Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
This just sounds like far out conjecture to create scenarios where you don’t look like a fool for the past 20 years. If it gets to 30 and you haven’t pulled ahead you should just give up.
But what would “give up” mean in this context?
Would “give up” mean that I would endorse Buy-and-Hold? Buy-and-Hold has never once in 145 years produced good results. I am going to endorse that? Huh?
“Give up” could mean that I would stop endorsing Valuation-Informed Indexing. That makes a bit more sense to me. If we are still at very high valuation levels 10 years from now, then, yes, I certainly believe that that would be cause for me to pull back on the strength of my endorsement of Valuation-Informed Indexing. It would suggest that there is some flaw in the model, some error in the understanding of how stock investing works that is behind it. I can go that far.
But I don’t think that giving up entirely on Valuation-Informed Indexing would quite make sense even in that extremely unlikely circumstance (what you are describing has never once happened in 145 years). It would be a reason to pull back, not to give up. We have to do something with our retirement money as we save it, no? Buy-and-Hold and Valuation-Informed Indexing are the only two research-based models we have. Are we going to give up on all research? If not, then we have to at least lean on one of the two models. If both have failed at some point but one has failed only in one case and the other has failed in all but one case, it still seems to me that the evidence is heavily weighted in favor of the model that has only failed once. A model that has only failed once is not a perfect model but it is a far better model that has only worked once.
And it is not entirely clear that, if we do not see a crash that takes us to a P/E10 level of 8 within the next 10 years, that Valuation-Informed Indexing will have actually failed for the first time. My first reaction is to see that as a failure since the predictions would not have worked. But it is always important to remember that VII is a long-term strategy. VII has been producing AMAZING numbers for 145 years now. If its predictions fail for the first time in history and it still has produced solid numbers that are better than Buy-and-Hold for most investors, is that really a failure?
I don’t think we can call it a success. If the model’s predictions fail, that is telling us something and it is not telling us something good about the model. I definitely would see it as a negative mark for VII if its predictions failed to come through for the first time in history. But it still seems to me that VII would remain the best model that we have available to us and that is a “success” of a limited sort.
For me to give up entirely on VII, I would have to see some evidence that it is actually INFERIOR to Buy-and-Hold. That I have never seen and that I would not see (at least not entirely, perhaps in a limited way) even if we did not see another price crash for another 10 years.
All that said, I do NOT think that VII is a 100 percent proven model at this point. It has far outperformed BH for 145 years running. That is a very big deal. But the mistake that the Buy-and-Holders made was to fall in love with a model that they truly believed was the answer before all the evidence was in. Now they feel too embarrassed to acknowledge even the possibility that they made a mistake.As a result, they no longer are even willing to discuss the peer-reviewed research of recent decades. I obviously do not want to repeat that mistake. So I want to work hard to keep my mind open to evidence that VII might not be everything that the evidence available to us today certainly indicates that it is.
That was a good question, Laugh. That raised some fresh points.