The great thing about studying what investors say on discussion boards is that you learn about how things work in practice, not theory.
Investors have been told for 25 years now to follow buy-and-hold strategies. And they say they do. But do they really?
I’ve seen hundreds of comments indicating otherwise. One thing I’ve seen a lot of is a rigid adherence to the idea of buy-and-hold combined with an extremely loose understanding of what it involves in practice.
There are lots of investors out there who in 1999 believed with their entire minds, hearts and souls that owning the S&P500 and the NASDAQ forever was the essence of buy-and-hold. Then the idea became to own just the S&P500 forever. Then it was the S&P and value stocks. Then the S&P and REITS. Then the S&P and small caps. Then the S&P and a global index. Then the S&P and Emerging Markets. The idea seems to be growing of late that maybe it’s best to leave out the S&P altogether and just go with all the other possible slices and dices.
That ain’t buy-and-hold. The idea of buy-and-hold was to stick with a plan long enough to see if it can really pay off. Switching to a different Permanent Portfolio every six months or so doesn’t do the trick.
Investors are kidding themselves. They like the buy-and-hold idea, and for good reason. It is indeed important to stick with a plan long enough to give it a fair test. But the promoters of the buy-and-hold concept did a poor job of pointing out the pressures that those following it will feel to abandon it. As a result, most would-be buy-and-hold investors are unprepared for those pressures and have no idea how to respond to them other than to change their understanding of what constitutes buy-and-hold regularly enough to keep up with their changing desires to own different classes of stocks.
Buy-and-hold is a good idea. But the popular formulation of it is unrealistic. We need a new understanding of how buy-and-hold can work, one that stands a better chance of playing out well in the world of flesh-and-blood investors.
The problem is that buy-and-hold became popular during the longest and strongest bull market in U.S. history. People came to think that you could buy the S&P and forget about it. That of course can never work. When the S&P is selling at reasonable prices, it is a wonderful asset choice. When it is selling at the sorts of prices that apply today, it represents a dubious long-term value proposition.
If we could just say that, we could develop all sorts of strategies for following what are basically buy-and-hold strategies but that are a good bit less rigid than what many of the promoters of the concept have endorsed. Until we develop that freedom, many investors will feel that their hands are tied. It is taboo to change one’s stock allocation or one’s mix of asset classes. But it’s becoming increasingly clear that it is foolhardy not to make some changes in one’s portfolio when the investing environment changes dramatically.
Is it okay to make shifts in the makeup of your portfolio from time to time? Of course. It’s not only okay, it’s pretty much mandatory. None of us knows it all starting out. We learn over time. If we didn’t put what we learned into effect by changing the makeup of our portfolios, there wouldn’t be much point to learning, would there?
We need to be more up front about the changes we make and the reasons why we make them. Many investors have given up on the S&P500 in recent years. For good reason. The S&P is dangerously overvalued. We should learn from our mistaken belief of yesteryear that the S&P would always be as attractive a buy as it was back in the time when it was available at a far more reasonable price.
Buy-and-hold should be a tendency, a goal, a principle. When we make it a dogma, we switch onto the wrong track. We all need to make changes in our portfolio composition and in our stock allocation from time to time. We should discuss those changes openly and thereby learn lessons from the mistakes we made at earlier times.
Today’s Passion: The article entitled Basics of the New Buy-and-Hold provides a groundwork for the development of a new way of implementing this strategy.
Maybe you can comment on the other types of “Permanent Portfolios”. These come under the heading of Balanced Funds, Life Cycle funds and Target Retirement funds. More and more investors are choosing these type of “Permanent Portfolios” for their workplace retirement plans.
A good example is Vanguard’s Wellington fund. Started in 1929, it holds 65% stocks and 35% bonds. It’s a steady performer with only one losing year (2002) during the previous 10 years. Learn more at this link . . .
http://finance.yahoo.com/q/pm?s=VWELX
These come under the heading of Balanced Funds, Life Cycle funds and Target Retirement funds. More and more investors are choosing these type of “Permanent Portfolios” for their workplace retirement plans.
The concept makes sense and I understand the appeal. Lots of middle-class people are looking for a simple and sensible way to invest for retirement. These funds appear to provide that.
Do they provide it in reality?
Yes and no.
They are a better choice than a lot of the altneratives out there. In relative terms, they offer a good deal.
But I do not get the sense that the managers of these funds do a sufficient job of adjusting the funds’ stock allocations in response to valuation changes. There’s no good reason not to do so.
Take a look at the Scenario Surfer, Schroeder. Test some scenarios. Taking valuations into account generally provides investors with far larger portfolios at the end of 30 years. Having a larger portfolio permits earlier retirement. What’s the downside to being able to retire earlier?
I certainly have no particular beef with the types of funds you are mentioning. But I also certainly would like to see the managers of these funds taking valuations into account to a greater extent than they are today. And they also should educate the people who own shares in the funds as to why they are doing so. That’s a win/win/win.
Rob
A good example is Vanguard’s Wellington fund.
I don’t have time to check out the material at the link, Schroeder, although I am of course grateful to you for providing it for those who do have the time.
I have sentimental feelings about Wellington. That’s was one of my dad’s favorite funds. He was a big Vangurd guy (my dad was a big fan of the low-cost concept). I often say that it was reading John Bogle that got me started on the path I am on today. An argument could be made that it was my dad’s love of the Vanguard family of funds that got me reading Bogle. So there’s a sense in which it was my dad who got me on the path I am on today. That’s a nice way to think about it.
Wellington is one of the funds I was invested in when I took my money out of stocks back in 1996. I haven’t done any study of it in the years since. But it is certainly a fund that I would consider buying when prices come to the levels where they need to be for me to get back in stocks. I cannot speak with any authority on this topic. But I have good feelings about Wellington.
My dad would never steer me wrong, you know? There’s a whole big bunch of historical data showing that this is so.
There are some who refer to Bogle as “Saint Jack.” In that same spirit, I like to think of my dad as “Saint Dad.” I like to think that he’s got a laptop up in heaven and is pulling up the words that we are directing to each other as we post them. And he’s thinking: “Yeah, Wellington, that’s the one to go with, Rob.” So maybe I will, you know?
Prices have to come down a good bit first, though. Those nasty out-of-control bull markets mess up everything for everybody, even those who have made it all the way to heaven! Grrrr….
Rob
There are lots of investors out there who in 1999 believed with their entire minds, hearts and souls that owning the S&P500 and the NASDAQ forever was the essence of buy-and-hold. Then the idea became to own just the S&P500 forever. Then it was the S&P and value stocks. Then the S&P and REITS. Then the S&P and small caps. Then the S&P and a global index. Then the S&P and Emerging Markets. The idea seems to be growing of late that maybe it’s best to leave out the S&P altogether and just go with all the other possible slices and dices.
You are right about this.
If the efficient market hypothesis were correct, capitalization weighting of the entire market would be ideal. The S&P500 comes very close to this.
BUT the S&P500 has done lousy since 2000. Suddenly, everything else looks a whole lot better.
Buy and hold forever–or at least for a month. [sarcasm]
Have fun.
John Walter Russell
“I certainly have no particular beef with the types of funds you are mentioning. But I also certainly would like to see the managers of these funds taking valuations into account to a greater extent than they are today.”
I agree that the managers of the types of funds I mentioned do not take valuations into account. They clearly state the policy and objectives in the perspectus. So investors can have a good idea of what they are getting.
If an investor wishes to have their fund manager to take valuations into account, they can choose a different category called “Tactical Asset Allocation” fund. Vanguard has one such fund and I’m sure other fund families have theirs, too. Your readers can learn about Vanguard’s Asset Allocation fund at this link . . .
http://finance.yahoo.com/q/hl?s=VAAPX
If an investor wishes to have their fund manager to take valuations into account, they can choose a different category called “Tactical Asset Allocation” fund.
I haven’t looked at the link. But tactical asset allocation sounds like a bad idea to me. That sounds to me like short-term timing. I favor only long-term timing, which would properly be characterized as strategic asset allocation, not tactical asset allocation. The goal of long-term timing is to keep one’s risk level roughly contant (to Stay the Course in a meaningful way). Staying the Course is a strategic goal.
I agree with you that the investors in the funds you mentioned above understand what they are getting into; the fund managers do not claim that they are engaging in long-term timing. I would like to see an educational effort put forward to explain to investors why long-term timing is critical for those seeking to Stay the Course in a meaningful way.
Once a large number of investors becomes aware of the need for long-term timing, my guess is that the mutual fund companies will set up funds aimed at serving that need. We need to generate demand first. That’s why an educational effort (which I naturally would like to see begin in the Retire Early/Indexing communities) is so critical. Education comes first, demand follows from that, and the creation of the funds needed comes from that.
I am not aware of any fund managers that practice Valuation-Informed Indexing today. Those who want to follow this approach need to set things up for themselves. But I’m working on it, I’m working on it!
Rob
Hey, Rob,
Re-found your site and am listening to some podcasts. Good job.
Have you ever looked at the original *Permanent Portfolio* of Harry Browne (it is called such)? It takes into account *economic cycles* with 4 asset classes–each with 25% of the holdings:
•Stocks (prosperity)
•Gold (inflation and economic/political panic)
•Cash (safe haven buffer)
•Long-term bonds (deflation, flight to quality, and recession)
This concept originated from Harry’s book, “Fail Safe Investing”.
Harry’s portfolio strategy is explicated here by a devotee:
http://crawlingroad.com/blog/2008/12/18/the-permanent-portfolio-allocation/
Historical returns from 1972 (all asset classes and total PP returns) are here:
http://crawlingroad.com/blog/2008/12/22/permanent-portfolio-historical-returns/
Note: I think Harry’s concept is worth a look (far more so than some legendary, balanced or balanced/conservative funds) and may be particularly relative to your “This Month’s PP” thread. (Note that there exists an actual managed fund of this name (PRPFX), and it does well, but it has broken from the original concept, is costly, and is actively managed. But I’m looking more closely at the original Harry Browne concept, which is easy (and inexpensive) to implement with ETFs.)
Question: in your opinion, does Harry Browne’s strategy—based on an allocation dealing with economic cycles—permit true buy-and-hold (and just rebalance yearly)? He claims it does and while it may not produce stellar returns in prosperity, it produces good returns over various economic cycles—and has never gotten “killed” in 37 years; it is protection based, which is what your objective seems to be. After looking at the Harry’s concept and historical data, what do you see as the virtues and flaws in it given it is not a traditional stock-and-bonds based concept?
The PP is not a valuations-based strategy as its concept is so different from that which uses stocks as the primary means to acquire wealth.
This has also been discussed I several Boglehead threads, no doubt because Harry’s portfolio broke even in 2008!
Best,
Arty
Hi, Arty. It’s nice to hear from you.
Yes, I spent a good bit of time looking at Harry Browne’s ideas when I was putting together my plan. I read his books and I subscribed to his newsletter for a time. The Permanent Portfolio concept makes a great deal of theoretical sense to me.
Browne is trying to do that same thing that Bogle is trying to do — to make investing easy. Bogle makes it easy by saying to invest mostly in stocks and then just ignore valuations. I obviously don’t think that is the way to go. Browne is saying just invest in everything (stocks, yes, but not just stocks) and count on the fact that at least one of your asset classes will be doing well at all times and that will balance out those that are not. Browne favors greater diversification. He is trying to smooth out returns so that you don’t freak out during a stock crash.
The analytical question is — What is true diversification? Bogle claims to favor diversification. But he recommends a false diversification because he fails to consider valuations. If you ignore valuations, stocks look like an extremely good asset class. So you end up investing heavily in stocks. That works great during times of reasonable valuations. But it wipes you out at times of extreme overvaluation. So it never works in the long run.
Browne is taking the thinking a step further. He is saying that you need to go beyond just stocks and bonds to be truly diversified. That makes sense to me. There obviously are times when both stocks and bonds do badly.
I ultimately did not follow Browne’s approach. My problem was that I felt uncomfortable having 25 percent of my money in an asset class that was headed downward (stocks were insanely overpriced at the time) and another 25 percent in an asset class (gold) that does not produce regular income. I live on the earnings of my investments. It worried me that these four asset classes would not produce enough steady income.
I ended up going with TIPS and IBonds paying 3.5 percent real. My plan requires a return of 4 percent real, so that left me a little short for a few years. But I felt that I could make up for the small shortfall once stocks returned to fair value and were again paying a long-term annnualized return of 6 or 7 percent real. I would be behind for the years in which stocks remained at insane prices and then catch up and go ahead once prices returned to reasonable levels.
I think that the Browne approach is worth further analysis. I see theoretical appeal. I just wasn’t able to pull the trigger on it myself.
I see Valuation-informed Indexing as a different variation on the theme being explored by Bogle and Browne. I don’t think we today know all the pros and cons. I see Valuation-Informed Indexing as a huge advance over Passive Indexing. But it may be that the Browne approach or some other alternative will ultimately be shown to be superior to Valuation-Informed Indexing. I think we need to explore things in more depth with more people participating to figure that one out for sure.
Rob
Hey Rob,
Agreed with what you say about Browne’s concept, and hear your concerns regarding income and the other issues you mention. His allocation is jarring and fear-inspiring (all that Gold and LT bonds), but it does represent a sort of diversification not typically seen, with results not typically acquired. And tracking error regret will always be a behavioral problem with him—a potentially acceptable trade-off for an informed investor.
Judged by the “butcher’s bill” Browne has, done brilliantly from a risk/return viewpoint through various economic cycles since 72. One either pulls the trigger or not but I see his approach as being a reasonable alternative to the usual fare.
There is at least one well-known valuation-informed investor: John Hussman. I’m sure you have read his weekly Tuesday commentaries which use valuations as a principal measure–especially the sort of long-term valuations you mention. Hussman was accused of being a “permabear”. He also said, rightly, that valuations were high after the last crash (’02) and nobody listened!
Of course, Hussman also looks at “Market Action,” which is a shorter-term timing mechanism, and there you and he may differ. I mention Hussman only because he is big voice who relies heavily on long-term valuations.
Trouble with stock valuations is that they do have a large trading “range” of acceptable valuations (unlike TIPS, say, which yields tend to roam almost exclusively within a 1-4% band or tighter) but that is another point. Thus, if you heeded the halting message of “irrational exuberance” in 1995, you lost out on 4 more years of great returns—if you got out entirely. If you scaled back during that time, however, then you did OK and did not get crushed in the following bear. Still, tracking-error regret is clearly a possibility for less well-informed investors, as they sat with fewer stocks watching their neighbors get rich—temporarily.
One other point. While you attack the *traditional* implementation of passive investing, I see your method, if I understand it, as being largely “passive” since you do not use short-term market timing or asset class hopping, or “tinkerings”. You seem to recommend few equity alterations, since P/E 10 would require infrequent allocation changes.
Now, when you mention “stocks,” I don’t know if you mean exclusively a TSM fund (S&P 500 proxy), or recommend a broader diversification among all asset classes and geography. While that diversification matters for reasons of standard deviation, in panic, all classes *tend* to be highly correlated. Still, am unsure what you mean, allocation-wise, when you say “stocks.”
Now that stocks seem at “good” valuations—poised to deliver good long-term returns—what equity allocation do you see as reasonable with your method? Keep in mind also, that if the equity risk premium is favorable (higher expected returns), one actually needs fewer stocks (less risk) to get “acceptable” returns. It’s one of those counter-intuitive things. Now you may invest even more stocks, for even greater expected return, but the risks increase also.
Arty
if you heeded the halting message of “irrational exuberance” in 1995, you lost out on 4 more years of great returns
This is absolutely so. Valuation-Informed Indexing is a purely long-term strategy. It often provides poor short-term results.
While you attack the *traditional* implementation of passive investing, I see your method, if I understand it, as being largely “passive” since you do not use short-term market timing or asset class hopping, or “tinkerings”. You seem to recommend few equity alterations, since P/E 10 would require infrequent allocation changes.
That’s all so. VII is a generally passive approach. It is those circumstances in which it departs from the passive approach that make all the difference, however.
Still, am unsure what you mean, allocation-wise, when you say “stocks.”
I don’t take a position on this. There are all sorts of ways to go about it. The key is to understand that valuations make a difference and that you cannot get away with staying at the same stock allocation at all price levels. To go purely passive is a big mistake.
Now that stocks seem at “good” valuations—poised to deliver good long-term returns—what equity allocation do you see as reasonable with your method?
My personal view is that the typical middle-class worker might want to be at about 50 percent or 60 percent stocks today. We all need to adjust for personal circumstances.
Rob
“Fat Tails” and Risk Management
What Harry Browne’s portfolio concept did, in essence, was to remove the “fat tails” from the bell curve of returns. That means he controlled the *potential dispersion of returns* by choosing specific asset classes that had low correlations to each other. (Browne’s “premia” are based on economic circumstances–making him somewhat unique.) By cutting Fat Tails, he was willing to sacrifice achieving the highest expected returns for avoiding the worst outcomes—a choice most investors, who are risk-averse regardless of what they “say”, would take if they understood the ramifications and had greater education. Browne accomplished this with a *permanent* quartile allocation at low cost.
By contrast, Larry Swedroe’s portfolio (and one he recommends for some clients) has about 30% equities (highest risk/return equities like small value) and 70% fixed income chosen among the safest instruments like ST Treasuries, TIPS, CDS, etc.. His equities have far higher expected returns than a TSM fund which means he needs fewer of them to achieve “good” results–like a higher equity portfolio would, over time. But his far lower exposure to Beta (equities) means, like Browne, he sacrifices the best returns for avoiding the worst returns. Like Browne, he has tracking error to contend with. And he has the possibility that the equity risk premia he selected will not perform in future as it has in 70 years of past. Like Browne, the stated objective is to avoid horrendous years. Unlike Browne, Swedroe says this portfolio is not for everyone, only for those who understand the trade-offs and tracking error issues. LSwedroe uses low cost index funds.
When you break it down, your VII seeks to do the same thing as these portfolios—but via timing mechanisms–to reduce Fat Tail risk and preserve capital; if you don’t make as much in any one year, fine, providing losses are minimized. If any formula is used, it will likely overshoot or undershoot in some years. If an investor now puts 50-60% in equities now, as you suggest based on P/E 10 for the average investor, we may get 4 more years of bad returns. This would be the opposite of rational exuberance 1995-99, and shows that the equity risk premium always exists, regardless of valuations—and in both directions; that is, both valuations and ERP *always* matter.
Your strategy shifts the *quantity* of equities—the Beta—not the *type* of equities so exposure to Beta risk is paramount. Of course, the market may well rally sooner, and you were likely at low equity exposure the last year or two, so you have some “cushion”. This is why long-term strategies are the only ones that make sense.
It’s all about true risk management, to me—that means preservation is a priority. If you stand back far enough from the screen, there may be many ways to accomplish this that lead to similar outcomes over time. The question is which type of journey do you want to live through and how much time do you have? Me? I prefer the softer ride and recognize I may not live long enough to compensate for an horrendous period. The Browne and Swedroe approach can be fixed-allocation/permanent, and look at past returns to gauge future expected returns, as all “guess-timations” must do.
The VII looks at past returns of a broad market to establish P/E 10. But because the implementation can be diverse (how much are you in equities, when do you shift?, etc.) it seems more difficult to figure expected returns than the “set allocation” methods of those above. But it is impossible to say which is better, except I think I know alternatives that are worse!
Arty
It’s all about true risk management, to me—that means preservation is a priority. If you stand back far enough from the screen, there may be many ways to accomplish this that lead to similar outcomes over time.
I strongly agree. I certainly do not believe that VII is the only way to do this.
it is impossible to say which is better,
My hope is that we will see much more discussion in coming years of all sorts of alternatives. We will never know for certain which approach is best. But over time we will become better and better informed as to the various pros and cons.
The thing that holds us back is the idea that nothing other than pure passive works. It is the idea that this one model is “”scientific” and that that is true of nothing else that is causing all the trouble.
The “this is science and nothing else is” nonsense is a marketing claim. It’s shameful that lots of people who pose as disinterested analysts have lent their names to the support of marketing claims. People in the stock-selling industry who comment on various strategies need to spell out when they are offering genuine analysis and when they are engaged in a marketing push. There’s nothing more dangerous than mixing science with marketing. The combination is a very dangerous form of marketing.
Your main point is an important one, Arty. We are in the early days of exploration of new ideas. We don’t possess final answers today. We know that pure passive is not it. But we have lots and lots of exciting discussions ahead of us for many years to come.
Rob
Rob,
Do you need always to adjust your (stock) allocation in response to valuations? Let’s look at that with several different thoughts. Basically these thoughts are questions for you.
ALTERNATIVE INVESTMENTS
Let’s assume that some portfolio designs can be buy and hold (what you call “passive” and I call “buy and hold AND passive”)–forever. Let’s say, just for example, the Harry Browne portfolio has this potential due to its unusual conceptual design that does not rely on stocks—or any one asset class—to drive its returns. In the Markowitz sense, the HB portfolio is truly a “portfolio as a whole” concept (unlike the “complete” stocks/bonds portfolio typically tauted). Though there are no assurances go forward, the HB has had 37 years of good returns using its “anti-fat tail” approach. Other concepts that cut fat tail risk might also work. After you retire, you might switch to more of an income-producing portfolio.
So the HB portfolio might work–as is– because it is not “about stocks”. At least it would not be under the same valuations criticism you hold to the “traditional approach”, yes?
———–
TRADITIONAL RISK AND RETURN
Now, let’s look at a more traditional approach, which I think is what your VII is about, and where your critiques are directed. Here, what you posit, a priori regarding valuations is true. Price matters, and—over time—prices adjust (have adjusted, historically) to a mean. The question is, must you alter your stock percentage in response to valuations? Here, I think, the answer is, “it depends”.
First I would say that 2 principles hold even if they *seem* in conflict.
1. The Equity Risk Premium is *always* present regardless of valuations (but can be much higher or much lower).
2. Valuations matter, affecting 1.
If you are at high valuations (low ERP and high risk going forward) you face two choices to reach a given goal:
1. Reduce allocation (Beta) and reduce risk *and* reduce your potential for higher return (even with high valuations).
2. Let it ride (ala 1995) with all that this entails.
See, it depends on the goal, which subsumes both monetary need and personal risk profile. If your need for return is very high, and your willingness/ability for risk is equally high, you may actually need to retain a *higher* allocation to stocks—even at high valuations (at enormous risk, though for each passing month).
If you are at low valuations (high ERP), you face two choices to reach a given goal:
1. Recognize that a *lower* equity allocation may achieve the same (original) goal. This *must* be so because the ERP is higher. And Lower equity means lower risk (due to lower Beta exposure). So, one does not have to increase stock allocation due to the valuations change–it depends on goals and profiles.
2. Or you can increase stock allocation (what you suggest). But this incurs greater risk (Beta) *even though valuations are low.* The reason is that the ERP is *always* there—regardless of valuations. However, valuations matter, sometimes powerfully.
Having said that, I think *most* investors are actually risk averse. and if they understood this all, would usually opt for the more conservative approach at both valuation extremes.
So valuations is a tool that fits into a particular investor scenario. It must not be the only consideration. But it can help shape the decision. As you suggest at times, I don’t think it should be used to go *all in* or *all out* unless insane levels (2000) exist, and even then, some small exposure might be prudentt. Mostly, it is a tool for use at valuation extremes, in my view.
———-
ASSET CLASSES
This complicates things but…like it or not, asset classes matter too. At the height of tech bubble Growth stocks (that dominated the S&P) had an ERP around that of riskless T-Bills–or lower. But the Value premium was huge (especially Small Value). These premia matter also–just like the ERP over fixed income matters. If you accept the stock ERP you must accept the other two factors of premia–small and value–for they also exist over 70 years. It’s just that you can’t really time these unless at extremes (e.g., 2000). I’m not saying anything needs be done here. Just saying these matter also.
———-
LANGUAGE
Finally, it seems to me you are attacking a particular *type* of passive investing, not all types, yes? I say this because your own PE/10 strategy seems to utilize a passive approach–changing only when valuations shift in a gross sense. And this might be very rarely (once a year, or two years, or seven years), yes? Put another way, you, Rob, are applying a buy and hold and passive strategy that incorporates gross valuations (as distinct from the short-term variety and no portfolio tinkering, etc.).
I mention this only because, for me, there is a dissonance when you use the term “passive investing”. I know what you mean, I think, but you do it too. Just differently!
Arty
So the HB portfolio might work–as is– because it is not “about stocks”.
Yes, that’s right. Harry Browne is dealing with the same issue through another means. I don’t think there is any need to be concerned about valuations if you are following the Browne approach. In theory, you are already covered for all possibilities.
Good question.
Rob
The Equity Risk Premium is *always* present regardless of valuations (but can be much higher or much lower).
We disagree re this one, Arty.
At the top of the bubble, the most likely annualized 10-year return (as per The Stock-Return Predictor) was a negative 1 percent real. The guaranteed 10-year return on TIPS was a positive 4 percent real. That’s a difference of 5 percent real each year. That’s a huge negative risk “premium.” That’s a big risk penalty.
The risk premium concept follows from the idea that investors are collectively rational (the Efficient Market Theory). There should be a risk premium. People should be compensated for taking on the risks inherent in owning equities. People should demand an equity risk premium.
The trouble with the theory is — they don’t!
Investing is 70 percent an emotional endeavor. People are perfectly willing and happy to invest massively in stocks at times when stocks are providing a negative long-term return. Rationality doesn’t come into it.
I’ve recorded a podcast entitled “The Equity Risk Premium Explained at Last! (Perhaps).” It’s #89. I post three per week. So it should be on the site in about five weeks.
Rob
Mostly, it is a tool for use at valuation extremes, in my view.
Yes, that’s so.
Valuations always effect long-term returns.
But there are two practical reasons why you cannot profitably make allocation shifts in response to valuation changes except when the valuation changes are significant:
1) Stocks generally offer very big returns (6.5 percent real). For it to make sense to lower your stock allocation, the penalty for being invested in overpriced stocks has to be greater than the reward that goes with being invested in stocks in general. At extreme valuation levels, the penalty attached to overvaluation is so great that timing “works”; and
2) Our valuation assessment tools are not precise enough to permit anything too fancy. P/E10 gives you a good idea of where stock prices will be in 10 years. But take a look at the range of possible outcomes at the 10-year mark. It is very broad. So, again, you cannot get too fancy.
As a practical matter, I believe that what you say above is so. However, I don’t want people to get the idea that there is something special about bubbles that causes valuations suddenly to begin making a difference when they didn’t at other times. Valuations are always affecting the result. There just is no practical means to take advantage of this reality until prices get very much out of line.
This is another important point you are making here, Arty. You understand this stuff well.
Rob
asset classes matter too
I agree.
The reason why I don’t pay much attention to the asset class question is that I am primarily concerned with helping the typical middle-class investor, who is looking for something simple. Adding in considerations that deal with picking different asset classes complicates things.
It’s not at all “wrong” to look at these questions. I’d love to see other people look at them. I just don’t give the question much focus because I see it as the #1 priority to help the typical investor and the typical investor wants a way to keep it simple (this is what Bogle was seeking to provide).
You don’t need to study lots of different assets classes to do fine. You might do a bit better if you did. But it’s not a biggie. You can do fine with a broad stock index, a good alternative to stocks for when the long-term value proposition for stocks is poor and an understanding of how valuations affect long-term returns.
Rob
And this might be very rarely (once a year, or two years, or seven years), yes?
There’s only been a need for two allocation changes (in 1995 and in late 2008) over the past 34 years.
When I use the Scenario Surfer, I usually make an allocation change every 8 to 10 years on average.
Allocation shifts are rare (but critical) under this approach.
Rob
Finally, it seems to me you are attacking a particular *type* of passive investing, not all types, yes?
I’m attacking the dogmatism that says that timing never works. Most forms of timing that people engage in are a mistake, in my view. But there are circumstances in which timing is critical to long-term success.
That’s it.
It shouldn’t be so controversial.
Rob
for me, there is a dissonance when you use the term “passive investing”.
I wish there was better terminology available to me.
I looked up “Passive Investing” on Wikipedia and my recollection is that the suggestion was that Passive Investing is indexing. I love indexing! So I obviously don’t want to be viewed as a critic of indexing.
The problem is that people associate Passive Investing with Bogle and he mixed a bunch of concepts together in a package that some call indexing and that some call Passive Investing and that some call Bogleheadism and so on.
What makes it confusing is that I love most of what Bogle says. I am his biggest fan. I don’t think most people realize today how far-reaching his ideas are. But I believe that he got one point terribly, terribly wrong. He is wrong to say that timing never works. Timing is often required. That one mistake has so far poisoned all the good he has done. I hope that we can turn that around in coming days.
I settled on the term “Passive Investing” as being the thing I oppose because the stock allocation is the thing that Passive Investors are “passive” about. I am saying that investors must from time to time change their stock allocations. They don’t need to do this often. But they absolutely must do it to have any realistic hopes of long-term investing success.
Take the “Passive” out of “Passive Investing” and you’ve got a winner!
Rob
Rob,
The ERP at the time of 1995 was small. But it clearly existed; you had 4 more years of great returns.
Now, by 2000 it was still there just very small til it popped. But that valuation level was extremely rare. I’m talking more about general concepts. For the most part, the ERP exists–though to *greatly varying degrees*. This is a tough one to do via posting, but I don’t think that 2000 was a reasonable time to be retaining one’s equity allocation–it was a “bad” time. But 1995 was bad too, yes? Clearly the ERP existed. If you jumped ship entirely you missed 4 years of stellar returns.
It’s just in hindsight that we know 2000 was the worst! Stocks do have a large natural “range”, unlike TIPS, which are constrained to mostly a 1-4% yield range. From a valuations point we agree. And from an ERP view we largely agree.
One thing again, a high ERP (which exists *because of low valuations*) can also mean one can actually *lower* their stock allocation (and therefore risk) to achieve a stated goal. Counterintuitive but makes sense, no?
Hmmmm I think you may be conflating the EMH with other things. EMT has to do about information the market knows and the ability (inability) to exploit *perceived* innefficiencies. There is very little evidence–none really–that this exploitation can be done effectively. I see the EMH as different from views on *long-term* valuations. I also see it as different than the ERP. If there was no risk, there’d be no premium. Not sure we are talking about the same things, though we do agree on valuations mattering. Again, a tough one to do via postings, as we may be agreeing more than disagreeing but not realize it.
I agree that the herd theory (emotion) means that more investors are going out of the market when valuations favor–like now–and then go “get me in at any price” when valuations are high.
I also agree that not all timing is not the same (for me, the essence of the EMH vs long-term valuations).
And I agree the dogma you mention has become a cult where reasonable voices are silenced. You’ll love this though: When Larry Swedroe says “valuations matter” at the Bogleheads board, (he is certainly right, BTW) nobody is throwing him off the forum! They like their helpful “celebrities” there. And the mods don’t challenge them directly–their knowledge base is decidedly inferior. In fact, did you know Swedroe has vocally exploded several Bogle errors (outright mistakes), which despite Larry’s hard evidence as support, keep getting parrotted by Taylor?!
I see the problem with your passive terminology, Rob, because you are as passive as it gets, almost! But be careful. Indexing is passive. But passive investing is not necessarily indexing. DFA, for example, has created a different type of “indexing” using built-in efficiency screens and such, and I think other index funds are slowly following. DFA is pretty passive in philosophy. And it is clear you support indexing, to me at least.
Wikepedia has its problems, BTW, so be careful there too.
I understand why you focus on the Broad Market Index (TSM). Actually, so did Harry Browne. And it works better with your strategy and also with his. Keeps it simple, easier to implement the gross strategies.
I don’t yet have a better phraseology for you. I’ll think on it. All I am saying, as a new listener, is that you should probably explicate the differences more to the point of redundancy, since you are very much passive! Indeed more than Bogle since he auto-shifts his bond ratio based on age–another issue entirely…
Maybe “Buy and Hold” says it better, for me. But this is a nit-nack something to think about… I know what you *mean*.
Back to Larry Swedroe. He is a passive investor. He believes in buy and hold and not short-term timing. But he uses valuations to control risks. Certainly long term ones. But also with TIPS via yields (valuations). Huh? Now what?! You might find this very funny if you have read those discussions the last 2 years on Bogleheads. I think Larry is quite informed, BTW, but you need to read *all* of what he says.
Anyway, entirely on board with what you think on Bogle, indexing, etc. That comes across well, I think, to anyone who is capable of truly listening. Cultists (the “high priests”) can not by definition do that. You know this. But times like these have curative powers, yes?! And there are souls to reach who are, as yet, “non-robe” wearing disciples. That is your audience.
“Fear, is useful.”
Good stuff…
Arty
The ERP at the time of 1995 was small. But it clearly existed; you had 4 more years of great returns.
I believe that what matters is the long-term, Arty. I don’t view it as a “premium” to be ahead for a few years and then be down for the long term.
Rob
It’s just in hindsight that we know 2000 was the worst!
You have to think in terms of probabilities.
We knew in advance that the probabilities were very bad in 1995 and even worse in 2000.
We don’t know the probabilities only in hindsight. We know the probabilities in advance.
I would say that any time the probabilities are against you, there is no “premium” associated with being in stocks. Whenever the probabilities associated with owning stocks are worse than the probabilities associated with safe asset classes, there is a penalty for taking on the risks of owning stocks.
Rob
one can actually *lower* their stock allocation (and therefore risk) to achieve a stated goal. Counterintuitive but makes sense, no?
If I am reading you right, your question is — are there times when you can obtain higher returns by taking on less risk?
If that’s the question, my answer is “yes.”
This is the beauty of Valuation-Informed Indexing. You lower your risk, you increase your return. It is the proverbial “free lunch.”
Rob
There is very little evidence–none really–that this exploitation can be done effectively. I see the EMH as different from views on *long-term* valuations.
I say that, if the market were efficient, both undervaluation and overvaluation would be impossible.
If the market processed all information bits properly, prices would be self-regulating. High prices would cause people to sell stocks, and that would bring prices down.
It doesn’t work that way because of investor irrationality. People do not lower their stock allocations when the value proposition becomes poor. People are the market. If people are not rational, the market cannot be efficient.
Rob
did you know Swedroe has vocally exploded several Bogle errors (outright mistakes), which despite Larry’s hard evidence as support, keep getting parrotted by Taylor?!
I didn’t know about that one.
Larry has done good work on valuations questions. Larry and I don’t agree on everything. But he’s strong on the valuations question.
I recall someone saying that Larry was banned for a time a long time ago. I don’t know for sure that that’s so and I don’t know the details even if it is so.
It seems possible to me. He’s certainly not as dogmatic as some of the “leaders.”
Rob
you are as passive as it gets, almost!
That says it exactly.
But there’s a big difference between being pregnant and being almost pregnant and there’s a big difference between winning the World Series and almost winning the World Series and there’s a big difference between winning the lottery and almost winning the lottery.
The word “almost” covers a lot of territory in some circumstances.
Rob
All I am saying, as a new listener, is that you should probably explicate the differences more to the point of redundancy, since you are very much passive!
You’re making a valid point.
There’s a great risk of confusion if people are not clear on the basics.
The downside of saying things over and over again, is, as you suggest, that redundancy gets boring.
I go back and forth re how often I need to reiterate the basics.
Probably the rule I follow in practice is that, when I’ve said something so many times that I am boring myself to say it yet again, I figure it’s time to stop.
Rob
Back to Larry Swedroe. He is a passive investor. He believes in buy and hold and not short-term timing. But he uses valuations to control risks. Certainly long term ones. But also with TIPS via yields (valuations). Huh?
There are lots of people at the Bogleheads.org board who believe in what I am saying.
At the Vanguard Diehards board, there were hundreds.
Lots don’t dare to say it aloud. Of, if they do, they say it in some muted way and then drop it.
The thing that upsets the “leaders” is if you try to explore the implications of an effective strategy, to offer people practical details on how to make it work. It’s at that point that they see it as a big threat.
People can say “I believe valuations matter” or something like that. But you can’t link to The Stock-Return Predictor. Once people have the Predictor, they are able to learn about a better way to invest. That’s Trouble.
Rob
times like these have curative powers, yes?!
It would be nice to see something good come out of all this human suffering.
Rob
And there are souls to reach who are, as yet, “non-robe” wearing disciples. That is your audience.
There are millions who are looking for a better way to invest, a way that truly makes sense. I have never had even a moment’s doubt about this.
The problem is that people need to be able to ask questions, to learn gradually, to take things in over time. People don’t adopt a new approach after hearing about it one time. Learning has to be achieved through a gradual process.
Check out the article entitled “Community Comments on The Great Safe Withdrawal Rate Debate” if you want to be reassured on this point. These comments are from the early days of the discussions. People were crazy to learn about this stuff. It’s a total myth that people are not interested. This is what the Goon posters would like people to think. There is no truth to it whatsoever.
It is true that people do not buy into it today. Like you, they need to ask lots of questions and think it over for a time and all that sort of thing. That’s all perfectly natural. People are interested in the ideas but not willing to commit to them without asking lots of questions. Good for them. That’s exactly the right attitude. I applaud them for that.
People are not dumb. People just have a hard time accepting that so many “experts” could have gotten it so terribly wrong. I can certainly understand the feeling. I feel that way myself. I find the entire thing amazing.
Rob
“You have to think in terms of probabilities.”
Agreed.
“I would say that any time the probabilities are against you, there is no “premium” associated with stocks.”
That depends on the valuations, and one’s individual response to what they mean. This is not a perfect science. In 1995 you still got 4 more great years–the premium clearly existed. With each year after, the odds changed, until it essentially vanished.
“Whenever the probabilities associated with owning stocks are worse than the probabilities associated with safe asset classes, there is a penalty for taking on the risks of owning stocks.”
I basically agree. And, as a conservative investor, and newly informed, in retrospect, I may have reduced to a small % in 1995. But maybe emotions would have gotten the better of me. I wasn’t “in the game” then.
” If I am reading you right, your question is — are there times when you can obtain higher returns by taking on less risk?
If that’s the question, my answer is “yes.”
This is the beauty of Valuation-Informed Indexing. You lower your risk, you increase your return. It is the proverbial “free lunch.” ”
Not what I meant but I agree that over a lifetime, paying attention to valuations will *likely* mean more money in the end.
Here’s what I meant. And it is important. At today’s valuations, say an investor is 60% in equities. Now, assume today’s valuations were much more favorable than they already are (a much lower S&P, and therefore, a higher ERP). Then, to arrive at the same expected return/goal (say, for example, 10 years later), that investor can accomplish this with a lower % stock allocation, than in the previous (60%) circumstance. That is just how the numbers work. Higher *expected* return means you can accomplish a goal with a lower exposure than if the valuations were not as favorable. Is this clear now?
Now if your strategy-implementation puts you even more into equities at the lowest valuations, fine. But there are risks to that, obviously (event risks, stuff happens, etc). For *me*, I would not do that. But that’s not a judgment, just a choice.
We disagree on terms and usages, though, like EMH and ERP. Even as we may agree entirely on what *action* certain info is suggesting to us.
Regarding Larry, he posts almost exclusively at Bogleheads–by his own choice. He has entirely debunked Bogle’s paper on Value vs Growth and Small vs Large (“The Telltale Chart”), yet the same “talking points” keep being copied and pasted by Taylor to new posters. It’s a problem, really, because these new guys don’t get the correct info–just copied and pasted info that is sometimes stripped of context. This has huge implications for the vulnerable newbies. Also, Larry is big on the valuations issue, as you already know. It’s always funny when Larry comes out with that and he’s not trying to be funny–like an Alien invasion!
I caught up with some old posts of yours and Norstad and the older guys (on Diehards) but missed “living” that time, as you did. Only about 3 years ago I discovered indexing and Bogle. I found you shortly after I grasped those ideas, on a Google search specifically for *criticisms* of indexing and Bogle. I wanted to see contrary arguments. You were among the first hits. From the combined info I invested better.
I then found Hussman on Long-Term Valuations. He is a huge, popular voice in that regard, as I am sure you know. But, he is also a Market Action timer as he believes in that as a co-equal tool. I’m assuming you read many of Hussman’s weekly commentaries? Then I did tons of academic reading, and communication with Larry too. Then I found an old investor named Robert Gordon who used “Elliot Waves” for his long-term valuations/timing! So I ran the full spectrum.
I hope you are posting on Bogleheads, under some name at least. The valuations issue is important, and you have lots to say that can help on many topics. I don’t think you need to link to the PE/10 chart to make your points. I agree there are many, like me, just trying to figure it all out. Now, 2+ years later, I am far better informed, but a long way to go.
Arty
Rob,
Larry posted this is response to someone who said that stocks prices are less risky now due to valuations. Do you agree with Larry’s reasoning? If not, why?
Arty
“If stocks are less risky now then the prices would be lot higher because the ERP would be low.
The prices are low because the risks are very high.
Now expected returns are now high reflecting the high risks”
Do you agree with Larry’s reasoning? If not, why?
No. I mean no personal offense, but Larry is talking gibberish.
I think he’s sincere. What he is saying here is consistent with things he said to me in a conversation we had a few years back.
Larry is starting with an assumption that there is always a connection between risk and return. He understands well that high valuations bring low returns. But he also believes that in the idea of an equity risk premium. When you put those two beliefs together, you come up with gibberish.
Larry told me that since stocks were at their highest valuations and lowest returns ever at the top of the bubble, they must also have been at that time the safest they have ever been. Just the opposite is so. Stocks have never been as risky as they were at the top of the bubble.
The core problem is that he is starting with an assumption that stock investing is a 100 percent rational endeavor. All that he says follows if you believe that. There is no evidence anywhere that stock investing is 100 percent rational. All the evidence shows that stock investing is primarily emotional. Rationality enters in, but it rarely is dominant over the emotional factors.
To know how risky stocks are, you need to look at valuations. Stocks are far more risky at times of high valuations.
At the top of the bubble, stocks were extremely risky and offered a likely negative long-term return. Today, the long-term risk is much less and the long-term return is much greater.
Rob
This is not a perfect science. In 1995 you still got 4 more great years–the premium clearly existed.
It’s okay with me if you believe this, Arty. I just want to be sure you understand that I do not believe this. I do not see how being up for a few years and then being down for the long term translates into a “premium.” Anytime I am likely to be down for the long term I feel that I am suffering a penalty, not receiving a premium.
Valuation-Informed Indexing is a long-term strategy. Valuation-Informed Indexers don’t pay any attention to short-term results. It’s just not something that interests them.
Rob
a much lower S&P, and therefore, a higher ERP
Again, we don’t agree.
You are suggesting that lower valuations bring a higher risk premium. Risk is reduced at lower valuations. It does not make sense to say that the risk premium is greater when the risk is less.
The mistake is in thinking that risk is necessarily correlated with return. It can be. There are times when taking risk is rewarded with a greater return. There are also times when just the opposite is so — when the investor is penalized for taking on risk.
The only way to know which it is is to look at valuations, estimate your long-term return, and then compare that return with the return available with risk-free assets. When the return for stocks is less than the return available with risk-free assets, there is a risk penalty in place, not a risk premium.
Rob
Higher *expected* return means you can accomplish a goal with a lower exposure than if the valuations were not as favorable.
If valuations are lower and the likely long-term return higher, you can achieve your goal with less of a stock investment. That’s certainly so.
Rob
if your strategy-implementation puts you even more into equities at the lowest valuations, fine. But there are risks to that, obviously (event risks, stuff happens, etc). For *me*, I would not do that. But that’s not a judgment, just a choice.
I strongly agree that personal considerations need to come into play.
I would note that risk is less at lower valuations. There is still some risk to owning stocks even at low valuations. But risk diminishes as valuations drop.
Rob
We disagree on terms and usages, though, like EMH and ERP. Even as we may agree entirely on what *action* certain info is suggesting to us.
I think that’s a fair statement.
Rob
yet the same “talking points” keep being copied and pasted by Taylor to new posters.
This is standard operating procedure among the Big Shots there, I am afraid.
Rob
I hope you are posting on Bogleheads, under some name at least.
I am not.
I am happy to help out there if invited to do so.
I am not willing to post under a fake name.
I don’t believe that any poster should be required to post under a fake name. For people like me who have web sites, I see it as a plus if I use my real name because people interested in the ideas can check out the site for more information.
I have never posted anywhere under a fake name except for a few times at the Motley Fool as a joke. I created a persona who was even goonier than the goons to see how long it would take people to figure out that no one could really be that much over the top. I thought that was sort of funny and it didn’t disrupt any constructive conversations because the Goons were so dominate then that just about no one was engaging in fruitful discussions.
Rob
“The core problem is that he is starting with an assumption that stock investing is a 100 percent rational endeavor.
To know how risky stocks are, you need to look at valuations. Stocks are far more risky at times of high valuations.
At the top of the bubble, stocks were extremely risky and offered a likely negative long-term return. Today, the long-term risk is much less and the long-term return is much greater.”
OK, let me state Larry’s point another way–as I understand it– that incorporates the investor emotion (which emotion I’m sure he thinks exists).
You and I agree that the prospects for good long term returns based on today’s valuations are favorable, yes?
At the height of the bubble, the *perception* of going-forward risk was low for many people, (else there would not be a bubble); i.e., the *perception* in yet greater returns was high, because stocks had been soaring for years–no significant “event” had stemmed this rise, etc. And today, the *perception* is the opposite–risk *seems* high now–from an emotional standpoint.
Now, the perception may be because of the current “crisis,” or some other blameworthy “crisis” may have evolved from he eventual high valuations (which I think, you believe). Anyway, they are low for the same reasons they were formerly high–emotion. And that perception of risk (emotion) is a major player–maybe not all, but a lot.
—-
“I am not willing to post under a fake name.”
I respect that. Too bad you are not there. Would be nice if others posted here. You have important things to say.
Arty
the *perception* of going-forward risk was low for many people
Yes, now you’ve got it exactly.
Larry is telling people what the perception is, I am telling people what the reality is.
This is the difference between the Passive Investing model and the Rational Investing model. Passive Investing is a perception-rooted model. Rational Investing is a reality-rooted model.
This is why we have seen so many places that promote Passive Investing adopt a ban on honest posting. Permitting expressions of the realities hinders efforts to encourage false perceptions.
The question is — Should “experts” be encouraging our perceptions or discouraging our perceptions by focusing our attention on the realities?
I’m a reality guy all the way. I don’t say that I understand all the realities myself. I certainly do not think that is so. I say that I see it as the aim to uncover the realities. Sometimes you win, sometimes you lose. But I believe that we should be trying to reveal the realities, not to cover them up. That takes one down a very different path than the path taken by the Passive Investing enthusiasts.
Rob
You have important things to say.
Thanks for those kind words, Arty.
I agree that that board community would greatly benefit from hearing my voice (along with the many other voices that it hears, to be sure).
It’s not just that I would point out the errors in the stuff being put forward by Mel and Taylor and Larry and the other “leaders.” It’s that there are hundreds of others there who have grave doubts about the dogmas being pushed by these people, and, if they heard me giving voice to those doubts, they would be encouraged to express doubts of their own. You allow one person to post his sincere views, and the next thing you know you have two doing this, and then three and then four and then five. You wake up one morning not all that much further along the line and you have Mel and Taylor and Larry and all the others talking sense too. When we all post honestly, we all learn together. Permitting honest posting helps the Normals and the Goons in the end. Permit honest posting and time the Goons become Normals. Imagine!
It happens. You just need to trust the process enough to permit it to happen. People have bad in them and people also have good in them. We can talk ourselves out of this mess the same way we talked ourselves into it. It took 30 years of hearing people say how “scientific” Passive Investing was before we were able to get millions to “believe” in it. I don’t think it’s going to take 30 years to persuade people of the errors once we begin permitting them to be voiced. But I believe that the process we will use to get to a better place will be generally the same one. It won’t be one person who will come along with all the answers. It will be a community effort. I will say my part and then thousands of others will make their contributions and the end result will be the development of a far more effective and sensible and realistic model for understanding how stock investing works (one that may ultimately go by the name “Rational Investing” or one that may ultimately go by some other name.
Do you post over there, Arty?
If not, why not? You could go over there and put up some links to articles or podcasts or calculators from this site.
I’m not trying to get you into “trouble.” I think it would be a good thing to do. Maybe they will surprise us and permit a bit of honest posting on investing topics. Perhaps not. If not, what do you lose? You know that you gave it a try. You can come back and tell us how it worked out. You can always go back to lurk mode if it doesn’t work out.
If everyone who believed that the boards should be permitting honest posting did this, we would have solved this investing crisis before it happened. I understand that people don’t get paid to post on discussion boards and I understand that people don’t like being made the subjects of vicious smear campaigns. I get that loud and clear and I sympathize. The other side of the story is that our entire economy may well go over a cliff if we all don’t put our heads together and start taking some steps to get this train back on the tracks. It’s a community project. Each of us has a small role to play in getting things put right.
It’s not my intent to single you out, Arty. That message is intended for all listening in. In the event that you ever do give the idea a try, I hope you’ll come back and file a report here as to how things worked out.
Things have improved dramatically over there since the huge price crash. You never know for sure until you try!
Rob
“Do you post over there, Arty?
If not, why not? ”
“Things have improved dramatically over there since the huge price crash. ”
Rob,
Yeah, they have “improved”! :-).
I don’t post on any boards, though I read them. I exchange letters with individuals whose views interest me, and from whom I think I can learn.
With my own investing knowledge base being “small but in development” I prefer, to do it this way, right now. I also have to do so much with other boards related to my businesses that enough becomes enough. I don’t want this to become “work” also. I get far more out of coummunications like this. These 2 weeks I’ve been off work, so it helps me think things through.
I don’t get why this board has not been found by many others. Even obscure boards get populated. And this one has well thought out, and well-written, work.
I don’t want to make this about anyone in particular, but I believe Larry is very different from Taylor and Mel, say, and also Rick, and his knowledge base (on real and useful information) is vastly superior to theirs, especially the former two. Not knocking them, but Larry has run trading rooms, has done much to improve understanding in TIPS, is involved with investing research at core levels, and in my view, has great insight into this field. It was when Larry began freely talking about valuations (for me, 2 years after I had found your site, and he still talks on valuations), that I realized something was afoot. And he speaks a lot about investor emotions too. I know you have long histories with these men, but I just can’t lump the three of them together; there are too many huge differences.
What do you think of Hussman’s writings. He is likely your biggest supporter on long-term valuations, but does have that market action thing. Have you ever written to him? He might also be interested in your work, and he’s a “heavyweight” valuations guy.
We disagree on this, but I think your work should be prepared and submitted for peer-review. There are good people there too. That process may help you improve your work. And if you do get published, many more people will know about your work, if that is one of your goals, as it seems to be. And others may then build on it. It’s never science, per se, that is the problem. It is the people that use, misinterpret, or twist it to their own views (I see this in my exercise field all the time).
Arty
With my own investing knowledge base being “small but in development” I prefer, to do it this way, right now.
I understand. There are lots of people who feel this way. It’s actually one of the biggest problems we have facing us in trying to turn this thing around.
In most fields of human endeavor, people who spend a lot of time studying the matter in question know a good deal more than those who do not. “Newbies” defer to “experts.” Nothing could be more natural.
In investing, the usual rules get turned on their head. In investing, we got the fundamental premise (that the market is efficient) wrong. That has meant that all work done in this field from the 1970s forward has been gravely flawed. Our understanding of how investing works gets worse and worse and worse the more we try to “learn” through use of the flawed model.
So in this field the usual deference that Newbies grant to “Experts” hurts us. The Newbies often ask wonderful common-sense questions. They don’t know the details of what the studies say, obviously. But there’s an important sense in which they know a whole big bunch more than Bogle or Bernstein or Burns or Clements or Swedroe or whoever. They don’t believe all the flat-out crazy junk that these otherwise smart people have come to believe by reading all the books you have to read to become certified as an “expert” in this field. When all of the books are wrong, believing what they say sends you backwards, not forwards.
What we need is a Revolution of the Normals. It’s the “experts” who don’t know what they are talking about, but it’s the Normals who suffer the biggest financial hits; a good number of the “experts” have enough in excess assets that they are not really feeling that much pain in comparative terms. The Normals obviously see the benefit of learning how to invest effectively. But so far they have always deferred to the “experts.” The “experts” truly do not have a clue. Their entire lives are rooted in a belief in the Anti-Clue, the idea that the markets are efficient and that Passive Investing can work.
The big magazines and the big newspapers and the big web sites and this sort of thing have all advocated Passive Investing in the past. Many of them have quoted the “Experts” on numerous occasions. They’ve got a disincentive to report the things we have discovered in the Retire Early and Indexing discussion-board communities during the first seven years of our investing discussions.
My sense is that some of these places are open to reporting the realities if pressured to do so (Morningstar held back from banning honest posting at the Vanguard Diehards board for two years, despite numerous requests from the Big Shots there to do so). We need the Normals to get worked up enough over the losses they have suffered to be willing to send a few e-mail insisting (not asking) that honest posting be permitted.
Once we see that, it’s all downhill sledding. We’ve seen at all the boards that there’s a huge interest among the general public in learning the realities of stock investing; we all would like to see our retirement plans succeed. Once we have one place in which honest posting on safe withdrawal rates and other investing topics is permitted, I think that the idea is going to spread like wildfire. It will in not too much time be two places and then 20 and then 200 and then 2,000. That’s when the real fireworks (the good kind!) begin!
Rob
I don’t get why this board has not been found by many others.
Web sites are “discovered” by being put high in the rankings by Google.
Google uses links to determine which sites should be placed high in the rankings. Those that gets lots of ranks get placed high.
The Goon Central board (run by John Greaney, the author of one of the Old School safe-withdrawal-rate (SWR) studies) is a meeting place for people who want to be sure that no one posting honestly on the SWR topic can be heard on the internet. I have a long record of posting honestly on the SWR topic. So I am Public Enemy #1 at Goon Central.
When another site links to this site, someone from Goon Central goes over there, threatens the owner of the site, links to the Goon Cental board to make clear to him what sorts of things will be done to him if he ever again links to me or permits me to post at his site. This usually works. There are a few brave and good souls who are willing to stand up to the threats just on principle. But most people running web sites don’t feel that it is part of the job to have to tolerate threats to kill their wives and children or to destroy their businesses or to have tens of thousands of spam e-mails sent out under their names or to have thousands of links from porn sites to their sites aimed at leading Google to believe that their site is a porn site and all this sort of thing.
What would you do in these circumstances, Arty? Would you stand on principle? Or would you fold?
John Bogle folded. He saw the Campaign of Terror that Mel led against the Vanguard Diehards community. He reached inside and discovered that he didn’t possess the courage it takes to speak up. It’s the same with Bill Bernstein. It’s the same with Larry Swedroe. It’s the same with Scott Burns. It’s the same with Jonathan Clements. It’s the same with thousands and thousands of others.
The mistake at the root of the Passive Investing model has caused more human misery than any other mistake ever made in the history of personal finance. Would you like to be known as the person who brought that mistake to light? The first person of influence who stands up to the Goons is going to go down in history as the person who brought that mistake to light. I believe that someone is going to do it sooner or later. But given what I have seen over the past seven years, I cannot say anymore than I possess zero appreciation of why it is that a large number of generally good and smart people have been too afraid of what would happen to them to want to be the one to do the right thing.
If someone can figure out some way to save our economy from going over a cliff that doesn’t require us acknowledging that Passive Investing can never work in the real world and that it was a mistake to tell people that the most reckless retirement planning ideas imaginable are “100 percent safe,” I would be open to pursuing it. I have never been able to figure out how we can move forward into a very promising future (I believe that the Rational Investing model would usher in the golden age of middle-class investing) without first acknowledging what we got wrong in the past. So I just keep on doing what I do, urging people to take those steps that must be taken to turn something very, very, very bad into something very, very, very good.
My guess is that what we need is to suffer more pain. That’s going to sound heartless to some people. But the one thing that I have seen make a difference is the huge price crash. Yes, there is still a good bit of vicious opposition to honest posting on the realities of stock investing at the Bogleheads.org and Vanguard Diehards boards. But I have seen those boards both pre-crash and post-crash and I can tell you that both boards are far, far more honest today than they were pre-crash. The financial pain we have all suffered has made a big difference.
Once we get to the other side, we can make up the financial losses. I have a calculator coming out in a few weeks that will show people how they can be made whole from the losses they suffered in the crash (the gains that you are likely to experience over 30 years by making a shift to Rational Investing are enough in many cases to make up for the losses suffered in the crash).
So I don’t see the financial losses we have suffered as being all that big a deal (it’s not my intent here to minimize the very deep pain that many have suffered, just to put it into context). We NEED to experience this pain to overcome the power of the spell that our belief in Passive Investing has placed on us. Losing money is one thing. Losing our souls is something else. Passive Investing has robbed us of both.
I believe that we will all (Normals, Goons and “Experts” alike) eventually make it to the other side. You need to believe that to be able to wake up in the morning, you know? My feeling is that I just need to be sure to do whatever I can do to make it happen and also not to overreact to the frustrations I see when I see developments take place that are going to prolong the suffering. The way I often say it is — I can do no more and I can do no less.
I believe that once the Campaign of Terror is brought to an end, this site will rocket to the top. I look forward to having conversations here with thousands of people every day instead of a handful. I think that will be just great! It’s the talking-to-people-with-investing-questions part of this deal that I enjoy the most.
Onward!
Love!
Hope!
Courage!
Rob
I know you have long histories with these men, but I just can’t lump the three of them together; there are too many huge differences.
I’m certainly not saying that they are all saying the same thing.
Larry has wonderful insights. Mel has wonderful insights. Taylor has wonderful insights. That’s true of everyone. Bogle has wonderful insights. Bernstein has wonderful insights. Burns has wonderful insights. Clements has wonderful insights.
Is there some law that says that I have to give up any of them?
If the Passive Investing police passed such a law while I was sleeping, I am going to begin an effort to get it repealed.
We all come from different sets of life experience and we all have something to add, Arty. That’s true of each and every blessed one of us.
The reason why our understanding of how investing works has been going backwards at such a rapid pace in recent decades is that some smart and good people came to believe in the 1970s that they had finally found The One True and Right Answer. The fact that Passive Investing gets it wrong means nothing. The errors that were discovered could have been fixed in a jiffy once they were brought to light. It was the belief that this was The One True and Right Answer that caused all the troubles that followed and that have grown bigger and bigger in recent years.
The idea that you have found The One True and Right Answer is dogmatism. Dogmatism is death. Become dogmatic and learning becomes impossible. That’s the end.
Most middle-class investors are not dogmatic. But most middle-class investors defer to investing “experts.” And most investing experts believe in Passive Investing. And Passive Investing is pure dogmatism. It is not possible for the “experts” to shoot straight on investing until we do something about the Passive Investing problem. It’s not even possible for them to admit to themselves that this model doesn’t work until we have done something as a community about the Passive Investing problem. Would you be able to admit to yourself that you had caused this much pain without first hearing lots of others admit that they had done the same?
People continue to work under the assumption that our goal is to learn what works. No! We have three decades of research showing what works. That part is easy. The hard part is taking the steps that we need to take so that we can admit to ourselves what works and so that we can tell others what works. That one is tough as tough can be. That means getting some very big egos to say those oh-so-hard-to-pronounce words “I” and “Was’ “Wrong.” I think it would be fair to say that I am the world’s leading authority on the difficulty of getting investing Big Shots to say those three magic words. I am here to testify that it ain’t easy-peasey.
Everyone has something valuable to say. We need to hear them all.
No one can get it right unless he can hear what everyone else has to say.
Larry cannot today hear what everyone else has to say. Neither can Taylor. Neither can Mel.
None of these three can today get it right. That’s what they all have in common.
We all should be working as hard as we can to change that, in my belief. They all have important things to tell us. But none of them can be fully honest with us until they can first be fully honest with themselves. A fully honest person would not sit on his hands and say nothing about the tactics that have been used to crush those posting honestly on investing topics at that board. No way, no how.
Rob
“If valuations are lower and the likely long-term return higher, you can achieve your goal with less of a stock investment. That’s certainly so.”
That is exactly what I am saying.
But that carries huge implications regarding risk. If I can risk less in stocks, and place a comparatively greater amount in relatively “safe” instruments, then I’m controlling–lowering– my risks. That is different than a strategy that puts more in stocks at lower valuations (greater beta risk), and less in stocks at higher valuations (lower beta risk). The latter strategy is certainly valid also, as it may lead to greater upside, but it is also riskier due to the higher beta exposure since, as you say (and I agree),
“There is still some risk to owning stocks even at low valuations. ”
Thats’s all I’m saying…
—-
My other question regards how to use your calculator to help with stock allocation exposure.
It is a given that individual preferences matter. But raw beginners need someplace to begin analysis, yes? By that I mean, “how much do I put in stocks?”, is a fundamental question. Should some baseline recommendations be made with your model that also give adjusted usages? For aggressive, moderate or conservative investors? Basically, my question is how does a beginner use the tool with reference to these fundamental questions? Now maybe you don’t want to give info on how to determine allocations. But I’m not sure that you have strong opinions on that that differ from mainstream views.
Now once you have an allocation, should there then be some recommended “sliding scale” of stock exposure as valuations make changes that are *less than extreme* changes? How much of a change is enough to alter allocation?
At today’s PE/10 valuations, say an average investor would be 60% in stocks. We then get and enormous next year (+40%, say). Should we adjust stock allocation again, just a year later, since the PE/10 would have changed?
What are the “bands” that determine when we should adjust?
Now, this may mean lots of adjustments year-to-year or few, depending on valuations.
These are all questions, but if you can provide some specific guidance to dynamically using the tool as valuations shift, it may help.
Arty
But that carries huge implications regarding risk.
On this we are in complete agreement. The implications here are as far-reaching as far-reaching can be.
Investing intelligently is an exercise in risk assessment. We have learned that the conventional rules for assessing risk are flawed right down to the core. We are writing the new rules on a real-time basis. These are the rules that are going to govern all investing analysis for decades to come. It’s heady stuff.
If I can risk less in stocks, and place a comparatively greater amount in relatively “safe” instruments, then I’m controlling–lowering– my risks.
That’s right. And I definitely agree that that’s one way one could go with this.
There are lots of mix-and-match options. You could decide to take on the same level of risk you were taking on before and retire many years sooner. Or you could take on the same level of risk and be able to sleep better at night because you would be doing it with a lower stock allocation. Or you could formulate all sorts of in-between options.
If I were to write up all the strategy considerations I have discovered in the first seven years, I could continue turning out a new blog post exploring them every day for about 10 years.
I haven’t pursued that path. My thought is that it is more important to pursue the goal of opening up the boards to honest posting. Once we have honest posting, we have thousands of people exploring the strategy implications, not one none-too-number-savvy individual. I see huge leverage in that possibility.
But I do want to say that it tells me that you “get it” that you are seeing in how many directions the implications reach. It’s mind-blowing. Few see this. You need to study the new model for a time before this insight kicks in.
You are one of the first to get to the Promised Land, Arty. It’s a wonderful place. I often make the point that there is not one person alive who loses when we all get to the Promised Land. I say that because it pains me to see how much pain we have brought on ourselves trying to deny that we have discovered the Promised Land. It it all 100 percent pointless pain.
My take is that there is enough pain that we are required to suffer in this life for us to be going to so much trouble to cause ourselves even more. My dream is that there will come a day when we all come to see the wisdom of John’s injunction to just permit ourselves to “Have fun!”
Rob
Rob,
So, if stocks go up 40% in the next year, (PE 10 valuations increase), would, you be considering altering your allocation?
Just trying to get more detail on the tool…
—-
“The idea that you have found The One True and Right Answer is dogmatism. Dogmatism is death. Become dogmatic and learning becomes impossible. That’s the end.”
I agree.
“Everyone has something valuable to say.”
Not sure of that. Surely, the *quality* of opinions differ greatly. Depends on the opinion.
“Larry cannot today hear what everyone else has to say. Neither can Taylor. Neither can Mel.”
I think each of these three hold some portion of “the truth” and there is clearly overlap among them. But the differences are huge. Whether a person can “hear” what another has to say depends on the content of the opinion and the knowledge base or intent of the listener. I’ve never felt “unheard” by Larry (disagreed with but not unheard).
And I have little contact, or desire for communication, with the other two. Maybe you know these men personally. I know them only from their writings and opinions and the support they provide or do not provide for them. From that, and contradictory opinions I deem valid, I draw my opinions on the quality of what they have to say.
—
Rob, from what I see on Bogleheads, valuations gets discussed frequently. Stay-the course, is openly challenged. Perhaps more now than before, but these are not a proscribed topics, and writers far more experienced than me undertake these posts. And various metrics get discussed also, (Shiller’sPE 10 I think too) though with little agreement on which is a better “predictor” of future outcomes.
Again, I’d like to see you take your work to the acdemic community for peer-review. That can provide a lot os “street cred”. I think published work can help greatly in achieving broader objectives too. And they may actually help you improve your work. It seems you have most of the work done.
Boy, it does get confusing at times. Sometimes the more I learn the more “hampered by knowledge” I feel. I guess that’s normal though…
Arty
What are the “bands” that determine when we should adjust?
There are lots of legitimate points of view that could be put forward on this question. All that I can offer is my personal opinion.
My approach is to make as few allocation changes as possible while being sure to make those that are absolutely necessary.
When I am using the Scenario Surfer, I usually start thinking about lowering my allocation when the P/E10 level goes above 20. I usually start thinking about increasing it when the P/E10 level goes below 12.
So, for example, I might be at 70 percent stocks for a time and then drop to 20 percent stocks when the P/E10 level goes to 22, stay at 20 for a number of years, and then go up to 70 percent stocks again when the P/E10 gets back to 19, and then go to 100 percent stocks when the P/E10 goes below 12.
I don’t follow any rigid rule that says “always lower at 20” or something like that. If I did that, I might be lowering and increasing my allocation several times during a time-period in which the P/E10 level went below and above 20 a number of times. I aim to make only one allocation change every 8 or 10. There are times when I will make two allocation changes within two or three years. But then I might go 15 years before I make the next one.
I recommend that people run lots of scenarios with the Surfer to get a sense of what strategies work best for them.
We have a new calculator coming out soon called “The Investment Strategy Tester.” This will let you pick a particular strategy and then run 1,000 tests of it. The calculator will tell you how that strategy performed under the 1,000 tests and you can compare the results of one strategy under 1,000 tests with those for another strategy under 1,000 tests.
The purpose is not to bring discussion of the question you are asking to an end. The purpose is to give people more to think about so that people can make better-informed arguments pro and con all the various possible strategies.
We are in the early years of examination of the Rational Investing model, Arty. We’re going to be learning lots of new things as time goes on. I don’t follow precisely the same strategy today as I did on the day the Scenario Surfer was posted. I change my thoughts as I learn more. My hope is that all others will make an effort to do the same.
The idea of all the tools developed under the Rational Investing model is to encourage thought, never to shut it down. This model is intended to be the opposite of the Passive Investing model in every way. There are no One Scientifically-Proven Right Answers.
There are of course strategy ideas that possess greater appeal to me than most other strategy ideas. But the ones that appeal the most to me might not appeal the most to you. My aim is to provide the tools needed for lots of others to feel excited about getting into the discussions and putting forward their own takes.
Rob
Surely, the *quality* of opinions differ greatly.
There’s no question but that in an objective sense the quality differs.
The problem is that none of us are God. I can tell you what opinion possesses the greatest quality in my subjective opinion. But if you give me too much power to have my subjective opinions become God-like pronouncements, you are surely going to send things off track.
We all need to acknowledge that we are not God and to permit the other guy to have his say. That’s the secret to successful long-term investing. Had the Passive Investing dogmatists not come to believe that they were infallible, the errors in the Passive Investing model would have been brought to light in 1981, when the first research was published showing that valuations affect long-term returns.
All of our troubles result from the dogmatism inherent in the Passive Investing model. The reason why advocates of that model are so dogmatic is because there is zero rational case that can be made for this model. It is because the model is so riddled with errors that its advocates do not permit questioning and it is because questioning is not permitted that the model is so popular (few have been able to learn about the errors). It is because Passive Investing is the worst investing strategy ever conceived by the human mind that it has become the most influential investing strategy ever conceived by the human mind as well.
Rob
“We all need to acknowledge that we are not God and to permit the other guy to have his say.”
I agree. But freedom to speak is different than the quality of an opinion, which may be brilliant or moronic.
All of our troubles result from the dogmatism inherent in the Passive Investing model….It is because Passive Investing is the worst investing strategy ever conceived by the human mind that it has become the most influential investing strategy ever conceived by the human mind as well.
I hear you. Absent valuations, or maybe other concerns, it has severe flaws.
I see this in my field also, exercise science. Give you an example. Did you know that one set of exercise, say a Bench Press, accomplishes the same results (increased strength, hypertrophy, etc.) as multiple sets of that exercise? There is a huge and important body of evidence that indicates this—in preponderance. Think of the implications on a potential trainee’s time and perception of the “gym experience”, if everyone that exercised knew this. That is, you can accomplish in one workout hour what would otherwise take several hours.
And yet, the power brokers—who dominate the academic literature in *that* field—recommend lengthy and complicated routines so that it appears there is some secret (that only their cabal has). And after all, more is more in money, and the same must be true in exercise, right? So these “experts” then fit the science to shape that belief too, while also making them appear smarter–“Godlike”–as you might say. When the reality is, the simpler works just as well, and is more efficient, and experts are *not needed*.
But maybe, as you suggest, the belief in the former is so great that it needs to be preserved by trainees–not all–but many. Now in some ways that is different from what you are saying in investing, but it just shows that “inanity rules” in other fields too.
—
Is the 1981 research you mention Shiller’s work, or something else? Where can I access it?
Arty
What do you think of Hussman’s writings.
I think he’s great.
He is likely your biggest supporter on long-term valuations, but does have that market action thing.
I don’t personally endorse short-term timing. But I try not to be dogmatic re this question. If others want to explore possibilities, I think that’s fine.
I don’t think that the typical middle-class investor (my audience) should be engaging in short-term timing. If it works at all, it works only for the sophisticated investors willing to put a lot of time into it.
It won’t work just to read what some guy like Hussman says and then follow his instructions, in my view. I believe that the only strategies that work are the strategies in which you have confidence. You cannot have confidence in something you decided to go with just because some guru advocated it. My recommendation is to go only with strategies you fully understand. That means keeping it simple unless you are willing to put a lot of time and effort into the investing project.
I picked that idea up from Bogle. That’s one of his genius insights, in my assessment.
Have you ever written to him?
No. It would probably be a good idea to do that. I have an awful lot of things on my plate at the moment, Arty. That one is not currently at the top of my list. But it is something that I would like to do if some time opened up.
He’s a “heavyweight” valuations guy
I don’t see this as a situation where we have the Valuation People vs. the Non-Valuation People.
We all want to be successful investors. That’s true of each and every blessed one of us.
It’s impossible to invest effectively without understanding the effect of valuations. So this is something that each and every one of us needs to know about.
I am of course happy that there are others who understand valuations. I wouldn’t feel comfortable taking such strong positions if I were alone in my thinking re all this. But my focus is not so much in talking to those who share my views as it is figuring out why those who do not share my views do not. I want to understand why the Goons are so determined to ignore valuations.
That’s the key to it. Why would anyone want to set his or her retirement back by 5 or 10 years? That’s what believing in Passive Investing does to you. Why would anyone make that choice?
Understanding why it is that people make that choice tells us what we need to know to move things in a positive direction.
Jesus sat down to dinner with sinners, right? It is with a similar thought in mind that I post at the Goon Central board each day. My view is that we are all sinners, we all have Goon tendencies, we all see appeal in the idea of Passive Investing. You don’t help people stop committing sins by condemning them. You have to reach out your hand, you have to try to relate to what they are going through.
I believed in Passive Investing for a time. Why? Why was I out to destroy myself? Figure that one out, and you have figured out what matters most, in my view.
I haven’t figured it all out. But I think that I today understand the realities a lot better than I did on the morning of May 13, 2002. I spend most of my limited pool of time trying to come to a deeper understanding of the questions that I believe matter most, and I think the single one that matters most is why anyone would believe that valuations don’t affect long-term returns in the first place. So it is my inclination to spend more of my time talking things over with people who do not agree with me on valuations than with people who do agree with me on valuations.
Maybe I’m just a masochist. I suppose that’s another possible explanation of the choices I have made.
Rob
We disagree on this, but I think your work should be prepared and submitted for peer-review.
What purpose would be served? There are already a good number of peer-reviewed studies showing that valuations affect long-term returns. What good would one more do?
The need is to get the “experts” taking the research that has been done over the past 30 years into account when offering investment advice? You can’t solve that one without addressing the difficulty they have in saying the words “I” and “Was” and “Wrong.”
If the “experts” learn how to say the words “I” and “Was” and “Wrong,” we already have all the peer-reviewed studies we need. For so long as the “experts” have not learned how to say the words “I” and “Was” and “Wrong,” one more peer-reviewed study isn’t going to help.
It’s a distraction to worry about producing a peer-reviewed study. The suggestion is that this is an intellectual problem, that we just don’t know for sure yet what works. We know. We have always known. The idea that valuations don’t matter is preposterous. The problem is that we don’t want to admit that we know. We want to pretend and Passive Investing offers lots of scientific-looking “studies” that can be put to use helping us persuade ourselves that it is okay to go on pretending.
It is only by explaining to people how much pretending hurts them that you can help them out. You don’t need peer-reviewed studies to do that. All it takes is common sense.
The problem is that common-sense discussion of investing topics must be banned at all places that encourage Passive Investing. Common sense is a huge threat to Passive Investing. That’s the only problem we face. All the rest is a piece of cake once we deal with that one. The only way I know of to deal with it is to persuade those who have advocated Passive Investing that Rational Investing is so much better in so many ways that it is worth it to say the words “I” and “Was” and “Wrong.
It is not peer-reviewed studies that caused the problem and so it is not going to be peer-reviewed studies that are going to solve the problem. The answer lies in coming to a better understanding of the Get Rich Quick impulse that lies within all humans. It is the Get Rich Quick impulse that causes us to want to follow strategies that destroy us and to want to concoct peer-reviewed “studies” that make those strategies appear plausible for a time.
Rob
It’s never science, per se, that is the problem. It is the people that use, misinterpret, or twist it to their own views (I see this in my exercise field all the time).
Precisely so.
We “know” everything that we need to know.
The problem is that we act in ways totally contrary to what we know. We spend 90 percent of our efforts concocting rationalizations not to do what we “know” is the right thing to do.
It’s a joke trying to know more.
We need to direct our efforts to the human side of investing. Why is it that the humans keep messing up? That the entire deal.
Rob
I’ve never felt “unheard” by Larry (disagreed with but not unheard).
I agree with that statement.
But why does Larry not speak out against the tactics employed by the other two?
That’s the problem.
In no other field of life endeavor would smart and good people like Larry sit on his hands while other people in the room are engaging in the sorts of tactics that were employed by Mel to destroy the Vanguard Diehards.
Why did Larry lower himself?
He is afraid to speak up in the face of the intimidation we all feel when millions of people are investing in a way that is certain to cost them the loss of most of their life savings.
We need to change that.
When Larry feels comfortable speaking up, lots and lots of other good and smart people will too.
Then it will never happen again.
Then we will all be able to learn together effectively.
Including Mel.
Larry let down Mel big time when he failed to speak up. We need to change things so that Larry feels comfortable speaking up on Mel’s behalf when Mel himself wants to destroy Mel.
That’s it. This is the story of humans going to a lot of trouble to destroy themselves and lots of other humans who know better keeping their mouths shut while it plays out before them.
The way to change it is to persuade those who know better to speak up. We need to persuade the Larries of the world to post in a fully honest way (that means saying not only that he understands that valuations affect long-term returns but also that he is repulsed by the tactics that were used by Mel to stop people from exploring the implications of that important insight).
Successful investing is a community endeavor. That’s one of our most important findings of the past seven years.
Rob
Sometimes the more I learn the more “hampered by knowledge” I feel.
That’s because the tenets of Passive Investing have become part of the air we breathe in recent decades.
If we could wipe the slate clean of everything we ever heard about investing during the Passive Investing era, we could learn all that we need to know in a few weekends. No biggie.
It can take many years to undo the “learning” of the tenets of the Passive Investing model. These ideas are so absurd that we develop a deep emotional attachment to them once we accept them. People don’t like to be proven dumb.
If there were some rational arguments that could be made on behalf of Passive Investing, we could all quickly shake it off. It wouldn’t be so painful to admit being wrong in those circumstances. But the situation today is that most of the “experts” need to admit being wrong about whether or not valuations affect long-term returns. That’s the ABCs. It hurts big time to have to admit getting that one wrong.
The bad news is that we are facing an ugly, ugly monster out to devour the entire U.S. economy.
The good news is that, once we kill that monsters, it’s all good and it’s all easy and it’s all incredibly enriching (in all senses of the word).
Rob
And I have little contact, or desire for communication, with the other two.
I understand why you feel that way. I have spoken to many people who feel that way.
I think we hurt ourselves when we give in to those feelings.
The Bogleheads.org board and the Vanguard Diehards board have the potential to change the history of investing. Many of the ideas that I put forward at this site were developed during the years that I spent posting daily at the Vanguard Diehards board. You wouldn’t be able to take advantage of Valuation-Informed Indexing or Rational Investing if it were not for those boards.
Permit fully honest posting on those boards and you increase their value by 50 times. 50 times “tremendously valuable” is tremendously, tremendously, tremendously valuable (plus 47 more tremendouslies)l.
You get the benefit of all those insights if that happens, Arty. You lose out on all those benefits if it doesn’t.
Like it or not, there are supporters of Mel and Taylor who are not going to permit honest posting at those boards unless Mel and Taylor sign on. So you should care a great deal whether Mel and Taylor sign on. You are of course entitled to a different opinion, but that’s my sincere take.
We have to stop thinking that investing is something we do by thinkng up grand thoughts sitting in a room by ourselves. Investing is a community activity. We all should care about the integrity of the discussions held at our investing boards, just as we all care about the environment.
We all need clean air and clean water. So we all make efforts to protect the environment. We all need to adopt the same attitude about the integrity of the discussions held at our investing boards.
When we do that, all the bad stuff is over. When we permit honest posting by all community members, we are able as a community to figure out what we got wrong and to fix it.
Rob
the power brokers—who dominate the academic literature in *that* field—recommend lengthy and complicated routines so that it appears there is some secret (that only their cabal has). And after all, more is more in money, and the same must be true in exercise, right? So these “experts” then fit the science to shape that belief too, while also making them appear smarter–”Godlike”–as you might say. When the reality is, the simpler works just as well, and is more efficient, and experts are *not needed*.
That’s a great comparison, Arty.
People need to stop believing that the “experts” know something important that cannot be figured out through the use of common sense.
Using your common sense will put you far ahead of listening to people like Bogle and Bernstein and Burns. Those people hurt us because they promote Passive Investing, which encourages us to do precisely the wrong thing (to fail to change our allocations in response to big price changes). If all we had was common sense, we would be a lot better off.
I’m not saying that we cannot benefit from listening to Bogle and Bernstein and Burns and lots of others. I am saying that we should gain benefits from all their wonderful insights but that we must also possess a b.s. detector that filers out any of this Passive Investing gibberish before it reaches our brains and poisons them. Each of these people has done good work. Each of them has also hurt more people than he has helped through his advocacy of Passive Investing.
We can do it on our own. And we can benefit from listening to the experts, if they are willing to ease up on the dogmatic nonsense. But we really must stop thinking that we can count on the “experts” to get it right without us needed to challenge them when they talk gibberish. It’s our failure to take even minimal steps to act in our own self-interest that is destroying us. We need to stop worshipping gurus.
Rob
Is the 1981 research you mention Shiller’s work, or something else? Where can I access it?
I’d like to have a page at the site that provides links to all the research showing that valuations affect long-term returns. I haven’t had time to get to that yet.
I suggest that you start with the Shiller study that I link to at the “The Stock-Return Predictor” page. I think that may be the single best piece of work. If you want to look at more stuff, try doing searches for work that has been done by Arnott, by Peter Bernstein, and by Cliff Asness.
How many studies do you need to see before you believe the finding, Arty? Do you know of any reason for doubting Shiller’s study? How many times do we need to see it proven that valuations affect long-term returns before we accept that it is so?
Do you know of any reason for believing that valuations do not affect long-term returns? Have you heard of any studies going the other way?
Rob
Rob,
I mention Hussman not because he agrees with you but because his big *voice* might help others. Then again, he’s just one “active manager”, and can be written off as that, I suppose, by the traditionalists. Since Hussman does not post on boards (other than his own site), I suppose his reach is limited compared with the traditionalists. But his is the biggest voice I know on valuations…
—
“The problem is that we act in ways totally contrary to what we know. We spend 90 percent of our efforts concocting rationalizations not to do what we “know” is the right thing to do.”
I think research has been used by the traditionalists and it might be good to have some of your own. I should have clarified. I’m talking about your *tool* (return predictor) and its possible uses in an academic paper, not another paper on valuations, per se. The resulting process may also help you improve it, if it needs it.
As I see it, the simple investor needs some guidance tool, and some specificity to help him navigate the investing waters over time. OK, it is indeed easier than knowing the “Sharpe Ratio,” but some added *specificity* with the tool can help for new investors who possess little investing knowledge.
Perhaps your investing work is more properly “behaviorist”. Would there be any good in trying to publish the tool you use (in an academic journal) and discuss possibilities and ramifications for its use?
You totally crack me up with your podcasts, btw, (Sharpe Ratio, The Beatles…)… I enjoy them.
Arty
“But why does Larry not speak out against the tactics employed by the other two?”
He *does* by stating the contrary opinion, sometimes forcefully. I think that may be the more effective way than anything that can be construed as ad hominem.
Also, I’d say his investing strategy is antithetical to theirs in key ways. His listed portfolio, specifically designed to reduce dispersion of return (fat tails) is this:
30% equities of historically, the highest return/risk classes (Small Value, Emerging Markets, etc.).
70% safe fixed income (TIPS or ST treasuries).
Now, that is as UN-Bogle-like as it gets, even if one does not agree with Larry’s concept.
Won’t get great up years but avoids getting killed with a decent expected return–like Harry Browne via other ways.
He also speaks very clearly about valuations. Many have listened. Some won’t.
And alternative theories are being discussed daily (Harry Browne, others, etc., even active management gets mentioned or market timing–200 day moving averages, etc.) I can’t agree with many of them. But they do get posted.
—
“How many studies do you need to see before you believe the finding, Arty?”
All I said was that I wanted to read them.
Arty
and can be written off as that, I suppose, by the traditionalists.
A dogmatist can write off absolutely anything, Arty.
John Greaney is the co-leader (with Mel) of the Campaign of Terror against our board communities. I asked John the other day how much he lost in the stock crash. He said that the number is “well in excess of $1 million.”
John remains an enthusiastic leader of the Campaign of Terror today.
If the human mind is capable of writing off a loss well in excess of $1 million, the human mind is capable of writing off absolutely anything.
There are not intellectual arguments that are ever going to persuade the dogmatists. It ain’t gonna happen.
We can persuade the site owners. Morningstar did not ban honest posting for close to two years. It was about a year with Motley Fool and the site administrator at Motley Fool told me in an e-mail that he thought it would be “ideal” if honest posting were permitted.
If everyone who favors the idea of permitting honest posting at our boards sent an e-mail to that effect to the site owners, we would be on our way to overcoming this economic crisis.
The people who have been hurt most by the crisis need to begin taking a few sensible steps in support for their own self-interest.
That’s it. When we see that, it’s over. The Goons ain’t budging until we work up the energy and courage to take that little step.
Rob
but some added *specificity* with the tool can help for new investors who possess little investing knowledge.
That part I agree with. There are lots of things that I could do to make the tools easier to use. That’s important work.
The problem there is that there is only one of me and there are but so many hours in the day. I do hope to get to lots of things along those lines as time moves on.
Rob
Perhaps your investing work is more properly “behaviorist”.
Absolutely.
Passive Investing and Behavioral Finance are opposite models. Passive Investing in the model of the past. Behavioral Finance is the model of the future.
I call the Behavioral Finance model “Rational Investing” to better contrast it with Passive Investing. Passive ignores people/valuations. It implicitly posits that the way to overcome the negative investing emotions is to pretend that they don’t exist. I say that’s irrational. The rational thing to do is to acknowledge the reality that human investors possess emotions and to do your best to cope with it.
To cope with the effect of emotions on investing returns, you obviously need to know how much effect emotion is having at any given time. That’s what the P/E10 level tells you. The reason why stocks offered a poor long-term value proposition from 1995 through the first part of 2008 is that emotion had taken things totally off the rails. P/E10 told us that so that we knew to protect our portfolios from the fallout.
Ignoring the most important factor in investing success is not rational.
Taking emotions into account is rational.
Rob
You totally crack me up with your podcasts, btw, (Sharpe Ratio, The Beatles…)… I enjoy them.
Thanks for saying that, Arty. It makes me happy to hear you say that.
Especially the “crack me up” part. I don’t worry about coming up with investing insights. Once you give up on Passive Investing, you develop a kind of X-Ray Vision and you see investing insights everywhere you turn, more than you can possibly make use of. What I need is to connect with people when explaining the insights. What I need to do to get over the hump is to develop some ability to crack people up.
That’s the sort of thing that I spend most of my timing thinking about. How can I make this funny? Or how can I make this warm? Or how an I come up with stories to illustrate the points? That’s the sort of investing “expertise” that matters most. Successful investing is just common sense. The crying need today is for someone who has no ties to the promotion of Passive Investing and who has the communication skills needed to connect with people seeking to learn about an approach that does not defy common sense.
Rob
He *does* by stating the contrary opinion, sometimes forcefully. I think that may be the more effective way than anything that can be construed as ad hominem.
We are in 100 percent disagreement re this one, Arty.
This is an integrity issue. To permit a ban on honest posting at a board at which you participate is to allow your personal integrity to be undermined. I don’t see how any intellectual point could ever be as important as that. No way, no how.
There are always going to be people who believe in Passive Investing. Investing is a highly emotional endeavor and this is the most emotional investing “strategy” ever developed by the human mind. What Larry is up against in trying to help people learn how to invest effectively is the Get Rich Quick impulse that resides within all of us. He doesn’t overcome that by making a stray good point on valuations here and there while remaining silent re a matter that affects the integrity of the board discussions.
The reason why they permit Larry to post there is that they understand that making stray points is not going to change much. If Larry ever began speaking up re the issue that matters — the integrity of the board discussions — he would be out on his backside in a New York minute.
Larry is taking the easy path, not the path that gets the job done.
I’m of course happy that he says the right things about valuations. But I want to see the board community win back its self-respect. That opens up all sorts of wonderful opportunities. Putting forward a few post here and there that say the right things about valuations doesn’t cut the mustard. It’s not even a close call.
If anything, the fact that Larry does not speak up lends legitimacy to the ban on honest posting. If he thought that valuations mattered, he would do something to help the hundreds of others who have expressed a desire to post honestly on this question, wouldn’t he? The fact that he doesn’t speak up tells those who are trying to persuade themselves that valuations don’t matter all that much that they probably really don’t matter all that much. If they mattered much, this guy who believes that they matter would do something about the ban on honest posting on valuations, wouldn’t he? Larry’s inaction on the integrity questions speaks with far more force than his stray comments indicating that valuations matter.
Larry is intimidated. by the Goon tactics. He certainly isn’t the only one. I’m not saying that. But I find it silly to pretend that there is some other reason why he does not speak up. If people did not feel intimidated by the viciousness of the Goon tactics, every single community member would have spoken up loud and clear a long, long time ago.
I mean, come on.
Rob
Rob,
What are your views of this recent Shiller interview on valuations?
Have you seen it?
Arty
http://www.ritholtz.com/blog/2009/02/shiller-stocks-not-yet-cheap-enough-for-me/
Arty: but some added *specificity* with the tool can help for new investors who possess little investing knowledge.
Rob: That part I agree with. There are lots of things that I could do to make the tools easier to use. That’s important work. The problem there is that there is only one of me and there are but so many hours in the day. I do hope to get to lots of things along those lines as time moves on.
—
Rob,
What about this as a simplistic *direction* as an auxiliary to the tool. Say you had 3 risk-investing types (see below) and suggested model stock exposure portfolios for each, only because people can relate to the terms. Again, knowing that within each category (investor type) you’d have individual differences too.
So you’d have your traditional conservative, moderate, and aggressive types, and related PE/10 bands.
Stock Exposure for Moderate Investors
PE/10 is 7 or lower: 75% allocation
PE/10 is 10: 60% allocation
PE/10 is 14: 50% allocation
PE/10 is 20: 30% allocation
PE/10 is 30+: 20% allocation
Stock Exposure for Conservative Investors
PE/10 is 7 or lower: 65% allocation
PE/10 is 10: 50% allocation
PE/10 is 14: 40% allocation
PE/10 is 20: 20% allocation
PE/10 is 30+: 10% allocation
Stock Exposure for Aggressive Investors
PE/10 is 7 or lower: 85% allocation
PE/10 is 10: 70% allocation
PE/10 is 14: 60% allocation
PE/10 is 20: 40% allocation
PE/10 is 30+: 30% allocation
Then, investors could adjust numbers yearly, if desired, or in jumps, as they hit the PE/10 “bands”.
Note married to the numbers, of course, but this is just an example. Such an example may help explicate your intent. Note that this does not adjust for age, if indeed that is a necessary consideration, since that could be subsumed into the risk category itself.
Arty
Now, that is as UN-Bogle-like as it gets, even if one does not agree with Larry’s concept.
I’m not so sure.
Maybe it is as un-Lindauer-like as you can get, but not as un-Bogle-like as you can get. Lots of people who get their views on what Bogle believes from reading that board come to believe that Bogle is what Lindauer permits people to say he is. I have generally found Bogle to be about 10 times better informed than anyone would know by listening to what Lindaurer permits people to say about him.
I consider myself more of a Bogleheads than Bogle himself. Lindauer says that I am not a Boglehead at all. How can anyone say for sure? Half of what Bogle says is in direct conflict with the other half of what Bogle says. So I don’t know that it is possible to “define” Bogle as having taken any one particular position on any investing topic. My guess is that you could find a Bogle statement endorsing just about any investing position you wanted to put forward.
My guess is that Larry considers himself at least a bit of a Boglehead and that he is probably just stressing a different aspect of what Bogle says than are some of those who consider themselves the only Bogleheads who should be permitted to comment on what Bogle believes.
Rob
And alternative theories are being discussed daily
There’s one “alternative theory” that absolutely cannot be discussed there, Arty. Rational Investing.
I wonder why.
It’s the alternative theories that stand up to scrutiny that represent the biggest threat to the dogmatism. Discussion of the other alternative theories is generally permitted to the extent they do not stand up to scrutiny and do not therefore represent a threat. They might also be permitted if they do not possess widespread appeal. The “problem” with Valuation-Informed Indexing is that the case for it is just too strong and there were too many community members there who expressed a desire to learn more about it.
Rob
All I said was that I wanted to read them.
I understand. There’s nothing wrong with reading studies. I wish that I had an article at the site that listed them all and provided links. That would be a useful article.
I just want people (not just you, but anyone listening in) to understand that I don’t think that the studies issue has much to do with anything. Common sense tells us that valuations must affect long-term returns and there is no study that has ever shown otherwise. It turns out that we now have lots of studies showing that valuation affect long-term returns. Still, even if we did not have one, my view is that we would be right to accept the common-sense view that valuations affect long-term returns in the absence of any studies indicating otherwise.
The Grand Mistake was study-based. It was the misreading of the studies showing that short-term timing doesn’t work as also suggesting that long-term timing might not work that caused all the problems. If people hadn’t been emotionally inclined to misunderstand the scope of the findings of those studies, there never would have been any Passive Investing model and we would not today be trying to recover from the effects of the widespread popularity of the Passive Investing model.
Studies have their place. I think John Walter Russell’s research is of huge importance.
But the reality remains is that it was studies that got us into this mess. I highly doubt that it is going to be studies that are going to get us out of it. The key to getting out is people feeling enough pain that they will being acting in their self-interest and asking some hard questions of the big-name investing “experts.” There are lots of people who have told me that the only reason why they have ever believed that Passive Investing might work is because lots of big-name “experts” have endorsed it.
The big-name “experts” follow the literature. So they know about the three decades worth of studies showing that valuations affect long-term returns. It’s not a lack of studies holding them back from talking straight with us about the realities of stock investing.
Rob
What about this as a simplistic *direction* as an auxiliary to the tool.
This is a great idea, Arty. I have had lots of people send me e-mails asking for something along these lines. I like the way you set it up a lot. I need to prepare something like this for the The Stock-Return Predictor section of the site.
I won’t be able to get to it right away. There’s just too much other stuff on my plate. But I am going to move this to a higher place on the list and make a note to look at your set-up when preparing the article. I am absolutely convinced that something along the lines of what you have presented would help.
Rob
Rob,
Listening to your Bogle and Valuations podcast.
What we need is a *new* Rational Target Retirement funds (RTR Funds) based on valuations within a given risk level (as defined above. You could create it and run the funds–composed of simple TSM indexes–that vary percentage exposure based on valuations.
The risk level may change as one ages (the investor would have to make that decision), or he may not change, but the allocation % of each Risk Level would always be adjusting based on an underlying valuations grid.
Just a thought…
Arty
What are your views of this recent Shiller interview on valuations?
I thought Shiller came off as a likeable guy.
I disagree with him that people should wait until we go below a P/E10 of 10 to get back into stocks. But I see where he’s coming from. it’s a judgment call.
I recorded a podcast exploring the Shiller interview in depth. It’s #104, “Probability Investing.” That one should be out in about two months.
Rob
What we need is a *new* Rational Target Retirement funds (RTR Funds) based on valuations within a given risk level
Others have suggested this. I don’t oppose the idea of creation of a new fund. It doesn’t excite me too much, though.
If we get to a point at which all of the “experts” are pushing Rational Investing on a daily basis, we won’t need a new fund. It’s easier to practice Valuation-Informed Indexing that it is Passive Indexing (because you don’t have to overcome your common sense to bring yourself to invest this way). I don’t see that we need to add a layer of fund management to help people tap into the power of these ideas.
If the “experts” continue to push Passive Investing, we are doomed regardless of how many funds we set up. People very, very, very much want to invest emotionally. So long as thousands of big-name experts push the idea, most middle-class investors are going to do just that.
I think what we need is to recognize that promoting realistic investing strategies helps not just investors but the entire society. I see this as an environmental-type issue. We work as a society to encourage people to care about the environment and not to pollute it in pursuit of their selfish interests. The promotion of Passive Investing pollutes the economic environment. It has done great damage to all of us (Rationals and Passives alike) and threatens to take the economy over a cliff. We need to have policymakers speaking up in strong terms in opposition to the promotion of intensely emotional investing stratgies.
I also believe that policymakers should be doing something to open up internet discussions of investing to honest posting on safe withdrawal rates and other valuation-related topics. The public does much of its business on the interenet today. The same ethical standards that apply in all other areas of life should apply as well to internet sites that promote various investing strategies.
What’s the downside?
Rob
Rob,
Was listening to your podcast on “attitude”. And how investor’s can remain emotionally “invested” in doing the wrong thing. Reminded me of a story I kept (written I think, by Arthur Jones, who pioneered a far more rational approach to strength training than had existed in the mainstream–and, sadly, still exists as the dominant model, though people are slowly learning:
Imagine you are on a hiking trip through some rugged desert terrain. You see a figure in the distance. It’s an old man, bearded and half-naked, on hands and knees, with his fingers clawing at the hard, sandy earth.
“You ask, ‘What are you doing?’
” ‘I’m digging for gold.’
” ‘How long have you been at it?’
” ‘Weeks — months maybe. It’s painfully slow work.’
“You notice the old man’s bloody fingers, his raw and callused knuckles. You say, ‘But listen, man! Digging with your bare hands is a pretty inefficient way to prospect for gold. That hole’s only a couple of feet deep. Let me loan you my shovel.’
“You reach into your backpack, pull out a lightweight, tempered-edge spade, and drive it into the ground. Then, you show the man how he can break and scoop the hard sand much more efficiently. In less than five minutes you have demonstrated to the old fellow that he can make more progress in a few moments than he could in a month of using his bare hands.
“Then, an amazing thing happens,”. “That old man’s eyes fill with hate and his face flushes angrily. He charges at you and grabs the shovel from your hands. He’s now preparing to throw the shovel, or perhaps even try to beat you with it.
“You quickly retreat, and get the hell out of the old man’s range, as the shovel comes crashing down behind you on the hard sand.”
That’s not the end of the story.
“If you return to that rugged location in the desert a year later, what would you expect to see that old man doing? Would he be using the shovel properly and have holes as big as school buses spread over the immediate and adjacent surroundings?
“No, absolutely not! Instead, the prospector would be at that same spot — with a somewhat bigger hole — still digging with his even-more-callused fingers. And there, in plain sight, only a few yards away . . . would be the unused, and now rusty, shovel.”
Arty
Arty:
That’s pure gold.
You just told the entire story.
There’s nothing I can add to that.
I’m going to use your words as tomorrow’s blog entry. I am going to put up a preface saying “today’s entry is a guest blog entry by Arty and here it is — and then just post those exact words. This is what people need to hear. This is what people need to understand.
I have one suggestion. Would you considered posting additional comments to the most recent blog entry? You have put forward about 20 posts that have lots of great stuff in them. But most people only look at the most recent entry. So people are not going to see them.
Thanks for that wonderful story. I’m also probably going to use that one on a podcast. If people could hear those words and appreciate what they mean, we would be able to pull the economy back from the cliff. If people understood that message, they would understand why they have lost most of their retirement money and they could regain confidence in the market again because they would be able to see what they need to do to be sure that it never happens again.
We have no shortage of intellectual firepower whatsoever. What we have is an inability among the “experts” to pronounce those three one-sylable words “I” and “Was” and “Wrong”.
That’s it. That’s the entire story. The rest is just little details that follow from that.
Rob
Rob,
Valuations talk continues– in spades– at the Bogleheads, BTW. Someone mentioned valuation-informed investing (a Peter, I think) And Shiller and Hussman are also mentioned. You should look around…
I’ll post at new blog entries. I had tried to find the most relevant topical venue, but I see what you mean.
Arty
I check out Bogleheads.org when I can. It’s wonderful. I view it as the single best resource available today to learn how stock investing works.
It would be 10 times wonderful if honest posting on safe withdrawal rates and other valuation-related topics were permitted. That board would change the history of investing if the Big Shots would open it to honest posting (I mean allowing honest posting for all community members, not just honest posting for Passive Investing dogmatists).
Rob
“It would be 10 times wonderful if honest posting on safe withdrawal rates and other valuation-related topics were permitted. ”
There seems to be some discussion (they speak of a guy named “Rob” and PE/10 and Shiller and valuation-informed indexing. But these are just 2 threads, there are others, so maybe things are not that bad):
http://www.bogleheads.org/forum/viewtopic.php?t=34310&sid=cedb14adc622590fe4fc470e0b189d3f
http://www.bogleheads.org/forum/viewtopic.php?t=34108&highlight=&sid=cedb14adc622590fe4fc470e0b189d3f
Other than Larry, I don’t know these guys…
Arty
Things are very, very bad AND very, very good at the same time, Arty.
Things are good there because use of the discussion-board communications medium is the best way to learn about how stock investing works in the real world. You don’t get one person’s point of view, you get thousands of points of view. That’s great. That’s a huge plus.
Things are bad there because the Big Shots came to the conclusion that there was no possible justification that anyone could come up with for promoting safe withdrawal rate studies that got all the numbers wrong. So they imposed a ban on honest posting on SWRs and related topics. When you ban honest posting, you compromise the integrity of the board. That’s a huge negative.
I often link to the board because I think it would be wrong to deny my readers the benefits. But I ALSO often point out that a ban on honest posting applies at the board. I think it would be wrong to recommend that my readers make use of a board that has a ban on honest posting in effect. What if they used the board to help inform their investing strategies without knowing that a ban on honest posting is in place? I would not feel at all good about it if that happened.
It’s all crazy as crazy can be. There was a time when I would have thought you were nuts if you said that there was a board somewhere that banned honest posting on investing. Why would anyone do such a thing? Why have a board at all if you are going to ban honest posting?
The reality is that we now have a number of them.
And people wonder why the U.S. economy is going over a cliff!
We need to deal with the core problem — the fact that the “experts” continue to pretend that the three decades of academic research showing that valuations affect long-term returns does not exist. It exists! It’s real!
We cannot deal with the problem until we first acknowledge it. We need to as a community acknowledge that the “experts” messed up., Big time.
Rob