“I Would Not Feel Comfortable Failing to Exercise Price Discipline. Others Would Not Feel Comfortable Engaging in Market Timing. So Be It, You Know? The Smart Way to Play It Is to Try to Learn From Those Who Come at Things From a Different Perspective.”

Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

Yourso called research failed. You have admitted that predicting the future prices was hard. Your crash predictions have time and again. With your last failed prediction, you said we should question VII. Sorry, but I won’t gamble with my retirement, hoping to cash in on some kind of windfall like you.

f you don’t believe in Valuation-Informed Indexing, you shouldn’t follow it. That’s for sure. And you shouldn’t recommend it either. If you have doubts about it, you have both a right and a responsibility to express those doubts to others.

Personally, I don’t have any significant doubts. I know that I don’t know everything about Valuation-Informed Indexing. It’s a concept that needs to be developed further. And not just by me. We need to have thousands of people working together to develop the concept as fully as possible. We will make mistakes as that development process continues. It’s inevitable. I of course hope that we acknowledge our mistakes when they are discovered and quickly correct them and learn from them. But I don’t have any significant doubts re the core idea that price discipline is 100 percent required when buying stocks. I think that the case for that much is rock solid.

I don’t think it is entirely unreasonable to have some doubts. Prices certainly have remained high longer in the current bull/bear cycle than they have in any earlier cycle. I think that can be explained, primarily by looking at actions of the Federal Reserve. But I wouldn’t argue too much with someone who concluded that the fact that prices have remained high for a longer stretch of time in this cycle meant that this is not for him. Each person has to decide how to invest his or her money.

I would not feel comfortable failing to exercise price discipline. Others would not feel comfortable engaging in market timing. So be it, you know? The smart way to play it is to try to learn from those who come at things from a different perspective. I certainly try to learn from my Buy-and-Hold friends. I have even learned things from you Goons! It makes me happy when that happens. I hope that my Buy-and-Hold friends occasionally learn something from me. I know that some do because they have told me so. I don’t think you Goons could bear to acknowledge that you have learned things from me. But I believe that you have. And, again, that makes me happy.

My best wishes to you, Anonymous.

Windfall-Cashing Rob

Rob says

May 23, 2019 at 8:07 am

I like that question. It seems down-to-earth and real.

I only feel competent to address one question, Anonymous. Are stock prices determined by rational assessments or by emotional inclinations? There are lots of smart people around who address themselves to all of the hundreds of other important issues that arise in discussions of stock investing and I prefer that people looking for guidance turn to those others over me because I don’t believe that I possess any special expertise re any of those matters.

That said, I believe that the valuations/emotions question is BY FAR the most important investing question. It is also the most ignored investing question. The valuations/emotions question is the undiscovered continent of investing analysis. There is nothing more important in any market than the exercise of price discipline and, without an understanding of the valuations/emotions question, it is not possible for the stock buyer to exercise price discipline effectively when buying stocks. I would say that getting a handle on the valuations/emotions question is 70 percent of the story of how to become a successful long-term stock investor. It is one question but it is the one question that is so important and so poorly understood today that getting a handle on that one question provides the investor with 70 percent of what he needs to know to achieve his goals.

And I not so humbly submit that I am the world’s leading expert on that one important question. I didn’t set out to become the world expert on valuations/emotions. I was just some guy at a discussion board on early retirement who didn’t want to see my friends suffer failed retirements and thus worked up the courage to point out that the study that they were using to prepare their retirement plans lacked a valuations adjustment despite 21 years (at that time) of peer-reviewed research showing that one is required to get the numbers right. The reactions that I saw to that post told me that I was on to something “revolutionary,” to use Shiller’s word.

I saw intense positive reactions (many people told me that I was the first person who ever talked about stock investing in a way that made complete sense to them) and I saw intense negative reactions (a greater number either advanced death threats or tolerated those who advanced death threats in their presence). I knew when I saw those reactions that the story of how as a society we have for decades avoided exploring the far-reaching implications of Shiller’s work was the biggest story that I was ever going to stumble upon and that, if I truly believed that journalism is a noble calling (I do or I wouldn’t have made it my life’s work), then I had better get about the business of nailing this one down.

I have now spent 17 years of my life doing just that. I think that I have done a good job. I of course did not do it on my own. I had help from thousands of fine people, including some of the biggest-name experts in the field and lots of ordinary folks who just want to gain a better understanding of how to invest in stocks with less risk and with a good chance of earning far higher returns in the long run. I have told the story. I have been denied the readership that my work merits because of the corruption that has come to dominate this field in the Buy-and-Hold Era. But I believe that as a society we will be dealing with that corruption in the days following the next price crash. And then the work that I have done will be helping millions of people in a very big way. Shiller’s research changes everything. Absolutely everything. And I am the only guy walking Planet Earth today who can tell the story with the depth and detail with which it is told on the pages of this web site, So good for me (and good for all the people who have helped out — that includes you Goons!), you know?

So I know something very, very very important. And I know it in great detail and in great depth. But I know only one thing (the valuations/emotions thing). If I venture outside of my area of expertise, all that I am going to do is to mess people up. So the wise course of action for me is to keeping hitting away at the one big thing that I know better than anyone else while taking a pass on the hundreds of things that lots of others know better than me.

That’s preface.

I would tell that person that valuations matter and why I believe that and then try to answer any questions that he had or to address any concerns that he had. Does that answer your question?

I don’t believe that there is one answer to your question. I write for the average person. So I recommend index funds. I am persuaded by arguments that were advanced by Jack Bogle (one of my heroes) that index funds are the best choice for the average investor. I would refer people to Bogle’s writings for more detail on why index funds are best for the average person. But I would make that recommendation.

I would of course tell the person that, while investing in index funds as Bogle recommended, they need to take valuations into consideration when setting their stock allocation, which Bogle did not recommend. So I would not just say “do whatever Bogle said.” I would say to do what Bogle said re the many questions that Bogle got right but to not do what Bogle said re the very important question that Bogle got terribly wrong. If the person wanted to know why I am so sure that Bogle got that one important question so terribly wrong, I would tell him. But I would suggest that he read Bogle’s work to gain a good understanding of why index funds are a good choice because I think that Bogle handles that one perfectly well and probably better than I could (since I learned most of what I know about that topic from reading Bogle’s work).

What if the person were a more sophisticated investor, one who believed that he is capable of picking stocks effectively? I would tell him to go for it and wish him luck. I would warn him that investors can fool themselves about their abilities to pick stocks. Bogle pointed out that reality and I think he was right to do so. But I do believe that there are some investors who have the ability to add to their returns by picking stocks effectively and so I would tell the guy that and suggest that he check out all the people who offer good advice on how to do that. I don’t believe that I have much to offer in that area and so I would not say more than that.

Does that answer the question?

I would certainly recommend a lower stock allocation than what is generally recommended today because stock valuations are so scary high today. I would not recommend a stock allocation of zero unless the person was in highly unusual circumstances (as am I). I would recommend 30 percent stocks in the usual case. The reason is that short-term timing does not work and thus it is possible that we will see prices shoot up over the next year or two and I think it is better psychologically if the investor gets to share in those gains to some extent in the event that that happens. So 30 percent stocks would be my general recommendation.

I like TIPS and IBonds and CDs for the non-stock portion of the portfolio. But I am okay with other options for investors who have a strong desire to go with other options. I was talking with a friend about these matters about two weeks ago and I persuaded him that most experts are not giving due consideration to valuations. He hated the idea of going with TIPS or IBonds or CDs because he believes that the returns available from those asset classes today are too small. So he came up with the idea of moving a good portion of his money to high-dividend-paying stocks. He wanted me to endorse that choice. I did not do it.

I said that it made a good bit of sense to me. I said that I could imagine endorsing it if lots of people who believe that valuations matter studied it and came to the conclusion that it is a good choice. But I said that as of today I have not seen enough research on and discussion of that particular question to put my name to an endorsement. I did not oppose the idea. But I just don’t feel sure enough that that is the way to go to put my name to an endorsement. I feel sure that valuations matter. So I endorse valuation-informed strategies. But I believe that more study is needed re lots of follow-up questions. That’s why I always argue for the launching of a national debate re these matters.

I hope that that helps at least a tiny bit, my dear friend.

My best and warmest wishes to you and yours.

World Expert (re One Question Only!) Rob

Comments

Anonymous says

May 23, 2019 at 6:53 am

If someone came to you today and said they wanted to invest their life savings of $5 million by following the VII strategy, what specific investments and percentage allocations would you give them as a recommendation?
Rob says

May 23, 2019 at 8:07 am

I like that question. It seems down-to-earth and real.

I only feel competent to address one question, Anonymous. Are stock prices determined by rational assessments or by emotional inclinations? There are lots of smart people around who address themselves to all of the hundreds of other important issues that arise in discussions of stock investing and I prefer that people looking for guidance turn to those others over me because I don’t believe that I possess any special expertise re any of those matters.

That said, I believe that the valuations/emotions question is BY FAR the most important investing question. It is also the most ignored investing question. The valuations/emotions question is the undiscovered continent of investing analysis. There is nothing more important in any market than the exercise of price discipline and, without an understanding of the valuations/emotions question, it is not possible for the stock buyer to exercise price discipline effectively when buying stocks. I would say that getting a handle on the valuations/emotions question is 70 percent of the story of how to become a successful long-term stock investor. It is one question but it is the one question that is so important and so poorly understood today that getting a handle on that one question provides the investor with 70 percent of what he needs to know to achieve his goals.

And I not so humbly submit that I am the world’s leading expert on that one important question. I didn’t set out to become the world expert on valuations/emotions. I was just some guy at a discussion board on early retirement who didn’t want to see my friends suffer failed retirements and thus worked up the courage to point out that the study that they were using to prepare their retirement plans lacked a valuations adjustment despite 21 years (at that time) of peer-reviewed research showing that one is required to get the numbers right. The reactions that I saw to that post told me that I was on to something “revolutionary,” to use Shiller’s word.

I saw intense positive reactions (many people told me that I was the first person who ever talked about stock investing in a way that made complete sense to them) and I saw intense negative reactions (a greater number either advanced death threats or tolerated those who advanced death threats in their presence). I knew when I saw those reactions that the story of how as a society we have for decades avoided exploring the far-reaching implications of Shiller’s work was the biggest story that I was ever going to stumble upon and that, if I truly believed that journalism is a noble calling (I do or I wouldn’t have made it my life’s work), then I had better get about the business of nailing this one down.

I have now spent 17 years of my life doing just that. I think that I have done a good job. I of course did not do it on my own. I had help from thousands of fine people, including some of the biggest-name experts in the field and lots of ordinary folks who just want to gain a better understanding of how to invest in stocks with less risk and with a good chance of earning far higher returns in the long run. I have told the story. I have been denied the readership that my work merits because of the corruption that has come to dominate this field in the Buy-and-Hold Era. But I believe that as a society we will be dealing with that corruption in the days following the next price crash. And then the work that I have done will be helping millions of people in a very big way. Shiller’s research changes everything. Absolutely everything. And I am the only guy walking Planet Earth today who can tell the story with the depth and detail with which it is told on the pages of this web site, So good for me (and good for all the people who have helped out — that includes you Goons!), you know?

So I know something very, very very important. And I know it in great detail and in great depth. But I know only one thing (the valuations/emotions thing). If I venture outside of my area of expertise, all that I am going to do is to mess people up. So the wise course of action for me is to keeping hitting away at the one big thing that I know better than anyone else while taking a pass on the hundreds of things that lots of others know better than me.

That’s preface.

I would tell that person that valuations matter and why I believe that and then try to answer any questions that he had or to address any concerns that he had. Does that answer your question?

I don’t believe that there is one answer to your question. I write for the average person. So I recommend index funds. I am persuaded by arguments that were advanced by Jack Bogle (one of my heroes) that index funds are the best choice for the average investor. I would refer people to Bogle’s writings for more detail on why index funds are best for the average person. But I would make that recommendation.

I would of course tell the person that, while investing in index funds as Bogle recommended, they need to take valuations into consideration when setting their stock allocation, which Bogle did not recommend. So I would not just say “do whatever Bogle said.” I would say to do what Bogle said re the many questions that Bogle got right but to not do what Bogle said re the very important question that Bogle got terribly wrong. If the person wanted to know why I am so sure that Bogle got that one important question so terribly wrong, I would tell him. But I would suggest that he read Bogle’s work to gain a good understanding of why index funds are a good choice because I think that Bogle handles that one perfectly well and probably better than I could (since I learned most of what I know about that topic from reading Bogle’s work).

What if the person were a more sophisticated investor, one who believed that he is capable of picking stocks effectively? I would tell him to go for it and wish him luck. I would warn him that investors can fool themselves about their abilities to pick stocks. Bogle pointed out that reality and I think he was right to do so. But I do believe that there are some investors who have the ability to add to their returns by picking stocks effectively and so I would tell the guy that and suggest that he check out all the people who offer good advice on how to do that. I don’t believe that I have much to offer in that area and so I would not say more than that.

Does that answer the question?

I would certainly recommend a lower stock allocation than what is generally recommended today because stock valuations are so scary high today. I would not recommend a stock allocation of zero unless the person was in highly unusual circumstances (as am I). I would recommend 30 percent stocks in the usual case. The reason is that short-term timing does not work and thus it is possible that we will see prices shoot up over the next year or two and I think it is better psychologically if the investor gets to share in those gains to some extent in the event that that happens. So 30 percent stocks would be my general recommendation.

I like TIPS and IBonds and CDs for the non-stock portion of the portfolio. But I am okay with other options for investors who have a strong desire to go with other options. I was talking with a friend about these matters about two weeks ago and I persuaded him that most experts are not giving due consideration to valuations. He hated the idea of going with TIPS or IBonds or CDs because he believes that the returns available from those asset classes today are too small. So he came up with the idea of moving a good portion of his money to high-dividend-paying stocks. He wanted me to endorse that choice. I did not do it.

I said that it made a good bit of sense to me. I said that I could imagine endorsing it if lots of people who believe that valuations matter studied it and came to the conclusion that it is a good choice. But I said that as of today I have not seen enough research on and discussion of that particular question to put my name to an endorsement. I did not oppose the idea. But I just don’t feel sure enough that that is the way to go to put my name to an endorsement. I feel sure that valuations matter. So I endorse valuation-informed strategies. But I believe that more study is needed re lots of follow-up questions. That’s why I always argue for the launching of a national debate re these matters.

I hope that that helps at least a tiny bit, my dear friend.

My best and warmest wishes to you and yours.

World Expert (re One Question Only!) Rob