Rajiv Sethi, a professor of economics at Barnard College, Columbia University, said in a blog entry update dated February 17, 2010, that: “Rob Bennett makes the claim that market timing based on aggregate P/E ratios can be a far more effective strategy than passive investing over long horizons (ten years or more.) I am not in a position to evaluate this claim empirically but it is consistent with Shiller’s analysis and I can see how it could be true.”
Schroeder (a regular at the Goon Central board) put a comment to that blog entry that night describing a case in which he believes that Buy-and-Hold produced better results than Valuation-Informed Indexing. I disputed this point, arguing that Schroeder’s illustration was cherry-picked after-the-fact and that The Investor’s Scenario Surfer shows that Valuation-Informed Indexing produces better long-term results in roughly nine out of 10 of the possible returns sequences. I asserted that a strategy that produces good results in only one out of 10 of the possible scenarios is a high-risk strategy and that, thus, it cannot be said that Buy-and-Hold is providing good risk-adjusted returns even in those few cases in which it yields better nominal results than Valuation-Informed Indexing.
Sethi offered the following comments in response to my post:
“Rob, I don’t think that randomly generated returns (regardless of the distribution you are using) can provide a convincing test of your claim. What you would need to do is to use historical data (as Schroeder has done) with multiple starting points and horizons. But even this is not enough: the P/E thresholds you choose for switching portfolio composition must be such as to generate on average over time the same asset allocation as the buy and hold strategy. In other words, you can’t pick the critical P/E thresholds (12/20) and the asset allocations (25/50/75) independently: they have to be selected jointly to match the buy and hold asset allocation over long horizons.”
I posted a lengthy response, which I encourage you to read by following the link set forth above.
I am grateful to Sethi for sharing his thoughts with us. I believe that he has pushed the ball forward a bit. That Schroeder individual I am not so sure about (I’m joking — there have been numerous cases in which Schroeder has offered constructive comments and this is one of them, in my assessment).
The Bogleheads forum turns three years old today.
http://www.bogleheads.org/forum/viewtopic.php?t=50495&mrr=1266598918
Newcomers here may need to be informed that I am the “hocus” individual that they are busy “thanking” over there all the time. I am the “irritant” that made the “pearl.”
Oh, my!
Rob
Meaning that the Boglehead’s forum was formed by those escaping another forum, which you were in the process of destroying by your trolling.
I think it would be fair to say that that’s how the Buy-and-Hold Dogmatics saw it, Jose.
There were also hundreds of community members who loved the idea of allowing honest posting and who said so.
The posting rules of the forum permit honest posting. It’s the abusive posting of the Buy-and-Hold Dogmatics that should be reined in.
But then you have a problem — How can people continue to promote Buy-and-Hold when it is permissible to tell people about the 30 years of academic research showing that the odds of Buy-and-Hold ever working for the long-term investor are precisely zero?
That’s not my problem. And that’s not the problem of the thousands of community members there who have expressed a desire that honest posting be permitted.
The Buy-and-Hold Dogmatics are trapped. They claim that the reason why Buy-and-Hold is superior is that it is supported by the academic research. But they cannot permit people to learn about the academic research of the past 30 years because it would cause them to lose confidence in Buy-and-Hold.
This cannot stand. There is no one who benefits from not knowing how to invest effectively. Buy-and-Hold will continue to work its destruction on our economic and political systems until people become sufficiently fed up to insist that honest posting on the flaws of Buy-and-Hold be permitted. Then its over.
Then we begin the rebuilding process. The same human energies that are today being used to destroy our economy can do wonderful things when they are being put to used to rebuild it. The magic happens when a number of us work up the courage to say the Three Magic Words (“I” and “Was” and “Wrong”).
That’s what it takes. It doesn’t seem like it should be such a big deal. But for some of the humans, it is.
Rob