Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
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?
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
You think way too much of yourself.
You’ve said that in a direct way hundreds of times, Anonymous. If we count indirect ways, you’ve said in thousands of times. So the thought behind the statement is obviously of great import to you.
I am extremely proud of the work that I have done over the past 17 years. If that’s what you are accusing me of, then you are right on. I think that Bogle is a giant. He built the foundation for the Valuation-Informed Indexing Model, which I see as the future of investment analysis. So I of course think very, very highly of Bogle. But I of course believe that he got the valuations question wrong. Which means that he got every calculation wrong. If valuations have to be considered in every calculation, every calculation that Bogle performed got the wrong answer because he never considered the effect of valuations.
Shiller is the one who corrected Bogle’s work by showing that valuations must be considered in every calculation. So I also think a great deal of Shiller. I also view Shiller as a giant. But Shiller’s work has not had nearly the influence that it should have had for the past 38 years because Shiller and all those who believe that his work is important have shied away from saying to the Buy-and-Holders: “hey, you got the numbers wrong.” So Shiller doesn’t tell the entire story right either.
I say those words. I take all of the stuff that Bogle got right and incorporate it into my analysis. Then I add the stuff that Shiller got right so that the stuff that Bogle did actually helps people instead of destroying their lives. And then I add the part that Shiller failed to put into the mix, the exploration of the far-reaching how-to implications of Shiller’s “revolutionary” (his word) research findings. Without that critical part, the entire thing just does not work. People who don’t know Bogle don’t know how stock investing works. And people who don’t know Shiller don’t know how stock investing works don’t know how stock investing works. And people who don’t know Bennett don’t know how stock investing works. The way it is.
You are right that I think very, very highly of the work that I have done. But when you say that I think “too much” of myself, there is a clear suggestion that my high appraisal of my work is not justified by the realities. My high appraisal of my work is 100 percent justified. If I had not been right in my famous post of the morning of May 13, 2002, John Walter Russell would not have devoted eight years of his life to doing research on my ideas. If I had not been right in my famous post, Wade Pfau would not have devoted 16 months of his life to co-authoring research with me that shows beyond any doubt whatsoever that, in his words, “Yes, Virginia, Valuation-Informed Indexing works!” If I had not been right in my famous post, you Goons would not have put yourselves at risk of spending the remaining years of your lives in prison cells due to your desperate concern that, if the published rules of every internet site were followed, millions of investors would learn about the Valuation-Informed Indexing concept and buy into it.
You are the one who has an unjustifiably exalted view of yourself. Your view is that you can never admit even the possibility of once having made a mistake and that, if the laws of the United States don’t permit you to threaten academic researchers who show that you did indeed make a mistake, then those laws have to be ignored. You are the one on the wrong side of the law and that reality shows us that you are the one with the unjustifiably exalted view of himself.
I follow the law. I follow the peer-reviewed research. I follow the published rules of every site. I am the humble one here.
The work that I have done is of great value. I offer zero apologies for the work that I have done. But when I praise the work product, I am offering tribute to the country that put in place the laws that protect people like me from people like you. I am praising this country that I love as much as I am praising Rob Bennett the person. And I am praising Bogle when I praise my work because my work gives new life to Bogle’s work. And I am praising Shiller when I praise my work because my work gives new life to Shiller’s work.
Full truth be told, I am praising Greaney when I praise my work. Greaney’s intent when he posted his retirement study was to help people, not to destroy their lives. So, if Greaney had been thinking clearly, he would have thanked me for pointing out the error in his study and thereby permitting him to correct it before it caused him further embarrassment.
I have done amazing work. But I did not do it alone. I couldn’t have done it without the help of millions of people who formed the laws of this country and who built the Buy-and-Hold Model and who worked up the courage to stand up to you Goons when you threatened those of us trying to help out our fellow community members. It is the lawbreakers among us who suffer from an exalted view of themselves. I am just doing the job that we all sign up for when we sign up at a discussion board — using my intelligence and experience and love to help out my fellow community members.
I am playing it straight. You are playing it crooked. That’s a big distinction. It is because I am playing it straight that I have been able to achieve more and more great advances as the sand has continued to pass through the hourglass. I offered Greaney the opportunity to do the same. I asked him to work with John Walter Russell and me to develop the first valid safe-withdrawal-rate study. He took a pass. Greaney would be one of the ones today with all of the amazing accomplishments had he taken me up on that offer.
I think that what was going on there is that he just didn’t love himself enough to position himself to realize all those achievements. I like to think that I DO love myself enough to do good in the world. I am humble enough to respect the laws of the country in which I operate. That’s an appropriate and healthy humility. But I am proud enough to want to get the numbers right in retirement studies that I put before others for their consideration. That’s an appropriate and healthy pride.
Hating yourself is not the answer. Greaney hates himself. Not this boy, you know? I often point out that I can get things wrong, just as Greaney did. But I show deference to the law and I invite other community members to point out any mistakes that I have made so that I can fix them quickly. That’s a healthy humility that does not evidence itself in self-loathing. Greaney’s self-loathing helps no one, it brings us all down.
I love my work, I love my accomplishments. I hate your goonishness because it destroys you and millions of others. It is my view that the laws against financial fraud are good and necessary laws. I love it that my country protects me from people like you who engage in financial fraud. I wish that it protected me immediately. I wish that those laws were self-enforcing. I have learned through 17 hard years that this is not the way it works. But I still love it that I live in a country that has such laws and I retain confidence that those laws will be recognized in good and effective and life-affirming ways in days to come.
Proud (and Rightfully So!) Rob
You have such a warped view. You better hope your future employer doesn’t monitor social media.
I am proud of every word that I have written over the past 17 years, Anonymous.
I understand that the vast majority of the population does not agree with all of those words. I also understand that those words upset a good percentage of the population enough to make them angry. So it is possible that some potential employer would come across those words and elect not to give me a job as a result. I don’t think that’s likely. Most people don’t get one-tenth as worked up over this stuff as you Goons do. But there is more than a zero chance that something like that could happen.
If it does, I will just add that one to the long list of hurts that I have endured for working up the courage to point out on the Motley Fool board on the morning of May 13, 2002, that the retirement study posted at John Greaney’s web site lacks an adjustment for the valuation level that applies on the day the retirement begins. I have taken thousands of hard hits over the past 17 years. There is no getting around that one.
But you know what? I have a funny feeling that I will be experiencing thousands of pats on the back in the days following the next price crash, when we will as a nation make a decision to open every investing site to honest posting on safe withdrawal rates and thousands of other critically important investment-related topics and thereby to permit ourselves to live far richer (in every sense of the word) lives from that point forward. I have the funny feeling that I will have lots of good employers calling me up to offer me amazing jobs in those days.
So perhaps it will all even out in the end, you know? John Walter Russell ventured forward with the opinion way back in 2003 that this entire matter was going to end up better than any of us at the time could possibly imagine. That one has always had the ring of truth in it for me.
We’ll see.
Super-Employable (Not Now, But Later) Rob