A Rich Life

The Old Ideas on Saving & Investing Don't Work -- Here's What Does

Archives for January 2011

“Rob Can Be Exhausting & Perhaps Does Not Recognize Well-Supported Contrary Views As Well As I Wish He Would”

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Set forth below are some words that Arty put to the comments section of a blog entry from last week:

Hi, Dripguy,

To the Rob quote you mentioned, above, I do agree, as would Shiller and many, that extreme far-right valuations represent “dangerous road conditions”. And I’d add that this might apply not just to “buy and holders”.

Every year I have some intermittent discussions with Rob, usually around holidays or when I am of from work. I do understand he is quite enthusiastic on his views. Indeed, he can be exhausting, and perhaps does not recognize well-supported contrary views as well as I wish he would. Rob knows that and I know this going-in.

I understand the frustration some might feel with Rob, and I believe he can do much better with his dialogue approach. But this is sometimes also said of me, and it is not upon me to teach anyone else better discourse methods. What would he say if I suggested thus? I assume others have already done this. Maybe you have.

Rob and I do agree on some basics, and that “valuations matter” is likely the main of them (of course, many experts do not dispute that.) In fact, I first discovered Shiller and PE/10 long ago because of Rob, which is why I have returned here occasionally to say “hi” and chat. I do read the various investing boards when I can, and have found some discussion of PE/10 there too. Rob and I also agree that emotions can matter greatly in investing, as looking at any discussion board, and even its leaders, will pointedly demonstrate.

Rob and I do NOT agree on some central points. I do believe there is a buy and hold approach that accomplishes much of what he (or Shiller) might intend with P/E 10, though I feel it lies in what we might call a more conservative approach to investing that recognizes the “fat tail” events of the bearish kind—the wealth killers. PE/10 seeks to avoid that with long range timing, of course. I am hopeful Rob can recognize the validity of this approach to buy and hold and I am not sure the approaches are mutually exclusive (especially at extreme levels). But I think he’ll likely pass. It’s OK.

While I think Shiller’s PE/10 concept and Rob’s tools that use them are fascinating, I am not sure if they are very useful beyond the extremes of valuations—the broad middle. I have tried to examine this, and have not been successful in finding acceptable solutions for their general use, either by me or elsewhere. Rob seems to feel committed to his views and solutions. Perhaps Shiller does too. Though, I have indicated that even Shiller is still waiting for a better time to buy than March 2009 (as per his own words). He waits still. And if I used the Shiller tool, I would never be wholly out of stocks.

I suppose had PE/10 a definite utility, its use would long since have been employed by experts whose livelihoods depend on outperformance. PE/10 would have “changed everything” in that area. It hasn’t. Though, there again, we might agree that institutional managers have other ways to make money from us and may not seem popular if they were lagging the market as a whole—something that a Shiller model must sometimes do.

My question to you is given your position about Rob, why do you return here ever and read his articles and posts? You clearly have some history with him.

Happy New Year!

VII #24: Does Shiller Endorse Valuation-Informed Indexing?

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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 stockinvestingworks (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.

Read more:http://www.valuewalk.com/valuation-informed-indexing/ivaluationinformed-indexingi-24-brdoes-shiller-endorse-valuationinformed-indexing/#ixzz1Ak5maZK1

ITNR #37 — Never Ask a Stock Salesman Whether It’s a Good Time to Buy Stocks

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I’ve posted Column Entry #37 to my weekly Investing: The New Rules column at the Death by 1,000 Papercuts site. It’s called Never Ask a Stock Salesman Whether It’s a Good Time to Buy Stocks.

Juicy Excerpt: Cynical souls are going to jump to the conclusion that I am calling Bogle and the editors of Money and the top personal finance bloggers liars. It’s not so. I don’t believe that they are liars, at least not in the way in which the word is generally employed. I have seen a good bit of evidence pointing the other way. I believe that they are compromised. That’s something different.

“A Portfolio with Higher Prices, by Definition, Is More Risky than the Same Portfolio with Lower Prices”

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Set forth below are some words put forward by Joe Pitzi, a financial planner, to the comments section for a post at the Nerd’s Eye View blog (run by Michael Kitces, also a financial planner) titled What Is the Difference Between “Being Tactical” and “Market Timing:”

I find it amusing that some planners consider anything other than passive investing to be market timing. What you are describing here as “tactical” is essentially what you find in the teachings of Benjamin Graham. In his book, The Intelligent Investor, he outlines that investors ought to stay between 25% and 75% stocks at all times, and that valuations ought to be the driving force behind that decision. That provides a whopping 50% swing in your allocation to stocks when markets are extremely overvalued versus extremely undervalued. I would hardly call Graham a market timer…which leads me to ask, isn’t this simply value investing?

I submit that this concept is precisely what “value investors” like Grantham, Eveillard, Klarman, de Lardelmelle, Romick, Hussman and Leuthold preach year in and year out.

To your point Steven, there is no reason you cannot integrate a “value investing” strategy using index funds, ETFs, Vanguard or DFA. It doesn’t require “active fund management” to integrate a tactical approach. Furthermore, I completely disagree about your risk comment. You will never convince me that a 60/40 portfolio had the same risk in 2009 as it did in 2007. If you define risk as volatility (as the academic world tends to do), then the portfolio in 2009 actually had more risk. For a long-term investor, I submit that this definition of risk does not make sense. If you define risk as permanent impairment of capital (as value investors do), the opposite is true. A portfolio with higher prices, by definition, must have more risk than the exact same portfolio with lower prices.

VII #23: Even Stock Pickers Can Benefit from Allocation Shifts

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I’ve posted Entry #23 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Even Stock Pickers Can Benefit from Allocation Shifts.

Juicy Excerpt: Stock pickers do not believe in market efficiency; effective stock picking is impossible in an efficient market. But presuming that there might be some efficiency to the market, it is likely that there is a greater measure of efficiency on the micro side (how individual stocks are priced) than on the macro side (how the overall market is priced). Stock pickers are better informed than most indexers. So the market is probably better able to price stocks well relative to each other than it is to price the overall market properly.

Market inefficiencies present opportunities to stock pickers. They seek to take advantage of micro inefficiencies by picking stocks. It may be that even greater opportunities are available to them in the form of macro inefficiencies. Stock picking is all about gaining an edge. Lots of people are studying annual reports of all the companies in an effort to find profitable edges. How many are giving thought to how much of a change in their overall stock allocation is appropriate at various valuation levels? It may be that it is on the macro side that the low-hanging fruit is to be found.

Beyond Buy-&-Hold #19: There’s No Such Thing As An Unemotional Investor

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I’ve posted Entry #19 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called There’s No Such Thing As An Unemotional Investor.

Juicy Excerpt: It’s not my intent here to pick on Larimore and Bengen. Millions of Buy-and-Holder did what they did. They talked the Buy-and-Hold talk but the first time the theory was tested in a serious way they failed to walk the Buy-and-Hold walk. The human is The Rationalizing Animal. We do it so well that we fool ourselves into not thinking that we are doing it. We do this all the time.

ITNR #36 — Fear of Data

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I’ve posted Entry #36 to my weekly Investing: The New Rules column at the Death by 1,000 Papercuts site. It’s called Fear of Data.

Juicy Excerpt: In any other field, this would be the end of the controversy. The safe withdrawal rate is the product of a numerical calculation. When peer-reviewed research shows that the numbers now in use are in error, the studies generating those numbers need to be corrected. No? That’s sure how I have seen things work in all fields other than stock investing analysis. It doesn’t work that way in this field. Terms like “data” and “research” and “science” are given very different meanings when the topic at hand relates to stock investing.