Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
So if we need to talk about labeling people when we post, we should refer to you as delusional and a psychopath.
You should say what you believe, Anonymous.
I believe that the Greaney retirement study lacks a valuation adjustment and I believe that Shiller’s Nobel-prize-winning research showing that valuations affect long-term return is legitimate research. My views about short-term market timing (making guesses as to when prices will move up or down) are precisely the same as those of the Buy-and-Holders. I believe that the Buy-and-Holders made a mistake in thinking that long-term market timing also doesn’t work and isn’t required. At the time they made that call, Shiller’s research had not yet been published. So they took a shot on the dark. That shot in the dark turned out to be wrong. The best thing to do when you learn that you have made a mistake is to acknowledge it and move on with your life.
I encourage my Buy-and-Hold friends to acknowledge their mistake so that we can all get about the business of perfecting the first true research-based strategy, Valuation-Informed Indexing. Long-term market timing is price discipline. No market can survive without price discipline. We have suffered terribly several times in the past for our failure to exercise price discipline when buying stocks and I think that we should all be grateful that we now live at a time when bull markets and bear markets and economic crises are all optional becausse of what we have learned about how stock investing works in the real world from Shiller’s amazing Nobel-prize-winning research. We need to as a nation of people give ourselves permission to discuss that amazing, life-affirming research at every discussion board and blog on the internet, without a single exception.
You are going to behave as a Goon behaves regardless of what I say. So I have to accept that unfortunate behavior as a reality of life. What matters in the long-term is how the Normals (the 90 percent of the population that today follows a Buy-and-Hold strategy but that believes that every site should be opened to honest posting re the research) react to the next Buy-and-Hold Crisis, which today’s CAPE level suggest may be arriving within the next year or two or three. Those are the people I write for. Those people need to know how stock investing works and want to know how stock investing works. They are good people. They are smart people. They will suffer terribly in the next Buy-and-Hold Crisis, in the event that stocks continue to perform in the future somewhat as they always have in the past. I believe that the Normals will make the right call.
We will see. I don’t feel that I can say for certain given that there has never before been a situation quite like this, where the evidence for something all points in one direction and where the Get Rich Quick inmpulses of millions of people pull them in the opposite direction for a time. I know that I cannot say that I believe that the Greaney study contains an adjustment for the valuation level that applies on the day the retirement begins. I know how it made me feel about myself when for three years I kept it zipped re the error in the Greaney study even though I knew what harm might come to friends I had made at the Motley Fool board because of my lack of courage to stand up to you Goons. I have felt better about myseld as a person since the morning of May 13, 2002, despite all of the ugliness that you have so forcefully and relentlessly dished out. Being able to sleep at night is important to me. I have regretted much of what I have seen go down. But I have never for one second regretted the call I made when I advanced that fateful post.
I wish you all good things, you know? That I can do. So that I do. I cannot say that I believe that the Greaney retirement study contains an adjustment for the valuation level that applies on the day the retirement begins. So that I do not do.
I believe that Buy-and-Hold is the past and the Valuation-Informed Indexing (which is identical in eveey way to Buy-and-Hold except that it corrects the error that the Buy-and-Holders made when they suggested that long-term market timing might not always be 100 percent required for every investor at all times) is the future. But I am not God. Its theroetically possible that I am wrong. We will just have to wait and see how it all plays out in the days and years following the onset of the next Buy-and-Hold Crisis.
My best wishes to you and yours.
Rob
Why should I time the market when my current strategy has worked for the last 40 years?
I believe that investors should seek to Stay the Course in a meaningful way. When prices go to high levels, stocks are more risky. Investors who want to keep their risk profile constant need to lower their stock allocation to do that.
Rob
What if you see that your plan is not working? Should you stay the course then and let yourself go broke and get divorced?
There shouldn’t be any penalty attached to posting honestly re the peer-reviewed research. Once we see as a nation of people that such a penalty is being imposed, we should all work together to bring that to a full and complete stop.
Rob
There haven’t been any penalties for honest (truthful) posting. People are given the penalty of being banned when they can’t behave in a proper way. Calling people names (like goons, con-men, etc), or telling people they are going to prison, or not answering questions, or making up false claims about criminal acts are examples of poor behavior. Spouses also will issue a penalty to the other spouse by getting a divorce. If you don’t want a penalty, learn how to behave properly.
Would it be proper bahavior, in your view, for me to point out that the retirement study posted at John Greaney’s web site lacks an adjustment for the valuation level that applies on the day the retirement begins any time Greaney makes the claim in a discussion forum at which I participate that a 4 percent withdrawal tate is “100 percent safe”?
Rob
It is not proper when there is no error, as thousands have pointed out. Did Wade Pfau say there was an error? No. Did Shiller say there is an error? No.
Pfau said: “Yes, Virginia, Valuation-Informed Indexing works!” Valuation-Informed Indexing calls for market timing in response to shifts in valuations. Buy-and-Hold discourages market timing. To say that Valuation-Informed Indexing works is to say that the claim of Buy-and-Holders that market timing doesn’t work or is not required is in error.
The title of Shiller’s book is “Irrational Exuberance.” The reason why the people who developed Buy-and-Hold concluded that market timing is not required is that they believed that the market is efficient. That’s another word for saying that the market is rational. The idea is that investors take into consideration all developments that affect the return on stocks when setting the price of stocks. It would be rational to do that, not irrational. Shiller is saying that for emotional reasons investors do not take into consideration all developments that affect the price of stocks. To say that investors are irrational is to say that Buy-and-Hold is in error.
It’s not thousands who today say that there is no error in the pricing of stocks, it is millions. It is all stock investors. To the extent that the millons of people who owned stocks today believed that the price of stocks is in error, they would correct it. Today’s stock investors are living in delusion, Anonymous. A CAPE value of 30 is a CAPE value of deliusion. Irrational exuberance is a delusion. Development of the Buy-and-Hold strategy did not create the delusion. Stock investors have been living in delusion ever since the first stock market was opened for business. Every bull market is an act of delusion. If investors were not deluded, they would price stocks properly. There would be no overvaluation.
The error is not really an intellectual error. It is an unfortunate inpulse inherent in human nature to want to get something for nothing. Stock investing is dominanted by this impulse because it is investors who set the price of their stocks. Investors possess the power to vote themselves raises whenever they please and, so long as no one mentions the reality that the pumped-up price is going to disappear in time, the pretend money appears to be real and makes the human investors feel good. The error is believing that the pumped-up prices are real.
Awareness of the error corrects it. Stock investors do possess the capacity for rationality. When they become aware that there is irrational exuberance present in the current stock price, their rationality causes them to engage in whatever amount of market timing is required to get their risk profile back to what they had wanted it to be when they started investing. So irrational exuberance is self-correcting SO LONG AS INVESTORS HAVE EASY ACCESS TO THE INFORMATION NEEDED TO MAKE RATIONAL CHOICES. A ban on honest posting neutralizes the part of the brain that wants to make rational choices by permitting the investor to enjoy his delusion without the unccomfortable feeling that he has permitted his risk profile to get out of whack.
The error is in human nature. We all want something for nothing. So we are all drawn to Buy-and-Hold/price indifferent strategies. It’s not an intellectual error, it is an emotional error. Anytime someone observes that “stocks are overpriced today,” they are saying that there is an error. To misprice stocks is to make an error. The purpose of market timing (the long-term variety, not the short-term, variety) is to correct errors, to get prices back to where they should be. Market timing is the thing that brings rationality (the correction of errors) into the stock buying process.
Someone who says that there is no error is saying that there is no mispricing, that there is no overvaluation. Do you say that stocks are priced properly when the CAPE value is 30?
Rob