Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
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
As of today, May 24th 2019 what is the best no risk/low risk real return available?
You can answer that as well as I can, Evidence.
It’s a very small number.
But a very small positive number is obviously better than a very big negative number. The three earlier bull/bear cycles that we have seen in U.S. hisotry did not come to an end until we hit a CAPE value of 8. That’s a drop of more than 70 percent from where we are today. Have you given thought to how many years of your life it would take to recover from that sort of loss?
The Valuation-Informed Indexers will take only a minor hit. A loss of 70 percent of 30 percent of one’s portfolio is a loss of about 20 percent of one’s portfolio. That’s significant. But it is a loss that one can recover from in a reasonable amount of time.
And the long-term return on stocks will go up to 15 percent real per year after a drop to a CAPE value of 8. The Valuation-Informed Indexers will have lots of money to move into stocks when they once again offer a strong long-term value proposition. He will be able to go ahead of the Buy-and-Holder in no time. At least that’s how things have been playing out for 150 years now, for as far back as we have good records of stock prices.
The way to analyse it is to ask yourself whether you think that it makes sense to maintain the same risk profile over time. If valuations affect long-term returns, then stock investment risk is obviously not static but variable. To keep your personal risk profile roughly stable over time, you MUST be willing to adjust your stock allocation in response to big price swings. Does that not follow?
If we agree on that, we agree on everything that matters. There can be reasonable differences of opinion re the details. But that one is the key. Is long-term timing REQUIRED for those seeking to maintain a stable risk profile over time? I say that it is (and what I say is supported by 38 years of peer-reviewed research).
If you want to say that you think that the typical middle-class investor should today be invested 40 percent in stocks or 50 percent in stocks of even 60 percent in stocks, please do so. I think that you can add to the discussion by making your case. But please do not say that I have committed some horrible thought crime that justifies board banning when I tell people that the last 38 years of peer-reviewed research shows that long-term timing is REQUIRED for those seeking to maintain a stable risk profile over time.It does.
Every investor alive needs to hear that message. It is up to the investor as to what to do with his or her money. But every investor alive needs to be permitted to hear both sides of the story so that he or she can make an informed decision.
My best wishes to you.
Rob
So you are saying that the VII investor won’t make any money until after a crash?
If he has 30 percent in stocks and 70 percent in low-return asset classes, he will get whatever return stocks provide with the 30 percent and a low return with the 70 percent.
He will avoid most of the effects of the crash. And then he will earn amazing returns in the post-crash period.
In the long term, he will do better than his Buy-and-Hold friends, presuming that stocks continue to perform in the future at least somewhat as they always have in the past. He is aiming to invest the same amount in stocks as his Buy-and-Hold friends but to invest more in stocks than his Buy-and-Hold friends when stocks are priced to provide a better-than-normal return and to invest less in stocks than his Buy-and-Hold friends when stocks are priced to provide a worse-than-normal return. How could that not work out well?
It has been working well for 150 years now. That’s as far back as we have records. Stocks would have to perform in ways in which they never before have performed for it not to work out well this time too.
The aim is not to get a good return for a year or two or three. It is to get the best possible return over one’s investment lifetime. Keeping one’s risk profile stable is the way to do that. Once you determine what risk profile is right for you, you should just stay the course and not get distracted by all the noise of the Buy-and-Holders saying that they are sure that it is all going to turn out different this time.
That’s my sincere take, in any event, Anonymous.
I naturally wish you all the best that this life has to offer a person regardless of any differences we have over issues of investment strategy.
Rob
Which then means that up until now, the VII investor has not been doing as well as his buy, hold and rebalance friend and has been hoping for a crash in order to catch up.
Since 1870, he has done better in the long run. Without a single exception. There are a small number of cases (about 10 percent) in which the Buy-and-Holder has ended up with better long-term numbers. But, since the investor doesn’t know in advance when those times are going to take place, he is taking on more risk to pursue the Buy-and-Hold strategy. And the numbers are usually not that much better. Given that the added return is small and unlikely to appear, I think it is fair to say that the Valuation-Informed Indexer did better on a risk-adjusted basis.
I don’t like your phrase “hoping for a crash to catch up.” When someone buys flood insurance, is he “hoping for a flood so that his investment in flood insurance will pay off”? Nobody hopes for a flood or for a price crash. But these things are realities. Given that we now know when price crashes take place (all damaging crashes take place at times of super high stock prices, like those that apply today), it makes sense to prepare for them. The Valuation-Informed Indexer recognizes the reality of stock investing that the Buy-and-Holder refuses to recognize: it is price indifference (a willful refusal to engage in long-term timing no matter how much peer-reviewed research shows that it is required for long-term success) that causes price crashes. So, when large numbers of investors are persuaded to go with a Buy-and-Hold strategy, we begin making the sorts of plans that we need to make to deal with the fallout of a price crash. It’s not that we hope for crashes. We are the ones doing everything in our power to avoid crashes. We are encouraging long-term timing, which is what is needed to avoid crashes. Our Buy-and-Hold friends are encouraging price indifference, which is what causes crashes. It would be more fair to say that it is the Buy-and-Holders who are hoping for crashes, given that they are the ones encouraging use of the strategy that causes them.
Greaney’s study says that the safe withdrawal rate is always 4 percent. His study was based on the Trinity study, which showed why Peter Lynch was wrong to say that the safe withdrawal rate is always 7 percent. Greaney used his study to persuade lots of people at the old Motley Fool board that the safe withdrawal rate was not 7 percent, but 4 percent. Was Greaney “hoping” for a crash so that those who went with the 7 percent number would see that Lynch (in the days before he acknowledged his mistake) was wrong and that Greaney was right? I don’t think so. I think that Greaney believed that the 4 percent number was good science and that the 7 percent number was not and that he believed in science and wanted to share the fruits of science with his friends at the Motley Fool board.
That’s what I want to do. I believe that Shiller’s research is good science. Shiller showed us all something fundamental about how stock investing works that we didn’t know before he came along. He showed that risk is not static but variable. When investors collectively push stock prices up to crazy high levels, they are not generating real wealth but just borrowing from their own future returns. When you borrow lots of money from your future returns, you lower the safe withdrawal rate. If you want your retirement plan to work, you have to take that into account when calculating the numbers you are going to use in the plan.
No one hopes for a crash. But you cannot pretend that you believe in science-based investment strategies if you crush anyone who tries to inform people about what the last 38 years of peer-reviewed research tells us about how to calculate safe withdrawal rates properly. Humans learn new things over time. When they learn new things, they need to incorporate those new things into their analyses of the subjects that they subject to scientific analysis. We know things about how stock investing works today that we did not know in 1980. We should incorporate the new things that we have learned into our analyses.
As the very least, we should permit others to do so. If we elect to ignore the last 38 years of peer-reviewed research, that’s okay so far as the effects of doing so are limited to ourselves. When we ban honest posting, we cross a line. When we ban honest posting, we are affecting others. When we ban honest posting, we make ourselves either civilly or criminally liable for the losses of all of the others who would have chosen a different path if only they had been able to learn about it. It is a very, very, very bad idea to take on such liabilities. It helps no one and it hurts everyone.
That is my sincere take, Anonymous. I believe that we should open every discussion board and blog on the internet to honest posting re the last 38 years of peer-reviewed research in this field. Without a single exception.
Rob
“Since 1870, he has done better in the long run.”
Can you introduce me to this VII investor that has been following VII since 1870? I would like to meet him and ask him a few questions.
That’s obviously a silly question.
There is no one investor who has been around since 1870 who has been doing well following Valuation-Informed Indexing. And there is no one investor who has been around since 1870 who has been doing well following Buy-and-Hold. Researchers have return data available to them. They can compare how an investor following one strategy would have done compared to how an investor following the other strategy. Valuation-Informed Indexing has been beating Buy-and-Hold on a risk-adjusted basis for the entire history of the market. But only in the long-term. And Buy-and-Hold has prevailed on a nominal basis in about 10 percent of the cases.
All investors have a right to know that. That’s the dispute. I want to tell them everything that I know about the subject. When I do, a good number of the investors that I speak to are convinced and lose confidence in Buy-and-Hold. You Goons don’t want to see that happen. So you engage in criminal acts to block me from speaking to investors. I think they need to hear the message. And I think they have a right to hear the message.
Many do not care to listen even when I am permitted to speak. That’s the majority. That’s fine. That’s up to them. But those who care to listen have a right to hear the message and I have a right to deliver it. That’s how our system works. If the message is strong, it will catch on. That’s how our society advances over time — new ideas overcome all of the hurdles and thereby change the world in a positive way. But there are of course reasons why people who have invested their lives building up the old ideas do not want the new ideas to be heard. There are laws that govern what can be done to stop the new ideas from becoming more popular. Those laws are needed. Those laws have been violated in this case. We have to pull together as a society and insist on enforcement of our laws so that the new ideas have a chance to grow and change the world for the better.
That’s it. That’s the entire story. There is not one academic model explaining how stock investing works — Buy-and-Hold. Since 1981, there are two — Buy-and-Hold and Valuation-Informed Indexing. Both may be discussed at every discussion board and blog on the internet. That’s legally. In practical terms, Valuation-Informed Indexing may only be discussed in the most tentative and apologetic way. Those who go farther than that will be made to pay consequences in the world as it exists today.That needs to change. We should be encouraging people to say what they believe regardless of which model they favor. That’s the only way that as a society we will ever figure this stuff out to the best of our ability to do so.
I want to see that process play out. I want to see us all reap the benefits of the last 38 years of peer-reviewed research in this field. I think we are close. But it is going to take the passage of some time to tell the tale for certain.
My best wishes to you.
Rob
Can you introduce me to this VII investor that has been following VII since 1870? I would like to meet him and ask him a few questions.
This is why I have been calling for the launching of a national debate re these matters. That national debate will be our opportunity as a people to ask ourselves some profound questions about our behavior as investors going back to the time when the first stock market opened for business.
There is only one difference between Buy-and-Hold and Valuation-Informed Indexing. Buy-and-Hold is rooted in a belief that investment choices are rational. If the decisions we make about stock investing are rational, it follows that the market price does a good job of reflecting the true value of our stock holdings. Buy-and-Hold makes intuitive sense. OF COURSE investors are rational when deciding what to do with their retirement money. Their financial futures are at stake. Why would they not make rational choices?
Valuation-Informed Indexing is rooted in a very different premise, one that most people find highly counter-intuitive. Shiller’s wife has a degree in psychology. She got him interested in doing the “revolutionary” (his word) research that he did by talking to him about the many ways that research in the psychology field shows that humans are generally NOT entirely rational creatures. We certainly engage in large amounts of rational behavior. We are the rational animal. But the full reality is that we are also the rationalIZING animal. We lie to ourselves. All the time. Our brains are capable of discerning truth. But when our brains tell us something to which we have a strong emotional repulsion, we turn off our brains and go with what we want to believe over what the evidence shows to be the reality.
There are many alcoholics who are highly functioning people. They hold good jobs. They make lots of money. They help people. They are respected in their communities. All the while, they are engaging in behavior that threatens to destroy their family and their reputation and their health. What happens if a friend tries to tell an alcoholic that he has a problem that he needs to address? The alcoholic gets angry and insists that he can quit drinking any time he pleases. He has no problem. He will give up the friend if it comes to that. He will not give up the drink that is in the process of destroying him. Rational? Not even a tiny bit. But the alcoholic is not dumb. He develops in his mind a logical case for why he has the drinking under control that is strong enough for him to persuade himself that it is so. He is not entirely persuaded. If he were, he wouldn’t get angry when the subject came up. He is sufficiently persuaded to be able to go on drinking, which is his deep emotional desire.
That’s the story, Anonymous. We invest irrationally. We delude ourselves. We are all in on it. The investment advisers are in on it. The academic researchers are in on it. The bloggers are in on it. The book authors are in on it. To get to a CAPE value of 30, we pretty much all need to be in on it. If we permitted the Buy-and-Hold dogmas to be challenged in public places, the illusion would shatter and we would gain the ability to invest more effectively. That sounds like a good thing just as it sounds like it would be a good thing for the alcoholic to stop drinking. But the idea of not drinking is hated by the alcoholic and so he uses all his energies to develop ever more complicated rationalizations for why his drinking behavior is just fine. And the idea of acknowledging that our stock portfolios are worth only one-half of what we have fooled ourselves into believing they are worth is hated by the Buy-and-Hold investor with a burning, undying hate. He will stop the discussion of the 38 years of peer-reviewed research showing us that this is so if it is the last thing he does.
Shiller is trying to help us. He is trying to take us to a new place, a better place, a place where we can earn higher returns while taking on less risk. But, to get there, we need to work up the courage to acknowledge that we did not always know everything that there is to know about stock investing, that it was still possible in 1980 that we could achieve huge advances if we continued to perform research and to give those who came up with revolutionary research findings a fair hearing.
You say that you want to ask questions of the investor who has been around since 1870. The question that you should be asking is: “Why have you f’d up so terribly so many times? U.S. stocks provide a long-term average return of 6.5 percent real. How could anyone ever come up with a strategy that would cause that investment class to be less than a stellar choice? But look at what the price indifference that is at the core of the Buy-and-Hold project has done to us over and over again over the years. A Great Depression when the CAPE value hit 33? Huh? What the f? Stagnation when the CAPE value hit 25? Huh? What the f? A Great Recession that caused millions to lose their jobs and that has brought on a good bit of political unrest in recent years when the CAPE value hit 44? Huh? What the f?
The question that I would ask the 1870-2019 investor is: Why do you keep doing this to yourself? Why not just practice price discipline when buying stocks as you do when you buy sweaters and bananas and automobiles? Wouldn’t that make more sense?
Valuation-Informed Indexing makes all the sense in the world. The trouble is that it makes as much sense as telling an alcoholic to join a 12-step program. It could solve a huge problem. But it would solve the problem by causing humans to give up a cherished illusion and the emotional humans love their illusions so much that they will fight very, very, very hard to hold on to them.
Shiller is trying to help us. The peer-reviewed research in this field is trying to help us. The thousands of our fellow community members who have expressed a desire that honest posting be permitted at every discussion board and blog on the internet are trying to help us. Will we let them? That’s the question that we most need to be asking the 1870-2019 investor, who is us.
I think that we are going to permit ourselves to advance to a far superior approach to investing, the first true research-based strategy. I wish that we were not doomed and determined by our emotional nature to hurt ourselves so seriously before getting to the point where we work up the courage needed to take the leap. But that’s the reality of the day. We want to move forward. If we didn’t want to move forward, we would not have awarded Shiller a Nobel prize for his work. But we very, very, very much want to keep drinking too. We want to believe that the numbers on our portfolio statements are rooted in economic realities and that we can count on those fictional amounts to finance our retirements. We are for the time stuck standing at the threshold of something amazing and afraid to take the step forward that we need to take to live better lives from that time forward.
I wish us luck!
Rob
I think we should have a national debate on the best ways to remove lint from your navel. That would be about as interesting and productive on your debate request.
Okay, Anonymous.
I do wish you all good things, in any event.
Rob