I’ve recently posted Entry #197 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called It’s Critical to Distinguish Short-Term Bulls and Bears from Secular Bulls and Bears.
Juicy Excerpt: Shiller’s finding that long-term timing always works, combined with Fama’s finding that short-term timing never works, should change how we think about stock investing in a fundamental way. Our natural inclination is to focus on the short-term. We live in the short term and we possess a natural skepticism about efforts to predict long-term results. But the research is showing us that the short term just doesn’t matter, that the predictable long term always dominates in the end. So we need to make an effort to shift our focus.
We are living through the opposite of the 1975-1982 experience today. Many investors have concluded that we are in a bull market because prices have been headed upward for several years. No. There has never been a secular bear market that ended without us touching a P/E10 level of 8 and remaining in that general neighborhood for a number of years. In this secular bear, we haven’t yet gone anywhere near 8 and we were at fair-value price levels for only a few months in early 2009. Today’s bull market gains are a temporary phenomena that will be washed away into insignificance by the power of the long-term bear in which this short-term bull has asserted itself.
It’s when we have experienced the next crash that we will be at the price levels at which real bulls, secular bulls, are born. Don’t be fooled if we spend several years with the P/E10 value well below fair-value levels. It doesn’t matter. So long as the P/E10 value remains stable, stocks offer a strong long-term value proposition. You always want to be thinking about where prices are headed. When prices are at rock-bottom lows, there’s only one direction in which they can be headed!
x says
Since you’ve been maintaining a vigil for PE10=8 for 18 years (and counting) perhaps we need another category besides short and long term timing. Perhaps “glacial timing”. Feel free to use that.
Rob says
The general point that you are making is legitimate, X. The tone you are using to express it is unhelpful.
I haven’t been maintaining a vigil for a P/E10 of 8 for 18 years. I got out of stocks in 1996. Not because I thought that the P/E10 level would soon hit 8. I got out of stocks because stocks did not at that time offer a strong long-term value proposition.
What Shiller showed in his “revolutionary” (his word) research of 1981 is that stock investing risk increases as valuations increase. At some point, valuations are high enough that stocks offer a poor long-term value proposition compared to other asset classes. That was the case in 1996. So I went with the better value proposition. Is that really so strange? Is that not what all investors should be trying to do?
I have often said that we will see a P/E10 of 8 before this secular bear market comes to a close. I say that because never once in U.S. history has a secular bear market come to an end before we hit 8. I grant that it is possible that things could turn at 9 or 10. But that doesn’t change anything. A drop from the mid-20s to 10 is a huge drop. So the basic point remains valid.
All that I do that you do not do is to consider my self-interests when buying stocks. That’s a perfectly logical thing to do. You would do it too if you were not emotionally addicted to stocks. You are not emotionally addicted to stocks because of anything I have ever said. You were emotionally addicted to stocks on the morning of May 13, 2002. You became emotionally addicted to stocks because “experts” in this field (who possess expertise only in the use of marketing gimmicks) told you that stocks are the one thing on Planet Earth that are worth buying at any possible price. That is of course absurd and it is of course not true and we now have 33 years of peer-reviewed research (based on 140 years of historical data) SHOWING us with numbers that it is not even close to being true.
What did Shiller really show? He showed that stock investing is a highly EMOTIONAL endeavor.
What has every post that you and the other Goons have put forward over the past 12 years demonstrated? THAT STOCK INVESTING IS A HIGHLY EMOTIONAL ENDEAVOR.
A funny coincidence?
I think not.
The P/E10 value is taking a long time to fall to 8. THAT’S BECAUSE YOU AND MILLIONS OF OTHER INVESTORS ARE ADDICTED TO A GET RICH QUICK STRATEGY. We have had insane bull markets before. And they have of course always produced insane bear markets and economic crises. It is not possible that things could ever turn out any other way. What is different this time is that we have people purporting to be “experts” telling us that there is some sort of magical, mystical research (for which they are not able to provide a URL) assuring us that it is all going to turn out different this time.
This fourth go-around with Buy-and-Hold has made it an even more emotionally addictive and more destructive a Get Rich Quick scheme than it has ever been in the past. So the P/E10 value this time went to levels FAR above where it had ever gone before. And so it has taken longer for the secular bear market we have created to play out.
That’s not an argument for pushing the Get Rich Quick garbage even harder. It is an argument for permitting honest posting re the last 33 years of peer-reviewed research. We shouldn’t be trying to extend this economic crisis as long as possible. We should be trying to bring it to a full and complete stop as soon as possible.
We have a hard time communicating because you are not willing to take into consideration the 33 years of peer-reviewed research showing that a pure Get Rich Quick strategy never works in the long run. As much as you believe that it is imperative that we not permit discussion of the peer-reviewed research anywhere on the internet, I believe that it is imperative that we DO permit discussion of the peer-reviewed research. I see it as a national tragedy that we have delayed doing so for 12 years now.
We will get there. The good news here is 50 times more good than the bad news is bad. Even you Buy-and-Holders once believed that it was a good idea for investors to consider the peer-reviewed research when developing their investing strategies. My good friend Jack Bogle is going to return to his roots following the next price crash. The human misery he is going to see appear before his eyes is going to melt his heart. I think I know the man pretty darn well from studying his speeches and writings, which played a big role in forming my belief that all investors should be open to considering the findings of the peer-reviewed research in this field. Jack’s heart is going to melt and we are going to take this thing to a very, very, very good place. I am sure.
I naturally wish you all the best that this life has to offer a person regardless of what investing strategies you elect to pursue, X.
Rob
Rob says
A shorter response.
Most of us need to invest for roughly 60 years (from age 25 to age 85).
Even if following research-based strategies meant that we would be down for 18 years, it would be worth it to obtain far higher returns at greatly reduced risk over our 60-year investing lifetimes.
It doesn’t mean that. I am ahead today. And ALL investors would be ahead today if we had been telling them all along what the last 33 years of peer-reviewed research shows to be true beyond any reasonable doubt.
But even if the reality were otherwise, it would be worth being a little patient to be able to retire five to ten years sooner while reducing investing risk by nearly 70 percent.
My take.
Rob
Anonymous says
Red Alert, Rob!!!!! They are having yet another discussion on SWRs over at the boglehead forum and they are having it without your expert opinion:
http://www.bogleheads.org/forum/viewtopic.php?f=10&t=151623&sid=605f752d91a5c5ab2ab5729e995a802c
I think you better set them straight.
Rob says
I do what I can, Anonymous.
I pointed out the errors in the Old School SWR studies in my famous post from the morning of May 13, 2002. I think it would be fair to say that we would all be better off if Greaney had corrected his study within 24 hours and if we had all moved on to better things.
We are going to have to get those studies corrected sooner or later in any event. The best bet was to do it as soon as humanly possible. The best we can do today is to get them corrected by the close of business tomorrow.
I’m in.
How about you?
Rob
Rob says
The emotion in your comment tells a tale, Anonymous.
It stops hurting when you come clean.
I am sure.
Rob
Evidence Based Investing says
Most of us need to invest for roughly 60 years (from age 25 to age 85).
And yet you obsess about what your calculators say about 10 year estimated returns.
Your calculators show 30,40,50 and 60 year estimated returns at 5%+ real. This would suggest that stocks are a good long term value proposition.
Rob says
We are in complete agreement re your second point, Evidence. Stocks offer an OUTSTANDING long-term value proposition. I would characterize stock indexes as the best asset class for the typical middle-class investor. I think of myself as being every bit as much pro-stock as my Buy-and-Hold friends, possibly more so.
I don’t agree with your use of the word “obsess” in your statement of your first point. I REPORT what the results are at 10 years, that’s all.
The Buy-and-Holders cover this up. That’s why it may appear to you that I “obsess” re this point, it seems that way because I am the only one talking about it.
We ALL should be talking about it. Not just the 10-year results that I focus on. We all should be talking about ALL of it. The 10-year stuff is important. The 1-year stuff is important. The 30-year stuff is important. The 60-year stuff is important. How it all works together is important. No one should be obsessing on one aspect of the question and no one should be ignoring any aspects of the question.
We’re all in this together. We all are on the same side. We all should be working together to learn as much as we possibly can learn about how best to invest the money we intend to use to finance our retirements.
That’s my sincere take re these terribly important questions, in any event.
Rob