I’ve posted Entry #498 to my weekly Valuation-Informed Indexing column at the Value Walk site, It’s called The Stock Market Has So Far Underreacted to the Coronavirus Crisis.
Juicy Except: It’s a paradoxical chore to try to describe shifts in investor emotion in a way that makes logical sense of them. Emotions do not follow the dictates of reason. Prices could do just about anything and we would have to accept the reality, whether we could make sense of it or nor. But even emotion-filled choices usually have some sort of logic behind them even though it is often very different than the mechanical form of logic that is our first choice to employ when describing a turn of events.
You really have no clue about investing. Stocks are being driven by lack of options. Rates on CDs, bonds, Money Markets, etc., have dropped to almost nothing. There is even risk in negative rates. What else can they do?
A zero return is a lot better than a negative 70 percent return.
Once we open the entire internet to honest posting re the last 39 years of pee-reviewed research, investors will be able to educate themselves as to their options. Millions of investors will choose the zero return over the negative 70 percent return.
And that will pull stock prices down! Which is what we all should want. In a functioning market, stock prices would always be at least somewhat close to fair-value levels. We should want the stock market to be functional. We should permit it to do its most important job, which is to get prices right. We can all plan our financial futures much more effectively when stock prices are set properly.
And the returns on super-safe asset classes will go up when the value proposition of stocks improves because they will have to go up to attract capital.
Permitting honest posting is a win/win/win/win/win. It is not possible for the rational human mind to imagine any down side.
I don’t count the Buy-and-Holders having to learn how to pronounce the words “I” and “Was” and “Wrong” as a downside. That’s just one of those things. The human race did not come to Planet Earth knowing everything there is to know about how stock investing works. So there were going to be days when there were huge advances. Shiller provided us all with the biggest advance in the history of personal finance in 1981. Once the Buy-and-Holders say the words “I” and “Was” and “Wrong,” we all get to move forward and enjoy richer lives from that day forward. Since it is something that absolutely must be done, the best thing is to do it quickly and move on.
My sincere take.
Rob
A drop does not concern a buy and holder. They are not market timing. They know that the market has always recovered.
Market timers, however, are always concerned with price. They have to be right all the time with getting in and out.
You are describing short-term market timing, not long-term market timing. I disdain short-term timing but I view long-term timing as absolutely essential. You are right that I am deeply concerned with price. Why wouldn’t I be? I am deeply concerned with the price that I pay for cars and sweaters and bananas. Why would I play it different with stocks? But, no, I don’t care even a tiny bit about getting the time that I change my stock allocation right. All that matters to me is that I keep my risk profile constant over time (lowering my stock allocation when stocks become more risky and increasing it when stocks become less risky). If I get the risk profile right, I believe that the rest will take care of itself. At least, that is how it has worked for as far back as we have good records of stock performance (that’s 1870).
I agree that the market has always recovered. If there ever comes a day when the market does not recover, we are all in the soup anyway and what goes on in the stock market will be the least of our concerns. But I think that it is a mistake just to say that the market will recover some day in the future. We all get only so many years to finance our retirement. If you have a big stock allocation and experience a devastating price crash and the market does not recover for a long time, you will miss our on years of compounding. That greatly diminishes your odds of being able to retire at a reasonable age. It makes more sense to always pay attention to price and to engage in the amount of market timing needed to keep your risk profile constant over time. Then all those worries become a thing of the past.
The Buy-and-Holders have a slogan — Stay the Course. I believe strongly in the idea but not in the way that the Buy-and-Holders implement it. To me, staying the course means keeping your risk profile constant even if it requires making some changes in your stock allocation from time to time. It is the risk profile that needs to stay constant, not the stock allocation.
My best wishes to you, Anonymous.
Rob
Even long term timing involves getting in and out of the market and getting it right. Show me just one person that has done this successfully as I have yet to see this person.
To the opposite, the buy and holder doesn’t have to change a thing.
By the way, it is not true that a drop does not concern a Buy-and-Holder. Take a look at the comments that appeared on the Bogleheads Forum in the days following the 2008 price crash. Lots of the Buy-and-Holders who comprised that board community were deeply concerned.
Prices recovered quickly in that case. So the concern never deepened into an all-out panic. But, if prices had continued to drop hard and if the low prices had remained in place for years, we would have seen a panic. How do you think we get CAPE levels of 8 at the end of every bull/bear cycle? That’s insane. when the CAPE is 8, the entire market is priced at one-half of its real value. Huh? What the f?
It’s disillusioned Buy-and-Holders who make that possible. Insane bear markets are just the mirror image of insane bull markets. We could never have insane bear markets if we didn’t have insane bull markets first. Emotional extremes beget emotional extremes.
Rob
“Even long term timing involves getting in and out of the market and getting it right.”
No, it doesn’t. Stock prices remain high for very long time-periods and then remain low for very long time-periods. It it not necessary to identify on what day or week or month or year prices are going to turn. All that you need to do is to develop a conviction that you will never fall for the Buy-and-Hold mumbo jumbo, that you will always try to Stay the Course by engaging in long-term market timing and you are there, far ahead of most other stock investors.
“Show me just one person that has done this successfully as I have yet to see this person.”
I co-authored peer-reviewed research with Wade Pfau showing that every investor since 1870 who followed this approach succeeded with it. If you are so anxious to know about all the successes, why did you threaten to get Wade fired from his job if he continued to do honest work? We could have all worked together to get that research featured on the front page of the New York Times and today you would see it being discussed at every investing site on the internet. You would hear enough success stories to make your head spin.
“To the opposite, the buy and holder doesn’t have to change a thing.”
The market changes things for him when the Buy-and-Holder fails to engage in market timing in response to big price shifts. An investor who has the proper risk profile when the CAPE value is 16 has a horribly wrong risk profile if he sticks to the same stock allocation when the CAPE value goes to 32. To say that a Buy-and-Holder is smart not to change a thing when stock valuations change dramatically is like saying that a driver is smart to maintain the same speed when there is ice on the road as he did when the road was clean. Huh? What the f? That makes zero sense. That is reckless in the extreme.
Rob
I read the Bogleheads forum. They maintained staying the course.
I am still waiting for you to show me just one successful person who has retired successfully with VII.
Some did, some didn’t. Had prices dropped lower, the number who stayed the course would have dropped lower. And, if the price drop remained in place longer, the same would have been so. Buy-and-Holders always are the last to sell as the CAPE level drops to 8. That’s the worst possible time to sell. They would be better just to keep their risk profile constant so that they would not experience those pressures to sell at the worst possible time.
The Bennett/Pfau research shows that Valuation-Informed Indexing has always been far superior to Buy-and-Hold. So, those who followed it were obviously able to retire sooner. And those who followed Buy-and-Hold delayed their retirement by doing so. It is better to obtain higher returns while taking on lower risk. Showing people how to do that is pretty much the entire point of offering investment advice.
Gee, I wonder why you Buy-and-Holders engaged in extortion to silence Wade Pfau. Some of this investing stuff is so darn hard to figure out!
Rob
Buy and holders stay the course. If you don’t, you are not a buy and holder. Period. Still waiting for you to show us just one successful retirement with VII.
Do Buy-and-Holders lower their stock allocations when valuation get too high? If they don’t do that, they are not staying the course in a meaningful way. They are letting their risk profile go out of whack. Staying the course would be engaging in market timing to keep the risk profile constant.
I can live with the fact that Valuation-Informed Indexing has been far superior to Buy-and-Hold for as far back as we have records. If you could make that claim for Buy-and-Hold, you would never shut up about it.
Rob
Buy and holders stay the course. Period. They don’t time the market. Period. You haven’t ever shown one successful retirement with VII. Period. If you don’t understand that, I can’t help it.
If they are not engaging in market timing, they are not staying the course in a meaningful way. That’s the entire point of The Great Debate. Shiller showed something important in 1981. He showed that the market is not efficient and thus stock investors must engage in market timing to keep their risk profile constant (that is, to stay the course in a meaningful way).
That’s why the subtitle to Shiller’s book used the word “revolutionary” to describe his findings. That’s why he was awarded a Nobel prize.
I’ve shown (in research that was published in a peer-reviewed journal) that Valuation-Informed Indexing has been providing investors with higher returns at less risk for as far back as we have records of stock prices. That’s what matters. Word games don’t pay the electric bill when it gets cold outside.
Rob
“ Word games don’t pay the electric bill when it gets cold outside.”
Exactly. And who is playing word games? I would be happy to compare my portfolio to your’s and we will see who is paying the bills”
Is a big portfolio going to make you feel better when you are sitting in a prison cell, Anonymous? I would rather have the smaller portfolio and the knowledge that I have remained on the right side of the felony line PLUS the promise of a huge payday that will put your portfolio amount to shame.
If I truly believed that Greaney included a valuation adjustment in his retirement study, I would say that. I do not truly believe that. So I do not say that. I care about my friends and I view a failed retirement as a serious life setback.
I naturally wish you all good things, in any event.
Rob
Your silly comments about prison, felonies, huge paydays, made up death threats, etc., all demonstrate that you deserve the continued ban on the investing forums. There is no place for abusive posting like that.
Them’s the breaks, Anonymous.
I obviously hold a very different viewpoint. You Goons are responsible for your own behavior and should be held accountable for it. But we humans live in communities and so to some extent we are responsible for each other too. The site administrator at the Motley Fool should have given John Greaney the boot when Greaney advanced his first death threat. I wrote to him and asked him to at the time. Because he failed to do his duty as a site administrator, Greaney is looking forward to a long prison sentence today. That’s not what I have ever wanted for my old friend John and I am of course sad about it.
But I am not king of the world. I only get one vote re these matters. I have always made clear what I think needs to be done. Once I have done that, all that I can do is to sit back and watch things play out and hope for the best. So that’s what I have done for 18 years now and what I will continue to do for the next 18 million years, if I am around that long and if The Great Safe Withdrawal Rate Debate extends that far into the future.
I do wish you all the best that this life has to offer a person, in any event. I hope that that helps at least a tiny bit.
Rob