Set forth below is the text of a comment that I recently posted at the discussion thread for one of my columns at the Value Walk site:
Rob,
Just to help you out, here is the link. Your “question” was actually addressed in less than 90 minutes, as pointed out by Wade. It seems the embarrassment of that has lasted all these years. Here is a helpful link:
http://retirementresearcher.com/valuations-and-withdrawal-rates/
Wade never wrote any words of that nature until you threatened to send defamatory e-mails to his employer. Words that are said as the result of intimidation tactics don’t count, Sammy. Wade said what he really believes about safe withdrawal rates and about Valuation-Informed Indexing and about me in hundreds of e-mails that he exchanged with me, many of which I have reported on at my site.
Neither the Greaney study nor any of the other Old School SWR studies have been corrected to this day, Sammy.
There have been scores of articles published in all of the top-name publications pointing out that the infamous “4 percent rule” that came from those studies is likely not going to work for millions of retirees who employed it in their plans. Those people will be suffering one of the worst life setbacks imaginable. All of that could have been avoided f the studies had been correctly promptly once the errors in them had become public knowledge (this happened on the morning of May 13, 2002).
Correcting the studies also would have led to a great learning experience. People who cannot admit the possibility that they have made a mistake can never learn anything. If you think that you already know everything, how can you ever expend effort to move forward?
The safe withdrawal rate is not always 4 percent. It is a number that varies, depending on the valuation level that applies on the day the retirement begins. In 1982, the SWR was 9.0 percent. In 2000, the SWR was 1.6 percent. For a retiree with a $1 million portfolio, that’s the difference between living on $16,000 per year and living on $90,000 per year. That’s no small difference.
The Buy-and-Holders did a great thing in trying to turn investing analysis into a science. There’s too much subjectivity in this field. People need to use numbers to plan their financial affairs. The job of an investing analyst is to supply those numbers to people.
But it is inevitable in a new science that people are going to make mistakes. In the early days of Buy-and-Hold, people thought that the market was efficient. If the market was efficient, Buy-and-Hold would be the ideal strategy. If the market was efficient, the SWR would be a constant (and that number would indeed be “4”).
But Shiller showed in his “revolutionary” (his word) research of 1981 that the market is NOT efficient. He showed that risk is not constant but variable. It follows that the safe withdrawal rate CHANGES as valuations change.
Every investor need to know this. We should be discussing this at every discussion board and blog on the internet. We should be having a national debate re the implications of Shiller’s revolutionary findings. This is huge. And it is very, very, very positive news that we can now reduce the risk of stock investing by 70 percent just by letting that national debate take place.
That’s my sincere take, in any event.
I naturally wish you all the best that this life has to offer a person, Sammy.
Rob
Mark this day on your calendar, Mr. Market Timer: It is a FANTASTIC opportunity to buy some beaten down stocks (through no fault of their own) at incredible value. A smart investor knows how to look at ALL relevant indicators. Things like: Bill-to-book, projected earnings, free cash flow, EBITA, revenue growth, M&A activity, profit margins, same store sales, market cap, market share, volatility, price to sales, turnover, cash flow per share, dividend yield, PEG, management rating, etc. A smart’ timing-style’ investor would be maintaining a stock screen of their own making, and monitoring the markets, industries, indexes, and individual stocks that might be a good value. Running scared for 15 years while your insufficient nest egg just dwindled to practically nothing is hardly an investment strategy. It is a psychological quirk.
That all sounds like noise to me, Anonymous. Bogle advises us to tune out the noise. I think he’s right.
The only two factors that I look at are: (1) the long-term average stock return of 6.5 percent real; and (2) the P/E10 level, which tells you how much you need to add to that number or subtract from that number to determine whether stocks offer a good long-term value proposition or not. When stocks are offering an annual return of two percentage points more than the super-safe asset classes, I go with stocks on the thinking that I am being adequately compensated for taking on the added risk. When the difference is less than 2 percentage points in favor of stocks, I go with the super-safe asset classes.
That strategy has worked insanely well for the 145 years of stock market history available to us today. I am not able to imagine any reason why it would not continue working insanely well for many decades to come. It certainly makes sense. We consider price with everything else we buy and there is zero research supporting the “idea” that stocks might be the lone exception to the otherwise universal rule.
But I suppose we are going to have to wait and see to find out whether stocks will continue to perform in the future at least somewhat as they always have in the past or whether everything has for some unknown reason been turned upside down in our lifetimes. I have been wrong before. If it were happening again, I would in all likelihood be the last to know. Time will tell the tale.
I naturally wish you good luck in all your future life endeavors.
Rob
“The only two factors that I look at”
Why? You claim buying stocks is a value proposition, just like buying a sweater or a second hand car, and I agree enthusiastically. How, then, can you defend purposely blinding YOURSELF to all of the quality attributes of the item being considered? The fact a sweater is “size large” and “$12” hardly tells you enough to make an informed buying decision. Color, material, reputation of maker and seller, etc,etc,etc, all enter into it. Fit, style, appearance, and a lot of other things really MUST be considered or it’s just an impulse, illogical gamble.
You know?
I buy stocks for the return that they offer.
U.S. stocks offer a return of 6.5 percent real when priced fairly. That’s been so for 145 years now. No exceptions.
The rest is noise, Anonymous. There’s no need to pay attention to anything other than the average return and the adjustment that you need to make to average return to reflect the effects of mis-pricing. It’s dangerous to look at other stuff because it adds complexity and confusion to the project to do so.
I am confident that the stock market will continue to perform at least somewhat as it always has in the past. It could be that that’s about to change. No one can say for certain. But I am not about to put my retirement money down on that long-shot bet.
Bogle taught me to look to the peer-reviewed research for guidance. That’s why I rank him as the second most important investing analyst ever to walk Planet Earth. Add Shiller’s correction of Bogle’s one big mistake to the mix and you’ve really got something, in my assessment.
Rob
Give your rationale for deciding that P/E (and the 10 year PE, at that) somehow became the end-all and be-all single metric for a person deciding on timing the market to buy and sell stocks.
HINT: Nobel prize winner Robert Shiller, and also all other living Nobel prize-winning economists advise AGAINST this. Overtly and repeatedly. In unanimity. As you have been informed. Repeatedly.
The last 34 years of peer-reviewed research shows that all investors must consider price when buying stocks just as they consider price when buying everything else they buy. The research also shows that P/E10 is the best valuation metric.
Shiller has never advised against practicing price discipline when buying stocks. He won a Nobel prize for showing why this is required.
Wade Pfau co-authored with me peer-reviewed research showing how much sooner investors who practice price discipline can retire compared to those who follow Buy-and-Hold “strategies.” You Goons responded by threatening to send defamatory e-mails to his employer in an attempt to get him fired from his job unless he agreed to stop publishing honest research.
That’s not the way honest people respond to the peer-reviewed research, Anonymous. That’s the way that people working a con respond to seeing research published that exposes their con.
You are going to prison. I am not. That’s the bottom line here.
I’m happy to do what I can to help you out. But I have zero interest in engaging in behavior that would put me in similar circumstances.
No felonies for this boy.
Non-negotable.
Rob
“The research also shows that P/E10 is the best valuation metric. ”
Ah. So your answer is: “I don’t fucking know.”
At least please be honest, and own up to the fact you are working, as always, Mr. INFJ from your *feelings* and not from any rational basis. If you were up front about that, people could possibly respect you. As it is, though, when you claim ‘data’ and ‘research’ actually support you, then you are shown to be just a big honking liar. Again.
“They have an orderly view toward the world but are internally arranged in a complex way that only they can understand. Abstract in communicating, they live in a world of hidden meanings and possibilities.”
https://en.wikipedia.org/wiki/INFJ
The difference between the INTJ personality type and the INFJ personality type is the difference between Buy-and-Hold and Valuation-Informed Indexing. I think that much is fair to say, Anonymous.
INTJs dominate in the investing advice field today. They have made huge contributions. That much is for sure.
But we need more INFJs in this field. There are things that the INTJs miss that the INFJs see very clearly.
All of the personality types have pros and cons. They need to learn to work together for the benefit of all.
I see things that you don’t see, Anonymous. Just as you see things that I don’t see. We both need each other to do our best work. I don’t say the things that I say to hurt your feelings. I say the things that I say because I believe that on some level of consciousness you want to get it right and because I don’t believe that you can get it right without having someone who sees things that you do not see helping you out.
INTJs make amazing contributions. But they have a hard time acknowledging mistakes. It’s an unfortunate reality. All of the non-INTJs should be trying to help them out by encouraging them to try harder to understand the points being made by people who have other personality types.
My sincere take.
Rob
Can you please provide a link to the threats made to Wade’s job.
You were there, Anonymous. You don’t need a link.
I will provide a link to the members of your jury. Then they will decide on the length of your prison sentence. That’s how our system works.
I wish you all good things.
Rob