Valuation-Informed Indexing #184: The Yearly Review Illusion — Short-Term Ups and Down Have Little Effect on Long-Term Results

I’ve posted Entry #184 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Yearly Review Illusion: Short-Term Ups and Downs Have Little Effect on Long-Term Results.

Juicy Excerpt: I think it is yet another reason for rejecting the core Buy-and-Hold idea that the market is efficient. An efficient market would not remain either overvalued or undervalued for such long time-periods. It would jump from one state to another with more frequency. To understand why markets remain either overvalued or undervalued for so long, we have to take into consideration the role played by investor emotions and that of course means leaving behind us the possibility that the Efficient Market Theory is valid.

It’s exciting news that stocks remain overvalued or undervalued for long periods of time. It means that you don’t have to worry about missing out on gains or losses because you are slow to make moves. The best thing was to go with a high stock allocation in 1975. But if you missed that bus, another one came along in 1976 and then another in 1977 and then another in 1978 and on and on and on. It worked the same way when the long-term value proposition was headed in the other direction. You wanted to lower your stock allocation in 1996. But 1997 was another good year for doing so. And 1998 was yet another. And 1999 was yet another. And so on and so on and so on.


  1. Anonymous says

    You have actually made a good case for buy-hold-rebalance, but your analytical skills are too weak for you to notice. There is no need to put yourself at risk by letting your emotions get in the way with smelly get rich quick schemes like market timing.

  2. Rob says

    We disagree, Anonymous.

    It’s not an accident that I CAME CLOSE to making a good case for Buy-and-Hold. MOST of Buy-and-Hold is GOLD. I incorporated MOST of Buy-and-Hold into Valuation-Informed Indexing for just this reason. I LOVE most of Buy-and-Hold.

    There is one aspect of Buy-and-Hold that has been discredited by 33 years of peer-reviewed research. That’s the rebalancing part. Rebalancing is POISON.

    To rebalance is to permit your risk profile to get wildly out of whack. To rebalance is to fail to Stay the Course. Bogle is right when he emphasizes the importance of Staying the Course. He is wrong to say that it is possible to Stay the Course while also rebalancing. The two are opposites. It is a logical impossibility to Stay the Course while rebalancing.

    We know that valuations affect long-term returns (there is 33 years of peer-reviewed research showing this). So we know that risk increases as valuations increases. It follows that investors MUST, MUST, MUST, MUST, MUST be willing to lower their stock allocations as valuations increase to have any hope whatsoever of Staying the Course in a meaningful way. Rebalancing is pure poison. Rebalancing is pure Get Rich Quick (it has emotional appeal because it suggests that bull market gains are real but it NEVER works in the long run).

    My analytical skills are just fine. I am not the one relying on death threats and demands for unjustified board bannings and tens of thousands of acts of defamation and threats to get academic researchers fired from their jobs to make my case. That’s the Buy-and-Holders. Every time. I wonder why.

    Long-term market timing is the answer. Long-term market timing is price discipline. No market can function without price discipline. Every time in U.S. history in which the “idea” that long-term timing/price discipline is not necessary has become popular, we have seen a crash and an economic crisis. I want no part of it. I am seeking to build a reputation as the most severe critic of the “idea” that long-term timing/price discipline isn’t necessary alive on Planet Earth today.

    I wish you the best of luck with whatever investing strategies you elect to pursue, Anonymous.


  3. Sensible Investor says

    Rob, you are just flat-out wrong. Rebalancing is GOLD. Rebalancing doesn’t increase risk. It reduces risk. If stocks are way way up (as they are now), but bonds are just doing OK (as they are now) then your allocation can easily get out of whack with too many stocks. By rebalancing you are selling some of the stocks when they are relatively high and locking in those gains by buying bonds, which are a relatively stable investment. When stocks fall, you will sell some of your bonds and buy stocks cheap. You can either rebalance at a predetermined time (quarterly, bi-annually, or annually), OR when your allocation is more than perhaps 5% from your pre-determined target. Contrary to what you claimed, this approach REMOVES emotion from investing. Buy/Hold/Rebalance is a basic, easy to understand approach and quite frankly it works for millions of ordinary investors.

  4. Rob says

    I say that you’re wrong and you say that I’m wrong.

    What are we going to do about it, Sensible?

    The best thing thing that I can think of to do about it is to wish you the best of luck in all your future life endeavors REGARDLESS of what investing strategies you elect to pursue.

    And I do.


  5. Rob says

    I suppose that the other possibility is that I could punch you in the nose.

    I’ll tell you what: I’ll give you until the close of business today to think it over carefully.

    After that — Look out, I’m a comin’ to git you!


  6. Sensible Investor says

    Rob, all I did was explain why your claim was clearly wrong. The logic AND the data support my position on this matter and not yours. There’s no need to resort to empty threats of physical violence when people correct you.

  7. Anonymous says

    Buy/hold/rebalance has resulted in a healthy 7 figure portfolio for me (60% stocks/40% bonds) , but I assume you’ve done better?

  8. Rob says

    Yes, I am doing better. EVERYONE who follows research-based strategies is doing better than those who have been taken in by the smelly Get Rich Quick garbage pumped so relentlessly by the Wall Street Con Men. How could it be otherwise? I mean, come on.

    Try making an adjustment to your portfolio value for the effect of valuations. The people who invested in the Madoff fund thought they were doing great before they lost all their money. They bragged to all their friends about how smart they were to team up with this super-smart Madoff fellow and not to fall for any of the silliness contained in the peer-reviewed research. That worked out real well for them.

    How did Madoff trick them? He gave them phony numbers. He just made stuff up. Sound familiar?

    How mad do you think the millions of middle-class investors are going to be when they find out how they were tricked?

    Check out the reactions of the Madoff investors if you want to purchase a clue re this one.

    Then multiply by 500. Because Bogle and Friends have ruined more than 500 times the number of lives.The House that Jack Built has now become The Economic Crisis That Jack Built. Some funny joke, huh?

    I wish you all the best that this life has to offer a person, my easily fooled friend.


  9. passerby says

    “Try making an adjustment to your portfolio value for the effect of valuations.”

    So would the valuation factor you suggest he apply to his current portfolio balance be different than the one you apply to your own portfolio balance? What are the factors you recommend one use?

  10. Rob says

    This question doesn’t make any sense.

    What “factors” are you talking about?

    Overvaluation is mispricing.

    Correct your portfolio value for the overpricing containing in the nominal number.

    If you do that, you will be able to see through all the Buy-and-Hold garbage.

    If you fail to do that , you are only fooling yourself.

    Following a Get Rich Quick approach can make you feel good for a time. But never has it made any investor feel good in the long term. It’s a fantasy.

    Reality is not your enemy, Passerby.

    Reality is your friend.


  11. z says

    ehhh….maybe raise it to a C- You really need to spell out how the money in my bank account, which I’m using to buy and house and car this week as well as foreign travel, is over-valued. the banks and airlines sure seem to accept it for face value. all of it came from buy/hold/rebalance.

  12. Rob says

    Thanks for asking an intelligent question, Z.

    You are right that the money is real for practical purposes in the short term.

    This is an important fact. This is probably the single most important reason why so many smart and good people are taken in by Buy-and-Hold. It creates temporary wealth that is treated as real by banks and airlines and other institutions.

    It never lasts. We have 33 years of peer-reviewed research based on 140 years of historical return data showing that. It’s not real.

    I am telling you what the peer-reviewed research shows us. If you don’t want to believe it, you are of course free to believe whatever you prefer to believe. I am not free to lie about this matter. It would be fraud for me to do so. I am going to continue posting honestly. I don’t dare to consider the possibility of playing it any other way.

    Yale Economic Professor Robert Shiller was awarded a Nobel Prize for his work in this area. You don’t receive a Nobel Prize for repeating the conventional wisdom. Shiller taught us something very important and very new. Shiller’s work has far-reaching implications. All of my work explores those implications.

    There are thousands of economists who would like to be exploring these implications and writing about what they come up with on a daily basis. They do not feel free to do so because the Buy-and-Holders will destroy their careers if they do so. This is going to have to change. We are headed to a dark place if we do not make this change soon.

    I believe that we will make the change following the next price crash. Once we do that, the problem will go away. Once investors know what the research says, most will be happy to take into consideration the findings of the past 33 years. Once most investors are taking those findings into consideration, there will never again be insane overvaluation. It’s just not something that we will ever again need to worry about. It’s crazy to have the amount of your accumulated life savings jumping all around. We all should be happy that the days in which we need to endure such nonsense are in the process of coming to an end.

    The fact that as a society we have not been able to accept what the research says or even permit open discussion of what the research says does not suggest that these findings are unimportant. The reality is entirely to the contrary. It shows that we understand on some level of consciousness that these findings are of HUGE importance. It is because they are so important that they are so disconcerting to the millions of people who built their retirement plans pursuant to the very different findings of preceding years.

    The people who owned stocks in early 1929 were able to buy things that they were not able to afford in late 1929 because of one of our earlier experiences with the wonders of Buy-and-Hold strategies. The bank and airlines accepted those portfolio values at face value for a time. But then, when the Pretend Money disappeared, the value assigned those portfolios changed in a dramatic way. That’s the way it works. That’s what we have up ahead of us again when we experience the next price crash.

    Stock crashes are a horrible, horrible thing. We all should want them to be brought to an end. Shiller showed us how to do that. To bring stock crashes and the economic crises that inevitably follow them to an end, we need to stop encouraging people to believe in the Pretend Money. We need to do just the opposite. We need to DISCOURAGE belief in the Pretend Money. We don’t want to ban honest posting re the past 33 years of peer-reviewd research, we want to ENCOURAGE honest posting about the past 33 years of peer-reviewed research. It is by being exposed to honest posting re the peer-reviewed research that we all advance in our understanding of how stock investing works.

    We are the luckiest generation of investors ever to walk Planet Earth. Why? Because we are the first generation to have the last 33 years of peer-reviwed research, the research that puts the final puzzle piece into place, available to us. I think we should be taking advantage of our good fortune rather than pissing it away.

    It makes you happy to have banks and airlines recognize Pretend Money. Why? How does it help you to have that money credited to you ONLY FOR A SHORT TIME. It is my belief that that hurts you. If you knew the true value of your portfolio, you could plan your financial future far more effectively. I see no benefit to being tricked. Which is what is happening if you come for a time to believe that Pretend Money is real. If short-term timing worked, you could cash out just at the right moment. But it doesn’t. So how does this fantasy belief help you?

    What do you think it means to say “valuations affect long-term returns” if it does not mean that a portion of investors’ current portfolio value is Pretend Money? My feeble brain is not able to come up with any other way to interpret the statement. If your far superior Goon brain is able to come up with something, I would sure like to hear about it.

    We once thought that stock returns were random. That’s why they named the famous book “A Random Walk Down Wall Street.” Then Shiller showed that valuations affect long-term returns. That means that long-term return are NOT random. Shiller’s research changed our fundamental beliefs about how stock investing works in a “revolutionary” (his word) way. We all need to recognize that and to begin reaping the benefits that follow.

    That’s my sincere take re these terribly important matters, in any event.

    I wish you all the best that this life has to offer a person.


  13. The Pink Unicorn says

    We choose not to fail like you. We will not deprive our families like you have. We follow what has been successful for us and many others.

    Deal with it, Rob.

  14. Rob says

    It’s hard for me to imagine a bigger failure than ending up in a prison cell because you betrayed your friends by telling them lies that caused them to suffer failed retirements, Pink.

    I want no part of it.

    I wish you well. I only wish that you cared about your own future as much as I care about your future.


  15. Anonymous says

    Rob, if you’re raising a family of 4 in a 1200 sq ft house, you probably haven’t unlocked the secrets of how wall st. works.

  16. Rob says

    How much space do you think they are going to give you in a prison cell, Anonymous?

    When I put my head on my pillow in my 1200 square foot house, I can sleep. I wouldn’t be able to do that if I agreed to betray my fellow community members, as you Goons demand.

    I have played the cards I was dealt to the best of my ability. I can do no more and I can do no less.

    I don’t believe that there are any “secrets” that need to be uncovered in the days of indexing. Those who know what the last 33 years of peer-reviewed research says have available to them a smart and simple and safe way to invest in stocks. No earlier generation of investors had that available to them. I am pretty darn happy about that and I intend to share the good news with millions of middle-class investors.

    Hate is not the answer, Anonymous. It’s not a close call. Love is the answer, not hate. I am sure.

    My best wishes.


  17. Rob says

    One more point.

    The fact that some Wall Street Con Man is living in a mansion doesn’t mean that you should be listening to his views about how stock investing works.

    I want to hear what works for me, not what works for the con man. Telling me that he lives in a mansion just tells me that the fellow has figured out what works for him.

    Bernie Madoff lived in a mansion for a time. Big friggin’ deal.



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