I’ve posted Entry #255 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called How Developments Like the Greek Debt Crisis Affect Stock Prices.
Juicy Excerpt: Say that stocks are priced at two times fair value. There is only so much higher they can go. We cannot say when the market will fall, it might take a few years. But once prices hit two times fair value, we can say with a high degree of confidence that the odds favor a big price drop over a big price increase. You might see a year or two or rising prices following a time when prices hit two times fair value. But the odds are against you being able to retain those gains. The odds are strong that all of those gains are going to be lost and that the market price is going to continue falling hard at least until it has hit fair-value levels. Buying stocks when prices are at two times fair value is betting against the house; all wins are temporary.
The opposite is of course true when prices are at one-half of fair value. At that price level, even the worst economic news tends to push prices up. Why? Because all the bad news imaginable is already priced in to the market price. Things cannot get any worse in the minds of investors. So bad news bounces off investors like bullets off of Superman’s chest. Prices can only go so low. Buy stocks when prices are low and you are purchasing the proverbial sure thing. Valuation levels might remain the same for a time, in which case you still earn the average long-term average return of 6.5 percent real. Or prices might rise, in which case you do better than that. In the event that you see a price drop starting from a time when the market is selling at fair-value prices, it is highly unlikely that that price drop will remain in place for long.
Anonymous says
Take a look at this story:
http://www.bloomberg.com/news/articles/2015-12-01/vanguard-s-gain-is-wall-street-s-pain-as-billions-leave-the-financial-industry
Those darn buy and holders are depriving the market timing Wall Street guys lots of money.
Rob says
Bogle is a hero to the middle class. You have never heard me say different, Anonymous.
Indexing changed the world in a positive and life-affirming way. Valuation-Informed Indexing wouldn’t exist but for The Indexing Revolution.
But you are wrong to suggest that there is anything wrong with “market timing.” It depends on what form of market timing you are referring to. If you are saying that short-term market timing is a mistake, you are on solid ground because there is a wealth of peer-reviewed research showing that to be so. If you are saying that there might be circumstances in which long-term timing (price discipline) might not be 100 percent required, you are talking garbage. There is now 34 years of peer-reviewed research showing that price discipline is 80 percent of the stock investing story.
If you hear anyone saying that price discipline is not required, grab your wallet and run in the other direction. That’s a Wall Street Con Man. Or else it is someone who is 34 years behind in his reading of the peer-reviewed research in this field. And anyone who is 34 years behind in his reading of the peer-reviewed research and yet refers to himself as an “expert” is a con man of a slightly different sort.
Bogle continues to this day to say that long-term timing (price discipline) is not 100 percent required. Bogle is a con man. I oppose such garbage. There is no one on this planet who has spoken out as frequently and as forcefully in OPPOSITION to the smelly Buy-and-Hold garbage as I have. There are Post Archives.
I hope that helps a bit, Anonymous.
Rob
Anonymous says
If buy and hold doesn’t work, why do I. and many other, have millions of dollars in our diversified accounts?
Rob says
You don’t have what you think you have, Anonymous.
About half of your portfolio amount is Pretend Money. Stocks are today priced at roughly two times their fair value. Lots of the people who claim to be “experts” in this field are expert only in marketing gimmicks. They know that the key to getting people to buy what you are selling is getting them to like you. People love hearing that their accumulated wealth is double its real amount. Telling this lie has made the Wall Street Con Men very rich.
The other side of the story is that this lie has made millions of middle-class workers poor compared to what they would be if we permitted honest posting re the last 34 years of peer-reviewed research in this field. If you had not fallen for the Buy-and-Hold Lies, you would be able to retire years sooner. The relentless promotion of the pure Get Rich Quick strategy has hurt you in a very serious way.
Not this boy.
If you really feel a need to find one more person to make you feel comfortable in your belief in the Buy-and-Hold Lies, I would be grateful if you would try to find someone else.
It’s not my particular cup of tea.
Rob