Valuation-Informed Indexing #144
by Rob Bennett
Buy-and-Holders are worried. And getting more worried every day.
Seth Klarman Tells His Investors: Central Banks Are Treating Investors Like “Foolish Children”
"Surreal doesn't even begin to describe this moment," Seth Klarman noted in his second-quarter letter to the Baupost Group investors. Commenting on the market developments over the past six months, the value investor stated that events, which would typically occur over an extended time frame, had been compressed into just a few months. He noted Read More
How do I know that Buy-and-Holders are worried?
I began writing about the errors in the Old School safe withdrawal rate studies in May 2002. I have been trying to spread the word about the dangers of the 4 Percent Rule for 11 years, generally meeting with little success. In the past two years, numerous top-name publications have run articles pointing out the dangers of the studies. A few weeks ago, the Wall Street Journal joined them. When the leading financial publication in the United States is no longer worried about the reaction it will get from Buy-and-Holders to an article in which it lays the blame for millions of failed retirements on the long-discredited idea that investors don’t need to consider valuations when constructing their retirement plans, Buy-and-Hold is not inspiring much confidence in anyone anymore.
And how do I know that Buy-and-Holders are getting more worried every day? I read the reactions to the article posted by its readers and by readers of the article who gave voice to their reactions at a Bogleheads Forum thread discussing the article.
Beth Strycharz wrote: “It’s quite obvious that conventional wisdom for the past 10 year is out the window. New game, new rules, new plans.”
This has always been the problem with the Old School studies (and with Buy-and-Hold in general). The studies pretend to be science. But they assume that we will never again see a bear market. Once we do, all the “findings” in which retirees have placed their confidence are out the window. True research findings don’t change each time market psychology shifts.
Kenneth Anderson wrote: Retirement for the average man is an invention of the New Deal era and post-WWII. Prior to that, the only way a working person could really retire was to live with their adult children in their waning years. Perhaps the social experiment with a working man’s retirements is coming to an end.”
I don’t agree with the pessimistic conclusion. But I think this fellow is pointing at something important. The reason why we are still making basic mistakes in our retirement planning studies is that this really is a new science. Retirement will remain a realistic possibility for most of us. But we will be developing more sophisticated and more accurate means of planning our retirements effectively.
Frank Napoli wrote: Don’t forget the working man’s retirement plan — the lottery!
You didn’t see such sardonic takes advanced during the bull years. People turn to this sort of thing to relieve tensions that have been building up inside them.
Alan Aiello wrote: “If this is news to any investor, they better pay closer attention.”
That one is too true! The errors in the Old School studies were not hard to uncover. If we wanted financial planners to show us accurate retirement planning numbers, they would be happy to do so.
Eugene Hammons wrote: Rubbish!”
Defensiveness signals an underlying fear.
Nisiprius wrote: “4% was supposed to allow for stock market fluctuation. And it was supposed to have enough of a safety margin to be a reasonable planning guide for 30 years into the future. And less than 15 years later they are saying ‘oops’?”
ResNullius wrote: “It’s hard to imagine that current or anticipated future events, other than a total financial collapse around the world, would be worse than the 30- to 40-year period following 1929.”
This is whistling past the graveyard. The P/E10 value that brought on the Great Depression was “33.” In January 2000, we hit “44.”
Nisiprius wrote: “The CRSP — the source of almost any data for which the starting point is 1926 — was created in order to provide Merrill Lynch with numbers it could use in an advertisement. As with drug studies funded by drug companies, it would be churlish to suppose that the Chicago School of Business was in the bag; I have no doubt that the researchers saw it as an opportunity to do what they wanted to do anyway, and did it with skill and integrity. But it would be idealistic to assume that there was no funding bias at all.”
That’s a balanced and realistic assessment, in my view.,
Richard wrote: “The problem is that there never was a solid basis for the 4% rule. It’s just a general rule of thumb based on historical data that’s not sufficient to be a reliable predictor of the future.”
You weren’t allowed to say those sorts of things about the Old School safe withdrawal rate studies at the Bogleheads Forum back in the days before I was banned from the place!
Cut-Throat wrote: “This is amusing. Maybe this is the ultimate contrarian indicator.”
I remember Buy-and-Holders being “amused” by my claim in the days before the 2008 crash that the P/E10 value would one day drop below 20.
John94549 wrote: “Folks in the popular financial press could do everyone a huge favor by dropping the words “safe” and “rule” whenever “4%” appears in the piece.”
This one made my laugh.
Zaboomafoozarg wrote: “These threads are always depressing. By the time I get to the end of them, I feel like I’ll be lucky to get 0% return over the next 30 years.”
The reality is that we are on the threshold of achieving the greatest advance in our understanding of how stock investing works in our history. The only thing standing in our way is our unwillingness to give up on the Buy-and-Hold “idea” that it’s okay to stay at the same stock allocation percentage at all valuations levels. And confidence in that one is beginning to erode a bit.