I’ve posted Entry #187 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Do Women Understand Investing Better Than Men?
Juicy Excerpt: It might be that we shouldn’t even refer to “valuations.” Whenever we talk about valuations, what we are really talking about is investor emotions. Why do you think it is that most in this field would rather we talk about high P/E10 values and low P/E10 values rather than fear and greed and hope and love and shame and guilt, the emotions that cause P/E10 values to head upward or downward? It’s because most of the people working in this field are men! They don’t want to hear about that yucky emotional stuff. Turn it into a number or don’t come to the table! We crunch numbers here! We’re men!
That’s why the opportunity for advancement is so great. We’ve been tuning out discussions of investing emotions for decades without knowing that we were doing it. Men often do not even speak the same language as women. They kinda, sorta get the idea being advanced. But they don’t feel comfortable engaging over emotional stuff. They patronize people making points that very much need to be seriously considered.
Shiller himself is guilty of this. I laugh when I re-read his book because he tries so hard to reduce everything to numbers. He is always taking surveys to prove his points and looking at data and research and graphics and all this sort of thing. I understand why. He has noted that most in this field treat those who venture into the emotional realm as “unprofessional.”
I put the blog entry that went up here a few minutes ago by mistake — it was a repeat from a few days ago. One of the Goons (I don’t recall which one) pointed this out in a comment. Thank you, Goon friend!
The Goon comment was lost when I deleted the mistake post. Had I thought things through and realized that that was going to happen, I would have copied the words of the comment and posted them under my name at the replacement blog entry. Unfortunately, it’s too late for that now. I apologize to my Goon friend for the loss of his words, which but for my error would have remained in the Post Archives forever and ever and ever.
Anyway, my best and warmest wishes to all. Spring is coming!
Rob
Maket timing is emotional investing. I follow what you would describe as buy and hold (which is still not an accurate description) and that out the emotion.
Short-term market timing is emotional investing. We agree 100 percent re that one. And it is the Buy-and-Hold Pioneers who we have to thank for showing us that. There is now 49 years of peer-reviewed academic research showing that short-term timing doesn’t work. I rank the finding that short-term timing doesn’t work as the second most important research-based finding in the history of investing analysis.
I don’t get where you are coming from re long-term market timing, however. The same 140 years of historical data that shows that short-term timing never works also shows that long-term timing always works and is always required for those seeking to have a realistic chance of long-term investing success. If there were anything emotional about long-term timing, the Wall Street Con Men would be pushing it like crazy. I don’t see any Wall Street Con Men pushing the Valuation-Informed Indexing concept.
Long-term timing is price discipline. Exercising price discipline when buying stocks is 80 percent of the game. Exercise price discipline (that is, engage in long-term timing) and get everything else wrong and it is hard to imagine how you could do poorly in the long term. Fail to exercise price discipline and get everything else right and it is hard to see how you could do well in the long term. It’s not Rob Bennett who says that. It is 33 years of peer-reviewed academic research, based on 140 years of historical return data.
If there were any peer-reviewed academic research supporting the smelly Buy-and-Hold garbage, I am confident that we would have heard about it a long, long time ago. If If you were advocating a Get Rich Quick approach and you learned that there was research supporting your claims, would you keep it a secret? Give me a friggin’ break!
Following what the peer-reviewed research says is NOT emotional. It is ignoring the research that is emotional. Take a look at who puts up the death threats and the demands for unjustified board bannings and the tens of thousands of acts of defamation and the threats to get academic researchers fired from their jobs. It’s ALWAYS the Buy-and-Holders doing that. I have never seen an advocate of any other investing strategy behave in the manner that I see Buy-and-Holders engage in on a daily basis.
I wonder why.
Rob
Long term timing is also emotional. You have to make a decision when to trade, just like short term. The only difference is the timeframe. Timing is also a get rich quick scheme. Buy and hold is the opposite of all that.
You’re wrong, Anonymous.
You do NOT have to make a decision when to trade when practicing long-term timing. That’s why it works.
Stocks were well-priced in 1975. The remained well-priced until 1996. That’s 20 years in which you would have been doing yourself a favor by increasing your stock allocation to the level that makes sense for you when stocks are well-priced.
Stocks were poorly priced from 1996 through today (with the exception of a few months in early 2009). That’s 18 years in which you would have been doing yourself a favor by lowering your stock allocation to the level that makes sense for you when stocks are poorly priced.
It’s impossible to lose at long-term timing so long as you certain to do it There are no mistakes. There is no guesswork. You determine what price stocks need to be selling at for a purchase of stocks to be in your best interest and you refuse to buy when that price is not available. It’s the same thing you do when you buy a car or a house or a sweater or a banana.
Have you ever worried that you need to make “a decision when to trade” when buying bananas?The idea is pure silliness, right? Well, it is pure silliness in the stock purchasing context too. Price ALWAYS matters. To not consider price when buying stocks is an act of insanity. It’s as simple and as complicated as that.
If the people selling us bananas could get away with telling us that bananas are worth buying at any price, they would do it. The difference in the stock investing context is that the Wall Street Con Men are wealthy and powerful and well-connected people and they have been able to get away with things that the people who sell us all other goods and services have never been able to get away with.
This colossal act of fraud has brought on the biggest economic crisis in U.S. history. We are going to need to all work together to bring the colossal act of fraud to an end and to open up the internet to honest posting on safe withdrawal rates and on many other critically important investment-related topics.
Rob
There are no mistakes. There is no guesswork.
So why did you not buy when P/E10 told you to?
P/E10 doesn’t tell the investor to do anything, Helper. P/E10 supplies the investor with information that permits him or her to make an intelligent choice. It is the investor who makes the decision.
Stocks offered a strong long-term value proposition in early 2009. That’s a fact. I said so at the beginning of every RobCast I recorded at the time.
But it is not necessary to buy stocks every time they offer a strong long-term value proposition. There are other factors that need to be considered.
The P/E10 value always drops to 8 or lower before a secular bear market comes to an end. It did not do that in early 2009. That comes with the next crash.
Those who bought in early 2009 WILL end up being happy they did so IF they HOLD through that crash. Whether an investor can hold through the crash or not depends on his or her personal circumstances. P/E10 cannot tell the investor what to do. He has to look at his personal circumstances, consider the worst-case returns scenario that can pop up, and then make an informed choice.
One of the scenarios was that prices would continue falling until we got to a P/E10 of 8 or 7. So, if I bought at 13, I had a chance of seeing a 50 percent loss before prices began their move upwards once again and I ultimately came out winners.
I was holding TIPS and IBonds paying 3.5 percent real per year. Prices could have fallen to 8 or 7 and then stayed there for five years or eight years. I would have experienced a loss of 50 percent of my money and also missed out on a 3.5 percent real return for five or eight years. That’s not a terribly appealing scenario.
Now —
After those five or eight years, I would have seen prices skyrocket. I would have ended up ahead in the long run. That’s why I say that the value proposition was strong.
But I get that anyway. The P/E10 level has still not hit eight. So I get to buy at an even better price. And I still to get to see those huge gains that would have made me whole had I gone ahead and purchased stocks in early 2009. I am in good shape, Helper. My bet came through. Research-supported bets almost always come through )on a risk-adjusted basis they always do).
I have a friend who discussed the situation with me at the time and elected to put a good amount of money into stocks at the time. He sold after prices moved upward. So he made out super well. There was a risk in what he did, though. A lot of investors who did that failed to sell when prices moved upward. Those people will lose their gains in the next crash. Not good.
There was nothing wrong with buying in early 2009. So long as you were certain that you would be able to hold through a crash, you would end up winners. So I applaud people who took that course.
But there is also nothing wrong with not buying in 2009. Buying opportunities never present themselves for a few months and then go away. Buying opportunities (and selling opportunities too) stay around for years and years. There has never been an exception.
There were too possible good choices in 2009 and I took one of them. Things have turned out as I expected and I am happy with that. Please understand that, when I say that things turned out as I expected, I am not saying that I had an expectation that things would turn out precisely as they have. It’s not possible to know in advance what returns sequence will pop up. If we could do that, we could engage in short-term timing. Things turned out as I expected because one of the possible return sequences popped up. I made my decision based on all the possibilities and things have as a result worked out well for me.
Your problem is that you focus on the short term. You look only at today’s prices and think “oh, it would have been better to have bought stocks in 2009.” No! You need to take the upcoming price crash into consideration. When you do that, buying in 2009 still makes perfectly good sense. So does not buying in 2009. And, at the time the decision had to be made, both return sequences were strong possibilities.
P/E10 did not tell me to buy or not to buy. P/E10 told me the range of possibilities and provided me a rough statistical likelihood for each of them. Going by what P/E10 told me, I elected to wait for the next price crash to make a purchase. As the years go on, you will see how great a choice that was. If you were open to giving consideration to what the peer-reviewed academic research tells all willing to listen to its message, you could see that today. You’d be better off seeing it today than having to take on the huge losses you will be experiencing in the next crash to see it.
That’s my sincere take re this terribly important matter, in any event. If the research permits us to predict long-term returns effectively (it does), we all should be doing it. We hurt ourselves when we close ourselves to the important lessons taught us by the last 33 years of peer-reviewed research.
Rob
“it is not necessary to buy stocks every time they offer a strong long-term value proposition. The P/E10 value always drops to 8 or lower before a secular bear market comes to an end. That comes with the next crash. The P/E10 level has still not hit eight. So I get to buy at an even better price.”
So you are waiting for PE10 to hit eight, following an enormous crash. Then you intend to buy and clean up on stocks, is that right?
If VII really is a STRATEGY (not a tactic), then I’m just trying to understand your personal plan.
How much (both percentage-wise and total dollar value, if you don’t mind) do you intend to plunk on the table at that time?
How old will you be then? What is your target Asset Allocation?
I don’t intend to wait until P/E10 hits 8 to begin buying. I was ready to buy at 13. The process that I follow is to have several conversations with my wife before making a move. We had had our first conversation about buying when the P/E10 value started moving up again. So I never bought in 2009. But I do not intend to wait until the P/E10 hits 8 to buy. I will start discussions with my wife about buying when the P/E10 hits 15.
I will probably go to 30 percent stocks when the P/E10 is 15. Then 60 percent at 12. Then 90 percent when we hit 10.
I won’t report the dollar numbers because I of course understand that you Goons are hoping that you will be able to deny me an income long enough to keep yourselves out of prison. You’ll just have to take your chances re that one.
I don’t have a target asset allocation. I would stay at 90 percent until the P/E10 hit 20 on the way up. I would then drop to 60 percent.At 22, I would drop to 30 percet. At 25, I would drop to zero stocks.
But I don’t believe that we will ever see 20 again after the next crash. After the next crash, we will be able to open the entire internet to honest posting. Everyone will learn what the last 33 years of peer-reviewed academic research says and we will never again see insanely high or low valuation levels. I could see us going up to 18. But I doubt we will ever see 20 again after the next crash hits.
Rob
“It is the investor who makes the decision.” Exactly, and that is why emotion comes into play where it does not with buy and hold.
Thanks for making my point.
So if there is a fire in the house and you make a decision to run out the door, that’s emotional because there is a decision involved.
But if you curl yourself up in ball in the corner and get burned to death, that’s rational because at least you avoided making a decision.
Makes sense, Anonymous.
Rob
Rob,
Your most recent post really highlights one of the biggest problems with VII. It also exposes your very limited knowledge and emotional response.
There is no plan or really logic to implementing your strategy. This makes it impossible for someone to follow. You are just throwing out random numbers and saying I think I’ll be about this amount invested but it has no fundamental backing.
Based on your research your magic number of PE/10 8 always hits so why would you start buying in a PE/10 when by your logic it would still be about 100% greater than where it is going.
Even more curious is your wildly conflicting stock allocation just based on if the market is “on its way down” or “on its way up”. You do realize you can’t really know this until much after the fact. You can look back at the data and say yes in this point in time prices were trending upwards but you can’t do that in the moment. You do realize ups and downs do occur even when the broader trend for a year or even five years is one or the other.
So you will be 0% in stocks when the PE/10 is 20 “on the way down” but still 90% allocated in stocks when PE/10 is 20 “on the way up”. Simply put this is idiotic and doesn’t even mesh with what you constantly harp about. All you talk about is buying based on value how has value changed so drastically just based on how you perceive where the market is heading. So at one point in time PE/10 of 20 is such a terrible value you should have no stocks but at another point in time it is still worth having a ridiculous 90% allocation. This is literally the definition of market timing and in the short term.
To me this post really says it all. Your VII has no clear implementation strategy which is one of the biggest appeals of buy and hold. Additionally this post really reveals your limited knowledge and own inability to implement your VII logically.
I think you missed out on the last crash trying to rest so staunchly on your VII laurels that you are upset about losing out on so much profit. Your current investment strategy is clearly emotional and has a huge element of SHORT TERM market timing.
You are raising questions here that a lot of people struggle with, Earl. Thanks for doing that.
There is no plan or really logic to implementing your strategy. This makes it impossible for someone to follow.
There is a logic and the logic is not hard to understand. What make it hard for you is that you bought into the logic behind Buy-and-Hold before you heard about the logic of Valuation-Informed Indexing. You need to open your mind to a new type of logic. Then it will all come very easy.
Based on your research your magic number of PE/10 8 always hits so why would you start buying in a PE/10 when by your logic it would still be about 100% greater than where it is going.
I think you meant to say “buying in at a P/E10 of 15.”
You always want to be comparing the long-term value proposition of owning stocks with the long-term value proposition of owning one of the super-safe asset classes (TIPS, IBonds, CDs). When the P/E10 is 15, the long-term value proposition of stocks is very strong. That’s why you want to own stocks in those circumstances.
When the P/E10 is 8, the long-term value proposition of stocks is even stronger. So naturally you want to go with a higher stock allocation.
You are always trying to do what is best for you, not what is best for the Wall Street Con Men. It’s as simple as that. You go with the stock allocation that gives you the greatest return and the least possible risk.
So you will be 0% in stocks when the PE/10 is 20 “on the way down” but still 90% allocated in stocks when PE/10 is 20 “on the way up”. Simply put this is idiotic and doesn’t even mesh with what you constantly harp about
It meshes perfectly and it is not idiotic. This is the future of investing analysis, Earl.
Start by asking yourself why Buy-and-Hold posits that you can always stay at the same stock allocation. This is rooted in a belief that the market is efficient. That means that the market processes all information quickly. Economic developments are the cause of price changes.
We know this is wrong because stock prices do not play out in a random walk. Shiller showed that in 1981. When the model we used failed, we needed to build a new model. If it is not economic developments that cause price changes, what is it? We need to answer that question. The answer to that question affects every strategic decision we make.
It is INVESTOR EMOTION that determines stock prices.
Stock prices have been following the same pattern for 140 years. P/E10 levels go up over time until they hit an insane high (25 or above). Then they crash dramatically and continue going down until they hit 8 or lower. Then they start up again. That is not at all the pattern you would see if it were economic developments determining stock price changes. It is PRECISELY the pattern that you would see if it were investor emotions determining stock prices.
We all possess a Get Rich Quick urge. That’s why the P/E10 goes up and up and up over time.
We all ALSO possess Common Sense. We deny our common sense for so long as prices are going up. But when prices reach a point of total insanity, our confidence in the Get Rich Quick idea weakens and Common Sense takes over. That’s when you see a price crash. At that point, we have an economic crisis, which makes it impossible for the Get Rich Quick urge to become dominant again. After having gone up, up, up for many years, P/E10 levels now go down, down, down.
When the P/E10 level hits 8 or 7, we are at one-half fair value. The most likely annualized 10-year return is 15 percent real. At that point, the value proposition is so amazingly strong that we overcome the emotional depression we felt as a result of the economic crisis and we begin gaining confidence in the Get Rich Quick concept again.
If you don’t believe that this is how it works, you are going to have to offer some alternative explantation of why this pattern has been repeating for 140 years. The odds of that happening by coincidence are probably 1,000 to 1. You could do a statistical analysis to test this. Things just do not follow such a precise pattern over and over again for no compelling reason. The compelling reason is that this is how human psychology works and that human psychology is what determines stock price changes.
All you talk about is buying based on value how has value changed so drastically just based on how you perceive where the market is heading.
When the P/E10 is 20 on the way down, there is very little value in stocks. The P/E10 has to go all the way down to 8 before it turns up and it might be years before it starts back up again. All you are buying is years of pain. We all get only so many years to finance our retirements. To tie up our money in an asset class providing low or negative returns for 10 or 15 or 20 years is not helpful. It is a disaster.
When the P/E10 is 15 or 16 or 17 or 18 on the way up, the long-term value proposition is very strong. When it is 19, it is a little less strong but still present. When it is 20 or 21, you are on the warning track. There is real danger in owning stocks. But there is also a chance that you could continue to see good returns for a number of years. Whether you stick with stocks in those circumstances depends on your risk profile. If you are a low-risk investor, you should lower your stock allocatio at 20. If you are a high-risk investor, you might stick with stocks all the way to 22 or 23 or 24. Stocks are insanely priced when the P/E10 is 25.
You cannot compare a “20” on the way up with a “20” on the way down. The return offered and the risk that applies is just not the same in those two circumstances. I do not want to own stocks at 20 on the way down. But I would not go to a zero stock allocation at 20 on the way up. As I mentioned in the earlier post, I don’t believe that I will need to face this choice in any event. Once we open the internet up to honest posting, investors will be able to obtain the information they need to invest effectively and there is no reason to believe that we will ever see 20 on the way up or the way down again.
Your entire problem is that you are ignoring the effect of investor emotion. You cannot make sense of stock investing without looking at this factor. It is 80 percent of the game.
The Buy-and-Hold Pioneers did a lot of good stuff, they produced a lot of powerful insights. They missed the factor of investor emotion. Since that is 80 percent of the game, they missed something so big that it caused all of their calculations to be wildly off the mark. Add in that factor and it all works. Leave out that factor and the pieces of the puzzle just do not fit together.
So at one point in time PE/10 of 20 is such a terrible value you should have no stocks but at another point in time it is still worth having a ridiculous 90% allocation. This is literally the definition of market timing and in the short term.
It is certainly market timing but it is 100 percent long-term market timing. There are no short-term considerations playing any role. Valuation-Informed Indexers believe that short-term price changes cannot be effectively predicted. Fama showed this with research done in 1965.
When I say that P/E10 always works its way up from 8 to 25 or higher than then from 25 or higher down to 8 or lower, THAT IS ALL TRUE ONLY IN THE LONG TERM. There are always lots of temporary price drops on the way up to 25 and lots of temporary price increases on the way down to 8. NONE OF THOSE MATTER. It is the psychological dynamic that drives the P/E10 level up to 25 or higher and then down to 8 or lower that matters. Ignore the short-term noise and you will see that and this will all make sense. That psychological dynamic has been controlling stock price changes for 140 years now.
Rob