Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
What peer-reviewed research, outside of Shiller’s paper and Pfau’s paper, have you read and taken into consideration with respect to how stock investing works?
Those are the two biggies. I also recall looking at work by Rob Arnott, by Peter Bernstein, by Michael Kitces and by Andrew Smithers. Some of the things that I looked at may not have been peer-reviewed but in all these cases we are talking about material that was published in high-quality publications with tough standards.
And of course there was eight years of in-depth research on safe withdrawal rates and scores of related issues by John Walter Russell. John’s work was not peer-reviewed but it was subject to intense scrutiny by thousands of our fellow community members and every non-Goon agreed it was the highest quality work possible.
There were two long papers on “Bubble Logic” by Cliff Asness that impressed me. They had more of a focus on logic than on data but data was used in support of the logical arguments.
I also was strongly influenced by the book “Stocks for the Long Run,” which makes data-based arguments. That book is firmly rooted in a belief in the Buy-and-Hold model. So I don’t agree with many of the strategic recommendations advanced in the book. But it is possible in some cases to gain a sense of how the recommendations made in that book would be altered if the author (Jeremy Siegel) appreciated the importance of making adjustments for valuations. So I found the material presented in the book helpful in advancing my understanding even though in most cases I wouldn’t feel comfortable citing its results without offering qualifications or caveats.
The single finding that had the biggest impact for me was Wade’s finding that there is not a single study in the literature showing that it is not necessary for investors to practice price discipline (long-term timing). I had heard the claim that “timing doesn’t work” so many times from Buy-and-Holders that I just assumed that there must be at least one study backing it up. There is not. There is the one study that Wade discredited because of its glaring flaws. And outside of that, nothing. Most people who say that timing doesn’t work are thinking that Fama’s work showed that. But the reality is that Fama looked only at short-term timing — he never even attempted to examine whether long-term timing works or not (it was not even possible to practice long-term timing until Bogle founded Vanguard in the mid-1970s and made broad index funds widely available). Wade was ASTOUNDED by that finding. He couldn’t get over it. He was very careful to be sure that he had checked the entire literature because he realized that this finding turned everything we once thought we knew about how stock investing works on its head.
Another thing that has always impressed me is that in 36 years no one has found major problems with Shiller’s work. There are details that people argue over and that is always going to be the case and that is of course appropriate. But given how “revolutionary” (Shiller’s word) Shiller’s findings were, there obviously would be lots and lots of people motivated to find holes in his claims. Yet he was awarded a Nobel prize in 2013, after his critics had had over 30 years to find any significant holes.
Finally, I think it is a big deal that Shiller’s finding has continued to apply on a going-forward basis for 36 years now. The Buy-and-Holders like to suggest that this mountain of research showing that valuations affect long-term returns is the product of data mining. But if it were, there is no reason why it should continue to work on a going-forward basis. Yet here we are 36 years down the road and stocks are still performing in the way that the Valuation-Informed Indexing Model posits that they should perform and not in the way that the Buy-and-Hold Model posits that they should perform. I do not think that that means that the Valuation-Informed Indexers have it all figured out. I very much believe otherwise. But I do think it shows beyond any reasonable doubt whatsoever that the last 36 years of peer-reviewed research is pointing to something important and that we should permit it to be discussed at every investing site on the internet.
I certainly do not mean to leave people out. I understand that there are others who have made important contributions in this area. I am just mentioning off the top of my head the people who had the greatest effect on me personally as I struggled to gain a better understanding of these terribly important matters.
I probably should mention that Rob Arnott’s “Editor’s Notes” column at the Financial Analysts Journal had a big influence on me. A very common phenomenon in this field is that people read the findings of a paper and appreciate them in some very limited way but are not able to appreciate how far reaching the implications of the findings are. People are very cautious in the money area and they want to be 100 percent certain that they get things right before they state something. Arnott had the courage to discuss some very far-reaching and very scary implications in plain language. Reading his work gave me the courage to do the same. I did not speak the way I speak today back in 2002.
I was deeply influenced by the book “Stock Cycles.” That book is heavy on statistical analysis but none of it has gone through a peer-review process.
Finally, I really have to mention the hundreds of thousands of comments by my fellow community members. The comments are not peer-reviewed, to be sure. Far from it! But they serve a similar purpose as a peer-review process. The comments of our fellow community members keep us on the straight and narrow, they identify holes in our thinking, they suggest new directions that need to be explored, they warn of the dangers of over-statements. I have benefited immensely from that sort of feedback, both from my thousands of Buy-and-Hold friends and from my hundreds of Valuation-Informed Indexing friends. Heaven help us all but I have benefited from feedback advanced by my Goon friends (on more than one occasion feedback that appeared in a form very, very, very unlike any that has ever been seen in a peer-review sort of environment!).
I think that it would be fair to say that 100 percent of the peer-reviewed research available to us today shows that valuations affect long-term returns and that 0 percent shows otherwise.
I hope that helps a small bit.