I’ve posted Entry #400 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Shiller Should Return to Making Long-Term Predictions.
Juicy Excerpt: One, it is the fair thing to do. Our Buy-and-Hold friends do not believe that predictions work. Shiller’s research suggests that they should. The Buy-and-Holders are right to seek accountability from those of us speaking from the other side of the table. If we truly believe that Valuation-Informed Indexing is a better strategy, we should demonstrate the courage of our convictions needed to put our names on publicly voiced return predictions. When those predictions fail, it helps the Buy-and-Hold case. And it should. If effective predictions cannot be made, Buy-and-Hold is the best strategy and investors need to know that.
Two, the humbling experience of seeing a prediction fail forces those of us who believe that at least long-term return predictions should be possible back to the drawing board. Shiller got it wrong back in 1996. I got it wrong when I made my prediction after the price recovery of March 2009. As painful as it is to make public mistakes, doing so can bring on a learning experience if we dig deep to discover why we got it wrong. None of us today knows all there is to know about how stock investing works. We all need to be digging deeper all the time. We possess a human inclination to become complacent in our beliefs. Seeing those beliefs fail a public test shakes us out of our complacency.
“Shiller got it wrong back in 1996. I got it wrong when I made my prediction after the price recovery of March 2009.”
Shiller learned from his mistake and doesn’t make predictions any more.
I hope you learn from your mistake.
The issue that you are focused on is a secondary issue. I am focused on the primary issue.
If the market is efficient (this is the premise of the Buy-and-Hold strategy), then the numbers on your portfolio statement are rooted in economic realities. If valuations affect long-term returns (this is the premise of Valuation-Informed Indexing), then the numbers on your portfolio statement are largely rooted in emotion at times of high valuations. The portion that is rooted in emotion disappears over time.
Which of these two things are true is a very, very big deal. It affects every financial planning decision you make. You cannot engage in any effective financial planning unless you get the numbers right. And it is impossible for any Buy-and-Holder to get the numbers right if valuations truly affect long-term returns (as I believe to be the case).
You are focused not on that critically important question but on an also-important-but-less-so question. You are focused on the question of WHEN the pretend gains will disappear. We all would like to know that. It’s certainly worth looking into. But it’s not the huge big deal that you make it out to be. If you lose 50 percent of your life savings in 2020 rather than in 2016, have you no longer suffered a loss? It’s still a devastating loss. In some circumstances it is even worse if the loss is delayed because the delay causes you to continue making poor financial planning decisions until the day the loss shows up on your portfolio statement.
We need to get better at figuring out when the losses will take place. I agree with that much. That’s why we all should be working together on this stuff. I have offered some thoughts as to why it may be that prices have remained higher for a longer time in this bull/bear cycle than they did in any earlier one. But I only possess one sorely limited brain, you know? We would make quicker progress if Bogle was helping us out on a daily basis and if all the other people who work in this field were helping us out. Each person comes at things from a different angle and you never know who is going to be the one to supply the missing piece to the puzzle.
I would like to see everyone trying to figure out how stock investing works in the real world rather than pulling the covers over their heads and pretending that we can go back to 1980. 1980 is gone. It has been gone for a long, long time. The future should not scare us. It should excite us. We should embrace it. We should move forward with caution and prudence. But we should definitely move forward.
My sincere take.
Progress-Loving Rob
I am aware that stock prices are volatile, that is why stock returns are high. If the risk in stock investing disappeared then so would the reward.
If stock prices fell to the point where Rob Bennett would consider buying them and the price volatility also disappeared then the millions of people who don’t currently invest in stocks would enter the market attracted by the low risk and high reward. This flood of new money into stocks would drive up the price of stocks and hence lower future returns. The magical high return/low risk environment that you wish to see simply cannot happen as it would sow the seeds of its own destruction.
No.
The return on stocks is determined by the profitability of the underlying companies. For 150 years now, U.S. companies have been sufficiently profitable to support an average long-term return of 6.5 percent real. The most likely scenario is that the average long-term return is going to continue being something in the neighborhood of 6.5 percent real on a going forward basis.
We can all get insanely emotional and push the return to much higher levels for a few years. But we don’t create real gains when we do that. We create pretend gains that we need to pay back in the years that follow. We cause ourselves great pain by doing that. We make effective financial planning impossible because millions of people are left with little understanding of how much wealth they possess. We cause millions of failed retirements because people retire years or even decades before they have saved enough to be able to do so safely. We cause hundreds of thousands of businesses to fail because spending dries up when the pretend gains are lost in a crash. Millions of people lose their jobs when the businesses fail. Not good.
You almost get it when you say that a magical high return/low risk environment sows the seeds of its own destruction. It depends on how you define “high return.” If you consider a return of 6.5 percent real a high-return environment, you are wrong. That return can be had virtually risk-free. Just invest in stocks when they are selling at reasonable prices. That has never failed for a long-term investor. But, yes, returns of more than that do indeed sow the seeds of destruction. Return of more than that do indeed push valuations up and future returns down. We turn a wonderful investment class into a horrible one when we let that happen.
We all need to be working together to see that it never happens again. The key is education of investors. Investors want to act in their self-interest. We need to explain to investors how the only ones who get rich from the promotion of Get Rich Quick/Buy-and-Hold strategies are the Wall Street Con Men. Show investors how bad an asset class stocks become when prices go to two or three times fair value and people won’t invest heavily in stocks at such times. And that pulls prices down and solves the problem.
Stock prices are self-regulating so long as honest information on what the peer-reviewed research shows us is freely available to all investors. It is the Ban on Honest Posting that caused this economic crisis. We can bring it to a permanent end by opening every investing board and blog on the internet to honest posting on the last 37 years of peer-reviewed research in this field.
My sincere take.
Rob
“The return on stocks is determined by the profitability of the underlying companies. ”
No it is not. The return is determined by the price you pay. You say this a lot but you clearly don’t actually understand it.
I will give you a simple example.
A company exists for a year. You buy the company at the start of the year. At the end of the year the company is disbanded all assets are sold, liabilities satisfied and there is $1 left. The $1 is the profitability of the company.
What is your return?
If you paid over $1 you lost money.
If you paid 98 cents you made about 2% and if you paid 90 cents you made over 10%
You see? Return is entirely dictated by price paid.
Okay, Evidence.
I do wish you all good things, in any event.
Rob
Was my example too complicated? Do you need me to make it simpler?
I made a lot of friends at the old Retire Early board, Evidence. I had a lot of good times there. I heard people’s stories, I heard about their hopes for the future and I heard about their fears and concerns. I don’t feel comfortable turning on my friends and posting dishonestly re the numbers that they are using to plan their retirements. I just do not. It’s not in me.
We will see what happens in the days following the next price crash. There’s a big difference between knowing intellectually that the investment strategy you are pushing is going to cause millions of people to suffer serious life setbacks and reading about the misery that those people are enduring in the real world. I believe that Bogle is going to flip. And, when Bogle flips, you Goons will be left standing in Nowheresville. So you’ll flip too. You won’t be Goons anymore! We will all get to live far richer lives (in every sense of the word) than we ever imagined possible in earlier times.
I will do anything that I can to help you out. I won’t commit financial fraud myself. That’s a crazy thing to ask anyone. So no to that. But I will do anything that I can. We will be friends and we will enjoy a great learning experience and we will see once again why it is such a great country that we live in.
I hope that works for you, old friend.
I don’t see that I have anything else to offer, in any event.
Hang in there, man.
Eternal Optimist Rob
You didn’t address the point I made. Your comment “The return on stocks is determined by the profitability of the underlying companies.” suggests you don’t actually understand how price paid determines returns.
I probably should have never stopped taking my meds, you know?
It’s always so much easier in hindsight to see these things.
Oh, my!
Older But Wiser Rob
“I probably should have never stopped taking my meds, you know?”
And you somehow think your responses help your case? It just adds to the lunacy of the last two decades.
There’s been a certain amount of lunacy in evidence over the past 16 years, Anonymous. I am going to have to give you that one.
There’s also been a mountain of wonderful, soul-satisfying, life-affirming stuff. I think it would be fair to say that the good stuff that we have seen go down has been 50 times more good than the bad stuff that we have seen go down has been bad.
It will be interesting to see how it all plays out. No?
That’s my sincere take, in any event.
I naturally wish you all the best that this life has to offer a person, dear Goon friend.
P.S.: I watched “Moneyball” for a second time today. That’s our story. Extremely inspirational.
Please take good care.
Rob Beane
“It will be interesting to see how it all plays out. No?”
We have already seen it all play out. It hasn’t been pretty for you.
There’s been bad stuff. I don’t say different.
But I think it would be fair to say that the good stuff that we have seen is 50 times more good than the bad stuff we have seen is bad.
We are as a nation working our way through a process that will in time take us to a very good place, a place that deep in our hearts we all want to be. We are all in this together, Anonymous. We all want the same things. And we are close to making some huge steps forward.
That’s my sincere take re these terribly important matters, in any event.
I naturally wish you all good things.
Rob
“the good stuff that we have seen is 50 times more good than the bad stuff we have seen is bad.”
You keep saying that. The bad stuff is obvious. Bans from every major finance board. The one and only lifetime ban from the Bogleheads conference. Personal finances – utter disaster. Writing career – nonstarter. The only expert who ever acknowledged your existence disowned you years ago. To the few people who are aware of you at all, you are universally reviled as a passive-aggressive narcissist and pathological liar.
Where’s the good stuff? What could possibly top that steaming dung heap, 50 times over?
I would have to write seven books to cover all the good stuff, Anonymous. Review the site. Start anywhere and then just go from there. You’ll get the idea if you can open your mind even a tiny bit to the possibility that the Buy-and-Holders are just as capable as any other humans of making a mistake.
To keep it simple, let’s look at one thing. I put a post forward on the morning of May 13, 2002, saying that the retirement study posted at John Greaney’s site lacks a valuation adjustment. That’s huge. If that’s true (and it is — thousands of people have looked at the Greaney study over the past 16 years and not one has been able to identify a valuation adjustment in it), that one post has the potential of saving millions of people from suffering the effects of a failed retirement. It’s not just Greaney who made that mistake. Lots of people did. There were thousands of articles on retirement planning that advised people to employ the infamous 4 percent rule that Greaney advocates in his study. Once we open the entire internet to honest posting re the last 37 years of peer-reviewed research in this field, we will be making honest and accurate retirement planning studies and calculators available at every site on the internet.
If getting those accurate retirement planning numbers out to millions of people were the only thing that I did with this thing, that would justify all of the abuse that you Goons have dished out to us. But that of course is not the only thing. That was the first day. I have been building on that foundation for 16 years now. And I will continue to do so.
Has the bad stuff hurt us? obviously.
What really matters in the long run? The good stuff.
Love builds. Hate destroys. Love triumphs over hate in the end. Every time. If it didn’t we wouldn’t be here. If it didn’t, we wouldn’t live in such a great country. You could look at a lot of things and focus on the bad stuff and talk about how terrible the world is. The trick is to overcome the bad stuff, to make something good out of it. And you can look at the slider at the top of every page of this site and see what expert after expert after expert who visited this site had to say about the amazing work that I have done with the help of thousands of fine fellow community members.
Goon garbage is Goon garbage. I am stunned that you Goons ever enjoyed a single victory. I’l give you that one. But the very fact that you have had to engage in criminal behavior tells the story of what following a pure Get Rich Quick investing strategy does to people. Not this boy, you know?
I love my country. So I am going to continue to follow the laws of my country and to advise all others to do the same. I will do anything in my power to help you Goons out because I think it would be fair to say that you got caught up in something a lot bigger than you realized you were heading into in the early days. But nothing on the wrong side of the felony line for this boy. Not in 16 years, not in 16 billion years.
Does it make me sad to reflect on how things have transpired over the first 16 years of our discussions? Sure. Without question.
Does it make me excited to look forward to the advances that we will be achieving in days to come? Sure. Without question. And the positive feelings are 50 times stronger than the negative feelings.
We’ll see how it goes, Anonymous. I am 100 percent certain that the American people are going to come out on top re this one. But you are not going to believe it just because I say it. You are going to have to see it all play out with your own eyes. You are going to become worried about what it means to cause millions of failed retirements on the day they take you away in handcuffs to your prison cell. It breaks my heart. But I can’t change it, can I? At least we have all the good stuff to look forward to. So I make an effort to focus on that.
Love is the answer. I am 100 percent sure.
And I do wish you all good things.
Rob
“Review the site.”
I’ve seen enough. There’s nothing good here.
“I put a post forward on the morning of May 13, 2002, saying that the retirement study posted at John Greaney’s site lacks a valuation adjustment. That’s huge.”
No. That’s also, quite literally, nothing. It’s of less significance than the dust mites in your bed.
“And the positive feelings are 50 times stronger”
So to summarize, the bad stuff is everything that is factual and documented. The good stuff is your “positive feelings.” In other words, your feelings are 50 times more real to you than actual reality. Which means we have no common frame of reference for continuing this discussion. Sound familiar?
I agree with you when you say “we have no common frame for continuing this discussion.”
We are starting from opposite premises.
If the market is efficient, Buy-and-Hold is the ideal strategy. If the market is efficient, stock price changes are determined by economic realities and investors can count on the numbers on their portfolio statement to reflect something of real and lasting significance. If the market is efficient, stock investing risk is a constant and the safe withdrawal rate is always the same number — 4 percent.
If valuations affect long-term returns, stock investing risk is variable (it depends on the valuation level that applies at a particular point in time) and the safe withdrawal rate drops as low as 1.6 percent at times of high valuations and rises to as high as 9.0 percent at times of low valuations. If valuations affect long-term returns, stock price changes are determined primarily by shifts in investor emotions and the numbers on portfolio statements reflect only a temporary emotional reality and it is only by adjusting for the effect of overvaluation or undervaluation that investors can know the true and lasting value of their stock portfolios and engage in effective financial planning. If valuations affect long-term returns, Buy-and-Hold is the purest and most dangerous Get Rich Quick investment strategy ever concocted by the human mind. It will cause an economic crisis every time it becomes popular because the market’s primary job is to get prices right and, once large numbers of investors come to believe in Buy-and-Hold, there is no means by which the market can get prices right again but to crash them.
Are we enemies?
We believe in different things. In your eyes, that makes me an enemy. So be it, you know? I don’t see you as an enemy. I certainly accept that you follow an investment strategy rooted in a different premise than the one that I follow. But I also accept that I could be wrong and thus it is important that I listen to people with other views and learn from them. Even if I am right about the core point, there are things that I can learn from people with other views — perhaps they have thoughts on some non-core point that will make my understanding of the realities firmer and clearer and more complete. So I think of you as a friend.
Shiller’s work is not rooted in feelings. That is of course silly. The man was awarded a Nobel prize for good reasons. He is saying the opposite of what Bogle is saying. The two could not be further apart in their views as to how stock investing works. But Shiller’s work is 100 percent solid. It has passed every test to which it has been put. Bogle’s work once appeared to be solid. Before Shiller came along, most informed people thought that the market was efficient. Shiller discredited that idea. Buy-and-Holders still outnumber Valuation-Informed Indexers 10 to 1. So there are still many good and smart people who believe that Buy-and-Hold is a real thing. But the intellectual work needed to discredit it has been around for 37 years. The idea that the market is efficient was disproven 37 years ago. If valuations affect long-term returns, there aint no way in God’s green earth that the market is efficient. If the market were efficient, returns would play out in the form of a random walk both in the short term and in the long term.
If you don’t think that there’s anything good at the site, don’t read it, Anonymous. There is certainly no law that says that you have to come here. There ARE laws limiting the sorts of tactics that you may engage in to block people who have an interest in hearing the message from hearing it. It is your violations of those laws that are going to get you sent to prison in the days following the next price crash. I will do what I can to help you out, you know? I have said that about 500 times. I will do what I can to explain your behavior in a way that might make people who have lost most of their retirement savings as a result of your actions less angry with you. I am not going to say that the Greaney study contains a valuation adjustment. I am not going to join you on the wrong side of the felony line. But I will do what I can.
The crash is going to hurt people. It breaks my heart that it is going to take another price crash to get these ideas out before millions of people, to help us all to advance in our understanding of how stock investing works in a big way. But whachagonnado, you know? I did everything that a human being can do to help us all avoid that pain. I did my part and then I did some more on top of that and then I did some more on top of that. I am not Superman. At some point I have to accept that we live in communities and we are going to need a few more community members (perhaps 10?) to work up the courage to stand up to you Goons if we are going to make good things happen here. I think we will find them. I think we are going to have John Freakin’ Bogle himself working on the side of the American people in the days following the crash. So I think we have good things to look forward to.
What do we do when we see the crash that Shiller has predicted, Anonymous? Do we throw our hands up in the air and give up? Is that the end?
I don’t think it is the end. I think we rebuild. I am grateful that we have 37 years of peer-reviewed research showing us how this stock investing thing works in the real world to help us with that rebuilding process. I am going to do what I can. I can do no more and I can do no less. I hope that you will be working with Bogle and me and Shiller and all the others when we make it to the other side of The Big Black Mountain. I think you will be. You’ll say “no, it could never happen.” But losing 50 percent of your life savings and seeing the suffering of millions of people may bring on a change of heart. It has been known to happen, my dear Goon friend.
We don’t have a common frame of reference re the investing stuff. We certainly believe in very different things in that realm. But I suspect that deep down we possess a common frame of reference re something even more important. In the United States, we have means of working out such differences. We talk them over. We don’t make use of death threats or demands for unjustified board bannings or thousands of acts of defamation or threats to get academic researchers fired from their jobs. Those sorts of things are not accepted behavior in any field of human endeavor outside of the investing advice field.
You can point to all the bad stuff we have seen during the first 16 years and argue that it is hopeless. I can point to the laws against financial fraud and show that the people of the United States are on my side on the ultimate question. We do not as a people approve of your tactics. So you are fighting a losing battle. Once people see the financial pain that is associated with permitting relentless promotion of a Get Rich Quick investing strategy and prohibiting discussion of the first true research-based strategy, those who engaged in the financial fraud stuff will be going to prison. That’s going to make a pretty darn big statement, you know? That’s going to get written up in the newspapers. That’s going to go viral.
The stuff that is on the wrong side of the felony line is not for me, Anonymous. If anything, I am trying to get you to move away from that stuff. I certainly do not feel any inclination to join you. We are making progress. We’ve got 37 years of peer-reviewed research showing us what works. We have seen a Nobel prize awarded to the economist who showed that Buy-and-Hold is a big pile of smelly garbage. We have had thousands of our fellow community members express a desire that honest posting be permitted at our boards. We have had scores of big-name experts make efforts to go honest on various points. We have seen you Goons go completely nuts, showing that even the most ardent advocates of Buy-and-Hold no longer believe that it can be defended in civil and reasoned debate. What does that tell you?
It tells me that we are close. Very, very close. A death threat is a Hail Mary pass. It is a desperate act. I don’t even think about throwing Hail Mary passes. I don’t have to. I have 37 years of peer-reviewed research on my side. That counts for something in this country. Ultimately, it is going to be the peer-reviewed research that wins the day. I wish it would have happened sooner. Very, very, very much. But I can’t say that I feel even the tiniest inclination to jump from the winning side just in time to line up a prison sentence for myself. Um — thanks but no thanks.
I hope that you have all the happiness that you are seeking in life.
If you have questions re Valuation-Informed Indexing, please let me know and I will offer you whatever help I am able to deliver. If you see no merit in it, please feel free to mosey on down the line knowing that you have my best wishes every step of the way.
I am going to continue posting honestly on safe withdrawal rates and on scores of other critically important investment-related topics. If I ever see any evidence that the Greaney study contained a valuation adjustment, you will see me reporting on it here within 24 hours of the time that I learn about it. If I never see any such evidence (I have developed a funny feeling over the years that I never will), I will just have to make the best of the circumstances in which I have been placed. I will post honestly. I will tell anyone giving thought to using that study to plan a retirement that it is in error. I will encourage all investing sites to warn people about the study so that we don’t see even more failed retirements than have already been set in motion by the errors in it.
Does all of that not make perfect sense? It sure seems to me that it does.
I do wish you all good things, my dear Goon pal.
No-Good-Site-Maker Rob