Is Andrew Smithers Really Mannfm11?

Research on Safe Withdrawal Rates

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RobBennett
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Is Andrew Smithers Really Mannfm11?

Post by RobBennett »

Please see the issue dated 4-30-04.

http://www.weedenco.com/welling/biframe.htm

Juicy Quote #1: While the Efficient Market Theory was dominant - although not universally accepted - among economists until 20-25 years ago, strong evidence and numerous research studies disproving it have been piling up for years.

Juicy Quote #2:News of the demise of the random walk has only very slowly spread outside of the economics profession, in part because its overthrow came as a considerable shock to many economists. Nonetheless, if the random walk hypothesis were correct, then the most likely return on equity investment in the future would simply be its historic average return. The evidence, however, is strongly against this.

Juicy Quote #3: It shows the prospective real returns on U.S. equities from the end of 2003 out to 2013, assuming just for the sake of argument that the market returns to fair value by the end of 2004 and then subsequently provides the historic average return. The upshot is that even over 10 years, the prospective return on equity investment is barely above zero - and even if we'd taken the chart out another 10 years, the prospective return is still under 4% per year.

Juicy Quote #4:There usually have to be at least two downward cycles before people actually start to be able to accept their errors of the past. So this current secondary bubble is actually very typical, classic.

Juicy Quote #5: The advice people are always given is "not to panic."Â￾ But the really valuable advice would be: "panic now, not later."
Mike
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Post by Mike »

News of the demise of the random walk has only very slowly spread outside of the economics profession...
Jim Rogers stated that new ideas tend to be first ignored, then people grow actively hostile, and only later does acceptance come. I read the first chapter of Bernstein's new book last night, who related the sad experience of early scientific pioneers who were forced to recant upon threat of torture. Only later did people accept what they had discovered. It would not surprise me if most people were still in the ingoring or hostile stages when reversion to the mean eventually takes place. RTM is probably still a few years away, IMO.
mannfm11
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Post by mannfm11 »

I guess I am going to find out who Andrew Smithers is if I follow that link. I was going to write a book and I wrote several chapters. Random Walk was one of the chapters. I think it has been proven that if one can take the bad months out of the market and keep most of the good months in the market, the returns are massive. Straight through time, they are okay.

There is a lot here that I perceive to be very accurate. For one the returns over the next 10 years and the next 20 years on a portfolio held today is very accurate in my opinion. The longer we have positive returns, the longer the really bad returns are going to last and the longer the market presents no buying opportunity. As I pointed out, we are looking at about inflation plus 2.75% in the market right now. If you want to fudge and count stock buybacks, then you can increase this to a little above 3%. But who owns the SPX besides mutual fund investors? That means they are going to only get dividends and growth and I think the stock buyback is another bull market fiction that academia believes and few else. It makes plenty of money for their MBA grads in busines and on Wall Street and little for those that have the risk capital up for the business. If liquidating a company doesn't show up in increasing dividends, then there really isn't anything being paid and it is nothing but a beancounters reasoning and little else, like not recognizing the dilution costs associated with stock options, though there is no cash payment.

I think if one looks at 3.5% growth in dividends, it will take 20 years before dividends and growth get a point where they will start to produce an opportunity for investment gains. That doesn't mean a time in the next 20 years won't materialize that will allow one to buy stocks and make a killing, but that those holding sizable portfolios now, expecting anything more than very minimal or even lower than treasury bill returns for the next 20 years, then liquidate are going to have a rude awkening. I think zero is a pipe dream and no one is going to live long enough to get even with the top in 2000. when the market was around 300% of maximum top value. A dividend in the low 3% range has always been the top in the market and if you examine the Shiller data, you will see that the CPI adjusted values in 1973 and 1966, when dividends hit this level were not exceeded until 1993. Being that we were almost 3 times that level, we are likely in for maybe 50 years before the game gets even.

As I wrote, stocks are priced like any other financial asset. The yield is agreed to when the asset is purchased, not what it will sell for. In the case of stocks, there is a floating return tied to inflation and they act a little like an inflation adjusted bond. But, the core risk and return as associated with inflation is fixed in a limited range. If one is holding stocks now, they are agreeing to a return stipulated above, at 2.75% above the rate of inflation. Higher inflation will serve to move the time in which stocks take a new high forward, but it will also devalue the amount invested and for that matter, cause the holder to incur taxes associated with inflation and not real gains.

Only price changes or growth are going to restore the long term returns associated with stocks. Any short term gains we are going to see from here will only create a new high point where people will wish they got out of stocks. Since what stocks pay is dividends and the growth has historically been 1.1% above inflation, it is fairly easy for one to make a decision whether to engage in a portfolio of SPX stocks or to not. Because we are dealing with long term numbers and a sizable portfolio, the risk associate with the portfolio is basically reduced to market risk, but no beneficial return will accrue by engaging in the strategy, without a return that relates to the price and the financial markets in general. Because most people are required to engage in a portfolio strategy through managed funds and not through thorough stock selection, the returns associated with the portfolio is all they can gain. In an overvalued market, the idea behind the portfolio has been defeated, as the portfolio is now a group of stocks priced to return only a risk free return.

Taking the idea that stocks return 10% is like taking the idea that government bonds return 8% based on data collected in the 1980's. Or for that matter, if one bought long term government bonds in the 1980's, they will find that if they have 10 years left on the bonds, they have made an excessive return. This is because the inflation portion of the return has been diminished and the value of the future stream promised has increased. To make the same assumption with bonds at the current price over what they were 10 years ago would be faulty. The yield of a 10 year bond is now around 4.75%, down from around 7% in 1994. Being that a bond with 10 years left on it bought in 1994 would have been then a 20 year security, the additional return might be more, maybe 7.4% down to 4.75%. Stocks are not this type of instrument, as stocks are always an inflation plus instrument instead. Their short term price might be affected by taxes and a shortage of current return in the form of dividends, but the long term scheme eventually turns to inflation plus real growth plus dividends. A stock can respond to higher CPI, whereas a bond is terribly diminished in value by a higher CPI. What we saw in the early to mid 1980's was a rapid move in inflation down below the dividends offered on stocks, but still a healthy dose of inflation, which set off a growth trend that people took to be real. The real fully valued stock market came to light in the mid 1990's and every thing after that was piled on excess valuation. What we had seen was a financial return to normal, met with an upward inflationary revaluation of stocks to the peak prices in 1966. Since people and academia and many stock analysts had bought random walk and the other ideas about stocks, it seemed a destiny that they would continue this trend and people piled in with alternate returns in other assets somewhat depressed from the 1980's. There was very little financial reason for what happened in the stock market after 1995 and one might have been able to financially expect something like 6.5% or a little higher for holding stocks for the long run from then on.

As this page is about finding a safe withdrawal rate from stocks, that is pretty simple. I think, as I have pointed out before, that John is pretty much on the money and out of a manged SPX fund, something like 2.5% of value should never exhaust the fund. One can look at dividends in any given year and take 1% extra out and they will be okay. If they want to amortize the fund over their life expectancy and leave about 10 years for error and longivity, they can take 10 years more than their life expectancy and amortize the present value by around 5%. If you live 10 years past, you probably won't be worrying about money anyhow.

A better course is to get into something liquid, maybe 3 year treasuries and wait. Take what you need to live out within reason, but leave the rest. 3 year treasuries will produce the 2.5% I mentioned and they will give you the right to renegotiate or sell out at close to par over a short period of time. Wait for the market to show a dividend over 3% and put a little money back into the market. At 4.5% dividends put all but one year of living expenses into the market and go on.

Random walk and some of the other lies invented and propagated by wall street and ivy league buffs will not allow this theory. They don't recognize that the lows in 1975 required a 233% gain to get back to inflation adjusted even from 1966. This was a number that wasn't exceeded for quite a few years and with still more inflation. This means one has zero gains plus dividends to show for holding stocks for 20 to 30 years. Take a square look at the current dividend and realize that is the true return you are buying out of stocks. Don't pay any attention to the PE ratio we hear about so much because you can't take the PE ratio to the bank. There is only evidence of what people put in the bank that is paid by the corporation and the book keeping schemes of recent years cannot cover up a poor ability to pay the shareholder a return. Remember the dividend plus 1% is your real return and don't forget about the still looming and I think highly likely financial event of deflation that will devastate stocks. We are in a period of excess capacity and tight commodity supplies and if the commodity supplies weren't so tight, a lot of inflation could be absorbed and higher growth transpire profitably. But, I sense we are in for a debt hangover and at some point, monetary growth won't be used for more spending, but for running in place to support the credit structure as more people reach their credit limits.
JWR1945
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Post by JWR1945 »

Juicy Quote #3: It shows the prospective real returns on U.S. equities from the end of 2003 out to 2013, assuming just for the sake of argument that the market returns to fair value by the end of 2004 and then subsequently provides the historic average return. The upshot is that even over 10 years, the prospective return on equity investment is barely above zero - and even if we'd taken the chart out another 10 years, the prospective return is still under 4% per year.
When I use P/E10, I get a small negative (total) return over the first decade.

Dividend amounts (in real dollars) increase slightly (about 11% assuming 1.1% real growth/year for ten years), from below 2% to something closer to 2% (but still less than 2%). This means that you can withdraw close to 2% of the initial dollar amount of your holdings safely during that decade. I disagree slightly with mannfm11 about not being able to take P/E to the bank. You can, but that is bad news. The declining P/E10 as valuations return to the normal range means that stock prices decline enough to be problematic when you sell. Price declines can be large enough to put you into a less favorable position than if you had stuck with cash at a 0% real interest rate.

Looking at the examples with my New Tool, if the real return is flat for a decade, 3% withdrawals (based on the initial portfolio amount and adjusted to match inflation) leaves you with 65% to 75% of your initial balance at the end of ten years [with a projected lifetime around 30 years]. Compare this with cash at 0% real interest. It can be withdrawn at 3.3% for 30 years (with a final balance exactly equal to zero). At the end of a decade you would still have 67% of your (real) balance remaining. Alternatively, if you withdraw 3%, you still have 70% of your initial balance.

But notice: cash at 0% real interest is roughly equivalent to a 50% stock/50% commercial paper portfolio during the first decade. If you can get a positive (real) interest rate, the results favor cash and there is no risk.

The arguments against S&P500 investments become even stronger when one considers the more likely situation in which valuations continue to fall below typical levels. Multiple compression will be unpleasant and it will take time.

Have fun.

John R.
hocus2004
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Post by hocus2004 »

Here is a link to a speech that Andrew Smithers gave this past January.

http://www.smithers.co.uk/newsdyn.php?p ... =&pgndx=54

Juicy Quote #1: "I am expecting something of a revolution, over the next few years, in the assumptions that are made about the returns on equity investment."￾Â￾

Juicy Quote #2: "The fact that equity returns have been badly forecast does not mean that the job is impossible. A rational approach to forecasting equity returns is possible."￾

Juicy Quote #3: "Even over the very long term, the current value of the stock market will affect the return."￾

Juicy Quote #4: "If these points were understood, the current forecasts being made for equity returns would be very low indeed."￾

Juicy Quote #5: "Equity investing is much less risky than it would be if returns followed a random walk."￾

Juicy Quote #6: "Armed with this information, the most likely returns in the future can be calculated."￾

Juicy Quote #7: "Investing in an overvalued stock market has many similarities to playing roulette. The chances of making money in the short term are not far from evens, but the longer you play, the more certain you are to do badly."￾
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