Valuation-Informed Indexing #104
by Rob Bennett
It’s taking a long time. Robert Shiller published research that revolutionized (his word) the field of stock investing in 1981. I’ve been writing about how to implement his insights for 10 years. For a time, that earned me the title “Most Hated Poster on the Internet.” It hasn’t been quite that bad since the crash. But I ain’t Mr. Popularity even today.
Southpoint Qualified Fund and Southpoint Qualified Offshore Fund returned 2.5% net for the first quarter, compared to the S&P 500's 6.2% return and the Russell 2000's 12.7% gain. During the first quarter, Southpoint's funds averaged 133% long and 70% short. Q1 2021 hedge fund letters, conferences and more The fund's long positions added 13% gross Read More
How much longer?
Someday these ideas have to catch on, don’t they?
The ideas have to reach a Tipping Point. Then you’ll be hearing about Valuation-Informed Indexing everywhere you go. Set forth below are the five things I believe we need to see happen to get us there:
1. We Need to See Another Price Crash
The best ideas in the world don’t catch on when there is no one interested in what they promise to deliver. We lived through the greatest bull market in history from 1981 through 2000. No one was looking for a better way to invest. Since 2008, we have seen pockets of interest. It’s going to take another crash to get the fire going, though.
2. We Need to See a Game-Changing Event
I’ve been saying for several years that the big day is going to be when John Bogle walks to the front of an auditorium and gives a speech containing the words “I” and “Was” and “Wrong.” That would be written up on the front page of the New York Times. Once it is written up on the front page of the New York Times, lots of people who are today afraid to speak up will find enough courage to do so. Momentum will accumulate quickly.
I had hopes when Brett Arends wrote in the Wall Street Journal about The Market Timing Myth, saying “it’s hooey” and “they’re leaving out more than half the story.” That one should have gone viral. But humans are social animals. Everyone would have written about it if they were sure that everyone else would be writing about it. Since they weren’t sure, it didn’t happen. When Bogle gives his “I Was Wrong” speech, everyone will be sure and there will be no holding back the wave.
3) Shiller Himself Might Give Things a Push
Shiller has said in interviews that he has never told us all he knows about stock investing because he would be branded “unprofessional” if he did so. I have a funny hunch (this is pure speculation) that he may have already written Irrational Exuberance II, the book in which he describes the strategy implications of his ideas (he was careful to avoid any discussion of how to implement the ideas in Part One) and is just waiting for the right moment to come forward with it. He’s been working this ground for a long time. He knows the signs to look for to know that the coast is clear.
4) We Need to Find Ways Around the Obstacles
For a long time people used to complain to me that there was no research supporting Valuation-Informed Indexing. Other than Shiller’s research. Which for unexplained reasons didn’t seem to count. Then John Walter Russell published a mountain of research exploring the Shiller-backed realities of hundreds of issues. Then the story was that we need peer-reviewed research. Wade Pfau produced peer-reviewed research. Then the beef was that it wasn’t published in a prestigious enough journal (the big-name journals are the ones least likely to want the old kings of the hill replaced by new kings of the hill).
Buffett has said that it may be that the only way we can defeat the old ideas is to wait until the people who won fame and fortune pushing the old ideas die off one by one. That takes too long! We have an economy we need to rebuild. We need to get something going soon.
I think there will be an internet solution. Some big site will give its approval to Russell’s work or Pfau’s work or some other enterprising fellow’s work and the peer-review thing will quickly come to be seen as being not such a big deal. Peer-reviewed research is not necessarily independent research. There’s as much politics in the peer-review process as there is in many other ways of presenting ideas for public consideration. We need to stop using peer-review as a Good Housekeeping seal of approach and seek out the strongest ideas, period.
5. The advocates of Valuation-Informed Indexing need to stop apologizing for their beliefs
It’s hard to promote a new idea. It’s doubly hard when the advocates of the idea evidence defensiveness. This is my pet peeve. I cannot tell you how many times I have heard smart people try to argue that changing your stock allocation in response to big valuation shifts is “not really market timing.”
If it’s not market timing, what the heck is it? The Buy-and-Holders all recognize it as market timing, and, if you try to say otherwise, they can tell they are being conned. We are market timers! We should be proud of it! The entire point of Shiller’s research is that long-term market timing is good. Long-term market timing is price discipline and no market can long survive without price discipline. So we have absolutely nothing to be ashamed of. We need to change how we present our case to start having more success with it.
Rob Bennett views his web site as an ongoing financial education project. His bio is here.