I’ve posted Entry #528 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called It’s the Irrationality of Mispricing That Makes Long-Term Returns So Predictable.
Juicy Excerpt: It shouldn’t be that way because, if returns were predictable, the market should take into consideration the information that makes predictions possible and incorporate that information into its assessment of the value of the market. Which would change the price. Stock prices are self-regulating so long as investors behave rationally. The problem is — investors are not capable of rational behavior!
It is a new year, Rob. What do you plan to accomplish this year? Do you think you will finally get your book completed? Do you think you will get a job? Fill us in on the plans.
My target date for completing the book is June 1. My intent is to look for a job after the book is completed.
Rob
“My target date for completing the book is June 1.”
Your target date was end of 2019. Then a few weeks later. Then end of 2020. Now June 2021.
Is there any reason in the world to believe you’ll meet this latest deadline? I see none. And since the job hunt conveniently follows the book completion, that gets put off forever too.
An unbiased observer can only conclude that you were never serious about either.
What will come first: The big stock crash or the completion of your book?
I kick myself for not having finished the book years ago. It “should” have been finished a long, long time ago. That much is certainly fair to say.
The other side of the story is that Shiller published his Nobel-prize-winning 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 40 years ago. Shiller has not written the book that I am close to finishing during those 40 years. Bernstein pointed out the the Buy-and-Hold safe withdrawal rate studies were off by two full percentage points for those who retired at the top of the bubble 18 years ago but Bernstein has not written the book that I am close to finishing. Wade Pfau got to see the ugliness of the pure Get Rich Quick/Buy-and-Hold approach when it is confronted with what the peer-reviewed research shows up close and personal but Wade hasn’t published the book that I am close to finishing.
I wish that I had finished the book years ago. But the full reality is that the reason why I have not is that it is a very, vary, very hard project. Intellectually, it is not terribly difficult. Anyone of average intelligence could have written this book years ago, The hard part is the emotional part. When you tell the truth about stock investing, you are pointing out the dangers of the Get Rich Quick/Buy-and-Hold urge that resides within all of us. You are finding fault with your fellow humans. The purpose is to help them live better and richer lives in the future. But still…. You are finding fault with all of the humans and that’s s a very hard thing for one of the humans to do. So it has taken a good but of time to come to terms with it all and to get the right words on paper.
I make the comparison to Galileo. I think that what Galileo did was wonderful. The humans once thought that the earth was the center of the universe and that is not so. We need to know that to make sense of things, Galileo offended lots of people when he told the truth about that matter. People had come to believe that the Bible is the revealed word of God and the Bible has words in it suggesting that the earth is the center of the universe. Galileo wasn’t hated because he was wrong, he was hated because he was right. People really, really, really wanted to believe that there were no errors in the Bible and there were. He helped us all by showing us that that was the case. But he drew some hate from his fellow humans by doing that.
I am a person of faith I believe there is a God. I believe that my soul will be judged after I die. So there is a sense in which I should be on the ant-Galileo side of the table. But I am not, If there really is a God, I believe that he would want us to learn as much as we can about the world in which we live. Learning that the earth revolves around the sun is learning something important that God did when he set up the world. So Galileo brought us closer to understanding God, in my assessment.
That’s what I am trying to do. We need to know how stock investing works. Every last one of us needs to know that. If the Buy-and-Holders got the market timing thing wrong once upon a time, then the Buy-and-Holders got the market timing thing wrong once upon a time. I think we all need to come to terms with that reality and move forward. I think that my book will help us in that effort. So I am proud to be close to completing it.
Do I wish that it had been a less difficult project? Sure. Absolutely. A thousand times over. But the book wouldn’t have nearly the same value if it were a less difficult project, would it? If it were a less difficult project, the book would already exist and I wouldn’t be making any significant contribution. It was a very difficult project, one that no one before me dared to take on. So I forgive myself for being more than a little bit slow in the completion of it. Saying something important that millions of people very, very, very much do not want to hear is an emotionally painful thing to do. But someone has to do it if we are all going to come to a better understanding of this important subject. I think it would be fair to say that I was elected. So I have put myself to the task and I am close to completing it. Late but very, very, very effectively, judging by the many passages that I have already been able to put to paper and review carefully.
I can live with all that. I wish that it had been easier. But it has been what it has been. I am not physically able to post dishonestly re the numbers that my friends are using to plan their retirements. So I took it this other way instead. I offer no apologies and I suffer no regrets.
At the end of all this, the world will have in its possession a highly valuable book that it did not have in its possession on the morning of May 13, 2002. So I did good working up the courage to advance that famous post.
My best and warmest wishes to you.
Rob
What will come first: The big stock crash or the completion of your book?
I don’t know.
Rob
Maybe neither will happen.
I think that both will happen. But we are going to have to wait a bit to find out for sure, you know?
My best wishes to you.
Rob
So you haven’t finished the book because you’re an emotional basket case. Why do you think that will change by June?
I haven’t finished the book because we all are in important respects emotional basket cases, Anonymous. I am not the person who came up with the “idea” that market timing (price discipline!) is not always 100 percent required.
Rob
“I don’t know.”
And that is why timing doesn’t work.
We disagree, Anonymous.
It would be fair to say that that is why short-term timing doesn’t work.
Rob
Long -term didn’t work either.
Long-term timing has been working for as far back as we have good records of stock prices. The peer-reviewed research that I coauthored with Wade Pfau shows that beyond any doubt whatsoever. We should be discussing the Bennett/Pfau research at every discussion board and blog on the internet and we should have been doing that going back to the day it was published.
It is impossible for the rational human mind to imagine an alternate universe in which long-term timing did not work. To say that long-term timing might not work is the same as saying that a perpetual motion machine might work or that there is a fountain of youth or that it is possible by giving voice to some magical incantation to transform coal into goal.
Not this boy. Please mark me down as “pro science.” In all fields other than the investment advice field and in the investment advice field as well.
My best to you and yours.
Rob
It didn’t work when you tried it. You had repeated crash predictions that failed. You are never got back into the market after you pulled out in 1996.
Would I be close to finishing work on an amazing book had I not done the research that led me to getting out of stocks in 1996, Anonymous? I think that it would be fair to say that that one has paid very big dividends. Research-based stock investing strategies work.
My sincere take.
Rob
You already admitted in another thread that timing didn’t work when you said:
“Going by the historical, the crash should have arrived 14 years ago. You’ve got me re that one, Anonymous. We are living through something unprecedented. It’s scary.”
You’re saying that the timing did not work in the short term. I acknowledge that it didn’t work in the short term. But I do not advocate short-term timing. I advocate long-term timing.
The reason why market timing is essential is that irrational exuberance is a real thing. Irrational exuberance is a terribly destructive force (it is responsible for nearly 70 percent of the risk of stock investing, according to the peer-reviewed research that I co-authored with Wade Pfau). So we need a way to combat it. The only means available to us to combat irrational exuberance is market timing. So we want to do everything we can to encourage market timing.
You are saying that sometimes irrational exuberance persists for a long time. That is so. We have never before seen irrational exuberance persist for as long as it has in this current bull market. That’s why it is so imperative that we open every discussion board and blog on the internet to honest posting re the last 40 years of peer-reviewed research in this field. Doing that will help us pull stock prices down. Failing to do it will permit them to remain high for an even longer time.
Any market timing that people engaged in a few years ago to bring stock prices down did not “work” in the send that stock prices are still insanely high. But it was a noble effort. If we had been able to bring prices down a few years ago, millions and millions of people would have been able to do a better job of planning for their financial futures. People who should have been saving more but were fooled by the phony numbers on their stock portfolio statement would have saved more. Entrepreneurs who started businesses that they would have not started if the economy was not being artificially pumped out by the phony stock numbers would not have started those businesses (and thus would not have to see them fail with the next price crash). Politicians who were given credit for a good economy during the time the economy was being pushed forward artificially would have been assessed by voters more effectively. And on and on and on.
There is no possible benefit that comes from lying to ourselves about the value of our stock portfolios, Anonymous. Irrational exuberance is a terribly destructive force. We all should be doing everything in our power to keep it in check. That means engaging in market timing. We all should be engaged in market timing and we all should be encouraging our friends to engage in market timing.
To say that there might be some circumstance in which market timing might not work is like saying that there might be some circumstance in which driving sober did not work. If you drive drunk on a few occasions and survive the rides, it doesn’t follow that driving sober no longer works. Driving sober is always better than driving drunk. Practicing market timing (price discipline!) when buying stocks is always better than failing to practice market timing when buying stocks. It is not possible for the rational human mind to imagine any exceptions to the rule.
If the market were efficient, none of this would be so. But the market is NOT efficient. Shiller showed with his Nobel-prize-winning research.
Rob
14 years is short term? You previously said long term was 10 years. Now you are moving the goal posts yet again.
We are in uncharted territory, Anonymous. This bull market is the longest ever seen in U.S. history. I didn’t move the goalposts. I have just acknowledged that they moved.
I have been urging that we open every discussion board and blog on the internet to honest posting re the last 40 years of peer-reviewed research going back to the morning of May 13, 2002. If we did that, the bull market would have been brought to a close a long, long time ago. It’s you Buy-and-Holders who have been saying that we should not engage in market timing, which is the reason why the bull market continues to this day. It’s you who are moving the goal posts, not me.
If it were up to me, bull markets wouldn’t even last 10 years. If we all practiced market timing, we wouldn’t even experience any more bull markets. Market prices are self-regulating so long as all investors practice market timing.
Bull markets are a Buy-and-Hold thing, not a Valuation-Informed Indexing thing.
Yes?
Rob
Timing means that you have to pick a time. The definition of long term can’t change with a timing scheme. You are making the case for buy and hold once again.
You don’t have to pick a time.
You have to identify a level of stock investing risk that is appropriate for you and then stick to it — Stay the Course.
As soon as the CAPE level reaches a point where your stock allocation is not appropriate for you, you should adjust your allocation. But, if you fail to do so, and the level of stock investing risk remains inappropriate for you, you can make the change a year later or two years later or whatever.
It’s risk management that matters, not the time you do it. It’s best to do it as soon as it is needed. Buy risk management is a good thing no matter at what time you engage in it.
Timing always works. It is not possible that it could ever not work. Timing is price discipline, Price discipline is always a plus. This is so in every market that ever existed. The stock market is the first exception.
The idea that market timing is not required comes from the Efficient Market Theory, which was discredited by Shiller’s Nobel-prize-winning research.
Rob
You picked a time. You made a forecast of a crash. It didn’t happen. Look at how much the market went up, despite your prediction.
It is true that I forecast a crash and that it didn’t happen. And it is true that the market went up even more.
All that means is that the irrational exuberance is an even bigger problem today than it was when I made the prediction. The need for market timing is GREATER.
You make it sound like it is a good thing that the market went up even more, I say that it is a horrible thing. The higher the market goes, the more we are seeing irrational exuberance do harm to us all. I would like to see stocks priced properly. I would like to see us all practicing market timing at all times. I think price discipline is necessary in all markets, including the stock market. I do not believe that the market is efficient. I believe that Shiller’s Nobel-prize-winning research is legitimate research.
Rob
You said the last 14 years did not work out like you thought it would. That is not much comfort to anyone that might have followed your advice and is now entering retirement.
It is certainly so that the last 14 years did not work out as i thought they would. If someone said that they were not going to follow the Valuation-Informed Indexing strategy as a result, I would not find fault with them. I don’t think that would be a crazy position to adopt.
It’s up to the individual. Each person has to decide for himself or herself what strategy to follow.
Rob
“It is certainly so that the last 14 years did not work out as i thought they would.”
And that is why those that followed buy and hold are more prepared for retirement vs the VII investor. You portfolio reflects what happened versus what you wished had happened.
Having a bunch of irrational exuberance in your portfolio and treating it as something of financial significance does not prepare you for retirement. It is a delusion.
It is irrational exuberance that is the product of a wish. It is research-based strategies that are based on what really happened.
Rob
The buy and holder has the money in his portfolio. The VII investor does not. I would rather be the one with the money vs the one that is just hoping to get some money.
The Buy-and-Holder does NOT have the money in his portfolio. That’s the entire point of Shiller’s research. That’s why the subtitle of his book describes his work as “revolutionary.” The Buy-and-Holder has irrational exuberance in his portfolio. Irrational exuberance is not real, lasting money. It is pretend, temporary money. Not the same thing at all.
It is important to know how much money you actually have. To do that, you must make an adjustment to the number on your stock portfolio to adjust for the effect of irrational exuberance. Whether or not one makes that adjustment determines whether he is a Buy-and-Holder or a Valuation-Informed Indexer.
Rob
Millions of portfolios show that you are wrong.
Today they do.
And the entire history of the market shows that today’s CAPE value needs to be taken into consideration to know what those portfolios will show tomorrow.
Irrational exuberance is real. Acting together as a society we can rein it in. Not one of us has the power to do that acting alone. This is a group project. This is why we need to feel free to talk about what the research shows, Learning the realities of stock investing is empowering.
Rob
No, it doesn’t.
Okay.