I’ve posted Entry #516 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Economic Developments Are Never As Big a Deal as Investment Analysts Make Them Out To Be.
Juicy Excerpt: If the influence of irrational exuberance is much greater than we realized at earlier times (in the days when many academics believed that the market is efficient, it was thought that the influence of irrational exuberance was zero), the influence of economic developments must be much less. Yet the practice of explaining price changes by making reference to economic developments is ingrained in the thinking of investment analysts. We need to break the habit of assuming that economic realities drive the stock market.
So the Fed setting rates to zero has not really had an impact, nor has tax reform, nor has Covid-19; according to Rob Bennett the financial expert. Got it.
Yes, there is a reason why you have no support in your comments section.
To the long-term investor, those sorts of things should not be a big deal. We have been seeing events like that since the day the market opened for business. Yet for 150 years, the long-term average return has been 6.5 percent real. Things go up, things go down. It all balances out in the long term. It is the last 39 years of peer-reviewed research in this field that shows that, not me. It is the peer-reviewed research that is the true expert, in my assessment.
The one thing that changes dramatically is valuations. When irrational exuberance is out of control, like it was in January 2000, the most likely 10-year return is a negative 1 percent real. When irrational depression is out of control, like in 1982, the most likely 10-year return is 15 percent real. That’s a huge difference. Long-term investors don’t need to fret about the temporary economic ups and downs; that stuff cancels out in the long term. But they do need to pay attention to valuations because valuations have a huge effect on long-term returns. It is not possible to set your allocation properly if you do not pay attention to valuations.
That’s my sincere take, Anonymous. And there would of course be thousands of comments here every day if you Buy-and-Holders had not engaged in criminal behavior to block discussions at lots and lots of place. You saw the same thing that I saw — thousands of people have shown an interest in learning what the last 39 years of peer-reviewed research in this field teaches us all about how stock investing works in the real world. I think we are going to make the leap to consideration of true research-based strategies in the days following the next price crash. It will be interesting to see how it all plays out.
My best wishes to you.
Rob
“Yet for 150 years, the long-term average return has been 6.5 percent real. Things go up, things go down. It all balances out in the long term.”
Thanks for making the case for buy and hold.
Market timing means you have to be right on when you get out and when you get back in. You are a good example of this. You missed out on one of the largest bull markets ever and you can’t make up for the last 24 years. I know you will keep trying to spin it, but simple math says otherwise.
Simple math which does not include an adjustment for the effect of irrational exuberance says one thing and simple math adjusted for the effect of irrational exuberance says something very different. Given that there is now 39 years of peer-reviewed research showing that irrational exuberance is a real thing, I believe in making the adjustment.
I didn’t “miss out”on anything worthwhile is irrational exuberance is a real thing. Who wants gains that are going to disappear in the long run. Such “gains: make it harder to know the true value of your portfolio, which makes it harder to engage in effective financial planning.
If the CAPE value shows that you need to lower your stock allocation to get your risk profile back to what you determined it should be, that’s the right time to make that change. It’s the same with making a change in the other direction. Do it when you need to do it to keep your risk profile constant and you can’t go wrong. The peer-reviewed research that I co-authored with Wade Pfau shows that that approach has been delivering far higher returns with much less risk for 150 years now. Works for me.
Rob
“Given that there is now 39 years of peer-reviewed research showing that irrational exuberance is a real thing, I believe in making the adjustment.”
In those 39 years, my returns have far outpaced your returns. Wade Pfau doesn’t say what you says he does.
You don’t adjust for the effect of irrational exuberance. You are always going to get the numbers wrong if you fail to adjust for irrational exuberance.
Here’s what Wade Pfau says:
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.”
All of those quotes are from you and your website. When we look at all of Wade’s comments in his books and websites, there are no comments like any of those. In fact, Wade will not even speak with you.
I put more credit in what he said before his career was threatened. What he said after the threats doesn’t count for much. There almost certainly are bits of truth mixed in it. But there is no way for anyone to know how much is true and how much is just stuff that he feels he needs to say to continue working in the field that he spent years of life training to work in. I am confident that everything will change when you Goons are placed in prison cells in the days following the next price crash, Wade will then go back to saying what he truly believes, in many cases agreeing with things that I believe and presumably in some cases disagreeing with me (which is of course what we should expect and how it should be). We’ll see.
We got into this mess as a society and we will get out of it as a society. My job is to do what I can to help us all move in a positive direction. Posting dishonestly wouldn’t help. So I don’t do that. I believe to this day that the retirement study posted at John Greany’s web site lacks an adjustment for the valuation level that applies on the day a retirement begins and so I continue to say that. I praise the Buy-and-Holders to the skies for the many genuine contributions they offered because I believe that that too is the honest thing to do. But I do not say that the Buy-and-Hold retirement studies contain valuation adjustments. I believe strongly that the people making use of those studies need to know that. So, when I am offered opportunities to tell them, I do that,
I believe in us as a country, Anonymous. So I believe that we are going to work our way out of this one, just as we have worked our way out of a lot of tight spots that we got in before this one. I am one of those darned flawed humans. So it is always possible that I am wrong about that one. But I sincerely believe that we will all make it successfully to the other side. When we do, there will not be one among us (including you Goons, in my assessment) who will wish that we could back to the days of death threats and demands for unjustified board bannings and thousands of acts of defamation and acts of extortion. I believe that we will put all that behind us and go on to live richer and better lives in the future. I personally don’t see that we have any real choice and the ocean of human misery that we will bring on with the next Buy-and-Hold Crisis will make that clear to each and every one of us.
I naturally wish you all the best that this life has to offer a person.
Rob
I put more credit into what he says publicly vs someone that controls messaging on their own website.
You can do that, Anonymous. Each person has to decide for himself or herself what he or she is going to credit.
I’ll tell you what I think is going to happen. After the next price crash, there are going to be millions of people who are going to be trying to understand why half of their life savings disappeared overnight. The Buy-and-Holders will offer their standard explanation that it’s that bad, bad economy that did it. The explanation will satisfy some of us. But I don’t think that it will satisfy as many of us after the crash as it does today. We already have about 10 percent of the population that has doubts about Buy-and-Hold, I believe that a 50 percent price crash will push that number up to 20 percent. And then all bets are off. Get that number up to 20 percent and it will be much harder for you Goons to get honest posting shut down on discussion boards and blogs. With 20 percent of the community in their corner instead of 10 percent, there will be more who will have the courage to call you out on your b.s.
In time, the 20 percent will become 40 percent and then the 40 percent will become 80 percent. I think that the publication of Shiller’s Nobel-prize-winning research showing that valuations affect long-term returns (and that therefore long-term timing always works and is always 100 percent required) was a turning point. I think that, once that research was published, there was only one way that this thing could go. It has taken a lot longer for us to make good stuff happen than I ever would have imagined possible.You got me re that one. But I continue to believe that in time we will all elect to make the huge leap forward in our understanding of how stock investing works that Shiller made possible for us. I believe that our future will be better than our past. Sue me, you know?
My best wishes to you and yours.
Rob
Nothing worked out the way you said it would. You have no one here supporting you and your conclusions. Now you are in your 60’s and you have wasted your time.
“I’ll tell you what I think is going to happen. After the next price crash, there are going to be millions of people who are going to be trying to understand why half of their life savings disappeared overnight. ”
You have made so many crash predictions that never came true. Your fear kept you out of the market and now it is too late to make up for lost ground. Clearly, you would have done WAY better with buy and hold.
Nothing worked out the way you said it would. You have no one here supporting you and your conclusions. Now you are in your 60’s and you have wasted your time.
It’s fair to say that things did not go as I expected. I knew that Greaney’s pals would get abusive. I thought that the rest of the community would rein them in within a few days. To be fair, there have been thousands who have expressed a desire that honest posting re the peer-reviewed research be permitted, some with very strong and clear language. But very few are willing to stand in the fire in the face of brutally abusive stuff. So the practical result is that a tiny minority (you Goons appear to represent about 10 percent of the various communities) come to possess a veto power over what the other 90 percent are able to talk about.
The question is whether that will change in the days following the next price crash. My guess is that the pure Get Rich Quick/Buy-and-Hold approach is going to possess a lot less appeal after it has destroyed millions of lives not just in theory but in actual fact. But no one can say for certain until it actually happens. So I think we’re just going to have to wait that one out. It’s not as if I have any other options. I think it would be fair to say that I am physically incapable of posting dishonestly re these matters. So my intent is just to keep playing it in the way that I have been playing it for 18 years now.
I don’t agree that I have wasted 18 years. I learn new things every single week. That hasn’t been one week in the past 18 years when I haven’t learned something new. I think it would be fair to say that I am today the world’s foremost expert on Valuation-Informed Indexing,which is the investment strategy of the future in the event that Robert Shiller’s Nobel-prize-winning research turns out to be legitimate research. Not bad work if you can get it!
It will be interesting to see how it all plays out.
Rob
You have made so many crash predictions that never came true. Your fear kept you out of the market and now it is too late to make up for lost ground. Clearly, you would have done WAY better with buy and hold.
That’s not what the numbers say, Anonymous. Not when you adjust them for the effect of irrational exuberance, as the last 39 years of peer-reviewed research shows you must.
If there is no such thing as irrational exuberance, Buy-and-Hold is the ideal strategy. I’ll give you that one. If irrational exuberance is a real thing, Buy-and-Hold is the most dangerous strategy ever concocted by the human mind. I believe that Shiller’s Nobel-prize-winning research is legitimate research. Sue me, you know?
Rob
“ That’s not what the numbers say, Anonymous.”
It is exactly what the numbers say. In fact, with things not working out as you said it would, you finally had to admit that you have to go back to work.
I never left work in the first place. I left corporate employment so that I could do independent journalism that would ultimately be far more lucrative. I achieved great success with those efforts — Valuation-Informed Indexing is the future of investment advice. The financial problems are the results of the criminal behavior of you Goons. That has zero to do with how I invest and there is every reason to believe that I will be compensated for the losses you caused when I bring lawsuits in the days following the next price crash.
I have done fine with my investments. Not as well as I would have done had I been going with a higher stock allocation. But that will of course change if there is a price crash. So that all comes down to whether irrational exuberance is real or not. If irrational exuberance is not real, then everything that I have ever said about stock investing is nonsense. If irrational exuberance is real, then everything that I have said is of great importance and needs to be considered by every investor on the planet. So I will be making millions with my journalism work and will also have millions coming to me either in lawsuit awards or in lawsuit settlements.
Valuation-Informed Indexing has been FAR superior to Buy-and-Hold for the entire history of the stock market. The only exception is the last 14 years because the crash has been long deferred. But, if irrational exuberance is real, that deferral is not going to help the Buy-and-Holder in the long run; it just encourages them to continue to believe in a delusion. The only way that following the research-based strategy could have any downside is if the research is in error. Is Shiller is wrong, then I am wrong. But if irrational exuberance is a real thing, then ignoring its existence is a very big mistake and a deferral of a crash does not change that.
Everything comes down to whether irrational exuberance is a real thing or not. Your behavior itself shows that it is real. You behavior is HIGHLY emotional behavior. If investors were 100 percent emotion, you never would have committed a single criminal act.
Rob
Despite your spin, you have admitted you are unemployed and not earning anything and that your returns have suffered because you didn’t hold stock.
I am not employed by any corporate entity. I work every day on my book and on my weekly column and responding to comments posted at the blog. I have not earned a penny with the investing work for 18 years but I would have earned hundreds of millions if you Goons had not engaged in criminal behavior to hold me back. I’ve earned less than I would have earned had I been going with a higher stock allocation if the calculation is done without consideration of irrational exuberance. You of course get different numbers if you take the effect of irrational exuberance into consideration, as the last 39 years of peer-reviewed research in this field shows you must.,
Shiller changed our understanding of how stock investing works in a fundamental way. That’s why he was awarded a Nobel prize. Once people feel safe talking about the far-reaching implications of his research findings, we all make a great leap forward and begin living richer and better lives. It doesn’t happen for so long as those who believe that Shiller’s research is legitimate engage in self-censorship. If we want to see the good things happen, we need to work up the courage to stand up to you Goons. It’s hard to do but it is very, very, very important that it be done. I want to see honest posting at every site, without a single exception. That’s best for every human being on the planet.
Is irrational exuberance real? We need to find out. There’s only one way to do it. That’s to stand up to you Goons and say without fear 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 and should be corrected immediately. The more there are who are posting honestly, the easier it is for all those who do so and the more popular Valuation-Informed Indexing becomes and the less popular Buy-and-Hold becomes.
I do not believe that the Greaney study contains a valuation adjustment. Do not.
Rob
You have confirmed what I said. You are unemployed and haven’t earned any money. The book is worthless until it is monetized. As you have also admitted, you made less on investments by staying out of stocks. The rest is just your spin.
That is the core as to why you have no followers. You need a successful track record.
Okay, Anonymous.
I believe that the next price crash will be a turning point in the history of the United States. If stocks continue to perform in the future anything at all as they always have in the past, we are going to see millions of lives destroyed. But people are going to see that ocean of human misery and it is going to give them the courage they need to stand up to you Goons and argue in support of my idea of permitting honest posting at every discussion board and blog on the internet, without a single exception. Once the possibility of honest posting on the peer-reviewed research opens up, things just get better and better and better for every one of us.
Have I paid a temporary price for my unwillingness to post dishonestly re the error in the Greaney study (it lacks and adjustment for the valuation level that applies on the day the retirement begins)? Obviously. I have paid a price. But how many people get an opportunity to play a role in saving their country from a horrible economic crisis and in then teaching millions of people how stock investing works in the real world? I am blessed, Anonymous. That’s the bottom line. So I am just going to give it my best shot and continue to respond to you Goons with compassion and with love and see where that takes us all. I believe that we are a good country. So I believe that we are all going to pull together and take this to a very good place.
My best and warmest wishes to you and yours.
Rob
People believe in all sorts of crazy things. That is why we need to look at actual results to figure out what is real and what is fantasy. I am sorry for your poor outcome, but you made your own choices.
Got it, Anonymous.
Please take good care.
Rob