Bogleheads

[peter71]

hi all,

so i gather from the discussion of rob bennett and "passion saving" on the "worst investment books ever" thread that there's some sort of history here, but while i haven't read the book my sense from his website is that the concept of "valuation-informed indexing" is really just that (i.e., he's an indexer who's read shiller and thus worries about valuations, no?)

http://www.passionsaving.com/I....tions.html

but what am i missing here? is it just the messenger and the tone or is it also the message?

all best,
pete

[tetractys]

I'm not the person that can sustain any kind of argument, but I'll try to say something briefly out of my first thoughts:

There's a fine line where risk management and market timing collide. Trying to depend on valuations as an indicator for market timing is not a dependable way to manage risk. Boleheads are more concerned with the risk management part, or keeping their portfolios balanced to their risk tolerance. Valuations do come into play though, through the usual rebalancing process, albeit free from the use of market timing indicators.

OK, I can't believe I've tried that ... I'll poke my head back up in a few days maybe.

Tet

[peter71]

hi tetra,

thanks for your reply! i've been further looking at bennett's site and it certainly is an interesting read for anyone who hasn't looked at it. you've got to love that he gives "twenty criticisms" of his own approach and "ten weaknesses" with himself as a money advisor, but i'd add that there's also some potential interaction effects among those weaknesses and criticisms -- i.e., if he's a self-described "egomaniac" /and/ a "numbers dunce" I'm not sure he's the one to be taking the non-stationary correlations from the shiller paper and reifying them in the form of a retirement simulator . . . still, if shiller's mostly right and if the behavioral finance people who say people can't really stomach "stocks for the long term" are mostly right, then i think there's definitely something to be said for the basic strategy . . . on the other hand, i don't think it's out of the question that glassman (dow 36,000) was in many ways right, either, and in a world where both shiller/bennett and glassman make some valid points there's certainly a strong argument for being a diehard.

all best,
pete

[jeffyscott]

While that messenger has some problems, I personally agree with the concept of owning relatively more stocks when prices are reasonable or cheap and relatively less when they are expensive.

I would also extend this to owning relatively more or less of various categories of stocks based on where the better values are. For example, a few years ago foreign stocks had better valuations than US. So at that time I increased foreign and decreased US, but only to a new allocation that I would be comfortable owning forever (went from 25% foreign to 35%).

Similarly, when stocks (in general) seemed to have gotten relatively highly valued, decided we did not want too much more risk and let our allocation fall to 50% (from 75%) as prices rose by doing a little selling and mostly by just adding new money to bonds.
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Jeffy

press on, regardless - John C. Bogle

[Prokofiev]

I would love to buy stocks only when they are cheap and sell them when they are high. That's a no-brainer.

But what valuation technique or model will you use as your crystal ball?

The PE(10) model uses 10 yr earnings to smooth out the earnings data. But how relevent are 1997 earnings to a stock selling today? And how relevent are PE ratios much less PE(10) ratios from 1920 or 1930's?? Using an average PE(10) over the past 100 years will more or less have you waiting to buy stocks for a VERY long time. Even Shiller says to not take this TOO seriously and has a portfolio that includes stocks. But sitting on the sidelines for the past 10 years hoping for a market crash has cost Rob and his followers (if he has any) a lot of money.
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Everything should be made as simple as possible, but not simpler - Einstein

[edge]

Bennett seems to be mentally ill. His message can be boiled down to: Use Shiller's PE/10 to try to time the market. This message is dangerous and heavily data mined. Bennett does not have an understanding greater than "this worked in the past" as to why PE/10 is a good indication of value.

The other 9999999999999999999 pages of his writings are the self aggrandized rants of a severely damaged individual.

[bob u.]

Hi Pete,

What you're "missing" is a long sad tumultuous history from the Morningstar days that, in my view, would be best not revisited at this site.

You're welcome to send me a pm and I'll try to explain in my limited way. It's also possible you can recover some of the unpleasantness from the Morningstar archive, but you also might find that it's best to move on.

Whatever I've said above I mean in a courteous, but cautionary, way. All the best, Bob U.

[jeffyscott]

[oneleaf]

If you look at Rob's book on Amazon, there is a negative review. Rob responded to it simply with "What have you got against Mallo Cups?". (in regards to a small little comment on mallo cups in the review).

This pretty much sums up every conversation that Rob ever engaged in. As soon as you take him seriously, you've already lost.

The idea that valuation matters was never the problem. He wants to make it seem like he's being censored, but that's not even remotely the case. It was his posting style that was annoying. Hi hijacked EVERY thread.

[lazyday]

The links in this post will lead to plenty of discussion about (and by) Mr. Bennett:

http://retireearlyhomepage.com.....php?t=941

By the way, I think he's now been banned from that board too.

[peter71]

hi all,

sure thing. given there's also some posts on rob's site about how no one on this site is willing to discuss valuations at all (certainly not what i've found) i think you could argue that actually doing so might be the best revenge, but i'm myself happy to let both aspects of the topic go for now and let others debate the substance further as they wish. in any case, i hadn't known shiller owns stocks himself so that's something learned in the process

all best,
pete

p.s. i'll spare people the "why no love for Dow 36,000?" thread, but as i've suggested a couple times before i do think there could be a shred of truth to the idea that whereas P/E's (including P/E 10's) were once quite meaningful as predictors of 10 year returns (basically shiller's claim) they've now for various reasons become less so. i haven't read /that/ book either, though, so i have only the vaguest sense of what those reasons are . . .

[bob90245]

The reason valuations matter so much in the writings of Shiller and Bennett is because they are considering only one slice of the stock market. So if you have all your equity eggs in the S&P 500 asset class basket, you better keep a close watch on that one basket!

Myself, I subscribe to the idea of diversfying one's equity allocation. When I read Bill Schultheis' Coffeehouse Investor book and website, it was a revelation.

[alec]

Well, here's a conversation from early 2007 on Valuations and Timing. You can also do a google search for "A Comprehensive Look at The Empirical Performance of Equity Premium Prediction" by Goyal + Welch, which doesn't speak to highly of timing the market based on a number of valuations.

After Stein & Demuth's "Yes you can time the market" book came out, there were a whole bunch of discussions on avoiding stocks when their valuations were high. Unfortunately, said strategy stopped working after 1985, oppsie.

btw - Rob Bennet [aka Hocus] totally exited stocks in 1995-1996 and has suffered severely for it.

- Alec

[Orion]

[ataloss]

I think it is better to buy stocks when the market p/e ratio is 6-10 but I am not sure what good this "insight" does me given current available investing options. Certainly it doesn't follow that switching in and out of stocks or sitting on the sidelines for 10+ years is the best approach. As for Mr. Bennett's other point that a 4% withdrawal rate with inflation adjustments might be too high for portfolio sustainability given current conditions, isn't that obvious?

I noticed that he is blogging about this thread at his web site anticipating that peter71 will face some sort of consequences for raising questions.
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Have Fun!

[Valuethinker]

[jeffyscott]

I know this is the digital age, but I don't think that means that the decison has to be: Stocks...yes or no?

How about, instead, the decision being: Stocks...25%, 50%, or 75%. Or if a small range is desired make it 40, 50, or 60%, or something like that.

Also rather than make this decision based on one magic measure (P/E10), why not consider everything? Such as: the current P/E (factoring in things such as temporarily low earnings, as in 2002), P/B, dividend yield, projections of expected return, expected return from alternatives (eg. TIPS, Bonds), etc.

For example currently P/E10 is extremely high, but other valuation measures seem to mostly be just high. If things looked really cheap, I might go up to 60% or possibly even 70% in equities. If I really believed P/E10 was the magic bullet, I might drop down to 30%. As things are, I end up at 50%...part of this decision is also related to expected returns from safer alternatives.
_________________
Jeffy

press on, regardless - John C. Bogle

[lazyday]

[Orion]

[grayfox]

For stocks, the important thing is the equity risk premium. This should certainly be taken into account when setting your allocation to equities. Exactly how depends on the investor. If the erp gets smaller, some investors should reduce their equity allocation, other investors should increase their equity allocation.

[bob90245]

[jeffyscott]

[ataloss]

I like the non binary approach to stocks. I have accumulated cash and short term bonds. Equity investments don't look overly promising right now. from the bobsfiles site on PE10 :

Note carefully, however, what an r-squared of 0.5 signifies. It means in this case that the P/E ratio based on trailing ten-year earnings explains 50% of the market's return over the subsequent decade. Though fifty percent is a lot better than nothing, it still means that half of the market's ten-year returns can not be explained in terms of where the P/E ratio stood at the beginning of that ten-year period.

Interesting that when back tested Rob Bennett's system failed but it didn't stop him from touting it.
_________________
Have Fun!

[peter71]

hi all,

for a non-trivial social scientific relationship an R-squared of .5 is actually quite high (though that's for more than ten years out). i was wondering if the website was therefore mixing up pearson's r and R-squared, but i double- checked the data in SPSS for the 10 year analysis and confirmed that, 10 years out, P/E 10 explains 29% of the variation in ten year stock returns over the entire period . . . BUT . . . per the mention of the non-stationarity of the relationship above, i then ran the same regression on just the last 25 years of data and found that P/E 10 explains only 6% of the variation in ten year stock returns -- suggesting that its importance as a predictor of returns has, (maybe for dow 36,000 type reasons?) much declined.

all best,
pete

[DRiP Guy]

[edge]