Valuation-Informed Indexing #208
by Rob Bennett
Prior to the morning of May 13, 2002, I never wrote a word about investing, I wrote only about saving strategies. From the morning of May 13, 2002, forward, I have never written about anything but Valuation-Informed Indexing.
GrizzlyRock Value Partners was up 34.54% net for 2021. The fund marked 10 years since its inception with a 198% net return, resulting in an annual return of 11.5%. GrizzlyRock enjoyed 14.8% long alpha against the S&P 500 and 26.9% against the Russell 2000. Q4 2021 hedge fund letters, conferences and more The fund's short Read More
I am either studying or writing about Valuation-Informed Indexing ten hours per day, seven days per week. When I am not studying it or writing about it, I am thinking about it. I think about this stuff even when I am taking a shower or watching television. If I were able to remember my dreams when I woke up from them, I have a strong hunch that I would learn that I dream about Valuation-Informed Indexing.
I have created five calculators the show how Valuation-Informed Indexing works that are available nowhere else on the interest. It took a lot of time and money to create those calculators. One of them sucked up almost two years (while I was working on many other projects as well) of work effort. I spent the entire 12 months following the 2008 price crash recording over 200 one-hour-long podcasts exploring every possible aspect of the Valuation-Informed Indexing project.
This is the 208th column I have written on the topic at this site. I wrote another 100 columns at the Death by 1,000 Papercuts site and another 100 columns at the Out of Your Rut site. I’ve written scores of guest blogs on the new model for understanding how stock investing works. I’ve given presentations on it to the first three Financial Bloggers Conferences.
I’ve built entire discussion boards (The Great Safe Withdrawal Rate Research Group) focused on the topic. I’ve written hundreds of thousands of discussion-board posts and blog comments. I’ve been bounced from 15 different investing sites as the result of demands made by Buy-and-Holders that I be banned from discussions in which they participate.
Didn’t Bruce Springsteen say something once about how “I’m a slave to rock and roll!”? Some people say this has become my obsession. I don’t see it that way. But I can acknowledge having evidenced a certain intensity re this exciting new stock investing strategy. It’s all based on Shiller’s 1981 finding that valuations affect long-term returns. But I think it would be fair to say that I have over the past 12 years taken the Valuation-Informed Indexing concept to some places to which Shiller has never taken it.
What’s the big deal? Why is it that I cannot let go?
I can explain that by posing one question. It’s a question that I would like to ask every investing expert in the world. The question is: “How have you changed your investing advice as a result of Shiller’s “revolutionary” (his word) 1981 finding that valuations affect long-term returns?”
I am not able to think of anyone who does not acknowledge Shiller’s contribution. You have to hit the ball a mighty long way to win a Nobel prize. Fama still says that he doesn’t believe in bubbles. But I doubt that even Fama would say that Shiller is not a towering figure in this field. So we are all united re that one.
But I am also not able to identify many who have changed their investing advice as a result of Shiller’s findings.
Shiller says that today’s P/E10 value tells us something about what the return will be over the next ten years. A great opportunity to test the proposition came to us in 2000, when the P/E10 metric went to the highest value it has ever gone to in history. When the P/E10 value hits “44,” a regression analysis of the historical data says that the annualized 10-year return should be something in the neighborhood of a negative 1 percent real.
How many investing experts told their clients and readers to dramatically lower their stock allocations at that time? I suppose that a few did. Jeremy Grantham. Rob Arnott. Ed Easterling. But how many others? How many ordinary investors knew how critical it was to their financial futures that they lower their stock allocations at that time? Many were promoting Buy-and-Hold strategies. Many were saying that it is fine to stay at the same stock allocation at all times.
That strikes me as a very, very, very strange reality. In other fields, we learn new things and we move ahead. In the investing field, we learn new things and — we ignore the new things we have learned.
I believe that the reason why we do this is not that investing doesn’t matter but that it matters too much. We cannot bear to acknowledge having made big mistakes in our investing strategies because we know that making big mistakes in this area delays our retirements. So we are in denial about what we learned from Shiller. We aren’t going to acknowledge this mistake until it wrecks us.
When that happens, we are going to realize that we have missed out on 33 years of learning experiences. We will enter a new world, one in which there is no legitimate argument over whether we need to adjust our stock allocations in response to big valuation shifts but only over what tools we should use to determine how big an allocation adjustment is needed in different circumstances.
The research shows that getting your stock allocation right is 80 percent of the investing game. Get that one right and it is almost impossible to do poorly in the long run. Get that one wrong and it is almost impossible to do well in the long run. The issue that we don’t permit ourselves to talk about today (how much we should be changing our stock allocations in response to shifts in valuation levels) will be seen as the single most important issue of all in days to come.
Shiller started a revolution in our understanding of how stock investing works. The bull market delayed progress for a good number of years. But the bull market is over now and the day is approaching when the gates will be lifted and hundreds of powerful new investing insights will come flooding in.
Rob Bennett has recorded a podcast titled Probability Investing. His bio is here.