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:
You predicted a crash much earlier than 2016. You just kept changing the date. After changing the date a few times you then gave a revised timeframe and said that if we didn’t see a crash by the end of 2015, that would be grounds for people to question VII. Would you like a link to those comments?
I don’t need a link, Sammy. I remember what I said. You can link for the benefit of others if you think that that’s a plus, so far as I am concerned.
The reason why I changed the date is that we do not know the date. Shiller’s research shows is that it is irrational exuberance, not economic gains, that causes overvaluation. Irrational exuberance is not rooted in anything real, it is just the product of investor emotion. So it never lasts. It always disappears into the mist in time. So it is a terrible mistake to engage in financial planning in which you count stock gains that are the product of irrational exuberance as if they are real money. If you retire based on overvaluation in your portfolio, you are going to pay a terrible price down the line.
All of that is 100 percent solid, 100 percent of the evidence available to us supports what I said in the paragraph above and 0 percent cuts against it. But what most people want to know is WHEN this is going to happen. That we do not know. All of evidence available to us ALSO shows that short-term timing never works. So we always know which direction prices are headed in the long run and we never know when the price change is going to take place.
This is why Shiller went 10 years out in the prediction that he made in 1996. He knew what the evidence says and he was trying to be careful. He felt that by going that far out he could get it right. What he said was totally in line with what has always happened before. So I would say that it was a safe prediction at the time he made it. But it STILL did not work out. If prices go down tomorrow, people who followed his advice will be ahead as a result. So his words possessed great value. But the prediction he made failed all the same. It’s easy to get the long-term price direction right, it is very hard to get the precise timing right.
I do think that my failed prediction is grounds to question VII. The entire purpose of me giving the prediction was to hold myself accountable and the prediction failed. Doesn’t that have to count as taking credibility points away from the strategy that I am promoting? I think that it does. The failed prediction is grounds for taking points away.
But it’s not like the Buy-and-Holders have been doing at all well with that they are saying. The Buy-and-Holders got the retirement numbers used by millions wildly wrong. They said that a 4 percent withdrawal was “100 percent safe” for those retiring at the top of the bubble. When you do the calculations accurately (presuming that valuations affect long-term returns), the safe withdrawal rate you get is 1.6 percent. Huh? What the f? Those Buy-and-Hold retirement numbers were cited in thousands of newspaper articles. We are likely to see millions of failed retirements in days to come as a result of that little mistake.
I don’t say that Valuation-Informed Indexing is perfect in every last detail. But we have to invest our money somehow. We can’t just say “well, I will not invest one penny of my money until there is a model that gets every single prediction right, not one exception!” We are not there and we have to make a choice out of two options. VII got a few predictions wrong in circumstances in which it’s not likely that it will make much difference in the long run. Buy-and-Hold likely caused millions of failed retirements and an economic crisis that has caused serious political frictions in recent years. I choose Valuation-Informed Indexing 500 times over.
Can I understand how somebody who was right on the line between the two strategies might get pushed to the Buy-and-Hold side of the line because of my failed prediction? I can. If you are right on the line, it would make sense that the failed prediction would push you the other way. That’s why I offered the prediction in the first place. I wanted to provide some accountability. The failed prediction counts against VII, there’s no question about that much.
Does that help at all?
Rob
Anonymous says
“The reason why I changed the date is that we do not know the date.”
So you finally admit that you can’t time the market. Can you change the subject now?
I write this already knowing your mealy-mouthed response. You can’t time it SHORT TERM. Short term meaning within any time frame at all. Or in Shiller’s case, a whole decade. I would be simply thrilled if you would come back with something you haven’t written a hundred times before.
Rob says
I cannot come back with anything different because the same story still applies, Anonymous. Short-term timing never works. That’s been true for 150 years of stock market history. Long-term timing always works. That’s also been true for 150 years of stock market history. That’s just the way it is. I didn’t create the stock market, you know. It’s not my doing that it is the way it is. I just report on what the peer-reviewed research says and the peer-reviewed research just reveals the realities.
Say that you were trying to figure out how many cans of beer a person can drink before he caused a car accident. And you accumulated data showing that drinking one can of beer has virtually no correlation with car accidents. Two cans has a slightly higher correlation but the odds are still strong that a person drinking two cans of beer is not going to get into an accident. And a person drinking ten cans of beer gets in an accident in the vast majority of cases. What conclusions would you draw from this data?
The way that the Buy-and-Holders analyze things, they would conclude: “You cannot tell whether a person is going to get in an accident by looking at whether he has consumed beer or not — there are many cases in which people consume beer and don’t get in accidents.” Is that true?
It’s true in some hyper-technical sense. There is no number of cans of beer that you can identify as the number that certainly causes an accident. You might look at someone who has drunk six cans of beer and say: “This guy is going to get in an accident for sure! He can barely stand up!” Still, there are cases in which someone drinks six cans of beer and does not get in an accident. So those who follow the Buy-and-Hold approach to data analysis say: “You cannot look at the number of cans of beer consumed to know if there is going to be an accident or not! The data doesn’t tell you the precise number of cans of beer it takes to cause an accident in each and every case! So we cannot draw any conclusions from this data!”
I just don’t buy it, Anonymous. You CAN draw conclusions. Drinking beer increases the risk of car accidents. The more cans you drink, the more risk there is. It’s the same with stock investing. Overvaluation causes price crashes. The higher the P/E10 level, the greater the risk.
Shiller looked at where things stood in 1996 and saw that we were in a situation where investors had drank six cans of beer. He concluded from the data that we would see a crash because the odds were strongly in favor of one. We didn’t have one within the time-frame of his prediction. The six-beer car driver got lucky. The Buy-and-Holders concluded: “Hey! We never need to worry about drinking beer again! Six cans won’t cause a crash! Neither will twelve cans! Neither will fifty cans! Beer-drinking doesn’t cause car crashes ! Shiller’s failed prediction proves it!”
It doesn’t. Shiller’s failed prediction shows that it is very hard to make precise predictions of WHEN overvaluation is going to cause a price crash. But it always does. There has never been one exception in the historical record. Overvaluation increases the risk of a price crash in each and every case. In some cases, the bad outcome pops up relatively quickly and in other cases it take more time than you would expect for the bad outcome to pop up. But it is not as if it makes much difference. The bad outcome still wipes you out. You still would be better off not drinking so much beer before driving. You still would be better off permitting investors to have access to the information they need to have access to to avoid letting valuations get so out of hand.
Stocks are risky for one reason. Buy-and-Hold strategies become popular from time to time and then valuations inevitably get out of hand. It’s not like there’s nothing we can do about it. We today have 37 years of peer-reviewed research showing us the dangers of Buy-and-Hold/Get Rich Quick. Why not tell people about it? Why not permit honest and accurate reports on safe withdrawal rates and lots of other critically important investment-related topics? Permit honest posting on the peer-reviewed research and stock prices become self-regulating. It seems to me that we will all live in a better world when stock prices will never again be able to go to these extreme highs or these extreme lows.
You absolutely can time the market. Not with precision. Buy you can time it. That’s been true for the entire history of the market. Just as it has been true that drinking beer has been causing accidents since the beginning of car-driving even though we cannot say with precision how many beers will cause an accident in a particular case. Overvaluation is risky. So we should all avoid it. And we should do everything we can to help others avoid it. Just because we cannot say with precision what day a crash will come in a particular case is not reason not to warn people on a daily basis of the dangers of buying overvalued stocks. The crashes caused by overvaluation hurts all of us in very, very, very serious ways. Those of us who love stocks as an asset class want to see Buy-and-Hold buried 30 feet in the ground where it can do no further harm to humans and other living things.
My sincere take.
Sober Driving Rob
Anonymous says
“You absolutely can time the market. Not with precision. Buy you can time it.”
Prove it. It’s your assertion, so it’s up to you to supply proof. But you refuse. When asked for evidence you answer is one of these:
a) The whole world is my evidence
b) Read Wade’s paper, it’s in there somewhere
c) I wish you all good things
The greater mystery is what joy you could possibly derive from making stupid, baseless assertions, knowing full well that you won’t even make an attempt to back them up. That bizarre behavior has gotten you repeatedly banned, and exiled to this backwater. Yet you persist.
Rob says
a) The whole world is my evidence
b) Read Wade’s paper, it’s in there somewhere
c) I wish you all good things
The whole world is indeed my evidence. Please point to one market in which it is not necessary for market participants to practice price discipline. There isn’t one. If price discipline is critical in every other market, what could lead anyone to believe that it is not critical in the stock market?
And, yes, the Bennett/Pfau research paper does indeed CONFIRM what common sense tells us must be so. As does Shiller’s research. As does Arnott’s research. As does Russell’s research. And on and on and on.
The reason why everything points in the same direction is because that is the right direction. Buy-and-Hold is a Get Rich Quick scheme. People like it because it puts more money in their pockets. Temporarily. But people get pissed off over Get Rich Quick schemes when the Pretend Money disappears. I think that is what is going to happen this time too.
We’ll see.
Get Rich Slow Rob