I’ve posted Entry #207 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Rational and Irrational Investing Ideas Co-Exist.
Juicy Excerpt: People don’t respond with excitement when they learn that it is possible to reduce stock investing risk by 70 percent. They respond with worry. What if it doesn’t work? It’s been working for 140 years. What if you got something wrong? The paper passed peer-review and is subject to challenge to anyone who has access to the internet. What if it stops working? Anything can happen in this crazy, mixed-up world of ours but most of us elect to get out of bed every morning and brush our teeth and get on with the business of the scary new day all the same.
There’s something about stock investing that makes people think it should be rational. There’s money involved. I think that’s the thing. Bankers don’t wear loud ties because folks who appreciate formality in every other life endeavor sleep better knowing that their retirement money is being handled by people of great prudence. We don’t want the people handling our money to be wild and crazy guys and gals. So we like to think that there is some magical force rendering the stock market a rational place.
It’s not so.
The market is every bit as rational and every bit as nutso as the humans who participate in it. That’s us! The market is no more serious or silly than all of us who have money in it.
What are you talking about? “Us”???? You don’t have any money in the market and you have admitted to not being in the market since 1996. It is a joke for you to even think you are some kind of expert in the market.
I don’t think of myself as an “expert,” Anonymous. I am an expert relative to those who advocate Buy-and-Hold. I guess that’s a form of expertise. But the reality is that we are all at a primitive level of understanding how the stock market works. We all have a lot to learn.
If someone refuses to pay two to three times what a car is worth, that doesn’t show that he knows little about cars. To the contrary, it shows that he knows more than those who are okay with paying two to three times fair value. It is my limited expertise that has kept me out of the market since 1996.
It is by limiting one’s stock allocation when prices are insanely high and risk is off the charts that one obtains a good long-term stock return. That’s what VII is all about. The less I invest in stocks today, the less I lose in the next crash and the more I have available to me to invest when stocks are again available for sale at reasonable prices. Make sense?
Please take good care.
Rob
Buying stocks is not like buying cars. Cars are a commodity (unless it is a collectible car). You can produce as many cars as the market demands and they have a finite life. Cars depreciate/wear out. Stocks are shares of a company that can generate profits/growth. You ate not consuming the asset, like you are with a car.
The thing you are buying when you buy stocks is a revenue stream. In the U.S., the revenue stream is strong enough to generate a long-term average return of about 6 percent real per year.
That’s if you pay fair price.
If you pay half of fair price, you get a return of 12 percent real (because you are getting two dollars worth of stock for every dollar you pay to buy stocks).
If you pay two times fair value, you get a return of 3 percent real.
If you pay three times fair value, you get a return of 2 percent real.
Price matters, Anonymous. All of the peer-reviewed research and all of the historical return data shows this to be so. Exercising price discipline is 80 percent of the stock investing game.
Rob
It is not just revenue stream. Is is current or anticipated profit, stability, dividends, etc.
Again, it is nothing like buying a commodity (cars, bananas, etc.).
Price matters with everything that can be purchased for money.
It’s not just with commodities. Price matters when buying luxuries. And price matters when buying services. Price ALWAYS matters.
Buying a car? Price matters.
Buying a trip to the Bahamas? Price matters.
Buying a music CD? Price matters.
Buying a repair of the pipes in your house? Price matters.
Buying stocks? Price matters.
There are no exceptions, Anonymous.
There are people who will TELL you that stocks are an exception. These people are called “stock salesmen.”
Gee, I wonder why they don’t tell us the straight story?
Some of this stuff is so hard to figure out!
Rob
Rob,
You are just making yourself look silly. Buying stocks is NOTHING like buying a car or any other commodity/consumed asset. If I buy $100 worth of bananas at the grocery store, they will be worth $0 in a matter of a week or so. I will either eat them or they will be rotten. If I buy $100 worth of stock, it will still have value in another week. In fact, that value could be higher and over time, it is likely to be higher. If we even take the highest trading days ever in the market, we see that we would have still made money buying at the peak.
There is no comparison of buying commodities versus stock.
We disagree, Anonymous.
When you buy a banana, you are buying the nutrition that it provides. You continue to benefit from having received that nutrition for as long as you are alive on Planet Earth.
The same is true with anything else you buy. If you buy a movie, you will benefit from what you learned from watching the movie for as long as you remember it.
When you buy something, you obtain a benefit. Whether the purchase is a smart one is determined by how much you pay. If you could have obtained a greater benefit by spending the money on something else, you made a poor decision. Stocks are worth buying at some prices but not at other prices, just like anything else that can be obtained with money.
Stock prices will always go up. The value of the market goes up by 6.5 percent per year. That’s awesome. I certainly take second place to no one in arguing for the merit of investing in stocks.
But you must take price into consideration when buying to be able to invest effectively. That’s the one that the Buy-and-Holders got terribly, terribly wrong.
Stocks were at the highest price at which they ever sold in January 2000. Did we know that prices would go up even from that high price? Absolutely. We also know that stocks were a horrible, horrible buy at that time. The most likely 10-year annualized return was a negative 1 percent real. Risk-free TIPS were paying 4 percent real. That’s a differential of 5 percent per year for 10 years running — a total of 50 percent of your starting-point portfolio value.
Following a Buy-and-Hold strategy ALWAYS delays your retirement by many years while increasing risk DRAMATICALLY. There has never in 140 years of stock-market history been a single exception. It’s not just that Get Rich Quick is not the answer, Get Rich Quick is actually the problem.
It never works. It never can work. That’s why Buy-and-Holders get so enraged when someone reports honestly what the last 34 years of peer-reviewed research shows us about how stock investing works in the real world.
Rob
Stock prices always go up.
But there is a cost associated with having dead money for 10 years before they go up.
In circumstances in which money invested in stocks is dead money, you are better investing your money elsewhere.
If you start investing at age 25 and hope to retire at age 65, you only have 40 years to finance your retirement. To give up 10 years is a big deal.
You should be seeking to earn a decent return on your money at all times. You should be using the peer-reviewed research in this field as a guide and tuning out the mumbo-jumbo marketing slogans of the sorts of “experts” who push the smelly Buy-and-Hold garbage on us all.
There are responsibilities that apply when giving investing advice. It shouldn’t be all about turning a quick, smelly buck.
My take.
Rob
Price matters with everything that can be purchased for money.
Yep, and that’s why institutional investors (the ones with 1000x more information about stocks than you’ll ever have) constantly adjust their prices as new events come out.
If you could grasp even the basics of how the stock market works, your kids might be going to Disneyland this year 🙁 .
“When you buy a banana, you are buying the nutrition that it provides. You continue to benefit from having received that nutrition for as long as you are alive on Planet Earth.”
Actually, you do not. Your body uses that nutritional value rather rapidly and then it is depleted. In your example of the banana, potassium is one of the primary nutritional benefits. After consuming the banana, the potassium will be utilized/depleted in less than 24 hours.
None of this is about having information or lacking information, Anonymous. It is about giving in to the Get Rich Quick impulse or reining in the Get Rich Quick impulse.
The Get Rich Quick impulse is risk. There is now 34 years of peer-reviewed research showing that. That research is based on 140 years of historical data. When you give in to the GRQ impulse (that is, when you fool yourself into thinking that there might be some mystical,magical alternate universe where price discipline might not be required when buying stocks), you add to your risk. When you make use of tools showing you how dangerous Buy-and-Hold strategies are, you add to your risk. It’s been that way since the first stock market opened for business.
There were institutional investors who had information coming out of their ears who jumped out of windows during the Great Depression. Their tons of information didn’t help them one whit. Books and articles and calculators and podcasts that told them about the importance of price discipline when buying stocks would have helped them a great deal.
When my mother was alive she used to say to me that she couldn’t understand why my older brother still smoked because “he’s so smart.” He’s plenty smart. But being smart or not being smart has absolutely nothing to do with why somebody smokes or doesn’t smoke. Having lots of information has nothing to do with why one becomes addicted to a Buy-and-Hold strategy or not. The Get Rich Quick impulse is an emotional thing. It is not rooted in one’s brain.
That’s the problem I have with you. You are plenty smart. But you use your intelligence to avoid the findings of the peer-reviewed research in this field, not to explore them. I call this model “Valuation-Informed Indexing,. So I make a suggestion that being informed makes a difference. However, the full truth is that it is not being informed that does the trick. Not by itself.
If you never become addicted to smoking in the first place because you are informed of the dangers, then in that case being informed can make a difference. And being informed can make a difference once you have an epiphany and come to see how much a pure Get Rich Quick approach can hurt you. But there is something beyond being informed that is needed to make one an effective long-term investor.
I don’t today have an entirely clear understanding of what that something is. Why do some people get this stuff and others have such a hard time with it?
I look at the people who get it and try to identify similarities. That has given me little clues but nothing that has impressed me enough for me to be able to write full articles describing the secret. I think that part of it is caring about something other than investing enough to overcome the power that the Get Rich Quick urge has to fool us all about what works in investing.
I care deeply about journalism. I once believed in Buy-and-Hold. So I have as much of a Get Rich Quick urge as you. I think that what pulled me out was my love of journalism. In the early months of these battles, I saw a story. And I couldn’t let that go. I had to figure it all out, learn what I needed to learn to tell the story properly. I think that is what helped me see things that others couldn’t see and rise above all the emotional pressures.
John Walter Russell and Wade Pfau cared about their statistical craft. They are researchers and getting the numbers right means something to the. So they overcame the emotional pressures too, completely in John’s case and partially in Wade’s case. I think they both saw this as sort of a puzzle and they wanted to see the puzzle pieces click in. That gave them what they needed for the information to have an effect.
Not everybody who invests is going to be a journalist or a researcher. So we need to identify other motivators for seeing through the garbage GRQ stuff. I have a vague idea that the answer is to have positive investing emotions. People in this field cite fear and greed as investing emotions all the time. Those are both negative emotions. Greed brings on bull markets, fear brings on bear markets. I think there have to be positive investing emotions too. People need to nourish hope and love as investing emotions that could counter the two negative investing emotions.
For example, you might have hopes for an early retirement. Those hopes might give you what you need to counter all the Buy-and-Hold garbage and to become able to study and understand clearly the last 34 years of peer-reviewed research. Or you might feel love for a son or a daughter and want to help them obtain a strong financial footing and that love might empower you to see through the Get Rich Quick fantasies of a world where price discipline doesn’t really matter all that much.
Do we care enough about our long-term investing results? We think we do. I am beginning to question whether we really do on a deep level. The long term is a distant thing for most of us. It is an abstraction. We get a little surge of positive feeling every time prices go up because seeing that makes us feel that we are smart, it flatters us. To overcome that, we need to have as strong a feeling about the long-term. And to care about the long-term, we need to have positive investing emotions like love and hope as well as negative ones like fear and greed.
That’s part of the reason why I use that catch phrase in my conversations with you Goons where I point out that “I love my country.” That’s a positive emotion. I try to focus on that, how our country will be better off when honest posting is permitted, to help me work up the courage to violate the Social Taboos that tell us all that we should not hurt people’s feelings by telling them about what the peer-reviewed research shows us about the chances that GRQ strategies will be successful in the long run. I love my country. That’s a reason for wanting people to know the realities of stock investing.
These are still sketchy ideas. I think coming to a better understanding of this aspect of the question is an important project for coming days. Why is it that the peer-reviewed research clicks for some while other perfectly smart people remain mired in all the Buy-and-Hold/Get Rich Quick garbage? Informing people is important. I am a journalist, I obviously care about informing people. But there is another element here, some sort of emotional element, that is needed for the information side of things to click.
I am no smarter than you Goons. But I get it and you don’t. Why? What do I possess that you lack?
I didn’t get it myself prior to the evening of August 27, 2002. Why does the current-day me get it when the prior-day me did not?
Why does Bogle sort of, kind of get it and sort of, kind of not get it? Why is the same so for Bernstein and Burns and Swedroe and Schultheis and Piper and Tresidder?
Hope and love are the counters to fear and greed, I believe. But what do we need to do to help people to feel more hope and love and for the information we supply them to therefore make a difference in aiding their efforts to understand this stuff?
I think I feel a column coming on!
Rob
Actually, you do not. Your body uses that nutritional value rather rapidly and then it is depleted. In your example of the banana, potassium is one of the primary nutritional benefits. After consuming the banana, the potassium will be utilized/depleted in less than 24 hours.
You are better off alive than dead, Anonymous.
Without any nutrition you would be dead in a week.
Supplying your body with nutrition in the short term pays off big-time in the long term.
I mean, come on.
Rob
The point here is that there never can be some magical law making one asset class the best choice at all times.
I am fine with saying that stocks always offer at least some potential benefit.
But other asset classes offer benefits too. Stocks in a general sense are the best, in my assessment. But there are circumstances in which other asset classes offer a superior long-term value proposition.
The idea that stocks are always a good investment choice is marketing mumbo jumbo. The people who came up with that one are trying to sell stocks. I mean, come freakin’ on.
How could any asset class ALWAYS be best? That one makes zero sense except as a marketing gimmick. If word got out that one asset class was always best, people would bid up its price until it was no longer best.
Does that sound like something that just might happen in this mixed-up world of ours?
Rob