Thanks very much for posting the link, Arty. I don’t agree with what Bernstein is saying here. But he does an excellent job of presenting the other side of the story. He is highly intelligent and fair-minded. So I encourage all reading these words to listen to his take.

It certainly is true that today’s P/E10 number includes some years in which earnings were depressed. That’s what it is supposed to do! You don’t want only super-good years or only super-bad years. You want a mix. By including 10 years of earnings rather than one year, you get more of a mix. P/E10 is doing its job here!

The more important point is that he is missing the emotional side of the story entirely. He talks as if it is economic developments that cause stock return changes. All Buy-and-Holders do that — that is what the model teaches. Valuation-Informed Indexers believe that the correlation works the opposite way. It is stock price changes that cause the economy to do well or poorly.

Huge bull markets cause 20 years of poor stock returns. There is not one exception in the historical record. 20 years of poor returns cause millions of people to cut back on spending. The spending cutbacks cause an economic crisis.

The economic crisis can come to an end only when investors have reached a point where they have overcome the anxiety they feel over having lost so much money. We need to fall to one-half fair value before that can happen — after investors have been fooled by a bull market, it takes prices that low to persuade them to give stocks a chance again. To get to one half of fair value, we need to see a 65 percent price drop from where we are today.

All that Bernstein says makes sense from the standpoint of someone who believes in Buy-and-Hold. I am happy to give him that much. I don’t believe in Buy-and-Hold. So it doesn’t add up for me. But, again, I do encourage all who have ever listened to any of my words to listen to some of Bernstein’s words to hear an intelligent presentation of the other point of view.

Rob

P.S. I once asked Bernstein to tell the Bogleheads Forum what he thought of The Stock-Return Predictor (he and I were participating on the same thread back in the Morningstar days). He declined to respond to the question. I think that says something about the level of confidence he possesses in his ideas (no dig intended at the man, just at the ability of these ideas to inspire confidence in otherwise intelligent and fair-minded people).

TWO Bears in ten years slammed earnings and skews the Shiller metric.

They only look at it from this perspective because they are Buy-and-Holders, Arty.

Say that once we got to a P/E10 of 25 they had taken a look at the academic research and the 140 years of historical data and had warned everyone to drop to a stock allocation of 20 percent or so because we would soon be seeing three or four bear markets that would be so devastating that they would be causing a prolonged economic crisis. If they had been saying that all along, would they be even a tiny bit surprised today to see that we have actually experienced two of those bear markets? Obviously not.

The problem with Get Rich Quick investing schemes is that you have to engage in fantasy thinking to be able to maintain a belief in them and fantasy thinking always ends up hurting you in the end. This is one of the reasons why I believe it would be a good idea to permit honest posting on safe withdrawal rates and many other critically important investment-related topics.

There are always going to be some of us who give in to the obvious appeal of Get Rich Quick thinking. There are also always going to be some of us who resist that temptation. Permit honest posting and we always have access to both sides of the story. That gives us a fighting chance at seeing the downside of Get RIch Quick and perhaps working up the energy to resist its call on our weak human nature.

Once honest posting is banned, we are in a death spiral and the only way we can get out is by having the entire society (including non-stock-investors) suffer an economic crisis. I believe that we are too rich a society today to survive the sorts of economic crisis we have seen in the past every time Buy-and-Hold strategies have become popular.

The more wealth you possess, the harder the trip down when you lose just about all of it (the drop from a P/E10 that is three times fair value to a P/E10 that is one-half of fair value is a loss of five sixths of the accumulated wealth of a lifetime). I believe that things have reached a point where we are either going to need to open the internet up to honest posting on safe withdrawal rates and other critically important investment-related topics or see the entire show come to an unfortunate end.

I think you know which outcome I am rooting for and which outcome I believe is the one that millions of us will come to endorse on the final page of our little saga, Arty. We’ll see.

Rob