Valuation-Informed Indexing #148
by Rob Bennett
Robert Shiller and Jeremy Siegel are two of my favorite investment analysts. The entire Valuation-Informed Indexing project is of course rooted in Shiller’s revolutionary 1981 finding that valuations affect long-term returns. And in another way Siegel can be considered a grandfather of Valuation-Informed Indexing as well. Siegel’s book Stocks for the Long Run popularized the idea of rooting one’s investment strategies in what the historical return data tells us about what works. That’s Valuation-Informed Indexing with one big change — I include the effect of valuations in all my analyses because of Shiller’s finding and Siegel reports on the data as if valuations did not matter (pursuant to the dictates of Eugene Fama’s earlier revolutionary finding that the market is efficient and that valuations thus do not matter).
I’ve made a good number of enemies (and some good friends as well, to be sure) exploring the implications of Shiller’s findings in internet articles and blog posts and discussion-board posts over the past 11 years. I try hard to become or remain friends with the many good and smart and hard-working Buy-and-Holders whom I come into contact with during my travels. Sometimes, those efforts pay off. More often, though, Buy-and-Holders find my views on how stock investing works too “out there” for a warm relationship with me to be a possibility.
I say that Buy-and-Hold is a Get Rich Quick scheme. I say that the relentless promotion of Buy-and-Hold caused the economic crisis. They have their retirement money riding on a bet that Buy-and-Hold strategies work. The sad reality is that I have lost many friendships that meant a lot to me as a result of my stubborn (even I acknowledge that I am unyielding re this stuff!) insistence that, if valuations matter, they matter a great deal indeed and cannot be ignored by those seeking to enjoy a realistic hope of long-term investing success.
Robert Shiller has had more success than me in remaining friends with those on “the other side.” Jeremy Siegel has done more to popularize the Buy-and-Hold concept than anyone I can think of other than John Bogle. But he and Shiller remain personal friends. They are not just colleagues. They have vacationed together with their families. They truly like each other and care for each other despite their fundamental disagreement on the question of how the stock market works.
I think that’s super.
That’s the way it should be.
I strongly disagree with the investing advice promoted by Buy-and-Holders. But I have great respect and admiration and affection for the human beings who have worked so hard for so many years doing the promoting. I believe that the Buy-and-Holders got some important things wrong. But they are trying to get things right. And it is by trying to get things right and sometimes failing that over time we humans accomplish great things. I believe that the Buy-and-Holders have done important work that in the long run will be seen to have advanced our understanding of how stock investing works in highly significant ways. The Buy-and-Hold pioneers are heroes in my eyes.
There are times when my affection for them makes me want to soften my presentation of my own views. Perhaps I could say things in a way that would be perceived as less confrontational and thereby help the friction between me and my (estranged) Buy-and-Hold friends dissipate.
But probably not.
There’s a danger in walking that path.
It’s a danger that I suspect that Shiller and Siegel have succumbed to from time to time.
There’s a risk involved in fraternizing with the enemy. I certainly don’t think of the Buy-and-Holders as my “enemies” in any personal sense. I like them as people. But the Buy-and-Hold idea that it is not necessary for an investor to take the valuation level that applies for stocks into consideration when setting his stock allocation is very much the enemy. It is that idea that is responsible for 70 percent of the risk of stock investing, according to the Shiller-informed view. You cannot have as strong a belief in the power of Valuation-Informed Indexing to change the world for the better as I have and not be troubled by the human misery that the promotion of Buy-and-Hold strategies has caused for this generation of investors.
I love the investors who commit the sin that the Buy-and-Holders commit. But I hate that investing sin. It’s important that I not let my desire for friendships with these good people cause me to pull my punches in doing what I can to root this sin out of the collective investing mindset of today.
I believe that Shiller has pulled his punches from time to time.
It’s wonderful that he is warm with Siegel and with lots of others in the field who hold very different viewpoints. But we need Shiller making the case for a new approach to stock investing as strongly as he can possibly make it. I have seem him on numerous occasions fail to do that. One doesn’t gain the sense listening to Shiller that Siegel’s investing advice is nearly as dangerous as one concludes it to be when one follows the logic chain set forth in Shiller’s book where it leads one.
We all need to work harder not to dehumanize those who hold different investing viewpoints. None of us has a market on the truth. We often find that the fellow who we today view as being wrong in reality holds a better grasp of the full realities of a situation than we possess ourselves. So we should keep the hand of friendship extended at all times.
But we also have an obligation to push our ideas as far as they can fairly be pushed regardless of whether it hurts the feelings of some of our friends for us to do so or not. The full reality is that our friends want to understand how stock investing works as much as we do. They won’t realize their goal unless we work hard to make our case as compelling as possible.
Friends can disagree. And not just a little and over a few inconsequential matters. Friends can disagree strongly on matters of great import. There are circumstances in which we can only show the respect we feel for our friends with different opinions by disagreeing with them strongly on matters of great import.