A Rich Life

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

Valuation-Informed Indexing #354: Risk Increases Steadily As Stock Valuations Rise

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I’ve posted Entry #354 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Risk Increases Steadily As Stock Valuations Rise.

Juicy Excerpt: I worry about valuations a great deal. I don’t worry about bubbles at all. In fact, I would be inclined to agree with Eugene Fama, who has said that he does not believe that bubbles exist. I think that’s right. I believe that the bubble phenomenon is mythical. Overvaluation exists. Overvaluation is a big deal. But there is no knowable point at which harmless overvaluation becomes transformed into a dangerous bubble. All overvaluation is equally harmful.

Valuation-Informed Indexing #353: Shiller Has Lost Confidence in His Earlier Understanding of How P/E10 Can Be Used to Time the Market

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I’ve posted Entry #353 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Shiller Has Lost Confidence in His Earlier Understanding of How P/E10 Can Be Used to Time the Market.

Juicy Excerpt: What made me uneasy with Shiller’s comments was that he didn’t make any more effort than the Buy-and-Holders did to note that there was more than one way that things could go. It was certainly true that prices could continue to fall and my personal assessment was that that was the most likely scenario. But chiller’s work and the work of all of the researchers who have followed in his footsteps shows not only that long-term timing always works but also that short-term timing never does. Neither Shiller nor I nor my Buy-and-Hold friends nor anyone else could say for sure which way prices were headed. To offer truly useful advice, we needed to make that clear. I didn’t think that Shiller had done that and I said so in the podcast that I recorded at the time.

“Does It Not Make Perfect Sense To Divide By Two At A Time When Stocks Are Priced At Two Times Their Fair Value?”

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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:

Of course you always give the caveat that people must reduce their account balance by 65% in order for your math to work, but then again, you said math wasn’t your thing.

Math isn’t my thing, Anonymous. The math supports what I say 100 percent. The math has been supporting what I say for 147 years now. So I suppose that you could say that math is my friend re this matter. But math isn’t really what gets of off, no. I care about the people. I am happy to use math to help people. But it’s the people that are my focus, not the math.

I think with the 65 percent number you might be thinking of the likely size of the next price crash. We always go below fair value before a secular bear market comes to an end. To know the true value of your portfolio, you would need to divide by two. Today’s P/E10 value is about two times the fair-value P/E10 value.

Why do you object to dividing by two? Does it not make perfect sense to divide by two at a time when stocks are priced at two times their fair value? Would you not like to know the true value of your portfolio? Do you not think that knowing that number would be a huge help in engaging in effective financial planning?

I think it makes all the sense in the world to divide by two. I think everyone should do it. I see it like brushing your teeth, huge upside and nearly no downside (the tiny bit of effort put into the task is the tiny downside). I can’t say that I have ever once in the 15 years heard any reasonable argument for NOT dividing by two.

The only one that I have been able to come up with myself is that, if you think the market is efficient, there would be no need to divide by two. I think that’s why it was not common practice pre-1981 to divide by two. But Shiller showed in 1981 that the market is NOT efficient, that valuations affect long-term returns. So that should have been the end of that. But for 36 years now we have been living in a twilight zone where few of us divide by two and yet everyone who follows the peer-reviewed research knows on some level of consciousness that we all need to do so. But they don’t say anything because it would hurt the feelings of those who don’t divide by two to realize that they have been making a terrible mistake all these years.

How is that ever going to change if a few of us don’t work up the courage to just say out loud what we realize the last 36 years of peer-reviewed research teaches us all about how stock investing works in the real world? If I keep my mouth shut, I am just one more person making the problem worse. It gets worse the longer the cover-up goes on because as more time passes it becomes more embarrassing to admit the mistake. So I try hard not to keep my mouth shut.

I try to be as gentle and loving as I can be in what I say because I don’t like to hurt people’s feelings any more than any of the rest us do. But I do make an effort to say what I believe. I believe that I end up hurting people’s feelings MORE by not speaking up. People are going to find out the realities the hard way when the next price crash arrives. Is it really a kindness to let them be surprised by seeing most of their life savings washed away with the tide? Or is the kinder thing to talk about the last 36 years of peer-reviewed research and what it means? I see this as a case where the truly kind thing is telling people the thing they very much do not want to hear.

Those are my sincere thoughts, in any event.

I naturally wish you all good things.

Rob

“He Has Not Yet Been Able to Put the Story Together in His Head. Because It Is Not Discussed By Lots of Different People at Lots of Different Web Sites. That’s How We All Learn About Any Subject That We Come to Learn About Over Time — By Talking Things Over With Lots of Different People Coming at the Subject From Lots of Different Perspectives.”

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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:

So now you probably think Barton is a supporter and agrees with you, right?

Yes and no, Anonymous.

He didn’t say the words “I endorse Valuation-Informed Indexing and I am going to follow the strategy myself starting today and I am also going to tell all my friends to do the same.” In that sense, which I suspect is the sense that you have in mind, I would not call him a supporter.

But there is another sense in which, yes, I very much think he is a supporter. He wrote an article that made some important points. Those points relate to the Valuation-Informed Indexing story, to the story of why, 36 years after the publication of peer-reviewed research showing that there is precisely zero chance that a Buy-and-Hold strategy could ever work for even a single long-term investor, there are still people advocating this strategy. He obviously sees the importance of those points. But he has not yet been able to put the story together in his head. Because it is not discussed by lots of different people at lots of different web sites.

That’s how we all learn any subject that we come to learn about over time — by talking things over with lots of different people coming at the subject from lots of different perspectives. When Barton has a chance to hear what he needs to hear to fully appreciate the case for Valuation-Informed Indexing — as I believe he will in the days following the next price crash — I 100 percent believe that he will become a big-time supporter.

So perhaps the best way to describe him today is not as a supporter or a detractor but as a person in the state of BECOMING a supporter. I cannot make him a supporter by sending him a single e-mail no matter how many words I include in that e-mail or how powerfully I arrange those words. All that I can do at this point in time is to send an e-mail that makes some points that have particular relevance to him and then wait for the rest of the magic to happen as he hears more points of views expressed in different ways and with different words in the days following the next price crash. Since that’s the best that I can do at this moment in time, that’s what I did. We all have to play the cards that are dealt to us to the best of our abilities.

I don’t see Barton as being that different from lots and lots of others in this regard. Jack Bogle is not a full-throated supporter of Valuation-Informed Indexing today. But he has put forward a good number of statements indicating that he supports the basic principles of the research-based approach. I believe that in the days following the next price crash, Bogle will hear things from lots of different people that will cause things to click for him in a way that they have not clicked to this day and that he will become a full-throated supporter.

I believe that the same will happen with Bill Bernstein and with Scott Burns and with Bill Shultheis and with Wade Pfau and with Larry Swedroe and with Carl Richards and with thousands and thousands of others. All of these people will then be working hard to help us bring the Buy-and-Hold Crisis to an end and to make the transition to the other side of The Big Black Mountain and to live far richer (in every sense of the word) lives than any of us imagined we could ever possibly lead in darker, earlier times in our lives. That’s a good thing, right? That’s something that we all should be looking forward to, right?

I am sure looking forward to that day.

If you’re not, it is my strongly held view that you should be asking yourself why you are not. Learning is a positive. Human progress is a good thing. Knowing how to invest effectively for the long-term is better than not knowing how to invest effectively for the long-term. Reporting the safe withdrawal rate accurately is a plus. Learning together is a win/win/win/win/win. It’s not even possible for the rational human mind to imagine any possible negative following from a Learning Together experience.

These are my sincere thoughts re these terribly important matters, in any event. I naturally wish you the best of luck in all your future life endeavors, good friend.

Rob

“You Didn’t Use ANY Valuation Metric in Your Study, John. It’s Not That You Are Wedded to Some Valuation Metric Other Than P/E10. All of the Financial Fraud Stuff Followed Because You Included No Valuation Adjustment AT ALL in Your “Study” and You Were Not Able to Think Up Any Way to Defend This Mistake Within the Bounds of the U.S. Law.”

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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:

“Stocks were priced at three times fair value in 2000.”

Only if you believe that PE10 is an immutable number as are the constants from the physical world.

This does not follow.

Someone could use a different valuation metric and conclude that the market was priced at 2.6 times fair value or 3.4 times fair value or whatever.

You didn’t use ANY valuation metric in your study, John. It’s not that you are wedded to some valuation metric other than P/E10. You made NO adjustment. That’s why your numbers are so wildly off the mark.

Had you said in response to my May 13, 2002, post “Well, I used valuation metric x and I came up with a safe withdrawal rate of 1.8 but I of course see the need to let my readers know that, had I used P/E10 — the metric endorsed by Nobel-prize-winning economist Robert Shiller — the number that I would have produced would have been 1.6,” there would have been no problem. The community members who saw merit in metric x would have used 1.8 and the community members who saw merit in the metric endorsed by the Nobel-prize-winning economist would have used 1.6. There would have been no death threats. There would have been no demands for unjustified board bannings. There would have been no tens of thousands of acts of defamation. There would have been no threats to get academic researchers fired from their jobs.

All of the financial fraud stuff followed because you included no valuation adjustment AT ALL in your “study” and you were not able to think up any way to defend this mistake within the bounds of the U.S. law. So you went down the dark path that you went down.

I told you at the time NOT to go down that dark path. You have no beef with me, my long-time abusive-posting friend. Your beef is with John Greaney. Your beef is with the man in the mirror.

Rob

“Say That There Were Only 100 Million Investors in the World. That Would be $5 from Each of Them. I Think it Would be Fair to Say that There Won’t be One Investor in the World Not Getting a Whole Lot More than $5 of Benefits from Being Able to Have Thousands of Professionals Comment on the Last 36 Years of Peer-Reviewed Research in this Field.”

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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:

Fantasy forecasts? You mean like forecasting that you will get a $500 million settlement payment?

Time will tell the tale, Anonymous.

If this was not a matter of great importance, you wouldn’t fight so hard. If the level of fight that you have directed to this matter is a good indicator of its importance, I will be getting a lot more than a $500 million settlement payment.

It’s not only Rob Bennett who will be able to do honest work in this field when this matter is brought to a successful conclusion. Every single person who works in this field will be able to do honest work in future days. And ever single investor in the world will be able to take advantage of the many powerful insights that follow from Shiller’s “revolutionary,” Nobel-prize-winning 1981 findings. Say that there were only 100 million investors in the world. That would be $5 from each of them. I think it would be fair to say that there won’t be one investor in the world not getting a whole lot more than $5 of benefits from being able to have thousands of professionals comment on the last 36 years of peer-reviewed research in this field, which just happens to be the most important 36 years of peer-reviewed research in the history of investing analysis.

We’ll see how it all plays out. But I don’t think it is stretching on my part for me to expect payments of a lot more than $500 million. Not after what we have seen during the first 15 years of The Great Debate As to Whether or Not to Permit Debate on the Last 36 Years of Peer-Reviewed Research. And I cannot help but wonder why it bugs you so much that I may be seeing a $500 million settlement payment on the other side of this. You will be one of those benefiting from the amazing learning experience that we all will be enjoying. Does it hurt you in some way that I will receive a settlement payment of $500 million? Why not wish me luck with it? Why not enjoy the reality that one of your fellow community members received a $500 million settlement payment and that you played a part in it? It’s a pretty darn exciting and amazing reality.

Why not take it even a step farther? I am not the only one who will be seeing a huge financial payoff on the other side of The Big Black Mountain. Why not try to develop some research-based investing insights of your own and receive some finance rewards of your own as a result of Shiller’s “revolutionary” (his word), Nobel-prize-winning findings? There’s no law that says that only Rob Bennett can mine these opportunities. The field is open to all. Instead of fretting about how much I will be seeing, you could be directing your energies to seeing that you receive a nice, big payment of your own.

You of course may do as you please. There is no law that says you must reap personal benefits from this. But I do believe that it would be a better use of your limited human energies to employ them making your life better rather than fretting over someone else making his better. Feeling anger over the good fortune of others pulls us down. As a friend, I would rather see you pulled up than pulled down.

These are my sincere thoughts re these terribly important matters, in any event.

I naturally wish you the best of luck in all your future life endeavors.

Rob

Buy-and-Hold Goon to Rob: “I Chose the Path That Has a Proven Track Record of Success, Buy-and-Hold.” Rob’s Response: “Given That Those Are Your Sincere Beliefs, You Are Doing the Right Thing.”

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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 don’t agree with you that Buy-and-Hold has a demonstrated track record of success, Anonymous.”

“It will be interesting to see how it all plays out, Anonymous.”

I have watched it play out. You can continue to live in your fantasy world. That is your right.

I don’t want to risk my retirement and have my family live in fear, so I chose the path that has a proven track record of success and that is what we see with buy and hold.

Given that those are your sincere beliefs (I certainly believe that they are), you are doing the right thing, Anonymous.

I naturally wish you the best of luck with it.

Rob

Buy-and-Hold Goon to Rob: “If You Needed Heart Surgery and a Doctor Said That He Could Do a Procedure That Has a Demonstrated Track Record of Success or, Alternatively, He Said That You Could Try This Other Surgery That Might Work, But Has No Track Record, Which Would You Choose?”

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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 needed heart surgery and a doctor said that he could do a procedure that has a demonstrated track record of success or, alternatively, he said that you could try this other surgery that might work, but has no track record, which would you choose?

I don’t agree with you that Buy-and-Hold has a demonstrated track record of success, Anonymous.

The U.S. stock market has generated an annual average return of 6.5 percent real for 147 years running. U.S. stocks should represent an AMAZING long-term value proposition.

But look at what happened in the four occasions in U.S. history when the Buy-and-Hold “strategy” became popular. On the first occasion, this “strategy” caused losses big enough to cause the first of the four economic crises suffered in U.S. history. On the second occasion, this “strategy” caused losses big enough to cause the second of the four economic crises suffered in U.S. history. On the third occasion, this “strategy” caused losses big enough to cause the third of four economic crises in U.S. history. On the fourth occasion, this “strategy” caused losses big enough to cause the fourth of four economic crises in U.S. history.

Huh? What the f?

I’m beginning to develop a funny feeling that perhaps going pure Get Rich Quick is NOT the answer, that perhaps going pure Get Rich Quick is actually the freakin’ problem, just as the last 36 years of peer-reviewed research in this field indicates.

When the first heart surgery was performed, there was no “track record of success.” There was a mountain of scientific evidence showing that heart surgery would enhance millions of lives and the decision was made that as a society we would have to go with what the science said and let the track record of success develop naturally over time. Had advocates of the morticians lobby threatened to kill any doctors who employed the new scientific knowledge to help millions of people lead better lives, we would all be worse off today.

Fortunately, we have laws protecting us against that kind of behavior. Unfortunately, the Wall Street Con Men have for 36 years now been able to use their considerable wealth and power and connections to evade those laws. I think it would be fair to say that following the next price crash we will be working together as a society to insure that our laws are enforced, that those who have posted in “defense” of Mel Lindauer, John Greaney and Jack Bogle will be put in prison cells where they belong so that the rest of us will be able to enjoy the benefits of Shiller’s “revolutionary” (his word), Nobel-prize-winning research for many decades to come.

It will be interesting to see how it all plays out, Anonymous.

I naturally wish you the best that this life has to offer a person, my hostile-to-scientific-breakthroughs friend.

Rob

Buy-and-Hold Goon to Rob: “Buy-and-Holders Don’t Have to Concern Themselves With Theories.”

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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:

Buy & Holders don’t have to concern themselves with theories. They choose an equities to fixed income ratio commensurate with their tolerance for risk and begin investing. Rebalancing takes care of those times when either asset class gets overvalued. And many Buy & Holders hold other equity classes other than the S&P 500, a practice which is anathema to LuckySeven as its Grand Poobah maintains that they should only hold that particular asset class. The proof is in the pudding. Rob Hocus No Step 2 Bennett is suffering through a failed attempt at early-retirement using his LuckySeven strategy while Buy & Holders have been richly rewarded by avoiding extremes.

Okay, John.

Rob

“For Us to See Successful Valuation-Informed Indexing Outcomes, We Are Going to Need to Start Talking About VII at Every Investing Board and Blog on the Internet. That’s How It is Done. You Tell People About What the Research Says and Then Those People Ask Questions to Firm Up Their Understanding, and Then Those People Try Out VII, and Then Over Time You Have Reports of Successful VII Outcomes.”

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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:

Can you show anyone with a successful VII outcome?

What I can show you is 36 years of peer-reviewed research, Anonymous.

That’s enough for me. It’s up to you whether that is enough for you or not, it’s not up to me to decide for you. But it is up to me to decide for me. I have decided that it’s enough for me.

The problem is not that you and I have come to different conclusions as to what is enough. That’s normal. That’s what you should expect to see. In any community, there are going to be different positions taken on different issues. It’s a 100 percent healthy thing that that be the case.

The problem is that you are using abusive tactics to decide for others. You are saying “no one is going to get to hear what Rob Bennett has to say because I have decided that what he is saying is not enough for me.” No. That’s over the line. That is not acceptable.

If no one speaks up about your abusive tactics (and the abusive tactics of other Buy-and-Holders — you obviously are not the only one causing a problem re this matter), then we will never be able to point to millions of people using Valuation-Informed Indexing successfully because no one will ever know about Valuation-Informed Indexing. For us to see successful VII outcomes, we are going to need to start talking about VII at every investing board and blog on the internet. That’s how it is done. You tell people about what the research says (or, if you want to stare things more diplomatically, what you BELIEVE the research says) and then those people ask questions to firm up their understanding, and then those people try out Valuation-Informed Indexing, and then over time you have reports of successful VII outcomes, more and more and more of them as time passes.

We cannot get to the successful outcomes until we permit people who believe in Valuation-Informed Indexing to post honestly. That’s the very first step in the process that must be followed if we are ever to have reports of lots and lots of successful VII outcomes. I am trying to get the process started. I am refusing to post dishonestly because I believe that it is my right to post honestly and because I believe it is my responsibility to the community to post honestly. You are demanding something of me that I obviously cannot deliver until the possibility of honest posting is opened up and at the same time you are refusing to permit the possibility of honest posting. It doesn’t add up.

I am 100 percent confident that we will in time see millions of cases of successful VII outcomes. But I continue to insist that my right to post honestly be recognized because THAT IS HOW IT IS DONE.

I didn’t cause any of this problem. I was a Buy-and-Holder myself on the morning of May 13, 2002. I gave up on Buy-and-Hold on the evening of August 27, 2002, when Greaney put forward his first death threat and 200 Buy-and-Holders endorsed it (in fairness, there were 50 others — presumably some Buy-and-Holders and some Valuation-Informed Indexers — who spoke out in opposition to the death threat). If I could turn back the clock to 1981, so that we could all begin posting honestly 36 years ago, I would do it and I am 100 percent certain that Jack Bogle and all of my other Buy-and-Hold friends would participate in the process that would have led us to a place where we would have millions of successful VII outcomes today. But I of course do not have the ability to turn back the clock.

The best that we can do today is to work together to open up every investing board and blog on the internet to honest posting starting at the close of business today. That’s what I propose. I think it would be fair to say that, if we take that path, we will all look back someday to today as a Second Independence Day for the people of the United States. The last 36 years of peer-reviewed research is the most exciting 36 years of peer-reviewed research in the history of the United States. It is truly exciting and liberating stuff. We all should be exploring the far-reaching implications of Shiller’s amazing research findings on a daily basis.

That’s my sincere take re these terribly important matters in any event.

I naturally wish you the best of luck in all your future life endeavors, my good friend.

Rob