I’ve posted Entry #80 to my weekly Investing: The New Rules column at the Death by 1,000 Papercuts site. It’s called Stock-Selling Mumbo Jumbo Explained for You at Last!
Juicy Excerpt: The Stock-Selling Industry employs its own special vocabulary to cover its tracks. Rob Bennett rips the mask off these charlatans and explains in plain English what their “mumbo jumbo” really means.
arty says
Rob,
Here is a new article from your linked site and not sure you’ve read it: http://www.valuerestorationproject.com/
This guy is a good analyst.
One caveat regarding long-term value propositions is that retirees may lack the time to wait-out 10 or more years to reap the rewards. Sometimes markets stay down or go lower for many years (even if “fairly valued” by historical standards) and this is the one demographic group that cannot afford big losses because they may lack time.
Of course, and for the same reason, they should be especially careful to keep their equity percentage in check when PE/10 does not suggest good long-term value.
Rob says
Your links are always super, Arty. I did not hear back after writing to that fellow. I of course continue to love his stuff all the same.
You’re making a good point re retirees. They are more vulnerable and thus likely to be less able to stick to their plans for the long-term. That means that stocks are to some extent less suitable for them.
The thing that would help more than anything else (in my view!) is if everybody talked openly about this stuff all the time. To me, it’s all about being able to invest for the long term. We all need to hear about the experiences of others in trying to do this. So let’s talk! We all need to stop being so bashful!
Rob
arty says
Rob,
Greed and fear is always going to play large, and that will always challenge a broad acceptance of a valuations-based strategy. Point being it takes discipline to impel the knowledge such a system offers.
Now, getting whacked by Mr. Market makes these voices easier to hear, and perhaps implementation more likely. But as discipline is always essential, I doubt a great many folks (including pros) will do anything other than chase or run—as they have always done.
But I do think more folks these days are getting the message because of guys like Shiller, Hussman, Grantham, Abodeely, you, etc. But it also takes curiosity on the part of the investor to find them. Most let others handle their retirement accounts.
Rob says
Arty:
I am much more optimistic re the future than you (and, to be fair, just about everyone else alive) is on these matters.
All middle-class investors are required to invest in stocks. Most hate the idea of putting their money at risk. VII reduces the risk of stock investing by 80 percent.
This is going to be adopted by millions once we get the help of The Stock-Selling Industry. We need to persuade them to direct their hundreds of millions in marketing money to the promotion of strategies that work. For years, they have promoted Get Rich Quick. When that changes, stock investing will become a far safer and more enjoyable experience.
I think people make too much of fear and greed. The bigger problem has been ignorance — it’s hard to do the right thing when you don’t know what the right thing is. Now we do. So there is no reason to think that we will continue to make the same mistakes in future days.
True learning advances knowledge. There is no reason why things should always go around and around in circles. We just need to all get on the same page.
Rob
arty says
I can’t agree more regarding the efficacy of a valuations-based method. But for me, it’s easy.
The biggest general problem, perhaps, is that most of the money managers can’t afford to underperform, even for short periods, hence they cannot (don’t, will not) utilize the method to its fullest, even assuming they access the research and understand how it works, and even if believe it probably works better than their own short-term guesses. Those are huge “ifs”. As most of the 401ks and IRAs are professionally managed by these folks, that is a big problem.
That leaves individual investors—who manage their own money. Now, the ones that are fortunate enough to discover the arguments—and modify their ignorance, so to speak—have the best opportunity to benefit. So, yes, the more of these that can access the proper discussions, the better.
But the self-investor represents the minority. And even those who do understand the concept, must also have the discipline to implement it in contrary-seeming times that challenge the gut even as the concept is intellectually accepted.
But to reiterate, as most money is controlled by managers who are are constantly pressured to outperform on a short-term basis (and many of these, therefore, are short-term timers making their current best guesses), there are inherent huge challenges that seem difficult to arrest unless a far bigger calamity than 2008 impels change.
Rob says
You’re accurately describing the way it is, Arty. I just don’t feel that it needs to be that way in the future. My personal view is that it cannot be that way in the future. I don’t think our system can take too many more of these economic crises.
Once a significant percentage of the population (20 percent?) understands Valuation-Informed Indexing, short-term strategies just won’t matter as much anymore. Today, the guy who guesses right that stock prices will be headed up is a hero. Once 20 percent are VIIs, there are going to be huge sells any time prices start upward. So the bull markets will get cut off. The people listening to the short-term timers will get bored seeing their predictions never turn out.
I see investing as a battle between rationality and emotion. Emotion has had the edge in the past because we just didn’t know much about how stock investing works. There were few academic studies done before the 1960s. Emotion is the product of ignorance. We can overcome ignorance by educating ourselves.
There still will be people drawn to emotional strategies. That will never change. But I don’t think that group will ever be dominant again. It will become a sideshow. The average investor will just be seeking a good return at low risk and will follow the strategies that permit him to achieve his entirely reasonable goals. The industry will spend its money promoting good stuff instead of bad stuff.
I don’t think the industry wants to promote bad stuff even today. I think they have painted themselves into a corner. I think if Shiller had published his research in 1971, the title of the book would have been A Valuation-Informed Indexer’s Walk Down Wall Street.
Rob
arty says
I suppose if enough individuals who own their professionally-managed 401ks and IRAs became educated in this, then you’d see them, for example, order a switch from “Moderate” to “Conservative” selections when long-term valuations were poor and vice versa when favorable.
That is the most likely approach, actually, since then (while it still may not entail indexing) they could at least mandate their equity exposure under the conservative-moderate-aggressive rubric. And that would truly matter.
I could not agree more re: the battle between rationality and emotion. I see it the same way. I also hypothesize, as you, that had the studies been available sooner, things might be better. But there is a lot of hope with that. I’m guessing the emotion will always be the winner until we receive enough of the systemic shocks to motivate. Even then. Why wasn’t irrational exuberance 2000—and its bear— not enough? Why not 2008 just a few years later? See, it has to get *really* bad frequently enough. Then, maybe. Remember, most folks believe that stocks always go up in the long run. And they do. Sort of. It’s the short run that can eviscerate, though.
But a vision of a better tomorrow is good. And there are signs things may be improving as this info is more readily available. When Shiller was getting going, only the ivory tower inhabitants could be in the know. Now all the curious can know. But many have to be taught that getting curious is necessary, and not just listening to what some advisor says.
Rob says
Why wasn’t irrational exuberance 2000—and its bear— not enough? Why not 2008 just a few years later?
These are the types of questions I think about every day. It’s frustrating that people are so resistant to the message.
But it of course does no good at all to lose patience with people. Once you lose patience, the game is over.
So I have to figure out — Why?
It’s that we really don’t know much. That’s scary. So we pretend we know more than we do. That gets us into trouble. The more trouble we are in, the more scared we are, and the more we cling to old beliefs. It’s very much a vicious cycle.
I just don’t think it has to continue forever. I think the bad place we are in today is an historical quirk. We picked up some pieces of the puzzle before we picked up other pieces and thereby came to get a mixed-up idea re how things work. But we will grow out of that.
But a vision of a better tomorrow is good.
I see this as my most distinguishing characteristic. I don’t think there’s anyone else out there who has a vision of the future that is one-fifth as positive as mine. I don’t think Shiller has anything close to a complete understanding of how wonderful his insights are. And I don’t think Bogle has anything close to a complete understanding of how wonderful his insights are either!
It’s going to be super cool watching the good stuff start to dawn on people.
Rob