Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Uh oh, Robert Shiller days you are wrong, Rob. The stock market dropping is due to the uncertainty of the Coronavirus and he never blames buy and hold. He even talks about the previous stock market strength has been the result is low unemployment, not buy and hold.
There’s nothing that Shiller says in that article that I disagree with.
I certainly believe that the Coronavirus matter is causing genuine economic disruptions. There are economic causes for the drop in stock prices that we have seen. The trouble with Buy-and-Hold (price indifference) is that it greatly increases the odds that economic disruptions will cause terrifying price crashes rather than manageable price drops.
If we were at fair-value prices (a CAPE of 16) when the Coronovirus became an issue, we would see a price drip, perhaps down to a CAPE value of 13. That’s a 20 percent drop. But we were at a CAPE value of near 30 when the Coronavirus became an issue. A drop from 30 to 13 is far more devastating to millions of people than a drop from 16 to 13. A price drop that big can transform the irrational exuberance into irrational depression and bring the CAPE value all the way down to 8. Then you have a total price drop of near 70 percent, which would bring on a huge economic contraction because of the massive loss of consumer buying power.
I believe that Shiller would agree with these ideas if he were presented with them and asked to comment on them. It is of course entirely possible that he would offer a somewhat different spin. That would be normal and healthy. What is not normal and healthy is this insane situation where we have groups of insanely abusive Buy-and-Holders (the Lindaurheads and the Greaney Goons) engaging in criminal acts to block millions of people from hearing what the last 39 years of peer-reviewed research in this field teaches us all about how stock investing works. We should be encouraging EVERYONE to post honestly because it is through honest posting that we all learn. There should not be a ban on honest posting re safe withdrawal rates or any other investment-related topic at even a single site.
Once we open every site to honest posting re the peer-reviewed research, we should all pull together and make it a community project to always keep the CAPE value as close to 16 as possible. Small moves away from fair-value price levels do not hurt much, So I wouldn’t be concerned if I saw the CAPE value rise to 18 or drop to 14. There are always going to be small ups and downs. But we should all be working to see that we never again experience a CAPE value of 25 or more. Those sorts of CAPE values create extremely painful experiences for all of us. It is because we have tolerated insane CAPE values in recent years that we are in the mess that we are in today.
It all comes down to permitting honest posting. Investors love, love, love the idea of being able to reduce the risk of stock investing dramatically. The peer-reviewed research that I co-authored with Wade Pfau showed investors how to reduce the risk of stock investing by nearly 70 percent (by being sure to always, always, always practice market timing/price discipline when buying stocks). There’s a reason why you Goons threatened to get Wade fired from his job if he continued doing honest work in this field. When people learn the realities, Buy-and-Hold goes down because all of the research shows that market timing/price discipline is 100 percent required for the stock market to function smoothly, just as it is for any other market to function smoothly.
That’s my sincere take, Anonymous. The continued promotion of Buy-and-Hold for 39 years after the peer-reviewed research was published showing that there is precisely zero chance that such a :”strategy” could ever work for even a single investor has put us all in a very bad situation. The answer is to let Buy-and-Hold go down and let the first true research-based strategy (Valuation-Informed Indexing) replace it.
My best wishes to you.
Rob
“If we were at fair-value prices (a CAPE of 16)”
The idea that there is a single “fair-value price” that should apply at all times is nonsense.
I don’t agree, Evidence.
It is true that we cannot know the fair-value price for stocks with absolute precision. If our economy becomes more productive for an extended period of time, the fair-value CAPE level will go higher If it becomes less productive, the fair-value CAPE will go lower. There is no way to know at any moment in time whether the fair-value CAPE is in the process of rising or falling. It is possible that the fair-value CAPE today is 15 or 17 rather than 16.
But 16 is the best approximation available to us. The 16 number is based on 150 years of stock market history. What is today’s CAPE of 29 based on? Nothing. It is just the crazy number that results when a massive amount of investor emotion (unrestrained by discussion of the findings of the last 39 years of peer-reviewed research) is permitted to undermine the proper functioning of the market so that a small number of Wall Street Con Men can pocket a few extra unearned dollars. Somehow I am unimpressed.
If someone were to say “I have examined both the research of Shiller and of others and have come to the conclusion that the proper CAPE today is 17 and I adjust the current-day price to reflect that,” I would have no objection. I might be persuaded by the case he made and I might not be. But I would credit him with having taken a rational approach in either event and I would be grateful for his effort to help me come to a better understanding of things. Just because he hadn’t convinced me wouldn’t mean that he had not offered something of value. It could be that I had become subject to some biases (it has been known to happen) and had become blind to some significant realities.
That is not what happened in my criticism of the Greaney retirement study. Greaney didn’t elect to use a CAPE of 17 or 15 as the fair-value CAPE in his study. He did not make any valuation adjustment whatsoever! Huh? What the f?
The only possible justification for not making any valuation adjustment is a belief that the market is efficient. Does Greaney believe that? If he does, he should say why he believes it. He had never done so. Not once in 18 years. Shiller showed in research published in 1981 that the market is NOT efficient If the author of a retirement study is going to claim that he knows more about the subject of stock investing than a Nobel-prize-winning economist, he should be willing to state his reasons for believing that. Greaney instead responded to my question about whether there was a valuation adjustment in his study with death threats and with demands for unjustified board bannings and with thousands of acts of defamation and with threats to get academic researchers who dared to “cross” him by doing honest work in this field fired from their jobs. Not this boy, you know? No freakin’ way, no freakin’ how.
There is some grounds for legitimate differences of opinion on what the safe withdrawal rate is at any one particular point in time. I say that the SWR in January 2000 (when the CAPE was 44) was 1.6 percent. I have no quarrel with someone who comes to things with a difference perspective and concludes that it was 1.5 percent or 1.7 percent. Let a thousand flowers bloom , you know? But 4.0 percent? That’s the Greaney claim. Is that supposed to be a freakin’ joke? 4.0? When the CAPE is 44?
I cannot go there. A lot of the people who posed at the old Motley Fool board had become friends of mine over the years. They were using the Greaney study to plan their retirement. A failed retirement is a serious life setback. I am happy that I eventually (it took three years!) worked up the courage to point out the error in the study. I believe that Greaney himself would go back and correct the error in the study if he could do it over.
My best and warmest wishes to you.
Error Correcting Rob
“It is true that we cannot know the fair-value price for stocks with absolute precision. If our economy becomes more productive for an extended period of time, the fair-value CAPE level will go higher If it becomes less productive, the fair-value CAPE will go lower. There is no way to know at any moment in time whether the fair-value CAPE is in the process of rising or falling. It is possible that the fair-value CAPE today is 15 or 17 rather than 16.”
My argument is not that we can’t know the exact “fair-value” but rather that such a thing does not exist.
The value of a financial asset or group of assets is determined by what the market is willing to pay.
If you are trying to buy a used car you might look up the Kelley Blue Book value. This is not some arbitrary number that a self appointed expert says is the fair-value price of the car but rather a value determined by a survey of actual sales and the prices paid for those cars. if no-one is willing to pay $10,000 for a car then the car is not worth $10,000 no matter how much wishful thinking is involved.
The difference between the car market and the stock market is that honest posting is permitted in the car market. If the engine of one car model always breaks down, people would write about that and car buyers would assign a lower value to that model. That’s how markets work.
This is why I am always saying that we need to open every discussion board and blog on the internet to honest posting re the last 39 years of peer-reviewed research in this field. If investors had access to honest and informed takes, they would see to it that stocks were priced properly by buying more stocks when the value proposition was strong and fewer stocks when the value proposition was poor.
That’s the entire debate. For so long as honest posting re the peer-reviewed research is prohibited, the thing that we call the stock market is not truly a market at all. It is a scam. I want to see a real stock market. I want to see a stock market that functions properly. A market that produces a CAPE value of 29 is not a market that is functioning properly.
Make sense?
Functioning Stock Market Advocate Rob
“they would see to it that stocks were priced properly”
You still don’t get it. There is no such thing as a “fair-value price” or a “proper price”. You imagine that some great internet discussion will lead to a thing that doesn’t exist and can’t exist.
Please mark me down as saying that we should open every discussion board and blog on the internet to honest posting re the last 39 years of peer-revewed research in this field, without a single exception. Following U.S. law works in every field of human endeavor other than the investment advice field. I have a funny feeling that it would work in the investment advice field as well.
We’ll see.
Optimistic Rob
Opening up every discussion board to what you refer to as “honest posting” would make no difference for a number of reasons
1) You’re wrong
2) Even if you were right you have demonstrated over the past 18 years that you have no ability to explain or persuade other people
3) Even if you were right and you suddenly developed the ability to persuade people the market would instantly take away the high returns you expect to get. If the market volatility disappeared and you got your high return/low risk assets people would react by pushing money into those assets, driving up the price and lowering returns.
I don’t think that I am wrong. There is 39 years of peer-reviewed research supporting Valuation-Informed Indexing. There are zero years of peer-reviewed research supporting Buy-and-Hold. That tells me that I am probably on to something.
You would have never demanded that I be banned from a single board if I had not shown an ability to persuade a LOT of people. Please give me a freakin’ break.
If honest posting were permitted, the market would be able to function properly and returns would be what the economic realities support. That’s a return of about 6.5 percent real per year. That works for me. And that would work for the vast majority of investors. It’s when we get caught up in the Get Rich Quick/Buy-and-Hold garbage that we bring on bull markets and the economic crises that always follow in their wake. We would all be better off if we just permitted the market to provide the returns that are economically justified and left all the irrational exuberance stuff behind us.
That’s my sincere take, Evidence.
My best and warmest wishes to you and yours.
Confident-That-He-Is-Right (But Also 100 Percent Happy to be Subjected to the Challenges to His Thinking That We Would See If the Entire Internet Were Opened to Honest Posting) Rob
“That’s a return of about 6.5 percent real per year.”
It is that sort of comment that convinces me you truly don’t understand how stock investing works.
I have tried to explain this to you before and it hasn’t worked but I will give it one more try.
You mention 6.5% real (that is the historical return), I will use 10% nominal just to keep things simple.
The DJIA has risen at about 5%/year so where does 10% come from (reinvested dividends). The dividend yield on average has been about 5%.
Year 0 $100 stccks
Year 1 $105 stocks $5 div (reinvest div = $110 stocks)
Year 2 $110 * 1.05 = $115.5 stocks $5.50 div (reinvest div = $121 stocks)
and so on
So an individual investor can get the 10% nominal by reinvesting dividends
Now think of investors as a whole (who own 100% of the stocks)
At the end of year 1 the stocks have grown in value by 5% and kicked off 5% in dividends, so far so good.
Now the investors try to reinvest their dividends by buying stock
From who?
They already own 100% of the stock, they can’t buy any more
Now some investors can but stocks from some other investors but collectively they have not increased the shares that they own, it is simply dollars moving one way while stocks move the other way.
Hence they cannot realize the 10% nominal (6.5% real) compound growth that you imagine can happen in some imaginary “honest posting future”
Investors who receive dividends have received a return on their stock investment regardless of whether the dividends are used to purchase more stock or are put into some other investment class. The reality is that there is always going to be some investor selling stocks. So an investor who receives dividends will be able to invest those dividends in stocks if he pleases. The key is that he not overpay. You want to permit honest posting re the last 39 years of peer-reviewed research at every site so that all investors will be aware of the long-term value proposition of stocks and will refuse to overpay. That keeps the irrational exuberance down and permits us all to obtain higher returns while taking on dramatically less risk. Which is a 100 percent good thing.
You say that I do not know how stock investing works. You say that there is no price at which stocks are not worth buying. So I say that it is you who do not know how markets in general work. There has never been a market in which the good being bought and sold was not not worth buying at some price. When you persuade investors that there is no price at which stocks are not worth buying, you take price discipline out of the stock market. It is price discipline that makes markets work. So, when you remove price discipline from the stock market, you make it dysfunctional and we experience price crashes and economic crises. Not good.
Slow Learner Rob
“That keeps the irrational exuberance down and permits us all to obtain higher returns while taking on dramatically less risk. ”
No it doesn’t and it can’t.
Imagine your unrealistic scenario happened, the price of stocks fell to CAPE 16 and volatility was greatly reduced. At that point Rob Bennett would buy stock (if what he has been saying for the last 18 years is true).
From who?
What sort of idiot would sell low volatility/high return stocks to you. I certainly wouldn’t. You say that there is always someone willing to sell and that is true. Your problem is people like me and others who aren’t idiots.
If stocks did sell at CAPE 16 promising low risk 6.5% real returns then the flood of people wanting to but such a unicorn investment would drive the price up. You need low risk 6.5% real before you will invest in stocks, well what about people who will accept 6.4% real, or 6.3% real. They will outbid you and get the stocks instead of you.
What am I supposed to do stick my money under my bed or invest in super low return bonds. No, if low risk/high return assets are available I will invest in them, as will millions of others and they will outbid you driving prices up. (And by the way if you say that lenders will need to offer higher interest rates that will simply demonstrate that you don’t know how the bond market works. The yield of bonds is driven by how much people are willing to pay for them, not the coupon rate)
In other words the magical low risk/high reward future you imagine would only work if no one knew about it.
We completely disagree, Evidence.
There is nothing unicorn about the idea of stocks being a low-risk asset class. Stocks are not TODAY thought of as a low-risk asset class only because prior to 1981 we did not know what made stocks risky (the idea that market timing is not required). Now we know. So now we can all enjoy low-risk stocks if we care to. It is up to us.
There are lots of things that we enjoy in our daily lives that in the days before the progress that was achieved that brought them into existence could have been described as unicorns. Penicillin was once a unicorn. Air travel was once a unicorn. The Beatles were once a unicorn. Laptop computers were once a unicorn. Cell phones were once a unicorn. Women working in jobs outside of the secretarial and nursing realms was once a unicorn. Black people feeling free to vote was once a unicorn. And on and on. Every great advance was once a unicorn. That’s why we call great advances ADVANCES. They bring something new and wonderful into the world.
Shiller’s Nobel-prize-winning research is a great advance. A unicorn, to use your terminology. There was a time when it didn’t exist. Now it does. Shiller brought something new and wonderful into all of our lives. Good for him, you know? I am fine with that.
Would stocks be more appealing in a world in which honest posting re the last 39 years of peer-reviewed research was permitted at every discussion board and blog on the internet? Obviously. That’s what we all should want. That’s a plus. The entire reason why we encourage people to do research into how stock investing works is so that we can make stock investing more appealing. I hardly see how the fact that Shiller succeeded in the task is a reason to ban discussion of his research. I mean, come on.
You are saying that, if we permit honest posting, stocks will come to be so appealing that people will buy them like crazy and the price will get too high. I don’t think so. If the price gets too high, the research will tell people that the long-term value proposition is no longer there and people will sell and the price will come down. Stock prices are self-regulating in a world in which honest posting is permitted. We simply do not need to worry about the problem that you are pointing to. The market will take care of it. That’s what markets do. The market today cannot function because we are not permitting honest posting. But, if we permit honest posting, we free the market to do what markets do, which is to get the price right. So it will all work out.
I believe that there is one aspect of your suggestion that is probably correct. The returns on low-risk asset classes have been set artificially low because of the ban on honest posting. When people come to believe that there is no price at which stocks are not worth buying (which is a crazy belief but one that many people hold in the Buy-and-Hold Era), they invest in low-risk asset classes only as a sort of stabilizing factor in their portfolios, not for the return that they offer. In a world in which stocks are a low-risk asset class too, people will naturally compare the returns on stocks and the investment classes that are today thought of as low-risk asset classes and decide between the two on the basis of return. Stocks would beat those asset classes today by a country mile. So, yes, it is fair to say that the market is going to need to make adjustments when the internet is opened to honest posting re the last 39 years of peer-reviewed research.
The obvious adjustment would be for the returns on the low-risk asset classes to increase. Stocks will be very appealing when the risk is low and the return is 6.5 percent low. But there will still be some volatility in stock prices. My guess is that the CAPE might vary from 12 to 20 in a world where honest posting was permitted. So people would still want to own TIPS and IBonds and CDs so long as the returns on those asset classes were increased enough to bring them closer to the return offered on stocks. So perhaps the return on safe asset classes would increase to 3 percent real or 4 percent real.
Would that be so terrible a thing? I think it would be a wonderful thing. I don’t personally see any downside. If that’s what the market says the return should be on low-risk asset classes, then let it happen. I see no reason to artificially hold those returns down by prohibiting honest posting re the last 39 years of peer-reviewed research.
The 6.5 percent real return that I have said will apply for stocks is not something that I made up. That is the average, long-term return. It’s an historical fact. All that I am saying is that we should let people know when the likely 10-year return is something different. When the likely 10-year return is 15 percent real, as it was in 1981, we should tell people that. And, when the likely 10-year return is a negative 1 percent real, as it was in 2000, we should tell people that. For the market to function properly, investors need to be informed as to the return that they are likely to obtain on their stock investment. So we should all get about the business of informing them. We all will live better lives when we permit the market to function smoothly and effectively.
My sincere take.
Unicorn Chasing Rob
” If the price gets too high, the research will tell people that the long-term value proposition is no longer there and people will sell and the price will come down. ”
“Will sell”
Who will they sell to? If the long-term value proposition is no longer there why would anyone buy those stocks.
Every reply you make underscores the pact that you think that stock returns come from the returns fairy.
You want there to be people who will sell you stocks when the long-term value proposition is there and buy them back from you when the long-term value proposition is no longer there.
That will not happen.
That’s not what I want AT ALL, Evidence. I have that now. What I want is for stock investing to become a more rational endeavor, to take a good bit of the emotion out of it. I want to open the entire internet to honest posting re the last 39 years of peer-reviewed research. When people are able to educate themselves, they will make better choices. We will not see as much overvaluation or undervaluation when honest posting is permitted (and encouraged!).
Price-Conscious Rob
“We will not see as much overvaluation or undervaluation when honest posting is permitted (and encouraged!).”
If stock prices are less volatile then they would become a more attractive investment option.
What do you think that would do to stock prices?
It would make stocks more appealing in relative terms when compared with the super-safe investment classes. So the return on the super-safe asset classes would improve.
In a world in which honest posting re the last 39 years of peer-reviewed research were permitted, stock prices would self-regulate to set the CAPE at somewhere near the fair-value price. My guess is that the CAPE would stay within a range between 12 and 20.
We would all be better off in such a world. That’s why learning is widely viewed as being a good thing. That’s why Shiller was awarded a Nobel prize for his “revolutionary” (his word) research.
Rob