Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
There doesn’t have to be a crash. Stock returns could simply be lower in the future. Or earnings might be greater than average. As a student of Shiller, surely you are aware that PE10 will go down this year even if the market stays the same.
For returns to remain low enough for long enough for P/E10 levels to return to fair-value levels is just a more drawn-out way to experience the same negative effects that we would experience in a crash. The annualized real return on stocks for the past 18 years has been 3.5 percent real. That’s half of the return that millions of investors have been counting on to finance their retirements. And we are nowhere even close to fair-value price levels after those 18 years of poor returns. We are still at P/E10 levels so high that the one time in history when we experienced them before we saw a Great Depression as a result. Not good. Great depressions hurt people, Anonymous. In very serious ways.
And you are wrong when you say that earnings could be enough better than average to help us to avoid the massive amounts of human misery that always follow when as a society we permit P/E10 levels to rise to the levels they have reached in recent decades. It is possible that earnings could increase enough to support a long-term average return of 6.6 percent real or 6.7 percent real rather than the 6.5 percent real that has applied for 150 years now. But we were not looking at 6.6 percent returns in the late 1990s, Try 20 percent. Try 25 percent. Try 30 percent. That’s a massive amount of human suffering that our Wall Street Con Men friends caused with their relentless promotion of the smelly Buy-and-Hold garbage.
Not this boy, you know? I am going to continue to post honestly re safe withdrawal rates and scores of other critically important investment-related topics. I am happy to do anything in my power to get your prison sentence reduced a bit. But no financial fraud garbage for this boy. I don’t like the idea of going to prison in the days following the next price crash. And I don’t like the idea of causing millions of failed retirements. I was a Buy-and-Holder myself once upon a time because I believed that Bogle was sincere about using the peer-reviewed research as a guide. I think Bogle was on the right track in the days before he went to the dark side. I am going to continue to tell people how stock investing works according to ALL of the peer-reviewed research, both the pre-1981 research that supports Buy-and-Hold and the post-1981 research that shows that valuations need to be taken into consideration to get any of the numbers even roughly right.
I hope that works for you, my good friend.
Rob
The simple fact is that you have no idea what the market will do. Not tomorrow, not next month, not ten years from now.
Shiller wrote a whole paper predicting 0% real returns for the ten year period of 1996-2006. He was off by 6.6% real per year. Someone who sat out that decade would have missed out on 89% real gains. Which is also known as a busted retirement.
Ten years is long-term timing. And he blew it. If he can’t time the market, what on earth makes you think you can?
The point you are making here is a legitimate one, in my view, Anonymous. Shiller did indeed make a startling prediction in 1996 that from one point of view did not turn out. You are helping people out when you point that out. Maybe Shiller is wrong in what he says about stock investing. If there is even a tiny chance that that is the case, investors need to know about the case for believing that. So re that part I am grateful.
I don’t agree with you re the conclusions you reached as a result of Shiller’s failed prediction. But even that is not a problem, so far as I am concerned. You say: “The simple fact is that you have no idea what the market will do.” Shiller’s research says otherwise and he was awarded a Nobel prize for it. So there are obviously some very smart people who disagree with this statement of yours. And of course the Bennett/Pfau research shows the same thing while providing much more detail re the benefits that go to investors who make use of Shiller’s “revolutionary” (his word) findings when setting their stock allocations. But there are lots of smart people who believe as you do. So I don’t think you are out of line to say that you personally believe that I have no idea what the market will do.
Where you cross the line a bit is with your use of the phrase “the simple fact is…” It’s not a simple fact if Shiller believes otherwise and if the Bennett/Pfau research shows otherwise and if the members of the committee who awarded the Nobel prize in Economics were sufficiently impressed with Shiller’s work to give him that high honor. In your perspective, this is a simple fact. In the perspective of Eugene Fama (another Nobel prize winner — on the same day!), this is a simple fact. In the perspective of 90 percent of the investing population, this is a simple fact. But it ain’t a simple fact in Rob Bennett’s perspective or in Robert Shiller’s perspective or in the perspective of 10 percent of the investing population. It would be EXTREMELY helpful if from time to time you would recognize THAT simple fact.
Ten years is long-term. I think it is fair to say that. There’s a reason why Shilller made the prediction a ten-year prediction; it’s because he felt that that was long enough for the long-term realities to assert themselves. And they didn’t assert themselves in 10 years in that particular case. But then two years later we experienced the second biggest economic crisis in U.S. history. My view is that Shiller was wrong in a hyper-technical sense but that he was 10 times more right than he was wrong. He performed a huge national service by letting us know that that economic crisis and by telling us what we need to do to avoid it. I think we all owe a huge debt of gratitude to him for what he did with us when he “blew it,” to use your phrase.
I think Shiller is a national hero.
I think Bogle is too, just for the record. I think Bogle is wrong re long-term timing. But I think he is right re lots of other important stuff. So I see no reason not be reward him with heroic status too. Just so long as I am honest enough to note at the same time that I think it is Shiller and not Bogle who is right re the long-term timing thing.
Please note that I do not say that it is a “simple fact” that Shiller is a hero. In my eyes, it is a simple fact. Others think he “blew it.” That’s the mixed reality that we need to live with today, like it or not. I think the guy is right on and I offer no apologies and I am 100 percent unwilling to say otherwise. But I CAN say that there is always the possibility that I am wrong and that Shiller is too. So no one should go just by what I say or just by what Shiller says. Each investor needs to make up his or her own mind as to how to invest his or her retirement money. Of course, we need to open up every discussion board and blog on the internet to honest posting so that all investors will be able to hear both schools of thought explored in great depth before making the decision as to how to invest his or her money in an informed way.
My best wishes to you.
Non-Apologetic Market-Timing Rob
“I think Shiller is a national hero.”
No one who sold their stocks in 1996 on his say so agrees with you.
“But then two years later we experienced the second biggest economic crisis in U.S. history.”
Shiller picked the time frame, not me. You of course want to cherry pick. But okay, let’s include that crash. In fact, let’s go from January 1996 all the way to today. Average real return? Still 6.6%.
“I think Bogle is wrong re long-term timing.”
What you think is irrelevant. All that matters is what the data says. And all the data says that Bogle is right. No one can time the market. You are wrong.
No one who sold their stocks in 1996 on his say so agrees with you.
Not if they understood at the time they acted on his advice why he said it. If they understood why he said it, they would be happy today that he offered that advice and that they followed it. If they didn’t understand the reasoning, they might be unhappy today. But that’s on them. Shiller provided his reasoning for the prediction at the time he made it.
Shiller picked the time frame, not me. You of course want to cherry pick. But okay, let’s include that crash. In fact, let’s go from January 1996 all the way to today. Average real return? Still 6.6%.
You’re not counting the 50 percent price drop baked in to today’s price. Count that and people would be thrilled to have been warned in 1996 that stocks were likely to perform poorly for the next 22 years.
You’re acting like it’s a good thing that the price drop has been delayed. The longer the price drop is delayed, the worse off we all are. We would all be better off today if the price drop had come in the 10-year time-period in which Shiller predicted it would come. The delay has HURT stock investing, not helped them.
Those words are spoken from the perspective of someone who believes that valuations affect long-term returns, to be sure.
It IS interesting that the annualized real return from 1996 until today is 6.6 percent real. I see that as a strong point for the Buy-and-Hold side. If I were in your shoes, I would be stressing that point and I don’t blame you a tiny bit for focusing on it.
What you think is irrelevant. All that matters is what the data says. And all the data says that Bogle is right. No one can time the market. You are wrong.
This part I don’t think is so good. This part is arrogance. Yucko! Shiller would not have been awarded a Nobel prize if these questions had been settled and sealed before he came on the scene. I don’t believe that these matters are even close to settled and sealed. I say not only that everyone CAN time the market. I say that everyone who wants to keep his risk profile roughly stable over time MUST time the market. There is no other way to get the job done in a world where valuations affect long-term returns.
Humble (Kinda, Sorta) Rob
“You’re not counting the 50 percent price drop baked in to today’s price.”
Of course not. Because it hasn’t happened. That 22 years included two massive crashes. The timing for which Shiller did not predict. So there’s no reason to believe that he has any insight on the timing of the next crash. He even says as much. And he certainly isn’t predicting a 50 percent crash. Since he can’t time the next crash, there are only two courses of action: buy and hold, or sell out and hide under the bed. We know which of those worked over the last 22 years.
“Shiller would not have been awarded a Nobel prize if these questions had been settled and sealed before he came on the scene.”
Shiller’s Nobel prize doesn’t prove he can time the market. His blown prediction proves he can’t.
I understand how desperately you need to believe that you are on to something. But you just aren’t.
Of course not. Because it hasn’t happened.
That’s the entire difference of opinion right there.
If price changes are determined by economic realities, no one can predict them and Buy-and-Hold is the ideal strategy.
If price changes are determined by investor emotion, risk is greater at times when emotions are most out of control and smart investors need to reduce their stock allocation to keep their risk profile roughly constant over time.
If I wait until prices have crashed to tell people about the risk they are taking by investing in stocks at today’s prices,what the heck good am I? It’s too late then. Once prices have crashed, stocks won’t be risky anymore. If valuations really do affect long-term returns, then people need to be told TODAY that their retirement portfolios are only worth one-half of what their portfolio statements are telling them that they are worth. To wait until after prices drop to let them know would not be terribly helpful.
Desperate Market Timing Rob
“If price changes are determined by investor emotion, risk is greater at times when emotions are most out of control and smart investors need to reduce their stock allocation to keep their risk profile roughly constant over time.”
Even if that premise had any merit, it would depend on your ability to gauge overall investor emotion, relative to other time periods. Accurately enough to beat the results of buy and hold. Neither you nor Shiller have ever demonstrated the slightest ability to do that. If you had any respect for data, you would acknowledge that fact.
I demonstrated it in freakin’ peer-reviewed research, Anonymous. It was the entire point of the work that I did with Wade Pfau to show that.
Which of course is why you threatened to send defamatory e-mails to his employer if he continued doing honest work in this field. Which of course is why you will be going to prison in the days following the next price crash, when this massive act of financial fraud will be exposed on the front page of the New York Times.
Oh, my!
Rob