I’ve posted column entry #24 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Does Shiller Endorse Valuation-Informed Indexing?
Juicy Excerpt: Shiller has said surprisingly little about how to implement his investing ideas. His focus has been on doing research and on setting forth a new theory of how stockinvesting
works (the subtitle of his book is: “The National Bestseller That Revolutionized the Way We Think About the Stock Market.”). The idea behind this column is to put forward one person’s take on where our understanding of how stock investing works is headed presuming that Shiller’s ideas prevail in days to come. My ultimate aim is to launch a national debate in which we will hear thousands of people offering views on these topics, some of them likely being at least somewhat in line with what I suggest here and some of them likely sketching our very different perspectives on where things are headed.
Sure he does (support value informed indexing). I’ve watch all of the Yale lecture series of his economics class that are available for free on the web, and it is painfully obvious that Shiller endorses the concept of considering valuations, the current “animal spirit”, and the degree of irrational exuberance in place at any given time. He is constantly being interviewed to access the real estate market and its future direction.
If he feels all of these things can be intelligibly accessed, then certainly he would support the idea of making portfolio adjustments based upon market climate, not just upon one’s age or risk tolerance.
Rob, “value informed investing” is not as shunned as I think you believe that it is. I have read 100s of articles during my adult years with topics accessing whether various stocks, sectors, the (U.S.) market in general, or world markets are under or overpriced which often include suggestions to move into or out of the topic of discussion. The concept in general is practiced as least as often as buying-and-holding (in theory).
Outside of theory, true buy-and-holding is EXTREMELY rare. I can’t say that I know a single individual that has maintained a pre-defined buy-and-hold allocation which survived both the 2000 crash and the 2007 crash, without either one of these events compelling them to do something different (in other words, fail at buying and holding).
Thanks much for stopping by, Azanon. Those are extremely helpful comments.
I half agree with you and I half do not.
There’s no question but that many people follow valuation-informed strategies. I have run into thousands of them at the various boards and blogs. Even Bogle himself acknowledges that valuations affect long-term returns. Guess who I learned this from? John Bogle! Mr. Buy-and-Hold himself.
The problem we face today is that, if valuations matter, Buy-and-Hold is pure, dangerous nonsense. While many people acknowledge that valuations matter, how many of the studies and calculators prepared during the years when we thought that Buy-and-Hold could work have been corrected? Have ANY been corrected? If there are so many who understand that Buy-and-Hold can never work, why not? What is going on?
We are living in a strange twilight zone in which everyone who has even a passing familiarity with the literature knows that valuations affect long-term returns but in which just about no one talks publicly about the OBVIOUS IMPLICATIONS of this critically important finding. Other than me, Shiller comes the closest to doing this. But Shiller does not discuss how investors should set their stock allocations in his book. Why not? Why has no one else picked up the ball and tackled this project in the 11 years since Shiller’s book was published?
I turned in a column yesterday with the title “Stocks Are Less Risky Than Bonds.” That’s huge. That changes the history of investing. People have been thinking that stocks were more risky than bonds for many, many years now. It is crazy that I am the first person to be saying that, if Shiller is right, stocks are less risky than bonds.
What the heck is going on?
What’s going on is that Buy-and-Hold started out as science and morphed into a marketing gimmick. Today it is 100 percent marketing gimmick. There is no science in it anymore, not 30 years after Shiller’s research showed that the fundamental principles are in error. But that doesn’t mean that no one believes that timing isn’t necessary or that stocks aren’t always best for the long run or any of this other nonsense. Millions of good and smart people believe these things! They are in the process of destroying their retirement hopes and the “experts” in this field are doing little to inform them of the 30 years of research showing that Buy-and-Hold can never work in the real world.
Why?
Because we have created a monster. Investing is an intensely emotional endeavor. There are people who have spent 30 years following pure Get Rich Quick strategies while thinking that they were following an approach that was rooted in science, an approach that DISDAINS Get Rich Quick thinking. Tell these people that they are following a Get RIch Quick approach and they go NUTS. That’s not even a tiny bit of an overstatement. I have seen this happen thousands of times.
We are going to have to deal with this problem as a society. The direct losses from Buy-and-Hold are $12 trillion. The indirect losses are likely to be another $8 trillion. The combined number is bigger than the number for the entire national debt accumulated over the time going back to the days of George Washington. Our free market economy cannot continue to take those sorts of losses. If our economic and political systems are to survive, we are going to have to have some brave and patriotic people step forward and point out that the Buy-and-Hold Emperor is wearing no clothes. We are going to have to pull together to help the Buy-and-Holders get over their emotional pain and find a way to manage the transition from the Buy-and-Hold Era to the Valuation-Informed Indexing Era.
In a theoretical sense, it shouldn’t be hard. VII is so superior that the shift is likely to bring on the greatest period of economic growth in our history. Permitting honest discussions of the realities of stock investing is a win/win/win/win/win, with no possible downside. But I can tell you with 100 percent certainty of not being contradicted by any reasonable person that many Buy-and-Holders do not see it that way. There is a ban on honest posting at the Bogleheads.org board. And at Morningstar.com. And at Fool.com. And at IndexUniverse.com. And on and on.
These places do not want to ban honest posting. They all permitted honest posting for a time. But they all ultimately agreed that a ban was needed. Why? Buy-and-Holders went so nuts at their boards that the boards could no longer function. The pain that Buy-and-Holders are feeling is INTENSE. They are not pretending. They are feeling great pain.
The people who congregate in investing communities don’t like to talk about emotional pain. We don’t even have a vocabulary for it. The usual reaction is to think that once we start talking about emotions we are no longer talking about investing. No! ALL OVERVALUATION IS THE PRODUCT OF INVESTOR EMOTION.
If we are going to talk about the effects of overvaluation, we are going to need to talk about investor emotions. The old rules of what is properly viewed as an investing topic and what is not no longer apply. The rules changed when Shiller discovered that valuations affect long-term returns. The emotional pain that is being felt by the Buy-and-Holders (which is what is keeping stock prices propped up today) is part of the story of our economic crisis, which means that it is a story of huge political significance as well.
Anyway, those are my thoughts. I think you made excellent points in your comment, Azanon. I hope we all will hear from you again.
I remember an Azanon from the Early Retirement Forum. Are you the same fellow?
Take care, my new friend.
Rob
I’d just like to briefly clarify two sometimes misunderstood concepts:
“buy-and-hold”, where it concerns the typical asset allocation of today, isn’t exactly buying and holding. Literally, buying and holding, means buying an investment then holding it indefinitely regardless of price change. In reality, most modern asset allocation endorses rebalancing – usually annually – that will accomplish, you guessed it, selling high and buying low.
In other words, prices matter to the modern asset allocator too (whether they realize it or not), … just not as much as they do to you. Case and point, had one “rebalanced” a 60/40 portfolio through the 1990s, they would have “banked”, exponentially, quite a bit of cash by 2000, despite the 60% portion suddenly dropping.
The second concerns the statement “stocks are more risky than bonds”.
That statement deserves clarification. This is typically a reference to stocks volatility and, as a result, the fact that they are a poor investment vehicle when the investment time horizon is 5 or less years. Stocks ARE, matter of fact, more risky than bonds for 5 years or less, regardless of the P/E 10 level. I know that you know, Rob, that short term stock timing does not work.
But long-term? It’s actually common knowledge (to investment professionals anyway) that stocks are less risky than bonds, because bond investors accept the risk of their money not keeping up with inflation, which is a HUGE risk.
And by-the-way, I’ve been banned at http://early-retirement.org/forums/ I’d admit to being biased, but I think based on my knowledge of investing (and personal investing success), I consider it their loss.
I’ve been banned at http://early-retirement.org/forums/
If the ban was solely because you posted honestly on matters of importance to the board community, the ban is 100 percent wrong, in my assessment.
I consider it their loss.
Who is “their,” Azanon?
If the “their” we are talking about is a group of thugs who don’t want you around because you point out the weaknesses in their arguments, I cannot say that I am too worried about the “their” suffering a loss. They brought that loss on themselves.
If the “their” is the entire Retire Early community, I am very concerned. I have been the primary builder of that community for 11 years now. I want to see the community thrive.
If you were banned solely for posting honestly and thereby making a group of thugs “look bad,” it is the entire Retire Early Community that has suffered because of the unjust and indefensible banning. I hope that we will in days to come be able to organize the entire internet to set up procedures to insure that this sort of thing can never happen again.
Those who put their blood, sweat and tears into building a community have a right to a say in how it will be run. We all need to stop reacting in fear to the thugs on the internet and stand up to them and in defense of our own right to post intelligently and honestly and civilly.
This is my sincere take re this matter.
Rob
“most modern asset allocation endorses rebalancing – usually annually – that will accomplish, you guessed it, selling high and buying low.”
Rebalancing keeps you at the same stock allocation at all price levels, Azanon. That is its PURPOSE.
There is now 30 years of academic research showing that valuations affect long-term returns. Given that valuations affect long-term returns, why the heck would anyone want to stay at the same stock allocation in the face of dramatic price swings? That would be INSANE. That would be dramatically lowering your return while dramatically increasing your risk. For what purpose?
The only reason why any reasonable person ever believed that rebalancing made sense is that there was a time when many believed in the Efficient Market Theory, which posits that overvaluation is a logical impossibility. If overvaluation did not exist, Buy-and-Hold would indeed be the best strategy ever developed by the mind of mortal mind. I give them that.
But it has been 30 years now since Shiller showed that valuations affect long-term returns.
The only reason why anyone continues to believe in rebalancing today is the ban on honest posting. Once we overcome the ban, the millions of middle-class investors whose retirement hopes are riding on their ability to gain access to accurate and honest and realistic and data-based investment advice are going to be able to learn the realities and rebalancing will be no more.
Rebalancing was a MISTAKE. I don’t say that it was cooked up with bad intent. But it shouldn’t take 30 years to correct such a dangerous mistake. There are millions of people suffered big financial losses today because of their misplaced confidence in rebalancing, which The Stock-Selling Industry continues to promote like mad even two years after the beginning of the economic crisis brought on by widespread use of this “strategy.”
Rob
It’s actually common knowledge (to investment professionals anyway) that stocks are less risky than bonds, because bond investors accept the risk of their money not keeping up with inflation, which is a HUGE risk.
I’d be grateful if some of these investment professionals would begin sharing their knowledge with the peons who have their retirement money at risk and who have placed their confidence in the conventional wisdom that stocks are more risky than bonds. The title of my weekly column at the ValueWalk.com site for next Tuesday is :”Stocks Are Less RIsky Than Bonds.”
We are in complete agreement re the point you make here, Azanon. My sense is that we differ in the level of outrage we feel over the failure of the “professionals” to publicize this point. If stock returns are highly predictable (Shiller showed that they are 30 years), stocks are OBVIOUSLY less risky than stocks. So why is it that millions of investors would be shocked to hear this today?
I think it is would be fair to say that the primary reason is that The Stock-Selling Industry profits handsomely from the promotion of Buy-and-Hold and that the entire house of cards falls to the ground once it becomes common knowledge that long-term stock returns are highly predictable.
Rob