I’ve posted Entry #490 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called High CAPE Values Are the Primary Cause of the Coronavirus Crash.
Juicy Excerpt: Say that the coronavirus problem is sufficiently severe to cause stocks to be priced for a time at 20 percent below their fair-value price level. That is a CAPE value of 13. So, if the problem entered the scene at a time when stocks were selling at fair-value prices (a CAPE value of 16), we would see a price drop of 3 points of CAPE value. However, if the problem occurs at a time when the CAPE value is near 30 (as it was a few weeks ago), the appearance of the problem could cause prices to fall by 17 CAPE points (from 30 to 13).
That big of a price drop could transform the irrational exuberance that had been dictating stock prices in earlier days into an irrational depression, which could continue to push them all the way down to a CAPE value of 8. That’s a total drop of nearly 22 CAPE points, a loss in portfolio value of nearly 70 percent.
The S&P500 is about 5% off it’s all time high.
Thank you for that update, Evidence.
Rob
Speaking of updates, how goes your progress with your book and your job search?
I am not looking for a job until the book is at least close to being finished. The book is 50 times more important than anything else. So that has to come first. I am okay with taking full-time employment if all that is left with the book project is editing and proofing. I can do those things on nights and weekends. But the stuff that requires intellectual effort needs to be finished before I take that much time away from the priority project.
The book is advancing every day. It is definitely moving in the right direction. But my time estimates for when it would be completed ended up being way off. I thought that it would be finished by the end of last year. Now my aim is to finish it by the end of this year. The difference is that last year I was trying to write the shortest version of the book that could be written. Shorter is definitely more marketable. But I got to a point where I was not confident that every reader would understand the points being made unless I provided more background. So I decided to explore the possibility of a longer book.
It ended up being MUCH longer. Nothing is written in stone. I still hope to be able to cut back on the length of the book. But my current intent is to write it as long as it needs to be written for every important point to be made and it appears that that is going to be a very long book. There’s a thing that novelists say, that they do not construct the entire plot for their book, they create the characters and place them in circumstances but ultimately the characters determine their own behavior, in a sense the characters write the book in the end. I am the one putting down the words but I want to let this incredible story write itself. Whatever needs to be said for the average person to make sense of this crazy story should be said. However long it takes to tell the entire story in a narrative that flows step by step will be how long the book is.
I am upset that the book is taking so long. But I just have to accept it. Not everything is under my control. I do think that things are moving ahead slowly but surely and I remain confident that it will all be worth it in the end.
Um — Thanks for asking.
Rob
Perhaps y0u should seek out a co-author that can help you make the points, yet keep the book to a reasonable length? I am a bit more puzzled about the job search. I thought you needed the money? Wouldn’t that take priority if you need the funds?
There’s “need the money” and there’s “need the money.” There are different ways that those phrases can be employed. I need the money. But I need this book to be written properly more. And of course it is not just me who needs that. The entire country needs that. So I have to be willing to make some personal sacrifices to come through for my country. I am trying my best to balance the conflicting demands that have been placed on my conscience.
Having a co-author would make things worse. I have lived this story for over 18 years. There is no one else who understands the story that is being told in the book at the level of depth that I understand it. That includes Shiller. The problem is not that I am not up to the job. The parts of the book that are written are amazing. I have zero lack of confidence in the project. What I have lost confidence in is the idea that I could somehow tell this story in 85,000 words if I worked it hard enough. I now have concluded that that cannot be done.
I will continue to struggle to keep the length down. But, if the length ends up being more than what I want it to be, I am just going to have to accept that. The story has to be told properly. Someone who wants access to the complete story needs to have a place where he can get that. That place is going to be this book. Those who will not be able to bear the thought of reading a long book on investing will have shorter versions of the story available to them. That article that I send to people from time to time (“Buy-and-Hold Is Dangerous”) is 11,000 words. That’s not short. But it is a lot shorter than the book. The article is complete in the sense that it treats every key point in at least a cursory manner. The purpose of the book is to treat every important point in a complete manner. It turns out that it takes a lot of words to pull that off. That’s the reality that I have reluctantly come to accept after trying hard to do it the other way.
Looking for a co-author would just be seeking to avoid responsibility for something that is my job. I can write the book in the way that it needs to be written for it to do the job that it needs to do. I just need to let go of my preconceptions. I cannot force this book to be a certain length. The reason why the cover-up of the errors in the Buy-and-Hold retirement studies has continued for so long is that there are elements of this story that are very, very, very hard for people to believe. If there is something true that it is very, very, very hard for people to believe, then it is going to take some time to explain that thing to people. That’s just the way it is.
I have brought up the story of Galileo on several occasions. Galileo had something important to say (that the earth is not the center of the universe, as was indicated in passages from the Bible) that many people did not want to believe. I don’t think that there is anyone today who is not a crazy person who believes that the earth is the center of the universe. So eventually the truth that Galileo spoke was just too important for people to ignore. But it took a lot of time for that to happen. People who believed that the Bible is the inspired word of God had a really, really, really hard time letting the Galileo truth in to their minds. That’s where we stand today with the Shiller truth that the market is not efficient, that in fact valuations affect long-term returns and the safe withdrawal rate is a number that changes with changes in valuation levels.
I hope that it is not going to take much longer before more of us begin to take that Nobel-prize-winning truth in to our minds. The purpose of the book is to make that happen. I need to address all of the obstacles that as a society we face in our effort to advance in our understanding of how stock investing works. I wish that it were an easier job. I wish that I could just say “valuations matter” or “timing always works” and be done with it. But thinking that that is going to do the job is not being realistic. My job is to figure out what is causing the emotional resistance to letting in the message of the last 39 years of peer-reviewed research in this field and then to overcome those obstacles with my words. However darn many of them it takes to succeed at that job is the darn number of words that I need to include in the book.
I hope that that helps at least a tiny bit.
Galileo Supporter (While Remaining a Person of Faith as Well!) Rob
“There’s “need the money” and there’s “need the money.” There are different ways that those phrases can be employed. I need the money. ”
Put another way, do you need the money to pay the bills now and during retirement years? If so, why wouldn’t you prioritize getting a job over working on the book.
I’ve answered that question on many occasions.
I love my country.
We have millions of people in this country investing in stocks to finance their retirements. And we have the Buy-and-Holders telling them that they shouldn’t engage in market timing/price discipline. And we have 39 years of peer-reviewed research showing that market timing/price discipline always works and in fact is 100 percent required if we don’t want to see an economic crisis.
Someone has to expose this scam, Anonymous. It is a critical piece of business. I have a funny feeling that the Buy-and-Holders themselves would like to see the scam exposed and that they would do it if they weren’t worried about seeing their loved ones murdered by you Goons or seeing their careers destroyed by you Goons.
We are all in this together. We all want to know how to invest effectively. We all need to pull together and see to it that every discussion board and blog on the internet is opened to honest posting re safe withdrawal rates and scores of other critically important investment-related topics.
That’s where I am coming from, in any event.
Patriotic Rob
So, you see your mission as being more important than feeding your family?
My primary mission is to take care of my family. Doing what I can to see that we do not experience a Second Great Depression is part of that mission. My mother lived through the Great Depression. I don’t want my family to endure those things. And I don’t want millions of other families to endure those things.
Once you Goons are prosecuted and placed in prison cells, I won’t have any problem feeding my family by doing the work that I have trained to do my entire life and that thousands of our fellow community members have expressed a desire that I continue doing. That’s the answer. Our laws against financial fraud and extortion and threats of physical violence are good and necessary laws. Once we begin enforcing them in the investment advice field as we already do in all other fields, we all begin living richer and fuller lives. That’s where I want to take this thing.
The very fact that anyone would ever have to face a dilemma to post dishonestly or to not be able to feed his family highlights the problem that we are all facing. We should all want everyone posting honestly. We all benefit when everyone posts honestly. The fact that many Buy-and-Holders don’t see it that way (and that a much larger number of Buy-and-Holders are okay with the fact that some Buy-and-Holders don’t see it that way) tells a tale, Anonymous.
If Buy-and-Hold were a real thing, Buy-and-Holders would welcome questioning of their ideas. The fact that we are talking about whether someone will be able to feed his family because he committed the terrible crime of pointing out an error in a Buy-and-Hold retirement study is a story that every investor on the planet needs to know about. If Buy-and-Hold were a real thing, the Buy-and-Holders would want to correct any errors that they happened to make in their retirement studies.
This is my sincere take, in any event.
Rob
What does posting honestly mean?
It means saying that the retirement study posted at John Greaney’s web site lacks an adjustment for the valuation level that applies on the day the retirement begins.
Rob
But Wade already posted honestly about that subject and how you were wrong. So that means posting honestly already occurred.
With a gun to his head.
If there were not 39 years of peer-reviewed research showing that there is precisely zero chance that a pure Get Rich Quick/Buy-and-Hold “strategy” could ever work for a single long-term investor, Wade never would have been threatened. Had he not been threatened, Wade would have continued saying what he said in hundreds of comments that he made during the 16 months in which he believed that his career would not be destroyed if he continued doing honest work in this field.
I OPPOSE the criminal behavior, Anonymous. I oppose the financial fraud that Greaney engages in when he fails to correct the error that was pointed out to him on the morning of May 13, 2002. And I oppose the threats that were directed at Wade to persuade him to stop doing honest work. I think that Wade should be PERMITTED to do honest work. It’s by seeing honest work from people like Wade that we all are able to learn how stock investing works in the real world and go on to live better and richer lives from that point forward.
My best wishes.
Extortion Critic (and Financial Fraud Critic Too) Rob
“With a gun to his head.”
The problem is that no one has seen any evidence whatsoever as to these allegations that you have made.
I am happy to go by whatever the members of your jury decide, Anonymous. The members of your jury will be seeing this:
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.”