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September 20, 2010


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The ones on the saving side are very good, in my view. You've picked things that are truly myths and that truly matter (ideas that have truly led people in unfortunate directions).

I accept that you truly believe that the claim that "You can beat the market's return consistently without taking any additional risk" is a myth. I strongly believe that you (and lots of other smart and good people) are wrong about this. Taking valuations into consideration when buying stocks removes roughly 80 percent of the risk of stock investing. There has never been a time when stock were priced reasonably and provided a poor long-term return and there has never been a time when stocks were priced insanely high and provided a good long-term return.

People have a hard time letting this in. But when they do I think we are going to see some wonderful advances.


The stock market is for money you can afford to lose. There are much better ways to invest money. The market is in a terrible position, and your money needs to be safer.

Are there any other (more compelling?) myths you think I should add?

If I were making the presentation, I would add something about the myth of money = wealth, when money = transaction unit, but I'm not sure if that would be appropriate for your audience.

Is there anything here you think I should re-state or have wrong? (I'm just in the process of putting my thoughts together, so this is a very rough draft.)

No offense here, but I know people who give/tithe who do not have control over thier finances, so I'm not sure I'd add the bit about charitable contributions = good money management skills. If you wanted to talk to it, I'd be very clear that giving itself won't make you wealthy or better manage your budget.

Which of the above do you think are most interesting/something an audience would want to hear?

The income-to-wealth bullet (#2). I encounter that all the time; people assume to have wealth, you must have high income. If you are successful in making the audience understand that in a short time, I'd love to see a transcript of the presentation. :)

Myth - If I win the lottery then I'll be set. Why? Because the odds are already against you with the probability of winning the lottery. Plus, most people who win the lottery end up in DEBT. Check out this article for more info:

Rob, how exactly do you calculate your valuations?

"A high income relative to those you know leads to happiness"

I like this one, because it is so true...

Myth: Your investment returns are based only on how well the investment performs.
Truth: One of the biggest factors to calculating real return is cost. If you are paying high fees for a managed investment you have to remember to deduct that from your return to get your net profit.

@Eugene - I assume you were asking me? I calculate purchasing power. Dollars are a handy mean (a unit to account with), but aren't reflective of wealth, especially over time.

And I don't want to hijack FMF's post, so I'll leave it at that :) Although, if folks are interested, I may be able to write an article describing how I value wealth.

Sorry Rod, my question was directed at Rob Bennett, the first respondent in this entry.

I thank you the quick explanation though.


Stop it! Seriously. Do you just like poking a cornered animal to see what it will do? And when it snaps at you for the 100th time when does it get boring?

You know he isn't going to answer the question so you are just provoking the issue.

Please stop poking him.

Apex, please understand that I am only asking a question. A legitimate question in response to the assertion made in the first comment of this entry. It is no more and no less than that.

I also want to make it clear that my question was not motivated by anything personal or psychological such as cornering or poking. In fact, who the author is would not have impacted my questioning. If FMF himself said that, I would have asked that question as well.


I am not going to comment on this again but that's frankly a load of bull.

You and Rob went back and forth for about 100 comments on a previous post. It went on so long that it brought in other posters who like to poke Rob. All of you have admitted that you have a history of trying to get him to answer certain questions for years and have had no success.

Given that, it is not true that you are just asking a question. You are asking one of a series of questions you have asked him hundreds of times with no success in getting the answer you want but with great success of creating a long series of increasingly hostile comments. Your question may be legitimate but you know it has no reasonable chance of being answered.

I don't think it's very polite to do that when you know it has a high chance of leading to a long series of unrelated posts that take over a topic and crowd out all others.

"Fact: There is no correlation between income and wealth."

I disagree with that. I think you're overstating it.
I'm guessing you really mean to say that "high income doesn't guarantee high wealth" which I'd agree with.

There is certainly a direct correlation between income and wealth. Compare the median net worth of the bottom 20% income earners and the top 20% income earners. People in the bottom 20% have $8k median and $100k mean and people in the top 20% have $356k median and $606k mean.

Maybe you're just looking at millionaires or you're saying that a high income doesn't necessarily guarantee a high net worth. But if you just look at the relationship between income and wealth there is direct correlation that people who make more income have more assets.

The only on that I can think of that you might have missed is "Myth: Wealthy people don't have to think about money - they can just buy whatever they want."

In fact, with a few possible exceptions, I bet they have to think about money much more than someone living check to check (or check not-quite-to-check). The biggest difference between wealth and poverty in many cases is the difference between having to make your own choices and having them made for you.

I'm sure there are dozens of easy-to-find citations, but I can't track them down because my lunch is over and I'd like to remain employed.


I'll let FMF speak for himself, but I want to say that I agree with the statement. I have known people who made around the poverty level all thier lives, yet had modest to sizable net worth when they retired. I've also known people whose households' made north of $300k/yr who have very little net worth heading into retirement (most have sizable debt loads). I understand what you are trying to say, and I do agree that it's easier to accumulate wealth with a high income, but the key to the statement is spending less than you earn. It doesn't matter how much you make if you are spending over that amount; if you spend less than that amount, you are accumulating wealth and your net worth improves. The poor may have no money, but they also have little debt; it's the high earners that accumulate high debt, which offsets the wealth they could be accumulating.


Hmm. I see your point. There is a good possibility it may devolve, in which case, I will stop, just like before, or FMF will close the comments. Whichever comes first.

Then again, who knows, maybe not. Yes, we have a past, but in my mind, the past is the past, and today is a new day. Even if something has failed 100 times, it is no reason in my mind to try 100 times more. :)

And in any case, it's only a question. A question brought about from an assertion being made. Nothing bad has happened. Have faith. :)

"Taking valuations into consideration when buying stocks removes roughly 80 percent of the risk of stock investing. There has never been a time when stock were priced reasonably and provided a poor long-term return and there has never been a time when stocks were priced insanely high and provided a good long-term return"

I can find two perfect examples of both of Rob's assertions.

DD (a 200+ year old company paying dividends every year, and 100 years paying pensions)

LNUX (a flash-in-the-pan Red Hat wannabe, that is now US:GKNT) Look at the 10-year chart.

Rob can answer how he determines valuations, but why would you need to ask if the answer is so obvious? It's not an exact science, if one at all. A PE ratio is one way, but better is to study the company and its market thoroughly and do the best one can. In other words, do basic research and decide whether your gut is warning you to stay away or pick up a real bargain. I don't see any purpose trying to illicit challenges from Rob by asking nearly rhetorical questions, when basic investing theory will do.

I would be buying BP right now. The oil is disappearing, and so far, their liabilities are well below their earnings for two consecutive quarters. A dividend yield of 10% by the end of the year is not out of the question. BP will be around for a VERY long time.

I think it's a great list of myths. I especially like the one that you don't need a high income to be happy if you spend far less than you earn and are happy without a lot of things. I have really started to change my outlook on what is important in life, and many of my friends feel the same way now. This scares me a little for the future, as 70% of our economy is based on consumers spending more than they earn. If after the Great Recession, which CNN tells us was over in June, everyone becomes far less materialistic and far more frugal, we're in for a long period of malaise in the job market. Let's not try to convince everyone to follow our example.

.....naaahhhh, what am I thinking!....The urge to splurge and get right back into debt is just too powerful a force with the government ready to bail us out when we misbehave! Let's give them all more tax cuts and incentives to dig deeper financial holes! We don't have to change our wasteful ways, it's just un-Americun!

Hey Todd, thanks for the response.

As a fellow stock picker, I actually don't mind the idea of valuations. In fact, I monitor and valuate stocks almost daily.

Also, I fully agree DD is a great stock. As for a stinker, I'd like to throw BBI in there as well.

That said, all traders and active investors use some kind of valuations method, be it technicals or fundamentals. Something, anything, to try to get the edge. So, I am asking what is Rob's method?

And respectfully, what I am asking is not rhetorical or even conceptual. He says his valuations method can beat the market, and I am asking is if he could share with us exactly how.

I don't blame anyone for thinking that I am challenging him, but I can't say it enough: I am not. It's just a question, no more, no less.

Finally, I would not buy BP right now. In my opinion, to trade BP right now is still trading on news, and much of the positive news regarding the oil well being killed is already baked into the stock at this point. So now, the story moves on to who's getting how much reparations money, the extent of the coastal damage to the fishing industry, what kind of federal fines they will have to pay, oh and the status of future Gulf drilling is still up in the air. All bearish sentiments.

Having spent so much money on fighting the spill the the cleanup, followed by so much reparations and fines, and uncertainty for further off-shore drilling in the Gulf (which is a primary cash cow for BP), I think BP is going to be on the defensive for the next year or two. Not my idea of a trade personally.

Besides, why pick that company when you have oil competitors who is not saddled with such debts? I would go with something more like COP or maybe even XOM. You don't even have to deal with the ADR.

As for the dividend, I think the Obama administration has already put a freeze on the idea for the rest of the year....

However, during that time, I turned a fellow trader to some very nice BP bonds during that time, which DID pay 10% dividend! I don't know if they're still available, but if you're into that, it's worth checking out.

Incidentally, I traded BP three times already since the oil spill. :D It's was fun and harrowing at the same time, but I don't think it was easy money. Which is why it goes back to my original question, because ultimately, that's what every trader wants to know, right?

Or, you COULD buy-and-hold BP.... :D

# Myth: You can beat the market's return consistently without taking any additional risk.
# Fact: You can not. No one can.

I think you should revisit your data. If for arguments sake you assume a standard distribution of returns, with the market being the average, you will find some outperform the mean and some underperform. Some will consistently underperform and some will consistently outperform. Those who outperform can consistently outperform even if you believe the outperformance is random (coin flips). This “fact” comes from reading a line in USA Today without understand the research behind the statement.

This 'fact' really only exists in the academic vacuum of a perfectly efficient market- which most academics would argue does not exist in practice. Before using this as fact, one should really understand modern portfolio theory and math.

“50% of actively managed funds underperform their benchmark”. This ‘fact’ really doesn’t tell you that much. By how much? What’s mode? The shape of the curve? You can have a curve that has 50% below the mean, where the worst performance is only -1% and the best performance is +100%.

People outperform their benchmarks on a consistent basis. I am not saying everyone should try, but it is not a fact that no one can. Do the research and learn about the stats behind the simple claims.

"Rob, how exactly do you calculate your valuations?"

There are 200 podcasts at my website on Valuation-Informed Indexing, Eugene. There are over 100 articles on the subject. There are four unique calculators. There are thousands of blog posts. There are links to scores of Guest Blog Entries. There are links to four Google Knols that examine the most important issues in depth. There are endorsements from scores of big-name experts and from hundreds of my fellow community members.

Have you considered taking a look at those materials?

Is your interest in Valuation-Informed Indexing sincere? That's the real question.

If Valuation-Informed Indexing upsets you, have you considered asking yourself why?


"You know he isn't going to answer the question so you are just provoking the issue."

I've answered tens of thousands of questions over the past eight years, as thousands of us participating in discussions at the Retire Early and Indexing discussion-board communities have developed the Valuation-Informed Indexing model, Apex.

You're right, of course, that I insist that some minimal rules of basic human decency apply in any discussions of these questions. People are not going to be able to make sense of things if we do not observe those rules. There is a reason why such rules apply in discussions of every topic discussed on the internet with the exception of the Big Fail of Buy-and-Hold.

I'm happy to help those who have sincere questions. The mark of sincerity is that the person listens to the answer given and tries to learn from it. Questions that are put forward as a form of baiting or out of defensiveness do not belong. We as a community need to act to rein that sort of thing in when we see it evidencing itself before us.


"If FMF himself said that, I would have asked that question as well."

I feel the same doubts re your motives that Apex feels, Eugene. But in the event that you are sincere, the valuation metric that I use is P/E10. That's the price of the index over the average of the past 10 years of earnings. This is the metric used by Yale Professor Robert Shiller. Shiller got the idea from Benjamin Graham, Buffett's mentor.


"I don't think it's very polite to do that when you know it has a high chance of leading to a long series of unrelated posts that take over a topic and crowd out all others."

Discussion of this topic should certainly not be permitted to crowd out others. I certainly agree with that comment.

I sincerely believe that the statement that I referred to is a money myth. So I was doing the right thing to note that in my comment.

If someone has a sincere question, I don't see that there's any harm in asking it where the topic happened to come up and I certainly don't mind taking a moment to provide an answer that might help someone out.

But, as I noted on the earlier thread, the proper way to handle an extended discussion of Valuation-Informed Indexing is with a separate thread on Valuation-Informed Indexing. FMF does not find appeal in that idea, so that's out for now. So I suggest that those who have questions about Valuation-Informed Indexing ask them at MY blog ("A Rich Life"). There's a link at my name and I am present there every day.

If you have sincere questions, I would be happy to hear from you there, Eugene. And I would of course be happy to hear from anyone else who has sincere questions. I live for that stuff!


"Have faith. :)"

Re this one, we're very much on the same track, Eugene.

Things are rarely as good or as bad as they appear to be. People are capable of all sorts of surprises. Having faith in your fellow humans is very much the way to go, in my assessment.

I believe that you want to know the best way to invest, Eugene. Perhaps we can start with that little bit of common ground. And I hope that you can say that I obviously have not put eight years of my life into this because I think it is a bad idea. We clearly disagree on some things. But it seems to me hard to imagine that at some level of consciousness we don't want the same things out of our investing strategies.

Just don't link to The Forbidden Site, okay?


"But in the event that you are sincere, the valuation metric that I use is P/E10."

What you see is what you get with me, so yes, I am sincere. :)

Unfortunately, we've already gone down this path before, and none of the quantitative questions regarding P/E 10 has been answered. From what I've seen, it appears that Prof. Shiller's data was used improperly by you to draw erroneous conclusions.

If you would like to see the specifics of the questions, they are copy and pasted here. If you too are sincere (instead of just saying that you have written a lot of articles), please feel free to answer those questions.

Otherwise, with nothing new under the sun, I too will move on so that I will not upset the other readers.

Eugene: Thanks for the BP advice. I had not heard of BP bonds, but 10% dividend yield is nothing to shy away from. I did not know Obama was out to punish BP, its employees, and its shareholders with regards to dividends, when their quarterly profits of nearly $10 billion is far and away enough to pay damages for another year or two--outside of extortion. The amount paid out to dividends is dwarfed by their profit, so it's like cutting off the nose of shareholders, pensioners, and employees to spite BP's face. This is one of ten companies in my individual stock portfolio that I would buy and hold for 30 years, like DuPont, Con-Ed, and other high dividend yielding stocks regardless of short-term (<5-year) valuations. The cheaper they are, I just buy more shares and leave them alone even when they reach new lows (like DD at $16.50).

"He says his valuations method can beat the market"

I am absolutely saying that, Eugene.

"and I am asking is if he could share with us exactly how."

There's now a mountain of research showing that valuations affect long-term returns. There's hardly anyone anymore who even disputes this.

If valuations affect long-term returns, then the risk/reward ratio for stocks VARIES. It is not a constant (which is the core premise of the Buy-and-Hold Model, which was developed before the Efficient Market Theory was discredited).

Say that your optimal stock allocation at a time of fair valuation is 70 percent stocks. Then your optimal stock allocation logically MUST be something more than 70 percent when valuations are half of fair value and MUST be something less than 70 percent when valuations are double fair value.

The most important thing in stock investing is getting your stock allocation right. With Buy-and-Hold, it is a logical impossibility to do this. With Valuation-Informed Indexing, you aim to get the allocation right. You take valuations into consideration when setting your allocation. That MUST provide a better risk-adjusted return than Buy-and-Hold.

That's logic. The logic is rock-solid. Some insist on looking at data to check whether the logic holds up in the real world. When you look at the data, you see that for as far back as we have had records, this has always worked. Theory says it must work and the data shows that it always has worked.

What else could it have going for it, Eugene? If you don't want to believe, you obviously do not have to believe. We can still be friends as far as I am concerned. But given that theory says this is a lock and the entire historical record shows that it has a perfect record, would it be fair if I asked you a question back as to why you are so darned skeptical?

You are asking me why I believe in a tone suggesting that you find this remarkable. Can you tell me why you believe that it does not work? I find THAT remarkable.

I know that there are many experts who say you cannot time the market. You know what? They believe that because they believe in Buy-and-Hold, which was developed prior to the publication of the research discrediting the Efficient Market Theory. If the Efficient Market Theory checked out, Buy-and-Hold would make perfect sense.

But the Efficient Market Theory did not check out. We should have abandoned Buy-and-Hold when the EMT went down. There is today no reason for believing that long-term timing does not work. None. There has never been a single study showing this. There is a theory, that's all. And that theory has been discredited by a mountain of research done over the past three decades.

Rob Arnott, the former editor of the Financial Analysts Journal, says that we are on the threshold of a "revolution" in our understanding of how stock investing works. I think he's right.

It's not a bad thing. It's a good thing. After this revolution, we will all be earning higher returns at lower risk. The only problem this has brought on is that it has freaked out a lot of people who believe in Buy-and-Hold. Things change, Eugene. All learning brings change. This is a good thing for all of us. Please try to let in at least the possibility that this is something good and I think you will end up being pleasantly surprised.


"Unfortunately, we've already gone down this path before, and none of the quantitative questions regarding P/E 10 has been answered. From what I've seen, it appears that Prof. Shiller's data was used improperly by you to draw erroneous conclusions."

It appears to me from looking at the comments you posted at the other thread that you are taking statements put forward at The Forbidden Site at face value, Eugene. Every now and again those people post something accurate. But I think it would be fair to say that they do it only to throw people off the track. It is an extremely rare event.

Rahiv Sethie is a professor of economics at Columbia University. Here is what he had to say about Valuation-Informed Indexing: "Rob Bennett makes the claim that market timing based on aggregate P/E ratios can be a far more effective strategy than passive investing over long horizons (ten years or more). I am not in a position to evaluate this claim empirically but it is consistent with Shiller's analysis and I can see how it could be true."

It certainly would be fair to say that I support Shiller's model over Fama's model. That's the only difference between Buy-and-Hold and Valuation-Informed Indexing. Buy-and-Hold is rooted in the Fama belief. VII is rooted in the Shiller belief.


"I too will move on so that I will not upset the other readers."

That's of course fine, Eugene.

If you ever do develop an interest, I hope you will take me up on my offer to talk these matters over at the "A Rich Life" site. I would look forward to talking things over with you.

I certainly wish you the best of luck with whatever investing strategies you elect to follow in any event.


Rob: I looked over some of your web articles on Valuation-Informed Indexing very briefly. I think you are advocating re-balancing portfolios based on overall market index over- and under-valuation, on a long-term basis rather than short-term timing. Maybe I misunderstand what you mean by "indexing". Do you shift from fixed income or cash to buy stock funds, or index funds, then sell on quick upticks back into cash? Do you look at short-term, irrational swings that happen daily or weekly (9/11 attack, Asian Flu, Greek Default), or are you looking at broad valuation over months and years? If the former, are you not Buy-and-Hold? If the latter, are you not Market Timing? If you are reallocating and re-balancing on index valuations, how is that different from actively managed diversified portfolios?

Tell me if I'm following your strategy or not.

For 25 years, most of my 401k has been in Fixed Income Fund (0.30% expense ratio) paying 8.60% since 1985 on average. Now it's paying 4.25% per year. All of my meager Roth IRA is in dividend paying stocks, which I don't trade much at all. They represent about 15% of my total investments. For all that time, I've made short-term trades of 10% of cash to buy S&P Index Fund (0.18% expense ratio) on days where the S&P Index falls more than 1%. If it falls another day, I continue to put in another 10%. Any day it rises, even if 0.25%, I sell the last 10% I bought, making a small profit (usually that 0.25% in a week). If the market index drops 0.25% or more the following day, I buy that 10% back. If the market goes up the second day, I sell the next to last lot of index fund. While I don't make as much profit off of the lowest-priced lot, I make money--SIMPLY BY REDUCING MY COST BASIS AND FREEING UP CASH FOR ANOTHER PURCHASE. If the market tanks for the season, and I run out of cash except for my monthly contributions and company match, I'm in a holding pattern. I still buy the index with my monthly contribution to bring down my overall cost basis slightly. Whenever the market is higher than my contribution purchase, I sell that tiny fraction for the opportunity to buy it back. Small change, but a profit nonetheless. I never sell any lot at a loss, since my long-term outlook is really LONG term, holding my funds at a negative cost basis and buying any amount to lower my overall cost basis. I never risk more than 10% in any trade, based on the odds of a market moving in either direction more than ten days in a row, from the delta of my last lot purchased or sold.

If I can keep up the short-term timing on last in, first out, my average easily beats the S&P 500 at any historical term. I never get more than 15% per year (1999), but I never get less than about %10 (2001). I've been doing this for a long time, constantly watching my rolling 12-month average. When I stop trading for small profits, my overall average guides towards the mean of my Fixed Income Fund, but I rarely ever lose money year over year. Most of the time, I get stuck 100% in Fixed Income as the market recovers and can't participate, but there are always panic days that I get back in for a short time, knowing that the index is oversold, and even a slight recovery of market senses gives me a little more profit to add to that 4.25%, and boost my annual average to the 10% I expect. I'm not going to double my money, but since I max out all retirement contributions, with a 9% company match, it's good enough not to get greedy and try to time the overall market trends based on valuations or technical indicators. Panic and excitement are my best friends, while boring trend-lines and moving averages are my worst enemies. I don't follow valuations, I follow volatility.

Is this Value-Informed Indexing, or just low-risk market timing of an index?

"or are you looking at broad valuation over months and years?"

Thanks for your question, Todd.

Valuation-Informed Indexing is strictly a long-term strategy. There are no short-term allocation shifts at all.

It is very much like Buy-and-Hold in all respects but one very important one. Valuation-Informed Indexers look at valuations when setting their stock allocations. From 1975 through 1995, valuations were either great or good or not too bad. Valuation-Informed Indexers would have been at high stock allocations for that entire time-period. From 1996 through 2008, valuations were horrible. Valuation-Informed Indexers would have been at low stock allocations for that entire time-period. There were a few months after the crash when valuations were good. They are not insanely high today. But they are on the high side today.

I personally am in agreement with the Buy-and-Holders that short-term timing (changing your stock allocation with the expectation of seeing a benefit within a year or so) is not a good idea (I am not dogmatic about this, though, and I am of course glad to hear that it works well for you, Todd). The difference is with long-term timing. Buy-and-Holders disdain long-term timing as well as short-term timing. I say that long-term timing works and is essential.

Long-term timing is not about picking good entry and exit points or anything like that. There is no guesswork. It is just about comparing value proposition and choosing the best one. I look at the most likely 10-year return for stocks, using a regression analysis of the historical data as guidance. Then I compare that with what I can get from a low-risk asset class. I go mostly with the asset class offering the better value proposition.

For example, at the prices that applied in 2000, the most likely annualized 10-year stock return was a negative 1 percent real. TIPS were paying 4 percent real at the time. So I would go with TIPS. Then, when stock valuations went back down to reasonable levels, I would use the extra money I would have from avoiding the poor years for stocks to buy more stocks than I could buy if I had been following Buy-and-Hold. That way I gain compounding returns on that money for many years into the future.

All of the confusion comes from a failure to distinguish short-term timing from long-term timing. People who say that timing doesn't work need to think about why it doesn't work in the short term. It doesn't work because stock prices are set by investor emotion, which is unpredictable. In the long-term, stock prices are set by the economic realities, which are highly predictable (stocks have been paying an average long-term return of 6.5 percent real for as long as we have records). So there is no reason for anyone to believe that there will ever come a time when long-term timing will stop working.

Stocks are like anything else that can be bought or sold. They are an amazing deal at some prices, a good deal at other prices, and an awful deal at other prices. Valuation-Informed Indexers go with higher stock allocations when stocks are an amazing deal or a good deal than they do when they are an awful deal. I personally don't think that this should even be controversial. In my eyes the idea of taking into consideration the price of something you buy before you buy it is just common sense.


Rob wrote:
"I look at the most likely 10-year return for stocks, using a regression analysis of the historical data as guidance. Then I compare that with what I can get from a low-risk asset class. I go mostly with the asset class offering the better value proposition."

10-year TIPS are currently yielding around 1%

What is the likely 10-year return on stocks? Do stocks offer a better value proposition today than 10-year TIPS?

"10-year TIPS are currently yielding around 1% What is the likely 10-year return on stocks? Do stocks offer a better value proposition today than 10-year TIPS?"

The most likely 10-year annualized return for a purchase of a broad index fund at today's prices is 3 percent real, Schroeder.

I believe that investors purchasing stocks should be compensated for the risk they are taking on. My usual rule is that I want 2 percentage points real higher for investing in stocks. That would put stocks and TIPS at a draw.

There's a special factor that applies in today's circumstances, however. We are today living in the aftermath of the most insanely high valuations we have ever seen in history (a P/E10 of 33 caused the Great Depression -- this time we went to 44). Insanely high prices don't only hurt stock investors, they destroy the entire economy. The reason is that investors think of their inflated portfolio amounts as being real and spend more than they would have spent had they known the true amount of their accumulated wealth. When a large part of their life savings goes "Poof!" they stop spending, businesses fail, millions lose their employment, and so on. It takes years for the economy to recover from a time when Buy-and-Hold has become a popular strategy.

I believe that the 3 percent number will apply at the end of 10 years. But I believe that the road taking us there is going to be so rocky that it is only a tiny number of investors who will be able to hold to their stock allocations. If you don't hold to your stock allocation, the 3 percent number doesn't apply. So I believe that the best thing to do is to go with a low stock allocation until valuations are much lower than they are today (in practical terms, that means going with a high stock allocation only after the next crash).

I think it is healthy and enlightening if different people offer different takes on the judgment call. Shiller says that he would get into stocks after we drop to a P/E10 level of 10 (that's a 50 percent drop from where we are today). I think 12 would work and would be a bit safer, but I generally agree with Shiller. Neither of us are God and it helps to have different people coming at the question from different perspectives.

There is no one set of rules for Valuation-Informed Indexers any more than there is one set of rules for Buy-and-Holders. If you asked Bogle what stock allocation all investors should be at, could he answer you? He could not. He could tell you the factors to look at and that's all. It's the same with VII. I can say with conviction that you need to change your allocation in response to price changes. But different Valuation-Informed Indexers are going to have different strategies re how much they change it and re when they change it.

The distinction between the two models is that Buy-and-Hold says that it is okay (or even a good thing!) to fail to change your stock allocation in response to changes in valuations and VII says that you MUST change your stock allocation in response to valuations. To fail to do so is fail to Stay the Course (Bogle's #1 tenet of sound investing) because valuations affect long-term returns and thereby change the return/risk profile for stocks.


At the risk of derailing the other lines of chat I would suggest an additional myth. That myth is "debt is bad or debt is good" Too many people believe one or the other when in my opinion debt is just a tool which can increase wealth significantly or eliminate it entirely.

Rod F.

But my point is that there IS correlation between income and wealth. Most people with low incomes have little wealth and most people with high incomes have higher wealth. There is correlation and its directly evidenced by the statistics. This is not to say that one thing automatically causes the other however

I'm making more of a semantics argument here because I think "correlation" is not the right word to be using since there is technically correlation. If FMF said "high income doesn't guarantee high wealth and low income doesn't guarantee low wealth" then I'd agree. But thats not the same as saying that there isn't correlation between income and wealth.


"It appears to me from looking at the comments you posted at the other thread that you are taking statements put forward at The Forbidden Site at face value, Eugene."

For clarification, those questions did not come from anywhere else other than myself. I am asking those questions, based on your claims that you are using Shiller's PE/10. I respect and do not doubt Prof. Shiller's claims. However, what I am wondering is why you are misinterpreting Shiller's own data?

That's all I'm saying. It's all covered before. I don't know why this is so difficult for you to understand, but I did promise I'd also stay out of it, so whatever....

"I am wondering is why you are misinterpreting Shiller's own data?"

No investment philosophy is worth defending with those sorts of tactics, Eugene.

When you feel tempted to do something like that, it's a sign that it's time to move on to something better.


Eugene wrote:
" However, what I am wondering is why you are misinterpreting Shiller's own data?"

Shiller's data is available to anyone. I can't speak for Rob. But I believe he takes the data and places it in something like an Excel best fit curve. Then from this curve, he extrapolates what returns might result for a give P/E10 level.

Here is an example from his affiliated website . . .



That is the best comment here. And you summed it up perfectly and succinctly. But succinct is not my gift. :)

Debt is not evil just as money is not evil or credit cards are not evil. There are good ways to use it and bad ways to use it. The reason it is seen as evil by so many is the vast majority of American's are using it in destructive ways.

Most people use credit cards in destructive ways, doesn't mean I can't use them without destruction or even to my benefit regardless of what Dave Ramsey preaches as gospel truth on credit cards.

The same is true of debt. Other people's stupidity in their use of it is a complete non sequitur when it comes to an argument for or against the use of debt in general even though it may be entirely inappropriate for some or even most people (which I am convinced it is).

For FMF's purpose though I think it is probably not a myth he wants to highlight because most people do not naturally know how to use debt well.

"Shiller's data is available to anyone."

This statement is exactly right. This statement I love. It's not even Shiller's data. It's everyone's data. Shiller just compiled it.

We're all looking at exactly the same data. We're seeing different things in it. Why? Because some of us are starting out from the premises put forward by Eugene Fama and some of us are starting out from the premises put forward by Robert Shiller. They are opposite premises. So they lead to opposite places. The data being used is the same but leads to very different strategic conclusions for different people using different premises to examine it.

Fama's premise is the Efficient Market Theory. Under the EMT, each year is an isolated event. The average long-term return is 6.5 real. So the neutral position is to assume a long-term return of something close to 6.5 real. Stocks are always the best choice in those circumstances. So Buy-and-Hold advises people always to be heavily in stocks. It all follows.

Shiller's premise is something that might fairly be called the Emotional Market Theory. Under this theory, each year is affected by what happened in the years that came before. If we have been living through times of big valuation increases, the odds of a big price drop are high and the expected return is nothing even close to 6.5 real -- it might be a negative number! So Valuation-Informed Indexing advises people sometimes to be heavily in stocks and sometimes to be sure not to be heavy in stocks. Again, it all follows.

Buy-and-Holders should not be the enemies of Valuation-Informed Indexers. They are people starting from a different premise. But we all can learn from each other. We need to know how those other people think because they might come up with insights we don't know about and -- Gulp! -- they might even be right! If we tune them out, how are we ever going to learn enough about what they are saying to make an informed decision on that question?

I have great respect and affection for Buy-and-Holders. I have learned a lot from them. I have come to believe that they are wrong about some important things. But I of course understand that I too have been wrong about important things from time to time. I try to do for Buy-and-Holders what I would have wanted my friends to have done for me when I was wrong -- help me out by exposing me to the other way of thinking in a charitable, friendly way.

No one disputes what the data says. The dispute is over how to look at it. We should put aside all these attacks, acknowledge that we have different ways of looking at things, and attempt to work together as FRIENDS to learn what it is we all need to learn to invest more effectively. We are all on the same side. We all want to do the best we can with our retirement money. That's the common ground that we should try to keep in mind at all times.


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