A Rich Life

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

The Big Picture Blog Reports on Wade Pfau’s Research Showing the Superiority of Valuation-Informed Indexing Over Buy-and-Hold

by

The Big Picture blog early this morning posted an article reporting on Academic Researcher Wade Pfau’s research showing the superiority of Valuation-Informed Indexing over Buy-and-Hold. The report is titled: Buy-and-Hold is Dead (and Never Worked in the First Place).

Juicy Excerpt: Attorney, tax expert and financial writer Rob Bennett told us…”The thing that I have done that no one before me has done is to explain the practical IMPLICATIONS of Shiller’s findings. Even Shiller has never done this…. Shiller and many others have been keeping their mouths shut about the practical implications of his theory for three decades now.” Bennett’s website provides endorsements for his stock timing theories and argues that the prevailing Buy-and-Hold dogma helped to cause the financial crisis.

After seeing the report, I sent the following words to Wade:

Wade:

I hope things have been going well with you. I think of you often. I miss talking things over with you!

I am of course continuing my work to spread the word re your breakthrough research on Valuation-Informed Indexing and on the true cause of the economic crisis. An article was posted early this morning at The Big Picture blog that reports on the essential points:

http://www.ritholtz.com/blog/2012/11/is-there-a-better-way-to-allocate-stocks-thasn-buy-hold/

I’d be grateful to know your thoughts. My thought is — You need to get to work finding a journal for the follow-up research on VII that you told me about! I noted in my first comment on the discussion thread for the article (the comment has not yet appeared at the site) that you would be thrilled to get back to work on that paper if you were given some encouragement. Please consider these words of mine as encouragement that you direct some energies to this important project! Soon! Today! Yesterday!

I also wanted to share with you the words that I sent to the author of the article when he showed me a draft version yesterday night. Thoughts of your good work (and the good work of John Walter Russell and John Bogle and Robert Shiller and so many others) came flooding into my brain when I read the words of the article. Here is the text of my e-mail:

George:

If you have followed Bob Dylan’s career, you know that he has always been a smart-aleck in his dealings with the press. He gave a clue why in some words he put forward after he wrote the first volume of his autobiography and read the reviews of it. He said that those reviews brought him to tears. Most of the people who reviewed his records were not musicians and thus were not able to appreciate the struggles he was overcoming in producing the records. Many of the people who reviewed his autobiography had written books of their own and thus “got” what he was trying to do. The reviews of his autobiography were the first reviews that he fully respected.

That’s the feeling I experience reading your words. What’s different about your write-up is that it shows that you appreciate the scope and significance of the project. That’s the thing that very few others get. It almost brings me to tears to see that after ten years of work someone is seeing how big a deal this is and helping me get the word out to the millions of people who need to hear the message.

<

I am extremely grateful. Please let me know if there is ever anything i can do to help you or your readers in return. I have worked for this sort of write-up for a long time. I am humbled to see the draft. I will work hard to merit the trust you have placed in me by giving these ideas the serious consideration that I have long believed they merit.
<
I believe that you are moving the ball forward in a significant way. You focused on the right things. The people who have tried to hold me back are good people who want to do good work. You didn’t focus on the negatives, you focused on the positives. I believe that that is the approach that people need to take to help those people see that we are all on the same side re these matters. An advance in our understanding of how stock investing works helps us all live richer lives.
<
When your article appears, I will forward a link to it to Wade. I have hopes that reading your words will melt his heart. It may take some additional time but somewhere down the road a piece I believe that either your words or words that follow from your decision to release your words will melt John Bogle’s heart.
<
You have filled my heart with good cheer on this special Sunday night.
<
Thank you.
<
Rob

You of course have also done very important work, my old friend. Please take a bow!

I will ask my boys to say a prayer for you. My understanding is that God listens with special care to the prayers of children.

And, as John Walter Russell used to regularly advise us all — Have fun!

Rob

Addendum:  The article now appears at the ZeroHedge.com site and at the WashingtonsBlog.com site.  The Financial Times links to the article at its “Alphaville/Further Reading” section, referring to Valuation-Informed Indexing as “An Alternative to Buy-and-Hold.”

“Unless Taylor Larimore [Co-Author of the Book The Bogleheads Guide to Investing) Has Had Some Secret Discussions With Bogle That No One Knows About, He Is Mischaracterizing Bogle’s Position.”

by

Yesterday’s blog entry reported on an e-mail that academic researcher Wade Pfau sent me on January 20, 2011. My response is set forth below.

Wade:

That’s super. I am grateful for your constructive efforts.

1) CJKing is an awesome poster, probably the best I have ever seen on this topic. If it’s possible to contact him through a private e-mail system there, he can probably be of help. He is extremely knowledgeable re this topic and also has spent
years thinking carefully through all the angles.

2) His recommendation to read Valuing Wall Street was a great one. Smithers uses a different valuation metric. John Russell did some research seeking to determine which metric worked best (P/E10 or Tobin’s Q). He ultimately went with P/E10 but my recollection is that he also had generally good things to say about Tobin’s Q.

3) John Russell wrote an article making the point you were making re the size of the data set. He certainly agreed with your intuitive sense re this. I will try to track down that article.

4) Richard’s point is the most important, in my view. People need to understand WHY long-term timing works but short-term timing does not. I struggled with this for a long time. Once I was clear on the premises of
the new model, I was able to understand all sorts of aspects to the question that I had been blind to before. If you want me to say more on this (now or later), please just let me know and I will expand on the point.

5) Norbert Schlenker’s behavior is inexplicable. He banned me from his board. However, I think his substantive comments on the thread where he supplied the graphic were perfectly fair. He expressed a certain skepticism but it was more a cautious skepticism than a rigid skepticism. And the one big negative he pointed to — the success of Buy-and-Hold in the late 1990s — no longer applies since the crash. It’s of course not his fault that he happened to prepare the graphic prior to the crash.

6) You described Benjamin Graham’s take properly. I will try to track down an article that quotes his words.

7) Bogle has said that Valuation-Informed Indexing can work:

http://arichlife.passionsaving.com/2009/07/28/bogle-says-valuation-informed-indexing-can-work/

Unless Taylor Larimore has had some secret discussions with Bogle that no one knows about, he is mischaracterizing Bogle’s position. In fact, Bogle warns about the effect of overvaluation in nearly every speech he gives. Bogle himself timed the market successfully! He has said in published interviews that he lowered his stock allocation to about 30 percent at the top of the bull partly because of valuation concerns. He obviously is ahead
today because of his decision to do that. Taylor is of course aware of this. These points were made dozens of times to him in threads that reside today in the Post Archives of the Vanguard Diehards board.

That’s a great thread! I am sure that that is going to help some people gain a better sense of the realities.

Rob

“I Definitely Need to Cite [You] as the Founder of Valuation-Informed Indexing…. Shiller Pointed Out the Predictive Power of P/E10 But Never Discussed How to Incorporate It Into Asset Allocation.”

by

Yesterday’s blog reported on an e-mail that I sent to academic research Wade Pfau on January 16, 2011. Wade responded later the same day. He endorsed John Walter Russell’s characterization of a paper purporting to show that long-term timing does not work as testing “idiot switching.” He said: ” ‘Idiot switching.’  That is great, and describes exactly what the Fisher and Statman paper does.  You and John have a great knack for coining new terms.  I think VII is a much better term than any alternatives I’ve come across.” He added that he did not think it would be appropriate to use the term “idiot switching” in an academic paper.

Wade also reported that “as always, I will be reading all your links.” He said: “I definitely need to cite some of your work as the founder of VII, as I have not found anyone else who can lay claim to that.  Shiller pointed out the predictive power of PE10 but never discussed how to incorporate it into asset allocation, as far as I know.”

 

Valuation-Informed Indexing #87 — The Fair-Value P/E10 Number Is Somewhere Between 14 and 16

by

I’ve posted Entry # 87 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Fair-Value P/E10 Number Is Somewhere Between 14 and 16.

Juicy Excerpt: Yale Economics Professor Robert Shiller, the grandfather of the Valuation-Informed Indexing model, puts it at 16. There’s a good case that can be made for that number. But “16” is not the only reasonable answer to the question “What is the fair-value P/E10 number?”

John Walter Russell, former owner of the www.Early-Retirement-Planning-Insights.com site, did the statistical work for development of The Stock-Return Predictor and the other calculators available at my web site. John put the fair-value P/E10 number at 14. He explained why in this article: Typical Values of P/E10.