The model in which all of the conventional investing wisdom is rooted is flawed right to its core, Tough Money. People have a hard time taking this in.

The fact that the model is flawed does not mean that there is nothing at all to much of the conventional wisdom. In many cases, the flaw causes us to see things that really are there in a mixed-up sort of way. Many of our fundamental beliefs about investing are half-truths.

The flaw is the failure to take valuations into account (the Efficient Market Theory posits that both overvaluation and undervaluation are logical impossibilities because rational investors should want to price things properly). It makes all the sense in the world to own a mix of different types of assets, some of which will do well when others are doing poorly. The problem is that, if you fail to take overvaluation into account, all may be going down at the same time (just some less than others).

When overvaluation gets as out of hand as it did in the late 1990s, it is possible to have a situation in which just about every asset class is going to be going down at the same time. The answer is to look at valuations before investing and to encourage everyone else to do so. If all took overvaluation into account, we could never get into this sort of situation. It is Buy-and-Hold (the idea that you don’t need to consider valuations when setting your stock allocation) that caused the problem.

We have to get to a point where we all feel free questioning Buy-and-Hold. Then we’re on our way to some great places.

Rob