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:
“Buy-and-Holders believe that the market is efficient”
You really love setting up and knocking down your straw men. I’m a buy-and-holder, and I am telling you that is not what we believe. Yes, the market can become overvalued and undervalued. We simply believe those conditions cannot be used to profitably time the market.
That doesn’t make sense, Dan.
Stocks are obviously a more risky choice when they are overvalued. So the way to profit from the reality that they are overvalued is to invest less in them, to go with a lower stock allocation.
The historical return data shows that that strategy (Valuation-Informed Indexing) has worked for 145 years running now. Buy-and-Hold has not yet worked for a single long-term investor.
And yet the (marketing) experts in this field continue to push it relentlessly. I wonder why.
There’s nothing even a tiny bit intellectually challenging in figuring out how to profit from the reality that the market is not efficient. You go with a lower stock allocation when stocks are overpriced and with a higher stock allocation when stocks are underpriced. How could that ever not work? The problem is an emotional one. Stocks are insanely overpriced today. Millions of investors desperately want to believe that the values nominally assigned to their portfolios are real. And lots of (marketing) experts are happy to turn a quick buck by encouraging them to place their confidence in these fantasies.
Again — that’s my sincere take re these terribly important matters.
I wish you all good things.
Rob
Anonymous says
When is the new proposed crash date?
Rob says
You’ve asked this one 500 times, Anonymous.
There is no new crash date. There was never an old crash gate. I once offered a guess as to when I thought the next crash might come. But I of course said at the time that my guess was worthless because the research shows that short-term timing doesn’t work. It still doesn’t work.
If you were able to think clearly, you would be asking yourself why you have asked this question 500 times. Does it matter when the crash comes? What matters is that it is coming. There is no scenario that can be described in which Buy-and-Hold becomes a good idea because a crash doesn’t take place for a certain amount of time. Crashes are so destructive that any benefits of Buy-and-Hold are always more than 100 percent wiped out by the crash it brings on. And Buy-and-Hold ALWAYS brings on a crash. There has never been a single exception. It is not possible for the human mind to imagine how there could ever be an exception.
You feel so strongly about your Get Rich Quick strategy that you have committed criminal acts on behalf of it. And you ask when the crash is coming. What does it matter? You have put yourself in circumstances in which you will be going to prison following the crash. That’s what matters here. That’s the story here. And yet you continue. That’s the power of the Get Rich Quick impulse on the workings of the human mind when it is permitted to get completely out of hand.
When does the prison sentence begin, Anonymous. That’s the question that matters for you. And the answer is — it doesn’t matter. The fact that you are going to prison is what matters. The date that it begins is a matter of trivial importance. You are focused on the wrong thing. You are not capable of thinking clearly re these matters because you cannot bear to acknowledge what you did to yourself when you put your Get Rich Quick urge first and your ability to engage in reason in service to it.
Not this boy.
Please take good care. old friend.
Rob
Anonymous says
You stated 2016 as the absolute latest date before you started seriously reevaluating your position. Well 2016 has come and gone and it looks like you have changed nothing.
Yes, it matters when the crash date is. For example, if it is in 2020 instead of 2010 then 2012 then 2014 then 2016 then doesn’t really matter you could spend an extra decade in a thriving market instead of sidelined waiting for a crash. If your market timing gimmick can’t predict within the correct decade it is worthless.
My prison sentence will be never.
Rob says
I don’t have precise recall re what you are saying that I said re 2016 being “the absolute latest date.” I have a vague recollection that there may have been a date that I gave that after which I said that I would need to re-evaluate. I try to re-evaluate all the time. I believe very strongly in Valuation-Informed Indexing. I believe it is the future. But I also believe that every one of us humans is flawed, obviously including myself. So I do think think there’s a need to question one’s self. That’s why I interact with you here, Anonymous. You are giving the other point of view. You are challenging my thinking. That part of our interaction is part of a healthy process.
No, I haven’t changed my beliefs. I still believe that Valuation-Informed Indexing is the future. I don’t want to stop questioning, I don’t want to stop re-evaluating. Doing that helps me to learn new things. So I need to continue doing that. But you are correct that my confidence is probably greater today than it has ever been.
The question you raise in your second paragraph is an important one. I don’t agree even a tiny bit with your conclusion that “if your market timing gimmick can’t predict within the correct decade, it is worthless.” I suspect that this impression you have is at the core of the dispute. I can see how intuitively it might seem that that is the case. The numbers do not back up what you are saying, not at that extreme. I know because i have done hundreds of runs with the Scenario Surfer. There have been many occasions where I made an allocation change thinking that valuations were such that I would see a payoff within a limited amount of time and then the payoff was denied for many years and yet ultimately I ended up with a bigger portfolio than I would have had following the Buy-and-Hold strategy. Crashes hurt much more than you would think they would. They have a counter-intuitively big negative impact on long-term portfolio growth.
We need more research on this question. I asked John Walter Russell to look into this question and he did a little bit of work in this area a long time ago. But he died before he was able to produce results that I considered definitive and compelling. So we need someone else to take up the ball. You are right that there is some risk in remaining with a low stock allocation for an extended period of time. This is one of the big risks of Valuation-Informed Indexing, that we don’t know what return scenario will come up and some will provide better results than others and that you can get locked out of the market for extended periods of time by following a valuation-informed strategy. So I do see this as an important area of inquiry.
Our disconnect re this question results from the fact that your conclusion is based on a gut reaction rather than an analysis of the numbers. I don’t have a solid analysis of the numbers to point to either. But I do have experience with the Scenario Surfer, which is the best tool that I know about to simulate the possibilities. It indicates that the issue that you are pointing to is real. In fact, in about 10 percent of cases, the Buy-and-Hold strategy produces better numbers at the end of 30 years. I have run scenarios where that has happened. So I believe this is real.
But it is amazing how often the opposite is true. It is amazing how far behind the Valuation-Informed Indexer can be and still come out ahead in the end. There is a counter-intuitive power to this that you are missing. Also, you need to include a consideration of risk in your analysis. In those rare cases in which the Buy-and-Holder ends up ahead, he ends up only a little bit ahead while the Valuation-Informed Indexer usually (not always) ends up far ahead. It might be that there’s some crazy scenario where things would not end up that way. I don’t think we have enough data to rule out that possibility. But we have enough data to say that the possibility is a bit remote. It is certainly not the likely case.
Please look at the return scenario that we are seeing play out today. You Buy-and-Holders have a way of suggesting that Buy-and-Hold has done well in recent years. It has not done at all well for the entire 20 years since prices first reached insanely dangerous levels in 1996. From 2000 forward, Valuation-Informed Indexing is ahead. That should never happen under the Buy-and-Hold theory. IBonds, a risk-free asset class, have beaten stocks for close to 17 years running. That’s just not supposed to be possible. But it obviously IS possible since it just happened. That reality should cause all Buy-and-Holders to stop and think for a moment. Buy-and-Hold is ahead going back to 1996. But not by much. Add in a risk factor of 2 percentage point (say that it is worth 2 percentage point of return to be in a risk-free asset class rather than in a high-risk asset class) and Valuation-Informed Indexing beats Buy-and-Hold from every possible starting date in recent history. Wow!
That’s BEFORE factoring in the effect of the next price crash, Anonymous. Factor in another crash and then all the many years of compounding losses that will result from it for the Buy-and-Holders and there is no comparison between the two strategies. Valuation-Informed Indexing is going to end up pulverizing Buy-and-Hold once again, just as it has been doing for the entire history of the market up until now. All signs from the real world point to that ultimate result.
I want to be able to make stronger research-based claims re this particular aspect of the question. I would like to have available to me research that would permit me to say that “even if the P/E10 value remains above 20 for five more years, the odds of Buy-and-Hold prevailing in the end are less than 20 percent” or whatever. I cannot be that precise in my claims today. The data is there. I just don’t know that I have the statistical abilities to work the numbers in the way that they need to be worked to make accurate and precise claims re this question.
I sure would like to be able to do so. If you Buy-and-Holders were thinking clearly, you would want to know precise answers to the question you are raising here too. You would make it happen. With all those people who post at the Bogleheads Forum, you could get this research done. You should be working that hard. We all should be working together to make that happen. And we should not be trying to prove a point when we go about doing it. We should be trying to LEARN. We all need to learn the REALITIES re the question you raise here. Bogle should be leading this effort. I am not being funny. He started Valuation-Informed Indexing. He should be working hard to show how powerful a strategy it is. If he were thinking clearly today, he would be leading this effort today.
Those are my sincere thoughts, Anonymous. I do agree that prices have remained high much longer than I thought they would. You are right on re that one. And it is an important reality. I do believe that there comes a point when prices remain high so long that Valuation-Informed Indexing begins to lose appeal as a strategy. But everything that I have seen indicates that that time-period is much longer than those who jump to a quick conclusion without studying the numbers closely would first imagine. You have to dig into the numbers and think things through carefully to come to learn the reality and, if you do this, I am confident that you are going to modify your thinking a bit. Probably not enough to be in full agreement with me. But I am confident that, if you look at this question in a serious way, you will modify your thinking at least a bit. It is looking at this sort of thing that impressed me so much and that over time has made me a strong believer in the Valuation-Informed Indexing concept.
Super question. I AM going to try to force myself to continue to re-evaluate. That is important. That is what I ask my Buy-and-Hold friends to do and so that is something that I need to do as well. But I have not been coming to the conclusions that you seem to think that I should come to when I perform my re-evaluations. For me, the case for VII keeps getting stronger. Yes, prices have remained high for a longer time than I once thought at all likely. But the odds that VII will in the long term absolutely kill Buy-and-Hold remain very strong according to every fair-minded analysis that I have looked at. I myself would not have expected that to be the case once upon a time. But I believe in looking at the numbers. And that is indeed what the numbers say (at least according to my own assessments of them).
We’ll see about the prison sentence. I believe that we are just going to have to let thing play out to see how that one goes. My belief re this one is not the same as yours. But I am rooting for you. And you never know, right? Crazy things happen in this mixed-up world of ours from time to time.
I hope that helps a bit, my good Buy-and-Hold friend.
Rob
Rob says
There’s a point that I need to add that did not hit my brain until a moment after I pushed the “send” button.
It is our need as a society for better answers to this sort of question that compels me to soldier on re these matters. We all should want to see the studies that could be produced re this question if every academic researcher alive today felt free to do honest work in this field. No researcher should feel intimidated re performing ANY research whatsoever. We all lose when researchers are afraid to research certain questions. I want to see this sort of research go forward. Not just one study either. I would like to see dueling studies. Let’s have a Buy-and-Holder do a study and then have a Valuation-Informed Indexer do a counter-study and then on and on and on until we are all exhausted with our studies of the question.
What’s the freakin’ downside? That’s a win/win/win/win. That’s what our discussion boards and blogs were created to do. That’s why we have people like Wade Pfau spend years in school learning how to do competent research. We want them looking at questions like this because we all live better lives when we become empowered by their research to form better informed views re questions like this.
I feel this so strongly. This is what drives me. I believe that God put me on earth to make the case for opening up this field to honest research because it is so important that we all get on the same page re this one. This is not a case where the Buy-and-Holders have to win or lose and the Valuation-Informed Indexers need to win or lose. Everybody wins when this kind of research goes forward. Learning Together is the proverbial free lunch. It is because I believe so strongly in the Learning Together concept that I built that Retire Early board into the #1 most successful board in the history of the Motley Fool site. This stuff matters. Big time.
That’s my sincere take re this terribly important matter, in any event.
This is the sort of question that I live for, Anonymous. Thanks for getting my blood going so early this Wednesday morning. Yowsa!
My meds! Where are those darn meds?!
Rob