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Comments on: Podcast #41 — Bogle and Valuations



The Old Ideas on Saving & Investing Don't Work -- Here's What Does



Last Build Date: Fri, 20 Apr 2018 02:13:15 +0000

 



By: Rob

Sat, 13 Dec 2008 14:00:04 +0000

Given today’s PE10 Ratio what should my stock allocation be given that I had 60% of investments in equities? Should I move up to 70%? Stay at 60% That's a smart and practical question, Retire Later. A lot of people are in that sort of circumstance today. First, I need to say that this is a judgment call. There is no one right answer. This is the sort of question that I believe we should be discussing on a daily basis (with honest and informed posting about valuations both permitted and encouraged) at the Retire Early and Indexing boards. We better inform our judgments by hearing from many others coming at the question from a variety of sets of life experiences. My personal take is that this person should be staying at 60 percent stocks If he is certain that he is able to emotionally handle another 50 percent price drop without selling any stocks. This person has been dealt a huge financial blow as a consequence of his emotional attachment to Passive Investing. If he is not sure that he is over that yet, he needs to lower his stock allocation before being made to pay an even bigger price for his inclination to go with emotional investing strategies. This way of looking at the question is the big distinction between Passive Investing and Rational Investing. Rational Investors always take the emotional considerations into consideration (paradoxically enough, it is irrational to ignore the emotional realities). Taking the emotional considerations into consideration is the key to walking the buy-and-hold walk as well as talking the buy-and-hold talk. If this person feels that he cannot bear any further hits whatsoever, he should be out of stocks altogether until he has recovered from the damage done to him by falling for the Passive Investing concept in earlier days. He should spend his time learning about the new model and only when he is confident that he fully understands why the market is not at all efficient in the short term (but is very much efficient in the distant long term) should he venture back into stocks. He should be making a serious effort to learn as quickly as possible. There is a big price to be paid for remaining out of stocks too long. The considerations above of course do not apply to Rational Investors (those who possess a clear understanding that valuations always have and always must affect long-term returns). For the Rational Investor, a 70 percent stock allocation is fine at today's prices. An argument could be made for going with 60 percent. It's a judgment call. The historical data argues for the higher allocation. The level of emotionalism we see in investors today (less than a year ago, but still very high by historical standards) argues for the lower allocation (because that emotionalism may cause us some time down the road to go to valuation levels as absurd on the low side as last year's valuation levels were absurd on the high side). I like this question a lot. This sort of discussion is the future of stock investing analysis, in my assessment. Rob



By: Retire Later

Sat, 13 Dec 2008 00:45:17 +0000

I will put the question to you that you put to Mr. Bogle. Given today's PE10 Ratio what should my stock allocation be given that I had 60% of investments in equities? Should I move up to 70%? Stay at 60%



By: Rob

Fri, 12 Dec 2008 16:13:21 +0000

A2Z needs to know that we have related our findings to the Gordon Model. We are not engaged in finding a chance correlation. We are on solid theoretical grounds. There is reason to doubt A2Z's sincerity. Please note the goonish comments contained in his post. I highlighted his post regardless because I believe he makes an important point. You are of course correct that we are on strong theoretical grounds, certainly (in my view!) far stronger than the theoretical grounds that once supported the Passive Investing model. Still, it is a good idea to put forward appropriate caveats. We don't want to make the same mistakes that the Passive Investing enthusiasts made before us. We always should strive to entertain some measure of doubt re our findings, we always should strive to remain open to new findings and new ideas and new interpretations of old findings. So I like the point that A2Z brings to the table. I hear him to be saying: "You can't be absolutely sure no matter how strong the evidence is for your case." I think that's good. I see that as a healthy take. There are going to be people who believe in Passive Investing for a long time to come. We want to be friends with those people. We want to share with those people, learn from those people. So we need to do all that we can not to get too carried away with the idea that we have figured it all out, no matter how strong the case may appear to be in our eyes. What I like about A2Z's post is that he suggests a means by which we can honestly give a little credence to the Passive Investing position. I certainly am not gong to endorse Passive Investing (unless someone puts forward an argument that persuades me of its merit). But I do want to be able to show respect and affection for those who believe in it. One of the biggest problems I struggle with is coming up with a case for Passive Investing that has intellectual merit and yet I know that there must be one (otherwise there wouldn't be so many smart and good people endorsing it). A2Z's post helps in this regard. I'm not trying to say anything more in support of the A2Z post than that. But I think that that is a pretty big deal. The case for Rational Investing is very strong today, in my assessment. The case for Passive Investing is very weak today, in my assessment. But we humans can never know anything with absolute certainty. It's good to be reminded of that and it's good to hear arguments that can be used to encourage ourselves to employ a bit of humility and caution in the way we state things. A2Z has helped us out in that regard and for that I am grateful for him taking the time that it took him to craft his post. I just wish that he would have reviewed the post before hitting the submit button and thought to delete the goonish part! Rob



By: Rob

Fri, 12 Dec 2008 15:57:28 +0000

There is a way to be cautious without timing What I most dislike about Passive Investing is the arrogance associated with it. That's a big-time turn-off for me. There are all sorts of solutions to the problems that can be identified once you are able to accept that there are indeed problems. The big obstacle for seven years now has been that many Passive Investing enthusiasts are extremely reluctant to acknowledge the problems. Once the attitude goes, constructive solutions just come flooding in. Change the attitude and you change the reality. Rob



By: John Walter Russell

Fri, 12 Dec 2008 15:47:27 +0000

A2Z needs to know that we have related our findings to the Gordon Model. We are not engaged in finding a chance correlation. We are on solid theoretical grounds. Have fun. John Walter Russell



By: John Walter Russell

Fri, 12 Dec 2008 15:45:44 +0000

There is a way to be cautious without timing: reduce your withdrawal rate (or add to your nest egg if still accumulating funds). It is a lousy way to go, but it is better than bankruptcy. Of course, this tosses the single, valuation indifferent, 4% (plus inflation) number out the window. Have fun. John Walter Russell