A Rich Life

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

Comments

  1. Rob,

    I am just wondering about something. You made a prediction that we would see a drop of 65% in the market and that it would happen by 2015. Let’s say that 2015 comes and goes and then we don’t have that 65% drop. What then?

  2. You have asked this question numerous times, Anonymous. It is a perfectly good question. It is of course a question that I ask myself. So I certainly don’t mind going through it. But I am not going to go through it over and over again unless some new angle develops that we have not explored before.

    The key to everything is the question of whether stock price changes are caused by economic developments or by shifts in investor emotion. If it is economic developments, as Fama theorized, then Buy-and-Hold is the ideal strategy. I obviously believe that it is shifts in investor emotion, as Shiller theorized.

    If I ever saw any evidence that it is economic developments, it’s possible that I would switch back to believing in Buy-and-Hold. The entire historical record of stock prices tells us that it is not economic developments. If it were economic developments, both short-term and long-term prices would fall in the pattern of a random walk. For 140 out of 140 years, short-term prices really have fallen in the pattern of a random walk. That’s why there are today millions of good and smart people who believe in Buy-and-Hold. But most of those people would stop believing in Buy-and-Hold if we were all free to post honestly and point out that for 140 years out of 140 years prices have NOT played out in a random walk in the long term. In other words, Buy-and-Hold has been 100 percent discredited by the peer-reviewed research in this field (that’s been so for 33 years now).

    So Buy-and-Hold is out (for me, at least) no matter what happens. You are suggesting a scenario where Buy-and-Hold might work for the first time in history (that is, long-term prices might play out in a random walk for the first time). I guess that is theoretically possible. To say it is impossible would require proving a negative, which is a pretty darn hard thing to do. I can report that it has never yet happened with authority because I can check the historical record and see what it says. I do not have a crystal ball that lets me look into the future. So I cannot say with certainly that it will not happen for the first time this time. There’s a theoretical chance that it could happen even though it has never happened before. I give you that one.

    But what of it?

    If Buy-and-Hold works for the first time in history, perhaps we will be able to say that Buy-and-Hold worked for 20 years (starting in 1996) out of 146 years (presuming that we reach this conclusion at the end of 2016). Does that tell us that it is reasonable to use Buy-and-Hold as a strategy to plan one’s retirement? It does not. A strategy that works in only 20 years out of 146 years is not a good strategy to use to plan one’s retirement. Buy-and-Hold has too long a history of failure for one success to turn things around for it. It would need to continue working for many, many years into the future for us to be able to make a reasoned case in support of it.

    So Buy-and-Hold is out. At least for me. At least for many years into the future. And I only get so many years on this planet. There are not enough years left in my life for Buy-and-Hold to be able to work in enough years for me to be able to say in honesty that I view it as a reasonable strategy for the typical middle-class investor to use to plan his or her retirement.

    Now —

    I am saying that it is virtually impossible that I could ever go back to Buy-and-Hold. But quasi-scientiic beliefs (which is what beliefs re how stock investing works are, in my assessment) must be disprovable. If I am not willing to accept that how returns play out in coming years can discredit my current-day beliefs, then I have let my inevitable biases overwhelm my ability to think clearly. There have to be circumstances in which real-world developments would cause a change in my thinking re my model for understanding how stock investing works.

    It is not possible for me to imagine developments that would restore my belief in Buy-and-Hold. And my strong belief is that developments will play out in a way that confirms my belief in Valuation-Informed Indexing. But I think I have to concede in fairness that it is at least possible that things could play out in way that would discredit to some extent my belief in Valuation-Informed Indexing.

    Probably the best way to put it is that, if we did not see a price crash in a long time, that would push me in the direction of Strategy C. Strategy C is the model that has no theoretical support but that millions of people follow today because they see the logical inconsistencies in the Buy-and-Hold Model but do not yet feel comfortable making the switch to Valuation-Informed Indexing (largely because they have not yet been able to discuss it on the internet!).

    I don’t like Strategy C because I believe in research-based strategies. VII really is a research-based strategy. And Buy-and-Hold was at least once thought by a large number of good and smart people to be a research-based strategy. The only appeal of Strategy C is that it is “non-dogmatic” because there is no research supporting it. Strategy C is just a middle-ground for those who can’t yet decide whether Fama or Shiller was right. It would make me sad to shift in the direction of Strategy C because it would mean giving up on Bogle’s dream of having a research-based strategy to recommend to millions of middle-class investors. But there are no research-based strategies other than Buy-and-Hold and Valuation-Informed Indexing. So, if things went as you are suggesting, I think that I would have no choice but to move a bit in the direction of Strategy C.

    That means that I would be less firm in the things I say. I would be less expansive in my claims. I would continue to say that the historical record supports Valuation-Informed Indexing over Buy-and-Hold because it does. But I would feel a need to note that there would then be one time-period (the most recent one) in which Buy-and-Hold prevailed and that that argues for investors following a Strategy C approach, one tilted more in the direction of VII than what most Strategy C followers follow today but not a pure VII approach.

    The short version is that I would have to conclude that we just don’t know as much about how stock investing works as we once thought we did. My take today is that our knowledge has increased dramatically over the past 50 years. We started out knowing just about nothing because there had never been sustained and systematic academic study of how stock investing works prior to the 1960s. Then we saw the many huge advances achieved by the Buy-and-Hold pioneers. Then Shiller added the missing piece that makes the whole thing work. And then we struggled over a number of years to get the Buy-and-Holders to acknowledge their one mistake. Then we had it all. That’s how I see things going.

    But you are right to suggest that, if things play out in coming years in ways in which never before in history they have played out, that would make me conclude that perhaps our knowledge is not as great as today I believe it to be. It would force me to pull back a bit. I would obviously continue to argue for opening the internet to honest posting because that’s the only way we can advance regardless of the level of our knowledge today. But the things I would say in my posts would be a bit less tilted in the direction of VII and a bit more tilted in the direction of Strategy C if we saw things in coming years that we have never seen before.

    Re the timing —

    The VII model predicted a crash by the end of the first decade of the new Century (because prices hit their peak in 2000 and it can take as long as 10 years for a crash to hit). We saw the crash in late 2008. That part checks. We went to price levels this time far, far, far beyond any we have ever seen before. So it appears that this time it will take two crashes to get the P/E10 level down to 8. The time-period for the second one began in late 2008. So the model predicts that we should see a P/E10 of 8 by the end of 2018.

    My personal take is that it should not take that long. We have never before had an experience where the P/E10 level was so high that it took two crashes to bring it down to 8. So all I can do is offer my personal take that I do not think we will need to wait until 2018 to see it happen. My personal take is that investor psychology took a big hit in 2008 and that it will probably not take us more than 8 years to see the second crash. That would take us to the end of 2016 (not 2015, as you suggest in your goonishly deceptive comment).

    If we do not see a second crash by the end of 2016, I will continue to favor Valuation-Informed Indexing over Buy-and-Hold but I will feel a need to pull back a bit on my claims. I will in essence become an advocate of a Strategy C approach that is tilted in favor of Valuation-Informed Indexing rather than in favor of Buy-and-Hold.

    There are no circumstances in which I would ever post in support of the Ban on Honest Posting or the abusive acts or in some cases even criminal acts that have been employed by you Goons. I will always follow the laws of the United States in the posts that I offer in support of Valuation-Informed Indexing or, in the extremely unlikely event that the market performs in coming years in ways in which it has never once in history ever performed before, in support of a Strategy C approach with a tilt in the direction of Valuation-Informed Indexing.

    I hope that helps a bit, Anonymous.

    My best and warmest wishes to you and yours.

    Rob

  3. There are new angles to consider Rob. One, you predicted that 65% drop a while ago and with the continued run up you are looking at an even larger drop to make your case.

    Second a sustained level of a higher than the historical average PE ratios will result in your target PE10 level to creep up. We could be in a vastly different environment with regards to PE ratio than 140 years ago so weighing todays ratio equally with 140 years ago may not make sense. The accounting practices are certainly much different today.

    Lastly a regression to the mean is not necessarily a logical expectation. Peer reviewed research of the last 140 years would show the average height of humans today to be much smaller than the average height right now. I don’t expect a regression back to that mean do you?

  4. All of those points are reasonable ones, Anonymous. Thank you for a helpful post.

    Yes, it is certainly so that the higher prices go, the bigger the drop that follows will be. We should be expecting the P/E10 level to drop to 8 before this economic crisis comes to an end. The higher prices go, the worse off we all are. We all should be rooting for stock prices to return to fair-value levels (a P/E10 of 15) as quickly as possible. That’s the best of all worlds for all investors. Indeed, it’s the best for all CITIZENS.

    There is no law that says that the fair-value P/E10 number will always be 15 or that the average long-term return will always be 6.5 percent real. Every investor is obviously free to use different numbers. If you think that the going-forward return will be 7, you should use that as your number. If you think 6, you should use that. I would like to create a revised version of The Stock-Return Predictor that lets investors plug in their own numbers for the average long-term return. I use the historical record and I think that’s the best default. But it really is the investor’s choice as to which number to use.

    Whether is makes sense to believe that returns will revert to the mean depends on whether you believe that the cause for prices going high is economic growth or investor emotion. If it is investor emotion, then, yes, I believe it makes sense to expect a reversion to the mean. Actually, it makes sense in that case to expect a reversion to BELOW mean. Price gains that are rooted in emotion don’t just cause a reversion to the mean, they cause investors to become irrationally DEPRESSED when prices revert to the mean, which pulls them for a time to far below the mean. We are headed to a P/E10 of 8. Not because 8 is the mean. 15 is the mean. It is irrational depression that will bring us to 8. 8 is just as crazy as 25.

    If you believe that price gains were caused by economic gains, then you shouldn’t expect reversion to the mean. Those gains are real. If the economic gains were real, then you would have a case like the one you describe where the average height has increased over time.

    Rob

  5. Rob,

    You are changing your story. Here is your previous prediction and what you said if the crash did not come by 2015:

    ” don’t know when the crash will come. I don’t think anyone knows. I believe that the people who pretend to know are fooling themselves.

    I know that there is 32 years of peer-reviewed academic research (NOT opinion) showing that a crash is coming.

    I was asked to give a time frame and ?felt that that was a reasonable thing to demand of me. So I gave it my best shot. I said that, if we do not see a crash by the end of 2015, that would be grounds to question this VII stuff. I think that is fair. We cannot say when it will come but there are lots of reasons to believe that it should come by the end of 2015. If it doesn’t, that would suggest that we are missing a big piece of the puzzle and I think it would be fair for my critics to point that out. That’s all I can say on the matter. ”

    It seems you change the story as time goes on.

  6. I stand by all that, Anonymous.

    I once said that I believed that the crash would come by the end of 2015. I said that because I believed that. I also said that no one could say precisely when it would come.

    Now I say that I expect to see the crash by the end of 2016.

    Short-term timing doesn’t work. So people are always going to get short-term predictions wrong. As a general rule, I avoid making them. But I think it was fair for you to ask the question you asked. So I gave it my best shot.

    I believe today (based on the peer-reviewed research of the past 33 years) that we will see another crash by the end of 2016. But I am certainly not all-knowing. It could be that I will be proven wrong.

    I’m not going to stop saying what I believe. I am not going to lie about this.

    The research is as clear as it could be in showing that short-term timing never works. It is also as clear as it could be in showing that long-term timing always works and is always 100 percent required for those hoping to have some realistic chance of long-term success as an investor.

    That’s the reality. That’s where things stand. Those who practice short-term timing (and any prediction that such-and-such will happen at a given time contains some element of short-term timing in it) are fools. But those who fail to practice long-term timing are ALSO fools.

    So what do we do?

    If we are responsible people, we acknowledge that we cannot get predictions precisely right. But we ALSO acknowledge that the risks of owning stocks go up DRAMATICALLY when we fail to practice long-term timing. That one mistake increases risk by 70 percent, according to the peer-reviewed research that I co-authored with Wade Pfau.

    I am never going to tell a fellow investor that there is anything even remotely safe about failing to exercise price discipline when buying stocks. It is the worst mistake that an investor could ever make. The fact that the Wall Street Con Men spend hundreds of millions of dollars trying to persuade investors to follow this insanely risky path is a national scandal. I want nothing to do with it.

    Smoking four packs of cigarettes a day is a risky health choice. But no one can say precisely how many years it will take off a person’s life for him to smoke four packs of cigarettes per day. So should we all say that it is perfectly fine for the tobacco companies to spend hundreds of millions of dollars saying that the research shows that you can add decades to your life by smoking four packs of cigarettes every day? I don’t think we should. I think there must be limits to what marketing lies can be told when they hurt so many people.

    There has never been any marketing lie that ruined as many people’s lives as the lie that there is some mystical, magical planet on which there might be one or two investors for whom a Buy-and-Hold strategy might work. The peer-reviewed research shows that refusing to exercise price discipline ALWAYS dramatically increases risk while also ALWAYS dramatically reducing return. I want nothing to do with it. I hope to gain a reputation as the most severe critic of the smelly Buy-and-Hold garbage alive on Planet Earth.

    If you want to spread the word all over the internet that I once said that I thought that the next crash would come by the end of 2015 and that I now say that I believe that it will come by the end of 2016, please feel free to do so. It’s true. And telling that story shows the dangers of short-term timing, which is a good thing.

    But please ALSO tell people that I am the most severe critic of Buy-and-Hold alive on Planet Earth today and that no one has stood up to the Wall Street Con Men and their Internet Goon Squads as faithfully as I have.

    Is that fair enough? Do we have a deal?

    If you tell people both of those things (and in fairness, I do believe that you should tell people BOTH of those things), I will consider you a friend for life.

    Rob

  7. Rob proves the ‘thousand monkeys typing a thousand years” hypothesis with:

    “…
    blah blah blah
    blah blah blah….. I have let my inevitable biases overwhelm my ability to think clearly. blah blah blah
    ….”

  8. I don’t agree with what you are saying here, Passerby.

    But I AM biased.

    And I HAVE been wrong before.

    And it COULD be that it has happened again.

    And, if that were the case, I would in all likelihood be the LAST to see it.

    BECAUSE of my biases.

    All of that is so.

    No?

    Rob

  9. Then: “I said that, if we do not see a crash by the end of 2015, that would be grounds to question this VII stuff.”

    Now: “I stand by all that…Now I say that I expect to see the crash by the end of 2016.”

    Um, standing by something means you reiterate it. It does not mean you merely admit saying it but just don’t believe it anymore.

    Anyway, face it, you will never question this VII stuff. Not in 2015 or 2016 or 2050. VII is your identity. It is truth and law and beyond question.

  10. I stand by the way I said it, X. I said that I didn’t know and that it is not possible for anyone to know and that yet it was a fair question to ask and so I thought I should give it my best shot.

    I believe strongly in VII, X. That certainly is so.

    But it is also so that I believe strongly in all aspects of BH that have not been discredited by the peer-reviewed research in this field.

    My personal belief is that VII is just an updated version of BH. I started out calling it Buy-and-Hold 2.0 or The New Buy-and-Hold. In my own heart, I still feel that that is what it is.

    What I really believe in is using the peer-reviewed research to guide one’s investing choices. It is because BH aimed to do that that I was drawn to BH. And it is because VII aims to do that that I am drawn to VII.

    It is certainly possible that there will be new research done that will cause me to change my thinking in important ways. I doubt that there will be anything that will be significant enough to make me change my views on core BH principles (like the idea that short-term timing doesn’t work) or core VII principles (like the idea that long-term timing always works and is always 100 percent required). But you never know.

    I start with the idea that we should use the peer-reviewed research to guide our thinking and go from there. That’s the reason why I love most of Buy-and-Hold and that’s the reason why I love VII (which I see as an extension of Buy-and-Hold) and that’s why I will love incorporating whatever insights the peer-reviewed research adds to the mix in coming years.

    VII is not my religion. But I think it would be fair to say that the idea of using the peer-reviewed research to guide one’s thinking in the investing realm is my religion. That’s what I feel such respect and affection and gratitude for people like Bogle and Burns and Bernstein and Swedroe and Fama. These people are the Buy-and-Hold giants that built the framework on which I built Valuation-Informed Indexing. I have always felt that I was working WITH them rather than AGANST them.

    I believe that they all feel the same way deep down in their hearts. They put on a show of rejecting the peer-reviewed research of the past 33 years because they don’t want to get on the wrong side of you Goons. But there is plenty of evidence in their work that they would LOVE to be able to honest and research-based work again. I believe that we are going to see them flip following the next price crash.

    When we are all on the same page, we will all be making incredible progress in a very short amount of time. We have denied ourselves the benefits of all of the huge insights that have become available to us over the course of the past 33 years. Once we all come clean, the benefits of the most important 33 years of progress in this field all become available to us in a single day. That’s going to be an amazing time.

    I will always love what Valuation-Informed has done to help us all live richer (in every sense of the word) lives. But I will ALSO always love all that Buy-and-Hold has done to help us all live richer (in every sense of the word) lives.

    Despite however smelly things may have gotten from time to time!

    Rob