Valuation-Informed Indexing #364
By Rob Bennett
I recently discovered a fascinating article by Nassim Nicholas Taleb that explains something about stock investing that I have been trying to figure out for a long time now. It’s called The Most Intolerant Wins: The Dictatorship of the Small Minority.
This Tiger Cub Giant Is Betting On Banks And Tech Stocks In The Recovery
The first two months of the third quarter were the best months for D1 Capital Partners' public portfolio since inception, that's according to a copy of the firm's August update, which ValueWalk has been able to review. Q2 2020 hedge fund letters, conferences and more According to the update, D1's public portfolio returned 20.1% gross Read More
I began writing about stock investing on the internet in May 2012. I gained a certain amount of fame (infamy?) by pointing out in a post that I put to a Motley Fool discussion board on early retirement that the retirement studies responsible for the famous (infamous?) 4 percent rule (the rule states that retirees may safely take an inflation-adjusted 4 percent withdrawal from their retirement portfolios each year to cover living expenses, presuming that stocks continue to perform in the future somewhat as they always have in the past). I witnessed two strong reactions to the post. One group of community members implored me to continue with this line of thought; they said that the discussion provoked by the post was the best that we had ever seen at that board. Another group became insanely hostile, eventually shutting down the discussion and driving me off the board.
I have seen the same basic pattern repeat at scores of internet sites. My views on stock investing are rooted in the research of Robert Shiller which shows that valuations affect long-term returns and that stock investing risk is thus not static but variable and that investors therefore must adjust their stock allocations in response to big valuation shifts to have any hope of keeping their risk profiles roughly constant over time. About 10 percent of the investing population shares my perspective and shows intense appreciation when I offer comments on various strategic questions rooted in a belief that valuations must always be considered. Roughly another 10 percent does not share my views but has a sufficient interest in them to ask questions about them. The remaining 80 percent of members of the communities I have visited believes in some form of Buy-and-Hold. About one in eight of the members of that group (10 percent of the total community) is abusive in its comments.
I have been frustrated for some time that the abusive group possesses a virtual veto over what is discussed on these boards. The 10 percent that shares my views would of course be happy if full discussion of the many far-reaching implications of Shiller’s research were permitted. The 10 percent who ask questions would also prefer that since it would permit them to get answers to their questions. Most of the Buy-and-Holders are not terribly interested in participating in discussions of Shiller’s ideas but have no objections to seeing others do so. But the abusive behavior of the small number of extremely hostile Buy-and-Holders always brings the discussions to a halt. I have seen this same dynamic play out so many times that I have come to anticipate it when I visit a new site.
It’s a strange phenomenon. Shiller is obviously a well-respected figure. And the very purpose of discussion boards is to facilitate discussion. My comments on Shiller’s work suggesting that much of the conventional Buy-and-Hold wisdom about how stock investing works is outright dangerous has generated more discussion than any other comments that I have ever seen advanced at any internet site. And of course it would be a good thing ever for those who come to conclude that my ideas are entirely lacking in merit to at least permit others to debate them. We all learn more when our views are challenged than we do when they are met with easily won endorsements. So it would be a win/win/win for the ideas to be discussed. And yet, even though 90 percent of the members of most communities either agree with the views or are okay with the idea of permitting discussion of them, these discussions are repeatedly shut down.
I think that Taleb’s article provides an important clue to solving the mystery.
Taleb writes: “It suffices for an intransigent minority –a certain type of intransigent minorities –to reach a minutely small level, say three or four percent of the total population, for the entire population to have to submit to their preferences. Further, an optical illusion comes with the dominance of the minority: a naive observer would be under the impression that the choices and preferences are those of the majority.”
Taleb asked: “How do books get banned? Certainly not because they offend the average person –most persons are passive and don’t really care, or don’t care enough to request the banning. It looks like, from past episodes, that all it takes is a few (motivated) activists for the banning of some books, or the black-listing of some people.”
Intuitively we would think that a community in which 90 percent of the population either wants to hear a discussion or is at least tolerant of the idea of the discussion being held would permit the discussion. But it’s not necessarily so. Intensity matters. The 90 percent of community members who are okay with hearing discussions of Shiller’s ideas do not really care much whether those discussions go forward or not. But the 10 percent that feels threatened by those discussions feels very, very strongly that they must be blocked. Over and over again, the complacent group defers to the intense group out of a preference for peace over free debate.
I don’t think that it is safe to assume that, because Shiller’s idea’s have not managed to persuade more than 10 percent of the population in the 36 years in which they have been circulating that these ideas will not one day in the future spread like wildfire. I believe that the failure of the ideas to spread can be attributed to an intensity differential. As Machiavelli once wrote: “The innovator makes enemies of all those who have done well under the old conditions, and lukewarm defenders of those who may do well under the new. This coolness arises partly from fear of the opponents, who have the laws on their side, and partly from the incredulity of men. Men do not readily believe in new things until they have had a long experience of them.”
Shiller’s idea that valuations affect long-term returns is something new. Those who have built careers and reputations around a very different idea will oppose the idea’s spread with an intensity that will be enough to carry the day until the defects of the old idea are seen clearly with the arrival of a severe price drop. With the arrival of a severe price drop (which we should expect within the next year or two or three is Shiller’s research is valid), the intensity differential will shift. At that time, the 90 will be demanding answers and the percent will no longer be able to win the day with intensity alone. At that point, a true intellectual debate will be launched, one that I believe the Valuation-Informed Indexers will win.
Rob’s bio is here.