Wikipedia defines the Overton Window as “ the range of ideas tolerated in public discourse.” The entry explains that: “The Overton window is an approach to identifying which ideas define the domain of acceptability within a democracy‘s possible governmental policies. Proponents of policies outside the window seek to convince or persuade the public in order to move and/or expand the window. Proponents of current policies, or similar ones, within the window seek to convince people that policies outside it should be deemed unacceptable.”
It’s not only in politics that the concept applies. There is an Overton Window that applies in the investment advice realm too. And sometimes the rules as to whether an idea falls inside the window or outside it can be plenty strange.
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One rule that tripped me up for a long time was the rule regarding safe withdrawal rates,. The conventional (Buy-and-Hold) view is that the safe withdrawal rate is always the same number, 4 percent. That cannot be if Shiller’s research showing that valuations affect long-term returns is legitimate. The return that a retiree obtains on his stock investments obviously affects the amount that he can withdraw from his portfolio. So Shiller showed that the safe withdrawal rate is not a constant but a variable. Do the math and you learn that the safe withdrawal rate can rise to as high as 9 percent at times of super low valuations and can drop to as low as 1,6 percent at times of super high valuations,.
That cannot be said. I am telling you as a friend because I wish that someone had told me 16 years ago. That cannot be said. Don’t go there.
But it’s funny. You can actually almost kinda, sorta say it and live to tell the tale, William Bernstein says on Page 234 of his book The Four Pillars of Investing that, to identify the safe withdrawal rate at a time when stocks are as overvalued as they were at the top of the bubble, you need to subtract 2 percent from the usual 4 percent number. So the safe withdrawal rate for people who retired at that time was 2 percent. Nothing bad happened to Bernstein when he said that. So it is not entirely true that you cannot say that the safe withdrawal rate varies.
But you have to be careful. I got into a lot of trouble saying the same thing as Bernstein because I added a bit of clarity that he prudently elected to leave out of his account. I said that, given that the Buy-and-Hold studies get the safe-withdrawal-rate number wrong, they should be corrected. Bernstein didn’t do that. His sin was forgivable, mine was not.
Is there a difference? Intellectually, no. A failed retirement is a serious life setback. So, if you get the safe withdrawal rate wrong in a study, you need to correct it. Intellectually, that follows. But the practical reality is that pointing out in an obscure passage in a long book that the safe withdrawal rate varies with changes in valuations does not raise the same threat to people who have published studies claiming that the safe withdrawal rate is always the same number. The two statements are very similar and the one certainly follows from the other. But the softer statement is barely tolerable while the stronger one goes just a bit too far.
The Overton Window has to do with sensitivities. What Bernstein said certainly made Buy-and-Holders uncomfortable. But he did not push. He said his bit and then dropped the subject. I didn’t have the sense to realize where the line was. I remember that, when I read the passage in the Bernstein book, I thought that his publisher’s publicity department would be bringing attention to the passage because it was such a shocking claim that it would generate lots of attention for the book. Um -- no. Had the publisher drawn attention to Bernstein;s barely tolerable claim, we would probably have seen book burning parties organized.
I believe that Berntstein said what he said as a result of the dictates of conscience but sensed that this was not a point that he wanted to highlight. Scott Burns once described my blunt approach on this issue as “catastrophically unproductive.” I get so excited about the far-reaching implications that I see in an investing insight that I just cannot hold back.
I cross the lines all the time. I say that long-term market timing always works. Buy-and-Holders hate that. They view their disdain for market timing with the solemnity of a marriage vow. I have had friends tell me that I need to find some another way of making my point than saying that there is a form of market timing that always works. Perhaps I could advocate “tactical asset allocation variances.” Overton Window or no Overton Window, that’s just not my style. I love animated debate. So I like provocative statements. I don’t shy away from them. I don’t state things provocatively just for the sake of being provocative. But I feel that, if the evidence really does show that long-term timing works, the best thing is just to say it clearly and see if anyone can punch holes in the claim and learn from the experience.
Why does it bother my Buy-and-Hold friends so much that I do that? I think they have doubts themselves. Shiller once described the intellectual leap from the finding that short-term price changes are unpredictable to the Buy-and-Hold belief that the market sets prices properly as “one of the most remarkable errors in the history of economics.” That says it, in my view. There is just no basis for the claim that long-term timing does not work or even that it is not required (long-term timing is really just price discipline -- how could that ever be a bad thing?). The Buy-and-Holders want to continue believing in their strategy and so it makes them uneasy even to entertain the possibility that there is a form of market timing that always works. Ignore their discomfort at your peril.
My thought, though, is that we need to move the Overton Window. Our Buy-and-Hold friends obviously want to get it right. Had Shiller’s research been published prior to Fama’s, the idea that it is not necessary to exercise price discipline when buying stocks never would have become a thing. In that case, we all would be promoting long-term timing today. I think that we need to work to make that happy day a reality. So we need to push for a bit of expansion of the Overton Window. There’s great potential for advances in understanding that follow from opening up new fields of inquiry.
Rob’s bio is here.