Shiller P/E (does it matter?)

Coffina: One metric that I've been looking at a lot recently is the Shiller price-to-earnings ratio, and this metric uses 10-year average of real GAAP earnings in the denominator. The advantage is that it's been much more predictive historically of future total returns than one-year price-to-earnings ratios, which really hold little to no predictive value. A one-year price-to-earnings ratio will tell you, for example, that the valuation looked in line with historical norms right up to the financial crisis, and then it actually peaked in late 2009, after the recovery was already well under way.

In contrast, the Shiller price-to-earnings ratio was at relatively high levels, about the 80th percentile relative to the last 25 years, or in other words, it had been lower 80% of the time in the lead-up to the financial crisis. And then in the depths of the financial crisis in late 2008 and early 2009, the Shiller price-to-earnings ratio was seeing levels that it hadn't seen in 20-plus years.

So, the Shiller P/E tends to be a lot more predictive of future total returns, and that measure right now is at about 26, which is about the 68th percentile relative to the last 25 years. So, in other words, the market has in general been cheaper, based on this measure, 68% of the time since the late 1980s. That's certainly a cause for concern based on recent history.

So, what we've seen historically is that any time the Shiller P/E is above, say, 25.5, which is about the 60th percentile relative to the past 25 years, subsequent total returns for investors have been very poor, on average in the low-single digits, with some very severe drawdowns

Glaser: So should investors then be preparing for a big sell-off, or a repeat of 2008?

Coffina: It's very, very hard to say. It's one thing to say that the market is richly valued relative to historical standards. It's a completely different thing to say that this means stocks are going to decline over the next one year, three years, or even five years. As I mentioned, in 1996 and in 2002, the S&P 500 was valued at similar levels and went on to have a great run over the next five years until it ended in a crash. So even over a time period as long as five years, saying that the market is relatively richly valued relative to history doesn't tell you much about what stocks are actually going to do in the near term.

Glaser: Over the next 10 years, then, from these valuation levels, what kind of total return should investors be thinking about?

Coffina: Well, that's a great question, and I wish I had a better answer for you. It's going to largely depend on what happens to price-to-earnings ratios. I mentioned before that over the last 25 years, the Shiller P/E ratio took a big step up versus the prior 100 years. The measure used to be around 14-15. Over the last 25 years the norm has been more like 23-24. So anyone who is looking at a measure like this in, say, the early '90s would have decided that, say, 1992 was a great time to sell stocks, and they would have missed out on the '90s bull market, and even through the 2002 crash, they would have missed out on total returns in the high-single digits.

There's definitely a caveat to this whole kind of analysis; market conditions can change, and past is not necessarily a good indicator of what's going to happen in the future. In particular, in the environment that we're in right now, if interest rates stay as low as they are currently, that can certainly justify sustained higher valuation levels going forward. I'm not saying that's going to happen, but it's certainly possible.

[8/24/14 Mitch Zacks chimes in]

Currently the CAPE ratio is flashing some warning signs as it hits levels that have previously been seen only before some of the major market sell-offs of the past century. Interestingly enough, however, valuation multiples based on trailing twelve-month earnings and future earnings estimates are showing a market which is expensive but not unusually extended given current interest rate levels.

The question for investors is, of course, whether the high reading of the CAPE ratio should prompt a reduction in equity exposure.

Now, I am a little biased as Zacks created the quarterly consensus earnings estimate which effectively enables valuation multiples to be calculated based on forward looking earnings data. P/E multiples based on analysts' earnings estimates show a market that is more expensive than historical, but not at the eye-popping levels shown by the CAPE ratio. Despite this bias, at the end of the day, I do not think long-term equity allocation should be adjusted based on the current high reading of the CAPE ratio.

First and foremost, I have learned over many years it never makes sense to time the market. It does not work. It does not work if you react to newsletters, earnings trends, IPO activity levels, discounted cash flow models, P/E multiples, gurus, magazine articles, tea leaves or sunspots.

In fact, one of the few metrics that does seem to have some value in terms of predicting future market performance is interestingly enough, tracking what Wall Street investment strategists—the analysts who set equity and fixed-income exposure of brokerage firm model portfolios—are recommending to investors and promptly do the opposite. The reason this methodology may work is that by the time multiple strategists are calling for the market to go in a certain direction, the information they're responding to is already reflected in stock prices. As a result, the market surprises by reacting to new information and moves in the opposite direction. This rule of thumb would currently indicate increasing equity exposure as many of the strategists are recommending a reduction in equity exposure.

Additionally, there are a few problems with the CAPE ratio. All the methodologies of calculating P/E multiples are designed to compare current prices to future expected earnings. There is agreement amongst investors that the key metric in stock market valuation is future earnings.

No one buys a stock such as Apple ( AAPL ) based on what the company earned over the past twelve months. Investors instead focus primarily on what AAPL will earn in the future and whether those earnings are greater than expectations currently built into the stock's price. As a shareholder of AAPL, you are valuing the company based on the future theoretical dividends AAPL can potentially pay as opposed to the historical dividends it has paid. The past earnings data, however, is often used as benchmark for predicting what the future will bring. Want to know what Apple will earn next year? Look at what they earned last year and then estimate how many more iPhones they will sell.

The CAPE ratio makes the assumption that historical ten-year inflation adjusted earnings are a good predictor for corporate earnings over the next ten years. As a result, the CAPE multiple is showing an extremely high level because current stock prices are being compared to trailing ten-year historical earnings.

Essentially, ten-year historical corporate earnings numbers may not be a good predictor of the future as they include the years 2008 through 2010 when corporate earnings were incredibly depressed due to the financial crisis. Therefore, an investor's faith in the CAPE ratio as a predictive tool of future market performance comes down to whether or not corporate earnings will revert to historically depressed levels.

This depends to some extent on whether the financial crisis is seen as a recurring event or a once in a seventy-five year outlier. I am certain the financial crisis is an outlier as opposed to a recurring event, and as a result, the CAPE ratio is likely not as meaningful as it has been at other times.

Corporate Earnings, Inflation and Interest Rates

Unfortunately, another argument why corporate earnings will mean-revert is because corporate profit margins, which are at all-time highs, will move back to historical lower levels. This argument has a stronger leg to stand on because if wage inflation starts to pick up, corporate profit margins should come under some pressure.

As I have written numerous times before, the market's P/E multiple is higher than its historical average primarily because interest rates are substantially lower than what they have been. If interest rates remain below historical levels then the market's valuation is reasonable. It all comes down to whether wage inflation materializes. If it does, the market will be in for some rough sledding with decreasing corporate profit margins while the P/E multiples come under pressure due to rising interest rates.

Despite my anticipation of inflation as a result of quantitative easing, no inflation has actually materialized for more than two years. The trillions of dollars sloshing around the fixed income market buying and selling U.S. government bonds is telling us that interest rates are expected to remain low for quite some time. The yield on the 10-year would be below 3% only if inflation was expected to remain incredibly low for a very long time. 

Though I am convinced that once the yield on ten-year U.S. government bonds starts to revert to its historical levels, stock market valuation multiples, regardless of how they are calculated, will come under pressure. Ultimately, the future direction of the market is going to be dependent on whether interest rates remain low or inflation returns to the system.

So Where Is the Market Headed Now?

While I do not think the market is at a dangerous level of valuation, I do feel that future returns in the market will be lower than they have been over the past five years. Rates are going to have to go higher and valuations are going to have to come down.

[That's safe to say.  The past five years have returned 16.58% mainly because it doesn't include 2008 which returned -37.00%.  The returns have been (starting in 2009): 26%, 15%, 2%, 16%, 32% (for an average of 18%, 16.58% for the five years from today).  AAPL returned 147%, 53%, 26%, 33%, 8% (for an average of 53%!, 34% for the five years from today).  AAPL dropped 57% in 2008.]

200 years of the stock market (actually only 189)

I'm a glutton for historical numbers, especially pertaining to stocks. Awhile back I came across a post that had a histogram of the overall stock market returns since 1825. More on the numbers shortly...

Prior to reading that post, I was already aware that, from the end of 1814 to the end of 1925, the U.S. stock market experienced compound annual growth of about 5.8% per year. This is based on data put together by Robert Shiller, and this measure used a price-weighted index, which has many flaws but is the way that most of the indices are measured today.

To use a different time period and a different yardstick, Buffett once mentioned that the Dow went from 66 to 11,219 during the 100-year period during the 20th century, which is a 5.3% CAGR. Adding dividends to that figure, and shareholders might have realized 7-8% annually or so.

To use a third historical time period, I noticed in Buffett's annual shareholder letter that the S&P 500 has averaged 9.8% annually over the last 49 years (since he took over at Berkshire).

I think the last 200 years provides pretty good evidence that over the very long term, I feel comfortable expecting the market to average somewhere between 6% and 9% annually including dividends (if I had to guess, I'd be closer to 6 than 9).

Take a look at the last 189 years of general stock prices:

Some anecdotes I find it interesting to observe the results of 189 years between 1825 and 2013:

• The market had 134 positive years and 55 negative years (the market was up 71% of the time)
• 44% of the time the market finished the year between 0% and +20%
• 60% of the time the market finished the year between -10% and +20%
• Only 14% of the time (26 out of 189 years) did the market finish worse than -10%
• Only a mere 4.8% of the time (fewer than 1 in 20 years) did the market finish worse than -20%

So to put it another way (using the 189 years between 1825 and 2013 as our sample space), there is an 86% chance that the market finishes the year better than -10%. There is a 95% chance the market ends higher than -20%. And as I mentioned above, there is a 71% chance that the market ends any given year in positive territory.

One last observation: the market was 5 times more likely to be up 20% or more in a year (50 out of 189) than down 20% or more in a year (9 out of 189)!

Now, lest my readers suspect me of predicting further gains... let me make it clear that I'm not trying to make a case that I think the market won't or can't go down, or even go down a lot. On the contrary, after 5 years in a row of not just positive years, but exceedingly above average gains, we are certainly "due" for a down year. After all, the market finished the year down 29% of the time over the past 189 years, or about once every 3 or 4 years.

I just think that it's difficult to predict when the down year--and certainly when the next big crash will come. Make no mistake, the market will crash from time to time. The economy will suffer another credit crisis. It's just difficult to know when. The stock market certainly will go through another 10% correction in the near future. It will likely go through a 20% correction in the near future. There have been 12 of those corrections since the mid-'50s when the S&P 500 index was instituted, or about one every 5 years. We haven't had one since early 2009 so we're due for one of those as well.

Although certain to happen again, crashes are rare. The 2008 type scenarios are extremely rare. Only 3 times since 1825 did the market finish a calendar year down 30% or worse. That's about once every 63 years. People tend to overestimate the probability of a market crash when one recently occurred. The storm clouds of 2008 are in the rearview mirror, but they are still visible and the effects of the storm still evident.

They key thing to remember is that when you own a stock, you own a piece of a business. Graham's logic is as simple as it is timeless. It really helps to remember that you don't own numbers that bounce around on a screen, you own a business that has assets, cash flows, employees, products, customers, etc. Just like the owner of a stable, cash-producing duplex located in a quality part of town isn't frantically checking economic numbers or general stock index prices on a daily or weekly basis, nor should the owner of a durable business that produces predictable cash flow – purchased at an attractive price – be concerned about the day-to-day fluctuations in the quoted price of his share of the company.

As Munger said, sometimes the tide will be with us and sometimes the tide will be against us, but the best thing to do is to just continue to swim as competently as we can. Although ocean tides are much easier to predict than the direction of the stock market, I still think it's best to focus on swimming as opposed to anticipating the changes in the tides.

-- John Huber, Base Hit Investing

understanding the business

Many investors equate understanding the business to understanding the product or service of the business. I certainly wasn’t too far from that line of thinking in my earlier investment journey. I was ignorant enough to think that Coca-Cola, MasterCard and Wal-Mart were without doubt within my circle of competence. I don’t drink Coke, but I certainly know what Coke is. Heck, better yet, I even know Cherry Coke and Diet Coke. I have two credit cards that have MasterCard sign on them and I use them very often. I also go to Wal-mart occasionally. How could I not understand these businesses? They are part of our daily lives.

It all changed when I heard the following message from Mr. Buffett in his talk to UGA students:

“I have an old-fashioned belief that I can only make money in things that I can understand. And when I say ‘understand,’ I don’t mean understand what the product does or anything like that. I mean understand what the economics of the business are likely to look like 10 years from now or 20 years from now. I know in general what the economics of, say, Wrigley chewing gum will look like in 10 years. ”

It was truly a "eureka" moment for me because I have taken it for granted that "understand" means understand what the product does. We all know how to use a credit card. But that doesn’t mean we understand MasterCard. For readers who think you understand MasterCard, I challenge you to answer the following questions about MasterCard. What is the business model of MasterCard? What is MasterCard’s gross and net margin and why? Why would banks issue credit cards with MasterCard, and why do merchants accept them?

... I hope by now, you can see the differences between understanding the product of a business and understanding the economics of the business and why it matters enormously to us. It is the difference between knowing the name of something and knowing something, which are two levels of understanding. Very often we understand both the product of a business and the economics of the business as our research moves along, but great danger remains when we mix up those two concepts, especially when it comes to the brands that are ubiquitous in our daily lives.

-- Grahamites

the nature of long-term investing

I think it's in the nature of long term shareholding of the normal vicissitudes, in worldly outcomes, and in markets that the long-term holder has his quoted value of his stocks go down by say 50%. In fact, you can argue that if you're not willing to react with equanimity to a market price decline of 50% two or three times a century you're not fit to be a common shareholder, and you deserve the mediocre result you're going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.

-- Charlie Munger, BBC interview

Lazy Investing

here are 10 “think-like-an-amateur” secrets from our “Lazy Person’s Guide to Investing.” (review) Ten simple ways to get into peace-of-mind investing.

3. Peace of mind from knowing advisers have no special skills either

Actually it’s worse. Nobel economist Daniel Kahneman also used the casino metaphor in “Thinking, Fast and Slow,” neuroscience. Based on “50 years of research” he found that the “stock-picking skills” of managers and advisers is “more like rolling dice than like playing poker.” Their picks are no more “accurate than blind guesses.” In fact, “this is true for nearly all stock pickers ... whether they know it or not ... and most do not.”

5. Peace of mind: realizing markets are irrational, unpredictable, dangerous

Wharton School of Finance economist Jeremy Siegel, author of “Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies,” researched 120 of the biggest up and biggest down days in the stock market, the last two centuries. In only 30 of those big-move days did Siegel find a reason for market movement. In other words, 75% of the market’s biggest twists and turns in history were irrational and unpredictable black swans. Bottom line: 100% of the time Wall Street’s just guessing.

6. Peace of mind is deciding never to actively trade in the stock market

Active trading feeds anxieties and stress and kills peace of mind. Behavioral-finance professors Terry Odean and Brad Barber of University of California studied 66,400 portfolios at a major Wall Street firm for seven years. Three key factors reduced their returns: their stock-picking skills, transaction costs and taxes. Active traders averaged 258% portfolio turnover annually. But turnover was a mere 2% for buy-and-hold investors. Yet they earned seven percentage points more than the active traders.

8. Peace of mind means never trading on hot tips and emotions

Yes, the stock-picking and trading skills based on “gut feel” is invariably a loser decision. A Morningstar study says most investors get in and out of the market at the wrong time. Irrational exuberance fuels a buying frenzy at the top. Investors jump in, buy high, lose. Then when the market drops, they panic, sell, lose. You want peace of mind? Build your Lazy Portfolio.

9. Peace of mind vs. overconfidence: Your brain may be your worst enemy

A behavioral-finance study reported in Money magazine concluded that 88% of all investors have what psychologists like Kahneman call “optimism bias,” overconfidence. We take big risks, handicapping ourselves, lose. Then we make excuses. Over half the overconfident investors who think they are beating the market often underperform by 5% to 15%. But they can’t admit failure, so never learn. Bottom line: Our brains are often our worst enemies.

10. Peace of mind: Most day-traders don’t make a living, eventually get out

In the end, you wake up to the fact that trading is not the get-rich promises that overly optimistic newsletter gurus want you believe. Yes, you can trade online for a few bucks a pop. But you can still make lousy picks. Lose fast and furious. Another Odean-Barber study revealed that as many as 75% of traders lose money. And even the rare successful traders rarely make more than $100,000 a year. As David Dreman put it in his New Contrarian Investment Strategy, “Market timers, if they don’t die broke, rarely beat the market.”

[by Paul Farrell via roy]

see also Six Rules for Lazy Investors

follow the billionaires

Investors looking for a one-stop “buy and forget” guru-following strategy now have a couple of exchange-traded funds to choose from.

In June, I compared the Global X Top Guru Holdings Index ETF (GURU) to its chief competitor, the AlphaClone Alternative Alpha ETF (ALFA). Today, I’m going to throw a new index competitor into the mix: the iBillionaire Index. An iBillionaire Index ETF is in the works as well, though the sponsor did not have a specific launch date.

Let’s take a quick peek at each of these guru-following strategies and highlight their differences. At first glance, you might think the strategies are interchangeable and that there is no value in adding another “me too” ETF. But the strategies each have unique features that can make each better than the others under the right set of market conditions.

ALFA was the first guru ETF to come to market, beating GURU by about a month. It also happens to be the most complex of the three. The AlphaClone index ranks hedge fund managers by a proprietary system and equally weights their top holdings. There is an allowance for overweighting if a stock has multiple guru owners. For example, a stock held by twice the number of managers would have twice the weighting in the index.

ALFA has one other noteworthy feature: It has a “dynamic hedging” mechanism that allows it to be up to 50% short during a prolonged market downturn. In ALFA’s case, the ETF will shift half of the portfolio into an inverse S&P 500 fund when the S&P ends a month below its 200-day moving average.

GURU, which is based on the Solactive Top Guru Holdings Index, runs a simpler strategy. GURU’s portfolio is simply an equally weighted mix of the “high conviction” picks of the hedge fund managers that Global X follows. Only managers that run concentrated portfolios are considered, but beyond that, there really is no other criteria.

The iBillionaire Index takes a slightly different approach. To start, it limited its pool of gurus to “financial billionaires,” or money managers who have amassed personal fortunes of over a billion dollars.
But secondly — and most importantly — its holdings are limited to constituents of the S&P 500. Per iBillionaire,

“It is composed of the top 30 large-cap equities listed on the S&P 500 in which financial billionaires have allocated the most funds, providing ample trading liquidity, a well-known benchmark, and better results to equity indexation than capitalization-weighted indices. Devised from 13F filings, the iBillionaire Index provides investors an efficient and effective way to follow the smart money. In essence, the index works as though one gathered a group of billionaires and asked them to come to a consensus as to which S&P 500 stocks are the best bets.”

With that said, which guru-following ETF strategy is best?

It’s really going to depend on the kind of market you’re in and what you’re using as a benchmark. ALFA’s ability to go short is a tremendous asset in a sustained bear market and will almost certainly cause it to outperform GURU and iBillionaire’s index. But in a sideways market or a volatile zig-zagging market (not exactly technical terms, but bear with me), it’s going to get whipsawed. It’s the curse of all trend-following models — they only work in a trending market. And in a long bull market, it won’t have any effect at all.

ALFA also has a small market-cap bias; Morningstar classifies it as a “mid-cap growth fund.”  GURU is considered a “large-cap” growth fund by Morningstar. iBillionaire — when its ETF is released — will likely have an even greater large-cap bias, as its mandate limits it to companies within the S&P 500.

I’ll summarize like this: If you think we might see a prolonged bear market, ALFA is the ETF for you; if not, GURU or an ETF based on the iBillionaire Index would likely be your better option.

***

article links

Brains vs. Brains: Which ‘Guru’ ETF Is Right for You? (6/13/13)

Your Newest Guru Investing Option: The iBillionaire Index (11/13/13)

iBillionaire To Launch New Billionaire-Tracking Guru ETF (2/21/04)

Investing Like A Billionaire With The iBillionaire ETF (8/2/14)

Want to invest like Buffett and Soros? Try this (8/3/14)

Buffett on the market valuation

As stated in the GuruFocus' "Where are We With Market Valuations?" article, "as pointed by Warren Buffett, the percentage of total market cap (TMC) relative to the US GNP is “probably the best single measure of where valuations stand at any given moment.”

What were his comments in a December 2001 Fortune article about the market in 2000?
Memorably he stated that "the ratio rose to an unprecedented level. That should have been a very strong warning signal."

[It reached 148.50 on 3/30/00]

What was the percent return of the S&P 500 after the Market Cap/GDP reached that "unprecedented level?"

[it dropped 43.1% in three years]

Has there ever been another time when Buffett touted a “very low-cost index?”
As stated on Reuters.com in the Buffett: Index funds better for most investors article by Jonathan Stempel dated May 6, 2007, “Buffett said at a press conference,” “A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money.”

What was the Market Cap to GDP at that time?

[110.70 on 6/30/07]

What was the percent return of a “low cost” ETF that tracks the S&P 500 from May 6, 2007 to March 2009?

[it lost 53.6%]

What is the Market cap to GDP today?

122.3%

Considering the "best indicator where valuations stand," is currently near previous highs, might Warren actually be estimating that by the time his trustee is needed, the Market Cap to GDP will be at much lower levels?

If the valuation ratio reverts to those historical lows of 40%, and we are currently at 122%, does that mean a near 67% drop is possible?

Buffett's real secret

Buffett's real secret, beyond the IQ and emotional hard drive, is optimism. Berkshire is just a big levered up play on the economy. Trains, ice cream, Coke and banking. Buffett's famous for saying 'be greedy when others are fearful,' but what his real gift is believing in America and levering up on it. He generates cash betting against super catastrophic events in insurance and uses the money to bet against the collapse of the economy. That's been his formula for more than 60 years. If you take nothing else away from Buffett's notes it's that the richest man in the world got that way by betting against Doomsday. There's a lesson in that for all of us.

the biggest problem investors face

For years, there have been two principle adjectives used to describe the buy-and-hold investment style: Dead or alive.

The buy-and-hold style was, of course, labeled as dead during and after the financial crisis of 2008, when anyone who stayed with their investments saw their portfolios get cut in half.

The same style is purportedly now alive and well, as anyone who stuck it out after their losses -- or jumped into the market after the turmoil -- has seen a years-long rally that has recouped the losses and reached record highs.

Truthfully, the problem may be less with the style and more with the adjectives, because at least one leading money manager and behavioral finance expert now suggests that buy-and-hold is unrealistic and impossible.

This week, Natixis Global Asset Management committed $1 million to a three-year research project by the Laboratory for Financial Engineering at the Massachusetts Institute of Technology to help figure out how investors can bridge the emotional gap between a desire to generate superior investment returns and an aversion to taking risk.

In discussing the project, Andrew W. Lo, director of the Laboratory for Financial Engineering -- and manager of the ASG Diversifying Strategies Fund (DSFAX), a Natixis issue -- noted that the research is designed to tackle the really tough part of investing, the one where you put your hand back in the fire after you've been burned.

Standard advice typically amounts to "the market will be up in the long run," encouraging buy-and-hold for decades.

"That might sound like good advice because on paper when you take a look at the S&P 500 ($INX) over the last 10, 20 or 30 years the performance looks pretty good the longer you go," Lo said during an appearance on "MoneyLife with Chuck Jaffe." "The problem is that advice is just not realistic. You can't expect an investor to live through 2008-2009 and be perfectly happy to see their investments decline by 50 percent.

"You literally would have lost half . . . nobody is going to be rational to the point of not taking that information and reacting to it," he added. "We are all emotional in that context."

As a dedicated long-term investor, I can argue that point empirically by looking at my own portfolio, which went through the financial crisis virtually unchanged, with just a few small moves on the fringes but with the primary investments remaining the same.

I can also think back to those rough market times, however, and remember the nausea as the core of my portfolio was being gutted.

That emotion, in hindsight, is precisely why pure buy-and-hold can be, for most people, unrealistic.

Whether it is making moves on the edge of a portfolio or hiring a money manager who adapts and tries to guide the portfolio, it's basic human nature to want to avoid pain.

Lo compared it to a different human imperative.

"It's not credible to say to an investor, 'Here's a stock index fund, you ought to just keep your money in it and don't worry about it and leave it there for 10 or 20 years,'" he said. "That's like telling a teenager he or she ought to abstain; it might be reasonable advice in the long run, but in the short run it's very difficult to follow."

No matter what strategy investors opt to follow -- whether it is buy-and-hold or some rapid-trading, momentum-driven methodology -- the necessary personal ingredient for success is emotional discipline, the ability to stick it out.

C. Thomas Howard, director of research at AthenaInvest and author of "Behavioral Portfolio Management," told me recently that the biggest problem investors face comes in accepting an investment strategy and following it as it is; they pick a strategy that they understand and like, follow it easily during good times, but then have a tough time the moment they question a trade, a stock pick or the results in the market.

"You can't invest like a great investor if you're not investing just like that investor," Howard said. "You start to think you know better, or that there's just this one thing they are doing that you don't like, and suddenly you are changing. Now you are not following a successful system, you are modifying one; that may work out for you, or it may not."

Howard noted that by cherry-picking the parts of a methodology they like -- but ignoring or changing moves they're less comfortable with -- investors typically give themselves the wrong scapegoat for when something goes wrong. Invariably, they blame the adviser, newsletter editor, investment service or guru for failing when it was their own moves that altered the strategy.

"There's lots of ways to make money in the stock market, to be successful," Howard said. "The key is that you have got to master your emotions, follow a narrowly defined strategy, and consistently take only high-conviction positions over time."

Bring that back to the buy-and-hold strategy and recognize that the market is going to test your conviction. Ultimately, that's what leads Lo to say that buy-and-hold forever can't be done, even if most behavioral-finance guys say that it's the strategy investors might benefit the most from.

That said, investors need to do some self-examination and perhaps give their portfolio several different approaches, one where the core of their holdings is something as simple as buy-and-hold, but where there is enough money being invested in other ways that it creates enough conviction to stay invested in good times and bad.

In the end, it may not be that buy-and-hold is dead, impossible or unrealistic so much as it's that one piece of a puzzle for those investors who stomach it as one strategy in a multi-pronged attempt to come up with a portfolio they can live with in all market conditions; if you can't live with buy-and-hold when it feels more like a fruitless duck-and-cover play -- if you don't think you can witness the carnage of 2008 all over again and remain invested -- then you need to prepare for the days when the market again punishes buy-and-holders.

Knowing that now means you can protect against a downturn; finding out too late guarantees that your story will include the worst outcomes at the worst times.

***

in response, check the comments at the end of the article

Warren Buffett would also disagree.

“Unless you can watch your stock holdings decline by 50% without becoming panic-stricken, you should not be in the stock market.” – Warren Buffett

“If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?  Many investors get this one wrong.  Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall.” – Warren Buffett

[Actually, I think the article is largely correct as it describes the behavior of most people.]