Our inclination to believe that Get Rich Quick investment strategies are sound and that there really is research supporting the Buy-and-Hold concept is a self-destructive inclination. We need to fight it. And, since it is never going to go away no matter how much we fight it, we need to develop a sense of humor about it.
Buy-and-hold will remain a thing as long as flawed humans walk the planet. These flawed humans need to learn how to laugh at their unfortunate weaknesses, get back on the horse, and go to battle once again.
The first place I was banned was the Retire Early board at the Motley Fool. The site administrator told me that he thought that it would be “ideal” if the fellow who was promoting a retirement study that claimed that the safe withdrawal rate is always the same number (he said that a 4 percent withdrawal was always “100 percent safe”) would permit honest posting regarding the dangers of his study. I thought that was an odd way to look at things. It certainly was true that that would have been ideal. But only the site administrator had the power to make that ideal a reality.
Had he taken effective action to rein in the abusive posting of the fellow with the study, the rest of the board community would have been fine. When he failed to take effective action, the board splintered into pieces and a place that had at one time had been generating an amazing amount of grade-A material on personal finance became a nothingburger in a matter of months.
The next board that I went to was called Financially Independent, Retired Early (FIRE). The owner there knew what had happened at Motley Fool and was determined to avoid seeing a repeat at his board. But there were Buy-and-Holders there, too, and they viewed criticism of the retirement study as criticism of their favored stock investment strategy (and presumably of their intelligence in choosing that strategy as their own). So, the discussions there became as heated as the ones that had been held earlier at the Motley Fool board. I made a plea for sanity. I said that we needed to “normalize” our discussions of stock investing.
It’s now been 22 years since I advanced my fateful post, finding fault with the retirement study being promoted at the Motley Fool board, and things haven’t been normalized yet. The retirement study has not been corrected to this day and honest, research-based posting (my belief that valuations matter is rooted in my belief that Robert Shiller’s Nobel-prize-winning research showing that valuations affect long-term returns is legitimate research) is still not permitted at most discussion boards and blogs. Not even a tiny bit normal. My job as a journalist is to figure out what the heck is going on.
The key to understanding is to consider the meaning of the first word in Shiller’s book title Irrational Exuberance. The Buy-and-Holders are not dumb. Not by a long shot. I like to observe that I have never met a dumb Buy-and-Holder. But they are clearly something. People use retirement studies to plan for retirement. It shouldn’t be a controversial position to claim that the authors of retirement studies should aim to get the numbers right. But for 22 years that retirement study that I found fault with on the morning of May 23, 2002 (it lacks an adjustment for the valuation level that applies on the day that the retirement begins) has remained uncorrected and most of the Buy-and-Holders who have become aware of the situation are just fine with that.
They are not dumb. As Shiller suggests, they are irrational. It’s not that their I.Q.s are not high enough to detect the lack of a valuation adjustment in the retirement study. They are okay with a retirement study getting the numbers wrong for the same reason why pretty much all of us struggle at times not to overeat and not to drink to excess and not to get into silly arguments. And not to engage in lots of other self-destructive behavior.
Shiller’s research ventures into unexplored territory. It tells an important truth about stock investing. And it does so using all the standard, rational tools that are used in all investment research. But the thing that it discovers is very, very different from the things that are discovered in most other investment research. It discovers that the people making the investment choices, the human investors, are irrational.
That’s a big change from what the people who put together the Buy-and-Hold strategy were thinking when they did their work. They believed in the Efficient Market Theory, which posits that all investors are engaged in the rational pursuit of their self-interest. If only! If that were so, today’s CAPE value of 35 would be a logical impossibility. And yet there it is.
We are all nut cases, When we eat. When we drink. When we argue. When we buy stocks.
The difference today is that we have a sense of humor about our deficiencies in the first three areas but not in the last. It’s not all bad news! This means that we possess the potential to make huge strides in a short amount of time by learning to laugh at some of the foolish lies we tell ourselves about what works in stock investing. Learning to laugh at ourselves is the first step to achieving some exciting advances.
