Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Of course you always give the caveat that people must reduce their account balance by 65% in order for your math to work, but then again, you said math wasn’t your thing.
Math isn’t my thing, Anonymous. The math supports what I say 100 percent. The math has been supporting what I say for 147 years now. So I suppose that you could say that math is my friend re this matter. But math isn’t really what gets of off, no. I care about the people. I am happy to use math to help people. But it’s the people that are my focus, not the math.
I think with the 65 percent number you might be thinking of the likely size of the next price crash. We always go below fair value before a secular bear market comes to an end. To know the true value of your portfolio, you would need to divide by two. Today’s P/E10 value is about two times the fair-value P/E10 value.
Why do you object to dividing by two? Does it not make perfect sense to divide by two at a time when stocks are priced at two times their fair value? Would you not like to know the true value of your portfolio? Do you not think that knowing that number would be a huge help in engaging in effective financial planning?
I think it makes all the sense in the world to divide by two. I think everyone should do it. I see it like brushing your teeth, huge upside and nearly no downside (the tiny bit of effort put into the task is the tiny downside). I can’t say that I have ever once in the 15 years heard any reasonable argument for NOT dividing by two.
The only one that I have been able to come up with myself is that, if you think the market is efficient, there would be no need to divide by two. I think that’s why it was not common practice pre-1981 to divide by two. But Shiller showed in 1981 that the market is NOT efficient, that valuations affect long-term returns. So that should have been the end of that. But for 36 years now we have been living in a twilight zone where few of us divide by two and yet everyone who follows the peer-reviewed research knows on some level of consciousness that we all need to do so. But they don’t say anything because it would hurt the feelings of those who don’t divide by two to realize that they have been making a terrible mistake all these years.
How is that ever going to change if a few of us don’t work up the courage to just say out loud what we realize the last 36 years of peer-reviewed research teaches us all about how stock investing works in the real world? If I keep my mouth shut, I am just one more person making the problem worse. It gets worse the longer the cover-up goes on because as more time passes it becomes more embarrassing to admit the mistake. So I try hard not to keep my mouth shut.
I try to be as gentle and loving as I can be in what I say because I don’t like to hurt people’s feelings any more than any of the rest us do. But I do make an effort to say what I believe. I believe that I end up hurting people’s feelings MORE by not speaking up. People are going to find out the realities the hard way when the next price crash arrives. Is it really a kindness to let them be surprised by seeing most of their life savings washed away with the tide? Or is the kinder thing to talk about the last 36 years of peer-reviewed research and what it means? I see this as a case where the truly kind thing is telling people the thing they very much do not want to hear.
Those are my sincere thoughts, in any event.
I naturally wish you all good things.