I’ve posted Entry #36 to my weekly Investing: The New Rules column at the Death by 1,000 Papercuts site. It’s called Fear of Data.
Juicy Excerpt: In any other field, this would be the end of the controversy. The safe withdrawal rate is the product of a numerical calculation. When peer-reviewed research shows that the numbers now in use are in error, the studies generating those numbers need to be corrected. No? That’s sure how I have seen things work in all fields other than stock investing analysis. It doesn’t work that way in this field. Terms like “data” and “research” and “science” are given very different meanings when the topic at hand relates to stock investing.
Arty says
Rob,
I think the page that uses your Returns Calculator should contain a number of landmark P/E supporting charts. There is nothing so gripping as visual hard data to make fundamental points.
It might be helpful is to include a simple chart showing the *Most Likely* 10 outcomes based on the landmark PEs given below. That way, even without playing with the slider bar (which sometimes does not re-calculate the chart graphic, like now…maybe it is my PC but it sometimes does not work for me), the fundamental message is delivered in stark terms.
Thus, as you mention in your supporting text, below the chart, Predictive P/E 10s could be shown for:
Low: 5, 7
Shiller’s stated entry (interview): 10
Moderate: 14
Today (and other): 24
High: 44
I’d also include the post-2002 crash to show it was still highly valued (thus leading to 2008).
Perhaps too, you can list the P/E for each day, sort of like how there is a sign in Times Square showing the current deficit! Rounding to whole numbers should prevent having to change it too often.
Arty
Rob says
I strongly agree with what you are saying here, Arty. Actually, I have been making occasional efforts to do what you are describing for a year or so now. It was an earlier comment of yours along these lines that persuaded me of the importance of this.
The big problem that holds me back is that I have about zero ability to develop charts. I am not a numbers guy. Anything that has numbers in it and my name at the bottom is dangerous! The only way this can be done is for me to work with someone with a skill with numbers or for someone with a skill with numbers to do it on their own. Either way would get the job done. But this is not a task that Rob Bennett can handle on his own.
I talked with John about it before he died. John did indeed add a section on “Graphics” to his site. There’s good stuff there. Unfortunately, he died before he was able to build that section into something as big as what we ultimately need.
There’s a fellow named Sam Parker who has helped me with some numbers-related stuff. It might be that I could impose on him to build some things. He’s a great guy. I just don’t like to push too hard (Sam has been extremely helpful on a couple of other projects).
If you have any abilities in this area, I would of course love to be able to put up anything you came up with (or of course you could put them up at your own site if you wanted to develop one — the more people we persuade to get involved in this stuff, the better for all of us, in my view). Or if there is anyone reading these words who is able and willing to help out, I would sure be glad to hear from him or her. My e-mail is: hocusreports@Verizon.net. My telephone number is: 540-751-0685.
I think that we could provide hundreds of powerful graphics on scores of different topics. You are absolutely right that graphics make the point more powerfully than words. I am 100 percent on board re this idea. I am just sort of frustrated by my lack of abilities on the numbers side. I do appreciate you bringing it up again. It is important.
Rob
Rob says
Perhaps too, you can list the P/E for each day, sort of like how there is a sign in Times Square showing the current deficit!
I explored the idea of having a widget created for WordPress blogs that would report the most likely 10-year return and would be automatically updated for changes in the P/E10 level. Bloggers would be able to download the widget for free and add it to their blogs. I talked with a technical guy who indicated that the cost to develop this would not be at all prohibitive (we’re talking about a few hundred dollars).
I held back (at least for a time, probably not permanently) because of marketing concerns. I can develop the widget. But will bloggers who promoted Buy-and-Hold (most still do) be willing to install the widget on their sites? And will readers understand where the numbers coming from for so long as there is a ban on honest posting on investment topics in place on the internet? These are serious practical problems.
We need one or two big names to come out and declare that there are serious doubts about Buy-and-Hold. At that point, everything opens up. At that point a widget would be a hit because everyone would be talking about these new ideas and everyone (both Buy-and-Holders and Valuation-Informed Indexers) would at least be interested in checking out the widget.
As of today, we remain in the Denial Phase. As of today, the Buy-and-Holders still view a ban on honest posting as being in their best interests. I am 100 percent convinced that they are wrong. But we need to get a few people with more influence than I happen to possess to say that to open things up. My guess is that it is the next stock crash and the deepening of the economic crisis that will come with it that will do the trick (a terribly sad but probably true assessment, in my view).
Rob
Arty says
Rob,
Just type in normal text–for now–the following outcomes, repeated from my initial post, above (in a bit larger typeface):
Low: 5, 7
Shiller’s stated entry (interview): 10
Moderate: 14
Today (and other): 24
High: 44
I’d also include the post-2002 crash to show it was still highly valued (thus leading to 2008).
I think that would tell most of what is needed. You won’t need a chart. Just make it prominent. The info is the key thing here. And it is compelling support for the model. Takes minutes to do this in normal type.
BTW, I still can’t get the predictor to work and redraw the chart when I punch in different data.
Rob says
It pains me to hear that the calculator does not work for you, Arty. This suggests that it is not working for lots of others.
It is probably a browser issue. I use Safari and have never had a problem. If you’re using Explorer (I presume this is the more popular browser), that’s bad news. My recollection is that John and I tested a number of browsers for the later calculators but I don’t think we did this with the Predictor (which was the first one produced).
I will put this on my list of things to check into somewhere down the road, but it’s a long list and I don’t expect to get to this anytime soon unless I hear from a number of other people that there is a problem (It is entirely possible that there are lots of people having a problem and not letting me know out of politeness).
Rob
arty says
I use Safari and it is not working. My guess is that most folks who experience this just move on without reporting it. The world and net are just too fast for most to care if something does not appear to work.
That is one reason why I think it is important just to insert the text I suggest above, and let people see the RANGE of pertinent historical possibilities in plain hardcopy-the very ones you later discuss. Simple, no chart needed and it gets the point across with no fuss.
Later, you can move on to widgets, which are a great idea. But for now, just get that brief copy up.
Rob says
I’m grateful for your suggestion, Arty.
I agree with you that most people are not going to bother telling me about a calculator that doesn’t work. The possibility that there are a good number of others for whom the calculator is not working distresses me because people need to be able to use the calculator to see how all this stuff works.
Rob
Arty says
Just put up that little bit of hardcopy that is vital to making your P/E points. Make it prominent. No chart-making needed; use plain text. That will cover this problem and really drive the point home.
Arty says
Hussman,
There is one prominent manager who uses valuations powerfully, and also makes mention of P/E 10 from time to time. That is Hussman, who has the popular weekly column on his site. I think I mentioned him to you long ago.
Now, I don’t use his (long-short) stock fund or recommend it. (It simply isn’t needed as indexing does all that is necessary.) But he is greatly informed by valuations of your sort, and states them in his weeklies. Many on the various boards read his column, which come out each Tuesday.
If you read the archived weeklies, you’ll see what I mean. He said that he almost never gets invited on to CNBC, because when they discover his view is often negative, and supported by Shiller data and other metrics he uses, they won’t let him on! And since he won’t edit his views, you never see him there. He does interviews on Morningstar, though.
Hussman is a very bright man, educated and articulate. If you haven’t looked deeply into his writing, you might be pleasantly surprised.
Rob says
I agree re Hussman, Arty.
My personal view is that NO ONE disagrees re valuations. I learned about the importance of valuations from John Bogle. If Mr. Buy-and-Hold is on board, everyone is on board.
The difference is that some permit themselves to make use of what they have learned and others do not permit themselves to do this. If you want to keep pushing Buy-and-Hold, you must pretend (both to yourself and to others) not to understand valuations. I don’t think it is possible to believe in Buy-and-Hold (which is really just a fancy name for Get Rich Quick/Emotional Investing) without suffering cognitive dissonance.
It is not my intent to hurt anyone’s feelings by pointing this out. I do not say it as a dig. There are many smart and good people who believe in Buy-and-Hold. It is possible to be smart and good and still fall victim to cognitive dissonance. We are all human. We all have limitations. It’s not something to be ashamed of. It’s just a reality that we all need to accept if we want our economy to become able to move forward again.
That’s my sincere take re all this, in any event.
Rob
Arty says
Yeah, pretty much the educated ones all agree that valuations matter (there are many who are not educated, albeit bright, and so do not know), regardless of how they implement strategy. The biggest questions concern what to do about them. And the answers there are more varied, and inevitably filtered through personal risk factors.
The choices are easier (mechanically, not emotionally) at valuation extremes. For example, below P/E 10 and above P/E 10 30, (nevermind P/E 40) generally scream for appropriate action.
But in that middle ground it is interesting to see how folks play it. For example, I have no idea how Shiller is/was personally invested. But one could infer from his interview (in 2009 that he was waiting for P/E 10) that he was not in stocks at all. And that was about, what, P/E 12 or so at that time of March Lows. In any case, stocks offered a strong long term valuation proposition, as you mentioned in your podcasts of that time. Yet Shiller—the man who impelled this method—was (and remains) still waiting. So, no easy answers once you get past the extremes of valuations.
Note too that your words of *strong long term valuation proposition* were about simultaneous with the now infamous heretofore secretive “Plan B” revelation!
But the point remains that intelligent response to P/E 10, especially in the mid-ground, is never clear-cut, though at extremes, it should be.
Rob says
the point remains that intelligent response to P/E 10, especially in the mid-ground, is never clear-cut, though at extremes, it should be.
That sounds right to me, Arty.
We know that it is foolish to drive at a speed of greater than 90 MPH. And we know that it is silly to limit your speed to under 30 MPH when driving on the highway. But there are some legitimate differences of opinion as to whether the best speed is 55 or 60 or 65.
It may be that those differences will never be resolved. But that presents no big problem. If we can just persuade people to avoid the 90 MPH speeds that the Buy-and-Holders have been pushing for 30 years now, we will be able to pull the economy back from the cliff and everything is likely to work out more or less fine. It’s the relentless promotion of the crazy extreme stuff that is causing all the trouble.
Rob
Arty says
Agreed. The Left Tail Risk (caused by 90MPH speed) is the huge issue. If we don’t go fast enough (staying conservative), to me, that is less a crime than crashing.
At present, we are a bit accelerated, though not speeding.
DRIPGUY says
A question for Arty:
Arty, Rob just used his favorite wild-eyed claim: “If we can just persuade people to avoid the 90 MPH speeds that the Buy-and-Holders have been pushing for 30 years now, we will be able to pull the economy back from the cliff and everything is likely to work out more or less fine. It’s the relentless promotion of the crazy extreme stuff that is causing all the trouble.”
My question is simple: How can you engage Hocus in dialog, and simply overlook such manic, grandiose, and ridiculous all-encompassing claims, having no basis whatsoever?
You seem an honorable guy, and I know that discussing PE10, and all kinds of things can be rewarding, interesting, and enlightening. But are you really so blind to Robert Michael “Hocus” Bennett’s obvious difficultly separating fact from fantasy, and if not, why in the world would you give him ‘credibility’ by acting as if the things he says are not even registering with you, as you try (valiantly and remarkably I might add) to extract SOME nugget of meaning out of his babble.
You do realize it’s babble, right? You do realize he doesn’t even follow his own ‘teachings’, and that he has no plan, and as you’ve seen him admit, his innumeracy is astounding, and a bizarre point of perverse pride for him…
Anyway, just thought I would ask…. carry on….
Rob says
I ordinarily would not permit those words to appear here, Drip Guy.
This is a learning site, part of a learning community (the Retire Early/Indexing community). We don’t permit name-calling. If I permit you to call me names, other community members pick up a suggestion that I might permit you or someone else to call them names at some other time. We need people of intelligence and integrity participating here to achieve our goals. So it is part of my job to delete that sort of thing. I take that responsibility seriously.
I am making an exception to the usual rule in this case. Arty has participated a good bit at the Bogleheads forum and it may be that he can share some perspective that would aid in a healing process. That would of course be a good thing. So I have let your words appear and Arty can decide whether he wants to respond to them or not.
Please don’t read into this any indication on my part that the rules for participation here have changed or that I am giving thought to no longer honoring my responsibilities in this area. The next post that you submit that contains name-calling will likely be deleted. Say what you have to say without resorting to garbage talk or else please find some other place at which to put the garbage talk forward. It is not welcomed in the Retire Early/Indexing Community. We do not need the business that bad, my old friend.
Rob
Anonymous says
Hi, Dripguy,
To the Rob quote you mentioned, above, I do agree, as would Shiller and many, that extreme far-right valuations represent “dangerous road conditions”. And I’d add that this might apply not just to “buy and holders”.
Every year I have some intermittent discussions with Rob, usually around holidays or when I am of from work. I do understand he is quite enthusiastic on his views. Indeed, he can be exhausting, and perhaps does not recognize well-supported contrary views as well as I wish he would. Rob knows that and I know this going-in.
I understand the frustration some might feel with Rob, and I believe he can do much better with his dialogue approach. But this is sometimes also said of me, and it is not upon me to teach anyone else better discourse methods. What would he say if I suggested thus? I assume others have already done this. Maybe you have.
Rob and I do agree on some basics, and that “valuations matter” is likely the main of them (of course, many experts do not dispute that.) In fact, I first discovered Shiller and PE/10 long ago because of Rob, which is why I have returned here occasionally to say “hi” and chat. I do read the various investing boards when I can, and have found some discussion of PE/10 there too. Rob and I also agree that emotions can matter greatly in investing, as looking at any discussion board, and even its leaders, will pointedly demonstrate.
Rob and I do NOT agree on some central points. I do believe there is a buy and hold approach that accomplishes much of what he (or Shiller) might intend with P/E 10, though I feel it lies in what we might call a more conservative approach to investing that recognizes the “fat tail” events of the bearish kind—the wealth killers. PE/10 seeks to avoid that with long range timing, of course. I am hopeful Rob can recognize the validity of this approach to buy and hold and I am not sure the approaches are mutually exclusive (especially at extreme levels). But I think he’ll likely pass. It’s OK.
While I think Shiller’s PE/10 concept and Rob’s tools that use them are fascinating, I am not sure if they are very useful beyond the extremes of valuations—the broad middle. I have tried to examine this, and have not been successful in finding acceptable solutions for their general use, either by me or elsewhere. Rob seems to feel committed to his views and solutions. Perhaps Shiller does too. Though, I have indicated that even Shiller is still waiting for a better time to buy than March 2009 (as per his own words). He waits still. And if I used the Shiller tool, I would never be wholly out of stocks.
I suppose had PE/10 a definite utility, its use would long since have been employed by experts whose livelihoods depend on outperformance. PE/10 would have “changed everything” in that area. It hasn’t. Though, there again, we might agree that institutional managers have other ways to make money from us and may not seem popular if they were lagging the market as a whole—something that a Shiller model must sometimes do.
My question to you is given your position about Rob, why do you return here ever and read his articles and posts? You clearly have some history with him.
Happy New Year!
Rob says
That’s an pow-pow-powerful response, Arty. Thanks for taking the time to craft it and share it with us all.
We obviously don’t agree on all questions. My personal belief is that that is a healthy and good thing and my sense is that you pretty much (or perhaps entirely) agree.
You have said some things that help me see a bit into the minds of those who disagree with me on investing topics (there are still two or three who fit this description, amazingly enough). My expectation is that I will return to these words from time to time to try to review insights that may help me in my efforts to communicate effectively with those who are skeptical re my message.
You see, Drip Guy? Even a Goon can on occasion bring about something good! (I’m joking around — kinda, sorta.)
Rob
Arty says
Rob. Not sure what happened. My response to Dripguy says “Anonymous” on it!
Arty
Rob says
I don’t know why, Arty.
But everything appears to be cool.
Rob