I’ve posted Entry #339 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Buy-and-Holders Base Their Investing Decisions on Flawed Forecasts, Just Like All Other Investors.
Juicy Excerpt: Why do Buy-and-Holders not identify the return being paid on stocks before buying them? Because they really do make forecasts but they are fantasy forecasts that they do not want to acknowledge even to themselves because they understand that these forecasts would sound silly if spoken aloud. Buy-and-Holders “forecast” that stocks will provide long-term returns at least somewhat close to the average long-term return of 6.5 percent real at all times.
Anonymous says
Fantasy forecasts? You mean like forecasting that you will get a $500 million settlement payment?
Rob says
Time will tell the tale, Anonymous.
If this was not a matter of great importance, you wouldn’t fight so hard. If the level of fight that you have directed to this matter is a good indicator of its importance, I will be getting a lot more than a $500 million settlement payment.
It’s not only Rob Bennett who will be able to do honest work in this field when this matter is brought to a successful conclusion. Every single person who works in this field will be able to do honest work in future days. And ever single investor in the world will be able to take advantage of the many powerful insights that follow from Shiller’s “revolutionary,” Nobel-prize-winning 1981 findings. Say that there were only 100 million investors in the world. That would be $5 from each of them. I think it would be fair to say that there won’t be one investor in the world not getting a whole lot more than $5 of benefits from being able to have thousands of professionals comment on the last 36 years of peer-reviewed research in this field, which just happens to be the most important 36 years of peer-reviewed research in the history of investing analysis.
We’ll see how it all plays out. But I don’t think it is stretching on my part for me to expect payments of a lot more than $500 million. Not after what we have seen during the first 15 years of The Great Debate As to Whether or Not to Permit Debate on the Last 36 Years of Peer-Reviewed Research. And I cannot help but wonder why it bugs you so much that I may be seeing a $500 million settlement payment on the other side of this. You will be one of those benefiting from the amazing learning experience that we all will be enjoying. Does it hurt you in some way that I will receive a settlement payment of $500 million? Why not wish me luck with it? Why not enjoy the reality that one of your fellow community members received a $500 million settlement payment and that you played a part in it? It’s a pretty darn exciting and amazing reality.
Why not take it even a step farther? I am not the only one who will be seeing a huge financial payoff on the other side of The Big Black Mountain. Why not try to develop some research-based investing insights of your own and receive some finance rewards of your own as a result of Shiller’s “revolutionary” (his word), Nobel-prize-winning findings? There’s no law that says that only Rob Bennett can mine these opportunities. The field is open to all. Instead of fretting about how much I will be seeing, you could be directing your energies to seeing that you receive a nice, big payment of your own.
You of course may do as you please. There is no law that says you must reap personal benefits from this. But I do believe that it would be a better use of your limited human energies to employ them making your life better rather than fretting over someone else making his better. Feeling anger over the good fortune of others pulls us down. As a friend, I would rather see you pulled up than pulled down.
These are my sincere thoughts re these terribly important matters, in any event.
I naturally wish you the best of luck in all your future life endeavors.
Rob
Long Time Hoco Researcher says
Buy & Holders understand that the “average” long-term returns for stocks is a meaningless number. What matters is how their investment in stocks are like to perform relative to what other alternatives are available for their investment funds. Buy & Holders also understand that market metrics are not carved in stone. Only Rob Hocus No Step 2 Bennett seems to imagine that market metrics are unchanging in the same fashion as physical constants. Of course, Rob Hocus No Step 2 Bennett has a whole bunch of fantasies which collectively comprise his Fable of Hocomania.
Rob says
I don’t agree that the average long-term return is a meaningless number. I think it tells you something important about the long-term performance of the asset class.
I don’t think that market metrics are carved in stone. They obviously can change. There are many cases in which this has happened.
But I don’t believe that it is safe to ignore market metrics when making important life decisions such as when to retire. Stocks were priced at three times fair value in 2000. Buy-and-Holders were telling aspiring retirees that it was “100 percent safe” to count all of that money as real. I don’t buy it. There has never in history been a time when stocks were insanely overpriced and when we did not see a huge price drop in the following years. Those planning retirements need to know that.
Buy-and-Hold is a marketing gimmick. The Wall Street Con Men claim that there is research backing it. But that is of course a lie. Wade Pfau spent several months trying to find a single study supporting the crazy claim that it is not necessary to practice price discipline when buying stocks. He of course came up empty-handed. The fact that Bogle’s Goons then threatened to destroy his career if he continued doing honest work in this field just makes it look that much worse for Buy-and-Hold.
I like honest strategies. Especially when it comes to my retirement money.
Call me madcap, John.
Rob
Long Time Hoco Researcher says
“Stocks were priced at three times fair value in 2000.”
Only if you believe that PE10 is an immutable number as are the constants from the physical world.
Rob says
This does not follow.
Someone could use a different valuation metric and conclude that the market was priced at 2.6 times fair value or 3.4 times fair value or whatever.
You didn’t use ANY valuation metric in your study, John. It’s not that you are wedded to some valuation metric other than P/E10. You made NO adjustment. That’s why your numbers are so wildly off the mark.
Had you said in response to my May 13, 2002, post “Well, I used valuation metric x and I came up with a safe withdrawal rate of 1.8 but I of course see the need to let my readers know that, had I used P/E10 — the metric endorsed by Nobel-prize-winning economist Robert Shiller — the number that I would have produced would have been 1.6,” there would have been no problem. The community members who saw merit in metric x would have used 1.8 and the community members who saw merit in the metric endorsed by the Nobel-prize-winning economist would have used 1.6. There would have been no death threats. There would have been no demands for unjustified board bannings. There would have been no tens of thousands of acts of defamation. There would have been no threats to get academic researchers fired from their jobs.
All of the financial fraud stuff followed because you included no valuation adjustment AT ALL in your “study” and you were not able to think up any way to defend this mistake within the bounds of the U.S. law. So you went down the dark path that you went down.
I told you at the time NOT to go down that dark path. You have no beef with me, my long-time abusive-posting friend. Your beef is with John Greaney. Your beef is with the man in the mirror.
Rob
Anonymous says
“Why do Buy-and-Holders not identify the return being paid on stocks before buying them?”
Because we might guess horribly wrong and embarrass ourselves, like we did when you tried to identify such a thing?
I don’t need forecasts, the past will do – my portfolio has doubled in the last 5 years. My problem is too much money.
Rob says
Okay, Anonymous.
Don’t forget your internet friends when you write your will!
Rob
Rob says
To give a more serious answer, this is what makes Buy-and-Hold so dangerous. You are counting gains generated by mispricing as real.
If you made forecasts of future returns based on what the last 36 years of peer-reviewed research teaches us about how stock investing has always worked in the past, you would see that your phony gains of recent years are just going to be “paid back” through reduced gains in coming years. It has been working that way since the first stock market opened for business.
When you engage in discounting of your pretend gains, you possess a more accurate understanding of where you stand today. That permits you to engage in more effective financial planning. The more overvaluation there is in the market, the greater the extent to which this is so.
Rob