I’ve posted Entry #379 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Your Lifetime Return As a Stock Investor Depends on the Point of the Bull/Bear Cycle At Which You Begin Investing.

Juicy Excerpt: Buy-and-Holders would argue that there is no way to know when those magical time-periods have come to an end and that investors who stuck with stocks from 1982 until today have done just fine. The annualized return for those 36 years is 8.9 percent real. That is indeed a super return. But I cannot help pointing out that most of that super return came from the first half of the 36-year time-period, the half that began with a P/E10 level of one-half of the fair-value P/E10 level. The annualized return from January 2000 forward was only 3.3 percent real. And, in the event that we see a 50 percent price drop in the near future, that would bring the portfolio amount that started at $100,000 a bit below the $1.2 million figure where it stood at the top of the bubble. Stocks can provide good returns even starting from high price levels. But the downside of the investment choice — which virtually disappears at times of super low prices — should become a serious concern at times of sky-high price levels.

I’ve posted Entry #378 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stocks Have Been Performing Poorly for a Long Time — That’s Good News!

Juicy Excerpt: I don’t think it is fair to cite the price-only return. Stocks pay dividends. So dividends should be included in assessments of how well the stock market has been performing. Count dividends and the real return so far for this Century is 2.9 percent. That number is not quite so shocking. But it is certainly not good. As Hulbert observes, most investors would guess that stocks have been doing much better for the past 18 years. Why the confusion? How is it that so many of us have been so misled about the long-term performance of the asset class on which our hopes for our financial futures are riding?

Stock performance is a big deal. When millions of people experience sub-par stock returns for many years running, they spend less on all consumer goods and services. The effect on the economy is substantial. But Hulbert is right — most investors are not even aware that stocks have been doing this poorly for this long. People notice when automobile manufacturers are no longer offer strong value propositions, or when companies producing smart phones are no longer getting the job done. But poor stock performance goes unnoted. Why?

I’ve posted Entry #377 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Studying Safe Withdrawal Rates Is the Best Way to Learn How the Stock Market Works.

Juicy Excerpt: The safe withdrawal rate concept is a long-term concept. It’s not possible to tell someone how realistic their retirement plan is by seeing how it performs in one year or two years or three years. And it is not helpful to tell them that it will take 20 years for them to know whether the plan is going to work or not. Aspiring retirees need to know how plans that stretch far into the future are going to work but need that information on the day the retirement begins. They need long-term guidance, not short-term guidance. But they need that guidance provided in the short-term.

The magic of Shiller’s research showing that today’s P/E10 level offers highly accurate predictions of how stocks will perform 10 and 15 and 20 years out provides just that. The safe withdrawal rate at the time Shiller offered his prediction was 3.1 percent. That’s probably a better indicator of the value proposition offered by stocks at the time than Shiller’s helpful but flawed prediction. The 3.1 percent number is not so awful as to overstate the dangers of stocks when they are selling at those price levels. But it is low enough given the average long-term return of 6.5 percent to suggest that stocks were a far less appealing option than they are in ordinary circumstances. That simple number told the story better than Shiller’s carefully prepared testimony!

I’ve posted Entry #376 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called How Many Bull/Bear Cycles Are Required to Prove That Valuations Matter?

Juicy Excerpt: I sometimes make the claim that 100 percent of the evidence available to us today supports Shiller’s view of how stock investing works and 0 percent supports Fama’s view. I of course understand that the statement strikes most Buy-and-Holders as extreme and absurd. But I advance the claim sincerely. It’s that hill-and-valley graphic showing how valuations play out in the long term that persuades me that the case is so strong. The hill-and-valley graphic applies for the entire history of the stock market. And it is logically incompatible with a belief in Buy-and-Hold.

A visitor to my website asked me the other day how many times the hill-and-valley pattern has played out. The answer is four times. We came to the end of one bull/bear cycle in the early years of the 20th Century. We came to the end of a second at the onset of the Great Depression. The third ended with the stagflation of the 1970s. And we are presumably nearing the end of the fourth bull/bear cycle in our nation’s history today. Four completions of the cycle was not enough evidence to make the case for my friend. He asked me to get back to him when I can say that the same basic cycle has played out not four times but thirty times.

I’ve posted Entry #375 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stock Investors Are in the Process of Acquiring Self-Knowledge.

Juicy Excerpt: While I believe that the Get Rich Quick element of the Buy-and-Hold concept is a big part of its appeal, I don’t think it’s right to say that that is the only factor pushing millions of good and smart people toward a belief in the strategy. Millions believe that Buy-and-Hold is research-based regardless. It’s a very good sign for the future that so many of us long to make use of research to guide our stock investing strategies.

I see the popularity of Buy-and-Hold as a precursor to something very different. I foresee true research-based strategies achieving the dominance that Buy-and-Hold achieved in the days of crazy high prices in the days following the crash that will show us all in stark and scary terms the long-term pitfalls of following Buy-and-Hold strategies.

Today’s stock investors are in the process of developing self-knowledge. We are getting close to the point where we will be able to see how emotional we have become about stock investing just by looking at the P/E10 level and seeing how out of whack we have collectively permitted it to become. We are in the process of learning how to keep our Get Rich Quick impulse in check and for the first time in stock-market history to act in our true self-interest.

I’ve posted Entry #374 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called What Buy-and-Holders Really Believe.

Juicy Excerpt: Stock returns have been dramatically subpar for 18 years running now. But Buy-and-Holders are not unhappy with them. When they assess the merit of their strategy, they consider the time-period from 1982 (the beginning of the last bull cycle) through 1999 as well, years when Buy-and-Hold performed very well indeed. Over the last 35 years, Buy-and-Hold has been a good strategy. That’s what counts for most Buy-and-Holders.

The trouble is that stocks are today priced at two times fair value, and, if those who are happy with Buy-and-Hold today saw their portfolio value reduced by 50 percent, they would not be so happy any longer. It can take a long time for the downside  of the Buy-and-Hold concept to evidence itself. I believe that the minds of many Buy-and-Holders will open to new ideas following the next price crash.

Presuming that the next price crash takes valuations to fair-value levels or lower and that they remain there for some time, that will be the first time since Shiller published his research showing that valuations affect long-term returns that investors will be able to consider its implications without the bias that comes from enjoying years of good stock returns. I believe that we will see the launching of a national debate on the meaning of Shiller’s research findings at that time.

I’ve posted Entry #373 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called It’s Logically Inconsistent to Buy Stocks in Response to Valuation Shifts But to Rule Out Selling Them for That Reason.

Juicy Excerpt: I think that the biggest cause of the problem is an unfortunate marketing reality: there’s generally more money to be made selling stocks than there is to be made selling the safe asset classes that investors should be buying into when stock prices rise to dangerous levels. Most of the people who are promoted as “experts” in this field are compromised by their need to push stocks for a living. In some cases, they appreciate the benefits that investors could reap by lowering their stock allocations but hesitate to give voice to them. In other cases, they themselves are taken in by the pro-stock commentary that becomes ubiquitous at times of high stock prices (it is an excess of pro-stock commentary that causes the high stock prices!) and cannot even appreciate the case for a lowering of stock allocations at such times.

I’ve posted Entry #372 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Bull Market Has a Long Memory of Bearish Times — and That’s Okay!

Juicy Excerpt: More importantly, I don’t think that Shiller would say that the P/E10 metric offers precise guidance. Using the median for earnings rather than the mean pulls the number from the very, very scary high of 31 down to just the very scary high of 28. That’s not much of an improvement. The 32 reading is especially alarming because it is so close to the reading that applied in the days just prior to the Great Depression. But the full reality is that there has never been a time when the P/E10 rose to 25 when we did not suffer an economic crisis in the days that followed. The mean-adjusted reading of 28 is plenty dangerous itself.

I’ve posted Entry #371 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Biggest Problem With Buy-and-Hold Is the Questions It Takes Off the Table — Part Three.

Juicy Excerpt: The full reality here is that the 1.1 percent withdrawal rate that applies for retirees who insist on retention of the full starting-point portfolio value is not that much less than the 2.0 percent number that applies for retirees who are okay with seeing the portfolio balance reduced to $1 over the course of 30 years. That’s not much of a price to be paid for the benefit attained by paying it. Say that the investor began retirement with a portfolio of $1 million. The difference here is that the investor taking an annual withdrawal of $11,000 is assured of being able to pass along at least $1 million to heirs or charities while the investor taking an annual withdrawal of $20,000 is assured of being able to pass along nothing. The retiree who wants to pass along $1 million instead of zero needs to reduce his annual withdrawal by $9,000. That’s not a bad deal!

I’ve posted Entry #370 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Biggest Problem With Buy-and-Hold Is the Questions It Takes Off the Table — Part Two.

Juicy Excerpt: When I was developing the retirement calculator, it occurred to me that it would be helpful for investors using it for me to include some features not included in the Buy-and-Hold calculators. My calculator permits investors to examine how the safe withdrawal rate changes in response to a lowering of the stock allocation. It permits investors to compare the safe withdrawal rate obtained by investing in stocks with the safe withdrawal rate obtained by investing in super-safe asset classes like Treasury Inflation-Protected Securities (TIPS). It permits investors to examine how much of a difference it makes to plan a retirement that is sure to have at least one dollar remaining in the portfolio at the end of 30 years (this is the assumption used in the Buy-and-Hold studies and calculators) versus one that is sure to have 50 percent (or some other percentage) of the starting-point portfolio amount remaining.

The questions examined in my calculator but ignored in the Buy-and-Hold calculators are important strategic questions. It amazes me that they have not been studied in depth for years. I have come to the conclusion that the reason why we have as a society held back for many years examining many important strategic investing questions is that our belief in the core tenets of Buy-and-Hold has put us in a frame of mind in which examining these questions seems pointless or even troubling.