I’ve posted Entry #51 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called Am I Crazy for Saying What I Do About the Stock Market?
Juicy Excerpt: The first argument in support of the claim that I am crazy is that I put forward such outrageous claims. I don’t just say that Buy-and-Hold has a few flaws, I describe it as the most dangerous Get Rich Quick scheme ever concocted by the human mind. I say that the promotion of Buy-and-Hold caused the economic crisis. I say that Valuation-Informed Indexers take on only one-fifth of the risk taken on Buy-and-Holder and yet earn higher returns. There is not anyone else alive on Planet Earth making these claims today. When one person’s claims are that far removed from the norm, it is evidence that that person is crazy.
Arty says
Rob,
Of course, you are crazy. Even a crazy person can see that.
But your primary position (Shiller-inspired) concerning valuations, has been shared by some experts who are, at present, deemed to be not crazy.
And being out of the stock market for 14 years, in itself, does not make you crazy. Everyone, regardless of the modalities that inform their decisions, has unique abilities to assume risk. If yours enable you to sleep well, that sounds dangerously reasonable.
Even Shiller said he wasn’t buying-in at PE/12 (March lows) but not sure what he actually did—and who cares? Someone else who uses PE/10 may have scaled-in and scaled-out over the last 14 years, as expected. Or remained happily conservative with buy and hold, like with a Harry Browne approach. Or they got blasted by taking on too much equity risk.
The correct decision for an individual is his alone.
But you are still crazy and thus entertain, terrify, and inform the masses.
Don’t know if Irene is threatening you but stay safe in the hurricane.
Rob says
Of course, you are crazy.
Thank you for pointing that out, Arty.
This is the thing I don’t get about the Buy-and-Holders. They call me crazy with this tone that carries a suggestion that they view being crazy as a bad thing.
Huh?
“I’m Down” is a crazy song. If you look at the UTube video (I recommend this), Paul McCartney is shouting out words in which he is registering some sort of complaint. But at the same time he is dancing around and laughing and just having a great old time being alive. It’s crazy in a good way.
Do the Buy-and-Holders really not get this?
It’s always nice to hear your voice, Arty. My expectation is that we will see a big rainstorm but nothing too scary.
Rob
Rob says
Yikes! I forgot the link!
http://www.youtube.com/watch?v=X7dHoEmUtIs
Rob
Arty says
Nice link. Great song.
Stay well and stay crazy! As you have seen, either through fear or grudging respect, folks do pay attention to crazy.
Peace.
azanon says
Rob,
When are you going to say something different? It’s like you make the same post over and over. In short, use P/E 10 to determine when to buy stocks, above P/E 15 is risky, P/E 15 is fair priced, and below is a great price. Ok, we got it.
Maybe you could start making recommended stock percentages based upon the current P/E 10 level?
azanon says
If you can’t take that next step towards helping others apply your advice, such as what stock percentages to have, then there are going to be a great number of people who don’t find your advice very useful.
Right now that’s what buy-and-holders have over you. They not only have a different philosophy, but also they go that next step and give (in their case) age adjusted recommended allocations.
I realize the P/E 10 method doesn’t consider age as important, but that’s besides the point. You could still make recommended allocations based on a given P/E 10 level but, to my knowledge, you haven’t done that yet.
Rob says
When are you going to say something different? It’s like you make the same post over and over.
This is so true and so funny!
The only message I have really put forward for nine years now can be reduced to two words — Valuations Matters.
And the killer is — even the Buy-and-Holders agree with that statement!
What the heck is all the noise about?
Thanks for stopping by, Azanon.
Rob
Rob says
You could still make recommended allocations based on a given P/E 10 level but, to my knowledge, you haven’t done that yet.
I don’t think that’s entirely so, Azanon.
Actually, I don’t agree with your suggestion that the Buy-and-Holders do this either.
Are you saying that Bogle would be willing to give one stock allocation that all investors of a certain age should adopt? I don’t think he would. I think he would say it depends in part on one’s risk tolerance.
I think Bogle is right about that. Age is a factor. And risk tolerance is a factor. And the life goals you are pursuing is a factor (you should have a different stock allocation if you are planning to start your own business in five years than if you are not). Bogle and I agree on all that.
The only part re which we disagree is that I say that valuations is a fourth factor that should be taken into account and Bogle does not recognize this as a factor that needs to be considered.
Again, though, this hardly sounds like a difference of viewpoint that should be generating any significant controversy. How did this ever become such a biggie for the Buy-and-Holders?
Rob
azanon says
“Actually, I don’t agree with your suggestion that the Buy-and-Holders do this either.
Are you saying that Bogle would be willing to give one stock allocation that all investors of a certain age should adopt? I don’t think he would. I think he would say it depends in part on one’s risk tolerance.”
It’s not a matter of agreeing or disagreeing when conclusive evidence is available. There are recommended allocations all over the place that follow the buy-and-hold method. I believe Bogle recommends as a default 100 minus your age in stocks. So does Bernstein.
“Risk Tolerance” actually shouldn’t ever be a factor for either your method or the buy-and-hold method because, depending on which method you’re using, one could derive a theoretically ideal portfolio, and to deviate from it would be to, mathematically, increase risk. Also, the solution to preventing someone from selling at a bad time is education, not getting them to lower their initial stock allocation.
If you cannot identify a practical APPLICATION of what you’re teaching, then is there any point in teaching it? The application in this case would be recommended percentages based on valuations, in your case. If you (the expert) can’t even come up with one, how do you expect the layfolk to?
By the way, I disagree with you own your own method that “age” is a factor. At what age is it OK to pay too much for stocks? At what age is it ok to pass up on a killer valuation stock deal? In any event, if you consider age or risk tolerance important, you should still be able to come up with some recommended allocations that include them.
The public awaits you to derive a practical application!
Rob says
to deviate from it would be to, mathematically, increase risk.
We are coming at this from very, very different heads, Azanon.
Mathematically?
Do you see this as an exercise in mathematics?
We are talking about investing. Investing is about emotions. That’s the risk. If you ignore emotions, you lose. This is the message of 140 years of historical data and 30 years of academic research (plus simple common sense).
Mathematics has a place. I certainly make it a point to look at the numbers.
But mathematics is not the core issue here. The issue is investor emotions.
You are looking for good investing insights in all the wrong places!
Rob
Rob says
I believe Bogle recommends as a default 100 minus your age in stocks.
Does he say that that’s mathematically the right answer?
Please don’t tell me he does! You’re threatening to cause me to lose confidence in one of my heroes!
Bogle is smarter than that.
I hope!
Rob
Rob says
Also, the solution to preventing someone from selling at a bad time is education, not getting them to lower their initial stock allocation.
We disagree, Azanon.
There are thousands of community members who have put forward hundreds of thousands of posts trying to educate the Buy-and-Holders. And here we are in the worst economic crisis in our nation’s history! What good has all this education hoo-hah done any of us?
When people buy into Get Rich Quick strategies, they become emotionally invested in stocks and oblivious to efforts to educate them. We need to stop pushing the Get RIch Quick garbage and we need do that by the close of business today.
That’s my take, in any event.
Rob
Rob says
At what age is it OK to pay too much for stocks?
Your age is one of the factors that you need to look at to determine whether the price being asked is too much or not.
Say that stocks are priced to pay a long-term return of 1 percentage point per year greater than the return available from CDs. What do you do?
If you are young, you might go with stocks on the thinking that that 1 percentage point can make a difference when you include years of compounding on the differential you obtain from investing in stocks.
If you are close to retirement, you might go with CDs on the thinking that getting one point of extra return is not worth taking on the added risk of investing in stocks.
Valuations are important. But they are never the only thing you should be looking at.
Rob
Rob says
The public awaits you to derive a practical application!
The practical application is to invest rationally and to tune our the stock selling experts trying to push Buy-and-Hold on you. That permits you to retire five to 10 years sooner, according to the last 30 years of academic research.
Would you buy a car without looking at the price just because a salesman said that the dealer’s new marketing slogan is: “Cars for the Long Run”?
I wouldn’t.
I would check whether the deal being offered could be easily beat elsewhere.
I urge you to follow the same practice when buying stocks. When the deal is good, buy. When the deal is awful, stay away! And by all means tune out the marketing mumbo jumbo.
It doesn’t get much more practical than that.
Rob
Rob says
Of course this might be the first time in history that a pure Get Rich Quick approach will work out for the long-term investor.
We can’t say for sure. None of us has a crystal ball.
I wish you the best of luck with whatever investing strategies you elect to follow in any event, Azanon.
Rob