Valuation-based market timing with PE10 can improve returns?
Posted: Sat May 28, 2011 4:52 pm
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Investing Advice Inspired by Jack Bogle
https://www.bogleheads.org/forum/
There are many definitions of "risk". Although I haven't read the paper, I assume he is referring to "standard deviation" as "risk". This is misleading.fredflinstone wrote:That's what Professor Wade Pfau says:
http://mpra.ub.uni-muenchen.de/29448/1/ ... _29448.pdf[M]arket timing [using Schiller's PE10 measure of valuation] provides comparable risks and the same average asset allocation as a 50/50 fixed allocation strategy, but with much higher returns.
BTW, what tool(s) are ya'll referring to for finding current/old PE 10s?bob90245 wrote:There are many definitions of "risk". Although I haven't read the paper, I assume he is referring to "standard deviation" as "risk". This is misleading.fredflinstone wrote:That's what Professor Wade Pfau says:
http://mpra.ub.uni-muenchen.de/29448/1/ ... _29448.pdf[M]arket timing [using Schiller's PE10 measure of valuation] provides comparable risks and the same average asset allocation as a 50/50 fixed allocation strategy, but with much higher returns.
The P/E10 backtest tool will tell you to increase your stock allocation when business risk is high -- the very reason that causes P/E10 to fall. For those with short memories, I would imagine that the P/E10 tool would have told investors to load up on stocks during the financial meltdown of 2008-2009 when P/E10 fell below 15. However, I don't remember anyone telling investors that stocks were no longer as risky, do you?
This website displays P/E10 in an easy-to-read format. Taken directly from Robert Shiller's P/E10 spreadsheet.Noobvestor wrote:BTW, what tool(s) are ya'll referring to for finding current/old PE 10s?
From the article:fredflinstone wrote:That's what Professor Wade Pfau says:
http://mpra.ub.uni-muenchen.de/29448/1/ ... _29448.pdf[M]arket timing [using Schiller's PE10 measure of valuation] provides comparable risks and the same average asset allocation as a 50/50 fixed allocation strategy, but with much higher returns.
The annualized return for that market timing strategy for large cap US stocks from Jan. 1871 to Jan. 2010 was 9.11% (I think that is total return) and the Standard Deviation (SD) was 13.93.The baseline market-timing strategy chooses either 100 percent stocks or 100 percent Treasury bills at the start of each year, depending on whether the value of PE10 is below or above its “historical average” at that time. ...When PE10 is above average, this suggests market overvaluation, and the investor chooses Treasury bills. When PE10 is below average, the investor chooses stocks. Following Fisher and Statman, I assume that 100 percent stocks is used (or the more aggressive allocation in later comparisons) for the years 1871-1880 when PE10 values could not yet be calculated.
If you look at the growth of 1 dollar invested 139 years ago, the all-or-nothing valuation-based market timing strategy provides 7 times higher returns than the 50/50 balanced fund. I see how taxes could shrink the difference, but it is not plausible that they would eliminate the entire discrepancy. Trading costs are so low nowadays that it is reasonable to ignore them entirely, except if you are buying thinly-traded equities.docneil88 wrote:I'd be surprised if the extra return of that market timing strategy would make up for the tax costs and trading costs of the extra trading.
This is a valid point. It would be psychologically difficult to "overbalance" into equities at times when equities are most despised. If you read the paper, you'll see that Pfau considers both all-or-nothing valuation-based strategies as well as "partial-shift" valuation-based strategies. The latter produce lower returns than all-or-nothing strategies but are still greatly superior to the 50/50 balanced fund in terms of risk-adjusted returns.docneil88 wrote:Also, since it's an all or none strategy, that makes it more difficult as an investor to stay faithful to the strategy at times when the strategy is not working.
Professor Pfau has identified a valuation-based asset allocation strategy which provides risk-adjusted returns that are greatly superior to the 50/50 balanced fund advocated by many Bogleheads.555 wrote:Could someone please explain what the fuss is all about.
Hi Fred, 7X sounds like a lot, but it's over the span of 129 years. The difference in annualized return is 9.11% vs. 7.08%, a difference that I still believe would be mostly eaten up by the higher taxes involved with a strategy that has much higher turnover than buying and holding a broad index fund. Best, Neilfredflinstone wrote:If you look at the growth of 1 dollar invested 139 years ago, the all-or-nothing valuation-based market timing strategy provides 7 times higher returns than the 50/50 balanced fund. I see how taxes could shrink the difference, but it is not plausible that they would eliminate the entire discrepancy.
Your figures are wrong. Look at Figure II on page 8 of the study. "Fixed 50/50" refers to a 50/50 balanced fund. "MT 0-100" refers to various all-or-nothing market timing strategies:docneil88 wrote:Hi Fred, 7X sounds like a lot, but it's over the span of 129 years. The difference in annualized return is 9.11% vs. 8.98%, a difference that I still believe could be eaten up by the higher taxes involved with a strategy that has much higher turnover than buying and holding a broad index fund. Best, Neilfredflinstone wrote:If you look at the growth of 1 dollar invested 139 years ago, the all-or-nothing valuation-based market timing strategy provides 7 times higher returns than the 50/50 balanced fund. I see how taxes could shrink the difference, but it is not plausible that they would eliminate the entire discrepancy.
"The stock market will fluctuate, but you can't pinpoint when it will tumble or shoot up. If you have allocated your assets properly and have sufficient emergency money, you shouldn't need to worry." (AAII Guide to Mutual Funds)
"Endless tinkering is unlikely to improve performance, and chasing last period's stellar achiever is a losing strategy." (Frank Armstrong, author and adviser)
"It must be apparent to intelligent investors--if anyone possessed the ability to do so (market time) he would become a billionaire--quickly--." (David Babson, author, adviser)
"What it really takes to improve your returns and diminish your risks is a willingness to stop focusing exclusively on the movement of the markets." (Baer & Ginsler, The Great Mutual Fund Trap)
"If we haven't said it enough, we'll say it again: Market timing is dangerous." (Barron's Guide to Making Investment Decisions.)
"Only liars manage to always be "out" during bad times and "in' during good times. (Bernard Baruch, famed investor)
"Market timing recommendations have an impressive track record of being harmful to an investor's financial health." (Peter Bernstein, author, researcher)
"There are two kinds of investors, be thay large or small: those who don't know where the market is headed, and those who don't know that they don't know." (Wm Bernstein, author and adviser)
The Boglehead (forecasting) Contest began in 2001. Of 99 Diehard guesses that year, only 11 even guessed the direction of the stock market. In January 2008, only 2 Bogleheads guessed how low the S&P would go. Of 11 professional forecasters, every one thought the S&P would gain (it declined -38%)
"If you're determined to succeed at investing, make it your first priority to become a buy-and-hold investor." (Jack Brennan, Straight Talk on Investing)
"For the 12 years ending 1997, while the S&P rose 734% on a total return basis, the average return for 186 tactical asset-allocation mutual funds was a mere 384%. (Buckingham Financial Services)
"I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two." (Warren Buffet)
"Market timing is an ineffective strategy for mutual fund investors." (CDA/Wiesenberger)
"Any investment method that relies on predicting the future is doomed to fail." (Chandan & Sengupta, financial authors)
"A successful investor has a good knowledge base, a well-defined investment plan, and nerves of steel to stick with it." (Andrew Clarke, financial author)
"Most investors are unable to profitably time the market and are left with equity fund returns lower than inflation." (2003 Dalbar Study)
"Take my word on it. Buy-and-hold is still your best long-run strategy." (Jonathan Clements, author & journalist)
"The buy and hold equity investor (S&P 500) would have earned a return of 8.35% for the 20 years ending 12/08, while the market-timer would have earned just 1.87%." (Dalbar research)
"Market-timing is bunk." (Pat Dorsey, M* Director of Fund Analysis."
"The performance of 185 tactical asset allocation mutual funds was compared with buy-and-hold strategies and equity mutual funds over the years 1985-97. Over this period the S&P 500 Index increased 734%, average equity funds increased 598%, and tactical asset allocation funds increased 384%." (David Dreman, author)
"Market timing is a wicked idea. Don't try it-ever." (Charles Ellis author of The Loser's Game)
"Do nothing. I think all of this market timing is statistically unfounded. I don't trust it. You may avoid a downturn, but you may also miss the rise. Choose the risk tolerance you're OK with and hold tight." (Professor Eugene Fama)
"Forget market timing in any form." (Paul Farrell, (CBS Marketwatch.com)
"The best practice for investors is to design a long-term globally diversified asset allocation based on present and future financial needs. Then follow that plan religiously, through all markets good and bad." (Rick Ferri, author and adviser)
"Benjamin Graham spent much of his career trying to devise a goodformula for when to get into--and out of--the stock market. All formulas, he concluded, failed." (Forbes, 12-27-99)
"Buy and hold. Diversify. But your money in index funds. Pay attention to the one thing you can control--costs." (Fortune Investor's Guide)
"Dont' sell out of fear or buy out of greed. Just keep making investments, and let the market take its course over the long-term." (Norman Fosback, author, researcher)
"The only function of economic forecastng is to make astrology look respectful." (John Kenneth Galbraith, Economist)
"I've learned that market timing can ruin you." (Elaine Garzarelli, Shearson Lehman chief strategist)
"Staying on course may be just as difficult in bull markets as in bear markets." (Good & Hermansen, Index Your Way to Investment Success)
"For most investors the odds favor a buy-and-hold strategy." (Carol Gould, author & financial columnist)
"If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting that's going to happen to the stock market." (Benjamin Graham)
"From June 1980 through December 1992, 94.5% of 237 market timing investment newsletters had gone of business." (Graham/Campbell Study)
"Your very refusal to be active, and your renunciation of any pretended ability to predict the future, can become your most powerful weapon." (Graham & Zweig, The Intelligent Investor)
"The best advice: buy and hold." (John Haslem, author and researcher)
"Even in a bear market, market-timing and actively managed mutual funds generally hurt investment performance more than they help it." (Mark Hulbert, N.Y.Times columnist)
"After receiving the Nobel Prize, Daniel Kahneman, was asked by a CNBC anchorman what investment tips he had for viewers. His answer: "Buy and hold."
"Timing the market is for losers. Time IN the market will get you to the winner's circele, and you'll sleep better at night." (Michael Leboeuf, author)
"No one is smart enough to time the market's ups and downs." (Arthur Levitt, former SEC chairman)
"It never was my thinking that made the big money for me. It always was my sitting." (Jesse Livermore, author & famed investor)
"Nobody can predict interest rates, the future direction of the economy or the stock market." (Peter Lynch)
"Buying-and-holding a broad-based market index fund is still the only game in town." (Burton Malkiel, Random Walk Down Wall Street)
"At the peak of the bull market in March of 2000 only 0.7% of all recommendations on stocks issued by Wall Street brokerages and investment banks were to "Sell." (Miami Herald, 1-26-03)
"If you can't handle the short term, if the uncertainty is stressful and the headlines are unbearable, then the markets are too hot for you: get out of the kitchen." (Moshe Milevsky, author & researcher)
"We're not keen on market-timing. It just doesn't work." (Morningstar Course 106)
"We've yet to find anyone who can accurately and consistently predict the market's short-term moves." (Motley Fools)
"Odean and Barber tested over 66,400 investors between 1991 and 1997. Their findings: "The most active traders earned 7% less annually than buy-and-hold investors."
"Forget trying to time the market and do something productive instead." (Gerald Perritt, financial author)
"The market timer's Hall of Fame is an empty room." (Jane Bryant Quinn)
"Countless studies have proved that no one is able to time the market effectively." (Mary Roland, author & journalist)
"Trading is based on the rather arrogant belief that the trader knows more than the buyers and sellers with whom he is trading." (Ron Ross, The Unbeatable Market)
"In the long run it doesn't matter much whether your timing is great or lousy. What matters is that you stay invested." (Louis Rukeyser, TV host)
"For the 10 years that ended 12-31-2000, only one newsletter out of the 112 that Timers Digest follows managed to beat the S&P 500 Benchmark." (Jim Schmidt, editor)
"What do I really think is going to happen? -- I have absolutely no idea. (John Schoen, senior producer for msnbc.com)
"I have learned the hard way that market timing and trying to pick a fund that will out-perform the market are both losing strategies." (Larry Schultheis, author and advisor)
"I'm a strong advocate of buying and holding." (Charles Schwab)
"It turns out that I should have just bought them (securities), and thereafter I should have just sat on them like a fat, stupid peasant. A peasant however, who is rich beyond his limited dreams of avarice." (Fred Schwed Jr., 'Where are the Customers' Yachts?)
"If you are not going to stick to your chosen investment method through thick and thin, there is almost no chance of your succeeding as an investor. (Chandan Sengupta, financial author)
"Investors should look with a jaundiced eye at any market timing system being peddled by its guru-creator." (W. Scott Simon, financial author)
"Buying and holding a few broad market index funds is perhaps the most important move ordinary invests can make to supercharge their portfolios." (Stein & DeMuth, (authors & advisor)
"Humans can't consistently pick the right stocks or call markets." (Ben Stein, economist author)
"It's my belief that it's a waste of time to try to time any market decline, or try to pinpoint a market bottom." (James Stewart, Smart Money columnist)
"It's a staple of personal finance advice: Buy-and-hold, because trading the stock market is a sucker's bet." Larry Swedroe, author and adviser.
"People should stop chasing performance and just put together a sensible portfolio regardless of the ups and downs of the market." (David Swensen, Yale Investments)
"Trust in time and forget market timing. Allow time to work its compounding magic for you. Let market timing inflict its miseries on someone else." (Tweddell & Pierce, financial authors)
"Stay invested. Not only does buy-and-hold investing offer better returns, but it's also less work." (Eric Tyson, author, Mutual Funds for Dummies."
"Few if any investors manage to be consistently successful in timing markets." (Wall Street Journal Lifetime Guide to Money)
"If you're considering doing your own market timing, the best advice is this: Don't." (John Waggoner, USA Today financial columnist)
"If you buy, and then hold a total-stock-market index fund, it is mathematically certain that you will outperform the vast majority of all other investors in the long run." (Jason Zweig, author, Wall Street Journal Columnist)
"I do not know of anybody who has done it (market timing) successfully and consistently. I don't even know anybody who knows anybody who has done it successfully and consistently." (Jack Bogle)
With all due respect, Taylor, some of these gurus you have cited are not uniformly opposed to valuation-based market-timing.Taylor Larimore wrote:Bogleheads:
Nearly every investor, at one time or another, is intrigued by market timing schemes. However, I have learned from personal experience that market-timing is a dangerous game as these experts explain:
"The stock market will fluctuate, but you can't pinpoint when it will tumble or shoot up. If you have allocated your assets properly and have sufficient emergency money, you shouldn't need to worry." (AAII Guide to Mutual Funds)
"Endless tinkering is unlikely to improve performance, and chasing last period's stellar achiever is a losing strategy." (Frank Armstrong, author and adviser)
"It must be apparent to intelligent investors--if anyone possessed the ability to do so (market time) he would become a billionaire--quickly--." (David Babson, author, adviser)
"What it really takes to improve your returns and diminish your risks is a willingness to stop focusing exclusively on the movement of the markets." (Baer & Ginsler, The Great Mutual Fund Trap)
"If we haven't said it enough, we'll say it again: Market timing is dangerous." (Barron's Guide to Making Investment Decisions.)
"Only liars manage to always be "out" during bad times and "in' during good times. (Bernard Baruch, famed investor)
"Market timing recommendations have an impressive track record of being harmful to an investor's financial health." (Peter Bernstein, author, researcher)
"There are two kinds of investors, be thay large or small: those who don't know where the market is headed, and those who don't know that they don't know." (Wm Bernstein, author and adviser)
The Boglehead (forecasting) Contest began in 2001. Of 99 Diehard guesses that year, only 11 even guessed the direction of the stock market. In January 2008, only 2 Bogleheads guessed how low the S&P would go. Of 11 professional forecasters, every one thought the S&P would gain (it declined -38%)
"If you're determined to succeed at investing, make it your first priority to become a buy-and-hold investor." (Jack Brennan, Straight Talk on Investing)
"For the 12 years ending 1997, while the S&P rose 734% on a total return basis, the average return for 186 tactical asset-allocation mutual funds was a mere 384%. (Buckingham Financial Services)
"I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two." (Warren Buffet)
"Market timing is an ineffective strategy for mutual fund investors." (CDA/Wiesenberger)
"Any investment method that relies on predicting the future is doomed to fail." (Chandan & Sengupta, financial authors)
"A successful investor has a good knowledge base, a well-defined investment plan, and nerves of steel to stick with it." (Andrew Clarke, financial author)
"Most investors are unable to profitably time the market and are left with equity fund returns lower than inflation." (2003 Dalbar Study)
"Take my word on it. Buy-and-hold is still your best long-run strategy." (Jonathan Clements, author & journalist)
"The buy and hold equity investor (S&P 500) would have earned a return of 8.35% for the 20 years ending 12/08, while the market-timer would have earned just 1.87%." (Dalbar research)
"Market-timing is bunk." (Pat Dorsey, M* Director of Fund Analysis."
"The performance of 185 tactical asset allocation mutual funds was compared with buy-and-hold strategies and equity mutual funds over the years 1985-97. Over this period the S&P 500 Index increased 734%, average equity funds increased 598%, and tactical asset allocation funds increased 384%." (David Dreman, author)
"Market timing is a wicked idea. Don't try it-ever." (Charles Ellis author of The Loser's Game)
"Do nothing. I think all of this market timing is statistically unfounded. I don't trust it. You may avoid a downturn, but you may also miss the rise. Choose the risk tolerance you're OK with and hold tight." (Professor Eugene Fama)
"Forget market timing in any form." (Paul Farrell, (CBS Marketwatch.com)
"The best practice for investors is to design a long-term globally diversified asset allocation based on present and future financial needs. Then follow that plan religiously, through all markets good and bad." (Rick Ferri, author and adviser)
"Benjamin Graham spent much of his career trying to devise a goodformula for when to get into--and out of--the stock market. All formulas, he concluded, failed." (Forbes, 12-27-99)
"Buy and hold. Diversify. But your money in index funds. Pay attention to the one thing you can control--costs." (Fortune Investor's Guide)
"Dont' sell out of fear or buy out of greed. Just keep making investments, and let the market take its course over the long-term." (Norman Fosback, author, researcher)
"The only function of economic forecastng is to make astrology look respectful." (John Kenneth Galbraith, Economist)
"I've learned that market timing can ruin you." (Elaine Garzarelli, Shearson Lehman chief strategist)
"Staying on course may be just as difficult in bull markets as in bear markets." (Good & Hermansen, Index Your Way to Investment Success)
"For most investors the odds favor a buy-and-hold strategy." (Carol Gould, author & financial columnist)
"If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting that's going to happen to the stock market." (Benjamin Graham)
"From June 1980 through December 1992, 94.5% of 237 market timing investment newsletters had gone of business." (Graham/Campbell Study)
"Your very refusal to be active, and your renunciation of any pretended ability to predict the future, can become your most powerful weapon." (Graham & Zweig, The Intelligent Investor)
"The best advice: buy and hold." (John Haslem, author and researcher)
"Even in a bear market, market-timing and actively managed mutual funds generally hurt investment performance more than they help it." (Mark Hulbert, N.Y.Times columnist)
"After receiving the Nobel Prize, Daniel Kahneman, was asked by a CNBC anchorman what investment tips he had for viewers. His answer: "Buy and hold."
"Timing the market is for losers. Time IN the market will get you to the winner's circele, and you'll sleep better at night." (Michael Leboeuf, author)
"No one is smart enough to time the market's ups and downs." (Arthur Levitt, former SEC chairman)
"It never was my thinking that made the big money for me. It always was my sitting." (Jesse Livermore, author & famed investor)
"Nobody can predict interest rates, the future direction of the economy or the stock market." (Peter Lynch)
"Buying-and-holding a broad-based market index fund is still the only game in town." (Burton Malkiel, Random Walk Down Wall Street)
"At the peak of the bull market in March of 2000 only 0.7% of all recommendations on stocks issued by Wall Street brokerages and investment banks were to "Sell." (Miami Herald, 1-26-03)
"If you can't handle the short term, if the uncertainty is stressful and the headlines are unbearable, then the markets are too hot for you: get out of the kitchen." (Moshe Milevsky, author & researcher)
"We're not keen on market-timing. It just doesn't work." (Morningstar Course 106)
"We've yet to find anyone who can accurately and consistently predict the market's short-term moves." (Motley Fools)
"Odean and Barber tested over 66,400 investors between 1991 and 1997. Their findings: "The most active traders earned 7% less annually than buy-and-hold investors."
"Forget trying to time the market and do something productive instead." (Gerald Perritt, financial author)
"The market timer's Hall of Fame is an empty room." (Jane Bryant Quinn)
"Countless studies have proved that no one is able to time the market effectively." (Mary Roland, author & journalist)
"Trading is based on the rather arrogant belief that the trader knows more than the buyers and sellers with whom he is trading." (Ron Ross, The Unbeatable Market)
"In the long run it doesn't matter much whether your timing is great or lousy. What matters is that you stay invested." (Louis Rukeyser, TV host)
"For the 10 years that ended 12-31-2000, only one newsletter out of the 112 that Timers Digest follows managed to beat the S&P 500 Benchmark." (Jim Schmidt, editor)
"What do I really think is going to happen? -- I have absolutely no idea. (John Schoen, senior producer for msnbc.com)
"I have learned the hard way that market timing and trying to pick a fund that will out-perform the market are both losing strategies." (Larry Schultheis, author and advisor)
"I'm a strong advocate of buying and holding." (Charles Schwab)
"It turns out that I should have just bought them (securities), and thereafter I should have just sat on them like a fat, stupid peasant. A peasant however, who is rich beyond his limited dreams of avarice." (Fred Schwed Jr., 'Where are the Customers' Yachts?)
"If you are not going to stick to your chosen investment method through thick and thin, there is almost no chance of your succeeding as an investor. (Chandan Sengupta, financial author)
"Investors should look with a jaundiced eye at any market timing system being peddled by its guru-creator." (W. Scott Simon, financial author)
"Buying and holding a few broad market index funds is perhaps the most important move ordinary invests can make to supercharge their portfolios." (Stein & DeMuth, (authors & advisor)
"Humans can't consistently pick the right stocks or call markets." (Ben Stein, economist author)
"It's my belief that it's a waste of time to try to time any market decline, or try to pinpoint a market bottom." (James Stewart, Smart Money columnist)
"It's a staple of personal finance advice: Buy-and-hold, because trading the stock market is a sucker's bet." Larry Swedroe, author and adviser.
"People should stop chasing performance and just put together a sensible portfolio regardless of the ups and downs of the market." (David Swensen, Yale Investments)
"Trust in time and forget market timing. Allow time to work its compounding magic for you. Let market timing inflict its miseries on someone else." (Tweddell & Pierce, financial authors)
"Stay invested. Not only does buy-and-hold investing offer better returns, but it's also less work." (Eric Tyson, author, Mutual Funds for Dummies."
"Few if any investors manage to be consistently successful in timing markets." (Wall Street Journal Lifetime Guide to Money)
"If you're considering doing your own market timing, the best advice is this: Don't." (John Waggoner, USA Today financial columnist)
"If you buy, and then hold a total-stock-market index fund, it is mathematically certain that you will outperform the vast majority of all other investors in the long run." (Jason Zweig, author, Wall Street Journal Columnist)
"I do not know of anybody who has done it (market timing) successfully and consistently. I don't even know anybody who knows anybody who has done it successfully and consistently." (Jack Bogle)
True. But when an investment approach is strongly supported by both empirical evidence (139 years of U.S. data) and common sense (buy when cheap, sell when expensive) then it is probably going to continue to work well in the future.William Million wrote:You can back test for many things over 139 years and find that some factor gave you larger returns (buying in odd years instead of even, for instance). My point is that you could come up with 20 fancy theories for how to time the market, backtest them all from 139 years ago and some of these theories, even rather preposterous ones, would beat the market. It doesn't necessarily mean any of them will beat the market over the next 139 years.
Here's what I told Wade when he said that he would still be working on the paper after he takes his CFA exam:fredflinstone wrote: I am open to the possibility that Pfau has made a mistake in his research, but I have yet to see any evidence of that.
Mel Lindauer wrote:And while you're at it, Wade, don't forget to take taxes and trading costs into consideration since that would certainly change the outome vs buy-and-hold.
Remember, tax-deferred accounts didn't exist for most of the period studied, which means most of this trading activity would have had to been accomplished in taxable accounts. And you need to consider the tax rates that were in effect at the various times as well as the brokerage charges and sales loads that were in effect at the various times the trades were made. Investing and trading were very expensive prior to Jack Bogle and Vanguard.
Using decades of data and common sense (they called it the "lottery effect"), many experts said small growth stocks should be avoided at all costs in the 90s. Out of sample, they've been the best performing asset class.fredflinstone wrote:True. But when an investment approach is strongly supported by both empirical evidence (139 years of U.S. data) and common sense (buy when cheap, sell when expensive) then it is probably going to continue to work well in the future.William Million wrote:You can back test for many things over 139 years and find that some factor gave you larger returns (buying in odd years instead of even, for instance). My point is that you could come up with 20 fancy theories for how to time the market, backtest them all from 139 years ago and some of these theories, even rather preposterous ones, would beat the market. It doesn't necessarily mean any of them will beat the market over the next 139 years.
Japan had high P/Es in the 1950s and 60s, yet very strong stock performance for the next 30 years.fredflinstone wrote:By the way, Professor Pfau replicated his research in Japan and came up with similar results. The successful "out-of-sample" performance of valuation-based market timing reinforces the arguments for it.
It is quite ironic that you would question this market timing startegy because it is well known that you yourself are a timer.555 wrote:Could someone please explain what the fuss is all about.
If the buying only in odd years beat the market over the past 139 years, why not adopt that strategy?fredflinstone wrote:True. But when an investment approach is strongly supported by both empirical evidence (139 years of U.S. data) and common sense (buy when cheap, sell when expensive) then it is probably going to continue to work well in the future.William Million wrote:You can back test for many things over 139 years and find that some factor gave you larger returns (buying in odd years instead of even, for instance). My point is that you could come up with 20 fancy theories for how to time the market, backtest them all from 139 years ago and some of these theories, even rather preposterous ones, would beat the market. It doesn't necessarily mean any of them will beat the market over the next 139 years.
By the way, Professor Pfau replicated his research in Japan and came up with similar results. The successful "out-of-sample" performance of valuation-based market timing reinforces the arguments for it.
I have yet to see any evidence that Pfau's research is flawed in any significant respect.
It would be nice to see sensitivity, but if I were to pick specific numbers to study so that I wouldn't be accused of data mining, PE10 and Jan 1 (or Dec 31, which comes to the same place) would be the natural choices. January 1 seems the obvious choice for an annual event.JW Nearly Retired wrote:Two points. First this whole approach cries out for sensitivity studies that could be easily done but were not. The author says re PE10 "there is no particular theoretical reason to pick precisely 10 years", but does. Also says "there is no particular need to test whether other measures would produce better results" and doesn't. He does not even bother to mention anything about no particular reason to choose the first day of January to make your in\out decision for the year.
Many wouldn't. There's lots of reports of value funds suffering from massive redemptions toward the end of this period (which was a large mistake in hindsight). However, to criticize a strategy because it takes a lot of discipline to follow is not a very good criticism. Buying stocks after they've plunged is hard, yet rebalancing is widely recommended. If you want to beat the market, any strategy will have to be hard to work.JW Nearly Retired wrote:Second point is just that who will have the patience for this sitting out of stocks from 1988 to 2009.
There's a reasonable theoretical justification for timing based on PE10. There really isn't one for odd/even years.William Million wrote:If the buying only in odd years beat the market over the past 139 years, why not adopt that strategy?
Of course, if buying in odd years did not beat the market, that means buying in even years beat the market and you should adopt that approach, since the "evidence" supports it. You can come up with a lot of approaches that beat the market over the past 139 years, but that doesn't mean you wouldn't be nuts for following those strategies for the next 139 years.
As I mentioned above, that's true of any strategy.William Million wrote:If you decide to use that PE10 metric and you beat buy and hold from day one, no problem. But even if you believe in it, you would probably concede that you could underperform for a while? So you should also decide: After how many years of underperformance, will you call it quits and abandon this market-timing strategy? 5? 10? 20? That's oen of the problems with market-timing. Even if you're right, you might give up in year 15. Then years 16-20 is when you would have blown past buy-and-hold.
These things don’t have to be cliffs you jump off.richard wrote:Many wouldn't. There's lots of reports of value funds suffering from massive redemptions toward the end of this period (which was a large mistake in hindsight). However, to criticize a strategy because it takes a lot of discipline to follow is not a very good criticism. Buying stocks after they've plunged is hard, yet rebalancing is widely recommended. If you want to beat the market, any strategy will have to be hard to work.JW Nearly Retired wrote:Second point is just that who will have the patience for this sitting out of stocks from 1988 to 2009.
grayfox wrote:It is quite ironic that you would question this market timing startegy because it is well known that you yourself are a timer.555 wrote:Could someone please explain what the fuss is all about.
Probably the most well-known timer there is, short of Big Ben. Every EE knows exactly what I'm talking about.
http://en.wikipedia.org/wiki/555_timer_IC
The worse problem, IMO, is that this paper is a response to an article by Fisher & Statman. If I'm reading correctly, they switch at the point p/e ratios move out of range, rather than waiting until some specific annual date. If so, why this change in methodology?JW Nearly Retired wrote:IMO, it doesn't really matter much if you data mine accidently by picking the "obvious choice", or because you are just lazy and want to publish something quickly, or if you do it because it gives the most impressive results. The results are equally misleading in all cases. You need to look at all the data and analyzed it in more then one narrow way.
I did read his paper:Taylor:
Pfau's paper demonstrates convincingly that a valuation-based long-term market-timing approach can and does beat a 50/50 balanced fund--and does so by a large margin. I recommend that you read his paper.
In order to help avoid data mining, the rolling median measure will be used in subsequent comparisons.
Past performance is no guarantee of future performance.For the market-timing strategy based on the rolling median PE10 value, the slightly lower
wealth accumulation results from a geometric return of 8.59 percent, compared to 8.6 percent for
the buy-and-hold strategy. The two strategies provide, essentially, the same returns.
This is a fundamental point. Low p/e means the market is telling you risk is high (and vice versa). You would expect to get higher returns because risk is higher. Of course, expected returns do not necessarily equal actual returns, or it would not be the case that risk was higher.bob90245 wrote:The P/E10 backtest tool will tell you to increase your stock allocation when business risk is high -- the very reason that causes P/E10 to fall. For those with short memories, I would imagine that the P/E10 tool would have told investors to load up on stocks during the financial meltdown of 2008-2009 when P/E10 fell below 15. However, I don't remember anyone telling investors that stocks were no longer as risky, do you?
Using a popular image, if hamburger is cheap today, is it because you're getting regular hamburger at a good price or is it because the hamburger is lower quality?letsgobobby wrote:Does it not make sense that buying things on sale is better?
fredflinstone wrote:Professor Pfau has identified a valuation-based asset allocation strategy which provides risk-adjusted returns that are greatly superior to the 50/50 balanced fund advocated by many Bogleheads.555 wrote:Could someone please explain what the fuss is all about.
lol I osculated with laughter on that post.grayfox wrote:It is quite ironic that you would question this market timing startegy because it is well known that you yourself are a timer.555 wrote:Could someone please explain what the fuss is all about.
Probably the most well-known timer there is, short of Big Ben. Every EE knows exactly what I'm talking about.
http://en.wikipedia.org/wiki/555_timer_IC
I think you are making a mountain out of a molehill.fredflinstone wrote:"Professor Pfau has identified a valuation-based asset allocation strategy which provides risk-adjusted returns that are greatly superior to the 50/50 balanced fund advocated by many Bogleheads."555 wrote:Could someone please explain what the fuss is all about.
Sounds like you've got the market timing gift. Given that, are US stocks under or overvalued today? Japan? Europe? EM?letsgobobby wrote:With regards to it being hard to do, perhaps - but not impossible. My stock exposure was never higher than 30% or so before 2008, and by fall 2009 it was almost 70%.
I believe Adrian suggested you "get out of stocks completely" during the time stocks were at their cheapest:letsgobobby wrote:Adrian Nenu went 100% stocks at some opportune moment during the 2008-09 crash.
If you really can "do it" consisently, you can make it into the Forbes 400 pretty easily with a little leverage. Never confuse luck with skill.letsgobobby wrote:If I can do it (with no formal business or investment experience or education)
Using that logic, if a company declares bankruptcy, and its stock drops to zero, it must be an incredible deal. Look at that low price! Alas, stocks drop (and rise) for a reason.letsgobobby wrote:Does it not make sense that buying things on sale is better?
That's actually very funny :lol: though I had to click in the link to figure out whygrayfox wrote:"It is quite ironic that you would question this market timing startegy because it is well known that you yourself are a timer.555 wrote:Could someone please explain what the fuss is all about.
Probably the most well-known timer there is, short of Big Ben. Every EE knows exactly what I'm talking about.
http://en.wikipedia.org/wiki/555_timer_IC "
Nope. Among other things, following convention is actually a pretty good check on data-mining.JW Nearly Retired wrote:Pfau cannot know that he hasn't picked some extreme outlier case in the data. Whatever you call it, having a huge set of data and arbitrarily throwing away all but an infinitesimal subset of it to analyze is shoddy and likely to be misleading. There are 200 and something closing prices a year and all but one are ignored. He should have tried trading on all of them. You could also reasonably try PE6/7/8/9/10/11/12 whatever. Trying a couple of thousand combinations of equally "reasonable" hypotheses is just some number crunching that could be done easily. If you get a small standard deviation of results over these 1000's of cases we would get some confidence this should work. Large deviation forget it. My bet would be on a large std deviation but I'm willing wait to see.richard wrote: We do appear to have a different take on the meaning of data mining. To me, choosing a reasonable hypothesis and testing it is not data mining. Testing lots and picking the best without theoretical justification is data mining. However, given that the earlier research used a different methodology (assuming my quick browse is accurate) does raise these issues.
Prof Pfau's paper is much like him digging one shovel of dirt out of the ground, finding one gold nugget, and immediately putting his "gold mine" up for sale. Nobody had better buy that mine until it's proven that random shovelful is not some fluke.
I really cannot understand why some finance grad student hasn't done this sort of analysis right. Could it be they have but didn't publish it because proving you can't beat the market doesn't look good on a finance resume? Nah, more likely it's just lazyness.
JW
That's what I now consider a problem. He seems to have switched from the convention used in earlier studies (switching if the metric is over the line on Jan 1 rather than when the metric crosses the line). If so, he's not following convention.peter71 wrote:Nope. Among other things, following convention is actually a pretty good check on data-mining.
Hi Richard,richard wrote:That's what I now consider a problem. He seems to have switched from the convention used in earlier studies (switching if the metric is over the line on Jan 1 rather than when the metric crosses the line). If so, he's not following convention.peter71 wrote:Nope. Among other things, following convention is actually a pretty good check on data-mining.
But I certainly agree with your disagreement with a post the disagrees with me.
both you and richard are conflating comments about the world's total equity and individual stocks. Obviously an individual stock (company) can be worth zero. It is nearly impossible that the entire world's future corporate earnings can be zero forever, unless we are in WWIII, in which case none of this matters at all. Implicit in any rational asset allocation is that the world will go on... companies (en total) have some value. that is why a broadly diversified valuation strategy works... even though an individual company, sector, or even country may go to zero, the entire world will not. Using richard's analogy, while the hamburger may reek, the entire global food supply will not rot within the 7 day sell-by date.yobria wrote:Sounds like you've got the market timing gift. Given that, are US stocks under or overvalued today? Japan? Europe? EM?letsgobobby wrote:With regards to it being hard to do, perhaps - but not impossible. My stock exposure was never higher than 30% or so before 2008, and by fall 2009 it was almost 70%.
I believe Adrian suggested you "get out of stocks completely" during the time stocks were at their cheapest:letsgobobby wrote:Adrian Nenu went 100% stocks at some opportune moment during the 2008-09 crash.
http://www.bogleheads.org/forum/viewtop ... highlight=
If you really can "do it" consisently, you can make it into the Forbes 400 pretty easily with a little leverage. Never confuse luck with skill.letsgobobby wrote:If I can do it (with no formal business or investment experience or education)
Using that logic, if a company declares bankruptcy, and its stock drops to zero, it must be an incredible deal. Look at that low price! Alas, stocks drop (and rise) for a reason.letsgobobby wrote:Does it not make sense that buying things on sale is better?
Nick
I can see that hedge fund and retail mutual fund managers likely have a short-term focus. But tell me why a pension fund manager would opt for a short-term rather than a long-term focus? My understanding is that at least 40% of pension funds employ a passive strategy using index funds to implement their Investment Policy Statement (IPS).letsgobobby wrote:The ability to have a very long-term view is a gift that only individual investors can have. It doesn't seem hedge fund managers, mutual fund managers, or pension fund managers have that luxury. In that sense, since valuation metrics only work to assess long-term (and not short-term) results, maybe the individual has an advantage.
Taylor, I think you may be misunderstanding the result you cited above. This is the part of the paper where Pfau compares a 100% buy-and-hold-forever stock strategy to the much lower-risk Market Timing approach. His point is that the Market Timing approach produces essentially the same returns as 100% equities but with much lower risk. If you look later in the paper you will see that the Market Timing approach produces much higher returns than a 50/50 balanced fund but with similar risk.Taylor Larimore wrote:Hi Fred:
I did read his paper:Taylor:
Pfau's paper demonstrates convincingly that a valuation-based long-term market-timing approach can and does beat a 50/50 balanced fund--and does so by a large margin. I recommend that you read his paper.
In order to help avoid data mining, the rolling median measure will be used in subsequent comparisons.Past performance is no guarantee of future performance.For the market-timing strategy based on the rolling median PE10 value, the slightly lower
wealth accumulation results from a geometric return of 8.59 percent, compared to 8.6 percent for
the buy-and-hold strategy. The two strategies provide, essentially, the same returns.
Pfau's use of a widely-used valuation metric certainly is not data mining. It would be nice to see the results for PE8, PE12 and so on, but this is a quibble. You are missing the forest for the trees. Also, you are rude in the way that you convey your criticism.JW Nearly Retired wrote:IMO, it doesn't really matter much if you data mine accidently by picking the "obvious choice", or because you are just lazy and want to publish something quickly, or if you do it because it gives the most impressive results. The results are equally misleading in all cases. You need to look at all the data and analyzed it in more then one narrow way.richard wrote: It would be nice to see sensitivity, but if I were to pick specific numbers to study so that I wouldn't be accused of data mining, PE10 and Jan 1 (or Dec 31, which comes to the same place) would be the natural choices. January 1 seems the obvious choice for an annual event.
This is really crappy academic research.
JW
The paper refutes a central tenet of the Boglehead investing philosophy. It's a big deal.555 wrote:I think you are making a mountain out of a molehill.fredflinstone wrote:"Professor Pfau has identified a valuation-based asset allocation strategy which provides risk-adjusted returns that are greatly superior to the 50/50 balanced fund advocated by many Bogleheads."555 wrote:Could someone please explain what the fuss is all about.