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:
Rob,
There you go just making stuff up, like the comment about 10%. All anyone has to do is read the comments section here and on your website to see the lack of support.
Just like other topics, your typical excuse is that people are too afraid to post here or on your website, but that is B.S. as anyone can post anonymously.
People can post anonymously. That certainly helps to address the fear problem. It does not entirely eliminate it.
Say that you are driving in the early morning hours and you come to a red light. Your eyes tell you that there is zero chance that you will get in an accident or get a ticket if you go through the red light. Do you go through it? Some people do. But many people do not. There is a Social Taboo against going through red lights. Social Taboos have a powerful effect on all of us, even when no one is looking.
There was a movie in the 1960s called “Guess Who’s Coming to Dinner?” It was about a liberal-minded couple whose daughter was dating a black man and she was bringing him to dinner to meet her parents. The liberal parents were 100 percent in favor of the civil rights revolution. There was no logical reason that they could come up with for why their daughter should not marry a black man. But they were uneasy with the idea. Why? Because there long had been a Social Taboo against inter-racial dating and marriage. It was in the process of being broken down and it is not nearly as strong today as it was then. But at that time it influenced the thinking even of people who 100 percent thought that black people were equal to white people. Social Taboos are hard to overcome.
There are lots of examples of this. It was considered a scandal when Rhett Butler said in Gone with the Wind: “Frankly, Scarlett, I don’t give a damn.” No one had ever said the word “damn” in a movie before. There was a Social Taboo being broken in that movie. That word and words worse than it are used in television programs today all the time. The Social Taboo has been eroded. But it took a lot of time to get from what we found acceptable then to what we find acceptable today.
I violated a Social Taboo when I put up my famous post pointing out that the retirement study posted at John Greaney’s web site does not contain an adjustment for the valuation level that applies on the day the retirement begins. If I was right about that (I was), then the study got the numbers wildly wrong and the lives of thousands of people at that site were damaged in very serious ways. So I did something very valuable for that community. But that’s not how most of the Buy-and-Holders felt about it.
Shiller changed our intellectual understanding of how stock investing works when he published his Nobel-prize-winning research. The Buy-and-Holders have been ignoring that research for 39 years now. So the question of whether it should be considered has become a highly sensitive matter. Speaking frankly about these matters just isn’t done. There is a Social Taboo against doing what I did.
You are saying that people could violate the Social Taboo anonymously and would not be required to pay a price for doing so. But humans are built so that we are careful not to violate Social Taboos even when there is no way that we could get caught. The censor lives inside us. I can give a personal example. On the day that I put forward that famous post, I still believed in Buy-and-Hold. I believed that the Buy-and-Hold retirement studies needed to be corrected. But I endorsed the strategy that produced those studies. That’s crazy. If the Buy-and-Hold Model caused retirement studies that get the numbers wildly wrong to be produced, there is something very wrong with that Model. I see that now. I did not see it them.
It has taken me 18 years of pushing back against the Social Taboo for me to work up the courage to say some of the things that I say today. I say today: “Market timing is 100 percent required for all investors, it is the key to long-term success.” I didn’t say that in the early days. In the early days, I used to say in an apologetic tone that I only advocate long-term timing, not short-term timing. That’s so. Short-term timing really doesn’t work. But over time I came to see that it is defensive to always feel a need to make that distinction. It is the Buy-and-Holders who have hurt millions of people by failing to distinguish short-term timing (which doesn’t work) from long-term timing (which is always required). So those of us advocating market timing have nothing to be defensive about.
There was a voice within me in the early days telling me not to be so blunt. It was my fear of violating the Social Taboo that generated that voice within me. To come to a better understanding of how stock investing works in the real world, I need to work up the courage to violate that Social Taboo on a daily basis. We all do. Our problems understanding how stock investing works are not intellectual problems. They are fears of violating the Social Taboo, concerns that we have that this one mistake that the Buy-and-Holders made has been covered up for so long that it is going to hurt a lot of people’s feelings if as a society we elect to begin permitting and encouraging open discussion of the far-reaching implications of Shiller’s Nobel-prize-winning research.
Rob
You have long held the position that we would some day see this huge market crash and that eventually buy and hold would be blamed and you would be rewarded for that. When challenged, you said to “wait and see how things turn out”. We are now in the era of Covid-19. If the market does well, the Fed will be credited for their support of the market. If we see a stock crash, Covid-19 will be blamed. Any small chance of your buy and hold crash scenario has now gone away. How else can their be any other outcome or conclusion? It’s over.
If we see a very damaging price crash over the course of the next year or two, it will be properly blamed on the coronavirus issue. But it will also be true that the relentless promotion of the Buy-and-Hold strategy will have caused the price crash to have been much worse than it would have been if we had all been taking price into consideration when buying stocks. If we did that, the CAPE would never have gone much above 16. Prices still would have fallen, perhaps to 12. That would be a price drop of 25 percent. But the way things are set up today, we may see a price drop of 75 percent (from a CAPE of 32 to a CAPE of 8). That’s a price drop of 75 percent. Buy-and-Hold/Get Rich Quick takes any economic problem and makes it much worse than what it would be if investors were able to learn what the last 39 years of peer-reviewed research teaches us about how stock investing works in the real world.
You say “if the market does well…” If Shiller is right (I obviously believe that he is), it is not possible for the market to do well. Stocks were priced at two times fair value when the coronavirus crisis hit. If prices drop to fair-value levels, that would be “doing well” in the sense that it would permit millions of people to better plan for their financial futures because they would know the true value of their portfolios. But people would be left knowing that their life savings is far less than they previously believed and they would cut back on spending, which would cause hundreds of thousands of businesses to go under and millions of workers to be thrown out of their jobs. If instead prices rose, that would be even worse. Then the inevitable future crash would be even more devastating because the loss of pretend wealth would be greater.
The creation of Pretend Wealth is never a good thing, Anonymous. It is impossible that it ever could be. You are a Buy-and-Holder. That is why you don’t worry about high stock prices. Buy-and-Hold is rooted in a belief in the Efficient Market Theory, which in turn is rooted in a belief in Rational Man Economics. If investors were rational, high stock prices really would be a good thing. If investors were rational, they would bid stock prices up when the economic realities improved. So higher stock prices would signal greater wealth for all of us, which of course would be a good thing. But if price rises that take the CAPE value above 16 are nothing more than the product of irrational exuberance, those price rises are a very bad thing. They make it impossible for people to know how much wealth they possess, which of course makes it impossible for them to plan effectively for their financial futures. Not good.
You say “it’s over.” I agree that it is over but not in the way that you mean. I say that it was over in 1981, when Shiller’s Nobel-prize-winning research was published in a peer-reviewed journal. Shiller’s research discredited the Efficient Market Theory. so we should have at that time buried Buy-and-Hold 30 feet in the ground, where it could do no further farm to humans and other living things. If Shiller’s Nobel-prize-winning research is legitimate research, Buy-and-Hold is the purest and most dangerous Get Rich Quick scheme ever concocted by the human mind and there will obviously come a day when the destruction that it has caused will have grown so great that we will as a nation move on from it.
It’s been over intellectually for a long, long time. What has kept Buy-and-Hold alive for the past 39 years is an emotional urge, our Get Rich Quick urge. We all have a Get Rich Quick urge residing within us. We want to believe that we are richer than we are. Buy-and-Hold is popular because it flatters us, it tells is that the core reality of every other market that exists (that price discipline is absolutely essential for the smooth functioning of the market) doesn’t apply in the stock market. Shiller’s contribution was to show that the stock market works just like every other market that ever existed, that the “idea” that it is not necessary to take price into consideration when buying stocks is a dangerous fantasy.
We are there intellectually. We have been there for a long time. What we need to do today is to bring our emotions into tune with what the last 39 years of peer-reviewed research teaches us about how stock investing works in the real world. I believe that a huge price drop will cause a larger percentage of the population to become suspect of the pure Get Rich Quick approach and then the first true research-based approach (Valuation-Informed Indexing) will just grow and grow and grow. In the days following the next price crash, Buy-and-Hold will have lost the only edge that it continues to possess after the publication of Shiller’s Nobel-prize-winning research, the claim that it makes that gains that are the product of irrational exuberance are real and can be counted on to finance a retirement.
We’ll see, you know? If Shiller is wrong, then I am the biggest fool who ever walked Planet Earth. If Shiller is wrong, then I have wasted 18 years of my life. But, if Shiller is right, then Valuation-Informed Indexing is the future and Buy-and-Hold is the past. And I have spent the last 18 years of my life developing the model for understanding how stock investing works that will become dominant in coming days. That’s important work for which I can realistically expect to be well-compensated.
We’ll see.
My best wises to you and yours.
Future-Focused Rob
With Covid-19, no one, including you or Shiller knows what will happen in the market. Nothing will be the same for a long time. VII is just as useless as any other model. You will need to find something else as an income source for your retirement.
No one can say with precision how the market will behave at any time. That’s not just a Covid-19 reality. That’s a universal rule.
But market prices do not fall in the pattern of a random walk or anything even remotely close to it. Stock prices are strongly influenced by the level of overvaluation or undervaluation that is present in that day’s price. In the long term, prices always move in the direction of the fair-value CAPE level (16).
If we permitted honest posting on the last 39 years of peer-reviewed research, stock prices would be self-regulating. Investors obviously want to act in their own self-interest. So, if we permitted them to know how to maintain a constant risk level, the vast majority would engage in market timing. They would increase their stock allocation when the price of stocks was low and the future return high, and they would lower their stock allocation when the price of stocks was high and the future return was low.
The Buy-and-Holders have screwed all of this up. Instead of encouraging market timing (price discipline!), they have discouraged it, thereby encouraging a Get Rich Quick/price indifferent approach. The result is that stocks were priced for a huge crash before the Covid-19 even appeared. Now that we have an economic problem as well as an overpricing problem, we have the potential for a HUGE price crash. It would have been better to have let investors act in their own self interest and engage in market timing. Then all we would have to worry about would be the economic issue. That would be a genuine problem. But nothing like what we are looking at today.
Get Rich Quick investing strategies do not help, Anonymous. They hurt us, in a big way. We should be permitting honest posting at every site on the internet, without a single exception.
That’s my sincere take, in any event.
Risk Minimizing Rob