Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Yet another article that says you are wrong, Rob.
http://svrn.co/blog/2017/5/14/waiting-for-the-market-to-crash-is-a-terrible-strategy
And can you tell us how his data is wrong?
It’s not his data that is wrong. It’s his thinking process that is wrong. This fellow is testing what John Walter Russell referred to as “Idiot Switching.” Idiot Switching never works. For obvious reasons.
The thought process behind Idiot Switching is that overvaluation is irrational and that the irrationality should be exposed by the market and that the smart investor should therefore be able to exploit this irrationality by timing his moves in and out of the market. It makes sense. I don’t deny that. But it doesn’t work. Idiot Switching has a TERRIBLE track record. My guess is that Idiot Switching does even worse than Buy-and-Hold in the long run. Sometimes it works just by luck. But the historical record shows that it is a very, very bad strategy. One of the things that I love about the Buy-and-Holder is that they have done more than anyone else to EXPOSE the flaws of Idiot Switching.
Look at what happened in the late 1990s. Stock prices were at insanely high levels in 1996. We were priced for a crash. Idiot Switchers got out of stocks. Then we had three years of the biggest gains in history in 1997, 1998 and 1999. If you want to know how stock investing works in the real world, you need to take a moment to try to understand why that happened, why Idiot Switching was such a disaster in that particular case and in fact fails just about every time it is tried.
The Idiot Switchers are applying reason to an unreasonable situations. They are saying “prices SHOULD come down because they are now so high.” But the entire reason why prices got so high in the first place is that investors are not rational but highly EMOTIONAL Those darned emotional investors DON’T CARE that stocks are priced for a crash, they just go ahead and send them to higher and higher price levels anyway despite the logic behind the Idiot Switching “strategy.”
Valuation-Informed Indexing is not Idiot Switching. Not in any way, shape or form. Valuation-Informed Indexers are as much opposed to Idiot Switching as they are to Buy-and-Hold. Idiot Switching is at heart really just another emotional approach, another marketing gimmick.
Valuation-Informed Indexing is a risk management approach. The core idea is that investors should be trying to keep their risk profiles roughly constant over time. Risk increases as price increases. So for an investor to keep his risk profile constant, he MUST adjust his stock allocation in response to big price swings. Do that and you reduce the risk of stock investing by 70 percent while also increasing your returns enough to be able to retire many years earlier. It is impossible to imagine any scenario in which keeping your risk profile constant would not produce good results and of course the entire historical record shows that taking this simple step has been paying off big time for the investors who follow it for 145 years now. It is impossible for the rational human mind to imagine any circumstances in which it would not.
A showing that Idiot Switching does not work is old, old news, Anonymous. Those who follow the research in this field have known what this guy is saying for a long, long time. To check the merit of VII, you have to do what Wade Pfau and I did in the research that we co-authored and had published in a peer-reviewed journal. We checked the merit of VII. That is of course something very, very different from what this fellow did.
That’s of course why you threatened to destroy Wade’s career if he continued to do honest work while you did not threaten this fellow in any way. Idiot Switching offers no threat to Buy-and-Hold. Once the American people are able to learn about Valuation-Informed Indexing, which is the first true research-backed strategy, there will be no more Buy-and-Hold. We will all pull together to bury the smelly Get Rich Quick “strategy” 30 feet in the ground, where it can do no further harm to humans and other living things.
That’s Rob Bennett’s sincere take re these terribly important matters, in any event.
I naturally wish you the best of luck in all your future life endeavors.
Rob
Curious Carl says
Rob, when did you get out of stocks? Is there anything you’d do differently?
Rob says
I got out of stocks in the Summer of 1996.
The only thing that I would do differently in an investment context is that I should have bought TIPS when they were paying 4.0 percent real instead of waiting until they fell to 3.5 percent real. I knew that the 4 percent real return for a risk-free investment option was an amazing value proposition and I told a friend of mine that at the time. He was able to talk me out of it because I was not seeing anything in the media where people were talking about the amazing value proposition and I let that influence me. I worked up the courage to do the right thing when the return dropped to 3.5 real.
In a non-investing context, I think I was wrong not to speak up about the errors in the Buy-and-Hold retirement studies when I first began posting to the Motley Fool Retire Early board in May 1999. I certainly was not as sure that those studies were in error then as I am today. But I certainly thought that they were in error and I had a responsibility to share those thoughts with my fellow community members. I rationalized. I would have missed out on lots of good times had I spoken up earlier because I am sure that Greaney would have had me banned. But it still was the right thing to do. I should have just went ahead and did the right thing and let the chips fall where they were going to fall. Which is pretty much what I ended up doing in May 2002.
My best wishes to you, Carl.
Rob
Curious Carl says
So you missed out on the great bull market of the 1990s. No regrets?
Rob says
I didn’t miss out pre-1996. But I had very little money saved in those days. So my participation was minimal.
Zero regrets re the post-1996 years. I regret that I cannot buy stocks at reasonable prices. I see that as a national tragedy that has hurt us all in very serious ways. But that’s obviously not something that I could change by myself. Given the cards that I was dealt, I am confident that I played them the best that I possibly could.
There was one year prior to 1996 when I remember being excited about the gains I had earned over the year when I was redoing my budget at the end of the year. I could have been 1995 or 1994, I am not sure. I hadn’t studied valuations at the time, so to me the gains were all good. That was my one time experiencing the Get Rich Quick feeling that comes from following a Buy-and-Hold strategy. Ironically, it was Bogle’s book that did the most to get me out of that way of thinking. Shiller ultimately did more, but Shiller came later for me. Bogle was the bigger early influence.
Rob
Sensible Investor says
I was able to buy stocks at bargain basement prices in 2009. Where were you when the stocks were cheap, Rob? 2009 was your time to shine!
Rob says
Not really.
I agree that the value proposition for stocks was strong in early 2009. I reported that at the beginning of every podcast that I recorded at the time.
But I don’t think that there is ever a circumstance in which you need to jump to take advantage of a time-limited opportunity. Good opportunities remain in place long enough for you to think things through carefully.
I talked to my wife about moving some money into stocks in 2009. We were close to making a decision. But then prices went up again. So the good value proposition was no longer there.
That would have been a good investment. I don’t say otherwise. But the same opportunity will be available the next time prices come down. It’s not like I missed out in any permanent way by holding off on buying until the next price crash. I have been earning 3.5 percent real on that money in the years since. And I of course will be able to move it into stocks and earn very high returns (perhaps 15 percent real) after prices fall. And I have been investing virtually risk-free all that time. I’ll take it
I don’t buy into the idea that you need to jump at opportunities. The reality is that there is ALWAYS something good to do with your money if you can keep your emotions in check. I certainly don’t knock people who invested in stocks in 2009. The long-term value proposition was strong. But we didn’t know then how things were going to go. There were arguments for playing it the other way. It was essentially a judgment call. I decided to go in, but once the value proposition was no longer there, I naturally elected not to follow through.
The phrase “bargain basement prices” is emotion talking, in my assessment. The P/E10 value went to 13, which is only two points below the fair-value price of 15. That’s basically fair value, nothing close to “bargain basement.” I worry that we may see what bargain basement prices really look like in the days following the next price crash. It will not be a pretty picture if we go there. There will be an amazing opportunity present for those with money to invest in stocks. But the country as a whole will be suffering terribly, as it always does when we work our way out of the traps we build for ourselves when we fall for the Buy-and-Hold garbage.
My best wishes to you, Sensible.
Rob
Anonymous says
You say Idiot Switchers got out of stocks in 1996, because of high valuations.
Which is exactly what you did. For the exact same reason. But you are absolutely NOT an Idiot Switcher.
Even you can’t really believe such nonsense. Or can you?
Rob says
Idiot switching is getting out of stocks in 1996 for the perfectly good reason that valuations are sky high and expecting that you will be rewarded for doing so within six months or a year or two years. If you did that, then your strategy failed. Stock prices zoomed for the next six months and for the next year and for the next two years. When you saw that your strategy failed, you gave up on it and then bought back into stocks, having missed out on two years of gains. Then you lost out again down the road a bit when prices fell hard. Idiot switching is a very bad strategy.
That’s not at all what I did. I got out in 1996. But I had not thought that that strategy would be vindicated within two years. The research does not support such a belief. I got out because the long-term value proposition was not there. So the fact that prices zoomed did not concern me. I knew from looking at the historical record that that was a live possibility. So, when prices continued up, I did not become alarmed and did not buy in and ended doing fine in the long run, just as the research showed would happen.
You are confusing (for about the 10,000th time, I feel obliged to note) short-term timing and long-term timing. Fama showed that short-term timing never works and was awarded a Nobel prize for his efforts. Shiller showed that long-term timing always works and was awarded a Nobel prize for his efforts. Both Fama and Shiller merited their Nobel prizes. Valuation-Informed Indexing COMBINES the powerfully important findings of Fama with the powerfully important findings of Shiller. We never, never, never, never, never practice short-term timing (idiot switching) because we know that it never works. But we always, always, always, always, always practice long-term timing because we know that it always works and is always 100 percent required for all investors who seek to keep their risk profiles roughly constant over time.
It is my view that anyone who does not understand the importance of the distinction between short-term timing and long-term timing cannot be fairly referred to as an “expert” in this field. Understanding that distinction is key to understanding the last 36 years of peer-reviewed research in this field and the last 36 years of peer-reviewed research is the most important 36 years of peer-reviewed research published in the historical of investing analysis.
I should add that it’s idiot switching that gave market timing a bad name. Market timing is wonderful. It is through market timing that we practice price discipline when buying stocks. Market timing ALWAYS works so long as it’s not idiot switching. The peer-reviewed research that I co-authored with Wade Pfau shows that any investor can reduce the risk of stock investing by 70 percent while also earning far higher returns just be being willing to tune out the Buy-and-Hold noise and practice market timing faithfully.
So how the heck did it come to be that millions of good and smart people believe that market timing is a bad idea?
Their experience with idiot switching was so bad that they gave up on market timing altogether. Investors became so intent upon avoiding the disaster suffered by idiot switchers that they became freakin’ Buy-and-Holders.
Fama was right. We need to avoid idiot switching. And Shiller was right. We need to be certain to always practice market timing. We need to take ALL of the peer-reviewed research into consideration when buying stocks.
I hope that helps a small bit, Anonymous.
Rob