Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Warren Buffett: “The best thing that can happen from Berkshire’s standpoint … over time is to have markets that go down a tremendous amount,” he said. “We are going to be buyers of things over time. And if you’re going to be buyers of groceries over time, you like grocery prices to go down. … What we fear is an irrational bull market that’s sustained for some long period of time.”
That’s Valuation-Informed Indexing. That’s the concept in a nutshell.
Rob
Warren Buffet’s favorite holding period is “forever” and suggests buying the S&P 500 and holding it. He is one of the biggest buy and holder proponent.
Buffett has indeed said those things and I rank Buffett as my third favorite investment expert of all time (after Shiller and Bogle). So I think that people should give serious consideration to those words of Buffett.
I also think that, if we opened the entire internet to honest posting re the past 40 years of peer-reviewed research, Buffet would endorse Valuation-Informed Indexing. VII is much more in tune with the logic behind Buffett’s statements than is Buy-and-Hold as it is today practiced by most Buy-and-Holders.
There are two reasons.
One, Buffett picks individual stocks after devoting a great deal of effort to picking the right stocks. That’s the ideal, in my view. When you pick the right stocks, you don’t need to worry about the short-term noise. Your stocks are going to do well over the long term, and most importantly, you possess personal knowledge of WHY they are going to do well — so you have the confidence you need to stick to your plan.
The problem with that approach (in my assessment) is that it takes an amount of talent and energy not possessed by the ordinary investor. To invest effectively like Buffett invests is a full-time job. I greatly prefer the Bogle approach, which is to invest in a broad index fund. And Buffett hinself advises this for the ordinary investor. Index funds are a godsend, in my assessment. One of my catch phrases is that Bogle and Buffett go together like chocolate and peanut butter. Buffett is right that the investor needs to consider the value of the shares he purchases (the reason why he does so much research is to identify value) and Bogle was right that it is not realistic to expect the ordinary investor to be able to do that amount of research and thus index funds are the better choice.
Stocks are today priced for a 60 percent loss of value. A Buffett investor (someone who picks individual stocks intelligently) will not be hurt to the same extent as a Bogle investor. A Buffett investor might see a 30 percent loss of value because his stocks are superior to the average stocks purchased by a Bogle investor. The purpose of Valuation-Informed Indexing is to bring the Bogle investor up to the level of the Buffett investor. By lowering his stock allocation at times of insane prices, the VII investor diminishes the losses suffered at times of insane prices and thereby insures that he will receive lifetime returns somewhat in line with those enjoyed by the Buffett investor (probably not quite as good but as close as one can get without making investment research one’s full-time job).
Buffett’s catch phrase that his favorite holding period is forever reminds me of the Bogle catch phrase to “stay the course.” If the market were efficient, as was believed to be the case at the time Buy-and-Hold was being developed, the best way to Stay the Course would have been to stick with the same stock allocation at all times (to avoid market timing). Of course, Shiller added a critically important piece to the puzzle when he showed with his Nobel-prize-winning research in 1981 that the market is NOT efficient, that in fact valuations affect long-term returns. So the reality is that the investor who failed to engage in market timing when prices get to the levels where they reside today is FAILING to Stay the Course. He is drifting off course by permitting his risk profile to go wildly out of whack for no good reason. To Stay the Course in a meaningful way, investors MUST engage in market timing with the aim of keeping their risk profile roughly constant over time.
Benjamin Graham, who was Buffett’s mentor, was the first Valuation-Informed Indexer. He advised investors to change their stock allocation from 25 percent stocks to 50 percent stocks to 75 percent stocks, depending on valuations. That’s the VII concept. I am highly confident that Buffett would endorse Valuation-Informed Indexing if we elected to bury all the nasty criminal stuff 30 feet in the ground, where it could do no more harm to humans and other living things, and launched the national debate re the far-reaching implications of Shiller’s amazing research findings that we should have launched 40 years ago.
Sticking with the same risk profile at all times is what Buffett really favors. For indexers, that requires market timing.
My sincere take.
And my best and warmest wishes to you, Anonymous.
Rob
There is an interesting SWR article on Morningstar today.
https://www.morningstar.com/articles/1066569/whats-a-safe-retirement-spending-rate-for-the-decades-ahead
I like that article a lot.
It gets into numerous factors that were ignored during the time when Buy-and-Hold dogmatists were arguing that there is only one safe withdrawal rate that applies for all investors are all times. The retiree can change the safe withdrawal rate that applies for him by being willing to reduce spending if his preferred rate does not produce good results for a number or years or by being willing to take on part-time employment or by being willing to leave a smaller amount to heirs than he would prefer. Effective retirement planning requires that one be willing to take a look at all of these factors. And of course the valuation level that applies on the day the retirement begins must be considered as well — this article acknowledges that.
I wish that this article had been published on the afternoon of May 13, 2002. A lot of discussion board and blog communities that have been burned to the ground by Lindauerheads and Greany Goons would still be around. And we would all be learning from the powerful insights generated during those discussions. We would all be living better and freer and more fulfilling lives. Moving past the dogmatism of earlier days would yield all good stuff and zero downside.
I view the publication of this article as a highly encouraging sign. Now we just need to see a few brave people take the ball and run with it into the end zone.
My best wishes to you, Evidence.
Rob
Gee Rob. You must be right because you have such a massive investment portfolio and you are keynote speaker at every key investment meeting. Just look at all the comments your followers post on this board. How do you ever keep up with such a volume? I guess managing that big pile of money, keeping up with all those speaking engagement and responding to all your fans leaves you no time to go out and get a job.
I posted honestly re what the past 40 years of peer-reviewed research teaches us all about how to calculate the safe withdrawal rate, Anonymous. That’s worth something.
A bull market is a liar’s market. During a bull market, we all get together and say “I’ll pretend that stocks are worth such and such if you will pretend too but we all have to agree to slam anyone who dares to cross us by posting real numbers.” There is a price to be paid for telling the truth about stock investing during an insane bull market and I have paid that price. So be it, you know?
I believe that the day is coming when we will permit honest posting re the past 40 years of research at every discussion board and blog on the internet, without a single exception. I don’t think that we have any choice but to go there. The effects of not going there will just be too horrible, in the event that stocks continue to perform in the future at least somewhat as they always have in the past.
The core dispute is — Are stock investors 100 percent rational or are they at times highly emotional? All that we have seen from the Buy-and-Holders for 19 years now is an insane level of emotion. what does that tell us re the question of whether Shiller is right or not? You know what I think it tells us.
I did right by my fellow community members. That means something to me. So that’s what I did. If Buy-and-Hold were a real thing, no one would be pressured to pretend that they believe in it. If Buy-and-Hold were a real thing, the Buy-and-Holders would want people who had doubts about it to express their honest views so that they could hear those challenges and address them.
That’s my sincere take re these terribly important matters, in any event.
I naturally wish you all the best that this life has to offer a person.
Rob
“I posted honestly re what the past 40 years of peer-reviewed research teaches us all about how to calculate the safe withdrawal rate, Anonymous. That’s worth something.”
No you don’t. You merely give your opinion of what one guy said and then you repeat it over and over and over and over again. You have said everything thousands of times and everyone has given you the same responses. Time for you to get on with your life and actually do something for a change.
Everyone has not given me the same responses. You Goons have given the same responses thousands of times. But you are not everyone and you do not speak for everyone. 10 percent of the members of all the communities I have spoken to have shown great interest in what I have to say and have expressed a desire to hear more.
Those people have a right to hear what they want to hear. 10 percent of all investors is millions of people. Those millions need to hear the side of the investing story that they have not been able to hear for 40 years now. The normal way to handle things is that a national debate on these matters would have been launched soon after Shiller published his Nobel-prize-winning research. If things had gone that way, no one would have even been surprised when I said that its not possible to calculate the safe withdrawal rate without taking valuations into consideration. They would have just said: “Oh, he must believe that Shiller’s Nobel-prize-winning research is legitimate research.”
We need to as a society figure out how to get things back to where they should have been all along. We need to get to a point where everyone understands that there are two academic models for understanding how stock investing works, not one, and that there is not a thing odd about people wanting to talk about Valuation-Informed Indexing in the same way that other people talk about Buy-and-Hold. Shiller’s research exists. So people should be able to talk about it at every discussion board and blog on the internet, without a single exception.
That’s where I am coming from, in any event, Anonymous. If I have said that Greaney got the number wrong in his retirement study thousands of times, you have said that he did not get it wrong thousands of times. It all comes down to whether or not you believe that Shiller’s Nobel-prize-winning research is legitimate research.
My sincere take.
Rob
“ 10 percent of the members of all the communities I have spoken to have shown great interest in what I have to say and have expressed a desire to hear more”
Yet you can’t get one person to post anonymously her in support of you.
But if we opened every discussion board and blog on the internet to honest posting re the past 40 years of peer-reviewed research, I would have thousands and thousands and thousands, with more joining in every day. I can live with that. Playing that way would be applying the same laws that apply in every field other than the investment advice field to the investment advice field as well. Playing it that would be good for everyone. The laws that apply in every field other than the investment advice field are good and important and necessary laws.
My sincere take.
Rob