Set forth below is the text of a comment that I recently posted to the discussion thread for the weekly column that I write at the Value Walk site:
Rob,
I don’t post here to taunt. I post to correct factual errors. As you have pointed out, you have been WRONG about your predictions on the market. That blows a big wide hole in your whole story around VII. It is not just a small miss and there is no minimizing how bad this is for the story you have been telling us for the past 2 decades. Instead, it just provides further support for those that have stuck with buy, hold and rebalance.
I was wrong in the prediction that I made. I said that we would see a crash by the end of 2016. I wouldn’t describe it as a “small miss.” I made the prediction for the purpose of being held accountable and the prediction failed. I think that people need to know that. I think it is significant.
I don’t quite go along with the idea that it blows a big hole in VII. It diminishes the case for it a bit. I think that much is fair to say. But that’s as far as I can go.
The big issue that divides Buy-and-Hold and Valuation-Informed Indexing is that Buy-and-Holders believe that stock market gains represent something real, they are produced by economic developments, while Valuation-Informed Indexers believes that in circumstances in which valuations are super high they represent only irrational exuberance, they are produced by extremes in investor psychology and cannot be counted on to last. If the Valuation-Informed Indexers are right re that one, that is a very, very big deal. It has implications that affect the continued viability of our economic system. Shiller predicted the economic crisis of 2008. He was able to do that because of what he learned about how stock investing works as a result of his Nobel-prize-winning research. Knowing what causes economic crises and what we need to do to stop them is a very big deal.
Shiller got a prediction wrong too. So it would be fair to say that the prediction-making aspect of the Valuation-Informed Indexing project has not been working out so hot. The trouble is that we cannot stop making predictions. Shiller was able to foresee the economic crisis because an implicit prediction he made that trillions in consumer spending would disappear when the crazy valuation levels of the mid-2000s dropped to more reasonable levels. Had we all paid attention to what he said in his book, we could have avoided that economic crisis and all the political turmoil that followed in its wake. We need to continue to make predictions about how permitting stock prices to rise too high ends up hurting us all in very big ways. The only way to stop the crazy price jumps is to explain to people how much harm they do to all of us.
So I strongly believe that we need to continue to make predictions. But I do agree that it’s a dangerous business. I had a prediction that failed. So did Shiller. We need to be very careful when making predictions. We don’t know it all and it is easy to get the predictions wrong. Shiller was careful when he made his prediction and I was careful when I made mine. So even being careful is not enough. We need to be super careful. We need to be humble. We need to realize that we don’t know it all. We need to keep digging into this stuff so that over time we know more and we can be confident that we are able to make predictions that won’t fail.
I do think you taunt in your comments, Sammy. Not in this particular comment. But you have done it often both in comments you have made here and in comments that you have made at my site. You are helping people when you point out that my prediction failed. That’s a pure positive.But, yes, there have been times when you have pointed it out not in a spirit of trying to learn more about the subject matter but in a spirit of trying to silence me. That’s different. And the reality is that I have been proven right in the story that I have been telling for 16 years 20 times for every time that I have been proven wrong. I was the person who first posted about the errors in the Buy-and-Hold retirement studies. That was on May 13, 2002. I helped a lot of people doing that. That post was based on a sort of prediction too, one that has checked out. None of us bat 1000. I get a lot more right than I get wrong and I have helped a lot of people by getting the ones right that I got right and I couldn’t make those contributions if I were not willing to take the risk of getting one wrong every now and again.
That’s my sincere take re this one in any event, my dear friend. I naturally wish you all the best that this life has to offer a person regardless of our differing views on how stock investing works.
Sometimes Wrong (but Sometimes Right Too!)
Rob
“So it would be fair to say that the prediction-making aspect of the Valuation-Informed Indexing project has not been working out so hot.”
And the Titanic sinking wasn’t so nice.
Market timing IS prediction making. Forward tests, not back tests, which is all you’ve got to cling to. So to properly rephrase your quote: The market timing aspect of your market timing scheme has failed miserably every single time.
You keep saying “just you wait till the next crash, it will be a doozy”. Sorry, you’re out of chances. You’ve proven beyond any doubt that you have no understanding of how the market works. You proved that 22 years ago, when you got out of stocks forever. The single fact is all anyone will ever need to know about your market knowledge.
I see the issue of whether stock gains are rooted in something real or are just the product of irrational exuberance and the issue of whether it is possible to say precisely when those gains will disappear as two separate issues. 100 percent of the evidence available to us today supports the belief that gains that result from overvaluation are not rooted in anything real and will disappear in time. But the ability to say precisely when those gains will disappear is not there.
Someone who retires based on portfolio numbers that are rooted in irrational exuberance is making very risky choices. He doesn’t know when his retirement will fail but he knows or should know that the odds are strong that it will. Huh? What the f? I think it would be better to hold off on retiring until there is enough real money in the account to support a long-term retirement. To me, the question of when the retirement will fail is of secondary importance. The question of whether it is a safe retirement or not is of far greater importance.
That’s my sincere take re this one, in any event.
I would add that I detect a lot of emotion in your post, Anonymous. That’s a telltale sign, in my assessment. I believe that the Buy-and-Holders made many hugely valuable contributions to our understanding of how stock investing works. I think of them as friends. Can you say the same re the Valuation-Informed Indexers? Can you point to any valuable contributions that we have made over the past 37 years? Do you think of us as friends?
My best wishes to you.
Rob
“I would add that I detect a lot of emotion in your post”
No, there are a lot of facts in my post. None of which you bothered to address. But that’s no surprise. Facts aren’t your thing. They just get in the way.
Okay, Anonymous.
I do wish you all good things, in any event.
No-Facts Rob
The way we determine what is right is by measuring outcome. Your predictions failed, thus you are wrong.
You certainly are right that my prediction failed, Anonymous. We have no disagreement re that one.
And I like your comment that “the way we determine what is right is by measuring outcome.” I had doubts about making the prediction at the time you asked for it. I knew that there was at least a small chance that it would fail (I of course said this at the time) and I knew that, if the prediction failed, you Goons would jump on me and distort what I had said and all this sort of thing and of course all that I feared has indeed come to pass. But the bottom line for me was that you had a right to demand that I make a prediction because that is the only way to provide accountability and having some accountability is essential. So I decided to go ahead with the prediction. I don’t regret my decision even though the prediction failed. Because I agree with you that we need to look at outcomes to determine what is right. We have to get outside the realm of opinion and have some objective things to look at. My prediction supplied something objective to be considered and you Buy-and-Holders won that round. Good for you, you know? My hope is that we will all learn something from your victory re that one.
We disagree when you suggest that I am wrong not just re the particular prediction that I made but re the core question of whether valuations affect long-term returns (which is another way of saying whether stock gains at times of high valuations are the product of irrational exuberance rather than the product of economic realities). I continue to believe that I am right re that one.
Now —
To turn the tables a bit, we need some objective means of determining whether the Buy-and-Holders are right or wrong in their belief that the market is efficient, that price changes are caused by economic developments and not by irrational exuberance. We need to determine what is right by measuring outcomes, as you put it. How do we go about doing that?
The test is going to be whether we experience another price crash in the next few years. If we see stock valuations drop to fair-value levels, millions of people will experience the loss of 50 percent or more of their life savings. Millions of retirements will fail. We will be facing an economic (and political) catastrophe.
Will the Buy-and-Holders be responsible for that economic (and political) catastrophe? In one sense, no. The crash will show that they made a mistake, that they were wrong in their beliefs about how stock investing works. We are all flawed humans. We all make mistakes. Their belief in Buy-and-Hold was sincere. It will be just one of those things.
Except —
The Buy-and-Holders did not just express their view that the market is efficient, that stock investing risk is constant, that there is no need for investors to practice price discipline when buying stocks, that the safe withdrawal rate is the same number at all valuation levels. They went farther than that. They advanced death threats and demands for unjustified board bannings and thousands of acts of defamation and threats to get academic researchers fired from their jobs. They engaged in criminally abusive behavior in an effort to crush debate over the most important public policy issue facing the United States today, an issue re which thousands of our fellow community members (including a good number of big-name experts) expressed a desire to be able to talk over in civil and reasoned discussions. The Buy-and-Holders opened themselves to thousands of civil lawsuits for damages and in some cases even to criminal prosecutions in the event that they are proven wrong in the eyes of the world in the days following the next price crash.
It’s a national tragedy, Anonymous. That’s my sincere take.
There are two schools of thought in the academic community as to how stock investing works. Both Fama and Shiller were awarded Nobel prizes. Every citizen of the United States has every right in the world to express his or her view as to which school is the correct one at every investing discussion board and blog on the internet. It’s a darn shame that there are people who will be getting sued and people who will be going to prison and people who will be seeing their reputations damaged in the days following the next price crash, in the days in which the entire nation learns which school of academic thought is correct by measuring outcomes, as you put it. That’s the reality and it is my job as a journalist to report that reality. But I am not going to tell you that it doesn’t break my heart to see my Buy-and-Hold friends do such harm to themselves. It breaks my heart into hundreds of pieces. I try to get myself back up each day and shake off the dust and move on. But with a broken heart. I love both my Buy-and-Hold friends and my Valuation-Informed Indexing friends. I am always going to do everything in my power to help out my Buy-and-Hold friends as well as my Valuation-Informed Indexing friends. I will always have a broken heart when I see any of my friends place themselves in harm’s way.
The Buy-and-Holders won the round re my prediction and also the round re Shiller’s prediction. That caused me some embarrassment. But in an overall sense it is a good thing. I need to keep my ego in check and one hopes that seeing a prediction fail in so public a way helps inject a dose of humility into my thinking. The failed predictions provide a learning experience for all of us. The fact that this particular learning experience provides points for “the other side” is trivial. The thing that matters is that we have all been given an opportunity to learn. Good for us, you know. I made a prediction. I was proven wrong when outcomes were measured. All who chose to learn from that experience learned something. Our collective knowledge of how stock investing works advanced a bit. Good stuff.
There is still that other issue out there. Are stock gains that take place at tines of overvaluation the product of lasting economic realities or temporary irrational exuberance. We are going to be seeing measured outcomes showing who is right re that one in the days to come. We will all be enjoying another huge learning experience at that time. My hope is that your prison sentence will be on the short side (I personally don’t dare to hope anymore that there will be no prison sentence at all — but who knows, you know? These are strange circumstances and I think it would be fair to say that just about anything is at least possible.) and that we will be able to get together for a beer somewhere and laugh at the craziness that went down in the days before we were able to know what is right by measuring outcomes.
One of us is right and one of us is wrong, Anonymous. I don’t think there is any dispute re that one. We will be finding out who is right and who is wrong by just the means that you described (measuring objective outcomes) in days to come. I naturally wish you the best of luck with that. I don’t have a good feeling re where things are headed re you. But I am one of those darned flawed humans. Maybe I have it wrong. I sure got the prediction thing wrong. Maybe it is just happening again. We will have to wait a bit to find out for sure. You can count on me to send good thoughts in your direction. I can do no more and I can do no less.
I hope that helps a small bit.
My best wishes.
Failed Prediction Guy Rob
Everyone knows there will be a crash someday. Even Fama (whose ideas you clearly don’t understand.) Everyone knows valuations affect returns. You’re saying nothing that isn’t already common knowledge.
Oh, except that “long-term timing ALWAYS works.” I could give you a hundred links to that exact quote. Yes, ALWAYS works. Except for every time that it’s been actually tried. Those times, it didn’t work.
Now here’s where you babble incoherently about being right even though you were wrong. Take it away.
Buy-and-Holders acknowledge that there will be a crash someday. But they don’t acknowledge the implications of that reality. Buy-and-Hold survives today despite 37 years of peer-reviewed research showing that it could never work for even a single long-term investor because Get Rich Quick strategies possess a huge emotional edge. People cannot bear to acknowledge that the real, lasting value of their stock portfolios is only one-half of the number written on the portfolio statement. You get away with insanely abusive posting behavior because of the edge. That edge disappears when all portfolio values are reduced by 50 percent. At that point the emotional advantage shifts to those recommending research-based strategies. That will be a big change.
Everyone does not know that valuations affect long-term returns. Shiller wasn’t awarded a Nobel prize because he said something that everyone knew. He was awarded a Nobel prize because he said something “revolutionary” (his word), something that stands everything that we once thought we knew about how stock investing works on its head. Many Buy-and-Holders are okay with saying “oh, yeah, valuations affect long-term returns” because they are aware that there is 37 years of peer-reviewed research showing that and they don’t want to look foolish. But how many are willing to acknowledge the far-reaching implications of Shiller’s findings? If valuations affect long-term returns, there ain’t no way on God’s green earth that anyone could calculate the safe withdrawal rate accurately without taking the valuation level that applies on the day the retirement begins into account. But how many Buy-and-Holders objected when Greaney resorted to death threats to shut down the discussions about safe withdrawal rates that hundreds of us wanted to have back at the old Motley Fool board? If the Buy-and-Holders thought through what it means to say that valuations affect long-term returns, they would want those discussions to proceed so that we all could enjoy a learning experience together and save millions of people from suffering failed retirements.
If it were common knowledge that the Buy-and-Hold retirement studies were in error, my famous post of May 13, 2002, would not have generated any controversy. The reaction to that post tells the tale. Yes, we all “know” that valuations affect long-term returns. The evidence that this is so is overwhelming. 100 percent of the evidence available to us today shows that this is so and 0 percent of the evidence available to us supports the Buy-and-Hold strategy. But we know this only in a hyper-technical, intellectual way. We have not processed the information and integrated it into our understanding of how retirement planning and asset allocation and risk management works. To integrate the powerful insight, we need to give ourselves permission to talk it over and to explore the implications of it from hundreds or thousands of different perspectives. We need to open every discussion board and blog on the internet to honest posting re safe withdrawal rates and scores of other critically important investment-related topics. That’s the critical next step. That’s when Shiller’s breakthrough insight begins paying huge dividends for every investor alive on the planet. We don’t learn about something by reading a few words and then going about our business as if those words had zero significance. We learn by participating in discussions in which the many practical ways in which the new knowledge changes how we think about the subject matter in a fundamental and far-reaching way are explored.
Long-term timing is price discipline. Price discipline is the key to every market that has ever existed. It is not possible for the rational human mind to imagine circumstances in which long-term timing, reasonably executed, would not work. If you look at the historical record, you will see that long-term timing has produced results superior to Buy-and-Hold in 90 percent of the return sequences that have turned up. The fact that Buy-and-Hold produced better numbers in 10 percent of the return sequences doesn’t mean that Buy-and-Hold was the better choice in those cases. The investor didn’t know in those cases what sort of return was going to turn up in the particular case. He took a huge risk by going with a Buy-and-Hold strategy. Measured on a risk-adjusted basis, Valuation-Informed Indexing is ALWAYS better. And that shouldn’t be even a tiny bit surprising to anyone who has spent a little bit of time thinking this stuff through. Long-term timing is price discipline. How could exercising price discipline when buying something ever be a bad thing?
I wish you all good things, Anonymous. But I believe that Buy-and-Hold is the past and that Valuation-Informed Indexing is the future. I am 100 percent sure. Could it be that I am wrong? It has been known to happen. If it were the case that I was wrong, I would probably be the last to see it because my biases blind me more than they blind anyone else. So maybe I am wrong, you know? We will have to wait a bit and see how things play out to know for sure. But I believe that the last 37 years of peer-reviewed research is legitimate research and that Shiller merited his Nobel prize and that Greaney’s study got the numbers wildly wrong, putting the retirements of thousands of friends of mine at grave risk of failing somewhere down the line. I am going to continue saying what I believe in my posts. Even if there were not laws making it a crime to do otherwise, I would do that because I think it is the right thing to do. I don’t want to see my friends suffer failed retirements because I didn’t have the guts to stand up to you Goons so I am going to continue doing so. I believe that it will all work out in the end far better than any of us can even imagine today. But we are just going to have to wait a bit to see all the amazing and wonderful stuff take place in the real world.
I naturally wish you the best of luck in all of your future life endeavors, my dear friend. Please take good care.
Incoherent Babbling Rob
“Measured on a risk-adjusted basis, Valuation-Informed Indexing is ALWAYS better.”
Risk adjustment has a precise mathematical definition. Contrary to how you use the term, its definition is not “lop off enough so Rob looks not so wrong.”
Okay, Anonymous.
I do wish you all good things, in any event.
Take good care, man.
Risk-Adjusted Rob