Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
“I think there was good reason why Shiller was awarded a Nobel prize.”
Shiller is back in the NY Times:https://www.nytimes.com/2017/06/23/business/in-long-run-theres-no-such-thing-as-an-einstein-investor.html
“without deep expertise, it makes little sense to veer much from a simple market portfolio — one that seeks to match the overall performance of the market, and not beat it.”
“No single strategy is likely to beat the market forever.”
VII is a single strategy. You say it always always ALWAYS beats the market. Shiller says you’re wrong.
That article is 100 percent in tune with Valuation-Informed Indexing, Anonymous.
The point of the article — that you can’t beat the market — is one that I associate much more with Bogle than with Shiller. This is why I list these two men as the two top investment advisers of all time. The two most important principles of successful long-term investing are: (1) you can’t beat the market; and (2) valuations always matter. Bogle has done the most to promote the first point and Shiller has done the most to promote the second point. Combine the two points and you have Valuation-Informed Indexing, the first true research-backed model for understanding how stock investing works.
It’s not the Valuation-Informed Indexers who are trying to beat the market. That’s the Buy-and-Holders. Valuations have been affecting long-term returns for 145 years now. Shiller did not publish his “revolutionary” (his word) peer-reviewed research showing this until 1981. But the data used in that research stretched as far back as we have good records for U.S. stock returns. The reality that Shiller was pointing to has been a reality since the first stock market was opened for business. Valuations have ALWAYS affected long-term stock returns.
The Buy-and-Holders are seeking to beat the market by pretending that through some magical, mystical process it is all going to turn out differently for them than it has turned out for every investor who ever walked the planet before them. Is there a one in 250 billion chance that it is all going to turn out different this time? Sure, there is always a one in 250 billion chance. But risking your life savings on a one in 250 billion chance is not investing, it is gambling. I mean, come on.
I agree that “no single strategy is likely to beat the market forever.” I believe that today’s Valuation-Informed Indexers will beat today’s Buy-and-Holders. That’s because the Ban on Honest Posting has created an artificial environment. When the Buy-and-Holders became so emotional about their “strategy,” they denied themselves the information they need to act in their own best interests in the investing realm. Naturally, there is a financial penalty associated with that. Markets have always imposed financial penalties on irrational behavior.
But that behavior will not survive the next price crash. As the penalty is imposed and the Buy-and-Holders experience in real life the pain that is only in their imaginations today and that drives their abusive behavior, they will work up the courage to have the discussions about the last 36 years of peer-reviewed research that they need to have to come to understand what they could have come to understand 36 years ago. Then they will be able to accept the average annual market return of 6.5 percent real that the Valuation-Informed Indexers already accept today.
The Buy-and-Holders are not today emotionally capable of accepting the market return. But there is a mountain of evidence that they would be THRILLED to accept the market return if only they could have the discussions they need to have to make the transition from what we all knew about how stock investing works in 1980 and what those of us who can bear to look at the last 36 years of peer-reviewed research are happy to know today. We are working our way through a process of learning and growth, Anonymous. Accepting the market does not mean the same thing today as it meant in 1980. Today part of what it means to accept the market (rather than to try to beat it) is to accept that valuations affect long-term returns.
Shiller says: “It makes little sense to veer much from a simple market portfolio — one that seeks to match the overall performance of the market and not beat it.” You suggest that you agree with that statement. If you agree, why do you not divide the number on your portfolio statement by two to determine the value of your retirement portfolio today? The P/E10 value is at two times fair value, is it not? Does it not follow that you need to divide by two to identify the true value of your portfolio? The market produced that P/E10 value. You are rejecting what the market has done, living in a fantasy world where the market has done something different than what it has done. You are not accepting the market, but trying to beat it.
When you brag about how much money you have made with your investing strategy, is that not evidence that you are trying to beat the market? I don’t do that. I calculate the return that I have made and I accept it. I am not tied up in it emotionally. I don’t have to brag because it is not important to my self-esteem for me to believe that I am smarter than everyone else when it comes to investing. I am just using the stock market as a tool to provide for my retirement, it’s not personal. For you it is very personal. I get the feeling from you that, if your investing strategy did not make you feel smarter than everyone else, it wouldn’t be worth following. I get the feeling from you that 90 percent of the game is these feelings of superiority that you get from following a Buy-and-Hold strategy and that the actual returns you receive are a relatively small matter. I don’t think that’s healthy. I just want to do what I need to do to finance my retirement and then turn my attention to more interesting matters.
The question here is: “What is a ‘simple market portfolio’?” Is a simple market portfolio one where the risk profile jumps wildly up and down over time? Or is a simple market portfolio one in which the risk profile remains constant, one in which the investors misses out on the irrational exuberance “enjoyed” by the Buy-and-Holder but then also misses out on the irrational depression experienced when his beat-the-market strategy fails and leaves his retirement hopes in ashes, just as Get Rich Quick approaches have done to so many other investors over the history of the market? Thinking that you are going to be the first investor so smart that he can beat the market is a long-term recipe for ruin, Anonymous. The market is bigger than you. The market eats those so arrogant that they think that they will be the first to beat it for lunch.
It’s not research-based strategies that are seeking to beat the market, Anonymous. It is Get Rich Quick strategies that are seeking to beat the market. You can easily see whether it is Valuation-Informed Indexers or Buy-and-Holders who are seeking to beat the market by noting which group is more emotional in the comments that it makes on discussion boards and blogs when these sorts of issues come up in discussion.
Valuation-Informed Indexing is Buy-and-Hold with the Beat-the-Market element removed. That’s why it has less immediate marketing appeal. It is that Beat-the-Market element that makes Buy-and-Hold such an easy sell; we all have a Get Rich Quick urge residing within us and strategies with strong appeal to that urge are going to make lots of money for their advocates in the short term. But as Shiller (and Bogle long before him!) argues, Beat the Market/Get Rich Quick is always a loser in the long run. Buy-and-Hold is what sells, but Valuation-Informed Indexing is what works.
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.