Valuation-Informed Indexing #86
by Rob Bennett
You can’t time the market.
Gates Capital Management's Excess Cash Flow (ECF) Value Funds have returned 14.5% net over the past 25 years, and in 2021, the fund manager continued to outperform. Due to an "absence of large mistakes" during the year, coupled with an "attractive environment for corporate events," the group's flagship ECF Value Fund, L.P returned 32.7% last Read More
Is that opinion or truth?
Is that opinion or truth?
Stocks are best for the long run.
Is that opinion or truth?
We need to be able to tell the difference. Learning is a building-block process. You start with something you know for sure. Then you form hypotheses about things re which you are not entirely sure. You test them. Over time, there is more and more that you know about the subject you are exploring and less and less re which you need to be satisfied with opinions. If we are going to become more knowledgeable about investing, we need to be careful to distinguish truth from opinion.
The importance of the distinction came to mind when I saw the wording of a description of my retirement calculator that a retirement blog recently used to link to it. Here’s the home page of the blog. The blogroll is on the right side of the page. The link going to the Retirement Risk Evaluator is titled Stock Valuation and Returns — An Opinion.
That’s not the language I use on the calculator page. I say that the numbers generated by the Risk Evaluator are the product of calculations. Calculations are objective. So I am putting forward those numbers not as opinions but as truth. The fellow who writes the blog obviously likes my calculator enough to want people to know about it while also feeling uncomfortable enough with my claim that the numbers generated report important truths to use a title in which he describes these numbers as “opinion.”
I don’t object. The truth is that the numbers generated by any calculator are determined by the assumptions employed in the methodology chosen. My calculator is a New School retirement calculator rooted in a belief in Shiller’s finding that valuations affect long-term returns. The Old School retirement calculators are instead rooted in a belief in Fama’s Efficient Market Hypothesis. They generate very different numbers.
It was a huge step forward when the Buy-and-Holders elected to root their investment advice in the academic research and in analyses of the historical return data. I remember feeling frustrated when first learning about stock investing to hear one supposed expert express a viewpoint entirely at odds with the viewpoint being expressed by another supposed expert. If two experts are entirely at odds, you have to question what sort of expertise it is that they possess.
Expertise worthy of the name leads one to a certain conclusion. I would feel very uncomfortable if my dentist reached a conclusion about what needed to be done with my teeth entirely at odds with the conclusion of another dentist. If both possess expertise in their fields, both should be coming to conclusions in the same general ballpark.
In the investing field the experts at often entirely at odds. This suggests that the research done in this field is not yet sufficiently well-developed for any of them to justify calling themselves “experts.” So long as there is not a consensus on fundamental points, the idea that anyone could come to possess true expertise about the subject matter of the field is a joke.
So it doesn’t really bother me if people refer to my findings on safe withdrawal rates as opinion rather than truth. My findings are the product of mathematical calculations. But they are not the mathematical calculations you would engage in if you believed in the Efficient Market Hypothesis. It could fairly be said that it is my opinion that the market is not efficient that causes my safe withdrawal rate findings to be what they are.
I do object to the double standard that applies re these matters, however. I have seen many references to the Old School retirement calculators, calculators whose numbers are rooted in a belief in the contrary opinion, the opinion that the market is efficient and that valuations thus do not affect long-term returns. I have never seen those calculators characterized as reporting mere opinions. Those calculators are promoted as being the product of science. Those calculators are marketed as putting forward not opinion, but Truth.
It’s a dangerous bias for the promoters of these calculators to be engaging in.
Beliefs about stock investing are not stable. Beliefs about the appeal of stocks are always wildly slanted in favor of stocks at the tops of bull markets and wildly slanted in opposition to stocks at the bottoms of bear markets. That’s by definition. We couldn’t experience either bull markets or bear markets without there being wild swings in public opinion re the appeal of stocks.
So characterizations of retirement calculators that struck most people as perfectly acceptable at the top of the wild bull of the late 1990s may strike those same people as wildly inappropriate at the bottom of the wild bear that we will likely be seeing appear before us later this decade. Retirements that people thought might succeed during the bull market will be seen to fail during the bear market. The people whose retirements fail will be looking for people to blame. The people who promoted retirement calculators that got the numbers wildly wrong (according to the general belief re how stock investing works that will be popular at the bottom of the bear market) will likely be targets of the anger of those who suffer failed retirements.
In the old days, it was easy. Everything was opinion. Few thought of investing analysis as a science.
The Buy-and-Holders changed that. They transformed investing analysis into an academic enterprise. SUddenly there were professors who looked at this stuff and drew conclusions. There were studies. There were journals and peer review and tables filled with numbers.
The reality is that it is all still opinion!
There is no agreement on the fundamental points. Shiller showed that valuations affect long-term returns, a finding that discredits the Efficient Market Hypothesis. But the Buy-and-Holders just went along promoting Buy-and-Hold strategies as if Shiller had never come along. At that point, their science was transformed into marketing.
In my opinion!
Rob Bennett has advice for those saddled with a bad boss. His bio is here.