Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
“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
Why should you dictate the price of stock? Price is always determined by what someone is willing to pay.
If honest posting re the last 40 years of peer-reviewed research is permitted, that is going to change what people are willing to pay. People want to act in their self-interest. Permit them access to the information they need to do so and you are going to see a change in prices. It is not me dictating the price. It is investors doing so.
Doing something about fraud would help us all. Whoever would have thought it?
Rob
What specific information is missing from the internet?
Answer: none
I haven’t seen honest posting banned anywhere else but here. Perhaps you can give us examples of what you are talking about.
I haven’t seen honest posting banned anywhere else but here. Perhaps you can give us examples of what you are talking about.
Every comment you put forward illustrate the problem. Not every comment you put forward contains a death threat. Some do, some don’t. But every comment contains a hostile tone. That is the issue.
If Buy-and-Hold were a real thing, Buy-and-Holders would not be hostile to the idea of hearing challenges to their beliefs about how stock investing works. The hostility shows that Shiller was right — investing is not a 100 percent rational endeavor but a highly emotional endeavor.
That changes everything. Absolutely everything.
One thing that it changes is that, in a world in which investors are highly emotional, the safe withdrawal rate is not a single number but a number that changes from time to time depending on how emotional investors are at the various times. Shiller gave us the tool (CAPE) that permits us to distinguish the highly emotional times from the less emotional times. And of course identifying the risky times helps us to reduce risk. Once we know that it is there, we can tell people about it and people can then do something about it and then it is not there (at least not as much) anymore.
The job of an investment adviser is to help people cope with stock investing rusk. One does that through market timing. Market timing lowers risk by not permitting irrational exuberance to get out of control. Buy-and-Hold pushes risk to the highest possible level by encouraging investors to ignore it.
Your hostility is the story, Anonymous. The biggest reason why you don’t see people posting here, even anonymously, is that it embarrasses people to confront you re your emotional approach to stock investing. When people point out how emotional you are, they are not just saying something negative about you. They are saying something negative about all human beings. You did not personally pull the CAPE value into the 30s. We ALL did that as a people. When I say that today’s CAPE value is insane, I am saying that the humans are insane. And they are. Those same humans drink themselves to death and gamble themselves into poverty and racism themselves into deep social conflicts. And on and on.
But all is not lost! Those same humans also go to AA and overcome their drinking problems and make Shiller’s book a best-seller and award him a Nobel prize and express a desire on discussion boards that Rob Bennett be permitted to post honestly. We humans are screwed up and wonderful, both at the same time.
I think that we are going to pull together and overcome your hostility once we see how much human misery we end up causing with our screwed-up-ness. That’s what I sincerely believe. But we are just going to have to be a bit patient in letting things play out before us to find out for sure.
Grrrr….
My best wishes to you, dear Goon friend.
Rob
What specific information is missing from the internet?
Answer: none
There is lots of information missing from the internet. All of the discussions of why Buy-and-Hold is such a dangerous investing strategy, all of the discussions of why market timing is the key to long-term investing success are mssing.
I put forward my famous post pointing out the error in the retirement study posted at John Greaney’s web site on the morning of May 13, 2002. The Retire Early board exploded when I advanced that post. There were lots of posts thanking me for starting the post exciting discussion in the history of the board. And there were lots of posts saying that I must have forgotten to take my meds. That post put both sides in an uproar.
Why?
I didn’t say anything that a person with an average I.Q. could not have figured out on their own. I pointed out that the Greaney study lacked an adjustment for the valuation level that applied on the day the retirement began. Why would that cause a commotion?
There are two reasons.
One, it is an obviously important point. A seven-year-old understands that you cannot calculate the safe withdrawal rate without taking valuations into account.
And, two. it was a point with far-reaching implications. If the Buy-and-Holders got the safe withdrawal rate wrong, then why else did they get wrong? The answer is — everything. If the safe withdrawal rate was only 1.6 in January 2000, then stocks were not a good buy in January 2000. But everybody on that board had been buying stocks in January 2000. If all of those people were going to accept what I was saying in that post, then they had to accept that they made a mistake to continue buying stocks to the same extent in January 2000. That hurts. Who wants to make a mistake with their retirement money?
So I made a point that was obviously true and that was very hurtful to lots of people.
Which is what Shiller did. For 40 years now, we have as a society been stumbling around with the question of to what extent are we going to let Shiller’s breakthrough findings about how stock investing works penetrate our consciousness. I am saying that we should let them in. Some others are saying, no, that’s too painful, no can do.
That’s the story. Will out decision as a society change when prices fall hard? I believe so. But there is only one way to find out for sure. None of us can see into the future. None of us can say with 100 percent certainty how it will go.
But I believe that there is a lot of information re stock investing lacking from the internet today. I am doing what I can to fill the gap.
When the gap is filled, prices will change. It is what people believe about stocks that determines the price for which stocks sell. I have something different to say about how stock investing works from what my Buy-and-Hold friends have been saying for years now. When my information is available at every site on the internet, the CAPE value will no longer be in the mid-30s. It’s a physical impossibility. In a world in which honest posting re the peer-reviewed research is permitted, there can never be a CAPE value in the mid-30s.
Rob