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

“Shiller got it wrong back in 1996. I got it wrong when I made my prediction after the price recovery of March 2009.”

Shiller learned from his mistake and doesn’t make predictions any more.

I hope you learn from your mistake.

The issue that you are focused on is a secondary issue. I am focused on the primary issue.

If the market is efficient (this is the premise of the Buy-and-Hold strategy), then the numbers on your portfolio statement are rooted in economic realities. If valuations affect long-term returns (this is the premise of Valuation-Informed Indexing), then the numbers on your portfolio statement are largely rooted in emotion at times of high valuations. The portion that is rooted in emotion disappears over time.

Which of these two things are true is a very, very big deal. It affects every financial planning decision you make. You cannot engage in any effective financial planning unless you get the numbers right. And it is impossible for any Buy-and-Holder to get the numbers right if valuations truly affect long-term returns (as I believe to be the case).

You are focused not on that critically important question but on an also-important-but-less-so question. You are focused on the question of WHEN the pretend gains will disappear. We all would like to know that. It’s certainly worth looking into. But it’s not the huge big deal that you make it out to be. If you lose 50 percent of your life savings in 2020 rather than in 2016, have you no longer suffered a loss? It’s still a devastating loss. In some circumstances it is even worse if the loss is delayed because the delay causes you to continue making poor financial planning decisions until the day the loss shows up on your portfolio statement.

We need to get better at figuring out when the losses will take place. I agree with that much. That’s why we all should be working together on this stuff. I have offered some thoughts as to why it may be that prices have remained higher for a longer time in this bull/bear cycle than they did in any earlier one. But I only possess one sorely limited brain, you know? We would make quicker progress if Bogle was helping us out on a daily basis and if all the other people who work in this field were helping us out. Each person comes at things from a different angle and you never know who is going to be the one to supply the missing piece to the puzzle.

I would like to see everyone trying to figure out how stock investing works in the real world rather than pulling the covers over their heads and pretending that we can go back to 1980. 1980 is gone. It has been gone for a long, long time. The future should not scare us. It should excite us. We should embrace it. We should move forward with caution and prudence. But we should definitely move forward.

My sincere take.

Progress-Loving Rob

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 authors at one point refer to “the null of no predictability.”…My null is that price discipline (long-term timing) always works and is always required. The entire historical record supports that null.”

Simply breathtaking ignorance. “Null” does not mean “premise” or “position”. In the paper’s context it is short for “null hypothesis”, meaning “no relationship”. As in CAPE has no statistically proven relationship to stock market returns.

More generally, null means no value at all. As in “Rob Bennett’s reading comprehension skills are null.”

You go right to the heart of things with this comment, Anonymous.

You say: “In the paper’s context, it is short for ‘null hypothesis,” meaning no relationship.” We are in complete agreement re this point.

The null hypothesis behind Buy-and-Hold was discredited when Shiller published his “revolutionary” (Shiller’s word), Nobel-prize-winning research showing that valuations affect long-term returns. If valuations affect long-term returns, there IS a relationship. Price discipline (long-term timing) always works. And price discipline is always REQUIRED for investors seeking to keep their risk profiles roughly constant over time.

Wade Pfau spent months searching the literature seeking to identify a single peer-reviewed study showing that long-term timing might not work or might not be required. He came up empty-handed. There is nothing. Not one study. Nada. Zilch.

Buy-and-Hold is a marketing gimmick. Nothing more, nothing less. There is zero support for it in the peer-reviewed research or in the historical return data on which the research is based. Buy-and-Hold is a MISTAKE. Before 1981, people didn’t know. So I think it would be fair to say that Buy-and-Hold was an honest mistake in earlier days. But since 1981, anyone who follows the peer-reviewed research knows the story. 100 percent of the research supports Valuation-Informed Indexing, 0 percent supports Buy-and-Hold.

Are most Buy-and-Holders suffering from cognitive dissonance? It sure seems so to me. Is that an important reality here? It sure seems so to me. Do we still need to find a way to get accurate and informed investing advice out to millions of middle-class investors? It sure seems so to me.

I hope that helps a small bit.

Reading-Comprehension-Challenged Rob

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:

You predicted a crash much earlier than 2016. You just kept changing the date. After changing the date a few times you then gave a revised timeframe and said that if we didn’t see a crash by the end of 2015, that would be grounds for people to question VII. Would you like a link to those comments?

I don’t need a link, Sammy. I remember what I said. You can link for the benefit of others if you think that that’s a plus, so far as I am concerned.

The reason why I changed the date is that we do not know the date. Shiller’s research shows is that it is irrational exuberance, not economic gains, that causes overvaluation. Irrational exuberance is not rooted in anything real, it is just the product of investor emotion. So it never lasts. It always disappears into the mist in time. So it is a terrible mistake to engage in financial planning in which you count stock gains that are the product of irrational exuberance as if they are real money. If you retire based on overvaluation in your portfolio, you are going to pay a terrible price down the line.

All of that is 100 percent solid, 100 percent of the evidence available to us supports what I said in the paragraph above and 0 percent cuts against it. But what most people want to know is WHEN this is going to happen. That we do not know. All of evidence available to us ALSO shows that short-term timing never works. So we always know which direction prices are headed in the long run and we never know when the price change is going to take place.

This is why Shiller went 10 years out in the prediction that he made in 1996. He knew what the evidence says and he was trying to be careful. He felt that by going that far out he could get it right. What he said was totally in line with what has always happened before. So I would say that it was a safe prediction at the time he made it. But it STILL did not work out. If prices go down tomorrow, people who followed his advice will be ahead as a result. So his words possessed great value. But the prediction he made failed all the same. It’s easy to get the long-term price direction right, it is very hard to get the precise timing right.

I do think that my failed prediction is grounds to question VII. The entire purpose of me giving the prediction was to hold myself accountable and the prediction failed. Doesn’t that have to count as taking credibility points away from the strategy that I am promoting? I think that it does. The failed prediction is grounds for taking points away.

But it’s not like the Buy-and-Holders have been doing at all well with that they are saying. The Buy-and-Holders got the retirement numbers used by millions wildly wrong. They said that a 4 percent withdrawal was “100 percent safe” for those retiring at the top of the bubble. When you do the calculations accurately (presuming that valuations affect long-term returns), the safe withdrawal rate you get is 1.6 percent. Huh? What the f? Those Buy-and-Hold retirement numbers were cited in thousands of newspaper articles. We are likely to see millions of failed retirements in days to come as a result of that little mistake.

I don’t say that Valuation-Informed Indexing is perfect in every last detail. But we have to invest our money somehow. We can’t just say “well, I will not invest one penny of my money until there is a model that gets every single prediction right, not one exception!” We are not there and we have to make a choice out of two options. VII got a few predictions wrong in circumstances in which it’s not likely that it will make much difference in the long run. Buy-and-Hold likely caused millions of failed retirements and an economic crisis that has caused serious political frictions in recent years. I choose Valuation-Informed Indexing 500 times over.

Can I understand how somebody who was right on the line between the two strategies might get pushed to the Buy-and-Hold side of the line because of my failed prediction? I can. If you are right on the line, it would make sense that the failed prediction would push you the other way. That’s why I offered the prediction in the first place. I wanted to provide some accountability. The failed prediction counts against VII, there’s no question about that much.

Does that help at all?

Rob

Set forth below is the text of a comment that I recently posted to the discussion thread for the weekly column that I write at the Value Walk site:

Rob,

I don’t post here to taunt. I post to correct factual errors. As you have pointed out, you have been WRONG about your predictions on the market. That blows a big wide hole in your whole story around VII. It is not just a small miss and there is no minimizing how bad this is for the story you have been telling us for the past 2 decades. Instead, it just provides further support for those that have stuck with buy, hold and rebalance.

I was wrong in the prediction that I made. I said that we would see a crash by the end of 2016. I wouldn’t describe it as a “small miss.” I made the prediction for the purpose of being held accountable and the prediction failed. I think that people need to know that. I think it is significant.

I don’t quite go along with the idea that it blows a big hole in VII. It diminishes the case for it a bit. I think that much is fair to say. But that’s as far as I can go.

The big issue that divides Buy-and-Hold and Valuation-Informed Indexing is that Buy-and-Holders believe that stock market gains represent something real, they are produced by economic developments, while Valuation-Informed Indexers believes that in circumstances in which valuations are super high they represent only irrational exuberance, they are produced by extremes in investor psychology and cannot be counted on to last. If the Valuation-Informed Indexers are right re that one, that is a very, very big deal. It has implications that affect the continued viability of our economic system. Shiller predicted the economic crisis of 2008. He was able to do that because of what he learned about how stock investing works as a result of his Nobel-prize-winning research. Knowing what causes economic crises and what we need to do to stop them is a very big deal.

Shiller got a prediction wrong too. So it would be fair to say that the prediction-making aspect of the Valuation-Informed Indexing project has not been working out so hot. The trouble is that we cannot stop making predictions. Shiller was able to foresee the economic crisis because an implicit prediction he made that trillions in consumer spending would disappear when the crazy valuation levels of the mid-2000s dropped to more reasonable levels. Had we all paid attention to what he said in his book, we could have avoided that economic crisis and all the political turmoil that followed in its wake. We need to continue to make predictions about how permitting stock prices to rise too high ends up hurting us all in very big ways. The only way to stop the crazy price jumps is to explain to people how much harm they do to all of us.

So I strongly believe that we need to continue to make predictions. But I do agree that it’s a dangerous business. I had a prediction that failed. So did Shiller. We need to be very careful when making predictions. We don’t know it all and it is easy to get the predictions wrong. Shiller was careful when he made his prediction and I was careful when I made mine. So even being careful is not enough. We need to be super careful. We need to be humble. We need to realize that we don’t know it all. We need to keep digging into this stuff so that over time we know more and we can be confident that we are able to make predictions that won’t fail.

I do think you taunt in your comments, Sammy. Not in this particular comment. But you have done it often both in comments you have made here and in comments that you have made at my site. You are helping people when you point out that my prediction failed. That’s a pure positive.But, yes, there have been times when you have pointed it out not in a spirit of trying to learn more about the subject matter but in a spirit of trying to silence me. That’s different. And the reality is that I have been proven right in the story that I have been telling for 16 years 20 times for every time that I have been proven wrong. I was the person who first posted about the errors in the Buy-and-Hold retirement studies. That was on May 13, 2002. I helped a lot of people doing that. That post was based on a sort of prediction too, one that has checked out. None of us bat 1000. I get a lot more right than I get wrong and I have helped a lot of people by getting the ones right that I got right and I couldn’t make those contributions if I were not willing to take the risk of getting one wrong every now and again.

That’s my sincere take re this one in any event, my dear friend. I naturally wish you all the best that this life has to offer a person regardless of our differing views on how stock investing works.

Sometimes Wrong (but Sometimes Right Too!)

Rob

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

Thankfully I didn’t take his advice.

I can certainly understand why someone would say that, Evidence. I believe that the vast majority of investors share your view. Shiller’s prediction did not prove out. That’s an objective fact. At the end of the 10 years, the investor who remained heavily in stocks would be ahead. So the numbers support your view, from one popular way of looking at things.

All that said, my view is that Shiller’s advice was good advice. It all comes down to one thing. When prices go up beyond fair-value levels, are the extra gains the product of economic realities, as the Buy-and-Holders believe? Or are they the product of irrational exuberance, as the Valuation-Informed Indexers believe? If those extra gains are the product of irrational exuberance, they are going to disappear sooner or later. We don’t know when. But we know that they are going to disappear. So the risk of going with a heavy stock allocation at those sorts of prices is sky high. I think Shiller gave good advice in suggesting that investors with high stock allocations lower them.

I think you are wrong to say that you are happy that you didn’t take Shiller’s advice. Have you done calculations to see where you will stand if we see a 50 percent price crash, as we will if Shiller’s research is legitimate? You won’t be ahead at that point. So what good will having been in stocks all those years end up having done for you? Even in a case in which Shiller’s prediction ends up failing (which it did), those who ignore it end up behind in the long run. Huh? What the f?

The big deal here, in my assessment, is — What causes overvaluation? If it is true economic gains, Buy-and-Hold is the ideal strategy. If it is irrational exuberance, which is going to disappear in time, you have to consider the risk that you are taking by investing your retirement money in something that could disappear at any moment. I don’t like taking that sort of risk with my retirement money. So I follow Shiller’s advice. Even when he gets the timing wrong, the general point that he is making — that stocks are more risky when prices are high — is so important that the advice pays off in the long run.

That’s my sincere take, in any event.

I naturally wish you all good things.

Risk-Aware Rob

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

Uh, Oh. The RESEARCH says that VII and CAPE don’t work. Looks like that $500 million windfall just went out the window

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3142575

My view of the paper is that it is making a valid and important point. The paper does not conclude that long-term timing (price discipline) doesn’t work. I think the statistical point needs to be considered. Personally (please understand that I do not possess expertise in the statistics area), I lean toward saying that the statistical point being made is a good one so long as it is not overstated. I don’t think the paper overstates the point in a direct and clear way. But I think that overstatements are suggested. That’s my one big criticism of the paper. I don’t think it properly described the context in which these questions are being considered and thus might cause Buy-and-Holders to be misled into having more confidence in their strategy than the strategy merits.

The authors are saying that there are not enough independent data points to draw grand conclusions about long-term return predictability. I half agree and half disagree. Returns do not fall in the pattern of a random walk. It is my strongly held view that that has been demonstrated beyond any reasonable doubt whatsoever. If the authors are trying to say that returns play out in the form of a random walk both in the short-term and in the long-term, I reject that out of hand. I did not see a statement that clear in my quick read of the paper. If they are indeed not saying that, then I am more or less okay with what they are saying.

Stock returns play out in long bull/bear cycles of something in the neighborhood of 37 years each on average (we have data for 148 years and we are near the end of the fourth cycle in the record). We have 148 years of data supporting that general claim, the entire historical record. But when we try to get more specific, we get into trouble. Shiller predicted that returns would be negative in the ten years from 1986 forward — that prediction failed. I predicted that we would see a second price crash by the end of President Obama’s second term — that prediction failed. Both of those predictions were supported by the historical data. I believe that part of the problem with such predictions is the point being made in the paper — we don’t have a lot of independent data points.

There are only four bull/bear cycles in the historical record. So, when you try to identify when the current cycle is going to end, you don’t have many cases to look at. You can say “no cycle has lasted longer than x number of years.” But does that really show that the current cycle will not be the first exception to the general rule? Say that you studied four alcoholics and warned a friend of yours that in every one of the four cases the alcoholic ended up dead or in prison within 30 years of becoming an alcoholic and that thus he had better shape up because he only had five years to go before hitting the 30-year mark. Is it possible that your friend would remain alive and out of prison for more than another five years? It’s possible. You only studied four cases. Each case is different. If there were zero alcoholics who remained alive and out of prison at the end of five years out of a group of 10,000 alcoholics, you would have a very strong case re your five-year prediction. But, when you only have four cases, you have to be very cautious in your predictions. That’s the important point that I think is legitimate here.

The possible conclusion that I am uneasy about is any suggestion that alcoholism is not a very serious problem or that failing to exercise price discipline when buying stocks is not a very serious problem. I think that our failure as a society to exercise price discipline when buying stocks is killing us. I think that is is in the process of causing millions of failed retirements. I think that it was the primary cause of the 2008 economic crisis. I think that it has destroyed dozens of once top-notch investing boards and blogs. I think that it has played a big role in bringing on the political frictions on both the left and the right that have become characteristic of our political life in recent years. So I don’t at all go along with any suggestion along those lines.

The bull/bear cycle has applied for the entire history of the market. If the market were efficient (that is, if price changes were caused by economic developments. as the Buy-and-Holders posit), prices should play out in the form of a random walk, there should be no bull/bear cycle. But there is! And there has been for the entire history of the market! Stock returns have never played out in the manner in which they must always play out if the core belief of the Buy-and-Holders – market efficiency — is valid.

Short-term returns cannot be predicted at all. We all agree on that. Long-term returns cannot be predicted with precision. We all also agree on that. But long-term returns CAN be predicted; a range of possible returns can be identified and rough probabilities can be assigned to all points on the range. All of the evidence available to us shows that. There are legitimate questions as to the degree to which investors should be using predictions to influence their stock allocation decisions. We don’t know it all.I can go along with that much. But the Buy-and-Holders say something more than that — they say that it is perfectly okay for investors to fail to make any allocation changes whatsoever in response to valuation shifts. I view that one as irresponsible in the extreme.

The authors at one point refer to “the null of no predictability.” I believe that that phrase points to the core dispute that I have with Buy-and-Holders. The Buy-and-Holders seem to ASSUME that there is no need to engage in price discipline when buying stocks and then set up very high hurdles that they insist that those arguing in favor of price discipline (long-term timing) must leap. But why that assumption? In every market other than the stock market, price discipline is essential. It is price discipline that makes markets work. Without price discipline, we should expect markets to collapse. And, sure enough, on every occasion in history in which Buy-and-Hold has become popular, the stock market has collapsed. Could it be because the core assumption of the Buy-and-Holders is false, that price discipline is every bit as essential when buying stocks as it is when buying anything else? That’s what I believe.

In some scientific investigations, people test things with mice. If we were testing with mice and we had significant evidence that long-term timing always works and is always required but a limited number of independent data points, I would argue that we should bring in more mice and run more tests — we should try to get those data points up to where they need to be. But that’s not an option in this case. We just have to watch things play out. We will have more independent data points in time. But, given that one bull/bear cycle can take 37 years or even longer to play out, it is going to be a long time before we have as many independent data points as we would like to have. None of us engaged in these conversations is even going to be around anymore when that magical day arrives.

What to do?

I think we need to listen to people coming at these issues from all sides. I think we need to open up every investing discussion board and blog to honest posting on every possible question.

I think we all need to make more of an effort to become aware of the assumptions (assumptions are something different than evidence) driving our beliefs about how stock investing works. Wade Pfau spent months trying to find a single peer-reviewed study backing up the core Buy-and-Hold belief that long-term timing does not work. He couldn’t find one. That’s the “null” that the authors of this paper are referring to. The Buy-and-Holders ASSUMED that long-term timing doesn’t work and the authors of this paper are saying that there are not enough independent data points to entirely disprove that belief statistically. The other side of the story is that there is zero support in the historical record for the Buy-and-Hold belief. It is an assumption. There never has been any evidence for it.

Should Buy-and-Hold be the “null”? I sure don’t think so. Long-term timing is price discipline. Make Buy-and-Hold the null and you are ruling out the use of price discipline in the stock market. Huh? What the f? Where is that going to take you? I think it would be fair to predict that it is going to take you to a very bad place. And of course the historical record shows that indeed it always has. The widespread popularity of Buy-and-Hold ALWAYS causes economic crises. There is not one exception in the (limited, to be sure) historical record.

My null is that price discipline (long-term timing) always works and is always required. The entire historical record supports that null. I think that I can go along with a claim that the historical record does not alone PROVE that null. I think that that is the claim that this paper is making and my tentative sense is that that is probably a good point to make. But I worry that the claim will be misinterpreted by many Buy-and-Holders. I believe that there are Buy-and-Holders who will conclude that it is okay not to practice price discipline when buying stocks. It is my belief that nothing could be further from the truth. I believe that IN PART because of what we have learned in recent decades from investigations of the historical data, which indeed are not 100 percent conclusive by themselves. But I also believe it because the historical data just supports what we would all know from common sense if we were thinking clearly. Of course price discipline is required! It is required in every market that ever existed! Markets cannot function without price discipline! Why would anyone think it would be any different in the stock market from how it is in every other market that ever existed?

Again, I am grateful to you for bringing the paper to my attention. I will plan to write a column on it in the not-too-distant future.

And, as always, my best and warmest wishes to you and yours, my dear Goon friend.

Go Phils! It’s Nola day. The historical record shows that this one will with certainly be another win for the good guys!

Rob

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

Robb,
Thank you very much for your reply ,it does make a lot of sense staying the course with small return vehicles until the stock market valuation is at a reasonable level. So that I can increase my stock levels as the valuation gets more reasonable. Off the subject I was thinking an all purpose total S&P 500 ETF might be best for the stock portion. What is your opinion of these “advisers” I see on some of the web sites like SA, claiming a 9% return with dividend stocks? I know you do not give stock advise but if you just have a personal opinion about this
Be well
Max

It’s not something that I know anything about, Max. Please understand that I am NOT an investment expert. I don’t claim to be one and I am not one. I am a journalist. I have the skills of a journalist. I happened to do some writing about investing and I saw a huge positive response to it and I also saw an intense negative response to it and I thought “this is amazing — what a story!” So I tried to figure it out. I wanted to be able to tell this super important story completely and fairly. So I worked it and worked it and worked it.

I have to talk about investing stuff because that is part of the story. So, for example, with safe withdrawal rates, I had to develop a calculator that gives accurate reports of the safe withdrawal rate so that I could tell people how far off the Buy-and-Hold retirement studies are. No one else has those numbers. So it makes it appear as if I am some sort of expert in that I am giving people important information that is not available elsewhere. But it is not my intent to create that impression. My intent is to report this important story accurately and completely and fairly. It would be fair to say that I have become an expert on the question of how emotions and valuations interact. I think it would be fair to say that I am the world expert re that one. But not by choice exactly. I did not set out to be an expert even in that area. I became one because I wanted to tell the story effectively and I had to settle certain questions to do so and that made me a bit of an expert in relative terms.

But I just do not make any effort to become knowledgeable re funds and that sort of thing. There are lots of people who do a better job of that sort of thing and I don’t see that there’s anything that I can add to the mix. So I just don’t go down that road. Vanguard has good index funds with low fees. That’s where I would look for a fund. I would look for a broad U.S. fund. Keep it simple.

I don’t know what the claims are re 9 percent returns. There is certainly no asset class where you can get a guaranteed 9 percent real return. I don’t know precisely what the claims are that are being made. I DO have positive feelings about dividend stocks. When stocks have high dividends, you are protected to an extent. So I think it makes sense to explore that sort of thing if you have the time. But if you move away from a broad index fund, you need to put time into research to be sure that you understand what you are doing. I have run into very smart people who believe that investing in high dividend stocks is a good idea and I am persuaded that they are on the right track. So I would not dissuade you from the general idea of looking at dividend stocks. I would just check into that 9 percent claim. When something sounds too good to be true, there’s a good chance that it is not true. But perhaps the claim is explained when you look at all the details of it. I have not done that. So I cannot say.

That’s probably not terribly helpful. I don’t want to go down the road of moving outside of my area of “expertise.” I think the question of whether the market is efficient or valuations affect long-term returns is HUGE. I think that I could write about that for the rest of my life and never have time to move on to other issues. I can just go deeper and deeper and deeper and never run out of exciting stuff to explore. And there are very few others exploring that particular, hugely important, question. So I just intend to stick to that. I will work it and work it and work it to come up with good answers in that area. But I think it is better to leave it to others to work all the other areas because they know more than me about those areas and I just don’t feel that I have much to add outside of that one super-big matter.

That’s where I am coming from, in any event. The valuations thing is so big that it is my view that it’s almost impossible to mess up if you come to a good understanding of the valuations thing while it is also almost impossible to do well in the long run if you fail to come to a good understanding of the valuations thing. I see the valuations thing as being 70 percent of the stock investing story. I don’t claim to understand it all myself. I am still working it. It really has to do with understanding human psychology. That’s a big topic! And we have not done a good job in the past of applying what we know about human psychology to the stock market. I think it scares us. We don’t like to accept that human emotions affect stock prices because it causes us to lose confidence that we know where we stand financially. So there is a lot of work to be done in that particular area.

I hope that helps a tiny, tiny bit and I of course wish you the best of luck with whatever choices you make. I’ll tell you the tricky one. You could get it all right and still see bad results because most other investors fail to get it right. When the market crashes, it does great harm to our economic system. And we all suffer when damage is done to the economic system. That’s my big fear. I could figure all this valuations stuff out perfectly and the fact that millions of others don’t understand how it works could cause a crash, which could cause a Great Depression. Where am I then? We are all in this together. That’s my most important message. We all need to be concerned with the functioning of the market as a whole, not just with our personal returns. Very few people pick up on that message. That reality is my greatest frustration. When the stock market becomes mispriced, it’s like the air becoming polluted or the water becoming polluted. We all feel the effects.

My best wishes to you.

Rob

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

Good Morning Robb
The Pe/10 at this point is 32 , 50% over fair value.Using Value Informed investing the most likely stock return is .13%. Going to cash in retirement I would feel more comfortable with only a 20% allocation to stocks. Problem is in today’s world Tips pay less than 1%, and CD’s pay approximately 2.2% -2.8% less taxes. So my effective return is zero , but is it fair to say zero is better than a 50% loss? To me yes zero is better than stocks because the extra risk is not worth a only .13 return . Does this make sense to you? I won’t be brainwashed by the buy and hold’s to not panic. I am not a pro just a middle class retired guy. But even I can see and be open minded that Buy and Hold doesn’t work. Thank you for the time you put into your blog…Max

It’s always nice to hear your voice, Max.

Your concern is one shared by millions. It is actually not too hard to find people worried about investing in stocks at today’s prices. The big issue that many people have with lowering their stock allocations is that the returns available from alternative asset classes are not big enough to help their portfolio ever grow to the size they need it to grow to to permit them to retire.

You are of course correct that a zero return is better than a 50 percent loss. The trouble of course is that no one knows when the 50 percent loss is coming. This is why I push so hard on the need to look at the historical return data. Buy-and-Holders make it seem like 50 percent losses just sort of pop up out of nowhere. No! Crashes that have lasting effect (those in which the losses remain in place for a significant length of time) only take place at times of super high prices (like today). And, once we get to super high prices, we always experience a crash sooner or later. There are no exceptions. We cannot identify the date when the crash is coming. But we know with certainty that it is coming sooner or later. So we need to make all of our investing decisions with that knowledge in mind.

I ordinarily say that investors should never let their stock allocations drop below 30 percent. That’s because you don’t want to experience too much regret if prices continue upward. If you have a 30 percent stock allocation, you are at least getting some of the temporary goodies and perhaps that will be enough to help you stay the course. You have a stronger appreciation of the importance of keeping valuations in mind that most. So it is my view that a 20 percent stock allocation is not crazy for you. However, it is my personal take that you should not go below that.

It is important that you understand that it is not that stocks are a dangerous asset class in general, only that stocks become a dangerous asset class when prices rise to insanely dangerous levels. If you start thinking that stocks are dangerous in general, you will feel confirmed in that belief when prices crash. Then you will be reluctant to invest in stocks even after prices drop. That will not work. You will not be able to accumulate the funds you need to retire without investing in stocks. Over the course of a lifetime, Valuation-Informed Indexers go with the same stock allocation as Buy-and-Holders, they just go heavier in stocks when prices are good and less heavy when prices are bad.

The exciting thing about being in CDs or IBonds today is that you are not earning only the return marked on the certificate or the bond. Your intent is only to own the asset with the low return for a few years. Then that money will be shifted into stocks paying a high expected return (the likely long-term return on stocks can rise to 15 percent real in the wake of a price crash). If you earn 1 percent for three years and then 15 percent for seven years, your 10-year return is not 1 percent, it is a lot higher than that. The purpose of being in CDs or IBonds today is to preserve the capital you will need to invest heavily in stocks when the long-term value proposition on stocks is strong.

Do you see how it helps to talk these things over? You are not the only person who has doubts about stocks at today’s prices. Millions of people do. But most of us are highly reluctant to act on those doubts until we first give voice to them and then hear feedback from others re our thoughts, in some cases positive feedback and in some cases negative feedback. We think by talking things over with our friends and neighbors and co-workers. Talking things over is an essential part of the intellectual process. We cannot think clearly without first gaining the freedom to talk things over in peace.

This is the real harm that has been done to us all by the relentless promotion of the Buy-and-Hold strategy. Buy-and-Holders have a hard time persuading themselves that valuations do not matter. It’s a position that just doesn’t make sense. They do believe in the strategy enough to follow it; they are not entirely lacking in belief. But they are very much lacking in confidence. They just cannot find peace following a strategy that requires them to ignore price. So, when they hear others talk about the consequences of ignoring price, they freak out. The result is that the Buy-and-Holders insist that everyone else keep quiet about their doubts re this “strategy.”

For Buy-and-Hold to survive, we all need to keep quiet about what our common sense tells us and about what the last 37 years of peer-reviewed research in this field tells us. And, when we keep quiet about what our minds tell us, we lose the ability to think clearly. Most of us end up going along with the crowd because to develop the strength to engage in independent thought we would need first to be able to talk things over with others and the Buy-and-Holders cannot permit that. What a predickelmint!

The Buy-and-Holders are not bad people. They came up with tons of good stuff. But, like all the humans, they just are not capable of knowing it all and never needing to ask others for help. Over time, they have developed a hyper-sensitivity to criticism that keeps them trapped in the stone age of investing analysis, the pre-1981 timer-period. And, because they sense in a dim way that they are living in the stone age, they feel a need to stop all of those who are trying to learn how this stuff really works from having the discussions they need to have to engage in effective learning experiences.

Yes, that’s my favorite rant! I have put a lot of blood, sweat and tears into perfecting it over the years and I am sticking to it!

Take good care, old friend.

Rob

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

“When we get to the other side of the Big Black Mountain, we will never again need to worry about seeing our plans for the future disrupted by crazy swings in stock prices.”

Crazy swings in stock prices will always be with us. They are the reason that stocks provide great returns. If you somehow removed the risk inherent in stock ownership you would also remove the great returns. If a low risk/high return asset was available for purchase the the huge demand for such an asset would drive the price up lowering the return.

Your problem is that you want the great stock returns but are not willing to stomach the associated risk.

I do not agree that crazy price swings will always be with us, Evidence. And I do not agree that it is the crazy price swings that somehow cause the high returns associated with stocks.

I believe that stocks provide high returns because the underlying businesses are highly productive. In the United States, they have always been productive enough to support returns of 6.5 percent real per year. More than that is just emotional garbage. So I don’t trust returns of any more than that. But 6.5 percent annual returns are real and there is no need to take on foolish amounts of risk to obtain them. The underlying companies are going to be just as productive if I invest in a rational risk-reducing way as they are if I follow a Buy-and-Hold strategy.

I want the high returns for sure. And, no, I don’t like taking on risk. I would be willing to take on some added risk to obtain some added return. That part of what you say makes sense. But I don’t buy this idea that it is only by investing foolishly that I can obtain a good return. No. I like Bogle’s original idea of using the peer-reviewed research to guide one’s investing choices. That’s what makes sense to me.

The peer-reviewed research that I co-authored with Wade Pfau shows that investors can reduce the risk of stock investing by 70 percent just by being willing to leave the smelly Buy-and-Hold stuff in the rear-view mirror and so that’s what I do. I’ve been beating Buy-and-Hold on a risk-adjusted basis for 22 years running now and I have a funny feeling that I will be continuing to beat it for a long time to come.

But we’ll see, you know?

You’re not going to believe what I say just because I say it. Time is going to tell the tale. I go by what the research says. That tells us how stock investing has always worked IN THE PAST. In coming days, we will see whether the research is telling us something important or whether it is all going to turn out different this time. I think that the next crash will tell the story in a sufficiently compelling manner that even my good friend Jack Bogle will sign up with the good guys. And then where will you Goons be? I think that a good number of you Goons may come out in support of the idea of permitting honest posting re the last 37 years of peer-reviewed research in the days following the next crash. I will welcome the change. I will enjoy being able to talk things over with you in less friction-filled discussions.

I understand that you are going by one of the Buy-and-Hold dogmas when you say that stocks pay high returns only because of the risks associated with them. But I just don’t buy it. Shiller “revolutionized” (his word) the field with his Nobel-prize-winning research. So those old dogmas just don’t have the explanatory power that they once possessed, at least not for me.

Stocks have never in history been as risky as they were in January 2000, when the P/E10 level hit 44. They have provided an average annualized return of 3.3 percent real in the 18 years since. That’s far below the usual return of 6.5 percent real. It’s half of the normal return. For 18 years running. If investors are compensated for taking on extra risk, the return to stock investors should have been higher during those years, not lower.

The Buy-and-Hold dogmas don’t hold up to scrutiny. They possess a certain surface plausibility. But they just don’t stand up to scrutiny. When you test them with any sort of vigor, they always fail the test.

You believe in Buy-and-Hold because you want to believe in it, because you are emotionally invested in the concept, not because the ideas are strong enough to stand up to tough scrutiny. That’s why you get so angry when I challenge Buy-and-Hold in a forceful manner. You want to believe and I am making it harder for you to believe and so you strike out at me.

That’s my sincere take re these terribly important matters, in any event. I could be wrong. It has been known to happen.

Take good care, man.

Rob the Buy-and-Hold Challenger

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

So Bogle, Buffett and Shiller are all worried about job threats, death threats and getting banned from the boards, so they hold back. Got it.

All human beings want to be liked. All humans beings want to be able to work in the profession in which they have trained for years. No human beings enjoy seeing their words upset others.

I believe that these feelings of not wanting to go against the herd have been installed in our being by evolution. I believe that millions of years ago those who did not go along with the herd did not survive. So we all have this inclination to try to go along with majority opinions.

That’s why we have bull markets, Anonymous. We all would be better off if we did not have them. We all would be better off if we saw stock prices increase by 6.5 percent real every year without fail. But we don’t “vote” in the way that would serve our best interests. Some of us push prices higher and higher and higher, even to insanely dangerous heights. And the rest of us tolerate that behavior. Lots of us limit our participation in bull markets. But few of us actively try to stop them in their tracks. Few of us call out our friends and neighbors and co-workers on their b.s.

And so we end up with bull markets. And the bear markets that follow from bull markets. And the economic crises that follow from bear markets.

Shiller showed us the way out of the craziness.

But he hasn’t helped us in a practical sense because we have not yet given ourselves permission to post honestly re what the last 37 years of peer-reviewed research shows us re how stock investing works in the real world.

I think we are going to give ourselves permission in the days following the next price crash. I think that we are going to realize at that time that we don’t really have any other choice available to us.

We’ll see.

My best to you and yours.

Rob