I’ve posted Entry #465 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Buy-and-Hold Rules Out the Possibility of Investors Exercising Price Discipline When Buying Stocks.
Juicy Excerpt: What is my beef with Buy-and-Hold? It’s that it is a discipline indifferent strategy. If you don’t time the market, you are going with the same stock allocation regardless of the price at which stocks are selling. That makes no sense. How could price not matter? We consider price when buying everything else we buy. How could it be a good idea to ignore it when it comes to buying stocks? It’s worse than that. Buy-and-Holders aren’t just price indifferent. They are outright hostile to the idea of exercising price discipline when buying stocks.
What is my beef with market timing schemes like VII? It doesn’t have a successful outcomes track record like Buy, Hold and Rebalance.
Price matters
If I am buying a car today I will buy the model I want at the lowest available price available today.
I will not decide in the mid 90s that all cars are too expensive and wait through 2019 hoping that cars will one day be cheap enough.
What is my beef with market timing schemes like VII? It doesn’t have a successful outcomes track record like Buy, Hold and Rebalance.
That’s a reason for not following it yourself, Anonymous. It’s not a reason for blocking other people from hearing about it. That’s where you cross the line.
I have zero problem with people who favor Buy-and-Hold over Valuation-Informed Indexing. There are many millions of good and smart people in that camp. I was once a Buy-and-Holder myself.
But we have to permit discussion of these issues at every investing discussion board and blog on the internet. Buy-and-Hold was dominant in 1981, when Shiller published his research showing that the market is not efficient. For the new model for understanding how stock investing works to gain support, there has to be widespread discussion of the issues. Until we have that, we cannot say that most people genuinely prefer Buy-and-Hold. Most people have only heard one side of that story. That ain’t the American way.
My sincere take.
Rob
Price matters
If I am buying a car today I will buy the model I want at the lowest available price available today.
I will not decide in the mid 90s that all cars are too expensive and wait through 2019 hoping that cars will one day be cheap enough.
The biggest thing that I was working against me in my efforts to persuade people of the merit of Valuation-Informed Indexing is that it can take so long to work. The point that you are making here is rooted in how most people think about these matters. Most people acknowledge that valuations matter. But they find it hard to accept that stock prices could remain at levels that greatly reduce the appeal of stocks for 23 years. That is an exceedingly counter-intuitive idea. I get it.
My view is that what matters is whether price changes are caused by economic realities or by investor emotion. If they are caused by investor emotion, as Shiller claims, that’s a big deal. If that’s so, people need to know that. I don’t have a problem if people say that they are going to maintain their high stock allocations even though there is evidence in the research that high prices are caused by investor emotion. That is for each investor to decide for himself or herself. But I very much think that that issue should be openly discussed at every site. I don’t say that everyone should agree. I say that every person contributing to a discussion should feel 100 percent free to say what he or she truly believes. There should be no intimidation tactics practiced.
You say that you don’t want to wait 23 years. But of course you did not know in 1996 that prices were going to remain high for another 23 years. You have to make your decision re what stock allocation to go with in 1996 at that time. I chose to lower my allocation because of my concern over the risk presented by the CAPE value that applied at that time. Do I have a right to make that choice? I say that I do. And I say that I have a right to tell my friends about that choice and about my reasons for making it. That’s the dispute. Does the fact that Shiller has published peer-reviewed research showing that valuations affect long-term returns give those who believe that valuations affect long-term returns a right to say so on internet discussion boards?
There were people planning to hand in resignations from high-paying jobs in 2000 at the Retire Early board. Greaney was telling them that a 4 percent withdrawal rate was “100 percent safe.” An analysis that considers Shiller’s Nobel-prize-winning research shows that there was only a 30 percent chance that a retirement beginning at that time and calling for a 4 percent withdrawal would work. I think those people needed to hear that. If they chose to take 4 percent anyway, that would have been their business. But they should have been able to hear both sides.
There is not one academically respected model for understanding how stock investing works, there are two. That’s the bottom line re all this. The Buy-and-Holders have a Nobel prize on their side and so do the Valuation-Informed Indexers. Believers in both models have a perfect right to post their honest thoughts on all investing questions.
That’s my strongly held belief, Evidence. I naturally wish you all good things.
One more point. If we permitted honest posting, prices would quickly adjust in the stock market just as they do in all other markets. So you wouldn’t have to wait 23 years. The only reason why it has taken 23 years so far for prices to adjust is that honest posting is not permitted. Prices adjust as the result of market participants acting in their self-interest. Stock investors who have never heard the case for Valuation-Informed Indexing are not able to act in their self-interest because they are not able to become informed of the realities. None of us could become informed of the realities prior to 1981, when Shiller published his”revolutionary” (his word) research. But now they can. Shiller’s work was a ,major advance. We should be grateful for it and we should all be working together to figure out all the details of what it means. Once we do that, you won’t have to wait 23 years for prices to adjust anymore.
Rob
“ The biggest thing that I was working against me in my efforts to persuade people of the merit of Valuation-Informed Indexing is that it can take so long to work.”
You can’t wait forever. I would hate to be in a position of having to return to the workforce after the age of 60. Once retired,
I want to stay retired.
I would hate to be in a position of losing 60 percent of my life savings either after I retired or when I was getting close to retirement age.
And I would hate to be in a position of urging my friends to follow strategies that caused them to suffer such loses.
So I intend to continue to post honestly re the last 38 years of peer-reviewed research.
My best wishes to you.
Research-Based Rob
I would hate to not have much left of a nest egg, versus having a large nest egg that might have to weather a short term loss.
Speaking just of the nest egg, I would agree with you.
The issue here has been whether I am willing to tell my friends things about stock investing that I do not believe in order to appease you Goons or whether I am willing to pay the financial price that you impose on those who post honestly. I prefer to pay the financial price. I don’t like it. But this way I can live with myself. I kept my mouth shut re the error in the Greaney retirement study for three years because I feared what you would do to me if I “crossed” you. I did not feel good about myself in those days.
I have paid a financial price for my honesty. But now I feel good about myself as a person. And I believe that I will see big financial rewards too down the road a piece. But we will have to wait a bit to see how things play out re that one.
I wish you all good things, in any event. I hope that that helps at least a tiny bit.
Clear Conscience Rob
How embarrassing for you. VII just missed out on the largest bull market in history.
https://www.cnbc.com/2019/11/14/the-markets-10-year-run-became-the-best-bull-market-ever-this-month.html
Oh noes!
Embarrassed Rob
“ I would hate to be in a position of losing 60 percent of my life savings either after I retired or when I was getting close to retirement age.”
How does my 60/40 diversified portfolio go down by 60%? Looking at historical markets, it recovers in 5 years or less, so the spend down, if any, is minimal. Now, if I stayed out of the market for 17 years, yes, my retirement would be permanently damaged.
The peer-reviewed research that I co-authored with Wade Pfau examines these sorts of questions in great depth. We are now near the end of the fourth bull/bear cycle since 1870 (that’s as far back as we have good records) and in the earlier three bull/bear cycles Valuation-Informed Indexing ended up with far better results. I cannot tell you exactly how things are going to go. No one knows. I can tell you that, if Buy-and-Hold ends up ahead at the end of the cycle, it will be the first time in history that that has happened.
Here are some statements that Wade made while we were doing our research:
“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.”
“The findings for “market timing” are so robust anyway, that it hardly matters how we do it.”
“The maximum drawdown from market timing is much less. That is how far the portfolio drops from past highs to current lows. The Buy-and-Holder once experienced a 60.96% drop, whereas the worst drop for market timing was 24.16%.”
“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.”
If you stayed out of stocks for 17 years at a time when stocks were selling at reasonable prices, then I agree that that would be a bad thing. But you are talking about 17 years when stocks have been selling at very dangerous prices. Never before in U.S. history has an investor hurt himself by lowering his stock allocation when stocks have been selling at the sorts of prices that have applied for the past 17 years (with the exception of a few months in early 2009).
You believe with all your heart, mind and soul that it is going to be different this time. I do not. I cannot in good conscience tell my friends that it is going to be different this time because I do not believe it.
Your behavior shows that you realize how compelling a case is made in the Bennett/Pfau research. If you hadn’t seen how impressed most investors are when they hear about our research, you never would have threatened to get Wade fired from his job if he continued telling people about it. People don’t commit felonies (extortion is a felony) for no reason.
I wish you all good things. But please give me a freakin’ break.
I will be able to look all of my fellow community members in the eye in the days following the next price crash. You will not be able to do that. I’d rather be in my shoes by a factor of 500.
But we’ll see how it all plays out, you know? That’s the drama of the thing.
Law Abiding Rob
“ I will be able to look all of my fellow community members in the eye in the days following the next price crash. You will not be able to do that. I’d rather be in my shoes by a factor of 500.”
You would rather have a small fraction of a $400k portfolio versus a $5 million 60/40 portfolio? Really?
And be able to sleep at night? Yes. 100 percent yes.
By a factor of 500.
Life is a matter of making choices. I have made mine and you have made yours. The only choice that I have made that I regret is the choice that I made not to speak up about the error in Greaney’s study for three years. That was low. From May 13, 2002, no regrets. I didn’t like seeing what happened to the various communities. But I can sleep at night knowing that I did my part to take things in a positive direction.
Our laws against extortion and financial fraud and threats of physical violence are good and necessary laws. An investment strategy that cannot be defended except by criminal acts is an investment strategy that we all should be working to put thirty feet in the ground, where it can do no further harm to humans and other living things.
If the $5 million portfolio made you happy, you wouldn’t behave the way you do. Your abusive behavior tells the tale that needs to be told re Buy-and-Hold.
My sincere take.
Clear Conscience Rob
I cannot help you with your flawed and delusional thinking.
Okay, Anonymous.
I do wish you all good things, in any event.
Flawed and Delusional Rob