Set forth below is the text of a comment that I recently posted to another blog entry at this site:
Sounds like you’re living in a world of “woulds” and “coulds” while the other dads are out providing for their families in the real world. No?
That’s certainly not the way I see it. But I understand the point you are making. I don’t think that’s an entirely unreasonable way of putting it.
Back before we had kids, my wife and I used to go to a bed and breakfast for two nights on the weekend closest to New Year’s Day and write out our budget for the new year. On some categories, we would just carry over what we had from the year before. On some, we would add money. And on some we would subtract money. We obviously favored different categories (because different people have different interests). So we went through a process in which we held negotiations/discussions over what to do.
I remember one year where we were close to having all the numbers add up but we were still a little short. I think she wanted a little more money for the furniture category or something like that. She offered to give up that addition because we didn’t have enough money to make the numbers work out. I didn’t like that answer because I feel that she has a tendency to be willing to give things up for the sake of the budget and I believe that handling things in that way can make the budget-writing process seem like a chore to be avoided rather than a fun thing where you plan new life adventures. So I set my mind to trying to think up some other means of funding an addition in the furniture category.
She would have been willing to give up something in the vacation category. I didn’t want to do that because I think vacations are important. I was reluctant to give up anything in the savings category because I was counting the days until I would be able to leave my high-paying job. For a time we were stumped as to how to proceed.
Then it hit me. The income number we used in the budget was the combination of her salary and my salary. The reality was that I received a big raise every year in October (that was the beginning of the new fiscal year for Ernst & Young). I didn’t know exactly how big the raise was going to be. But I knew the range of possibilities. So I took the smallest amount of money that we would be receiving in those three months from the raise and suggested that we add it to our income for the upcoming calendar year and apply it to the monthly furniture category.
My wife did not like the idea of going along with that. In her mind it was “cheating.” She doesn’t count things as real unless she can hold them in her hand. The dollars that we were talking about were not yet in our hands. So for her that was out. But I pushed and eventually she went along with using those dollars before they were in our hands. My argument was that this was just an application of the accrual accounting concept. If we had had a debt we had had to pay in October, we certainly would have counted that in the negative column. This was money that was certainly going to be coming in. It was proper to count it in the positive column.
I’m living in a world in which the same ethical standards that apply in every other field of human endeavor apply in the investing advice field as well, Anonymous. That’s the world we are headed to in the not-too-distant future. I know that because I know that we simply have no choice. If we don’t make the move to that world, we all go down together. We are not a stupid people. When enough of us see that this crazy Ban on Honest Posting is taking us all down, enough of us to make a difference are going to work up the courage to speak out. My brain is not capable of imagining any other way it could play out.
It’s not me who is doing something odd here. It is you. And Linduaer. And Greaney. And Bogle. And even Shiller to an extent. It’s you guys who are holding back from talking about this huge breakthrough that we have achieved over the past 33 years. The normal thing would be to take advantage of peer-reviewed research that shows us all how to reduce the risk of stock investing by 70 percent. You are temporarily under a weird spell in which you see it as a bad thing to do that. I am doing what in normal circumstances would come natural to each and every one of us.
You should be asking yourself why so many good and smart people are doing this weird thing of denying themselves the benefits of the biggest advance in our understanding of how stock investing works ever achieved in our history. That’s the mystery here. That’s the big story.
They are doing this not because they think investing doesn’t matter. They are doing this because investing matters too much.
You believe in Buy-and-Hold, Anonymous. That part is not a lie. That part is not fraud. You truly believe (as do Bogle and all the others). If you were to say that you believe in Valuation-Informed Indexing, that would be as bad as me saying that I believe in Buy-and-Hold. That would be totally wrong and irresponsible. That is 100 percent out. You MUST say that you believe in Buy-and-Hold so long as that remains the case.
Where does that leave us?
It’s 90 percent of the population that believes in Buy-and-Hold today. So, if we were to do what Rob says and permit those who believe in Valuation-Informed Indexing to post honestly at every board and blog on the internet, what would happen? We would have 90 percent of the population saying one thing about how stock investing works and the other 10 percent of the population saying something entirely different.
In ordinary circumstances, this would not be a big deal. If I had some small difference with you, we would both accept that the other party had a different belief and that the other party was in all other respects a good guy and we would be friends and that would be that. The problem in this particular case is that the difference is over something HUGE. Someone who believed firmly in Buy-and-Hold would be recommending a 75 percent stock allocation today (Greaney’s study shows that 74 percent is the “optimal” stock allocation at all times). A firm Valuation-Informed Indexer would recommend 25 percent (20 percent for those with low risk tolerance and 30 percent for those with high risk tolerance). THAT’S A DIFFERENCE OF 50 PERCENTAGE POINTS OF STOCK ALLOCATION.
We’re not talking about who is going to win the World Series. We are talking about whether people are going to have enough to retire on or not. You (and Bogle and all the others) understand that it sounds really, really bad for the “experts” in this field to be saying “Oh, there is one school of academic thought that says that you should be at 75 percent stocks but please understand that there is another school of thought that says it should be 25 percent — You decide!”
That’s the core problem, Anonymous. The people who recommend Buy-and-Hold are not bad people and they are not dumb people. They are people caught in a trap brought about by the strange circumstances of our day. The Buy-and-Holders did an amazingly wonderful thing when they proposed that we all begin rooting our investment advice in the peer-reviewed research. They began a process in which investing advice will no longer be subjective but will become to a large extent objective. This is huge. This is the future. This is something that BOTH of us believe in.
The problem that the Buy-and-Hold Pioneers ran into is that they are human. The humans did not know it all back in the 1960s. When we are in the early days of building a new science (or quasi-science — that may be the best that we can ever do in this field), we are going to make mistakes. That’s what I believe happened here. The Buy-and-Holders felt very good about what they had come up with. They thought that they had figured this stuff out. And so they built careers around promotion of the model they had built. And then this Shiller fellow came along and messed everything up by proposing and showing support for a very different sort of model.
If all of this were of academic interest only, no one would care. There would be a Fama camp and a Shiller camp and there would be friendly arguments between the two camps but no real nastiness. There is nastiness in this case because the stakes are so high. If Fama is wrong, the people promoting Buy-and-Hold caused an economic crisis. Inadvertently. It wasn’t their INTENT to cause an economic crisis. But that’s what happened. And if Shiller is wrong, the people advocating Valuation-Informed Indexing are keeping people who listen to them out of a great asset class at a time when they should be heavily invested in that asset class and are thereby causing millions of failed retirements in a different sort of way.
I don’t want to destroy the lives of the people who read my stuff. That’s why I am so adamant on the point that I MUST post honestly. I might still destroy some lives because of my stupidity. But at least I will be able to say that I was HONEST. That’s something. That’s unfortunately the best that I can do in these circumstances.
You need to say what you believe too. The problem that we have is that Buy-and-Hold came first and so most people see that as the default position. People think: “If we are not sure, we should go with Buy-and-Hold because all the textbooks recommend Buy-and-Hold and 90 percent of the experts believe in Buy-and-Hold.”
That’s not entirely crazy.
But I have a big problem with what follows from that.
The big problem is that the new idea can never catch on if we all agree never to talk about it because it makes our readers feel uncomfortable to see that we are not sure of anything in these early days of our efforts to figure out how stock investing really works. So long as we all go along with the default and permit those on the Buy-and-Hold side to crush anyone who raises a dissenting voice, the popularity of Valuation-Informed Indexing can never grow.
I am a journalist. So the idea of permitting free speech is deep in my blood. I see censorship of new ideas as the ultimate tragedy. I cannot go along with the idea of using brutal intimidation tactics to stop a new idea (an idea put on the map by a guy who won a Nobel prize for his work!) from growing into a more popular idea.
I cannot go along with that, Anonymous. It can never be. It is not in me. You cannot make a dog meow and you cannot make a cat bark and you cannot make Rob Bennett post dishonestly on the numbers that his friends use to plan their retirements. That will never happen.
There are many things that I CAN go along with.
I can say that Jack Bogle is one of the giants in this field and always will be regardless of anything we come to learn in the future. I see that statement as being true. So I have zero problem making it.
I can say that Buy-and-Hold was a huge intellectual advance over what came before. I believe that and so I can say it.
I can say that the Buy-and-Holders are all smart people. I believe that and so I can say that.
I can say that the Buy-and-Holders are all good people. I believe that and so I can say that.
I can say that it is possible that I am wrong, that I have made mistakes in the past and that it is possible that that is happening again and that I would probably be the last to know if that were the case. I believe that and so I can say that.
I can’t say that the safe withdrawal rate is a constant number. I don’t believe that. I believe that it is a variable number, that the SWR depends on the valuation level that applies on the day the retirement begins. That’s what I believe. With people’s retirements at stake, that is what I have to say.
Yes, there is a sense in which I am living in a world of “woulds” and “coulds” and “shoulds.” I believe that we should be applying U.S. law and the rules of all of our boards and blogs to our discussions. Under U.S. law and under the rules of all of our boards and blogs, I am permitted to post my sincere views. I am acting as if that will someday really be the case even though that obviously is not the case today.
I love my country. Anonymous. In my country, that is the way it works.
It is the investing field that is out of whack here, not me.
I believe that the people of this country will pull the investing field into line with the norms of this great country following the next price crash, when everyone sees how much human misery has been brought on by our failure to apply the basic norms of life in the United States to this one field of human endeavor.
If you don’t believe that, you don’t believe that.
I believe that.
I have to play it the way that makes sense given my belief re this matter.
So there is nothing that we can do here except wait to see how it plays out following the crash.
You do not seem able to give and I do not seem able to give. I like you and, if you want to continue to offer comments here, you are warmly encouraged to do so. But I cannot change the human being that I am because you advance more intimidation tactics. I cannot wake up in the morning and be a different person than I have been for the first 57 years of my life on this planet.
I am the person I am. The person I am believes that Shiller’s work is true and important. I am a Valuation-Informed Indexer. I am not ashamed of it, I am proud of it. It is my intent to show that pride in this new model for understanding how stock investing works in every post I ever put forward. I have never given two seconds consideration to playing it any other way, Goon intimidation tactics be damned. It is impossible for me to imagine any circumstances (including the death penalty) in which I would give consideration to playing it some other way. They had a tag line for the Braveheart movie saying that: Everybody dies — Only a small number of us every truly live.” That line sums up how I feel re this matter. I would rather die than betray my readers and my family and my country. No can do.
Yes, I believe that we all will be Valuation-Informed Indexers at some point in the not-too-distant future. If you want to call that a “would” or a “could” or a “should,” I guess that’s fair. I cannot live any other way. I love my country and I need to act according to the norms that apply in that country to every field of human endeavor with the exception of stock investing.
I hope that helps a tiny bit, my old friend.
Rob
Dizzy says
“A firm Valuation-Informed Indexer would recommend 25 percent (20 percent for those with low risk tolerance and 30 percent for those with high risk tolerance).”
If 20% is “low risk tolerance”, what best describes 0% for the last 19 years? Perhaps “constant state of terror”, or “rank hypocrisy”?
Anonymous says
I understand the point you are making. I don’t think that’s an entirely unreasonable way of putting it.
I’m sure poor Rodd and Todd would agree 🙁 . Ok, off to work! Responsibilities, you know.
Rob says
If 20% is “low risk tolerance”, what best describes 0% for the last 19 years?
Personal circumstances, Dizzy. I don’t have a low risk tolerance. I have a high risk tolerance. Risk tolerance is not the only factor that comes into play. For example, Buy-and-Holders acknowledge that those close to retirement should go with a lower stock allocation that those far from retirement. That has nothing to do with risk tolerance. It is an issue relating to one’s personal circumstances and life goals.
It is never a good idea for the typical investor to go with a zero stock allocation. It is too extreme an allocation.
But investors always need to take personal circumstances into account. I am building an interest business and I rely on my savings to cover my life expenses. So I am in a position where I should be going with a stock allocation of about 30 percent less than the typical investor. When the typical investor should be at 80 percent stocks, I should be at perhaps 50 percent stocks. When the typical investor should be at 30 percent stocks, I should be at perhaps zero percent stocks.
That way of approaching the issue is entirely in accord with how the Buy-and-Holders do it. Buy-and-Holders offer guidelines for the typical investor. The Greaney study says that the optimal stock allocation is 74 percent. But I have never heard Greaney say that investors shouldn’t make adjustments to that percentage to reflect personal circumstances. He goes with 90 percent because he feels that he is in circumstances in which it makes sense to take on more risk. I don’t think he would object if an investor went with 50 percent on grounds that his circumstances required him to take a less risky position.
I have never recommended that any investor other than myself go with a zero stock allocation. There are some out there who should do that. But my circumstances are highly unusual. It is a rare investor who should be going with a zero stock allocation, in my assessment.
Rob
Rob says
I’m sure poor Rodd and Todd would agree 🙁 .
My boys names are Timothy and Robert. The fact that you feel a need to use made-up names shows how emotional you are re this subject. Buy-and-Hold did that to you. Following a pure Get Rich Quick approach not only destroys your investing portfolio. It rots out your soul.
If this nation falls into a Second Great Depression as a result of the unwillingness of the Buy-and-Holders to acknowledge the mistake that was revealed by the peer-reviewed research in this field 34 years ago, does that not affect my boys? It sure seems to me that it does.
I want my boys to be provided for financially. And of course the $500 million settlement payment that I expect to receive following the next price crash will be opening up opportunities for them that I never had available to me when I was young. That makes me very happy.
But of course one of the ways you Goons try to control people is by threatening their families. This is how you got Wade Pfau to flip. He wanted to do honest work and said so on many occasions. You threatened to destroy his ability to support his family and you made clear that you had Jack Bogle in your back pocket and the man agreed to commit financial fraud to get you off his back. It’s because you Goons have done that to many people that we are as a nation living through an economic crisis today.
That’s why we all need to unite as a people and get those who have posted in “defense” of Mel Linduaer and John Greaney and Jack Bogle placed in prison cells by the close of business today.
No?
It sure seems so to me.
I wish you all good things.
Rob
Anonymous says
I don’t have a low risk tolerance. I have a high risk tolerance. Risk tolerance is not the only factor that comes into play.
Oh, I see. So your asset allocation should be determined by a number of factors, of which valuations is one.
Makes sense. I guess that’s why every single educated and intelligent investor has been doing it that way for decades.
Anonymous says
It’s you guys who are holding back from talking about this huge breakthrough that we have achieved over the past 33 years.
You must be missing the literally thousands of valuation posts and Bogleheads and elsewhere.
Rob says
So your asset allocation should be determined by a number of factors, of which valuations is one.
It does make sense to consider a number of factors, Anonymous. We are in complete agreement re that one.
The one re which we disagree is that I say that the effect of valuations should be quantified. When you look at the historical data, you see that through the entire history of investing valuations has been the BIGGEST factor.
The Buy-and-Holders don’t treat it that way. Bogle says that investors should never lower their stock allocation by more than 15 percentage points. THAT IS NOT EVEN CLOSE TO WHAT THE HISTORICAL DATA SAYS. The data says that lowering it by 60 percentage points make sense at times of insanely high valuations.
And why are the Buy-and-Holders so emotional about this issue? Say that Bogle is right. Would it hurt for people to be permitted to say that lowering one’s allocation by 60 percent at times of insanely high valuations is a good idea? I sure don’t see how. People should say what they believe. If Bogle believes that 15 percent is the right number, he should say that. If Bennett believes that 60 percent is the right number, he should say that. We all improve our chances of enjoying a learning experience if we all post honestly.
That’s standard operating procedure in all fields other than investing analysis. That suggests very strongly to me that the dominant model today (Buy-and-Hold) is making investors hyper-emotional. That’s not good.
Rob
Rob says
You must be missing the literally thousands of valuation posts and Bogleheads and elsewhere.
I’m not missing them, Anonymous. I acknowledge that there are thousands of valuations posts. I say that it is not only the volume of valuation posts that matters. The RANGE of valuation recommendations matters too.
Say that millions of investors are counting on their portfolio values to be real at a time when stocks are priced at two times fair value. Posters who argue for lower stock allocation cause emotional distress for those millions of investors. An argument that one’s stock allocation should be low suggests that stocks do not offer a strong value proposition. Investors who are counting on the money in their stock portfolio to be real don’t want to hear that. There are all kinds of ways that those investors can impose social pressures to keep recommended stock portfolio percentages high.
Should those of us who believe that low stock allocations are appropriate at times of high valuations give in to those pressures? I say “no.” I say we hurt everyone when we do that. Those who really favor high stock allocations should of course say just what they believe. BUT SO SHOULD THOSE WHO FAVOR LOW STOCK ALLOCATIONS.
Say that social pressure in favor of high stock allocation recommendations causes us all to increase our recommended stock allocation percentage by 30 percentage points. Those who think 20 percent stocks is right say that they believe that 50 percent stocks is right so that they will win popularity points. Those who think 40 percent stocks is right sat that they believe 70 percent stocks is right to win popularity points. Is that a good thing? I think it is a HORRIBLE thing. You can’t trust what anyone says when everyone is upping their numbers so that they can sell more books or whatever.
Greaney recommends 90 percent stocks. All signs are that he is sincere in that recommendation. So good for him. But Greaney never faces any social pressure to lower his recommendation. I favor an allocation of 30 percent at today’s prices. I face ENORMOUS pressures to lower my recommendation. I am told that I will be banned if I don’t post dishonestly. I refuse to let the social pressures influence what I say. But how many of those who have grave doubts about the high stock allocation recommendations dare to stand up to those pressures? Most do not. So you don’t even know what the real range of opinion is. When you only hear recommendations from 50 percent and up, you can easily be fooled into thinking that that is the consensus view even though you would hear very different numbers if people felt free to post honestly.
Say that you are a liberal. Would you trust a conservative site to tell you the true story re a political development? Or the other way around? I wouldn’t. People are BIASED. We all are. With investing, the bias is not ideology-based but time-based. There is a huge bias in favor of stocks when stocks are priced as they are today. And then the bias swings in the opposite direction after prices crash. You are getting the wrong story at both times. People should be more negative about stocks when they are insanely overpriced and people should be more positive about stocks when they are insanely underpriced.
The reason why I fell in love with Buy-and-Hold a long time back is that Buy-and-Holders argue that we should use peer-reviewed research as a guide and doing that would permit us to escape from the emotional biases that does such harm to investors. I gave up on Buy-and-Hold when I saw that the claim that we should root our strategies in the research is a con.
Buy-and-Holders SAY that they like to take the research into consideration. But mention the 34 years of research showing that valuations affect long-term returns and they demand that you be banned. Once you do that, you lose any virtue there is in basing your decisions on the research. If you lie to yourself and others about what the research says, it no longer plays the role of keeping things objective.
We might as well not do any research if we are going to ban research that shows the dangers of our biases. Once you become selective about what research may be discussed, you turn the idea of rooting one’s strategies in research into a negative. Your information is all the product of subjectivity but you are fooling yourself into believing that it is objective. That’s the worst of all worlds.
It is not enough to discuss valuations. We must permit HONEST discussions of valuations.
Rob
z says
In one of your responses, you say Greaney recommends 74% stock. Then, in a comment made a few hours later, you say the number is 90%.
Oops.
Rob says
It’s not my oops. It’s Greaney’s oops.
His study says that 74 percent is “optimal.” But Greaney says 90 percent is better. He doesn’t follow or believe in his own study!
Does anyone call him out on the obvious contradiction? No one but me.
Greaney is a Get Rich Quicker. Get Rich Quick is popular so long as prices are insanely high. So he gets away with murder.
How popular do you think Greaney will be following the next crash? I don’t think he will be popular at all. I think that millions of investors who have seen their retirement hopes destroyed will want to see him and those who have posted in “defense” of him swinging from a tree.
It shouldn’t be done this way. He shouldn’t be tricking people and major figures in this field should not be helping him to trick people.
It’s all about making the short-term buck. When turning the short-term buck becomes your only aim, you end up in a prison cell in the long term.
Not this boy. Lots of people hate me today. But I won’t be going to prison following the crash Good. That’s too high a price to pay to gain admission to a corrupt internet discussion board, in my assessment.
Rob
Anonymous says
The one re which we disagree is that I say that the effect of valuations should be quantified.
Right. You say: Stocks will drop 65% in three years.
Everyone else says – current stock and bond valuations imply low returns from each, but the future is too uncertain to quantify.
I’m certainly in the “everyone else” camp.
Anonymous says
Say that millions of investors are counting on their portfolio values to be real at a time when stocks are priced at two times fair value.
The fair value of a stock, obviously, is the amount the market is willing to buy and sell it at.
Any other definition is just hocomania. As your portfolio value shows, you hardly know better than the market where stock prices are headed.
Rob says
Right. You say: Stocks will drop 65% in three years.
Everyone else says – current stock and bond valuations imply low returns from each, but the future is too uncertain to quantify.
I’m certainly in the “everyone else” camp.
I didn’t pull the 65 percent from the air, Anonymous. P/E10 levels have been playing out in cycles for 145 years now, as far back as we have records. They have hit 8 in every cycle we have seen. That’s 65 percent down.
If you think we are going to see something that we have never seen before, you certainly should invest pursuant to that belief and encourage others to do so too. You might be right. I have been wrong before. It could be that it is happening again. You certainly are in good company. There are millions of good and smart people who think as you do.
I have to say what I believe. There never should have been even the tiniest bit of controversy re that question.
There is now a mountain of research showing that future returns can be quantified. Not with precision. But we can identify a range of possible long-term returns and we can assign rough probabilities to each point along the range. That’s a huge deal. Every investor alive should know about this.
Some would no doubt choose to stick with Buy-and-Hold in any event. That’s their call. But every investor alive needs to know about this. Of that much I am 100 percent sure.
I wish you all good things.
Rob
Rob says
The fair value of a stock, obviously, is the amount the market is willing to buy and sell it at.
You’re wrong, Anonymous.
If the amount the market were willing to pay were the fair value, there would be no such thing as overvaluation.
Shiller showed with his “revolutionary” (his word) 1981 peer-reviewed research that overvaluation is a very real thing.
The fair value of the market is the price people are willing to pay ADJUSTED for the extent that they are willing to either overpay or underpay because of emotion.
Rob
Anonymous says
If the amount the market were willing to pay were the fair value, there would be no such thing as overvaluation.
State your net worth, and I’ll be happy to tell you from that how much better you can price stocks than the hedge funds and investment banks with 1000 times the information you’ll ever have.
Anonymous says
I didn’t pull the 65 percent from the air, Anonymous. P/E10 levels have been playing out in cycles for 145 years now, as far back as we have records.
Right, and the Swiss stock market has outperformed the German one (think WWI and WWII) for 145 years too.
Therefore, using the Rob logic, that must continue going forward.
Germany has to wipe out its stock market by invading Europe again and again, no? The future must repeat, right?
Rob says
State your net worth, and I’ll be happy to tell you from that how much better you can price stocks than the hedge funds and investment banks with 1000 times the information you’ll ever have.
But information isn’t the issue here, Anonymous. I acknowledge that those people have more information than I do.
Before my mother died, we had phone conversations in which she worried about my older brother’s smoking habit. She loves him and she doesn’t want him to come to harm. She would say: I can’t understand why he still smokes. He’s so smart!”
I couldn’t help but laugh when she said that. She was making a legitimate point. He is smart. And it’s not smart to smoke. So she was pointing to a real conflict. But we all know that smart people can become emotionally addicted to smoking every bit as easily as dumb people can. When you enter the realm of psychology, intelligence doesn’t matter.
The people whom you are referring to are perfectly smart. And, yes, they have access to tons of information. But they got a core point wrong. And so they are making ineffective use of their information.
Wade Pfau has a Ph.D. in Economics. He should be able to talk rings around me in discussions of investing. I had zero fear in our discussions that I wouldn’t be able to hold up my end. Why? Because I know that there is a mountain of evidence supporting Shiller’s finding that valuations affect long-term returns and zero supporting the idea that you don’t need to take valuations into account. If you know that, and if you are solid on that, no one can ever trip you up no matter how smart they are or how much information they have access to.
There are all kinds of things that Wade knows that I do not. And there are all kinds of things that Bogle knows that I do not. I just don’t offer comments on those matters. I have nothing to offer. So I keep my mouth shut.
The valuations matter is one that the super-smart people have not been able to process. Not because they are dumb. They really are super-smart. But they are gifted in one realm and not so gifted in another realm. The sorts of people who are strong with numbers tend not to be super strong in psychology. That’s just the way it is. Most people think of investing as a field where we need people who are strong in numbers. And we do, to a point. But Shiller showed that it is also very important that we have some people who are strong in the psychology area and not so strong with numbers. That’s me.
Wade is 50 times smarter than me when it comes to numbers. When it comes to psychology, I am smarter. He is not dumb in that area. Things eventually clicked for him. But it didn’t come to him as easily as it came to me. I am very strong in one particular area, the valuations area, the human psychology area. That’s the area where I can make a contribution. So that’s the only area re which I am willing to put forward thoughts. I am overmatched in the other areas.
The hedge fund guys have more information than me. But they are not today making good use of their information. They are going down blind alleys. They need to return to first principles and fix the model they employ to put all that information to work. Then they will be dynamite. But until then they will continue to get the numbers wrong despite all their intelligence.
Investing is not a rational endeavor. It is a highly emotional endeavor. It’s not a thing where the guy with the most information wins. It’s a thing where the guy with the most ability to rein in his Get Rich Quick emotions wins. That’s 70 percent or 80 percent of the game. That’s the thing that matters most.
Rob
Rob says
Germany has to wipe out its stock market by invading Europe again and again, no? The future must repeat, right?
The thing that will repeat forever and ever are the core principles by which the stock market operates.
In every market other than the stock market, it is universally accepted that price matters and is always an important consideration. In the stock market, there was a time (1965 through 1981) when lots of smart people came to believe that the stock market was the lone exception, it was the one market where it wasn’t necessary for all participants to exercise price discipline for the market to function.
In 1981, we learned that the stock market ISN’T this huge exception to the rules that govern every other market. The stock market is just like all those other markets. Price matters. Price is by far the most important consideration.
Now it’s just a matter of getting the word out. Then we are all set.
The problem has not been that this stuff is not important enough to get right. The problem for 34 years now has been that this stuff is so darn important that we cannot bear to acknowledge ever having gotten it wrong. We have so far failed to take advantage of Shiller’s “revolutionary” (his word) finding because it just hurts too darn much to acknowledge the human misery we caused by making the mistake.
No one is saying that the U.S. market will always provide a long-term return of 6.5 percent real. It always has up until now. But, as you point out, Germany fell and we can fall too. That will change things in the United States. But it won’t change the basic principle established by Shiller’s research (and denied by many of the “experts” in this field to this day). Some other country will become the world’s superpower if the United States goes under. In that new country, valuations will be the most important factor that investors will need to consider when forming their investing strategies.
Shiller’s findings apply in all markets. Researchers use the U.S. dataset because the U.S. market has been a generally stable market for a long time. It is the best market to study to learn how stock investing works. Once you know that, you can take what you have learned and use it to invest in any market with the caveat that the other market is likely not going to be as stable as the U.S. market and thus you are taking on more risk to obtain whatever return you happen to obtain.
Rob