I’ve posted Entry #552 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called When We Reject Market Timing, We Are Rejecting Rationality.
Juicy Excerpt: Most of us don’t want to do that. We want to pretend that bull market prices are real. It would be to our benefit to identify our likely long-term return before we made stock purchases. But doing that would shatter the illusion that overpriced stocks are as valuable as fairly priced stocks or underpriced stocks. The illusion has more appeal to us than the information that would permit us to invest in stocks in an intelligent way. Stock investors are wary of rationality! Rationality is the enemy of illusion and stock investors cherish bull market illusions.
The market is dropping again today, Rob. Notice that no one ever blames buy and hold as the reason for the drop. It is because buy and hold is not a big part of the market. Without being able to blame buy and hold, how do you expect to ever get your $500 million payment? At this point, you probably couldn’t even get 5 cents.
I blame Buy-and-Hold.
Any time the CAPE value is above 16, the long-term pull on the CAPE value is downward. Today, the CAPE value is far above 16. So the long-term downward pull is very strong.
There are always other factors in play. And, yes, you are right that that is what most of the commentary focuses on. I think that is a mistake. We have little control over those factors. In contrast, we have great control over the CAPE value. If we open the internet to honest posting re the peer-reviewed research, we can convince most investors to practice market timing (to go with lower stock allocations when prices are high). Once we all practice market timing, stock prices become self-regulating. High prices bring on low long-term return expectations, which bring on sales, which bring prices down to reasonable levels. Widespread promotion of market timing is the answer.
Buy-and-Hold is a HUGE part of the market. Today’s CAPE level is insane. And yet millions of investors are not practicing market timing even today. Huh? What the f? That would be impossible in a world without Buy-and-Hold. I mean, come on. Can you name one other market in which large numbers of market participants fail to practice price discipline? There isn’t one. This craziness is limited to one market that is very important to all of us. That’s because we once didn’t know how it worked, and when we did learn, we couldn’t bear to acknowledge the mistake we had made. So for 40 years we have been covering it up.
No, I can;t make five cents today. Again, that’s the fault of the Buy-and-Hold “idea” that market timing is not always required. If there were a rational case that could be made for the claim that market timing is not always required, the Buy-and-Holders would welcome challenges to their thinking and those with other points of view could make at least 5 cents. But when you advance claims that have zero support in the peer-reviewed literature, you have to shut down all challenges to your dogmas. That’s why we have seen the behavior that we have seen over the past 19 years.
The abusive stuff (especially the criminal stuff ) is desperation stuff, Anonymous. In a short-term sense, it keeps Buy-and-Hold going. But it reveals its weakness in a long-term sense. Not this boy, you know? I agree with Wade Pfau. “Yes, Virginia, Valuation-Informed Indexing works!”
We’ll see.
Rob
“No, I can;t make five cents today. ”
And you haven’t made anything for over 2 decades. Anyone in those circumstances MUST figure out what they are doing wrong as it is not a vast conspiracy.
I certainly don’t think it is a vast conspiracy. I find that idea a little bit silly. There are millions of people who invest in stocks.
It can’t be that I am wrong. Because the Greaney study is available on the internet. No matter how many times I look at it, it still lacks a valuation adjustment. So there is not a conspiracy. But there clearly is some sort of funny business going on.
If you are suggesting that it is my job to figure out the nature of that funny business and report on it, I agree with you. That’s my book. That’s what I write about in my columns at Value Walk.
The most concise way that I have found to state it are the three words that I use as the title of my book — Investing for Humans. Buy-and-Hold/the Efficient Market Theory/Modern Portfolio Theory is rooted in the idea that investors are 100 percent rational, that they act in their own self-interest. Shiller’s research shows that that is not so, that at times investors are highly irrational and self-destructive.
We very, very. very. very. very much do not want to acknowledge that. We want to believe that we are rational. We want to believe that the numbers on our portfolio statement are legitimate, that we don’t need to subtract 60 percent to identify the true and lasting value of our stock holdings. But, if Shiller’s Nobel-prize-winning research is legitimate research. we very much need to do that. We need to incorporate Shiller’s findings into our understanding of how stock investing works if our economic system and our political system are to survive. We need to give ourselves permission to calculate safe withdrawal rates accurately. It is important.
This is my sincere take, Anonymous.
My best and warmest wishes to you and yours.
Rob
If I tried to play professional baseball, but struck out every time over a 20 year period, do I blame it on a mass conspiracy by all the pitchers? Can I still expect to get wealthy as a professional player or should I get a real job?
I have never struck out once, Anonymous. Every time one of your Goons puts forward an abusive post, you are implicitly acknowledging that you haven’t had any more luck finding a valuation adjustment in the Greaney retirement study than I have.
Fair enough?
Rob
You have struck out every time. If not, you would not be banned and you would have support here on your website. Fans don’t attend games if all they see are strike outs.
If I had ever struck out, there never would have been a single Buy-and-Holder insisting on a single ban. They would have been thrilled to see someone who had challenged Buy-and-Hold strike out. They would want people to see that as often as possible. If I had ever struck out, the Buy-and-Holders would have OPPOSED the bans.
Rob
Baseball players who strike out every time are Banned (fired) from the team. Notice how no one wants you on their team. Teams want successful players.
Players who hit line drives every time they came to the plate would be banned if it were the players on the opposing team who voted on the matter. The problem that we have in the investment advice realm is that Buy-and-Hold came first and an entire industry was built around the promotion of it before Shiller came along with his Nobel-prize-winning research showing us all for the first time in history how stock investing works. So it is Buy-and-Holders who are in positions of authority. It is Buy-and-Holders who make decisions as to whether challenges to Buy-and-Hold should be permitted or not.
Those people have consciences. In the event that Shiller’s Nobel-prize-winning research is legitimate research, the next Buy-and-Hold Crisis will be causing an ocean of human misery. If all of that human suffering touches the consciences of the people who today are not permitting challenges to the Buy-and-Hold dogmas, we will see a break in the wall. Lots of people will be watching for that. There are millions of investors who would like to see honest posting and there is a lot of money to be made serving those people. So, once we see a break in the wall, the entire wall may collapse in not too much more time. That is what I am expecting to see take place.
Time will tell the truth. Ir Shiller’s Nobel-prize-winning research is legitimate research, the 40-year cover-up is going to do great harm to us all in coming days. If we are as good a people as I believe us to be, we are going to bring the 40-year cover-up to an end and live far better and richer lives from that point forward.
My sincere take.
Rob
“ Players who hit line drives every time they came to the plate would be banned if it were the players on the opposing team who voted on the matter. ”
Why would people that strike out (broke guys)be able to tell those players that know how to hit the ball (people with money), that whey can no longer play because they always got hits?
That’s what happens with Get Rich Quick approaches.
There were people who told the people invested in the Madoff fund that they were making a mistake. They said the same thing that you are saying: Hey, I’m making money here!”
Rob
So the people that strike out somehow think that those players that get all the hits must somehow be cheating and then they call them names and hope they fail in order to feel better.
There was a time when many people thought that slavery should continue forever. Entering a Civil War was not the first thing that those on the other side of the table tried to bring about change. They turned to that option only when everything short of that failed. The change had to take place. There was no getting around it.
There are millions of people today who need access to honest, accurate, research-based investment advice. There is no getting around it.It obviously would have been better had we opened the entire internet to honest posting on the afternoon of May 13, 2002. Then we all would have enjoyed an amazing learning experience over the past 19 years and would be looking forward to living richer and better and more fulfilling lives from this point forward. That’s not the way things played out. I am 100 percent confident that, if we could push a button to go back in time, you Goons would play it differently the second time around. But none of us have access to a time-travel button. we all need to make the best of the cards that were dealt to us.
Rob
There was a time when Coca Cola thought they needed a new Coke. Turns out, they didn’t. Change is only good when it is needed. Why would anyone change when what they have has always worked and then take on some new and unproven way of doing something? There is always some scam artist trying to peddle some scheme and use scare tactics to try and trick people. In the end, these scam artists getter banned and/or ignored.
Get Rich Quick/Buy-and-Hold hasn’t always worked.
We had a near depression in the early years of the 20th Century caused by high stock prices. That hurt a lot of people. That’s not working.
We had an actual depression in 1929 caused by high stock prices. That hurt a lot of people. That’s not working.
We had stagflation in the 1970s caused by high stock prices. That hurt a lot of people. That’s not working.
We had a scary economic crisis in 2008 caused by high stock prices. That hurt a lot of people. That’s not working.
We need to move on. We need to open every site on the internet to honest discussion of the last 40 years of peer-reviewed research in this field.
My sincere take.
Rob
Buy and hold, by definition, is the opposite of get rich quick. Further, history shows us that you do not understand the causes of each stock market drop. Anyone that has taken basic economics classes would laugh at your comments.
It depends on whether or not irrational exuberance is a real thing. If irrational exuberance is a real thing, then risk is obviously greater when irrational exuberance is high. Buy-and-Holders do not adjust their stock allocations in response to the increased risk. They treat the irrational exuberance gains the same as they do the gains that are rooted in economic realities. Nothing could be more Get Rich Quick than that.
A lot of the standard economics textbooks do not focus on Behavioral Finance. It is the flawed ideas at the core of Modern Portfolio Theory that are causing all the problems. That’s why it has been so hard to make progress despite the mountain of evidence showing that there is precisely zero chance that a pure Get Rich Quick/Buy-and-Hold approach could ever work for a single long-term investor. We need to update our understanding of how economics works to reflect the findings of Behavioral Finance (that’s the school of economics to which Shiller belongs).
Rob
“ A lot of the standard economics textbooks do not focus on Behavioral Finance.”
Wrong. Many talk about it. One example is with Bernstein. He speaks about the person in the mirror getting emotional and trying to time the market and how it never works. It is just like the emotional person that can’t handle th3 stress of a job, so they up and quit instead of sticking with it.
Bernstein wrote in his book that high valuations caused the 4 percent rule to be off by two percentage points at the top of the bubble. I pointed that out to Greaney in May of 2002. He responded by threatening to murder my loved ones. You Goons cheered him on.
That’s the problem. Had Greaney corrected the error in his study in May 2002, he would not be today looking forward to a long prison term. We all would have enjoyed an amazing learning experience over the past 19 years. And the CAPE value would not today be in the mid-30s.
Rob