Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
As you are so fond of pointing out, there are post archives:
“Rob says
December 5, 2014 at 6:03 am
You’ve asked me what I will do if there is not another crash within the next two years. I have said that I will write a column saying that that tells me that there is something wrong with the Valuation-Informed Indexing concept and that I will continue studying the matter to try to figure out what really works best.”
You have a month to draft and polish that column. Of course, you won’t. Attempting to type “there is something wrong with VII” would cause your fingers to snap off.
No, that’s not so.
I have an article at this site titled something like “20 Reasons to Have Doubts About the VII Strategy.” There IS something wrong with VII. The biggest thing that is wrong with it is that we have not had enough people study it in depth to have confidence in it. We need to have lots of good and smart people doing their best to find holes in it. That’s how we learn. I believe strongly that VII is the future of investing analysis. But am obviously biased and extremely so. I have invested 14 years of my life in this. Anyone who goes just by what I say is a darn fool. We need to have lots of people looking at this and seeking to poke holes in it.
I am not going to have that column up by the end of this year. But I do have a column like that in my list of future columns. So it will probably come out in the early part of next year. My tentative title is “The Odds That We Will See Another Crash By the End of 2007 Are Now Less Than 50 Percent.” There’s only a small bit of time left in 2016. So I pretty much rule out the possibility that the prediction will be proven accurate. I now say that we should see the next crash “within the next year or two or three.” That takes us to late 2019. If you go ten years out from September 2008, you get to late 2018. I am adding an extra year to be extra careful that I do not flame out on yet another prediction. The odds are probably stronger in the first of the three years than in the last of the three years. So I think that it is probably so that the odds of seeing the crash in 2017 are a tiny bit less than 50 percent (even though 2017 is the most likely year of the three years).
Again, all of this DOES indeed show that, “there is something wrong with VII.” I am not disputing that. I am saying that VII is the best strategy that we can come up with given what we know from the research available to us today, nothing more and nothing less. We need to continue to advance in our understanding of these maters. We do that by talking things over, by exploring new ideas and confirming or refuting earlier ones and by performing new research. That’s just the standard way by which humankind advances in its understanding of things over time. We need to follow the standard procedures that apply in all other fields of human endeavor to the stock investing field as well.
That’s my sincere take in any event, X. I naturally wish you all good things.
Rob
Anonymous says
“I now say that we should see the next crash “within the next year or two or three.”
Which is exactly what you said two or three years ago, correct?
Rob says
That’s correct, Anonymous.
You are focused on the wrong thing.
You are focused on WHEN the crash comes. That’s not what is important. What matters is that the RISK of a crash is so much greater when prices are high than when they are low.
You are probably going to be investing in stocks for about 60 years. When you look back at age 85 at how you did from age 25 forward, the WHEN of price crashes will be immaterial. The level of RISK you took on by either practicing price discipline or failing to do so will be everything. The historical return data shows that keeping your risk profile roughly stable is 80 percent of the stock investing game. Always be sure to make whatever adjustments in your stock allocation that are required to keep your risk profile roughly stable and you will always do well in the long run. Fail to do so and you will of course always fail to do well. There has never once in 145 years been an exception to that common-sense rule.
Does that help?
Rob
Anonymous says
What if you are 70 years old and then a crash still doesn’t happen when another 10 years go by?
laugh says
It matters when it comes. If it takes 60 years and stocks only use 50% of their value there is no way you will ever catch up due to lose compounding.
145 backwards looking years are irrelevant. The next 40 years is what matters for the current generation.
Rob says
What if you are 70 years old and then a crash still doesn’t happen when another 10 years go by?
The money gets left to your heirs and they receive the benefit.
You continue to focus on how long it takes for the crash to occur. My response is always that it doesn’t matter. Overvaluation is the product of fantasy. Reality-based strategies are always better than fantasy-based strategies. It is not even possible for it to ever be otherwise (when measuring results on a risk-adjusted basis).
We cannot tell how long it is going to be before a crash takes place, only that one is certainly coming. And it doesn’t matter. That is always my two-part answer to questions along these lines. If the crash comes quickly, you are ahead. If the crash comes slowly, you are ahead. You are ALWAYS ahead. So you shouldn’t fret so much about when the crash will come. It doesn’t matter in the long run.
It SEEMS like it matters in the short run. You look at your portfolio statement and you say “Gee, I am ahead of where I would have been had I followed a reality-based strategy.” And on paper, it really is so. But the numbers on the piece of paper are rooted in fantasy. The numbers on the piece of paper do not control the long-term result. It is reality that controls the long-term result. You want to try to tune out the short-term fantasy stuff and focus on the long-term reality stuff.
Valuation-Informed Indexing ALWAYS works, Anonymous. We have 145 years of historical return data available to us and there has never been an exception. Something like that doesn’t happen by accident. It plays out that way over and over and over again because it MUST play out that way.
If I said that it is better to brush your teeth than not to brush your teeth, you wouldn’t argue. You would accept that it is better to have clean teeth and not feel any need to push back. If someone for some reason felt that he wanted to make a case for not brushing your teeth, he could point to people who have not brushed their teeth for a few days or even a few weeks and who have not suffered terrible consequences. He could argue that it is much better not to brush your teeth because you save the time you would have devoted to the task and you don’t necessarily suffer negative consequences for doing so. In the long run, though, you do always suffer negative consequences for not brushing your teeth. It is a foolish way to proceed. We are lucky that there is no industry in place that generates billions in revenue by advising people not to waste time brushing their teeth.
Unfortunately, we do have an industry that generates billions in revenue advising people not to practice price discipline when buying stocks. The foolish advice this industry pumps out has destroyed millions of lives and is in the process of destroying millions more. Not one person benefits from their lies. The investors would all benefit from knowing the realities. The millions who are now unemployed as a result of the Buy-and-Hold Crisis would be benefit from people knowing the realities. The industry would benefit from being free to tell the realities; more people would feel comfortable buying stocks if there were no price crashes. But we cannot get from the horrible place where we are today to the wonderful place where we all want to be tomorrow without working up the courage to stand up to you Goons. That’s been the rub for 14 years now.
You should brush your teeth, Anonymous. I am sure. And you should practice price discipline when buying stocks. Again, I am sure. You can come up with all sorts of crazy scenarios in which it might appear that in the short term the failure to do so might not produce horrible results. In the long term, the results of Buy-and-Hold are always horrible. The crazy scenario is going to come to an end and the realities are going to come to dominate in the long run. There is no other way it can play out. There are no exceptions. It is not possible to imagine any.
Please brush your teeth. Please practice price discipline when buying stocks.
Or don’t.
It’s your call.
But if you elect not to practice price discipline when buying stocks, please don’t ask me to go along with your lies, to encourage or tolerate them. I can tolerate them to the point of letting you say them; everyone has a right to offer their take, in my view. But I cannot tolerate them to the point of not pointing out the 35 years of peer-reviewed research revealing the error that you are making in going with a pure Get Rich Quick approach. I believe strongly that my friends need to know about that 35 years of peer-reviewed research whenever some Buy-and-Holder tries to con them. So, when I see you conning my friends and when I have the ability to do something about it, I am going to do that something. It’s not personal. It is a matter of conscience. I don’t approve of cons. I don’t approve of financial fraud. I don’t approve of Get Rich Quick. I don’t approve of Buy-and-Hold.
I hope that helps a bit.
Rob
Rob says
It matters when it comes. If it takes 60 years and stocks only use 50% of their value there is no way you will ever catch up due to lose compounding.
145 backwards looking years are irrelevant. The next 40 years is what matters for the current generation.
The basic point that you are making here is legitimate, Laugh.
It obviously is true that what you care about is the next 40 years, not the past 145 years. The problem, of course, is that none of us knows what the next 40 years will bring. We look to the last 145 years of returns for guidance re that question. There have been lots of different types of scenarios that have played out over the past 145 years. The most realistic assumption is that something at least generally along the lines of one of the scenarios that we have seen play out in the past is what we will play out in the future.
If you are confident that we will see something different in the future than what we ever seen in the past, it’s fine to go with that belief. But if you are offering advice to others that is rooted in that belief, you need to let them know that that’s the case. The Buy-and-Hold retirement studies said that a 4 percent withdrawal was safe for retirements in which the historical return data showed that no withdrawal greater than 1.6 percent was safe. That’s fraud when it is done knowingly and it is error even when it is done as the result of cognitive dissonance. If you say “presuming that stocks perform in the future in a way in which they never have in the past have performed, then 4 percent is safe,” that’s on the right side of the line. The Buy-and-Holders don’t do that. They claim that there is data supporting their crazy claim that the safe withdrawal rate is always the same number. That’s fraud (not knowing fraud in cases where cognitive dissonance rules, but still).
There ARE scenarios where the Valuation-Informed Indexer falls behind because overvaluation remains in place longer than anticipated and then cannot catch up because he has missed out on compounding returns. These cases are rate. They constitute about 10 percent of the scenarios that can be generated using the 145 years of historical return data available to us. Investors do need to know about this possibility. It would be wrong to hide this reality from them.
Still, we are talking about a 10 percent possibility. There is a 90 percent possibility that the VII investor will end up ahead in the long run. And, in the 90 percent of cases in which the VII investor ends up ahead, he usually ends up FAR ahead while, in the 10 percent of cases in which he ends up behind, he is usually behind by just a little. Investors have no way of knowing in advance whether one of these rare scenarios is going to play out or not. So I think it is fair to say that VII always offer the better risk-adjusted long-term return. The Buy-and-Hold investor occasionally will end up ahead but he takes on far more risk in gaining that slight chance of ending up ahead.
Does that help?
Rob
Anonymous says
Today is Christmas. There is a much greater chance of Santa Claus coming down your chimney versus you collecting a $500 million windfall. Nonetheless, Merry Christmas!
Rob says
Santa Claus is real, Anonymous. He took the freakin’ cookies! I mean, come on.
Merry Christmas to you and all your Goon pals.
Rob