Set forth below is the text of a comment that I recently posted to another blog entry at this site:
A good number of years back, I asked John Walter Russell to calculate the dollar amount of overvaluation in January 2000 (the high point of the bubble) using the figures for total market capitalization. The market was overpriced by a factor of three at the time; the fair-value P/E10 is 15 and the P/E10 at the top of the bubble was 44. This calculation showed mispricing of $12 trillion.
If the market were to return to fair-value levels (it always does), we were looking to experience losses of $12 trillion. Those are the direct losses attributable to the promotion of Buy-and-Hold strategies. If we permitted honest posting on the last 34 years of peer-reviewed research, we never could experience overvaluation. So we never would have experienced those losses.
There are several indirect effects as well.
One is that much of the money that investors “earned” via the bull market (which the Buy-and-Holders were telling them was real) was invested in real estate, causing a secondary bubble there. The real estate bubble caused about $4 trillion in overvaluation. That brings the total overvaluation to $16 trillion.
We never stop at fair value. Emotional extremes beget emotional extremes. Irrational Exuberance leads to Irrational Depression. There has never been a time in U.S. history when the secular bear created by a secular bull did not take us down to a P/E10 level of 8 or lower, half of fair value. That drop will cost us another $4 billion, bringing the total overvaluation to $20 trillion.
The Congress enacted an economic recovery bill in 2009 in response to the onset of the Buy-and-Hold Crisis. That cost us several more trillion dollars, bringing the total losses up to about $22 trillion.
The Federal Reserve has put several trillion into the stock market since then in an effort to keep the collapse from accelerating, bringing the total losses to somewhere in the neighborhood of $24 trillion.
In contrast, the entire Federal debt (comprised of all of the annual budget deficits going back to the days of George Washington) is only $18 trillion. The losses that we need to cover as a result of the continued promotion of Buy-and-Hold “strategies” for 34 years after the peer-reviewed research was published showing that there is precisely zero chance that a pure Get Rich Quick strategy could ever work for even a single long-term investor either here or in any other solar system is $6 trillion more than the entire Federal debt.
Buy-and-Hold is bad stuff, Anonymous.
Truly bad stuff.
The absolute worst for humans and other living things.
Hence, the great emotional pain you evidence in every comment that you post to this site.
We all need to pull together and persuade our good friend Jack Bogle to walk to the front of a big room and to say the words “I” and “Was” and “Wrong” and thereby to take us to the other side of The Big Black Mountain, where investing risk is reduced by 70 percent and where we all can realistically expect to be able to retire five to ten years earlier than we ever imagined possible in the Buy-and-Hold Era.
Rob
laugh says
Your math, as usual, stinks. The ‘losses’ were as temporary as the ‘gains’. To treat one as real (losses) and the other as imaginary (gains) is an inconsistent and flawed framework for decision making.
Especially as you are somehow treating the losses as ‘final’. The market has moved on. Rob Bennett is stuck in the mud.
Rob says
There’s too much emotion here for me to make full sense of the point that you are trying to put forward, Laugh. But I do sense that there’s a legitimate question buried under the attitude-related stuff. I’ll do the best I can to respond to the question that I believe you are trying to ask.
Losses and gains should of course be treated in the same manner. Neither gains nor losses that take the market away from fair-level prices are real. The fair-value P/E10 number is 15. When we are above 15, gains are not real because anything above 15 is fantasy stuff. When we are below 15, losses are not real because anything below 15 is fantasy. Fair value is real value.
Gains of 6.5 percent real are not fantasy even if they occur at a time when we are at fair value. A gain of 6.5 percent in a year will not cause the P/E10 number to increase.
The 6.5 percent real gain achieved each year does indeed last forever. That’s based on economic realities, not emotional garbage. Gains above that are not real. Gains above that are rooted in emotion.
Losses that take us below a P/E10 of 15 are not final. They are temporary. But losses that take us from inflated prices down to fair-value prices are of course final. Inflated prices are a mirage and those losses are just permitting market prices to reflect the economic realities once again.
I don’t know what you are trying to say when you say that “the market has moved on.” The market is still there. My guess is that you are trying to suggest that we will not see another price crash. I don’t buy it, Laugh. For two reasons. One is a numbers-based reason. There has never been a secular bear market that did not take us to a P/E10 value of 8 or lower; that’s 65 percent down from where we are today.
The other reason is an emotions-based reason. Buy-and-Hold investors are still insanely emotional. We can see that in the wording you use in your posts. If you had confidence in your strategy, you would not behave the way you do. You are not the only one behaving this way. ALL Buy-and-Holders behave this way. Buy-and-Holders are frightened rabbits.
I believe that investment advisors should be trying to make investors more confident, not less so. Get Rich quick garbage undermines confidence. I believe that we all should be trying to help investors by talking honestly about what the last 34 years of peer-reviewed research teachess us about how stock investing works in the real world.
Take good care, Goon friend.
Rob
x says
“The fair-value P/E10 number is 15.”
By that reckoning the market has been unfairly priced since the late 1980’s. So basically you’re saying that life is unfair.
laugh says
Btw, the long term mean/median for Shiller’s CAPE are now around 16.5. Not 15. In 25 years it will probably be 20. That is the funny thing about medians and means. They change.
I mean, the market has moved on and you are now behind by 100% based on your foolish portfolio choices muttering about losses that are decades in the past using numbers that don’t make any sense.
No losses are ‘final’ as you put in your post. That is simply a twisted way of looking at things and is a big part of why your personal portfolio is so far behind.
Rob says
I don’t know about life being “unfair.” The purpose of research is not to tell us whether something is fair or not. It it to tell us what IS.
You are making an important point that I don’t think you see, X. It is true that the market remains overpriced and underpriced for long periods of time. This is one (of many) reason why it is important to keep track of valuations. If overvaluation and undervaluation occurred as part of a random walk, as the Buy-and-Holders assumed to be the case, valuations would not be such a big deal. There would be times when prices were too high and times when they were too low and times when they were just right all mixed together. But that’s not the way it works. I reality, prices climb to high levels and remain high for long periods of time, then fall to low levels and remain there for long periods of time. So the investor MUST consider valuations to have any hope of achieving good long-term results.
Prices did not reach insanely high levels until 1996. So you were best to stay with a high stock allocation until then. But, yes, stocks have offered a poor value proposition from 1996 forward, with the exception of a few months in early 2009.
My best wishes to you.
Rob
Rob says
Btw, the long term mean/median for Shiller’s CAPE are now around 16.5. Not 15. In 25 years it will probably be 20. That is the funny thing about medians and means. They change.
You have to keep in mind that prices are at insanely inflated levels today. Adjust for that and you get 15. Fail to adjust for that and you get 16.
It doesn’t matter much. If you use 15, you get amazing long-term results from stocks. If you use 16, you get amazing long-term results from stocks. Fail to adjust and you get poor long-term results from stocks. That’s been the case for 145 years running now. So I am always sure to consider valuations.
Could the average return change over time? It could. But by how much? Buy-and-Holders were counting the 30 percent returns we saw in the late 1990s as real. Huh? I think it’s fair to say that it’s never going to change that much, that adopting a Buy-and-Hold “strategy” is taking a trip to FantasyLand. I mean, come on.
I hope that helps a bit, my long-time Goon friend.
Rob
laugh says
Why don’t you adjust back to the 1920s to get a median/mean of 10 then?
Rob says
Because the purpose is to get accurate numbers.
If you invest emotionally, you use numbers to rationalize GRQ strategies.
If you believe that smart investors should be following peer-reviewed research, you do your best to obtain accurate numbers.
I became a Buy-and-Holder a number of years back because Bogle advocated using research to guide your strategies. That made sense to me. Then I came to learn that Bogle made no changes to his strategy in response to Shiller’s “revolutionary” (his word) research of 1981. That’s when I got off the Buy-and-Hold train.
And I’ve never looked back.
The human mind can rationalize anything, Laugh. You show that with every post you put forward.
The reality is that Shiller won a Nobel prize for his research. It matters. Any “expert” who has not incorporated Shiller’s findings into his advice is working a con.
The vast majority of those working the con believe it themselves. I am even willing to say that it is entirely possible that ALL of those working the con believe it themselves. But it is a con all the same.
The Buy-and-Hold “idea” has destroyed millions of middle-class lives. I am proud to be known all over Planet Internet as the lead advocate of the idea of permitting honest posting on the last 34 years of peer-reviewed research so that we can put this dangerous and costly con to rest.
I hope that helps a bit.
My best wishes to you.
Rob
Anonymous says
It doesn’t look like Shiller is planning on a crash. He says that the S&P is going up and he makes a good case for buy and hold:
http://www.cnbc.com/id/40862634
Rob says
Thanks much for sharing the link, Anonymous. You have shared a good number of links to Shiller stuff and I am grateful for that. Shiller is the Master. I have a strong belief in the importance of his research and all of my work is an attempt to tease out implications of his research. But there is no question but that Shiller and I do not agree on all points. It is important that people see where the differences are so that they can make up their own minds. You have been super at bringing Shiller videos and articles to people’s attention.
I was not able to play the video at the link you provided. I don’t know why. I tried to find another site offering the video but was unsuccessful in finding one. So all I have to go by is the article that accompanied the video in your link.
The article indicated that all that Shiller said was that the S&P may reach 1430 by the year 2020. I haven’t done the math to see how likely that scenario is but it doesn’t sound unreasonable to me. I don’t agree even a tiny bit that that statement alone would suggest either that Shiller does not expect another crash or that Shiller is making a good case for Buy-and-Hold. We disagree strongly re that one.
It is entirely possible that we could see a crash sometime in the next year or two and then see the S&P rise to 1430 by the Year 2020. In fact, a scenario along those lines is precisely what we should expect given the last 34 years of peer-reviewed research in this field. It always happens like that. In the 145 years of historical return data available to us, there has never been a single case in which it did not go like that. We do not know precisely when the crash will come or precisely when we will recover and then boom back up to 1430. But we know from 145 years of stock market history (as analyzed in 34 years of peer-reviewed research) that it is highly likely both that we will see another crash taking us down 65 percent from where we stand today and that we then will see a recovery that will take us to something in the neighborhood of 1430.
I am mystified as to how you could say that the playing out of that scenario would make a case for Buy-and-Hold. I think the playing out of that scenario would make the strongest case imaginable for Valuation-Informed Indexing.
Those who follow Buy-and-Hold will be losing 65 percent of their retirement money over the course of the next few years if this scenario plays out. We will then be seeing a huge boom in stock prices in the years following that crash. The Buy-and-Holders will have very little capital remaining at that time to invest in a booming stock market. The Valuation-Informed Indexers, in contrast, will be loaded. They will suffer only small losses in the crash because they have adopted valuation-informed stock allocations. So they will be able to participate to a far greater extent in a booming stock market. That’s not an advantage? Huh?
It’s a huge advantage. I have performed hundreds of runs on the Scenario Surfer. Scenarios like this show up over and over and over again. In fact, they show up in the MAJORITY of 30-year runs. The scenario that Shiller is describing (going by the text set forth at your link — I have not seen the video) is the one that makes Valuation-Informed Indexing so magical.
What happens is that for many years the two strategies either perform equally or Buy-and-Hold is actually superior to VII for a time. Then we see a scenario of the type being forecast by Shiller and the VIIer goes so far ahead in a very short amount of time that the Buy-and-Holder cannot ever catch up. It’s not just the huge differential in returns. The VIIer obtains compounding on that differential for decades into the future. At the end of his lifetime, the VIIer is usually hundreds of thousands of dollars ahead. I have seen numerous cases in which the VIIer is over $1 million ahead. That is not the norm, to be sure. But it happens not too terribly infrequently.
Anyway, that’s my take.
I expect to try to turn this one into a column. Thanks again for your help here. I am learning from you. I hope that I am giving something back so that it is a two-way street.
My best wishes to you.
Rob
Anonymous says
“It is entirely possible that we could see a crash sometime in the next year or two and then see the S&P rise to 1430 by the Year 2020. In fact, a scenario along those lines is precisely what we should expect given the last 34 years of peer-reviewed research in this field. It always happens like that. ”
That sounds like short term timing, which you said never works.
Rob says
No, it’s not short-term timing, Anonymous.
I’ve been out of stocks since the Summer of 1996. That’s 19 years!
That’s how I avoided the slow-leak crash of the 2000s and the dramatic, scary crash of 2008 and that’s how I obtained a 3.5 percent real return on TIPS and IBonds and that’s how I will avoid the crash that will be coming in the next year or two or three (presuming that stocks continue to perform in the future at least somewhat as they always have in the past). I didn’t know precisely when any of the crashes would be coming. I “lost out” in certain years. For example, from 1996 through 1999, the Buy-and-Holders did DRAMATICALLY better. But I stuck with the rational research-based approach and it has of course paid off big time, as it always does.
You don’t need to know precisely when a crash will come. All you need to know is that the risk of owning stocks reaches insanely high levels when prices reach insanely high levels. So you MUST reduce your stock allocation at such times to keep your risk profile roughly constant. Do that and you can’t lose in the long-term.
Short-term timing never works. The Buy-and-Holders got that one right. Long-term timing (price discipline) ALWAYS works. The Buy-and-Holders got that one wrong. Go along with the thing that the Buy-and-Holders got right and correct the thing that the Buy-and-Holders got wrong and you have the first true research-based strategy, a strategy that is not just a marketing gimmick but that actually works in the real world.
We have learned more about how stock investing works in the past 34 years than we learned in all the previous years in which we studied the question. Good for us! Now we just need to work up the courage to send you Goons to prison where you belong and get about the business of spreading the word to every investor alive on the planet today.
Exciting times!
Rob