A Rich Life

The Old Ideas on Saving & Investing Don't Work -- Here's What Does

Valuation-Informed Indexing #557: Buy-and-Hold Is Only Popular At Times When It Is Dangerous

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I have posted Entry#557 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Buy-and-Hold Is Only Popular At Times When It Is Dangerous.

Juicy Excerpt: Few investors are shy about acknowledging that they follow a Buy-and-Hold strategy today. It makes them feel smart to say that they have been following the strategy that pushed stock prices up to one of the highest levels ever achieved. Not so many will acknowledge following the strategy when prices have fallen hard. Investors are much more inclined to brag about their successes than to bemoan their mistakes. When the flaws of Buy-and-Hold become evident to all, few will own up to once having followed the strategy.

Buy-and-Hold Goon to Rob: “Your Jury Will Demand to See Proof of Death Threats. Your Jury Will Demand to See Proof of VII Outcomes. Your Jury Will Demand to See Proof of Extortion. Your Jury Will Find That You Have Committed Perjury.”

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Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

Your jury will demand to see proof of death threats.  Your jury will demand to see proof of VII outcomes.  Your jury will demand to see proof of extortion.  Your jury will find that you have committed perjury.

Yeah, yeah.

Rob

“You Always Need to Adjust the Number on Your Portfolio Statement for the Effect of Irrational Exuberance to Know the Real Numbers. Failing to Do That Always Hurts You Because It Is Always a Bad Thing to Make Decisions Based on Bad Numbers.”

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Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

What I say is that we have not even one successful outcome using market timing.  If you heart surgeon said that he wants to do heart surgery on you, but has yet to have a successful outcome, are you going to do the surgery?  Of course not.  You don’t risk your life and you don’t risk your retirement.  You go with proven outcomes, like buy and hold.

What I say is that we do not have one successful outcome with Get Rich Quick/Buy-and-Hold. If irrational exuberance is a real thing (and there is 40 years of peer-reviewed research showing that it is), then you always need to adjust the number on your portfolio statement for the effect of irrational exuberance to know the real numbers. Failing to do that always hurts you because it is always a bad thing to make decisions based on bad numbers. Shiller’s Nobel-prize-winning research showing that irrational exuberance is a real thing changes everything that we once thought we knew about how stock investing works.

Rob

“You Say That Timing Is a Mistake. I Say That It Is Absolutely Critical. The Market Cannot Do Its Core Job — Getting Prices Right — If Investors Don’t Engage in Market Timing.”

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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 don’t get the question of whether market timing is required or not right, you can’t get anything right. That one is fundamental.”

This statement is correct as we have yet to see even one successful outcome when using market timing. Anyone that pushes timing schemes has not gotten anything right….as you say.

We agree that the question is fundamental.

We disagree re the reality.

You say that timing is a mistake. I say that it is absolutely critical. The market cannot do its core job — getting prices right — if investors don’t engage in market timing. When enough investors become persuaded that market timing is not required, the market becomes dysfunctional and eventually it collapses and we all pay a terrible price.

My best wishes to you and yours.

Rob

“All That Would Be Lost If We Permitted Honest Posting Is the Crazy Ups and Downs That Have Characterized the Stock Market in the Pre-Shiller Era. A Steady Return of 6.5 Percent Real, Without the Economic Crises That inevitably Follow When Large Numbers of Investors Are Persuaded to Forsake Market Timing (Price Discipline!) Sounds Just Fine to Me.”

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Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

It has everything to do with what we are talking about.  We are talking about what has really happened in the past versus what was predicted to have happened.  If your predictions came true, you would be using those as proof of your predictions having come true.  However, since things didn’t turn out how you said they would, you want everyone to ignore the results and say that it is all pretend money.  You can’t change the past just to support your narrative.

There were predictions that Shiller made that did not prove out and there were predictions that I made that did not prove out. You are right that, if the predictions has proven out, I would cite that as evidence (not absolute proof) in support of Valuation-Informed Indexing. You are wrong that I do not want people to ignore the failure of the predictions. I think it is important that people know about that. I DO think that all stock gains above those that support a CAPE value of 16 are Pretend Money. The point of Valuation-Informed Indexing is to distinguish real economic gains, which can be used to plan one’s future, from phony irrational-exuberance gains, which do not have lasting value.

If those gains are really the product of irrational exuberance, as Shiller’s Nobel-prize-winning research indicates, they are still going to disappear into thin air. Knowing precisely when that will happen is less important in my eyes than knowing that it will sooner or later happen. If it turns out that Shiller is right (I believe he is), we are going to see millions of failed retirements and hundreds of thousands of failed businesses and millions of workers thrown out of their jobs and an increase in political frictions. None of that is required. If people had access to accurate, honest, research-based investment advice, we could never again see the CAPE value reach the level where it resides today. Stocks would be an amazing asset class offering annual returns of 6.5 percent real. All that would be lost if we permitted honest posting is the crazy ups and downs that have characterized the stock market in the pre-Shiller era. I can do without that stuff. A steady return of 6.5 percent real, without the economic crises that inevitably follow when large numbers of investors are persuaded to forsake market timing (price discipline!) sounds just fine to me.

That’s where I’m coming from, Anonymous.

Rob

“The Buy-and-Holders Still Act As If Their Strategy Is the Only Game in Town. They Still Move to Silence Those Who Challenge Their Dogmas. It Is the Ban on Honest Posting That Is as Odd as All Get-Out. It Is 100 Percent at Odds With Both Our Laws and With Our Cultural Norms”

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Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

You’ve never actually met Scott Burns. Or Greaney. Or Wade. Certainly not Shiller. And any online contact with them ended at least a decade ago. Yet here you are, still dropping their names, as if you talked to them just yesterday.

This is quite possibly the oddest blog still in operation.

Shiller published his Nobel-prize-winning research showing that there is precisely zero chance that a pure Get Rich Quick/Buy-and-Hold strategy could ever work for a single long-term investor in 1981. The normal thing would have been for a national debate to be launched at that time. It wouldn’t be reasonable for every investor to switch from Buy-and-Hold to Valuation-Informed Indexing in one day. So the normal thing would have been for there to be a transition period. Some people would write in support of Buy-and-Hold, some people would write in support of Valuation-Informed Indexing, some would take a position in the middle. In time, we would all work it out together.

That debate has not been launched to this day. The Buy-and-Holders still act as if their strategy is the only game in town. They still move to silence those who challenge their dogmas by making reference to the last 40 years of peer-reviewed research. That’s the odd thing, not that I craft articles from the perspective of someone who believes that Shiller’s Nobel-prize-winning research is legitimate research. We should have thousands of people doing that on a daily basis. The odd thing is that there is any controversy about it.

No one knows everything. We all are capable of making mistakes. The Buy-and-Holders made a mistake when they came to believe that market timing does not always work and is not always required. Once they are able to acknowledge the POSSIBILITY of a mistake, we can as a nation launch the debate that should have been launched 40 years ago and have everything in this field return to normal procedure. Buy-and-Holders will advocate Buy-and-Hold, Valuation-Informed Indexers will advocate Valuation-Informed Indexing and those who believe in middle positions will advocate middle positions. No death threats. No extortion. No criminal stuff of any kind. In fact, no non-criminal intimidation stuff. Just an amazing learning experience that helps us all to live better lives from that point forward.

It is the Ban on Honest Posting that is as odd as all get-out. It is 100 percent at odds with both our laws and with our cultural norms. Nobody should have lost their head when I pointed 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. People planning retirements and being exposed to the claims made in that study (Greaney said that a 4 percent withdrawal rate was “100 percent safe” even at the time when the safe withdrawal rate was 1.6 percent and a retirement plan calling for a 4 percent withdrawal had only a 30 percent chance of surviving for 30 years) needed to know that. I offer no apologies for working up the courage to post honestly re that matter, regardless of how odd it seemed to sdo o in a context in which a Ban on Honest Posting re the peer-reviewed research had come to be accepted as the norm in this particular field.

My best and warmest wishes to you and yours.

Rob

“Is It Just a “Factual Observation’ That the Sun Revolves Around the Earth? Ignore Many Years of Scientific Research and You Can Get Your Mind to a Place Where That Does Indeed Appear to Be a ‘Factual Observation.’ Take the Research Into Consideration and You of Course Arrive at Very Different ‘Factual Observations.”

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Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

We look at outcomes to see as to what was right and what was wrong.  As noted by the discussion from the forum noted in the link, Shiller, just like you, has been wrong much more frequently than he has been right.  That is just a factual observation.

Did you adjust the value of stocks downward by 60 percent to reflect the effect of irrational exuberance in determining the “outcomes” that apply today? If you failed to do that, then you made the same mistake that Greaney made in his retirement study, you failed to take the last 40 years of peer-reviewed research into consideration when performing your calculations.

Is it just a “factual observation” that the sun revolves around the earth? Ignore many years of scientific research and you can get your mind to a place where that does indeed appear to be a “factual observation.” Take the research into consideration and you of course arrive at very different “factual observations.”

I believe that Shiller’s Nobel-prize-winning research is legitimate research.

Rob

“If We See Hundreds of Thousands of Businesses Go Under, It’s a Horrible Bull Market. And for What? We Get the Same 6.5 Percent Real Return Regardless of Whether We Play These Games to Push Prices Up Temporarily or Whether We Permit Honest Posting and See Prices Remain at Reasonable Levels at All Times. I Don’t See the Fantasy Thrill Ride as Being Worth the Price Attached to It.”

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Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

It’s only a horrible bull market if you are over the age of 60 and you missed out on the bull run.  At that point, it is too late for you.

If we see millions of failed retirements, it’s a horrible bull market. If we see hundreds of thousands of businesses go under, it’s a horrible bull market. If we see millions of workers lose their jobs, it’s a horrible bull market. If we see increased political frictions, it’s a horrible bull market.

And for what? We get the same 6.5 percent real return regardless of whether we play these games to push prices up temporarily or whether we permit honest posting and see prices remain at reasonable levels at all times. I don’t see the fantasy thrill ride as being worth the price attached to it.

Rob

 

“If Shiller’s Research Is Legitimate, We Are Going to See an Ocean of Human Misery During the Next Buy-and-Hold Crisis. That Is Going to Melt People’s Hearts. People Are Going to Work Up the Courage to Stand Up to You Goons at That Time. And We Will All Live Richer and More Fulfilling Lives From That Point Forward.”

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Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

“One of the two strategies is suited for use by humans. The other is not. That’s the difference.”

Are you now marketing your timing scheme to aliens? I guess that is your only option since there is no one here on earth supports you.

You don’t support yourself, Anonymous. You had to click an “I Agree” button before you were permitted to post at any of the boards you post at. So your yourself gave your agreement to the laws by which we govern ourselves in this country. That’s a problem for you and the other Buy-and-Holders.

I acknowledge that honest posting re the last 40 years of peer-reviewed research in this field is banned at every large site on the internet. But I don’t think that the Ban on Honest Posting is a viable long-term proposition. If Shiller’s Nobel-prize-winning research is legitimate research (I believe that it is), we are going to see an ocean of human misery during the next Buy-and-Hold Crisis. That is going to melt people’s hearts. People are going to work up the courage to stand up the you Goons at that time. And we will all live richer and more fulfilling lives from that point forward. Once we make the transition to Valuation-Informed Indexing, there will not be one person who will ever want to go back to Buy-and-Hold.

We are living through a huge leap forward in our understanding of how stock investing works. Huge advances can be messy. I wish it wasn’t so. But it is obviously so. And you are right about the bans. But I am right about the laws of the United States. The laws of the United States say as much about what we are as a people as does the Ban on Honest Posting re Shiller’s amazing research findings.

We’ll see.

I wish you all good things, in any event.

Rob

“The Community LOVES This Stuff. That Has Been True Going Back to the First Day. It Is the Community’s Love for This Stuff That Caused the Goon Freak-Out.”

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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”

And THAT is the reason that the community has rejected you. You are incapable of having any normal conversation. You would never tolerate it, yet you somehow think it is okay for you to do so.

The community has not rejected me. Hundreds of community members have praised my work in the most effusive manner imaginable. I have been humbled by their comments.

You Goons are not the community. You make up about 10 percent of the community. Many community members are afraid of you and censor themselves when they see the price that they will be made to pay if they participate in discussion in an honest and helpful and constructive way. That only shows why we have adopted laws prohibiting the types of tactics that you have employed. Once we begin enforcing those laws in a reasonable manner, the Goon stuff will be a thing of the past and we will all be on our way to living richer and better and fuller lives in the future.

The community LOVES this stuff, Anonymous. That has been true going back to the first day. It is the community’s love for this stuff that caused the Goon freak-out. Most community members don’t fully understand it. That’s why they need to be able to ask questions and learn over time. And most community members follow some form of Buy-and-Hold strategy today. So that is where their sympathies lie. But the majority of community members believe that honest posting should be permitted. And that is what matters. Once the possibility of honest posting is opened up, we are on our way to a very, very good place.

My best wishes to you.

Rob