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:
The way we remove bias is looking at outcomes. With your VII strategy, you decided to pull out of stocks over 20 years ago. We can look back on your posts (which you have tried to revise) and see that you had lower returns versus the commonly used buy, hold and rebalance portfolios (such as those described on Simba’s list). Since you can no longer deny your failure, your most recent attempts at trying to soften the critics is that you think you did better from a “risk adjusted” basis. as any person grounded in statistics can tell you, you do not risk adjust historical returns as those are actual returns…….but as you admit, you are not really a “numbers” guy.
Buy-and-Hold has been performing poorly for 18 years running. From January 2000 forward, the annualized return has been 3.2 percent real. That means that millions of Americans are short of where they need to be for retirement. They were counting on returns of something in the neighborhood of 6.5 percent real (the long-term average return for 150 years now). So we are all paying a huge price for the out-of-control bull market of the late 1990s. When we push prices up so far above what the economic realities permit, we are borrowing returns from future years. It hurts to have to pay back the debt.
I have my money in TIPS and IBonds paying 3.5 percent real. So I beat the stock return from 2000 forward by a tiny bit. But I of course did so by taking on only a fraction of the risk. So I think it would be fair to say that I am a good bit ahead of the Buy-and-Holders from 2000 forward.
The Buy-and-Holders are a good bit ahead of me counting from 1996, when prices first reached dangerous levels. But stocks are today priced for a 50 percent crash. On the day after prices drop that much, I will be far ahead counting from 1996 forward as well. So the real question here is — When stock prices travel to levels of extreme overvaluation, are additional gains the product of economic developments (in which case they would be true and lasting gains) or at they the product of irrational exuberance (in which case they would be non-real and only temporary gains)? I believe that those gains are the product of irrational exuberance.
This is really the only difference between Buy-and-Holders and Valuation-Informed Indexers. Buy-and-Holders count all gains as real, even gains attained at times of extreme overvaluation. Valuation-Informed Indexers do not. We believe that those gains are the product of irrational exuberance. It seems to me that it is an issue of huge national importance to figure out whether it is Fama or Shiller who is right re this one. If Shiller is right, we will be seeing millions of failed retirements in days to come because millions of people planned their retirements in reliance on Buy-and-Hold retirement studies and calculators which are rooted in a belief that even gains attained at times of overvaluation are real and lasting gains. We will also be seeing a deepening of the economic crisis in the event that Shiller is right because a 50 percent price crash will cause trillions of dollars of consumer buying power to disappear from the economy.
This is the $64,000 question. Is Shiller right re this one or is Fama right re this one? It is my strongly held view that a national debate should be raging re this question on every discussion board and blog on the internet. The answer to the question affects the future of each and every one of us. I think Shiller is right. I find his case very persuasive. Of course, I acknowledge that 90 percent of the population is today inclined to believe that those gains are real. Shiller and I are very much in the minority.
My best and warmest wishes to you, Sammy.
Rob
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