I’ve posted Entry #335 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called There Would Be Great Benefits to Valuation-Informed Indexing Even If Market Timing Did Not Work.
Juicy Excerpt: Buy-and-Holders are working a sleight of hand. People look at the low rates of return provided by Treasuries and they conclude that market timing is not an appealing idea. There are ways around the problems stressed by the Buy-and-Holders but most investors are sufficiently impressed by the low returns provided by Treasuries to remain cool to the market timing concept. But that’s not really the issue in dispute. The important question is — Is overvaluation real? If overvaluation is real, investors cannot even know where they stand financially without considering the effects of valuations, something that Buy-and-Holders warn them that they must never, never do because to do so would be to engage in the same sort of thought crime that causes others to try market timing.
The market is valued today according to what all the people holding stocks think it’s worth. What the market is valued tomorrow, the next day or any day in the future depends on the collective individual decisions of those who participate in the market by owning stocks. CAPE or PE10 is not some magical metric which tells you exactly what the market value should be or when market valuations will shift. Only in the Bat$hit Crazy Wide World of Hocomania has PE10 been elevated to the status or a religious belief.
The people who comprise the market cannot price stocks properly without access to the information needed to do so. As of today, honest discussion of the implications of the last 36 years of peer-reviewed research is banned at every major investing site. So it is not even possible for today’s investors to price stocks properly. They would need to gain the ability to post honestly to do that.
P/E10 tells you the proper price of stocks presuming that the market continues to behave in the future at least somewhat as it always has in the past. It is possible that the market will behave differently in the future. If that’s what you believe, you can make whatever adjustment you feel you need to make to reflect your personal belief.
There is no question but that emotion plays a huge role in the setting of the daily price and that that price does not last into the long-term to the extent that it reflects only emotions and not economic realities. This is why knowing today’s P/E10 level permits you to have a much better idea of what the price will be in 10 years or 15 years or 20 years than you would have if you did not look at today’s P/E10 level. The P/E10 level tells you how much of today’s price reflects emotional cotton-candy nothingness and how much of it reflects economic realities. You can count on the portion of the price that reflects the economic realities. You cannot count on the portion of the price that reflects only emotional cotton-candy nothingness. It is the market’s job to price stocks properly. So the cotton-candy nothingness just gets blown away in the wind in time.
Do you think that stocks offered the same value in 1982, when they were priced at one-half of fair value, as they did in 2000, when they were priced at three times fair value? I sure don’t. The research shows that the safe withdrawal rate was 9.0 in 1982 and 1.6 in 2000. For a retiree with a portfolio of $1 million, that’s the difference between living on $90,000 per year and living on $16,000 per year. That is too big a difference to overlook in any study purporting to identify the safe withdrawal rate. Aspiring retirees need accurate numbers. If you give them inaccurate numbers, you are going to hurt them in very serious ways.
We agree that P/E10 does not tell you WHEN prices will return to fair-value levels. That is determined by investor emotion. No metric that I know of can tell you that. P/E10 tells you HOW MUCH prices need to correct. But the correction takes place only in the long-term and there is no way to know in advance when it will take place. That is why short-term timing does not work. If you could know in advance WHEN the price correction would take place, you could engage in short-term timing successfully. It just doesn’t work that way.
But, if you are a long-term investor, you certainly need to know the real long-term value of your portfolio. It is not possible to engage in effective financial planning without getting the basic numbers at least roughly right. When stocks are priced at three times fair value, as they were in 2000, using unadjusted portfolio statement numbers won’t get you anywhere even remotely in the neighborhood of having accurate numbers. People were using the incorrect numbers in the Greaney study to determine when to turn in resignations from high-paying corporate jobs. Those people’s lives were destroyed by the errors in that study. I believe strongly that Greaney should have corrected the study within 24 hours of the moment when he became aware of the errors in it.
There is no excuse for the death threats. And the death threats show that Greaney did not believe that it would be possible for him to justify the methodology used in his study in civil and reasoned debate. People who are making an honest effort to help investors do not advance death threats when their statements are questioned. People who advance death threats when questioned are working some sort of con. I mean, come on. I can accept that Greaney worked a con on himself before he worked it on others. But the con that he worked still did a great deal of harm to those others.
You say that today’s market price is determined by the assessment of today’s investors as to what the market is worth. If that were so, how would it be possible for P/E10 to effectively predict the market price that will apply 10 years into the future for 145 years running now, the entire history of the U.S. stock market for which we have records? You are wrong. The market price is set partly by the factors that you refer to. But there is another factor that you and all Buy-and-Holders ignore that was revealed by Shiller’s “revolutionary” research findings of 1981. The factor that we did not know about until 1981 is that the market always eventually closes the gap between the emotionally determined price and the real, economic price. When you know the extent to which today’s price differs from the real, economic price, you know in which direction prices are headed in the long term. That’s very important information for investors planning retirements which will extend for more than 10 years into the future, which is the vast majority of them.
These are my sincere thoughts re these terribly important matters in any event, my good friend. I naturally wish you all the best that this life has to offer a person.
Rob
The folks who set prices have massive amounts of information including Shillers work. They can also read or have their computers ingest your awful website.
The market concludes you are irrelevant.
Here’s some reading material for you Rob. You’ll of course immediately dismiss it as it does not comport with the established HocoNarrative.
https://finance.yahoo.com/news/stock-market-may-new-price-regime-20-years-112802224.html
The folks who set prices have massive amounts of information including Shillers work. They can also read or have their computers ingest your awful website. The market concludes you are irrelevant.
The market has concluded that I am irrelevant. As of today, it would be fair to say that the market has indeed concluded that. All that you have to do to understand what is going on is to look at today’s P/E10 level. That tells the story. Today’s investors are on a collective basis insanely irrational. They have rejected the last 36 years of peer-reviewed research; they don’t like what it says and they don’t care to think about what it says. And so they have rejected this fellow on the internet who is always talking about that last 36 years of peer-reviewed research and how important it is and how we need to be talking about it at every discussion board and blog on the internet. The peer-reviewed research is irrelevant today and this Rob Bennett fellow, who drones on about the peer-reviewed research, is irrelevant too.
You nailed it, Laugh.
The part you leave out is that the market has never remained at today’s P/E10 level for long. It just doesn’t work like that. A man can blot out all his troubles by becoming a drunk. He can say “my job is irrelevant” and “my health is irrelevant” and “my marriage is irrelevant” and “my family is irrelevant” and “my financial future is irrelevant” and “my self-respect is irrelevant.” It works for a time, does it not? The guy is satisfied with his circumstances and so he continues on down that path. Only the next drink matters. Everything else is irrelevant.
It’s not a good long-term strategy, Laugh. The world continues to exist whether this drunk fellow deems it irrelevant or not. And the peer-reviewed research continues to exist for you and for all Buy-and-Holders, whether you deem it irrelevant or not. The peer-reviewed research describes REALITY. You want no part of it because reality imposes on your Buy-and-Hold fantasy world, the world where price matters for everything you buy except stocks, stocks are the one big exception to the otherwise universal rule. I think that reality is going to intrude on your fantasy world, Laugh. The peer-reviewed research shows that this is what has been happening for 145 years running now, the entire history of the stock market available to us, and I believe that it is going to continue happening on a going-forward basis. I believe that the peer-reviewed research is trying to tell us something important and so I am not willing to disregard it for whatever temporary pleasures I could attain from living in the Buy-and-Hold fantasy world.
We will see what happens, okay? It is all going to play out before us.
I am on your side. When the Normals turn on you, I am going to put forward words aimed at getting your prison sentence reduced a bit. I am going to say that you suffered from cognitive dissonance, which is what I believe. I am going to say that you followed the strategies that you urged others to follow, suggesting that you were not fully engaged in a scam as the word is generally understood. I am going to say that you got caught up in something a lot bigger than you realized at the beginning of your involvement and felt trapped and couldn’t find a way out of your predicament. I am going to do what I can. I don’t ask for anything in return. I am going to do it because I believe that it is the right thing to do.
I am not going to say that I believe that Greaney included a valuations adjustment in his study. I am not going to deny that there is 36 years of peer-reviewed research showing that a valuations adjustment is required. There are things that I cannot say and remain on the right side of the law. I love my country. So there are lines that I am not willing to cross. Caring for you does not mean not caring for myself. I am going to continue to respect the laws of our nation while doing everything in my power to help you out while remaining within the confines of those laws, which I believe to be good and necessary laws.
I was your friend on May 13, 2002, I am your friend today and I will be your friend on the day that I am called to testify at your trial. That one is non-negotiable. I hope that works for you.
So we will see. And then we will pick up our bags and move forward to our next exciting adventure having learned whatever is it that we were supposed to learn from this crazy saga and a half.
Please take good care, my old friend.
Rob
Here’s some reading material for you Rob. You’ll of course immediately dismiss it as it does not comport with the established HocoNarrative.
I don’t dismiss that article at all. I don’t agree with its conclusions. That’s what makes a ballgame, isn’t it? One side pitches and one side bats and each tries to outdo the other. That’s a super article that makes reasonable points that all investors should consider before making decisions re their retirement portfolios. I certainly have no trouble saying that I appreciate the effort that went into producing the article, effort that will help us all out in the event that the conclusions reached in the article point to important truths.
There is no subject in which every human being in the world agrees. If everyone in the world agreed about how stock investing works, there would be no purpose to investing discussion boards. The idea is to talk through our disagreements and thereby to learn from each other. Advancing death threats is not talking through disagreements. Demanding unjustified board bannings is not talking through disagreements. Putting forward tens of thousands of acts of defamation is not talking through disagreements. Threatening to get academic researchers fired from their jobs is not talking through disagreements. This fellow is doing it in the way that it is supposed to be done. He is not in any way, shape or form endorsing the way that you Goons have been doing it for 15 years now. Good for him. He’s helping. It’s the reasonable expression of different points of view that makes the discussion-board world go around.
He’s acknowledging that we are living through something that we have never seen before. There is no earlier time in history in which prices have remained at these levels for this long. He is suggesting that that is a perfectly good thing. Perhaps. But the other possibility is that it is a very bad thing. That’s the case that I argue on a daily basis. Who is right? Only God knows with absolute certainty. This fellow is a human and he has gotten them wrong in the past. I am a human and I have gotten them wrong in the past. We both make a terrible mistake if we become so arrogant as to dismiss the other fellow’s point of view out of hand.
You play God, Long-Time. That’s where you go off the reservation.
When you threaten those with whom you disagree re investing rather than engage in reasoned conversation with them, you play God. You act as if you are the first person who ever walked the earth who has all the answers and doesn’t need to consider the views of others even when thousands of your fellow community members express a desire that each community member be permitted to express his sincere views honestly.
As your friend, I implore you to knock off the funny business. You are walking a very, very dark path, a path that leads to no good places either for you or for any of the humans who happens in their travels to come across your words and to be influenced by them.
That’s my sincere take re these terribly important matters in any event.
I naturally wish you the best of luck in all your future life endeavors.
Rob
“He is suggesting that that is a perfectly good thing.”
As always, you distort. He suggests no such thing. What he SAYS is “For a long and painful 20 years – for someone betting on a steady, unchanging world order – the P/E ratio stayed high by 1935-1995 standards”.
That “someone” is you, Rob. He says people like yourself “should brace themselves for continued higher multiples than those of the old days … this could be another 20 year journey”
Are you braced?
I’m braced.
I don’t know the future and I don’t claim to know it, Anonymous. I know what our peer-reviewed analyses of the past tell us about what is most likely to happen in the future, nothing more and nothing less.
Are you braced for what will happen to your portfolio in the event that stocks continue to perform as they always have in the past rather than entering this new world where they can remain at the sorts of valuation levels that apply today indefinitely? You need to be braced too.
The difference between us is that I welcome the expressions of the other point of view that help me to brace myself for things that I don’t expect to see happen. You do the opposite. You engage in insanely abusive behavior aiming to insure that you never need to be exposed to the points of view that you would need to hear to properly brace yourself for things you don’t expect to see happen.
If you were thinking clearly, you would see that permitting honest posting helps you out because people like me help you to brace yourself for the unexpected in a way that hearing Buy-and-Holders talk about investing can never do. Buy-and-Holders cannot make the case for Valuation-Informed Indexing as effectively as I can because they don’t believe in it. For you to be properly braced, you need to hear from people like me on a daily basis. You should be thanking me for my contributions, not threatening to kill my wife and children.
These are my sincere thoughts re these terribly important matters, Anonymous.
I wish you well.
Rob
We are so lucky that you have all the answers and that you will also save us from impending doom.
You’re lucky that you live in a country that permits us all to post our honest views and that has laws against financial fraud that make that crime a felony punishable by imprisonment.
So am I.
I appreciate the benefits that I have obtained by living in this country. That’s why I love it.
That’s why I refuse to say that I believe that John Greaney included a valuations adjustment in the retirement study posted at his web site.
I wish you all good things.
Rob
We are so lucky that you have unique insights as to what constitutes fraud by those evil goons.
My job is to post honestly. The community is able to work its magic only if each member posts honestly. So, yes, I am doing my part, and, yes, you are lucky that I am doing so.
If you don’t see it, you don’t see it. But I would not feel a tiny bit comfortable playing it any other way. So it is my intent to continue to post honesty re safe withdrawal rates and scores of other critically important investment-related topics.
If nothing changes following the next price crash, then you win, right? Take comfort in that, you know?
I believe that everything will change following the next price crash. I take comfort in that. But I am not God. I could be wrong. There are no absolute certainties in this life.
If I want to be able to sleep at night, I just have to accept that that uncertainty is part of the story here. My take is that the same is true for you from the other side of the table. You are at risk of going to prison. That’s an uncertainty that you are just going to have to accept so long as you are 100 percent opposed to the idea of permitting honest posting re the numbers that we all use to plan our retirements. If that’s where things stand for you — if you can no more bear to permit honest posting than I can bear to post dishonestly — then just accept that that’s where your life has led you and accept whatever comes –prison sentence or no prison sentence — with good cheer.
I don’t wish you any harm, Goonie. I wish you all good things. If there were some way that I could make you happy without committing a felony under the laws of a nation that I love, I would do it in two seconds There is no way that it can be done. So I just have to accept that this place is the place to which my life has led me and try to be of good cheer in doing so. I respectfully suggest that you attempt to do something similar.
I will remain your friend regardless. Whether you go to prison or not, I am always going to remain your friend. Nothing that has happened over the past 15 years takes away the good times that we had together in the days before my famous post of the morning of May 13, 2002. So that friendship has never been in doubt in my eyes.
I would suggest that you just try not to let the bad guys (whoever they may be) get you down. I would suggest that you enjoy each day of precious life given to you by a loving God. That’s what I try (and often fail) to do.
I hope that helps a tiny bit.
Rob
We are all so lucky to have you, Rob, as the sole honest person when it comes to investing as everyone else is lying and committing fraud.
Some are committing fraud.
Some are suffering from cognitive dissonance.
Some have never educated themselves re these issues.
Some have tried to educate themselves but to this day suffer from a genuine confusion.
Some have tried to do honest work, have been frightened by the response of the Buy-and-Holders and have pulled back from doing so, rationalizing that they can do more good through that approach than by sacrificing their careers in an overly idealistic quest (I was in this group from May 1999 through May 2002).
Yes, I try very hard to post with complete honesty, even when the price associated with doing so is high. I have seen too clearly what results when those of us who have come to at least a partially clear understanding of these issues fail to do so. Shiller published his “revolutionary” (his word) research findings in 1981. Had Shiller or someone else been uncompromising in his or her insistence on his or her right to post honestly re what that research tells us about Buy-and-Hold, our board and blog communities would not have been put through what they have been put through over the past 15 years. I think it would be fair to say that every single community member (including Lindauer and Greaney) wishes that someone had done what I have done over the past 15 years back in 1981. Those acts of cowardice, however understandable, have hurt each and every one of us in very serious ways. I don’t want to engage in such cowardice, knowing where it takes us. Sue me, you know?
I don’t say that I am better than everyone else. We all try to make positive contributions. Again, I include Lindauer and Greaney in that; I believe that Lindauer and Greaney started out with an intent to make positive contributions. But here we are. It’s not all Lindauer’s fault or all Greaney’s fault. It’s the fault of all of us who failed to speak up when we saw them engaging in ugly behavior. I did that. I am ashamed that I failed to speak up from May 1999 through May 2002. I engaged in all same rationalizations that Bogle and Shiller and Pfau and Bernstein and all the others engage in today. I know how they feel and I sympathize. No one should have to see his or her career destroyed because he wants to post honestly re an important subject. But again — here we are. How are things going to change if we all keep on doing the same things?
I will post honestly, Goonie. I made that decision on the morning of May 13, 2002, and I have never seen any good reason to change it for 15 years running now. The answer is not for one more person to rationalize dishonesty. The answer is for those who are not speaking up against the abusiveness to begin doing so. We all would be better off if we all did that. I cannot force anyone else to do anything, no matter how important I think it is that they do that thing. All that I can do is to set an example by doing the right thing myself. That much I will do. And I will offer precisely zero apologies for doing so.
If Buy-and-Hold can only be defended with death threats, Buy-and-Hold belongs in the trashcan of history.
I am 100 percent sure.
If Buy-and-Hold can be defended through civil and reasoned discussion, then every Buy-and-Holder alive should unite in opposite to the tactics that we have seen employed for the past 15 years by the Lindauerheads and the Greaney Goons. There should be zero controversy re this matter.
Again I am 100 percent sure.
You are lucky to have me, Goonie. And you are lucky to have the thousands of our fellow community members who dared to put their lives and their careers on the line by posting once or twice that they would like to see our boards and blogs opened up to honest posting on safe withdrawal rates and scores of other critically important investment-related topics. And you are lucky to live in a country that has laws against financial fraud that protect you and all of us from the sort of behavior that you have been engaging in for 15 years now. And you are lucky that you have a conscience that makes you feel bad about your behavior without me even needing to explain to you why you should feel bad.
We are all lucky. And we are all going to make it successfully to the other side of The Big Black Mountain. I wish that it wouldn’t take all the human misery that will accompany the next price crash to get us there. But you know what? The good news here is 20 times more good than the bad news here is bad. So I’ll take the package as delivered. The truth is that we are very, very lucky indeed and that we should work to keep focused on that important and encouraging reality.
You are lucky. I am lucky. And here we are quarreling for 15 years whether errors in retirement studies should be corrected within 24 hours or not. It’s a big old goody world, just as John Prine once argued, is it not?
Take care, my good friend.
Rob