I’ve posted Entry #573 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called More of the Money We Earn Is Used to Buy Stocks Than Anything Else.
Juicy Excerpt: Our lack of confidence in our understanding of how the stock market works is not an accident. We don’t want to know. In one sense, we do. We know that it is important to know and we do not want to make mistakes with our retirement money. But knowledge of how the market works would make it much harder for us to fool ourselves to the extent we need to to keep a bull market going for long. So we comment ruefully about our lack of knowledge while suppressing any inclination to dig down deep and figure out what is really going on when trillions of dollars of wealth go “poof!” in a price crash.
Another article shows once again that buy and hold has always worked and lowers risk versus timing schemes:
https://www.fool.com/investing/2021/11/17/how-to-turn-30000-into-over-500000-with-almost-no/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article
Juicy excerpt: “ In fact, if you had put your money into the S&P fund at any point and left it alone for at least 20 years, you would have turned a profit no matter how poor your timing was for your initial investment.”
I like the article. It’s the points made in this article that persuaded me to become a Buy-and-Holder a good number of years back.
But it’s not realistic. Look at that statement that you advanced as your juicy excerpt. The numbers show that the investor does well if he leaves his money in for 20 years. `Today’s CAPE value is 40. At the end of a bull/bear cycle, we usually see the CAPE value fall to 8. That’s a loss of 80 percent. Say that a guy is near retirement age and he has a portfolio value of $1,000,000. But he loses $800,000 in the next price crash. What do you think that the chances are that that fellow is going to stick with his high stock allocation after losing $800,000? It’s not going to happen.
Please think about this. The CAPE value could never even get to 8 if the vast majority of investors did not lower their stock allocations. It’s the selling that brings the price down. A CAPE of 8 is insane, just as insane on the low side as a CAPE of 40 is on the high side. It is the Buy-and-Hold “strategy” the encourages such insanity, that makes such crazy CAPE values inevitable both on the high side and on the low side.
Now please consider how Valuation-Informed Indexing solves this problem. The Buy-and-Holders have an injunction that I like a lot — “Stat the Course!” If only they really believed in it! In a world in which valuations affect long-term returns — the world in which we happen to live — stock investing risk is not constant but variable. So the investor who wants to Stay the Course in a meaningful way MUST practice valuation-based market timing to do so. Investors who fail to engage in market timing are letting their risk profile jump all over the place for no good reason.
So the Valuation-Informed Indexer has a very different reaction when the bull market ends and the bear market begins. He is not shocked that his imaginary gains — the irrational exuberance that the Buy-and-Holders treated as real — disappeared into thin air. He was expecting that to happen and he adjusted his stock allocation as necessary to keep his risk profile constant over time. And he is not bummed up that stock prices are now lower. He knows from his reading of the last 40 years of peer-reviewed research in this field that lower stock prices translate into higher stock returns on a going-forward basis. So he is not freaked out. He doesn’t suffer devastating losses. He doesn’t lower his stock allocation at the worst possible time for doing so. He obtain much higher lifetime returns, as shown in the peer-reviewed research co-authored by Wade Pfau and Rob Bennett.
There’s a lot that is good in Buy-and-Hold. That’s why I incorporated everything in Buy-and-Hold except for the one horribly mistaken idea that market timing is not always require into the Valuation-Informed Indexing concept. I think that it would be fair to say that the stuff described in that article is 35 percent of what is needed to be a successful long-term stock investor. There’s one element missing — market timing. Valuation-Informed Indexing adds that critical element, which is 65 percent of the story. It does you no good to get a lot of stuff right if you make a critical mistake that causes the entire strategy to collapse. Valuation-Informed Indexing fixes the thing that the Buy-and-Holders got wrong. We don’t discourage market timing, we encourage it! Valuation-Informed Indexing is the approach to Buy-and-Hold that actually works in the real world!
That’s Rob Bennett’s sincere take re this terribly important matter, in any event.
My best and warmest wishes to you and yours, dear Goon friend.
Rob
Why doesn’t it bother you that you never say anything new? What you do can easily be replaced by a bot. Maybe it already has. Greaney suggested as much earlier this year. From now on you will be addressed as Rob-bot.
There’s no need to say anything new. The point that I have made repeatedly since the morning of May 13, 2002 — that we need to open every discussion board and blog to honest discussion of Shiller’s amazing Nobel-prize-winning research findings — is the most important public policy issue before our nation today. If irrational exuberance is a real thing, Shiller’s discovery of it is the most important advance in the history of personal finance.
The Buy-and-Holders do not account for irrational exuberance (they developed the Buy-and-Hold concept in the days before Shiller published his amazing research). That means that every calculation they have ever done has been in error (you can’t leave out an important factor and get any calculations right). Going from getting every calculation wrong to getting every calculation right is a big advance.
We have the opportunity before us for us all to begin living better and freer and richer lives just by working up the courage to say the words “I” and “Was” and “Wrong.” And. once the entire internet is opened to honest posting re the past 40 years of research, we will have thousands of people participating in the effort to build the first true research-based model for understanding how stock investing works.
If I am successful in my effort to open every site to honest posting re the last 40 years of research, I will have done more good for the world than I could have reasonably expected to accomplish in 50 lifetimes. So it is my intent just to keep my eyes on the prize. I repeat one point over and over and over again because it is a very, very, very important. Irrational exuberance exists. It is real. It is not possible to make any accurate statement about how stock investing works without coming to terms with Shiller’s Nobel-prize-winning findings.
My claim that we need to open every discussion board and blog on the internet to honest posting re the last 40 years of peer-reviewed research cannot repeated often enough. This one issue is more important than all other investment-related issues put together.
My sincere take.
And my best and warmest wishes to you.
Rob
“the most important public policy issue before our nation today”
And you’ve convinced exactly zero people of that after nearly 20 years. So either everyone on earth is blindingly stupid, or Rob-bot needs some new code.
I’ve convinced thousands that there is enough to the Valuation-Informed Indexing concept that they would like to hear more. That’s why you engaged in criminal behavior to stop the idea from taking over the entire internet. The concept is so strong that you feel incredibly threatened by it. You never would have behaved the way you did otherwise. The behavior of you Goons (along with lots of other things) tell me that I have a tiger by the tale.
We’ll see,, you know?
I naturally wish you all the best that this life has to offer a person, in any event.
Rob
“There’s no need to say anything new. The point that I have made repeatedly since the morning of May 13, 2002 — that we need to open every discussion board and blog to honest discussion of Shiller’s amazing Nobel-prize-winning research findings — is the most important public policy issue before our nation today. If irrational exuberance is a real thing, Shiller’s discovery of it is the most important advance in the history of personal finance.”
The problem you have is that you just ignore everything that others have said and ignore the facts put before you. As such, people eventually grow tired of the repetition and then either block you or ignore you. When someone posts something you don’t like, you just delete it or block it and then things never change.
In the entire 19 years, no one has advanced anything showing that Greaney included a valuation adjustment in the retirement study posted at his web site.
Rob