Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Provide a link to Pfau’s comments. I only see where he said you are causing him harm.
Anyone who cares to know whether the study contains a valuation adjustment can check for himself. Wade said it but you don’t need to hear Wade day it to know that it is so. Wade hadn’t said it yet on the morning of May 13, 2002, when I worked up the courage to say it.
I would like us to get to a point where we can hear everyone saying it all the time. That’s what this is all about. I should’t have held back saying it for the three years in which I knew it but didn’t say it. And one one else should ever hesitate to say it. Getting the numbers right in retirement studies is important.
Rob
Like you have said many times, you really aren’t a “numbers” guy, right? I guess numbers really are not all that important for market timers and only for the buy and hold crowd, right?
Most Buy-and-Holders are better with numbers than I am. But they have permitted an excessive rationalism to influence their thinking. The reason why they once surmised that valuation-based market timing is not 100 percent required for every investor is that at the time that Buy-and-Hold was being developed there was a widespread belief among academic economists that the stock market is efficient, which would mean that investors would make rational choices in pursuit of their self-interest. If that were so, there would be no mispricing. So there would be no need for valuation-based market timing.
Shiller discredited the Efficient Market Theory. That’s why he was awarded a Nobel prize. He showed that at times investors are not rational at all but in fact highly emotional. The Buy-and-Holders can’t accept that. All of their beliefs about how stock investing works presume a world that doesn’t exist. a world of purely rational investors. They ignore the effect of overvaluation because they just cannot accept that it exists. Because overvaluation is such a critically important factor and because they entirely ignore it in all their calculations, they get all the numbers wrong!
They are able to perform the calculations. But their core assumption re how stock prices are set is in error and thus far they have not been able to bring themselves to acknowledge the error.
You don’t have to be a math genius to see that the Greaney retirement study lacks a valuation adjustment! If there were one there, Greaney would have provided a link to the page in the study containing it many years ago. I mean, come on.
Rob
“ Most Buy-and-Holders are better with numbers than I am.”
Yes, and this is all about numbers. Perhaps you should stick with something you actually know something about. It hasn’t gone that we for you over the last 23+ years.
Tell me what adjustment the Buy-and-Holders make to their portfolio value when the CAPE value is where it is today.
It’s not that they do not make a big enough adjustment for irrational exuberance. They make no adjustment at all. How can you justify that? Do you think that irrational exuberance doesn’t matter?
Stock are today priced at two times their real value. So irrational exuberance is half of the story. Make no adjustment and you are not just getting the numbers wrong, you are getting them WILDLY wrong. But you can always say “I am good with numbers” because you engage in abusive behavior to be sure that no one dares to mention the 50 percent of the story that you ignore.
I think that ignoring a critically important part of the story is getting the numbers wrong. To say that the safe withdrawal rate is the same number at all times is to implicitly say that stock investing risk is the same at all times. Which is a nutso thing to say. In a world in which valuations affect long-term returns, it is a logical impossibility that stock investing risk is the same at all times.
That’s my sincere take re this terribly important matter, in any event.
My best wishes to you and yours.
Rob
Someone that is not good at numbers can’t make any assessment about valuation. Someone that is not good at numbers can’t tell you that numbers are wildly wrong.
I think that, when someone gets an important number wrong in a retirement study, he should be grateful to the person who points out the error to him, regardless of whether that person is particularly good at numbers.
The idea that someone who is not particularly good at numbers can’t see that a study that ignores a key factor of the question under examination is in error is absurd. Either Greaney included a valuation adjustment in his study or he did not. If he did not, he got the numbers wrong. If someone told you the score of a baseball game and you knew that it was his practice to ignore all runs scored by outfielders and catchers, would you trust his report?
The obviously proper thing to do is to do is to calculate the safe withdrawal rate accurately. Anyone who is a friend to Greaney should have told him to do that on the afternoon of May 13, 2002. John Walter Russell was a true friend to him. He invited Greaney to work with me and Russell to produce the first accurate safe-withdrawal-rate calculator. Did you encourage Greaney to accept that generous and kind offer, Anonymous?
Please mark me down as saying that accuracy matters in the production of retirement studies. Please mark me down as saying that it is absolutely critical. People who point out errors in retirement studies are HELPING.
My sincere take.
Rob
So all these buy and holders that know numbers better than you and that have multi-million dollar retirement portfolios should all switch over to your market timing scheme, despite the fact that buy and hold has worked in EVERY single 30 year period, while at the same time, we have never seen a successful outcome with your market timing scheme. Got it.
Whether they switch or not is up to them. I don’t tell people what to do. All that I say is that they should permit honest posting re the peer-reviewed research. There are thousands of people who expressed a desire to engage in discussions of what the research says. When you engage in criminal behavior to block such discussions, You are walking down a very dark path. I wouldn’t do it. I think that going down that path was a very bad move.
Buy-and-Hold has NEVER worked better than Valuation-Informed. Wade Pfau and I spent 16 months examining that question. It has never happened once in the history of the market. Surprise! Surprise! It has never happened because it never CAN happen. If valuations affect long-term returns, investors who fail to engage in valuation-based market timing are permitting their risk profile to get out of whack. That can never be a good thing. It’s a logical impossibility. I mean, come on.
If we are not going to permit discussion of the peer-reviewed research, we should just shut down all the peer-reviewed journals. They aren’t doing us any good if we don’t permit discussion of what is published in them. The Buy-and-Holders once advocated making reference to the peer-reviewed research. If you encourage people to publish peer-reviewed research, there’s always a chance that you will learn something new. When you do, you have to learn how to pronounce those horrible words “I” and “Was” and “Wrong.” That’s just the way it goes. There’s no getting around it.
My best wishes.
Rob