Set forth below are the texts of two comments that I recently put to another blog entry at this site:
I should add that I think it is possible that a big reason why the Buy-and-Hold Pioneers did not say that price should be considered in the setting of one’s stock allocation may have been a feeling that it would be more simple to have investors stay at the same stock allocation at all times. Back in the early 1980s, when Shiller published his research, valuations were at rock-bottom lows. People may not have been able then to imagine the P/E10 ever going above 20 again. There may have been a feeling that there was no harm being done in ignoring valuations.
If that is the case, the idea didn’t work. We not only went to 20. We went to 44. Things got out of hand. And it was Buy-and-Hold that caused things to go out of hand. People saw stocks delivering big payoffs and they of course liked that. They never heard the other side of the story, that unjustified payoffs lead to big problems down the road. Now that we are living through the big problems, more and more people are coming to believe that ignoring price didn’t turn out to be such a hot idea.
I like your comment because it is at least rooted in something real, Sensible. I think this simplicity concern was probably a real consideration in why things were done the way they were done. People were not bad to want things to be simple. But people need to accept that it was a mistake or at least that there is a POSSIBILITY that it was a mistake. No one gets it all right in the first draft. THere is a lot of interest among investors in the idea of incorporating valuations into their strategy. We have to permit discussion of the idea. To not do so makes people look unethical. THat’s not a line you want to cross.
It makes sense to tell people to limit their valuation-induced changes. I can see something like that being done for the sake of simplicity. And it is entirely possible for VII to work with only one valuation change every ten years or so on average. But people need to know when things get out of hand. The problem with not looking at valuations at all is that you look up one day and the most likely annualized 10-year return is a negative number. None of us should ever want to see that happen.
Bogle says that allocation changes for valuation reasons can be considered six times in an investor’s lifetime. That’s exactly correct. That’s once every ten years or so. The problem is that Bogle says that the changes should not be more than 15 percent. That’s not even close to being right. In 1982, the most likely annualized return was 15 percent real. In 2000, it was a negative 1 percent real. 15 percent just doesn’t do it.
But that’s the only point on which there is a difference between me and Bogle. And if we had all been calling for occasional allocation changes (once every 10 years on average) all along, we never would have hit 44. We hit 44 because people just stopped worrying about valuations. Had people been aware of the danger, we might have been able to get away with allocation changes not much greater than 15 percent.
There’s a lot of common ground here. If people came to this with good intent, it could all be worked out with mutual respect and warmth. If you are signaling a willingness to play it that way, I obviously am 100 percent on board. You next post will tell the story. If people want to work it out, it certainly can be worked out. The hard part is getting people interested in following a path that leads in time to a mutually positive result. Anyway, I am certainly supportive of the idea of taking such a path.
Rob
I’ll take this a step further.
Bogle has said that changes should not be more than 15 percent. That’s not enough to get the job done. But I think it could be possible to come up with a reasonable approach that doesn’t ever call for changes too much bigger than that.
Benjamin Graham suggested a 75-50-25 scheme. So long as the investor is always sure to not wait until things are so out of hand that he needs to make two switches at once, he would never need to make a switch of more than 25 percent under the Graham scheme. That’s not far off from what Bogle has recommended and the additional change can be justified on grounds that valuations ended up getting more out of hand in recent years than people realized they would in earlier days.
I’ll see what comes back.
Rob
Anonymous says
Retail investors only make up like 25% of the market so what are you on about you obnoxious clown?
Rob says
It’s not only retail investors who need to know how stock investing works for the market to function properly, Anonymous.
And it’s not only retail investors who benefit from “revolutionary” (Shiller’s word) advances when those advances are communicated widely and explored in great depth through the contributions of thousands and thousands of interested parties.
Do you see?
Consider the anger evidenced in your comment.
Does that anger signal confidence?
Or does it signal fear?
You know what I think, Anonymous.
Bottom line — I love my country.
My best wishes to you and yours.
Rob
Anonymous says
Bogle has said that changes should not be more than 15 percent. That’s not enough to get the job done. But I think it could be possible to come up with a reasonable approach that doesn’t ever call for changes too much bigger than that.
Sounds like you and old Jack have similar views. Yet another good reason not to insult and bully him constantly (not that anyone is listening).
Rob says
Jack and I have similar views. Valuation-Informed Indexing is Buy-and-Hold with the Get Rich Quick element removed, nothing more and nothing less.
It’s no insult to point out to a man that he has made a mistake. I’ve made mistakes. Lots of them. When my friends point out to me that I have made a mistake, I certainly don’t feel that they are trying to insult me. They are trying to help me avoid further embarrassment. That’s an act of kindness, not an act of insult. That’s how they show their friendship. If they weren’t true friends, they might not work up the courage to speak up. Yuck! Who needs that kind of friend? I hope that I have been a true friend to Jack.
I hope that everyone in the world listens. I don’t control that part of things. People can listen or not listen as they decide. It’s not for me to say. It is certainly for me to hope. And it is certainly for me to be certain that I do all I can possibly do to spread the word.
Does all of that not make good sense, Anonymous?
Rob
Anonymous says
It’s no insult to point out to a man that he has made a mistake. I’ve made mistakes. Lots of them. When my friends point out to me that I have made a mistake, I certainly don’t feel that they are trying to insult me.
I doubt you have many friends who twist a difference in opinion about the future into the other side having been “mistaken”.
Rob says
It’s not a difference of opinion, Anonymous.
If John Greaney was putting forward statements at the Motley Fool board that “It is my OPINION that a withdrawal rate of 4 percent will work for those beginning retirements today,” I never would have felt a need to put forward that famous post of May 13, 2002.
He didn’t say that.
He said “the historical data shows that a 4 percent withdrawal is 100 percent safe.”
That’s a lie. Backed by threats of physical violence and threats to get academic researchers fired from their jobs, it is a criminal act of financial fraud.
Greaney BELIEVES that 4 percent is going to work. Bogle BELIEVES that Buy-and-Hold is going to work. That is not in dispute. That is not the issue.
Greaney is telling lies about what the academic research says. Bogle is telling lies about what the academic research says.
That’s the act of financial fraud.
Most people don’t check this stuff out as carefully as I have. Most people at the Moltey Fool board heard what Greaney was saying and noticed that no one was calling him out on what he was saying and assumed (quite understandably) that he was telling the truth. It’s the same with Bogle.
But Greaney and Bogle ARE NOT TELLING THE TRUTH.
The truth is that Greaney and Bogle believe that Buy-and-Hold can work and probably will work. But the further truth is that Greaney and Bogle are engaging in abusive practices to block millions of people from finding out about the 33 years of peer-reviewed research showing that they are wrong to believe what they believe. Greaney and Bogle have a responsibility to tell people about that research and to warn people that they may be wrong in their claims and to permit and invite and encourage posts exploring the implications of the research showing that they are wrong.
This is not about opinions.
It stopped being about opinions when the Buy-and-Hold Pioneers adopted the wonderful practice of rooting their investing claims in the peer-reviewed research. Once you do that, you take on a responsibility to correct your claims when subsequent research finds them to be in error.
Now —
There’s a thing called cognitive dissonance. It is possible for humans to know one thing with their minds and to be unable to acknowledge that thing with their hearts. There are circumstances in which humans say things that in an objective sense are falsehoods but that in a subjective sense they believe to be truths. I believe that that is what is going on here. That part of the story needs to be told too and that part of the story cuts against a finding of financial fraud.
But there are limits.
Death threats are over the line. Demands for unjustified board bannings are over the line. Tens of thousands of acts of defamation are over the line. Threats to get academic researchers fired from their jobs are over the line.
If as a society we are going to elect to permit a finding of cognitive dissonance to excuse any crime, then we cannot justify keeping Bernie Madoff in prison. Madoff told a writer with New York magazine that he thought he was helping people. It may well be that that’s a lie he tells to himself and a lie that he believes about himself. The bottom line is that he created documents reporting on transactions that never took place. That’s a line you cannot cross. There’s no point in having laws against financial fraud if we are going to permit a claim of cognitive dissonance to cancel out their effect in all cases.
I will be claiming that cognitive dissonance applies in this case. I owe that to my Buy-and-Hold friends. I believe that to be the case.
I will NOT be claiming that prison sentences are inappropriate for those who crossed the line and for those who helped out those who crossed the line or who covered up for those who crossed the line.
That’s where things stand, Anonymous.
I have zero problem with you stating an opinion different from my own. I believe that you really do hold a different opinion. I believe that you have both a right and responsibility to express it.
But I also know that you have crossed the lines that make you guilty of financial fraud on thousands of occasions. And I am telling. My expectation is that papers will be filed following the next price crash. I will argue for a good measure of charity when the time comes. But I will also argue for at least a small measure of justice. Our society cannot survive to face another day without any justice whatsoever being achieved re this matter.
And I love my country.
The more you evidence your hate of it, the more I will rise up in protection of it.
I love my country. Deal with it.
My best wishes to you and yours.
Rob