Investing-The New Rules: Bogle on the Hot Seat

Is the Buy-and-Hold strategy a bunch of hooey?

Uh oh. Rob Bennett puts investment advising guru John Bogle on the hot seat. Find out what ensues in this week’s edition of Investing–The New Rules.

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Investing — The New Rules
Bogle on the Hot Seat

#17–August 23, 2010

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I want to put Vanguard Founder John Bogle on the hot seat.

Bogle is the most popular investment advisor alive today. He is also the lead advocate of the Buy-and-Hold strategy. If Bogle were to announce in clear and unmistakable terms that he thinks Buy-and-Hold is a big bunch of hooey, I think that would be the end of it.

Why would I think that Bogle would say that Buy-and-Hold is a big bunch of hooey?

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Because that’s what he believes! He’s said so in public statements!

Not directly. That’s why the farce continues. But he has said it indirectly many times.

Bogle has said that he believes that valuations affect long-term returns and that he thinks it is critical that investors “stay the course.” If valuations affect long-term returns, investing in stocks carries more risk and offers less reward at times of insanely high prices than it does at times of reasonable prices. So investors seeking to stay the course need to lower their stock allocations at such times. Does that not follow?

That ain’t Buy-and-Hold. That’s the opposite of Buy-and-Hold. Buy-and-Hold is the investing strategy that posits that investors do not need to change their stock allocations in response to price changes. So John Bogle, Mr. Buy-and-Hold, is himself a major critic of the Buy-and-Hold strategy. Weird, huh?

It’s weird. And dangerous too.

Most investors have an inclination to engage in self-deception. When stocks are insanely overpriced, as they have been for most of the time from 1996 forward, we like to fool ourselves into thinking that it’s not such a big deal. When Bogle says that Buy-and-Hold can work, he is feeding that fantasy.

I think that’s part of the explanation for why he does it. Buy-and-Hold always proves to be a disaster for the investors who follow it. But it markets well. It brings in huge bucks for The Stock-Selling Industry from which Bogle made his millions.

If Bogle were a politician, there would be reporters asking him about the obvious contradictions in his “platform” on a daily basis. He might duck the questions. But at least we would get to watch him squirm on UTube. That would cause a good number of us to lose confidence in the man and his ideas and better men with better ideas (I don’t mean just me — there are lots of people who have become aware of the dangers of Buy-and-Hold in recent years) a chance to gain traction. That’s how this dynamic society of ours works when it is working well — good ideas beat out bad ones in the court of public opinion.

I first suggested putting Bogle on the hot seat in a post that I put to the Vanguard Diehards board back in February 2007 (See Post #38 — “hocus” was my screen-name). Bogle was speaking to a meeting of the group that met at that board and I announced that I would be attending to ask him some questions about valuations and the inconsistencies in his investment advice. The response I received from the people in charge of the meeting, two of the co-authors of the book “The Bogleheads Guide to Investing,” did not suggest to me that Bogle’s lead supporters possess much confidence in his ability to handle tough questioning.

The e-mail I received disinviting me to the event stated: “Our Diehards get-togethers are private social meetings of friends and like-minded souls who love, admire and respect Jack Bogle and his teachings. You’ve constantly misquoted, distorted and disrespected Jack Bogle and Bill Bernstein. Your latest post “Jack Bogle’s Big Mistake” was, in our opinion, the final straw. Jack and Bill both join us at our private events because they enjoy meeting with friendly, like-minded Diehards in a relaxed and secure atmosphere. We want them to continue to enjoy and attend our private social events. Therefore, we regret to inform you that you will not be allowed to attend.”

Yucko!

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ALSO at DBKP:
* Investing-The New Rules: Price Drops are Good News
* Investing–The New Rules: The Lily Tomlin Approach
* Investing–The New Rules: Young Investors Taking Hardest Hit
* Planning for Retirement: Retirement Riddle
* Investing–The New Rules: The Godfather Visits InvestoWorld
* Investing–The New Rules: Determining Stock Value Using P/E10
* Investing–The New Rules: The Monster That Ate the U.S. Economy
* Investing–The New Rules: Stocks Are Not Worth Buying Today
* Investing–The New Rules: Sarah Palin Will End Economic Crisis
* Investing–The New Rules: Dollar-Cost Averaging is a Loser
* Investing–The New Rules: John Bogle’s Evil Twin?
* Investing–The New Rules: Stock Return Predictor Not a Case of ‘Too Good to be True’
* Investing–The New Rules: The Stock Investor’s Weather Report
* Investing–The New Rules: Harness the Power of The Stock Return Predictor

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I agree with “Uphaus”, the community member who said the following (Comment # 85) : “Perhaps you all (including the invited speakers) are comfortable with such a version of a “restricted covenant” (is there a consent form that needs to be signed?), but what it tells me is there is a blackball procedure which I find morally disquieting. The very idea that Jack Bogle’s “safety” (or anyone else’s) would be an issue [see Post # 65] puzzles me, and the notion that the invited speakers need to be “protected” from disagreement really is astonishing.”

I take particular exception to the suggestion that, because I have let Bogle know of mistakes he has made and asked that they be corrected, I somehow lack love and admiration and respect for the man. I see the reality as being entirely to the contrary. Yes Men are not showing affection and respect by agreeing with everything that a Big Shot says; their flattery is rooted in a selfish desire to take the easy path to success. I point out Bogle’s mistakes to him because of the respect and affection I feel for him. I deal with him in the manner in which I would want him to deal with me if the tables were turned.

Bogle is not a politician. But the investing approach that he has been pushing hard for decades now has had a more negative effect on the economic and political system of this nation than has any government program pushed by any politician. Middle-class investors are now trillions in the hole and there are serious people today saying that, if steps are not taken to deal with the economic crisis, we all (Bogle included!) may end up living through the Second Great Depression.

We all should be doing all that we can to put Bogle and the other Buy-and-Hold advocates on the hot seat. Not because we are meanies. Because we have enough genuine respect for these people to understand that it was not their intent starting out to cause the second biggest economic crisis in U.S. history and that, if they possessed a better understanding of the realities, they would be working with us to bring this madness to a full and complete stop. It’s by working up the courage to ask Bogle some questions that he very much needs to struggle with that we show that our love is the real thing and not some pose we adopted to help sell a calculator or a book or a study or a web site.

I don’t want people telling me I’m great when I’m messing up. I count on my friends to take me aside and explain the facts of life to me so that I stop messing up as soon as possible.

I’ve learned a lot from John Bogle. I think of him as a friend.

Jack — you messed up, man! Please fix, you big dummy!

by Rob Bennett
images: dbkp file

Rob Bennett often writes about safe investing strategies. His bio is here. And please don’t even think about failing to read these Important Cautionary Words.

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