Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Here’s an interesting article: https://www.washingtonpost.com/business/get-there/what-history-tells-us-about-your-investments-in-2017/2016/12/30/1e4c5714-cc4d-11e6-a87f-b917067331bb_story.html
Juicy excerpt: “Since 1990, the S&P 500 has traded above the average CAPE ratio in 307 of 324 months — that’s 95 percent of the time. If you abandoned U.S. equities when the CAPE ratio was overvalued (like Rob) you would have missed gains of more than a 1,000 percent over that time (like Rob.) In fact, had you only invested when the CAPE was 25 percent overvalued — i.e., when stocks were simply “expensive” — your total returns since 1990 would have been 650 percent. This is one of many reasons it is ill-advised to use valuation as a timing mechanism.”
Let me anticipate your brilliantly insightful response: “I obviously disagree.”
This is another one of those cases in which you have done us all a service by bringing a relevant and helpful article to our attention, Anonymous. I was not able to read the entire article because I have hit my limit on Post articles for the month. But I will read the rest when I am able and consider this one as fodder for a possible future column. My comments below are based only on the excerpt that you have provided.
Yes, I do indeed “disagree” if the point of the column (when read in its entirety) is to suggest that long-term timing is a bad idea. The phrase “if you abandoned U.S. equities” jumps out at one. You see that to abandon equities is an extreme position, right? Why would one test the value of exercising price discipline by looking at what happens when one takes the most extreme position possible?
Aiming to pay a fair price for a car is a good idea, right? If you determine that a particular year and make of a car is properly priced at $30,000, you might make a decision not to pay more than $30,000 for that car. You have a number of options open to you in the event that the dealer quotes a price of $35,000. You could come back with an offer of $25,000, hoping to meet in the middle. Or you could make an offer of $30,000, saying that you know that that is the true value of the car and saying that you just are going to refuse to pay more than that figure no matter what. Or you could walk out saying that you are insulted by the offer and vowing never to come back.
The last option is a poor strategic choice. It is common for dealers to quote prices in excess of the price at which they are willing to sell a car. Walking out every time this happens makes it likely that you are never going to own a car and forsaking cars is a bad idea. Extreme acts often bring bad consequences. It does not follow that potential car purchasers should accept every price ever requested by a dealer. What follows is that potential car purchases should avoid extremism.
So it is with stock buyers. Exercising price discipline is always a good idea. Never once in 145 years of stock market history has it not produced good long-term results. But, no, extremism in the exercise of price discipline is not a good idea. Engage in extreme behavior when exercising price discipline and you can mess up even the great concept of price discipline.
The flaw in the article is that in the real world no one would choose to exercise price discipline in the crazy way examined in this article. How about checking to see whether price discipline exercised in a more reasonable way works or not? That always works. Is there some reason why you are not open to doing it that way? Is there some reason why the article does not explore what happens to investors who do it that way?
It is a horrible, horrible idea to fail to exercise price discipline (to fail to, in the words used in the article, “use valuation as a timing mechanism.) So, yes, I disagree. The words you use in your comment — “Let me anticipate your brilliantly insightful response” — convey sarcasm and hostility. This is where things become goonish.
Say that you disagree with me 100 percent. Say that you are highly confident that it is a bad idea to exercise price discipline when buying stocks. Okay. That would mean that we have a difference of opinion. A common occurrence in this world, right? Is hostility the usual response to the evidencing of a difference of opinion? It is not. Outside of the investing realm, people have differences of opinion all the time and they do not feel hostile toward each other. In the investing realm, people go freakin’ nuts when someone expresses a different point of view.
But only followers of one particular strategy do that. Buy-and-Holders do that. I have never in our 14 years of discussion seen a time when a Valuation-Informed Indexer became hostile solely because a Buy-and-Holder expressed a different point of view. But I have seen it from Buy-and-Hold Goons hundreds of thousands of times. Why? What is it about the Buy-and-Hold strategy that makes you Goons go so freakin’ nuts every time your ideas are challenged?
I think the problem is that the core Buy-and-Hold idea (that it is not necessary to exercise price discipline when buying stocks) defies common sense. Exercising price discipline works in every other market that exists and there is now 35 years of peer-reviewed research showing that it works in the stock market as well. That simple and obvious reality drives you Buy-and-Holders out of your freakin’ minds.
You see one one level of consciousness that Buy-and-Hold just does not make sense and you cannot bear to entertain the possibility that you have for a long time been mistaken in your investing beliefs. And so you lose it. You jump for all sorts of means to block out the knowledge that is causing you pain. You give in to feelings of hostility toward those bringing reports of what the last 35 years of peer-reviewed research says because you want them to shut the hell up before their comments cause you to experience any more anguish.
I believe that you are better off feeling that anguish now. The anguish is going to be more painful if you put it off until after the next price crash.
And I believe that that is not your choice to make re the millions of middle-class investors who have a desire to learn today what the research says. If you choose to ignore the last 35 years of peer-reviewed research, so be it, it’s your life. You do not have the right to make that decision for millions of others. When you engage in behavior contrary to U.S. law to block those millions from gaining access to the information that they need to gain access to to protect themselves from feeling great anguish following the next crash, you place yourself outside the laws of this country. That’s bad news.
And that bad news tells us something bad about Buy-and-Hold. It tells us that it is pure emotion, that it is a very, very, very bad strategy.
Please note that I did not say that the article is bad. The article examines an important question. I don’t know everything. I could be wrong. People need to read articles like this to appreciate how I might be going wrong.
But people also need to see articles like this challenged by people like me. People need to see Buy-and-Hold CRITICIZED on a daily basis, as often as it is promoted. You Goons intimidate people into either not criticizing Buy-and-Hold at all or into holding back their punches when they criticize Buy-and-Hold. That’s bad news. That’s why I call you “Goons.” You have hindered our debate in a very serious way by engaging in this sort of behavior. You need to knock it the heck off. You need to do that by the close of business today.
I am not a Buy-and-Holder. I am the most severe critic of Buy-and-Hold alive on Planet Earth today. I am a gift to those who possess confidence in the Buy-and-Hold strategy. That’s not you. People who possess confidence in a strategy are happy to see it criticized. Criticism helps us strengthen our beliefs as part of the process in which we develop responses to the criticism. You lack confidence in your investing strategy. That’s not good.
Does ANYONE possess confidence in Buy-and-Hold?
It appears that just about no one possesses confidence in this strategy. Not all Buy-and-Holders are Goons. Most are not. But the Buy-and-Holders who do not personally engage in Goon behavior would criticize the Goon behavior when they saw it if they possessed confidence in the strategy. And just about no one does this. For so long as prices remain high, most non-Goon Buy-and-Holders TOLERATE the hostile or even abusive or even criminal behavior of Goons like you. What the h?
Buy-and-Hold is messed up, Anonymous. That’s my sincere take re this terribly important matter in any event.
Once again, I do appreciate that you took time out of your day to bring the article to my attention. Considered by itself, that was the action of friend. If I am wrong about investing, I want to find that out as soon as possible. By bringing the article to my attention, you did something that could potentially help me to learn something important that as of this morning I had not learned.
But then you crossed the line and included that hostile language. That is the part that I wish you could knock off. Leave out that part and we (and millions of others) have a great debate that we all learn from. Include that part of some of us end up in prison cells following the next price crash. Yucko Deluxe!
No?
Please take good care, my dear friend.
Rob
Anonymous says
“If I am wrong about investing, I want to find that out as soon as possible.”
How about now? That report presented simple, objective, provable facts. But you say it’s wrong anyway. Why? Because you feel it must be wrong. Common sense, and all.
So getting back to your quote, it’s impossible to convince you that you are wrong. Your gut feelings will always beat someone else’s arithmetic.
Rob says
I wrote a column about that article that will appear at the Value Walk site in a few weeks, Anonymous. Perhaps reading the column will help you to understand where I am coming from. Perhaps not, you know? But all that we can do is to continue to try.
You are right in your suggestion that common sense matters a lot to me. Common sense is my default. There are cases in which the belief that follows from common sense turns out to be the wrong one. We need to keep out minds open to the possibility that counter-intuitive findings are pointing us to something important.
But it is my strong belief that, in the investing realm, the research findings of the last 36 years support the common-sense belief that price discipline is key when buying stocks. So I go with that. I believe that the reason for the friction we have seen is that it was not until 1981 that the research was in line with common sense. The pre-1981 research, the research that was once thought to support Buy-and-Hold and that is still thought to support Buy-and-Hold by millions of good and smart people, was not discredited until Shiller published his “revolutionary” (his word) findings in 1981.
You are right that it would take a lot at this point to convince me that I am wrong. I have studied this stuff for a long time and in great depth and so my views are to a large extent fixed. I like to believe that I remain at least a tiny bit open-minded.
But you know what? We humans are always influenced by our biases. And I think it would be fair to say that I have a strong bias in favor of Valuation-Informed Indexing at this point in the proceedings. So I certainly would not advise anyone to change his or her opinion re how stock investing works based solely on what I say. People need to take my bias into consideration when thinking about what I say and check out what I say by checking into the research on their own and by asking questions and by looking for holes in my arguments and by talking things over with others and all that sort of thing. I am not God. I believe what I believe. But I am every bit as flawed as all of my Buy-and-Hold friends.
That’s my sincere take re these terribly important matters, in any event.
I naturally wish you all the best that this life has to offer a person, my good friend.
Rob
Anonymous says
If you had confidence in VII, you wouldn’t need to call people goons. You can dish out criticism, but you can’t take it.
Rob says
I am a journalist, Anonymous. It is my job to tell this story fairly and completely and honestly. I am not telling the story honestly if I do not use the word “Goons.”
There was a time when the peer-reviewed research really did seem to support Buy-and-Hold. That was from 1965 to 1981. The Buy-and-Holders are heroes for telling us so many important things about how stock investing works. In 1981, those following the peer-reviewed research learned that the Buy-and-Holders had messed up re the valuations matter. In an ideal world, John Bogle would have come clean on the day that Shiller published his “revolutionary” (his word) research. Bogle did not come clean on that day. I believe that he was suffering cognitive dissonance. He truly believed in Buy-and-Hold and Shiller’s research findings really were revolutionary. It would be asking a lot to expect him instantly to appreciate all of the far-reaching implications of that amazing advance in our understanding.
The reality remains that we are now 36 years down the road. Our economic system will collapse if we do not find a way to get accurate and honest investing advice out to millions of middle-class people. This is not a joke. This is public policy concern #1 in the United States today. I am going to get the word out re what has happened over the past 15 years.
If I could wave a magic wand and take us back to the morning of May 13, 2002, I would be happy to do so. I am 100 percent sure that Mel Linduaer and John Greaney and Jack Bogle would sign on to the idea in about two seconds. I don’t have a magic wand. Neither do you. We are going to have to find another way.
The only thing that I have been able to come up with is just to continue reaching out to people and asking for their help. I am 100 percent confident that we will see different results following the next price crash. There are millions of good and smart people living in the United States, people who love their country and who will be happy to do what they need to do to help us all out. We will get to where we need to go. I wish that it would have happened sooner. But the full reality remains that the good news here is 50 times more good than the bad news here is bad.
When I explain to people following the crash that those who follow the peer-reviewed research have known for 36 years that it is not possible to perform any investing-related calculation without making an adjustment for the valuation level that applies on the day the calculation is made, most are going to ask an obvious question — Why didn’t I hear about this back when I could have saved my retirement by knowing it? What would you have me tell those people?
They didn’t hear about it because you Goons blocked my efforts to spread the word. Your efforts are documented at this site. Only Goons inject death threats into discussions of stock investing strategies. Only Goons inject demands for unjustified board bannings into discussions of stock investing strategies. Only Goons inject tens of thousands of acts of defamation into discussions of stock investing strategies. Only Goons inject threats to get academic researchers fired from their jobs into discussions of stock investing strategies.
People need to hear about the role that you Goons played in causing the economic crisis. The Goon aspect of the story is an important element of the story. This story doesn’t make sense without an explanation of the role played by you Goons. But for you Goons word would have gotten out 15 years ago. And there obviously had to be other Goons that blocked efforts to get the word out in the years from 1981 through 2002. No? What else could explain the fact that most people have never considered the far-reaching implications of Shiller’s revolutionary research findings?
I have sympathy for you Goons. You are hurting. You believe in Buy-and-Hold. You have told your friends about it. You were embarrassed to have your friends learn that you got the numbers wrong in the studies they used to plan their retirements. I wish that hadn’t happened to you. But you have no beef with me. Your beef is with Bogle and the other Wall Street Con Men. They should have come clean years ago. Had they come clean, you would have been spared that embarrassment. I did what I had to do to protect my friends at the Motley Fool site from suffering failed retirements. There were many people at the Retire Early board there who believed that Greaney’s study was legitimate research. Someone had to speak up. I was just the first community member to work up the courage to do something that very much needed to be done.
I am happy to bend over backwards to help you Goons in any way that I can. I don’t ask for anything in return. I will do that because I think it is the right thing to do.
I won’t say that Greaney’s study contains an adjustment for the valuation level that applies on the day the retirement begins. That’s fraud. That’s a felony. That’s a prison sentence. For me! Not freakin’ interested, you know?
I won’t say that there is not 36 years of peer-reviewed research showing that a valuation adjustment is required in any honest and accurate calculation of the safe withdrawal rate. Again, a felony. Again, not freakin’ interested.
You do the math.
Tell me what you want me to do for you and, if it is on the right side of the felony line, I will do it.
I won’t cross the felony line. Not in 15 years. Not in 15 billion years. Not for any amount of money.
You know the score. Be a tiny bit realistic in your requests and I will do anything that I can to help out. Ask me for things that I cannot possibly even consider doing for you and I obviously will say that I wish you all good things and be on my way. I don’t exactly have any other options open to me, do I?
Your move, old friend.
Rob