Does VII work?

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Re: Does VII work?

Postby hocus » 02/17/08 at 17:37:35

we both know that your definition of "Staying the Course" (changing one's stock allocation in response to changing valuations) is different from everybody else's. ?

It's different from Mel Lindauer's. I think that much is fair to say.

Is it different from John Bogle's?

It depends on which section of a Bogle speech you read.

Most of his speeches have a section that advocates passive investing. That's the Mel Lindauer section.

Most of his speeches also have a section that say that Reversion to the Mean is an Iron Law of stock investing. That's the Rob Bennett section.

If Reversion to the Mean exists, then stocks offer a different long-term value proposition at different valuation levels. If the value propositon is ever changing, one is not "Staying the Course" by sticking with the same stock allocation.

How does Bogle resolve the conflict? I don't believe that there is one person on Planet Earth who knows the answer. I don't believe that Bogle knows the answer.

I give Bogle credit for being the one who got me on the path that led to development of the Valution-Informed Indexing concept. I say that I do not believe that he is a Lindauerhead. But I cannot say that I understand how he makes sense out of the "Staying the Course" concept (which he identifies as a critical concept).

I'd love to hear Bogle address the question. If I had been permitted to attend the last Vanguard Diehards meeting, this certainly would have been one of the questions that I would have directed to him. It's not my fault that we don't know the answer today.

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Re: Does VII work?

Postby Schroeder » 02/17/08 at 18:52:03

hocus wrote:If Reversion to the Mean exists, then stocks offer a different long-term value proposition at different valuation levels. If the value propositon is ever changing, one is not "Staying the Course" by sticking with the same stock allocation.

How does Bogle resolve the conflict? I don't believe that there is one person on Planet Earth who knows the answer. I don't believe that Bogle knows the answer.

Bogle will be the first to tell you that he will employ tactical asset allocation. It's no secret, hocus. It's in his books. He tells his readers that they can shift their stock allocation (though by no more than 15% from their long-term stock allocation). To me, that's a form of VII. A mild form, but a form all the same.

As I mentioned before, one cannot assess long-term value propositions in a vacuum. If bond yields offer a poor long-term value proposition when compared to stocks, that doesn't make for a clear case to shift out of stocks and into bonds.

The example I cited was 10-year TIPS yielding around 1.5%. And William Berstein and Bogle are estimating stocks could return 3.5% real. So right now, the long-term investor probably should tilt toward stocks.

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Re: Does VII work?

Postby hocus » 02/17/08 at 19:14:46

To me, that's a form of VII. A mild form, but a form all the same.

That supports my point that he supports both Passive Investing and Valuation-Informed Indexing.

The two ideas are in direct contradiction to each other and Bogle supports them both.

Yowsa!

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Re: Does VII work?

Postby hocus » 02/17/08 at 19:16:01

It's in his books.

I read those books. I learned from them. I took the ideas put forward in them seriously.

That's what got me in all this hot water!

Rob
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Re: Does VII work?

Postby hocus » 02/17/08 at 19:19:34

If bond yields offer a poor long-term value proposition when compared to stocks, that doesn't make for a clear case to shift out of stocks and into bonds.

At the top of the bull, TIPS were offering a guaranteed long-term return of 4 percent real and stocks were offering a most-likely long-term return of a negative one percent.

I ain't smart enough to understand all the intricacies of the Efficient Market Theory. But I developed a funny hunch that TIPs might be the better deal for long-term investors.

Do you think I might have been on to something? Please understand that I don't claim to be one of the Big Brains. I'm not in that class of intellect, to be sure.

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Re: Does VII work?

Postby hocus » 02/17/08 at 19:21:38

And William Berstein and Bogle are estimating stocks could return 3.5% real. So right now, the long-term investor probably should tilt toward stocks.

Um, right.

Uh, that makes sense.

If Bogle isn't able to square what he says at the beginning of a speech with what he says at the end of a speech, he's the guy we all should be going with when deciding what to do with our retirement money.

That makes sense, Schroeder. Good point.

Rob
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Re: Does VII work?

Postby Schroeder » 02/17/08 at 19:41:28

hocus wrote:If bond yields offer a poor long-term value proposition when compared to stocks, that doesn't make for a clear case to shift out of stocks and into bonds.

At the top of the bull, TIPS were offering a guaranteed long-term return of 4 percent real and stocks were offering a most-likely long-term return of a negative one percent.

I ain't smart enough to understand all the intricacies of the Efficient Market Theory. But I developed a funny hunch that TIPs might be the better deal for long-term investors.

Yes, TIPS at 4% real was an incredible deal back then. But 10-years TIPS are only offering 1.5% real today. As I said, the poor long-term value proposition for TIPS doesn't make a compelling case to switch out of stocks and into TIPS today. Especially when other respected authors like Berstein and Bogle estimate stocks could return 3.5% real over the long term.

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Re: Does VII work?

Postby Schroeder » 02/17/08 at 22:15:55

hocus wrote:If Reversion to the Mean exists, then stocks offer a different long-term value proposition at different valuation levels.

I don't think anyone will argue with you on that point. As far as "if" reversion to the mean exists, I think the evidence is quite strong that it does exist, as the following S&P 500 price chart shows . . .

Image

The red line my best attempt to identify the mean. Whatcha think? Of course, it's only an eyeball estimate. :roll:

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Re: Does VII work?

Postby hocus » 02/18/08 at 06:50:18

Yes, TIPS at 4% real was an incredible deal back then.

How many of the people at our boards knew this at the time, Schroeder?

If you go back and look at the Post Archives for the Motley Fool board, you will see that there were some who tried to talk about it. They were shut down by those who know better what's good for us all.

You say that we should listen solely to Bogle and Bernstein today. Did Bogle and Bernstein tell us then in clear and understandably terms about the incredible deal being offered by TIPS? If they got it wrong then, who's to say they aren't getting it wrong again today?

I'm a Bernstein fan. I'm a Bogle fan.

I'm also a community fan. I like to hear a lot of different viewpoints so that I can take the best from a lot of different sources.

Bernstein is not God. Bogle is not God.

And, yes, what I say about Bernstein and Bogle can safely be said about Lindauer and Greaney as well.

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Re: Does VII work?

Postby hocus » 02/18/08 at 06:55:01

I don't think anyone will argue with you on that point.

Lots and lots of people have argued it.

It's a good thing too. It's by hearing their arguments and constructing responses to them that I sharpened my own understanding. And all the others who participated in the discussions had opportunities to sharpen their understandings too.

If there were final and definitive answers to these questions, we would print out the final and definitive answers and memorize them and forget about having discussions.

The reason why we set up boards to facilitate having discussions with people having different viewpoints is that we understand the long-term benefits of doing so.

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Re: Does VII work?

Postby Schroeder » 02/18/08 at 10:07:01

hocus wrote:You say that we should listen solely to Bogle and Bernstein today.

I don't know if I said "solely".

On the other had, it is you and JWR who rely solely on your "Returns Predictor" which is a P/E10 based estimate. Now tell me, is that a balanced view?

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Re: Does VII work?

Postby hocus » 02/18/08 at 10:12:46

it is you and JWR who rely solely on your "Returns Predictor" which is a P/E10 based estimate. Now tell me, is that a balanced view?

It would not be balanced if we banned contributions from anyone presenting a different point of view.

Each community member needs to state his own views accurately and honestly. The balance comes from the fact that there are many people holding many different viewpoints all participating in the same community.

Bogle has never encouraged vicious smear campaigns against anyone who expresses a viewpoint a bit different than his own. That's why I say that Bogle is not a Lindauerhead.

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Re: Does VII work?

Postby Schroeder » 02/18/08 at 10:42:49

I see someone else raised the question about taxes . . .

**LINK**
What are the tax implications of this strategy?

The return are higher. So the taxes are higher.

I can live with that.

Rob

Hmm... You know, I read somewhere that a portfolio in a tax-advantaged account will grow more than a portfolio subject to annual taxes. The rationale is that taxes drains off money from the portfolio leaving less money available to compound.

Same principle applies to a strategy that incurs more transactions (like VII) versus a B&H strategy which, in theory, incurs fewer transactions.

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Re: Does VII work?

Postby hocus » 02/18/08 at 12:35:13

Same principle applies to a strategy that incurs more transactions (like VII) versus a B&H strategy which, in theory, incurs fewer transactions.

What "theory" is that?

VII involves the number of transactions that the investor elects to engage in. It's the same with rebalancing.

There is no tax imposed on those who look to the historical data to become informed of the realities of long-term investing.

The sensible thing to do is to aim to engage in only those transactions that put your finanically ahead. Do that and you will pay higher taxes, but only because your returns are greater. That means that you will also retire sooner.

To forsake the greater returns solely because you don't want to pay taxes on them is like turning down a raise because you don't want to pay taxes on the larger income.

It's crazy talk.

Knowing the realities of investing is a win/win/win. There is no possible downside.

Rob
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Re: Does VII work?

Postby Schroeder » 02/18/08 at 12:51:56

hocus wrote:VII involves the number of transactions that the investor elects to engage in. It's the same with rebalancing.

And how do you know this? It would be helpful if you would present an example from the historical data so it can be compared.

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