Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
“It’s following a research-based strategy for investing in my favorite asset class.”
Your favorite asset class, which you haven’t owned in 23 years. Did that tidbit of information make its way into the article that you’ve been scattering far and wide? Or was there just no way to squeeze it into that tight 11,000 words?
Note: The comment as it appeared in the thread from which it was taken contained errors in the numbers showing annualized real returns for January 2000 through January 2019. I corrected those errors when preparing this blog entry. The points that were being made in the comment remain valid with the correct numbers applied.
I don’t mention that in the article. It’s not my intent to hide it. If I were hiding it, you wouldn’t know about it. But you are right in your suggestion (which you advance in a sarcastic tone) that it was hard to find room for all of the essentials of this story in a single article. There were other things that had to be said, so that got left out. My #1 project for 2019 is to take that article (which I am extremely pleased with — I view it as the finest piece of journalism that I have ever produced) and to blow it up to full-book length. I will certainly be discussing the fact that I got out of stocks in the Summer of 1996 in the book. So people who are hearing my case in the place in which I put the entire story forward in one telling will know that.
You want them to know because you know that most people will find it offputting. People’s minds have been saturated with Buy-and-Hold thinking. So most people think that the idea that TIPS or IBonds could do better than stocks for 23 years running is absurd. The reality is that that is what has happened. If there had been no Ban on Honest Posting, if we had been talking about these issues at every discussion board and blog for the past 17 years, all investors would understand why they should expect TIPS and IBonds to beat stocks when as a society we permit stock prices to reach the levels that we have permitted them to reach during the Buy-and-Hold Era.
Here is the annualized real return, with dividends reinvested, for stocks starting from the various, relevant starting points:
January 1996 — 6.2 percent
January 1997 — 5.4 percent
January 1998 — 4.6 percent
January 1999 — 3.4 percent
January 2000 — 3.0 percent
I was getting big raises in those years. So I was able to save a lot more in the later years than in the earlier years. So it is the numbers for the later years that are most relevant. My 3.5 percent return beats the number for stocks in 2000 and in 1999. It comes close in 1998. It gets beat in 1997 and 1996. But if you adjust for risk (I think it would be fair to say that an investor should be compensated two additional points of return for taking on the much greater risks associated with stocks), the TIPS/Ibonds number wins in 1997 and gets beat by only a little in 1996.
Factor in the effect of a 50 percent price crash, and the TIPS/Ibond numbers are ahead across the board. Then consider that stocks will probably be offering a 10-year annualized return of 15 percent real after the crash, and that differential grows a lot bigger after the Valuation-Informed Indexer is able to take advantage of the fact that, by lessening his participation in the stock market when it offers a poor value proposition, he is able to increase his participation in it when it is offering a strong value proposition.
The Valuation-Informed Indexer comes out ahead in the long run. I have run many hundreds of scenarios on the Scenario Surfer. There are lots of variations re the details of the various return sequences. But the bottom-line reality is always the same. Practicing price discipline when buying stocks pays off big time in the long run. Surprise! Surprise! Who’d a thunk it?
Stocks have performed HORRIBLY for the past 19 years. You should be ashamed of that 3.0 percent number. Millions of people depend on the magic of compounding to finance their retirements. The magic is reduced considerably when the annualized return is reduced from the normal 6.5 percent real to a shocking 3.0 percent real for 19 years running. That number is killing us as a nation. We are all hurting because of that number.
What caused that number? It was that insane 126 percent price jump that we saw from 1996 through 1999. We are still paying for that. And what caused those four years of insanity? Buy-and-Hold. People thought those phony gains were real. So they didn’t bother to exercise price discipline. And we are all still paying the price for that horrible mistake 19 years later.
Yes, people are shocked to hear that I have been out of stocks for nearly 23 years. Most people have never heard the case against Buy-and-Hold. What people should be shocked about is that I have been out of stocks for nearly 23 years and I am ahead today because of my decision to go with the peer-reviewed research instead of the marketing slogans of our Wall Street Con Man friends. And I will be farther ahead following the next price crash, which will bring more devastation to millions of middle-class people. Again, courtesy of everybody’s favorite Get Rich Quick scheme.
We should all be striving to invest rationally. Our common sense tells us that price discipline must work when buying stocks because it works in every other market that has ever existed. We now have 28 years of peer-reviewed research confirming that what our common sense tells us must be so really is so.
We have as a society spent millions of dollars promoting the purest and most dangerous Get Rich Quick scheme ever concocted by the human mind. I think it would be a good idea to now spend an equal amount of money promoting the first true research-based approach, the first strategy developed after the research needed to get it right was available to us all.
Valuation-Informed Indexing is what Buy-and-Hold was intended to be. We should fix the mistake and move forward as a people. There is no good reason to deny ourselves the benefits of Shiller’s Nobel-prize-winning research any longer. Knowing how to invest effectively for the long run is a good thing. Learning how to pronounce the words “I” and “Was” and “Wrong” gets us to the place that deep in our hearts we all really want to go. Those three words have an incredible liberating power.
Stocks are my favorite asset class. And yet I have been out of stocks for close to 23 years now. Huh? What the f? It says something about us as a people that a person who believes that the lessons of the past 38 years of peer-reviewed research should be acknowledged has had to stay out of stocks for 23 years as a result. That’s freakin’ crazy. But it is not the investor who follows the research who is off his meds, as you Goons like to suggest. It is the people still advocating Buy-and-Hold strategies 38 years after the peer-reviewed research in this field showed that there is precisely zero chance that such strategies could ever work out well in the long run who are off their meds.
No society as rich as ours should ever have to endure an annualized stock return of 3.0 percent real for 19 years running. That number is a summation of the horrors of what the widespread promotion of Buy-and-Hold has done to us as a people. It’s a national scandal. That never could have happened in a world in which we permitted honest posting re the peer-reviewed research.
I should be able to invest in stocks and earn a return at least somewhat approaching 6.5 percent real doing so. We all should. Once we open every discussion board and blog on the internet to honest posting re the last 38 years of peer-reviewed research in this field, we all will be able to do so from that point forward. It is Buy-and-Hold holding us back and Buy-and-Hold can be corrected by a society of people with enough concern for its future to enforce the laws against financial fraud.
My sincere take
Beating-3.0-Percent-Real-for-19-Years-Running Rob
How about some honest posting. TIPS didn’t exist in 1996. Secondly, you have exaggerated the returns.
https://www.morningstar.com/articles/801922/20-years-in-have-tips-delivered.html
Third, you don’t just give yourself bonus points on what you think was risk. There are not risk adjustments to historical results because they are actual results, not forecasts.
Just admit you were wrong to get out of stocks. You can’t change history will lies.
In the days before TIPS and IBonds were available and when stocks were priced at insanely high levels, I put some money in certificates of deposit (CDs). They were paying a (non-inflation-adjusted) return of close to 7 percent and inflation at the time was less than 3 percent. So I obtained a real return of more than 4 percent. That’s as good as TIPS and IBonds provided once they became available.
All of these wonderful opportunities were available to you as well as to all other investors. Why weren’t they being widely written up? Because most investment experts are Buy-and-Holders. They believe that it is impossible that there could be investment classes offering a better deal than stocks. So, when they see them, they don’t see them. We don’t see things that we don’t want to see, things that we have persuaded ourselves cannot be seen.
I don’t agree with what you are saying about risk. The investor doesn’t know at the time he makes a decision to buy TIPS or stocks what the return on stocks is going to be. The return on TIPS is a sure thing, the return on stocks is unknown. So there is more risk in buying stocks. Should the investor not be compensated for taking on that risk? It seems to me that he should be. If I have a choice between getting a sure 4 percent real from TIPS and possibly getting 6 percent real from stocks but also possibly seeing a negative return from stocks, I would rather take the sure 4 percent real. The ceiling is higher with stocks. But I am not being sufficiently compensated for risk in that case.
Why shouldn’t investors demand higher returns from stocks, given that they are riskier? Should they not receive any compensation for being willing to take on that risk.
Stocks ended up doing better from 1996 forward. I give you that one. But there was no way of knowing that was going to happen in 1996, when the investment decision had to be made. TIPS or CDs were offering a sure thing. Stocks offered a chance of doing better but also a chance of losing lots of money. I want to be compensated for taking on that risk. If stocks cannot offer a return of 2 percentage points of return more than I can get from an asset class with a guaranteed return, I don’t want them. I just don’t see the appeal if there is no compensated being paid for the added risk taken on.
If you take on added risk without being compensated for doing it for your investment lifetime, you are going to end up doing poorly. If you get compensated for taking on risk, I could see it working out. But if you are willing to take on more risk without being compensated, it is my view that you are being foolish. I don’t see how that could work out in the long run,
To take on added risk without being compensated for it is an emotional choice, in my assessment.
I wasn’t even a tiny bit wrong to get out of stocks. The fact that I am ahead today shows that. And the fact that I will go much farther ahead after the next price crash highlights the point. And then of course I will enjoy decades of compounding returns on the amount by which I am ahead. Valuation-Informed Indexing gets better and better and better over time while Buy-and-Hold gets worse and worse and worse over time. It’s been working that way for 150 years now. That’s as far back as we have good records of stock prices.
Do you even divide the numbers on your portfolio statement by two in making these assessments? It is my sense that you do not. Huh? What the f? How can you possibly get the numbers right if you fail to do that? Do you understand what is being signified by the words “the stock market is now priced at two times its fair value”? To fail to divide the numbers on your portfolio statement by two at a time when stocks are priced at two times their fair value is like trying to calculate the safe withdrawal rate without including an adjustment for the valuation level that applies on the day the retirement begins.
It’s the mistake that the Buy-and-Holders make over and over and over again — treating Pretend Gains (“Irrational Exuberance”) as if they were real. Irrational Exuberance is not real, Anonymous. Irrational Exuberance will not help you to pay the electric bill when it is cold outside.
Now you get angry. Now you come back with name-calling and threats of violence and threats of career destruction. The Buy-and-Hold Way.
That stuff doesn’t show that Irrational Exuberance is real. That stuff shows that Shiller is right that investing is a highly emotional endeavor and that it is not possible to get it right without taking the emotional (valuations) side of the story into account.
My sincere take.
Right-to-Get-Out-of-Stocks (According to the Numbers, If Not the Marketing Slogans) Rob
What guaranteed real returns are available in CDs, TIPS, IBonds etc. today?
I looked on Bankrate and there is a 3% APY for a CD with a 2-year term and a deposit of $2,500.
I presume that the point that you are seeking to make is that that return is not good enough to generate the level of compounding needed to finance a solid middle-class retirement. I’ve heard that concern expressed many times.
It’s a whole lot better than a loss of 70 percent, okay? A whole lot better.
Now you will come back and say that I cannot give you the precise date that we are going to see the loss of 70 percent. I cannot do that, that’s for sure. But 70 percent losses don’t just pop up randomly. They always take place at times of insanely high prices, like those that apply today. So I can say that the RISK that we are going to see a 70 percent loss in stocks is far higher today than it would be if we were at reasonable price levels. And I can give you the historical data you need to assess how big a risk that is and whether it is worth going with the 3 percent (non-inflation-adjusted) return that is available with CDs today.
Investing is a risk-assessment exercise. That’s the name of the game. You cannot build a retirement account earning 3 percent non-inflation adjusted. I certainly acknowledge that. But there is no reason to believe that you would ever need to do that. If you put a portion of your money in an investment class earning 3 percent at a time when there is a strong likelihood of a 70 percent price drop in the more heavily promoted asset class, you have protected that money during a bad time for investors. If stocks suffer a 70 percent loss (as they will if the CAPE level drops to the level to which it has dropped at the end of every earlier bull/bear cycle in U.S. history), the most likely annualized 10-year real return for stocks going forward from that point will be 15 percent real. If you earn 3 percent for a year or two on a certain amount of money and then 15 percent real for the next 10 years, your 12-year return is plenty good enough to support a solid middle-class retirement.
Valuation-Informed Indexing is about taking risk and return into consideration when making allocation decisions instead of going with what the Wall Street Con Men say regardless of whether or not it makes sense for you. There was a fellow at the Bogleheads Forum who said “no one would go into a bank and say ‘I’ll take a certificate of deposit” without first asking about the return being offered. That’s exactly right. No one should buy stocks without first checking the likely return either. It’s never a plus to fail to inform yourself of how your investment class is likely to perform.
If you inform yourself, you will do better in the long term. That’s been so for 150 years now, as far back as we have records. There’s never been an exception to the general rule. The Buy-and-Hold stuff is just a marketing gimmick. It is a money-making thing. The idea is just to keep you dumb so that you will do what you are told. If a car dealer told me not to ask about the price of his car before buying it, I would feel that he was insulting my intelligence. I think that you should feel the same way when the Wall Street Con Men come up with all these marketing slogans aimed at keeping you in the dark as to whether stocks offer a strong value proposition at a given point in time or not. I am trying to make you rich, not our Wall Street Con Men friends. Our Wall Street Con Men friends are rich enough already, in my assessment.
Anyway, that’s the concept. I wish you the best of luck in all your future life endeavors.
Educated-Consumer-of-Stocks Rob
I was reading an article at another spot on the internet and I came across this quote from Upton Sinclair: “It is difficult to get a man to understand something when his salary depends upon his not understanding it.” That’s the deal. Buy-and-Hold is a money-maker. It appeals to the most base human emotions and thereby it brings in the bucks by the truckload.
I don’t think that we can afford it anymore. Too many human lives are in the process of being destroyed by this massive con. I think that after the next price crash we are going to have to realize that we need to move forward as a nation. I think we will.
But I don’t know everything. I could be wrong. It has happened before and, if it were happening again, I would probably be the last to know. So we are just going to have to wait to see how things play out in the days following the next crash.
My best wishes.
Upton Sinclair Fan Rob