Valuation-Informed Indexing #34: I Favor Market Timing — No Apologies

reminiscences of a stock operator pdf

by Rob Bennett

There’s a fellow named Larry who visited my blog one day. He is a very nice guy and a very smart guy. He found my advocacy of long-term market timing more than a little off-putting.

Larry politely pointed out to me that there is a wealth of academic studies showing that market timing doesn’t work. I responded by telling him that in nine years of effort I have never been able to find such a study.

I’ve found many studies that show that short-term timing (changing your stock allocation with the expectation of seeing a benefit for doing so within a year or so) doesn’t work. I have never found a single one showing that long-term market timing (changing your stock allocation in response to big shifts in valuations with an understanding that you may not see a payoff for doing so for as long as 10 years) doesn’t work.

Larry was at first unsure how to respond to this. My sense was that he was personally convinced that I was off my rocker. But he is too polite a person to say so. So Larry offered me a deal: If he were to spend the next three weeks reading every article at my site and checking on the accuracy of the claims made, would I be willing to post an article which he would report on his findings? “Sounds good,” I said. So Larry got to work.

A few weeks later, I got a call from Larry. We ended up speaking for several hours.

He said that every claim he was able to check out passed all his tests. It’s all true! There is zero evidence that long-term timing does not work. There is a mountain of evidence that it does. The statement “timing doesn’t work” is false. A more accurate statement is “timing always works.” (Of course, the most accurate statement is the one that distinguishes between short-term timing and long-term timing, pointing out that short-term timing never works and that long-term timing always works.)

Larry has worked with actuaries concerned about the state pension crisis. He once worked for a Presidential candidate. He knows venture capitalists.

The next day he told me that he had become so excited as a result of our talk that he was not able to sleep because his mind was racing with thoughts of the possibilities for how we could change the world in a  positive way by getting the word out about how stock investing really works.

Our findings would help with the state pension funding crisis. The politician might be able to get policymakers involved. Venture capitalists would be lined up to finance projects helping people to learn the realities of stock investing if they learned about the work we have done in the Retire Early and Indexing communities and checked it out as carefully as Larry did.

I’ll share with you a few statements that Larry made to me in e-mails that indicate how strongly he came to feel about Valuation-Informed Indexing over the next few weeks.

Larry said: “What you have done is beyond awesome.” He said: “The P/E10 tool could drastically change how the entire investing industry operates and measures risks.” He said: “I believe this tool, combined with quality macro-economic analysis, will change the history of investing in this country.”

So Larry and I are partners. We are working together to spread the word.

No. That last part isn’t true.

Larry got cold feet. As excited as he was about the positive changes that promotion of Valuation-Informed Indexing could bring to our world, there is one element of this strategy that he just couldn’t accept: It involves a form of market timing.

Larry said: “The key is explaining that Valuation-Informed Indexing is a tool of asset allocation, not market timing.” He said: “Timing is cast in such a negative light by the press and this is reinforced by most planners.” He said: “I can’t visualize large institutional investors telling their clients that they are engaged in market timing.”

Larry is not the only one who feels this way. Over the course of the past nine years, I’ve run into hundreds of people who are generally supporters of the Valuation-Informed Indexing concept but who have been quiet in their support of it because of fears that it violates a Social Taboo to speak out in favor of market timing.

Market timing is dirty. Market timing is stupid. Market timing is evil. That’s the widespread perception.

There is not an iota of merit to such claims. The reality is precisely the opposite: Long-term market timing is the key to long-term investing success. But when an idea becomes as widely accepted as the idea that there is something bad about market timing has become, it comes to feel weird and strange and wrong to go against it.  No matter how much good  we believe market timing could bring to the world, we don’t feel right promoting it,. It’s not done. To promote market timing, even the long-term variety, makes you a social outcast.

We’re going to have to get over this.

The finding  that short-term timing never works is the second most important discovery ever made in the history of investing. The finding that long-term timing always works ranks higher. This finding is the most important investing discovery of all.

We need to get the word out.

No apologies.

Rob Bennett admires John Bogle but believes he made a big mistake with his endorsement of Buy-and-Hold. His bio is here.

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About the Author

Rob Bennett’s A Rich Life blog aims to put the “personal” back into “personal finance” - he focuses on the role played by emotion in saving and investing decisions. Rob developed the Passion Saving approach to money management; Passion Savers save not to finance their old-age retirements but to enjoy more freedom and opportunity in their 20s, 30s, 40s, and 50s - because they pursue saving goals over which they feel a more intense personal concern, they are more motivated to save effectively. He also developed the Valuation-Informed Indexing investing strategy, a strategy that combines the most powerful insights of Vanguard Founder John Bogle and Yale Professsor Robert Shiller in a simple approach offering higher returns at greatly diminished risk. Tom Gardner, co-founder of the Motley Fool web site, said of Rob’s work: “The elegant simplicty of his ideas warms the heart and startles the brain.”

4 Comments on "Valuation-Informed Indexing #34: I Favor Market Timing — No Apologies"

  1. Thanks so much for taking time out of your day to comment a second week in a row, Ss4johnny. Now I think of you as a friend!

    The statement sounds overblown. I certainly understand the reaction.

    Please understand that Larry started out a skeptic. He made that statement only after investigating these ideas for a long time and being led to that conclusion by the evidence. I agree with Larry. But it took me a long time to get there too. This is something that looks better and better the more time you spend with it.

    You are of course right that market professionals know about P/E10. But that doesn’t mean that many have come to see its amazing power to reduce stock investing risk. The great power of P/E10 comes in connection with indexing. Most professionals are focusing on strategies more sophisticated than indexing. Most have never thought through what it would mean to for the first time have a means of having millions of middle-class investors participate in the market without causing it to crash.

    I’ll give you one example of what I am getting at. We have had four economic crises since 1900. Each and every one was preceded by a stock crash that wiped out massive amounts of wealth and that caused consumers to become afraid to spend and that thereby caused thousands of businesses to fail. What if we made stock crashes obsolete?

    That’s what Valuation-Informed Indexing does. Every investors alive wants to obtain good results. Permit people to learn when stocks are worth buying and when they are not, and no one will be willing to buy them when they are not worth buying. That means that prices will always remain at levels where the value proposition of stocks is strong. That means no more crashes (we have never had a crash of any lasting significance that started from a time of moderate or low prices).

    Can you imagine how much more economic growth we all would have experienced if we had not had to live through the stagflation of the 1970s and the Great Depression and the economic collapse of the early 1900s? We would all be far, far richer people today if we had known what we have come to learn from the past 30 years of academic research back in 1900. We obviously cannot change the past. But we sure can change the future.

    We do not have an efficient market today. But we COULD have one. All we need to do is to permit people to learn the realities of stock investing before putting their money on the table. If we talked about these matters on every discussion board and blog on the internet, we would all know what we need to know to become far more effective investors and we would all become empowered to live far richer and more fulfilled lives as a result.

    That’s my take, in any event, Ss4Johnny. I do understand that there are lots of good and smart people who are not quite as enthused about these ideas as I am. You’re super for helping us all out with your contributions here.


  2. Thanks much for your comment, Chipper.

    I agree that marketing considerations play a role here. But I also believe that part of it is just that, when Buy-and-Hold was developed, we did not know all there was to know about how stock investing works and now the people who advocated it feel that they have painted themselves into a corner.

    You know what would be an interesting test? To find out how many of those who recommend Buy-and-Hold follow it themselves. My sense, based on years of talking about this stuff with lots of people, is that the vast majority who advocate Buy-and-Hold follow it themselves. So this is not purely a marketing-driven thing (although, again, I do believe marketing considerations play a role).

    The problem with Buy-and-Hold from a marketing perspective is that sooner or later it causes a crash. That scares people away from stocks for a long time. So the long-term marketing effect is not so hot.

    I think we need a national debate on the merits of and the dangers of Buy-and-Hold. I think that a lot of people who today see big marketing benefits from promoting Buy-and-Hold could be brought around in time. I think there are huge marketing benefits to be had in promoting a far safer and far more enriching approach to stock investing. It’s just a question of getting people up to speed on all the benefits of Valuation-Informed Indexing, benefits which many of us did not feel comfortable talking about until the economic crisis showed us why ignoring valuations is never an approach that works well in the long run.

    I hope you are able to stop by again in future days, Chipper.


  3. Money managers do not want investors to know about market timing because people would pull out. Their profits depend on people not knowing how to do this.

  4. I suppose I agree with your conclusion that long-term market timing could work. This statement from Larry, though, was a bit overplayed: “I believe this tool, combined with quality macro-economic analysis, will change the history of investing in this country.” Market professionals already know P/E 10. However, I do agree that in general value investors ignore macro-economic analysis at their own risk.

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