Re Clark M. Blackman's letter to Bob Veres
The following is in response to Clark Blackman’s article last week, Glass Houses? An Open Letter to Bob Veres.
I must thank Mr. Blackman for cogently laying out the argument for buying and holding versus attempting to actively manage client portfolios, and for recognizing Bob Veres as someone who helps the industry discuss matters that give rise to passionate debates about what is best for clients. In this case, I am responding to several points raised by Mr. Blackman in his letter.
Mr. Blackman asserts that “the more sophisticated group (of advisors) consists of those who stayed calm and rational in the face of a stampeding herd spooked by fears that things could only get worse.” As someone who spent the first sixteen years of my career as a buy and hold, strategic asset allocator, I would respond that there is nothing sophisticated about buying and holding asset classes in any market environment. Anyone can do it, and it doesn’t take much time, energy, research, or expertise. It does take an abiding belief in one of two things: either the investor believes in the theory behind buying and holding, or the investor doesn’t believe in the theory, but believes there is no better alternative.
The theory of buying and holding rests on many misguided assumptions, beginning with the efficient market hypothesis. Efficient markets theory rests on the principles that the economy is not subject to structural change and that investors have perfect economic foresight. Both of these central ideas were disproved with the bursting of the tech bubble, the real estate bubble, and now the credit bubble, not to mention academic research led by H. Woody Brock, Mordecai Kurz, Robert Shiller, and many others. To deny that endogenous risk exists, or to deny that economic regimes can change, strikes me as an extraordinary argument to make in such turbulent times.
Mr. Blackman does an excellent job of addressing the second issue with active management, when he says that it can’t be done. If I tell you I can “day trade” by buying the market at its low price and selling at its high price, and can earn 1,000% per year on my money, the correct response would be that the comment doesn’t deserve a serious reply because the assertion is impossible. It can’t be done, so why discuss it.Display article as PDF for printing.
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