Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
“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.
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 w iththat 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
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