Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
After rereading these words, I feel the need to put forward an addendum to them.
Valuation-Informed Indexing is the new idea, Buy-and-Hold is the long-established strategy, the dominant model today for understanding how stock investing works. So, yes, I carry the burden of proof when it comes to persuasion. People who hear my words should be skeptical of them because they challenge conventional thinking, thinking held and advanced by millions of good and smart people. The burden of proof is on me when it comes to PERSUASION.
But the burden of proof is not on me when it comes to whether or not I should post my honest views. People who hold minority viewpoints are required in our society to post their honest beliefs. If I were to say that I believe that Greaney’s retirement study contains an adjustment for the valuation level that applies on the day the retirement begins, I would be guilty of financial fraud. I obviously do not believe that. There are thousands and thousands of posts in the record in which I state very forcefully that I do not believe that. I hold a minority viewpoint. I am required by the laws of the United States to express that minority viewpoint each time that I speak re these matters. That’s as clear as anything could be clear.
This difference in how the two burdens of proof are set up is critical to the proper working of our economic and political systems. It would be a bad idea if we all changed our views on important issues each time some fellow or gal came along and expressed a new idea. That would be a disaster. So we have a social norm that says that new ideas must be challenged, that the burden of proof must be placed on the person advancing the new idea. All of that is right and just and proper and life-affirming. So one of the two burdens of proof really us on me.
But the other burden of proof — the burden that must be met for you Goons to avoid prison time — is on you Goons. People should not be easily persuaded of what I have to say. But I don’t have to persuade anyone of anything to win the right to post honestly. That is established in our society’s social norms and indeed in our criminal code (which of course has its roots in our long-held social norms). I have an absolute right to post honestly, as does everyone else. Even if it turned out that you were right about Buy-and-Hold, you would still be guilty of crimes when you advanced death threats and when you threatened to get Wade Pfau fired from his job and so on. That stuff is completely over the line even though my viewpoints on how stock investing works are minority viewpoints.
Now — the practical reality is that you are not going to be prosecuted for your crimes unless as a society we come to have serious enough doubts about Buy-and-Hold for a significant number of people (more than 10 percent of the population!) to be concerned about the effects of your criminal acts on our entire society. Not every criminal transgression is prosecuted. Not every person who commits a crime lands in a prison cell.
If a significant percentage of the populations becomes concerned about what has happened to them after they lose 60 percent or more of their life savings, you will go to prison. If no one becomes concerned, or if only the 10 percent who currently are concerned are concerned at that time, you will in a practical sense be off the hook. I believe that we are going to see more people become concerned in the days following the next price crash. But we of course are going to have to wait to see how that one plays out.
There are two burdens of proof. One is on the substance issue — Can Buy-and-Hold work, given the 38 years of peer-reviewed research showing that valuations affect long-term returns? The burden of proof is on me re that one. The other burden of proof is on the question of whether I have a right to post honestly and whether people who are interested in hearing what I have to say have a right to hear what I have to say even though you Goons would prefer it if people could not hear the minority viewpoint expressed on every discussion board and blog on the internet. Re that one, the burden of proof is on you Goons.
We have as a society adopted laws protecting the expression of minority viewpoints. We believe as a society that it is important that new ideas be entertained. Even though most new ideas are not going to pan out, it is important that death threats and threats to get academic researchers fired from their jobs not be permitted because in a small number of cases new ideas will prove to have great value and, unless we protect those ideas from criminal acts of the people who profit in some way from the continued promotion of the old ideas, we will never hear the new ideas that are the lifeblood of our system. It is new ideas that make our economy so productive that our stock market has been able to generate an average annual return of 6.5 percent real for many, many years. Cut off the possibility of new ideas ever again being heard because established interests prefer to see people continuing to believe in the old ideas and we are all a far poorer people than we have ever been at earlier times in the history of the United States.
I am 100 percent confident that I can meet the burden of proof that will rightly be imposed on me to show that Valuation-Informed Indexing is superior to Buy-and-Hold so long as the burden of proof is imposed on those who have elected to engage in criminal behavior to block people from hearing the case for the new model. I will be interesting to see how things play out in the days following the next price crash.
My best wishes to you, Goon friend.
New-Ideas-Guy Rob
Fidelity reports that the average 401k has increased by 466% over the past 10 years. At the same time over these 10 years, Rob Bennett stayed out of the market and told people that it would crash.
If those gains are real and lasting, then obviously that’s fantastic.
If they are mostly the product of irrational exuberance, then that’s not so great.
The annualized real return for the S&P 500 over the past 10 years has been 11.4 percent. The total return is 194 percent. So, if you started with $100,000, you would now have about $300,000. Again, that’s fantastic.
But also again, that’s not so great if the $300,000 is mostly irrational exuberance. This is the fourth bull/bear cycle that we have seen since 1870, which is as far back as we have good records. The earlier three did not come to an end until the CAPE value hit 8. That’s about 75 percent down from where we are today. If that $3000,000 gets reduced by 75 percent, you end up with $75,000. That’s less than what you started with. Not so fantastic.
There’s only one question that matters. When stocks become overpriced, is the amount of overvaluation the product of economic realities, as the Buy-and-Holders say? Or is the amount of overvaluation the product of irrational exuberance, as the Valuation-Informed Indexers say? That’s it. That’s the whole deal. We should be discussing that question at every investment site on the internet.
You don’t make adjustments for the effect of valuations, Anonymous. You don’t do it when you calculate the safe withdrawal rate and you don’t do it when you determine how your portfolio is doing. We can never agree for so long as you don’t make that adjustment. Shiller’s Nobel-prize-winning research shows that you need to adjust for valuations. So that’s what I do.
Shiller’s research discredited Fama’s research, which is the research on which the Buy-and-Hold strategy was built. If Shiller’s Nobel-prize-winning research is legitimate research. Buy-and-Hold is dangerous stuff. Investors need to adjust for valuations to have any idea what is going on. And the Buy-and-Holders do not do this. Your post here shows that.
Valuation-Adjusting Rob
The buy and holder wouldn’t lose anything. The buy and holder knows that the market has always recovered in 5 years or less. The buy and holder continues buying stock and goes on to experience new market heights. Meanwhile, the market timers have shown that they cannot predict the market and they make terrible timing mistakes.
The market has not always recovered in five years or less. That’s a false claim. When stock prices have risen to crazy levels, the losses that are experienced can remain in place for a very long time.
You are of course right that the market will eventually reach new highs. But following a Buy-and-Hold strategy can put you behind for a long time and all of that time when you are behind you are missing out on the compounding returns that you would have enjoyed had you followed a research-based strategy rather than going with a pure Get Rich Quick approach.
I am the co-author (with Wade Pfau) of peer-reviewed research showing that market timing has ALWAYS put investors far, far ahead in the long run. There has not yet been one exception in the historical record.
There was a good reason why you Buy-and-Holders committed criminal acts in threatening to get Wade fired from his job in the event that he continued doing honest work in this field. You wouldn’t be willing to risk going to prison over this stuff if you didn’t know from your experience at the various boards that there are millions of investors who would like to learn about true research-based strategies. Your criminal acts have delayed the day when those people will learn about Valuation-Informed Indexing but I don’t think that you will be able to put off that day forever. I believe that, when millions of investors suffer big losses in the next price crash, they will be seeking compensation from those who engaged in criminal acts to keep them from learning what they needed to learn and wanted to learn. When you are not able to cover their losses, I believe that they will insist on criminal prosecutions. But we will see.
We do not agree on some of this stuff, Anonymous.
My best wishes to you.
Market Timing Rob
Give us a list of all 5 year periods that recovered and/or made money and then give us list of 5 year periods that lost money. Next, show us all the time periods that you were able to sell off your stock before a crash and when you bought back in so that we can all see how VII worked for you.
Wade Pfau contacted me because he had read my stuff and was intrigued by the Valuation-Informed Indexing concept. He wanted me to work with him to develop research showing whether it was Buy-and-Hold or Valuation-Informed Indexing that was superior in the long run. Here is what he said:
“Yes, Virginia, Valuation-Informed Indexing Works!”
“What you see in the top part of the graph for each year is the amount of wealth accumulated after 30 years for someone following Buy-and-Hold against someone following Valuation-Informed Indexing….Valuation-Informed Indexing provides more wealth for 102 of the 110 rolling 30-year periods, while Buy-and-Hold did better in 8 of the periods.”
“I will take steps in my final paper to test a wide variety of assumptions about asset allocation, valuation-based decision rules, whether the period is 10, 20, 30, or 40 years, lump-sum vs. dollar-cost averaging, and so on, and to show that the results are quite robust to changes in any of these assumptions.”
“Any data mining that I am doing is in favor of buy-and-hold, not in favor of market timing.”
“The findings for “market timing” are so robust anyway, that it hardly matters how we do it.”
“Market timing provides signficantly higher returns at a comparable level of risk.”
“The market timer enjoys a far less risky strategy.”
“On a risk-adjusted basis, market-timing strategies provide comparable returns as a 100 percent stocks Buy-and-Hold strategy but with substantially less risk. Meanwhile, market timing provides comparable risks and the same average asset allocation as a 50/50 fixed allocation strategy, but with much higher returns.”
“‘I’m excited about this, as depending on what you have already done, I think I can design a study using the Shiller data to provide historical simulations of Valuation-Informed Indexing strategies against fixed Buy-and-Hold strategies and also lifecycle strategies (declining allocation to stocks as one ages). If Valuation-Informed Indexing consistently outperforms fixed and lifecycle strategies, then the proof is in the pudding so to speak. Given how well valuations help to explain withdrawal rates, I think there is a lot of potential for this topic.”
“It makes complete sense to have an equity allocation that is in some way flexible. Having a completely inelastic demand for equities is a bit bonkers; no-one acts that way with life’s other important commodities.”
“I wrote up the programs to test your Valuation-Informed Indexing strategies against Buy-and-Hold, and I must say that the results look very promising…. I am quite excited about the findings so far. As you say in the podcast, Valuation-Informed Indexing should beat Buy-and-Hold about 90 percent of the time, and I am getting results that support this for various strategies.”
“Now that I am accounting for risk, I am even more amazed by how well Valuation-Informed Indexing works.”
“My idea is to show many different tables with results over the whole period for returns and risks. Valuation-Informed Indexing always provides more returns for often less risk.”
“No matter what I try, Valuation-Informed Indexing will still perform better in 85-95% of cases for 30 years.”
“I have a new figure for showing this as well. And a nice figure showing the outperformance percentages across rolling periods of lengths between 1 and 40 years. I think it is all quite persuasive.”
It is not possible for the rational human mind to imagine an alternate universe in which market timing would not work. This is a preposterous idea. Market timing is price discipline. Price discipline is what makes all markets work, How could there ever be a world in which practicing price discipline was not a good thing? I mean, come on.
Buy-and-Hold is a scam. The whole thing depends on market timing not working and market timing has ALWAYS worked. I don’t believe that it started out as a scam. I think it was just a mistake. There really is peer-reviewed research showing that short-term timing doesn’t work and people saw that and jumped to the hasty conclusion that no form of market timing is required. But of course a showing that short-term timing does not work is by no means the same thing as a showing that no form of market timing is required, Shiller was the first researcher to check out long-term timing and he found that it always works. And every researcher who has replicated his research has found the same thing.
If you just use the term “price discipline” in place of the term “market timing,” you see how absurd the whole Buy-and-Hold concept is. Is there any halfway reasonable person who would say that price discipline is a bad thing? That’s what the Buy-and-Holders are saying when they claim that market timing is not required when buying stocks.
There has never been any showing that market timing is not required when buying stocks. It’s a scam. An unintentional scam. But a scam all the same. And there is now 38 years of peer-reviewed research showing Buy-and-Hold to be a scam. We should be telling people this. We should be telling people this at every discussion board and blog on the internet.
My sincere take.
Research-Believing Rob
In short, you refuse to provide the data I requested.
I wish you all good things, Anonymous.
Data-Refusing Rob