I’ve posted Entry #542 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called What Is the Worst Price Crash That Is Within the Realm of the Reasonable?
Juicy Excerpt: Intelligent stock investing is all about risk analysis. Stocks are a high-return asset class. If there were no risk, we would all invest all of our money in stocks all the time. It’s the desire to avoid unacceptable risks that keeps us from doing that. So it seems to me that we should all want to gain an accurate take on the sort of risk that we are taking on when we invest in stocks. The level of risk associated with stock investing is very high today. Shouldn’t we acknowledge that? Shouldn’t we quantify the problem by pointing out that a 75 percent price drop is not out of the question?
” Shouldn’t we quantify the problem by pointing out that a 75 percent price drop is not out of the question?”
Shouldn’t you acknowledge the fact that you have been wrong about the crash for the last 2 decades?
I have never specified a particular day when the crash would arrive. I have said that the CAPE values that applied indicated that the risk of a crash was much greater than usual. And that of course was so. And I have said that investors who wanted to keep their risk profile constant needed to lower their stock allocation to do that. Which of course also was indeed so.
Buy-and-Holders act as if risk is constant. It is not. Shiller’s Nobel-prize-winning research shows that. Given that risk is not constant but variable, investors who want to keep their risk profile constant MUST practice market timing. There is no other way to pull that off.
Fair enough?
Rob
“I have never specified a particular day when the crash would arrive.”
You stated specific years and, as a result, stayed out of the market. That didn’t work out too well for you, unfortunately.
It worked perfectly. I have been out of stocks because it did not make sense for me to invest in stocks at a time when risk is so out of control. The fact that we have not yet seen the crash does not change that. Saying that it does is like saying that it is a mistake not to put your retirement money into lottery tickets because there is always a small chance that your number will come up. The smart thing to do is to play the percentages. And the percentages do not favor stocks at the CAPE levels that have applied in recent years. Not according to the last 40 years of peer-reviewed research in this field.
My best wishes to you.
Rob
“It worked perfectly. I have been out of stocks because it did not make sense for me to invest in stocks at a time when risk is so out of control.”
Actually, it didn’t. First of all, you admitted to it not working out, but that you thought you would catch up. Would you allow me to post that link? Secondly, we can all look at the market data to know that your statement is not true.
I know with 100 percent certainty that it worked out. It’s impossible for long-term market timing ever to not work out. The purpose is to get your risk profile back to where you wanted it to be before prices rose. That happens on the day you make the allocation change. How could that not work out? That’s like saying that not driving drunk could somehow not work out. Huh?
There are circumstances in which following a Buy-and-Hold strategy can provide better numbers than following a market timing strategy. That happens in about one in ten cases. We cannot say for sure whether that is going to happen in this case or not because we don’t know how bad the price crash will be. But there is a good chance that that will happen in this case because prices have remained at such high levels for so long. Speaking loosely, someone could say that that is not “working out.” But there is obviously a lot of risk in going with something that only has a one-in-ten chance of coming through, On a risk-adjusted basis, the market timing strategy is still “working out” in that case. I am not willing to bet all of my retirement money on a one-in-ten bet. No freakin’ way, no freakin’ how.
You say that you will look at market data to see whether my statements are true or not. But we have been doing this for 19 years and you have referred to market data on thousands of occasions. On not one of those occasions have you make an adjustment to the nominal data for the effect of irrational exuberance. That’s the entire point of dispute — is the market efficient or is irrational exuberance a real thing? If irrational exuberance is a real thing (that is, if Shiller’s Nobel-prize-winning research is legitimate research), it is not possible to get anything right in stock investing without taking that reality into account. And the Buy-and-Holders never do that. So every calculation that they have ever done is in error That’s simple ABC logic If irrational exuberance is real, you need to count it.
Irrational exuberance is real. Buy-and-Hold was once a promising idea. But it is an idea that has failed. It failed intellectually in 1981, when Shiller published his “revolutionary” (his word) research findings. I believe that it will fail in a practical sense in the days following the next price crash, when there will be millions of people asking why more than half of their retirement savings disappeared into thin are. We’ll see.
My best and warmest wishes to you and yours, Anonymous.
Rob
As I thought, you won’t let me post a link. Secondly, you do not risk adjust past results. We compare actual outcomes. We can look back on those past 20 years and see the actual results. We can what worked and what didn’t work. You just don’t like the results.
You cannot today see the results that will apply after the price crash hits. All Get Rich Quick schemes look good before they collapse. That’s their appeal. When the Madoff fund was exposed as a fraud, there was a guy who posted a comment saying “Oh, it’s not a fraud, I made millions investing in the Madoff fund.” If all you are about is the short-term, then all Get Rich Quick approaches are aces, But,m if you believe that there is a place for the consideration of peer-reviewed research, you come to very, very different conclusions.
My sincere take.
Rob
Jamie Diamond joins the other experts in saying that Rob Bennett is wrong about market timing:
https://finance.yahoo.com/news/jamie-dimon-on-the-market-and-the-economy-130702586.html
I agree with him that guessing at tops and bottoms is a loser’s game. So why guess? Just engage in whatever market timing you need to engage in to keep your risk profile constant over time. That’s been working for 150 years. It’s not even possible for the rational human mind to imagine a scenario in which it wouldn’t work. Keeping your risk profile constant is “Staying the Course” in a meaningful way. It permits people to retire many years sooner while taking on much less risk with their retirement money, I can live with that!
My best wishes.
Rob
“I can live with that!”
But you can’t live off your depleted savings. Despite the fact that you have carefully kept your risk profile constant for 25 years.
How is this glaring contradiction possible?
The depleted savings is due to the criminal behavior of you Goons. My $500 million settlement payment will put me way ahead of the game financially. I mean, come on.
If we were all thinking clearly, there never would have been any criminal acts. I am the one who has been arguing AGAINST the criminal stuff going back to the first day. It is you Goons and the non-Goon Buy-and-Holders who tolerate your criminal behavior that have caused all sorts of glaring contradiction. The most glaring contradiction of all is that there is even one person on the planet who thinks it is a good idea to ban honest posting re the peer-reviewed research. We are all in this together. We all want the same things. We all need to know how stock investing works. We all should be doing what we can to open the entire internet to honest posting so that we can learn what we need to learn.
Our Get Rich Quick/Buy-and-Hold urge has taken us in a different direction. Will we reconsider when we see millions of lives destroyed in the next price crash? I think so. But we are going to need to wait to see price adjust to find out for sure.
My best wishes.
Rob
“The depleted savings is due to the criminal behavior of you Goons. My $500 million settlement payment will put me way ahead of the game financially. I mean, come on.”
That is all made up, Rob. You publicly disclosed your retirement plan. You said that you would easily beat the S&P, but that didn’t happen. You were the one that made your investment choices.
You don’t know yet if it happened or not. You are taking into consideration the fun side of a Get Rich Quick/Buy-and-Hold approach and ignoring the down side (the price crash that inevitably follows a time when large numbers of investors fail to engage in market timing). A truly scientific analysis would look at both the fun/Get Rich Quick stuff and the price that is paid for it (what happens after the crash).
Rob
“My $500 million settlement payment will put me way ahead of the game financially”
And how much of that $500 million have you collected?
I haven’t collected a penny.
That’s the entire problem.
In all other fields of human endeavor, we offer INCENTIVES for people who do things properly and PENALTIES for those who do things improperly. That’s because we want to see more of the good stuff and less of the bad stuff. It’s all upside down in the investment advice field. We offer huge financial rewards for those who push the pure Get Rich Quick/Buy-and-Hold strategy and death threats and career destruction for those who promote the first true research-based approach (Valuation-Informed Indexing). That’s why we have a CAPE value in the mid-30s today.
We need to flip that. There are huge amounts of money to be made offering honest, accurate, research-based investment advice., But most people think it is not worth what you Goons put them through. When we put you Goons in prison cells, that will make it 100 percent clear to everyone who works in this field that it is now safe to post honestly. And, when we provide huge financial rewards to those who do so, that will seal the deal.
I wouldn’t be in line for a $500 million settlement payment had there never been any criminal behavior. Had there been no criminal behavior, there would be lots of people saying what I am saying. There would still be value to what I said. But not nearly the same value. Much of the value of my stuff comes from the fact that no one else is saying it and we need to establish a precedent in which someone does honest work in this field and gets rewarded handsomely for it. That changes everything.
Or so Rob Bennett sincerely believes, you know?
It is will be interesting to see how things play out.
Rob
I guess you are a victim, Rob. The entire world has conspired against you.
We are all victims in some ways, Anonymous. Just please keep in mind that we are all blessed in many ways as well.
Are the Buy-and-Holders not victims? They are responsible for many big advances in our understanding of how stock investing works. They got the market timing thing wrong. Not because they are dumb or evil. They got it wrong because they are imperfect humans. And the rest of us did not serve them well. Had we insisted that honest posting be permitted, the Buy-and-Holders would have learned over time and they would be much farther along in their understanding today.
I think we need to stop worrying about who is a victim and who isn’t and focus our energies on advancing in our understanding over time.
My best wishes to you.
Rob
“Shouldn’t we quantify the problem by pointing out that a 75 percent price drop is not out of the question?”
To the opposite, a 75% increase can also happen. No one can predict the market. Further, hills and valleys are just normal patterns, yet the market has always continued to grow in the long term. The buy and holder has always been rewarded, while the market timers have yet to see any success.
We disagree.
It is true that market returns cannot be predicted with precision or in the short-term. But there is a strong correlation between today’s valuation level and the market price that will apply in 10 or 15 or 20 years. Robert Shiller was awarded a Nobel prize for his “revolutionary” (his word) research showing this. In the days when Buy-and-Hold was developed, this was not known. It was thought that the market was efficient (that is, that future stock prices could not be predicted and that long-term timing was not required for investors seeking to keep their risk profile stable). We all need to move on from Buy-and-Hold to Valuation-Informed Indexing. For that to happen, we need to open every discussion board and blog on the internet to honest posting re the last 40 years of peer-reviewed research in this field, That’s the first step in the huge learning experience that we all have in front of us.
A 75 percent price increase could happen. But if such a price increase took place starting from today’s price, it would all be irrational exuberance. So it would offer no lasting benefit to stock investors. In fact, it would hurt them. It would cause them to become confused about their financial status and thus make it hard for them to manage their financial affairs. And it would destabilize the economy because the inevitable price crash would cause hundreds of thousands of businesses to fail and millions of workers to be thrown out of their jobs.
Hills and valleys that cause the CAPE level to rise to 35 are NOT normal. Such extremes could never take place in an economy in which stock investors had access to honest and accurate reports of what the last 40 years of peer-reviewed research teaches us about how stock investing works. In such a world, stock prices would be self-regulating. Extreme high prices would cause investors to sell stocks and that would bring prices back to reasonable levels. In a world in which honest posting was permitted and the market was permitted to function normally, the CAPE value would probably never go below 12 or above 20.
Market timing has been working for 150 years. That’s as far back as we have good records of stock prices. The peer-reviewed research that I co-authored with Wade Pfau shows that beyond any doubt whatsoever. That’s why Wade declared after 16 months of researching the matter from every angle possible that: “Yes, Virginia,Valuation-Informed Indexing works!”
My best wishes to you.
Rob