I’ve posted Entry #96 to my weekly Investing: The New Rules column at the Death by 1,000 Papercuts site. It’s called Why Wall Street Doesn’t Want You to Know the Truth About Stock Investing: Part Two.
Juicy Excerpt: The financial press is toothless. Politicians who mess up get grilled. But reporters in the investing field are intimidated by the quasi-scientific claims made by Buy-and-Holders. It’s a special few who are able to work up the courage to ask hard questions of a John Bogle or a Warren Buffett or a Robert Shiller.
Evidence Based Investing says
Valuation-Informed Indexing would reduce the risk of stock investing by 80 percent while increasing returns and greatly diminishing the odds that we will see future economic crises.
Your lack of understanding of stock investing is profound. If VII did “reduce the risk of stock investing by 80 percent” (which it wouldn’t) then the price that people would be prepared to pay for those less risky stocks would increase thereby reducing returns.
Rob says
No, that’s not so, Evidence.
It’s not my understanding that is deficient. It is the understanding of the people who promote Modern Portfolio Theory (MPT), which is the academic construct behind the way of understanding stock investing that you put forward here, which is deficient.
You are right that MPT posits that investors are willing to pay more for asset classes that are less risky, presuming that the return offered by the two assets classes is the same. This is perfectly logical. It is also perfectly wrong.
How do I know? Take a look at what happened in 2000. Stocks were offering the lowest likely long-term return they have ever offered in history — a negative 1 percent real. TIPS and IBonds were offering 4 percent real. That’s a differential of five full percentage points. Not for one year. For ten years running! A total different of 50 percent of the initial portfolio value.
That’s cannot happen under MPT. It is a logical impossibility.
But it happened.
MPT does a poor job of describing the realities of stock investing, Evidence. It is you and the others who place their confidence in MPT who lack an understanding of how stock investing works.
MPT does make sense. It describes how stocks would perform in a different sort of world, a world in which investors had available to them the information they need to make intelligent, rational asset-allocation decisions. That’s the world we will live in after we open the internet up to honest posting on safe withdrawal rates and many other critically important investment-related topics.
MPT describes what would happen in a free market, There are no free markets without free speech, Evidence. It is fantasy thinking for so long as the ban on honest posting on the last 30 years of academic research remains in place.
Thanks for sharing your thoughts. You have added some much-needed balance to the discussion here by taking time out of your day to help us all out. I of course wish you the best of luck regardless of what investment strategies you elect to pursue.
Rob
Drip Guy says
Rob said: “MPT does make sense. It describes how stocks would perform in a different sort of world, a world in which investors had available to them the information they need to make intelligent, rational asset-allocation decisions.”
The times I agree with you are so few that I like to take note when our intellectual paths do occasionally cross. The above snippet is one such occasion. The inference within is something we ALSO agree on — that the theory itself is not necessarily wrong or imperfect, but the real world information systems people rely on (and people themselves!) are (and might always be) imperfect, thus the chances for deviation from what might be predicted under the theory.
Rob goes on to say:
“That’s the world we will live in after we open the internet up to honest posting”
Rob, the internet IS open for honest posting. It’s just that a tiny handful (20? 30?) boards out there were visited with a singular persistent troll smearing fecal matter on the walls and screeching at the top of his lungs in every thread, and so those boards eventually banned that ONE person. Thus the signal to noise component of the information system increased, and the market got a bit more efficient.
Whenever you post, the world gets a just a little dumber, Rob.
I think it would be more accurate to say BENNETT is the cause of bubbles and crashes versus your own rather goofy ideas on the matter.
Rob says
The times I agree with you are so few that I like to take note when our intellectual paths do occasionally cross.
I second that emotion, Drip Guy.
It’s just that a tiny handful (20? 30?) boards out there were visited with a singular persistent troll smearing fecal matter on the walls and screeching at the top of his lungs in every thread, and so those boards eventually banned that ONE person.
Um — good point, Drip Guy.
Truly outstanding!
Whenever you post, the world gets a just a little dumber, Rob.
Yeah, yeah.
I bet you say that to the owners of all the blogs at which you post, Drip Guy.
I think it would be more accurate to say BENNETT is the cause of bubbles and crashes versus your own rather goofy ideas on the matter.
But are you sure?
It’s your retirement money that’s at stake here, my long-time abusive posting friend. You need to be sure.
Rob