A Rich Life

“The Biggest Mental Block We Face Is the Idea That ‘Timing Doesn’t Work.’ “

Rob — Fri, 03 Sep 2010 12:06:57 +0000

Recent blog entries have set forth the texts of e-mails between a community member named “Larry” and me. Set forth below is the text of an e-mail that I sent to Larry on November 11, 2009.

Larry:

Thanks for the update.

I share your thinking on both aspects of the Hedge Fund question. Yes, there is a better understanding of the valuations topic among those who promote hedge funds (Easterling and John Mauldin are active here). But I too am skeptical of hedge funds, especially for the average person.

To me, the key is getting the word out to the typical middle-class investors. It is when the middle class dramatically overinvests in stocks that we see destruction to our economic and political systems. One big frustration that I feel that I come up against again and again is a compartmentalization of concerns.

People who care about economic and political issues tend to tune out investing discussions and people who care about investing tend to tune our economic and political concerns. All these areas overlap in the stock market. When the middle-class loses large portions of their life savings in the market, damage is done to the economy and to public confidence in our political leaders. I see these issues as connected. But I don’t know of too many others who approach these questions in an integrated way.

I am of course glad to hear that you are hearing a positive reaction to the calculator. I have both a positive and a negative reaction to your finding that it helps to promote the calculator as an asset allocation tool. That’s certainly a fair way to describe the calculator, and it is of course a good idea to go with what works.

However, I also believe that it is critical to get out the message that long-term timing works and is essential for long-term investing success. The biggest mental block we face is the idea that “timing doesn’t work.” If it were not for widespread belief in this idea, I don’t think that there ever would have been any objections to any of this. It all makes perfect sense.

But people have a really hard time accepting that timing works. So I can see how it might help to promote the calculator as an asset allocation tool. But I personally believe the message that timing always works is an important one (the other way of saying it is that paying attention to the price you pay for something always works).

I look forward to seeing your chart.

Rob

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“The Key Is Explaining That Value-Informed Indexing Is a Tool for Asset Allocation, Not Market Timing”

Rob — Thu, 02 Sep 2010 12:58:59 +0000

Recent blog entries have reported on my correspondence with a community member named “Larry.” Set forth below is the text of an e-mail that Larry sent me on November 4, 2009, and one that he sent me on November 11, 2009.

Rob,

Thanks for the information. I will do whatever I can to help from this point forward. I may even start a site myself and link to your site. My mind is spinning with positive ways to get the word out.

Rob,

I just wanted to check in with you.

I presented the valuation index approach to some friends and influential acquaintances this week and they all think it makes sense. One of the individuals follows Ed Easterling’s writings. I’m also finding that those in the Hedge Fund world have an understanding of valuations and index investing. I’m not sure if that is good or bad thing since I’m not a big fan of Hedge funds.

However, I think the valuation approach makes a lot of sense to the middle class investor. I’ve been testing the calculator with people in my network. The response is way positive. The key at least for me is explaining that the P/E 10 and valuation informed investing is a tool for asset allocation not market timing. I have a friend that significantly reduced their exposure to stocks based on the return calculator as an asset allocation tool.

I also came up with a different way of presenting valuation investing. I call it “The Index Fund Movement Strategy”, and people seem to get it. When the P/E ratio is high, Stocks generally begin to die. Therefore you reduce your allocation of stock index funds e.g., the S&P 500. When the P/E ratio is low, Stocks generally begin to grow. Therefore, you increase the index fund stock allocation portion of your portfolio. I am also working on a simple chart that shows this concept graphically and it’s pretty cool.

Have a great week and keep the faith.

Larry

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“This Is So Big That Our Brains Are Not Capable of Taking It In All At Once”

Rob — Wed, 01 Sep 2010 12:39:34 +0000

Recent blog entries have set forth the texts of e-mail correspondence between a community member named “Larry” and me. Set forth below is one that Larry sent on November 4, 2009, and one that I sent in response that same day.

Rob,

I’m now a 100% believer. I am sure that you have this chart from Ed Easterling but it is awesome and supports your position on valuation investing.

http://www.crestmontresearch.com/pdfs/Stock%2020%20Yr%20Returns.pdf

I came across this on another site. I think I may be matching your passion on this subject!

Larry:

That’s good news.

Yes, Ed Easterling puts out fine stuff. He came out very hard on the errors in the Old School SWR studies in an article at his site, saying that many people will be spending their declining years working as greeters in WalMart because of the demonstrably false retirement-planning claims.

Several years back, John Russell and I invited Ed to a special event at the SWR Research Group board at which he fielded questions from us in real time for about an hour or so. He had agreed to field questions from the entire community at the NoFeeBoards.com site, but the Goon element there insisted that the discussion be banned (John and I ignored the ban and were later removed from the site because we continued to post honestly).

I link to Ed’ s site in an article that I am announcing at my blog tomorrow. The article links to 20 studies showing that valuations affect long-term returns. I have not cleaned it up yet (there may some typos and I have not double-checked that all the links are in working order). But you might want to take a look at some of the research that is rarely played up by The Stock-Selling Industry:

http://www.passionsaving.com/buy-and-hold-is-dead-part-one.html

http://www.passionsaving.com/buy-and-hold-is-dead-part-two.html

What I believe you will find in coming days is that more and more implications of the reality that valuations affect long-term returns will hit you. The implications reach in a hundred directions. This is so big that our brains are not capable of taking it in all at once. I’ve been thinking about this stuff 24/7 for over seven years now and I still learn something new almost every day. I have recorded 184 podcasts of over an hour each exploring the implications and I have a list of over 100 more than I will record in coming days if time becomes available.

An important issue that comes up over and over again in this debate relates to how it is that human learn about a subject of interest. We are NOT logic machines. We do not learn solely by processing evidence. We have filters that “protect” us from information bits that “do not compute” according to our accepted paradigm. Learning is a gradual process. We take one idea in and acceptance of that one leads to another and acceptance of that one leads to yet another. It takes a lot of these small changes to bring about a paradigm shift in our thinking.

This is why I feel so strongly that we need to have a place on the internet where people interested in investing can congregate and post honestly. People are not going to come around to these ideas unless they are permitted to ask questions and bit by bit come to a new understanding. We have found thousands of people who are interested in doing so. The rub has been that there is a much smaller number that is determined to block the learning process and this group is about 50 times as intense as the group that favors the idea of allowing the learning process to mover forward.

Once we get to a point where honest posting is permitted, I believe that Passive Investing is finished. There is not one person alive who benefits from it (this includes The Stock-Selling Industry, in my assessment). It will all fall down once it can be questioned effectively. So my belief is that the key is figuring out a way that questions may be raised as part of reasoned and civil discussions.

Rob

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“Not One Pension Fund Manager Dares to Be the First One to Employ Accurate Numbers”

Rob — Tue, 31 Aug 2010 12:24:41 +0000

Yesterday’s blog entry set forth the text of an e-mail that I received from a community member named “Larry” on November 2, 2009. Set forth below is the text of an e-mail that I sent to Larry later that same day (there were several short e-mails sent between us prior to this one).

Larry:

I understand the need for pension funds to adopt more reasonable assumptions. If you think it helps, I think I could dig up an editorial that Rob Arnott wrote for the Financial Analysts Journal several years back highlighting this very concern.

They’re just not investing rationally. They are using assumptions that make no sense. For example, the most likely 10-year return on stocks in January 2000 was a negative 1 percent. They were using high positive numbers.

I view this as a political/competitive problem. If one pension fund manager used realistic numbers, he would be fired. That fund would be so far behind all the others in its assumed returns that it would not be tolerated. If ALL the pension funds used accurate numbers, all the pension fund managers would be greatly relieved. My guess is that they would feel much better about themselves if they could use accurate numbers.

But the process of getting from where we are to where we need to be is a political problem, in my assessment. It’s like trying to solve the deficit problem. There is universal agreement that it needs to be solved but it is in neither party’s interest to be the one that takes it on. We need some player at the table who is able to take the GENERAL interest into consideration.

This is what the economists call “The Tragedy of the Commons.” Every single pension fund benefits from using realistic numbers. But not one pension fund manager dares to be the first one to employ accurate numbers because it would make his fund look so much worse in relative terms. The problem is either solved across the board or not at all.

One thought is that there might be an opening to solve the problem when we go to valuation levels far below fair value (after the next crash). At that point, using accurate numbers would mean using numbers MORE favorable than the Passive Investing numbers rather than less so.

Once word gets out about how stock investing works, I believe that there would be enough books written about the Rational model that we would not go back to Passive. My concern is — Can our economic and political system bear another stock crash?

Rob

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“The P/E10 Tool Could Drastically Change How the Entire Investment Industry Operates & Measures Risk”

Rob — Mon, 30 Aug 2010 16:17:02 +0000

I’ve had extensive e-mail correspondence and one long telephone conversation with a community members named “Larry” about the need for us to get political leaders involved in speeding up the transition from Buy-and-Hold to Valuation-Informed Indexing. I will be setting forth the text of some of those e-mails here at the blog in days to come.

Set forth below is the text of an e-mail that Larry sent me on November 2, 2009, after a long telephone call on which we conversed about these matters in depth. Larry spent several weeks going over all the materials at my site and at John Walter Russell’s site prior to the telephone call.

Rob,

Thanks for talking with me on the phone.

I get how big this really is after talking with you yesterday. I think the P/E 10 is an incredible risk management tool that large institutional investors, actuaries, economic forecasters, individual investors, mutual fund managers, and financial planners should all use. Risk management is the one area that the people in these professions understand. The P/E 10 tool has the ability to drastically change how the entire investment industry operates and measures risk.

However, I still believe you need to include the qualitative analysis to back up the numbers in this tool to gain credibility. In my view, overcoming this ”last missing link” will take the P/E 10 into the mainstream of the investing world. I could not sleep last night because I believe this tool combined with quality macro economic analysis will change the course of investing in this country.

I am working on a conceptual model of how to take this mainstream. I also think that venture capitalist or angel funding is a very real possibility to fund a business that will promote this tool to the masses. I am more than happy to contact key venture capitalists and even Mr. Perot himself if we can package this properly.

Mr. Perot does not have any money in the market (or very little) presumably because of the risk involved. He has invested in bonds for many years. Suzy Orman takes the same approach as Mr. Perot. Almost all of her personal money is in bonds due to the risk in the market. There is a reason why banks don’t loan money to invest in the stock market!

Larry

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Beyond Buy-&-Hold #1 — How We Ruined Our Economy (& How We Can Rebuild It)

Rob — Fri, 27 Aug 2010 12:43:18 +0000

The Out of Your Rut site has posted the first entry in my new, weekly Beyond Buy-and-Hold column. It’s called How We Ruined Our Economy (and How We Can Rebuild It).

Juicy Excerpt: The reality is that we may end up someday looking back at this economic crisis as the best thing that ever happened to us. Many of us were not open to hearing the message for as long as Buy-and-Hold had not done too much damage, but now that we appear to be headed into the Second Great Depression, more and more people each day are opening their ears to talk of new investing ideas. That’s what we need! We need new ideas, better ideas, more enriching ideas, more life-affirming ideas!

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Daily Caller Article #9 — Meet the New Media, Same as the Old Media

Rob — Thu, 26 Aug 2010 12:20:37 +0000

The Daily Caller site has posted my opinion piece titled Meet the New Media, Same as the Old Media.

Juicy Excerpt: Established money bloggers blacklist up-and-coming bloggers who pose a threat to their dominance. Those who have nothing special to say are welcomed with open arms. It’s the ones who connect best with readers while questioning the line put forward by the “in-crowd” who get the cold shoulder (no links).

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VII #4 — The Stock Market Functions Unlike Any Other Market

Rob — Wed, 25 Aug 2010 11:58:07 +0000

I’ve posted Entry #4 in my Valuation-Informed Indexing column at the Value Walk site. It’s called The Stock Market Functions Unlike Any Other Market.

Juicy Excerpt: Fama was onto something huge when he developed the Efficient Market Theory. The theory is almost valid. He just tragically left out a link in the logic chain. The stock market functions unlike any other market. You cannot use the nominal market price as something real because it is not the product of a negotiation process for all the shares outstanding at a given time. You also need to consider the playing-around factor, the extent to which investors of the day have elected to make themselves feel good (or bad) about their financial circumstances by assigning a temporary price to stocks higher (or lower) than the one that would apply if the number were determined by making reference to real financial transactions.

Fama made a mistake and then Malkiel copied his mistake and then Bogle copied the mistakes of Malkiel and Fama. We are today as a result in a big mess. The idea of rationalizing the investing project was a wonderful one. But when you get a foundational point wrong,the analytical errors must be corrected or else all of the strategic recommendations developed from following the implications of the invalid foundational point will be in error.

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Investing: The New Rules #17 — Bogle on the Hot Seat

Rob — Tue, 24 Aug 2010 11:52:59 +0000

I’ve posted Entry #17 in my Investing: The New Rules column at the Death by 1,000 Papercuts site. It’s called Bogle on the Hot Seat.

Juicy Excerpt: I take particular exception to the suggestion that, because I have let Bogle know of mistakes he has made and asked that they be corrected, I somehow lack love and admiration and respect for the man. I see the reality as being entirely to the contrary. Yes Men are not showing affection and respect by agreeing with everything that a Big Shot says; their flattery is rooted in a selfish desire to take the easy path to success. I point out Bogle’s mistakes to him because of the respect and affection I feel for him. I deal with him in the manner in which I would want him to deal with me if the tables were turned.

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Daily Caller Article #8 — Conservatives Fall Into a Trap to Blame Obama for the Bad Economy

Rob — Mon, 23 Aug 2010 12:28:07 +0000

The Daily Caller site has posted my opinion piece entitled Conservatives Fall Into a Trap by Blaming Obama for the Bad Economy.

Juicy Excerpt: We haven’t been honest about the true cause of the economic crisis. We are all ashamed that we were taken in by what can fairly be called a Get Rich Quick approach to investing. Did anyone ever really believe that stock prices could go up as fast as they did in the late 1990s without there being a price to be paid somewhere down the road? It’s time to come clean. The alternative is to go along with the liberal mindset that says that only government matters.

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