by Rob Bennett
Third Point's Dan Loeb discusses their new positions in a letter to investor reviewed by ValueWalk. Stay tuned for more coverage. Loeb notes some new purchases as follows: Third Point’s investment in Grab is an excellent example of our ability to “lifecycle invest” by being a thought and financial partner from growth capital stages to Read More
There are two major criticisms directed at me by my detractors.
One is that the stuff I say about investing is so crazy out-there that I am obviously in need of meds and my investing advice is so dangerous that I should be banned from the internet before I do more damage.
The second criticism is that the stuff I say is so obviously true that I am improperly tooting my own horn to suggest that I have come up with anything new.
It’s more than a little hard for me to accept that both of these criticisms can possibly be true.
Yet, amazingly enough, there is an important sense in which both claims really are so.
No one disputes my claim that valuations affect long-term returns. Even my harshest critics acknowledge that I am right about this.
My critics are also correct to point out that I have never said anything about investing that goes beyond what follows inevitably from acceptance of a claim that valuations affect long-term returns. If you agree that that’s so, you are bound (at least in my assessment) to believe everything I say about investing. So it is fair to say that there is nothing new here.
It sure seems new when I say it. But everything I say is pretty darn elementary. The frank truth is that, if this were not so, I would not be able to come up with it.
The part that I add is that I calculate things. I reduce the insight that valuations matter to numbers.
This is what sets off fireworks. Buy-and-Hold is a numbers-based model, a data-based model, a research-based model. But valuations are never given consideration in the calculations done under this model (Buy-and-Hold was developed pursuant to the Efficient Market Theory, which posits that both overvaluation and undervaluation are logical impossibilities).
Buy-and-Hold took investing from a world in which most advice was subjective in nature to one in which most advice is objective in nature. I think that was a wonderful change. The big problem in investing is that emotion clouds our thinking. When we root our investing advice in objective numerical calculations, we create a check against our negative emotional impulses. We force ourselves to look at the realities whether we want to do so or not.
Well — not really.
This is what you would intuitively think would happen when investing advice became objective. The reality is that during the Buy-and-Hold Era we have put objectivity to use fooling ourselves to a greater extent than we were ever able to fool ourselves in the bad old days when most investing advice was acknowledged to be not much more than subjective impressions.
We use numbers to make our case today. But we leave the effect of valuations out of our calculations. So the numbers we use for guidance on what to do with our retirement money are all wrong!
We possess great confidence in the investing advice generated by this process because, after all, it is rooted in numbers, the hard stuff. That’s why the bull market of the late 1990s was the most out-of-control bull market ever seen in history. We didn’t just believe in our self-delusions this time; we really, really, really believed. We mistook our self-delusions for science this go-around.
We acknowledge that valuations matter. That’s so obvious that it is beyond dispute. But we don’t ever include the effect of valuations in our calculations because that would cause the numbers to come out other than how we want them to come up. Correctly calculated numbers would not support our Get Rich Quick fantasies. No! We need numbers. But not correct numbers. We need wrong numbers.
The thing that I do that is new is to calculate the numbers properly, or at least to try to do so. I consider the effect of valuations in all my calculations. That’s never been done before because investing advice wasn’t objective in the pre-Buy-and-Hold Ere and accurate reporting of the numbers has not been tolerated since the bull market took off in the 1980s.
Is Valuation-Informed Indexing something new? Yes and no. It’s obvious. If something obvious cannot be considered something new, there’s nothing new here.
But it is also stuff that cannot be spoken today. It’s real. It’s counter-fantasy, counter-bull-market, counter-Buy-and-Hold. In that sense it’s really something new.
That’s why I am do darn controversial. The Buy-and-Holders cannot stand it that I use their own weapon against them. They have been persuading themselves about the merit of fairy tales for 35 years now by assuring themselves that numbers-based arguments represent science. And then I come along adding in a factor that everyone knows matters and thereby showing that done properly the science says something very different.
The rules of stock investing have not changed since the first stock market opened for business. Had we always kept the realities in mind, there never would have been a single bull market. It’s when we forget about the importance of valuations that bulls and the bears that follow from them come into effect.
I am reminding us all of something that somewhere deep in our hearts we never really forgot in the first place. What I say is not new enough to justify calling me an original thinker but only new enough to justify throwing bricks at me to persuade me to shut up and leave people to their pleasant dreams of wild bull markets that don’t end in terrifying economic crises.
Rob Bennett views Jeremy Siegel as a dangerous individual who wrote a fantastic book. His bio is here.