Valuation-Informed Indexing #269

by Rob Bennett

Set forth below are eight questions that should be keeping Buy-and-Holders up at night.

1) What are the top ten changes that have been made in the Buy-and-Hold strategy as a result of Shiller’s “revolutionary” findings?

Yale Economics Professor Robert Shiller showed in peer-reviewed research published in 1981 that valuations affect long-term returns. That “revolutionary” (Shiller’s word) finding changed everything we thought we knew about how stock investing works. If valuations affect long-term returns, stock risk is variable rather than fixed; that means that we can reduce risk by taking valuations into account when setting our stock allocations. Shiller’s book exploring this finding in depth was a national bestseller. He was awarded a Nobel prize for his work.

Given the importance of this advance in our understanding of how stock investing works, one would have expected that the Buy-and-Holders would have made scores of changes to their strategy to reflect the new understanding. Can the Buy-and-Holders identify even ten changes?

Can they identify even one?

2) Why was there no reaction from the lead promoters of Buy-and-Hold when Brett Arends of the Wall Street Journal wrote that they are “leaving out half the story” of how stock investing works?

I have been writing about the dangers of Buy-and-Hold for 13 years now. So I was encouraged when I saw the Arends article saying that to ignore the effect of valuations on long-term returns is to leave our half the story of how stock investing works. I was amazed to see the article go down the memory hole without generating comment (except by me).

Arends could be wrong. But, if he were, it would be in the interests of the Buy-and-Hold advocates to point out his mistake. Why did no one do this?

3) Why has there been no clear explanation of the errors that were made in the Old School safe-withdrawal-rate studies?

I pointed out the error in the famous “4 percent rule” in May 2002. I got a lot of flak from Buy-and-Holders for doing so. But 13 years later just about every major publication in the field has run an article noting that the 4 percent rule is not backed by the historical data and that it would be dangerous for retirees to continue to follow it.

How was this mistake made? Why did it take so long to discover it? What can we learn from the mistake?

4) How was Shiller able to predict an economic crisis that began in September 2008 in a book published in March 2000?

I am the only person in this field who has blamed the economic crisis on the heavy promotion of Buy-and-Hold strategies (the idea that investors don’t need to lower their stock allocations when prices reach insanely dangerous levels caused the out-of-control bull market of the late 1990s and the loss of the $12 trillion of pretend wealth created by the bull market caused consumer buying power to constrict enough to cause hundreds of thousands of businesses to fail). Except for Shiller. Shiller has not said in the wake of the 2008 crash that Buy-and-Hold caused the economic crisis. But he did predict the loss of trillions in pretend wealth in Irrational Exuberance, a loss that he suggested would likely take place late in the first decade of the new Century.

How did he know?

And why have others not drawn the obvious conclusion that, since Shiller’s investing model was the one that predicted the crash and the economic crisis, it has earned credibility in the eyes of fair-minded people?

5) How did Bogle come up with his rule that investors never need to lower their stock allocations by more than 15 percentage points no matter how high stock prices go?

A regression analysis shows that the most likely 10-year annualized return for an index-fund purchase made in 1981 was 15 percent real. In 2000, it was a negative 1 percent real. An 80 percent stock allocation makes sense in the former circumstance. A 20 percent stock allocation makes sense in the latter circumstance. That’s a change of 60 percentage points, not 15. Bogle’s number is off by 400 percent.

6) Why do Buy-and-Holders become so emotional when their claims are challenged?

I have been banned at over 20 investing discussion boards and blogs. It is a common experience for me to receive apologies from the site owners who ban me in which they note that they believe that my work has great value and that they consider me one of the most polite and warm posters on the internet. They say that they are banning me solely because their Buy-and-Hold readers demand it and because they don’t want to lose the business brought by these followers of a purportedly research-based strategy.


Why would followers of a research-based strategy be upset by challenges to their beliefs? Wouldn’t they see such challenges as a way to confirm and thereby strengthen their convictions?

7) Why was Wade Pfau not able to find a single peer-reviewed study showing the long-term timing doesn’t work or isn’t required?

I worked with Academic Researcher Wade Pfau for 16 months. Wade holds a Ph.D. from Princeton. He performed an in-depth search of the academic literature trying to identify a single study showing either that long-term timing (changing one’s stock allocation in response to big valuation shifts with the understanding that it might not produce benefits for ten years or longer) doesn’t work or isn’t required without success.

Could it be that, contrary to the core belief of the Buy-and-Holders, one form of market timing always works and is always 100 percent required for investors seeking to keep their risk profiles roughly constant?

8) Is there any reason to believe that price matters any less in the stock market than it does in every other market known to humankind?

Price is what makes the car market run. Price is what makes the banana market run. Price is what makes the sweater market run. Price is what makes the grass-seed market run.

How can we be so sure that price does not matter when buying stocks?

If large numbers of the participants in these other markets became convinced that it was not necessary to take price into consideration when making purchases, it would cause them to collapse. Could that be why we have been seeing so much turmoil in the stock market in recent years?

Rob Bennett’s bio is here