Beyond Buy-and-Hold #76

By Rob Bennett

Buy-and-Hold doesn’t work. Look around. it’s obvious.

But wait! The Buy-and-Holders have an explanation.

It’s the Economy! Buy-and-Hold is aces. It’s that darnned economy that is messing everything up. Buy-and-Hold cannot be expected to produce good results in the face of such a bad economy.

Trying to have it both ways

Please think over what is being said here. When Buy-and-Hold produces good results, we credit the investing strategy. When the results are poor, we place the blame elsewhere. As Church Lady might observe, “How convenient for the advocates of Buy-and-Hold!” It’s a “heads I win, tails you lose” approach to investing analysis.

And you know what? This isn’t the first time the Buy-and-Hold advocates have played this little trick on us.

This is the fourth time in U.S. history that The Stock-Selling Industry has been successful in persuading a large percentage of investors to follow a Buy-and-Hold strategy. The first time, Buy-and-Hold produced gangbuster results until an economic crisis ruined all the fun and we didn’t see acceptable stock returns for another 20 years.

The second time, Buy-and-Hold produced gangbuster results until an economic crisis ruined all the fun and we didn’t see acceptable stock returns for another 20 years. The third time, Buy-and-Hold produced gangbuster results until an economic crisis ruined all the fun and we didn’t see acceptable stock returns for another 20 years.

The fourth time (this time), Buy-and-Hold produced gangbuster results until an economic crisis ruined all the fun and we didn’t see acceptable stock returns for another 12 years (and counting).

Are you beginning to see a pattern?

There is a reason why it always plays out the same way. Economic crises always ruin the Buy-and-Hold game because the Buy-and-Hold game always causes an economic crisis. To say that “Buy-and-Hold isn’t working because of the economic crisis” is to say “Buy-and-Hold isn’t working because of what Buy-and-Hold is.

Buy-and-Hold is the investing strategy that says that stocks are worth buying at any price, that it is okay to stay at the same stock allocation no matter how high prices go. That can never, ever, ever work in the long term. It is a logical impossibility.

We often refer to stocks as “risky” without stopping to think about the nature of that risk. The risk is that stocks might some day become so high-priced as to provide poor long-term returns. Stocks never perform poorly when they are low-priced or fairly priced, stocks always perform poorly when they are high-priced. So the proper way to say it is to say that high-priced stocks are risky.

Stock prices are set by investors. If we all were concerned about our retirements, we could pump stock prices up to 10 times what they are today over the course of the next six months. Why don’t we do just that?

We don’t do it because our common sense tells us that it is a silly and dangerous game. Whenever we cause stock prices to increase more than the 6.5 percent gain justified by each year’s economic growth, we are borrowing the extra returns from future years, pumping up our returns in the now in exchange for poor returns a few years down the road. What’s the point?

Do you remember the “New Paradigm” in the economy and the stock market?

Common sense tells us not to play stupid games with our retirement money. Buy-and-Hold encourages us to play such games. Hey! Maybe this will be the first time in history when overpriced stocks provide good long-term returns! No one has a crystal ball. No one can say for certain.

The Buy-and-Holders encouraged us to play this game to the hilt in the 1990s, to pump and pump and pump stock prices and never to apply the brakes by lowering our stock allocations when risk got out of hand. When millions of investors agree to take on far more risk than they could handle, an economic crisis follows. And the Buy-and-Hold advocates then blame the economic crisis for their strategy failing once again.

Yuck!

It’s a dishonest game. It has hurt millions of people in very serious ways. I want no part of it. I am working hard to earn a reputation as the most severe critic of Buy-and-Hold alive on Planet Earth today.

If you are feeling the pain of this economic crisis, or if you know of others who are, I hope you will place the blame where it belongs. It is The Stock-Selling Industry and its reckless and relentless promotion of Buy-and-Hold investing strategies that brought on this crisis.

There’s nothing wrong with our economy. We should be grateful that our economy was strong enough to survive for a good number of years in the face of the relentless promotion of Buy-and-Hold strategies. We should all be doing whatever we can to bring our wonderful economy back to life. By making sure that Buy-and-Hold dies and is never permitted to come to life again.

Rob Bennett has identified the 23 most common and most costly investing mistakes. His bio is here.

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Beyond Buy-and-Hold #75

By Rob Bennett

You’re a Phillies fan. You have hopes for the team winning the World Series next year. The manager is interviewed on television. You are reassured to hear him say that “pitching is what matters in this game, it’s all about pitching.”

The next day, the manager releases the team’s best five pitchers on waivers. You are shocked. You tune in to the news that night to hear his explanation. He says: “I strongly believe that pitching matters. That said, I know of no reason to believe that teams with better pitchers win more games. So I am not even a tiny bit concerned that we are losing all our best pitchers. I am convinced that pitching matters a great deal in baseball, but I also am confident that it has no effect on whether you win or lose games.”

That’s crazy talk. To say that pitching matters is to say that, all else being equal, teams with good pitchers win more games than teams with bad pitchers. The idea in the game of baseball is to win games. To say that something matters in baseball is to say that it helps you win games.

Everyone understands this logic for so long as the discussion relates to baseball. Things get foggy for many when we turn our focus to stock investing.

Valuations matter in stock investing

There is something close to a universal consensus on this point. I have talked to tens of thousands of investors and I have never met one who disagreed.

But I have met many investors who argue that, while valuations matter, paying attention to valuations will not help you achieve better investing results. That is, valuations matter, but having valuations on your side (by investing more heavily in stocks at times of low valuations than at times of high valuations) will not help you win at the game of investing.

All Buy-and-Holders believe this. If they didn’t, they wouldn’t be Buy-and-Holders. If you believe that having valuations on your side helps you win at investing, you would obviously set your allocation in such a way as to have valuations on your side. That is, you would go with a higher stock allocation when prices were low than you did when price s were high. Investors who do that are Valuation-Informed Indexers.

Valuations versus “anytime is a good time to be in the stock-market”

Why do Buy-and-Holders hold this contradictory belief? Why do they believe that valuations matter but that having valuations on your side does not help you win at the game of investing?

It’s because of a mistake that was made in the early 1970s. The people who developed the Buy-and-Hold Model discovered that short-term timing doesn’t work. They didn’t know at the time of the need to distinguish short-term timing from long-term timing; the research showing the importance of this distinction was not published until 1981. So they concluded that timing in general does not work. And they made that the fundamental premise of their investing model.

Having rooted all their beliefs about investing in a conviction that timing does not work, they didn’t pay much attention to the research showing that long-term timing always works when it was published. They ignored it. Then they ignored the confirmations of that research. Then they ignored the confirmations of the confirmations.

It’s getting harder to ignore the 30 years of research showing that the fundamental premise of Buy-and-Hold Investing is the opposite of the reality now that the widespread promotion of Buy-and-Hold has caused the second worst economic crisis in U.S. history. But the desire to ignore that 30 years of research is today greater than ever. Had the flaw in the Buy-and-Hold Model been acknowledged in 1981, when it was discovered in an intellectual sense, the model could have been changed before it did harm to anyone. It would have been a case of no harm/no foul. We cannot say that it is that today. Today we need to say that Buy-and-Hold has caused more human misery than any earlier idea in the history of personal finance.

The stock market and its affect on the economy

Will we ever be able to fix the mistake and bring our economic crisis to an end?

I sure hope so. I don’t think we can wait for the investing experts to come around. I have contacted many of them and have found them to be resolute in their conviction that these errors must never be publicly discussed or corrected. The Buy-and-Hold Model is going to be fixed when the investors suffering the losses resulting from the flaws in it demand that it be fixed, not before.

So we all need to begin asking ourselves some very basic questions about this wildly popular investing strategy. Does it make sense? If you are going to put your retirement money at stake on the merits of Buy-and-Hold, you had better be sure it is a strategy that at least makes some sense. Does it? Is there even a tiny bit of logic that supports the idea that valuations matter but that there is no need to change your stock allocation in response to big swings in valuations?

I submit to you that there is zero logic supporting that claim. Buy-and-Hold makes not a lick of sense. Going by logic, we should all expect Buy-and-Hold to cause the millions of middle-class investors following it to suffer frightening financial wipeouts, wipeouts big enough to cause the global economy to collapse.

My sense is that many of us had doubts all along. The story never held together. We should have spoken up. During the bull market, Buy-and-Hold became so popular that we permitted ourselves to become intimidated by its apparent success. Now we are paying the price for our cowardice. Now we are seeing not only a collapse of our economic system but even signs that our political system may be vulnerable to potential collapse.

Valuations matter. The Buy-and-Holders got that one right. Since valuations matter, investors must take valuations into consideration when setting their stock allocations. There’s no getting around it. Buy-and-Hold is dead. We need to get about the business of building an investing model that works.

Rob Bennett has written about the eight investing questions you need to ask before putting money on the table. His bio is here.

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Beyond Buy-and-Hold #74

By Rob Bennett

At what price are stocks no longer worth buying?

That’s the question that should terrify Buy-and-Holders, for two reasons. One, it is a question that demands an answer. And, two, Buy-and-Holders are not able to come up with one.

Before you buy a car, you check Edmunds.com or some such site to identify the fair selling price. If you are in desperate need of a car, you might be willing to pay a bit more. But there are limits. You won’t pay $60,000 for a car that properly should go for $20,000.

Why doesn’t it work that way with stocks? Stocks were selling for three times fair value in 2000. Investors were buying like crazy. Why? Why don’t we care about getting ripped off when it comes to how we invest our retirement money?

Should “sky’s the limit” be the rule with stocks?

Say that you think it is okay to pay three times fair value. There still has to be a limit. Would you be willing to pay six times fair value? Would you be willing to pay ten times fair value? Shouldn’t there be some price at which you would conclude that stocks are not worth buying?

People don’t even want to think about the question. It is a disturbing question. The suggestion contained in the question is that we can know when stocks are worth buying and when they are not. Which would of course be a wonderful thing. And we of course can indeed do this. So why don’t we? Thinking about that one is the disturbing part of the project.

Why don’t we want to know when stocks are worth buying?

Why don’t we want to know when we have had too much to drink? Why don’t we want to know when we have had too many candy bars? Why don’t we want to know when we have been at the gambling tables too long? Why don’t we want to know when our current flame is bad news?

We like to tell lies to ourselves. That’s why.

How stocks become overpriced

There’s only one way in which stocks can become overpriced. It happens when gains are excessive for a number of years in a row. We want to count those gains as real. It brings us closer to retirement to count the gains as real. We want.

Our minds won’t let us have what we want. Our minds are logical. Our minds tell us that the excessive gains don’t count, that they don’t bring us lasting wealth and that they don’t bring us closer to retirement. So we turn off our minds. We become Buy-and-Holders and count those excessive gains. Then they treat them as real and they depend on them.

If we all spent time thinking about at what price stocks are no longer worth buying, we all would be better investors. But there would be a price for heading down this road. We could no longer indulge our fantasies of being able to retire early by taking advantage of the phony gains we enjoy during bull markets.

The key to smart investing: facing the truth

Smart investors are honest with themselves. They always want to know where they stand. They use accurate numbers because they understand that financial planning is a sick joke when the plans are based on phony numbers. Getting the numbers right is important.

Buy-and-Holders cannot stand the thought of using accurate numbers. Using accurate numbers slows you down. Using accurate numbers means having to save all the money you need for retirement, no fudging permitted. No fair! No fun!

We all know we are kidding ourselves. I know this because of my nine years of talking these issues over with tens of thousands of middle-class investors. I have never met a Buy-and-Holder who was not defensive about his insistence on using inaccurate numbers. I have never met a Buy-and-Holder who dared to answer the question of when stocks are so overpriced as to not be worth buying.

It’s a sad situation. We do ourselves great harm by fooling ourselves. And we are all aware on some level of consciousness that that is what we are doing. But we fight efforts to get a discussion going out in the open. We prefer to live in pain over facing the struggle it would take to adopt honest investing practices.

Here’s my challenge to you: Start small. Pick one aspect of the investing project and be honest with yourself about it. If you can handle that much, I am confident you can move on to great things.

Answer the question: At what price are stocks no longer worth buying? You don’t have to answer the question in the way I would. But, if you are to claim to be a rational investor, you need to have some answer to the question.

What is it?

Are stocks worth buying when they are selling at two times fair value?

How about three times?

How about six times?

How about ten times?

At what price are stocks no longer worth buying? Do you know? Are you able to put forward any justification for not being able to advance a simple and clear and confident response to this basic question?

Rob Bennett writes about how to obtain lasting investor confidence. His bio is here.

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Guest Post

It is quite unfortunate that the majority of investors approach investing with the mind set that they need to find stocks that will provide the greatest return in the shortest possible time. The entire day trading industry is built upon this need for instant gratification. Brokers are all too happy to fill this need by offering low trading commissions and beautiful charting and trading tools. As is often the case, constant portfolio turnover and churn is where the real money is for the brokers. “Making it up in volume” may not work for Detroit any more, but it works very well for the discount brokerage industry.

Investors who get seduced by these tools and the hope of a quick profit, tend to significantly under perform the market. Step back for a moment and consider this: The total market return (for example an index such as S&P 500) is the sum of the returns of all the individual investors in that market, institutional investors such as funds, less the commissions and fees they pay out to their brokers.

The problem is that of the three main participants in the market, individual investors are the only ones who are completely dependent on good stock picking for their profits:

1. Brokers: They typically do not care about which stocks are up and which are going down. As long as their customers are buying and selling, they make money in form of commissions and the spread between bid and ask. The greater the trading activity, the better it is for them.
2. Funds (mutual funds, pensions, hedge funds, etc.): Fees and expense ratios are the main source of income. Hedge funds do have a part of their fees tied to performance, but they are also guaranteed a part of their income as a percentage of Assets Under Management (AUM). Performance plays a role in attracting new customers but it is unlikely that the fund company will operate under loss as long as it has a good size asset base.
3. Individual investors: Completely dependent on the returns of their investments for their profit.

The intermediaries provide a service and get paid for it. Nothing wrong with it, except that the goals of an individual investor and the brokers/fund companies are not necessarily aligned at all times. The stock market may or may not be efficient, but I can tell you this – the industry is extremely efficient at extracting every cent of profit from the investing public – that is, from YOUR investment returns.

Fortunately, Successful Long Term Investing is Not Complicated

Your investing success depends on you, and no one else. No one has the same incentives as you do. It is not complicated, but unless you have a well defined process and the discipline to stay with it, it is going to be very hard. It also requires a change in the way most of us think about investing and stocks. Stop thinking about rate of return and beating the market and start focusing on a solid investment plan and process and your returns will take care of themselves. Use the following principles and you will be on your way to create a good plan that works for you.

1. Invest in businesses, not stocks – A stock is just a way of gaining a part ownership in a business. Do not think of a stock as a bet. Only buy stock in a company that you will be happy to run yourself if you were to own it outright. So you will need to think about profits, customer loyalty, growth prospects and competition. You should really consider all aspects of the business before you invest in it. Spend more time choosing your investments than you would, for example, in choosing a new microwave oven.
2. Do not over pay – It is one thing to buy a company that is profitable and has a strong competitive position. It is another to buy it at a price that will ensure profits for you. If you pay a premium for your stock, that is when the stock is overvalued, the company may continue to rake in profits and cash flow for the next ten years and your stock may not move. This is because over time, all stock prices approximate the intrinsic value per share of the company. However, at any given instant of time, the stock prices may be out of whack with the value as it is more dependent on the investor sentiment and the demand/supply of the stock in the market. You may want to read my thoughts on how to buy stocks at a discount to understand better how this process works.
3. Ignore the market, turn the TV off, cancel CNBC – If you are following the two principles laid out above, you are more 80% there. However, if you are the kind that panics when the market does, you are likely to sell off your good stocks at the worst possible time. If the investment merit of the stock has not changed, there is no reason to sell it. It is just better to tune out the unnecessary noise.
4. A down market is an opportunity, a buoyant market is scary – When your barber starts giving you stock tips, it is most likely the time to sell. When the IPO market heats up, sell. When everyone sells their stocks and hides their cash under the mattress, buy. When the number of new investing blogs in a year exceed the number of new “frugal” blogs, sell. You get the idea. The trick is to buy low and sell high. The days after the Lehmann Bros collapse were some of the best days to scoop up sound and profitable companies such as American Express.
5. Do not, and I mean this, do not be afraid of cash – It is surprising how so many investors feel compelled to buy a stock, any stock, if they have cash sitting in their brokerage account. The only valid reason to invest in a stock is if you have researched the business and decided it has investment merit. When the market is overvalued and there is a paucity of good investment values, it is prudent to stay in cash. Buying an iffy stock that eventually loses money is neither macho, nor sexy.
6. Get in with the correct process – The correct process, and the mind set for successful investing, is not to buy stocks that will go up. The correct process is to buy ownership in a company that makes money for its owners without overpaying for the share. Sure there may be times when you judge wrong, and there may be times when you have to be patient for years to profit, but if you do this long enough, with good number of stocks, you will eventually win out over the market and the average unenlightened investor. If you do not use the correct process, just know that there are many businesses out there just waiting for you to hand them your hard earned money.

If you have stayed with me so far, you are probably asking this obvious question: How do I find time and help to research the stocks and the businesses in the manner you are suggesting? In the old days, only investors with considerable assets, who could afford a full service broker and their custom advice, bought stocks. Today, technology and new financial products such as funds and etfs have brought in many new investors in the market and discount no frills brokers have thrived. The fact is, if you can’t afford good advice, you will have to make time to research your stocks. There is no way around this. Even if you have a good advisor, I recommend you do not buy any stock that you do not understand yourself. Then by all means take advantage of low commissions offered by discount brokers.

Shailesh Kumar, perhaps better known as Arohan, runs the popular value investing site Value Stock Guide where he doles out stock advice and recommends undervalued stocks to buy to new investors and stock market grey beards alike.

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Guest Post

Reaching a point when you can grow your money via investments is an exciting time. But there are many factors that affect investors’ decisions. These are normally guided by investment strategies, which are influenced by investment goals, risk tolerance, and your future needs for capital.

There are three basic types of investment strategies: growth investing, income investing and value investing, with the greatest thing separating them generally being the level of risk involved. Many younger investors have greater tolerance to risk as they can bank on having more time to make up losses, while investors closer to retirement may favour a conservative approach that’s protective towards their assets.

The basic investment strategies

Growth investors look for companies in markets that traditionally have high earnings and take risks buying stock from promising start-ups in the hope that the companies will grow into industry leaders. Value investors, by contrast, search for stocks that might have been overlooked by the market. Undervalued as opposed to low priced, these stocks represent a good deal to savvy investors. Income investing is a more conservative strategy that targets companies that consistently pay out high stock dividends.

Most investment strategies have risk guidelines that separate the risk averse from the moderately tolerant. Someone who is risk averse will prefer transactions with lower risk, even if it means losing out on higher rates of return. Research has indicated that investors who prefer this type of trading generally stick to index funds and government bonds.

Investment strategies aim to balance risk with reward through asset allocation, using an investor’s assets and unique risk tolerance profile to deliver returns. All assets – equities, fixed-income and cash and equivalents – represent different levels of risk and behave differently, hence the complexity of allocation.

Finding winning investments

Very rarely can investors pick stock market winners by intuition. Following set goals and guidelines has proven to be a far more successful method. Many investors choose to research companies within a certain industry or within certain financial criteria. Owing to the large amount of information that’s freely available today, it’s possible to find company information including financial data such as total and net assets, turnover, profit and stock information by using a business directory.

There is no one strategy that is fool proof. Developing investment strategies is as much about understanding the investor’s strengths and weaknesses as it is about understanding the market. For example, a person who is good at research and analysis will be good at finding opportunities in company accounts, and know when to buy and sell.

Becoming a good investor means not only developing an investment style but also learning how to process large amounts of company information. By first understanding asset allocation and risk guidelines, and second processing company data, you too can leverage the stock market to your benefit.

This article is brought to you by Duedil, the largest database of free company financials in the world.

Beyond Buy-and-Hold #73

By Rob Bennett

Your favorite investing expert is your favorite investing expert. Your favorite investing expert is not your friend.

It’s important that you make this distinction.

Say that a political figure aspires to the Presidency. What happens? Do we hand him the keys to the White House because he talks a nice game?

We do not. He is subjected to vetting. He is asked questions. Hard questions. His answers are not accepted on faith. They are checked. Contradictions are noted. Vagueness is faulted. We place demands on our Presidential aspirants.

That makes sense. You don’t want to let the wrong guy in the White House. Put the wrong fellow (or gal) in the job and you have a big mess on your hands.

Why don’t we do a similar investigation when it comes to investment advisors?

So it is with the person you put in charge of informing your investing strategies. All of your hopes and dreams for the future are dependent on your ability to make good investing calls. Allow emotion to influence your judgment, and you can blow the entire deal. You do not want to do that. If you start thinking of your favorite investing expert as your friend, you are letting emotion enter a place where it does not belong.

There is no one person who knows all the answers either in the political field—or in the investing field. If you want to hear good stuff about President Obama, you can find lots of articles making a case for him. If you want to hear bad stuff about President Obama, you can find lots of articles making a case against him. Can that be said about your favorite investing advisor?

Magazines do not often run critical articles about investing experts. The deal seems to be that those who follow an expert only want to hear positive words while those who do not follow that expert don’t care to read about him at all. So why write critical articles?

Before locking in with an investment advisor, first read the criticisms against him

The people who follow an investing expert should be excited to see articles making a case against the fellow’s advice. There are three reasons:

1. The guy might really be bad news and you want to find out as soon as possible if that is so,
2. The guy’s approach might stand up well to criticism and you will gain confidence in the guy’s approach to see it tested and to see it pass the test,
3. The guy is going to get lazy if he is not often challenged in public.

All investing experts can improve. Not too many are likely to improve if we do not make demands on them.

You need to be making demands on your favorite investing expert. Does he really know what he is talking about? Does his advice work in all types of markets or only in some? Is he the type to tell you only what he thinks you want to hear and does he therefore tend not to report to you the downside of the strategies he recommends? Are his views consistent? Or does he cover up holes in his arguments with word games that sound good until the day they leave you busted?

Your investment advisor is NOT your friend

We don’t make demands on our friends. So we need to be careful not to come to like our investing advisors too much. We can make friends at work or around the neighborhood or while having coffee after Sunday services. It’s dangerous to start thinking of your favorite investing expert as your friend. You don’t want to go there.

How many of those who invested in the Madoff fund didn’t listen to the voice within warning them that something wasn’t right because Madoff seemed like such a nice man? Con men always seem like nice men until the con reveals itself. There has never been an effective con man who wasn’t friendly. It might be a bad sign if your favorite investing expert is super warm and super funny and super likable.

I’m serious.

One of the most important jobs of a good investing expert is to tell you when you are full of it. That’s hard work. People don’t like being called out on their nonsense. The investing expert who pops your fantasy balloons risks losing you as a client. That takes guts.

That’s when the guy really earns his money. The good ones are the ones who care enough about your financial success to risk losing the business rather than to let you risk losing your life savings. A good investing expert is a professional. That means he tells you the way it is, not the way you want it to be.

A bad investing expert will be your best friend in the world. He will send you a Get Well Soon card when your financial plan crashes. He might even tell you a good joke every now and again. No charge!

The Bottom Line

There’s money involved in this game. You need to summon up a measure of seriousness if you are to avoid getting crushed. You need a man (whether it happens to be a man or a woman playing the role). Do you know why many investing experts direct most of their energies to becoming their clients’ best friends? They don’t see themselves as investing professionals. They see themselves as salesmen.

People are being taken every day. And the saddest part of it is that it is people who they think of as friends who are doing it to them. You know there’s something wrong going on when you are paying money to someone to be your friend. A true investing expert has a job to do that cannot be accomplished if he gets too caught up in an effort to get you to like him.

Rob Bennett warns middle class investors of the tricks employed by The Stock Selling Industry. His bio is here.

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Beyond Buy-and-Hold #72

By Rob Bennett

I often refer to Buy-and-Hold as “the purest and most dangerous Get Rich Quick scheme ever concocted by the human mind.” People are often surprised to hear me say that.

Am I getting at something in particular? What precisely do I mean to signify when I characterize Buy-and-Hold as “a Get RIch Quick scheme”? Am I just throwing dirty words around?

I hope I am not just throwing dirty words around. The phrase “Get Rich Quick” has a particular meaning in my mind. I mean something specific when I characterize Buy-and-Hold as the most intense dosage of that something that I have seen in my days of walking Planet Earth.

The distraction of empty promises

When people send you those e-mails asking you to deposit money in a foreign bank account, that’s Get Rich Quick. The e-mails always flatter you. That’s because the scammers need to have your emotions kick in and overcome your reason. Your reason would tell you to exercise caution when it comes to making deposits of large sums of money. The chance to make a killing because we are one of the so darn smart and special ones entices us to do things we otherwise would know not to do.

That’s what Buy-and-Hold is all about.

The trick to Buy-and-Hold is painfully obvious. That’s true with all Get Rich Quick schemes. It doesn’t follow that you’ll see it when I describe it to you. We all hate to acknowledge having been taken in by Get RIch Quick schemes. So we work our minds overtime trying to come up with rationalizations for investing in foolish ways.

The trick to Buy-and-Hold is that you don’t bother checking to see whether stocks are fairly priced before putting money on the table. Huh? You wouldn’t buy a car that was priced at three times fair value. But millions of middle-class people have happily purchased stocks priced at three times fair value. Why? The stock-selling experts told them that they are special, that the laws of mathematics might not apply to them. Down goes the trap!

The institutionalized version of Get Rich Quick

So Buy-and-Hold really is Get Rich Quick. But I go farther than that. I say that it is the purest and most dangerous Get Rich Quick scheme ever concocted by the human mind. Why so strong?

How many people do you know who were taken in by the deposit-money-in-a-foregn-bank scam? And how many do you know who were taken in by Buy-and-Hold?

That’s why.

The Buy-and-Hold scam has taken a lot more money from a lot more people. This particular Get Rich Quick scheme has caused enough human misery to bring on what is already the second biggest economic crisis in U.S. history and one that threatens soon to take over first place. Buy-and-Hold has earned top honors in the money con category.

How can you avoid falling for Get Rich Quick schemes in the future?

You cannot do it by educating yourself. There are millions of smart people who follow Buy-and-Hold strategies. Education is not the answer here.

The answer lies in consideration of the wisdom of the saying “It’s impossible to cheat an honest man.” Cons almost always play to our self-inflated image of ourselves. Have you noticed how Buy-and-Holders are always putting down investors who follow any path other than the one they personally favor? Other investors are dumb. Other investment approaches are not backed by science. Only Buy-and-Holders are truly rational. Pride comes before an investor wipeout. Why? Because giving in to feelings of pride puts your emotions in charge of your ability to engage in reason.

Do I hate Buy-and-Holders?

By no means! I admire and respect and like most Buy-and-Holders. I enjoy talking things over with them. I count on them to point out weaknesses in my strategies, to let me know when it is me getting too full of himself, starting to think that his ideas are the best ever and the only rational ones and the ones that will triumph over all in the end.

We cannot banish our Get Rich Quick impulses. We all would if only we could. There’s not one person alive who views Get RIch Quick investing as a good thing. Yet millions upon millions stake their retirement money on Get RIch Quick approaches every day.

I think we might need to stop thinking of Get Rich Quick as “the Other” and just come to accept that it is part of us. Doing that might permit us to see it in places where we do not see it today. I don’t think for two seconds that the Buy-and-Holders want to be following a Get Rich Quick strategy. If they could become a bit more accepting of the charge, perhaps they could eventually become relaxed enough to see that there’s perhaps at least a tiny bit of merit to it.

I’ve only done half the job when I have identified Buy-and-Hold as a Get RIch Quick scheme. The more difficult and important task is figuring out how to get the Buy-and-Holders to abandon their Get Rich Quick ways. I cannot say that I have been super successful re that one as of today.

I’m working on it! I’m working on it!

Rob Bennett offers life planning tips at his website. His bio is here.

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Beyond Buy-and-Hold #71

By Rob Bennett

When it comes to Buy-and-Hold investing strategies, I’m tough. I describe Buy-and-Hold as the purest and most dangerous Get Rich Quick strategy ever concocted by the human mind. I say that it was the heavy promotion of Buy-and-Hold that was the primary cause of the economic crisis. I point out that the academic research has been showing for 30 years that there is precisely zero chance that Buy-and-Hold could ever work for any long-term investor.

Yowsa!

I must really hate Buy-and-Holders, huh?

No. That’s not even close to being true.

As negative as I am re Buy-and-Hold, I am just that enthusiastic re Valuation-Informed Indexing. I say that we could bring the economic crisis to a quick end by opening up the internet to honest posting re Valuation-Informed Indexing strategies. I often cite research showing that we could all retire five to ten years sooner if only we would make the switch to Valuation-Informed Indexing. I note that the historical stock-return data shows that switching to Valuation-Informed Indexing reduces the risk of stock investing by 80 percent.

Guess which group of investors it was that laid the foundation for the discovery of Valuation-Informed Indexing?

It was the Buy-and-Holders!

The way to financial liberation

Our economic crisis is a tragedy. It’s not just that we have seen so much human misery. it’s that all of that human misery was 100 percent avoidable. We are a blessed people. We have learned more about how stock investing works over the past 30 years than we learned in all the years that came before that time-period. What we have learned promises to liberate millions of us from the chains of paycheck dependence. Lucky, lucky, lucky us!

Our good fortune was the product of years of hard effort on the part of — the Buy-and-Holders! It was the Buy-and-Holders who came up with the idea of using the academic research as a guide to how to invest. Valuation-Informed Indexing is the end result of that powerful idea. It was by following the academic research where it led that we were able to develop the principles of Valuation-Informed Indexing.

But wait.

Didn’t the Buy-and-Holders get it wrong? Wasn’t it their idea that there is no need to lower your stock allocation when prices rise to insanely dangerous levels that caused this mess?

Yes, the Buy-and-Holders did mess up. Big time.

But who hasn’t?

Do you know any field of human endeavor in which the pioneers got it all right on the first try? I can’t think of one. We shouldn’t be surprised that the Buy-and-Holders messed up big time. We should have expected it all along. That’s what usually happens when the humans go about making huge advances in their understanding of some matter of importance. Mess-ups are a part of the process.

Mess-ups are a good thing

I wish we could all start seeing it that way. If we could, we would see the defensiveness that has been holding us back from spreading the word about all of our exciting breakthroughs disappear. If we could just accept that mess-ups are a natural part of the learning process, we could help the Buy-and-Holders come to see that Valuation-Informed Indexing is not so much a refutation of their years of hard work as it is a vindication of them and a fulfillment of them.

The two most important breakthroughs in the history of investing analysis were Fama’s showing that short-term timing never works and Shiller’s showing that long-term timing always works. Put them together and you have the safest and best strategy for investing in stocks ever concocted by the human mind. Had Shiller published his research in 1971 instead of 1981, the book A Random Walk Down Wall Street would have been titled A Valuation-Informed Walk Down Wall Street and we would have spared ourselves all this anguish.

Does it really matter all that much? Does the fact that we achieved the second great breakthrough in 1981, a few years after the defective strategy had been widely publicized, mean that the Buy-and-Holders were all just a bunch of dummies?

I sure don’t see it that way. Shiller would not have done the research he did had the work that at one time seemed to support Buy-and-Hold not been done first. Shiller’s work was a reaction to Fama’s work. Shiller’s work did not do away with the need for Fama’s insights, it amplified them by filling in parts of the story that Fama missed and that we needed to know about to put Fama’s insights to productive use.

The Buy-and-Holders are not dumb people. The Buy-and-Holders are not bad people.

We hurt them when we tolerate the continued promotion of Buy-and-Hold. Each time the economic crisis worsens, the Buy-and-Holders feel worse about themselves and the investors who were ruined by their investing strategy become more angry about what was done to them.

We owe the Buy-and-Holders a big debt. The best way to honor that debt is to help them see that the future is Valuation-Informed Indexing. And that they merit a whole big bunch of credit for developing the insights that over time led us to the magical place at which we now stand.

Rob Bennett is known for his unconventional job search tips. His bio is here.

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Beyond Buy-and-Hold #70

By Rob Bennett

I was talking with a friend of mine at the Financial Bloggers Conference in Chicago. He’s a Buy-and-Holder. He told me what I need to do to get reinstated at the various boards and blogs that have banned me for pointing out the dangers of this popular investing strategy.

I need to pull back a bit. It’s okay for me to say that valuations matter, people can deal with that. But I need to not post so often. It really gets on people’s nerves when they see me participating in every thread in which the valuation issue comes up. And my posts are so long! I need to write shorter posts less frequently and not take such strong stands. It wouldn’t hurt if I would stop describing Buy-and-Hold as a Get Rich Quick scheme, for example.

Okay.

He’s right, of course. The Buy-and-Holders would love it if I followed that advice.

The investment strategy of the future—maybe the near future

But my goal is to bury Buy-and-Hold 30 feet in the ground, where it can do no further harm to humans and other living things. I would like to see all of the experts in this field endorsing Valuation-Informed Indexing, which I view as the investing strategy of the future. I look forward to the day when The Stock-Selling Industry is spending hundreds of millions of dollars promoting investing strategies that work.

What are the chances that those things are going to happen if I stop speaking out strongly in opposition to Buy-and-Hold or do so less frequently? I think it is safe to say that the chances are pretty darn small. If I follow the advice of my Buy-and-Hold friends, I will be more popular. But I will also be ineffectual! I will not achieve my goals. I can see how that sounds good from their point of view but I am not able to see how it could be seen as a good thing from mine.

Now, I’d like to make a point coming at things from the other direction.

Have you ever heard me offer the sort of advice that was offered to me to the Buy-and-Holders? They outnumber me by 10 to 1 on every board and blog at which I have posted. Have I ever once asked that they post less frequently or less forcefully? I don’t do that.

I enjoy it when Buy-and-Holders engage in a vigorous effort to make their case. It keeps my on my toes when they do that. There have been numerous times when I have learned something important from interactions with my Buy-and-Hold friends in which they were stating their case as forcefully as possible.

Why is it that the Buy-and-Holders and I have such a different take on things?

Telling the truth is never easy—especially when it comes to investing habits

It’s because I am confident in what I am saying. I don’t say that I know it all. There have been a few occasions when I have learned things through my interactions with Buy-and-Holders that caused me to change my thinking on an issue. I don’t think I am arrogant. But I am confident that I am on the right track.

There are two reasons.

One, I root my investing beliefs in the academic research, which in turn is rooted in the historical stock-return data of 140 years. That’s objective stuff, real stuff. It gives me confidence to know that my views are rooted in something real.

The Buy-and-Holders cannot say that. Their views are rooted in the research of the 1960s and 1970s. But they have never corrected their model to reflect Shiller’s finding in 1981 that valuations affect long-term returns. They know that, of course. It makes them feel shaky re just about everything they say.

Two, my primary goal is to learn how investing works. If I had a conversation with a Buy-and-Holder that convinced me that I had made a mistake, I would just correct the mistake. I don’t feel a need to defend anything because Valuation-Informed Indexing is something new enough that I think everyone understands that it remains subject to revision.

Again, the Buy-and-Holders cannot say that. The Stock-Selling Industry has been pushing Buy-and-Hold relentlessly for years now. If it turns out that there is something to the 30 years of research now backing up Shiller’s findings, this investing model was responsible for causing a huge amount of human misery. The Buy-and-Holders feel that it is too late to make corrections in their investing strategy. Their take is that too much damage has already been done.

So we are playing two different games. I engage in conversations with Buy-and-Holders because I want to teach and learn. They are not open to learning experiences. To acknowledge that it is possible for them to learn something, they would need to acknowledge that they do not know it all today. They cannot bear to acknowledge such a thing. If people accept Buy-and-Hold, they are happy. Those who do not immediately accept the strategy must either be bullied into coming around or be removed from the discussion.

I owe a lot to the Buy-and-Holders. I have learned a great deal from them. They changed our understanding of how stock investing works in fundamental ways and I think we all should be grateful to them.

As a friend, I must tell them that I think they made a terrible mistake when they abandoned the learning project. It is not a healthy situation on a discussion board or blog when one side is trying to shove its viewpoint down the throats of everyone. It’s when people of different viewpoints engage in honest and warm give and take that boards and blogs really take off.

Rob Bennett acknowledged in an article on learning from mistakes that he never should have bought that Leo Sayer album. His bio is here.

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Beyond Buy-and-Hold #69

By Rob Bennett

As we learn more about how stock investing works (and as we permit ourselves to talk over what we have learned), we will need to change the language we use to discuss the subject.

Are you a bull?

Or are you a bear?

If you are a smart investor, you are neither.

The designations “bull” and “bear” were meaningful in the days before there was academic research showing that short-term timing (changing your stock allocation because of a guess as to where stock prices are headed) doesn’t work. In the days when large numbers of investors believed that guessing where prices were headed was the way to buy low and sell high, the most important thing to know about an investor was whether he was a bull or a bear.

”Bull” and “Bear” no longer matter

For educated investors, it doesn’t matter. If you don’t believe that there is any way to tell in which direction stock prices are headed, why would you be a bull or a bear? To indulge in guesses of either type is against your self interest. Why bother?

But wait.

I have been at a zero stock allocation since the Summer of 1996. I say that stock prices will likely fall another 65 percent over the course of the next few years. I’m the meanest of growling bears. There’s no question about that, is there?

There’s a question.

I’m not a bear. Why not? Because I’m not guessing. When I say that stock prices are headed downward, I am going by what the academic research says. Valuation-Informed Indexing is a research-based approach, not a guessing game approach.

Holy self-contradiction, Batman! Didn’t I say above that timing doesn’t work? Now I’m saying that timing is a research-based concept. It is.

Long-term timing in the stock market always works

The same historical data that shows that there has never in history been a time when short-term timing worked also shows that there has never in history been a time when long-term timing did not work. Long-term timing always works. Investors who understand what the academic research says always engage in long-term timing.

I cannot tell you that stock prices are going to fall this week or this month or even this year. To do that would be to practice short-term timing. It cannot be done. Or at least so says the research.

It’s something different to say that prices are headed down and down hard in years to come. We now have 140 years of historical data showing that those sorts of predictions always work out .

So it’s not right to say that I am a bear. Being a bear has always been about taking guesses. When you say that stock prices are going to fall because of what the academic research says on the subject, you are not a bear. That’s not what the word means.

What are you?

The point of investing is not to be a bull or a bear, but an informed investor

I would say that you are an informed investor. Going by what the research says is smart investing.

How about the bulls and bears? Are they dummies?

I don’t want to insult anyone. Can we say that they are not informed about what the research says, at least according to my assessment? That sounds a little softer.

And how about the Buy-and-Holders? They follow the research showing that short-term timing doesn’t work but ignore the research showing that long-term timing always works. They are partially informed. They know enough about what the research says to be dangerous. But it is to their credit that they care about the research and I believe that in time they will come around to following not only the pre-1981 research that supports Buy-and-Hold but also the post-1981 research showing how dangerous it is to fail to practice long-term timing.

The rules of the investing game are changing. People have a hard time not thinking of those who say prices are headed downward as bears. There were many decades of investing history in which that is what you called people who believed prices were headed downward.

The label doesn’t fit in a day in which informed investors root their assessments of which way prices are headed not in guesses but in research showing how stock investing really works. I am not a bear. I’m just some fellow who thought that the Buy-and-Holders were smart to root their strategies in what the research says and who came over time to believe that those of us who follow data-based strategies should take into consideration not only the research published before Shiller published his breakthrough findings but also in the research published in the three decades since that day.

You can ask me where I think stock prices are headed and I’ll tell you. But I will never engage in any guesswork. It’s not my thing. I’m not a bear any more than I am a bull. I am an investor who informed himself about what Shiller’s research says and who came to believe that the man is on the right track.

Rob Bennett has written extensively on what causes stock price changes. His bio is here.

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