mistake.

They thought that they were doing the rational thing. Their idea was that valuation-based market timing is unnecessary because overvaluation is a logical impossibility. Investors are engaged in the rational pursuit of their self-interest. They look at every scrap of information affecting stock prices before setting the price. Any temporary mispricing gets fixed quickly. So, engaging investors in market timing to correct mispricing isn't necessary. Right?

No, that's not right. I think it's loony tunes. But I do acknowledge that it sounds plausible on first consideration. Investors should be engaged in the rational pursuit of their self-interest. Their retirements are at stake. Why wouldn't they be?

What the Buy-and-Holders missed is that humans are really not the rational animals that they are sometimes portrayed to be. Just about every novel ever written makes this point. Just about every song ever sung makes this point. All of the major religions were founded in an effort to address the problems that develop because of this core reality of human existence. The people who developed Buy-and-Hold somehow got through life, never reading a novel, never hearing a song, and never attending Sunday school classes. They know about numbers, that sort of thing. A good understanding of numbers can help in the investment advice biz. But it only gets you so far.

There are no numbers that can ever explain today's CAPE value. It's a dangerous CAPE value. Our nation should be united in an effort to get it down before it delivers us some serious hurt. But we are frozen in inaction. If we were to act, that would be as good as acknowledging that we made a mistake in telling investors that there is no need to engage in valuation-based market timing. It's a mistake so big that we cannot bear to face it, no matter how great the need to do so.

Assuming that human investors are rational is not rational. That's the bottom line. Humans are not capable of engaging in the rational pursuit of their self-interest without a lot of help. I believe that they could pull it off if they were given that help. But rational investing is a goal to strive for, not a given. By assuming that it came automatically, the Buy-and-Holders closed the door on investigation of all the things that could be done to get us all closer to achieving this important goal.

Buy-and-hold can never be rational until an injunction to always engage in valuation-based market timing in an effort to keep one's risk profile constant over time is added to the mix.

Rob's bio is here :

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