Tuesday, August 18, 2009

Guest Post: A Critique of Value Informed Indexing

A few weeks ago I published a guest post by Rob of A Rich Life. In doing so, it appears that I inadvertently stumbled into the middle of a religious war. Schroeder, a critic of Rob's has asked me to post the critique which follows, and having read it, I thought I would share it with my readers and let you all make up your own opinions. This critique is broader than a direct response to the guest post on Money and Such. With this, I think that I will gracefully bow out of what appears to be a larger dispute between these two thoughtful writers. I am sure that Rob will respond in detail in the comments below. The guest post.

This is a critique of Rob Bennett's "Valuation Informed Indexing" or VII for short. Here is Rob's claim:
"Valuation-Informed Indexing always provides better risk-adjusted long-term returns than Passive Indexing. If you take the same portfolio as the Coffeehouse Portfolio or the Wellington Fund and instead of following a rebalancing strategy you adjust your stock allocation in response to big price changes, you will achieve higher risk-adjusted returns. I am not able to imagine how there could be any exception to this general rule." [Shadox - this quote is taken from Rob's comment (#24) to this post on Get Rich Slowly]
Adjusting your stock allocation in response to big price changes" is the key phrase and defines Rob's VII. And the claim is that if you adjust your stock allocation in response to big price changes, you will achieve higher returns than sticking with a static, never-changing stock allocation.

In order to compare VII versus a static, never-changing stock allocation, we need decision rules that tell us how to implement VII. Rob provides us VII decision rules here:
"A Valuation-Informed Indexer might go with a stock allocation of 50 percent at times of moderate prices (a P/E10 level from 12 to 20), a stock allocation of 75 percent at times of low prices (a P/E10 level below 12) and a stock allocation of 25 percent at times of high prices (a P/E10 level above 20)."
How do we determine P/E10 levels? P/E10 data is contained in an Excel spreadsheet on Robert Shiller's website. Here is the link.

So if you were a VII investor and followed Rob's guidelines, you would have maintained a normal stock allocation of 50% when the P/E10 level ranged between 12 and 20. This was the case up to 1992. However, you would have switched to 25% stocks in 1993 when P/E10 first went above 20. P/E10 stayed above 20 for the next 16 years before dropping below 20 in October 2008.

Now that we have defined Rob's VII, we can take the next step and test Rob's claim. Repeating what Rob wrote above:
"If you take the same portfolio as the Coffeehouse Portfolio or the Wellington Fund and instead of following a rebalancing strategy you adjust your stock allocation in response to big price changes, you will achieve higher risk-adjusted returns."
I will choose the Coffeehouse Portfolio because the returns are tracked on Bill Schultheis' website:

Year Return
1991 23.55%
1992 9.57%
1993 15.64%
1994 -0.58%
1995 22.89%
1996 14.53%
1997 17.95%
1998 6.88%
1999 8.30%
2000 7.25%
2001 1.88%
2002 -5.55%
2003 23.56%
2004 14.18%
2005 5.97%
2006 15.002%
2007 2.91%
2008 -20.25%

Annualized 17 Year Return 8.61%

Rob says that a VII investor would have reduced their stocks to 25% when P/E10 went above 20. This occurred in 1993. And since the Coffeehouse Portfolio is 60% stocks, we need to add a bond fund to make the valuation-adjusted stock allocation equal 25%.

To achieve a 25% stock allocation with the Coffeehouse Portfolio, we would need to add a bond fund such as the Total Bond Market (TBM). By my calculations, you would place 58% of your money in TBM and 42% in the Coffeehouse Portfolio.
So for example, if you had $10,000 and only want $2500 in stocks (25%), you would put $5800 in TBM and $4200 in the Coffeehouse Portfolio (CH). How much do you now have in stocks?
$4200 * 60% = $2520

Which is close enough to $2500.

We now have almost all the information to test Rob's claim that when you take the Coffeehouse Portfolio and instead of following a rebalancing strategy, you adjust your stock allocation in response to big price changes and thus, you will achieve higher returns. The only piece missing is the returns for the Total Bond Market. That data can be found at this website:

Year TBM
1991 15.25%
1992 7.14%
1993 9.68%
1994 -2.66%
1995 18.18%
1996 3.58%
1997 9.44%
1998 8.58%
1999 -0.76%
2000 11.39%
2001 8.43%
2002 8.26%
2003 3.97%
2004 4.24%
2005 2.40%
2006 4.27%
2007 6.92%
2008 5.05%

So with a little spreadsheet work, we can apply Rob's VII guidelines and produce valuation-adjusted returns for the Coffeehouse Portfolio. The left column represents the unmodified Coffeehouse (CH) and the right column represents the Coffeehouse modified using Rob's VII guidelines:

Year CH VII
1991 23.55% 23.55%
1992 9.57% 9.57%
1993 15.64% 12.18%
1994 -0.58% -1.79%
1995 22.89% 20.16%
1996 14.53% 8.18%
1997 17.95% 13.01%
1998 6.88% 7.87%
1999 8.30% 3.05%
2000 7.25% 9.65%
2001 1.88% 5.68%
2002 -5.55% 2.46%
2003 23.56% 12.20%
2004 14.18% 8.41%
2005 5.97% 3.90%
2006 15.00% 8.78%
2007 2.91% 5.24%
2008 -20.25% -5.58%

Coffeehouse (CH) 18-year annualized return = 8.52%
VII 18-year annualized return = 7.93%

So it appears that adjusting the stock allocation for the Coffeehouse Portfolio in response to big price changes did not produce higher returns. The valuation-adjusted returns were 7.93% annualized over the 18 year period from 1991 through 2008. This is lower than the unmodified Coffeehouse annualized returns of 8.52% over the same period.

To repeat, the Coffeehouse Portfolio maintained a static, never-changing stock allocation of 60% over the full period. By contrast, the valuation-adjusted Coffeehouse added TBM in response to big price changes as occurred in 1993 and thus reduced its stock allocation to 25% and maintained that lowered stock allocation from 1993 through 2008.

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94 comments:

Ren said...

I feel silly asking this, but could you confirm that these combined returns include annualized rebalancing to the 25% stock allocation? (or whichever percent VII suggests at that time)

The biggest problem I have with something like VII is the apparently arbitrary choices for the decision rules. Something like QPP seems like a better choice, maximizing the ration between return and risk. But even that seems overly complicated without enough benefit to justify the effort.

Rob Bennett said...

You're the tops, Shadox!

Your involvement in these discussions has been an amazing plus. You posted my guest blog entries, permitting me to get the word out about Valuation-Informed Indexing. You then offered your own views, some favorable, some skeptical, all fair-minded. And now you have posted a guest blog by one of my leading critics and thereby brought out the best in my good friend Schroeder. This is the medicine we need to get this investing train back on the tracks!

I don't agree with all that Schroeder says. But I am excited to see his name on a blog post here saying it. People (that's me!) learn by hearing other points of view. Schroeder needs to hear from Rob Bennett from time to time. Rob Bennett needs to hear from Schroeder from time to time. Everybody else needs to hear from both of us (and from lots and lots of others, to be sure!).

The right stuff!

Rob

Rob Bennett said...

it appears that I inadvertently stumbled into the middle of a religious war.

I know the feeling, Shadox.

I knew when I put my fateful post to the Motley Fool board that what I was saying was going to be controversial. In my mind, that meant that the thread would continue for a day or two, perhaps three at the outside.

Seven Freakin' Years!

It's not even possible.

But it really did happen. I know this for sure! I was there!

Rob

Rob Bennett said...

I am sure that Rob will respond in detail in the comments below.

I've presented the case for Valuation-Informed Indexing in the earlier Guest Blog Entries and in the materials at my site. I don't think it helps for me to repeat all that here.

I'll limit myself to one point: Can a single backtest disprove that case?

I say "no."

Backtests are never a perfect indication of anything. One thing that they can never tell you is whether the results obtained came at the cost of taking on greater risk. I say that Valuation-Informed Indexing always produces better risk-adjusted returns. That's not the same thing as saying that it always produce better returns.

It's always going to be possible to identify a backtest that will show good results for just about anything. If you wanted to show that putting your retirement money into lottery tickets is a good idea, you could construct a backtest showing that. It wouldn't make it so. It would just demonstrate that human creativity reveals itself in lots of human endeavors, including those advertised as "scientific."

My view is that price always matters. If x stock allocation makes sense when stocks are priced fairly, then x stock allocation cannot possibly also make sense when stock are priced at two or three times fair value. That's logic, not backtesting.

There have been lots of backtests done showing that Valuation-Informed Indexing is superior and I have learned important things from looking at them. But those backtests have never been the primary reason why I recommend this approach. I recommend it because it makes sense, because I am not able to get my mind around a claim that it is possible for an approach that calls for ignoring valuations when setting my stock allocation to work in the long run.

If there are some who want to look at a second backtest, I suggest the one done by Norbert Schenkler at the Financial WebRing Forum. Norbert is no supporter of mine (although I do think of him as a friend). If you went by his posts at the Goon Central board, you would almost certainly conclude that he hates my guts. Still, I think he did a backtest that advanced the ball and I am grateful to him for putting it together:

http://www.financialwebring.org/forum/viewtopic.php?t=106998

I do NOT say that Norbert's backtest by itself proves the case. I view it as an important data point, nothing more and nothing less. In my mind, the thing that proves the case is common sense. The price that you pay for stocks must matter. The fact that the historical data confirms that they do is just icing on the cake, in my assessment.

Rob

Rob Bennett said...

or whichever percent VII suggests at that time)

There is no one correct allocation that a Valuation-Informed Indexer is supposed to go with when any particular P/E10 level applies, Ren. All that VII says is that you must make some change in your stock allocation in response to big price changes.

Some do not like this. Some insist that I give specific allocations that apply for particular P/E10 levels. That makes as much sense as demanding that John Bogle give one stock allocation that applies for all Passive Indexers.

You need to consider things other than valuations when setting your stock allocation. You need to look at your life goals, your financial circumstances, and your risk tolerance, just as Passive Indexers do. The only difference is that Valuation-Informed Indexers also take valuations into consideration. The riskiness of stocks changes dramatically with big changes in valuations. So those trying to Stay the Course must change their allocation in response to big price changes. If you fail to do that, you are permitting yourself to be blown off course.

I discuss the question of how you know when to change your stock allocation in far greater depth in RobCast #137 ("Nine Valuation-Informed-Indexing Portfolio Allocation Strategies"):

http://www.passionsaving.com/personal-finance-podcasts-page-eighteen.html"Nine VII Portfolio Allocation Strategies

The bottom line is that there is no one right way to do it. The wrong way to do it is to invest passively. To invest passively is to ignore valuations altogether. Yikes!

Rob

Rob Bennett said...

The biggest problem I have with something like VII is the apparently arbitrary choices for the decision rules.

The root problem is that our valuation assessment tools are imprecise. We know for certain that valuations affect long-term returns. But we cannot say that x change is going to produce y result. A further complication is that stocks generally represent a far stronger value proposition than the alternative asset classes. Whenever you lower your stock allocation, you are taking a risk of causing yourself to experience lower returns for a number of years (we can never know how stocks are going to perform over the next year or two or three).

If you try to get things just right, you are probably going to mess up. If you are willing to be satisfied with being sure that you have achieved greater risk-adjusted returns while accepting that you will not get the best possible results, you will make allocation changes only at the extremes -- only when the odds are so much on your side that it is almost unthinkable that making the changes will not put you ahead in the long run.

But even that seems overly complicated without enough benefit to justify the effort.

VII is not complicated at all. It is as simple as simple can be. But please do not think that making one allocation change every ten years or so cannot make a huge difference. I have a calculator at my site that shows that the typical VII investor can expect to retire five years sooner than the typical Passive Indexer.

What people fail to consider is the compounding returns phenomenon. VII always puts you ahead sooner or later. Once it does, the differential just grows and grows and grows over time.

Here's the calculator ("The Investor's Scenario Surfer"):

http://www.passionsaving.com/portfolio-allocation.html

Rob

Ren said...

I experimented with that calculator a bit and what I think I learned, though it's difficult to tell from such limited run-throughs (a Monte-Carlo version would probably be much more useful), is that factoring in dollar-cost-averaging into the mix greatly reduces the difference between the strategies.

I suspect this is expected as it improves the return/risk ratio.

FYI, I set the allocation to 75% stock when the P/E10 was less than 12, 50% between 12 and 18, and 25% greater than 18. I also set the TIPS return very low as a baseline, but I may experiment further with a more normal TIPS return.

Another problem I have with this whole methodology is that it assumes that P/E10 is the only significant factor affecting the long term price of a stock. I simply don't accept that premise.

Ren said...

I did a couple more tests with the calculator and using my 75/50/25 12/18 rules (which, again, I find to be completely arbitrary). I ran 20-normal and 32-bear scenarios and found that this result was generally very close to the 50% rebalance result. Again, I also had continuing investment each year which, as I said before, I expect achieves much of the same result as the VII.

One the accumulation phase of investing is over, I do expect a different strategy becomes necessary. Perhaps that's when VII makes more difference.

I think one key factor that would make a huge difference in the acceptance of this type of strategy would be a demonstration that there is a significant correlation between P/E10 and annual returns. While we all generally accept some sort of reversion-to-mean eventually, if it takes decades to occur then it doesn't really inform investment decisions.

Rob Bennett said...

I think one key factor that would make a huge difference in the acceptance of this type of strategy would be a demonstration that there is a significant correlation between P/E10 and annual returns. While we all generally accept some sort of reversion-to-mean eventually, if it takes decades to occur then it doesn't really inform investment decisions.

The correlation between the P/E10 value and the long-term return is strong, Ren. But it is strong only in the long term. If you go out only five years, the correlation is weak. If you go out 10 years, it is reasonably strong but precision is not great. If you go out 15 years, the correlation is a good bit stronger. If you go out 20 years, the return you will obtain from a broad index fund is 78 percent predictable just by looking at P/E10.

This is NOT a short-term strategy. It does not work unless you go out 10 years. Short-term returns are not predictable. All that most experts say about that is backed up by the historical data. It is on long-term predictability that the "experts" get it wrong.

Rob

Rob Bennett said...

Here's a graphic showing the correlation between P/E10 and the 20-year return on a broad stock index:

Correlation at 20 Years

Here's 10 years:

Correlation at 10 Years

Rob

Schroeder said...

Ren said...
"I feel silly asking this, but could you confirm that these combined returns include annualized rebalancing to the 25% stock allocation? (or whichever percent VII suggests at that time)"

That is correct. Without rebalancing, the annualized return for VII was 7.55%. This was slightly lower than VII with annual rebalancing which was 7.93%.

Schroeder said...

Rob Bennett said...
"I say that Valuation-Informed Indexing always produces better risk-adjusted returns. That's not the same thing as saying that it always produce better returns."

OK, I didn't know about the last part. The Coffeehouse Portfolio had higher returns but because it took more risk by sticking to 60% stocks, it somehow was an empty accomplishment.

Rob Bennett said...

it somehow was an empty accomplishment.

It's with this sort of comment that you lose me, Schroeder. I said that it was achieved by taking on more risk and I don't think it's worth it. In nine out of ten tests I have done, VII has beaten Passive. So that's the way I choose to go.

If you want to invest passively, you understand that you have every right in the world to do so, right?

So why the antagonism?

Not everybody agrees that investing passively is a good idea. I am one of those who feels strongly that it is not.

Is there some reason why we cannot be friends all the same? Is there room in this crazy mixed-up world of ours for different viewpoints on whether Passive Investing is a good idea or not?

I like the idea of being your friend. I don't at all like the idea of posting dishonestly. Is there something in The Rules of Passive Investing that requires that saying something that I don't believe to be true is the price that I must pay to win the friendship of a Passive Investing Dogmatist?

No can do.

Rob

Shadox said...

Simmer down there, guys. Polite discussion only on this blog, please.

Schroeder said...

Rob Bennett said...
"In nine out of ten tests I have done, VII has beaten Passive. So that's the way I choose to go."

What does it mean when you say "that's the way I choose to go."? Does that mean you actually bought stocks when P/E10 dropped below 20?

Ren said...

Maybe I should know the answer to this, but in the correlation graphs you (Rob) linked, what P/E10 value is being used? Is that the average P/E10 over the 10 and 20 year spans? Is it the P/E10 from the start of the period?

I think I'm still missing something fundamental on the distinction you're trying to make between long and short term timing. If you make adjustments on an annual basis for the current P/E10, doesn't that really amount to short-term (less than 5 years) timing?

Rob Bennett said...

Does that mean you actually bought stocks when P/E10 dropped below 20?

Shadox has asked that we engage in polite discussion. I am going to answer this question honestly. If Shadox determines that my honest response is impolite, I have no problem if he takes it down. I ask that if he takes down the honest response to the question that he also take down the question. If the only posible honest response to a question is "impolite," I think it is fair to say that there is something impolite in the question.

I have often shared details of my personal financial circumstances on discussion boards. I think this helps people. It provides context for discussions that can otherwise become excessively theoretical. So I would obviously like to be able to respond to this question.

In the real world, there's a problem with doing so. I am the person who discovered the analytical errors in the Old School safe withdrawal rate studies. When I did so, an individual who published one of the Old School studies organized a smear campaign against me and the hundreds of people who expressed great interest in learning more about the realities of safe withdrawal rates and other investing topics. One element of the smear campaign was to post thousands of false claims about my personal financial circumstances at scores of discussion boards and blogs.

The usual tactic is to take something I say about my personal circumstances and change one or two elements so that to the casual reader it sounds like it might be right even though the statement made is incorrect. For example, I have long argued that the vast majority of middle-class investors should keep some money in stocks even when prices are insanely high while also reporting that my financial circumstances required me to go to a zero stock allocation during the time when the risk of owning stocks was sky-high. Many thousands of posts were put up all over the internet saying that I advocated that all investors go to a zero stock allocation.

I do the work that I do to help people learn how to invest more effectively. It obviously does not serve that purpose for thousands of deliberately false posts about my personal financial circumstances to be posted all over the internet. So I have adopted a policy of not posting again on my personal circumstances until effective action has been taken to rein in the Campaign of Terror against our boards and blogs.

The bottom line is that it would not be responsible for me to answer this question. I have written my congressman (Rep. Frank Wolf) asking for his help in enacting legislation to deal with the problem of internet smear campaigns. I hope to be able to devote more time to the effort to get such legislation adopted in coming days. Until such legislation is adopted, I believe that all internet posters should be aware of the dangers of sharing details of their personal financial circumstances on boards or blogs. As the law is written today, those trying to post honestly on these matters are at a great disadvantaged compared to those with less constructive motives.

I believe that the most positive action that could be taken re this matter would be for all those who have positive motives for posting on the internet to unite to rein in the most abusive practices of those who lack positive motives. I suggested united action in a post that I put to the Money Bloggers Network forum. The entire thread was deleted by the owners of that forum without explanation.

Rob

Rob Bennett said...

in the correlation graphs you (Rob) linked, what P/E10 value is being used?

This is an important question.

Please look at the horizontal line at the bottom of the graphic, Ren. Those numbers are P/E10 values. Now look at the vertical line on the side. Those numbers are long-term annualized returns.

What is being shown is that, as the price you pay for stocks goes up, the long-term return you obtain from investing in stocks goes down.

In January 2000, the P/E10 value was 44. If stocks continue to perform in the future anything at all as they have always performed in the past, any money that you put into stocks in January 2000 will deliver a negative long-term (10 years) return. Treasury Inflation-Protected Securities (TIPS) were paying 4 percent real. By investing heavily in stocks when they were selling at those prices, you delayed your retirement by a good amount of time. You not only invested in such a way as to greatly reduce your long-term return. You also gave up years of compounding on the differential.

This is why Valuation-Informed Indexers alway end up ahead. They often do NOT end up ahead in the short term. Those who invested heavily in stocks did not really suffer a big hit until September 2008. Passive Investors viewed that hit as a surprise. Rational Investors did not. Rational Investors look to the historical data before investing in stocks so that they alway know (within reason) what is coming in the years ahead.

When the price of stocks is reasonable or low, the long-term return is alway good or great. When the price of stock is what it was from 1996 through 2008, the long-term return is always poor. There are no exceptions in the historical record. My view is that there is no way for the rational human mind to imagine circumstances in which this would not be so. Stocks were selling at three times fair value in 2000 (the fair-value P/E10 is 14). Wouldn't you expect to obtain a poor long-term return from an asset class for which you paid three times fair value?

The graphic is just showing the extent to which this has always been true in the past. A graphic showing what happens at five years out would show a weak correlation between P/E10 and return. Short-term timing never works. Long-term timing always works. Those are the two most important lessons taught by the historical stock-return data. Passive gets one of them right and one of them wrong. That's why we are experiencing an economic crisis today.

Rob

Rob Bennett said...

If you make adjustments on an annual basis for the current P/E10, doesn't that really amount to short-term (less than 5 years) timing?

There's no need to make annual adjustments. You can if you like. But VII works great for those who only make one allocation shift every eight on ten years on average. It's up to the individual how many allocation shifts to make.

Say that you did make annual allocation shifts. These would generally need to be minor shifts. It is rare for the P/E10 value to change enough within a short period of time to justify significant shifts. For the entire time-period from 1975 to 1995, the P/E10 value justified a high stock allocation. For the entire time-period from 1996 through 2008, the P/E10 value demanded a low stock allocation. So there were only two shifts required from 1975 through 2009 (one in 1996 and one in late 2008).

If you wanted to, though, you could make annual shifts. You could have gone to 20 percent stocks in 1996 and then down to 15 percent in 1997 and 10 percent in 1998 and 5 percent in 1999 and 0 percent in 2000. That would be a more gradualist approach. There are pros and cons to doing it in a gradual way and there are pros and cons to limiting the number of shifts to one every eight years or so. I lean towards limiting the shifts, but a perfectly reasonable case can be made for going the other way.

Say that I made annual shifts. Would I then be engaged in short-term timing? No. I define "long term" to mean 10 years out. I have a calculator at my site that tells you the most likely 10-year return for each P/E10 value (based on a regression analysis of the historical data). The most likely 10-year return for the money I invested in 1996 would depend on whatever the P/E10 was in 1996 and the most likely 10-year return for money I invested in 2000 would depend on whatever the P/E10 was in 2000.

The thing that people have a hard time getting their heads around is that this only works in the long term. Say that you went to a 20 percent stock allocation in 1996 because prices were insane. Prices went up dramatically for the next four years. Did that mean that VII did not work? No! VII tells us nothing about what is going to happen in the short term (time-periods of less than 10 years). If you need to know what is going to happen in the short term, this is not for you.

The beauty of it is that it ALWAYS works in the long term. There has never been an exception in the historical record. This is the closest thing to a sure bet that I have ever seen in investing. To appreciate why that is, you need to understand the logic. The logic is that stock prices ultimately MUST reflect the economic realities or else the entire stock market will collapse. It is the PURPOSE of the market to set prices properly and sooner or later that purpose has to be fulfilled. VII investors are not hoping or dreaming that the stock price is going to come down hard when prices get to where they were from 1996 through 2008. They KNOW this is going to happen. It HAS to happen (or else the market would collapse).

So VIIs always know what is coming many years down the road. There are no surprises, no shocks, no panics. When stocks offer a strong long-term value proposition, you invest heavily in them. When stocks offer a poor long-term value proposition, you do not invest heavily in them.

Because you are not invested heavily in stock at time when they are certain to do poorly, you sooner or later obviously end up with a big edge over Passive Investors. You invest that differential in stocks selling at good prices. The magic of compounding causes the differential to grow and grow and grow. At the end of 30 years, VII investors are in nine cases out of ten far, far ahead; there are some cases in which their portfolios are DOUBLE the size of those of Passive Indexers. The historical data shows that those open to the idea of investing rationally can realistically expect to be able to retire five years sooner as the result of doing so.

Rob

Rob Bennett said...

what P/E10 value is being used? Is that the average P/E10 over the 10 and 20 year spans? Is it the P/E10 from the start of the period?

The graphic is not showing an average P/E10. It is showing the precise long-term (20-year or 10-year, depending on which graphic you are looking at) return associated with a precise P/E10 level that applied at some point in the past.

There is no one long-term return associated with any one P/E10 level. The graphic is reporting the specific returns that came up in the past. But the purpose is not to claim that a particular return will come up for a particular P/E10 value in the future. The purpose is to show the correlation between these two values.

The correlation is strong. We know that when the P/E10 value goes up, the long-term return goes down. But we do not know the precise return that will apply. We can identify a range of possible returns and assign rough probabilities to each point within that range. That's all. But that's a lot.

Rob

Rob Bennett said...

Another problem I have with this whole methodology is that it assumes that P/E10 is the only significant factor affecting the long term price of a stock. I simply don't accept that premise.

This is a good comment because it expresses a view that many share. I do not agree with the comment. I think it might be helpful if I say why.

I say that P/E10 is pretty much the only thing that matters for the typical investor. If you look to the P/E10 of the index before you buy, you will do well. If you fail to do this, you will do poorly. There are other things that more sophisticated investors could look at. But the edge obtained from looking at other stuff is tiny compared to the edge obtained by looking at P/E10.

To understand why this is so, you need to understand what it is that P/E10 is telling you. It is telling you the price of the stocks you buy. The price is by far the most important thing you need to know.

Say that you were buying a car. Would you sign the papers without first taking a look at the price? You would not. No one would do that. But millions do just this when buying stocks.

When you buy stocks, you are buying an income stream that extends far into the future. When stocks are priced reasonably, that income stream is well worth the price being charged. When stocks are not priced reasonably, you hurt yourself by giving up money that has value for an asset class likely to provide less of an income stream than the money you gave up would have supplied had you invested it elsewhere.

The most dramatic case was in January 2000. The most likely long-term annualized return on stocks was a negative 1 percent. TIPS were paying 4 percent real. For every dollar you invested in stocks rather than TIPS, you were giving up 5 percentage points of real return every year for 10 years running. Do that with too much of your money and you delay your retirement by many years.

No one would object if I said that the price tag on a car you buy is the most important thing you need to look at to determine whether the car is worth buying or not. Yet when I say this about P/E10, it is viewed as "controversial."

Why?

Why is it that so many of us think that it is not necessary to look at the price of the stocks we buy before putting money on the table? I think it is because The Stock Selling Industry has devoted so many hundreds of millions of dollars to promoting the Passive model that we have lost access to our common sense. Many of us have come to believe that price really does not matter when buying stocks. But I have never been able to find one sliver of historical data showing that there is anything to this idea.

Price matters. With stocks just as with everything else that can be bought or sold. P/E10 tells you the price you are paying for the stocks you buy. So the P/E10 value that applies is the single most important thing you need to know before making a stock purchase. For most of us, it is pretty much the only thing we need to know. If we know the P/E10, we will do fine. If we do not, we will not.

Rob

Rob Bennett said...

I ran 20-normal and 32-bear scenarios and found that this result was generally very close to the 50% rebalance result.

Thanks for playing with the calculator a bit, Ren. The calculator tells the story better with numbers than I can with words.

The calculator permits you to compare the long-term results of VII with the long-term results for 80 percent rebalancing, 50 percent rebalancing and 20 percent rebalancing. My experience is that VII nearly always is on top (80 percent rebalancing ends up on top in about 10 percent of my tests), 80 percent rebalancing is usually second, 50 percent rebalancing is usually third, and 20 percent rebalancing is usually fourth.

The difference is not always huge. It sometimes is. There is no way to know in advance whether the difference is going to be huge or not. This depends on the returns sequence that pops up and that is a random event. So I cannot tell you in advance how much you are going to gain by going with VII.

I can tell you that it puts the odds on your side. There is about a 90 percent change that you will end up ahead. But there is a small chance that you will not end up ahead. And in some cases you will only be ahead by a little and not by a lot.

Rob

Rob Bennett said...

factoring in dollar-cost-averaging into the mix greatly reduces the difference between the strategies.

Thanks for pointing this out, Ren.

Dollar-Cost Averaging is in essence a form of timing. It is timing for investors who reject the idea that timing is a good thing (because they believe in Passive Investing).

Those who follow Dollar-Cost Averaging are selling stocks when prices are high and buying stocks when prices are low. That's Valuation-Informed Indexing!

The question is -- Does Dollar-Cost Averaging incorporate enough timing into an investment plan to make it workable in the real world? I say "no." I say that we should embrace long-term timing, not give it our reluctant and hesitant support. "Time" is not a four-letter word. To time the market is to take price into consideration when making stock purchases. That's a wonderful thing to do. I don't want anyone to fail to do that.

Long-term timing always works. It works when you do it by engaging in Dollar-Cost Averaging and it works when you do it through Valuation-Informed Indexing. It is the same principle that makes both things work. To the extent that Dollar-Cost Averaging helps (and it does help), it helps because it is a form of market timing.

This is what is missing in most middle-class investment plans today. We need to incorporate effective timing strategies into out plans. The first step is coming to a general consensus that Passive Investing does not make sense. Once we give up on Passive, the conversation will naturally turn to the question of what are the most effective ways to time the market. That's where all the gold is.

The past of investing is discussing whether to time the market or not. The future of investing is discussing how to most effectively time the market. To not time the market at all is suicide. We all need to work to get over our resistance to market timing. This is the entire deal, in my assessment. We need to stop thinking of timing as something bad and accept that it is the ticket to financial freedom and economic growth.

Rob

Anonymous said...

I've been reading this thread and was impressed that Schroeder produced a clear test of Rob's ideas, a test that relied on stated assumptions and public data. Rob's ideas failed the test.

The problem, as I see it, is that Rob's ideas are essentially untestable hypotheses and therefore not particularly useful. This is for several reasons. First, and critically, Rob declines to actually give specific ways to invoke his strategy. That not only prevents them from being tested, it vitiates any assertions he makes.

Second, Rob changed the definition of his strategy after Schroeder's backtest. That is, he changed his assertion from saying VII MUST produce better results to saying that it produces better "risk-adjusted" returns. "Risk" is undefined here, and yet another reason why his assertions are untestable.

I note that Rob also says that he's presented the material that would rebut Schroeder at other places and he won't repeat it. That certainly leaves one with the impression that he has no effective defense against Schroeder's backtest. So far, Rob has not otherwise shown much drive to minimize verbiage.

Finally, there is Rob's statement that a single backtest cannot disprove a case. This flies in the face of the most fundamental bases of scientific analysis; it only takes ONE disproof to invalidate an argument. Rob, it's actually quite simple. If your logic says that VII MUST always be superior(or that all cats are black), and I find one case in which VII is inferior(or one white cat), then your proposition fails.

At this point, it seems that, for Rob to have credibility, he must do one of the following.

1. Explain why Schroeder's analysis is wrong. This might, for example, consist of finding errors in Schroeder's computations or his assumptions. It would help quite a bit if Rob actually gave quantitative recommendations of how to invoke VII.

2. Produce a series of backtests that show that VII is superior and, therefore, that Schroeder's is a special case. Rob apparently thinks this would be easy to do, as he states that "There have been lots of backtests done showing that Valuation-Informed Indexing is superior". He points to one by Schlenker, but indicates there are many more. How about telling us about those?

This could also serve a constructive purpose for you in trying to refine your ideas. If some backtests show your system is inferior (Schroeder's) and some show it is superior (Schlenker's?), then that should give you some insight.

Otherwise, we are left with Schroeder's well-constructed and defensible backtest as opposed to Rob's assertions that it's "common sense" that VII must work, supported only by repetition.

Anyway, that's my two cents.

P.S. Rob refers us to the Goon Central Board. I don't think this is helpful.

Rob Bennett said...

Rob refers us to the Goon Central Board. I don't think this is helpful.

Here is a link to the board we are talking about:

Board in Question

I think it is fair to say that the terminology that I use is a charitable description of the reality that applies.

And the same tactics that are employed on a daily basis at that board have been used to destroy or compromise dozens of boards and blogs at which thousands on my fellow community members have expressed a desire that honest posting on these matters be permitted.

I'm with my fellow community members. Every board at which I have posted has published rules in place prohibiting the use of these tactics. Those rules reflect the community will. It should be respected.

Rob

OddManOut said...

Schroder: Does that mean you actually bought stocks when P/E10 dropped below 20?

Bennett: I am going to answer this question honestly.

You would think one more word would be enough to answer the question. Instead, you wrote 576 words which didn't.

Wow.

Anonymous said...

Rob said: "All that VII says is that you must make some change in your stock allocation in response to big price changes."

That's it? That's the sum of your message? Are you serious? WOW.

An investor does not need long-winded platitudes, or thousands of words that add up to saying that you have to make "some" change in stock allocation in response to "big" price changes. What possible use is this type of advice? "Some" change doesn't even give you the direction of the change, much less the magnitude or frequency.

Until Rob can provide a specific, quantitative strategy - well, he seems to have nothing substantive to contribute.

In all honesty, I have been following this thread but will stop. The site has turned into thousands of words by Rob that basically boil down to NOTHING I can use or learn from.

Rob Bennett said...

That's it? That's the sum of your message? Are you serious?

Yes.

There are thousands of articles that appear on the internet every day and address investing topics. How many of them advise investors how much they need to change their stock allocation in response to price changes? Not many.

All that changes once we reach a consensus that Passive Investing can never work in the real world. The reluctance that many feel to point out that the Passive Investing emperor is wearing no clothes is holding us all back. Once we acknowledge that the one thing that can never work is to invest passively, we will have thousands of people coming at the investing question from all sorts of perspectives and telling us all sorts of things about investing that today we do not know.

Because we cannot know these things today. In today's environment, once someone comes up with a good insight about investing, it is smashed down. No good insights can be heard. Because all good insights reflect in a negative way
on the Passive model and the primary desire among many today is to protect Passive from criticism.

I came into this by being the first person to point out the analytical errors in the studies that we all use to plan our retirements. Those studies have caused millions of busted retirements (I am presuming here that stocks will continue to perform in the future somewhat as they always have in the past). Think about what it means to our economy to have millions of people suffer busted retirements. Think about how many people we help when we open up the possibility of giving people accurate retirement planning numbers by giving up the "defense" of Passive.

All learning is achieved through a building-block process. You learn one thing and then you build on that and then you build on the thing you built on and so on. With the development of the Passive model, we got the very first building block wrong. Passive was built on the premise that the market is efficient and this idea has been entirely discredited by the academic research of the past 28 years. Once we acknowledge that our belief in Passive was a mistake, hundreds of doors open to us for the first time.

Getting everything wrong about investing is a bad thing. When we made the mistake of thinking that the market gets the price right (and that therefore timing doesn't work, etc., etc.), we got it all wrong. The idea of Rational Investing is to try to get as much as we possibly can right. Getting things right makes a difference in the long run.

Rob

Rob Bennett said...

Until Rob can provide a specific, quantitative strategy - well, he seems to have nothing substantive to contribute.

The very idea that effective investing advice could ever be solely "quantitative" is a product of the Passive Investing Mindset.

You want tuna with good taste and I want tuna that tastes good. If it doesn't work, I'm not interested. The limits you impose on the investment advice you are willing to consider insure that it will not work. The emotional aspects of stock investing (the 70 percent of the investing project that Passives ignore when they rule out consideration of valuations) are the most important consideration in any approach that has a realistic chance of working in the real world.

Rob

Anonymous said...

5 lbs of b.s. in a 3-pound bag.

Adios. I'm done here.

Ren said...

I've tried. I've really tried. But I can't get past the flawed premise. The premise I refer to is "that it makes sense". From centuries of experience we know that our intuition about the way things work is not a reliable measure of how things actually work.

Also, even if I were to accept your "reversion-to-P/E10 of 14" argument (correct me if that's a mischaracterization), there is no information on how long such reversion could take and it could easily be longer that any investor's time horizon.

I also take issue with your recent statement that "Passive Investing can never work in the real world." That's just silly. We've seen it work in the real world. Additionally, I'd argue that anyone with a "busted retirement" was not following proper allocation and rebalancing strategies. Someone close enough to retirement to have it busted shouldn't have had enough stock exposure to have suffered a huge loss, plus, rebalancing from the good stock years would have locked in a significant portion of those gains.

The fact that people let their emotions take over and expose themselves to more risk than they can tolerate is not an indictment of passive investing. If anything, it is an argument in favor of it.

Schroeder said...

Rob, What is the formula you use for risk adjusted return?

Schroeder said...

Rob Bennett said...
"Those who follow Dollar-Cost Averaging are selling stocks when prices are high and buying stocks when prices are low."

Can you provide a reference for this definition, Rob?

My understanding is that Dollar-Cost Averaging is simply purchasing the same dollar amount on a regular schedule. For example, someone who contributes, say, $200 every two weeks from their paycheck to buy mutual fund shares at their workplace retirement plan is Dollar-Cost Averaging.

Rob Bennett said...

I've tried. I've really tried.

That's great, Ren.

From centuries of experience we know that our intuition about the way things work is not a reliable measure of how things actually work.

I disagree, Ren. I strongly believe that one should start with what makes sense. I agree that there are counter-intuitive realities. But I feel much more comfortable following an investing approach that makes sense than I would following one that did not make sense.

there is no information on how long such reversion could take and it could easily be longer that any investor's time horizon.

No, that' not right, Ren. You cannot know precisely when stock prices will return to reasonable levels. But it is rare for it to take more than 10 years. Usually, the process starts in a time-period much shorter than that. An investor would have to have an extremely short time horizon for that to be a problem. If you are only going to be investing for a year or two, this is not for you in any event.

That's just silly. We've seen it work in the real world.

I challenge you to find any time in U.S. history when an investor who failed to adjust his stock allocation in response to big valuation changes did better than those who did.

Additionally, I'd argue that anyone with a "busted retirement" was not following proper allocation and rebalancing strategies.

The Old School safe withdrawal rate studies were saying in 2000 that taking a 4 percent withdrawal from a high-stock-allocation portfolio was "safe." The analytically valid studies show that these retirements have only a 30 percent chance of surviving 30 years. There are millions of people who either followed these studies directly or who listened to advice of financial planners who referred to the studies in developing their recommendations.

The fact that people let their emotions take over and expose themselves to more risk than they can tolerate is not an indictment of passive investing.

I strongly disagree. Passive is a 100 percent emotional strategy. Investors who invest rationally feel more and more confidence in their plans over time because stocks always perform in accord with their investing model. For Passives, it is just the opposite. There has never been a time when Passive worked in the long term. And all investors know on some level of consciousness that the price you pay for stocks must affect your return. So no investor can ever come to possess real confidence in a Passive plan.

Thanks for the back and forth, Ren. I hope it helped some people. I thought your questions and comments were good ones.

Rob

Rob Bennett said...

My understanding is that Dollar-Cost Averaging is simply purchasing the same dollar amount on a regular schedule. For example, someone who contributes, say, $200 every two weeks from their paycheck to buy mutual fund shares at their workplace retirement plan is Dollar-Cost Averaging.

You are absolutely right, Schroeder. Thanks for pointing that out and I apologize to all who read my response above. I was thinking about Rebalancing and using the term "Dollar-Cost Averaging."

I still believe that it is an interesting finding that Dollar-Cost Averaging helps to diminish the disparity between the results for VII and the results for Passive.

I'm not a fan of Dollar-Cost Averaging. It does cause you to but at different prices, of course. But if you are doing this during a time like the time-period from 1996 through 2008, you are buying some stocks are terrible prices and other stocks at terrible, terrible, terrible prices. That doesn't provde much comfort!

I believe that the thing to do is to check the price of the stocks you are buying, compare the value proposition to that which you could obtain from far safer asset classes, and determine which is the better deal.

If stocks offer a good value proposition, it might sense to spread out the buys through a Dollar-Cost Averaging procedure. But overpriced stocks do not become a good buy by being purchased through a Dollar-Cost-Averaging process.

Rob

Rob Bennett said...

What is the formula you use for risk adjusted return?

I don't have a formula, Schroeder.

I have used the Scenario Surfer to determine whether Passive Indexing or Valuation-Informed Indexing provides better results. I haven't done a scientific test. But my experience is that VII beats all rebalancing approaches in about 90 percent of the return patterns that are consistent with what we have seen in the historical record.

A strategy that only performs well in one out of ten cases is high risk. I see no reason to take that risk. To say that Passive is better because it prevails in one out of 10 possible scenarios is like saying that buying lottery tickets is a good idea because there are cases in which that provides a good payoff. An investor should be seeking to get the odds on his side. The Passive Investor is deliberately turning the odds against himself. Yes, he could do well. But that is very much a long-odds bet, according to the historical record.

Rob

Schroeder said...

If you don't have a fomula for Risk Adjusted Return, I don't see how you can make any claims that invokes risk adjusted returns.

Pardon me if I am skeptical of your homemade calculator, Rob. How about running your calculations with actual data like S&P 500 and Total Bond Market. And then compare a static, never changing stock allocation, say, 60% stocks and 40% bonds with your VII method. To make it easy, just use the same timeframe that I did from 1991 through 2008.

Anonymous said...
This comment has been removed by a blog administrator.
Rob Bennett said...

If you don't have a fomula for Risk Adjusted Return, I don't see how you can make any claims that invokes risk adjusted returns.

I explained this above, Schroeder. VII comes out on top in nine out of ten tests. No one can know in advance whether you are going to come out on top or not because we cannot know in advance what the return pattern is going to be. The odds for Passive are one in ten. The odd for VIII are nine in ten. Thus, Passive is a lot more risky.

Also, in the rare cases when Passive comes out ahead, it is almost always by a small bit. When VII comes out ahead, it is sometimes by a small bit and sometimes by a lot.

Pardon me if I am skeptical of your homemade calculator, Rob.

You should be asking yourself why you are skeptical, Schroeder.

There is such a thing as healthy skepticism. I feel that myself. But there are things that can be done to address a healthy skepticism. What I have done is to put the calculators before tens of thousands of Passive Investing advocates and see if any of them can find any flaws in them. No one has been able to find anything yet.

Actually, the case is a lot stronger than that. Many Passive Investing advocates have become so frustrated with their inability to find any flaws in the argument for VII or in the calculators that they have insisted that discussion of VII and the calculators be banned at their boards and blogs, even though large numbers of community members have expressed great interest in learning more about them. Discussion is banned at Motley Fool. Discussion is banned at Morningstar. Discussion is banned at Bogleheads.org. Discussion is banned at the Early Retirement Forum. Discussion is banned at IndexUniverse.com. There's some sort of funny businesss going on here. I'm sure of it!

Plus, you have the many smart and well-informed people who have looked at the calculators and raved about them. I have a widget at the left-hand side of the home page of my blog where I set forth a sampling of the long, long list of positive comments. It seems possible to me that one or two smart people might be taken in by a flawed calculator. But the number is now in the hundreds. The idea that all these people have been taken in seems unlikely to me.

All that said, it certainly makes sense to check out the calculators every which way they can be checked out. I have proposed a national debate on the flaws in the Passive Investing model and on the search for a better model. A national debate would certainly permit lots of checks on the calculators. I have contacted lots of big names -- John Bogle, Jonathan Clements, Bill Bernstein, Larry Swedroe, and on and on. Most have offered complementary words about our discovery of the errors in the Old School SWR studies (without offering to help get the word out to the millions who will suffer busted retirements unless they are warned!) but none has endorsed the idea of a national debate. I think it would be fair to say that the leading advocates of Passive Investing are not feeling particularly confident that their model will be the one that would survive scrutiny if scrutiny of both models were brought to bear.

Healthy skepticism is good. It helps us learn. Blind skepticism is not good. It keeps us locked into our prejudices. I seek to maintain a healthy skepticism toward the claims of both the Rationals and the Passives. I think it would be fair to say that for the past seven years the Rationals have evidenced about 600,000 times more interest in the idea of constructive debate on these questions than have the Passives.

I cannot help but wonder why.

Rob

Rob Bennett said...

How about running your calculations with actual data like S&P 500 and Total Bond Market. And then compare a static, never changing stock allocation, say, 60% stocks and 40% bonds with your VII method. To make it easy, just use the same timeframe that I did from 1991 through 2008.

The Scenario Surfer does something a lot better than that, Schroeder. You are talking about comparing what happens in a single scenario. The Surfer lets you compare what happens in thousands of different scenarios, all of them consistent with the return sequences that we have already seen play out in the historical record. There's no comparison.

That said, the test you are describing certainly has value. We should be doing tests like this on a daily basis at hundreds of different boards and blogs. We all would be enjoying an amazing learning experience by doing so. Can you tell me why we are not already doing this?

I am all for it. There are two possibilities. VII could be shot down, which is a good thing if it deserves to be shot down. Or VII could be confirmed as the superior indexing approach, which is a good thing if it deserves to be confirmed as the superior indexing approach.

Are you willing to go to the board at Bogleheads.org this morning and put up a post saying that you want to see these discussions begin? If you and a number of others do this, I am confident that pressure can be brought to bear on the owners of that forum to reopen it to honest posting on the effect of valuations on long-term returns. Thousands of your fellow community members would be grateful if you could find it in your heart to take the time out of your day to do this little thing.

I am joking around a tiny bit. But the reality is that ultimately this is how we are going to discover the truth here. The questions we are discussing are questions of numerical calculation. Either the Old School SWR studies got the numbers wildly wrong (as has been confirmed by a good number of big-name experts) or they did not. If those studies got the numbers wildly wrong, the Passive model is a terribly flawed model. Given that most of us are investing our retirement money pursuant to the dictates of this model, we all very much need to find out one way or the other.

John Bogle participates in the annual meetings of the Bogleheads and I have expressed a willingness to appear at the next meeting and pose my questions to Bogle and see whether he is able to offer reasonable responses (Mel Lindauer, the author of "The Bogleheads Guide to Investing," banned me from an earlier meeting when he found out that I planned to attend on grounds that Bogle needs to be "protected" from my line of questioning). If you and a few others put the pressure on the owners of the Bogleheads forum, I am game.

I think we would be helping millions of our fellow investors and in an ultimate sense we would be helping Bogle and all the other Passive Investing advocates too (I am confident that Bogle did not develop the Passive model with the aim of causing the greatest loss of middle-class wealth in the history of the United States -- the things that he got wrong were mistakes that have been compounded by the reluctance of the Passive Investing advocates to acknowledge their errors in the 28 years since the academic research revealed them to us).

I am up for taking this to the next step, Schroeder. I believe that by telling middle-class investors the realities of stock investing as we know them to be today we could regain their confidence in the markets and thereby pull ourselves out of this economic crisis. If you put that post to the Bogleheads.org forum this morning, you can count on me being the first to run to the front of the room and applaud you, my old friend.

Rob

Rob Bennett said...

I took a quick look at your blog, Ren. I love the visual of the New York City skyline that is at the top of the home page today.

I live in a small town today. But I visit the city (D.C.) from time to time and I always feel pangs of regret that I don't live in a city today. When my boy first saw a skyscraper (this was in Philadelphia, small stuff compared to New York), he was awed. I planted the idea in his head that someday he might want to move away from mommy and daddy and take up residence in a big city and take in that experience for a bit.

Enjoy your trip in October. I agree with you about the energy level. I think that's really the thing I like about cities. I just like taking in all that energy. I just like looking at the people. That's simple fun.

Rob

Anonymous said...

Forty posts, thousands of lines, and we finally see Rob's grand plan, and it is simple:


"Are you willing to go to the board at Bogleheads.org this morning and put up a post saying that you want to see these discussions begin?"

With Rob, it has always boiled down to getting more attention, which is why he acts badly when no one responds to his posts -- just to get a reply, even a negative one. He would love to enlist others to talk about him in the places he has been removed from, whether that dialog is good or bad -- it does not matter to Rob, the object is the attention.

Don't be the instrument that expands Rob's mania.

Rob Bennett said...

He would love to enlist others to talk about him in the places he has been removed from, whether that dialog is good or bad -- it does not matter to Rob, the object is the attention.

It is certainly fair to say that I have devoted years of my life energy to building the various Retire Early and Indexing boards at which the Valuation-Informed Indexing strategy was developed. I have played the lead role in getting the discussions started and in writing up our findings and in developing calculators and in recording podcasts. But none of these ideas were developed by one guy sitting in a room thinking grand thoughts. The entire Rational Investing model is the product of a community effort. We have had hundreds and hundreds of people offer constructive contributions over the first seven years of our discussions. We have had thousands express a desire that honest posting on investing questions be permitted at our boards.

I think of many of the people who took time out of their days to share the observations that helped us to build this new and exciting model for understanding how stock investing works as friends of mine (I feel this way even about a number of the Goons, to be sure). I naturally object when they are attacked or smeared or when their right to post their sincere views is violated.

I look forward to the day when honest posting on all investing topics will be permitted just about everywhere on the internet. We allow honest posting on many other topics and I am not able to see any reason why discussion of the flaws of the Passive Investing model should be treated differently. We have done wonderful work together. I am proud of every community member who contributed in a positive way. I am grateful for the hundreds of people who have expressed excitement over the work we have done and I look forward to sharing our work with millions more middle-class investors (and many of the big-name "experts" too!) in days to come.

It's when we get past the ugly stuff that the real firewords (the good kind!) begin!

Rob

Schroeder said...

Rob Bennett said... "What I have done is to put the calculators before tens of thousands of Passive Investing advocates and see if any of them can find any flaws in them."

I suspect these were not Passive Investing advocates you were speaking to, Rob. If they were Passive Investing advocates, they would have given you the following critique.

It is very easy to test for flaws in your Scenario Surfer. Standard practice is to run "out of sample" tests using actual historical data. And we can do that very easily using historical data readily available on the various websites.

For example, I obtained S&P 500 (LCB) and Total Bond Market (TBM) at these two links:

http://www.assetplay.net/article/index/domestic-index-fund-returns.html

http://www.assetplay.net/article/index/bond-index-returns.html

Then for 10-year periods starting with 1993-2002, I calculated 10-year annualized returns for both 60% stocks, 40% bonds (aka. Passive) and 25% stocks, 75% stocks (aka. in response to P/E10 above 20). Here are the results:

Year . . . . 60/40 VII
1993-2002 8.92% 8.11%
1994-2003 9.77% 8.15%
1995-2004 10.67% 8.95%
1996-2005 8.23% 7.04%
1997-2006 7.85% 6.91%
1998-2007 6.19% 6.06%
1999-2008 1.90% 4.13%

Only in the last period did VII beat 60/40. This is no where near the result Rob obtained from his Scenario Surfer where he claims VII beats 60/40 nine times out of ten.

Now can you see why I am skeptical of Rob's calculator?

Rob Bennett said...

Only in the last period did VII beat 60/40.

There are several links above that point people to places where they can provide good information. There is a wealth of material at my site and at the www.Early-Retirement-Planning-Insights.com site. Shiller's book Irrational Exuberance is available in bookstores and libraries everywhere and has been widely reviewed. There have been thousands of threads examining these ideas at the Retire Early and Indexing discussion-board communities. There have also been a good number of blogs that have explored these ideas in recent months; a search for "Valuation-Informed Indexing" or "Rob Bennett" or "Rational Investing" would probably turn up some good stuff.

The truth is out there!

Rob

Anonymous said...

Schroeder brings up an important point about Mr. Bennett's calculators which I tried to make in a previous comment that was deleted. This is Shadox's blog and I respect his right to delete comments as he deems fit. However, I think it germane to the discussion to point out as Schroeder has that the calculators Rob touts to sell his investing strategy are flawed.

Rob has been advised more than once that his calculators have problems. A Canadian CFP, Norbert Schenkler, has this to say about the output of Rob's "Scenario Surfer" in a post at the Financial Webring Forum in a thread in which the participants attempted to have a reasoned discussion with Mr. Bennett about his Lucky 7 investment strategy;

"A warning.

The Scenario Surfer's results are based on completely fabricated return sequences concocted from thin air by hocus based on what he believes should happen given valuations, not what does happen. I know this because the primary developer (the "John" hocus refers to) has admitted that it's based on a spreadsheet which he made available to the public.

Unfortunately, insufficient cleanup prior to publication revealed something very telling. When I examined the contents of that spreadsheet, I found, after much misdirection within the sheet itself, the return time series along with a comment saying they were based on Rob's imagination.

Needless to say, that calls into considerable question the reliability of any output the 'Scenario Surfer' might produce."

Rob is quick to trot out his calculators as proof of the superiority of his investment technique. But despite all the time and energy he has devoted to the promotion of his strategy, what you won't find him providing is a simple backtest of that strategy. Go to Bill Schultheis' website and you'll find clear and concise information about the composition of his Coffeehouse Portfolio and its annual returns. Same for creators of other Lazy Portfolios. Go to Rob's website and you'll find a sea of words but no clear and concise explanation of how an investor could utilize Lucky 7 or a simple backtest of the returns it might have produced.

In the FWF thread I mentioned ealier;

http://www.financialwebring.org/forum/viewtopic.php?t=106998&postdays=0&postorder=asc&start=0

Rob's Lucky 7 appeared to give very favorable results. However, it doesn't appear to be a strategy easily followed by the average investor. The favorable returns for Lucky 7 vs a buy-and-hold-rebalance approach are based on the investor being prepared to be either 100% or 0% invested in equites depending upon PE10. I feel that would be a tough emotional row to hoe for the typical investor. In addition, that backtest is a simple two compartment model; S&P 500 and fixed income. Personally, I find it much more comforting to be invested across several equity categories.

The woods are full of doomsayers after a market downturn. Someday they may be right, the sky really is falling. Until then, I think it prudent to follow and investment strategy similiar to the Coffeehouse Portfolio that stresses diversification. I have no quarrel with Rob should he choose to use Lucky 7 for his personal portfolio. But I think he's wrong to promote it as the best, indeed the only way for a person to invest rationally. And I do have a problem with him using calculators that contain fabricated return sequences to promote his strategy.

Respectfully,

Anon

Shadox said...

Yes. I am monitoring this comment thread and unfortunately I have to delete comments that I think are getting too aggressive or impolite, especially when they come from anonymous contributors.

I have no intention of censoring the discussion and I have no problem with heated and frank discussion, but let's keep it polite and not personal.

To be honest, I fail to see what the big fight is about. What's wrong with someone saying he believes indexing is an incomplete theory? You disagree, Do your own thing.

There are so many people giving investment advice. There are people peddling penny stocks and active (and extremely expensive) mutual funds. Do you attack everyone who gives investment tips you disagree with, with such vengeance?

Anonymous said...

"Do you attack everyone who gives investment tips you disagree with, with such vengeance?"

First, my apologies for remaining anonymous. I didn't want to have to open a Google account in order to post a comment.

You're new to Hocomania. Rob has posted for 7 years across the internet under the pseudonym, Hocus. A little research will show that he's been banned from at least 15 personal finance boards or blogs; Motley Fool, Bogleheads, Vanguard Diehards, Early Retirement Forums, Raddr Pages to name a few. I'm sure given sufficient time you'll come to understand why many of us who have witnessed Rob's activites at personal finance boards and blogs over the years find him so annoying. But investigate it for yourself. Inquire about Hocus or Rob Bennett at any of the above boards and see what reaction you get. Or just wait. As time goes by you too will learn why Mr. Bennett ultimately wears out his welcome at any venue at which he posts. Good luck....

So in answer to your question, no, only persistent internet trolls like Mr. Bennett.

Rob Bennett said...

A Canadian CFP, Norbert Schenkler, has this to say about the output of Rob's "Scenario Surfer" in a post at the Financial Webring Forum

Schenkler did say this. But Schenkler is a long-time and regular contributor to the Goon Central board:

Goon Central

I think it would be fair to say that Schenkler would say just about anything to block people from learning about what the academic research has said about Passive Investing for 28 years now. Indeed, Schenkler is part-owner of the Financial WebRing Forum and the Financial WebRing Forum has banned honest posting on these questions.

The other side of the story is that Schenkler posted a graphic to the Forum that (in his words) shows that: "The evidence is pretty incontrovertible. Valuation-Informed Indexing...is everywhere superior to buy-and-hold overt ten-year periods."

Graphic Showin VII Superior to Buy-and-Hold

We have the same fellow both banning honest posting and preparing a graphic showing that VII has always been the superior strategy. Could anything be more strange?

My guess as to what was going on there is that Norbert was trying to work out some deal where I would be permitted back onto the boards in exchange for an agreement not to post honestly on safe withdrawal rates. This is only a guess; I obviously cannot see into Norbert's head. My sense is that the Goons have come to understand that the case against Passive has become so strong that it simply can no longer be defended, but they don't want anyone around pointing out the abusive posting that they employed to block honest posting for seven years. So it is now not the mistake about Passive Investing that they are covering up. They are now covering up the cover-up! Yowsa!

Rob

Rob Bennett said...

But despite all the time and energy he has devoted to the promotion of his strategy, what you won't find him providing is a simple backtest of that strategy.

This is because backtests should not be trusted. A "backtest" is when you arrange the data the way you need to arrange it to make a particular outcome show up, knowing at the time you are deciding on the rules of the backtest what the results are going to be if you arrange things in a certain way. Backtests can provide insights. They do have value. But all investors need to be wary of what they see in backtests.

The calculators are not backtests. They use a regression analysis of the historical data as their engine. So they report what will happen with stocks if they perform in the future somewhat as they always have in the past. But those using the calculators cannot arrange the data in the way they want it to fall to achieve the result they want to achieve. With the calculators, you never know in advance what sort of return sequence is going to come up, just as the investor in real life does not know this.

Schroeder was able to generate one returns sequence in which Buy-and-Hold "worked." But look at how many assumptions he had to make to generate that finding. If in real life just one of those assumptions goes the other way, the result would be the opposite of what his backtest showed.

What the investor needs to know is what are the odds of a particular type of return sequence showing up in real life. This is what the calculators show. They show that VII wins in nine out of ten of the possible sequences and Buy-and-Hold wins in one out of ten.

The two results are entirely consistent. It's just a question of whether you want to pretend to yourself that a non-representative backtest possesses some great significance. I say "no." I don't say that Buy-and-Hold can never end up on top. I say that this is a rare outcome. I say that the middle-class investor should not be putting his retirement money down on such long-odds bets.

Buy-and-Hold is a high-risk strategy. It is reckless. This is what people need to learn. The reason why it is so risky is that it calls for investors to stick with stock allocations that made sense when prices were reasonable after prices go to insanely dangerous levels. it might be a good thing for The Stock-Selling Industry for middle-class investors to do that. It is not at all likely that it is ever going to turn out to be a good thing for the middle-class investors for them to do that.

Rob

Rob Bennett said...

Go to Bill Schultheis' website and you'll find clear and concise information about the composition of his Coffeehouse Portfolio and its annual returns.

I had a conversation with Bill about Valuation-Informed Indexing in a thread at the Get Rich Slowly blog. I asked if he would like to engage in a more in-depth e-mail discussion and he was enthusiastic. He took a look at my site and then sent me an e-mail saying: "Holy Toledo! This is amazing stuff."

In my response e-mail, I included a link to an article at my site that contains snippets of 101 community members expressing a desire that honest posting be permitted at the various Indexing and Retire Early boards. There were a number of comments in that article in which people pointed to the role played by Mel Lindauer, the author of "The Bogleheads Guide to Investing" and the leader of the Campaign of Terror against the Vanguard Diehards board at Morningstar.com. Bill posts at the Bogleheads.org board, a board that was formed by Mel and some friends of his when Morningstar was not willing to grant their demands that honest posting on valuations be banned at the Vanguard Diehards board (yes, the entire Bogleheads.org community was formed to escape my questioning about the errors in the Old School retirement studies and related matters). After Bill saw the thread in which Mel's views on honest posting on valuations were made known to him, he stopped returning my e-mails.

Does that not tell a tale? Please don't think that this is something that has only happened one time. Similar things have happened more than a dozen times! We have a big problem in InvestoWorld, Houston!

The story here is that there was once a day when academic researchers believed in something called the "Efficient Market Theory." Passive Investing comes from that. But the Efficient Market Theory was discredited by research done by Robert Shiller in 1981 and Shiller's finding (that valuations affect long-term returns) has been confirmed many times since. The Stock-Selling Industry had already directed many millions of dollars to the promotion of Passive Investing at the time it was discredited by the research. And Passive had become extremely popular with the industry's customers. So some sort of decision was made not to tell the customers that the model they were using to plan their retirements doesn't work. Here we are a number of years later suffering through the economic crisis that we made inevitable on the day that "decision" (it is not known to what extent it was a conscious decision, it appears to me that cognitive dissonance played a big role) was made.

If we want to survive the economic crisis, we need start shooting with middle-class investors. If we do that, we make all the "experts" who have promoted Passive Investing for the past 30 years look bad.

I have nothing against the "experts." i certainly do not believe that anyone who is promoting Passive Investing in the year 2009 can reasonably be referred to as an "expert," but I find these people smart people and good people and I believe that they want to help investors. Today, their hands are tied and I want to help them.

We untie their hands by refusing to permit them to continue to spout the gibberish marketing slogans we have been hearing for 30 years. We need to ask ourselves what it means to believe that "timing never works." For that to be true, it would also have to be true that prices have zero effect on long-term returns. Is it possible for any sane person to really believe such a thing?

It is not possible. Rob Arnott asked 200 academics how many believed in the Efficient Market Theory today. Not one hand went up. Then he asked how many of them used the EMT in their "research." Nearly every hand in the room went up. People are being paid to produce "research" that they know cannot possibly generate meaningful results. We are living in fantasyland.

Rob

Rob Bennett said...

The woods are full of doomsayers after a market downturn.

I am the farthest thing that one could possibly be from a "doomsayer."

First of all, I learned that the Old School retirement studies got the numbers wrong back in the mid-1990s (from reading John Bogle's book, in you can believe the irony!). And I went public with what I knew in a post to the Motley Fool boards on May 13, 2002. I am not someone who started saying that valuations affect long-term returns only after the crash.

More importantly, there is nothing whatsoever "doomy" about the idea of looking to the historical data to learn how stock investing works in the real world. There is a widget at the right side of the home page of my blog entitled "Favorite RobCasts." It gives titles (with links) to some of the most important podcasts that I have recorded describing what we have learned about investing as the result of our first seven years of discussions. Please consider the suggestions re the important stuff we have learned contained just in the titles:

* I Know More About Investing Than John Bogle (And You Can Too!)

* Market Timing -- What Works and What Doesn't

* When Stock Losses Are True Losses and When They Are Not

* Risk Tolerance in the Real World

* Stocks Are Less Risky Than Bonds

* Cash Is a Strategic Asset Class

* Only Valuations Matter (Everything Else Is Priced In)

Does any of this sound even the tiniest bit "doomy."
There ARE people spreading doom talk today but it sure ain't Rob Bennett. What I am doing is precisely the opposite. When we tell middle-class investors the realities of stock investing, we provide them the information they need to be able to invest confidently again. This is what we must do if we are to pull out of this economic crisis.

One of my guest blogs here showed that the stock crash was not even a bad thing! I cannot imagine a less doomy message than that! The reality is that prices were so high before the crash that stocks were providing long-term returns lower than money markets. Now that is no longer so. Now we are able to use stocks again (the best asset class for those seeking financial freedom) to plan our retirements. I have a hard time seeing how any reasonable person could argue that showing with the historical data that the crash was a good thing is a gloom-and-doom message. It is a message of hope.

The problem we face today is that those who have been promoting Passive Investing for years now dare not let middle-class investors know what the historical data says. If they do, the obvious question is going to be -- Why did you tell me not to lower my stock allocation back when I could have done something to protect my retirement assets?

The "experts" today are not trying to help us learn how to invest effectively. They are trying to defend Passive Investing, to block scrutiny of it. They are compounding the error they made 28 years ago and driving our economy ever closer to a cliff that could lead us to a worse economic crisis than the one we experienced in the 1930s (guess what investing strategy was all the rage in the late 1920s -- Passive Investing!).

The doomy thing is to accept that we are finished, to give up and die. The hopeful thing is to take a sad song and make it better.

Rob

Rob Bennett said...

I think he's wrong to promote it as the best

I think it would be wrong for me not to say that what I believe is best is best. That would obviously be dishonest.

Do you deny that the investment strategies that you think are best are best in your mind, Anon? If you do not post dishonestly on this question, why do you insist that others do so?

This is the entire deal. If we can gain the ability to post honestly, all of us can learn together. For so long as honest posting is prohibited, all investing discussions lack integrity. Integrity matters.

I think Passive Investing can never work in the real world. I think that Valuation-Informed Indexing is superior to Passive Indexing. I think the Old School safe withdrawal rate studies caused millions of busted retirements by getting the numbers so wildly wrong. I offer no apologies for my long record of posting honestly on these matters.

Rob

Rob Bennett said...

To be honest, I fail to see what the big fight is about.

John Greaney owns the www.RetireEarlyHomePage.com site. He presents his safe withdrawal rate study there. The study uses the Old School SWR methodology. I say that the Old School methodology is analytically invalid because it does not include an adjustment for the valuations level that applies on the day the retirement begins. Hundreds of community members have expressed a great desire to learn more. John does not like that idea. John has friends who are willing to engage in viciously abusive posting to "help him out." The longer this goes on, the worse John and all those who have posted in "defense" of him look if honest posting on valuations is permitted anywhere on the internet ever again.

That's it.

Rob

Rob Bennett said...

As time goes by you too will learn why Mr. Bennett ultimately wears out his welcome at any venue at which he posts.

Here is a link to an article at my site that contains snippets of posts that were put to the Motley Fool board in the early days of the discussions, before the ban on honest posting was put in place:

Community Comments Showing Excitement Over The Great Safe Withdrawal Rate Debate

Here's a link to an article my site containing snippets of 101 community members expressing a desire that honest posting be permitted at the Indexing and Retire Early discussion-board communities:

Community Members Oppose The Ban on Honest Posting

Rob

Rob Bennett said...

What's wrong with someone saying he believes indexing is an incomplete theory?

I don't mean to be picky but on reading this over again I noticed something that might cause confusion and I wanted to make it clear that I love indexing. Bogle's development of the indexing concept was the first big step toward development of the Rational Investing model. None of the strategies that I endorse would be possible without indexing (we cannot effectively predict the long-term returns of individual stocks). Valuation-Informed Indexing is obviously an indexing strategy and I learned about the value of indexing from John Bogle.

The thing that I oppose is Passive Investing. If you are open to making the necessary changes in your allocation, indexing is wonderful. Passive Indexing is a huge mistake. Passive Indexing is sooner or later almost certainly going to wipe you out.

The problem with Passive Indexing is that sooner or later you are going to be going with a stock allocation that is wildly unsuitable for someone with your risk tolerance. Valuation-Informed Indexers do not have this problem. They make the changes in their stock allocations that are needed to keep their risk level roughly constant.

It is the Passive part of Passive Indexing that causes all the trouble. There is nothing wrong with indexing at all. Indexing allows you to achieve a great amount of diversification at low cost. What's not to like?

Rob

Anonymous said...
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Rob Bennett said...
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Anonymous said...

Rob says, "I think Passive Investing can never work in the real world."

Oh? Then you think the returns for the Coffeehouse Portfolio since 1991 are imaginary? And the returns for Vanguard's Wellington Fund since its inception on July 1, 1929 are imaginary as well?

"I think that Valuation-Informed Indexing is superior to Passive Indexing."

Fair enough. But why not show the world backtested results of Lucky 7 vs. a passive portfolio such as the Coffeehouse Portfolio? If the evidence is overwhelming why your reluctance to show backtested results? Why is it you prefer to use a calculator whose output depends upon suspect internal data?

"I think the Old School safe withdrawal rate studies caused millions of busted retirements by getting the numbers so wildly wrong."

The safe withdrawal studies you attempt to rename "Old School" are retrospective studies which looked at what withdrawal rate would have resulted in a portfolio's survival (terminal value at least $1) over a given period of time for all years in the past for which data is available. You say they "got the number wrong." Would you please point to the arithmetical errors you claim to have discovered in those studies?

I offer no apologies for my long record of posting honestly on these matters.

Then how about an apology for the inference that others are posting dishonestly and must therefore be "goons" when they don't agree with your opinions?

Rob Bennett said...

Then how about an apology for the inference that others are posting dishonestly and must therefore be "goons" when they don't agree with your opinions?

I offer no apologies, Anonymous.

You say that there needs to be an "arithmetical error" in the Old School retirement studies or else there is no need to correct them. I do not agree. The studies claim to report the safe withdrawal rate. They get the numbers wildly wrong. They don't get the numbers wrong because there are any arithmetical errors. They get the numbers wrong because they entirely ignore the most important factor bearing on the question of whether a retirement is safe or not (the valuation level that applies on the day the retirement begins).

I have spoken to many thousands of middle-class investors over the past seven years. I think it would be fair to say that it is a very tiny percentage who have any idea of the extent of the gamesmanship being employed by those who put forward investing advice that purports to be data-based. There is one number you get if you do the study in an analytically valid way. There is another you get from leaving out the most important factor. The Stock-Selling Industry spends millions promoting the studies that leave out the most important factor and then when the error is pointed out, the response is "there is no arithmetical error, so there is no need to fix anything." I think it i fair to say that the millions of retirees who are going to suffer busted retirements are not going to find the joke to be terribly funny when they realize the trickery that has been played on them.

The tobacco companies make money by selling us cigarettes. Do you think it would be appropriate if they spent millions promoting smoking as way to prolong life and then, when called on the nonsense, explained that all they had to do in their "studies" to make them show that was to leave out consideration of all the deaths caused by smoking and that since these things were deliberately left out, there is no need to fix the studies? I would not. To play that sort of games when people's lives (or people's retirements) are at stake is a sick and cruel joke.

When a middle-class investor looks for a study to help him plan his retirement, he should be able to count on the person doing the study having good intent. If the person doing the study learned seven years ago that the numbers in the study are wildly off the mark (not because of an arithmetical error but because the most important factor bearing on the question examined in the study was entirely ignored), I think it is fair to say that that person lacks good intent.

I believe that we all need to stick up for each other a bit. A good number of friends of mine have suffered horrible financial losses because of this kind of trickery (which is common among investing "experts"). I am not part of The Stock-Selling Industry. I have had a lot of people thank me for pointing out this trickery before it did them harm. I care about those people and I am going to continue to do what I can to warn them about the dangerous stuff that is out there. I would like to see lots of other people get involved in the effort. I see this as important work.

The question of what the historical data says about what withdrawal rate is safe for a retiree is not a matter of opinion. The safe withdrawal rate is the product of a mathematical calculation. I don't think it is asking too much of the "experts" to insist that they consider all the factors bearing on the result when they examine this question in their "studies."

Real live people suffer real live busted retirements as a result of this stuff. Any apologies should be coming from the ones who got the numbers wrong in the "studies," not from the ones who tried to help by pointing them out before they did more harm.

Rob

Anonymous said...

Ok, I'll say it; UNCLE! I have no interest in having any further conversation with a passive-aggressive internet troll. This Shadox is but a small sample of why Mr. Bennett has found himself banned from so many other sites. There's reason Scott Burns chided Rob about the "catastrophically unproductive" behavior he uses to champion his beliefs. Good luck with Mr. Bennett. In due time he will turn on you just as he has on all those who also once provided him a platform.

Rob Bennett said...

There's reason Scott Burns chided Rob about the "catastrophically unproductive" behavior he uses to champion his beliefs.

Scott did indeed use that phrase in connection with my efforts to inform people of the realities of safe withdrawal rates. Scott said that the reason why the general media has failed for years to let us know about the errors in the Old School studies is that:"it is information most people don't want to hear." I can certainly offer personal testimony re that one!

Still, what Scott's words tell is that the primary motive of many "experts" is marketing, not giving effective investing advice. They are telling us what we want to hear when prices are high (that it is possible that they will stay high or go even higher) rather than what we need to hear (that high prices always signal a price crash since the market cannot continue to function unless prices at some point line up with the economic realities).

I have had many, many people try to pressure me into silence on what the historical data says. My view is that if all those who understood the realities spoke up, we never could have gotten to those insane price levels in the first place. It is because those who know the story censor themselves that those who are engaged in marketing talk are able to have so much success persuading people to follow strategies that are unlikely to work out in the long run.

We need to have all points of view represented at all times. Otherwise, we all are left worse off. I believe that we all have not only a right but a responsibility to express our sincere views on investing. Efforts to silence those reporting on what the historical data says should be interpreted as a sign that stocks are dangerously overpriced, in my view.

Rob

Anonymous said...

Just curious, Rob. Precisely what sort of feedback regarding your method and style of communicating your message would convince you to consider altering them?

Rob Bennett said...

Precisely what sort of feedback regarding your method and style of communicating your message would convince you to consider altering them?

This is a good question.

I understand that many people are upset by the things I say about stock investing. I get that loud and clear. People say all the time that "it's not the message." But I know that it is the message. There was a day when I posted only on saving and never investing and I was the most popular poster at the entire Motley Fool site. I was the same guy! I posted long then too!

I am all for the idea of being compromising and accommodating and avoiding friction and all this sort of thing. I also believe that discussions at boards and blogs need to possess integrity. If people with views on one side do not feel free to voice their true beliefs, integrity is lost. I view that as a very serious loss.

People with different viewpoints need to be able to post together and treat each other with respect and affection while still voicing their sincere beliefs. If I saw people from "the other side" doing that, I would bend over backwards to make things work from my end because that sort of behavior would be healing to the board and blog communities. Having one side agree to silence itself is not healing. Having one side silence itself is poison.

I've give an example of what I would consider a resolution that would not be ideal from my point of view but that I would view as at least reasonable and healing. I believe strongly that the Old School SWR studies are analytically invalid. My sense is that there are two or three who do not agree. My view is that the studies should be corrected. But a less dramatic change that at least would put things on the right side of the ethical divide would be if those who have Old School studies explained within them that there is a New School that believes that valuations must be taken into account and included links to materials in which advocates of the New School make their case.

There would be people who would read those studies and ignore the New School stuff because they do not believe in it. But there would also be some who would take a look at the links and who would end up being persuaded. That's the way it should be. People should be able to hear both points of view and make up their own minds.

We will never know how many community members believe in Rational ideas until we take away all penalties for expressing support for such ideas. My guess is that many are going to support Passive ideas even if we take this step. But if we take this step, we will win back our integrity and we will certainly have a greater number supporting Rational ideas. That's how change is achieved over time.

I believe strongly that any of us who hold back from saying what we truly believe solely because we fear what certain posters will do to us in the event that we do so are letting the entire community down when we give in to those pressures. I think it is cowardly and wrong behavior. So I make a serious effort not to lead anyone into thinking that I might be willing to go down that path.

I will put great efforts into getting along with any who sincerely want to get along with all their fellow community members. I feel that I have an obligation to give the back of my hand to those who tear apart the fabric of our community interactions by engaging in tactics that should be beneath all of us. I demand more of myself and I demand more of all my fellow community members because I believe that we all end up feeling better about ourselves when we demand more of ourselves.

Rob

Anonymous said...

Rob sayeth;

"I believe strongly that the Old School SWR studies are analytically invalid. My sense is that there are two or three who do not agree. My view is that the studies should be corrected. But a less dramatic change that at least would put things on the right side of the ethical divide would be if those who have Old School studies explained within them that there is a New School that believes that valuations must be taken into account and included links to materials in which advocates of the New School make their case."

The safe withdrawal rate studies which you continue to try to relabel as "Old School" included all valuation levels for the periods of time in question. Your "New School" approach attempts to use PE10 to forecast what returns for the S&P 500 will be for future periods of time. In other words, you are guessing as to what returns and hence the SWR rate will be in the future. Fair enough. But the burden falls upon you to prove that your "guess" is worthy enough to generate interest in your approach. You belive it is the obligation of those who have conducted retrospective studies to help you market your strongly held belief. I strongly believe it's your task to compete in the marketplace of ideas. Why is it you insist that others must do the heavy lifting for you?

Schroeder said...

Rob Bennett said... "Schroeder was able to generate one returns sequence in which Buy-and-Hold "worked." But look at how many assumptions he had to make to generate that finding."

This is a very strange comment. First, the assumptions I used were directly as Rob described VII here . . .

http://forums.moneyblognetwork.com/viewtopic.php?p=31109#31109

Second, if you are complaining that there is only one returns sequence, then we have a bigger issue and that concerns sample size. If the sample size is small, then a reliable regression analysis cannot be made. Thus, Rob's calculator is one of Garbage-In, Garbage Out.

Having stated that, during the previous 70 years, there were 25 years when an investor following VII would have reduced his stock allocation to 25% in response to P/E10 level rising above 20. Is 70 years of historical data a big enough sample size?

The years when a VII investor would have reduced his stock allocation to 25% in response to P/E10 level rising above 20 were the following:

1961-1969
1993-2008

I have already posted the results for 1993-2008 showing that 60% S&P 500 and 40% TBM beat VII (a 25% S&P 500 and 75% TBM portfolio) six out of those seven 10-year periods.

Here are the results for the nine-year period from 1961-1969. A 60% S&P 500 and 40% bonds portfolio returned 6.49% annualized. This is higher than a 25% S&P 500 and 75% bonds portfolio which returned 4.31% annualized.

I used 5-year Treauries for the bond side. Data was obtained from Gummy's website:

http://www.gummy-stuff.org/returns.htm

To repeat, there were only two returns sequences (1961-1969 and 1993-2008) during the previous 70 years where P/E10 rose above 20.

Schroeder said...

Rob Bennett said... "I don't say that Buy-and-Hold can never end up on top. I say that this is a rare outcome."

But it is not a rare outcome. It was on your suggestion that applying VII decision rules would come up on top to a non-modified Coffeehouse portfolio. To your surprise, we found this a false assumption.

And then I simulated a 60/40 balanced fund using S&P 500 and Total Bond Market. Again, applying your VII decision rules, 60/40 came on top six out seven times for the 1993-2008 period.

I'm sorry, Rob. But that's what the historical data says. Most people will more likely be persuaded by the results from actual data, not something made up on a homemade calculator. Sure, you might persuade some people that your homemade calculator represents the real world. But you haven't persuaded me.

Rob Bennett said...

But the burden falls upon you to prove that your "guess" is worthy enough to generate interest in your approach.

There is no guessing involved. The idea of a SWR study is to report what will work in the event that stocks perform in the future as they always have in the past. A New School study reports the number accurately. An Old School study assumes an imaginary universe in which valuations have zero effect on long-term returns. There is nothing "safe" about an assumption that stocks will perform in the future in ways entirely different from how they have always performed in the past.

I think it would be fair to say that there is no investing topic in the history of the internet that has generated even a fraction of the interest we have seen generated by the SWR debate. We have seen hundreds of thousands of posts at scores of boards and blogs during the first seven years of our discussions.

The entire purpose of the ban on honest posting was to block the many community members who expressed a desire to learn more. Here is a link to an article in which a number of community members express gratitude for what they were able to learn before the ban was put in place:

Community Comments on New School SWR Research

Rob

Schroeder said...

Rob Bennett said... The other side of the story is that Schenkler posted a graphic to the Forum that (in his words) shows that: "The evidence is pretty incontrovertible. Valuation-Informed Indexing...is everywhere superior to buy-and-hold overt ten-year periods."

Norbert did write those words. But that wasn't his point because Norbert did not stop there. He continued:

"In 1996, you could not make an argument that the historical data ever showed a period where B&H was better. Timing was sometimes no better but it was never worse. But then the late 1990s happened and it all went to hell. B&H turned out to be a huge winner in the late 1990s."

So is the evidence still "incontrovertible"? I don't think so.

We can all read Norbert's original words and see right away that Rob has mischaracterized Norbert's message by using only selected quotes. Frankly, I do not like that kind of trickery.

Rob Bennett said...

But then the late 1990s happened and it all went to hell. B&H turned out to be a huge winner in the late 1990s." So is the evidence still "incontrovertible"? I don't think so.

He wrote those words before the crash, Schroeder. The late 1990s is obviously no longer an exception to the rule that has applied throughout the entire historical record.

Rob

Anonymous said...

According to Rob;

"An Old School study assumes an imaginary universe in which valuations have zero effect on long-term returns."

On the contrary, the SWR studies which you mischaracterize as being "Old World" encompass all valuation levels in effect for the periods of time studied. You choose to use PE10 in the belief that it alone enables you to determine the "correct" valuation for the S&P500 and thus will accurately predict future returns and hence future safe withdrawal rates.

Your so-called "New School" method of predicting safe withdrawal rates is a faith-based system. You "believe" that PE10 will allow you to predict in advance what the returns for the S&P 500 will be. From that, you extrapolate that it therefore enables you to accurately predict what the SWR will be for some period in the future And perhaps at some future point in time you'll be able to brag that you predicted the correct number for the hypothetical safe withdrawal rate for some date out into the future. But as of today, what you are doing is making a guess. You could be right; you could be wrong. Time will tell.

In the meantime, the retrospective studies will continue to show what the SWR was for specific periods of time in the past. And apparently you will continue to fault them because they don't predict the future. I guess the world will just have to wait for confirmation that you have indeed created a magical crystal ball at your blog that predicts the future. That's very exciting, though it is a drag that we must wait so many years to confirm your guess. The bright side is it will give you ample opportunity to scurry about the web informing all of your great powers.

There is of course one other eensie-weensie thing to consider. All safe withdrawal rate studies are hypothetical studies. They make assumptions in order to make it practical to arrive at conclusions. All the researchers and Mr. Bennett use only the S&P500 as the sole equity position in their studies. All assume the hypothetical subject will continue makeing yearly inflation-adjusted withdrawals without regard to market conditions or the size of their remaining portfolio. And they all assume a specific period of time. So if you only invest in the S&P500, never blink in the face of bull or bear markets and know the date of your demise, then congratulations; you and the hypothetical subject are best buds! Otherwise, the SWR number is by necessity a rule-of-thumb and all were doing here is arguing for the pure entertainment value of it! At least most of us are, to one individual this is a religion and he takes a dim view of others who do not share his beliefs....

Anonymous said...

Rob said:

"I understand that many people are upset by the things I say about stock investing. I get that loud and clear. People say all the time that "it's not the message." But I know that it is the message."

Um, no. Speaking only for myself, I can say without reservation that my objection to you is 5% what you say, and 95% how you say it (and say it and say it and say it and say it and say it) without ever saying anything substantive.

Rob Bennett said...

the SWR studies which you mischaracterize as being "Old World" encompass all valuation levels in effect for the periods of time studied.

The Old School studies look at all years -- so they look at both high-valuation and low-valuation years. But they include no adjustment for the valuation level that applies at the time the retirement begins. If you were doing a study as to whether smoking improves one's health or not and you noticed that a high percentage of the people examined died early deaths from cancer but you failed to let this fact affect your conclusion that smoking improves one's heath, you would have issued an analytically invalid study. The important thing is not to look at high valuation years, it is to let what happened in these years affect the result of the study. The Old School SWR studies report the SWR as being the same for retirements beginning at high and low valuations.

You choose to use PE10 in the belief that it alone enables you to determine the "correct" valuation for the S&P500 and thus will accurately predict future returns and hence future safe withdrawal rates.

No. We looked at a number of good valuation metrics. P/E10 showed itself to be the best. But it doesn't follow that it is the only "correct" valuation metric. There are others that could have been used. The Old School studies did not use any valuation metric whatsoever.

Your so-called "New School" method of predicting safe withdrawal rates is a faith-based system.

The New School studies are rooted in an assumption that stocks will perform in the future somewhat as they always have in the past. I acknowledge that it is possible that they will not. But that is the most neutral position to take. One community member did a standard deviation analysis to determine the odds that for the first time in history valuations will have zero effect (the assumption employed in the Old School studies). The odds are 740 to 1 against this happening. Taking a 740 to 1 bet with your retirement money is not "safe." It is risky.

As of today, what you are doing is making a guess. You could be right; you could be wrong.

I am reporting what the data says will work in the event that stocks perform in the future somewhat as they always have in the past. It is always at least theoretically possible that stocks will perform in ways in which they have never performed before. I will not be "wrong" if that happens because I have told people that the calculator is based on how stock have always performed in the past. The Old School studies are already wrong because they are based on an assumption that stocks will perform in a way they never have and to assume such a thing is not "safe." The words "safe" and "risky" are not synonyms. They are antonyms.

all we are doing here is arguing for the pure entertainment value of it!

If you were posting for entertainment value, you would not feel so strongly that reports of what the historical data says about SWRs needs to be prohibited. You are trying to defend something that cannot be defended, an investing model that says that there is no need to change one's stock allocation in response to big price changes. It is the popularity of the Passive Investing model that is at the root of all the friction we have seen. Once that model is buried ten feet in the ground, all sorts of doors open to us.

To argue about things that are as obvious as what we are talking about here is irrational. Passive Investing caused this irrationality. Humans deserve a better investing model than one that causes them to engage in such nonsense.

Rob

Rob Bennett said...

I can say without reservation that my objection to you is 5% what you say, and 95% how you say it (and say it and say it and say it and say it and say it) without ever saying anything substantive.

I don't believe you, Anonymous. If you didn't have an intensely emotional reaction to hearing what the historical data says about what works in investing, you would not feel so strongly that honest posting on investing questions needs to be banned on the internet.

It may be that you personally have told yourself that you do not object to the message and that you have persuaded yourself that this is so. That's called cognitive dissonance. But your behavior shows that hearing reports of what the historical data says causes you great emotional pain.

Hearing the realities of stock investing should not cause anyone great emotional pain. Any model that causes people to experience the pain we have seen evidence itself in a number of comments to this thread is an investing model that needs to be replaced with something better suited for humans. Humans strive for rationality in many areas of life endeavor. There is no good reason why we should not be doing this in the investing realm as well.

Rob

Schroeder said...

Rob Bennett said... "You are trying to defend something that cannot be defended, an investing model that says that there is no need to change one's stock allocation in response to big price changes."

This is dogmatic, one-way thinking. Rob, why do you so strongly object when someone defends the static stock allocation model?

The static stock allocation model is followed by many successful balanced mutual funds like Vanguard's Wellington and Wellseley.

The Wellington fund has a good long-term track record. Since inception, it has returned 7.99% annualized.

https://personal.vanguard.com/us/FundsSnapshot?FundId=0021&FundIntExt=INT

Rob Bennett said...

why do you so strongly object when someone defends the static stock allocation model?

I don't object even a tiny bit to this, Schroeder. There are millions of people today who believe strongly in the Passive Investing model. I believe that these people not only have a right to post their honest beliefs but a responsibility to do so. We need people doing that to keep those of us arguing for the Rational model on our toes.

What I object to is the idea that Rob Bennett and others who reject the Passive model should keep our mouths shut about our objections. It is dishonest for us to do so. We should be putting objections forward just as strongly as we feel them (while also noting the points re which we have less confidence in our views). We should always be polite. We should always be warm. We should always be friendly. And we should always present our case as strongly as we are able to present it.

When both sides present their case in a polite but strong way, the community enjoys a wonderful learning experience. Some end up on one side, some on the other, some in the middle. That's just the way humans are. That's how thinking evolves over time.

When that process is poisoned by intense pressures to conform to one particular point of view or silence yourself, the learning process breaks down. When there are many posters expressing a strong belief in Passive and only a small number expressing a tentative belief in Rational, many community members conclude that the case for Passive must be stronger. Not because it really is stronger. Because those who are able to make a strong case for Rational silenced themselves.

It is cowardly for a community member not to post his sincere views on these matters. That is my take. And those who give in to the temptation to yield to social pressures and take the cowardly way out let down the entire community. They undermine the integrity of the discussions by failing to work up the gumption to stand up for their right to post their sincere views.

I don't want to be guilty of that. My view is "I post honestly or I post not." When I post at a community, my goal is to help that community grow. Growth is sometimes hard. But it is always worthwhile. Given the intensity of the opposition to honest posting that we have seen re this matter, I believe that the potential for growth is huge. I am excited to be part of the effort to bring this wonderful growth project to life.

It's all about combining honesty with love. Honesty by itself is not enough to get the job done. Love by itself is not enough to get the job done. Combine the two, and you've got something that can move mountains.

Rob

Schroeder said...

Rob Bennett said...
"why do you so strongly object when someone defends the static stock allocation model?

I don't object even a tiny bit to this, Schroeder."

I don't believe you are being sincere, Rob. Your true feelings are expressed when you say: "You are trying to defend something that cannot be defended..."

Rob Bennett said...

Your true feelings are expressed when you say: "You are trying to defend something that cannot be defended..."

If we permit the debate, Passive Investing will go down. That certainly is my belief, Schroeder.

I presume that you think different.

But maybe not so much. On some level of consciousness, I think you agree with me that permitting the debate means Passive goes down.

If Passive cannot withstand scrutiny, isn't it better for all of us that it go down? That's my take.

Any investing model that can only be held up with the sorts of tactics that we have seen being used to hold up Passive is an investing model that deserves to go down.

The tactics can delay the end result. But they cannot change the end result. The fall of Passive wa inevitable when we learned that valuations affect long-term returns. That was in 1981.

We didn't have the will in 1981 to bring it down. That's changing. It cannot happen soon enough for me.

But the fact that I want to see Passive go down does not mean that I do not feel respect and affection for many of those who believe strongly in Passive. That's a very different question. I know lots of wonderful people who are big-time believers.

Rob

Schroeder said...

At first, I thought Shadox's description of the debate as "a religious war" was an exaggeration.

But then I read Rob's words: "If we permit the debate, Passive Investing will go down."

Apparently, Shadox's description was no exaggeration.

Rob, I believe in live and let live. This is a free country and everyone is free to invest as they choose. If people want to invest in VII, I have no problem.

But apparently, you do not want to reciprocate and allow others who choose to follow a static stock allocation to let them do so. After all, you believe: "Passive is an investing model that deserves to go down."

Rob Bennett said...

After all, you believe: "Passive is an investing model that deserves to go down."

I look forward to the day when Passive Investing is no more and we are all talking about different ways to invest rationally. There is no "idea" in the history of personal finance that has caused even a fraction of the human misery that has been caused by the promotion and subsequent widespread acceptance of the Passive Investing "idea."

Look at the friction we see on this very thread, Schroeder. Imagine that we were all pursuing the same goal -- to achieve financial freedom as early in life as possible. There would be none of that. All that ugliness is brought to the table because of the desire on the part of some to "defend" Passive Investing.

Not this boy.

This sort of thing is not my particular cup of tea, Schroeder. A lot of what we have seen in our discussions is sub-human. It has no place in discussions of how to invest effectively. And it all follows from that decision to give in to the Get Rich Quick impulse that drives the Passive model. Yes, I would very much like to see us all go beyond that and make our way to a better and richer and more loving place.

Please feel free to characterize me as the leading critic of Passive Investing alive on Planet Earth today. I've seen up close and personal what it does to otherwise smart and good people. I want no part of it.

The goal of investing advice should be to help people overcome the urge to invest passively, not to give in to it. Please put me down as "leaning against" the whole Passive Investing thing.

Rob

Anonymous said...

Mr. Bennett, the evidence clearly indicates that it is you and not your message that is unwelcome at personal finance discussion boards and blogs. One need only look at this comment thread to see that you have no interest in having a reasonable discussion about your ideas. Instead, you demand that they be accepted without question and that you be idolized for your brilliance in arriving at your beliefs. Any whose opinions differ from your own you label as "goons" and/or infer that they are posting dishonestly. It doesn't really matter that you have some eccentric opinions about valuations or investment strategies or safe withdrawal rates or interpretations of what the historical stock returns tables mean. What is important is your overwhelming desire to drown out any opinions other than your own in a sea of words and through repetitious posting.

All manners of discussion about valuations, market timing and investment strategies flourish daily at various online sites. Norbert Schenkler, whom your referenced earlier, has discussed at length a PE10-based strategy at Morningstar's Vanguard Diehards Board (You do remember that board don't you? They banned you due to your habit of hijacking every conversation and redirecting the discussion to center on you and your ideas.) That those discussions do not include you is not related to your "message" but rather is testament to your inability to behave yourself in the past during those discussions. Some 15+ venues have all reached the same conclusion; Rob Bennett's participation has a negative impact on personal finance discussions. Your message (whatever that might be) has not been banned anywhere. What has been banned is the participation in those discussions by you, Rob Bennett

If you so desire you can continue to blame others and avoid any introspection which would seem to flow naturally after finding yourself banned from so many forums. Mr. Bennett, after some 15+ banishments, might you possibly entertain the thought that you or your behavior at those boards and blogs might possibly be at fault? If indeed you have any message it would seem your time could be spent more productively by polishing and refining that message rather than spamming every personal finace discussion board and blog you come across on the internet. You might even stop to consider the wise counsel of the distinguished Scott Burns who admonished you for attemting to communicate your message in a manner which he deemed, "catastrophically unproductive."

Anonymous said...

Should anyone be interested, here is a comment from an email Scott Burns' directed to Mr. Bennett regarding his online behaviour and Mr. Bennett's response to Mr. Burns' admonishment that Rob proudly displays at his blog;

"You go about it in a manner that is catastrophically unproductive by adding missionary zeal that inflates your importance and demeans others. The whole idea that there is a new school of Safe Withdrawal Rates reeks of personal aggrandizement."


http://www.passionsaving.com/200711.html

Perhaps others can read that passage and conclude that Rob doesn't have serious emotional issues; I cannot.

Rob Bennett said...

Norbert Schenkler, whom your referenced earlier, has discussed at length a PE10-based strategy at Morningstar's Vanguard Diehards Board

I applaud Norbert for this. The more that people learn about the realities, the better for every single person involved.

The difference between Norbert Schenkler and Rob Bennett is that he points out that Valuation-Informed Indexing is always superior to Passive Indexing in one thread and then goes right back to advocating Passive Indexing in the next thread as if he had learned nothing from looking at the data. My view is that once we learn that the Old School retirement studies get all the numbers wrong, we should warn people not to use them to plan their retirements. The idea is not to say the right things on one or two occasions. The idea is to consistently point out the dangers of Passive Investing and to provide tools to help people avoid being drawn to it. It's about 50 times easier to stop someone from investing passively before they have ever done it than it is after they have spent 30 years developing an emotional commitment to this "strategy."

The quote from Scott Burns is accurate. I disagree with Scott. I think that letting people know the realities of stock investing is wonderfully productive work. Look at the number of businesses that have failed as the result of the promotion of Passive Investing. Look at the number of retirement plans that have gone bust. Look at the stress we have seen put on many marriages. Look at the pain suffered by those who have lost their jobs in this economic crisis. I believe that the troubles we are seeing in the health care debate too can be traced to our unwillingness to talk straight re stock investing. When people are under financial stress, it becomes harder to win their trust. I see the idea of reporting the realities as a win/win/win/win/win. I am a big Scott Burns fan. But I believe that he is very much on the wrong track re this one.

Rob

Schroeder said...

Rob Bennett said... "Look at the number of businesses that have failed as the result of the promotion of Passive Investing. Look at the number of retirement plans that have gone bust. Look at the stress we have seen put on many marriages. Look at the pain suffered by those who have lost their jobs in this economic crisis. I believe that the troubles we are seeing in the health care debate too can be traced to our unwillingness to talk straight re stock investing."

That is just one man's opinion. I don't share Rob's opinion.

Rob Bennett said...

That is just one man's opinion. I don't share Rob's opinion.

Fair enough, my old friend.

Rob

Anonymous said...

Rob opines;

"The difference between Norbert Schenkler and Rob Bennett is that he points out that Valuation-Informed Indexing is always superior to Passive Indexing in one thread and then goes right back to advocating Passive Indexing in the next thread as if he had learned nothing from looking at the data."

Not exactly. Norbert shows using one particular set of assumptions (S&P 500 only; no other diversification across asset classes, range of equities exposure 0-100%, band menthod of rebalancing) that in his particular backtest Rob's Lucky 7 strategy performed well against a static buy-and-hold strategy of 60% S&P 500/bonds.

A poster "Smartsometimes" used a different set of assumptions some time ago in this thread (http://socialize.morningstar.com/NewSocialize/forums/t/188720.aspx?PageIndex=10) at Morningstar's Vanguard Diehards Forum and found that Lucky 7 underperfomed a B&H portfolio.

This is as one would expect. Performance comparisons between Lucky 7 and buy-and-hold portfolios are highly dependent upon the assumptions used in the backtests. In these two particular backtests the equities portion consisted entirely of the S&P 500. In the original guest post, Schroeder attempts to compare Lucky 7 to a more diversified approach, the Coffeehouse Portfolio, and finds that the Coffeehouse Portfolio outperforms Lucky 7 for most time periods.

This is not to say that Lucky 7 is not an interesting strategy. It seems to have performed rather well over past periods of time as have passive investing strategies. But the data doesn't indicate as Mr. Bennett would have us believe that Lucky 7 always works and passive strategies never work. One can find many examples of bactested passive portfolios (e.g. those of Trev H over at www.bogleheads) that offer improve returns relative to investing in only the S&P 500. Nor has he convincingly shown that using his approach is easier to use than investing in a passive portfolio or that it innoculates an investor against panic in the event of a market downturn.

Again, it would seem Mr. Bennett could make more productive use of his time by backtesting and explaining just how a potential investor might actually use his valuation-informed strategy instead of just endlessly prattling about its superiority on internet discussion boards and blogs (at least on those that still grant him posting privileges). The strategy is indeed interesting, though it doesn't appear to be something that the average investor could easily use. At any rate, for Mr. Bennett's valuation-informed investment strategy to be considered a valid strategy doesn't mean that passive investing strategies "have never worked."

Rob Bennett said...

Performance comparisons between Lucky 7 and buy-and-hold portfolios are highly dependent upon the assumptions used in the backtests.

We certainly agree re this one, Anonymous.

Again, it would seem Mr. Bennett could make more productive use of his time by backtesting

No. More backtesting will not help for the very reason you cite in your words quoted above. Backtests do not prove anything. Backtests are valuable. I am certainly not opposed to backtesting. But even a thousand backtests do not alone prove things one way or the other. A lack of backtesting is not the problem here and more backtesting is not the solution.

People are going to interpret backtests in different ways. We all need to be okay with that. That's natural and healthy. It wouldn't be a good thing if everybody saw things the same way.

and explaining just how a potential investor might actually use his valuation-informed strategy

I have close to 100 articles on investing at my site and four unique calculators and over 100 podcasts and many blog entries. I have put forward tens of thousands of comments at discussion boards in response to questions put to me by my fellow community members. I have done my part to help people learn how to make use of the Valuation-Informed Indexing strategy and then some more on top of that and then some more on top of that again.

The problem has never been me not being willing to take time out of my day to help people understand how VII works. The problem from the first day has been the attitude we see evidence itself in your next comment:

instead of just endlessly prattling about its superiority on internet discussion boards and blogs (at least on those that still grant him posting privileges).

That sort of comment is rude and defensive and degrading both to those who give voice to it and to those who happen to be exposed to it. Comments of that nature (and we have seen many thousands many times worse than that one, to be sure) have driven hundreds of fine people out of our communities. Each time we lose people of intelligence and integrity, we all suffer a loss.

Instead of pushing those people out, we should all be trying to encourage more of them to sign up. We all need to work to see that the community standards are honored and that those not willing to participate in a learning experience find some other place at which to direct their posting energies. The Retire Early and Indexing boards and the Personal Finance Blogosphere don't need the business that bad.

I will continue to work hard to honor my obligations to my fellow community members to respond to whatever questions they happen to have about these exciting new ideas to the best of my ability. I will continue to give the back of my hand to the sorts of individuals who come to see our boards and blogs as their own private garbage cans into which they can spew whatever trash they please. It is human beings that meet in these communities, not pigs. Keep the garbage talk to yourself. We are better than that.

This is not to say that Lucky 7 is not an interesting strategy.

I am grateful to you for that part. There was a day when none of those on "the other side" would acknowledge that much.

Rob

Rob Bennett said...

The strategy is indeed interesting, though it doesn't appear to be something that the average investor could easily use.

It is the easiest thing imaginable to use. All middle-class investors have bought houses and cars and comic books and bananas. They have come to learn that price matters when buying any of those things. The idea that there is some sort of pixie dust that has been sprinkled on stocks that makes them different from anything else in the world that can be bought or sold is the idea that makes stocks so mysterious to those who are taken in by the claims of the Passive Investing Model.

I am trying to put an end to the complexity caused by promotion of the Passive Investing "idea." Stocks are by their nature an easy investment class to understand. I am trying to explain to people what they need to know to make that natural simplicity evident again after it has been obscured by the endless convoluted word games that must be used to prop up the "idea" that investing passively can be a good thing.

At any rate, for Mr. Bennett's valuation-informed investment strategy to be considered a valid strategy doesn't mean that passive investing strategies "have never worked."

You're wrong, anonymous. Either valuations affect long-term returns or they do not. If valuations do not affect long-term returns, the market is efficient and everything I say is wrong and Passive is the way to go. If valuations do effect long-term returns, then all investors should be considering valuations when setting their stock allocations. What possible reason could there be for not considering a factor that affects the result?

You need to examine why you are so wedded to the Passive concept. What is the nature of its hold on you? Why does it matter to you so much that Passive not be universally rejected? What do you feel that you personally have at stake in this?

I didn't put up my post of May 13, 2002, thinking that Passive Investing cannot work. I had no idea where this was going to lead. But when the evidence trail led me to a belief that Passive can never work, I just followed it. I don't have anything against those who advocate Passive. I view a good number of them as some of the best investing analysts out there. But it also doesn't bother me even a little bit to tell people that Passive can never work once I discover that that is in fact so. Why does it bother you so much that I share this belief with others?

That's the root question here. You don't want me to say "Passive can never work." Why? If you were a Yankees fan and I were a Red Sox fan and I said "The Yankees have no chance to win the pennant," I doubt that that would bother you. We could be friends even though we had different opinions on which baseball team is best. But it doesn't work that way for you when it comes to our views on what investing model is best. When it comes to Passive Investing, all must bow down at the alter and show undying reverence. I don't care to bow down to this "idea," which I view as a reckless and dangerous idea.

Can you please try to explain why that bothers you so? Do you think the world is going to blow up if someone posts on the internet that he does not think investing passively can ever work out in the long run?

Important Note: I do NOT say that those who developed and promoted the Passive Investing idea did so with bad intent. I say that this is all the result of a MISTAKE. I am trying to get the mistake CORRECTED. It is not necessary or helpful (or even accurate, in my view) to accuse people of bad intent to achieve this goal. But it IS necessary to speak plainly about the nature of the problem. I believe that the entire problem is the widespread belief in Passive Investing. When we take that away, I believe we will be entering The Golden Age of Middle-Class Investing. We are not going to be able to overcome the effects of Passive Investing if none of us work up the courage to point out that the emperor is wearing no clothes.

Rob

Anonymous said...

This site has turned into a Rob Bennett Mega-monologue.

BORING........

Schroeder said...

Rob Bennett said... "But when the evidence trail led me to a belief that Passive can never work, I just followed it."

And the evidence trail led me to conclude that your belief, that Passive can never work, is false. Frankly, saying that "Passive can never work" sounds like a cheesy marketing slogan from someone trying to wage a religious war.

I also believe Rob is caught up using recency bias in forming his opinion. This is a common trait that leads humans to weigh immediate short-term conditions like the recent stock price crash and improperly conclude that static stock allocation can never work.

This same faulty thinking leads some to believe that investing in real estate can never work now that we have experienced the housing bust.

However, this faulty thinking ignores the historical data. When viewed over the long term, we have seen housing prices have rose modestly ahead of inflation. The recent price behavior of a great housing bubble followed by a housing crash is only a very recent phenomenon.

This same analysis can be applied when evaluating static stock allocation. When viewed over the long term, we have seen several balanced funds that follow a static stock allocation like Vanguard's Wellington and Wellseley deliver good results.

Rob Bennett said...

When viewed over the long term, we have seen several balanced funds that follow a static stock allocation like Vanguard's Wellington and Wellseley deliver good results.

The good results are not due to Passive Investing, though. The good results are because the funds are balanced and because stocks are a great asset class for the long-term investor. These funds have enough going for them outside of the Passive part that they are able to deliver good results despite following a passive allocation strategy, not because of it.

I don't say that a passive investor can never obtain a good result. I say that investing passively always subtracts something and never adds anything.

Rob

Anonymous said...

And the sun slowly sets on another episode of Hocomania....

Schroeder said...

Rob has started a commentary on his heavily censored website.

http://arichlife.passionsaving.com/2009/08/27/it-appears-that-i-inadvertently-stumbled-into-the-middle-of-a-religious-war/#comments

John Walter Russell makes the following comment:

"It is amazing how people will struggle to resist the obvious."

Funny, I can say the same for our old friend, Rob.

If you would like to join us here and continue the discussion, John, please feel free.

Rob Bennett said...

If you would like to join us here and continue the discussion, John, please feel free.

There are many people of intelligence and integrity who have at one time participated in the discussions and thereby helped us all out and who subsequently elected to stop participating once the Goons injected too much ugliness into the proceedings. Humans have developed rules for interacting with others and there are good reasons why those rules need to be enforced. Those who appreciate the importance for the future of our economic and political system of us all learning how stock investing works need to work up the courage to insist that effective action be taken against those who come to the discussions with no good intent.

Rob