Valuation-Informed Indexing #138 — Will It Be Okay to Say “I Told You So!” After the Next Crash?

I’ve posted Entry #138 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Will It Be Okay to Say “I Told You So!” After the Next Crash?

Juicy Excerpt: Predictions are a way of testing the merit of competing theories. Shiller’s theory permitted him to predict events that actually did play out. The Buy-and-Holders did not predict the crisis. To the contrary, they were shocked and amazed and stunned by the crisis. That should tell us something about the merit of their model for understanding the markets. It does not by itself tell us they are wrong in all that they say. But the fact that they failed so spectacularly re this one issue suggests that we should evidence greater skepticism toward other ideas being put forward by people from that school of thought.

Even more importantly, a full discussion of the research findings behind Shiller’s prediction would go a long way toward helping us overcome the crisis. The first thing that a doctor does when trying to cure an ailment is to form a diagnosis. Get the diagnosis wrong and you are likely to get the treatment wrong. Have we gotten the diagnosis for our economic troubles wrong? It sure seems so to me.

Comments

  1. Evidence Based Investing says

    The Buy-and-Holders did not predict the crisis.

    Buy and holders did not predict the crisis because they realize that trying to predict the future gyrations of the stock market is a fool’s errand.

    The buy and holders predicted that if you buy and hold the market then you will get the market return (minus the very small expenses associated with buy and hold investing).

    And they were right.

  2. AnnieM says

    Did you predict the last crash? If so, could you point me to a place where that prediction was published?

  3. Rob says

    Did you predict the last crash? If so, could you point me to a place where that prediction was published?

    Here’s an article titled “Why Stocks Crashed” that I posted in October 2007, pointing out that I wanted the article on the record before the crash came so that no one could say that I was saying that a crash was coming only after it had taken place:

    http://www.passionsaving.com/why-stocks-crashed.html

    All Valuation-Informed Indexers knew the crash was coming years before it came, Annie. Shiller predicted the crash that arrived in September 2008 in a book that was published in March 2000.

    There’s now available to us all 32 years of peer-reviewed academic research showing us how to predict crashes with an amazingly high degree of accuracy. All that we need to do to stop any investor from ever again being hurt by a crash is to overcome the intimidation tactics of the Buy-and-Hold Mafia.

    The idea that long-term timing is not absolutely required of every stock investor was a terrible mistake. We need to work together to persuade my good friend Jack Bogle to come clean re that mistake. It would be best if he did that before the close of business today.

    Rob

  4. Rob says

    they realize that trying to predict the future gyrations of the stock market is a fool’s errand.

    Then why has the long-term return of stocks been HIGHLY predictable for 140 years running, according to every possible statistical test?

    And why is it that, every time Buy-and-Hold has become popular, every investor following it has experienced a wipeout of the accumulated savings of a lifetime?

    Are we to believe that this is all just some strange coincidence, Evidence?

    When one strategy never fails for 140 years and another never work for 140 years, I start to have doubts about the one that never works. Call me madcap.

    Rob

  5. Rob says

    The buy and holders predicted that if you buy and hold the market then you will get the market return

    That’s a tautology, Evidence. It is a statement that coveys precisely zero meaningful information.

    To say that Buy-and-Holders obtain the market return is like saying that someone who never leaves a certain building remains safe so long as that building doesn’t catch on fire and dies if the building does catch on fire.

    When a building catches on fire, the smart thing to do is to leave the building.

    When the stock market is priced for a massive crash, the smart thing to do is to lower your stock allocation.

    If you weren’t emotionally addicted to the purest Get Rich Quick strategy ever concocted by the human mind, you would get this in two seconds. You don’t hear the words I put forward because it is emotionally painful for you to acknowledge that you have been taken by the Wall Street Con Men.

    Your beef is with the Wall Street Con Men, not me. I have been arguing for 11 years that honest posting on safe withdrawal rates and many other critically important investment-related topics should be permitted at every investing board and blog on the internet, regardless of how bad it makes the Wall Street Con Man look for us all to see that they have been running a massive con.

    Rob

  6. Trebor Martin says

    Rob,

    If you predict something twelve years too soon, have you really predicted anything?

  7. Rob says

    Thank you for asking an intelligent and important question, Trevor. I believe that there are millions of middle-class people who experience precisely the doubt you are evidencing by asking this question.

    The reality here is counter-intutive. It seems like the answer might be “no.” It seems like predicting something 12 years too soon is not doing something terribly useful. But what seems is not always what is. The answer to the question is “yes,” you are doing something amazing by being able to predict something 12 years in advance.

    The best way to see why this is such a big deal is to experience it for yourself. Please go to the Scenario Surfer:

    http://www.passionsaving.com/portfolio-allocation.html

    Run through some 30-year returns sequences. What you will find is that over and over and over again you will see yourself “predicting” a crash years before it comes. And, if you lower your stock allocation as you should, over and over and over again you will find yourself far, far ahead of the Buy-and-Hold portfolio in the long run. You will obtain FAR higher long-term returns while taking on DRAMATICALLY reduced risk. There will be some cases (not the norm) when your portfolio value at the end of 30 years will be more than DOUBLE the size of any of the three (20%, 50% and 80%) Buy-and-Hold portfolios.

    What you are seeing here is the power of compounding returns applied to investing. When you lose money in a crash, you lose not only the numbers of dollars you lose directly in the crash. you also lose DECADES of compounding on those returns. The losses are so large that the human mind can barely process the information.

    Valuation-Informed Indexers NEVER experience those losses. Not once in 140 years have they experienced those losses. But every Buy-and-Holder HAS experienced them. There has never been an investor who lived a normal lifetime of 80 years or so who did not experience at least one crash in his investing lifetime. So every Buy-and-Holder has been hit in a very hard way that not a single Valuation-Informed Indexer has ever been hit.

    As a truly great and kind man was often known to say –

    Have fun!

    Rob

  8. Trebor Martin says

    I predicted the Red Sox were going to win the World Series in 1986. Since they won in 2004, I guess I was right. The whole ball going through Buckner’s legs really didn’t affect anything.

  9. AnnieM says

    If you “predicted the crash 12 years too soon”, then that doesn’t seem to be much of a prediction. That’s just saying that the market will go down a lot some day. Yes, and it will go up a lot some day. That’s like the guy with the sign saying that the earth is coming to an end. Sure it will, but when?

    You seem to have very high confidence in your own special abilities.

  10. Rob says

    I predicted the Red Sox were going to win the World Series in 1986. Since they won in 2004, I guess I was right.

    It’s more like if you predict that a doctor who has become an alcoholic is going to lose his job. You know it is going to happen. You can’t say precisely when.

    But to conclude from that reality that “it makes no difference whether a doctor is an alcoholic or not” is pure foolishness. It makes all the difference in the world.

    Rob

  11. Rob says

    If you “predicted the crash 12 years too soon”, then that doesn’t seem to be much of a prediction. That’s just saying that the market will go down a lot some day.

    No, it’s a whole big bunch more than that, Annie.

    Long-term, valuation-informed predictions always work. There has never been one time in the 140-year history of our market when they did not work.

    And the benefits are huge. We are talking dramatically increased returns and a 70 percent reduction in risk.

    The only question here is — Why is there even one person alive today who is still following a Buy-and-Hold strategy?

    The answer is — The Wall Street Con Men spend hundreds of millions trying to fool people like you into thinking there is some mystical, magical “study” supporting Buy-and-Hold.

    Ask to see the URL for this magical study.

    They will call you a “troll” and ban you from the site where you are asking the question.

    I have seen it happen hundreds of times.

    There is no study. It is a con.

    It is the biggest con in the history of the United States. There are millions of middle-class people whose lives have been destroyed as a result of this con.

    Even the Wall Street Con Men would ultimately be better off if our economic system survived. So the con helps no one.

    Please take good care.

    Rob

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