Yesterday’s blog entry reported on an e-mail that academic researcher Wade Pfau sent me on January 20, 2011. My response is set forth below.
That’s super. I am grateful for your constructive efforts.
1) CJKing is an awesome poster, probably the best I have ever seen on this topic. If it’s possible to contact him through a private e-mail system there, he can probably be of help. He is extremely knowledgeable re this topic and also has spent
years thinking carefully through all the angles.
2) His recommendation to read Valuing Wall Street was a great one. Smithers uses a different valuation metric. John Russell did some research seeking to determine which metric worked best (P/E10 or Tobin’s Q). He ultimately went with P/E10 but my recollection is that he also had generally good things to say about Tobin’s Q.
3) John Russell wrote an article making the point you were making re the size of the data set. He certainly agreed with your intuitive sense re this. I will try to track down that article.
4) Richard’s point is the most important, in my view. People need to understand WHY long-term timing works but short-term timing does not. I struggled with this for a long time. Once I was clear on the premises of
the new model, I was able to understand all sorts of aspects to the question that I had been blind to before. If you want me to say more on this (now or later), please just let me know and I will expand on the point.
5) Norbert Schlenker’s behavior is inexplicable. He banned me from his board. However, I think his substantive comments on the thread where he supplied the graphic were perfectly fair. He expressed a certain skepticism but it was more a cautious skepticism than a rigid skepticism. And the one big negative he pointed to — the success of Buy-and-Hold in the late 1990s — no longer applies since the crash. It’s of course not his fault that he happened to prepare the graphic prior to the crash.
6) You described Benjamin Graham’s take properly. I will try to track down an article that quotes his words.
7) Bogle has said that Valuation-Informed Indexing can work:
Unless Taylor Larimore has had some secret discussions with Bogle that no one knows about, he is mischaracterizing Bogle’s position. In fact, Bogle warns about the effect of overvaluation in nearly every speech he gives. Bogle himself timed the market successfully! He has said in published interviews that he lowered his stock allocation to about 30 percent at the top of the bull partly because of valuation concerns. He obviously is ahead
today because of his decision to do that. Taylor is of course aware of this. These points were made dozens of times to him in threads that reside today in the Post Archives of the Vanguard Diehards board.
That’s a great thread! I am sure that that is going to help some people gain a better sense of the realities.