Valuation-Informed Indexing #155
by Rob Bennett
I can identify the precise moment that I lost confidence in Buy-and-Hold as an investing strategy.
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It was the evening of August 27, 2002. I had put up my famous post pointing out the errors in the Old School safe withdrawal rate studies on the morning of May 13, 2002. That had generated the most exciting debate on the realities of stock investing we had ever seen at the Motley Fool’s Retire Early board, then the most successful discussion board in the site’s history. We were learning every day. People were coming up with exciting new angles to examine every day. It was good stuff piled on top of good stuff piled on top of good stuff.
The Buy-and-Holders were frustrated. If valuations really affected long-term returns, as very much appeared to be the case, all sorts of powerfully important implications seemed to follow. Those who were emotionally invested in the Buy-and-Hold strategy did not want to see people exploring those implications. But there were clearly many community members who very much wanted to explore them and the published rules of the board clearly permitted this. What to do, what to do?
It was on the evening of August 27, 2002, that the death threats were posted.
All of the best contributors left the board community not long after.
I had considered the building of that board community my top life accomplishment up to that day. We had the most effective savers and investors from around the globe participating in the discussions there. We were on a daily basis exploring strategies not discussed in the best personal finance libraries in the world.
And now it was gone.
Because — the Buy-and-Holders couldn’t handle a discussion of the peer-reviewed academic research of the past 32 years (at that time, it was 21 years). If you had asked me prior to that evening what investing strategy I favored, I would have identified myself as a proud Buy-and-Holder. I couldn’t say that anymore. An investing strategy that causes that level of defensiveness cannot stand the test of time, in my assessment. So I moved on.
I went looking for board communities rooted in a belief in Shiller’s research, in a belief that valuations matter and that Buy-and-Hold can never work. I was amazed to find none. I have not identified one to this day.
There are bear boards, of course. A lot of them.
But I don’t like Shiller because he is a bear. I like Shiller because I believe that his research findings are valid and important. In a world that understands Shiller, there cannot even be bulls and bears. In a world that understands Shiller, stock prices can never again get out of control. Bulls and bears are a thing of the past.
We need a place to discuss Shiller’s model (Valuation-Informed Indexing). I’ve learned in the following 11 years that there are lots of good and smart people who have serious doubts about the merit of the Buy-and-Hold concept. Unfortunately, it takes some digging to identify such people. Most doubters never go to the trouble. So they continue believing that Buy-and-Hold may at least kinda sorta work. It’s by talking things over with like-minded people that we firm up and expand our beliefs. There is no place for Valuation-Informed Indexers to do that today.
I recently engaged in e-mail correspondence with Joachim Klement, Chief Investing Officer at Wellershoff & Partners. Joachim told me: “I can confirm your experience with long-term market timing. It does work and we use it in our firm a lot. In fact, our strategic asset allocation is based on our market outlook for the next five years or so, which in turn is informed by reliable predictors of long-term future developments like the Shiller PE. The funny thing is that we are here in Switzerland and we gain a lot of traction at small to medium-sized banks and asset managers with this kind of investment approach.”
Our discussion soon turned to The “Why?” Question.
Valuation-Informed Indexing is a huge advance. But most experts continue to promote Buy-and-Hold strategies and most investors continue to follow Buy-and-Hold strategies. Why? Why haven’t we seen a shift from the discredited model to the exciting new one?
I argued in one of my e-mails to Joachim that: “People are social animals. They need to hear others endorse an idea to have confidence in it. It would make a huge difference if there were a place where people could go to find that lots of knowledgeable folks believe in these ideas. There is huge power in community.”
Joachim agreed. He said:”I will keep my eyes and ears open. If you want to start such a [community] yourself, you can count me in as a contributor.”
I am putting this one high on my list of important projects to which I need to devote some time over the next year or two. It’s not enough for a small number of us to have learned what we need to learn to break free of the misconceptions of the Buy-and-Holders. We need to create a community in which our ideas can be openly discussed and refined and challenged and improved if Valuation-Informed Indexing is to achieve its true potential. I think that the time will soon be ripe for this initiative, if it is not already.
Rob Bennett has recorded a podcast titled “Fear and Greed and Hope and Love.” His bio is here.
- I can confirm your experience
- I argued in one of my e-mails to Joachim
- Joachim agreed