Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
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 choose 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
Rob,
You have commented so frequently on Shiller that he has obviously seen your comments. As such, it is odd that he has never commented to you to say he agrees with you. Why do you think that is?
I agree that it is exceedingly odd. It is the oddest thing that I have ever seen in my lifetime. So we are on the same page re that one.
I doubt that Shiller has seen too many of my comments. But I believe that he knows who I am and has at least a vague sense of the issues that I have raised. He responded to a question that John Walter Russell asked him when John and I were working on one of the calculators. So he has no problem with responding to questions. But he did not respond when I asked for help re all of the abusiveness. So I think it would be fair to say that he does not want to get involved re that aspect of the question.
It’s not just re me and you Goons that Shiller behaves this way. Our key dispute has been — Is the safe withdrawal rate the same number at all times or is it a number that varies with changes in valuation levels? Shiller didn’t need me to bring that issue up to know that it is an issue that needs to be addressed. The 4 percent number was cited in thousands and thousands of articles that were used by people planning their retirements. If Shiller’s Nobel-prize-winning research is legitimate research, the safe withdrawal rate is a number that varies from 1.6 percent to 9 percent, depending on the valuation level that applies on the day the retirement begins. The error in the Buy-and-Hold retirement studies is obviously a matter of grave importance. He should have addressed it in his book. If he didn’t have room in the book, he should have written a follow-up book addressing the how-to aspect of the question. That error should have been corrected long before I came on the scene.
It is my job to solve this puzzle. Why don’t people talk about this very, very, very important stuff?
The problem is the cover-up. If Shiller had only published his Nobel-prize-winning research last week, we would be talking about this stuff today at every investing site on the internet. But he didn’t. He published it in 1981. So the people who work in this field have been engaged in a cover-up for 39 years now. That sounds really, really, really bad. Some people are going to go to prison. Others are going to be faced with civil lawsuits. Still others are going to see damage to their reputation as “experts.” Books are going to have to be rewritten.
Shiller’s Nobel-prize-winning research changes everything that we once believed we knew about how stock investing works. Showing that market timing is required is like showing that there is a pill that cures cancer and that there is no longer any need for people to undergo chemotherapy. It is a wonderful advance. It is good stuff piled on top of good stuff piled on top of good stuff. It’s not even possible to imagine any downside. But it upsets the apple cart in a major way. People who have put themselves forward as experts during the Buy-and-Hold years are going to need to acknowledge that they did not always know everything there is to know about the subject of stock investing, that as a society we have achieved amazing advances over the past 39 years that we have not shared with the millions of people who need to be taking these advances into consideration when investing their retirement money.
Shiller does not want to set off the nuclear explosion that I set off when I noted in my famous post from the morning of May 13, 2002, that I did not believe that the retirement study posted at John Greaney’s web site contains an adjustment for the valuation level that applies on the day the retirement begins. He doesn’t want to see threats to kill his loved ones. He doesn’t want to see thousands and thousands and thousands of posts telling lies about him and doing harm to his reputation. He does not want to see defamatory e-mails sent to people who work with him, as we saw threatened in the Wade Pfau case. Gee, I wonder what is going on here?
Shiller’s reluctance to speak openly about the dangers of the Buy-and-Hold “strategy” are not even a little bit hard to understand when you consider the criminal behavior we have seen engaged in by Buy-and-Holders for 18 years running now. The problem is that the abusive stuff is not going to come to an end until those of us who believe that Shiller’s Nobel-prize-winning research is legitimate research work up the courage to stand up to you Goons. Once people feel free to post honestly, the research-based approach will grow and grow and grow in popularity. But none of the good stuff can happen until then. So I try as hard as I can to post honestly myself and to encourage others to do so as well.
I hope that that helps a small bit, my dear Goon friend.
Goon Enemy #1 Rob
Given Shiller’s visibility, he would not be afraid to say anything. In absence of his comments, one can only assume he does not agree with you.
We had a civil rights revolution in this country in the 1960s. Do you believe that in the early days of that struggle that every leader who enjoyed the same level of visibility that Shiller enjoys today spoke openly about his true beliefs re the situation? I do not.
Do you think that every person who enjoys visibility in Hollywood spoke openly about concerns they had re the behavior of Harvey Weinstein? I do not.
Do you think that every scientist who believed that smoking causes cancer spoke openly about their beliefs before it became safe to do so? I do not.
Death threats affect people. Demands for unjustified board bannings affect people. Threats to get academic researchers fired from their jobs affect people. That’s why we have laws against those things. That’s why you Goons employ those things as tactics.
We are as a nation standing on the threshold of achieving the biggest economic advance that we have ever achieved in our history. We are going to make it. But we need to work up the courage to stand up to you Goons to pull it off. I think that we will make it in the days following the next price crash. At that point the price of not speaking up will be so clear that a larger number of us will work up the courage it takes to stand up to your abuse. From that point forward, it will be all downhill sledding.
It will be interesting to see how it all plays out.
Progress-Loving Rob
There were plenty of people speaking out on civil rights. Yet there is lack of any proof regarding death threats and job threats. Therefore, your arguments are hollow.
There have been plenty of people who have spoken out in support of the idea of permitting honest posting on the last 39 years of peer-reviewed research in this field. Wade Pfau is one of them. Here are some of his comments:
A) Academic Researcher Wade Pfau’s Statements Showing Interest In and Confidence in Rob Bennett’s Work
1) “I do cite you and John Walter Russell in my paper as the earliest and strongest advocates of this approach [New School safe-withdrawal-rate research].
2) “Are you aware of Shiller offering asset allocation advice based on PE10? …. If you read Rob Bennett’s stuff carefully, I think he did provide an important contribution in terms of describing a way for PE10 to guide asset allocation for long-term conservative investors. I also think he was right on the issue of safe withdrawal rates.” — Posted at the Bogleheads Forum discussion board.
3) “I am also extremely grateful to Rob Bennett for motivating this topic and contributing his experience and encouragement.” — Written in Acknowledgments section of Wade’s breakthrough research paper.
4)”You deserve much of the credit as the whole idea of Valuation-Informed Indexing belongs to you.”
5) “I definitely need to cite some of your work as the founder of Valuation-Informed Indexing, as I have not found anyone else who can lay claim to that. Shiller pointed out the predictive power of PE10 but never discussed how to incorporate it into asset allocation, as far as I know.”
B) Academic Researcher Wade Pfau’s Statements on the Superiority of Valuation-Informed Indexing Over Buy-and-Hold
1) “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.”
2) “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.”
3) “Any data mining that I am doing is in favor of buy-and-hold, not in favor of market timing.”
4) “The findings for “market timing” are so robust anyway, that it hardly matters how we do it.”
5) “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%.”
6) “Market timing provides signficantly higher returns at a comparable level of risk.”
7) “The market timer enjoys a far less risky strategy.”
8) “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.”
9) “If everyone increased exposure after a market fall and vice versa, then this would dampen out the big swings in the market aggregates, and we might get shallower boom/bust cycles.”
10) ““‘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.”
11) “Yes, Virginia, Valuation-Informed Indexing Works!”
12) “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.”
13) “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.”
14) “I have been toying with the idea of sending the paper to the Journal of Finance, which is the most prestigious journal in academic finance.”
15) “Now that I am accounting for risk, I am even more amazed by how well Valuation-Informed Indexing works.”
16) You shouldn’t be too excited with great wealth accumulations if they happened due to unusually high valuations, and low wealth accumulations shouldn’t be as scary if valuations are also quite low.”
17) “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.”
18) “No matter what I try, Valuation-Informed Indexing will still perform better in 85-95% of cases for 30 years.”
19) “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.”
20) “You haven’t seen anything yet! This was just the secondary study. I’m still working on the main one!”
C) Academic Researcher Wade Pfau’s Statements of Incredulity That He Was the First Academic Researcher to Examine the Valuation-Informed Indexing Strategy
1) ” I know that there is an extensive literature about the predictability of long-term stock returns dating back to Campbell and Shiller’s work in the mid-1990s. I also know that there is an extensive literature about short-term market timing strategies…. But my question is about LONG-TERM market timing strategies. In other words, using market timing over periods of at least 10 years to obtain better returns than a Buy-and-Hold strategy. The literature seems slim.”
2) “Let me just explain a bit more why I posted about this here. Valuation-Informed Indexing has had critics for years, but until Norbert did it in 2008, nobody seemed to have provided a serious investigation of it. I just couldn’t understand why. And that bothered me.”
3) “Two papers by Fisher and Statman are still all I can find that provide evidence against long-term market timing.”
4) “I’m so confused by why Fisher and Statman didn’t consider risk in their idiot switching tests. Valuation-Informed Indexing is much less risky by pretty much any standard I consider. I must wonder… did I make a mistake somewhere? Why haven’t academics already published research about this?”
D) Academic Researcher Wade Pfau’s Statements on the Dangers of the Conventional Retirement Planning Advice
1) “The traditional approach to retirement planning (as described on pages 10 and 11 of The Bogleheads’ Guide to Retirement Planning, for example) is counterproductive and possibly damaging.”
2) “Retirees now frequently base their retirement decisions on the portfolio success rates found in research such as the Trinity study…. This is not the information that current and prospective retirees need for making their withdrawal rate decisions.”
3) “This article provides favorable evidence based on the historical record for long-term conservative investors to obtain improved retirement planning outcomes (lower savings rates, higher withdrawal rates) using valuation-based asset allocation strategies.”
4) Wade sent me a link to an article in Business Week that was published more than eight years after my post pointing out the errors in the Old School retirement studies and which he characterized as “quite sympathetic to the point you were trying to make all along”.
5) “Though I was only trying to do an Old School safe-withdrawal-rate study, all that I ended up doing was showing in a different way what you had been saying all along: the safe withdrawal rate changes with valuations.”
6) “Valuations are the driving factor. ”
7) “This is similar to your drunk driving analogy, which I agree with.” The discredited but uncorrected retirement studies find that in most circumstances a 4 percent withdrawal rate provides a huge cushion for the retiree using it. However, in each of the three cases in history when stocks reached insanely high price levels, retirements using a 4 percent withdrawal came within a whisker of failing. To say that this shows that a 4 percent withdrawal is “100 percent safe” (these words are used in the Greaney study) for a retirement beginning at a time of insanely high price levels is like saying that driving drunk is “100 percent safe” because 97 sober drivers drove their cars 20 miles without incident while 3 drunk drivers were paralyzed for life in car accidents but did not die. The fact that 4 percent only worked by a whisker in the cases in which valuations were high at the beginning of the retirement shows that a 4 percent withdrawal is high-risk at times of high valuations, not that it is “100 percent safe.”
8) ” Actually, this issue shouldn’t really even be all that controversial. It’s just common sense that the probabilities from the Trinity study shouldn’t be interpreted as forward-looking probabilities for new retirees.”
9) Naturally, I am finding that Valuation-Informed Indexing can allow you to reach a wealth target with a lower savings rate, use a higher withdrawal rate, and also have a lower “safe” savings rate, than a fixed allocation.
E) Academic Researcher Wade Pfau’s Statements Showing His Concerns that Continuing to Report Honestly on the Investing Realities in the Face of the “Hostile Environment” for Doing So Created by Buy-and-Holders Would Harm His Career
1) “I was trying to pay tribute to your accomplishments in what I knew would be a hostile environment.”
2) “Valuations and long-term investors is a somewhat controversial topic.” Wade posted these words to his blog in October 2011 as his explanation of why he was abandoning his plan of doing further research on the superiority of Valuation-Informed Indexing strategies over Buy-and-Hold strategies. He had told me in earlier days that “You ain’t see nothing yet!” when I praised his breakthrough research in this area. After his flip to the dark side, Wade removed the page containing this blog entry from his site.
3) “We have both read and met to discuss your paper. Unfortunately, we did not find the paper’s incremental contribution to the academic finance literature, assuming the analysis proved to be correct, rose to the level that we are seeking for papers in the JFR. Thus sending the paper to a reviewer would be inefficient.” These words are from an academic journal’s “desk reject” of Wade’s breakthrough research.
4) ) ““ I was discouraged when I first received the “desk reject” by the editors of the same journal that published the Fisher and Statman paper. I realized that I didn’t have a chance with one of the top journals.”
5) “I think I should stay publicly quiet for a while, as I really don’t want anyone sending messages about any topics to officials at my university.”
6) I don’t want them [the Goons] working behind the scenes to derail me.”
7) “I did warn the editor of the Journal of Financial Planning that they may receive some ‘hate mail‘ after I mentioned your name in the safe savings rate paper.”
Buy and hold wins again.
https://fourpillarfreedom.com/heres-how-18-different-portfolios-have-performed-since-1970/
Not a single market timing scheme made the list.
That’s the problem, Anonymous. There’s 39 years of peer-reviewed research showing that market timing is the key to long-term investing success. So why not include market timing among your options? The peer-reviewed research that I co-authored with Wade Pfau shows that incorporating market timing into your strategy does two things: (1) it increases return; and (2) it diminishes risk. That’s a bad thing how? It sounds like a very, very GOOD thing to me.
All that you need to do to understand why market timing is so essential is to recognize that it is by market timing that we practice price discipline when buying stocks. Price discipline is what makes markets work. So it is perfectly silly to think that market timing might not be required when buying stocks. How did the idea that market timing is not required ever gain any credence? It was that crazy Efficient Market Theory that did it. If the market was efficient, market timing would be a bad thing. But of course Shiller showed that the market is NOT efficient 39 years ago. If we were all thinking clearly, this “controversy” over whether market timing is required would be ancient history by now.
The article notes several times that there is a trade-off between volatility and return. But of course again that is an idea associated with the Efficient Market Theory that should have been left in the dust many years ago. The Bennett/Pfau research shows that there is no trade-off. Following a true research-based strategy increases return while also diminishing risk. Surprise! Surprise! Is it really so odd that going from a pure emotion-based approach (price indifference) to a true research-based approach (market timing) would help in every possible way?
I have never had any problem making the case on the merits for Valuation-Informed Indexing.The case on the merits is overwhelming. The case on the merits blows people away. The problem that I have faced is that the case is so strong that it shocks people who have only heard about Buy-and-Hold strategies. People just cannot believe that we have known about a superior stock investing strategy for 39 years and that it is not talked about at every site on the internet every day. You are giving a perfect illustration of the problem with this article. The author lists a good number of possibilities and failed to even include the first true research-based approach (the belief that the market is efficient is not research based, that was just an assumption that turned out to be false when tested by Shiller). Huh? What the f? What possible reason could there be for listing all possibilities except the one supported by the research? That’s an emotional call, not a rational one.
I looked to see if the author of the article supplied an e-mail address. If he had, I would have sent him my article “Buy-and-Hold Is Dangerous.” I think there’s a good chance that, if we got into a conversation, he would become a Valuation-Informed Indexer in time. Or, if we posted at the same board, I think he might come around in time. People do not become convinced by hearing about a new idea one time. They need to see it discussed multiple time by different people and ask questions about it on numerous occasions before they are able to gain confidence in it. Please note that the Valuation-Informed Indexers have no fear of having Buy-and-Hold discussed in our presence. But a large percentage of Buy-and-Holders are so terrified of the idea that people might learn about Valuation-Informed Indexing that they do not include any research-based portfolios in their lists of how different types of portfolios perform over time. Gee, I wonder why.
None of this is rational, Anonymous. You can’t make the realities of stock investing disappear by putting your fingers in your ears and ignoring the clear message of 39 years of peer-reviewed research. If Shiller’s Nobel-prize-winning research is legitimate research, there will be another price crash within the next year or two or three. Millions of people will suffer failed retirements, hundreds of thousands of businesses will fail, millions of people will loses their jobs, political frictions will increase. I believe that at that time there will be people who will be concerned enough about what the Ban on Honest Posting has done to us as a nation that they will stand up to you Goons and we will all pull together and enjoy the greatest learning experience ever achieved in the personal finance realm. We’ll see.
Market timing is required. It always has been, it always will be. The only reason why many people don’t like acknowledging the importance of market timing at a time when stocks are priced at two times their real value is that it would require them to acknowledge that the value of their stock portfolio is only half of what they have been led to believe it is. That will no longer be an issue after prices have fallen by 50 percent or more. So we’ll see what happens then.
I wish you all good things. But I think that the Ban on Honest Posting is hurting us all in very serious ways. So I cannot sign on to it.
If there was any evidence that market timing is not required, you would present that evidence and we never would have seen a single death threat or a single unjustified board banning or a single act of defamation or a single effort to get a single academic researcher fired from a single job. I mean, come on.
The peer-reviewed research matters. My sincere take.
Market Timing Schemer Rob