Set forth below is the text to a comment that I recently posted to another blog entry at this site:
The people at ValueWalk are buy and holders?
The people at ValueWalk.com are value investors. They follow the Warren Buffett approach. That’s part of what Valuation-Informed Indexing is all about. VII is a combination of Buffett and Bogle. Most of the ValueWalk.com readerships buys individual stocks; they are not indexers.
Some would call them Buy-and-Holders. They believe in holding their stocks for the long term. But they are not the Bogle-type of Buy-and-Holder because they are not indexers. They focus on the long-term, as does Bogle and as do Valuation-Informed Indexers.
The question that matters is –Do they believe in changing their stock allocations in response to big changes in valuations?
To some extent, they do. I don’t believe that there are many people who participate at that site who would say that valuations don’t matter. So they certainly have some sympathy with the idea that investors should take valuations into consideration. They often post articles there on Shiller. So they clearly think that Shiller’s ideas add something to investing discussions.
But you could say most of that about the people who participate at the Bogleheads Forum, couldn’t you? Most of the Bogleheads have at least some respect for Shiller’s contributions. Most Bogleheads would agree that valuations matter. All Bogleheads focus on the long-term. The only issue re which ValueWalkers and Bogleheads are in disagreement is the question of whether it is better to invest in index funds or in individual stocks (and both camps have some partial dissenters from the general position of their camp on that issue).
Most ValueWalkers do not quantify the extent to which they need to lower their stock allocations at times of high valuations to keep their risk profiles roughly stable.
That’s they way in which the ValueWalkers are like Bogleheads (and, indeed, the followers of all investing strategies other than Valuation-Informed Indexing). That’s been the core point of contention for the entire 13 years of our discussions.
What makes someone a Valuation-Informed Indexer is that he believes that it possible to use the historical return data to inform one’s decisions as to how much to change one’s stock allocation in response to either low or high valuations. Buy-and-Holders don’t do that except to the small extent recommended by Bogle; Bogle says that it is okay to increase or lower one’s stock allocation by 15 percentage point in response to low or high valuations. My sense is that most ValueWalkers would follow the same general practice. Some would lower their stock allocations by about 15 percentage points at times of insanely high valuations, some would not do so at all. That’s pretty much what Bogleheads do. The two schools of thought are in rough agreement re this critical point, in my assessment.
This is what it is all about, Zippy. The is the “revolution” that Shiller started. The peer-reviewed research that I co-authored with Wade Pfau shows that investors lower stock investing risk by 70 percent by changing their stock allocations in response to insanely high or low valuations (by the amount suggested by the historical return data, not some arbitrary 15 percent rule). That’s huge. That’s the biggest advance in the history of investing analysis. Lowering risk by 70 percent changes the stock investing game in a fundamental way. It turns everything we once thought we knew about how stock investing works on its head.
That’s the message that needs to get out. Stock investing risk is not stable but variable. Changing your stock allocation in response to big valuation shifts is not elective but mandatory (for those who want to keep their risk profiles stable). There is no support in the historical data for the idea of limiting one’s allocation change by some arbitrary 15 percent rule. Investors should lower their stock allocations by whatever percentage is needed to keep their risk profile roughly stable (using the historical return data as their guide to what stock allocation change is needed).
Few investors know this today. All investors very, very much need to know it.
The reason why the word has not spread for 34 years is that Shiller’s finding that risk is variable and not fixed is 100 percent in conflict with the core Buy-and-Hold belief that the market is efficient. Risk would be stable in an efficient market. Returns would fall in the pattern of a random walk in an efficient market. Shiller showed that they do not, that they never have, that they never can (because the primary determinant of stock price changes is investor emotion, not economic developments).
I hope that helps a bit.
Rob
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