Yesterday’s blog entry reported on an e-mail sent by academic research Wade Pfau to me on January 16, 2011. My response is set forth below.
Wade:
Your last sentence is the amazing thing. I cannot get over this. Shiller’s book was very well received and it has been out for over 10 years. But I have not been able to find anyone who has made a serious effort to explore the practical strategic implications of Shiller’s work. It’s just been sitting there waiting for someone to jump on it.
The subtitle of the paperback version of Shiller’s book is: “The National Bestseller That Revolutionized the Way We Think About the Stock Market.” So it should not be a surprise to anyone that agreement with these ideas leads to the adoption of new strategies.
In fairness, this didn’t hit me either for a long time. I just kept drilling in different areas and then one day it hit me that the common thread was that everything I did was an attempt to identify strategic implications of Shiller’s findings. The reason this is controversial is that no one has done this before. People want to see it approved by experts before they go with it. Somebody needs to go first to get the ball rolling.
I do not have the ability to do research and have no interest in developing that ability. My aim is to be the journalist who tells the story of the shift to the new model and who explains to the typical middle-class investor what the research that
will be done means for him or her. I need to have people do the research so that I can demonstrate to readers that experts have signed off on all this.
It’s an exceedingly odd story. But that’s indeed where things stand, so far as I am able to figure all this out.
Rob
what says
Doesn’t seem odd to me. Taking action on Shiller’s work might not pay off for 10-20 years. Humans are not equipped to withstand relative under performance for those kinds of time frames.
Rob says
Taking action on Shiller’s work might not pay off for 10-20 years.
In terms of dollars in your portfolio account, what you are saying is so, What. However, in terms of risk-adjusted performance, you begin reaping the benefits of a valuation-informed strategy on the first day you follow it.
I any event, I do find it exceedingly odd that we do not have thousands of businesses today serving the needs of those who would like to follow a research-based strategy. I know from my interactions with middle-class investors that there are millions who would like to earn higher returns at reduced risk and who would like to be able to retire years sooner. We are talking about putting hundreds of thousands of dollars in people’s pockets over the course of an investing lifetime. It would seem to me that there would be a lot of money to be made creating materials and tools aimed at helping people do that.
My view is that it is an historical accident that we don’t have thousands of such businesses and web sites in place today. The problem is that the historical data cannot say two opposite things. So long as a society we pretend that it supports Buy-and-Hold, a true research-backed approach cannot be promoted because it makes the Buy-and-Holders anxious to know that their strategy is in reality the opposite of the strategy that the research recommends. Had Shiller published his research in 1971 rather than 1981, I believe that we would all be Valuation-Informed Indexers today and that there never would have been a peep of controversy about it. I believe that we all want to achieve good results with the money we invest to finance our retirements.
Also, please understand that, if we all felt free to promote research-backed strategies, no one would have to wait 10 years to see a payoff in their portfolio accounts. If millions of people came to learn the realities of stock investing, we would never again see massive levels of overvaluation or undervaluation. We would have a far more stable market and a more stable economy too. We all would see steady gains in our portfolios rather than the crazy ups and downs that are characteristic of stock performance in times when Buy-and-Hold strategies become popular. The 10-year delay to which you are making reference is a function of the intense investor emotionalism that comes to dominate all investing choices when large numbers of investors come to believe that it is not necessary to consider price when buying stocks. There would be no such emotionalism in a world in which we permitted honest reports of what the academic research says re these matters.
In any event, I am grateful for you taking time out of your day to share your thoughts with us. I of course wish you the best of luck regardless of what investment strategy you elect to pursue.
Rob
arty says
If there are money managers using PE 10 as a foundation of their allocation strategy it is not realistic to expect folks would blab about it— unless they are also doing tons of other variable selections (see Hussman and Grantham) or are trolling openly for clients.
We know about those two guys for one reason only—they run FUNDS whereby their supportive literature is meant to show how bright they are to their current and prospective clients who will buy their fund. Personally, I think they are both “too smart by half” and would be better off without all that other stuff (guesswork) that only drives up the fund costs. But simplicity doesn’t market well; it just works!
I know about a dozen money managers and know how they trade. None use PE/10 (many aren’t aware of it, sadly, as they told me so) and most use Kentucky Windage married to an attractive salesman personality.
Shiller won’t talk about implementation as he is afraid to do so (doesn’t want the blame if someone loses money based on his comments) and he seems a shy type anyway, who hedges so often that his public comments are nearly useless. Forget him as being a leader in implementation. He’s has already given what is needed in data.
It is not always up to the creators to figure out every nuance. All science is overwhelmingly cumulative. But unless they are academics exploring it, if it is actually being used to make real money, they won’t give it away in books or programs.
And because it takes patience to reap the rewards, PE 10 is likely not used by many money managers who must satisfy clients with outperformance—today. (WHAT is correct on that point, as Grantham has also mentioned this regarding the source of managerial FEAR of job loss; see his letter here: http://www.gmo.com/websitecontent/JGLetter_ALL_4-12.pdf)
But that doesn’t mean that those individuals willing to do the work to understand it can’t benefit from it. I pay attention to valuations but I don’t make frequent adjustments to account for them.
Rob says
WHAT is correct on that point
What correctly describes TODAY’S reality, Arty.
But what about tomorrow’s? Tomorrow is another day.
When I first became interested in frugality, there was no literature available. There was Tightwad Gazette and there was Your Money or Your Life. I used to read those two over and over again because there was nothing else out there. Today there are HUNDREDS of blogs promoting frugality on a daily basis.
The credit-card companies make money from people NOT being frugal. Yet the personal finance bloggers promote frugality all the same. Personal finance blogs are NOT required to just repeat whatever the corporate interests in the field put forward as money “advice.” We are free to tell people the realities. Herein lies the power of this new communications medium.
There is nothing to stop us from doing the same in the investing realm. We can report honestly and accurately what the research says. I believe that over time that will change the advice given by the corporate guys too. But, whether that happens or not, bloggers are free to report the realities.
I’m going to report the realities.
I don’t like all the friction. I feel that it serves no positive purpose. If there is way to rein it in, count me in. If there is not, then don’t. I am going to continue to report the realities in either event. That’s my job. That’s what I do. That’s not open to negotiation.
If the entire world follows me, that will make me happy. I think this is a huge advance. It would obviously make me happy to see the entire world embrace a huge advance.
If the entire world ignores me, that would make me sad. But you know that? Sometimes that’s the way the cookie crumbles. I don’t get to say what others do. Only others get to say what others do. So it’s on them.
I acknowledge that What is accurately describing how things have played out in the past. I don’t see the future being bound by the past. I think things can change. We have things available to us that we did not have available to us in the past. We have indexing. That’s huge. We have academic research. That’s huge. We have the Personal Fiannce Blogosphere. That’s huge.
I see good things happening, things that have never happened before. But I have no objection to people saying that they don’t see those things happening because they have never happened before. That’s a different perspective. Perhaps I am too optimistic and too idealistic. I have been wrong before and it could be that it’s happening again. If it were, I would in all likelihood be the last to know.
That said, I AM optimistic and idealistic. I do think that huge advances forward are possible and I do think that we are on the verge of achieving one today. It is my belief that we are on the 99-yard line re this thing.
We’ll see.
Rob
arty says
What WHAT is saying (and Grantham, to give some gravitas to the suggestion) is the reality through which change must force. It will take some time–and greater market plummets–to challenge the present reality, so that it becomes obvious to all the current managed approach does not serve.
But that has been forever thus—and in many fields— with any great improvements. Great upheavals are often necessary for great changes.
Rob Bennett says
It will take some time–and greater market plummets–to challenge the present reality, so that it becomes obvious to all the current managed approach does not serve.
We’re already in an economic crisis, Arty.
If we wait until we are in the Second Great Depression to speak up, it may be that there will have already been so much damage done to confidence in our political system that things will spiral out of control.
There have been thousands of community members who have expressed a desire that honest posting be permitted. That translates into millions of middle-class investors who possess such a desire.
We all should be working together to make good things happen by the close of business today.
That’s my sincere take.
Rob
Rob Bennett says
Will it be easier for John Bogle to say the Three Magic Words after we are in the Second Great Depression?
It won’t be. It will be harder.
The easiest time for him to have said them was July 2005, when I began posting to the Vanguard Diehards board.
It’s gotten harder for him every day since.
The easiest time for him to say them of the days still available to him in which to say them is today. It will be a bit harder tomorrow.
It can never get easier. It can only get harder.
Once we see that, it seems to me that we all should be doing all we can to make it as easy as possible for him.
That’s certainly my intent, in any event. I care about the guy. I think we all should. He made a lot of important contributions. We wouldn’t be where we are today but for his efforts.
Rob
what says
i have a feeling rob bennett needs more ‘caring’ than john bogle. i would spend more time on that if i were you.
Rob says
We all need a whole big bunch of caring, What. I think it might be that What is at this moment in time more in need of caring (especially from What!) that EITHER John Bogle or Rob Bennett.
John Bogle wouldn’t be associating with the sorts of individuals who have put up posts in “defense” of Lindauer and Greaney if he were not in a very dark place. So we know with certainty that he is in need of more caring.
Rob Bennett fears for what is happening to his country as more businesses fail and more people are thrown out of work as a result of the Buy-and-Hold Crisis. All of the wonderful insights he has put forward over the past 10 years amount to nothing if the economic and political system he loves goes under. So we know with certainty that he is in need of more caring too.
We know that What is is need of more caring because we see the heavy doses of hate and anger and contempt that come through in nearly ever post he puts forward nowadays. What needs enough caring to help him understand that we are all in this together, that we all want the same things, and that there is no shame in making a mistake about an investing question, that the shame comes only in the attempt to deny the mistake and cover it up.
Will we all someday soon get the caring we require?
That’s my bet.
But I have no crystal ball, What. I don’t have magic powers that let me see into the future. We’re all going to have to wait and see. That’s the drama of the thing.
You have my wishes that you experience the best of luck in all your future endeavors in any event, my long-time, brutally abusive and self-hating friend.
Rob
what says
Thank you for making my point so clearly, albeit not concisely.
Rob says
Fair enough, What.
My best wishes to you and yours.
Rob