Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
The stock market crashed. Did you get invited back to the boards that banned you? Are those nasty goons in prison? Did Jack Bogle give his “I was wrong speech”? Did you get that call from The New York Times? Did you get your $500 million settlement?
If prices drop to fair-value levels of lower (a huge drop from where we stand today), millions of people will be able to see with their own eyes the mountain of human misery that we have brought on with the relentless promotion of the smelly Buy-and-Hold garbage, Anonymous. There are thousands and thousands and thousands and thousands of people who love this country. When prices drop to fair-value levels or lower, those people will work up the courage to stand up to you Goons and we will see the biggest economic advance in our nation’s history. I am sure.
When we get to the other side of the Big Black Mountain, we will never again need to worry about seeing our plans for the future disrupted by crazy swings in stock prices. The reality is that every price drop increases the long-term return obtained from stocks; the negative effect of the price drop is canceled out by the positive effect. And every price increase lowers the long-term return obtain from stocks; the positive effect of the price increase is canceled out by the negative effect. The only reason why Buy-and-Holders get so upset by price crashes is that they count the full amount of their portfolios as real even though there is 36 years of peer-reviewed research showing that the portions of their stock portfolio representing overvaluation have no lasting value.
I don’t have any idea whether prices will go up or down tomorrow and I feel no need to have any idea. Things that possess real value don’t get reduced to nothing overnight as the result of some swing in emotions. Those of us who follow research-based strategies have a calm confidence about our financial futures that those who follow the pure Get Rich Quick approach do not possess. That’s why I advocate Valuation-Informed Indexing and urge opening every site on the internet to honest posting re the 36 years of peer-reviewed research showing that Buy-and-Hold is a big pile of smelly garbage.
I hope that helps a small bit.
Rob
“When we get to the other side of the Big Black Mountain, we will never again need to worry about seeing our plans for the future disrupted by crazy swings in stock prices.”
Crazy swings in stock prices will always be with us. They are the reason that stocks provide great returns. If you somehow removed the risk inherent in stock ownership you would also remove the great returns. If a low risk/high return asset was available for purchase the the huge demand for such an asset would drive the price up lowering the return.
Your problem is that you want the great stock returns but are not willing to stomach the associated risk.
I do not agree that crazy price swings will always be with us, Evidence. And I do not agree that it is the crazy price swings that somehow cause the high returns associated with stocks.
I believe that stocks provide high returns because the underlying businesses are highly productive. In the United States, they have always been productive enough to support returns of 6.5 percent real per year. More than that is just emotional garbage. So I don’t trust returns of any more than that. But 6.5 percent annual returns are real and there is no need to take on foolish amounts of risk to obtain them. The underlying companies are going to be just as productive if I invest in a rational risk-reducing way as they are if I follow a Buy-and-Hold strategy.
I want the high returns for sure. And, no, I don’t like taking on risk. I would be willing to take on some added risk to obtain some added return. That part of what you say makes sense. But I don’t buy this idea that it is only by investing foolishly that I can obtain a good return. No. I like Bogle’s original idea of using the peer-reviewed research to guide one’s investing choices. That’s what makes sense to me.
The peer-reviewed research that I co-authored with Wade Pfau shows that investors can reduce the risk of stock investing by 70 percent just by being willing to leave the smelly Buy-and-Hold stuff in the rear-view mirror and so that’s what I do. I’ve been beating Buy-and-Hold on a risk-adjusted basis for 22 years running now and I have a funny feeling that I will be continuing to beat it for a long time to come.
But we’ll see, you know?
You’re not going to believe what I say just because I say it. Time is going to tell the tale. I go by what the research says. That tells us how stock investing has always worked IN THE PAST. In coming days, we will see whether the research is telling us something important or whether it is all going to turn out different this time. I think that the next crash will tell the story in a sufficiently compelling manner that even my good friend Jack Bogle will sign up with the good guys. And then where will you Goons be? I think that a good number of you Goons may come out in support of the idea of permitting honest posting re the last 37 years of peer-reviewed research in the days following the next crash. I will welcome the change. I will enjoy being able to talk things over with you in less friction-filled discussions.
I understand that you are going by one of the Buy-and-Hold dogmas when you say that stocks pay high returns only because of the risks associated with them. But I just don’t buy it. Shiller “revolutionized” (his word) the field with his Nobel-prize-winning research. So those old dogmas just don’t have the explanatory power that they once possessed, at least not for me.
Stocks have never in history been as risky as they were in January 2000, when the P/E10 level hit 44. They have provided an average annualized return of 3.3 percent real in the 18 years since. That’s far below the usual return of 6.5 percent real. It’s half of the normal return. For 18 years running. If investors are compensated for taking on extra risk, the return to stock investors should have been higher during those years, not lower.
The Buy-and-Hold dogmas don’t hold up to scrutiny. They possess a certain surface plausibility. But they just don’t stand up to scrutiny. When you test them with any sort of vigor, they always fail the test.
You believe in Buy-and-Hold because you want to believe in it, because you are emotionally invested in the concept, not because the ideas are strong enough to stand up to tough scrutiny. That’s why you get so angry when I challenge Buy-and-Hold in a forceful manner. You want to believe and I am making it harder for you to believe and so you strike out at me.
That’s my sincere take re these terribly important matters, in any event. I could be wrong. It has been known to happen.
Take good care, man.
Rob the Buy-and-Hold Challenger
” In the United States, they have always been productive enough to support returns of 6.5 percent real per year.”
The 6.5% real is a theoretical number.
It is the return you would have achieved if you had invested in the stock market throughout its history and reinvested all dividends received back into the stock market. Some people may have done this but most did not.
If all US dividends throughout history had been reinvested in the market that would have driven up prices, hence reducing yield and reducing the total return.
The theoretical 6.5% real comes from the relatively low average price paid for stocks. The yield on stocks has averaged about 5% over time because of the price paid. If you remove risk many more people will be willing to invest in stocks driving up prices and lowering yield.
The second that stocks are cheap enough to entice you back into the market someone else will bid a penny more for that stock and you won’t be able to buy it. Someone else will pay two pennies more and so on.
Your 6.5% real growth without any risk simply cannot happen because if it was available someone else would outbid you.
At that point you would have 2 choices.
1) Sit on the sidelines and not own stocks
2) Up your bid to the the point where you outbid all others for that stock, driving up the price, lowering the yield and hence lowering the total return.
6.5% real may be available in the future, but only if the prices are low enough which will only happen if risk averse investors are not competing to purchase those stocks.
Now Larry Swedroe is taking on CAPE:
https://www.advisorperspectives.com/articles/2018/04/02/beware-of-the-misinterpretations-of-the-cape-ratio
He presents multiple persuasive, data-supported arguments, and ends with this conclusion:
“Investors should not be using stock valuations to time the market.”
Notice the pattern? This is what EVERYONE says. Even the guy who invented CAPE. The first time you link to someone (not named Rob Bennett) who says otherwise, will be the first time. We’ve been waiting many years now. All you’ve ever served up is the supremely lame “he doesn’t say not to do ‘long-term’ timing” as if that in any way supports your argument.
The 6.5% real is a theoretical number.
I am grateful for your post, Evidence. You are giving people some things to think about. That’s a plus. I certainly don’t claim to know it all. People need to hear different perspectives. So thanks for providing yours.
My view is that, if we opened up the internet to honest posting on the last 37 years of peer-reviewed research in this field, we would greatly reduce the risk of stock investing. Asset classes that are now possess appeal because they are perceived as being less risky than stocks would possess diminished relative appeal and so the return on those asset classes would increase.
I don’t say that we could ever eliminate the risk of stocks entirely. There are always going to be people who don’t follow the research even if we permit discussion of it. But I do believe that we can greatly reduce risk by permitting discussion of the new research.
And I don’t say that the return in the future has to be precisely 6,5 percent. The return is determined by the earnings of the underlying companies That could go up a bit or down a bit. But my personal belief is that the best default number to use is 6.5 percent real since that is the number that has applied throughout history. I certainly do not trust the numbers that show up on our portfolio statements. Those numbers are heavily influenced by emotion at times of high stock prices.
Thanks again. I like seeing that sort of post show up here. Maybe you are right and I am wrong.n In that case, you are helping out in a very big way.
Rob
Now Larry Swedroe is taking on CAPE:
I feel the same way about your post that I feel about the last one by Evidence, Anonymous. You are helping out by letting us know about Larry’s article. We need to have a national debate about these matters. They are of huge importance. We need to know what Larry Swedroe thinks. And we need to know what you think. So thanks for taking the time out of your day to share your thoughts.
I don’t buy the argument that Larry makes. I notice that at one point there is a reference to “tactical asset allocation.” That sounds like short-term timing to me. As you know, I am one of the fiercest critics of short-term timing alive on the planet. If all that Larry is saying is that investors should not make use of P/E10 to engage in short-term timing, I couldn’t possibly agree more.
If he is saying that there is no need to engage in long-term timing, then I obviously disagree and very strongly. Long-term timing is price discipline. No need to engage in price discipline when buying stocks? Huh? What the f?
And I am far from the only one who believes that long-term timing is required. We have seen thousands of smart investors express that view over the course of the past 16 years. Most hold back from repeating what they believe once you Goons threaten to kill their family members if they continue posting honestly. But that just tells you that you are desperately trying to find some means of “defending” Buy-and-Hold in the face of 37 years of peer-reviewed research showing that there is precisely zero chance that it could ever work for a single long-term investor. Yes?
Wade Pfau holds a Ph.D, in Economics from Princeton. His conclusion after studying Valuation-Informed Indexing in great depth for several months was that Valuation-Informed Indexing is the future and that Buy-and-Hold is “dangerous.” He said: “Yes, Virginia, Valuation-Informed Indexing works!” And he co-authored research with me proving it and had it published in a peer-reviewed journal. The response of you Goons was to threaten to send defamatory e-mails to his employer in an effort to get him fired from his job in the event that he continued saying publicly what he truly believes re these matters.
Gee, I wonder who is more credible, a Ph.D. in Economics from Princeton or some internet Goon who engages in felonies when a Ph.D. in Economics says something that he doesn’t want other people on the internet to hear? Some of this investing stuff is so darn hard to figure out!
Take good care, man,
Rob
“We need to have a national debate about these matters. ”
Why? Because you say so? Everyone else seems to get it, but here you are thinking you found some “key to the kingdom” of investing. Come back when you actually have a system with proven outcomes.
It’s not just me who says that we need to have a national debate re these issues, Anonymous. You can take a look at the slider at the top of every page of this site and see what lots of others have to say. The fact that Shiller was awarded a Nobel prize is a statement by us as a society that his findings need to be explored in much greater depth and detail. Thousands of our fellow community members have expressed a desire that honest posting be permitted at every discussion board and blog on the internet. That should tell you something.
The only thing holding us back at this point is you Goons. And your behavior is criminal! Why do I have a funny feeling that the American people are going to win this one?
We’ll see what happens in the days following the next crash. I am 100 percent sure that that is going to be the turning point. I could be wrong. It has been known to happen. But we’ll see, you know?
I naturally wish you the best of luck with it, my good friend.
Rob
It’s not much of a debate when it only happens here, and you delete every comment that you don’t like.
Do you think anyone (other than you) would disagree with that statement?
The debate needs to be held at every discussion board and blog on the internet. You certainly will get no argument from me re that one.
We had hundreds of people at the Motley Fool board excited to begin the debate back on the morning of May 13, 2002. They told us so. Then you Goons stepped in with your insanely and criminally abusive behavior and put a stop to a debate that most of our fellow community members wanted to see proceed pursuant to the published rules of the site and the laws of the United States.
Will we be able to collectively work up the courage to overcome you Goons in the days following the next price crash?
I believe we will.
But we are going to have to wait a bit to find out for sure, no? I could be wrong. It has happened before. If it were happening again, I would probably be the last to know.
That’s my sincere take re this terribly important matter, in any event.
All good things.
Rob
“The debate needs to be held at every discussion board and blog on the internet.”
Then why aren’t you posting there? Obviously you define “insanely and criminally abusive behavior” as comments that you simply don’t like. You can’t handle criticism, so you walk away and call yourself an abuse victim.
A death threat is not criticism. It is an act of intimidation. It is not an effort to communicate. It is an effort at suppressing communication by others.
A demand for an unjustified board banning is not criticism. It is an act of intimidation. It is not an effort to communicate. It is an effort at suppressing communication by others.
Defamation is not criticism. It is an act of intimidation. It is not an effort to communicate. It is an effort at suppressing communication by others.
A threat to get an academic researcher fired from his job is not criticism. It is an act of intimidation. It is not an effort to communicate. It is an effort at suppressing communication by others.
There are laws against financial fraud. They permit us as a society to place the sorts of “individuals” who engage in these tactics in prison cells, where they cannot hurt us anymore. Will there be a widespread demand in the days following the next price crash that these laws be enforced in a reasonable manner? I believe that there will be.
But we are going to have to wait a bit to find out for certain, no? Are you okay with waiting a bit to see how things play out?
Rob
You have never once posted an external link to any of those things. If they had happened, the perpetrator would have been banned. Instead, universally, you were banned.
What would a disinterested bystander conclude after being presented with these undeniable facts?
Emotion plays with people’s minds, Anonymous. I mentioned in a previous post that I wrote in response to a similar comment how O.J. was found innocent at his trial but is widely viewed today as guilty of the crime for which he was charged.
Millions of people have their lives staked on the legitimacy of the Buy-and-Hold strategy. Say that you are a guy who is 60 years old and who has $1 million in his portfolio today. If Shiller is right, that fellow has a true portfolio value of $500,000. Do you think he enjoys hearing that? What our minds don’t want to hear, we block out. This has been going on since the beginning of time.
What happens when that fellow sees $500,000 of his life savings disappear into thin air? Does he send a thank-you note to Saint Jack?
I don’t think he is going to send a thank-you note. I think he is going to be on the look-out for explanations for why he was encouraged to follow an investing strategy that ruined his life.
But we will have to wait a bit to find out for sure how things are going to play out.
I naturally wish you all the best that this life has to offer a person.
O.J.-Skeptic Rob
My response to your comment will be exactly as relevant as your comment was to my perfectly clear question.
The Pussycat Swallowtail is a rare tropical butterfly that Lord Beasley Waterford tracks down to the South Pacific. Local natives direct him to Gilligan’s island where Waterford tracks it all over the island and finds it in yellow and red variants plus a blue imposter. The Skipper tries passing off a fake of it at one point, and Gilligan swats it away once.
Okay, Anonymous.
I do wish you all good things, in any event.
Rob