Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
“The fair-value CAPE value of 16 is based on 150 years of stock market history”
The average CAPE value over the period was 16
That does not mean that 16 is the fair value at every moment in time.
The entire question that we are trying to determine is what IS the fair value of stocks at every moment in time.
The Buy-and-Holders say that the best indicator of fair value is the price assigned by the market. If the market were efficient and investors were engaged in an effort to set prices properly through a rational process, I would agree with that. Shiller showed that the market is NOT efficient and that investors do NOT set prices rationally. So that doesn’t work.
How would you calculate the safe withdrawal rate if you don’t want to use the average CAPE value and you are aware that there is 38 years of peer-reviewed research showing that the Buy-and-Hold approach doesn’t work, Evidence?
If there is an investor who believes that the fair-value CAPE number is really 17, I have no problem with that. Perhaps that investor believes that our economy will be more productive in the coming years than it has been on average over the past 150 years. That would bring the CAPE value up. Going with a different number makes sense if you hold that belief.
I don’t have a belief as to whether the economy will be more or less productive in the future than it has been in the past. So I use the CAPE value that has been the average for 150 years. I think that that’s a sensible default number.
What I don’t feel even a tiny bit comfortable doing is assuming that the number that will apply in the future will be nothing even close to the number that has applied for 150 years. When you use the 16 number, the safe withdrawal rate you get for a retirement beginning in 2000 is 1.6 percent real. Greaney says that the safe withdrawal rate at the time was 4 percent. Huh? What the f? That’s not exactly close, you know? He is assuming that stocks will perform in the future nothing at all as they have always performed in the past. Based on what?
And does he tell people about these crazy assumptions that he makes that stocks are going to perform in the future in ways in which they have never performed in the past? He does not. He tells people that his crazy assumptions produce numbers that are “100 percent safe.” And, when he is questioned about the methodology that produced the crazy numbers, he responds with death threats. And when we get a fellow with a Ph.D. in Economics to help us out and he spends 16 months researching these questions and concludes that the Buy-and-Hold studies are “dangerous,” Greaney responds by threatening to get the guy fired from his job if he continues to do honest work in this field. Are you freakin’ telling a joke?
That’s a con, Evidence. Bernie Madoff is in prison today for financial fraud. What John Greaney has done is 500 times worse than anything that Bernie Madoff has ever done. Not this boy, you know? I don’t want to be associated with a criminal enterprise. Not no way, not no how.
If Greaney were saying that he thought that 1.7 might be safe in 2000, and if he presented a reasonable case for that number, I could say that that’s not crazy even if I didn’t personally agree. The criminal stuff is something very, very different. I don’t want my name associated with that sort of thing except as the name of the person who EXPOSED this massive act of financial fraud. If you don’t feel that you can report the safe withdrawal rate accurately and honestly, you are better off just not reporting it all. That’s my sincere take.
I hope that that helps a small bit.
Crime Exposing Rob
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