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 authors at one point refer to “the null of no predictability.”…My null is that price discipline (long-term timing) always works and is always required. The entire historical record supports that null.”
Simply breathtaking ignorance. “Null” does not mean “premise” or “position”. In the paper’s context it is short for “null hypothesis”, meaning “no relationship”. As in CAPE has no statistically proven relationship to stock market returns.
More generally, null means no value at all. As in “Rob Bennett’s reading comprehension skills are null.”
You go right to the heart of things with this comment, Anonymous.
You say: “In the paper’s context, it is short for ‘null hypothesis,” meaning no relationship.” We are in complete agreement re this point.
The null hypothesis behind Buy-and-Hold was discredited when Shiller published his “revolutionary” (Shiller’s word), Nobel-prize-winning research showing that valuations affect long-term returns. If valuations affect long-term returns, there IS a relationship. Price discipline (long-term timing) always works. And price discipline is always REQUIRED for investors seeking to keep their risk profiles roughly constant over time.
Wade Pfau spent months searching the literature seeking to identify a single peer-reviewed study showing that long-term timing might not work or might not be required. He came up empty-handed. There is nothing. Not one study. Nada. Zilch.
Buy-and-Hold is a marketing gimmick. Nothing more, nothing less. There is zero support for it in the peer-reviewed research or in the historical return data on which the research is based. Buy-and-Hold is a MISTAKE. Before 1981, people didn’t know. So I think it would be fair to say that Buy-and-Hold was an honest mistake in earlier days. But since 1981, anyone who follows the peer-reviewed research knows the story. 100 percent of the research supports Valuation-Informed Indexing, 0 percent supports Buy-and-Hold.
Are most Buy-and-Holders suffering from cognitive dissonance? It sure seems so to me. Is that an important reality here? It sure seems so to me. Do we still need to find a way to get accurate and informed investing advice out to millions of middle-class investors? It sure seems so to me.
I hope that helps a small bit.
Reading-Comprehension-Challenged Rob
The premise is wrong and represents deeply flawed thinking. There will always be some kind of back-tested approach that ‘worked in the past’. it is logically impossible to show that long (or short) timing ‘doesn’t work’. There was always something that worked.
Either the premise of Buy-and-Hold is wrong or the premise of Valuation-Informed Indexing is wrong. It is a logical impossibility that both are right since the two premises contradict each other (it’s not possible that price changes are always caused solely by economic developments and also sometimes caused at least in part by non-economic psychological factors, it’s not possible that investors as a whole are always 100 percent rational and that investors as a whole are also sometimes highly emotional).
It’s natural that you would think that my premise is wrong and that it represents deeply flawed thinking. You believe in the opposite premise. You couldn’t believe in the opposite premise without thinking that my premise is wrong and represents flawed thinking. But of course the same is true coming from the other direction. I couldn’t believe in my premise without thinking that your premises is wrong and represents flawed thinking. The premise that one holds to determines one’s take on every stock investing question. We are essentially living in different worlds, speaking different languages.
The question is — What to do in such circumstances?
We could refuse to speak to each other. We could say “that guy says weird stuff, even his language is messed up, I am not going to have anything to do with him.” From the perspective of the person holding the premise, doing that makes a lot of sense. There are people talking about this sort of question in the political realm. They are saying that Trump supporters and Trump detractors disagree on fundamental questions and cannot get along and that they thus should not even try, they should just limit their communication to others in the same tribe and ridicule and dismiss anything they hear from people in the other camp. It is unsettling to hear ideas expressed that one does not believe in.
I do not at all think that this is the right way to go. I have sympathies for some things that Trump supporters say and I have sympathies for some things that Trump detractors say. I think there are good people on both “sides.” I put the word “sides” in quotes because I believe that all of us who live in American are on the same side, we all need to try to learn from people with different views and work with them to build the best country we can build. It’s hard sometimes. It’s confusing sometimes. It’s unsettling sometimes. But it works. I think that making an effort to understand where the other fellow is coming from pays huge dividends down the line. Personally, I believe that it is probably the only thing that works in the long run. None of us know it all, Just when we think we have it figured out, something unexpected comes along to throw us. Often it is the disparaged “Other” who possesses the background needed to come to terms with this unexpected development and it is only by listening to what the disparaged “Other” says that we shape ourselves into our best possible selves.
I agree that it is not possible to show with absolute certitude either that long-term timing works or that long-term timing doesn’t work. We are not Gods. We really don’t know anything with absolute certitude. And in this case our knowledge is particularly limited. We don’t have the amount of data that we would need to feel 100 percent confident of either position. We don’t disagree re that one (although I think it would be fair to say here that you ACT as if you believe you possess perfect knowledge when you demand that those who express views rooted in a different premise than the one you subscribe to to be banned from our boards and blogs — please note that I do not demand that Buy-and-Holders be banned).
We cannot wait until we have perfect knowledge. We need to make some decision as to how to invest our money TODAY. We would like to have perfect knowledge but we do not possess it. What to do?
I say that we should let both sides speak. That’s what the published rules of every site say. That’s what the laws of the United States say. That’s what our social norms say. I believe that that is the way to go.
That’s not the way we have gone as a people over the past 16 years. You have prevailed in your efforts to get the views of those holding the minority point of view suppressed. In some cases you have out-and-out banned them. In other cases they took note of what happens to people who express the minority view in clear and firm terms and adopted a policy of self-censorship so that they could continue to speak in a halting and vague and limited and apologetic way. That’s not the path that I have chosen. I have insisted on my right to speak honestly and I have gotten banned at the demand of those holding the majority point of view.
That’s where things stand, Laugh. You think my premise is flawed. I think your premise is flawed. You are in the majority, I am in the minority. Our social norms, reflected in our laws and in the published rules of all of our boards, says that the minority has a right to express its sincere views without hesitation or vagueness. Those social norms have not been reflected in the decisions of site administrators. I think those site administrators made bad calls. I think they hurt their sites by shutting down the clear expression of the minority point of view. I think that, once a board shuts down the expression of a minority point of view supported by 37 years of peer-reviewed research and a Nobel prize in economics, that that board becomes a corrupt entity. I don’t want to play a role in corrupting our boards. I want them to achieve their fullest potential. I don’t think they can achieve their fullest potential until then come to reflect our social norms and our laws. I think that it is only when every community member feels free to express his or her sincere views that our boards can do the good that they were set up to do.
You are the “Other” to me every bit as much as I am the “Other” to you, Laugh. I disagree with your views on how stock investing works. But I do not want to limit your ability to express your views (I of course DO want to limit your ability to violate the laws of the United States, which is not at all the same thing — the laws of the United States limit what you can do to block others from speaking, they do nothing to limit your ability to express your own views honestly). I do not dislike you. I view you as a friend. I view you as someone who happened to live through different experiences than me and who as a result came over time to believe that Fama’s research is legitimate and Shiller’s research is not while my life experiences caused me to believe that Shiller’s research is legitimate while Fama’s research is not.
Is it unsettling for someone who believes that Fama’s research is legitimate and who has his retirement money riding on that belief to hear that there are people who do not believe that? Sure. The reason why our laws say that the minority may speak even in cases where the voicing of their views is unsettling to the majority is that there are circumstances in which permitting the voicing of minority views leads over time to amazing growth experiences for everyone and our social norms favor the creating of amazing growth experiences. I love my country and its social norms. That’s why I love the idea of permitting honest posting on the last 37 years of peer-reviewed research at every discussion board and blog on the internet.
I hope that helps a small bit, my dear “Other” friend.
Deeply-Flawed-Premise Advocating Rob
“I say that we should let both sides speak.”
That is not what you really want. People have tried having a conversation with you for the past two decades. You haven’t listened. People don’t agree with you and have told you such. Eventually, people grew tired of your tactics and, after much irritation, had no choice but to block you. Instead of facing reality, you have explained it all away as some mass conspiracy, along with tales of death threats, job threats, jury trials, prison sentences, $500 million settlement payments, etc.
Okay, Anonymous.
I do wish you all good things, in any event.
Reality Ignoring Rob
You are wrong. This is not a ‘point of view issue’. Making things a ‘matter of opinion’ when they are logically false/true is the type of ignorant relativism that makes ‘anything’ possible to be right or wrong.
It is ALWAYS possible to find a back-tested strategy that beats buy-and-hold, hence it is ALWAYS possible to say that some kind of scheme ‘beat the market’. Therefore, it is IMPOSSIBLE to say that timing doesn’t work. Trying to find a paper that argues against an impossibility is a reductive waste of time.
Simply put, all timing can work. If you get the timing right!
It is just that almost no one has got it right so its best not to try. Your horrific long term returns, for example.
If Buy-and-Hold cannot be discredited, then Buy-and-Hold is not the product of science. For something to be the product of science, it has to be falsifiable. If 150 years of stock market history isn’t enough to discredit Buy-and-Hold, nothing is. The reality is that the only thing that has supported Buy-and-Hold for 37 years now is the naked assertion that the market is efficient.
There is simply no evidence for this assertion. For the market to be efficient, investors would need to be rational — they would need to be willing to act in their self-interest. This is the ASSUMPTION on which Buy-and-Hold is based. But why assume this? People do not always act rationally (in their self-interest) when it comes to drinking. Some people become alcoholics. That’s not rational. People do not act rationally when it comes to smoking. People do not act rationally when it comes to gambling. People are not fully rational creatures. The reasonable thing is to believe that people will be only partly rational and also partly emotional when it comes to investing in stocks too.
If the level of collective investor emotionalism waxes and wanes, then stock investing risk is not constant but variable. If the level of stock investing risk is variable, then investors must be willing to adjust their stock allocations in response to dramatic changes in valuations to have any hope whatsoever of keeping their risk profiles roughly stable over time.
A strategy that is rooted in a common-sense observation as to how humans are constructed (they are emotional creatures) is not a “scheme.” It is an approach to investing rooted in reality rather than in a long-discredited assumption that has been doing great harm to both investors and to the society in which it is advocated for as long as stock markets have been in existence. When someone is trying to make a decision as to whether to hand in a resignation from a corporate job, he needs accurate information as to the lasting value of his stock portfolio. The Buy-and-Holders are not able to provide it because they are not willing to look at what the 150 years of stock-market history available to us for review tells us about how stocks perform differently in the long run starting from different price levels (because some reflect a greater level of emotionalism than others).
I do not believe in Buy-and-Hold. So I am not going to recommend it to others. I have no problem with you recommending it. I believe that you believe in it. So I believe that you should recommend it to others. But not me. I should be saying what I believe re these matters when I advance posts with my name on them. I believe that the last 37 years of peer-reviewed research in this field is legitimate research. I believe that Shiller deserved his Nobel prize. I believe that valuations affect long-term returns. I believe that the safe withdrawal rate is a number that varies given the valuation level that applies at a given point in time.
I wish you the best of luck with the strategy that you have decided is right for you, Laugh. Does that help at all?
Horrific Long-Term Returns Rob
Making things a ‘matter of opinion’ when they are logically false/true….
I feel a need to offer a second response to your comment focusing on these particular words.
Buy-and-Holders say that investors are always collectively rational in their pricing of stocks. Valuation-Informed Indexers say that there are times when investors are collectively irrationally exuberant re stocks and other times when investors are collectively irrationally depressed re stocks. You are saying that not only do you personally believe that the Valuation-Informed Indexing view is wrong but that the Buy-and-Hold view is true as a matter of pure metaphysical logic, that there can be no legitimate questioning of it.
Buy-and-Holders say that stock investing risk is stable, that there is only one safe withdrawal rate that applies at all valuation levels and that investors should remain at the same stock allocation at all times so long as their personal life circumstances remain stable. Again, you are saying that this view is true as a matter of pure metaphysical logic, that there can be no legitimate questioning of it, that there is nothing that those who believe that Shiller’s Nobel prize was merited can contribute to any discussion of stock investing.
Buy-and-Holders say that no form of market timing can work and that therefore stocks are the only thing that can be purchased in this world in which there is no need for the person doing the purchasing to exercise price discipline when doing the purchasing. Again, you are saying that this is so as a matter of pure metaphysical logic, that it is an axiom beyond question or dispute or challenge.
Why is it an axiom beyond question or dispute or challenge? In the world of science, things can be questioned. If Buy-and-Hold is beyond question, Buy-and-Hold is not the product of science. Once the claim that price discipline is not required when buying stocks is advanced as dogma, we have left the realm of science.
If Shiller had published his Nobel-prize-winning research showing that valuations affect long-term returns in 1961 rather than in 1981, we would all be Valuation-Informed Indexers today. Buy-and-Hold left the realm of science and became dogma in the 16 years between when Fama showed that short-term timing never works in 1965 and when Shiller showed that long-term timing always works and is always required in 1981. Our dispute is not one rooted in differences over what the historical return data says. Out dispute is a turf fight. There is a lot of money in Buy-and-Hold and the people who make that money were embarrassed when those engaging in science uncovered their error and have become increasingly desperate to cover it up as more and more time has passed and more and more lives have been destroyed by it.
I am grateful to the Buy-and-Holders for establishing the ideal that stock investing claims should be rooted in science. But they fail to honor their own ideal when they advance death threats and demands for unjustified board bannings and thousands of acts of defamation and threats to get academic researchers fired from their jobs. That stuff ain’t science. That stuff is the OPPOSITE of science. That stuff represents a running away from science. That stuff is rooted in an emotional desire to avoid a developing science that in recent decades has been saying something that the Buy-and-Holders did not expect it ever to say and that the Buy-and-Holders very, very, very much do not want to hear (or even to permit others to hear).
There is nothing illogical in a belief that price discipline is required when buying stock just as it is when buying anything else. The illogical thing is to believe that, just because humankind did not always know everything there was to know about how stock investing works, we must all remain ignorant of the realities for all time so as not to upset those who made a mistake over 50 years ago. Mistakes are part of the scientific process and correcting mistakes when they are uncovered is also a part of the scientific process.
That’s my sincere take, Laugh.
I do wish you all good things.
Former (Because I Am a Believer in Science and Science Permits Us to Learn New Things Over Time) Buy-and-Holder Rob
“If Buy-and-Hold cannot be discredited, then Buy-and-Hold is not the product of science. For something to be the product of science, it has to be falsifiable. If 150 years of stock market history isn’t enough to discredit Buy-and-Hold, nothing is.”
There’s nothing cuter than a lunatic trying to apply logical arguments. You just argued that Buy-and-Hold is a “product of science.”
You are dimly recalling a comment from awhile back about crank beliefs, which cannot be falsified. Like a belief in invisible unicorns. VII is another perfect example. You won’t define how to implement it, so it can’t be tested, so it can’t be falsified.
“Buy-and-Holders say that investors are always collectively rational in their pricing of stocks.”
No, that’s just another straw man argument. Buy-and-Holders say that the market cannot be timed. Not the same thing at all. Unlike VII, Buy-and-Hold has been tested, against countless back-tested timing schemes. Those schemes always fall apart in forward tests. Your own personal miserable returns make it laughably easy to dismiss VII.
Of course, facts don’t persuade you, and never will. Because you’re a lunatic and a crank.
Okay, Anonymous.
I do wish you all good things, in any event.
Lunatic Crank Rob