Vanguard Founder John Bogle in a recent video interview with the IndexUniverse.com site offered an almost-but-not-quite endorsement of the Valuation-Informed Indexing strategy, the investing strategy explored at this site. Bogle’s comments come in the wake of a growing wave of opinion that the Passive Buy-and-Hold strategy long advocated by Bogle has been proven a failure by last year’s stock crash.
“Big moves out of stocks should not be done at all,” Bogle told interviewer Jim Wiandt, publisher of the www.IndexUniverse.com site. But “tactical asset allocation — I should say strategic asset allocation rather than tactical — can be done at very rare times, so rare and so difficult to observe, maybe six times in an investor’s lifetime, three times when the market is stupidly high and three times when stupidly low.”
Valuation-Informed Indexing rejects the idea that Passive Investing (sticking with the same stock allocation even when stock valuations change dramatically) can ever work in the real world for the long-term investor. This strategy is rooted in the Rational Investing model (the alternative to the now-dominant Passive Investing model), a model that accepts the academic research of the past 28 years showing that valuations always affect long-term returns. Valuation-Informed Indexers adjust their stock allocations as needed to keep their risk levels roughly constant rather than keeping their allocation levels constant and thereby permitting their risk levels to get wildly out of whack from what they had determined was right for them when they set them. Thus, Valuation-Informed Indexers lost far less in the crash and will be benefitting from greatly enhanced compounding returns for decades to come. The historical stock-return data shows that there has never yet been a time in U.S. history when Passive Indexers have done better than Valuation-Informed Indexers although there have been many cases in which the valuation-informed strategy soundly beat the passive strategy.
Bogle distanced himself from the position advanced by Mel Lindauer (author of The Bogleheads Guide to Investing) during his Campaign of Terror against the Vanguard Diehards discussion-board community (which expressed great interest in learning more about Valuation-Informed Indexing); Lindauer said that those who follow valuation-informed strategies are not properly thought of as “Bogleheads” and that it is “dangerous” for indexing boards to permit civil and honest discussion of the academic research of the past three decades showing that valuations affect long-term returns. In contrast, Bogle invited those who find appeal in valuation-informed strategies to “be my guest” in following them (and presumably in discussing them amongst themselves and with any of their friends who happen to be Passive investors).
However, it cannot be said that Bogle gave a full and clear endorsement to the new indexing strategy, a strategy developed by the thousands of members of the Retire Early and Indexing discussion-board communities participating in the controversial series of discussions collectively known as “The Great Safe Withdrawal Rate Debate.” He expressed skepticism as to investors’ ability to take advantage of the message of the historical data, saying that Valuation-Informed Indexing works only “if you can pick the times” to make the necessary allocation shifts. “I don’t do it myself — I’m not smart enough to,” the Vanguard Founder (and father of the Indexing Revolution) added. Bogle did not offer any explanation of why he does not view himself as “smart enough” to follow this exceedingly simple strategy (but his expression of concern over picking the right times to make allocation shifts suggests that he may not yet possess a clear understanding of the key distinction between short-term timing and long-term timing — that picking market high and lows is not necessary for success as a long-term timer).
Still, Bogle made two major concessions that no big-name Passion Investing advocate has made before.
First, he conceded (in the words quoted above) that Valuation-Informed Indexing is a strategy, not a tactic. Passive dogmatists have often played word games in which they pretended (perhaps to themselves as well as to others) to acknowledge the academic research of the past three decades while ignoring a key finding of that research — that changing one’s stock allocation in response to price changes works only when applied strategically (to obtain long-term benefits) and not when employed tactically (to obtain short-term benefits). The historical data shows both that tactical (short-term) timing never works and that strategic (long-term) timing always works. Bogle’s acknowledgment that the benefits of long-term timing are strategic rather than tactical is potentially a highly significant development; Passive Investing dogmatists have long taken advantage of the general public’s confusion over what the academic research says about timing (that short-term timing is a bad idea and that long-term timing is required for long-term success) to thwart efforts of investors to learn the realities of stock investing by planting the suggestion that advocates of Valuation-Informed Indexing are promoting a doomed tactical change rather than a common-sense strategic one.
Second, he noted that knowing when to lower or increase one’s stock allocation “might not be quite as difficult as it seems.” This statement suggests that Bogle has been educating himself about the message of the historical data in the months since the crash. There have been numerous good discussions of the merits of Valuation-Informed Indexing at the Bogleheads.org board since September 2008, when the ban on discussion of the academic research of the last 28 years was eased but not entirely lifted.
Wiandt imposed a partial ban on discussion of the investing realities at the www.IndexUniverse.com site after first expressing excitement about publishing articles on the Valuation-Informed Indexing strategy and then learning from his senior editor (who has ties to Mel Lindauer and other “leaders” of the Bogleheads.org board community) of Lindauer’s position. However, Wiandt too has evidenced a softening in recent months. His site recently published an article by Rob Arnott, former editor of the Financial Analysts Journal, arguing that most of the conventional investing wisdom of today (insights developed under the Passive Investing model) is the product of “myth and urban legend.” Arnott has said that we are today living in the early days of a “revolution’ in our understanding of how stock investing works.