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:
Frank Martin and Seth Klarman agree that sometimes it is best to hold a larger than normal amount of cash and wait for a better opportunity set. The way I look at it is…
First the value guys stop buying and might trim back a bit so they can sleep well.
Then the garp guys stop buying and might trim back a bit until they can
sleep well. That leaves only the momentum guys buying but the momentum
list gets smaller and smaller and volatility gets stronger and stronger.
A bit more selling by the value and garp guys to sleep better and then
the Doors start playing ” This is the End “. Is it a waterfall or does
it just grind down lower 1% each day or week or month.
I do not care as long as the cash holdings that let me sleep at night is ready for finding
And that is how it works.
Thanks much for stopping by, Kirk.
We agree much more than we disagree. Basically, there are lots of people who have differing views and all those views get mixed together to create a market. My own view is that valuations count for a lot more than most people think, but that’s just me. I could be wrong. The market as a whole is better able to assess things than any one individual. So as a general rule I think it would be better for people to listen to what the market is saying than to listen to what Rob Bennett is saying.
There is one more element of the story that causes me to be a bit more alarmed than most others are re where valuations stand today. What if some views are flat-out censored? What if some views are suppressed so brutally that the people who hold those views stop expressing them publicly? Then you get into a situation where the market cannot do its jobs of mixing all views together and coming to a reasonable aggregate of lots and lots of different takes.
I have seen this sort of thing play out many times. I posted at a Retire Early board at Motley Fool where there were thousands of people using the Buy-and-Hold retirements studies to plan their retirements. Those studies say that the safe withdrawal rate is always 4 percent regardless of how high or low valuations go. That cannot be so according to the 35 years of peer-reviewed research showing that valuations affect long-term returns. People who know about the last 35 years of peer-reviewed research know that those retirement studies get the numbers wrong, wildly wrong at times of outlier valuation levels. The demonstrably false claims made in those studies are going to cause millions of people to suffer failed retirements in day to come, in the event that the stock market continues in the future to perform anything at all as it has performed during the 145 years of stock market history for which we have good records.
Not one of those studies has been corrected in the 14 years since I put up that post. Instead, I have been banned at over 20 investing discussion boards and blogs run by Buy-and-Holders who do not want their readers to know what the last 35 years of peer-reviewed research says on this subject. I have had many top-name experts tell me that they think that my point is right on, that the retirement studies should be corrected. But they have also told me that they are afraid to say so in public. I have had University professors contact me. I have had academic researchers contact me. I have had investors advisors contact me. Those people live in fear that their true beliefs about how the stock market works will be discovered and they will lose their jobs as a result.
The market cannot function when people live in fear of giving voice to their true beliefs. The purpose of a market is to set prices properly and the means by which a market works this magic is through the transmission of information. For example, a car dealer can ask for a certain price for a certain model of car. But if the person with an interest in buying the car learns by reading Edmunds that the price being asked is too high, the market punishes the person who set his price too high by giving the potential buyer the information he needs to obtain a better price from a different dealer.
It doesn’t work that way in the stock market. Treasury Inflation-Protected Securities (TIPS) offered a 4 percent real return in 2000. The most likely 10-year real return for stocks when they are selling at the price at which stocks were selling in 2000 is a negative 1 percent. Every investor could have raised his annual return by 5 percentage points for 10 years running just by shifting money from the stocks asset class to the TIPS asset class. That’s a total increased return of 50 percent of the initial portfolio value. Increase your portfolio value by 50 percent through a 10-minute transaction (backed by 35 years of peer-revirewed research!) and you can retire many years sooner. This is a very big deal.
There are of course reasons why the Buy-and-Holders are so hotly opposed to the idea of permitting millions of investors to learn what the peer-reviewed research says. These people have built careers promoting Buy-and-Hold strategies. They put themselves forward as “experts.” If they acknowledge the mistake that was discovered by Shiller’s 1981 finding that valuations affect long-term returns, they are going to cause their customers to doubt their expertise. The fact that they have covered up the error for 35 years makes them look like salesmen (at best!) more than true experts. This is a turf war. There is a mountain of money to be made by keeping millions of investors in the dark re what the research says.
The other side of the story is that the market cannot do its job (setting prices properly) if people cannot be informed as to what the research says. People cannot make intelligent, rational choices if they cannot gain access to important information relating to those choices. I believe that as a society we all need to pull together to work up the courage to stand up to the Buy-and-Holders and DEMAND (not ask!) that they follow the laws prohibiting the use of the tactics that have been employed for 14 years now to keep people from learning what they want and need to learn.
I hope that helps a bit. That’s where I am coming from, in any event.
I hope we get another chance to talk things over a bit. Your comment brought a nice bit of sunshine to my Wednesday morning, my new friend.