Jake@EconomPic to Rob: “Came Across Your Philosophy…Interesting”

Set forth below is a link to a Twitter exchange that I had recently with Jake@Economic Pic. Set forth below the link is the text of our exchange:

Jake
?@EconomPic
@Rob_Bennett_ Came across your philosophy. One piece (seems to be) missing is relative valuation vs cash/bonds. How do you account for that?
9:28 AM – 9 Jun 2016

Jake ?@EconomPic Jun 9
@Rob_Bennett_ basically the term premium between stocks / bonds. When stocks were rich in 00’s this premium was small (no opportunity cost)

Jake ?@EconomPic Jun 9
@Rob_Bennett_ now at 2% bond yields, much wider… so even a 4% stock return will do much better. Thanks in advance! Interesting

Jake ?@EconomPic Jun 9
@Rob_Bennett_ some additional thoughts on valuations mattering (but also in relative not just absolute terms) here http://econompicdata.blogspot.com/2015/04/the-relationship-between-stocks-and.html?m=1 …

Rob Bennett ?@Rob_Bennett_ Jun 9
@EconomPic Thanks. I will read this later today and offer a comment. Much appreciate your interest and feedback.

Jake ?@EconomPic Jun 9
@Rob_Bennett_ one more for you (if you’d like). Similar framework but includes a shorter timing signal (momentum) http://econompicdata.blogspot.com/2015/11/valuations-do-matter-even-over-shorter.html?m=1 …

Rob Bennett ?@Rob_Bennett_ Jun 9
@EconomPic Jake — I don’t believe in short-term timing, only long-term. It may work. Smart people do it. But it is beyond my skills. — Rob

Jake ?@EconomPic Jun 9
@Rob_Bennett_ as long as evidence based and systematic, I think worth a look, but appreciate that side of it

Rob Bennett ?@Rob_Bennett_ Jun 9
@EconomPic Jake — This is the peer-reviewed research on VII: http://arichlife.passionsaving.com/wp-content/uploads/MPRA_paper_35006.pdf … I worked with Wade Pfau for 16 months on this.– Rob

Rob Bennett ?@Rob_Bennett_ Jun 9
@EconomPic i compare likely 10-year return for stocks to return on safe asset class. I go with safe unless stocks are 2 points real better.

Rob says

June 27, 2016 at 2:29 pm

You are entitled to your opinion, Anonymous. And Jim Rogers is entitled to his opinion. I do not believe that price changes are ever caused by a single economic event. So I am going to continue saying that I don’t believe that. And time will tell whether more people will in time come around to my point of view or not. I cannot force others to believe something that I believe. But I also cannot post dishonestly re my own views. So I am just going to continue to say what I believe and watch how things play out.

I don’t say that the Brexit vote will be the event that will set in force an emotional reaction that will ultimately bring on the next price crash. It could happen. But the peer-reviewed research shows that short-term timing doesn’t work. So I am not willing to make any prediction re this question. In the event that we see a crash in the aftermath of the Brexit vote, there will no doubt be people who will say that the Brexit vote caused that crash. I don’t buy it.

I can certainly accept that the Brexit vote could start a chain of emotional reactions that would cause a crash. That makes all the sense in the world. But would we see a crash if valuations at the time of the Brexit vote were insanely low instead of insanely high? I don’t think we would. And the fact that we see a crash in the real world will not prove the point because to prove it we would need to see what would have happened had prices been low instead of high. And of course we cannot run that test.

There IS a way to run the test in an indirect way. We could look at whether we see as many crashes when prices are low as we do when prices are high. If we see crashes only starting from times when prices are high (that is indeed the case — the few crashes we see when prices are low or moderate don’t last long, so they are not significant crashes), then it is fair to say that it is high prices that really cause crashes, not the economic events that in a nominal sense bring them on.

So I just don’t buy the argument that you are making. My guess is that Rogers is speaking loosely. He is probably only trying to say that the Brexit vote will be the economic event that will start the chain of events, including EMOTIONAL reactions, that will bring on the crash. When you say it that way, I can buy in. I believe that events like the Brexit vote can TRIGGER crashes. I just don’t think they are the sole causes of crashes or even the primary causes of crashes.

That’s the important distinction for me. We cannot control economic events. So placing the blame for crashes on economic events leaves us with no policy prescription. Placing the blame on high valuations DOES offer a policy prescription — permit honest posting on the last 35 years of peer-reviewed research so that experts in this field will warn people of the dangers of buying overpriced stocks, which would of course keep prices from ever getting too high and thereby put an end to crashes and the economic crisis that follow from them.

Your take is that nothing will change. The Wall Street Con Men have been pushing the smelly Buy-and-Hold/Get Rich Quick garbage ever since the first market opened for business and they will continue to rape middle-class investors by doing so because there is so much money to be made pushing GRQ schemes. I don’t buy it, Anonymous. I think the Wall Street Con Men are smart people and good people. They feel trapped. They feel that they will not be able to keep their jobs if they tell the truth about how stock investing works because Goons like you will go after them just like you go after me if they tell the truth about the value of your portfolio.

I think they want to tell the truth. I see LOTS of evidence of that. I think that, when things get bad enough, more of them are going to work up the courage to speak the truth in more clear ways and then the dam will break and eventually everyone will be doing it. We will achieve 35 years of progress in our understanding of how stock investing works in a short amount of time.

That’s what I believe, Anonymous. If we had had Shiller’s research available to us following the Great Depression (the product of an earlier Buy-and-Hold “boom”), we never would have engaged in the behavior that caused the runaway bull of the 1990s. We didn’t have Shiller’s research in earlier days. So we made the same dumb mistake over and over again. Now we have it. I don’t think we are going to continue to make that mistake once the word gets out. And I think that the word will be getting out following the next price crash. There are too many people who want to see it get out for you Goons to continue to be successful blocking their efforts. And there’s too much darn money to be made by those who become known as the pioneers in the effort to get the word out!

I don’t believe that even you Goons are going to be blocking efforts to get the word out following the next price crash. I think you are going to be pissed at the Wall Street Con Men at that time. You deny it now. But you haven’t seen huge losses in your portfolio yet. Losing most of one’s life savings changes a person’s perspective re these sorts of things. Take a look at what happened with the Madoff investors and you will see how it goes. Lots of people who called Madoff “Saint Bernie” in the days before they lost their life savings had different names for him after they suffered the losses. You won’t be calling Jack Bogle “Saint Jack” following the next crash, Anonymous. You will have a different name for him at that time, in my view.

But we’ll see, you know? I believe this. You don’t. There’s nothing that I can say that will bring you around to my point of view. There’s nothing that you can say that will bring me around to your point of view. We come at these questions from different sets of life experiences and we see things with different perspectives. It’s not personal on my end. I believe that perhaps it is a little bit less personal even from your end today than it was once upon a time. But I harbor no illusions that you are going to flip prior to the day your prison sentence is announced. It is asking a lot of someone to ask them to acknowledge things that they suspect will get them thrown in prison if they come clean about them. So I think we are stuck for the time-being. We are going to have to be a little bit patient and wait to see how things play out.

I think it is possible that the Brexit vote will bring on a crash. I also think it is possible that it will not. I believe that people who speak with certainty about such matters are fooling themselves. I don’t know much about Rogers. But I know enough to have a vague impression that he is a reasonably smart guy. But my guess is that, if you checked out how earlier predictions of his turned out, he would have a mixed track record. I never checked his track record. But I have checked the track records of lots of others who I thought seemed reasonably smart. And those track record always seemed mixed to me when I checked them. That’s how I came to develop confidence that Bogle’s take re short-term timing is the right one. (In contrast, of course, long-term predictions based on valuation levels have ALWAYS worked, going back 145 years now.)

Anyway, that’s where I am coming from re this one. At the time you posted, I was working on a column for the Value Walk site re this question of the effect of the Brexit vote on stock market prices. There’s a few ahead of that one in line but that one should be appearing within a few weeks (I have not finished it yet so I cannot say precisely when it will appear.)

I naturally wish you luck with all your future life endeavors, old friend.

Rob

Comments

Anonymous says

June 27, 2016 at 1:19 pm

Rob,

I just watched the interview with Jim Rogers. He said that the next market crash will be due to Brexit and the related fall out. That means no one will be blaming the buy and hold crowd for any crash. I guess that means you will not be getting your $500 million windfall nor will you get your headlines on the front page of The New York Times.
Rob says

June 27, 2016 at 2:29 pm

You are entitled to your opinion, Anonymous. And Jim Rogers is entitled to his opinion. I do not believe that price changes are ever caused by a single economic event. So I am going to continue saying that I don’t believe that. And time will tell whether more people will in time come around to my point of view or not. I cannot force others to believe something that I believe. But I also cannot post dishonestly re my own views. So I am just going to continue to say what I believe and watch how things play out.

I don’t say that the Brexit vote will be the event that will set in force an emotional reaction that will ultimately bring on the next price crash. It could happen. But the peer-reviewed research shows that short-term timing doesn’t work. So I am not willing to make any prediction re this question. In the event that we see a crash in the aftermath of the Brexit vote, there will no doubt be people who will say that the Brexit vote caused that crash. I don’t buy it.

I can certainly accept that the Brexit vote could start a chain of emotional reactions that would cause a crash. That makes all the sense in the world. But would we see a crash if valuations at the time of the Brexit vote were insanely low instead of insanely high? I don’t think we would. And the fact that we see a crash in the real world will not prove the point because to prove it we would need to see what would have happened had prices been low instead of high. And of course we cannot run that test.

There IS a way to run the test in an indirect way. We could look at whether we see as many crashes when prices are low as we do when prices are high. If we see crashes only starting from times when prices are high (that is indeed the case — the few crashes we see when prices are low or moderate don’t last long, so they are not significant crashes), then it is fair to say that it is high prices that really cause crashes, not the economic events that in a nominal sense bring them on.

So I just don’t buy the argument that you are making. My guess is that Rogers is speaking loosely. He is probably only trying to say that the Brexit vote will be the economic event that will start the chain of events, including EMOTIONAL reactions, that will bring on the crash. When you say it that way, I can buy in. I believe that events like the Brexit vote can TRIGGER crashes. I just don’t think they are the sole causes of crashes or even the primary causes of crashes.

That’s the important distinction for me. We cannot control economic events. So placing the blame for crashes on economic events leaves us with no policy prescription. Placing the blame on high valuations DOES offer a policy prescription — permit honest posting on the last 35 years of peer-reviewed research so that experts in this field will warn people of the dangers of buying overpriced stocks, which would of course keep prices from ever getting too high and thereby put an end to crashes and the economic crisis that follow from them.

Your take is that nothing will change. The Wall Street Con Men have been pushing the smelly Buy-and-Hold/Get Rich Quick garbage ever since the first market opened for business and they will continue to rape middle-class investors by doing so because there is so much money to be made pushing GRQ schemes. I don’t buy it, Anonymous. I think the Wall Street Con Men are smart people and good people. They feel trapped. They feel that they will not be able to keep their jobs if they tell the truth about how stock investing works because Goons like you will go after them just like you go after me if they tell the truth about the value of your portfolio.

I think they want to tell the truth. I see LOTS of evidence of that. I think that, when things get bad enough, more of them are going to work up the courage to speak the truth in more clear ways and then the dam will break and eventually everyone will be doing it. We will achieve 35 years of progress in our understanding of how stock investing works in a short amount of time.

That’s what I believe, Anonymous. If we had had Shiller’s research available to us following the Great Depression (the product of an earlier Buy-and-Hold “boom”), we never would have engaged in the behavior that caused the runaway bull of the 1990s. We didn’t have Shiller’s research in earlier days. So we made the same dumb mistake over and over again. Now we have it. I don’t think we are going to continue to make that mistake once the word gets out. And I think that the word will be getting out following the next price crash. There are too many people who want to see it get out for you Goons to continue to be successful blocking their efforts. And there’s too much darn money to be made by those who become known as the pioneers in the effort to get the word out!

I don’t believe that even you Goons are going to be blocking efforts to get the word out following the next price crash. I think you are going to be pissed at the Wall Street Con Men at that time. You deny it now. But you haven’t seen huge losses in your portfolio yet. Losing most of one’s life savings changes a person’s perspective re these sorts of things. Take a look at what happened with the Madoff investors and you will see how it goes. Lots of people who called Madoff “Saint Bernie” in the days before they lost their life savings had different names for him after they suffered the losses. You won’t be calling Jack Bogle “Saint Jack” following the next crash, Anonymous. You will have a different name for him at that time, in my view.

But we’ll see, you know? I believe this. You don’t. There’s nothing that I can say that will bring you around to my point of view. There’s nothing that you can say that will bring me around to your point of view. We come at these questions from different sets of life experiences and we see things with different perspectives. It’s not personal on my end. I believe that perhaps it is a little bit less personal even from your end today than it was once upon a time. But I harbor no illusions that you are going to flip prior to the day your prison sentence is announced. It is asking a lot of someone to ask them to acknowledge things that they suspect will get them thrown in prison if they come clean about them. So I think we are stuck for the time-being. We are going to have to be a little bit patient and wait to see how things play out.

I think it is possible that the Brexit vote will bring on a crash. I also think it is possible that it will not. I believe that people who speak with certainty about such matters are fooling themselves. I don’t know much about Rogers. But I know enough to have a vague impression that he is a reasonably smart guy. But my guess is that, if you checked out how earlier predictions of his turned out, he would have a mixed track record. I never checked his track record. But I have checked the track records of lots of others who I thought seemed reasonably smart. And those track record always seemed mixed to me when I checked them. That’s how I came to develop confidence that Bogle’s take re short-term timing is the right one. (In contrast, of course, long-term predictions based on valuation levels have ALWAYS worked, going back 145 years now.)

Anyway, that’s where I am coming from re this one. At the time you posted, I was working on a column for the Value Walk site re this question of the effect of the Brexit vote on stock market prices. There’s a few ahead of that one in line but that one should be appearing within a few weeks (I have not finished it yet so I cannot say precisely when it will appear.)

I naturally wish you luck with all your future life endeavors, old friend.

Rob