Valuation-Informed Indexing #246
by Rob Bennett
I have posted over 200 full-length articles on investing at my web site. I have also recorded over 200 one-hour podcasts. I have developed five unique calculators that required about one year of development time each. I have posted nearly 500 column entries. I have produced hundred of guest blog entries. There are hundreds of thousands of long discussion-board comments with my name on them.
And I worry sometimes that I might have it all wrong.
I advocate Valuation-Informed Indexing. Which is the opposite of today’sdominant model for understanding how stock investing works — Buy-and-Hold — in every possible way. Buy-and-Hold posits that investors should stay at the same stock allocation at all times. Valuation-Informed Indexing posits that risk is variable and that it is 100 percent impossible for investors to maintain the same risk profile at all times unless they are willing to adjust their stock allocations in response to big changes in valuations. The two core ideas lead to dramatically different strategic choices on every stock investing question that comes up.
I think I am right. I’m pretty darn sure. I am almost certain.
But not quite.
It horrifies me that there might be someone who will act on something that I have said solely because I have said it. I don’t think that anyone has ever done that. Because I am in the minority, my claims are subjected to a huge amount of skepticism. And, in any event, the majority views are reiterated so often that it is hard to imagine that there is anyone alive who isn’t aware that there are lots of good and smart people who disagree strongly with what I say.
Still, it might be that there is one misguided soul who somewhere along the line decided that he liked my style and thus was going to make an investing choice that I recommended solely because I did so. I wish that I could reach through the computer screen and shake that person. Hey! Guy! I am not sure! Hey! Friend! I could be wrong!
I wouldn’t experience these concerns if I told people how to select a dog breed that is right for them or if I wrote about the latest on electronic gadgets or reported on baseball games. For two reasons. One, there are more grounds for confidence re the realities that apply in those fields. And, two, mistakes do not cause nearly the same amount of damage in those fields. The investing field is very unsettled; we are in the early days of figuring out what really works. And getting something wrong in this field can mean causing someone’s retirement to fail. There’s little room for error.
Paradoxically, those are the very reasons why the Buy-and-Holders pretend to an unwarranted confidence re their beliefs.
While I do not claim certainty that Valuation-Informed Indexing is the answer, I DO claim certainty that there is a serious case to be made that Buy-and-Hold strategies are dangerous and that thus the Buy-and-Holders should not be claiming certainty either. But they do. The Buy-and-Holders often give the impression that they have the answers, that they know for sure.
I would put my confidence level at 90 percent. Please feel free to discount that assessment for bias. Even after 80 percentage points of discounting have been applied to that assessment, there’s still a 10 percent chance that the Buy-and-Holders are wrong about advice that millions of people are using to plan their retirements. They should be more cautious in how they state things.
Why aren’t they?
Paradoxically, it’s because these matters are so important that the Buy-and-Holders are so irresponsible in how they state things.
If the Buy-and-Holders believed that the Red Sox were going to win the World Series, they would have no problem with acknowledging that they could be wrong, that the Dodgers might prevail after all. Because it’s not that big a deal to anyone either way. People don’t get defensive about things that are not a big deal. We are all willing to give the other guy his due re matters that don’t concern us greatly.
Getting how investing works right is life-and-death. Our life savings are at stake. The thought of experiencing failed retirements in our 60s or 70s or 80s frightens us all so much that we block the thought from entering our minds. So we tend to overstate our confidence in our beliefs about how investing works.
The Buy-and-Holders believe that they know what works. But they are not sure. So, when they say that it is not necessary for investors to lower their stock allocations when valuations rise to insanely dangerous levels, they state the view as if it were the most obvious thing in the world. To state it any other way would be to suggest that they might be wrong, that they might have ruined their own lives and the lives of their friends and their neighbors and their co-workers with their mistaken ideas re how stock investing works. They cannot bear to contemplate that possibility. So they banish even the possibility that they are in error from their minds and from public discourse.
I think the Buy-and-Holders are wrong. I think they have made a terrible mistake. I think that they have ruined the lives of millions of people with their dogmatism.
But I also believe that when their mistakes become known to all (I believe that this will happen following the next price crash), it will be important that we all make an effort to understand why they acted like such know-it-alls. They didn’t want to get it wrong. They knew how important it was that they not get it wrong. They couldn’t bear to let in the thought that perhaps they had gotten it wrong.
The Buy-and-Holders are flawed humans. I believe that there is a very good chance that they are wrong in their beliefs about stock investing. But I don’t believe that there is any chance at all that I am wrong in my belief that they are good and smart people doing their best to help people discover how stock investing works.