I’ve posted Entry #71 to my weekly Investing: The New Rules column at the Death by 1,000 Papercuts site. It’s called I’m Extreme! That’s Good!
Juicy Excerpt: None of the studies have been corrected. Why? Because everyone in the field understands that the day we all openly acknowledge that Buy-and-Hold caused millions of failed retirements is the day Buy-and-Hold dies. And, like Spokane Al, many see that as an “extreme” event.
It is an extreme event. Buy-and-Hold has been the dominant model for close to 40 years.
But it is not an extremely bad event. It is an extremely good event.
Arty says
JJ ABODEELY is an excellent writer and seems influenced by Shiller, Grantham, Hussman and others who similarly understand that valuations matter.
Here is a good example that you will perhaps find inspiring:
http://www.valuerestorationproject.com/2011/10/on-market-timing-and-whiskey/
And here are some of his articles. I’m trying to find more as this guy seems a strong ally towards sensible investing.
http://pragcap.com/?s=jj+abodeely&x=10&y=6
Rob says
“My friends, I had not intended to discuss this controversial subject at this particular time. However, I want you to know that I do not shun controversy. On the contrary, I will take a stand on any issue at any time, regardless of how fraught with controversy it might be. You have asked me how I feel about market timing. All right, here is how I feel about market timing: If when you say market timing you mean the loser’s game, the fool’s errand, the speculator’s effort that separates savers from their capital, turns investors into gamblers, lines the greedy pockets of brokers, strategists, and newsletter writers, challenges the irrefutable logic of efficient markets, yea, literally plunders the wealth from widows and retirees; if you mean the evil action that disrupts the well counseled man and woman from the pinnacle of appropriate strategic asset allocation, balanced objectives, long-term orientation into the bottomless pit of fear, and greed, and meaningless noise, high expenses, and tax inefficiency, and short-termism, then certainly I am against it.
“But, if when you say market timing, you mean assessing fundamental value compared to price, favoring undervalued assets while avoiding overvalued ones, always demanding a margin of safety and being in cash when none exists; if you mean being opportunistic and forward looking, buying low and selling high; if you mean the activity which saves investors from catastrophic and permanent losses of capital, achieving positive absolute returns, the endeavor that avoids following the herd up the mountain of excess and over the cliff of despair, favoring instead consistent compounding of modest returns, and the ability to sleep well at night; if you mean that undertaking which has provided capital as the gasoline for the engines of economic growth and prosperity, protected purchasing power and met future liabilities, funded robust retirements, sustainable wealth transfer, and philanthropic endowments, then certainly I am for it.
“This is my stand. I will not retreat from it. I will not compromise.
“JJ Abodeely, 2011”
Holy moly!
I don’t have time at the moment to go beyond those three paragraphs. But I think it would be fair to say that, if this guy were a woman, I would be feeling obliged as a matter of principle to divorce my current wife and marry her instead.
Has no one told this fellow that there are certain sorts of things about investing that just may not be said>
How did you find this fellow, Arty? I am going to be spending lots of time going over everything he has written and trying to connect with him. This is a major find. If I can figure out a way to be in the same room as this fellow for a moment or two, for that moment or two I won’t even be an extremist anymore! I’ll just be good old middle-of-the-road Rob again. Whoever thought that we would see that day again in this Century?
Rob
Arty says
Thought you’d might find him interesting. Found him on some google search, several links on, for more Shiller PE/10 discussion (and if you look at his articles in that link I sent, you’ll find lots of that or valuations discussion, both attacks on Shiller and defenses from JJ). Sort of like how I found your site when searching for added info on indexing and criticisms. Funny, how things get found, eh?
His quote is a clear play on another older quote from a different context—literally whiskey. But I have read a number of JJ’s articles and he is a bright guy and knows all the main players from Markowitz to Fama to Bogle to Shiller, Grantham, Hussman. And I’ll be looking for more from him. Maybe I’ll write him but I’ll let you get first dibs on that!
The man has my attention.
Rob says
I’ve sent J.J. an e-mail, Arty.
I included links to my bio and to the “About” page for this blog, which provides background and links re the Buy-and-Hold Crisis.
I haven’t had time yet to read all the articles at his site, but what I have looked at is certainly impressive and encouraging.
Thanks very much for pointing us to this valuable resource. As you note above, this is how the internet works when it is working well.
Rob
Arty says
Good luck with your communications with JJ. Let us know how it goes.
Rob says
I’ll report it here if I hear anything from him.
I am going to put a link to that super three-paragraph explanation of all you need to know to become an effective investor at the “Links That Matter” section of the site (it’s on the right-hand side of this page, near the bottom of the page), in any event.
Rob
Arty says
There have been a number of critiques of Shiller, none of them very good, in my view. The biggest complaints (on TV and from some advisors) seem to be centered on earnings being depressed because of the last two Bears, thus sullying the metric some. But, I don’t see that as a huge issue and if this caused one to remains too conservative using PE/10, I don’t see that as the greater crime. If they are right, you’ll just make a bit less.
Here is another lengthy discussion of Shiller, but here too, I’m not left convinced that any change in how I view PE/10 is warranted. This guy is an individual stock picker/seller so does not have skin in the buy and hold game, I think. Still, always good to see other views.
http://seekingalpha.com/article/299217-prof-shiller-and-cape-may-be-correct-generally-but-the-market-is-currently-cheap
Rob says
That’s a fine article. It’s intelligent and in-depth and fair-minded. I am grateful to you for posting it.
I understand why you say this fellow is not invested in Buy-and-Hold because he picks individual stocks, He is not following the approach urged by the majority of posters at the Bogleheads Forum.
I use the term “Buy-and-Hold Model” in a broader way. I use it to refer to any investing strategy not in accord with Shiller’s findings but instead rooted in the Efficient Market Theory. These are the only two models that I know of that possess intellectual coherence. This guy is NOT following the Shiller model, according to my quick assessment. So he does indeed have something invested in a belief in the Buy-and-Hold Model in at least that sense.
The big difference between the two models is the belief about what causes stocks to be priced as they are. The Buy-and-Hold Model presumes RATIONAL investors pursing their own self-interest. The Shiller model (Valuation-Informed Indexing) presumes EMOTIONAL investors getting caught up in conflicting internal urges to follow Get Rich Quick strategies and to embrace the safety of sticking to what common sense says must be so.
I’ll give an example that illustrates why this difference is so fundamental.
The fellow debates whether stocks are overpriced by 20 percent or not. He brings in all sorts of evidence to make the case that stocks are not overpriced today and worries that those who follow Shiller may miss out on a chance to buy stocks at a reasonable price.
It’s true that the Shiller model is not saying that stocks are dramatically overpriced today. They are overpriced. But if that is all there were to worry about, investing heavily in stocks would not be such a terrible idea today.
The reality (according to Valuation-Informed Indexers) is far, far worse than what the relatively modest amounts of overvaluation present today suggests.
If stock prices are determined primarily by emotion, the losses that investors have suffered from 2000 forward are likely to cause far larger losses in the years ahead. When we go to fair value, the price drop will not stop but will accelerate.
That is 100 percent irrational. If investors were rational, they would BUY MORE when prices reached fair value levels. But investors are NOT rational, not today. When prices fall to fair value levels, emotional investors will give up on stocks and lower their allocations dramatically, causing much steeper price drops. Prices will continue to fall until we get to one-half fair value. Those losses will likely put us in the Second Great Depression.
This guy is good at using his reasoning powers to make an intelligent argument. What he is failing to appreciate is that the thing he is studying is NOT a rational endeavor. So logic alone does not help us understand it.
Can you imagine trying to understand romantic relationships solely though the use of logic? It would be a disaster. Or can you imagine trying to use a computer program to write a song? It would be a disaster. That’s what this fellow is trying to do in this article. He is describing what investors SHOULD do, not what they WILL do in the event that investors act as they have always acted before.
The Shiller Model adds a dimension that has not been considered before. The Shiller model considers the effect of human emotion. That’s why we look at P/E10. P/E10 is a valuation metric and all mispricing is an emotional phenomenon. P/E10 tells us how irrational the market is at any given time. This guy assumes away everything Shiller brings to the table before he starts his analysis because this guy ASSUMES that investors are rational actors.
Rob
Arty says
Chuck Carnevale is a reasoned man without a particular vendetta that I can discern. I read him often. Funnily, he makes more sense than many of the die- hards, even as he represents the ultimate evil to them—a “speculator”.
He does make some errors in the article on Shiller’s metric, but that’s OK. Seems a good sport trying to figure things out.
I think Chuck assesses his own valuations, on an individual stock level and maybe as a group (like the S&P), but more the former. He is not an indexer, is my take. But valuations DO matter to him in a way they do not for the fund buy-and-holders and perhaps not the Shiller folks either.
In fact, I’ve learned to revisit a few of these types as they offer angles on debate that get missed in the polarizing views of the investment boards. I know all the other arguments so why not hear some fresh voices? These guys—the individual stockpickers (the “bad” boys according to the gospel) sometimes provide that.
Rob says
My view is that the idea that stock picking can never work is more marketing mumbo jumbo. I have never seen a study that makes an effective case that this is so.
Effective stock picking takes intelligence and discipline. We should admire and learn from effective stock pickers, not ridicule them.
I recommend indexing for the 90 percent of middle-class investors who don’t have the time to do the research needed to pick stocks effectively. But it embarrasses me as an indexing proponent to hear Bogle and others argue that stock picking can never work even for those who put the effort into the job needed for it to pay off. People who overstate their case discredit themselves by doing so.
We are supposed to believe that Warren Buffett is a fool for believing that he can pick stocks effectively? People who speak such nonsense insult our intelligence by doing so, in my assessment.
Rob
Arty says
I think both your points are correct.
There are successful stockpickers (incredible as it may seem). AND most people lack time skill or inclination to try this. I’d bet you find more stockpickers who care for valuations than conventional players. After all, Hussman, Grantham, and Buffet all pick individually and all think valuations matter.
And for anyone—lay and pro alike— a solid indexing approach that cares for valuations is valid. S&P 500 plus some quality fixed income does the trick admirably.
Rob says
I’d bet you find more stockpickers who care for valuations than conventional players.
Yes. The trick is to find solid value propositions. So you want things to be mispriced in your favor, not against you.
The beautiful thing about indexing is that it makes it so easy to identify good value propositions. You don’t need to worry about all the things stock pickers study. All you have to do is look at the P/E10 value.
And the Buy-and-Holders ruin it by saying not to look at that!
This drives me crazy. They came within one step of creating the ideal investing approach and now they refuse to fix that one mistake.
But people are coming around.
Rob
Arty says
They are getting there, I think. All great things go through phases that are less than, well, less than great.
Or perhaps there are just a few who make a lot of noise about the issue. Hell, even Bogle clearly came out in support of Shiller’s metric, and obviously even the “dumb” stockpickers know more of value about Shiller than do most indexers.
And yeah, it can really come down to using just the S&P and whatever fixed income you think appropriate (providing those bonds are not too inherently risky—those that contain equity-like risk themselves—like high yield bonds.
So for those who promote simplicity it doesn’t get much simpler—for something that would work optimally, that is. Now buy and hold IS simpler, in that no moves are made. But then you have very few approaches, usually only the conservative ones (like a Wellesley fund or Permanent Portfolio) that can give buy and hold a fighting chance— because they never overreach their equity allocation. But most don’t do that; most have too much equity, typically.
Rob says
Or perhaps there are just a few who make a lot of noise about the issue.
That’s it, Arty.
I know this because I know how people reacted in the early Motley Fool days. The majority loved the idea of discussing new ideas. Loved, loved, loved it!
But the majority wants nothing whatsoever to do with the ugly, nasty stuff. They hate, hate, hate that stuff. They don’t want to see it and they don’t want to have to put themselves at risk by speaking out in opposition to it.
So the small number willing to dump garbage over everything to get their way essentially have veto power over what can be discussed. It might be 20 percent ruining things for the other 80 percent.
At some point, the 80 percent will get fed up. Then it’s over.
Or should I say — Then it begins!
Rob