Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
If you think it is overpriced, then don’t buy the stock. Others don’t have to think like you or do like you (thank goodness). The last house I bought, the asking price was $1.25 million and is in a very hot area. I was bidding along with several others. I ended up paying $1.33 million. Two years later, the house is worth at least $1.6 million without factoring in what could be another price war. Did I overpay? Now compare that to the S&P in 2010 and every year after when you kept telling us it was overpriced. Look at where it is today. Look at how people would have lost out listening to your bad advice.
How much money do you have in your investment accounts right now, Rob?
I rest my case.
It’s not possible for anyone to “lose out” by becoming informed as to what the last 43 years of peer-reviewed says about how stock investing works in the real world. Prices are set by markets. For investors to set prices properly, they need access to the information needed to make good choices. The peer-reviewed research is obviously critically important information. We all benefit when every investor is able to talk over the far-reaching implications of Shiller’s Nobel-prize-winning research at every site because permitting honest posting re the research permits us to do a better job of establishing stock prices.
Or so Rob Bennett sincerely believes, in any event.
Rob
Even if his stocks are overvalued he owns assets. Overvalued stocks and other assets like a house bought with stock proceeds are real assets. Look to the real world. I think Tesla was and is significantly overvalued. But even a large shareholder like Elon Musk can sell. He sold billions of dollars in Tesla stock to buy Twitter, another real asset. You don’t understand these things, you do not understand how investing works!
Investors are better off if the assets in which they invest are priced properly. It permits for more effective financial planning.
The safe withdrawal rate is the perfect example. If honest posting re the peer-reviewed research is permitted, aspiring early retirees can make sound decisions as to when to hand in their job resignations. I believe that honest posting re the research should be permitted at every site.
That’s where I’m coming from re this terribly important matter.
Rob
The prices are what people will pay for them.if a Junior Bacon Cheeseburger at Wendy’s costs $3 then I consider it overpriced, but if other people think it’s a fair enough value at a fair enough price then Wendy’s will still sell their cheeseburgers. If I don’t like it I can go to their competition, make my cheeseburger at home, or not but a cheeseburger at all. What you’re doing is like not buying the cheeseburger and getting mad at everyone else for not agreeing with you about the price of the cheeseburger.
No. What I am saying is that, if Wendy’s says in a commercial that their Junior Bacon Cheeseburger costs $3 but then charges you $6 for it, all of the people who are hurt by this dishonest practice should be permitted to call them out on their dishonesty. That’s how the dishonesty gets fixed. Greaney said that the safe withdrawal rate is 4 percent at a time when it was really 1.6 percent. That hurt people. All of us who knew about the error in the study should have felt free to call it out. None of us should have been made to feel afraid to call out the error.
When people in the community noticed that no one was calling out the error, they came to believe that the study was probably accurate. When I called out the error, people lost confidence in the study. That’s why Greaney freaked out. He wants people to continue to have confidence in the study and he has seen that that is not possible in a world where people feel free to call out the error in it. I want to see the study corrected. So I naturally support the idea of permitting honest posting re the research.
Rob
Wendy’s won’t tell you the Junior Bacon Cheeseburger is $3 and then charge you $6 for it. The stock market won’t tell you that Wendy’s stock is $20 per share and then charge you $40 for it. Market forces determine stock price. If enough investors think that Wendy’s is going to be growing like crazy then that $20 per share stock could all of a sudden be worth $40. Likewise, if the $3 JBC is seen by everyone else as a bad value then Wendy’s will have to cut the price of the burger and may need to cut costs in other areas in order to stay in business. This is how markets work. Everyone has a say. No single person can dictate prices.
I don’t agree. I agree that this is how markets SHOULD work. But it’s not how they work in the real world. In the real world, there’s a thing called irrational exuberance that makes investors want to believe that their $50,000 portfolio is really worth $100,000. There’s a lot of money to be made encouraging those irrational beliefs. Thus, the Buy-and-Hold “strategy.” And, if anyone reports on what the last 43 years of peer-reviewed research says, the entire Buy-and-Hold house of cards comes crashing to the ground. Hence, the ban on honest posting.
There are times when the cashier at a Wendy’s overcharged the customer. The wonderful thing is that the customer who is overcharged usually complains. So this doesn’t become a standard practice. In the stock market, the person who is overcharged for the stocks he is buying LIKES it. When he pays double the real value for those shares, he believes that all of the shares he bought at early times are now worth two times their real value. So he is fine with being overcharged. If people reacted in the same manner to being overcharged in the stock market as they do to being overcharged in any other market, the CAPE value could never rise to where it resides today.
Market forces do NOT determine stock prices. For market forces to determine stock prices, we would need to open every site to honest posting re the peer-reviewed research. Relentless promotion of the pure Get Rich Quick/Buy-and-Hold strategy makes the stock market dysfunctional.
Rob
There’s active investing and passive investing. You can actively invest in stocks but that takes a degree of skill/intelligence, study, and temperament that most people do not have or have the time for. One person may see Hershey trading at 20 times earnings, which is historically low for Hershey, and buy up a bunch of shares. Another person might think that by buying a lot of Gamestop shares and then transferring them to Computershare that they will somehow benefit from a short squeeze and become a billionaire while simultaneously destroying the financial system as we know it. To me, the Hershey guy is more rational. The rational and the irrational are in the same market. So as far as the efficient market hypothesis goes I’m actually on “Team Rob”. The markets are inefficient and smart people can get better long-term returns by taking advantage of inefficiencies.
Whatever “rules” on CAPE that you came up with may have worked in the past but the past is not a perfect indication of the future. You must look at the big picture. In the big picture there’s just more capital flowing into the market, from here and abroad, and a lot of that is “dumb money” that would only sell in a panic.
More goes into what makes stock prices high than just pure irrational exuberance. People put their retirement money directly into the market every time they get paid. Some use a strategy (wise or unwise), some just blindly picked some things and gave their allocation less thought. Some people invested in stocks because the returns on fixed income were so low. Indexing does actually create a type of “buy high sell low” as your S&P 500 Index fund is weighted so that large companies like Apple and Microsoft get the largest slices of the pie, but overall most “winners” do continue to win (see “The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New” by Jeremy Siegel) as they have built-in competitive advantages. Apple would have to screw up pretty big to lose the people who they currently have locked into their “ecosystem”.
But despite all of this buying and holding index funds has been a proven winner, one that requires very little of the attributes required to be consistently successful as a non-index stock investor. There’s many, many things going on and not even Warren Buffett fully understands it (most opportunities actually go on his “too hard” pile!) Buffett, one of the best stock market minds who ever lived, thinks most people should just buy the index and forget about it. Just ride through the good and the bad times, and you’re more likely to come out smelling like a rose (especially if you increase your contributions during downturns, as opposed to cashing out which human nature leads many to do).
These are, in any event, my sincere thoughts re: this important matter.
I entirely agree that the past is not a perfect indicator of the future. And I don’t think it’s entirely unreasonable to say that more goes into making stock prices high than just pure irrational exuberance.
However, I also believe that irrational exuberance is a factor that should not be ignored. If you take irrational exuberance into consideration, you are not going to come to a conclusion that the safe withdrawal rate is the same number at all possible valuation levels.
Rob
Here’s what an indexer could do to insulate his or herself from price corrections.
75% to VFIAX – S&P 500
15% to VEXAX – Extended Market
10% to VBTLX – Total Bond Market
Rebalance regularly. Quarterly, annually, or semi-annually. Pick one. If a once in a generation price crash comes and your 10% bond allocation turns into 1/4 of your portfolio or whatever then you can rebalance and buy the stocks cheap.
If you don’t like my percentages you can mix them up. Could be 50% S&P, 25% Extended Market, 25% Bonds. You could do 1/3 into each. Just make it reasonable. 100% in TIPS is not reasonable.
I don’t think that 100 percent TIPS is a good idea for the typical investor. But each investor needs to consider his personal circumstances. I went to 100 percent TIPS and IBonds because I was trying to get an internet writing business of the ground. So I was taking on a lot of risk outside of my investment portfolio. It made sense for me to want to keep risk in my portfolio to a minimum. And stocks were at the time prices at the riskiest levels ever seen in U.S.history. Also TIPS and IBonds were paying amazing returns for risk-free asset classes (4 percent real). I think my 0 percent stock allocation made perfect sense at that time for me.
I believe that an investor who goes with 60 percent stocks should drop down to 30 percent stocks when stocks are priced as insanely high as they are today. That way, he keeps his risk profile roughly constant over time and manages to Stay the Course in a meaningful way. It’s not the stock allocation that needs to stay the same, it’s the risk profile. And stocks are far more risky when they are priced at insanely high levels.
What I really think is that we should all be working together to keep stocks priced at reasonable levels. If we did that, we wouldn’t have to worry about bull markets or bear markets or economic crises. I could live with that. Returns would never go much above 6.5 percent real. But I see that as a very good return. I think it’s a Get Rich Quick urge that makes us seek more than that even though we know how much human misery is experienced each time we let Buy-and-Hold strategies become popular. Avoiding Get Rich Quick/Buy-and-Hold is 70 percent of what it takes to achieve long-term stock investing success.
Rob
Why didn’t you buy stocks in 2009?
Stock prices went down to levels a little below the fair-value level in 2009. Given that I was at a very low stock allocation (zero!) prior to the 2008 price crash, it made perfect sense for me to buy stocks at that time. I had discussions with my ex-wife about doing that. She said that she would like to think it over a bit before taking action. I agreed to hold off a bit. Then prices went back to crazy levels. So I never increased my allocation.
It sounds keeping an asset allocation that includes stocks and rebalancing at regular, predetermined intervals would have been a better approach for you.
I strongly disagree, Sensible. I believe that all investors should be aiming to Stay the Course in a meaningful way. In a world in which valuations affect long-term returns (the world that we live in, according to Robert Shiller’s Nobel-prize-winning research showing that valuations affect long-term returns), it’s not possible to do that without being willing to engage in valuation-based market timing.
I was once a Buy-and-Holder. But not anymore. I gave up on Buy-and-Hold on the evening of August 27 2002, when Greaney advanced his first death threat and over 200 Buy-and-Holders endorsed it. A “strategy” that causes people to endorse death threats is far too emotional for this boy. I believe in research-based strategies. I began working on the Valuation-Informed Indexing strategy on the morning of August 28, 2002.
Rob
We know how VII worked out for you. It can’t get any worse than this. If you dumped your money into an S&P 500 index fund in January or March 2009, things wouldn’t have been quite this bad for you. That much I’m sure of.
If there had never been any abusive posting or criminal behavior on the part of Buy-and-Holders, I would be a multi-billionaire today. Are you joking?
The first 22 years of our discussions show that there is a HUGE interest among millions of investors in learning the realities of stock investing as revealed by the peer-reviewed research in this field. And there is a huge interest among most of the experts to be freed to talk about the research. The only thing that has been holding us back for 22 years now is the abusive behavior of you Goons. I mean, please give me a freakin’ break.
My sincere take.
Rob
Making up all these stories has not helped you in one bit. You are still banned/ignored and broke. When you have a complete failure like that, you have to come to the conclusion that you are the problem, learn from your mistakes and then correct your course. Instead, all you have done is doubled down on a failed strategy.
I believe to this day that the Greaney retirement study lacks a valuation adjustment. And I had formed friendships with a number of the people who posted at the Motley Fool board in the days before I worked up the courage to point out the error in the study. Those friendships matter to me.
And of course there are millions of people all around the country with whom I have never had personal interactions but who I would be friends with if we got to know each other. Those are the people who I have in mind when I write the words of my book.
My best wishes to you and yours, in any event. (Yes, I have learned things from you Goons too on occasion!)
Rob