Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Many years ago, you were asked about when a crash would occur. Eventually, you said that if a crash did not happen by 2015, we should question timing and VII. It never occurred. Now we are 8 years after that point and it still hasn’t happened. This just illustrates the problem with market timing. While waiting around for a crash, the market timer watches their portfolio erode and then they have nothing left when they expect to benefit from a new cycle.
To the opposite, we have seen that the market ALWAYS returns after EVERY drop and goes on to new highs.
We are in 100 percent agreement that the market always returns after every drop and goes on to new highs, Anonymous. I don’t think that that justifies failing to engage in market timing/price discipline because you need to engage in market timing/price discipline to keep your risk profile constant as valuations change in a world in which valuations affect long-term returns (the world we live in, according to Robert Shiller’s Nobel-prize-winning research). But I certainly believe in your core point and I think it is an important point. This point is part of the reason why I do not advocate extreme allocation decisions (I say that investors should maintain a 30 percent stock allocation even when stock prices rise to crazy, scary highs, like what we see today).
The Bennett/Pfau research shows that this idea that engaging in price discipline will cause an investor’s portfolio value to erode over time is just a Buy-and-Hold myth. Wade Pfau and I looked at the history of stock price movements going back to 1870 and it has never yet happened. Market timing has always proven to be far superior to Buy-and-Hold over the long term. The evidence is so strong that Wade (who holds a Ph.D. in Economics) was amazed at what our research found. He told me that he kept asking himself: “Am I doing something wrong?” But, no, he wasn’t doing anything wrong. It was the people who came up with Buy-and-Hold who did something wrong by failing to distinguish short-term timing (which really doesn’t work) from long-term timing (which is really just price discipline and which thus of course always works and is always 100 percent required for investors who want to keep their risk profile stable over time).
Investors who are worried that they may “miss out” on some gains in the event that it takes longer for an overpriced market to crash than it ever has in the past can of course follow a Buy-and-Hold strategy if that sounds like a good idea to them. I have never objected to that and I have never heard any other Valuation-Informed Indexers object to that. What I object strongly to is the ban on honest posting re the last 41 years of peer-reviewed research, which means that investors do not get to hear both sides of the story when making their allocation decisions.
The ban on honest posting is a national scandal, in my personal assessment, the worst case of financial fraud in our nation’s history. It is proper that you decide on your own allocation. It is not even a tiny bit proper that you determine the allocation decisions of millions of others by engaging in absusive and in some cases criminal behavior to block them from learning what they need to learn to make informed decisions of their own. That makes you responible for the losses of millions of people (I am presuming here that stocks may continue in the future to perform something along the lines of how they have always performed in the past) and the collective losses are likely to be in the many trillions of dollars, far more than you Goons will be able to cover. Which means that the United States will be facing not just an economic crisis but a political crises as well. Not good.
My best and warmest wishes to you and yours, in any event.
Rob
The lack of “price discipline” has led to many, including me, see really nice gains while others, like you, who do have “price discipline” were wiped out. If as you claimed above the prices will always return after a crash then those of us who lack “price discipline” will be coming out ahead of Valuation Informed Indexers who were already wiped out before the crash!
I don’t know why you put the term “price discipline” within scare quotes. Price discipline is the entire story. In every market that has ever existed, price discipline is the thing that permits the market to function. Price discipline is absolutely essential. And the only way to exercise price discipline in the stock market is through market timing. That’s why market timing always works, as the Bennett/Pfau research shows.
You say that youb have enjoyed “nice gains.” But you didn’t subtract for irrational exuberance. So you don’t even know the amount of your real gains. How could you know if they were “nice” or not?
We do agree that prices will always return after a crash. So a Buy-and-Holder would indeed end up ahead of a Valuation-Informed Indexer if the Valuation-Informed Indexer were wiped out. But the Bennett/Pfau research shows that that doesn’t happen. Buy-and-Holders can certainly get ahead for a time when price are high. That almost always happens. But the Valuation-Informed Indexer suffers smaller losses in the crash. Then he has more money to invest in stocks at the time when stock prices are low and going-forward returns are off the charts. So in the long run he ends up ahead. Not by a small amount. In the usual case, he ends up ahead by hundreds of thousands of dollars over the course of an investing lifetime.
If you truly wanted to know the realities of this, you would have encouraged people to explore the Bennett/Pfau research at every site so that we all could learn more and more and more. Instead you thrratened to get Wade fired from his job if he continued to do honest work re these msatters. That shows where you are coming from. You don’t want people to see research that shows people that market timing/price discipline is required. That’s the source of the conflict. I want people to know the realites and you want people to continue living in the dark ages when it was widely believed that the market was efficient and market timing was not needed.
It’s always needed and we need to tell people that. To tell people, we need to open ever site to honest posting re the research.
Rob
So you are somehow better off with your zero balance versus sensible with his significant buy and hold balance? How is that working out for you at the grocery store?
There never should have been any abusive posting. There never should have been any criminal behavior. The way that we deal with situations like that in this country is that we file lawsuits against the abusive parties. When I receive my $500 million settlement payment, I will be set financially for many lifetimes. That shouldn’t have been necessary. There never should have been any abusive posting. Greaney should have just corrected his study within 24 hours of the moment when the error he made in it was brought to his attention. But we don’t live in a perfect world, you know? The fact that the work that I have done for the past 21 years has a market value in the hundreds of millions of dollars shows that Shiller’s Nobel-prize-winning research is good stuff. We all need to be obtaining benefits from it. For that to happen, we need to open every site to honest posting re the peer-reviewed research.
Why does this investing stuff have to be so hard?
Rob