I’ve posted Entry #189 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stock Gains Are a Bad Thing.
Juicy Excerpt: Say that you’re 35 years old and that you expect to retire at age 65. You’ll be buying stocks for another 30 years. If stock prices increase this year, you’ll see an increase in your portfolio value. But you’ll also be forced to pay a higher price for the stocks you buy with each paycheck. Do the math and you’ll see that you would be better off if the price gain were delayed until closer to your retirement date.
Stocks are like anything else you buy. They offer a better value proposition when you pay less for them. And stock gains always push prices up. Since you are going to remain a net buyer of stocks for many years to come, stock gains are bad for you.
Honest Anonymous says
One of the more inane things I’ve read.
People will ALWAYS be retiring, are you saying stock prices should wax and wane saw-tooth style with every generation of retirees? Flat-lined for 35 years and then a 5-year parabolic spike? Then what? Cash out? Whose going to buy at the inflated prices? Not your so-called VII followers. If this is your logic then stocks are a bad idea period.
And what if you are retired for 30 years? Could you withstand whipsaw valuation losses on your portfolio in favour of those just entering retirement?
Wow.
Rob says
No.
I don’t know where you are coming up with this stuff about flatlining and spiking, Honest.
The best thing is if stock prices always reflect fair value. The value of the market increases by 6.5 percent real per year due to economic growth. We are all best off if market prices increase by that amount and no more. And they would if only we permitted investors to learn about the implications of the past 33 years of peer-reviewed research.
I suppose that what you are getting at is that most individual investors would be better off if stock prices increased by LESS than that because they would be able to buy stocks at good prices for most of their investing lives. That’s so and the article does indeed try to bring out that point. But that is not the only factor that needs to be considered. We want to see economic growth. If we hold stock prices down below what is justified by the economic growth we are experiencing, we are holding ourselves back for no good reason. And there are retirees who would be hurt. And there is the spike and flat-line issue you make reference to here.
The best thing is just to play it straight. The point of the article is that most people don’t see that today. Most people see price gains as a good, no matter how high prices already are. The idea being expressed here is that every price gain has a good and a bad side to it and every price drop has a good and a bad side to it. The ideal is the proper mix of the two sets of benefits and detriments, the amount of gain reflected by the annual economic gains, a gain of 6.5 percent real.
I hope that helps a bit.
Rob
Honest Anonymous says
“I don’t know where you are coming up with this stuff about flatlining and spiking, Honest.”
I get it directly from your brain:
“Do the math and you’ll see that you would be better off if the ***price gain were delayed until closer to your retirement date.***”
There will always be people of all ages all the time. What you are saying is that people closest to 65 should influence stock prices upward — A LOT — since they have 30+ years of valuation and inflationary purchasing power to catch up with, but that the 30-50-year old at the same time should influence stock prices to be depressed so that they can continue to buy.
Which is it, Rob, you want the retirees to enjoy stock gains or the pre-retirees to enjoy undervaluation? You can’t have it both ways at the same time.
“The value of the market increases by 6.5 percent real per year due to economic growth.”
Stock market gains and economic growth have a very low/negative correlation. Maybe you could drop your single obsession and research some other financial factors.
Rob says
You need to calm down, Honest.
You didn’t get what you said from my brain. You got it from your anger and hate and venom.
What I said is 100 percent true and important. Most investors are personally better off if prices drop rather than rise. People need to know what. We did not know all there is to know about stock investing in the years before 1981. We now know a lot more. Most people today still root for price increases. That’s unfortunate. We need to change that. That’s the purpose of the article.
I never said anything about this crazy flatlining and spiking. You made that stuff up and then tried to put it in my mouth because you are feeling so much hurt. You are ashamed that you got some things wrong about how to invest effectively and so you are lashing out at me. I didn’t teach you the wrong things. I have for 12 years been trying to teach you the right things. And your lashing out has been getting in the way of your ability to learn for those entire 12 years.
You seriously need to chill out. Big time.
I didn’t say anything about people closest to age 65 influencing prices upward. The valid point is that people who are selling stocks should be rooting for higher prices. There are people near age 65 who start selling stocks. Yes, those people are in a position where they should be rooting for higher prices. But, if we permit honest posting on the last 33 years of peer-reviewed research on the internet (something I have been advocating going back to the morning of May 13, 2002), we won’t have to worry about people influencing prices. Market prices are SELF-CORRECTING so long as we let the market function.
The market cannot function without information. Information is the lifeblood of any market. We do not allow people to obtain accurate information today (because it embarrasses the Buy-and-Holders for people to learn the realities). That’s why we are in an economic crisis today. I believe that we will be opening the internet up to honest posting following the next price crash. Then all our problems will go away. Then the market will be able to work its will. Which is a good thing. The market can handle all this stuff. It doesn’t need any flatlining or spiking or influencing from us.
You are caught in a vicious cycle. You scream and yell and holler and threaten. That makes it hard for you to learn. Then you get more things wrong because you haven’t been able to learn. Then you scream and yell and holler and threaten some more. And the whole thing starts over again.
The purpose of the article is to INFORM. We need to INFORM investors of the realities to get the market functioning properly. So, yes, people need to know that price increases are generally a negative from a personal portfolio-buliding standpoint. But price increases are a GOOD thing from the standpoint of building the economy. So we need price increases. If we just allow people access to the information they need to make sound decisions, none of this will be a problem. All of the problems are a result of the Ban on Honest Posting enforced by the Wall Street Con Men and their Internet Goon Squads.
Do you see?
We all absolutely CAN have it both ways at the same time. We can have just the right amount of gain. That’s 6.5 percent real per year. That leaves us all much better off than we ever were in the Buy-and-Hold years. EVERYBODY benefits from us opening the internet to honest posting. Buy-and-Hold hurts us all. Even the Wall Street Con Men. Even you Goons.
ALL stock market gains are rooted in economic growth. THAT”S WHERE THEY COME FROM. If there were no economic growth, there would be no stock market gains.
You believe that there is a low correlation because you are living in a world in which the Wall Street Con Men and their Internet Goon Squads have enforced a Ban on Honest Posting. Investors cannot act in their self-interest without accurate information. So stock prices are often in all sorts of crazy places not justified by the economic realities. But the economic realities justify gains of 6.5 percent real per year.
We would all be better off if market prices reflected the economic realities. And they would if only we would lift the stupid Ban on Honest Posting and let investors know about the 33 years of peer-reviewed research they need to be able to act in their self interest when buying stocks.
Does all of that not make good sense?
Rob
Anonymous says
Rob,
YOU need the market to drop because you missed out on one of the largest bull markets we have ever seen.
Rob says
It’s not what I need or what anyone else needs that matters, Anonymous. It’s what the last 33 years of peer-reviewed research in this field says that matters.
Bull markets are a lie. To say that something is the biggest bull market ever seen is to say that that something is the biggest lie ever told.
To count money earned in a bull market as money you will use to finance your retirement is like counting money you borrow on a credit card to cover your costs of living. You end up having to pay back every penny, plus interest. Not this boy.
My best and warmest wishes to you and yours.
Rob
Anonymous says
This is why Buy, Hold and Rebalance is the way to go. Those that follow this method have adjusted their allocation as the market rises and falls. They don’t have to try gimmicks like lucky 7, which is based on emotion.
Rob says
How have they adjusted their allocations, Anonymous?
Buy-and-Holders don’t adjust their allocations in response to valuation shifts. They rebalance. To rebalance is to STAY AT THE SAME ALLOCATION. That’s why that prefix “re” is in there. It means “again.”
This is the entire dispute between the two Nobel Prize winners. According to Fama, risk is constant and you maintain the same risk profile by maintaining the same stock allocation. According to Shiller, risk is variable and you maintain the same risk profile by CHANGING your stock allocation in response to shifts in valuation levels. All of the differences between the two models follow from that one core difference.
It is that one core difference that makes Shiller’s ideas so “revolutionary.” Until 1981, we believed that rebalancing kept the investor’s risk profile constant. In 1981, peer-reviewed research was published saying otherwise.
I obviously support the Shiller position. You obviously support the Fama position. They both have Nobel prizes for the work they have done in this field.
That’s the entire story in a nutshell, is it not?
Rob
bizarro says
According to Shiller, risk is variable and you maintain the same risk profile by CHANGING your stock allocation in response to shifts in valuation levels…
I obviously support the Shiller position.
And yet your stock allocation has not changed in 18 years. Tell me again how it’s me who suffers from cognitive dissonance.
Rob says
Levels of overvaluation don’t change quickly, Bizarro.
Say that Fama was right. Then times of overvaluation and undervaluation would be random. You would have huge overvaluation in 1996 and then huge undervaluation in 1997 and then fair-value prices in 1998 and then a small amount of overvaluation in 1999. Then your point would be a strong one. Then it would be crazy to stay at the same stock allocation for 18 years.
BUT THAT IS NOT HOW IT WORKS.
Please look at Shiller’s site, where he provides the P/E10 value for all years going back to 1870. Valuations follow a pattern that has been repeating for 140 years without a single exception. Valuation go up, up, up, up (with small short-term drops mixed in, to be sure). Then they go down, down, down, down (with small short-term drops mixed in). Then they start going up again.
In 1996 valuations reached the “insanely dangerous” level. That’s when you need to lower your stock allocation in preparation for the big drops up ahead. You don’t know when they are coming because short-term timing doesn’t work. But you do know that they are on the way. Which means that risk is much greater than it would be if stocks were not selling at insanely dangerous prices.
We are still today in the down cycle that was signaled in 1996. Things started going down in 2000. We had a slow-leak crash from 2000 through 2008. In 2008, we had the first dramatic price crash. The second dramatic price crash is due this year or next year or the year following. Then the crashes will be over and we will begin working our way back up again.
There has never been a crash period that ended before we hit a P/E10 value of 8. THAT IS NOT A COINCIDENCE. It happens that way because of the realities of human psychology, which is a constant.
Humans respond to short-term feedback. When valuations are going up, the short-term feedback is positive. So prices keep going up for a long time. That said, people hold their beliefs on more than one level of consciousness. All the time that prices are going up people are afraid in another level of consciousness that prices will eventually crash. When prices get high enough that the fears on the second level of consciousness become dominant, prices crash.
BUT NOT NECESSARILY ALL AT ONCE.
It is a process. People let in a certain amount of fear. Then they block out any more because they cannot deal with it. Then they let in some more.
You are interpreting the price recovery of mid-2009 as a sign that the period of crashing prices had come to an end. It was not that. The recovery came because people became too terrified of what they had done to themselves in the bull market to accept any more price drops. They didn’t push the P/E10 value all the way back up to 44. But they did push it back up to the mid-20s. They essentially said “we will deal with that pain later, we have taken all the pain we can take at this point in the proceedings.”
The next crash is where we experience the pain we put off in 2009. The P/E10 level will drop to 8 or something close to that. Only then can we enjoy a permanent recovery.
Stocks have been an insanely dangerous asset class for 18 years running now. That’s why I have been out of stocks for 18 years running now. The return available is not nearly great enough to justify the insane level of risk. I get a better deal from the TIPS and IBonds I hold paying 3.5 percent real. Why would want to give up a great long-term value proposition in exchange for a poor one? That makes no freakin’ sense.
There were a few months in early 2009 when the P/E10 level was low enough so that the likely 10-year annualized return was appealing. I took note of that on all the RobCasts I recorded at the time. But whether it was worth getting into stocks at that time or not was a judgment call. To get that good return, you would need to live through the hellacious crash coming up ahead. Is it worth it? To some it is, to some it is not. I elected to wait for a time when I can get amazing returns from stocks without having to live through a hellacious crash. I certainly don’t apologize for making that sensible choice (Nor do I criticize those who made the other sensible choice of increasing their stock allocation a bit in 2009).
I don’t believe I suffer from cognitive dissonance. The problem, of course, is that no one who suffers cognitive dissonance recognizes it. So it is possible that I really do suffer and just don’t see it.
I am going to continue posting honestly all the same. If I don’t see it, I don’t see it. And I don’t see it. So I will just have to keep posting honestly what I sincerely believe and we will see how things turn out following the next crash.
Does that sound fair enough to you?
Rob
bizarro says
You claim to have sold all your stocks to buy TIPS/IBonds in 1996. Of course neither TIPs nor IBond existed in 1996, but let’s set that aside. Assuming every penny of your investments is now in TIPS and IBonds paying 3.5% real, then you would be crazy to ever sell those to buy stocks. Yes, even if you got the single digit PE10 that you’ve been pining for all these years. A self-described retiree giving up a risk-free 3.5% real to buy risky assets in the middle of a financial cataclysm? That would be the craziest thing you’ve ever done – and that’s saying something.
Rob says
You are of course engaging in Deception #50,678 when you say that I claim to have bought TIPS and IBonds in 1996. I have said thousands of times that the money I got from getting out of stocks in 1996 was used to purchase TIPS and IBonds paying 3.5 percent real when those asset classes became available. Before that, it was in CDs paying between 6 percent and 7 percent. Which came to a return of about 3.5 percent real. So it amounts to the same thing.
If you can develop a habit of telling the truth (even to yourself!), you will come to understand things at a much quicker pace, Bizarro. All of your difficulties in understanding are self-inflicted.
I couldn’t possibly disagree more with you more re your idea that I should stay in TIPS and IBonds following a price crash that takes the P/E10 level down to 8 or so. Stocks pay an annualized 10-year return of 15 percent real at those prices. 15 percent beats 3.5 percent easy.
You are using the discredited Buy-and-Hold Model to inform your ideas about risk. You are suggesting that retirees should avoid stocks if they can get a decent return elsewhere. No. The primary determinant of how risky stocks are is the price at which they are selling Stocks are not risky when the P/E10 level is 8.
Please point to a single time in the history of the U.S. market when stocks offered a poor long-term return when purchased at a P/E10 level of 8. There has never been one. What makes stocks risky is high valuation levels. And a P/E10 of 8 is a low valuation level. So stocks will not be a risky asset class following the next price crash. It makes perfect sense to buy stocks when the risk of doing so is so low and the return being offered is so high.
You don’t understand risk, Bizarro. It is not because you are dumb. It is because you keep trying to rationalize away the 33 years of peer-reviewed research showing that the Buy-and-Hold Model is rooted in error (the error is that it is not necessary to exercise price discipline when buying stocks). For investors who exercise price discipline (which would be every last one of us if the Buy-and-Holders would just acknowledge the mistake that has been revealed by 33 years of peer-reviewed research), stocks are not a high-risk asset class. For Valuation-Informed Indexers, stocks are not much more risky than CDs or TIPS or IBonds and offer far higher long-term returns.
Anyway, I wish you all the best that this life has to offer a person regardless of what investing strategies you elect to pursue.
Don’t let the bad guys get you down, man.
Rob
bizarro says
No, it’s you who don’t understand risk. There is no reason that at PE10=8 the market can’t get cut in half again. And then again. There is no reason that 10-year returns must be wonderful. Oh sorry, there is: because by golly, that’s what happened in 1932 and 1982. Well, checkmate for you.
Rob says
It’s not that it just happened in 1932 and 1948, Bizarro. It’s that it has been happening for 140 years running.
The precise situation hasn’t played out for 140 years. There are of course lots of situations that come up. But the model for understanding how stock investing works that posits that prices are determined by investor emotion rather than economic realities has been playing out for 140 years. The model that posits that economic realities determine stock prices without going through an investor emotion filter has been able to explain what happens in the market for zero out of 140 years. A 140 for 140 record is a whole big bunch better than a 0 for 140 record.
For a P/E10 of 8 to get cut in half and then get cut in half again would put us at 2. The fair-value P/E10 value is 14. So you are saying that stocks could be selling at one-seventh of their fair value. There’s an asset worth $700,000 available for pick-up at $100,000 and no one bothers to pick it up. Huh?
There are reasons why turnarounds start at a P/E10 of 8. The value proposition is extraordinary at that price. Yes, investors are depressed at that point because their Buy-and-Hold fantasies have ruined their financial futures. But that still is an amazing value proposition. When the value proposition gets that good, it starts to break through the depression that comes with following Buy-and-Hold strategies to finance your retirement.
It can take a few years. We might stay at 8 for five years or even more. And, yes, we might even go down to 6 or 5 for a short amount of time. What you are missing is that the odds of heading upward in the long term are so much better when we are at 8 than they are when we are at 26 that it’s like talking about two different asset classes. Stocks offer horrible long-term returns today and risk is off the charts. When we get to 8, stocks will offer amazing long-term returns and risk will be virtually zero. It makes ZERO sense to go with the same stock allocation in both sets of circumstances.
It is not coincidence that there has never once been a time when stocks offered a strong long-term value proposition when prices were insanely high or a poor long-term value proposition when prices were insanely low. The explanation couldn’t possibly be more obvious. Stocks are like any other good or service that can be purchased with money. They offer a great value proposition at some prices, a moderate value proposition at other prices, and a horrible value proposition at still other prices.
Anyone who tells you that he thinks that there might be some mystical, magical research supporting the Buy-and-Hold “strategy” is using a line on you, Bizarro. It’s marketing mumbo jumbo. It’s b.s. It’s a dangerous and irresponsible and in some cases a criminal lie.
I advise you to educate yourself about what the last 33 years of peer-reviewed research tells us about how stock investing works in the real world. Your retirement is too important for you to place your confidence in the lies of the Wall Street Con Men touting Buy-and-Hold strategies 33 years after they were discredited by the peer-reviewed research in this field.
My best wishes to you and yours.
Rob
Anonymous says
Buy-and-Holders don’t adjust their allocations in response to valuation shifts. They rebalance. To rebalance is to STAY AT THE SAME ALLOCATION. That’s why that prefix “re” is in there. It means “again.”
That would be like your holding exactly the same asset allocation over the last almost 20 years, correct? Even when valuations where the lowest they’d been in decades?
Rob says
The peer-reviewed research of the past 33 years shows that investors MUST be open to adjusting their stock allocations in response to big valuation shifts. It does NOT say that allocations must be changed frequently.
On average, one allocation change is needed about once every 10 years.
18 years is longer than 10 years. But the ten-year thing is a rule of thumb. Sometimes a change will be needed after three years. Sometimes you can go 18 years without needing to make a single change. It comes to about 10 years on average.
I will be making a change following the next price crash. Say that that happens next year. That will mean one change for me in 19 years. Then two years later we may see a big price spike. Say that I increase my stock allocation by 80 percent following the next crash. Then we have a price spike and I lower it by 20 percentage points. That’s two allocation changes in 21 years. That’s right on average.
Nothing that I have done is out of the norm. It is on the edge of the norm. But the last bull market was the most insane bull market in history. So we all should be making changes on the edge of the norm. We are living through the most dangerous time to own stocks in U.S. history. What would you expect?
I did NOT stay at the same stock allocation when prices rose to insanely dangerous levels in 1996. And I will NOT stay at the same stock allocation following the next price crash. I am NOT a Buy-and-Holder. That’s what matters.
You are suggesting that I am a Buy-and-Holder because I haven’t changed my stock allocation in 18 years. If I am a Buy-and-Holder, why am I banned at the Bogleheads Forum? Is Jack Bogle not a Buy-and-Holder?
Rob
Anonymous says
I will be making a change following the next price crash. Say that that happens next year. That will mean one change for me in 19 years.
But since the last time the P/E 10 was lower than in 2009 was 30 years ago, it’s really more like once in 30 years. And since the odds of a great-depression level economic collapse in any given 1, 5, or even 20 year period is small, those following your strategy could easily end up holding a fixed 100% bond allocation for 50,60 or 70 years – longer than the typical investor’s investing life.
Rob says
None of that is so, Anonymous.
There were a few months in 2009 when stocks were not priced at insanely dangerous levels. There is never a need for investors to make rush decisions. You can always take time to think things through. If prices rise to insanely dangerous levels before you have time to think things through (as happened in 2009), you lose nothing except the thrill of living through a second stock crash.
Stock prices rose to insanely dangerous levels in 1996. That’s not 30 years. It’s not close.
We have never had an economic depression not preceded by a P/E10 level above 30. There are only two times in history when we have seen a P/E10 level higher than 30. The first time was in the months preceding the Great Depression. The second time was in the late 1990s.
There has never in U.S. history been a time-period of the sort you are describing in your comment. There have been time-periods when stocks were selling at prices at which money markets offered a better long-term value proposition. But those time-periods never last that long. Stocks are the best asset class available to the middle-class investor who has knowledge of what the last 33 years of peer-reviewed research in this field says.
Rob
Honest Anonymous says
Rob says:
“Do the math and you’ll see that you would be better off if the price gain were delayed until closer to your retirement date.”
Rob then says:
“We can have just the right amount of gain. That’s 6.5 percent real per year.”
So which is it, Rob? Do you want most of your stock gains near retirement or do you want 6.5% per year? You can’t have both.
Rob says
It’s better for everybody if gains are 6.5 percent real per year. If we permit honest posting, that’s what we will get. Market prices are self-regulating so long as there is no Ban on Honest Posting re the peer-reviewed research of the past 33 years.
The problem is that we all have a Get Rich Quick urge residing within us. So we are all vulnerable to the claims of the Wall Street Con Men that there might be some magical pixie dust that we could toss into the air to make a Buy-and-Hold strategy work for one or two long-term investors.
The words that you quote above help people overcome their Get Rich Quick urge. It is hard to trick people when they are able to see words showing how the trickery is hurting them.
The math is what the math is. Most investors are better off from a math sense when prices fall.
But that’s not the only consideration. We want to see economic growth. We have more economic growth if stock prices reflect the economic realities.
In any event, we are going to see price increases of 6.5 percent real if we permit honest posting. It doesn’t matter what you root for. You are going to get the price set by the market and the market is going to increase prices by 6.5 percent if investors are able to gain access to accurate and honest reports of what the last 33 years of peer-reviewed research shows.
I am trying to show people how much Buy-and-Hold hurts them in the long run. That’ the purpose of the math exercise. It’s just like when a credit card company tries to trick you into believing that it is a good idea to live a life far beyond what you can afford by taking on lots of credit card debt. That’s a lie. The math exposes the lie. So it is with stock investing. Get Rich Quick investing strategies sound good when you can only hear one side of the story. Once you see the math, you see why it is not a good idea to believe that the Wall Street Con Men are your friends.
What I want is honestly. People should know how damaging the pure Get Rich Quick strategy is to their retirement hopes. Once the word gets out about how many millions of middle-class lives have been destroyed by the Wall Street Con Men pushing their smelly Buy-and-Hold strategies, we will all be investing in our self-interest and we will be seeing gains of roughly 6.5 percent real each year. Stocks will be a low-risk asset class but returns will be as high as before and we will not see any more bull markets or bear markets or economic crises.
I hope that helps a bit.
Rob
bizarro says
There were a few months in 2009 when stocks were not priced at insanely dangerous levels.
But you didn’t buy. Why? Because you expected stocks to go even lower. Because that’s what your interpretation of history said they would do. But surprise, they didn’t.
The Dogs of the Dow used to be a hot investment strategy. Not anymore. Because once a pattern is recognized, it’s exploited by people with more money and faster computers. You expect to be able to buy in at PE10=8 again soon. Unless it’s fiscal armageddon, the pros will beat you in (again) and drive prices back up, while you’re still pondering.
By far the best move you ever made was buying those 3.5% real TIPS/IBonds. If that were possible now, I would retire today and withdraw 5% plus inflation RISK-FREE for the rest of my life.
This has been entertaining, but now I have to check out again for awhile. One last comment: I hope your upcoming FinCon presentation about predicting stock returns includes a announcement that you have owned no stocks in 18 years. Any audience member would find that highly relevant, given your chosen topic.
Rob says
If I were trying to defend Buy-and-Hold, this is the kind of argument I would be putting forward. I don’t agree with what you say here, Bizarro. But the content of your comment is honest. It is good for people to see this sort of comment so that they can make informed decisions as to which model for understanding how the market works they are going to use.
I haven’t prepared the FinCon presentation. I agree that listeners would find that relevant. And it may be that I will be able to fit it in. But five minutes goes by very quickly and I have a lot of other points I want to make. I’ve turned in the slides. I expect to do some practices of the oral presentation this week. I’ll fit that in if I can. But my guess is that there will not be room.
The TIPS/IBonds purchase was good. But it would have been better if I had pulled the trigger when they were paying 4 percent real!
You’re not right that the reason why I didn’t buy in 2009 was that I expected prices to go lower. I certainly saw that as one possibility. But I don’t believe in short-term timing. I don’t believe it is possible to know whether prices are headed higher or lower in the short-term (and there is 50 years of peer-reviewed research backing me up on this one). The POSSIBILITY that prices might go lower in the short term was certainly one factor that influenced me. The NEAR CERTAINTY that they would go lower in the long term was a bigger factor. But I still believed that stocks offered a strong long-term value proposition at the time and said so at the start of all the RobCasts I recorded at the time.
I do expect to be able to buy at 8. I won’t wait until 8 to start buying. But I believe that we will see 8 in the not-too-distant future.
I don’t think you are right about pros jumping in when we get to 8. Pros are humans too. Most of the pros believe in some version of Buy-and-Hold. They will be selling, not buying. That’s what will get us to 8 in the first place. And we never go to those lows and then jump right back up. The lows come about as a result of investor depression and it takes time for the depression to dissipate (just as it takes time for irrational exuberance to dissipate).
A root difference between us is that you imagine all sorts of people trying to outsmart us. My take is that most of the “experts” in this field are too busy outsmarting themselves to be able to outsmart too many others. Some might try if they knew more about the subject. But we are as a society at a primitive level of understanding of how the stock market works. We made huge strides during the Buy-and-Hold years (Thank you, Jack Bogle!). And Shiller supplied the final missing piece in 1981. But we have not yet incorporated all of the powerful insights developed over the past 50 years into a coherent whole. I’m working on it, I’m working on it!
I am worried about the possibility of financial armageddon. I put the odds at about one in three. I put the odds at two in three that my good friend Jack Bogle’s heart will melt following the next crash and that we will open the entire internet to honest posting on what the last 33 years of peer-reviewed research tells us and that we will thereby enter the greatest period of economic growth in U.S. history. I see the glass as being two-thirds full. But the empty one-third scares me all the same!
Take care, man.
Rob
Rob says
and faster computers.
Stock prices reached insanely dangerous levels in 1996. This is 2014.
The fellows with the blazing fast computers might want to try clearing the cache.
Rob
Rob says
Because once a pattern is recognized
What Shiller did in 1981 was something much, much bigger than recognizing a pattern. He showed that the core idea on which the entire Buy-and-Hold Model was built was in error.
The default belief is not that prices do not matter. The default belief is that prices DO matter. Prices matter with every good and service we buy. The puzzle here is — Why did so many smart people come to believe that price does not matter when buying stocks?
Many smart people came to believe this because in the early years of our investigations into how stock investing works (there were few serious investigations prior to the 1960s), a man named Eugene Fama made a startling discovery. Fama’s discovery was very important. He won a Nobel Prize for it. But Fama’s description of what he had discovered was tragically flawed.
Fama found that short-term timing (changing one’s stock allocation with the expectation of seeing a benefit for doing so within a year or so) does not work. All of the research done in the 50 years since supports Fama’s finding. It is the second most important finding in the history of investing analysis.
Unfortunately, Fama described the finding improperly. He did not say: “The data shows that short-term timing doesn’t work.” He said: “The data shows that timing doesn’t work.” The first statement is true and important. The second statement is wrong and dangerous. The second statement has caused millions of people to lose their jobs and has put millions of people on track to suffering failed retirements and has caused hundreds of thousands of business to fail and has caused numerous discussion boards and blogs to be burned to the ground or to be ethically compromised. The second statement will in days to come be responsible for having put a good number of friends of mine in prison cells.
The second statement is as false as any statement could ever be false. Shiller was the first person to test whether long-term timing (changing your stock allocation in response to a big shift in valuations with the understanding that you may not see benefits for doing so for as long as 10 years) works or not. Shiller found that long-term timing ALWAYS works and is ALWAYS 100 percent required for any investor hoping to have any realistic hope whatsoever of long-term investing success.
The false statement needs to be corrected. That’s what this 12-year saga is all about. No one can talk intelligently and honestly about how stock investing works according to the peer-reviewed research in this field until that statement has been corrected.
Fama did not discover a pattern showing that long-term timing doesn’t work. Fama didn’t discover ANYTHING about long-term timing because he never bothered to test whether long-term timing works or not or whether long-term timing is required or not.
Shiller did not find a pattern different than the pattern Fama found. Fama had never found any pattern relating to long-term timing because he never looked at the phenomenon. Shiller found the only pattern that has ever been found relating to long-term timing — he found that it always works and that it is always 100 percent required. Every researcher who has done follow-up work has found precisely the same thing.
There is no conflict in findings here. ALL of the data shows that short-term timing doesn’t work and ALL of the data shows that long-term timing ALWAYS works and is ALWAYS 100 percent required. Common sense of course tells us the same thing. ALL of the data confirms what our common sense tells us MUST be so.
The problem is that flawed human beings built their careers around an investing strategy that was developed before all the research that was required to know what works had been completed. These flawed human beings need to be encouraged to work up the courage to say the words “I” and “Was” and “Wrong” and thereby to permit themselves to spend the remainder of their lives doing good work rather than destroying millions of lives by refusing to acknowledge a very, very, very big error about a very, very, very important matter.
This is not about patterns. This is about saving the U.S. economic system from collapse as the result of an error made by our Buy-and-Hold friends nearly 50 years ago and uncovered by the peer-reviewed research in this field 33 years ago.
My best and warmest wishes to all of my soon-to-be-prison-dwelling Goon friends.
Rob
Anonymous says
I defend buy, hold and rebalance because of its superior performance with actual real life numbers of using this strategy.
Rob says
And that’s helpful and good and true and proper, Anonymous.
But you go a step beyond that.
You make use of 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 protect yourself from having to respond to the findings of the last 33 years of peer-reviewed research in this field.
That’s financial fraud.
Thats a felony.
That’s prison time.
That’s where you cross a line that no one should ever cross just because he feels emotional angst knowing that there are people in the world who have beliefs about how stock investing works different than his own.
That’s my sincere take re this terribly important matter in any event.
My best and warmest wishes to you and yours, Anonymous.
Rob
Honest Anonymous says
“I am worried about the possibility of financial armageddon. I put the odds at about one in three. ”
Can we see your mathematical model/algorithm supporting your probability claim? Thanks.
Rob says
There is no mathematical model supporting the probability claim, Honest.
I believe this because what I know about my country’s history and how we have pulled together to get through earlier crises and then to thrive in the years following.
We are the luckiest generation of investors who ever walked the planet. Combine Fama’s findings and all the insights that followed them with Shiller’s findings and all the insights that follow from them and we have the investing problem beaten. We can all earn far higher returns than ever before while being exposed to only a fraction of the risk. That’s Investor Heaven. Every single one of us, including all of my Buy-and-Hold friends, wants that. It’s a matter of us all pulling together and showing the kindness and courage and intelligence required to make it happen.
The other possibility is a very dark one. If we continue on the path that we are on today of banning discussion of the past 33 years of peer-reviewed research at every major investing board and blog on the internet, we are likely to see the Second Great Depression. The losses from Buy-and-Hold will end up being in excess of $20 trillion. No economic system, no matter how great, can survive that sort of hit. It is not a viable ongoing proposition to think that we can make millions of middle-class investors responsible for their own retirements and then deny them the information they need to invest effectively.
I love my country. And I have faith in my country to pull through this.
Heck! I have faith in my Buy-and-Hold friends! I believe that Jack Bogle himself is going to feel his heart melt following the next crash. I expect to be working side by side with Jack to put things back together.
But I don’t feel that I can say that the odds of that happening are 100 percent given what I have seen over the past 12 years. The Buy-and-Holders are deeply embarrassed and deeply ashamed and deeply humiliated to acknowledge their mistake today. They are going to be even more embarrassed and more ashamed and more humiliated to do so following the next price crash. The prison sentences will obviously be longer if they don ‘t come clean until after the next price crash. So there obviously is a significant chance that we will be going over the cliff.
To say that the odds are one in three that that will happen is to say that the odds are twice as good that we will all pull together and bring on the greatest period of economic growth in our history. My sense is that that’s about right. My sense is based on what we have done throughout history. We have gotten ourselves into some messy spots over the years. But we have always sobered up and pulled through before time ran out. I believe that the odds that we will do that yet once again are at least two times as great as the odds that we will let the whole thing go down because there is just too much embarrassment and shame and humiliation involved in acknowledging that this point that we have been telling lies (re something that started out as a mistake) re what the peer-reviewed research in this field says about how stock investing works in the real world.
I hope that helps a bit, my long-time Goon friend.
Rob