Set forth below is the text of a comment that I recently posted to the discussion thread for one of my columns at the Value Walk site:
Yes, Rob. The first step in effective investing is saving enough money to invest. You keep repeating that retirements are failing due to using the wrong numbers, yet we all know it is primarily due to insufficient savings.
There is nothing intimidating in anything I post and you know it. Intimidation is best characterized by threats and we all see how you threaten people with prison threats.
I prefer to discuss facts. I prefer to compare results. I wish you would do the same. My suggestion is for you and I to discuss and compare our investing strategies and their results so that readers can compare. Are you ready to have this adult conversation?
I’m happy to discuss real-world results, Sammy, but only if you are willing to make valuation adjustments to your portfolio numbers. The error at the core of the Buy-and-Hold strategy is the claim that valuations don’t matter. If they do matter, everything the Buy-and-Holders say is wrong.
Buy-and-Hold is a numbers-based approach. To show how dangerous it is, we have to report the numbers accurately and compare the accurate numbers to the Buy-and-Hold numbers. The Buy-and-Holders get upset when we do this. Because there’s just no comparison. If valuations really do matter, as Shiller showed and as I believe, then Buy-and-Hold is INSANELY dangerous.
The point of this column entry is that everyone acknowledges that valuations matter but few are willing to QUANTIFY the effect. That’s what the Stock Predictor does. It doesn’t just make a vague statement that valuations matter. It works the numbers. It shows HOW MUCH valuations matter. When you look at the numbers, it’s pretty darn amazing how big the effect is.
The idea that valuations don’t matter at all (the Efficient Market Theory) is wrong (in my view!) but at least it is logically consistent. The idea that valuations matter a little is flat-out at odds with all of the historical data available to us. If you truly believe that valuations matter, you should be willing to examine the data to determine HOW MUCH they matter. Anyone who takes a serious look at the data is going to walk away frightened about what Buy-and-Hold is doing to us as a nation.
You take comfort in your portfolio numbers. But are they real? That’s the question on the table. Shiller showed that valuations affect long-term returns. If that’s so, the portfolio numbers that we all use to plan our financial futures are not real. There are the nominal numbers that most of us use for planning and there are the valuation-adjusted numbers, the numbers you get when you consider the level of investor emotion that permitted inflated numbers to prevail for a time.
I mean no personal offense but it is my contention (based on 35 years of peer-revirewed research) that you are living in a dream world. We have discussed this stuff thousands of times and every single time you refuse to adjust your portfolio numbers for the overvaluation that applied at the time the discussion was being held. It’s easy to beat a competing strategy when you use phony numbers. Use numbers consistent with what the last 35 years of peer-reviewed research shows about how stock investing really works and your portfolio results will go from looking decent next to mine to looking very poor indeed.
The short version of all this is that any suggestion to compare portfolio results of Buy-and-Holders and Valuation-Informed Indexers BEGS THE CORE QUESTION of whether valuations matter or not. If you adjust for valuations, you get a result that favors Valuation-Informed Indexing. If you fail to adjust for valuations, you get a result that favors Buy-and-Hold. So you end up right back at the starting point of needing to determine whether valuations matter or not. That’s the only question that really matters.
That’s why I make such a point of noting that Shiller’s 1981 findings “revolutionized” the field. Everything we once thought we knew about how stock investing works is wrong if Shiller is right. We all should be talking about this. We should have launched a national debate re these questions 35 years ago, in my view.
Please take good care.
Rob
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