“The Reason Why People Cannot Stand to Learn What Shiller Showed Us Is That His Stuff Is Such a Huge Advance Over Buy-and-Hold That We Cannot Bear to Acknowledge the Mistake We Made As a Society When We Elected to Spend Hundreds of Millions of Dollars Promoting Buy-and-Hold Strategies. Shiller is the Steve Jobs of Personal Finance. But We Don’t Have IPhones in This Field Today! Because He Is Too Shy to Speak Out About His Huge Achievements!”

Set forth below is the text of a recent comment that I posted to a thread concerning one of my column entries at the Value Walk site:

Correct; buy and hold is not the correct market strategy in today’s time. Most simply put that strategy work well for select periods of time, but it will not work where the markets are today. It is actually a rather complicated discussion on why those preaching buy-and-hold want to hold onto this strategy, why this strategy worked historically and why it is flawed for today. Not sure we want to open that discussion … probably more of a white paper kind of thing.

Aaron:

I don’t want to try to entice you into a discussion that you do not think will prove fruitful. But I cannot resist putting forward some words here. I have spent the last 13 years of my life examining this question of why people have not moved from Buy-and-Hold to Valuation-Informed Indexing (the model for understanding how stock investing works that is rooted in Shiller’s 1981 finding that valuations affect long-term returns) for 34 years now. So I obviously see this as a question of huge significance.

The P/E10 level in 1982 was 8. In 2000, it was 44. That’s a difference of nearly 600 percent. It follows that a 1982 retiree could afford to take out from his portfolio each year SIX TIMES what the 2000 retiree could afford to take out from a portfolio of the same dollar size. If you run a regression analysis on the 145 years of historical data available to us, that’s the result you get. The safe-withdrawal-rate in 2000 was 1.6, meaning that a retiree with a $1 million portfolio could safely take out $16,000 to live on each year. The SWR in 1982 was 9 percent. That retirees could take out $90,000 per year. A pretty big difference!

Shiller’s finding changes the analysis of every strategic question imaginable. It makes zero sense for an investor to go with the same stock allocation when the SWR is 1.6 percent as he goes with when the SWR is 9.0 percent. Stocks are far more risky when the SWR is 1.6 percent. All investors should want to keep their risk profiles roughly constant. It’s not possible to keep your risk profile roughly constant if you are not willing to adjust your stock allocation in response to big valuation shifts.

Why does’t everybody know this? Why doesn’t every investing analyst make this point in every article he writes, in every presentation he gives, in every interview in which he participates? Has there ever been an investing insight of 1/500th the power of Shiller’s 1981 finding that valuations affect long-term returns?

As you say, there are lots of reasons. But one big reason is that the Valuation-Informed Indexers don’t talk about it much. We should be pushing these amazing new ideas but we do not. Shiller’s book is the best book ever written on investing. But I challenge you to say what Shiller recommends that investors do differently as a result of his research findings. Nowhere in that book does Shiller address the practical question of WHAT INVESTORS SHOULD DO DIFFERENTLY as a result of his findings!

Isn’t that odd?

I know why Shiller (and lots and lots of others) shies away from addressing the practical questions. I have spent the last 13 years of my life trying to learn what investors should do differently and then to share with them what I have learned. As a result, I have become the most hated poster on the internet. It’s not that Shiller’s findings have any bad aspects to them. Shiller’s stuff is good stuff piled on top of good stuff piled on top of good stuff. The reason why people cannot stand to learn what he showed us is that his stuff is such a huge advance over Buy-and-Hold that we cannot bear to acknowledge the mistake we made as a society when we elected to spend hundreds of millions of dollars promoting Buy-and-Hold strategies.

We have seen huge advances in the computer technology field over the past 34 years. I would argue that we have seen BIGGER advances in the investing analysis field. The problem is that we have not reaped the benefits of those intellectual advances. We keep quiet about them because we sense that it would hurt the feelings of the Buy-and-Holders to talk about the advances in a clear way.

That drives me crazy! I want to take advantage of the advances. I want to help others to take advantage of the advances.

That’s my story. That’s why I am here. That’s why I write this weekly column on the implications of Shiller’s findings. That’s why I even chide the great man himself from time to time. I want to see Shiller stop being so shy about what he has accomplished. He is the Steve Jobs of Personal Finance. But we don’t have IPhones in this field today! Because he is too shy to speak out about his huge achievements!

I understand 100 percent if you choose not to respond to these words. But, since the subject came up, I felt that I needed to get that off my chest.

Rob