The claim that buy-and-hold is research-based is a marketing ploy.

Buy and hold is not a research-based strategy.

I once believed so. I was once a buy and hold because I heard it was a research based strategy and it was good for me. I abandoned the strategy when I noticed that the commitment among buy-and-holders to follow the research it led to was not at all strong.

Buy and hold is a marketing tactic.

I believe the majority of buy-and-holds have a sincere belief that their strategy is research-based. I have participated in thousands of interactions with buys and holders over the years and my assessment is that their confidence in their strategy is strong and deep. Unfortunately I think it’s in the wrong place. The fact that Buy-and-Hold is promoted as research-based is actually a bad thing when it is not actually a research-based strategy. The belief that it is true makes people confident about bad strategies that they might not otherwise be confident about.

Please understand that most claims made by Buy and Hold are backed by research. There is only one claim that I question: the claim that valuation-based market timing is ineffective or unnecessary. Robert Shiller’s Nobel Prize-winning research showing that valuations affect long-term returns undercuts that argument. If returns change with changes in valuation, risk is variable rather than constant, so investors who want to keep their risk profile constant over time should practice valuation-based market timing.

On this issue, not only are buys and holders not following the research, they are doing the exact opposite of what the research shows to be good practice. Shiller’s research has been available to investors for 43 years now. He received the Nobel Prize for his achievements. His findings are important. I’ve asked several of my buy-and-hold friends to list some of the ways Shiller’s Nobel Prize-winning research has influenced their investment behavior. I have never received a response to that question. As far as buyers and holders go, Shiller’s Nobel Prize-winning research does not exist.

Of course, it doesn’t bother me that there are people out there who choose to follow investment practices that are different from the ones I follow. But given my belief in the merits of using research as a guide, I can’t help but wonder why buy-and-holds choose not to educate themselves about what the research says. I have come to believe that the commitment of buys and holders to research is not what they portray. Today I would like to tell you that buy-and-hold advocacy around the idea of ​​using research as a guide is usually nothing more than a marketing ploy.

Please understand that I don’t think that’s how things started. I believe Buy-and-Holders had a sincere belief in the value of research early on, and to this day still personally believe that their strategies are consistent with research. Research has a nasty habit of discovering new things about the world around us. Research never ends. Growing and changing. When that changes, we must change with it. Those of us who fail to do so can no longer fairly refer to ourselves as followers of research.

Understanding how stock investing works

Shiller’s findings have revolutionized our understanding of how stock investing works. Before his research began, the academic consensus was that investors pursue their own interests rationally. Sounds like a good idea, right? If the idea were proven, there would be no need for valuation-based market timing. In fact, if the idea is validated, valuations may never be significantly broken. Shiller showed that investors are not purely rational and are sometimes very emotional, setting stock prices to crazy places, and that valuation-based market timing is necessary to keep the train on track.

It changes everything. Once investors become aware of how emotional they are, they may be able to control their emotions sufficiently, making stock investing a much less risky business than it was before Shiller. We can end the bull market. This will allow us to end the bear market. This means that economic collapses will not be as frequent or as destructive as in the past. Keeping investor emotions in check is a yet undiscovered continent in the world of stock investing.

Buy-and-Holders don’t care about anything. They love theoretical research. They like it very much in theory. But when new research is published that requires them to question old beliefs if they are to be taken seriously, they place a higher priority on not admitting mistakes than on learning something new by studying and discussing the new research.

That is not a pro-research attitude. This is an attitude against research. Every escape is unfortunate.

Rob’s bio is here.