A Rich Life

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

“That’s the Question on the Table — Should investors Take the CAPE Value Into Consideration or Not? If You Ignore the CAPE Value and Just Stick With the Same Stock Allocation at All Times, You Are a Buy-and-Holder. If You Take the CAPE Value Into Consideration, You Are a Valuation-Informed Indexer.”

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

“Valuation-Informed Indexing is a long-term strategy. “

Which is why I asked “What <b>long term</b> real return are they offering at the minute?”

If I am making a decision as to what my asset allocation should be today I am going to compare the long term returns being offered at current prices by stocks, bonds and cash.

The CAPE value that applies for stocks at the moment affects that determination. That’s the question on the table — Should investors take the CAPE value into consideration or not? If you ignore the CAPE value and just stick with the same stock allocation at all times, you are a Buy-and-Holder. If you take the CAPE value into consideration, you are a Valuation-Informed Indexer.

If the CAPE value is high, that makes stocks less appealing because high CAPE values translate into low long-term returns, It also makes cash-like asset classes more appealing because high CAPE values increase the probabilities of a price crash for stocks. Cash-like asset classes offer an amazing value proposition when stock prices crash because they protect one’s portfolio from suffering big losses at such times and permit one to invest more heavily in stocks when stock prices are highly appealing than one could if one were following a pure Get Rich Quick/Buy-and-Hold strategy. Following research-based strategies is a win/win/win/win.

Do you see?

Rob

“Buy-and-Hold/Get Rich Quick Is What Sells. It’s a Fantastic Marketing Gimmick to Persuade People That Irrational Exuberance Gains Are Real and Lasting.”

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

“TIPS, IBonds and Certificates of Deposit are all good choices. “

What long term real return are they offering at the minute?

A Valuation-Informed Indexer would not be buying them for the purpose of obtaining the return that they offer “at the minute.”Valuation-Informed Indexing is a long-term strategy. The Valuation-Informed Indexer would invest in those asset classes because it would permit him to buy more stocks when stocks are available at good prices. The peer-reviewed research that I co-authored with Wade Pfau shows that Valuation-Informed Indexing has performed far better than Buy-and-Hold for the entire history of the stock market.

It is impossible for the rational mind to imagine a circumstance in which exercising price discipline (by engaging in market timing!) could be a bad thing and the entire history of the stock market confirms this common-sense understanding of how things work. Buy-and-Hold/Get Rich Quick is what sells. It’s a fantastic marketing gimmick to persuade people that irrational exuberance gains are real and lasting.

Valuation-Informed Indexing is what works. It is the first true research-based strategy. It is Buy-and-Hold corrected for what we have learned from the last 41 years of peer-reviewed research in this field. Those 41 years of peer-reviewed research are the most important 41 years of peer-reviewed research in the history of investment analysis.

My best wishes to you.

Rob

“I Am a Buy-and-Holder in Every Respect But One. I Incorporate Into the Buy-and-Hold Strategy Shiller’s Nobel-Prize-Winning Finding That Valuations Affect Long-Term Returns.”

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

Rob

What exactly is your investing strategy? Are you sitting on cash waiting for the next price crash? In TIPs?

Given your concern about valuations, what do you think in a reasonable way to invest now?

I am a Buy-and-Holder in every respect but one. I incorporate into the Buy-and-Hold strategy Shiller’s Nobel-prize-winning finding that valuations affect long-term returns.

I believe strongly that investors should Stay the Course. But in a meaningful way, not in a pointless, self-destructive way. In the days when Buy-and-Hold was being developed, there was a belief among academics that the market was efficient (that is, rational). If that were so, market timing would not be required. Shiller showed the it is investor emotion that is really the driving force behind stock price changes and that the only way to keep irrational exuberance from getting out of control is to always keep investors informed of how high prices diminish the long-term value proposition of stocks and that the only way for an investor to keep his risk profile stable when prices rise is to lower his stock allocation.

Each investor’s life goals and risk tolerance are different. So there is no one answer to your question. But I believe that it makes sense to take the conventional Buy-and-Hold stock allocation recommendation and adjust it 30 percentage points down at times of insanely high stock prices and 30 percentage points up at times of insanely low stock prices. That would put the typical investor at 30 percent stocks today. I would put the remainder in something fluid because you want to be able to move it into stocks if prices drop to insanely low levels, as they have in previous Buy-and-Hold crises. If the CAPE drops to 8, the most likely 10-year annualized return rises to 15 percent real.

TIPS, IBonds and Certificates of Deposit are all good choices. Cash is not just a holding place. It is an asset choice of great strategic value in a world in which the Buy-and-Hold “strategy” is being pushed relentlessly and causing an insanely dangerous bull market.

Rob

Valuation-Informed Indexing #604: The Efficient Market Theory Is an Ivory Tower Concoction

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I’ve posted Entry #604 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Efficient Market Theory Is an Ivory Tower Concoction.

Juicy Excerpt: I am living proof that not all information has been available to stock investors in recent years. I have been banned from numerous investing discussion boards and blogs. I have never once violated a posting rule. I am banned because I suggest that mispricing should be taken seriously and that investors are hurting themselves by permitting prices to get so out of control.

I don’t mean to suggest that the banning of my posts alone is such a big deal. But I have seen other people making similar points banned many times. And on many occasions I have seen people who have doubts about price indifferent strategies engage in self-censorship to avoid the embarrassment and banning that is visited on those who have doubts about Buy-and-Hold strategies and give free expression to those doubts.

Prices would certainly not be at the same levels if those who believe that market timing is required expressed those thoughts at every internet site. Those arguments obviously would not persuade all investors. But it is equally obvious that they would persuade some. And that would bring prices down. It seems inarguable to me that, if even one person has been banned from an internet discussion board because he advocated market timing at times of high stock prices that not all relevant information is available to stock investors. So the market is not today efficient.

“The Side Pushing the Death Threats (the Buy-and-Holders) Are Also the Side Pushing the Pure Get Rich Quick (No Market Timing!) Approach to Stock Investing.”

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

All the information is out there.   Your real issue is you want to say whatever you want on someone else’s website.  Just like Twitter and Facebook decide on content, no one has to give you full and unfettered access to their website.  Courts have ruled extensively on this.

When I point out that the Greaney retirement study lacks a valuation adjustment, people lose confidence in the findings of the study. Greaney saw that happening at every site at which I did it. Everyone doesn’t lose confidence in the study in one moment, It takes time. People have heard the message that market timing is not required thousands of times. To become persuaded that it is always required and always works, they need to hear the research-based message thousands of times. That’s how change happens. If we open up every site to honest posting re the peer-reviewed research, we will get to where we need to be.

No one has to give me full and unfettered access to their site. But each site owner should administer the published rules for posting at the site. If the site prohibits death threats, then those advancing death threats should be removed when they appear. That is what is missing. The side pushing the death threats (the Buy-and-Holders) are also the side pushing the pure Get Rich Quick (no market timing!) approach to stock investing. Get Rich Quick strategies are popular during out-of-control bull markets. So the site owners are willing to tolerate behavior that they would not tolerate in other circumstances. The Get Rich Quick element of the Buy-and-Hold strategy gives it a huge benefit from a marketing standpoint.

Will that benefit hold up in the days following the next Buy-and-Hold Crisis? I do not believe it will. I think that enough people are going to be pissed about the money they have lost to insist that the site owners permit honest posting re the peer-reviewed research. We don’t need 80 percent for that to happen, My guess is that we need 20 percent and we already have 10 percent. We’ll see how it goes.

There should be widespread alarm about a CAPE value of 31. There is not widespread alarm today because people have not yet personally experienced the downside of such a CAPE value. Shiller’s research shows them what it is and Shiller’s book tells them what it is. But it is something different to see what it means for stock prices to get totally out of control in a personal way. If it matters to enough people, we will see a huge advance and I doubt very much that we will ever go back to Buy-and-Hold. If it doesn’t matter to people, then we will not see the advance that Shiller’s research promises and we all will live lesser lives as a result. I think we are a good people. I think we are going to move forward. But we’ll see.

I am not capable of saying that I believe that the Greaney retirement study contains a valuation adjustment in any event.

My best wishes to you.

Rob

“If Irrational Exuberance Is a Thing, It Is Obviously a Bad Thing. So We All Should Be Doing All That We Can to Combat It. The Only Way to Combat It Is With Market Timing (Lowering One’s Stock Allocation When Prices Rise to Insane Levels to Pull Them Back Down to Reasonable Levels).”

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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 can clear things up.  Just post links of the actual death threats, job threats or other criminal acts.  While you are at it, point out where Shiller said he agreed with your VII timing scheme.  Point out where any expert has said Greaney’s work was in error.

I’ve posted links to the death threats. You Goons just say that they were discussions of gun safety. If Buy-and-Hold were a real thing, no advocate of the strategy would engage in discussions of gun safety at a retirement planning board. The purpose of the death threats was to intimidate people who wanted to hear honest discussions of the peer-reviewed research into silence.

The title of Shiller’s book is “Irrational Exuberance.” If irrational exuberance is a thing, it is obviously a bad thing. So we all should be doing all that we can to combat it. The only way to combat it is with market timing (lowering one’s stock allocation when prices rise to insane levels to pull them back down to reasonable levels). Shiller has on several occasions publicly recommended market timing. So he obviously believes in it. He once had a throwaway comment in an interview in which he suggested that his confidence in market timing is not today as strong as it once was. I have said that we should all want to know precisely what he meant by that comment and that the Buy-and-Holders should agree to rein in the criminal stuff long enough for Shiller to appear at the Bogleheads Forum and respond to questions re his views on safe withdrawal rates and on market timing. You Goons have not followed up on that suggestion.

Numerous experts have said that the 4 percent rule used in the Greaney study was in error. Wade Pfau, who was my co-author on peer-reviewed research showing that “Yes, Virginia, Valuation-Informed Indexing works!”, said that the Greaney study is “dangerous.” That’s a pretty darn clear assessment. I say that the dangerous study should be corrected and that Greaney should make moves to compensate the people who have been hurt by it or who are likely to be hurt by it in future days for the losses they have suffered or will suffer.

My best wishes.

Rob

“There Never Was Any Rational Case for the 4 Percent Rule or for Buy-and-Hold in General. The Value Proposition of Stocks CHANGES With Changes in the Price That Is Paid for Them, Just as the Value of Anything Else We Purchase Changes With the Price Being Paid. The 4 Percent Rule and Buy-and-Hold in General Defy Everything That We Know About Every Market That Exists.”

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

All we need to do is read that last post:

Author: hocus Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won’t see their posts anymore)
Number: 66804 of 888931
Subject: Re: Price-Adjusted Safe Withdrawal Rates
Date: 5/15/2002 11:45 PM
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Report Post | Recommend it!
No. of Recommendations: 2
If you retired on January 1st 1929 or 1966 or 1969, a 4% inflation-adjusted withdrawal rate would allow your money to last for 30 years. You’d be broke in year 31.

I was wrong and intercst was right. Please read my apology to him and to the board in general at this link:

http://boards.fool.com/Message.asp?mid=17225279

If you want to get the full story, you need to combine my apology post with the recent posts by Evidence acknowledging that the Greaney study really does lack a valuations adjustment. If the study really was in error, what the heck was I apologizing for?

I was apologizing because I didn’t want to see the board torn apart. There never was any rational case for the 4 percent rule or for Buy-and-Hold in general. The value proposition of stocks CHANGES with changes in the price that is paid for them, just as the value of anything else we purchase changes with the price being paid. The 4 percent rule and Buy-and-Hold in general defy everything that we know about every market that exists.

So why are there millions of smart people who believe that Buy-and-Hold is a real thing? All humans are born with a desire to get something for nothing. And stocks offer us a huge opportunity to do just that. All we need to do is to pump prices up to crazy levels and to silence anyone who points out the craziness and we have what we want — Pretend Money! We can have a much of it as we want! Irrational exuberance is an amazing deal.

Except that it disappears when the bull market ends and millions of people suffer an ocean of human misery. Will people continue to believe in the crazy stuff when that happens? I don’t think so. But we’ll see, you know?

We are talking two different languages, Anonymous. I keep citing the peer-reviewed research because I am talking the language of rationality. You keep talking what people are willing to say on public discussion boards because you are talking the language of emotion. Get Rich Quick/Buy-and-Hold is POPULAR for the length of a bull market. You need to suppress rationality for emotion to rule and I want the emotional stuff to be reined in enough for people to connect with the rationality.

The key is going to be what happens when the CAPE is 8 instead of 32. Will that change open people up to hearing what the last 41 years of peer-reviewed research says? I believe that it will. But we are just going to have to wait to see how things play put to find out for sure.

My best wishes.

Rob

Valuation-Informed Indexing #603: Is Stock Investing Gambling?

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I’ve posted Entry #603 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Is Stock Investing Gambling?

Juicy Excerpt: I remember my parents having a conversation at the breakfast table when I was eight years old. My mother claimed that stock investing was a form of gambling because you can gain money or lose money and you never know in advance which it is going to be. My father strongly disagreed. He said that investors are buying shares in real companies when they purchase stocks and that the fortunes of the companies are determined by economic realities. Today I believe that both of them were accurately describing a significant part of the stock investing experience.

“People Need to Know How Much Money They Have in Their Retirement Account If They Are to Plan Their Financial Future Effectively. And the Numbers They Get Are Entirely Different If They Take Irrational Exuberance Into Consideration From What They Get If They Do the Calculations Pursuant to the Buy-and-Hold Model.”

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

Bigger than Watergate?  What a joke.  It is all a silly waste of time.

You wouldn’t fight so hard if you thought it was a silly waste of time. You very much do not want to acknowledge that you made a mistake. That’s clear enough. But your behavior for 20 years now shows that you see that the stakes here are very, very high.

People need to know how much money they have in their retirement account if they are to plan their financial future effectively. And the numbers they get are entirely different if they take irrational exuberance into consideration from what they get if they do the calculations pursuant to the Buy-and-Hold Model.

Rob