Valuation-Informed Indexing #124
by Rob Bennett
I recently engaged in e-mail correspondence with Former Financial Analysts Journal Editor Rob Arnott concerning the Valuation-Informed Indexing investing strategy (Valuation-Informed Indexers believe that investors MUST change their stock allocations in response to big valuations shifts to have any realistic hope of long-term investing success because this is the only means by which an investor can keep his risk profile roughly stable over time). Rob was kind enough to give me a big thumbs-up on the content side (“your ideas are sound”) and frank enough to give me a big thumbs down on the process side (“your stridency is unhelpful to your cause”).
But I am NOT strident! How dare he?
Actually, it’s probably better that he dares. I was talking to my brother Steven about holiday plans and I happened to tell him the story of Arnott’s e-mails. My brother shared Rob’s views re the stridency thing! I’m surrounded! My own flesh and blood is part of the conspiracy!
I don’t believe I am strident. But I do note that many good and smart people, even people who have a good deal of respect for my investing beliefs, hold this perception. So I see this as a big issue.
Perhaps even bigger than the content-side issues. I believe that the content-side issues are a very big deal indeed. I believe that it was the widespread promotion of Buy-and-Hold strategies that was the primary cause of the economic crisis. And I believe that we could reduce the risk of stock investing by 70 percent by getting the word out about the 30 years of academic research that supports the Valuation-Informed Indexing concept. Still, I believe that it is the process-side questions that are most important, at least in the short-term. That’s because we need to address the process-side questions before we can launch the national debate on the content-side issues that we need to have to bring the economic crisis to an end and to become far more effective investors.
What’s going on?
If these ideas are powerful enough to win the endorsement of Rob Arnott, why doesn’t everyone buy into them immediately? No one is enjoying the economic crisis. We all want to obtain better returns while taking on less risk. What’s the source of the friction here? Why would I want to be strident, knowing how it would hurt my effort to win the support for the new investing model to be so? Or, if I am not being strident, why would so many smart and good people be perceiving me as having engaged in stridency?
Valuation-Informed Indexing is a big change. Big changes are hard to accept. It’s as simple and as complicated as that.
One of Rob’s e-mails tells the story.
He reports on how he has had difficulty getting his research accepted for publication in journals.
He reports on how articles that have been published have generated hate mail to the journals that published them.
He reports on how he has not been able to find a journal willing to publish research he co-authored with Nobel Laureate Harry Markowitz showing that a modest amount of error in stock prices would fully explain the famous Fama/French size and value effects.
He reports on how young professors who considered publishing research supporting Arnott’s investing beliefs were taken aside by colleagues and warned that doing so would be a career-limiting move.
Do you see?
Buy-and-Hold was a big advance. Lots of people got excited about the advance and built careers rooted in an understanding of the principles of this strategy. Then Shiller initiated a new and even bigger advance with his 1981 research showing that valuations affect long-term returns. As we move beyond Buy-and-Hold, people who became big shots during the Buy-and-Hold years are going to feel increasingly threatened. They are going to see “stridency” where it does not exist.
I love the Buy-and-Holders. I try to persuade them to correct their errors not out of some sort of hostility toward them but of of excitement about the places we are going to be able to take their ideas once we get past the silly defensiveness and begin working together to develop the reforms of the old ideas to the best of our collective abilities.
The people who characterize me as strident are not flat-out nuts. They are picking up on a real phenomenon. I am not strident. But I am something, something they have not see before.
I am excited about the implications I see in the academic research of the past 30 years. I am enthusiastic. I am passionate. I am impatient to get on with all the good stuff.
That’s not stridency. It’s too positive an emotion to be fairly characterized as stridency. It is only perceived as stridency by Buy-and-Holders (and by people like Rob Arnott who are trying hard to be sensitive to the concerns of the Buy-and-Holders) because the Buy-and-Holders today see the changes in our understanding of how stock investing works that are inevitably coming as unwelcome.
It won’t always be like this. Our Buy-and-Hold friends will become more open to consideration of the new ideas following the next price crash. Then we will all be "strident" together. And it will be a total blast.
Rob Bennett has been developing the Valuation-Informed Indexing investing strategy for 10 years. His bio is here.