Set forth below is the text of a comment that I posted to another blog entry at this site:
All it proves is that you can find patterns in the data. Let’s see….each time the P/E10 ended in a “1? in February, it dropped 10% by the following May. There’s no causation – that’s all in your head.
If we were talking about a small number of years, it would make some sense to say that it is just coincidence. But the P/E10 level has been effectively predicting long-term returns for 140 years. The odds of the same coincidence playing out 140 years in a row are probably something like 10 billion to one. This is something real.
We don’t know all the details. I don’t say that we know everything there is to know. But Valuation-Informed Indexing is rooted in something real and important.
That’s why Shiller was awarded the Nobel Prize in Economics. As a society we are gradually working up the courage to acknowledge what a big deal this is. At an earlier time, the people who awarded Shiller the Nobel prize wouldn’t have done so. My guess is that, if you looked at the portfolios of the people who awarded him the prize, you would find that most of them are more believers in Buy-and-Hold than they are in Valuation-Informed Indexing. But they are experiencing doubts. That’s what led them to make that statement.
They didn’t feel safe making a bold statement.They gave the prize to Fama too so that they could not be viewed as “taking sides.” They didn’t take sides but they changed the playing field. In the old days, Fama was it, there was no Shiller. Those days are gone. Buy-and-Hold is still dominant, Valuation-Informed Indexing is still the thing that can only be discussed tentatively, not in bold and firm and clear terms. But that is in the process of changing when the guy who did the research that led to the revolution in understanding is being awarded a Nobel prize for his work.
This isn’t some kind of thing where people are saying “Buy stocks in January and sell in May.” The data is available at Shiller’s web site. Buy-and-Holders can study it as long as they want. And yet in 12 years of discussions no one has ever found a single hole in the new model. That tells us something, Anonymous.
I have no fear that Jack Bogle will ask me a question that I cannot answer. But Jack sure has fears that I will ask HIM a question that HE cannot answer.
Why? Because Buy-and-Hold is the thing that is in the process of dying and Valuation-Informed Indexing is in the process of being born.
In future days, we won’t look at it that way. In future days, we will be able to look back at what the Buy-and-Holders did and give them full credit for all of their wonderful contributions. That becomes possible when the Buy-and-Holders stop being so defensive and when we all can acknowledge that Buy-and-Hold was a FIRST DRAFT effort at a research-based investing strategy and that Shiller’s “revolutionary” (his word) findings moved the Buy-and-Hold project forward in a very, very, very important way.
You either believe in following the research or you don’t, Anonymous. If you don’t believe in following the research, then you are just guessing when you invest your retirement money. If you don’t believe in following the research, then you really are back with the people who say “Buy in January and sell in May” and all the other garbage that follows from a guessing approach.
If you truly believe in following the research, you cannot ignore what Shiller discovered. His discovery that valuations affect long-term returns changes everything in a fundamental way.
Buy-and-Hold could once be promoted as a research-based strategy. It cannot honestly be promoted as that today. Once peer-reviewed research was published showing that valuations affect long-term returns and the Buy-and-Holders neglected to change their strategy to incorporate this revolutionary finding, Buy-and-Hold stopped being research-based and became just another case of investing superstition.
The Buy-and-Holders have two choices today. They can accept that they made a mistake and change the Buy-and-Hold Model so that it reflects the last 33 years of peer-reviewed research as well as the research that came before that. Then they go down in history as the people who developed the foundation for the first research-based strategy and then later made the changes needed for that model to work in the real world.
Or they can continue with the death threats and the demands for unjustified board bannings and the tens of thousands of acts of defamation and the threats to get academic researchers fired from their jobs. Then they go down in history as fools and con men and felons.
There is no middle ground. You cannot say “this is a research-based strategy” and ignore the last 33 years of peer-reviewed research.
They didn’t award Shiller the Nobel Prize because he is some clown who forgot to take his meds. When you say that Valuation-Informed Indexing cannot be discussed on the internet, you are saying that the last 33 years of peer-reviewed research cannot be discussed on the internet. That makes you the clown.
An unethical clown.
A clown headed on his way to a prison cell.
That’s my sincere take re this terribly important matter, in any event.
My best and warmest wishes to you, my long-time clown friend.