I’ve posted Entry #354 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Risk Increases Steadily As Stock Valuations Rise.
Juicy Excerpt: I worry about valuations a great deal. I don’t worry about bubbles at all. In fact, I would be inclined to agree with Eugene Fama, who has said that he does not believe that bubbles exist. I think that’s right. I believe that the bubble phenomenon is mythical. Overvaluation exists. Overvaluation is a big deal. But there is no knowable point at which harmless overvaluation becomes transformed into a dangerous bubble. All overvaluation is equally harmful.
“Overvaluation is a big deal” – markets were overvalued, according to you, in 2012, is that right?
Wow!
https://www.wsj.com/articles/no-end-in-sight-for-stocks-longest-streak-in-20-years-1507247342
markets were overvalued, according to you, in 2012, is that right?
Yes.
Rob
Wow!
You need to reflect on what the last 36 years of peer-reviewed research in this field is telling us, Anonymous. I would suggest that you try to get every investing discussion board and blog on the internet opened to honest posting re that research so that you will be able to tap into insights coming from people with lots of different perspectives and thereby learn as much as possible in the shortest amount of time.
The best of all worlds for stock investors is if stocks are always properly priced (a P/E10 value of 15).
In a less-than-perfect world, stocks would become slightly overvalued for a short amount of time and then return to fair value.
In a worse world, stocks would become wildly overpriced for a short amount of time and then return to fair value.
In an even worse world, stocks would become wildly overpriced and then remain wildly overpriced for a long time.
In the worst world of all, the worst that we have ever encountered in history, stocks would set records re the level of overvaluation reached and then remain at those record-setting price levels for a record-setting amount of time.
If the price that the market sets is accurate, as the Buy-and-Holders believe, then high prices are a good thing. Under that belief system. higher prices mean more wealth to go around. What’s not to like?
If the price that the market sets is inaccurate when it goes above fair-value P/E10 levels, then high prices are a bad thing. High prices that are rooted in investor emotion and not economic realities trick us and cause us to make ineffective financial planning decisions. They reduce out wealth in big ways in the long term.
It all comes down to whether overvaluation is possible or not. Fama thought that he had showed that it is not possible because he showed that in the short term investors cannot outsmart the market and thus concluded that the market is always getting it right. Shiller discredited Fama’s conclusions by showing that it IS possible to outsmart the market in the long term. The P/E10 level is telling us something important. It is telling us how much emotion there is in the market price at any given point in time. It is telling us what we need to know to avoid getting hurt by putting out confidence in emotion-generated prices.
We shouldn’t be celebrating high prices. We should be working together to develop tools to help our fellow investors learn what they need to learn for us all to get those prices back down to reasonable levels again.
My sincere take.
Rob
It doesn’t look like your interpretation of the peer reviewed research is paying the bills. As such, I am not interested.
“You need to reflect on what the last 36 years of peer-reviewed research in this field is telling us, Anonymous.”
What research, other than writings by Shiller and Pfau, have you included in your exhaustive review? Who are the”peers” that have provide review and responses to the research you have referenced?
It doesn’t look like your interpretation of the peer reviewed research is paying the bills. As such, I am not interested.
I don’t think there is any other choice that I could have made on the morning of May 13, 2002, that would have done a worse job of paying the bills over the next 15 years than the one I made, Anonymous. You got me re that one.
I think the difference between us might be that I see that as a positive. It is my view that, if the Buy-and-Holders were confident in their ideas, none of the nasty stuff would have happened. Every abusive post that I see sends a message to my brain that “Hey! You’re really onto something with this one! This one really touches a nerve!” Going 15 years without earning a dime is an amazing reality. I see it as a reality showing how important it is that we open the entire internet to honest posting re the last 36 years of peer-reviewed research. I see it as evidence that the current reality is untenable as a long-term proposition. We cannot continue to have this one area of human endeavor operating under entirely different rules from those that apply in every other field of human endeavor.
As always, that’s just my sincere but possibly flawed take.
Rob
“I don’t think there is any other choice that I could have made on the morning of May 13, 2002, that would have done a worse job of paying the bills over the next 15 years than the one I made, Anonymous. You got me re that one.
I think the difference between us might be that I see that as a positive. It is my view that, if the Buy-and-Holders were confident in their ideas, none of the nasty stuff would have happened. Every abusive post that I see sends a message to my brain that “Hey! You’re really onto something with this one! This one really touches a nerve!” Going 15 years without earning a dime is an amazing reality. I see it as a reality showing how important it is that we open the entire internet to honest posting re the last 36 years of peer-reviewed research. I see it as evidence that the current reality is untenable as a long-term proposition. We cannot continue to have this one area of human endeavor operating under entirely different rules from those that apply in every other field of human endeavor.”
Stand back and just consider what you wrote. The vast majority of us are focused on being successful with our investing strategies. If we were in a situation where we weren’t making a dime, we would make changes in what we are doing. In your situation, you seem to be focused on saying what you want, when you want and where you want. My guess is that you have made it your objective to be considered some kind of investing guru/leader. Those are two different objectives.
What research, other than writings by Shiller and Pfau, have you included in your exhaustive review? Who are the”peers” that have provide review and responses to the research you have referenced?
One of you Goons asked this question about two months ago and I responded with a long and detailed answer. I am not going to repeat those words here. If you want to tap into that one, I think you could find it by going through the somewhat recent blog entries.
The short answer is that there is a mountain of stuff. Shiller. Pfau. Russell. Arnott. Smithers. Bernstein. Kitces. And on and on and on and on and on. There’s no shortage of material.
The most important research that has been done is the two months in which Pfau went searching through the literature to determine how many studies there are showing that it is not necessary to exercise price discipline (long-term timing) when buying stocks. He found that there are zero. He was amazed to discover this. He spent years acquiring his Ph.D. and no one had ever told him this. He had heard thousands of times that “timing doesn’t work” and so he assumed that there must be a lot of research showing this. In fact, there is precisely zero research showing this. The claim that timing doesn’t work is 100 percent myth. There is no “there” there.
That’s the story, Anonymous. Given that there is precisely zero support for the key Buy-and-Hold claim, we should all be spending our energies trying to determine how stock investing really does work. If we did that, we would look to that mountain of research showing that the key is to always, always, always practice price discipline (long-term timing). The only reason why we are not all doing that today is that millions of us have a huge emotional investment in Buy-and-Hold. Either we have built out careers around it or we have written books promoting it or we have invested our life savings pursuant to its dictates or we have persuaded our friends that it is the way to go or whatever. We have not been engaged in an intellectual battle over the past 15 years, we have been engaged in a turf fight.
Buy-and-Hold was a MISTAKE. The idea that it is not necessary to practice price discipline was a MISTAKE. Instead of asking me what research supports Valuation-Informed Indexing, you should be asking me what research supports Buy-and-Hold. 100 percent of the research available to us supports Valuation-Informed Indexing. 0 percent of the research available to us supports Buy-and-Hold. This is why things get so nasty on your end. It’s hard to participate in an intellectual debate when you have no ammunition.
The core Buy-and-Hold claim is that timing doesn’t work. It’s that’s not so, the entire thing falls. Buy-and-Hold is a numbers-based system and, if timing works, all of the numbers it generates are wrong. Huh? What good is a numbers-based system that gets all the numbers wrong? A numbers-based system that gets all the numbers wrong is DANGEROUS.
The Buy-and-Holders were sincere when they developed their strategy. They truly believed that timing doesn’t work. They just didn’t have available to them at the time the tools they needed to determine the realities. There were no index funds in 1965. So there was no way to test whether long-term timing works or not. So Fama only tested short-term timing. Short-term timing really does not work. But he concluded falsely that timing in general doesn’t work. Had he been able to test both forms of timing, he would have concluded that “short-term timing doesn’t work but long-term timing always works.”
Shiller was the first to test long-term timing. He changed our understanding of how stock investing works in a fundamental way by showing that long-term timing always works. Research that doesn’t take his findings into consideration just doesn’t count anymore.
If some physicist came out with a study that was rooted in a belief that the earth is flat, reasonable people would just ignore it because it fails to take into account many years of research. That’s what we have with the Buy-and-Hold retirement studies. They are rooted in beliefs that people held prior to 1981. Yes, there are still smart and good people who hold those beliefs today but those people are not proceeding in a scientific manner. To proceed in a scientific manner, you need to take into consideration all the research available to you and there is now 36 years of peer-reviewed research showing that long-term timing always works and 0 years or research showing that there ever might be some alternate universe where it might not.
The short answer is — ALL of the research available to us supports Valuation-Informed Indexing and none of the research available to us supports Buy-and-Hold.
Now we just need to get prison terms announced for you Goons so that all of us who have expressed a desire to engage in civil and reasoned discussions about what the peer-reviewed research in this field really teaches us about how stock investing works can get down to the business of helping each other overcome any remaining thoughts that Buy-and-Hold (AKA/Get Rich Quick!) might be the answer.
I hope that helps a small bit, my long-term Buy-and-Hold friend.
Rob
In your situation, you seem to be focused on saying what you want, when you want and where you want. My guess is that you have made it your objective to be considered some kind of investing guru/leader.
I believe that everyone who writes about stock investing should post honestly, Anonymous. I certainly don’t say different. This stuff affects people’s lives in a serious way. A failed retirement is a big life setback. No apologies here for my insistence on recognition of my right (and the right of the thousands of others who have expressed a desire to be able to post honestly) to post honestly.
I certainly did not start out with the objective to become an investing guru. The reality couldn’t be more the opposite of that. I posted at the Motley Fool board for three years before I began posting about investing. I AVOIDED the topic.
I learned on May 13, 2002, that it is impossible to indefinitely avoid the topic. I posted about saving before that and I was an insanely popular poster, the most popular poster at the Motley Fool site. But what happens if you help people to save and tell them nothing about the dangers of Buy-and-Hold? They end up losing the money they saved in some crazy price crash. Huh? Is that a responsible or a loving way to proceed?
People become effective savers by coming to appreciate strong value propositions. The same basic principles that apply in the saving realm apply in the investing realm. Effective investors put their money in asset classes that offer strong long-term value propositions. It ain’t stocks when they are selling at the prices that apply today. We all should be telling people that no matter how much it upsets our Wall Street Con Men friends for people to learn what the research says.
In an ideal world, I would not be an investing guru. I don’t want to be one and I never trained to be one. What makes me an investing guru is the turf war being fought today between the Buy-and-Holders and the large number of people (about 10 percent of the population of investors) who understand that there is now 36 years of peer-reviewed research showing that valuations affect long-term returns.
I was born into the fallen world that exists before us, I didn’t create it. In this world, it is not possible to help people achieve financial freedom early in life without talking about the investing side of things and it is not possible to give effective investing advice without telling people about the insanely abusive (and, yes, criminal) 15-year Campaign of Terror against our board and blog communities led by our Buy-and-Hold friends. I am an investing guru today because most others are afraid to stand up to you Goons. I am afraid too. But I just refuse to direct my life energies to writing about a strategy that is discredited by 36 years of peer-reviewed research. So I do accurate, honest, research-based stuff, no Buy-and-Hold whatsoever.
I hope that helps a small bit, my long-time Buy-and-Hold friend.
Rob
“In an even worse world, stocks would become wildly overpriced and then remain wildly overpriced for a long time.”
So in this terrible world, my $100k stock investment becomes, say, $1M, and remains that way until I reallocate it to bonds, spend it on giving my kids a good childhood, or use it in retirement?
Funny how the market isn’t working as to how you say it works based on your interpretation of the peer reviewed research.
So in this terrible world, my $100k stock investment becomes, say, $1M, and remains that way until I reallocate it to bonds, spend it on giving my kids a good childhood, or use it in retirement?
If you take your money out of stocks before prices crash, you beat the system, Anonymous. It’s the best of all worlds to get the benefits of the ride up and to avoid the detriments of the ride down.
But how do you know when the crash is imminent? The research shows that short-term timing doesn’t work. So all you can do is guess and hope that you get lucky.
That’s gambling, not investing. I wish you the best of luck with it. But it’s not my particular cup of tea. I aim to keep my risk profile stable. So, if prices go up, my stock allocation goes down. And, if prices go down, my stock allocation goes up. I see that as a more emotionally balanced approach.
My best wishes.
Rob
Funny how the market isn’t working as to how you say it works based on your interpretation of the peer reviewed research.
Backatcha, my good friend.
Rob
“If you take your money out of stocks before prices crash, you beat the system”
1) That’s the whole point of buy and hold – you reallocate from stocks to bonds as stock prices rise, and you get older, and as your need to take risk lessens. You’re constantly “cashing out” as stocks go up.
2) Every long term investor, by your definition, is “beating the system”, since stock prices always rise over the long term.
“if prices go up, my stock allocation goes down”
Really? And how often do you change your stock allocation?
Actually, the market is working the way that has been described by the buy and hold crowd.
That’s the whole point of buy and hold – you reallocate from stocks to bonds as stock prices rise, and you get older, and as your need to take risk lessens. You’re constantly “cashing out” as stocks go up.
This would only work if stock prices only went up. They don’t. The annualized real return for the past 18 years has been 2.25 percent and we are priced for a crash of 50 percent or more within the next few years. So, at the end of 20 years, you might have an annualized return of something close to zero. Your risk would be dramatically INCREASING over time as you ran out of years in which compounding could work its magic. And then you are going to lower your stock allocation when prices finally return to reasonable levels? What the f? At that point, you need to make up for lots of lost time.
Rob
Every long term investor, by your definition, is “beating the system”, since stock prices always rise over the long term.
It is certainly true that stock prices always rise over the long term. But the most likely 10-year annualized real return on stocks in 2000 was a negative 1 percent and the guaranteed return on TIPS and IBonds at the time was 4 percent real. You are not beating the system to give up 5 percentage points of return annually for 10 years running. For someone who started out with a portfolio value of $500,000. that’s a loss of $250,000. Lose $250,000 here and $250,000 there and in time it adds up to real money.
Rob
Really? And how often do you change your stock allocation?
Investors seeking to keep their risk profiles stable need to make roughly one change every 10 years.
I last changed my stock allocation in the Summer of 1996.
There has been one time during those 21 years when it made sense to make a change, when the P/E10 value dropped to 13 for a short time in early 2009. I talked to my wife about making a change but we were not able to complete the transaction before prices went up to dangerous levels again.
Rob
Actually, the market is working the way that has been described by the buy and hold crowd.
If you had asked Buy-and-Holders in 2000 what the annualized real return would be for the next 18 years, not 1 in 100 would have said “2.25 percent.” Stocks have not been performing in the manner in which Buy-and-Holders say they should always perform for a long, long time now.
Rob
“If you had asked Buy-and-Holders in 2000 what the annualized real return would be for the next 18 years, not 1 in 100 would have said “2.25 percent.” Stocks have not been performing in the manner in which Buy-and-Holders say they should always perform for a long, long time now.”
I don’t know of anyone that only made their investment in 2000 and then immediately withdrew all their money after a crash. Buy and holders invest all the time and then withdraw money over a long period of time. To date, there has NEVER been a 30 year period in which a 4% withdrawal rate failed.
I agree that Buy-and-Holders invest all the time and then withdraw money over a long period of time. The question that has been on the table for 15 years now is — Is it better to take the price at which stocks are selling into consideration when doing that or is it better to ignore price? I believe that it is better to take price into consideration.
I obviously agree that there has never been a 30-year period in which a 4 percent withdrawal rate failed. The question that has been on the table for 15 years now is — What were the odds that retirements calling for a 4 percent withdrawal rate that began in January 2000 would survive 30 years? The historical data shows that those retirements had only a 30 percent chance of surviving 30 years. Those were high-risk retirements, not safe retirements. Why not tell people that?
It all comes down to whether the market is efficient or whether valuations affect long-term returns. A belief that the market is efficient takes you down one road and a belief that valuations affect long-term returns takes you down a very different road. I believe that valuations affect long-term returns. Is that okay by you, Anonymous? Should I have to ask “pretty please” before posting my sincere views on stock investing because you happen to hold different beliefs?
If so, why? Why do you get to dictate what people say about stock investing on the internet? People post their honest views on hundreds of different subjects on the internet every day and there is no big fuss made about it. Why is stock investing the one big exception? Why do you feel so strongly that everybody has to either believe in Buy-and-Hold or at least pretend to believe or at least keep his or her mouth shut? It is my belief that Buy-and-Hold is DANGEROUS. Is there some reason why I shouldn’t tell my friends that given that that is my sincere belief and given that this is a research-based belief and given that the consequences of getting this stuff wrong can be pretty darn dire (especially for those opting for early retirement)?
Rob
“If you had asked Buy-and-Holders in 2000 what the annualized real return would be for the next 18 years, not 1 in 100 would have said “2.25 percent.”
And they would be right. The real annual return from January 2000 to now is just under 3 percent. Your numbers, as usual (actually, as always) are wrong.
“I obviously agree that there has never been a 30-year period in which a 4 percent withdrawal rate failed. ”
Glad to hear that you agree with John Greaney. Nothing more to be said.
And they would be right. The real annual return from January 2000 to now is just under 3 percent. Your numbers, as usual (actually, as always) are wrong.
I used the calculator at the moneychimp.com site. The number it gives is 2.27. The only thing that I can think of that could be “wrong” about it is that this calculator requires that the calculation be done for Dec. 31 of the year selected. I chose Dec. 31, 1016. It is possible that the number is a bit higher because of gains experienced this year. But anything less than 6.5 percent low is a sub-par number. And the number is obviously nothing close to that.
The intensity of emotion you feel when you beliefs about investing are challenged comes though in the tone employed in your post, Anonymous. If your strategy were backed by research, you would not be so emotional.
http://www.moneychimp.com/features/market_cagr.htm
Rob
Glad to hear that you agree with John Greaney.
I certainly agree with him re that point.
Nothing more to be said.
I said something more. And thousands of my fellow community members described the debate that followed as the most exciting and the most illuminating ever held at that discussion board.
Greaney responded by threatening to kill my wife and children unless I agreed to stop posting my honest views. Again — emotion. This is the problem with Buy-and-Hold and indeed with all Get Rich Quick strategies. They make you feel good for a time on the surface. But your common sense is always at work undermining your confidence in your strategy. So you cannot bear to have your views challenged. Get Rich Quick strategies are addictive.
I do not approve.
Research-based strategies are NOT addictive. It is possible to have confidence in them because they make sense. The idea that prices matters when buying stocks makes a whole big bunch more sense than the idea that it is okay to ignore price when buying stocks since price matters when buying everything other than stocks.
Buy-and-Hold is a marketing gimmick. It exists to enrich the Wall Street Con Men who push it so relentlessly, not the millions of middle-class people who need to invest effectively to be able to finance their retirements.
Rob
“Greaney responded by threatening to kill my wife and children unless I agreed to stop posting my honest views”
Really? Can you please provide a link to the threat. I have never seen that.
I’ll supply a link to the members of your jury, Anonymous.
Rob
“I’ll supply a link to the members of your jury, Anonymous.”
I bet that if there was an article in which John Bogle or Robert Shiller said that Rob Bennett in the leading investment expert, you would provide the link without delay.
“I’ll supply a link to the members of your jury, Anonymous.”
Translation: I don’t have a link because I made it up.
I bet that if there was an article in which John Bogle or Robert Shiller said that Rob Bennett in the leading investment expert, you would provide the link without delay.
I don’t need Bogle or Shiller saying that I am the leading investment expert. There are thousands of people who have valuable things to say re stock investing and I am just one of them. We don’t need to identify any of them as the leading expert. We need to hear from all of them.
What I need Bogle or Shiller to do is to say that there is no place in discussions of how stock investing works for death threats or demands for unjustified board bannings or tens of thousands of acts of defamation or threats to get academic researchers fired from their jobs. If I saw behavior of that nature being advanced by other Valuation-Informed Indexers, I would disassociate myself from it in every way possible. I would be embarrassed by it. It would suggest that there is no reasoned case that can be made for Valuation-Informed Indexing. I of course I don’t believe that and I of course don’t want others to come to believe that. So I would speak up.
Everyone who knows about your behavior should speak up about it. There should not be even a tiny bit of controversy about speaking up re criminally abusive behavior. It’s over the line. Not one of us should tolerate it.
Lots of people do. But no one should. And part of the job of those seeking to make sense of stock investing in the year 2017 is to explain why lots of people tolerate things they should not tolerate.
When we’re all talking about this stuff in frank and open and honest and charitable ways, we will all be better off. I believe that we will turn the corner in the days following the next crash. But we will have to wait to see how things play out to know for sure. I have been wrong before. If it were happening again, there’s a good chance that I would be the last to know.
That’s my sincere take re these terribly important matters, in any event.
Rob
Translation: I don’t have a link because I made it up.
Okay, Anonymous.
Please take care, my good friend.
Rob
If The New York Times asked for a link to the death threats, would you provide it?
I would.
Rob
Please provide the link here to the death threats.
Um….
Rob
Certainly you have a link you can provide. Now is your chance.
It will be interesting to see how it all plays out, New York Times.
Please take good care, my long-time newspaper friend.
Rob
We would like to see that link as well. Certainly you wouldn’t make a claim without proof, right?
Happy reading, Guys!
http://www.passionsaving.com/
Rob
Hmmmmm……didn’t find any of those death threats. You must have made a mistake with the link.
Someone in this group made a big mistake. I think that much would be more than fair to say!
Rob
Robert. If you don’t have the link, you should apologize and ask for forgiveness.
Dear Holy Father:
Our faith at times requires us to believe in things unseen.
Rob
Thou shalt not bear false witness.
Wow, Rob even knows more than the Pope and sets him straight.
Thou shalt not bear false witness.
Oh, sure. But how about — Thou Shalt Not Threaten to Kill the Wife and Children of Thy Fellow Community Member?
Rob
Wow, Rob even knows more than the Pope and sets him straight.
You can take the boy out of the 60s.
But it seems that you cannot the 60s out of the boy!
Rebel Rob