“I Would Feel Better to Have Many, Many More Participating in the Discussions”

Last Sunday’s blog entry set forth the text of an e-mail that I received from Adam Butler, Director and Wealth Management & Portfolio Manager at Butler, Philbrick & Associates. Set forth below is the text of my response:

Adam:

Thanks so much for writing. Your note brought a good bit of cheer to my Saturday afternoon.

I would love to have a telephone conversation with you and Mike. My telephone number is 540-751-0685 (that’s in Virginia). I work from home, so I am available at most times. If you let me know in advance when you will be calling, I can be sure to be by the phone at that time.

I have not yet looked over the work reported on at your site. I am certainly going to do so. I wanted to get a response to you quickly. Then, after I get some other work I need to complete out of the way, I will spend some time looking over the materials at your site.

Please understand that all of the findings reported on at my site are tentative ones. My view is that we need a national debate on the realities of stock investing. I would like to see thousands of smart people contributing to these discussions. I felt an obligation to take a stab at addressing some of these questions. But it’s only by talking things over with lots of others that we can come to have strong confidence in our findings. I’ve enjoyed feedback from a good number of people (both experts in the field and ordinary investors) over the past eight years. But I would feel better to have many, many more participating in the discussions that we have been having in the Retire Early and Indexing discussion-board communities.

I am not a numbers-skilled person (I am a journalist). The four calculators at my site are the work product of a partnership that I enjoyed with John Walter Russell, the former owner of the www.Early-Retirement-Planning-Insights.com site. John died in October 2009. I wish that he could respond to your questions because he would give you sharper responses. I will take a stab at answering your questions. But I encourage you to take a look at John’s site (ownership of it was passed to me after his death) as well:

http://www.early-retirement-planning-insights.com/index.html

The two places to get started at his site are the Foundations section and the Guidelines section:

http://www.early-retirement-planning-insights.com/foundations.html

http://www.early-retirement-planning-insights.com/guidelines.html

John found a reasonably strong statistical correlation between the P/ E10 level that applies on a given date and the return earned 10 years later. He found an even stronger correlation at 15 years and at 20 years:

http://www.early-retirement-planning-insights.com/Year-10-PE10-Real-Return.html

http://www.early-retirement-planning-insights.com/Year-20-PE10-Real-Return.html

I believe that the difference between what you have found and what John found is that John generally used data from 1921 forward. He did indeed find a weaker correlation when using the data going all the way back to 1870:

http://www.early-retirement-planning-insights.com/Year10-PE10-Full-Data.html

http://www.early-retirement-planning-insights.com/Year20-PE10-Full-Data.html

It was John’s belief that the earlier data was not as relevant to the working of today’s market because economic conditions were so different. My understanding is that different researchers follow different practices re how far back to go. John used the data going back to 1870 when making very long-term predictions (those going 40 years out or more) because he felt that there was not enough data to make such predictions using only the data from 1921 forward.

I am not sure what you mean when you say “intermediate valuations provide little guidance to long-term returns.” Perhaps this point will be clearer to me after I read the material at your site.  This appears to me to be an important point that I want to explore more carefully.

Here are two graphics that relate to the work John did in the SWR area (the “Historical Surviving Withdrawal Rate” is our term for referring to the concept that is now generally referred to as the “Safe Withdrawal Rate” — we rejected the idea that just because a particular withdrawal rate happened to survive in a small number of tests that it could properly be deemed “safe”):

http://www.early-retirement-planning-insights.com/HSWR80T2-Graph.html

http://www.early-retirement-planning-insights.com/HSWR50T2-Graph.html

You might want to take a look at the article “The 4 Percent Shocker”:

http://www.early-retirement-planning-insights.com/4shocker.html

You also might want to look at “Our Strong Theoretical Foundations”:

http://www.early-retirement-planning-insights.com/strongfoundations.html

“The Logical Sequence” also might be helpful:

http://www.early-retirement-planning-insights.com/logicalsequence.html

Finally, I think that “Using All of the Data” is an important one:

http://www.early-retirement-planning-insights.com/usingalldata.html

I hope that I have not buried you in material. John and I had been working this on a full-time basis for nearly eight years when he died in October. So I get excited when I have a chance to share our findings with interested parties.

I hope to hear back from you about a time at which to have a telephone conversation to thrash some of this out. I can participate to only a limited extent in discussions of technical statistical questions as I do not possess expertise in this area. But I have written extensively about the big-picture implications of these findings, which I believe are huge. And I certainly need to hear both the good and the bad of what others with expertise see in the work that John and I did together.

I’d be grateful if you would let me know how you found about my site. I wrote several articles about my calculators at the www.ValueWalk.com site in the past few weeks. If it happened that that is where you found out about me, I want to let Jacob Wolinsky (the owner of the site) know that he has been a big help in spreading the word about all this.