Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
No one else thinks there is an error, so it doesn’t need to be fixed. If you disagree, do your own study.
Funny how you ignore your errors in depleting your savings, losing your house and your wife dumping you.
It will be interesting to see how things play out in the days and years following the onset of the next Buy-and-Hold Crisis, Anonymous.
My best and warmest wishes to you and yours, in any event.
Rob
“It will be interesting to see how things play out in the days and years following the onset of the next Buy-and-Hold Crisis, Anonymous.”
Did any of the previous “Buy-and-Hold Crises” move people towards your way of thinking?
There’s only been one Buy-and-Hold Crisis since Shiller published his Nobel-prize-winning research findings showing that valuations affect long-term returns. That was the 2008 Buy-and-Hold Crisis. Prices did not drop very low in that crisis. The CAPE value usually drops to 8 before a crisis ends but that time it never went below 13. And prices had gotten back to high levels in about a year. Usually a Buy-and-Hold Crisis lasts much longer than that. So I believe that the next crisis may cause more people to question the merit of the relentless promotion of the pure Get Rich Quick/Buy-and-Hold (no market timing, no price discipline) strategy.
We’ll see, you know? If we were all thinking clearly, honest discussion of the peer-reviewed research would have been permitted at every site going back to the first day. Given the messed-up situation in which we find ourselves, in which the only thing that cannot be discussed is the peer-reviewed research, I don’t know what we can do other than to see what happens as a result of the next crisis. Had we opened every site to honest posting on the afternoon of May 13, 2002, as I proposed at the time, we would today be 22 years farther along in our development of the Valuation-Informed Indexing concept than we are. Things played out in the way that things played out. Whatchagonna do?
I believe in using the peer-reviewed research as guidance, Evidence. It is because of my belief in using the peer-reviewed research as guidance that I became a Buy-and-Hold myself once upon a time. I think the Buy-and-Holders were right the first time. I think it’s makes sense to give what the research shows some consideration.
Rob
What about 2000, there was a similar drop then.
There was a drop in 2000. I don’t believe that the CAPE value ever dropped below 17 at that time. So prices never got below fair-value levels. People are not going to be able to appreciate the horrors of irrational exuberance until prices go below fair-value levels.
It would be nice if people could just read about irrational exuberance and that would do the trick. So far that hasn’t worked. We all have a Get Rich Quick/Buy-and-Hold impulse within us that makes us want to tune out the research. The question is — what would break through that psychological resistance to hearing what the research says. My thought is that a price drop that takes us below fair-value levels might reach more people.
I think it makes sense to believe that that might happen. I cannot prove it until we see the price drop and find out one way or the other. If you believe that Shiller is right that investor emotion plays a big role in the setting of stock prices, it makes sense to believe that a dramatic price change might change what people are willing to hear about how stock investing works. Once prices go below fair-value levels, people can no longer worry that permitting discussion of the peer-reviewed research would cause them to suffer financial setbacks.
Rob
So what good is your timing scheme when it never drops to a level that you like? Meanwhile, buy and hold has always worked for every 30 year period.
Bringing on a Great Depression wasn’t working. Bringing on the stagflation of the 1970s wasn’t working. Bringing on the economic crisis of 2008 wasn’t working. We would all be better off if we did everything in our power to rein in irrational exuberance when it appears on the scene. That requires valuation-based market timing. There is no other way.
That’s my sincere take re this terribly important matter, in any event.
Rob
You have said that you know how the stock market works and that VII would beat buy and hold. Instead, you are now saying that the market isn’t working like you think it should and that you have to convince everyone else to buy stock when you think they should for your system to work.
First of all, it’s not my system. It’s reality. The value of peer-reviewed research is that it helps us all to see realities to which we were previously blind. Shiller’s Nobel-prize-winning research was a huge advance. If Shiller’s Nobel-prize-winning research is legitimate (I believe it is), then what we believed in the days when Buy-and-Hold was developed needs to be updated to reflect the new findings. If Shiller’s research is not legitimate, then nothing that I say has merit. But of course I believe that Shiller’s research is legitimate. If Shiller’s research is legitimate, then everything that the Buy-and-Holders say is wrong because Shiller’s research changed our understanding of how stock investing works in a fundamental way.
Valuation-Informed Indexing has always beaten Buy-and-Hold. That has been so for as far back as we have good records of stock prices. The Bennett/Pfau research shows that beyond any reasonable doubt. If there were any reason to believe that there might be circumstances in which it is not 100 percent necessary for investors to practice price discipline/valuation-based market timing, the Buy-and-Holders would have presented that evidence many years ago. They have of course never presented anything, That’s why the Buy-and-Holders put so much energy into suppressing discussion of Shiller’s research findings. They have no answer to it. Valuations affect long-term returns. Irrational exuberance is real. Valuation-based market timing is required to fight it. The safe withdrawal rate changes with changes in valuation levels.
The market is certainly not today working as well as it would if every site was open to honest posting re the peer-reviewed research. In all markets, market participants need accurate information to make good choices. The ban on discussion of the past 43 years of peer-reviewed research makes it impossible for investors to make sound choices and we all pay a price.
The good news is that, if we permitted honest posting re the research at every site, we could all invest more effectively than we could in the days before Shiller’s Nobel-prize-winning research was available to us. We all have the option of living better and fuller and richer and freer lives than we were able to live before Shiller’s Nobel-prize-winning research was published.
The tricky part is that, to get to where we all want to go, we need to work up the courage to stand up to the tactics employed by the Buy-and-Hold Goon Squads. That ain’t no walk in the part. I think it would be fair to say that the members of the Buy-and-Hold Goon Squads feel very, very, very threatened by Shiller’s Nobel-prize-winning research findings.
My best wishes.
Rob
“ Valuation-Informed Indexing has always beaten Buy-and-Hold.”
No, we have never seen even one successful outcome with VII. Further, you admit in the above comments that we haven’t seen enough of a drop yet. Those in their 60’s and above have already run out of time waiting for this anticipated drop. The game is over for them.
The Bennett/Pfau research shows that there has not yet been a single case in which Valuation-Informed Indexing has not performed better than Buy-and-Hold on a risk-adjusted basis in the long-term.
Could this be the first time? It’s theoretically possible. It is certainly true that we have never before seen prices stay so high for so long.
But it should be up to each individual investor whether he wants to take that chance. We should permit (and encourage!) honest posting at every site and let each investor decide for himself what to do with his retirement money.
The game is not over for someone in his 60s. A person can live to 90. If prices drop next year, a person following a Valuation-Informed Indexing strategy will end up with a far larger portfolio than someone following a Buy-and-Hold strategy. And the stocks he buys at low prices will provide off-the-charts returns for many years to come. That individual will end up far, far ahead of someone who followed a Buy-and-Hold strategy. In any event, all should be able to hear both sides of the story.
That’s where I’m coming from re this thing, in any event.
Rob
“ The game is not over for someone in his 60s. A person can live to 90.”
Wrong. You need to have your retirement fully funded in your 60’s. Most people can no longer make it up by that time. Most people can’t or don’t want to keep working into their 70’s and 80’s. That is what this whole thing is about. It is about not having a retirement failure. It is about being able to stop working and enjoy your remaining years. The average person will only live into their late 70’s. They don’t want to work until the day they die.
The Buy-and-Holders don’t subtract for irrational exuberance when they determine whether their retirement is fully funded or not. They are using pretend numbers. That’s the worst of all worlds.
I believe that we should permit honest posting re the peer-reviewed research at every site, without a single exception.
Rob