A serious attempt at a serious discussion with Rob

[nfs]

Rob,

The last few days, I have noticed you writing a few times about the long term value proposition of stocks as long as one invests at fair value.  You have also noted, for years now, that stock prices are about twice fair value by your estimate and that long term means something like 30 years.  I'm an investor with a 30 year time horizon.  If stocks were at fair value today, your observation from historical data is that I can pretty much expect 6.5% compounded real returns over that long time period.

Taking your views about valuations and long run returns as true, what happens if I invest all my money today in stocks?  A plausible scenario is that stocks proceed to decline to what you consider fair value, say half of where they are today, and then I get 6.5% real from there on.  After 30 years, my realized return ends up being a compounded 4.1% real.  (I know you say you're not a numbers guy.  I am.  Trust me.  That's an accurate number.)

Should I be unhappy about a long run real rate of return of 4.1% per year?  Compared to alternatives like 10 year TIPS at under 1% per year, that doesn't seem all that bad.  The historical return premium for stocks over bonds is about 3% and this looks not so different.

Why shouldn't I just buy stocks today?

[hocus]

I'm an investor with a 30 year time horizon.

The point you are making here is a valid one. NFS. The 30-year payoff from stocks is almost certain to be greater than the payoff from one of the competing asset classes, according to the historical data.

Rob

[nfs]

The 30-year payoff from stocks is almost certain to be greater than the payoff from one of the competing asset classes, according to the historical data.

Continue, please.  

[hocus]

Continue, please.

Knowing valuations does not provide any help in the short-term or in the very distant long-term.

It doesn't help in the short-term because in the short-term prices are a random walk. In the short-term, it is investor emotions that are the primary influence on stock prices. There's no predictabilty.

It doesn't help in the very distant long-term because in the very distant long-term we really do have an efficient market. In the very distant long-term it is the economic realities that are the primary influence on stock prices. Valuations make a small difference at 30 years out, but not enough to justify investing in something other than stocks.

Valuations tell the story from about 10 years out to about 25 years out. That's the time-period in which the market is becoming increasingly less of a random walk and increasingly more of an efficient market. The correlation between the starting-point valuation level and return becomes stronger up to Year 20 and then begins to diminish. Stock returns are highly predictable at Year 30, but not by making reference to starting-point valuations. At Year 30, you can expect returns to have moved close enough to 6.5 percent real that stocks offer the better deal over alternative asset classes.

Here is a link to a set of charts that appear at Bob's Financial Website (Bob was a regular poster at The Old Vanguard Diehards Board):

http://bobsfiles.home.att.net/OddsAndEn ... #RetVsPE10

Click on "Real Returns vs. P/E10." The correlation is very weak at Year 5. It is statistically significant at Year 10. It is stronger at Year 15. It is extremely strong at Year 20. Then the correlation begins to grow weaker.

You don't need to look at valuations to form a reasonable assessment of what your return is likely to be 30 years out. It's impossible to form a reasonable assessment of what your return is likely to be 10 years out or 20 years out without taking valuations into account. Valuations are the primary influence on returns from about 10 years out to about 25 years out.

Rob

[nfs]

Valuations tell the story from about 10 years out to about 25 years out. That's the time-period in which the market is becoming increasingly less of a random walk and increasingly more of an efficient market.

If I understand you correctly, what you're saying is that you can time the market in the 10-25 year range by using PE10.  Yet a month ago, I ran a VII simulation for 20 year returns after-tax and the result was



Black is buy-and-hold, magenta is VII.  There is no clear winner in the period after WW2.  Sometimes it's better one way, sometimes the other.  Valuations do not seem to tell the story at all.

The correlation is very weak at Year 5. It is statistically significant at Year 10.

I would be interested to see a "not a numbers guy" demonstrate significance.  Please elaborate.

Valuations are the primary influence on returns from about 10 years out to about 25 years out.

This is the conclusion you would like to draw, not an axiom.  See the chart above and explain how you can possibly draw that conclusion from that trading result.

[hocus]

I would be interested to see a "not a numbers guy" demonstrate significance. ?Please elaborate.

I start with common sense. NFS. Bernstein says that valuations affect long-term returns as a matter of "mathematical certitude." He's right. Therefore, it is a logical impossibility that there could ever be a time when long-term timing does not work. You will always obtain higher returns at lower risk by permitting consideration of the effect of valuations to influence your stock allocation decisions.

If you don't want to do it, you don't need to do it. You earned your money and that gives you the right to do whatever you please with it.

If you want to see what the historical data says, there are many people who have looked at it in a serious way and confirmed what common sense tells us must be so. If you want to go with your emotional choice and feel a need to have some sort of "study" to point to to make you feel better about it, there's lots of that stuff out there too. People have looked at things with all sorts of agendas motivating their work and have come to all sorts of "findings" as a result. That's been going on since the first stock market opened for business.

You have posted in support of the tactics used by Greaney defenders to block honest posting on SWRs and on valuations in general. That tells us where you are coming from. I don't mean that as a personal dig. It's a reality that affects every post you put forward. If you think for certain that you know now how stock investing works, then you are not open to learning. If you are not open to learning, there are no words or studies that I or anyone else can put forward to convince you.

The reality is that you do not stay out of the discussions. You do not feel confident enough about your views to permit others to express their views without you smearing them for doing so. That's not a mark of confidence, in my assessment. I feel strongly that it is a mark of a lack of confidence. I certainly do not mean to say that it is only you who does this There obviously are a good number of others.

Valuations affect long-term returns. If you fail to correct your stock allocation percentage following a big change in valuations, you have allowed your plan to go wildly off course. You don't need to look at a "study" to know that much, NFS. That much is pure common sense.

Do as you please, you know? If you have genuine questions that you want to ask with the aim of learning together, I'll all for it. If you come to it with atttitude, I have better things to do with my time. If you put forward a post that evidences both some attitude and perhaps some desire to learn, I'll do my best to separate out the two elements and respond to the constructive desire in as helpful a manner as possible. The attitude you evidence in just about every post you put forward makes the job a lot harder than it would otherwise be, I can tell you that much for sure.

Do you want to learn how valuations affect long-term returns? Or do you want your old views to be reconfirmed? If you start out wanting one over the other, that's a problem. That's being emotionally invested in one approach. I think it would be fair to say that you are emotionally invested in a major way, NFS. I am too to some extent, of course. We all have emotions. But you don't see me supporting the sorts of tactics that have been employed by those defending the Old School SWR studies and the EMT. Not ever. There is no one who has spoken out in opposition to those tactics more often than I have.

The "significance" of the price you pay for something is obvious to anyone who cares to see it, NFS. Do you need someone to show you the significance of paying fair price for a house or a car or a banana? You obviously have the intelligence needed to understand why price matters for every other asset under the sun. I'd like to know how it is you came to believe that all the rules of buying and selling are stood on their heads when it comes to stocks. That's the incredible claim. Is there any justification in common sense or in data or in anything else to support that one?

That's the incredible claim. So that's where the discussions should begin.

I certainly don't mean to say that we understand today every aspect of the valuations matter. We do not. It would be a huge help if people like you who have skeptical views participated in a constructive manner. That would bring on a big learning experience on all sides of the question. The attitude meter would need to be turned down about 17 notches for that to happen.

You've participated in enough of these discussions to know that there is tons of evidence that valuations affect long-term returns, coming from dozens of the best-informed people in the world. For you to pretend at this late date that you just don't know anything about all this is disengenious in the extreme. It's game-playing. It's not a serious attempt to engage in a serious discussion, as you promote it as being in the thread-starter.

If you come back by saying that you have learned important things during the course of these discussions, that you regret your role in contibuting to the poisoned atmosphere that has done damage to so many boards, and that you still have doubts that you would like to explore some more, I'm happy to do anything that I can to see if we can find common ground on some points.

You need to figure out what your motivation is for posting, NFS. If your motivation is to learn, you are not going about it in the right way. It is not possible to learn about any other subject under the sun by going into the discussions with the attitude you evidence on a regular basis, and it's not possible with investing either. Investing is like everything else. You get out of it what you put into it.

Rob

[hocus]

The first sentence of my post immediately above was doctored by the individual who owns this site. The words that appear above are not the words that I wrote.

I wonder why.

Stock investing is a 100 percent rational endeavor? Sure it is.

Rob

[hocus]

Black is buy-and-hold, magenta is VII. ?There is no clear winner in the period after WW2.

There are many things that could be said about this. All are wasted words when said to someone who comes to the diiscussion with so much emotion that he cannot bring himself to object to the sort of dishonesty in evidence when a site owner doctors the words of the posters who participate at "his" discussion board.

One very simple thing is that the VII investor is investing with far less risk since his stock allocation is lower when stocks are at their riskiest. That's a huge edge. When Investor A obtains the same return as Investor B at far less risk, he is obviously far ahead of the game.

Another very simple thing is that we are now at one of the highest valuation levels ever seen in the history of the U.S. market. If VII investors are ahead of Passive Investing investors at a time when we are at one of the highest valuation levels ever seen, who do you think is going to be ahead after valuations return to more reasonable levels? Please do not insult your own intelligence by spending too much time thinking that one over. NFS. The question answers itself to anyone who is not so emotionally wrapped up in a failed approach that he cannot let the answer in.

A third very simple thing is that the investor practicing Passive Investing cannot stick to a buy-and-hold strategy when prices are coming down in the aftermath of a huge bull. This is always presumed in the sorts of "analysis" that you present above. Try using reasonable assumptions and see what you get. The VII investor is positioned to walk the buy-and-hold walk because the VII investor keeps his risk profile roughly stable as investors all about him are losing their heads buying into Passive Investing or whatever the emotional investing choice of the era is in the particular bull market under discussion.

You couldn't come up with these three on your own? You needed to ask? Give me a break, NFS. You certainly have not persuaded me that you are not intellectually capable of seeing these things on your own.

You're capable of seeing these things. And yet you act as if you are not. And you encourage efforts to smear those who post constructively. What do these realities add up to?

They don't add up to a finding that stock investing is a 100 percent rational endeavor. I think that much is fair to say.

The sort of edge shown in your chart is no small thing, NFS. It might be small for the first few years. Compounding will over time transform that certain edge (there can never be a time when valuations do not affect long-term returns -- we can be certain that this will always be so as a matter of "mathematical certitude") into something very large for the long-term investor. If you want to see how it plays out over 30-year time-periods, I constructed the Scenario Surfer to help permit interested parties to see just that.

The historical data shows the edge for rational investing to be very big, just as common sense tells us must be so.

Rob

[nfs]

Sorry for the late response.  I've been away for a few days.

Rob, I thought that if I carefully set the bounds of the discussion, you might be able to convey a coherent message.  Instead, I see 25 paragraphs of rant, based on demonstrable untruth and then extended via unsupportable and illogical leaps, with an occasional return to now familiar paranoid themes.

I'm putting it down to you being pissed at me.  As I don't expect that to change, I won't try to engage you like this again.

Enjoy your retirement.

[hocus]

Instead, I see

You used the right verb here, NFS. What you "see" is not necessarily what is so.

If you get that, you get it all. Because when you get that, you are willing to drop the abusive posting garbage enough to let the hundreds of community members who have seen something very, very different from what you see to use our boards for the purposes for which they were created.

You are not God, NFS. What you see is not Truth. Rein it in, fella.

I'm putting it down to you being pissed at me.

If I were pissed at you, I would be engaging in the same nastiness that you are engaging in, NFS. I would then be degrading myself in the same way in which you have elected to degrade yourself. I'm not interested in going there. If I go there, I become part of the ugliness than I am trying to bring to an end.

If you want to say that I am pissed at the abusive posting tactics that you employ to block others from seeing what you are not today able to see, you would be right. I am indeed pissed about that. Properly so. Many, many community members have been hurt as a result of that garbage. I oppose it.

I won't try to engage you like this again.

I understand.

The feeling is most definitely not mutual. If you ever feel that you want to ask sincere questions for the purpose of engaging in a mutual learning experience, please deal me in.

Rob

[DRiP_Guy]

Wow. Before Rob pulled his usual stunt of unaided self-implosion, he actually injected a little rare bit of truth into his narrative:

03/11/08 at 12:02:06

Knowing valuations does not provide any help in the short-term or in the very distant long-term.

short-term prices are a random walk.

in the very distant long-term we really do have an efficient market.

Valuations make a small difference at 30 years out, but not enough to justify investing in something other than stocks*.

*(I assume he does not mean 100% stocks here... but maybe he does, since he personally has been at the other end of the spectrum for about 10 to 15 years now!)

Shame he could not stick with the truth-telling long enough to appear sane.

If we interpolate Rob's own observations, pretend they are perfectly accurate, then what we are logically left with is the following:

Ignore valuations for the short term. Ignore valuations for the long term. If your investing horizon was ?somewhere less than thirty years and more than immediate (whatever interval that is), then MAYBE ?PE10 influences your outcomes in a measurable way, BUT as usual, Rob is unable to come up with a specific market timing method for someone to actually utilize that beats buy and hold, and his personal example of "sell-and-hide" is certainly not helpful as a market timing indicator, either, since it encompassed at least two periods of extremely favorable PE10 buying opportunities where Rob still did not pull the stock buying trigger -- maybe because he was just flat broke... ?