A Rich Life

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

“The Concept of Irrational Exuberance Affects Every Aspect of the Stock Investing Story”

by

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

One title does not apply to every situation and timeframe. It’s funny how you ignore everything else Shiller says.

The concept of irrational exuberance affects every aspect of the stock investing story, Anonymous. Every single thing. If the market is efficient, as was believed to be the case in the days when Buy-and-Hold was being developed, we can trust the numbers on our portfolio statement. In that case, it is economic realities that determine stock prices and we can plan retirements based on those numbers. But if Shiller’s Nobel-prize-winning research is legitimate, then those numbers are not real. They are largely the product of temporary investor mood swings, and we need to distinguish what’s real from what’s irrational exuberance to have any hope of being able to plan our financial futures effectively.

I don’t ignore everything else Shiller says. What I say is that we should be permitting discussion of what Shiller says at every site on the internet. What he said changes our understanding of how stock investing works in a fundamental way. Let’s all put our minds together and work together in a constructive spirit to advance our understanding of this critically important subject.

Does Shiller believe that the safe withdrawal rate is always the same number or does he believe that it is a number that changes with changes in valuations? We all should want to know the answer to that question. I said what I think 18 years ago, I think that Shiller would have said what he thinks by now if it weren’t for the criminal stuff we have seen coming from the Buy-and-Hold side of the table. I say that we should all pull together to bring the criminal stuff to a full and complete stop so that we can all learn at long last what Shiller believes re this matter. Then we should continue the discussions in the hopes of learning what thousands of others will have to say when they are permitted to speak without fear of having their careers destroyed or seeing their loved ones threatened.

There is not one school of academic thought as to how stock investing works. There are two. We have heard advocates of the Buy-and-Hold school thousands and thousands and thousands of times. Advocacy of the Valuation-Informed Indexing school is today banned at every large investing site on the internet. That ban is holding us back. The most important public policy matter before us today is the launching of the national debate that will bring that ban to a full and complete stop and insure that the same laws that apply in every field of endeavor other than the investment advice field will apply in the investment advice field as well.

Does all of that not make perfect sense?

Rob

Buy-and-Hold Goon to Rob: “We Don’t Have to Ask Shiller Anything”

by

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

We don’t need to ask Shiller anything. We can read. You should try it sometime.

I read the title of his book, Anonymous. It is “Irrational Exuberance.” If there is such a thing as irrational exuberance, stock investing risk is not constant but variable; risk is greater when there is more irrational exuberance. If risk is variable, it is a logical impossibility that the safe withdrawal rate is always the same number (since the safe withdrawal rate is a risk assessment tool). So I do not say that I believe that the safe withdrawal rate is always the same number.

I believe that Shiller will say the same if you ask him. I encourage you to ask him. It’s a question that every investor on the planet should want to know the answer to. If the safe withdrawal rate studies are in error, that’s huge. There are millions of investors who have used those studies to plan their retirements and a failed retirement is a serious life setback. So we all should want to know what Shiller thinks. And the only way to find out is to ask him.

Shiller will be happy to tell you what he thinks if you promise not to threaten him. It is the threats from the Buy-and-Holders that have been holding back progress in this field for 39 years now. People do not like to be threatened. That is why as a society we have enacted laws against it.

My best wishes to you.

Rob

“We Don’t Know Precisely What Shiller Believes Because He Has Not Been Questioned in Depth re What He Believes. I Believe That We Should Be Questioning Him in Depth re What He Believes.”

by

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

First of all, you have had plenty of time and formats to spread your opinions. Your problem hasn’t been getting your message out. Your problem is that you can’t get the investment community to agree with you. Secondly, your version of what you call “honest” posting is different than what most consider if the definition of that term. Third, millions of people don’t have to change why and how they buy stocks just to make you happy. You keep talking about Shiller saying how stocks work, yet you don’t agree with his comments. For example, he has continued to make statements, including comments in the last month, about staying in the stock market. Either Shiller is lying or else you are misrepresenting what he is saying.

We don’t know precisely what Shiller believes because he has not been questioned in depth re what he believes. I believe that we should be questioning him in depth re what he believes.

Is the safe withdrawal rate the same number at all times or is it a number that is higher when valucations are low and lower when valustions are high? I am not aware of Shiller ever directly addressing that point. I say that, if Shiller’s research is klegitimate, the safe withdrawal rate must change with changes in valuations. We should all want to know what Shiller believes. The best way to find out is to ask him.

My sincere take.

Rob

“The Stock Market Behaved One Way From 1870 through 2006 and Then in a Different Way from 2006 Through 2020. That’s 136 Years for Valuation-Informed Indexing and 14 Years for Buy-and-Hold.”

by

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

“It will be interesting to see how things play out.”

It has been 24 years, which has been long enough to see things “play out” and it didn’t turn out like you said it would. You have to stop blaming everyone else for your retirement failure.

t’s only been 14 years since things began playing out in ways that you would not anticipate by looking at the historical return data. Shiller published a paper in 1996 saying that prices would fall hard within 10 years. So you cannot say that things did not play out as expected up until 2006. From 2006 forward, yes. So it’s 14 years.

So the stock market behaved one way from 1870 through 2006 and then in a different way from 2006 through 2020. That’s 136 years for Valuation-Informed Indexing and 14 years for Buy-and-Hold. I’m going with Valuation-Informed Indexing.

I don’t want to suppress discussion by Buy-and-Holders. I think that we need to hear both sides, Maybe the Buy-and-Holders are right. I sure don’t think so. But I don’t think you can ever say for sure. So I want them participating in the discussions held at every site on the internet. But I want the Valuation-Informed Indexers participating as well.

That’s my sincere take, Anonymous.

My best wishes to you.

Rob

Valuation-Informed Indexing #528: It’s the Irrationality of Mispricing That Makes Long-Term Returns So Predictable

by

I’ve posted Entry #528 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called It’s the Irrationality of Mispricing That Makes Long-Term Returns So Predictable.

Juicy Excerpt: It shouldn’t be that way because, if returns were predictable, the market should take into consideration the information that makes predictions possible and incorporate that information into its assessment of the value of the market. Which would change the price. Stock prices are self-regulating so long as investors behave rationally. The problem is — investors are not capable of rational behavior!

“I Don’t Know Everything and I Do Not Claim To. You Do Not Know Everything Either. The Difference Is That You DO Claim to Know Everything. When You Deny Others the Opportunity to Hear Both Sides and Decide for Themselves, You Are Implicitly Saying That You Know Everything and Don’t Even Need to Consider Other Points of View.”

by

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 say that VII works:

“ I would point him to the Bennett/Pfau research showing that market timing has always worked for as far back as we have good records of stock prices.”

Then you admit, it hasn’t been working:

“Going by the historical, the crash should have arrived 14 years ago. You’ve got me re that one, Anonymous. We are living through something unprecedented. It’s scary.”

So, it really has not ALWAYS worked and if you are the 60 year old guy following VII, you are screwed.

I think that we all have to do the best we can with the information available to us. I don’t know everything and I do not claim to. I believe in Valuation-Informed Indexing. You do not know everything either. You believe in Buy-and-Hold. The difference is that you DO claim to know everything. When you deny others the opportunity to hear both sides and decide for themselves, you are implicitly saying that you know everything and don’t even need to consider other points of view. I reject that. I believe that we all need to remain open to other points of view.

I don’t believe that anybody is screwed. I believe that we all should do the best we can given the information available to us. I believe in Valuation-Informed Indexing. So that’s what I tell people I believe in.

And I naturally wish you all good things.

Rob

 

“Irrational Exuberance Hurts Us All. We Should All Do Everything We Can to Oppose It. We Should All Be Engaging in Market Timing and Encouraging All of Our Friends and Neighbors and Co-Workers to Engage in Market Timing as Well.”

by

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

“ There is a strong correlation between the CAPE value that applies today and the return that will apply for the next 10 years and the next 15 years and the next 20 years.”

It didn’t work like you said it would for the last 10 years, the last 15 years or the last 20 years and you stayed out of the market to your detriment.

If prices crash at some point (I believe that they will), it will have worked as I said it would. Price crashes hurt us. When stock prices crash, trillions of dollars of consumer spending power disappear from the economy and the economy contracts. Irrational exuberance hurts us all. We should all do everything we can to oppose it. We should all be engaging in market timing and encouraging all of our friends and neighbors and co-workers to engage in market timing as well.

Does all of that not make perfect sense?

Rob

“Market Timing Is Not a Problem, Market Timing Is the Solution to the Problem.”

by

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 prices are insanely high, they will be headed downward in the long run.”

Prices go up and down, but have always gone up in the long run. We cannot predict when and by how much they go up and down, which is why timing doesn’t work and your predictions didn’t work. As we look back on the last two decades we see that VII failed.

I agree that prices go up and down and I agree that prices always go up in the long run.

I do not agree that prices in the long run follow the pattern of a random walk. There is a strong correlation between the CAPE value that applies today and the return that will apply for the next 10 years and the next 15 years and the next 20 years. So risk is not constant, it is variable. So investors who want to keep their personal risk profile constant MUST practice market timing.

If the next price crash brings on the Second Great Depression, no one is going to say that Valuation-Informed Indexing failed. People are going to be kicking themselves for not insisting that honest posting re the last 39 years of peer-reviewed research be permitted at every discussion board and blog on the internet, without a single exception. If irrational exuberance is a real thing (I believe that it is), then irrational exuberance is the mortal enemy of all stock investors. It makes it impossible for us to plan our financial affairs effectively. If we permit irrational exuberance to get too out of hand, we are always going to see an economic crisis. When the mountain of Pretend Money disappears into thin air, trillions of dollars of consumer spending is taken out of the economy and hundreds of thousands of businesses go belly up. Not good.

There is only one way to combat irrational exuberance — market timing! Market timing is not a problem, market timing is the solution to the problem. No market can function effectively without price discipline and it is by practicing market timing that stock investors practice price discipline when buying stocks.

That’s my sincere take, in any event, Anonymous.

I naturally wish you all the best that this life has to offer a person.

Rob

Shiller: “The Level of Interest Rates Is an Increasingly Important Element to Consider When Valuing Equities…. Stock-Market Valuations May Not Be As Absurd As Some People Think.”

by

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

Uh oh. Once again, Robert Shiller says Rob Bennett is wrong.

https://www.project-syndicate.org/commentary/making-sense-of-soaring-stock-prices-by-robert-j-shiller-et-al-2020-11

First of all, Shiller is pointing out that the low interest rates (not buy and hold) are driving up stocks:

“ Market observers have noted the potential role of low interest rates in pushing up CAPE ratios. In traditional financial theory, interest rates are a key component of valuation models. When interest rates fall, the discount rate used in these models decreases and the price of the equity asset should appreciate, assuming all other model inputs stay constant. So, interest-rate cuts by central banks may be used to justify higher equity prices and CAPE ratios.
Thus, the level of interest rates is an increasingly important element to consider when valuing equities. To capture these effects and compare investments in stocks versus bonds, we developed the ECY, which considers both equity valuation and interest-rate levels. To calculate the ECY, we simply invert the CAPE ratio to get a yield and then subtract the ten-year real interest rate.”

Despite Rob telling us that Shiller thinks the market is about to crash, he actually says that the market looks attractive:

“ But, at this point, despite the risks and the high CAPE ratios, stock-market valuations may not be as absurd as some people think.”

And

“ But with interest rates low and likely to stay there, equities will continue to look attractive, particularly when compared to bonds.”

Shiller already told you not to time the market with CAPE, but you wouldn’t listen and you paid the price. Here he is again, explaining how continue to be wrong. There goes your $500 million windfall.

That’s an important article, Anonymous. Thanks for bringing it to our attention.

I have been saying since the morning of May 13, 2002, that we need to open every discussion board and blog on the internet to honest posting re the last 39 years of peer-reviewed research in this field, without a single exception. This article is the sort of fruit that we see develop from permitting honest discussion. Shiller is offering views that we have not heard before, Everyone who works in this field should be taking the points he makes here into consideration and incorporating them into their own views as to how stock investing works. I will write a column for the Value Walk site offering observations on this article.

My initial reaction is not to be entirely persuaded by the points that Shiller makes here. It certainly makes sense that low interest rates make stocks look more appealing in relative terms. But I don’t agree that: “Despite the risks and the high CAPE ratios, stock-market valuations may not be as absurd as some people think.” Interest rates are today very low. It seems unlikely that they will remain that low for long. What happens when interest rates rise? Just as a lowering of interest rates brings stock prices up, an increase in interest rates brings stock prices down.

If stocks were priced low at a time when interest rates were low, the pressure on stock prices to fall when interest rates rose would not be so great — they would already be low. But it seems to me that we are in a doubly risky situation today, There is pressure on stock prices to fall because they are so high. And there is added pressure on stock prices to fall because interest rates are so low that they can only go up. How are stock prices going to rise if they are already at insanely high levels at a time when low interest rates are giving stock prices a big boost?

I think it would be fair to say that today’s low interest rates go a long ways to EXPLAINING today’s high stock prices. That I can buy. But the risk that those prices are going to fall hard in the not-too-distant future is still present. If anything, it is worse than it would be if interest rates were high today. If interest rates were high today, stock investors could hope that interest rates would drop and give stock prices another boost. That cannot happen with interest rates where they are today.

He says that the low interest rates are “likely to stay there.” He doesn’t say why he believes that. Economic conditions do not remain the same indefinitely. Every crash that we have seen was unexpected. If it had been expected, that expectation would have brought stock prices down and diminished the size of the crash. It is when investors stop worrying about a crash that the danger of a crash is the greatest. I see this as an article that will cause many investors not to worry so much about a crash. It is my view that people should be very worried.

Please remember that interest rates are “priced in” to the market price for stocks. But irrational exuberance is never priced in. It is the one factor that by definition cannot be priced in because the process by which factors are priced in is a rational process and irrational exuberance takes place outside of rationality (the rational thing would be for investors to price stocks properly).

I believe that Shiller has advanced the ball with this article. It gives everyone in the field something to think about. I look forward to seeing what lots of smart people have to say about it.

My sincere take.

Rob

Valuation-Informed Indexing #527: You Don’t Have to Get It Right Twice for Market Timing to Succeed

by

I’ve posted Entry #527 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called You Don’t Have to Get It Right Twice for Market Timing to Succeed.

Juicy Excerpt: Market timers don’t have to guess at all. Market timing is an exercise in risk management, not guesswork. I would agree with my Buy-and-Hold friends that any strategy that requires guesswork is almost certainly not a good idea. But market timing is not such a strategy, at least not when it is employed in an intelligent manner.