“I Want the New Model to Become More Popular Over Time. It Can Never Become More Popular If the People Who Believe In It Always Pull Their Punches for Fear of Upsetting Any Buy-and-Holders.”

Roger:

Thanks much for your response.

I know that you are 100 percent sincere and I know that there are lots and lots of smart and good and hard-working people who agree with what you are saying here.

I believe that you are missing something. I’d be grateful if you would let me try to explain what I think that something is.

The purpose of all the work I do is to explore the implications of Shiller’s model for understanding how stock investing works. What people have a hard time accepting is that Shiller’s model (Valuation-Informed Indexing) is a complete replacement of the now-dominant model (Buy-and-Hold). The subtitle of Shiller’s book describes the ideas in the book as “revolutionary.”I think that sends the proper signal. Shiller’s model is something entirely new.

There’s only one difference. But that one difference has far-reaching strategic implications.

The difference is that Shiller’s model posits that you must take valuations into consideration when making any investment decision.

Buy-and-Holders look at a number of factors in choosing their stock allocation. The two biggies are: (1) the attitude of the investor toward risk; (2) how old the investor is. Looking at those factors, they say “you should have a stock allocation of about x and then you should stick with it unless something happens to change the analysis.”

Valuation-Informed Indexers look at an additional factor — the valuation level that applies at the time the allocation decision is being made. We believe that it is not possible to make a good decision on ANY investing question without taking valuations into account.

We believe that the investor should aim to keep his risk profile roughly constant. We also believe that the valuation level that applies affects how risky stocks are (stocks are more risky when valuations are high). Thus, we believe that investors MUST change their stock allocations in response to big price swings. We believe that it is a a terrible mistake not to do this. This is of course the OPPOSITE of what the Buy-and-Holders say. The Buy-and-Holders say that it is a bad idea to change your stock allocation, that it is something to avoid rather than something to be certain to do.

These ideas are rooted in opposite understandings of how stock investing works. They cannot be reconciled.

I feel great respect and affection for the Buy-and-Holders. The friction you see on these threads does not come from some personal animus on my end. I LIKE Buy-and-Holders. But I of course want to be free to tell people what I truly believe about stock investing. And the reality here is that a good number of Buy-and-Holders are not comfortable with what I say. It makes them feel uneasy.

A Buy-and-Holder might say that Investor A should always go with a stock allocation of 60 percent. A Valuation-Informed Indexer might say that that same investor should go with an allocation of 60 percent when prices are at moderate levels, an allocation of 90 percent when prices are super-low and an allocation of 30 percent when prices are super high. The research shows that by making that one change the investor will be able to retire five to ten years sooner and will experience a dramatically reduced risk level. The stock allocation an investor chooses is of great importance. The difference it makes to get the stock allocation right is counter-intutively great.

The problem we have is that, because the difference between the two models is so great, it shocks people to hear that the research supports Valuation-Informed Indexing. Most people have never heard that before. I sincerely believe that is so. There really was a time when lots of smart people believed that the research supported Buy-and-Hold. But my view (and this view is shared by many others) is that that earlier belief was discredited by Shiller’s research.

Now –

I don’t mind it even a tiny bit that lots of people still advocate Buy-and-Hold. Lots of people still believe in Buy-and-Hold. It would be wrong for those people NOT to advocate Buy-and-Hold. I have zero problem being friends with those people.

But I must object when others try to intimidate me into saying things I do not believe. I believe that Buy-and-Hold caused the economic crisis. Whenever stock valuations get insanely high, we have a crisis. There has never been a single exception in the historical record. If investors knew that stocks offer a poor long-term value proposition when prices are high, prices could never get insanely high again because the lowering of the value proposition would cause sales and the sales would pull prices back to fair-value levels.

That’s the dispute. Should investors who want to keep their risk profiles constant be changing their stock allocations in response to big price swings or should they be sticking with the same stock allocation at all times?

I want the new model to become more popular over time. It can never become more popular if the people who believe in it always pull their punches for fear of upsetting any Buy-and-Holders. I like the Buy-and-Holders. I have zero personal desire to upset them. But I feel bound in conscience to say what I truly believe about how stock investing works and I believe that it would be very, very wrong for me to change what I say to please Buy-and-Holders because of intimidation tactics applied by Buy-and-Holders who get upset to hear about these new ideas.

I hope that helps explain a little bit where I am coming from. I certainly appreciate your input in any event. I promise to return to your words a few times and reread them with the aim of picking up on points contained in them that I may be missing out on at the moment because of my personal biases. We all have them, of course. And we are always the last to know about how they are hurting us!

Rob