Posted on July 31 2011 – 2:09 AM – Posted by: Submissions
Guest Submission by Rob Bennett
We need to come to a better understanding of the economic crisis than is possible going solely by what the mainstream media reports about it. The reality, I believe (and I can point you to 30 years of academic research supporting this view), is that it was the heavy promotion of the Buy-and-Hold investing strategy that was the primary cause.
The core idea of Buy-and-Hold is that there is no need to change your stock allocation in response to changes in valuation levels. The idea is exceedingly counterintuitive.
With everything else we buy, price makes a difference. A car with a far market value of $20,000 is a good buy at $20,000, an amazing buy at $10,000 (half of fair value) and a poor buy at $40,000 (double fair value). But we have been telling the millions of middle-class investors to put most of their retirement money in stocks regardless of the price at which they are selling. Could that work?
There has never yet in U.S. history been a time when it worked. The idea has been tried four times in the past 140 years (that’s as far back as we have records). On each of those four tries, the result was a financial wipeout for the investors who followed it and an economic crisis for the entire society.
Why would experts say that Buy-and-Hold can work if it always causes an economic crisis? Stocks pay higher commissions than most alternative asset classes. It is in the short-term financial interests of those who make their living selling stocks to persuade middle-class people that stocks are always the best buy.
Some say that this is not a political issue, that those selling stocks should be able to say whatever they please to persuade middle-class people to buy them and that it’s the tough luck of the people who fall for the marketing pitches if their retirement plans fail. But what if the middle-class people who fall for the marketing pitches do so largely because they are not able to hear the argument against Buy-and-Hold strategies?
I have told the story of the dangers of Buy-and-Hold investing at many investing discussion boards and blogs. I have been banned from all of the major boards and from a good number of the major blogs even though at every site at which I have posted many community members have expressed gratitude to me for telling them the realities. There are powerful people who very, very much do not want middle-class investors to learn how stock investing works in the real world.
Buy-and-Hold didn’t just cause lots of people to suffer lots of financial misery. It was the primary cause of the economic crisis.
Stocks were overpriced by $12 trillion in January 2000. Even John Bogle, the lead advocate of Buy-and-Hold, acknowledges that it is “an Iron Law” of stock investing that prices return to fair value over roughly a 10-year time-period. That means that those who understand how stock investing works knew in 2000 that our economy would be losing $12 trillion in buying power over the course of the first decade of this Century.
So the economic crisis became inevitable once Buy-and-Hold became popular (and discussion of its dangers became politically incorrect). Any economy that loses $12 trillion in buying power is obviously going to collapse as tens of thousands of businesses fail and millions of workers lose their jobs.
The first step to rebuilding our economy is launching a national debate on the true cause of its collapse. We need to encourage web sites to lift the ban on posting on the 30 years of academic research showing that valuations affect long-term returns and that Buy-and-Hold can thus never work for the long-term investor.