A Rich Life

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

“For the New Model for Understanding How Stock Investing Works to Gain Support, There Has to Be Widespread Discussion of the Issues. Until We Have That, We Cannot Say That Most People Genuinely Prefer Buy-and-Hold. Most People Have Only Heard One Side of the Story.”

by

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 is my beef with market timing schemes like VII? It doesn’t have a successful outcomes track record like Buy, Hold and Rebalance.

That’s a reason for not following it yourself, Anonymous. It’s not a reason for blocking other people from hearing about it. That’s where you cross the line.

I have zero problem with people who favor Buy-and-Hold over Valuation-Informed Indexing. There are many millions of good and smart people in that camp. I was once a Buy-and-Holder myself.

But we have to permit discussion of these issues at every investing discussion board and blog on the internet. Buy-and-Hold was dominant in 1981, when Shiller published his research showing that the market is not efficient. For the new model for understanding how stock investing works to gain support, there has to be widespread discussion of the issues. Until we have that, we cannot say that most people genuinely prefer Buy-and-Hold. Most people have only heard one side of the story. That ain’t the American way.

My sincere take.

Rob

“I Have Attended Numerous Financial Blogger Conferences and At Each One That I Have Attended I Have Spoken to Financially Successful Bloggers Who Have Told Me That They Regretted the Abusiveness That Has Held Me Back and That They Hoped That Things Would Soon Change.”

by

Set forth below is the text of a comment that I recently posted to the discussion thread for one of my columns at the Value Walk site:

My plan has been a huge success, presuming that Shiller’s Nobel-prize-winning research is legitimate research, Sammy.

I definitely have spent down my nest egg. That part of your comment is accurate. But that of course has nothing to do with the merit of the Valuation-Informed Indexing strategy. Had it not been for your abusiveness and the abusiveness of other Buy-and-Hold Goons, I would be a multi-millionaire today. I have attended numerous Financial Blogger Conferences and at each one that I have attended I have spoken to financially successful bloggers who have told me that they regretted the abusiveness that has held me back and that they hoped that things would soon change.

I believe that things will change in the days following the next price crash. I believe that at that time millions of people will be looking for something that works better in the long run than Buy-and-Hold and I will be there with 17 years of solid material to share with them. I will be able to invest all of the money that I earn at that time in stocks selling at prices at which stocks offer amazing long-term returns. So I will be far, far ahead of where I would have been had I never worked up the courage to advance my famous post asking whether it makes sense to take valuations into consideration when calculating the safe withdrawal rate.

I couldn’t be happier than I am with Valuation-Informed Indexing today. I didn’t have all this stuff figured out on the day that I put forward The Post Heard ‘Round the World. I learn new things every week. My knowledge base is now deep enough for me to write a book on the subject (“Investing for Humans: How to Get What Works on Paper to Work in Real Life”), which I expect to finish by the end of the year. If I had ever had any doubts, I would not have spent so many years of my life going deeper and deeper and deeper. Each new thing I learn deepens my conviction that Shiller’s Nobel-prize-winning research is important stuff. Valuation-Informed Indexing is the future of investment analysis. I am sure. I want to share it with every investor alive on Planet Earth. I am not just satisfied with the strategy. I am passionately in love with it.

And of course it is not just me. I have a slider that runs across the top of every page of my web site that lists over 200 comments from both experts and ordinary investors praising my work in the most effusive ways possible. Wade Pfau’s conclusion after 16 months of research into the merits of the VII strategy compared to Buy-and-Hold was: “Yes, Virginia, Valuation-Informed Indexing works!” He wouldn’t have said that if he thought that the strategy was a failure. I mean, come on.

YOU say that it is a failure, that’s all. And I think it would be fair to say that you are not exactly the most open-minded person on the planet re this particular subject.

I do wish you all good things, in any event.

Nest-Egg Diminished Rob

Valuation-Informed Indexing #472: Strategic Assessments in the Investment Realm Involve Both Short-Term and Long-Term Considerations

by

I’ve posted Entry #472 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Strategic Assessments in the Investment Realm Involve Both Short-Term and Long-Term Considerations.

Juicy Excerpt: A random walk pattern would tell us that Buy-and-Hold is the ideal strategy. If prices played out in the form of a random walk, it would be fair to say that the risk of a big price drop is the same at all times; so it would not be possible to predict future returns and the best practice would be to stick with the same stock allocation at all times. But, if prices play out in the form of a hill-and-valley pattern, the knowledgeable investor can predict his long-term return by noting in which direction (hill or valley) prices are headed. And if prices can be predicted, risk is not static but variable. If risk is variable, investors who wish to keep their risk profile roughly constant over time must be willing to engage in market timing to have any hope of doing so.

“The Aim Should Be to Keep Your Risk Profile Roughly Constant Over Time.”

by

Set forth below is the text of a comment that I recently posted to the discussion thread for one of my columns at the Value Walk site:

For investors following your VII strategy, you are saying they need to write a book and sell it in order to finance their retirement? That’s part of the VII strategy?

Rob, if any person followed your plan, they would have experienced a failed retirement. It is simple math.

I am saying that every investor should practice market timing. The aim should be to keep your risk profile roughly constant over time. When valuations move up dramatically, you have to lower your stock allocation. When valuations move down dramatically, you have to increase your stock allocation. Wade Pfau and I co-authored peer-reviewed research showing that this approach greatly diminishes risk while also greatly increasing return. That’s been so for as far back as we have good records of stock prices.

I also say that any journalist who is placed in circumstances in which he happens to fall upon a story one-tenth as big and important as this one would be a fool not to pursue it for the remaining years of his life. Stock crashes cause huge amounts of human misery. If we can do away with stock crashes (and we can do that today by permitting widespread discussion and exploration of the far-reaching implications of Shiller’s Nobel-prize-winning research findings), we change the world in a very positive and exciting and life-affirming way. Please mark me down as being in favor of us doing that and as being humbled to have been able to have played the role that I have played in turning this amazing breakthrough in our understanding of how stock investing works into a reality.

I hate the bad stuff that we have seen. But the good stuff that is waiting over the horizon is so good that I don’t believe that hardly anyone is even going to remember the bad stuff once we make it together to the other side of The Big Black Wall of ignorance and indifference that is holding us back today.

We’ll see.

My best wishes.

Life-Affirming Rob

“If a Fellow Had Discovered the Cure for Cancer and People Who Worked in Cancer Treatment Centers Harassed Him for 17 Years and Kept Him From Earning an Income, Would You Conclude That the Value for the Cure for Cancer Was Zero? I Would Not. I Would Conclude That the People Harassing Him Saw the Great Value in What He Was Putting Forward or They Would Not Be Bothering With the Harassment.”

by

Set forth below is the text of a comment that I recently posted to the discussion thread for one of my columns at the Value Walk site:

The plan did not work like a dream. We can all see the math. 17 years is not a short term. After 17 years of missing your target, the nest egg is spent down to a level that you can’t recover. You are trying to convince people that they should try to time the market with your VII strategy. Why should they when it failed for you?

I agree that 17 years is a long time.

If you include the value of the book that I could not have written had I not taken this path, then my nest egg value is off the charts. I have not converted that value to cash as of today. But I see the value there very, very, very clearly. So that’s what I have to go by.

If a fellow had discovered the cure for cancer and people who worked in cancer treatment centers harassed him for 17 years and kept him from earning an income, would you conclude that the value for the cure for cancer was zero? I would not. I would conclude that the people harassing him saw the great value in what he was putting forward or they would not be bothering with the harassment.

Everyone should be timing the market. Not because of anything that happened to me and not because of anything that I say. Everyone should be timing the market because there is 38 years of peer-reviewed research in this field showing that market timing is required for long-term investing success. If valuations affect long-term returns (Shiller was awarded a Nobel prize for showing this), then stock investing risk is not stable but variable (depending on valuations). Investors seeking to keep their risk profile roughly constant over time MUST engage in market timing. To fail to do so is to fail to practice price discipline, which is obviously not at all a good thing.

It will be interesting to see how things play out in the days following the next price crash, Sammy.

I do wish you all good things, in any event.

Well-Wishing Rob

“We See a Mountain of Gold in Front of Us and It Is Hard to Accept That It Is Real and It Is Hard to Understand Why Everyone Else Is Not Picking Up the Gold That Has Been Sitting There for 38 Years Now.”

by

Set forth below is the text of a comment that I recently posted to the discussion thread for one of my columns at the Value Walk site:

Let’s talk about real numbers, Rob.

In 2002, you quit your job and stated that you had a nest egg of $400k and annual expenses of $30k. You stated you were invested in i bonds, TIPS and CDs. On many occasions, you quoted a real return rate of 3.5%. In 2005, you stated that your expenses were up to $38k, but that the market was returning 7% real and you would be getting bigger returns than that. After 17 years, you have stayed out of the market, so we know your plan failed. You are a shining example as to why you shouldn’t try to time the market. To this day, you refuse to answer the question as to why anyone should take YOUR advice, given your failed track record.

Like all the other humans, I was given skills that permit me to add value to the world. It is by being compensated for the value that I add to the world with those skills that I am able to cover my costs of living and pursue happiness for myself and my family. Following the principles that I describe in my book “Passion Saving: The Path to Plentiful Free Time and Soul-Satisfying Work,” I elected to leave my safe corporate job to do work that would pay less in the short term but that had the potential to permit me to add much more value and thus earn much more income in the long term.

That plan worked like a dream, Sammy. In the short-term, it worked horribly. I have not earned a penny since I left my job. That’s of course a catastrophe. But look at the other side of the ledger — look at the value that I have added to the world that will bring in compensation in the days following the next price crash. The shift from Buy-and-Hold to Valuation-Informed Indexing is the biggest advance in the history of personal finance.

It changes everything that we once believed we knew about how stock investing works. In the Buy-and-Hold days, we thought that market timing was a bad idea. As a result of our explorations of Shiller’s research findings. we now know that market timing is the key to long-term investing success. The peer-reviewed research that I co-authored with Wade Pfau shows that investors who incorporate market timing into their investment plan can thereby reduce the risk of stock investing by nearly 70 percent! While increasing their lifetime returns! Is that investor heaven or is that investor heaven?

And all of this is rock-solid stuff. Shiller was awarded a Nobel prize in Economics for his work. We should have been talking about this going back to 1981. We haven’t been because the advance is so big that it caused us to experience a large amount of cognitive dissonance. And, as the years have passed, the embarrassment felt by the Buy-and-Holders over making a mistake re the critical importance of market timing has grown to a point where many of them cannot stand the thought of people openly discussing what really works.

What does a society need in circumstances like that? A good journalist to get the word out! That’s what I am! That’s what I do! I am in the process of getting the word out. I wish that I had been getting compensated all along, in which case I would be a multi-millionaire today. But the abusiveness of you and a number of other Buy-and-Holders, which is the only thing holding me back, is not evidence that there is not a mountain of money to be made here. It is evidence that the mountain is so huge that it is hard to comprehend how huge it is.

Did you notice how excited Wade was in the days when he was doing research on Valuation-Informed Indexing? Those were the happiest days of his life. There are thousands of researchers who would like to experience that feeling. And there are thousands of journalists who would like to be writing about this stuff. And there are thousands of investment advisers who would like to be giving the straight story to their clients. And there are thousands of policymakers who would like to be pursuing policies that would help us all avoid economic crises like the one that we experienced in 2008 (that Shiller predicted in a book published in March of 2000). We are looking at good stuff piled on top of good stuff piled on top of good stuff piled on top of good stuff.

What’s holding us back? Why haven’t we cashed in all these mountains of good stuff?

We are afraid. Because we don’t see other people talking about this stuff. We wonder if, given the lack of discussion of the implications of Shiller’s research, we might be thinking about this stuff wrong. Wade told me that he experienced that exact feeling. I experienced that feeling at one time. John Walter Russell experienced that feeling. Everyone who begins pondering these ideas experiences that feeling. We see a mountain of gold in front of us and it is hard to accept that it is real and it is hard to understand why everyone else is not picking up the gold that has been sitting there for 38 years now. It is not the norm in our society for wonderful new ideas not to be widely discussed. But that’s the situation in the investment advice area since 1981. So we are in great need of a journalist to break this one wide open and to help millions of people live better lives by doing so.

And here I am, you know? That’s the job. It’s been a rough patch of road. These 17 years have been hard, hard, hard, hard, hard. I certainly don’t say different. You’ve got me on that one. But look at the asset that I have built up over those 17 years. I am in the process of writing a book (“Investing for Humans: How to Get What Works on Paper to Work in Real Life”) that tells the entire story in great depth. I expect to see that book change the world in a very positive way.

Not immediately. My expectation is that virtually no one will read it for so long as stock valuations remain where they are today. But what about after the next crash? I expect that at that time there will be millions of people who will want to know what happened to most of their life savings. And I will be able to tell them the story they want and need to hear in great depth. And tell them how we can all work together to be sure that nothing like this ever happens again.

That’s my life’s work, Sammy. That’s what I was put on earth to do. I have pulled off something amazing. In ordinary circumstances, I shouldn’t have been able to make one-five-hundredth of the contribution that I have made. Which would of course have meant that I would not have received one-five-hundredth of the compensation that I will receive. I don’t have that money in hand today. I don’t have one penny of it in hand today. But I have the asset that adds to the happiness of millions of people in hand. And I had to be willing and able to give up compensation for 17 years to acquire that asset. So I did what I had to do.

I say that my plan worked beyond my wildest dreams and hopes. I don’t like the way that things played out. If I were king of the world, we never would have seen a single abusive post. But I didn’t create the circumstances in which the things that happened happened and were tolerated at many, many places. All of those circumstances were in place before I came on the scene. My job is to provide people with the information that they need so that we can all work together to change the circumstances that prevail so that we can all live better lives. I am in the process of doing that.

Shiller’s research is important, Sammy. That’s why he was awarded a Nobel prize. I don’t think you are going to be able to hold back the History Train forever. I think you are fighting a losing cause. I would say that it is YOUR plan that has failed. But we are just going to have to wait to see how things play out in the days following the next price crash to find out for certain.

I naturally wish you all the best that this life has to offer a person, dear friend.

Wildly Successful But Poorly Compensated (For Now!) Journalist Rob

“If Shiller’s Nobel-Prize-Winning Research Is Legitimate Research, Then Every Calculation That the Buy-and-Holders Have Ever Done Is in Error.”

by

Set forth below is the text of a comment that I recently posted to the discussion thread for one of my columns at the Value Walk site:

As you admit, you are not a math guy. With investing, it is all about the numbers. I don’t think, however, it is just your poor math skills that lead to all of your false conclusions. Your retirement plan failed, your market timing strategy failed and the community at large humiliated you and kicked you out. As such, you have to push a false narrative in order to try and save face. As you can see, it’s not working.

I don’t consider math stuff to be my strong suit. So we are okay re that one.

I half agree with you that investing is “all about the numbers” and I half disagree. The Buy-and-Holders do not include adjustments for valuations in any of their calculations. Shiller’s work shows that valuation adjustments are required. So the two schools of thought produce very different numbers. If Shiller’s Nobel-prize-winning research is legitimate research, then every calculation that the Buy-and-Holders have ever done is in error. If you leave out the most important factor, your calculations are always wrong, no?

So who are the real numbers guys? The ones who always ignore the most important factor and get every calculation wrong? Or the ones who say “we better include valuations because we know that valuations always have a big effect”? I do not consider myself strong on numbers but I consider myself strong on emotions and it is investor emotions that cause mispricing (overvaluation and undervaluation). So I think it would be fair to say that I do a better job with the numbers than the Buy-and-Holders. Not because I am great with numbers. Because I am good enough with emotions to know that numbers relating to emotions need to be included and the Buy-and-Holders — who generally are not so strong dealing with emotions — do not.

I definitely think that it is better to get the numbers right than to get them wrong. I am 100 percent confident re that one.

Rob

Valuation-Informed Indexing #471: The Mathematics of Investing Is Not Difficult, But It Is Flat-Out Intolerable

by

I’ve posted Entry #471 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Mathematics of Investing Is Not Difficult, But It Is Flat-Out Intolerable.

Juicy Excerpt: I am a big fan of the following quote from Rob Arnott regarding true value of stocks: “Returns are for the most part a matter of simple arithmetic…. Much of our industry seems fearful of basic arithmetic of this sort.” These are such strange words. The experts in the investment advice field are fearful of simple arithmetic. That cannot be so. Yet I know from personal experience that it is so. So it is an exciting reality that Arnott worked up the courage to tell it like it is.

“Market Timing Always Prevails Because It Is Rooted in a Realistic Understanding of What Causes Stock Price Changes While Buy-and-Hold Is Rooted in a Mistaken Understanding.”

by

Set forth below is the text of a comment that I recently posted to the discussion thread for one of my columns at the Value Walk site:

17 years is long term (as you have even stated yourself). For your system to work, you need to have not spent down a considerable portion of your nest egg in order to take advantage of a market downturn. Time is your enemy when you market time. Of course, you are still doing the same as before by changing the topic and spouting lies in order to divert from the question that has been asked so many times.

Once again, answer the question:

Your timing strategy didn’t work and you did not get the returns you said you would. Why should anyone follow your advice or the VII strategy when you failed?

The reason why people should follow it is because it has always worked. There has never been one exception in the historical record.

In the event that stocks continue to perform in the future at least somewhat as they always have in the past, I will get the returns that I expected. Now, I obviously cannot get those returns on amounts that I sold off. But that’s a separate matter. I only sold off because I wanted to take advantage of huge opportunities that were presented to me. If I retained the assets, I would get those returns.

It will have taken longer to get them than I anticipated. You’ve got me there. 17 years is indeed a long time. A very long time. Stock prices have remained at very high levels for longer in this bull/bear cycle than they have in any earlier one. That’s real. That’s a fact.

But are you willing to act as if this strange situation will continue forever? I am not willing to do that. If stock prices are determined in the way that Shiller’s research shows they are, those high prices will end in not too much more time.

You say that” “Time is your enemy when you market time.” That’s probably true to a small degree. But I do not think that it is true nearly to the extent that you think it is true. Look at all the times in history when market timing has eventually worked (that’s every case currently available for our review). There were lots of cases in which Buy-and-Hold had gone ahead for a significant length of time. But in every case market timing won the day in the end. Do you think that’s coincidence? I sure don’t. I think market timing always prevails because it is rooted in a realistic understanding of what causes stock price changes while Buy-and-Hold is rooted in a mistaken understanding.

The one point that you are making that is somewhat valid is that prices have remained high for a longer period of time this time than ever before. That is so. If people want to go with Buy-and-Hold because of that, they should do that. But that is sure not what I am going to do. I don’t see any reason to believe that all of the laws of stock investing have suddenly been turned on their head. I believe that the fundamental rules will continue to apply as time goes by. We will just have to wait and see to know for sure. But I feel a lot better going with what has always worked than abandoning it for something very different for no good reason other than a hope.

I hope your strategies do for you what you are hoping they will do for you, Sammy. I obviously don’t expect to see that happen. But I am a fallible human and it could be that I will be proven wrong. If that turns out to be the case, I would like to think that at least my friend Sammy will see good results as a consequence. So there is no way that this can turn out all bad.

Rob

“Today, the Buy-and-Holders Scare People Into Thinking That They Will Pay a Financial Penalty for Exploring Shiller’s Research. That’s a Desperation Tactic. It’s What We Would See If Someone Came Up With a Cure for Cancer and the People Who Earn Big Incomes at Cancer Treatment Centers Put All Their Energies Into Destroying the Careers of the People With the New and Better Approach. That Sort of Thing Makes the People Involved Feel Sick Inside. It’s Not a Good Long-Term Plan. Eventually, a Good People Finds a Way to Make the Transition to the New and Better Approach.”

by

Set forth below is the text of a comment that I recently posted to the discussion thread for one of my columns at the Value Walk site:

Your portfolio did not do what you said it would do. VII did not work. We can all read what you wrote. Your plan failed. You do not make up risk adjustments. Nor do you even risk adjust for results that have already occurred. You should have learned that in your basic finance classes.

I disagree.

I have learned amazing things over the past 17 years. My work has been endorsed by thousands of ordinary people and by dozens of big names and the work is unique work (meaning that I have few competitors) in a highly lucrative field. That sounds real,real, real, real good to me.

If the work that I have done brings in even a small fraction of the value that it has added to the world, the Bennett family will be taken care of financially for many generations to come. If you would have asked me what the odds were that I would be able to produce this kind of value on the day when I began investigating the VII concept, I would have put it at one million to one. I guess I will just have to struggle on somehow now that the one in a million shot has come through for me.

Oh, woe is me!

I think you WANT me to have not succeeded. I think that is how you hope you will be able to block people from learning what they need to know — you don’t feel that you can defeat the ideas, so you put all your effort into defeating the person carrying the ideas to others. I see that as deeply, deeply, deeply sad stuff. If I ever get to the point where I feel that way about ideas that I am trying to defend, I hope that I just give up on those ideas rather than try to defend them that way.

I think that lots of others will be making big money from these ideas down the road a piece, by the way. Today, the Buy-and-Holders scare people into thinking that they will pay a financial penalty for exploring Shiller’s research. That’s a desperation tactic. It’s what we would see if someone came up with a cure for cancer and the people who earn big incomes at cancer treatment centers put all their energies into destroying the careers of the people with the new and better approach. That sort of thing makes the people involved feel sick inside. It’s not a good long-term plan. Eventually, a good people finds a way to make the transition to the new and better approach. That’s what I think we will see here. Probably not until we see all the human misery that we will see with the next price crash. But eventually. And better late than never, right?

Wade Pfau said after 16 months of researching this stuff: “Yes, Virginia, Valuation-Informed Indexing works!” You are standing in the path of the history train, Sammy. That’s not a good place to be standing. This is a nation committed to progress. The investment advice field cannot long remain the one big exception.

We’ll see.

My best wishes.

Rob