The Spirit Of Indexing
Humor
(With apologies to Virginia O'Hanlon, Francis Pharcellus Church
and The New York Sun ... and Santa Claus*)
Dear Editor:
I am 88 years old and my younger friends tell me that buy-and-hold investing doesn’t work anymore and is dying. Please tell me the truth: Is there any hope under the sun for passive investing?
Bill
Dear Bill:
Your new and younger friends are wrong. They have been affected by the market turmoil of the new era. They do not believe what they should have learned from long experience. Everyone overreacts to what has happened in the immediate past and forgets what they’ve seen over longer time periods. Each investor is but a small part of the total market, wishfully thinking he will know the time the tide will turn. In this world of markets of ours, it is the long run that counts, when the market weighs results, instead of the short run, when it votes by popularity.
Yes, Bill, buy-and-hold investing lives and works. It exists as certainly as mean reversion exists and the importance of low fees and diversification exist, and you know that they are here and continue to drive the market. Alas, how boring the world would be if everyone could truly predict the markets. There would be no challenges and no winners in the investing game. No systems, no recommendations, no technicians and no market timers. We would have no one to question or complain about. The eternal challenge of the market that fills the world of investing would be extinguished.
Not believe in buy-and-hold investing? You might as well not believe in IPO run-ups! You might ask your discount e-broker to watch the markets and catch those who never trade because they have only bought and held. But even if he never found them, what would that prove? They are quietly watching their portfolios grow and tending to their 401(k) plans. The most real things in investing are those that neither investors nor academics see in the mathematics: that predicting the market is incredibly difficult and that being right twice in a row is even more difficult.
You may tear apart an active mutual fund to see what makes it miss the market, but there is a veil of cost over it that eclipses the returns of even the strongest portfolio manager. Only experience in watching the markets over years, nay decades, can hint at the true picture of its linkage to earnings and the economy through herds of bulls and mobs of bears and herds of bulls again as tides of investing style and fashion flow in and out. Ah, Bill, there is little else of abiding results but buying and holding indices.
No buy-and-hold!? Thank Markowitz, Bogle, Fama and French that it lives on, gathering ever-larger indexed assets! A thousand corrections, nay Bill, 10 times a thousand corrections from now, buy-and-hold will still be justified by low costs, diversification and mean reversion.
Happy investing!
The Editor
*as well as to any and all who feel they were, or were not, mentioned
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