I’ve posted Entry #496 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Shiller Believes in Market Timing But Is Reluctant to Offer a Clear Endorsement.
Juicy Excerpt: Nowhere in his book does he offer advice on how investors who believe in his “revolutionary” (that word appears in the subtitle of the book) understanding of how the stock market works should make use of his insights to improve their returns. The obvious implication of every word written in the book is that investors should invest more heavily in stocks at times of low prices and should invest less heavily in stocks at times of high prices. But nowhere does Shiller identify the CAPE level at which investors should drop to a lower stock allocation. Investors buy books on investing to learn what to do with their money. So I find it hard to imagine that an editor of an investing book would not insist that an author include this sort of information somewhere within the pages of an investing book. But you won’t find passages addressing this question in Irrational Exuberance.
Evidence Based Investing says
Not sure if you have seen this
Wade Pfau: The 4% Rule Is No Longer Safe
Episode Summary
The noted retirement researcher discusses how pre-retirees and retirees can adjust their plans in times of market stress.
https://the-long-view.simplecast.com/episodes/wade-pfau-9Z7_8m/transcript
Rob says
Thanks much for providing that link, Evidence.
Wade makes about 20 points in that article that merit discussion. I will write a column for Value Walk looking at some of them.
I am certainly glad that Wade is saying that the 4 percent rule doesn’t work. I am proud to be able to say that he learned that from me. I don’t get the sense that our views today on these issues are precisely the same. But so what, you know? No two people have precisely the same views on all issues. I did something of great importance by launching The Great Safe Withdrawal Rate Debate and we are all continuing to learn stuff as a result 18 years later. We should be encouraging everyone to get involved. We need to examine these issues from all sides.
Part of the discussion should be — Why has it taken so long to get clear statements out before the public as to the errors in those studies? A lot of people planned retirements using those obviously flawed studies. It should’t take 18 years for stuff like this to happen. There should be ethical standards in this field. In a field with ethical standards, you would never see death threats or demands for unjustified board bannings or thousands of acts of defamation or threats to get academic reseachers fired from their jobs, none of the ugly Goon stuff. I mean, come on. We all need to know how stock investing works. So we all should be doing everything we can to help each other learn as much as possible.
The most significant idea that he puts forward in the article is the idea that Valuation-Informed Indexing worked from 1870 until 1996 and then stopped working. I don’t buy it. This is certainly the longest period of time that we have gone with prices remaining this high. That’s an important fact. People need to know that. So I don’t see that as a crazy position. But you have to look at more than what has worked for a certain number of years. You have to ask — WHY?
If the market were efficient, as the Buy-and-Holders say, market timing would never work. But it worked for nearly 130 years. Why? I think it is because gains that are the product of a CAPE level higher than 16 are rooted in irrational exuberance, not in economic realities. If that’s so, that’s huge. That’s something we need to figure out. Not next week or next month or next year. Now . Immediately. Last week. 18 years ago. 39 years ago. Like that.
So why hasn’t VII been working for the past 24 years? I think the crash has just been delayed. I have written in some depth on what may be going on on earlier occasions. It may be something as simple as the promotion of Buy-and-Hold. Investors feel safe not engaging in market timing today because they believe the claims that there is research backing up the Buy-and-Hold concept that timing is not required. Which is false, as Wade well knows. But millions of people believe it. So they don’t sell as soon as they would have in earlier days and the crash is delayed. But they will still sell eventually. And the loss of consumer buying power that will result when the CAPE drops dramatically could put us in a Second Great Depression. So this is something that we need to have many smart people examining in great depth.
I see the publication of the article as a nice step forward. I still believe in Valuation-Informed Indexing. But I have never said that I am God, I have never said that I have perfect knowledge. At least Wade’s criticism of the concept makes sense. And it wouldn’t surprise me even a tiny bit to see him flip back after the next price crash, which I still believe is coming (although I cannot say precisely when).
Anyway, I am certainly grateful for the link.
Wade Pfau Fan (As Always!) Rob
Anonymous says
“ So why hasn’t VII been working for the past 24 years?”
Just let that sink in. If buy and hold didn’t work in a 24 year period, you would call it a failure, yet you don’t hold yourself to the same standard. You cannot correct for a 24 year failure.
Rob says
Buy-and-Hold hasn’t worked for one day, Anonymous. There have been four times in U.S. history when the idea that it is not necessary to practice price discipline when buying stocks has become popular and on each of those occasions we have experienced an economic crisis. That’s not success. That’s failure.
And 24 years of high prices doesn’t mean much if it doesn’t last. Economic Crisis #5 will make people forget those 24 years super fast. Why didn’t Buy-and-Hold work for the 126 years before that 24-year time-period? If 24 years of sub-par results for Valuation-Informed Indexing justifies a ban on discussion of it, why doesn’t 126 years of sub-par results for Buy-and-Hold justify a ban on discussion of Buy-and-Hold? Memories of the 24-year time-period in which Buy-and-Hold put up good numbers for a time won’t pay the electric bill when it is cold outside. You need to be able to sustain it. And if that is what happens this go-around, it will be the first time in U.S. history in which it has. I think it would be fair to describe that as a long-shot possibility. Please excuse me if I bet with what the historical return data identifies as the heavy favorite.
Marketing gimmicks aren’t the answer. Honest posting re the peer-reviewed research is the answer.
This is my sincere take.
Gimmick-Free Rob
Anonymous says
Go ahead an so me just one failed buy, hold and rebalance failure. Give us a link, not just your biased comments. Facts matter.
Rob says
https://www.imdb.com/video/vi1686962457?playlistId=tt0032551&ref_=tt_pr_ov_vi
Anonymous says
https://www.urbandictionary.com/define.php?term=coo%20coo%20for%20cocoa%20puffs
Rob says
Yeah, yeah.
Rob