I’ve posted Entry #449 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Grantham Stills Believes That Valuations Matter, He Just Also Believes That High Stock Prices Have Grown “Sticky.”
Juicy Excerpt: Grantham objected to reports suggesting “that I believe high prices are here permanently and that I also believe regression to the mean has ended. This is, of course, inaccurate, as readers of my quarterly letters know. I have suggested that although mean reversion in margins and price earnings ratios is still probable, the speed of regression has slowed way down and become sticky. This slowdown is because nearly all of the factors causing it are themselves unlikely to change fast. These include Fed policy including moral hazard, lower interest rates, an aging population, slower growth, and productivity; and increased political and monopoly power for corporations. Because of this stickiness, I have suggested that regression of P/Es and profit share will take 20 years as opposed to the 7 years…that is more typical of the period 1900-1997 and that even then those measures will have only regressed back two-thirds of the way to the old normals… We should be braced for a long-drawn-out and painful flight path back toward the old ratios we know.”
Grantham is not saying that a CAPE value of 23 is the new normal. He is saying that the market has acted as if 23 is the new normal for over 20 years now and that it may continue to act as if 23 is the new normal for some time to come. But he is also saying that a CAPE value of 16 remains the true normal and that we will be getting there eventually. And, most importantly, he is saying that the long delay that we have experienced in getting back to truly normal prices has not been a boon to investors. It has hurt us. We would all be better off if insanely high prices had not become so sticky. He observes that: “What was quite surprising to me in this work, though, was how damaging even this reduced regression rate would be to the imputed returns of the S&P 500: 2.7% real per year for 20 years, a rate bound to break the hearts of many corporate and public pension fund officers.”
My guess is you wrote this in order to cover yourself on your failed predictions of a market crash. All you needed to do is write an article titled “I was wrong”.
I didn’t write it to cover myself. I wrote it because I write about Valuation-Informed Indexing and because I see the length of time that very high prices have remained in effect as the biggest reason to doubt whether Valuation-Informed Indexing will work in today’s environment.
I believe that it will. I remain an enthusiastic promoter of the Valuation-Informed Indexing concept. But I want people to know the other side of the story. And the reality is that we have remained at very high prices for much longer this time than in any earlier bull/bear cycle in U.S. history.
I don’t think that I was wrong. But that of course remains a live possibility. It is my view that the length of time that we have remained at high prices is the biggest piece of evidence suggesting that I might be wrong. If I were on your side of the table, this is the point on which I would be focused.
My best wishes to you.
Wrongo (But Not Really!) Rob
Years ago, when you were asked about a crash, you gave a date and said that if the crash didn’t happen by then, people should question VII. Your multitude of predictions, including that one have failed, and now we are many years beyond that point.
People that are your age, that would have followed your advice, would experienced failed retirements. Don’t you think you should, at the minimum, issue an apology?
“It is my view that the length of time that re have remained at high prices is the biggest piece of evidence suggesting that I might be wrong. ”
Might? I think you now realized you have been wrong all this time. It is time for you to give your “I was wrong” speech.
Years ago, when you were asked about a crash, you gave a date and said that if the crash didn’t happen by then, people should question VII. Your multitude of predictions, including that one have failed, and now we are many years beyond that point.
People that are your age, that would have followed your advice, would experienced failed retirements. Don’t you think you should, at the minimum, issue an apology?
Everyone should question Valuation-Informed Indexing. I stand by that one 100 percent.
Everyone should also question Buy-and-Hold. I stand by that one 100 percent too.
It is by questioning our ideas and the ideas of others that we learn. And learning is the one true free lunch in this world. So I am a big-time advocate.
I don’t think i should offer any apologies. Because I have always said that people shouldn’t believe in Valuations-Informed Indexing just because I advocate it. I have always said that anyone who does that has a screw loose. And because I have raised a lot of good questions about Buy-and-Hold. Which is good for Buy-and-Hold. Those questions can either cause Buy-and-Holders to make needed adjustments, which would be a plus. Or it can cause Buy-and-Holders to come to a stronger belief in Buy-and-Hold because they have seen it survive more challenges, which would also be a plus.
So there is nothing to apologize for. Asking questions is a good thing for everyone concerned. I am here to help. So I ask questions. I ask the hardest questions that I can think of. And I offer no apologies whatsoever for doing so.
It is your best friends who challenge you with questions about your beliefs, Anonymous. True fact.
Or so Rob Bennett sincerely believes, in any event.
Rob
Might? I think you now realized you have been wrong all this time. It is time for you to give your “I was wrong” speech.
I don’t think that I was wrong. But I do think that everyone needs to know that prices have stayed high much longer than Rob Bennett or Robert Shiller or Jeremy Grantham or anyone else who believes that valuations matter once thought was possible.
Rob
“So there is nothing to apologize for.”
But you were wrong time and again. If anyone your age followed your advice, they would have wrecked their retirement. You owe people a big apology.
We don’t agree, Anonymous.
I wish you all good things.
Non-Apologetic Rob
Sounds like fraud to me. Sounds like you have built up a big black mountain of deceit.
Yeah. yeah.
Rob
“We don’t agree, Anonymous.”
There is nothing to agree upon. You told people that their stock was going to crash. It didn’t. You were wrong.
Okay.
My best wishes to you.
Rob