Set forth below is the text of a comment that I recently posted to the discussion thread for one of my columns at the Value Walk site:
It is a load of crap saying that Shiller is holding back. He has pointed out why you should not be using CAPE for marketing timing.
Secondly, it is crystal clear that people, such as yourself, that pulled out of stocks have missed out on the huge gains we have seen in the market. You keep telling us to wait for the crash and your predictions, including those that you made on this site have failed to materialize.
Shiller has never put forward a single word suggesting that investors should not be using CAPE to practice effective long-term timing. He has said that he does not believe that “timing” works. Most people think of “timing” as “short-term timing.” It’s true that short-term timing doesn’t work — there is over 50 years of peer-reviewed research showing that. But what about long-term timing?
If it is true that valuations affect long-term returns, as Shiller showed, then long-term timing MUST work. And, indeed, the peer-reviewed research that I co-authored with Wade Pfau shows that, for the entire history of the market, long-term timing always HAS worked. Why not encourage Shiller and lots of others to talk about LONG-TERM timing, the kind that works? Would it not benefit all of us to have a national debate on that question instead of on this silly one that was settled by the research over 50 years ago? It seems so to me.
Why do you use a phrase like “pulled out of stocks”? That sounds emotional to me. I didn’t “pull out” of stocks any more than I pulled out of a deal that was offered to me by a car dealer but that represented a poor choice for me given what my research into the market value of the car showed me. I elected to invest to advance my own self-interest. Other asset choices offered a stronger long-term value proposition than stocks because stocks were insanely overpriced. So I went with the better deal. Why does that bother you so much?
I didn’t “miss out” on any “huge gains.” Most of the gains that you are talking about were caused by overvaluation. There is now 36 years of peer-reviewed research showing that gains produced by overvaluation are temporary rather than lasting gains. I am investing for the long-term. So I am not concerned with “missing out” on temporary gains. The concept of “missing out” on temporary gains is an absurdity to a true long-term investor.
Most of my predictions have materialized. I said that TIPS were an amazing deal when they were offering a return of 4 percent real and indeed those TIPS have been beating stocks for 18 years now! At greatly reduced risk! If that’s failing on a prediction, I can only pray that I continue to fail more and more spectacularly on my predictions for many, many years to come. The annualized real return for stocks for the past 18 years has been 3.3 percent (that includes dividends). How many Buy-and-Holders predicted that?
The one prediction that I failed on is that I predicted that prices would return to fair-value (or lower) levels long ago. We have never seen prices remain this high (and dangerous!) for this long. It would have taken a crystal ball to have predicted that one given that we have never seen anything like it before.
I still believe that we will someday return to fair-value price levels. We always have before and I believe that we will this time too. I don’t even believe that the market will be able to continue to function indefinitely if we don’t eventually return to fair-value price levels. It is the purpose of the market to get the price right and I don’t see how the stock market can prove to be different than every other market that has ever existed in that regard (and it certainly never has been different for the 150 years of its existence for which we have good price records).
But we will have to watch things play out to find out for sure. Please mark me down as predicting once again that prices will probably fall to fair-value levels or lower within the next year or two or three while also noting that short-term price predictions have a very poor track record and that I don’t think that I am any better at making short-term price predictions than anyone else.
I wish you all the best that this life has to offer a person, my long-term Buy-and-Hold friend.
Rob the Poor Predictor
Evidence Based Investing says
“We have never seen prices remain this high (and dangerous!) for this long. It would have taken a crystal ball to have predicted that one given that we have never seen anything like it before.”
Exactly.
Which is why attempting to time the market (either short or long term) is so dangerous.
No matter how many years of stock market history we study, the stock market still retains it’s ability to do something we have not seen before.
You may think that you know what typical valuation ranges are.
You may think that you know what how the market has reacted when it has been at this valuation before.
But the market doesn’t care.
It may behave the way it has in the past, or it may behave slightly differently, or it may behave a whole lot differently.
And then your model, built on what the market has done in the past, is no longer accurate.
Rob says
I like your statement that the market “may behave the way it has in the past, or it may behave slightly differently, or it may behave a whole lot differently.” That statement expresses a healthy skepticism re dogmatic takes on how the market works. We are in agreement re the need to avoid dogmatism and re the need to retain skepticism.
Where we get on different tracks is where you say “And then your model, built on what the market has done in the past, is no longer accurate.”
If all you were claiming with that latter statement is that we cannot be dogmatic about Valuation-Informed Indexing, I would agree with you. I believe in Valuation-Informed Indexing. But I could be wrong. So dogmatism would be a mistake. While it certainly makes sense for me to invest my money pursuant to the dictates of Valuation-Informed Indexing, it would be a terrible mistake for us as a society to prohibit the discussion of Buy-and-Hold or of any other alternative models. I could be wrong. So we need to encourage discussion of the other options so that they are there for the people who prefer them and so that we continue to develop them in the event that they are the models that really work.
What I don’t like about your latter statement is that you apply your skepticism ONLY to Valuation-Informed Indexing. The proper conclusion to draw from the earlier statement is that NEITHER Valuation-Informed Indexers NOR Buy-and-Holders should evidence dogmatism in their discussions of how stock investing works. It is this attitude that Buy-and-Hold and Buy-and-Hold alone is above all challenge that generates all the friction that we have seen over the past 16 years.
Is Buy-and-Hold not a model that describes how the stock market works, one based on what the market has done in the past? That’s surely what I have always understood it to be. Do you think that Buy-and-Hold was handed to us by God himself? I believe that it was developed by humans and that all humans are capable of making mistakes and that thus it is possible that there are some things wrong with the Buy-and-Hold Model and that thus we all should be trying to help our Buy-and-Hold friends out by letting them know when we run across something that appears to us to be in error.
I was a popular poster at the Retire Early board at Motley Fool. I made a lot of friends there. John Greaney had a retirement study posted at his web site that was frequently used by members of that board community to determine when they had enough saved to hand in resignations from their corporate jobs. According to this study, which is rooted in the Buy-and-Hold Model, the safe withdrawal rate is always 4 percent. If that’s so, then someone who needs $60,000 per year to live on in retirement, needs to save $1.5 million before handing in his resignation. If, on January 1, 1996, this aspiring retiree had $700,000 in his portfolio, not one responsible person would say that he should be handing in a resignation. He would be $800,000 short! He would not even be halfway to the goal-line!
Now —
The market increased in value by 126 percent over the next four years. So, even if he didn’t save another penny, the Buy-and-Holders would say on January 1, 2000, that his retirement would be “100 percent safe” if he handed in his resignation on that day. That’s not what the Valuation-Informed Indexing Model (rooted in the peer-reviewed research of Nobel-prize-winning economist Robert Shiller) says. The VII Model says that most of those gains were cotton-candy nothingness and that that aspiring retiree has a ways to go before he could enter a retirement that the historical return data indicates is safe.
You are right that we are all still learning how this stuff works. You are right that we don’t today know all the answers. You are right that dogmatism is a bad idea. I will sign a statement to that effect in blood.
But I will not sign a statement saying that the safe withdrawal rate is always the same number. I don’t believe it. It is a LOGICAL IMPOSSIBILITY if Shiller’s “revolutionary” (his word) 1981 finding that valuations affect long-term returns is legitimate. I care about the people who posted to that board. And I care about all the others who posted to all the other boards. I cannot lie to them about a matter of such great importance. A failed retirement is a serious life setback. I am 100 percent sure re that one.
So I am not going to lie about it.
If you want me to say that Shiller COULD be wrong, then, yes, I will say that. I am 100 percent certain that Shiller would say that himself. I have zero problem going there.
The issue for 16 years now has been that you need to be able to say that Bogle COULD be wrong too. It could be so, Evidence. And, it it turns out that it is Bogle who is wrong, then millions of people will have been hurt by the mistakes that he has made. So we all should be working together to be sure that any mistakes that he has made are corrected as quickly as possible. Those of us who feel gratitude to Bogle for all of the wonderful things that we have learned from him over the years should be ESPECIALLY determined to get any mistakes corrected as quickly as possible. When you love someone, you don’t like to see that person embarrassed by a failure to correct his mistakes promptly. Yes?
Valuation-Informed Indexing is a model for understanding how stock investing works that is built on what the market has done in the past and Buy-and-Hold is a model for understanding how stock investing works that is built on what the market has done in the past. Both models are rooted in peer-reviewed research published by Nobel-prize-winning economists. We all should be in agreement that this is an exciting time to be studying how stock investing works. We all should be in agreement that every single person contributing to the discussions held at our boards and blogs should feel 100 percent free to post with complete honesty. Never should any acts of intimidation be tolerated by any of us.
That’s my sincere take re these terribly important matters, in any event.
I naturally wish you the best of luck in all your future life endeavors, old friend.
Non-Dogmatic Rob
Anonymous says
I’ve never seen anyone use so many words to say so little.
“Bogle COULD be wrong too.”
Bogle says you can’t time the market. And, no, he couldn’t be wrong. It’s impossible that he is wrong. If he was wrong, some market timer would have leveraged his can’t-miss scheme a hundred times over. He would be the richest guy in the world.
Your “long-term timing” canard is just laughable. Any time you actually pull the trigger on an investment change – Bingo – you just did it – that’s short-term! Which explains you being out of the market for 22 years. Your own Catch-22.
Rob says
I like your statement about how all ACTIONS taken as part of the implementation of an investment strategy take place in the short term. That’s so. And I think this is what makes Valuation-Informed Indexing counter-intuitive to a lot of people.
The distinction between short-term timing and long-term timing is the entire deal. The mistake that the Buy-and-Holders made was to fail to see the importance of that distinction. When we all agree on the importance of that distinction, we will all be in a much better place.
Or so Rob Bennett, some fellow whose only claim to expertise in this field is that he figured out how to get his posts to appear on the internet, sincerely believes, you know?
This Rob Bennett individual might be WRONG. That’s the curve-ball. Yikes!
Hang in there, man.
Fallible Rob
Anonymous says
“When we all agree on the importance of that distinction, we will all be in a much better place.”
And when we don’t agree, we are called “goons” and told we are going to prison.
Rob says
No.
You are called “Goons” and told you are going to prison when you: (1) advance death threats; (2) demand unjustified board bannings; (3) put forward thousands of acts of defamation; or (4) threaten to get academic researchers fired if they continue to do honest work.
It is possible to imagine a world in which Buy-and-Holders and Valuation-Informed Indexers would live together in peace while openly disagreeing about how stock investing works. Robert Shiller and Jeremy Siegel hold opposite views and they took several family vacations together without experiencing any problems. Robert Shiller and Eugene Fama hold opposite views and they have appeared at several conferences together without any negative incidents taking place.
It can be done.
But the published rules of all of our board and blog communities and the laws of the United States are good rules and good laws. For people of differing views to live together in harmony there has to be a mutual respect and affection. A situation in which the majority intimidates the minority into self-censorship is not healthy and leads to no place good.
I respect my Buy-and-Hold friends. I love my Buy-and-Hold friends. But I am not willing to say things that I do not believe are true to appease my Buy-and-Hold friends. My personal view is that I would not be showing respect and love to my Buy-and-Hold friends if I did that. I would be showing fear of them. I would be evidencing cowardice. I would be degrading myself AND my Buy-and-Hold friends by walking that path. No.
I will sign on to any situation in which I and all my fellow community members (including my Buy-and-Hold friends, to be sure) are permitted to post honestly. I will not sign on to any situation that does not permit us all to post honestly. Communities that permit honest posting are magic. They permit us all to learn things that we never could have learned congregating only with others who thought as we did. Communities that demand dishonesty as the price of admission make me sick. That’s the way it is. I possess zero desire to sugarcoat that reality, a reality of which I am exceedingly proud.
That’s it, you know?
We can live together in peace or we can destroy ourselves by failing to make the effort required to do so. I vote for making the effort.
My best and warmest wishes to you and yours, old friend.
Rob