Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
“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.
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
Below is what Shiller is saying today.
“Spooky valuation story No. 1: The Shiller P/E ratio is now at 30.8, higher than it was right before the 1929 market crash.
The only time it was higher was right before the 2000 dot-com market meltdown, as you can see here. That does sound scary!
Especially when you consider that this valuation metric was invented by a Nobel Prize winner and Yale University professor Robert Shiller, who wrote The New York Times best-seller “Irrational Exuberance.” That’s an impressive list of credentials. He’s smarter than you and me, or at least me anyway, so his P/E ratio formula has to be right, no?
Not so fast. I checked with Shiller, and even he disagrees with this one. Shiller tells me he’s still got money in the U.S. markets, though he has been tilting toward Europe and emerging markets, in part, because they look cheaper. “For the immediate future, I am not that bearish,” says Shiller. “I am not thinking that the U.S. is a disaster.”
Shiller cites two reasons you shouldn’t buy the scare story that bears are concocting from his famous valuation metric. First, as many Shiller P/E commentators like to point out, Shiller says his P/E ratio is not a good predictor of short-term market moves, meaning one or two years. Instead, it’s better as a 10-year predictor. But even here, it’s not forecasting dire news. It’s still predicting gains over the next 10 years, even if they’re modest, says Shiller.”
So, Rob, what gives? Shiller says we shouldn’t buy your scare story. Not only is he not warning “divide your portfolio by two”, he’s still in the market himself. Doesn’t Shiller understand the last 36 years of peer-reviewed research? Doesn’t he understand his own research? If Shiller isn’t on your side, who is?
I don’t see any conflict between what I say and what you quote in that comment, Anonymous.
I certainly believe that you need to divide by two to know the true, lasting value of your stock portfolio. That’s what it means to say that stocks are priced at two times fair value.
But I certainly do not think of myself as a bear. I think of myself as someone who uses the peer-reviewed research as a guide to how to invest in stocks. I don’t see anything bearish or bullish about using peer-reviewed research as a guide.
I certainly agree that most investors should have some money in stocks today. But I certainly do NOT believe that most investors should have the same stock allocation today as they would have at a time when stocks are priced reasonably. If Shiller is saying that investors should go with the same stock allocation at all times, then we do indeed disagree. There’s a tiny bit of a suggestion of that in the words you quote. But I don’t think he says that. My take is that he is dancing around the issue. He doesn’t want to address the issue clearly because he knows that the Buy-and-Holders will go nuts if he does. So he offers some words that cut one way and some words that cut the other way.
I don’t quite agree with the fellow who is saying that Shiller’s words have credibility because he is “smarter than you or me.” Shiller is plenty smart. But Bogle is plenty smart too. If the test is which group has higher I.Q.s, I would feel comfortable with the Buy-and-Holders, there are plenty of smart people on that side of the table. I go with Shiller because he has 36 years of peer-reviewed research supporting him. That’s the biggie for me. The other biggie for me is that what Shiller says is consistent with what common sense tells me — price matters with everything else I buy so I have a hard time ignoring it when I buy stocks. Shiller is plenty smart but I wouldn’t say that that is the sole thing that makes him so persuasive for me.
I don’t like it AT ALL when Shiller says “for the immediate future, I am not that bearish.” Yucko! That one makes my blood run cold. He says this kind of thing all the time. He is saying here that he thinks that he can look at some sort of signal and identify the right time to get out of U.S. stocks. I am with the Buy-and-Holders re this one. I don’t believe that short-term timing works and I find it embarrassing when Shiller indicates that he believes in it. I believe that Shiller’s official position is that short-term timing doesn’t work but I have seen him refer to “indicators” and his confidence in them on many occasions. Nobody’s perfect and this is a case where my take is that Shiller is saying something that is outright foolish. I don’t see it as a super big thing. But I find it more than a little perplexing given how smart he indeed is. It shows once again that smart people get them wrong all the time. Being smart is a plus but it is not enough.
I don’t think that the U.S. is a disaster. I wouldn’t be looking around for undervalued markets. It can make some sense to do some of that. But my personal view is that the U.S. is a well-established market with a great track record. I think you can outsmart yourself trying to look for other markets at times when the U.S. market is insanely overpriced. My inclination would be just to lower your allocation in the U.S. market for a time.
I of course agree that P/E10 does not predict short-term returns. I agree that today’s P/E10 predicts a positive return over 10 years. But it predicts a very low positive return. If you are happy with a very low positive return and you understand that that’s what you are likely to get, a high stock allocation can work for you. But I think it makes more sense to go with a lower stock allocation today and then move to a high stock allocation when prices fall and the 10-year return going forward is much higher. Stocks have been providing a poor (about 2.25 percent) return for 18 years now. Most people cannot go for years and years with such a low return. People invested heavily in stocks have now lost out on close to two decades of compounding. What the f? Most people rely on compounding to meet their goals. Miss out on two decades of compounding and you are not going to make it. I think that the likely 10-year return at today’s P/E10 level is too low to be acceptable for any more than a small percentage of one’s portfolio.
I don’t have any “Scare story.” I have a research-based story. I think we should permit honest posting re the last 36 years of peer-reviewed research at every site on the internet. I see it as a win/win/win/win/win.
I do think that to some extent it would be fair to say that Shiller does not appreciate the implications of his own research. I don’t think there is anyone who ever lived who was able to appreciate all the implications of his own ideas. People learn from discussions with other humans. When we open every site on the internet to honest discussion of Shiller’s research, Shiller will hear lots of things that he has not heard until now. That will help him come to a better understanding of the far-reaching implications of his work. That will be a very good thing.
I don’t think that Bogle understands all the implications of his many powerful insights either. One of the things that I love about the Bogleheads Forum is that implications of Bogle’s ideas are being teased out there on a daily basis. I would bet $10 that, if you asked Bogle if he has ever read anything at that board that he did not think up himself, he would say “yes.” That’s super groovy, so far as I am concerned. Bogle got the ball rolling re those ideas. But then others came along and applied them in new and interesting and exciting ways. A win/win/win/win/win. Bogle teaches others and then others teach Bogle. I think that’s great. And I think that the same thing will happen with Shiller as we permit discussion of his powerful ideas at more places.
Shiller is on my side. So is Bogle. So is every American citizen. We acted as a people to make financial fraud a felony in the United States. I don’t know how anyone could be more on my side than to do that. If you asked Mel Lindauer or John Greanry on May 12, 2002, whether they thought that there is a place in investing discussions for death threats and demands for unjustified board bannings and tens of thousands of acts of defamation and threats to get academic researchers fired from their jobs, they would have said that there is no place for such garbage. They changed their minds under pressure. Humans do not always act rationally under pressure. But there is no problem here of the entire country not being united in opposition to the tactics that we have seen advanced by the Lindauerheads and the Greaney Goons over the past 15 years. We are entirely united. I mean, come on.
Everybody is on my side. But this has been a difficult transition. It hurts people to hear that they need to divide their portfolio balances to know the true and lasting value of their stock holdings. When people are hurt, they forget their true beliefs. This is something that happens with the humans all the time. I am 100 percent certain that we will all get things back on the right track in the days following the next price crash. Once there is no more need to divide by two, the marketing edge that Buy-and-Hold possesses today will disappear.
Or so the greatly flawed brain of Rob Bennett believes, you know?
I could be wrong, Anonymous. That’s the wild card here.
I naturally wish you the best of luck in all your future life endeavors.
Rob
“I don’t see any conflict between what I say and what you quote in that comment”
If you don’t see any conflict between what Shiller just said, and your years of predicting a 65% crash, then you’re walking around with your eyes screwed shut.
Shiller made the same sort of prediction when he said in 1996 that investors who were heavily invested in stocks would come to regret it within 10 years. The crash came in 2008, not in 2006. So those who want to say that Shiller was wrong in a technical sense can say so. My view is that he helped us all out in an enormous way by pointing out the huge risk associated with investing in stocks when they are selling at the sorts of prices that applied in 1996 (and today).
I wish that more people had the courage to point out these realities. People will love you if you encourage their Buy-and-Hold fantasies. But those who suffer failed retirements suffer serious life setbacks. I believe that this is a field in which we should be shooting straight with people. Shiller was right to say that stocks were a dangerous buy in 1996 and I was right to say that stocks were a dangerous buy a few years ago. I was proven wrong in a hyper-technical sense too. But if millions of middle-class people suffer wipeouts in the next few years, as the last 36 years of peer-reviewed research indicates they will, I will feel good that I at least make some effort to warn those whom I was able to reach.
No apologies, Anonymous.
You do have my best and warmest wishes, however.
Rob
“Shiller made the same sort of prediction when he said in 1996”
The topic is what Shiller is saying NOW. Not 21 years ago.
You really deserve to be the world’s first person to be banned from his own blog.
I addressed what Shiller is saying now in my earlier comment. There is nothing that is in any significant way inconsistent between what he says and what I say. I don’t get the sense that we are in 100 percent agreement on every tiny point. But then Mel Linduaer and John Greaney are not in 100 percent agreement with Jack Bogle on every tiny point. I think it would be fair to say that my views are more in accord with Shiller’s views than Mel Lindauer’s views or John Greaney’s views are in accord with Bogle’s views.
Rob
“middle-class people suffer wipeouts in the next few years”
This is what you say. Shriller is not saying that. That is a significant conflict.
I don’t agree, Anonymous.
He says that “for the immediate future” the U.S. market is “not a disaster.” So it MIGHT be a disaster sometime in the next few years.
That’s what I say.
I don’t rule out that it could prove to be a disaster in the immediate future. I say that there’s no way to know. It could be a disaster in the immediate future or it could be a disaster in the next few years.
I see Shiller saying essentially the same thing except that he adds a little bit of short-term timing to the mix (by saying that the U.S. market will not prove to be a disaster in the immediate future). I don’t see him saying that the U.S. market will not prove to be a disaster within the next few years. Does it really matter whether the U.S. market proves to be a disaster in the immediate future or in the next few years? Those heavily invested in U.S. stocks are going to get hit hard either way, right? So why is this such an important distinction.
The only distinction that I am seeing is that I do not take position on when the crash will come while Shiller seems to rule out the possibility that it will come in the immediate future (something that he could not do unless he possesses the power to practice short-term timing effectively, a power that was not given him by the “revolutionary” research findings that he published in 1981).
One of the many benefits of opening the entire internet to honest posting on these matters is that all interested parties could try to pin Shiller down on questions like this. If I were posting at the Bogleheads Forum and Shiller were appearing there today, I would ask him — Do you believe that there is a strong likelihood that middle-class people heavily invested in U.S. stocks will be suffering a wipeout within the next few years?” I think he would say “yes.” But I cannot say that with certainty given the statements that I have to work with. I’d like to enjoy more certainty on questions like this.
If he said “no,” I would follow up with a question re what happened between 1996 and today that caused him to change his mind. That answer would also be illuminating in the event that the conversation went down that road. Every investor alive would benefit from learning the answers to these sorts of questions. So it is my strongly held view that we all should be working together to achieve an opening of every site on the internet to honest posting re these matters as quickly as possible.
Rob
“I don’t see him saying that the U.S. market will not prove to be a disaster within the next few years.”
So naturally you assume he IS saying that. Even though he actually said nothing of the kind. Even though he implied nothing of the kind. Even though he is still in the market.
Discussion with you is pointless. Again I call for you to ban yourself.
He didn’t say those precise words.
But he said in 1996 that investors who remained heavily invested in stocks would live to regret it within 10 years. And today’s valuation level is higher than the valuation level that applied in 1996.
I am not willing to assume he has changed his mind, as you have.
And, in the unlikely event that he really has changed his mind, I would sure like to know why. That’s one of many reasons why I strongly support the idea of opening every site on the internet to honest posting re these matters. I see it as a move with huge upside and zero downside.
Please take good care, my long-time Buy-and-Hold friend.
Rob
Most people learn something new over the course of 21 years.
Most people.
I think that Shiller performed a huge public service by warning us all of the 2008 crash at a time when we could do something to avoid it.
I wish that lots of others had done the same thing.
I wish that lots of others would do the same thing today.
Lots of people suffered as a result of the 2008 crash. And lots more will suffer as a result of the next one. It’s all unnecessary suffering.
These people are suffering because of the few bucks that can be turned pushing a stale and worn out marketing gimmick. There are easier and better and kinder ways to turn a buck in today’s world.
That’s my sincere take re these terribly important matters, in any event.
Rob
“There are easier and better and kinder ways to turn a buck in today’s world.”
Like getting $500 million in settlement payments?
No, not like that at all.
The work that I have done to collect the $500 million settlement payment is the hardest work that I have ever performed in my lifetime. I would have preferred to collect a much smaller amount for doing a much easier job. It wasn’t my call, you know?
This job has been fulfilling beyond belief. I won’t say different re that. But very, very, very, very hard. It’s not a job that I would recommend to a friend.
There are easier ways to turn a buck in this world, I am sure of that much. There aren’t too many ways easy or hard to turn 500 million of the little buggers, I’ll give you that much. But I would not describe this as the quick and easy way to fame and riches, at least not for the past 15 years.
Yowsa!
Rob
So instead of an easy job that pays money, you took a hard job that pays nothing. For 15 years and counting.
That sounds, now what’s the word? Dumb.
Most people would call it dumb. I think it would be fair to say that that’s why you don’t see anybody else doing it.
I do love my country, Anonymous. Some would call that dumb too. But I do love my country. I don’t mean that I go carrying the flag around on anything like that. I mean that I love the idea of progress, I love the marketplace of ideas. That runs very, very deep with me. I think that’s why I was the one who couldn’t turn away from the opportunity even when I saw the brutality that was going to be directed at me if I didn’t.
I have a law degree and a Masters in Tax Law. I obtained both of those degrees with zero intention of becoming a lawyer. I always intended to become a journalist. But I didn’t want to be an ordinary journalist. I wanted to be able to say something that mattered. Getting the tax law degree meant that I could understand and write about the tax reform movement in a way that none of the other journalists covering it at the time could pull off. So I went to that extra time and expense even though I did not have the money to spare. It was important enough to me that the work I did count for something that I was driven to go the extra mile.
Some would say that that was dumb too. People say all kinds of things. It wasn’t dumb for me. We all get to live one life. And we all have only so much money. I would rather spend mine making myself the best tax journalist out there than going on nice vacations or whatever. So I did what I did.
My Retire Early dream was the same sort of thing. Some people try to retire early to escape work. I wanted to retire early to do more meaningful work. That is what motivated all of my saving efforts. Again, this goes very deep.
So here I am. Yes, there are people who will say I am dumb. They have to live their lives and I have to live mine. If I didn’t jump on the opportunity that was presented to me to change the world in an amazingly positive way, I would have regretted it for the rest of my life. So even today I don’t have any second thoughts. It’s just not in me to play it any other way. I am a child of the 60s. I see this as a 60s kind of thing to do. It’s idealistic. I am an idealistic sort of fellow.
For good or for ill, I am doing what I believe I was put on earth to do. It would have made my life easier if someone else had taken on the opportunity. But whatever it takes to walk way from it, I don’t have that thing inside me. I like to think that I would not walk away from a burning building if I heard a baby screaming inside it. And I cannot walk away from a situation I discover in which millions of middle-class people are looking for good information on how to plan their retirements and they are all being given information that is 36 years out of date. However things turn out, I will be able to go to sleep at night knowing that I did not walk past the burning building.
The part that you miss is that the fact that this job has not paid money for 15 years is what makes it so important that I take it on. If it paid a nice, steady wage, there would be people lined up to do the job. It’s very important work and, because it is such hard work and it does not pay a steady wage, there is no one else willing to accept the assignment. That makes it all the more critical that I accept it. If there were others taking it on, I could take a pass. Or, if it were not critically important work, I could take a pass. As things are, I cannot take a pass and live with the knowledge that I have done so.
I hope that helps you understand this particular aspect of the question a wee bit better, my long-time Buy-and-Hold friend.
Rob