A Rich Life

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

Valuation-Informed Indexing #384: There’s a Risk Attached to Lowering Your Stock Allocation When Prices Are High

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I’ve posted Entry #384 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called There’s a Risk Attached to Lowering Your Stock Allocations When Prices Are High.

Juicy Excerpt: Stock prices bottomed out from the 2008 crash in March 2009. In the nine years since, prices have increased over 260 percent (assuming reinvestment of dividends). The annualized real return has been 16.8 percent. Stocks were not overpriced in March 2009; valuations were slightly below fair-market value levels. But valuation-informed investors were wary of stocks even at those prices. Stocks had been overpriced for many years at that time. So there was a belief among many that, once prices began to fall hard, they would continue to do so. Buy-and-Holders, on the other hand, generally argued that the price drop created a buying opportunity. I think it would be fair to say that the Buy-and-Holders feel vindicated by the performance that we have seen from the stock market over the past nine years.

Would they still feel vindicated following a 50 percent price drop? A $100,000 lump sum invested in stocks in March 2009 would be worth $360,000 today. A price drop of 50 percent would bring that amount down to $180,000. That’s still a significant gain. A gain of $80,000 on a $100,000 investment over only nine years is a gain of a good bit more than the average long-term stock return of 6.5 percent real and certainly a gain much greater than what was available from most other asset classes during that time-period.

So valuation-informed investors missed out.

Site Visitor to Rob: “The Shiller CAPE Ratio Provided a Fairly Accurate Forecast of 10-Year-Ahead Returns—for a While. Since the Mid-1990s, However, the Predictive Power of This Metric Has Deteriorated.”

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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:

Here’s some new research, which you claim to always be interested in. The “fair-value CAPE”:

https://investornews.vanguard/valuing-the-stock-market-with-a-new-yardstick-the-fair-value-cape/

“As the figure below illustrates, the Shiller CAPE (cyclically adjusted price-to-earnings) ratio provided a fairly accurately forecast of 10-year-ahead returns—for a while. Since the mid-1990s, however, the predictive power of this metric has deteriorated.”

Specifically, the chart shows that Shiller’s results fall apart starting in 1996. Seems like that’s a significant year, but I can’t remember why. Anyway, the fair-value CAPE, which has smoked Shiller since then, is not predicting a crash. It says only that the market is somewhat overvalued.

Good news, right? You’re not really hoping for a crash are you? That would be ghoulish.

Thanks for the link.

The predictive value of the metric has deteriorated for a time because the insane level of mispricing which came into effect in 1996 has not yet resolved itself. Assume that stocks return to fair-value prices tomorrow and re-run the numbers and you will obtain very, very different results.

If stock prices are determined by a rational process, then there is no need to re-run the numbers. But, if stock prices are determined primarily by shifts in investor emotion, then it is absolutely imperative to do this. So the core question is — Are stock prices determined by economic realities or by shifts in investor emotion?

The way to test this is to check whether prices fall in the pattern of a random walk or not. If prices fall in the pattern of a random walk, it is reasonable to conclude that it is economic realities that are causing price changes. And, in the short term, we do indeed see a random walk. But in the long term, we do not see a random walk. In the long term, valuations affect long-term returns. Why? Because it is investor emotions that determine returns and valuations measure the extent of investor emotion present at various points of time. That’s what Shiller showed with his “revolutionary” (his word), Nobel-prize-winning research of 1981.

It would be very, very, very good news if there were a way to avoid another crash. I will certainly give you that one. If if it true that valuations affect long-term returns, the only way to avoid crashes is to educate investors as to the realities we have learned over the past 37 years. Stock prices are self-regulating so long as honest posting is permitted at every internet site. High prices equal low long-term returns and investors who are aware that long-term returns are going to be low sell stocks, which brings prices back to reasonable levels. Stock markets in which investors are not able to learn what the last 37 years of peer-reviewed research teaches us are runaway trains. It is price discipline that keeps markets functioning properly. Buy-and-Holders rule out any possibility of ever exercising price discipline when they make their first stock purchase. Not good (if the last 37 years of peer-reviewed research is legitimate research, which I believe it to be).

Ghoulish (But Only If Buy-and-Hold Remains Unchallenged for Too Much Longer) Rob

Valuation-Informed Indexing #383: Eight Implications of Shiller’s Finding That Valuations Affect Long-Term Returns

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I’ve posted Entry #383 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Eight Implications of Shiller’s Finding That Valuations Affect Long-Term Returns.

Juicy Excerpt: If stock investing risk is variable, investors who care to can minimize their lifetime investing risk by investing in stocks to the same extent as Buy-and-Hold investors over the course of a lifetime but investing more heavily in them at times when risk is low and by investing less heavily in them when risk is high. Stock investing risk is to a large extent optional for investors open to taking valuations into consideration when setting their stock allocations.

“If the Community of People That Invests in Stocks to Provide for Their Retirements Wants to Open the Internet to Honest Posting re the Last 37 Years of Peer-Reviewed Research, That Community of People Will Do That Thing. I Intend to Help. I Very Much Want Those Efforts to Be Successful. But This Is Not a Job for Me to Do Alone. This Is Not All on My Shoulders.”

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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 speculation is worthless. Even you must see that. If you want things to change, you have to take action yourself. But you refuse.

Consider the old man shaking his fist at those darn kids on his lawn. Anyone impressed by him? No. Anyone handing him $500 million? No. And that’s you.

But I wish you all the best that this life has to offer a person, in any event. Even though that helps not even a small bit.

I don’t think I need to take action myself, Anonymous. I believe that that way lies madness. Considering what is at stake here, if I took this all on my own shoulders and considered where things stand today at the end of 16 years of discussion, I would go insane. No. That ain’t the way.

We live in communities. If the community of people that invests in stocks to provide for their retirements wants to open the internet to honest posting re the last 37 years of peer-reviewed research, that community of people will do that thing. I intend to help. I very much want those efforts to be successful. But this is not a job for me to do alone. This is not all on my shoulders.

It’s a community that enacted the laws against financial fraud. It’s a community that awarded Robert Shiller a Nobel prize for his “revolutionary” (Shiller’s word) research findings of 1981. It’s a community that established posting rules at every site at which I have posted that prohibit the abusive tactics that you Goons have engaged in to silence the thousands who have expressed a desire to participate in honest learning experiences.

The United States is a good community. Our laws are good laws. We will prevail in the end. I have zero doubt.

It would be a terrible mistake for me to think that I should do this on my own or even that I COULD do it on my own. This is community business. My job is to let the community work its will.

I have a part to play and I intend to play my part. I will never say that I believe that John Greaney included a valuation adjustment in the retirement study posted to his web site. I would be letting down the community if I did that. So that will never happen. But it is for the community to decide how to proceed and when to proceed. My job is just to facilitate the process by which the community arrives at its decisions as to how to proceed and when to proceed.

I love my country, right? Is that not the catch phrase that I use all the time? That’s the bottom line here. That’s been the bottom line here going back to the morning of May 13, 2002. I love my country and so I cannot bring myself to violate its laws re so important a matter.

I hope that helps a small bit, dear friend.

My best wishes.

Rob

 

 

“How Much Rational Behavior Should We Expect to See When Prices Have Gone This Far Out of Control?”

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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’re convinced that your speculation has tremendous value, despite a batting average that approaches .000.

Please consider what the P/E10 level has been for the entire time in which I have been putting forward these “speculations.”

You’ve heard the phrase “irrational exuberance,” right? At a time when the irrational exuberance reaches the sorts of levels it has reached in recent decades, do you think you could realistically expect to see anything different?

I’m not saying that I like this reality. I am just trying to provide a bit of perspective. How much rational behavior should we expect to see when prices have gone this far out of control?

Will rationality ever be restored? That’s the question. It always has been restored in the past. I think it will be restored this time too.

But I have been known to get them wrong from time to time. We are just going to have to hang in there a bit to find out for sure.

My best wishes.

Rob

“I Have Zero Intention of Filing Any Criminal Charges, Either Now or at Any Other Time.”

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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 are the one making the claim. So you file the charges.

I have zero intention of filing any charges, either now or at any other time. So, if that is what you are worried about, you can stop worrying.

I will continue posting honestly re safe withdrawal rates and scores of other critically important investment-related topics. In the event that there are lots of other people demanding that charges be filed in the days following the next price crash, I am going to put forward some words aimed at putting the behavior of you Goons in the best possible light so that your prison sentences will be as short as possible given the circumstances that apply. If charges are brought, the members of your jury will determine the length of your prison sentence.

Under our system, I do not determine when charges are brought or how long the prison sentences will be. I AM required to post honestly under our system. If I say that I believe that Greaney’s study contains a valuation adjustment, then I am guilty of financial fraud too and I go to prison too. Not freakin’ interested, you know?

I will do my part and I will leave it to others to determine how others will play it (with the sole exception being that I will put in a good word for you Goons as a result of my feelings of friendship towards you).

I hope that works for you, my dear Goon friend.

Rob

 

“Most People Look at the Numbers on Their Portfolio Statement to See How Their Investment Strategy Is Doing. So Most People Are Not Inclined to Demand That Criminal Charges Be Brought Today.”

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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 laws were broken, then file charges. Otherwise, you are just repeating lies.

It is all the people of the United States who use the internet to learn how stock investing works. So the crime is against all the people of the United States. So we all need to pull together to demand that charges by filed by the prosecutors who work for us.

That will happen. Did the people who were defrauded by Bernie Madoff insist that charges be filed before the fraud was exposed? They did not. Madoff’s investors referred to him as “Saint Bernie” in the days before they lost their retirement money. The fraud had been going on for a long time. But it was only when they saw their retirement funds disappear that charges were brought. It appears to me that it is going to go the same way with The Great Buy-and-Hold Con.

All who follow the peer-reviewed research have known since 1981 that valuations affect long-term returns. So in an intellectual sense the fraud was exposed in 1981 (except it wasn’t really fraud until it was exposed — until Shiller published his “revolutionary” research findings, Buy-and-Hold was a mistake, not a con). But people have not suffered devastating losses to this day. We have seen poor returns for 18 years running now as a consequence of the out-of-control bull of the late 1990s. But the full reality is that those following Buy-and-Hold strategies have not done poorly if you count what happened in the years before 2000 and even from 2000 forward the losses have not been devastating. That’s what most people look at, most people look at the numbers on their portfolio statement to see how their investment strategy is doing. So most people are not inclined to demand that criminal charges be brought today. That would probably change if honest posting were permitted and people could see what has been done to them and how the Buy-and-Holders have behaved to keep the cover-up going. But I think it would be fair to sat that you Goons have zero intention of permitting honest posting. So we are where we are.

The fraud is ongoing. If the market continues in the future to perform anything at all as it has always performed in the past, we will see the devastating losses in the next year or two or three. Is there some reason why we would not demand charges to be brought at that time? That’s sure what I expect to see happen. All of us who love our country should of course be doing what we can to have this massive act of financial fraud exposed as soon as possible. But there is only so much that humans can do. You Goons are pretty darn brutal in your abusiveness. I think it would be fair to say that no one who lives in the United States has seen an act of financial fraud this extensive. So it may be that we are going to need to wait a bit re the bringing of criminal charges. We can let people know that they are coming so that they can avoid putting posts up in “defense” of the Lindauerheads and the Greaney Goons so that the number who go to prison will be as small as possible given the circumstances that apply today. And we can do what we can to urge you Goons to come clean prior to the crash so that your own prison sentences might be shortened a bit. And then we need to let it go and accept what comes. No?

The bottom line is that the good news here is 50 times more good than the bad news here is bad. The last 37 years of peer-reviewed research is amazing, life-enhancing stuff. The fact that we are going to see a good number of our Goon friends sent to prison is a drag, to be sure. But the negative here hardly compares to the good we will see done for millions when we are able to tell people how to invest in ways that permit them to retire many years sooner while taking on only a fraction of the risk that they had to take on in the Buy-and-Hold Era. We have to take the bad with the good. We should do all that we can to keep the bad as limited as we can possibly make it. But we should not lose site of the full reality that the good news here is 50 times more good than the bad news here is bad.

Does that help at all?

Rob

Valuation-Informed Indexing #382 : Does It Help to Add a Moving Average Component to a Valuation-Informed Stock Investing Strategy?

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I’ve posted Entry #382   to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Does It Help to Add a Moving Average Component to a Valuation-Informed Stock Investing Strategy?

Juicy Excerpt: A member of the Bogleheads Forum recently started a thread (“Using CAPE to Time Market?”) in which he expressed a view that the reason why using valuations alone to adjust one’s stock allocationis unsatisfying is because CAPE doesn’t predict short-term market moves. He sought feedback on whether it might be a good idea to combine the use of Shiller’s CAPE valuation metric (P/E10) with an examination of moving averages. The idea would be that the risks of using moving averages to time one’s allocation changes would be mitigated by making reference to the P/E10 level, which would signal to the investor times when severe price drops were more likely. The community member explained: “According to this strategy, I would follow a moving-average sell rule only when CAPE is high. At other times, I would refrain from using moving-average timing.”

I don’t think much of the idea.

“It’s Not at All Hard to Understand What to Do or Why You Need to Do It. The Hard Part Is Saying the Words “I” and “Was” and “Wrong.” Lots of People Have Their Lives Invested in Buy-and-Hold. It Is Hard for Them to Accept That They Have Been Doing It Wrong All These Years. It Is By Talking Things Over That We Work Through That Pain.”

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

VII is “half-baked” because you can’t define how to implement it. That’s what that term means. People have asked you countless times to define the VII strategy. You duck, dodge, evade until people get tired of asking, and finally you get banned. Playful fun for you, annoying noise for everyone else.

“Valuations affect returns” is not a strategy. Why is it so impossible for you to grasp that simple fact?

You implement the strategy by aiming to keep your risk profile constant over time rather than your stock allocation. That’s it. That’s the only difference from Buy-and-Hold.

If the market were efficient, your risk profile would remain constant even if you never changed your stock allocation. If valuations affect long-term returns, you MUST adjust your stock allocation in response to big shifts in valuations to have any hope whatsoever of keeping your risk profile even roughly constant. So Valuation-Informed Indexers do that.

Just do everything that you would do as a Buy-and-Holder but then add in the last 37 years of peer-reviewed, “revolutionary,” Nobel-prize-winning research, and you’ve got it. It’s not at all hard to understand what to do or why you need to do it. The hard part is saying the words “I” and “Was” and “Wrong.” Lots of people have their lives invested in Buy-and-Hold. It is hard for them to accept that they have been doing it wrong all these years.

It is by talking things over that we work through that pain. That’s why it is so important that we open every discussion board and blog on the internet to honest posting. We can’t begin the healing process until we bring the financial fraud stuff to a full and complete stop.

A simple example of how you implement a research-based model is to calculate the safe withdrawal rate accurately. At the top of the bubble, it was 1.6 percent going by the research and 4.0 percent going by the discredited Buy-and-Hold Model. Do you see how those are different numbers?

Now, you can take out whatever you want. Not all Buy-and-Holders take out 4 percent in retirement. The safe withdrawal rate is defined as the withdrawal rate that will work if the worst-case scenario ever seen in history happens to pop up in your retirement. That’s a very safe number. So a Buy-and-Holder might say “I’m going to take 4.5 percent, not 4 percent, that’s safe enough for me. Fine, you know? It’s his choice. It’s the same with a Valuation-Informed Indexer. He might take 2.0 instead of 1.6 even though his retirement begins at a time when valuations are what they were at the top of the bubble. What of it? It’s his money so it’s his choice.

The different between the two models is that the Valuation-Informed Indexer uses valuation-adjusted numbers to INFORM his decision. He starts with 1.6 and makes whatever personal adjustments he wants to that number, he doesn’t start with 4.0 and make whatever personal adjustments he wants to that number. The difference in implementation is that the Valuation-Informed Indexer uses accurate calculations. The last 37 years of peer-reviewed research shows that you have to take valuations into consideration to get the numbers right, so he does that.

Make sense?

Rob

Buy-and-Hold Goon to Rob: ” You Have Convinced Yourself That There Is Positive Stuff, But It Just Isn’t True. Somehow We All Think We Are Different and That It Will All Work for Us Even Though it Didn’t Work for Others. It Is Best Just to Look at the Black and White Results, Which in This Case is Dollars and Cents. It Doesn’t Really Impact the Rest of Us at All.”

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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:

“I sometimes ask myself: “If you knew how things were going to play out, would you have put forward that famous post from the morning of May 13, 2002?” Given the positive stuff we have seen over the past 16 years, the answer is obviously “yes, a thousand times yes!” ”

There is the problem, Rob. You have convinced yourself that there is positive stuff, but it just isn’t true. In any situation, you need to step back and try to pull away from your own biases and take an objective view. Your situation is not unique. We see that people have passions for their businesses and keep dumping money into it, hoping that someday it will work out, yet it doesn’t. We see people move to California in hopes of making it big as an actor/actress thinking that they have what it takes, yet they never make it. Or take the countless kids that think they will be a big NFL/NBA or MLB player and spend years chasing the dream, yet it doesn’t come through. At some point, you have to sit back and look at all the time you have invested and use that as an objective barometer to know that your future results are likely to lead to the same disappointments.

I am sure you think your situation is different. Those other people also think the same thing. We can look at others and see the obvious and know that things are not going to change for them, yet somehow we all think we are different and that it will all work for us even though it didn’t work for others.

Sure, you can go ask a few people if they think you are correct and that will also tell you to keep on pursuing your dream. The only problem is that they are just telling you what you want to hear. That is why it is best just to look at the black and white results, which in this case is dollars and cents. As you have admitted, this point of measure has not worked out for you.

You can decide to call me a goon or come up with more of your canned sayings to just write these comments off just like the rest. The fact is that it doesn’t really impact the rest of us at all. The only one hurt will be you if you decide to ignore this post just like you have done with the rest.

People have been trying to help you for years. Unfortunately, you don’t see it as help. If you are not willing to take it, no one can make you. It is all your choice, just like the rest of us make our own choices.

I hope at some point you decide to really help yourself and your family.

Okay, Anonymous.

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

Rob