A Rich Life

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

“I Proposed That We Open Every Site to Honest Posting on the Evening of May 13, 2002. If We Had Done That, We Would Today As a Nation of People Be 20 Years Farther Along in Our Understanding of How Stock Investing Works Than We Actually Are.”

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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:

Who does your wife blame for the divorce and being broke?

She believes that I am onto something important with my investing work.

She believes that you Goons should permit honest posting at every site. She is horrified by the death threats and the acts of extortion and all the other garbage.

But she also believes that, since the Normals (the 90 percent of Buy-and-Holders who today believe that market timing doesn’t work but who have no problem with people posting about the 41 years of peer-reviewed research showing that it always works and is always required) have essentially given you Goons veto power over what can be said about stock investing on the internet, I should drop it and find some other way to make a living.

I do not agree. I feel like I was a bit of a sleeze for those three years when I knew that the Greaney retirement study was in error and I kept it zipped because I was afraid of what Greaney and his Goon Squad would do to me if I posted my honest views. I loved the old Motley Fool board. I thought that there was more good information being provided there than you could find at the largest personal finance library in the world. So I felt that I was letting my fellow community members down by living in fear of you Goons.

I also felt that I was letting the Buy-and-Holders down by not pointing out the error in the study. The original idea of Buy-and-Hold was to be research-based. So it makes perfect sense for the Buy-and-Holders to permit honest posting re the last 41 years of peer-reviewed research. So I also felt that I was selling out the Buy-and-Holders (only a tiny percentage of which are Goons engaging in abusive and even criminal behavior) by keeping it zipped re the error in the study.

It broke my heart when Greaney and his Goon squad burned that community to the ground. So I just cannot stand to know that there are millions of people who would love to be making honest contributions today but who are not doing so because of their fear of what the Buy-and-Hold Goon Squads will do to them if they try it. I proposed that we open every site to honest posting on the evening of May 13, 2002. If we had done that, we would today as a nation of people be 20 years farther along in our understanding of how stock investing works than we actually are. I see this as an important subject. So I see that as a big deal. So I soldier on.

I am open to compromises. I told my ex that I would be willing to take on a different full-time job that brought in immediate money in return for a promise on her part to give me emotional support for working nights and weekends to open the internet to honest posting re the last 41 years of peer-reviewed research in this field. That would be hard. But I could live with myself if I did it that way. I could not sleep at night if I did nothing given how important it is that millions of middle-class investors have some access to honest and accurate and research-based reports on how stock investing works in the real world. I like being able to sleep at night. So I do what I do.

The situation is crazy. I give you that one. But the good news that we have seen over the past 20 years has been 20 times more good than the bad news that we have seen has been bad. So I think it would be fair to say that as a nation of people we are very much on the right track. I am humbled to be able to play a significant role in bringing about what I think can fairly be described as the biggest advance in our understanding of how stock investing works ever achieved in our history (the advance is seeing how critically important it is that every investor practice market timing/price discipline at all times).

Rob

Valuation-Informed Indexing #644: Stock Investing Risk Is Variable, Not Constant

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I’ve posted Entry #644 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stock Investing Risk Is Variable, Not Constant.

Juicy Excerpt: I do find fault with the people who came up with these ideas for one thing. They stated them too dogmatically. You sometimes hear people who believe in the efficient market concept refer to it as the efficient market hypothesis rather than the efficient market theory. That’s the right spirit.

It’s really just a guess. Guesses are fine. But they need to be distinguished from ideas that have been tested and found to possess some substance. That’s not the efficient market theory. There’s never been an iota of evidence to support this one.

Today there is a mountain of evidence showing that it does not check out. They put this one forward too soon. The efficient market concept is a half-baked idea or perhaps a quarter-baked one.

Valuation-Informed Indexing #643: People Spend More When Stock Prices Are High

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I’ve posted Entry #643 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called People Spend More When Stock Prices Are High.

Juicy Excerpt: But what if Shiller’s Nobel-prize-winning research is legitimate research? What if most of the stock gains of the past four years were just the product of irrational exuberance and did not possess any lasting economic significance? In that case, most of those gains will be going “Poof!” in the not-too-distant future. In that case, this woman should be continuing to live her life in the manner in which she was living it in the days before stock prices went insane. She should not be letting the irrational exuberance change her thinking about all of her spending choices.

Larry Swedroe: “While Valuations Do Provide Information on Future Returns, the Research Has Found That They Do Not Provide Information That Allows Investors to Profitably Time the Market.”

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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:

The Larry Swedroe looks at the research and says that Rob Bennett is wrong about timing the market with CAPE:

The Shiller CAPE 10: how to use it, not abuse it

Note the following: “ While valuations do provide information on future returns, the research has found that they do not provide information that allows investors to profitably time the market.”

And the summary says as follows:

“ The bottom line is that the CAPE 10 does provide us with valuable information (as do other current valuation metrics). However, it’s important that the information be used in the right way, as misusing it can lead to bad outcomes and the failure of plans. You should not use a valuation metric in a deterministic way (i.e., “I’m going to earn x percent”). Instead, the forecast should only be used in a probabilistic manner. And you should not use valuations to time the market, shifting allocations toward higher expected returning assets. “

Did you read that last line? It says “YOU SHOULD NOT USE VALUATIONS TO TIME THE MARKET”

I like the article. It provides value. So thanks for the link.

I don’t agree that CAPE cannot be used to profitably time the market. The Bennett/Pfau research shows that timing can be used to reduce risk by nearly 70 percent or to permit the investor to achieve his retirement goals much earlier in life. That’s investor heaven!

The article doesn’t even discuss the Bennett/Pfau research. Why? It’s either because Swedroe hasn’t heard of it (which shows how much damage the ban on honest posting is doing to all of us) or because he realized how much trouble he will be in with the Buy-and-Holders if he points to the peer-reviewed resesrch showing that timing always works and is always required for every investor seeking to keep his risk profile constant over time.

As always, the answer is to open every site to honest posting re the last 41 years of peer-reviewed research. Wade Pfau and I (and lots and lots of others) can make the case for market timing and Larry Swedroe and lots and lots of others can make the case against it. That’s how we all learn, by talking thijgs over amongst ourselves. That debate should have been launched on the afternoon of May 13, 2002. Or, better yet, on the day following the publication of Shiller’s Nobel-prize-winning research in 1981.

Please note that early in the article he explains why it is a logical impossibility that the safe withdrawal rate is the same number at all valuation levels. He explains that valuations affect long-term returns. If that’s so (all evidence available to us today shows that it is), it is a logical impossibility that the safe withdrawal rate is the same number at all valuation levels.

He doesn’t discuss how much encouraging market timing would help us to avoid economic crises. We could never get to the sort of CAPE level we have today if market timing were being encouraged at every site on a daily basis. It’s the failure of most investors to engage in market timing when needed that brought us this CAPE level (and that will have brought us the economic crisis that will follow from it, presuming that stocks continue to perform in the future somewhat as they always have performed in the past).

Rob

 

Buy-and-Hold Goon to Rob: “Here Is a Solution. If You Don’t Think Stocks Are Cheap Enough for You, Then Don’t Buy Them. We Are All Big Boys and Girls Here and Can Make Our Own Decisions.”

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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 is a solution.   If you don’t think stocks are cheap enough for you, then don’t buy them.  We are all big boys and girls here and can make our own decisions.

That’s a perfect solution, Anonymous.

Rob

“Market Timing Is the Thing That Permits the Market to Do its Core Job — Get Prices Right. It Is Market Timing That Keeps the Market Functional.”

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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 you fail to understand is that the top 10% are consolidating the ownership of stock and other assets. This is limiting the “supply” to those outside the top 10%. Ever play the game Monopoly? What happens to the bottom 90% of people when they own only a small percentage of the properties on the board? You have to decide if you are going to be an “owner” or a “consumer”. The top 10% have enough assets to ride out the ups and downs. In the end, they will win because they can keep buying assets, priced high or low. They are playing the long game. People with little to no assets can’t afford to play the game. They are just trying to survive.

It’s an increased desire to buy that sends prices up. This is why market timing is so essential. When prices are insanely high, market timing pulls them back down to reasonable levels. When prices are too low, market timing pulls them up to reasonable levels. Market timing is the thing that permits the market to do its core job — get prices right. It is market timing that keeps the market functional. We would never have a CAPE value like the one that applies today if we all stressed the importance of market timing.

Rob

 

“We Are in 100 Percent Agreement That the Market Always Returns After Every Drop and Goes On to New Highs. I Don’t Think That That Justifies Failing to Engage in Market Timing/Price Discipline Because You Need to Engage in Market Timing/Price Discipline to Keep Your Risk Profile Constant as Valuations Change in a World in Which Valuations Affect Long-Term Returns”

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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:

Many years ago, you were asked about when a crash would occur. Eventually, you said that if a crash did not happen by 2015, we should question timing and VII. It never occurred. Now we are 8 years after that point and it still hasn’t happened. This just illustrates the problem with market timing. While waiting around for a crash, the market timer watches their portfolio erode and then they have nothing left when they expect to benefit from a new cycle.

To the opposite, we have seen that the market ALWAYS returns after EVERY drop and goes on to new highs.

We are in 100 percent agreement that the market always returns after every drop and goes on to new highs, Anonymous. I don’t think that that justifies failing to engage in market timing/price discipline because you need to engage in market timing/price discipline to keep your risk profile constant as valuations change in a world in which valuations affect long-term returns (the world we live in, according to Robert Shiller’s Nobel-prize-winning research). But I certainly believe in your core point and I think it is an important point. This point is part of the reason why I do not advocate extreme allocation decisions (I say that investors should maintain a 30 percent stock allocation even when stock prices rise to crazy, scary highs, like what we see today).

The Bennett/Pfau research shows that this idea that engaging in price discipline will cause an investor’s portfolio value to erode over time is just a Buy-and-Hold myth. Wade Pfau and I looked at the history of stock price movements going back to 1870 and it has never yet happened. Market timing has always proven to be far superior to Buy-and-Hold over the long term. The evidence is so strong that Wade (who holds a Ph.D. in Economics) was amazed at what our research found. He told me that he kept asking himself: “Am I doing something wrong?” But, no, he wasn’t doing anything wrong. It was the people who came up with Buy-and-Hold who did something wrong by failing to distinguish short-term timing (which really doesn’t work) from long-term timing (which is really just price discipline and which thus of course always works and is always 100 percent required for investors who want to keep their risk profile stable over time).

Investors who are worried that they may “miss out” on some gains in the event that it takes longer for an overpriced market to crash than it ever has in the past can of course follow a Buy-and-Hold strategy if that sounds like a good idea to them. I have never objected to that and I have never heard any other Valuation-Informed Indexers object to that. What I object strongly to is the ban on honest posting re the last 41 years of peer-reviewed research, which means that investors do not get to hear both sides of the story when making their allocation decisions.

The ban on honest posting is a national scandal, in my personal assessment, the worst case of financial fraud in our nation’s history. It is proper that you decide on your own allocation. It is not even a tiny bit proper that you determine the allocation decisions of millions of others by engaging in absusive and in some cases criminal behavior to block them from learning what they need to learn to make informed decisions of their own. That makes you responible for the losses of millions of people (I am presuming here that stocks may continue in the future to perform something along the lines of how they have always performed in the past) and the collective losses are likely to be in the many trillions of dollars, far more than you Goons will be able to cover. Which means that the United States will be facing not just an economic crisis but a political crises as well. Not good.

My best and warmest wishes to you and yours, in any event.

Rob

Buy-and-Hold Goon to Rob: “Of Course” (in Response to the Question “Do You Believe That Robert Shiller’s Nobel-Prize-Winning Research Showing That Valuations Affect Long-Term Returns Is Legitimate Research?”)

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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:

“Do you believe that Robert Shiller’s Nobel-prize-winning research showing that valuations affect long-term returns is legitimate research, Evidence?”

Of course.

That’s good to hear.

That’s why I say that we all should be practicing market timing on a daily basis. I certainly don’t believe that we should be changing our stock allocations on a daily basis. The historical data shows that we can do just fine making allocation changes only once every ten years on average. But we should always be aware of where the CAPE value stands and of what it would mean for our stock portfolio if our stock allocation came to no longer make sense for us given shifts in valuation levels. That’s something that we should be thinking about in the back of our mind on a daily basis.

I don’t say that I wouldn’t believe in market timing had Shiller not piblished his amazing research findings. I like to think that common sense alone would have brought me around to that view (there has never in the history of humankind been a market that could remain functional without the participants in that market practicing price discipline). But I think it was a breakthrough when Shiller published research showing that what common sense tells us must be so re stock investing really is so in the real world.

My best and warmest wishes to you and yours.

Rob

“If Buy-and-Hold Is So Great, Why Do We Today Have a CAPE Value of 30? I Think That CAPE Value Tells the Story of What the Relentless Promotion of a Pure Get Rich Quick Strategy (No Market Timing Now!) Does to All of Us.”

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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 believe in the efficient market (and neither do Buffett, Munger, etc) but I also don’t believe in market timing. Buy and hold is the best way for most investors. If a smart trader like Jim Cramer can make so many bad calls what more an ordinary person working at Walmart? You can avoid entire sectors during times of irrational exuberance but even Buffett and Munger have made mistakes. If the brightest investing minds in the planet screw up what makes you thi k the Walmart employees who get their news from memes on Facebook will do better?

That’s my sincere and honest take re: these matters.

Thanks for offering your sincere and honest take, Anonymous. That’s always a plus.

I believe that market timing is absolutely essential. I believe that Buy-and-Hold is a catastrophe.

I love what Buy-and-Hold was INTENDED to be. I designed Valuation-Informed Indexing to be what Buy-and-Hold was intended to be. Everything in Buy-and-Hold except for the thing about market timing not always being required has checked out. So I just incorporated everything in Buy-and-Hold into Valuation-Informed Indexing with the exception of the one big thing that has been discredited by 41 years of peer-reviewed research that was not available to the people who put together the Buy-and-Hold strategy at the time they were putting it together.

If Buy-and-Hold is so great, why do we today have a CAPE value of 30? I think that CAPE value tells the story of what the relentless promotion of a pure Get Rich Quick strategy (no market timing now!) does to all of us. Many of the people working at Walmart are not engaging in market timing today. I cannot guranty that they will if we open every site to honest posting. But I sincerely believe that we can get the percentage who do up a bit. It’s 10 percent now. I believe that we can get that up to 20 percent within six months with every site opened to honest posting re the last 21 years of peer-reviewed research. It will take much longer to get it up to 40 percent and then 80 percent. But all we can do is all we can do, you know? It certainly seems more likely that we will be able to persaude more people to practice market timing (price discipline!) by permitting honest posting than we will be keeping the ban on honest posting (which has yielded a CAPE value of 30!) in place. Call me madcap.

The brightest minds in investing can certainly screw up, That’s why so many of them have endorsed Buy-and-Hold! The Bennett/Pfau research shows that the biggest difficulty in stock investing is not lacking a sufficient amount of intellect, the biggest problem is becoming so emotional that you come to believe that market timing/price discipline might not be 100 percent required at all times. People who work at Walmart are just as much capable of falling into the Buy-and-Hold traps as the experts. This is why I say that we should open every site to honest posting. We can all works together to help each other to tune out the Buy-and-Hold noise and come over time to live richer and fuller and better lives than we ever imagined possible in the Buy-and-Hold Era. The 41 years of peer-reviewed research is there for us. All that we need to do as a nation of people is to give ourselves permission to talk about it so that we can obtain the benefits it promises.

My best wishes.

Rob

Valuation-Informed Indexing #642: The Great and Obvious Appeal of Irrational Exuberance

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I’ve posted Entry #642 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Great and Obvious Appeal of Irrational Exuberance.

Juicy Excerpt: Stock drunk. That’s a term that I came up with years ago to describe the phenomenon. Buy-and-Holders don’t like it when I use that term. I understand why. It sounds insulting. But it is not my intent to insult. My intent is to understand and to describe. If we cannot name the thing that is causing all the trouble, we will never be able to overcome that thing. Irrational exuberance is a devilish customer. We won’t overcome it by keeping Shiller’s book stocked in the libraries but holding back from discussing openly and frankly what it tells us about the need to go to battle with our inner desire to have something for nothing, the Get Rich Quick urge that drives all this business about not needing to change our stock allocation when prices go nuts.

Have you ever heard anyone else talk like this? Use terms like “stock drunk” to explain today’s CAPE value? It’s not done. That’s why the CAPE value is so high. That doesn’t just happen. It happens because there is something inside us that lets it happen, that wants it to happen. We are all stressed financially. Each and every one of us. The phony gains that appear on our portfolio statement in the form of irrational exuberance ease those concerns. That’s the story.