Set forth below is the text of a comment that I recently put to another blog entry at this site:
I actually don’t know one person who buys into stocks without concern for price.
Yes and no.
Buy-and-Holders kinda sorta acknowledge that valuations matter.
But they don’t QUANTIFY the effect of valuations.
They quantify everything else. But not that. The Old School SWR studies contain NO adjustment for the valuations level that applies on the day the retirement begins.
That’s always been the source of the friction between me and the Buy-and-Holders.
I learned from them to quantify stuff and to pay attention to the peer-reviewed research and to focus on the long-term. So, when I learned from Shiller that valuations ALWAYS affect returns in the long-term, I naturally got about the business of QUANTIFYING the effect.
And the Buy-and-Holders went positively apeshit.
It’s THEIR idea!
But they hate it. They hate that one application of their idea with an awesome hate.
You figure it out, you know?
I think they hate it so much because they know on one level of consciousness that what I am saying makes perfect sense given everything else they believe.
If you come up with some different explanation of their behavior, please fill me in. Until someone comes up with something else, I am going with the cognitive dissonance thing.
It’s their idea to quantify things. I picked that one up from my Buy-and-Hold friends. But they hate, hate, hate the idea of quantifying the effect of valuations on long-term returns.
Other than that, Jack Bogle and I (and Mel Linduaer and I and John Greaney and I) are soul mates.
Rob
QUANTIFY the Effect of Valuations
Right, we don’t crunch the numbers and declare that stocks are about to fall by 65% or whatever. Instead, we note simply that higher valuations sometimes mean lower returns ahead, just as the Vanguard paper and many others have shown.
I actually don’t know one person who buys into stocks without concern for price.
Like every other asset for sale, prices are constantly being adjusted by the market to reflect current conditions. You can have all the “concerns” you want from your laptop in your basement, but the big boys have set the prices more correctly than you ever will. It’s called a market.
I’m “concerned” Audis are too expensive. So what? The market sets the price.
Right, we don’t crunch the numbers and declare that stocks are about to fall by 65% or whatever. Instead, we note simply that higher valuations sometimes mean lower returns ahead, just as the Vanguard paper and many others have shown.
That’s definitely what you do, Anonymous.
I think you should quantify the effect.
When you quantify it, the information you come back with is actionable.
Just saying “lower returns may be ahead” is not actionable information.
That’s my sincere take, in any event.
My best wishes to you and yours.
Rob
Like every other asset for sale, prices are constantly being adjusted by the market to reflect current conditions. You can have all the “concerns” you want from your laptop in your basement, but the big boys have set the prices more correctly than you ever will. It’s called a market.
What you have described is how it SHOULD work, not how it DOES work.
The thing that allows markets to work their magic of getting prices right is INFORMATION. How many investing sites offer a version of The Stock-Return Predictor? How many offer a version of The Retirement Risk Evaluator? How many offer a version of The Investor’s Scenario Surfer?
Market participants need that information to make the decisions that make a market functional. You Goons have DENIED millions of investors that information. They can’t do the job if you deny them the tools.
The “big boys” are in the same boat. A Big Boy who invests rationally will be fired from his job. Look at what happened to Wade Pfau. He co-authored research that he thought would win him the Nobel Prize. Wade was a Big Boy who tried to do a very Big Boy thing. But some other Big Boys came along and threatened to destroy his career unless he gave up his dream of helping millions of middle-class investors by publishing honest research.
Some of the Big Boys very, very, very much do not want millions of middle-class investors to learn what the last 34 years of peer-reviewed research says. They became millionaires by tricking us into believing that all the rules of stock investing will be turned on their heads and for the first time a Buy-and-Hold strategy might work for one or two long-term investors. Sure it will. That’s why the Big Boys pushing the smelly Buy-and-Hold garbage feel a need to employ 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.
We enacted laws making financial fraud a felony to keep those sorts of Big Boys in check. Those laws need to be enforced if we are to bring this Buy-and-Hold Crisis to an end.
My take.
Take good care, man.
Rob
I’m “concerned” Audis are too expensive. So what? The market sets the price.
Not without accurate and honest information it doesn’t, Anonymous.
Say that all the Audi dealers got together and vowed to destroy the career of anyone who gave customers accurate information about how much an Audi costs. People could buy Audis but they could never know how much they cost; they would just have turn over access to their checking accounts to the dealer and he would take whatever amount he wanted out of their accounts.
The dealers could get filthy rich in a small amount of time by quoting very low prices and then taking huge amounts out of the customer’s accounts. So long as they could insure that no customer could find out how much he paid, the Audi dealers would become millionaires and the Audi customers would be ripped off in a terrible way.
Eventually, though, the gig would be up. Some enterprising reporter would find out about the scam and the market for Audis would be destroyed. That’s what we are seeing in this economic crisis. Stocks were overpriced by $12 trillion in 2000. The Pretend Money created through the promotion of Buy-and-Hold “strategies” always disappears in time. We are in the process of seeing that Pretend Money disappear and of seeing the middle-class in this country destroyed.
Yes, the Wall Street Con men have gotten filthy rich by ripping us all of with their Buy-and-Hold Lies. But they live in the country that they are in the process of destroying. There comes a time when it has to be about more than just making a filthy buck. There comes a time when you have to give some thought to the millions of lives you are destroying and to the prison sentence you will be serving once you have brought on the Second Great Depression with your relentless promotion of Get Rich Quick garbage.
That’s my sincere take re this terribly important matter, in any event, Anonymous.
I love my country.
Sue me.
Rob
When you quantify it, the information you come back with is actionable.
Just saying “lower returns may be ahead” is not actionable information.
You can’t take direct action on an uncertain future. You can pretend the future is certain – you can say “65% stock drop is imminent!” if you want. But that doesn’t make it true.
The thing that allows markets to work their magic of getting prices right is INFORMATION.
Right, and let’s agree that the institutional investors which set the prices have 1000X more information, and resources to gather more information, than you ever will. So imagining you know something they don’t – that they’re unaware of P/Es, for example, is pure fantasy.
You can’t take direct action on an uncertain future. You can pretend the future is certain – you can say “65% stock drop is imminent!” if you want. But that doesn’t make it true.
The research does not support a claim that “a 65 percent stock drop is imminent.” When prices crash, they will crash because of a break in investor psychology. We cannot predict breaks in investor psychology. So that is out.
But the research shows that using P/E10 we can know when risk is elevated. If you see that someone driving a car is drunk, you can say with authority that the risk of him getting in an accident is higher than it would be if he were sober. If a doctor has a patient that has been smoking three packs of cigarettes for 40 years, he can say with authority that that patient is at greater risk of getting lung cancer than a patient that never smoked. If it is January, you can say with authority that the odds are much better that we will see a snowstorm sometime over the next three weeks than they would be if it were April.
There are things that we can say about future stock prices and there are things that we cannot say about future stock prices. We should be avoiding saying the things that we cannot say and we should be making certain to say the things that we can say. It is irresponsible not to warn investors of crashes when prices are insanely high because every crash of lasting significance took place at a time when prices were insanely high. Stock investing is a different long-term experience for investors who go with high stock allocations at times when prices are insanely high than it is for investors who are careful to lower their stock allocations when prices reach insanely high levels.
The future is uncertain in some ways but not in others. Ignoring prices always ends badly. That Buy-and-Hold strategies will produce bad results is not uncertain. Buy-and-Hold strategies have ALWAYS produced bad results. It is impossible for the rational human mind to imagine any other possibility. Buy-and-Holders do not practice price discipline when buying stocks. To fail to practice price discipline when buying stocks is akin to driving a car under the influence of alcohol. It is an insanely irrational act. It is the job of an investing advisor to warn his clients and readers of the dangers of this irresponsible and long-discredited (by the peer-reivewd research) investing strategy.
For a person who is driving drunk to justify his behavior by noting that “the future is uncertain” is sad. For his friends to encourage his rationalizations is irresponsible. I want no part of it. I love the contributions that the Buy-and-Holders have made. I want to make those contributions useful in the real world. To make those many positive contributions useful in the real world, we need to remove the Get Rich Quick element from the Buy-and-Hold strategy. We need to encourage long-term timing (price discipline) while continuing to discourage short-term timing (because the peer-reviewed research really does show that short-term timing doesn’t work, just as the Buy-and-Holders claim).
Rob
Right, and let’s agree that the institutional investors which set the prices have 1000X more information, and resources to gather more information, than you ever will. So imagining you know something they don’t – that they’re unaware of P/Es, for example, is pure fantasy.
Institutional investors are aware of Shiller’s work. The problem is not that they don’t know that it exists. The problem is that they have not integrated it into their thinking. For that to happen, we need to open every board and blog on the internet to honest posting. Then we will see the national debate that we need to see to have both institutional investors and average investors change their mindsets in the way in which they need to change them for us to see a 70 percent reduction in the risk of stock investing.
Consider the drunk driver again. Do you think that we need to instruct drunk drivers as to the dangers of driving when under the influence of alcohol? They know, Anonymous. They get it. When people drive drunk, they are not acting rationally. It is not a lack of knowledge that is the problem. It is an unwillingness to make use of knowledge available to us all that is the problem.
You want to invest well. And you are plenty smart. There is no problem with an inability to understand Shiller’s work on your part. You don’t want to understand the implications of Shiller’s work. That is the problem. The human will trumps the human intellect. When you want to know, you will let it all in. But not until then. Until you want to know, I am talking to a brick wall. You are able to produce a rationalization to overcome the power of any peer-reviewed research that I present to you.
If we permitted honest posting on the last 34 years of peer-reviewed research, it would be harder for you to rationalize. There still would be a part of you that wanted to (we all possess a Get Rich Quick urge). But you would be hearing the message that “ignoring price is dangerous” on a daily basis. That would have an effect. It probably would not make you a full-fledged Valuation-Informed Indexer. But it would change you. If honest posting were permitted, you would be going with a lower stock allocation than what you go with today. And so would just about everyone else. Words rarely cause instant conversions. But words do make a difference. If we heard the other side of the story, we would behave differently.
A lot of people say: “Commercials don’t effect me.” They claim indifference re whatever claims are made for a particular cola or a particular toothpaste. They point out that commercials rarely even make intellectual claims, most of them tell jokes or make emotional claims that lack intellectual substance. But the reality is that those people buy the brand of cola and the brand of toothpaste that are advertised the most. If stupid commercials didn’t get the job done, companies wouldn’t pay millions of dollars to have them aired on television. Emotional appeals work. Repetition of a message works.
It doesn’t matter how smart you are. Emotional appeals and repetition work on smart people just as surely as they do on dumb people. Institutional investors are every bit as human as you and I. Institutional investors get every bit as addicted to stocks as you and I. In every crash we have seen, there were institutional investors who were saying on the day before the crash that the skies looked sunny. They believed it when they said it. They just cannot see through their emotion-based biases.
The reason why we have seen friction in the 13 years of our discussions is that Shiller opened a door to The Forbidden Zone of investing analysis. Humans gain knowledge of how things work over time. By 1981, we had acquired a lot of knowledge of how stock investing works. But it was almost all numbers stuff, not human psychology stuff. The human psychology stuff is at least 50 percent of the game (I put it at 80 percent for those who invest in index funds, which is most of the population of investors, in my assessment). So Shiller’s advance was huge, bigger than anyone imagined possible. When an area of knowledge has been widely ignored, the potential for advances in that area is off the charts.
It makes the Buy-and-Holders feel bad that they ignored those advances for so long. It is not my intent to make the Buy-and-Holders feel bad. My intent is to make the Buy-and-Holders feel GOOD. When the Buy-and-Holders incorporate Shiller’s advances into their model, their entire model works. The Buy-and-Holders want to provide good investing advice. Now they can do it! Saying those three magic words opens the door to an amazing future.
The 13 years of discussions has been a debate re whether we are going to open that door or not. We don’t have any freakin’ choice. The cost of remaining ignorant of at least 50 percent of the stock investing story (80 percent in my assessment) has grown too high for our economic system to remain in place if as a society we continue to shut this wealth of powerful knowledge out. We are going to make this change. The longer we delay, the more people get hurt. So we should make it quickly.
Institutional investors know lots of things. But they are human. That means that they are flawed and their knowledge is incomplete. They need to know more to do their jobs more effectively. When we rewrite the textbooks in this field, they will know more. We need to rewrite the textbooks to reflect the last 34 years of peer-reviewed research. The first step to getting there is to open every board and blog on the internet to honest posting re the last 34 years of peer-reviewed research.
Wade Pfau holds a Ph.D. in Economics. You would think that he would know a lot more about stock investing than I do. But during the 16 months in which we worked together he commented again and again how I was teaching him things that he never knew before we began doing so. How do you think something like that happens? It didn’t happen because Wade is dumb. It happened because he was educated using those old textbooks, the ones that have not been updated to reflect Shiller’s “revolutionary” (his word) findings.
I never studied investing in a formal way. So I never saw any of those textbooks. I was not held back in the way that Wade was held back. Getting a Ph.D. is a good way to gain knowledge of a subject matter. But in a case in which the field is in the process of being revolutionized, it doesn’t work out so hot. In those sorts of times, you need to look at the revolutionary insights yourself and attempt to make sense of them to keep your knowledge up to date. That’s what I have done. That’s what has given me the edge over Wade (and over you).
If investing were a purely intellectual skill, the smarter investors would always prevail over the dumber ones. That’s not the way it works. Investing is in part an intellectual endeavor. But for those who invest in index funds, most of the intellectual work has been removed. Investing in index funds is a pretty darn simple matter. But as of today there are emotional complexities that remain. That’s because the people who promote the Buy-and-Hold Model don’t appreciate the implications of Shiller’s revolutionary findings. When they let in what we as a people have learned over the past 34 years, indexing will become as simple and as effective as the Buy-and-Holders intended it to be in the early days.
No. It will become MORE simple and MORE effective than the Buy-and-Hold Pioneers ever imagined was possible. The Buy-and-Holders led us halfway to a great place. Now we need to complete the journey. Shiller showed us the piece of the puzzle that we had been missing. Now we need to all pull together to snap that last piece of the puzzle into place.
We ALL benefit from learning what the peer-reviewed research of the past 34 years says. There is no downside. The only problem that we have ever experienced is that that last piece of the puzzle is so important that it makes the Buy-and-Holders feel bad that they didn’t have it in their possession all along. The Buy-and-Holders need to move past those feelings. The aim here is to give good investing advice, investing advice that works. We need to incorporate all the good stuff that the Buy-and-Holderd supplied into a model that also includes the one big piece of the puzzle that has thus far eluded them.
We need to work together to persuade the Buy-and-Holders to click that last piece of the puzzle into place. That’s what this has all been about going back to the first day. We all want the same things. We all should be working together to find out together what really works. We need to bring an end to The Debate About Having a Debate and move on to The Debate Proper.
Rob
We are dealing with a paradigm change.
One of you Goons noted the other day that you felt that it would have been “impossible” to permit discussion of the last 34 years of peer-reviewed research when I brought the question to the table.
It is ideas that seem so far out as to be “impossible” that support the biggest advances.
We are as a society on the verge of achieving the biggest advance in our understanding of how stock investing works ever achieved. We should be grateful re our good fortune, not upset to have to struggle with this wonderful advance.
We’re all on the same side. We all want to get it right. We all want to learn.
Rob
“The research does not support a claim that a 65 percent stock drop is imminent.”
Could you backpedal any faster? You’ve been calling for a 65% drop for five years. Because all the research (which begins and ends with PE10) told you so.
Could you backpedal any faster? You’ve been calling for a 65% drop for five years. Because all the research (which begins and ends with PE10) told you so.
All of the research says that we will see a 65 percent price drop. But there is no research that helps us identify with any precision when that drop will come.
Those are the realities, Stagnation. They frustrate you. You want short-term timing or no timing at all. But the research doesn’t support either of those extremes. The research supports the middle ground. The research says that we can ALWAYS know when the risk of owning stocks is high but we can never identify the day or week or month or even the year when a price crash will come.
That reality makes you very angry. That’s the reality all the same.
Rob
I can effectively predict that a man who drives drunk for 20 miles every day is going to get in a car accident in the not-too-distant future.
But I cannot identify in advance the day or week or even the month when it will happen.
The Buy-and-Holders insist: “You must identify the day or week or month that it will happen or else acknowledge that the future is entirely unknown.”
I reject that dichotomy. Because the research and the historical data reject that dichotomy.
Short-term timing NEVER works. Long-term timing (price discipline) ALWAYS works and is ALWAYS 100 percent required.
The Buy-and-Holders got it wrong. They got many things right. But they got one very important piece of the puzzle terribly, terribly wrong. They have caused vast amounts of human misery with their error.
We need to bring the entire nation together to get that error fixed. We are all in the same boat. We are all suffering the effects of the Buy-and-Hold Crisis. We all need to do everything in our power to bring it to an end.
Rob
You’ve been waiting for 19 years. If you can’t narrow down the time of the crash within a generation, your prediction is utterly worthless.
A big asteroid will hit us. Someday. Please take appropriate measures.
You’ve been waiting for 19 years.
At least we are talking about something real now.
This is the biggest problem that people (not just Goons but Normals too) have with Valuation-Informed Indexing. Yes, stock prices reached insanely dangerous levels in early 1996. Yes, that was 19 years ago. Yes, we are still at insanely dangerous price levels today. Yes, we still have that 65 percent price drop ahead of us. Even with the passage of 19 years!
What do you want me to do about it, Stagnation? That’s what the research shows. That’s the reality. That’s where things stand.
Most investing lifetimes last about 60 years (from age 25 to age 85). Is it such a big deal to stay at a low stock allocation for one-third of your investing lifetime? If doing so reduces the risk of stock investing by 70 percent while also providing you with sufficiently higher returns to permit you to retire five to ten years earlier?
It’s not such a big deal. It’s a wonderful trade-off.
The problem is that the Buy-and-Holders don’t like what this means from a marketing perspective. They want to provide instant gratification. That’s what sells. The Buy-and-Holders created $12 trillion of Pretend Gains with their relentless promotion of the pure Get Rich Quick approach. And then they took credit for those phony gains! That’s a pretty neat trick. From a marketing perspective. But it is a marketing gimmick that comes at the cost of the destruction of millions of middle-class lives. That’s not a price that I am willing to pay.
Let’s say that you are really, really, really bothered that it has taken 19 years for us all to experience the full pain associated with the relentless promotion of the Buy-and-Hold garbage. Please remember that we have already suffered a great portion of that pain. There are millions of people unemployed today because of the lies told by the Buy-and-Holders. There are millions on their way to suffering failed retirements. There are millions who will never recover from the financial losses they have suffered because of the 34-year Ban on Honest Posting re Shiller’s 1981 findings. But let’s put that all to the side for a moment and just look at the fact that, yes, it has been 19 years since prices reached the insanely dangerous level and we have not yet experienced all the human suffering that the Wall Street Con Men set us up for with their relentless promotion of the pure Get Rich Quick approach.
There’s something you could do if that really were your concern.
You could demand that every board and blog on the internet be opened to honest posting re the last 34 years of peer-reviewed research in this field.
Do that and stocks will return to fair-value levels and remain there from that day forward. Stock prices are self-regulating in a world in which honest posting re the last 34 years of peer-reviewed research is permitted. It is only the Campaign of Terror led by the Buy-and-Hold Mafia that has stretched this thing out for 19 years.
Now guess who has been the leading advocate of opening the entire internet to honest posting for 13 years now?
The cover-up is a mistake.
The Buy-and-Hold Mafia is a criminal enterprise.
If you have to commit felonies to “defend” your Get Rich Quick investing strategy, your Get Rich Quick strategy is not worth defending.
My take.
Rob
If you can’t narrow down the time of the crash within a generation, your prediction is utterly worthless.
No.
TIPS have been providing a risk-free return of 4 percent real since January 2000. Stocks have provided a high-risk return of 2 percent real from January 2000 forward. The research-based strategy has been trouncing the pure Get Rich Quick strategy for 15 years running.
Get Rich Quick did well from 1996 through 1999. It is those gains that will be erased in the next price crash. No, we have not yet suffered all the damage that the relentless promotion of Buy-and-Hold strategies insured we would suffer.
But those following research-based strategies have benefitted greatly for doing so for 15 years running now. We did not have to wait the full 19 years for the insights that we picked up from looking at the last 34 years of peer-reviewed research to pay off. We only had to wait four years.
Valuation-Informed Indexing has been paying off big time for a long. long time now. It will not have provided all of its benefits until we see the next crash. But the benefits already on the books are very substantial indeed. We have been earning far higher returns than Buy-and-Holders at greatly diminished risk for a decade and a half. Following the next crash, there won’t even be any comparison between the two strategies. And that differential will compound for decades to come.
Plus — you Goons are headed to prison in the bargain!
Not this boy.
Please try to find someone else.
Rob
A big asteroid will hit us. Someday. Please take appropriate measures.
If I knew that there were people doing things to insure that an asteroid would hit us, knowing that it would kill lots of people, I would do what I could to stop those people, Stagnation.
This economic crisis did not come out of the blue. The promotion of Buy-and-Hold/Get Rich Quick strategies ALWAYS causes an economic crisis. There has never been one exception in U.S. history (and there has never been one economic crisis that was not caused by the promotion of Buy-and-Hold/Get Rich Quick investing strategies). We all should be working hard to open every board and blog on the internet to honest posting on the last 34 years of peer-reviewed research in this field.
We cannot avoid every bad event that does harm to the humans who live on this planet. But we have 34 years of peer-reviewed research showing us how to avoid the harm done by the promotion of Buy-and-Hold investing strategies. Once that research became available to us, we should have begun exploring all of its many important implications and using every resource available to us to spread the word far and wide.
My take.
Rob
“TIPS have been providing a risk-free return of 4 percent real since January 2000.”
Thank you, Captain Hindsight. Such a helpful, actionable bit of advice.
“Is it such a big deal to stay at a low stock allocation for one-third of your investing lifetime?”
Um, yeah, it’s a big deal. Since you admit your crash can’t be predicted within even decades, you’re saying people should continue sitting out from now until doomsday if necessary. Do you truly not understand why no one salutes that message on your flagpole?
Thank you, Captain Hindsight. Such a helpful, actionable bit of advice.
I was recommending that people look into TIPS and IBonds at the time they were paying 4 percent real, X.
The Buy-and-Holders laughed.
That’s the problem.
The personal finance magazines could have all advised us to buy TIPS in 2000. But the Buy-and-Hold Mafia would have gone on the attack had they done so.
The vast majority of people who work in this field want to give honest and good and research-based advice. They are afraid to do so. They are afraid because the honest and good and research-based advice conflicts so strongly with the smelly Buy-and-Hold garbage favored by the Wall Street Con Men and they know what the Wall Street Con Men will do to them if they “cross” them.
That all needs to change. I often say that we should permit honest posting on every investing board and blog on the internet. I will go a step further. I believe that we should encourage honesty in this field. I think it would be fair to say that we would not be in an economic crisis today had we been doing that all along.
Honesty is viewed as a good thing in every field of human endeavor other than in the investing advice field. Why do you think that things have gotten so corrupt in this field?
I think it all goes back to the mistake that the Buy-and-Hold Pioneers made when they thought that the market might be efficient and to the 34-year cover-up of what the research says that began in 1981 when Shiller published his “revolutionary” (his word) findings.
I don’t feel comfortable engaging in financial fraud just to win the approval of you Goons, X.
Sue me.
Rob
Um, yeah, it’s a big deal. Since you admit your crash can’t be predicted within even decades, you’re saying people should continue sitting out from now until doomsday if necessary. Do you truly not understand why no one salutes that message on your flagpole?
If you don’t think Valuation-Informed Indexing is for you, you should stick with Buy-and-Hold.
Even in that case I think it is a mistake for you to commit acts of financial fraud. Having someone on an internet discussion board advocate an investing strategy that you don’t find appealing is not a good reason to do things that will land you in a prison cell somewhere down the line.
My sincere take.
Rob