A Rich Life

The Old Ideas on Saving & Investing Don't Work -- Here's What Does

Valuation-Informed Indexing #159 — The Same P/E10 Level Can Mean Different Things in Different Circumstances

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I’ve posted Entry #159 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Same P/E10 Level Can Mean Different Things in Different Circumstances.

Juicy Excerpt: In the late 1980s and early 1990s, we were on our way from a P/E10 of 8 to a P/E10 of 44. We certainly had no way of knowing at the time that we would end up at 44. We had never gone that high before. But we knew that the P/E10 level was likely to continue going up after hitting 18 even if for a few months it went below that market. Never once in U.S. history has the P/E level peaked at 18. It usually peaks at 25 or 26. So the odds were strong at the time that the long-term direction of prices was downward.

Just the opposite was the case when we hit 18 in early 2009. The P/E10 value peaked at 44 in 2000 and started its way downward. Never in U.S. history have valuation levels began working their way up again on a long-term basis without first hitting 7 or 8. So the 18 that we saw in 2009 was an 18 on the way to becoming a 7 rather than an 18 on the way to becoming a 25. That makes all the difference in the world.

Valuation-Informed Indexing #158 — Does P/E10 Do a Better Job of Making Return Predictions When Valuations Are at Extreme Levels?

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I’ve posted Entry #158 to my weekly Valuation-Informed Indexing column at the Value Walk site. it’s called Does P/E10 Do a Better Job of Making Return Predictions When Valuations Are at Extreme Levels?

Juicy Excerpt: Resistance to this idea is resistance to logic. Many investors don’t like to hear things said so bluntly. But that’s an obvious logical implication of the finding that valuations affect long-term returns. We have in the past 10 years grown more accepting of the idea that valuations matter. As more time passes, I believe that we will become more accepting that valuations matter in all circumstances, not just some.

Valuation-Informed Indexing #157 — Google’s Panda/Penguin Update Shows Us Where Opinion on Buy-and-Hold Is Headed

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I’ve posted Entry #157 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Google’s Panda/Penguin Update Shows Us Where Opinion on Buy-and-Hold Is Headed.

Juicy Excerpt: The company didn’t know that Google was going to change the rules. It obviously didn’t intend for these businesses to fail. The people with the failed businesses knew that some of the strategies they were employing were dubious. But now they are mad. Not a little mad. Very mad.

 

Valuation-Informed Indexing #156 — Confidence in Buy-and-Hold Is a Mile Wide and an Inch Deep

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I have posted Entry #156 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Confidence in Buy-and-Hold Is a Mile Wide and an Inch Deep.

Juicy Excerpt: Why don’t the millions of middle-class investors who have their retirement savings invested in the stock market know this? If the academic community has serious doubts about the strategy that millions are following to finance their retirements, shouldn’t we be telling them about it?

Valuation-Informed Indexing #155 — Critics of Buy-and-Hold Need to Form Communities Where Their Criticisms Are Fully Developed

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I’ve posted Entry #155 to my Valuation-Informed Indexing column at the Value Walk site. It’s called Critics of Buy-and-Hold Need to Form Communities Where Their Criticisms Are Fully Developed.

Juicy Excerpt: I argued in one of my e-mails to Joachim that: “People are social animals. They need to hear others endorse an idea to have confidence in it. It would make a huge difference if there were a place where people could go to find that lots of knowledgeable folks believe in these ideas. There is huge power in community.”

Joachim agreed. He said:”I will keep my eyes and ears open. If you want to start such a [community] yourself, you can count me in as a contributor.”

I am putting this one high on my list of important projects to which I need to devote some time over the next year or two. It’s not enough for a small number of us to have learned what we need to learn to break free of the misconceptions of the Buy-and-Holders. We need to create a community in which our ideas can be openly discussed and refined and challenged and improved if Valuation-Informed Indexing is to achieve its true potential. I think that the time will soon be ripe for this initiative, if it is not already.

Valuation-Informed Indexing #154 — Why Advances in Our Understanding of How Stock Investing Works Are Recognized Slowly

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I’ve posted Entry #154 to my Valuation-Informed Indexing column at the Value Walk site. It’s called Why Advances in Our Understanding of How Stock Investing Works Are Recognized Slowly.

Juicy Excerpt: One, 32 years is not really that long a time-period in the grand scheme of things. We are accustomed to experiencing rapid change in many fields of human endeavor. Try to sell a computer that was popular 32 years ago today and you will not get far. So in one sense 32 years really is a long time.

The difference is that the idea that the market is efficient (and that, thus, Buy-and-Hold strategies can work) is rooted in economic theories that go back a long, long way. The idea that the market is efficient is rooted in a belief in the Rational Man economic assumption. That one goes back to the days of Adam Smith!

The historical reality is that economists have been losing confidence in the Rational Man concept for a long time. Eugene Fama expanded use of the concept to the investing realm just about at the time when it was running out of intellectual steam in any event.

In days to come, the expansion of the concept to the investing realm will be seen as the last nail in its coffin. The Rational Man concept could do only so much harm for so long as it was merely an idea employed by economists. Now it is an idea that is causing massive destruction to millions of middle-class investment portfolios. It’s going to be hard for us to ignore the obvious and well-documented flaws in the idea once it brings on the Second Great Depression.

Still, when you consider that this idea has been influencing economic thought for several centuries, it does not seem so shocking that it has been possible for influential people to turn their eyes from the flaws in the investing strategies rooted in it for three decades now.

Valuation-Informed Indexing #153 — Five Reasons Why Valuation-Informed Indexing Always Beats Buy-and-Hold in the Long Run

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I’ve posted Entry #153 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Five Reasons Why Valuation-Informed Indexing Always Beats Buy-and-Hold in the Long Run.

Juicy Excerpt: Three, the compounding returns phenomenon grows the edge gained by going with a low stock allocation at a time of high prices into a very large number over time. It is hard for people who have not studied the numbers to get their heads around this one. I have seen the power of compounding work its magic so many times that I now can predict how a 30-year returns sequence is going to turn out in Year 10 or 12 or 15. Often, the Buy-and-Holder will go ahead of me for a few years at times of high valuations (when I go with a low stock allocation but a bull market pushes crazy prices to even crazier levels). Then there will be a price crash that will put me ahead by a modest amount. Then, with prices back at reasonable levels, I will return to a high stock allocation matching the one held by the 80-percent-stocks Buy-and-Holder. But compounding will cause my differential to get bigger and bigger over the years and I will end up with a far larger portfolio amount at the end of 30 years.

 

Valuation-Informed Indexing #152 — Buy-and-Hold and Valuation-Informed Indexing Cannot Co-Exist

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I’ve posted Entry #152 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Buy-and-Hold and Valuation-Informed Indexing Cannot Co-Exist.

Juicy Excerpt: We all learn more when we have available to us smart people who challenge our thinking. I would not be happy on a discussion board populated solely by Valuation-Informed Indexers. I of course like it when people say that the strategies that I advocate possess merit. But I learn more when I am challenged than I do when I am applauded. There have been several times during the 11 years of discussion in which I have solved some riddle that had long troubled me because a sharp Buy-and-Holder posed a challenge in such a way as to help me finally see through to the core of the dispute.

There are obviously lots of people who view Buy-and-Hold as the ideal strategy. We need to have those people’s opinions reflected in all discussions of stock investing. The normal thing in our society is to permit both sides to have their say. Democrats don’t need to acknowledge that Republicans are right to acknowledge that they have a right to speak up. And Republicans don’t need to acknowledge that Democrats are right to acknowledge that they have a right to speak up. We are a diverse nation. But we are united in a belief in free speech. So the ideal would be if Buy-and-Hold and Valuation-Informed Indexing could co-exist.

I no longer believe that is possible.

Valuation-Informed Indexing #151 — VII Both Appeals to and Repels Both Liberals & Conservatives

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I’ve posted Entry #151 to my weekly Valuation-Informed Indexing column at the Value Walk Site. It’s called Valuation-Informed Indexing Both Appeals to and Repels Both Liberals and Conservatives.

Juicy Excerpt: Buy-and-Hold is the product of Wall Street and Wall Street is generally viewed as conservative. And more anguish over the job losses suffered in the economic crisis comes from the liberal side of the political spectrum, suggesting that it is liberals who should favor a move to Valuation-Informed Indexing.

However, conservatives tend to be more concerned with the damage that the crisis has done to millions of small businesses. And conservatives tend to be more concerned about the ability of individuals to acquire wealth. In those respects, it is conservatives who we should expect to seek a change in how the markets operate.

Or consider the issue of income inequality.

The promotion of Buy-and-Hold strategies causes market instability. Workers living in a society in which Buy-and-Hold is popular can lose a large portion of the accumulated savings of a lifetime in a small amount of time. You might expect liberals to become upset over this aspect of the Buy-and-Hold experience.

Valuation-Informed Indexing #150 — Is It Better to Assume That Stock Returns Are Predictable or That They Are Not?

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I’ve posted Entry #150 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Is It Better to Assume That Stock Returns Are Predictable or That They Are Not?

Juicy Excerpt: If we assume predictability in cases in which the evidence is not absolutely persuasive and it turns out that we were wrong to do so, it’s hard to see how much harm would come of the mistake. Investors who believe that returns are predicable will lower their stock allocations once prices rise to very high levels, thereby pulling them back to earth a bit. Is that such a terrible thing to see happen? It sure does not seem so to me. I view price stability as a good thing.

But consider what happens if it turns out that prices truly are highly predictable and yet we cling to an assumption that they are not. Prices will rise and rise and rise and rise until they reach the sorts of levels that applied in the late 1990s and then they will crash hard. The highest P/E10 level we ever experienced prior to the 1990s was the “33” that applied late in 1929 and that brought on the Great Depression. In 2000, the P/E10 rose to 44. In the event that our default belief turns out to have been wrong, the mistake is likely to cause a depression of far greater length and depth than the one we experienced in the 1930s and early 1940s.