I recently wrote a Guest Blog Entry for the Weakonomics blog entitled Rational Investing in Irrational Markets.
Juicy Excerpt: But wait. The market is rational. A rational market would price stocks properly. There cannot be overvaluation in a market that is rational. Belief in the one idea logically rules out belief in the other.
John Walter Russell says
Here is a reference for Benjamin Graham’s 25% to 75% allocation rules: The Intelligent Investor, fourth revised version, pages 4 and 5 and also page 74.
Have fun.
John Walter Russell
Rob says
Thanks.
Rob
Will Redman says
[also provided to the orignial blog]
The book simply does not support that as being Graham’s FOREMOST advice.
A direct scan of the applicable page, with link below, will serve our purposes nicely top prove my point. Note that he says making an stock/bond apportionment (say 50/50) and then rebalancing back to the desired allocation as the market moves, is the favored approach (he gives a 5% band as the threshold in this example).
He THEN gives the idea of trying to move based on market valuations AS AN ALTERNATIVE to the fixed allocation described above, with rebalancing.
Sorry, if that is the best support Mr. Bennett can garner for his vague system, then he has merely reinforced that Mr. Value Investor himself, Benjamin Graham, recommended the equivalent of a buy-n-hold approach, with periodic rebalancing, as is favored by Mr. Bogle, and many others.
See for yourself:
http://i30.tinypic.com/3009rip.jpg
A nearby footnote also re-enforces Mr. Graham’s early pre-eminence in recognizing behavioral issues associated with trying to pick times and values to move into and out of the market:
http://i31.tinypic.com/foqik2.jpg
Rob says
Thanks for providing the link to the page of the book, Will. That’s extremely helpful.
The material at the link does NOT say that one approach is superior to the other. It says that rebalancing is simpler. It does not say it is better. Each of the two approaches described (Rebalancing/Passive Investing and Valuation-Informed Indexing) are described as alternatives to the other.
Graham is here endorsing Valuation-Informed Indexing. He is saying that it is a perfectly reasonable approach and that it works. That’s very important, given the reaction that we have seen to Valuation-Informed Indexing at numerous web sites in recent years. Discussion of Valuation-Informed Indexing has been banned at the following sites: (1) Motley Fool; (2) Morningstar.com; (3) IndexUniverse.com; (4) The Early Retirement Forum; and (5) Bogleheads.org. The readers of all of these sites have missed out on learning about this Graham-endorsed approach because of the blind dogmatism of many Passive Investing advocates. That’s a damning reality.
Graham is not condemning Passive Investing with the strong language that I often use to condemn it. That’s fair to say. Please keep in mind that we have learned much about the emotional dangers of Passive Investing in the years since Graham wrote those words. Much of my criticism is the result of behavior I have seen among Passive Investors during the insane bull market of the 1990s. We had never before in U.S. history reached valuation levels anywhere close to the levels reached in the late 1990s. How was Graham to know before it happened how dangerous stock investing was to become as the result of the massive promotion of Passive Investing in recent decades?
Now we know. I put a post to the Motley Fool board in May 13, 2002, reporting that the studies that financial planners use to help advise us on retirement questions fail to include an adjustment for the valuation level that applies on the day before the retirement begins and therefore get all the numbers wildly wrong. We have calculated the safe withdrawal rate accurately in the time since. We learned that retirees who used the Old School SWR studies to plan retirements beginning at the top of the bubble have only a one in three chance of seeing their retirements survive 30 years. The strong likelihood is that the errors made in those studies are going to result in millions of busted retirements in days to come. Not one of those studies has been corrected as of today.
It is this sort of thing that has caused me to take so strong a position in opposition to Passive Investing. We know today to an extent that we did not know when Graham was writing those words just how dangerous this investing strategy is when tried in the real world. All investors are human and all humans are drawn to Get Rich Quick schemes. Passive encourages the belief in the fantasy that stocks can provide reasonable returns even at times of insane valuations. Making investing a far more emotional endeavor than it needs to be is not a good idea, in my assessment.
I find no fault with Graham for not possessing a complete understanding of the dangers of Passive Investing. The evidence on this point available to us today was not available to him when he wrote those words. My question is — Given that Graham endorses Valuation-Informed Indexing in the words of the Bible of stock investing, why is it that discussion of this approach is banned at numerous discussion boards and blogs?
The only possible answer to this question is — Following Passive strategies makes investing so emotional an endeavor that those who have been taken in by the claims of this “strategy” find themselves unable even to tolerate civil and reasoned discussion of the pros and cons of the two alternatives described by Graham in the words that appear to us when we click the link above.
I stand by the claim made in this Guest Blog Entry, Will. Passive Investing is emotional investing. Passive Investing is irrational investing. I have seen thousands of Passive Investing advocates insist on a ban of civil and reasoned discussion of one of the two alternatives endorsed by Graham. I have never seen even one Valuation-Informed Indexer ask for a ban on discussion of Passive Investing. That reality tells a tale, in my assessment.
Rob
Will Redman says
Rob said: “My question is — Given that Graham endorses Valuation-Informed Indexing in the words of the Bible of stock investing, why is it that discussion of this approach is banned at numerous discussion boards and blogs?
The only possible answer to this question is…”
1) He certainly does NOT endorse anything like what you are promoting.
2) The answer to the question is obvious, but is one you apparently will not hear, from reading your blog:
* There is no ban on honest posting
* Sites that hope to be of any consequence do and should ban posts and posters who are obnoxious, disruptive, or otherwise at cross-purposes with the forum’s purposes.
You, for instance, are free to moderate responses here. The sites you mention by name have always, in my estimation, moderated based on objective criteria, in a transparent and consistent manner.
You, on the other hand, seem to moderate solely based on what displeases you personally, without weighing it’s potential to be informative, it’s veracity, or it’s utility. That’s a shame, and it unfortunately leads to one inescapable conclusion, given your long and loud protestations against a dozen other sites — that you, sire, are simply a hypocrite.
Rob says
I’m not buying what you are selling, Will. Not even a little bit.
Here’s a link to an article in which I quote snippets of posts put forward by 101 community members expressing a desire that honest posting be permitted at all of the various Retire Early and Indexing boards.
http://www.passionsaving.com/investing-discussion-boards.html
Allowing honest posting benefits all of us, Will. It is by hearing what those with different viewpoints believe that we are all able to learn together.
You’re wrong on this one, Will. I’m sure of it!
Rob