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

Warren Buffett: “The best thing that can happen from Berkshire’s standpoint … over time is to have markets that go down a tremendous amount,” he said. “We are going to be buyers of things over time. And if you’re going to be buyers of groceries over time, you like grocery prices to go down. … What we fear is an irrational bull market that’s sustained for some long period of time.”

That’s Valuation-Informed Indexing. That’s the concept in a nutshell.

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:

<i>I now have about $6.5 million thanks to Buy and Hold. You have almost depleted your savings and need to go back to work. Which one of us is in danger?</i>

The entire country is in danger in the event that stocks continue to perform in the future at least somewhat as they always have in the past. If it turns out that Shiller’s Nobel-prize-winning research is legitimate research, we will be seeing millions of failed retirement and hundreds of thousands of businesses going under and millions of people thrown out of their jobs. Another Buy-and-Hold crisis helps no one. It hurts us all.

If you adjust that $6.5 million number for the effect of irrational exuberance, it would be about $3 million. You would be a lot better off with $3 million living in a nation that is not going through its Second Great Depression than you will be with 1.5 million (stock valuations usually fall to one-half of fair value at the end of a bull/bear cycle) in a nation going through its Second Great Depression. Going full Get Rich Quick/Buy-and-Hold helps no one.

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:

You missed this part:

Michael: And so, what do you think about as the number in the environment today?

Bill: I think somewhere in 4.75%, 5% is probably going to be okay.

You need to stop your fraudulent and criminal behavior, Rob. Your board needs to be opened up to honest posting and you have been blocking that.

Greaney wasn’t saying that a 4 percent safe withdrawal rate can always be achieved in some way. He was saying that someone going with an 80 percent stock allocation always has a 4 percent safe withdrawal rate. That’s wildly wrong. At the top of the bubble, the safe withdrawal rate for someone going with an 80 percent stock allocation was 1.6 percent. It was possible at that time to get a 5.8 safe withdrawal rate going with 100 percent TIPS. A high safe withdrawal rate was certainly available to investors. But Greaney was not telling people how to get there. He was encouraging them to go with a high stocks/low safe withdrawal rate portfolio.

Investors always need to compare what they can do with different asset classes. That’s how you choose a good stock allocation. You look at the pros and cons of different allocations and choose the one that is best for you. The problem with Buy-and-Hold is that it discourages people from doing that. If an investor isn’t going to engage in market timing, why should he make a comparison of the merits of different asset classes? Say that getting your asset allocation right is 70 percent of the stock investing game. Once you adopt a Buy-and-Hold strategy, you have forsaken all the benefits of doing well with that 70 percent of the game. Buy-and-Holders don’t engage in market timing. So there is no reason for them to perform the comparison that an investor needs to perform to invest successfully for the long term.

My sincere take.

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:

But all the crash predictions haven’t materialized and the gap between buy and hold vs VII continues to grow. Aren’t we at the point that even a crash still doesn’t bring the buy and hold portfolio below VII?

I have done that analysis before. I have not done it super recently. The conclusion when I did it before was that it was a close call. It depended on whether you felt that you should be compensated for the extra risk that you take on when you invest in stocks. If you felt that you should be compensated for the extra risk, the Valuation-Informed Indexing portfolio ended up ahead. If you looked only at the numbers and didn’t insist on compensation for extra risk, the Buy-and-Hold portfolio ended up a little ahead in some circumstances. But not by a huge amount.

I believe that every investor should do the analysis. And not from just one angle. People should look at the question from multiple perspectives. The more you do that, the better you understand stock investing. And, the better you understand stock investing, the more likely you are to stick with your plan for the long term. Both Buy-and-Holders and Valuation-Informed Indexers say that that is critical. So I see the process of going through the analysis with an open mind as being absolutely critical for all investors.

This is always the sticking point between you Goons and me. I think that, the more you learn, the better off you are. And that we learn by talking things over. You want to silence all challenges to Buy-and-Hold. I think that’s nuts. If Buy-and-Hold is the real thing, it will be able to withstand any challenges. The fact that many Buy-and-Holders want to silence challenges is a very bad sign for Buy-and-Hold, in my assessment.

There is certainly some point at which, if an expected crash has not taken place for many years, it would have been better to have just followed a Buy-and-Hold strategy. Stocks offer much higher returns than super-safe asset classes. So there is a point at which it would pay off. But it is clear that that point is much farther out than most people realize. MUCH farther out. Crashes are devastating. Lose 70 percent of your portfolio in a crash and it can take a long, long time to recover from that loss. It is counter-intuitive how much you can hurt yourself by taking a hit like that.

In the final analysis, these questions are personal. Some people are willing to take the hit rather than ever put a significant amount of their money in a low-return asset class. That’s not me. But it is not my place to tell people what to do. If people want to go that way, I wish them the best of luck with it.

But others do not want to be placed in circumstances in which they could suffer a devastating hit. I think that we all should be doing everything in out power to let those people know what alternatives are available to them. I see Valuation-Informed Indexing as an amazing alternative for millions of people. So I want to get the word out. It is my sincere belief that everyone, including you Goons, ends up better off if the word gets out.

So I am 100 percent if favor of that, even though I acknowledge that there comes a time when, if the crash has been delayed long enough. Buy-and-Hold comes to be the better choice. I don’t think we are there yet. But I do think there could come a time when we would be there for some portion of the population. I think you Goons greatly, greatly exaggerate the benefits of Buy-and-Hold and that it is dishonest and foolish to do it to the extent you do. I think that Valuation-Informed Indexing is a far superior strategy on an overall basis but that there may be some exceptions to the general rule, and given how long the crash has been deferred, the past 24 years is a time-period that may end up being one of the exceptions to the general rule, at least for a portion of the population (but almost certainly not for all of it).

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:

Buy and holders did great with the 2008 crash. Take a look as to how they have been rewarded with the market rise since that time. Buy and holders, by definition, held their position and kept on buying when stock were low and continued to buy thereafter. Market timers, like Rob Bennett, have not done well. Robert Shiller tried to warn them by telling them to not use CAPE for timing the market, yet some are not willing to listen.

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 millions of people see 50 percent of their retirement savings disappear into thin air for no good reason, I have a funny feeling that they are going to know that SOMEONE is lying about how this stock investing stuff works. I have a further funny feeling that they are going to be able to figure out that it isn’t me.”

You just made the case again for buy and hold. How so? Well, if people followed your advice in 2009 and onwards, by staying out of the market, they would have lost out on one of the largest bull markets we make seen in our lifetime. We cannot predict when we will see the ups and the downs in order to time the market. Look at you, for example. One of the worst track records we have seen. Yet, what we do know is that the market will continue to cover from any downturn and will set new heights if we hold versus sell (which would be timing).

I don’t advise people to stay out of the market at ANY time. I say that risk is greater when the CAPE value is higher. And so, to keep their risk profile constant, I say they MUST be willing to adjust their stock allocation downward. I recommend a stock allocation of about 30 percent when the CAPE value is where it has been from 2009 forward.

We cannot predict PRECISELY when we will see ups and downs. But we know with certainty that we always see more downs when the CAPE value is high and more ups when the CAPE value is low. Yes, the market is up from where it was in 2009. But most of those “gains” are the product of irrational exuberance. So they will not be lasting in the event that stocks continue to perform as they always have in the past. Having a temporary gain and then watching it disappear is not a plus. The peer-reviewed research that I co-authored with Wade Pfau shows that Valuation-Informed Indexing ALWAYS beats Buy-and-Hold on a risk-adjusted basis in the long term. There has not yet been one exception in the 150 years for which we have good records of stock prices

Will the market recover from its losses eventually? It will. But it could take investors who suffer a 60 percent price drop in the next crash years or even decades to make up for that loss. We all only get so many years to fund our retirement account. To lose years or decades of compounding is a very big deal. Investors should be aiming to keep their risk profile roughly constant over time. That REQUIRES market timing. Market timing is price discipline. If you are not engaging in market timing, you are investing irrationally. Obviously you want to go with the form of market timing that always works — long-term timing — and avoid the form that never works — short-term timing.

My sincere take.

Market Timing 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:

Hey Rob:
Value informed investing in my opinion is spot on, but I do have a question. If one were able to pick undervalued lower valuation stocks , would this change the final outcome.?Hypothetically buying low PE 10 stocks instead of the current high PE10 values

Max

Max:

Thanks for your kind words re Valuation-Informed Indexing and for your question. I’ll make an effort to respond to it below. But please understand that I do not consider myself any sort of “expert” re the subject of stock investing. I am a journalist. I noticed back in May 2002 that the Buy-and-Hold retirement studies lacked valuation adjustments and thus could not possibly get the numbers right. There were hundreds of people who responded to my post asking whether we should be taking valuations into consideration when calculating safe withdrawal rates with great enthusiasm and there were hundreds of others who responded by threatening to kill my wife and children if I did not stop asking questions that cast doubt on the Buy-and-Hold strategy. That reaction caused me to look deeper into this stuff and over the past 16 years I have explored many aspects of the story. I am of course happy to share with you what I have come up with. But please understand that the proper way to do things is to have hundreds or thousands of people all offering their thoughts on these sorts of questions, not just one guy whose only claim to expertise in the field is that he figured out how to get his words posted to the internet.

Your logic is perfect except for one thing. It is possible to predict long-term returns when looking at a broad stock index. It is not nearly so easy to do so when looking at an individual company’s stock or at the stocks of a small group of companies. Say that Company ABC has a very low P/E10 value, say a P/E10 value of “8.” Does that mean that that company’s stock is underpriced? It does not. It could be that that company is close to bankruptcy and that it has been assigned a low P/E10 value for perfectly rational reasons. Investing in that low P/E10 stock would not give you strong long-term returns.

It’s different when the entire stock market has a low P/E10 value. It cannot be that all of the companies in the U.S. market are about to go bankrupt. Or you might say that, if things are that bad, it hardly matters how you invest, we are all doomed anyway. A root premise of Valuation-Informed Indexing is that the U.S. economy as a whole is going to keep chugging along at least largely as it always has in the past. There are individual companies that are going to go bankrupt. So there are individual cases in which low P/E10 values are justified. But on an overall basis those low P/E10 values are not justified. On an overall basis, the U.S. economy is likely going to continue chugging along as always and the low P/E10 value assigned to the entire market will in time be transformed into a fair-value P/E10 value.

So this only works when you are investing in a broad index fund. It’s sort of like when pollsters take an opinion survey. If you ask 10 people how they are going to vote, that tells you next to nothing as to how an election is going to go. But when you ask 10 million people how they are going to vote, you can generate highly accurate predictions as to how things are going to turn out. Predictions will not work unless the things being looked at are statistically significant. And looking at one company does not give you enough information to know whether the low (or high) valuation is justified or not. However, looking at all the companies offers powerful insights.

Now —

It may be possible to apply the principles of Valuation-Informed Indexing to slices of the market smaller than the entire market. Perhaps you could say “Mid-cap stocks have a lower P/E10 value than the market as a whole, so that is a better place to put your money today.” That’s not a crazy thought. I am not prepared to say whether that would work or not. I think we need to see more research on the question done by lots of different people before we draw conclusions re that one. It might work. There is reason to think it would. But my confidence in the predictions generated diminishes when the number of stocks being examined diminishes. The worst of all options is to make investing decisions based in predictions that don’t prove out. So I feel safer limiting my predictions to ones that we know have always worked, predictions rooted in an analysis of the entire market.

Again, just my thoughts. Please feel free to ask other people their thoughts re this matter. I have hopes that in time we will be able to get some others posting here and that we will all be able to enjoy a rich learning experience as a result.

Thanks for stopping by. It’s always nice to hear your voice, my good 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:

Of course valuations matter. But as Rob has so painfully proven – the timing matters too. And this is why buy and hold is generally better.

It’s so remarkably simple it is hard to fathom how rob could be on this ridiculous crusade for so long.

I agree with you that valuations matter, Laugh.

I presume that what you mean when you say that “timing matters too” is that the time it takes for prices to revert to fair-value levels matters. I don’t agree with you re that one, at least not entirely.

The time it takes for prices to revert to fair-value levels affects the result obtained. So it certainly can be said that in one sense the timing matters. But what can we do with this information? We can choose not to time the market at all — that’s what Buy-and-Holders do. Or we can choose to look at what has happened in the past, form some parameters for how we will adjust our stock allocations in moderate ways, and then compare the results of that approach with the results we would obtain if we followed the Buy-and-Hold approach. Wade Pfau and I compared those two possibilities in the peer-reviewed research study that we co-authored. We found that Valuation-Informed Indexing — doing the best that we can do with the limited knowledge available to us — has far out-performed Buy-and-Hold for the entire 150 years of stock market history available to us.

The time at which mean reversion occurs matters. But it is not known. We would like to be able to engage in short-term timing as well as long-term timing. That would be ideal. But the world in which that is possible just does not exist. So that one is out.

But we are able to develop general rules that have always applied in the past and base our strategies on a belief that those rules or something not too terribly far different from them are likely to work in the future as well. The entire historical record shows that that is a far better approach than refusing to exercise price discipline at all. Just because we don’t know everything doesn’t mean that we do not know anything. The reality that we don’t know everything that we would like to know about how stock investing works doesn’t prove that we haven’t learned a great deal indeed from the last 36 years of peer-reviewed research. We know a lot more today than we knew when the Buy-and-Hold strategy was developed and we should take all that we now know into consideration when developing our investing strategies.

My sincere take.

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:

Hi Rob,
I was wondering now with the PE 10 at 30 , would you wait out the market or buy in for 20% stocks. I have spent 3 weeks studying on your site, thank you very much for doing this it all makes sense, and I am the average middle income investor.

Thanks for stopping by, Max.

The value proposition for stocks is not strong at today’s prices. But my vote is for 20 percent stocks (unless you are in very unusual circumstances).

Please understand that the focus of Valuation-Informed Indexing is getting your emotions right. Yes, it is a numbers-based strategy. But the focus is not the numbers. The idea is to use the numbers to guide the emotions. It is the emotions that have been largely overlooked in this field. What Shiller really showed is that emotions matter more than we realized before he came along. Get the emotions right and the rest of stock investing is easy.

Stock prices could double over the next 12 months. That’s an extreme long shot. I very much doubt that that will happen. But the constant message of the historical return data is that you never know for sure. So you want to be covered for that possibility, as unlikely as it is. Say that prices fall 50 percent in a crash. If you go with 20 percent stocks, your portfolio will be down 10 percent. That is a worst case scenario and it is not too bad a case especially when you consider that you will have lots of money to move into stocks with prices down 50 percent from where they are today.

Please also understand that good arguments can be made the other way. A big factor is your personal profile. If you have studied the market for a long time and would be able to live through a doubling of prices and not be emotionally affected by it, going with a zero stock allocation at these prices might not be such a bad idea. For the typical investor, I think it is best to avoid extremes and a zero percent stock allocation is certainly extreme.

I hope that helps a small bit, my new 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:

If I divide the stock part by two, which makes no sense, I still have a huge pile of money.

You do understand that older folks shouldn’t have a huge percentage of stocks?

I’m happy for you that you have a huge pile of money, Laugh. I wish that you could take some joy in it and calm down about things a bit. There are lots of other people in the world who would like to have more money and permitting honest posting on the last 36 years of peer-reviewed research at every discussion board and blog would help them to make that dream a reality. That’s what this is all about.

Most Buy-and-Holders recommend that investors lower their stock allocation as they get closer to retirement. This is certainly a good idea for those following a Buy-and-Hold strategy. Following a Buy-and-Hold strategy sends the risk of stock investing off the charts. It would be dangerous for a Buy-and-Holder to go with the same stock allocation that he used when he was young at a time when, if he suffered huge losses, he would not be able to make up for them. So this bit of conventional advice makes sense in the context in which it is usually delivered.

However, it is not entirely necessary for Valuation-Informed Indexers to lower their stock allocations as they get close to retirement. The peer-reviewed research that I co-authored with Wade Pfau shows that an investor who switches from Buy-and-Hold to Valuation-Informed Indexing thereby reduces his risk by nearly 70 percent. The Valuation-Informed Indexer who does not lower his stock allocation when he nears retirement in most cases is facing less risk than his Buy-and-Hold counterpart who does so. The research shows that failing to take valuations into consideration when setting one’s stock allocation is BY FAR the primary contributor to risk. The other factors (like age) are small factors in relative terms.

Say that an investor has turned 60 and the P/E10 level has dropped to 8, half of fair value. The most likely return is 15 percent real. The investor should be trying to tap into as much of those juicy returns as he possibly can while they remain available. By going with a high stock allocation while the returns offered are so great, he can in a short amount of time amass enough capital to not need to invest in stocks at all when prices go higher (Personally, I would remain in stocks at all times, but not everyone feels this way). So an argument could be made that an investor of age 60 might consider a stock allocation of as high as 90 percent when the P/E10 level is 8.

Does that sound too risky? Yes and no. If he loses lots of money, he is in trouble. But how much lower can stock prices go when stocks are already priced at one-half of fair-value? It is certainly possible that the P/E10 level could remain at 8 or thereabouts for a long time. So the investor should not form expectations that prices are going to jump upward anytime soon. But the return is 6.5 percent real when prices remain steady. The investor does not need to see any price jumps at all to enjoy a very good return on his money.

The price level once fell to 5. That would be a big drop. But the P/E10 level did not remain at that insanely low level for long. If the investor cannot psychologically handle a drop to 5, he needs to go with a lower stock allocation for sure. And of course he needs to be careful that he is not fooling himself. But if he truly believes that he can handle a drop to 5 that only remains in place for a few years, he is probably in good shape. If we were to see a drop to 5 that remained in place for over 10 years, we would be seeing something that we have never experienced before. No one can say with certainty that it will not happen. But the likelihood of such an event is very low. It doesn’t make sense to give up the option to tap into years of huge returns because of a possible outcome that is a very low-probability event.

My take is that investors should lower their stock allocations a small bit when they get close to retirement. Even if it does not make logical sense to do so, the reality is that we are humans, not machines, and there is an added psychological fear that is going to arise when losses are suffered close to retirement age. But I don’t think that Valuation-Informed Indexers need to lower their stock allocations as much as Buy-and-Holders in these circumstances given that they have addressed the far bigger risk factor through their willingness to take the last 36 years of peer-reviewed research into consideration.

Please note the tone in your post. The attitude that comes through suggests that an investor who does not accept that he needs to lower his stock allocation when he nears retirement is a fool. But I have never heard you call those investors who do not accept the need to take valuations into consideration when setting their stock allocations fools. It is the Buy-and-Holders who are the bigger fools, Laugh. The peer-reviewed research shows that failing to take valuations into consideration sends investing risk into the stratosphere. Why do something like that? Why not just invest in the sensible, low-risk, high-return way that works best in the long run?

The answer to that one is that the Get Rich Quick urge that resides within all of us causes our brains to go haywire. Buy-and-Holders like counting the cotton-candy returns generated by bull markets as real. Any suggestion that they consider a research-based strategy makes them go mad because acknowledging what the research says means acknowledging that the cotton-candy returns always get blown away in the wind in the long term.

Valuation-Informed Indexing is a new paradigm. It is the first TRUE research-nased investing strategy. We didn’t have the last 36 years of peer-reviewed research available to us when Buy-and-Hold was developed and Bogle’s unwillingness to say the word “I” and “Was” And :Wrong” has held back the Buy-and-Holders from incorporating the most important research into their model for over three decades now. Drop the resistance to looking at what the research says and everything changes. Even in the Valuation-Informed Indexing era it will make sense for investors to lower their stock allocations a bit when they approach retirement. But this is not nearly as big a consideration in an environment in which investors have opened themselves to taking advantage of the power of the “revolutionary” (Shiller’s word) insights developed (but kept hidden from most investors) over the past 36 years.

I hope that helps a bit, my good friend.

Rob