A Rich Life

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

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.

Investors Who Do Not Engage in Long-Term Timing Are Not Exercising Price Discipline. No Market Can Function If a Large Number of Participants Are Not Exercising Price Discipline. We Need to Be Encouraging All Investors Never, Ever, Ever Again to Follow a Buy-and-Hold Strategy.”

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Set forth below is the text of a comment that I recently put to a discussion thread of this blog:

So B&H’ers are sloggers, not timers.

You insult the Buy-and-Holders with these words, Banned. You are acknowledging here that the Buy-and-Holders do not practice long-term timing.

LONG-TERM TIMING IS PRICE DISCIPLINE.

Investors who do not engage in long-term timing are not exercising price discipline. No market can function if a large number of participants are not exercising price discipline. Price discipline is the magic that makes markets work.

It is the failure of stock investors to exercise price discipline that caused our economic crisis. You are here acknowledging that the Buy-and-Holders caused the economic crisis.

That’s not a good thing, Banned. It is a very bad thing. We want to bring the economic crisis to an end. We need to be encouraging all investors to be ABSOLUTELY CERTAIN TO EXERCISE PRICE DISCIPLINE FROM HERE ON OUT.

Another way of saying it is to say that we need to be encouraging all investors never, ever, ever again to follow a Buy-and-Hold strategy.

At least not the first-draft version. If the Buy-and-Holders want to call the new model Buy-and-Hold 2.0 or something like that, I have zero problem with that. That was my original intent. All Valuation-Informed Indexing is is Buy-and-Hold with the error corrected, Buy-and-Hold with the Get Rich Quick element (the idea that there is no need to practice price discipline) removed.

We MUST practice price discipline.

For reasons that I wish were obvious to all. For reasons that WOULD be obvious to all if the Buy-and-Holders had not been telling people for 30 years that timing doesn’t work or isn’t absolutely required or some such thing.

Price discipline (long-term timing) is ABSOLUTELY required. That’s the mistake. If you don’t practice price discipline, you are not following a research-based strategy. Pre-1981, you were. But not today.

Rob

Barry Ritholtz Links to My Article on “Why Buy-and-Hold Investing Can Never Work,” Provides the A Rich Life Blog with the Biggest Traffic Day in its History

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Barry Rithlotz (owner of The Big Picture site) late yesterday afternoon linked to my article on Why Buy-and-Hold Investing Can Never Work at the Tuesday PM Reads section of his blog. The traffic brought in by that link made yesterday the highest traffic day in the history of the A Rich Life blog. Thanks, Barry!

The traffic number is important for reasons beyond the obvious reality that it makes me happy to have lots of readers for my work. I have been writing about the Valuation-Informed Indexing concept on the internet for over 10 years now. Thousands of middle-class investors and a large number of experts in the field have told me that they have found huge value in my work and that they believe that in years to come the Valuation-Informed Indexing Model will supplant Buy-and-Hold as the dominant model for understanding how stock investing works. Academic Researcher Wade Pfau spent 16 months exploring the concept in great depth and found that the entire historical return record shows that Valuation-Informed Indexing is far less risky than Buy-and-Hold and yields greatly increased long-term returns. The response of the Buy-and-Hold Goons has been to try to destroy my site by intimidating the owners of other sites that link to my site. They also threatened to send defamatory e-mails to Wade’s employer in an effort to get him fired from his job. I have written to many big-name Buy-and-Hold advocates asking them to take action re the Goons but to no avail thus far.

We all should be concerned about the Goon problem. Shiller’s finding that valuations affect long-term returns is the most important advance in the history of investing analysis. This advance has been to a large extent (but not entirely) covered up for 30 years now. People know about Shiller’s research. His book was a widely reviewed bestseller. But there is not one other site on the internet that explores the implications of Shiller’s finding in the in-depth way that I have explored it with the articles and podcasts and calculators available at this site. That is a shocking reality. We all need to learn how to invest effectively and we of course all want to learn how to invest effectively. I know as the result of my ten years of work trying to spread the word about Valuation-Informed Indexing why Shiller’s work has thus far had only a tiny fraction of the impact it needs to have if we are to recover from this economic crisis and enter the period of sustained economic growth that in ordinary circumstances it would have brought about by now. People are afraid to speak out. Millions of investors are addicted to Buy-and-Hold strategies (which are Get Rich Quick strategies in disguise — the people who developed the Buy-and-Hold concept did not intend to create a Get Rich Quick strategy but that is what they inadvertently did because Shiller’s research was not available to them at the time). We need to assure everyone working in this field that it is safe for them to advocate Valuation-Informed Indexing. This is the most important economic (and even political) imperative of our time.

Barry’s link helps in a big way. The Goon tactics are beyond the pale. I have had confirmed and passionate Buy-and-Holders tell me that they are ashamed of the tactics that they have seen the Lindaurheads and the Greaney Goons employ in “defense” of the investing strategy they favor. Sunlight is a disinfectant. The way to flush out the Goons is to shine the light of open discussion on their tactics. The more people know how they have behaved and the more people who speak out in strong opposition to how they have behaved, the less bad behavior we will see. As the bad behavior subsides, we will all become engaged in the greatest learning experience of our lifetimes. The Buy-and-Holders and the Valuation-Informed Indexers obviously are on the same side and want the same thing. The Buy-and-Holders have lots of doubts about the Valuation-Informed Indexing concept. They need to have their questions answered in an environment where they know that death threats and countless acts of defamation and unjustified board bannings and threats against academic researchers will not be tolerated. Barry’s link tells others interested in these ideas that they are safe from attacks because too many people are watching for the attacks to achieve their intended aim.

I officially hereby designate Barry as a Hero of the First Order to the Middle-Class Investor. I will be writing him to ask whether I can write at his blog on some sort of ongoing basis to share with his readers what I have learned about the Valuation-Informed Indexing concept as a result of my work of the past 10 years. Please pray for a positive outcome!

That’s my explanation of why the numbers I will report below are important. Enough preface! On to the numbers!

I get roughly 200 views at my blog on a typical day. I had a link at the high-traffic Jesse’s Cafe Americain blog last week. That day I had 696 views. The article reporting on my work that appeared at The Big Picture site last Monday produced a day with 813 readers. Barry’s 4:00 PM link yielded a daily views count of 1965 for yesterday. That’s a record for the blog, which has been around since 2005. I have over 1,000 views for today as of 9:00 AM.

These are sad, pathetic numbers. Please understand that I am NOT bragging. So long as a day with 1965 views breaks records, these ideas are not going anywhere. We need to see that sort of view count on a daily basis to get this snowball rolling in any significant way. We are talking about baby steps for baby feet.

Still. we all know that successful long journeys begin with small first steps. Barry’s link is potentially a small first step to something that down the road a piece will become something very grand indeed. As Bruce Springsteen reported in an important academic journal a number of years back, From Small Things, Mama, Big Things One Day Come (this one has become a sort-of theme song for our effort beginning on the morning of May 13, 2002, to get the errors in the Old School safe withdrawal rate studies corrected — it is that effort that led to all of the amazing insights that have been developed at this site and at numerous discussion boards and blogs over the past 10 years).

So I am feeling blessed today. I will have zero trouble thinking up reasons to be thankful when I sit down to dinner at my younger brother Steve’s house tomorrow afternoon.

Onward! Courage!

Obama’s Debate Performance and Buy/Hold

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Set forth below is the text of a thread-starter that I put to the Goon Central board:

A lot of people are saying that explanation for Obama’s sub-par debate performance is that he was been protected from effective questioning for years by an adoring media.I see the same sort of phenomenon going on with the Buy-and-Holders. They tell each other that they have it all figured out, that everyone is wrong but them. It makes them feel good when they silence those reporting on the last 30 years of academic research because Buy-and-Hold sounds reasonable when you don’t know about the research. But avoiding questions leads to flabby thinking, poor debate performance and poor portfolio results in the long term.My sincere take.

Rob

“We Are the First Generation of Investors Who Has Available to Them the Research Needed to Turn Stock Investing Into a High-Return, Virtually Risk-Free Endeavor”

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Set forth below is the text of a comment that I put to the blog in response to a comment by one of the Greaney Goons that “there is no ‘we,” just ‘you.'”

Everyone in this field faces an important question today, Trebor.

We are the first generation of investors who had available to them the research needed to turn stock investing into a high-return, virtually risk-free endeavor. No group of investors who came before us was so blessed. We can all live far richer lives than we ever dreamed possible if we elect to acknowledge mistakes we made in the past and move forward into an exciting future for all of us and all our friends, neighbors and co-workers.

The alternative available to us is that we can continue the Campaign of Terror, thereby bring on the Second Great Depression, and spend the remainder of our days regretting our foolish and powerfully sad choice.

Wade can contact me if he elects to take the better path. Bogle can do the same. Bernstein can do the same. Swedroe can do the same. The hand of kindness remains extended.

There will be no dishonest posts about safe withdrawal rates going up with my name on them. The odds of that one coming through were precisely zero on the morning of May 13, 2002, and remain precisely zero today.

I of course wish you well in all your future endeavors, my long-time abusive posting friend.

Rob

Rob Bennett’s Responses to Academic Researcher Wade Pfau: #11 — Many of Today’s Investing Advisors Are Positioning Themselves for the Post-Buy-and-Hold Era

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I’m going to let you in on a little secret. Ssssh! You must promise not to tell. I will no longer be the golden boy of the Big Shots in The Stock-Selling Industry if this one gets out.

I’m not the only one who has been thinking in recent years about where this industry is headed. Lots of people are having that thought. Buy-and-Hold died intellectually 30 years ago and the only thing that has been keeping it alive for a long, long time was that it had not yet brought on the economic crisis that always follows a time-period when a good number of the rubes buy into the Buy-and-Hold mumbo jumbo. Now that the crisis is here, the smart people are plotting their next move. When the next crash comes, the music stops for the Greatest Get Rich Quick scheme ever concocted by the human mind, Rob Bennett or no Rob Bennett.

Wade asked me about this in one of the response comments he posted to my blog. He said: “Rob, suppose the stock market does drop 65% as you are expecting. It might happen, who knows? Step 1: Stock Market Drops 65%. Step 2: ?? Step 3: Rob wins $500 million settlement from the Goons, the Goons are sent to prison, the investing public learns about and adopts VII. What is Step 2? There isn’t one. You will still be in the same position as you’ve been in for the last 10 years. Why didn’t something happen for you after the 2008 financial crisis? You are like the guy who keeps predicting new ends for the world as each previous prediction date passes by.”

Wade loves Valuation-Informed Indexing. He said it in twenty different ways in his e-mail correspondence with me. So his concern is not that the academic research doesn’t support the new strategy. His concern is that it gets the members of The Old Boy’s Club angry if we spill the beans. Showing that the academic research doesn’t support a strategy that has been marketed as a research-supported strategy hurts the marketing effort. People love jazzy slogans. But they lose their pop when it becomes widely known that they are not rooted in truth.

If things were going to change, he could sit tight for a year or two. But are things going to change? When? How? Can we be sure?

We cannot be sure of anything down here in the Valley of Tears. But my feeble brain tells me that things are going to change. Why? Because they cannot stay the same. There aren’t too many other alternatives.

My sense is that Wade thinks of the problems with Buy-and-Hold as being similar to the problems with the deficit. Smart people keep saying that the deficit is not sustainable. Yet it sustains! Smart politicians don’t offer specific statements on how they would reduce the deficit. Because what you say about reducing the deficit can and will be used against you. And nothing ever happens anyway. So why stick your neck out? The budget deficit issue is referred to on Capitol Hill as The Third Rail of American Politics. I think it would be fair to say that Wade Pfau has come to perceive the core error of the Buy-and-Hold Model as The Third Rail of Personal Finance.

Perhaps.

I’ve been foreseeing a Wave of community members rising up against the Lindaurheads and Greaney Goons going back to sometime in 2003. This is one movie in which the posse never shows up just in the nick of time. The posse is always to be found taking a nap in the guest room while I am left alone with my six-shooter against a gang of guys in black hats. These fellows are not gentlemen. Wade doesn’t like the sight of blood when it is on him and when it is his blood. In fairness, there are moments when I can kinda, sorta see the point.

Still, I think this one comes to a head soon.

Stock prices always end up at one-half of fair value in the wake of a huge bull. There’s not one exception in the historical record. That’s 65 percent down from where we are today. Bear markets usually last about 15 years. We are now 12 years into this one. Do the math. It’s not a pretty picture for those who have been telling tales about how stocks are always a good buy for the long run.

The Buy-and-Holders say they will never cry “uncle!” Watch their actions, not their words. Taylor Larimore (co-author of The Bogleheads Guide to Investing) was on the verge of selling in the months following the first crash. Some Diehard! Bill Bengen’s retirement study presumes that the retiree will never sell, no matter what. What did Bill tell his retiree clients in the months following the first crash? Sell! Sell! They always promise never to sell. They always sell. Buy-and-Hold advocates are like politicians. Their promises come with expiration dates.

This isn’t speculation. We know this to be so. What do you think always pulls the P/E10 value down to 7 or 8? Stocks sales do that. The reason why it takes years to get there is that the Buy-and-Holders always resist for a time. It is their sales that end the thing and permit prices to start working their way up again.

The next drop will hurt more than the first one. The first one came in the wake of a huge bull. People had slack in their budgets in those days. No one has slack today. Big price drops that take place when feelings are as raw as they are today hurt. People are going to be angry following the next crash. They are going to be looking for people to whom to direct their anger. Something tells me that I don’t want to have posts in my file saying that there is no need for corrections for retirement studies that get the numbers wildly wrong when those dark days arrive.

The experts in this field are smart people. They are already positioning themselves.

What do you think that Brett Arends fellow at the Wall Street Journal is up to? He says: “For years, the investment industry has tried to scare clients into staying fully invested at all times, no matter how high stocks go….It’s hooey…. They’re leaving out more than half the story.” That was a trial balloon. I hoped the article would go viral. It did not. But that doesn’t mean that it is not going to go viral someday. I’ll bet that I wasn’t the only one watching to see the reaction to that one. Everyone wants to be the new John Bogle. No one wants to stick his neck out too soon. Everyone wants to see someone else stick his neck out and live before sticking his own out too far. Most are cautious today. But wait. Wait until someone gives a big speech telling Truth and is applauded rather than jeered. Then comes the deluge.

Shiller didn’t include any discussion of how investors should adjust their stock allocations in his book. He left it to Old Farmer Hocus to tell the juicy part of the story. But how much do you want to bet that he’s already got a second book ready to send to the printers when the coast is clear for discussion of the practicalities?

And how about that Michael Kitces individual? He says: “There are time-periods where stocks are a terrible addition to that portfolio. Yet inexplicably, we as planners STILL tend to suggest that it is ‘risky’ to not own stocks when in reality the only material risk is to our business and ability to keep clients, NOT to the client’s goal.” Positioning, well-timed and well-executed. Did I mention that people in this field are smart?

Could it be that the rains will never fall hard enough to require the abandonment of Buy-and-Hold?

I believe that the Buy-and-Holders believe that.

I’ve looked at the data. It tells a different story than the one the Buy-and-Holders believe.

The Buy-and-Holders hate me with a burning passion. I do not think they should. I believe that, once you know you must make a change, the thing to do is to make the change as quickly as possible and thereby get that nasty transition period behind you. Things always look better when you wake up with the hard part of the hike behind you.

I’m trying to help the Buy-and-Holders. They don’t see it, but I am. I say that they got it almost right and that that is better than what just about any other group of investing analysts has managed. I am trying to persuade them to fix that one teensy little error so that they can continue to get credit for all the truly good stuff they have contributed. But do they thank me? Nooooo.

Wade is wrong when he suggests that nothing changed for me after the price crash. He wasn’t around before the crash. He thinks I am hated today. He doesn’t know what hate is! I was hatefully hated in a hateful way before the crash. Today you can tell that even the Goons are putting on an act. They try. The fire is just not there. Paul McCartney still sings “I Saw Her Standing There” today. And the words are all the same. But…. Well, you know.

Get Rich Quick schemes are a con. I saw a movie once where there’s this fellow selling snake oil and the townspeople catch on. Come back, Wade! Think it over!

I don’t think Wade is right that this is never going to flip. I think it is going to flip and I think it is going to flip hard when it does.

I think this is a Tipping Point thing. You can’t say anything real about Buy-and-Hold today. Because the Buy-and-Holders are the experts. No one cares what the research really says today. They are the experts. They get to decide.

People care about the numbers they see on their portfolio statements. When the numbers they see on their statements come to match the realities that they have not been told for years now, the word “expert” is not going to impress anymore. It’s going to be too late then to switch sides. People are not dumb.

We’ve never done this before. We’ve built stocks up to crazy prices and then watched those prices tumble. But never on this scale. Never with so much middle-class money (in the old days, only rich people could afford stocks). We certainly never did it with the internet available for the checking of stories. All those posts that argue that there’s no need to correct retirement studies just because the numbers in them are wildly wrong will sound different on the other side. They were meant as jokes! Funny, funny!  But jokes that were once widely thought funny can fall flat in changed circumstances.

Wade says that it is unclear what will happen in Step Two. He writes the words “Step Two” and follows them with a question mark.

Not this boy. I follow them with an exclamation point.

I’ve been seeing Step Two coming from the distance for a long time. I hope I’m well-positioned. I hope people don’t say I was too soft on the Buy-and-Holders!

 

VII #82 — Much to Gain by Killing Buy-and-Hold

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I’ve posted Entry #82 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Much to Gain by Killing Buy-and-Hold.

Juicy Excerpt: Academics have known about the holes in the Buy-and-Hold model for years now. They have also known that they would be putting their careers in jeopardy to talk about them openly. So they have generally kept their mouths shut. That doesn’t mean that they have turned their brains off. They have been thinking about how stock investing really works.

Once Buy-and-Hold dies, they are going to feel free to tell us about all the exciting ideas that have been gradually coming to life in their brains. We are going to see an explosion of knowledge of how stock investing really works once the Buy-and-Hold monster is truly dead and buried and can hold back progress no more.

“The Dollar Bills You Dangle in Front of Me to Entice Me to Join the Get Rich Quick Gravy Train Smell Bad. I Cannot Take That Smell, Man, You Know?”

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Set forth below is the text of a comment that I recently put to the Goon Central board:

for a smart guy, you sure are poor.

Money isn’t my god, Dab.I like money. I have hopes of making many millions of dollars as we transition from Buy-and-Hold to Valuation-Informed Indexing. Full truth be told, I have hopes of making hundreds of millions. That’s serious money for a boy who got his start at old St. Timothy’s in Northeast, Philadelphia.But money has never been the driver for me. If money had been the driver, I never would have left my job at the Big Six consulting firm. The aim of my Retire Early plan was to finance my shift to doing more meaningful work. I think it would be fair to say that I have surpassed my wildest hopes and dreams for myself in that regard. So I am getting what I set out to get in spades. And we live a comfortable middle-class life. So the money, while it isn’t anywhere in the ballpark of what I ultimately want it to be, has been good enough.I don’t love money for itself. I love it for what it can add to life. The work we have done over the past 10 years will permit millions of middle-class people to live lives beyond their reach in earlier times. They will be inventing things that would otherwise not have been invented. They will be curing diseases that would otherwise not have been cured. They will be breaking down barriers, freeing people’s minds and bodies, doing all the wonderful stuff that we humans are capable of doing when we have out acts together. It is enabling all that cool stuff that is the kick for me.

I’ll be using most of the money that will come flowing in as a result to fund even more of that sort of exciting stuff, in any event. The bottom line here is that I don’t keep score by dollars. I keep score by breakthrough insights.

That option is available to you and the other Sewer Rats. My answer when people said I was being mean to Greaney was always to point out that I invited him to help me develop the New School SWR methodology. He would today have his name on the biggest web site on the internet had he gone that route. I would have been there for him and John Walter Russell would have been there for him. It is only his own rotten and twisted pride that stood in the way.

There are hundreds of opportunities like that just sitting there in front of you today, Dab. You can choose the path of hate and just make things worse and worse for yourself and all others. Or you can choose the path of love and make things better and better for every soul touched by this stuff (which is just about all of them).

My take is that money that leads us upward and forward is good money and that money that leads us downward and backward is bad money. Don’t dangle money in front of my face and expect me to jump. Dangle the good stuff that good money can do and you will get my attention every time.

It’s not how much money you have that matters, Dab. It’s what you do with the money that comes into your possession that matters. I am using mine to spread a life-affirming new way to invest in stocks. My strong hunch is that doing that will make me rich beyond my wildest dreams. But the truly beautiful part of the arrangement is that, even if it doesn’t, I have the satisfaction of knowing that it is my name that is on that life-affirming new way to invest in stocks.

That won’t change even if I lose every dollar that ever passes through my hands in the Second Great Depression. The riches that I have come to possess by following the path of love are secure riches. This is why I don’t feel the hate and anger and contempt that you feel. Good money puts you in a better place in the long term than the bad, ugly, smelly money that comes from tricking people and bullying people and compromising your personal integrity.

I get one life to live and I intend to use it following the path that makes sense to me. The dollar bills that you dangle in front of me trying to entice me to join the Get Rich Quick gravy train smell bad. I cannot take that smell, man, you know? That’s the thing. You are going to need to do something about the smell of that Buy-and-Hold money to get this boy to sign up for the program.

Otherwise, no can do. Please try to find someone else. I can’t go for that.

Rob
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Beyond Buy-and-Hold #76 — Let’s Stop Blaming the Economy for Our Failed Investing Strategies

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I’ve posted Entry #76 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called Let’s Stop Blaming the Economy for Our Failed Investing Strategies.

Juicy Excerpt: When Buy-and-Hold produces good results, we credit the investing strategy. When the results are poor, we place the blame elsewhere. As Church Lady might observe, “How convenient for the advocates of Buy-and-Hold!” It’s a “heads I win, tails you lose” approach to investing analysis.