Voted by Whom?

Last week on my business trip I ate at a restaurant that had this sign across it's front enterance.

My only question is who voted? I sure didn't.

How useless are these throw-away marketing statements. Does anyone really care? Does anyone actually say "Oh, wow, it's been voted DC's best sea food restaurant. I am eat there!" I don't think so.

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Lemming Americans

Yes, people. There are Native Americans, African Americans, Jewish Americans and apparently we can add to our national diversity one more group: Lemming Americans. Those Lemming Americans are the ones that follow the herd. They hear something and they repeat it as loudly as they can, and truth or facts be damned!

It looks like a common sense reform to our health care system is going to be derailed by simple lies repeated often and loudly enough, by so called leaders and opinion makers. Apparently all it takes these days to make sure reform is derailed is someone to whisper conspiratorially "Death Panels". From that point forward the truth goes out the window. The lie gets repeated and magnified. The interested parties smile broadly and stand aside while the imbecile masses fight a battle contrary to their own self interests.

Let me comment on this one more time:

The Moral Argument - it is simply wrong that tens of millions of Americans do not have health insurance. All of us deserve to lead a healthy life and to receive decent treatment if we get sick. For crying out loud, we provide health services to our felons in prison, but not to our hard working poor. If there is injustice in the world, this is a clear example.

The Economic Argument - our system is broken beyond repair. My family of 5 - all completely healthy - WITH health insurance, spent more on health care last year than we spent on anything except for daycare and rent. This is without even counting the $12K or so in insurance premiums paid by my employer. The system is simply hemorrhaging money through waste and bureaucracy. Costs must be controlled or (i) our economy will collapse; or (ii) half of us will be uninsured.

The Fear Factor - the fear mongers would have us believe that government will pull the plug on granny. Complete and utter lie. Hate to break it to you idiots, granny already has socialized medicine. She's on Medicare! Or that government bureaucrats will come between us and our doctors. They don't tell you that right now there is an insurance company coming between you and your doctor, and that your insurance company makes money by denying you care. Why should they care? The fear mongers know that gullible Lemming Americans will buy anything they sell.

Here are some real things to worry about: today if you lose your job, you lose your health care insurance. If your employer decides to stop offering health care, you're out of luck. If you or a family member get seriously sick, your insurance will probably not be sufficient to keep you from financial ruin. If you exceed your lifetime insurance cap, as far as your insurance company cares you can just curl up and die. If you are not afraid, you don't understand the true nature of your predicament.

The Personal Experience Angle - I was born and raised in a country where so-called socialized medicine exists. You know what? If I had the unfortunate choice between getting sick in the US or getting sick in Israel, I would much rather get sick in Israel. The US has the best health care system in the world you say? Bullsh** I say. Base your claims on facts and on reality. Here's one easy comparison - life expectancy. Life expectancy in France, Canada and Israel - all countries with socialized medicine - is higher than in the US. Best health care system in the world my left foot. Lemming Americans.

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The Market, The Market

So what do you think about the stock market these days? It's been climbing non-stop since March. OK, there was a little hiatus in June, but investments I made in early March are now up more than 50%. My 401K is now well above break even. Our total portfolio is only a few percentage points down compared to where it was since this crash began. Truth is, I am getting nervous.

Just like I said that things weren't that bad in the dark days of February, they aren't that great now! BTW here's a post I wrote in early March preaching the upside of stock investing, just a couple of days before the market started bouncing back. No special powers of prognostication here, just simple coincidence.

The stock market upsurge has me just concerned enough that I have halted all new investments in the market (except for my 401K contributions), since the beginning of May. OK, there's also the small matter of my preparations for the possibility of buying a house, but even if this were not the case I think I would have paused for a while. I don't like this euphoric mood.

Yes, I believe we are done with the recession, but I don't think that euphoria is called for. There is still much economic risk out there, including risk to our currency from the twin scourges of inflation and deficit.

Curious to hear your take on the situation.

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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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House Hunting Update

Last week, while I was traveling on business, my wife went house hunting with our realtor. She saw several houses and thought that a few were worthwhile for me to look at as well. On Friday, when I got back in town I left work early and we went to look at 5 of them. The score card: one really nice house, two reasonable ones, one horrible and one... no longer for sale. The owners decided to rent instead of sell.

Anyway, one good house is all it takes. While it has been on the market for about 4 months and the price has come down substantially, it is still about $80K above our budget. We asked the realtor to help us decide whether we should still put in an offer. She thinks we should, but I think it may be difficult to get that house with our budget.

The two other houses I thought were decent would also work, but each of them requires a substantial amount of improvement before I would be happy. In any case, both are substantially less attractive than the house we liked. It's just like I said before, it looks like the house you want is always just a bit above your price range.

In the meantime, our mortgage pre-approval came through for the full amount we wanted. The mortgage broker had to send us the pre-approval letter three times, because she kept misspelling my wife's name... I don't think we'll be using her services when we actually apply for a loan. If she can't handle the fine details of spelling a name correctly, how can she be expected to handle our loan application correctly? Call me picky, but I want someone meticulous to help me hunt for a mortgage and to handle my finances. Am I wrong?

One more step successfully completed: I transferred some funds into our checking account. Just enough to cover our down payment when we decide put an offer on a house... we are locked and loaded. Now it's just a matter of deciding when and how to pull the trigger. It's all about patience and a steady aim.

Exciting stuff. No?

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