The Claim that Buy-and-Hold Is Research-Based Is a Marketing Gimmick

Buy-and-Hold is not a research-based strategy.

I once believed that it was. I was once a Buy-and-Holder myself because I heard that it was a research-based strategy and that sounded good to me. I abandoned the strategy when I learned that the commitment among Buy-and-Holders to following the research where it leads is not even a tiny bit strong.

Buy-and-hold is a marketing gimmick

I believe that the vast majority of Buy-and-Holders possess a sincere belief that their strategy is research-based. I have engaged in thousands of interactions with Buy-and-Holders over the years and my assessment is that their confidence in their strategy is strong and deep. Unfortunately, I also believe that it is misplaced. In the event that Buy-and-Hold is not truly a research-based strategy, the fact that it is promoted as research-based is actually a bad thing. The belief that it is causes people to have confidence in bad strategy in which they otherwise would not possess confidence.

Please understand that I believe that most claims made by Buy-and-Holders are backed by research. There is only one claim re which I have doubts, the claim that valuation-based market timing either does not work or is not required. Robert Shiller’s Nobel-prize-winning research showing that valuations affect long-term returns discredits that one. If returns change with changes in valuations, then risk is not constant but variable and investors who want to keep their risk profile constant over time are REQUIRED to practice valuation-based market timing.

Re this issue, the Buy-and-Holders are not only failing to follow the research, they are doing the opposite of what the research shows to be the proper practice. Shiller’s research has been available to investors for 43 years now. He was awarded a Nobel prize for his work. His research findings are important. I have on scores of occasions asked my Buy-and-Hold friends to list a few ways in which Shiller’s Nobel-prize-winning research influenced their investing behavior. Not once have I received a response to that question. So far as the Buy-and-Holders are concerned, Shiller’s Nobel-prize-winning research doesn’t exist.

It of course does not bother me that there are people in the world who elect to follow different investing practices than the ones that I follow. But given my belief in the merit of using research as a guide, I can’t help but wonder why the Buy-and-Holders have elected not to educate themselves as to what the research says. I have come to believe that the commitment among Buy-and-Holders to the research is not what they portray it to be. I would say today that Buy-and-Hold advocacy of the idea of using research as a guide is generally nothing more than a marketing gimmick.

Please understand that that is not how I believe things started out. I believe that the Buy-and-Holders possessed a sincere belief in the value of research in the early days and that to this day their personal belief is that their strategy is consistent with the research. Research has a nasty habit of discovering new things about the world around us. Research is never a finished thing. It grows, it changes. When it changes, we need to change with it. Those of us who fail to do so can no longer fairly refer to ourselves as followers of the research.

Understanding how stock investing works

Shiller’s research findings represent a BIG change in our understanding of how stock investing works. Before his research came along, the consensus academic understanding was that investors were engaged in the rational pursuit of their self-interest. That’s a plausible idea, is it not? If that idea checked out, there would be no need for valuation-based market timing. In fact, if that idea checked out, valuations would never get wildly out of whack. Shiller showed that investors are not purely rational, that at times they are highly emotional and set stock prices at crazy places and that valuation-based market timing is required to keep the train on the tracks.

That changes everything. If investors come to appreciate how emotional they are, they can gain sufficient control over their emotions to make stock investing a far less risky business than it ever was in pre-Shiller days. We could bring an end to bull markets. Which would permit us to bring an end to bear markets. Which would mean that economic collapses would be not nearly as frequent or as devastating as they have been in the past. The reining in of investor emotion is the undiscovered continent of the stock investing world.

The Buy-and-Holders show no interest in any of that. They like research in theory. They very strongly like it in theory. But when new research is published that would require them to question old beliefs if they were to take it seriously, they put a higher priority on not having to acknowledge a mistake than on learning new things by studying and discussing the new research.

That’s not a pro-research attitude. It is an anti-research attitude. It’s unfortunate as all get-out.

Rob’s bio is here.