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

“Because, it someone says that one of the things that I say is right, they know that they will be led by logic to saying that all of the things that I say are right.”

Who told you this?

I experienced it myself. I was a Buy-and-Holder myself on the morning of May 13, 2002. John Bogle was my hero. I had no intention at that time of leading an effort to replace Buy-and-Hold with a new model for understanding how stock investing works. All that I thought that I was doing was suggesting that we should consider valuations when calculating safe withdrawal rates.

Was there any possibility that Greaney cuuld have corrected his study on the afternoon of May 13, 2002, and that we could have thereby put this thing to bed? There was not. I didn’t see that at the time. But there was not. Greaney probably suspected where things would go if he did that. That’s probably one of the reasons why he did not want to correct the study.

If we need to consider valuations when planning a retirement, we need to consider valuations when setting a stock allocation. And we need to consider valuations when looking for the cause of an economic crisis. And we need to consider valuations when making a determination as to whether we have saved enough to buy a bigger house. And we need to consider valuations when a President takes credit for a strong economy. And on and on and on.

If irrational exuberance is a real thing, it needs to be taken into consideration when examining any of hundreds of economic questions. Irrational exuberance is a huge issue. I have been writing about it on a daily basis for 19 years and I have barely scratched the surface of all of the important things there are to be said about it. Irrational exuberance changes everything we once thought we knew about stock investing and everything we once thought we knew about economics.

That’s why there is so much resistance is launching the national debate. Change is scary. Shiller’s Nobel-prize-winning research changes EVERYTHING.

We can’t change our understanding of safe withdrawal rates without also changing our understanding of hundreds of other things. Because the REASON why the Buy-and-Hold retirement studies are in error is so fundamental. The reason is that they assume investor rationality and the reality is that investors are often highly emotional. The reason why they are emotional is that they are human. And those same human actors are involved in lots of other endeavors every day and they are highly emotional when engaging in those endeavors as well.

This entire debate is about reason vs. emotion. That’s a big subject with implications reaching in all sorts of directions. It makes people who have come to be thought of as “experts” anxious to see all sorts of new questions being put on the table.

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:

Can you show us the research that proves your allegations of death threats? Can you show us the research behind getting a $500 million dollar windfall?

The fact that the Greaney retirement study hasn’t been corrected to this day proves it, Anonymous. Are you able to imagine a scenario in which a retirement study is not corrected for 18 years after the error in it becomes public knowledge and where there have not been death threats and other criminal acts used to block discussion of the error? It is not possible for the rational human mind to imagine such a scenario. Anyone who wants to know what happened knows that there were death threats and other criminal acts.

And, yes, that’s a kind of “research” into how stock investing works. The Buy-and-Holders think of research as involving rows of numbers. That’s how research into rational stuff looks. But what Shiller showed is that stock investing is not a 100 percent rational thing, it is instead at times a highly emotional thing. Say that reason is 50 percent of stock investing and that emotion is 50 percent. Then half of your research should be looking at reason-based stuff (this is the sort of research that the Buy-and-Holders favor) and half of your research should be looking at emotion-based stuff.

A showing that a retirement study has not been corrected for 18 years after the error in it became public knowledge is the kind of “research” that Shiller showed we need to do if we are to come to a full understanding of how stock investing works. We need to get over this thing of believing that reason-based research tells the full story. It does not. The emotional stuff plays a big role. And we need to look at things like death threats and acts of extortion to get a grip on how the emotional stuff is affecting us all.

Shiller changed out understanding of how stock investing works in a fundamental way. It is because his work is so important and so revolutionary that we are having a hard time incorporating it into our thought processes. But we need to do it. Stock investing affects all of our lives. We need as a society to come up with some way of providing access to honest and accurate reports re safe withdrawal rates and re scores of other critically important investment=related topics. That means coming to terms with the death threats and all the rest. Stuff that is not rational. Stuff that is emotional. Emotional stuff that matters every bit as much as the rational stuff.

That’s the future of investment analysis. Shiller showed us what we need to do to get the numbers right for the first time in history and we all need to pull together to figure out what we need to do to make that dream a reality.

I don’t know where you came up with this idea that the $500 million is a “windfall.” That’s the amount that I have agreed to settle for so that we can leave the lawsuits behind and just enjoy working together to help everyone alive on the planet lead better lives than they were able to live in the pre-Shiller era. The way you calculate that number is just to look at what I would have earned with my work if there had never been a criminal act holding me back from opening every discussion board and blog on the internet to honest posting re the last 30 years of peer-reviewed research.

Do you know how many businesses went under in the Buy-and-Hold Crisis of 2008? Save those businesses from going under and right there you’ve got a lot more than $500 million produced. So I don’t expect to have too much trouble supporting the $500 million number. This is the biggest advance in the personal finance field in the history of our nation and there is nothing else in a close second place. I mean, come on.

Rob

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

“valuations affect long-term returns”. Well, obviously. Today’s P/E or interest rate has some correlation to future stock or bond returns.

But that’s a far, far cry from predicting the stock market is going to crash by 50%+ in the next three years.

No, it’s not.

Shiller predicted in late 1996 that within 10 years those going with high stock allocations would regret it. The same conditions that applied in 1996 also applied in 2009. So it was equally possible to predict in 2009 that we would see a crash by 2019.

Shiller ended up being a little off. That certainly happens. Precise predictions are not possible. But Shiller peformed a huge public service by letting us know in 1996 that we would be seeing a stock crash and the economic crises that inevitably follows one 12 years before it came to pass. Had we acted on his warning, we could have avoided both the crash and the economic crisis. That obviously would have been a good thing.

The entire historical record says that we should expect another crash within the next three years. If we took action today, we could reduce the pain suffered in the crash and thereby mitigate the political fallout that will follow from it. I cannot tell you the day or month or even the year that the crash will take place. But it would be irresponsible to ignore the 36 years of peer-reviewed research showing that one is coming.

You want to paint things in either black or white. Either we can predict everything with perfect certitude or we cannot predict anything at all. Neither of those two things are true. We certainly cannot predict with certitude. But the entire history of the market shows that it is overvaluation that causes crashes (and economic crises). And we today are experiencing a level of overvaluation rarely seen in U.S. history. The risk of a crash is super-high. People need to know that. Not just investors. Anyone who cares about the future of our country needs to know it. People suffer in economic crises. We should be telling everyone what the last 36 years of peer-reviewed research teaches us about these matters.

Those are my sincere thoughts, in any event.

I naturally wish you all good things.

Rob

Set forth below is the text of a comment recently put to another thread at this site by a regular site visitor, followed by my response:

Can you name a single person who’s either pure BH or pure VII as you define them? A person who would never, ever change his allocations under any circumstances, or one who is forced to mechanically make changes based on valuations, with no consideration of other factors?

Of course you can’t. No such person exists. Even theoretically there’s no sane person who believes valuations can never have an effect on future returns, or one who says they must always. The data is clear – historically, valuations have had some effect on future prices, some of the time. Shiller will tell you that. Vanguard will tell you that. Fama will tell you that. There are no two “opposite” (your word) views.

The retirement study posted at John Greaney’s web site does NOT contain an adjustment for the valuation level that applies on the day the retirement begins. Greaney often referenced that study in his posts at the Motley Fool board. I put forward a post on the morning of May 13, 2002, that asked whether we should be considering valuations when we identified the safe withdrawal rate. You say here that: “Historically, valuations have had some effect on future prices, some of the time.”

So should SWR studies include an adjustment for the valuation level that applies on the day the retirement begins or not? I say they should. What do you say, Anonymous?

Rob

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

Rob,

Does it concern you that there have been many market timing strategies that have been researched and peer reviewed but once discovered no longer work? PE10 would certainly fit into this mold as everyone is now well aware of the metric and its possible implication.

Does it concern you that the research you cite includes a huge chunk of time where implementing VII would have been incredibly impractical? In that sense a market inefficiency related to PE10 ratio could of existed but the cost of taking advantage of it at the time would have been too great to act on and thus correct the inefficiency.

Does it concern you that the research you cite doesn’t properly account for trading costs and tax implications at the time which again suggests that a PE10 market inefficiency could have existed without the ability to take advantage of it?

Does it concern you that the research you cite doesn’t properly account for trading costs and tax implications at the time so its comparisons to a buy and hold strategy are not perfect?

Does it concern you that you only use PE10 on the U.S. market and therefore are only informed about a single market? What is the plan for international stock allocation which isn’t informed by your PE10? Certainly a portfolio that totally ignores the entire rest of the world can’t be properly diversified and by your assessment less risky.

Does it concern you that the mean PE10 ratio could very well be trending upwards?

Does it concern you that there is no theoretical reason for the historical mean of PE10 and that it is nothing more than that the historical mean? The historical mean height of males throughout history is probably something like 5’3? foot. Should I expect a revision back to this historical mean?

Does it concern you that even if a PE10 over some historical mean represents a market inefficiency a market can remain inefficient for a very long time?

Set forth below is the text of a comment that I recently posted to the Goon Central board:

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

and stocks would be indistinguishable from bonds.

The returns on non-stock asset classes ARE generally determined by market forces (rather than by the productivity of the U.S. economy).

So there is a legitimate point to be made that, if the risk of stock investing was reduced by 70 percent and the long-term return on stocks remained stable, there would need to be some adjustment in the returns paid by asset classes like certificates of deposit.

If stocks carry little risk and CDs carry little risk, you can’t have stocks paying 6.5 percent real and CDs paying 3 percent real. Those numbers need to move closer to each other.

Please note, though, that it is not the stock number that is likely to move. Our economy is an established one. The productivity of established economies is generally stable. The stock number might move down to 6 percent or so. It is not likely to move much lower than that.

So for the numbers to come closer together, the return on CDS must INCREASE.

The banks that sell CDs offer as low a return as they can get away with and still sell the CDs. Today, they can sometimes get away with paying very low rates of return because the relentless promotion of Buy-and-Hold strategies has made investors so emotional about stock investing. All that changes once we open the internet up to honest posting on safe withdrawal rates and scores of other critically important investment-related topics.

Investors will no longer have a bias in favor of stocks once we permit honest posting and it is possible for them to become educated as to the realities. That means that they will demand that banks offer higher CD returns or they will refuse to buy CDs. The banks will comply.

We will all not only enjoy far higher returns from stocks at greatly reduced risk following the end of the Ban on Honest Posting. We will also enjoy higher CD returns. It’s a win/win/win/win/win.

Rob

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

If stock markets level out and volatility falls, then to my mind the equity risk premium would dry up and stocks would be indistinguishable from bonds.

You are trying to make sense of things through the use of concepts developed by people who believed in the Buy-and-Hold Model, Laugh. This cannot be done.

Stock prices are determined by the productivity of the U.S. economy, not by market forces. The idea that stock returns are high because stocks are a volatile asset class is part of the Buy-and-Hold mythology. There is zero support in the academic research for this “idea.” Volatility is risk. Volatility is a bad thing. Volatility adds nothing. We will all be better off when volatility is greatly reduced. A big reduction in volatility will be the greatest free lunch we have ever enjoyed.

Look at where things stood in 2000. Stocks were the riskiest they have even been in history. So there should have been a huge risk premium, right? Investors should have been looking forward to long-term returns of 15 percent or 20 percent real as their reward for being willing to take on that sort of risk, according to the risk-premium advocates. Yet the research tells us that the most likely annualized long-term return in 2000 was a negative number. Huh? You take on more risk than any stock investor before you has ever taken on and your compensation is a negative return? That makes sense? There was a risk PENALTY in place in 2000, not a risk premium.

The error that the Buy-and-Holders continually make is to ASSUME investor rationality. Rational investors would demand a risk premium. That much is certainly so. Like everything else in the Buy-and-Hold Model, the risk premium is 100 percent logical. That is the problem.

Stock investing would be 100 percent logical if only the human investors who buy and sell stocks were 100 percent logical. They are not. So the idea that any model for understanding investing that ASSUMES 100 percent logic could ever work in the real world is of course 100 percent nonsense.

You MUST incorporate investor emotion into the mix. That’s what P/E10 does. P/E10 tells you how irrational investors are being at any given moment.

The magic of permitting honest posting on what the academic research says is that the humans can CORRECT their irrational behavior by looking at the research. It was an insane act to go with a high stock allocation when the likely long-term return for stocks was a negative number. Now consider how the Buy-and-Holders and the Valuation-Informed Indexers cope with this reality. The Valuation-Informed Indexers let investors know what the research says, that they are destroying their hopes of being able to retire when they want by giving in to the Get Rich Quick urge that says that price means nothing, to just go ahead and buy stocks no matter how dangerously overpriced they are. The Buy-and-Holders take it just the other way. They say that there is some magic pixie dust that they are sprinkling in the air to make stock investing work 100 percent the opposite of how it has always worked throughout history, that it is JUST FINE to stay at the same stock allocation when prices go to insanely inflated levels.

That’s why those who listen to the Valuation-Informed Indexers always end up so far ahead. VII is HONEST. Honest investing advice helps the investor more than does the Get Rich Quick garbage pushed so heavily by the Wall Street Con Men.

Or at least that is my sincere belief re these important matters, Laugh.

Please take good care.