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:
Just for a little comic relief to anyone that might be reading these comments, here is a little tid-bit Rob posted over at his website:
“I would rate Bogle and me as roughly equal in importance. . . Just as I am nothing without Bogle, Bogle is nothing without me.”
In case you are wondering, it appears Rob was serious when he posted that.
I love Bogle. I learned about the errors in the retirement studies by reading Bogle’s book (he says that “Reversion to the Mean is an Iron Law of stock investing” — the safe withdrawal rate cannot be the same number at all valuations levels if Reversion to the Mean is an Iron Law). I rank Bogle second only to Shiller.
But I believe that Bogle is wrong about valuations. The market is not efficient, valuations affect long-term returns. And the valuations effect is huge. It is about 80 percent of the story for most investors. Most factors that affect stock investing we have no control over. But each investor decides for himself or herself whether or not he or she is going to adjust his stock allocation in response to big valuation shifts. So there is no factor that it is more important to get right than valuations.
And Bogle gets it wrong. That one mistake ruins his other work in a practical sense. Buy-and-Hold is a numbers-based strategy. When you get the numbers wrong, none of it works. And you cannot get the numbers right without taking valuations into effect.
Valuation-Informed Indexing is Buy-and-Hold with a valuations adjustment added. That’s it. That shows how much I love Bogle, that I would spend 15 years developing a strategy that incorporates all of his ideas except for the one big thing that he got terribly wrong. So, yes, Bogle needs to incorporate my work on how incorporating valuations into the mix changes Buy-and-Hold in a hugely positive way just as I incorporated all of Bogle’s ideas into Valuation-Informed Indexing (because they are genius!).
I never had any intent of saying anything negative about Bogle. When I started out talking about this stuff, I called the strategy not Valuation-Informed Indexing but Buy-and-Hold 2.0 or The New Buy-and-Hold. VII is really just Buy-and-Hold updated to reflect the last 36 years of peer-reviewed research. It was because of the negative reaction of my Goon friends that I changed the name. They don’t like VII being called “Buy-and-Hold 2.0” and Bogle made clear that he is with them, so I changed the name so as not to offend.
I still believe that I will be working closely with Bogle following the next price crash. I think he is a great man who has done great things and that the human misery that he sees following the next crash is going to cause him to come clean re his one big mistake and then we are all off to the races. Regardless of what happens, I will always sing the man’s praises. No one has done more to help the average investor by promoting simple and yet effective ideas with a long-term focus. But I have never felt even a tiny bit comfortable saying that valuations can be ignored. I learned from the peer-reviewed research (which Bogle taught me to use as my guide!) that valuations ALWAYS matter big time.
I love the man, Sammy. But, yes, I do believe that he is capable of making a mistake. As am I. As are you. As are we all. I only wish that all of his friends had helped him out by insisting that he deal with the mistake when he first learned about it. I think it would be fair to say that Bogle would feel about 100 times better about himself today had he played it that way back in 1981.