About the author

avatar

Jacob Wolinsky

Founder and CEO of ValueWalk.com (the “Site”) is a web site owned by VALUEWALK LLC, a New Jersey limited liability corporation. I am the former VP of business Development of SumZero, LLC, the world’s largest community I have prior experience in a value based pe firm focused on PIPE transactions in micro-cap companies, and at a value based research firm, which focused on smid caps.

  • Anonymous

    O, hey Rob did not realize it was you, you used a pseudonym! I thought you might have been refering to Value Investing Insight, If I knew it was you Rob I would have picked up on that acronym. I pick individual stocks, and do not index (although I think this is appropriate for 99% of investors maybe even myself!!), that being said I am very conscious of market valuations, so I do keep in mind what the Shiller PE is and am holding more cash, as a protection. That being said I would never sell out all stocks even if the Shiller pe was 100 (alright, maybe at that level I would), but I do keep overall market valuations in mind, and that being said based on current market valuations, I think we will get REAL returns of less than 3% going forward, as I noted in my article about pension funds. I think inflation will eat up these returns, and if we have hyper inflation like the 1980s, which is a very real possibility, the pe of the market could go down to 8 or so, meaning a 66% drop. I am not predicting this just keeping it in mind as I invest in individual stocks that look to provide a margin of safety, and as my portfolio as a whole. I would rather under-perform the market for a few years based on the greater fool idea (meaning in this case hope the shiller pe goes even higher or even stays the same), but I try to find individual securities that have a pe well below 15.

  • http://arichlife.passionsaving.com RobBennett

    My return was 3.5 percent real, MPFJ.

    Rob

  • http://arichlife.passionsaving.com RobBennett

    Hi, Jacob.

    My Personal FInance Journey is using the acronym “VII” to refer to “Valuation-Informed Indexing.” It’s a good sign if we get to a point where people are talking about it enough that they feel a need to start employing acronyms!

    Rob

  • Anonymous

    VII?

  • http://www.mypersonalfinancejourney.com/ My Personal Finance Journey

    Very interesting to hear how long you have been at it! What has been your return that you experienced during that time using your money with VII?

  • http://twitter.com/Rob_Bennett_ Rob Bennett

    MPFJ:

    Valuation-Informed Indexing is something that I have been developing and refining for over 15 years. I got started on this in the mid-1990s, when I was putting together a Retire Early plan. I took a look at the safe withdrawal rate research of the day to determine how much I could afford to take from my savings each year. Something about it didn’t seem right to me.

    I was able to put my finger on what that was when I read John Bogle’s book “Common Sense on Mutual Funds.” Bogle explains why Reversion to the Mean is an “Iron Law” of stock investing. If Reversion to the Mean takes place, the safe withdrawal rate cannot be the same number at different valuation levels (the return varies with changes in valuations, so the amount that can be taken out must change too).

    I did follow-up research that confirmed what Bogle said. This convinced me to take my money out of stocks in the Summer of 1996. I put the money in CDs paying a real return of 4 to 4.5 percent real for a few years, then moved it to TIPS and IBonds paying 3.5 percent real when they became available.

    In May 2002, I put a post to a Motley Fool discussion board asking whether valuations need to be taken into account in calculations of the safe withdrawal rate. A fellow named John Walter Russell did some research showing that the answer is “yes.” John and I then spent the next seven years (John died in October 2009 — I miss him every day) researching hundreds of questions and developing four unique calculators together.

    My understanding of how stocks works has gotten stronger and stronger as I have researched more topics and tried to develop sound responses to the thousands of questions about this that have been directed to me over the course of the nine years of discussions on boards and blogs. I learned the most in the 15 months following the September 2008 crash, when I recorded 200 podcasts on every angle I could think of. That forced me to organize my thinking and drill down on all sorts of questions I hadn’t taken on until then.

    I’ve benefitted from wonderful feedback from hundreds of my fellow community members and from a good number of experts in the field. Even a good number of Buy-and-Hold advocates have been extremely helpful. And the calculators have been a huge help. They allow me to test lots of different ideas and see where they lead according to the historical record. Wade Pfau’s research has now of course also been a big help.

    The short answer to your question is — I first took action on these ideas in the Summer of 1996, when I took my money out of stocks because of the excessive valuations (this was a few months prior to when Shiller gave his “Irrational Exuberance” to the Federal Reserve). I didn’t begin calling it “Valuation-Informed Indexing” until years later, however. I think I may have first started using that terminology in early 2006.

    I hope that helps a bit.

    Rob

  • http://www.mypersonalfinancejourney.com/ My Personal Finance Journey

    Another interesting post on the VII strategy Rob! Thanks for sharing and submitting to the Carnival of Passive Investing.

    I forgot to ask you on your last post about VII. How long have you been employing this in your personal investing?

  • http://arichlife.passionsaving.com Rob Bennett

    Okay, Evidence.

    Rob

  • Evidence Based Investing

    And you’re saying that the fact that The Stock-Selling Industry spends hundreds of millions pushing Buy-and-Hold is not having any influence on investor behavior?

    It obviously didn’t work because as you said
    “It is exceedingly unlikely that more than a tiny percentage of Buy-and-Holders stuck with their high stock allocations through so many years of financial pain

  • http://arichlife.passionsaving.com Rob Bennett

    We take a VERY different perspective to this investing stuff, Evidence.

    Have you ever looked at personal finance blogs on the internet? There are thousands of them. They tell the same story over and over and over again — you need to manage your money, try not to waste your money, don’t spend foolishly.

    Then the topic turns to investing and the SAME PEOPLE say “I am just going to stick at the same stock allocation no matter what,” or “I don’t believe in market timing” or “stocks are always best for the long run.”

    And you’re saying that the fact that The Stock-Selling Industry spends hundreds of millions pushing Buy-and-Hold is not having any influence on investor behavior?

    I think the promotion of Buy-and-Hold is having an influence.

    Rob

  • Evidence Based Investing

    Do you think that most people would have a hard time lowering their allocations in response to big price jumps if Money magazine were running cover article after cover article pointing out how much sooner they could retire if only they were willing to do so? I sure don’t. The experts were able to persuade millions that there is no need for them to change their allocations when stocks get dangerous. Why would they not be able to persuade millions of the accurate story just as effectively?

    Actually the experts were NOT able to persuade millions to keep their stock allocation constant. In the late nineties investors poured money into stocks, ignoring bonds, CDs and the like. The after the bubble popped the money poured out of stocks and safer investments became more popular.

    If investors had followed the advice to buy and hold rather than the CNBC/buy this hot stock now approach then we would not have seen the bubble and burst that we saw.

    People are emotional, and come the next bull market the same thing will happen.

  • http://arichlife.passionsaving.com Rob Bennett

    Thanks for taking the time to share your thoughts, Evidence.

    You make a good point. Other smart and good people have offered this criticism of the Valuation-Informed Indexing concept to me on numerous occasions. I don’t see it as being as big a negative as you do. But I do think you are making a legitimate point. It is entirely possible to imagine this being a problem for some Valuation-Informed Indexers.

    Are you taking into account how different the Valuation-Informed Indexer is going to feel after stock prices fall? One, he has long been anticipating a big price drop. So it comes as no surprise. And, two, the price drop is not a big hit for him (since he lowered his stock allocation in anticipation of it).

    It’s not that Valuation-Informed Indexing does not take emotions into account. It’s that Valuation-Informed Indexers PREPARE for possible emotional hits to come by setting their stock allocations accordingly. So they do not suffer the same emotional distress as Buy-and-Holders in response to big price drops.

    An even more important point is that VII is not something that the investor will need to practice entirely on his own. What we should be doing is spreading word about what really works everywhere we can. Then we should encourage all the investing experts to encourage our best emotional inclinations rather than our worst.

    Do you think that most people would have a hard time lowering their allocations in response to big price jumps if Money magazine were running cover article after cover article pointing out how much sooner they could retire if only they were willing to do so? I sure don’t. The experts were able to persuade millions that there is no need for them to change their allocations when stocks get dangerous. Why would they not be able to persuade millions of the accurate story just as effectively?

    We are all influenced by what we hear on television and on web sites and in newspapers. If all media outlets were promoting responsible investing strategies, my strong sense is that millions of middle-class investors would eat that up. My strong sense from having talked to thousands about these issues and about the effect of the economic crisis on their financial futures is that there are millions today who CRAVE responsible investing advice. I very strongly believe that the time is right for a big change.

    I think you are making excuses for Buy-and-Hold, Evidence. I mean no personal offense but that is my sincere belief. I believe that we have discovered something far superior and that we all should be dancing in the streets about what is now possible and that a good number of people have become emotionally invested in Buy-and-Hold and instead feel a need to make excuses for it. I look forward to the day when we get beyond all that and instead spend our energies making things better together instead of dragging our feet.

    We agree about the importance of considering the emotional side of the question, Evidence. We are soul brothers re that one. And I am sincerely grateful that you took the time to share your thoughts. I am obviously not unbiased re this matter. You have added a good bit of balance to the discussion here by explaining how things look from those holding a different perspective.

    I hope we will all hear from you again. Please take care, my good friend (I have had many conversations with Evidence at other blogs and boards).

    Rob

  • Evidence Based Investing

    1) Pfau’s research assumes an unlikely scenario — that Buy-and-Holders will hold to their high stock allocations in the face of huge losses.

    It also assumes another even more unlikely scenario – that Valuation-Informed investors will raise their stock allocations in the face of huge market losses (up to 90% in his example).
    It also assumes they will lower their stock allocations in the face of a huge bull market.

    VII takes the one difficult part of buy and hold, sticking to your plan by rebalancing (ie selling stocks and buying bonds in a bull market, buying stocks and selling bonds in a bear market), and puts it on steroids.

    If staying with “just” 60% stocks in 1999 was hard then dropping to 30% is more difficult. If keeping 60% of your portfolio in “dead” equities in the early 1980s was hard then raising your allocation to 90% is harder.

    What VII doesn’t consider is the emotional side. Getting it to work on paper is fine in theory, getting it to work in real life would be a lot more difficult.

Copyright © 2014 Valuewalk.com

Developed by Wordpress Junction

Share with your friends










Submit
Share with your friends










Submit
Share with your friends










Submit