Set forth below is the text of a comment that I recently posted to another blog entry at this site:
You are the only known person to be implementing VII.
I don’t know where you got the idea that I am the only person implementing Valuation-Informed Indexing strategies. Nothing could be farther from the truth.
Valuation-Informed Indexing is Research-Based Investing. The two terms are synonymous.
People have been following Research-Based Investing strategies since the first market was opened for business. And people have been following Get Rich Quick strategies (Buy-and-Hold) since the first market was opened for business. The history of investing analysis is the history of a battle between these two “ideas.” I put the word in quotes because Get Rich Quick is not really an idea, it is an emotional impulse. It might be more accurate to say that the history of investing analysis is the history of a battle between these two drivers of behavior, the one an idea and the other an emotional impulse.
Each “idea” becomes more or less popular at different moments in history. You can look at Shller’s site and track the popularity of the two ideas over the course of the past 140 years. Buy-and-Hold/Get Rich Quick got very popular in the early 1900s. Then we saw an economic collapse. Then Valuation-Informed Indexing/Research-Based became popular for a time and our economy thrived. Then Get Rich Quick/Buy-and-Hold became popular again in the late 1920s and we experienced the first Great Depression. Then Valuation-Informed Indexing/Research-Based became popular again and we recovered from the Depression. Then Get Rich Quick/Buy-and-Hold became popular again and we experienced the stagflation of the 1970s. Then Valuation-Informed Indexing/Research-Based became popular again and we saw another economic boom. Then Buy-and-Hold/Get Rich Quick became popular again and entered today’s economic crisis.
It’s a cycle, Anonymous. That’s not a coincidence. There is a reason why we always cycle back from Get Rich Quick/Buy-and-Hold to Valuation-Informed Indexing/Research-Based and from Research-Baed/Valuation-Informed Indexing to Get Rich Quick/ Buy-and-Hold.
We all possess a Get Rich Quick urge. So our natural state is to be drawn to Buy-and-Hold strategies. Investors have the power to set stock prices wherever they want them to be. We can vote ourselves raises. There is a voice within our heads that says: “Given that you have the power to vote yourself a raise, why not get together with your fellow investors and do it?” That voice is always present. It never goes away. Bull markets (the product of the Get Rich Quick urge) are a natural phenomenon.
If that were the end of the story, the markets couldn’t function. Our natural Get Rich Quick urge would destroy them every time we tried to build them. But we ALSO possess a Common Sense urge that COMPETES with the Get Rich Quick urge.
Get Rich Quick/Buy-and-Hold ALWAYS destroys all of those who follow it and also always destroys the economy of a people who collectively are taken in by it. There has never been a time when Buy-and-Hold/Get Rich Quick became popular and we did not see an economic collapse. There is no other way that an addiction to Buy-and-Hold/Get Rich Quick can end. Those addicted eventually reach a point at which hearing what common sense says or what the historical data says (it is really just a common sense urge that causes us to turn to historical data to learn how stock investing works) becomes unbearably painful because reality “insults” the Get Rich Quick urge (reality is a troll!). So Get Rich Quick/Buy-and-Hold ALWAYS creates the conditions that cause it to be discredited and that cause million of investors to swear off Buy-and-Hold/Get Rich Quick. Get Rich Quick/Buy-and-Hold cannot continue indefinitely, it is too destructive a force.
I believe that Valuation-Informed Indexing/Research-Based CAN continue indefinitely. I believe that, following the next crash, we are all going to turn to Valuation-Informed Indexing/Research-Based and never go back. There are many good and smart people who think I am wrong about this. There are many people who think that the humans can never overcome their natural inclination to destroy their lives with Buy-and-Hold/Get Rich Quick.
I don’t think that’s right. I think over time we are advancing in our knowledge of how stock investing works. I view the introduction of Buy-and-Hold as it was promoted by people like my good friend Jack Bogle as a POSITIVE. Buy-and-Hold is dangerous. It is the ultimate expression of the Get Rich Quick urge. It has never worked for a single investor in the long term and it is a logical impossibility that it ever could. But the core idea is a very positive one.
The core idea of Buy-and-Hold is that investing strategies should be focused on the long-term and should be rooted in research. That is a wonderful advance. That is breakthrough stuff. It is because Buy-and-Hold is (or at least was meant to be) rooted in research that I became a Buy-and-Holder myself. It is because Buy-and-Hold is (or at least was meant to be) rooted in research that I always refer to you Goons as “friends.” I obviously do not endorse your death threats or your demands for unjustified board bannings or your tens of thousands of acts of defamation or your threats to get academic researchers fired from their jobs. What I love about you is that you believe in research-based strategies (so long as they do not interfere with your addiction to Buy-and-Hold!) In an ultimate sense, we are on the same side. In an ultimate sense, we walk the same path. In an ultimate sense, we are trying to do the same thing.
You are a Valuation-Informed Indexer, Anonymous!
You spit on the ground when you hear the words. That doesn’t matter. Actions speak louder than words. You have advocated what you call “Strategy C” in comments to this blog. Strategy C is a mix of Get Rich Quick/Buy-and-Hold and Valuation-Informed Indexing/Research-Based. It is tilted in the direction of Buy-and-Hold. But it is not dogmatic Buy-and-Hold. When you advocate Strategy C, you are letting common sense and the results of the research done in this field to influence your thinking.
It would not be right to call you a pure Valuation-Informed Indexer. You certainly are not that. You HATE hearing what the research says. But you are not a pure Get Rich Quicker either. There is a part of you that sees some benefit in knowing what the research says. That is why discussion of what the research says hurts you so much. You very much want to follow Get Rich Quick and yet there is a part of you that sees through it and hearing what the research says reminds you of the benefit of paying attention to that voice of common sene.
The same thing is going on with Jack Bogle. He says that it is okay to change your stock allocation by 15 percentage points when prices reach insane levels. He pulled the 15 percent figure out of his backside. There is zero research pointing anywhere in that direction. But you can’t say that Bogle is a pure Buy-and-Holder. A pure Buy-and-Holder would say that you should not change your allocation at all — forget this 15 percent stuff. Bogle is a Valuation-Informed Indexer! He is more a Buy-and-Holder than a Valuation-Informed Indexer. But he allows the research to influence him a bit while still maintaing a greater belief in Get Rich Quick. He is a mix, like you.
Like just about everyone. I am a mix too, of course. You pointed out yesterday how in one of my columns I gave in to a temptation to make a short-term prediction and naturally got it wrong. That’s the Buy-and-Hold/Get Rich Quick side of me coming out. Short-term predictions don’t work. All the research shows it. It is a core principle of Valuation-Informed Indexing. So why try? Because I am human. And because humans are drawn to Get Rich Quick/Buy-and-Hold. Because I am a mess-up, just like all you Goons.
Many good and smart people think we are doomed to repeating this stupid cycle over and over and over again. I do not. The difference in this fourth cycle is that we now have 33 years of peer-reviewed research showing us what works. We never had that before. Common sense told us that price matters and of course the three earlier economic crises that were caused by a belief in Buy-and-Hold strategies taught us (for a time!) that the Pretend Gains that follow from adoption of Get Rich Quick strategies come at a price. But peer-reviewed research is different.
Research is objective. Research is numbers. I believe that the Buy-and-Holders were serious about using research to become better investors and I believe that research really makes a difference. Our MISUNDERSTANDING of what the research says has brought on what is likely to end up being known as the worst economic crisis in our history. But if the Buy-and-Holders are good people, as I believe they are, Jack Bogle’s heart is going to melt when we enter the Second Great Depression and he is ten going to work up the courage to walk to the front of a big room and say the words “I” and “Was” and “Wrong.” At that point, we are off to the races. Once Bogle flips, everyone is going to flip. I don’t see any reason why we would ever return to Get Rich Quick/Buy-and-Hold again once every web site on the internet is telling the story of what the last 33 years of peer-reviewed research says.
Get Rich Quick/Buy-and-Hold didn’t start with Jack Bogle and Valuation-Informed Indexing didn’t start with Robert Shiller. Both have been around since the first market opened for business. Because the human urge to get something for nothing has been around since the first market opened for business and the human desire to correct the excesses of Buy-and-Hold strategies with the common sense findings of the peer-reviewed research has ALSO been around since the first market opened for business.
And both the Get Rich Quick urge and the Common Sense urge reside within every human being. Bogle has a small desire to follow research-based strategies residing within him and Shiller has a small desire to follow Get Rich Quick strategies residing within him.
You are a Valuation-Informed Indexer, Anonymous.