Valuation-Informed Indexing #149 — The New Consensus That the Safe Withdrawal Rate Studies Are In Error Is the First Step Toward Far Bigger Discoveries

I’ve posted Entry #149 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The New Consensus That the Safe Withdrawal Rate Studies Are in Error Is the First Step Towards Far Bigger Discoveries.

Juicy Excerpt: The debate over whether it is necessary to take valuations into consideration when calculating the safe withdrawal rate has never been an intellectual debate. Intellectually, it was always as simple as determining the sum of two plus two to figure out that the Old School safe withdrawal rate studies were in error. Shiller showed with research produced in 1981 that valuations matter. The Old School studies don’t consider valuations. So the Old School studies get the numbers wrong. It didn’t take us 11 years to figure out that one.

What is has taken us 11 years to do is to come to begin to come to terms with what Shiller has taught us with his revolutionary research.

Knowing that valuations matter changes everything that we once thought we knew about how stock investing works. Everything. It’s not possible to overstate how big a change we are talking about here.

I talk about the implications in all my writings. I am the only one I know who does that. But all of us sense how big a deal this is.

Comments

  1. bannwd plop contributor says

    Rob: “taken us 11 years to do is to come to begin to come to terms with what Shiller has taught us with his revolutionary research.”

    So you follow Shiller’s investing advice. Okay… *which* Shiller is it you propose to follow?

    Forbes 2013 Investment Guide — Wealth Wizards
    Robert Shiller, Economist, Yale University

    Robert Shiller, perhaps best known for co-inventing the Case-Shiller Home Price Index, says the American dream of building wealth through homeownership is a fallacy.

    “I’ve documented that home prices in real terms didn’t increase from 1890 to 1990,” he says. “That was the bubble thinking, but it’s still fresh in our minds.”

    How do you get rich, then?

    “Go into finance or a related field. It’s a lifetime decision,” advises Shiller. “Finance is the technology for making things happen. Accountant, auditor, marketmaker … these are big occupations.” Shiller lectures his students that mathematics, astronomy, sociology are all very appealing, but there are no jobs in them.

    Shiller says his thesis supervisor, MIT economist Franco Modigliani, who won the Nobel Prize in Economics in 1985, prompted him to invest all his money in the stock market in the early 1980s as Paul Volcker’s rate hikes kiboshed inflation and sent the stock market soaring.


    Robert Shiller: I’m Betting the Farm
    By Robert Huebscher
    May 24, 2011

    Yale’s Robert Shiller, the economist who foresaw the implosions of the tech bubble in 2000 and the housing market in 2007, is now closely watching a different asset class. This time, however, it is one that is in an early stage of bubble formation, not of collapse.

    “This is my only bullish call that I’m making right now: It’s farmland,” Shiller said last week.

    Shiller delivered the keynote presentation at the IMCA 2011 annual conference in Las Vegas.

    His prognosis for the economy was that a lack of motivation on the part of consumers to spend will impede recovery. Equity returns will be disappointing over the next decade, he said, and TIPS is the only other asset class he likes right now.

    ____________________

    So is it farmland, or is it equities for you Rob? The one thing that is consistent is that Shiller says you should have sold that white elephant house long ago.

  2. bannwd plop contributor says

    He was for equities before he was against them before he was for them!

    “October 23, 2008, The keynote speaker at the annual securities forum in Stamford sponsored by the Connecticut banking department was Yale University professor Robert Shiller. A roomful of financial professionals listened to him. As for his own investing he says right now he is looking for opportunities to get back into the stock market. Why?

    Prof. Robert Shiller, Yale University Economist: Well, the price to earning ratio is no longer high as I defined it. I have my own definition and its falling and I believe when the market gets cheap you should go in a bigger way. “

  3. bannwd plop contributor says

    So, given that you follow Shiller’s advice, and promote it to others:

    * Are you buying equities on this dip?

    * How much farmland have you purchased?

    * Is your private home back o nthe market?

    * How has getting into and out of equities based on a PE10 timing approach fared for you in net terms, over the last 15 or 20 years, as compared to someone who just bought a market basket of the world economy and held it, keeping their trading and other costs low?

    Thanks in advance for your forthright, candid, complete and accurate answers to these important questions.

  4. Rob says

    So is it farmland, or is it equities for you Rob?

    It’s equities for me, Banned.

    Shiller may or may not be right about farmland. But that sort of thing is too complicated for the typical middle-class investor.

    The average person should be investing in stocks for growth and in TIPS or IBonds when stocks are too overpriced to offer a decent long-term return, in my assessment.

    Rob

  5. Rob says

    He was for equities before he was against them before he was for them!

    I agree with the point you are making here, Banned.

    Shiller has been inconsistent in his investing advice.

    I have said on numerous occasions that we need to put Bogle on the hot seat. The same obviously goes for Shiller.

    That’s a plus for those who learn from Shiller and for Shiller himself. When people call him out on his inconsistencies, he learns. He wants to learn. So we are helping him out when we do that.

    Shiller is every bit as much a human as Bogle and Bennett and all the others.

    Rob

  6. Rob says

    Thanks in advance for your forthright, candid, complete and accurate answers to these important questions.

    You know the answers to all these questions because you have asked them on thousands of prior occasions and I have responded on thousands of prior occasions.

    I am up significantly as a result of my discovery and development of the VII strategy.

    I have no interest in farmland as an investment, although I acknowledge that it may work well for those who put the time into it needed to do effective research.

    The idea that there is some sort of “dip” that I should be concerned about is pure Get Rich Quick garbage. Stocks are priced for a 65 percent price drop sometime over the next few years. Not interested.

    Stocks purchased at a reasonable price are the best long-term investment class for the average middle-class person. Stocks purchased at an insanely inflated price are the worst long-term investment class for the average middle-class person.

    So it has been for 140 years of stock market history, as reflected in the past 32 years of peer-reviewed academic research. A funny feeling tells me that so it will be for the next 140 years of stock market history as well.

    Let’s all say a prayer that Buy-and-Hold won’t be around to trick us anymore following the wipeout we all will suffer with this next crash!

    Rob the Hopeful One

  7. The Pink Unicorn says

    What does Wade say about Rob’s “work” on SWRs?

    “But I don’t believe that. I do not believe you have offered a valid correction to the safe withdrawal rate question. And I believe that retirement income strategies go much further than the question of a safe withdrawal rate. And so that is why I’ve had to endure your ongoing harassment for months on end now. ”

    So, Rob, I guess you include yourself in the errors of the SWR question……hhhmmmmmmmmm.

  8. Rob says

    I believe that Wade should be permitted to post honestly.

    And I believe that I should be permitted to post honestly.

    And I believe that Bogle should be permitted to post honestly.

    And I believe that Shiller should be permitted to post honestly.

    And I believe that Arnott should be permitted to post honestly.

    And I believe that Bernstein should be permitted to post honestly.

    And I believe that Burns should be permitted to post honestly

    And I believe that Pink should be permitted to post honestly.

    I think we all would be a lot better off, Pink.

    My best wishes to you.

    Rob the Pro-Honesty Investing “Expert”

  9. The Pink Unicorn says

    That last response is hilarious, Rob. You just violated it by deleting more of my posts again today.

  10. Rob says

    There is no inconsistency, Pink.

    I delete your intimidation posts BECAUSE I want to see people posting honestly.

    You are going to prison for similar reasons.

    We have adopted laws insuring that people who commit financial fraud go to prison so that other people can hold onto their wealth or increase it.

    Deleting your intimidation posts is a positive.

    Putting you in prison for your acts of financial fraud is a positive.

    Do you really not see this?

    Rob

  11. The Pink Unicorn says

    So when I asked you post the details of your financial returns, you call that intimidation?

    Yet, in the same post you throw out the same prison threats again in attempt to intimidate.

    Don’t worry, Rob. I save posts as they come in handy, and that is not good news for you.

  12. Rob says

    So when I asked you post the details of your financial returns, you call that intimidation?

    Yes.

    You Goons have announced thousands of times that your plan is to destroy me financially by making it impossible for me to make a living by posting defamatory posts about me wherever I go on the internet.

    You are afraid that you will be sent to prison following the next price crash. So you want to know if you can outlast me.

    It wouldn’t matter if I responded to the question. If I said that I had billions in reserve, you wouldn’t believe me. If I said that I had 53 cents remaining, you would wonder how I managed to continue posting when I was still up and about five years from now.

    The bottom line here is that, if you had not committed financial fraud, you would have nothing to worry about.

    The last thing in the world that I am going to do is to earn my own prison sentence by agreeing to join you in posting dishonestly re safe withdrawal rates. Do you think I am off my meds or something?

    Rob

  13. Rob says

    Yet, in the same post you throw out the same prison threats again in attempt to intimidate.

    It’s the only issue that matters at this point, Pink.

    You obviously would love to get out of this if you could find a way to get out of it without going to prison. There obviously is no such path available to you.

    I want it to end because I want us to get out of the economic crisis. That’s an issue of huge public policy significance.

    I do not feel comfortable lying to you and telling you that you can avoid a prison term. But I DO sincerely believe that your prison sentence will be a good bit shorter if you come clean before the next price crash.

    The idea that it is “intimidation” to try to help a friend get his prison sentence shortened is of course 100 percent nonsense.

    It would be intimidation if I were trying to get your prison sentence lengthened. You are the only one doing that, Pink. You are intimidating yourself!

    I ain’t got no Wall Street Con Men on my side, Pink. There’s nothing even a tiny bit intimidating about me.

    Rob the Non-Intimidating

  14. The Pink Unicorn says

    Rob,

    You can post financials and demonstrate returns. You just don’t want to. The lies, intimidation and defamation are coming from you. There is plenty of documentation. Your problem is that you have posted profusely on the Internet. There is an abundant amount of information for anyone that has to defend themselves from your lies and threats. On the flip side, you are lucky in that you seem to have limited assets or people might take action against you for things that have already been mentioned.

  15. Rob says

    You can post financials and demonstrate returns. You just don’t want to.

    My money is in TIPS and IBonds paying 3.5 percent real. It’s been there since the Summer of 1996. You could do the math yourself if it didn’t pain you to see that buying stocks when they are insanely overpriced never works out in the long run.

    My best wishes to you and yours, Pink.

    Rob the Rich Guy

  16. Rob says

    The math has been done by about 20 different people. Every one found that I am up.

    In any event, I naturally wish you the best of luck in all your future life endeavors, Pink.

    Rob the Math-Vindicated

  17. The Pink Unicorn says

    Rob,

    The question was not if you were up. You continue to say that you outperform everyone else and now we know that is far from the truth.

  18. Rob says

    I don’t outperform people who win the lottery, Pink.

    VII has outperformed Buy-and-Hold for 140 years.

    That’s why discussion of VII is banned at 15 different boards.

    The Buy-and-Holders have no other way of protecting their turf.

    You Goons have engaged in criminal acts of financial fraud.

    You will be serving long prison sentences following the next crash.

    I have offered to help to try to get your sentence reduced a bit. I sincerely believe that that remains a live possibility.

    You have indicated that you are not interested.

    So be it. It’s your life, man.

    If you ever change your mind, I’ll be there for you.

    If you never change your mind, I wish you every happiness in your remaining days.

    Is there anything else that I can do for you?

    Rob the Non-Lottery Winner

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