Posted: Fri Jul 18, 2003 1:06 pm
It could be that some especially bad result is more likely to occur once, sometime during that decade.
My sense is that this sentence is one that we need to examine in some depth. I'll offer a few thoughts on where I am coming from on this aspect of the question.
Bernstein says that in the short-term price changes are not predictable. The author of the book "Stock Cycles" also makes this claim. I presume that they are basing this claim on analyses of the historical data. So I accept that there is considerable support in the historical data for the idea that valuation affects prices in the long term but generally not in the short term.
Let me give an example of where using valuation levels to predict short-term price changes would have failed. I believe that stock prices were above normal levels in the beginning of 1995. Five years later, they were a whole lot higher. The fact that they were high at the start did not at all give you a sound basis for thinking that they would be heading downward soon.
I believe that the tricky thing in the short term is that the stock market has a tendency to go to extremes. Intuitively, you would think that, once prices go above the norm, there should be a downward tendency. There may be, but it may also be that there is an upward pull that is great enough to counter the downward tendency. Upward moves in price logically should cause downward moves in response, but because the market is not entirely rational upward moves often cause greater and greater upward moves instead.
Until they don't.
I believe that there is data supporting what Bernstein says on this point. But I also believe that there is data supporting what you are saying, JWR1945. The data that I am thinking about is data that you yourself presented in a post from the early days of The Great Debate. You were looking at the Dory36 section of the intercst study, and I recall you saying that all(or at least most) failed retirements had high-valuation start years.
If my recollection is correct, that suggests strongly that there is at least in some circumstances a connection between high valuations and really bad return years (the sort that cause busted retirements if they pop up in the early years of a retirement).
I am beginning to think that in general returns are not predictiable in the short-term. But that at extreme levels of valuation there is some predictability, enough to justify a special concern re the survivability of retirements beginning in years of extreme high valuation.
I am beginning to think that it is the way you describe it above. We need to be looking for one particular kind of bad retuirn year, the sort of bad return year that causes a busted retirement. Those types of return years seem to be correlated with times of high valuation. If a closer examination of the data bears this out, I believe that we might be onto something significant.
We would have identified the cause of a good percentage of all busted retirements, and we would have shown by looking at data that the likelihood of this bad thing happening is far greater in times of high valuation. Does that not suggest strongly that valuation matters when trying to determine what is safe?
This point, it should be noted, is independent of the valuation issue that causes Bernstein to put the SWR at 2 percent in the year 2000. If I understand things properly, the factor you are pointing to means that retirements beginning in high valuation years are less safe even if returns in the future are not less than average. This is an additional reason to believe that high valuation start years hold greater risk.
My sense is that this sentence is one that we need to examine in some depth. I'll offer a few thoughts on where I am coming from on this aspect of the question.
Bernstein says that in the short-term price changes are not predictable. The author of the book "Stock Cycles" also makes this claim. I presume that they are basing this claim on analyses of the historical data. So I accept that there is considerable support in the historical data for the idea that valuation affects prices in the long term but generally not in the short term.
Let me give an example of where using valuation levels to predict short-term price changes would have failed. I believe that stock prices were above normal levels in the beginning of 1995. Five years later, they were a whole lot higher. The fact that they were high at the start did not at all give you a sound basis for thinking that they would be heading downward soon.
I believe that the tricky thing in the short term is that the stock market has a tendency to go to extremes. Intuitively, you would think that, once prices go above the norm, there should be a downward tendency. There may be, but it may also be that there is an upward pull that is great enough to counter the downward tendency. Upward moves in price logically should cause downward moves in response, but because the market is not entirely rational upward moves often cause greater and greater upward moves instead.
Until they don't.
I believe that there is data supporting what Bernstein says on this point. But I also believe that there is data supporting what you are saying, JWR1945. The data that I am thinking about is data that you yourself presented in a post from the early days of The Great Debate. You were looking at the Dory36 section of the intercst study, and I recall you saying that all(or at least most) failed retirements had high-valuation start years.
If my recollection is correct, that suggests strongly that there is at least in some circumstances a connection between high valuations and really bad return years (the sort that cause busted retirements if they pop up in the early years of a retirement).
I am beginning to think that in general returns are not predictiable in the short-term. But that at extreme levels of valuation there is some predictability, enough to justify a special concern re the survivability of retirements beginning in years of extreme high valuation.
I am beginning to think that it is the way you describe it above. We need to be looking for one particular kind of bad retuirn year, the sort of bad return year that causes a busted retirement. Those types of return years seem to be correlated with times of high valuation. If a closer examination of the data bears this out, I believe that we might be onto something significant.
We would have identified the cause of a good percentage of all busted retirements, and we would have shown by looking at data that the likelihood of this bad thing happening is far greater in times of high valuation. Does that not suggest strongly that valuation matters when trying to determine what is safe?
This point, it should be noted, is independent of the valuation issue that causes Bernstein to put the SWR at 2 percent in the year 2000. If I understand things properly, the factor you are pointing to means that retirements beginning in high valuation years are less safe even if returns in the future are not less than average. This is an additional reason to believe that high valuation start years hold greater risk.