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:
Of course, Rob, if you can provide any factual proof of just one person that has been successful with VII, we would be happy to examine the data.
Shiller published his “revolutionary” (his word) research findings in 1981. Someone who converted to Valuation-Informed Indexing in 1981 and who was 25 at the time would be 61 today. We cannot declare success or failure at age 61. To know whether an investing strategy yields success or failure, we need to look at the LIFETIME effect. That’s what matters.
The same is true of Buy-and-Hold. Fama published the research that led to the development of the Buy-and-Hold strategy in 1965. Someone who became a Buy-and-Holder in 1965 at age 25 would be 77 today. That’s close to an investing lifetime. But we cannot say whether that person has been successful or not either. Stocks are priced at two times fair value today. If we have a crash next year bringing prices down by 50 percent or more, that person may be left homeless in his late 70s. That would be a catastrophe.
There is no perfect way to test which strategy works better. The best way is to look at the entire historical record and compare how investors following the strategies would have done in the long run. That’s what the research that I co-authored with Wade Pfau did. Our research showed that Valuation-Informed Indexing has been trouncing Buy-and-Hold for 145 years. Practicing price discipline greatly increases returns while also greatly diminishing risk. It’s a win/win/win.
But there are complicating factors. Neither Buy-and-Hold nor Valuation-Informed Indexing works for investors who cannot stick with their chosen strategy for the long run, even when it appears that it is not working. I believe that Valuation-Informed Indexing is easier to stick to, at least for those investors who understand the logic supporting it. But my guess is that my Buy-and-Hold friends would hold the opposing view, perhaps on the grounds that Buy-and-Hold is more simple. Assessments that don’t consider how the strategies are implemented are valuable but do not permit definitive conclusions, in my view. We need to look at how these things work in the real world and not all investors can stick with any strategy through hard times.
The bottom line here is that we need a national debate on these issues. When all of us feel free to discuss the pros and cons of both strategies with frank and bold and firm and polite statements, we all learn. That’s how we move human knowledge of these critically important matters forward, step by step, year by year.
That’s my sincere take re these terribly important matters in any event, Sammy. I naturally wish you all the best that this life has to offer a person.