“The Buy-and-Holders Don’t Want People to Think That They Made a Mistake. And None of the Good Stuff Can Happen Until They Do. If Shiller Is Right, the Buy-and-Holders Are Wrong. That’s the Core Reality Driving All the Friction That We Have Seen.”

Set forth below is the text of a comment that I posted to the discussion thread for one of my columns at the Value Walk site:

Thousands of things to be said? Okay, just give us one thing new. We will wait for your response.

You’ve been reading the column entries as they come out, haven’t you, Sammy? There’s 400 of them. So I have made 400 points that wouldn’t have been made had I not written them. Some of them were run-of-the-mill points. Some were earth-shaking.

Since you are asking for one, I will make note of one that I have always believed was an earth-shaking point that people should be talking about all over the internet. One of the first things that I learned about stock investing many years back is that stocks are more risky than bonds. I wrote a column a while back pointing out that, if Shiller is right that valuations affect long-term returns, then it is no longer true that stocks are more risky than bonds. Investors who take valuations into consideration when setting their stock allocations reduce the risk of stock investing by 70 percent (Wade Pfau and I showed that in the peer-reviewed research that we co-authored). Stocks are highly risky only for those with stick with Buy-and-Hold strategies despite what we have learned from the last 37 years of peer-reviewed research in this field.

That’s one implication of Shiller’s Nobel-prize-winning research. And of course I have written 400 columns here. And 100 more at the Out of Your Rut site. And 100 more at the Death by 1,000 Papercuts site. And I have 200 podcasts of over one hour in length each. And I have put forward more than 100 guest blog entries. And I have 200 full-length articles on investing at my site. And I have five calculators that do things that no other calculators on the internet do. And of course I am only one person. We could have thousands of people advancing these insights on a daily basis. And we would all learn more and more and more and more about how stock investing works in the real world if they did.

There’s one thing holding us back, Sammy. The Buy-and-Holders don’t want people to think that they made a mistake or even that there is a tiny possibility that they might have made a mistake. And none of the good stuff can happen until they do. Valuation-Informed Indexing is rooted in a belief that valuations affect long-term returns. If the market is efficient, as the Buy-and-Holders believe, there is zero possibility that valuations could affect long-term returns. Shiller showed that the Buy-and-Holders made a mistake. We all need to come to terms with that if we are going to move forward. It’s possible that Shiller is wrong. Anyone can get something wrong. But, if Shiller is right, the Buy-and-Holders are wrong. That’s the core reality driving all the friction that we have seen.

I love the Buy-and-Holders. I believe that they advanced hundreds of powerful insights that have helped us all. But I don’t believe that everything that there ever was to know about how stock investing works was known in 1980. I think that Shiller’s research is legitimate research. I think that Shiller deserved the Nobel prize that he was awarded. I believe that part of the research process is that new things are learned over time, that people who truly believe in the power of research (and the Buy-and-Holders certainly claim that they do) need to accept that things that they believe may someday be challenged by future research.

I believe that, for the valuation-informed investor, bonds are today more risky than stocks. That’s huge. Maybe I am wrong. But I don’t think that I am wrong that everyone in this field should be talking about the possibility. If I am right, it’s a huge advance that we learned that. And we learned it because of the research findings of Robert Shiller, which caused him to be awarded a Nobel prize. So the stuff that I say is solidly sourced stuff. We should all be doing what we can to get as many people as possible involved in a national debate as to whether we really know today that bonds are a more risky asset class than stocks.

That’s my sincere take re these terribly important matters, in any event. I hope that helps a small bit, my good friend.

Rob