Expert Agrees to Discuss SWRs on NFB Board!

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Expert Agrees to Discuss SWRs on NFB Board!

Post by hocus » Sat Jul 12, 2003 6:50 am

Exciting news!

I have been trying to keep my mind off of the safe withdrawal rate (SWR) business for a few months, but it seems that that old black magic just won't leave me alone. Events have transpired that caused me yesterday to extend an invitation to Ed Easterling of Crestmont Research to be the first expert to participate in one of our special "A Night with the NFB Group" events. He accepted this morning.

Here's what happened. John Maudlin on June 27 published an article on his web site called "The Investment Matrix Revelations." It was an astonishing piece of work. The article was based on research by Easterling into the realities of long-term stock returns.
Many of the points made in the article are much in line with points that have been made at this board during our discussions of the realities of SWRs.

The article notes, for example, that the historical data shows that "investment horizons of ten years, twenty years, and even longer aren't long enough to ensure positive or even acceptable returns." It observes that the patterns of returns that have applied in the past "clearly show the most important thing you can do to positively affect your long-term returns is to begin investing in times of low P/E ratios."

The article argues that, if the future is like the past, "you have excellent chances of getting above average returns from the stock market if you buy when P/E ratios are 10-12 or below." And that, "if you begin to invest at the beginning of a secular bear, real returns over the next 20 years are likely to be negative!" Easterlng's research shows that: "There has only been one time when investors have made more than a 2 percent real return (after taxes and other costs) over the next ten years when P/E ratios started over 21, which is easily where they are today (no matter who is figuring them). That one lone example is from the mid-90's through today. If we are right and returns become flat, then even that one period will turn out to be closer to 2 percent."

Another comment from the article that reminds me of a thought that has been made repeatedly during the course of The Great Debate is that: "This doesn't mean that you can't make 5-8 percent on your portfolio. It just means you have to look at alternatives to traditional buy-and-hold mutual funds. Value will rule. Think dividends." Yet another is the recommendation that "investors who want to own individual stocks should focus on stocks with deep value and rising dividends."

I believe that articles like this, which report more accurately the lessons of the historical data than do SWR studies employing methodologies that ignore the effects of changes in valuation levels, will in time help a lot of people formulate more effective investment strategies. I sent Maudlin an e-mail telling him so, and making him aware that research has been done at this board that generated similar insights into what the historical data reveals.

Maudlin forwarded my e-mail to Easterling, and Easterling sent me an e-mail asking for more information on the work done at this board. I sent him a long response with links to some of the best posts by raddr, JWR1945, and BenSolar, and asking him if he would serve as our first "A Night with the NFB Group" expert.

Easterling is more of an expert on what the historical data says about long-term stock returns in general than he is about the SWR issue in particular. However, his e-mail this morning indicated that he has taken a look at the intercst study and that he has some questions about it and about my views on it that he plans to put to me in a telephone conversation in the next week or so.

I told Easterling that our process for the "A Night With..." event would be to formulate a question or two in advance that we intend to be the focal point of the one-hour or two-hour discussion-board event. We will give him the question or questions in advance and ask that he start the event with a posting of his response. Then we will ask questions about the response in an effort to come to a more complete understanding of his views on the particular matter at hand.

I have indicated to him that there is no need to rush in setting a date for the event. I expect that the SWR issue is going to be with us for some time to come. However, I wanted to let the community here know that we have an expert who has accepted an invitation to participate in a special event night. I think it is a good sign for the future of the board that someone like Easterlng was sufficiently impressed by the research that has been put forward here to agree to participate in such an event.

I urge all board members to read the Maudlin article and to review the Easterling research, and to give some thought as to what sorts of questions you would like to pursue at the "A Night With..." event. I have hopes that these special discussions with experts are over time going to break the stalemate in the FIRE community on the SWR matter. My sense is that many people have become locked into their positions, and some of the data-based arguments are no longer receiving a fair hearing. I am hopeful that hearing some fresh and informed voices may help people see how clear the message is that the historical data really tells, and that we can use insights put forward by our special event guests to move us to taking steps toward protecting aspiring early retirees from the sort of investing advice often characterized as "rational" at the other board.

As a general rule, I still intend to refrain from posting for the next few months. However, I will participate on threads dealing with the "A Night With..." events. I hope that posting limited to that one topic will not take up too much of my time, and I want to do whatever I can to get the "A Night With..." concept off the ground. The idea holds a lot of potential for making constructive use of this new internet discussion board communications medium, in my view.

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Post by hocus » Sat Jul 12, 2003 6:56 am

Here's a link to the Mauldin article where the Easterling research is discussed.

http://frontlinethoughts.com/article.asp?id=mwo062703

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Post by ElSupremo » Sat Jul 12, 2003 8:27 am

Greetings Hocus :)

I hope you've been well. Be sure to let me know when the date firms up so I can make the appropriate arrangements. My plan is to have a completely separate board just for the big event. I'd also like to spread the word a bit to some of my other web associates who may be interested. Also get some notice on the home page and at the other sites.

Great work hocus! I can't wait!
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Post by hocus » Sat Jul 12, 2003 9:22 am

I can't wait!

Me either, ES.

One special-event discussion won't remedy the problems we face re the SWR question. But I believe that the cumulative effect of a number of these "A Night With..." events could do some real good.

I've noted before that I plan to start a SWR Research Group board late this year or early next year. I am thinking of restricting access to the new board, and could use some verification from you that that is permitted here, and if it is permitted, information about how it should be done.

My thought is I might want to restrict posting at the new board to those who agree that the conventional SWR methodology is invalid. I've grown weary of discussions of whether there is a problem with the existing SWR studies or not, as it seems crystal clear to me that there is. I would like the new board to focus on coming up with solutions to the exisitng problems rather than on discussions of whether problems exist.

Are restriction on posting permitted here? If yes, how are the restrictions to be enforced? Would there need to be a procedure where people would apply for posting privileges and I would accept them onto it? Or could I just state my intent for the board in a mission statement and ask that people honor that intent when posting?

I'd also like to spread the word a bit to some of my other web associates who may be interested.

One thing that I believe we need to do after a date is set is to put up a post at the Motley Fool board inviting people in that community to participate in the special event. There are lots of posters there who have expressed a desire to learn about the realities of SWRs, even if they do not feel comfortable posting on the subject at the other board at this time.

We do not want Disruptors to appear here, obviously. But I do not see a big problem in that regard so long as you will be present and able to delete posts. I would very much like to see some REHP board community members participate during the special event and then carry knoowledge of whatever they learn about the realities of SWRs back to the other community with them. I still hold hopes of someday re-uniting the two communities.

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Post by ataloss » Sat Jul 12, 2003 9:46 am

Interesting graphical way to present returns data
The article argues that, if the future is like the past, "you have excellent chances of getting above average returns from the stock market if you buy when P/E ratios are 10-12 or below."


I am not sure that you will get anyone to dispute that buying "low" is good.
The past 103 years have provided over 5,000 investment period scenarios-that is, the combination of investment periods from any start year to every year since that time. This provides an extensive history across which to assess the potential and likely outcomes.


of course the data are not independent but except for datasnooper probably no one cares
This doesn't mean you can't make 5-8% on your portfolio. It just means you have to look at alternatives to traditional buy and hold mutual funds. Value will rule. Think dividends. Absolute returns from bonds and specialized funds will be critical to the growth of your portfolio.


I accept the analysis about lower future returns in tsm type funds however the case for hedge fund investing isn't clear to me :wink:
fortunately one can buy and hold mutual funds in less overvalued areas of the market
Have fun.

Ataloss

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Post by hocus » Sat Jul 12, 2003 10:27 am

I am not sure that you will get anyone to dispute that buying "low" is good.

My enthusiasm for the idea of a validly done SWR analysis is that it gets us away from the endless blah, blah. blah you hear when one person expresses a view that x is "good," and someone else expresses a view that y is "good," and someone else that z is "good." Those sorts of discussions go on forever and never seem to produce any insights you can take action on. How do you know if they even mean the same thing when they use the word "good?"

SWR analysis, when it is true to what the data says, is different. What the data says is not a matter of opinion. Data analysis involves numbers. Data is hard, objective. You add up all the numbers that bear on the question being examined and you get a right answer to the question posed. That I find more helpful than someone's opinion of whether some investing idea is "good" or not.

Say that we did a valid SWR analysis and we learned that the SWR for a high-stock portfolio when stocks prices are at the level they were in the year 2000 is 2 percent. And that the same analysis says that there is a good chance that the SWR for a high-stock portfolio may be 5 percent or 6 percent sometime within the next five or ten years. That is information that I can make powerful use of..

At times when the SWR is 2 percent, I need to limit my investment in that asset class if my plan calls for an overall SWR of much greater than 2 percent. However, I can take advantage of the fact that the SWR is likely to be at 5 percent or 6 percent in years to come. Knowing that, I don't need to worry if an alternate asset class only provides a SWR of 3.6 percent. I can plan to move some assets into the stock class when the SWR for that class goes above 4 percent and thereby pull up my overall SWR to my target number of 4 percent.

This is just one example of how knowing the true SWR helps an investor make effective use of his capital. PeteyPerson was saying the other day that he feels bad that stock returns seem likely to be low for the foreseeable future. I have a different perspective on things. I was bummed out in a major way in the mid-1990s when the SWR for stocks fell so low. "Why did I have to be accumulating my retirement stash just at a time when the SWR for my favorite asset class is dropping to one of its lowest levels ever?" I complained.

Now I am beginning to get excited that we may be only five or ten years away (or possibly even less) from a time when the SWRs for stocks may jump up again to levels well above 4 percent. That is the sort of opportunity that I have been looking forward to for some time now. If we have made progress on determining the realities of SWR analysis before that day comes, all aspring early retirees will be able to take advantage of theb tools we develop to exploit those opportunities when they arrive. If not, people will be stuck playing guessing games as to whether prices are low enough to justify a withdrawal rate in excess of 4 percent or not.

I don't say that looking at the historical data answers every question that ever comes up in putting together an effective investment plan. But it's a lot better than playing guessing games, in my view. I can always adjust my personal withdrawal rate lower than the SWR if I am in a pessimistic mood, or adjust it higher than the SWR if I am in an optimistic mood. But I find it hard to know what sorts of adjustments to make when the number is calculated pursuant to an obviously invalid methodology.

I favor the idea of reporting the SWR according to what the data says and leaving personal opinion out of the analysis at that stage. Then the users of the data can make whatever adjustments they want after they know what the number calculated according to the data that applies to the question says. What I dislike about the conventional methodology is the decision to deliberately ignore data that we all know affects the question being examined just because in some circumstances including it in the analysis produces a number lower than the number that some people would like the SWR for stocks to be. You damege the integirty of the analytical process when you deliberately ignore certain bits of data just because you don't like the results produced when they are included.

That's my take on the question, anyway.

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Post by FMO » Sat Jul 12, 2003 10:43 am

Great stuff hocus. I really like the graphical presentation of the data. I am personally not so interested in it's applicability to SWR determinations, but am interested in its ramifications for maximizing total return over the next 20-30 years. The data seem to say that methodologies heavily dependent on indexing the market are not likely to yield very satisfactory results for a good while. I think most of us already suspected that, but the chart drives the point home in convincing fashion.

I have recently been attracted to the "deep-value", high dividend stocks which Mauldin recommends. Lately I have been reading the works of Geraldine Weiss, the "Duchess of Dividends" I continue to feel very comfortable with my real estate holdings, but am now starting to wonder what the impacts of this research would be on equity strategies which emphasize indexing and asset allocation. I am also curious as to the implications of this work to international markets. I am looking forward to this event.
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Post by ataloss » Sat Jul 12, 2003 12:52 pm

I am not sure that you will get anyone to dispute that buying "low" is good.
My enthusiasm for the idea of a validly done SWR analysis is that it gets us away from the endless blah, blah. blah you hear when one person expresses a view that x is "good," and someone else expresses a view that y is "good," and someone else that z is "good." Those sorts of discussions go on forever and never seem to produce any insights you can take action on.


Excuse me for my endless blah blah blah (although I am not the one with the 800 word post :)
Say that we did a valid SWR analysis and we learned that the SWR for a high-stock portfolio when stocks prices are at the level they were in the year 2000 is 2 percent. And that the same analysis says that there is a good chance that the SWR for a high-stock portfolio may be 5 percent or 6 percent sometime within the next five or ten years. That is information that I can make powerful use of..


Correct me if I am wrong but you are saying that less overvaluation would be associated with higher expected returns and withdrawls. IMHO that would be "good".
I favor the idea of reporting the SWR according to what the data says and leaving personal opinion out of the analysis at that stage.


I am anxioously awaiting the unveiling of this methodology.
Have fun.

Ataloss

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Post by hocus » Sat Jul 12, 2003 1:51 pm

Excuse me for my endless blah blah blah (although I am not the one with the 800 word post)

The blah blah blah phrase was not a reference to you, ataloss. I view much of the discussion about investing in the general media to be blah blah blah. You hear one thing from Expert A that contradicts something else you hear from Expert B, and what are you supposed to do in response to it all? The advice is not actionable

In August 2000, when I retired from my corporate job, I doubt that I would have acted on the advice of some expert giving me his personal opinion that TIPS were a better investment class than S&P stocks. How would I know if he knew what he was talking about or not?

The results of a valid SWR analysis are something different because the number produced is not a subjective opinion but the product of calculations performed on data points. The numbers are produced by an objective process. I really had no choice but to go with TIPS if I wanted my plan to work. My plan called for a 4 percent overall withdrawal rate, and stocks were only providing a 2 percent SWR. I didn't have much choice in allocation strategies unless I was willing to delay my plan of leaving the corporate job for a number of years.

I am anxiously awaiting the unveiling of this methodology.

Me too!

I believe that we are making slow but steady progress. But I am not under any illusion that we are going to achieve a consensus on a valid SWR methodology anytime real soon. At least we are making moves in the right direction. There are FIRE boards that cannot say that much at this particular moment in time.

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Post by palavajjhala » Sun Jul 13, 2003 5:47 am


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Post by hocus » Sun Jul 13, 2003 9:49 am

Thank you and looking forward to the discussions.

Thanks for postiing those links, palavajjhala. From time to time, I go back and read old SWR threads. I have been surprised how often my eyes are opened to new aspects of the question as a result of doing so.

I have been following the threads on SWR for a while, and the idea of having an expert is great.

Do you have a thought as to a question ir two that you would like to have us put to Easterling? Given the multitude of topics that we have discussed, I think it is important that we make an effort to focus the discussion on one or two specific questions.

Here are my two favorites:

1) Presuming that the future will be generally like the past, is an investor who retired on January 1, 2000, with a plan calling for a 74 percent S&P stock allocation and a 4 percent withdrawal rate best advised today to: (1) stick it out with the existing portfolio; (2) lower his or her allocation to stocks; or (3) return to the workforce?

2) Given your knowledge of what the historical data says re the long-term performance of stocks, do you believe that a SWR methodology that fails to take account of changes in valuation levels is either intellectually or scientifically valid?

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Post by JWR1945 » Sun Jul 13, 2003 1:25 pm

It is good to hear from you, hocus:

I have just posted a Summary Thread: SWR Definition that should help us with semantics.

I think that we should include an open ended question. Quite often, people will tell us something really useful if we just give them a chance. During my working career, I found that my dumb questions were the best. Engineers love to speak about their technical accomplishments and some of them are substantial, but no one ever asks. Mr. Easterling might have something significant that he is quite enthused about. Given an opportunity, he might give us some real insights.

Here are two dumb questions:
1) What do we do now? OR Where do we go from here?
2) What should we be looking for? OR looking out for?

I noticed this paragraph:
Maudlin forwarded my e-mail to Easterling, and Easterling sent me an e-mail asking for more information on the work done at this board. I sent him a long response with links to some of the best posts by raddr, JWR1945, and BenSolar, and asking him if he would serve as our first "A Night with the NFB Group" expert.
In view of all of the negative press that I have seen about hocus's long posts, I wonder if Mr. Easterling has developed an opinion on the matter. [WARNING: HUMOR]

I hope that we make this a very pleasant experience for Mr. Easterling. If so, it will encourage other experts to join us in the future.

Have fun.

John R.

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Re: Expert Agrees to Discuss SWRs on NFB Board!

Post by peteyperson » Mon Jul 14, 2003 11:59 am

I want to join in saying " Well Done, hocus ! "

People like myself and Ben Solar who are in the accumilation phase I'm sure are especially interested in the issue of what to do about buying in during a high P/E market. It goes to the heart of some of the difficult issues we face outside the subject of safe withdrawal rates.

Petey
hocus wrote: Exciting news!

I have been trying to keep my mind off of the safe withdrawal rate (SWR) business for a few months, but it seems that that old black magic just won't leave me alone. Events have transpired that caused me yesterday to extend an invitation to Ed Easterling of Crestmont Research to be the first expert to participate in one of our special "A Night with the NFB Group" events. He accepted this morning.
Last edited by peteyperson on Mon Jul 14, 2003 3:12 pm, edited 1 time in total.

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Post by peteyperson » Mon Jul 14, 2003 12:04 pm

Hey FMO,

Do you think you could add a little about Geraldine Weiss. Her books are all out of print via Amazon.com.

Thanks,
Petey



FMO wrote: I have recently been attracted to the "deep-value", high dividend stocks which Mauldin recommends. Lately I have been reading the works of Geraldine Weiss, the "Duchess of Dividends" I continue to feel very comfortable with my real estate holdings, but am now starting to wonder what the impacts of this research would be on equity strategies which emphasize indexing and asset allocation. I am also curious as to the implications of this work to international markets. I am looking forward to this event.

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Post by FMO » Mon Jul 14, 2003 12:49 pm

Do you think you could add a little about Geraldine Weiss. Her books are all out of print via Amazon.com.

Thanks,
Petey


Gladly. Geraldine Weiss is a popularizer of the theory that dividends are the single best indicator of the overall health and investment quality of a particular company. She has compliled a wealth of data on over 350 blue chip companies that she closely follows. She publishes a newsletter with her recommendations. She is frequently cited as a top performer by Hulbert.

It goes like this: The dividend yield of a particular blue-chip company fluctuates within a historically determined range of values that is a good indicator of the valuation condition of the company at any given point in time. She calculates the potential down/upside of a particular company based on its current dividend yield. It is a very safe and conservative strategy. The idea is that as a company reaches its historically undervalued level which corresponds to the maximum historical yield, it is a good buy candidate. The downside is limited because further reductions in price would result in the creation of incredibly good yields which create substantial price support. The stocks are sold as they approach yields which correspond to historical minimum yields. With her stategy you are "paid to wait" for price appreciation. Her website is here:

http://www.iqtrends.com/html/prospective.html

I am not a subscriber, but I agree with most of what she has to say.
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Post by peteyperson » Mon Jul 14, 2003 2:44 pm

Interesting stuff. Thanks FMO.

Petey




FMO wrote:
Do you think you could add a little about Geraldine Weiss. Her books are all out of print via Amazon.com.

Thanks,
Petey


Gladly. Geraldine Weiss is a popularizer of the theory that dividends are the single best indicator of the overall health and investment quality of a particular company. She has compliled a wealth of data on over 350 blue chip companies that she closely follows. She publishes a newsletter with her recommendations. She is frequently cited as a top performer by Hulbert.

It goes like this: The dividend yield of a particular blue-chip company fluctuates within a historically determined range of values that is a good indicator of the valuation condition of the company at any given point in time. She calculates the potential down/upside of a particular company based on its current dividend yield. It is a very safe and conservative strategy. The idea is that as a company reaches its historically undervalued level which corresponds to the maximum historical yield, it is a good buy candidate. The downside is limited because further reductions in price would result in the creation of incredibly good yields which create substantial price support. The stocks are sold as they approach yields which correspond to historical minimum yields. With her stategy you are "paid to wait" for price appreciation. Her website is here:

http://www.iqtrends.com/html/prospective.html

I am not a subscriber, but I agree with most of what she has to say.

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Expert Agrees to Discuss SWRs on NFB Boards!

Post by tjscott0 » Mon Jul 14, 2003 5:55 pm

peteyperson

Due to your interest in G Weiss; I suggust the following link:
http://www.quicken.com/investments/strategies/

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Post by hocus » Tue Jul 22, 2003 3:10 pm

Ed Easterling is able to meet with us from 9:00 to 11:00 am on Wednesday, August 6. Does anyone have any objections to that time and date?

If I don't hear any objections by the close of business tomorrow, I will be sending him an e-mail locking in the time and day. After we lock in the time and day, I will put up a post with additional information on the focus of the special event discussion.

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Re: Expert Agrees to Discuss SWRs on NFB Board!

Post by PainInTheAS » Tue Jul 22, 2003 3:24 pm

hocus wrote: I told Easterling that our process for the "A Night With..." event would be to formulate a question or two in advance that we intend to be the focal point of the one-hour or two-hour discussion-board event. We will give him the question or questions in advance and ask that he start the event with a posting of his response. Then we will ask questions about the response in an effort to come to a more complete understanding of his views on the particular matter at hand.


May I suggest that his reply be posted some time prior to the actual event (say, at least an hour, maybe more), otherwise the first half of the time may be consumed by NFB'ers digesting the responses and/or looking up/verifying any embedded references/arithmetic/etc.
Ed Easterling is able to meet with us from 9:00 to 11:00 am on Wednesday, August 6. Does anyone have any objections to that time and date?


It would probably help to mention a time zone (even though it is unlikely that I will be available to participate or even lurk in real time).

PITA

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Post by raddr » Tue Jul 22, 2003 3:24 pm

hocus wrote: Ed Easterling is able to meet with us from 9:00 to 11:00 am on Wednesday, August 6. Does anyone have any objections to that time and date?

If I don't hear any objections by the close of business tomorrow, I will be sending him an e-mail locking in the time and day. After we lock in the time and day, I will put up a post with additional information on the focus of the special event discussion.


:great: Good work!

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