We are in complete agreement re this one, Evidence.

I think it would be a good thing if fewer people were worried about investing in stocks. I love stocks as I think they are the ticket to financial freedom for middle-class Americans. The less scary they are, the better, so far as Rob Bennett is concerned.

You expect people to pay the same after the volatility is removed as they did before.

You’re leaving out the change that would take place by providing people the tools they need to invest effectively. I believe that investors are capable of making rational decisions. But only if we provide them the tools and information and support they need to do so. I am the fellow saying that we should open the internet up to honest posting on investment-related topics. That would make a huge difference. You cannot compare the world we live in today with the world that would come into place if we provided people with the information they need to be able to make sense of stock investing for the first time.

So, as your friend used to say “Have Fun”.

Here’s backatcha, Evidence!

Rob

The “marlarkey” thing is emotion, Evidence. None of us follows every strategy we hear about. We take what we like and leave the rest behind. To evidence hostilityto a strategy that lots of other people find valuable is a sign of a lack of confidence in the strategies that you have elected to follow. You need to get over that. Hate is not a sound long-term investing strategy. I’m sure of it!

The way that I would say it is, if there is a portion of your money that you are not going to make any use of for 30 years, you are virtually certain to get a solid return for putting that money into stocks regardless of valuation levels.

If you follow a Buy-and-Hold strategy for your entire portfolio, you need to be prepared to deal with a loss of 80 percent or more of your entire portfolio (the loss was 80 percent when we got to a P/E10 level of 33, but we went far beyond that in the late 1990s). Not recommended.

But, if you are talking about keeping 20 percent in stocks regardless of price, I think that makes good sense. Even an 80 percent loss on 20 percent of your money is not necessarily a huge deal. And, yes, so long as you hold those shares for 30 years, you will end up with a good return in the event that stocks perform in the future anything at all as they always have in the past.

Rob

Its hard to work out what piece of the puzzle you are missing. I think it’s the emotional side.

The reason why stocks have sold for only 14 times earnings is that they are volatile. People are afraid of that. Remove the volatility and the price that people will be willing to pay will rise. Without volatility there is less reason to fear stocks.

You expect people to pay the same after the volatility is removed as they did before. This would not happen. You don’t seem to understand human emotions.

Anyway I am traveling for a while so I won’t be able to reply any further for a period of time.

So, as your friend used to say “Have Fun”.

So if my investment horizon is longer than 30 years I should ignore this Valuation Informed Indexing malarkey?

At 10 years out, what you are saying is so, Evidence.

At 60 years out, it is not at all so. At 60 years out, the price paid makes just about no difference. Try entering different valuation levels into The Stock-Return Predictor and then compare the returns paid at 60 years. You’ll see that the starting-point purchase price has little effect at 60 years out.

At 30 years out, the starting-point purchase price has a small effect. But for practical purposes I would say that valuations don’t matter much at 30 years out.

Valuations matter from about Year 5 through about Year 25. The effect is greatest at Year 20.

Rob

There is no one alive who believes more strongly that the price paid affects the return obtained, Evidence. From one perspective, what you are saying here makes all the sense in the world.

Still, it’s a reality that stocks pay an average long-term return of 6.5. This is an objective fact.

If you pay more than fair value, you get a 10-year return of a lot less than 6.5 If you pay less than fair value, you get a 10-year return of a lot more than 6.5. So, yes the price you pay does matter. A lot.

At the end of 30 years, though, the price you pay doesn’t matter much. At the end of 30 years, it’s not valuations that affect your return but the productivity of the U.S. economy. At the end of 30 years, your return is close enough to 6.5 that the valuation level that applied at the time you made the purchase doesn’t matter than much anymore.

I don’t get the relevance of this to the questions being discussed above.

We agree that valuations matter (to the extent you really believe this — you have indicated elsewhere that you do not believe it). But the fact that valuations affect long-term returns does not rule out the possibility that the return on stocks is determined by the productivity of the U.S. economy rather than by some sort of market negotiation.

Different things control the investor return at different times. In the short-term, it’s investor emotion that sets prices (and, thus, returns). At 10 years out and 20 years out, it’s valuations that determine returns. At 30 years out and 60 years out, it’s the productivity of the U.S. economy that is the most important factor.

Where is the evidence that market returns are set through some sort of market negotiation (that investors are rewarded for taking on risk)? There is none. There never has been any. This has always been just an assumption. Moreover, It is an assumption that is not supported by either common sense or the historical record.

The evidence supports a belief that the stock return is determined by the profit-generating potential of the underlying businesses. That’s where the money comes from that shareholders receive in the way of returns.

There’s an old saying from Watergate days that reporters need to “Follow the Money.” Follow the Money here and you see that stock returns are ultimately a function of the profits of the underlying businesses. There is no market negotiation going on. That is a one of the “myths and urban legends” of the Buy-and-Hold model being criticized by Rob Arnott in his recent criticism of this model.

Rob

Because you dispute that investment return is set by a market process.
The example shows that the investment return is set by the market price that you pay for the investment.

You’ve left out an explanation of why you view this question as relevant to the discussion.

Rob

If the owners paid $1,000 or $10,000 or $100,000 makes a huge difference in the investment return.

An example.

Company A makes certain profit each year.

Year 1 $1000
Year 2 $1010
Year 3 $1036
Year 4 $1026
Year 5 $1038

Assuming all profits go to the owners then the owners make $5110. Easy so far.

What percentage return did the owners make on their money ?

Can you answer that question Rob or is there a piece of information that I have left out?