I have posted Entry #421 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called We Cannot Ignore Valuations Out of a Desire to Keep Investing Advice Simple.

Juicy Excerpt: That’s a total of four allocation changes in 36 years, not much more than one every 10 years. And the benefit would be a portfolio that earned significantly higher returns while facing dramatically reduced risk. Complex? I don’t think so. To my eyes, the more complex strategy is the Buy-and-Hold strategy. Buy-and-Hold sounds simple. But sticking with a stock allocation chosen at a time when stocks are a low-risk asset class during times when the risk goes sky high causes an emotional toll that adds to complexity in its own way. No long-term strategy will work if you don’t stick with it and a Buy-and-Holder just experiences too much change in his risk profile for him to be able to stay the course indefinitely. Valuation-Informed Indexers enjoy a smoother ride and that makes all the difference.

I’ve posted Entry #420 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Most of Us Are More Buyers of Stocks Than Sellers of Stocks.

Juicy Excerpt: Most of us are buying additional stocks with each paycheck. When the price goes up on the shares in our portfolio, the price also is going up on the shares that we purchase with a portion of each paycheck. A price increase yields a long-deferred benefit on the shares we already own (because we will not be selling them for many years) and an immediate detriment on the shares that we will be purchasing with our next paycheck.

I’ve posted Entry #419 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called What Makes Stock Investing Hard Is the Poor Feedback Mechanism on Allocation Choices.

Juicy Excerpt: But prolonged bear markets do not take place often. We have good records of stock prices going back to 1870. That’s 148 years. Stock valuations have always played out in a hill-and-valley pattern, with perhaps 20 years of gradually rising valuation levels followed by perhaps 15 years of gradually falling valuation levels. So an investor sees the completion of one full pattern only after he has been investing for 35 years. Someone who started investing in stocks in 1982 would not have personally witnessed the bottom of a secular bear market to this day, 36 years later (this bull/bear cycle has taken longer than any earlier one to play out). That’s a slow, slow, slow feedback mechanism, the kind that the human mind has a hard time processing and learning from.

I’ve posted Entry #418 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Shiller Revolution Is About Shifting the Focus from Economics to Emotions.

Juicy Excerpt: The Shiller investor would have been frightened by those gains. He would not have seen them as something to celebrate; he would likely have characterized them as “out of control.” All investors want the market to be as rational as possible; we have our retirement money invested in it. The difference, though, is that Buy-and-Holders see nothing concerning about big price gains — they are caused by economic developments as much as are small gains. Valuation-Informed Indexers, in contrast, see bull-market gains as emotion-generated gains. Times of high valuations are times of irrational exuberance. The times in which the market delivers big gains are the most dangerous times for stock investors.

I’ve posted Entry #417 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Three Comments That Reveal the Buy-and-Hold Mindset.

Juicy Excerpt: My take is that Shiller really did start a revolution in our understanding of how stock investing works. Joe takes the more conventional view. He is not hotly opposed to hearing Shiller’s ideas explored, as are some of my critics. But he is not nearly as enthusiastic about the project as I am. He is complacent. He is not certain that Buy-and-Hold is the last word in investing analysis. But he does not feel any burning need to find a replacement for it. He is opened-minded about the subject but not intense about it. I think that that’s the view of most Buy-and-Holders and that that is why we will not see Valuation-Informed Indexing become more popular until a price crash causes many more investors to adopt a less complacent attitude.

I’ve posted Entry #416 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called It’s a Mistake to Try to Identify Stock Bubbles.

Juicy Excerpt: There are cases in which drinking three beers will get you in an accident and there are cases in which it will not. What conclusions can we draw from that? I worry that, in the stock investing realm, the conclusion that is drawn when high prices do not produce a crash is that high prices are not so terribly dangerous. I see that as an unfortunate conclusion. The results that follow from being involved in either a car crash or a stock crash can be devastating. The aim should be to avoid these experiences. The fact that we cannot say with precision what sorts of inputs (cans of beer or levels of P/E10) will bring them on does not justify daredevil behavior (driving after consuming several cans of beer or investing heavily in stocks when prices are very high). Unfortunately, it seems to be human nature to conclude that, if doing dangerous things does not produce a wipeout on one or two occasions, it thereby becomes safe to take the chance a second or third time.

I’ve posted Entry #415 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Buy-and-Hold Is Dangerous.

Juicy Excerpt: Only in subsequent years did I discover the downside of rooting an investment strategy in objective, research-proven realities. The downside is that science does not stand still. We thought we knew how stock investing worked in the 1960s and 1970s, when Buy-and-Hold was being developed and popularized. Then we learned in 1981 that our fundamental beliefs were not nearly so solid as we had once imagined, The trouble with a numbers-based model is that, if mistakes are made, the model produces numbers that are wrong. The certainty that goes with an objective approach becomes illusory. A model that produces false numbers retains the appearance of objectivity but no longer is animated by the spirit of a scientific endeavor. Science that is not corrected for a long period of time becomes anti-science.

I’ve posted Entry #414 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Buy-and-Holders Are Satisfied With Their Strategy Because They Don’t Adjust Their Portfolio Statement Numbers for the Effect of Valuations.

Juicy Excerpt: Stock prices have increased by 309 percent from July 1996 (when Shiller issued his warning) through today. So an investment of $100,000 would have grown to over $400,000. But stocks are today priced at over two times fair value. If overvaluation is the product of irrational exuberance not possessing lasting economic significance, that $400,000 could be reduced to $200,000 in the next year or two or three. IBonds and Treasury Inflation-Protected Securities (TIPS) were available in the years following Shiller’s warning that paid long-term returns of 4 percent real that could be locked in for up to 30 years. Investors who were prompted by Shiller’s warning to lock in those juicy returns will end up ahead of their Buy-and-Hold friends in the event that stock prices fall by 50 percent and they would have gotten ahead by investing in far less risky asset classes. They would have obtained higher returns while taking on reduced risk, a good deal all around.

I’ve posted Entry #413 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Investors Fall Victim to an Anchoring Bias When They Fail to Quantify the Effects of Overvaluation.

Juicy Excerpt: I no longer believe that the safe withdrawal rate is 3 percent or anything close to 3 percent at times of extreme overvaluation. But I wonder how many investors do believe something along those lines. Most investors never have to respond to questions about their beliefs put to them on internet discussion boards So most investors never formulate the thought that the safe withdrawal rate never drops much below 3 percent. But the vast majority of investors accept that Shiller showed that valuations affect long-term returns. So they know on some level of consciousness that the safe withdrawal rate cannot always be 4 percent. I believe that they employ anchoring to persuade themselves that, while the number cannot always be 4 percent, it is probably never too far off from that mark. They tell themselves something that isn’t true and that could hurt them in a very big way because they do not have immediate access to the information they would need to identify the accurate number and because they would feel uncomfortable not filling that gap in their knowledge even if they can only do so by making use of a discredited anchor.

I’ve posted Entry #412 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called There’s a Big Difference Between Saying That Valuations Matter and Exploring HOW They Matter.

Juicy Excerpt: The safe withdrawal rate is a number that drops to as low as 1.6 percent in some circumstances and rises to as high as 9.0 percent in other circumstances.

That’s an extremely controversial statement. If you don’t believe me, remind me some time and I’ll show you the scars. People who are happy to acknowledge that valuations matter are not at all willing even to acknowledge the possibility that the safe withdrawal rate is not always the same number (Buy-and-Holders believe that it is always 4 percent). Why?

Isn’t it a different way of saying the same thing? To say “valuations matter” is to make a theoretical statement. To say “high valuations can push the safe withdrawal rate down to 1.6 percent and low valuations can push the safe withdrawal rate up to 9 percent” is to give that theoretical statement practical application. Why would anyone who shares a belief in the theory object to exploring its practical implications?

It’s because exploring the practical implications of the belief that “valuations matter” gives that belief life.