My Days at Pizza Hut University

Research on Safe Withdrawal Rates

Moderator: hocus2004

peteyperson
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Post by peteyperson »

Hey Mike,

It would seem that you can avoid low dividend and high valutation issues by investing in market caps and markets in general that are not so based around dividends and are at more reasonable valuations. Mid cap, Small Cap and Micro Cap all fall into this category.

Petey
- Who has yet to find a UK Small Cap index fund, only actively managed.
Mike wrote:If I understood the article:

1) Dividends were the lion's share of past equity total returns.

2) Dividends are at historically unprecedented lows.

3) Therefore, future equity returns from here are likely to be below historic averages.

To me, it seems that the boomers may be causing this lower dividend yield with their 401k and IRA retirement savings. If this is the case, the yield may stay low until the boomers start to retire in force. It may even go lower before it is all over. Of course, the market rarely pays any attention to my guesses. :)

Mike
Last edited by peteyperson on Fri Sep 05, 2003 6:50 am, edited 1 time in total.
peteyperson
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Post by peteyperson »

John,

John Bogle made a speech as a public rebuttal of the market timing suggestions put forth by Bernstein. Worth a look!

http://www.vanguard.com/bogle_site/sp20030605.html

Petey
JWR1945 wrote:Here is the full text of the interview with Bernstein. It's the first article in the 2-28-03 issue.
http://www.weedenco.com/welling/biframe.htm

That is a fascinating interview. It is well worth reading.

I was hoping to claim that Peter Bernstein has been getting his ideas from the nofeeboards, but the date is too early.

Previously, I have been able to claim (successfully enough) that Warren Buffett is projecting future stock returns based on early threads on our FIRE board.

Have fun.

John R.
JWR1945
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Post by JWR1945 »

That is, in fact, an interesting speech.

Here are some details worth keeping in mind:
1) John Bogle has presented growth rates and returns in nominal dollars. That is, dollars before adjusting for inflation. The 1970s saw tremendous growth in nominal dollars. The 1970s were horrible in term of real dollars. Almost everything that we have investigated has been in terms of real dollars.
2) John Bogle continues to refuse to acknowledge that there are some who have successfully timed the market over long periods of time. It would be much better for him to emphasize that such success is the exception and not the rule. He is right, of course, in stating that it is impossible to generalize a successful timing strategy. That would mean that everyone does above average. (You always need at least one person who does below average. One person can be sufficient, in theory.)
3) John Bogle has failed to recognize that different investors can have much different needs. The need to balance a portfolio grows as the portfolio itself increases. (That need is greatest at the end of accumulation and at the beginning of distribution. Its importance diminishes as you move away in either direction.)
4) The kind of timing that we have talked about on these boards is much different from what most people consider to be timing strategies. We have talked about coasting through periods when returns are most likely to be exceptionally poor (or when the associated risks are exceptionally high). We have talked in terms of getting prices only slightly better than average, whether buying or selling. That is much different from trying for dramatic gains and avoiding all losses.

I think that Mike has served us well by point out that the popularity of retirement portfolios has caused stock prices to increase and that they are likely to remain high in the near term. That is not unique to stocks. The potential returns from investments in general decrease as more people bid up prices.

I think that peteyperson's emphasis on intrinsic value is key to how we look at the market timing issue. Whether we refer to intrinsic value or the likely speculative return, there are times when it is risky to invest and there are other times when bargains abound.

And, of course, it is always worthwhile to consider each individual's needs and invest accordingly.

Have fun.

John R.
Mike
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Post by Mike »

John R. wrote:
I will now draw attention to the reduction in stock payout ratios.
Mike replies:

The data does support lower payout ratios as a partial cause of today's lower dividend yields. Although I think that the current P/E 10 may be artificially high due to a singular event. Corporate CEOs were fooled in large numbers by the false Y2K bug rumor. They allowed tech vendors to sell them vast quantities of Y2K "fixes" in the years leading up to 2000. This allowed tech earnings to comprise about half of the S&P profits at the peak. The rapid ramp up in tech earnings created a craze to invest in anything tech related, which expanded unusual tech investments into such areas as telecom and the internet. Once they realized that they had been fooled, the CEOs put their IT departments on a tight leash. Tech profits collapsed, and S&P earnings as reported were cut in half. One of the worst profit drops since the Great Depression. When considering payout ratios based upon P/E 10, I bear in mind that the pre Y2K rise in tech profits may not be easily repeated. Then again, tech has always been cyclical, and they may come up with some new highly useful products. The low yield tech companies do undeniably drive down the S&P payout ratio, I am just not sure how much because the pre Y2K earnings jump may be a one time event.
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Post by Mike »

Petey wrote:
Mid cap, Small Cap and Micro Cap are fall into this category.
Mike replies:

I have been buying smaller caps since last fall to take advantage of the nascent economic recovery. I also like to overweight areas that I think are relatively undervalued.
JWR1945
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Post by JWR1945 »

Regarding John Bogle's speech:
John,
John Bogle made a speech as a public rebuttal of the market timing suggestions put forth by [Peter] Bernstein. Worth a look!
http://www.vanguard.com/bogle_site/sp20030605.html
Petey
I wish to draw attention to the graphs.

John Bogle has added the dividend yield and the earnings growth rate together and separated it from the speculative component. That is exactly what he should have done.

The Gordon Equation estimates the reasonable amount for stocks to grow by this formula:

Total return = Dividend Yield + Dividend Growth Rate

(The Gordon Equation is a rearrangement of the Dividend Discount Model, which relates the discount rate of future dividend income to present values. The discount rate is what investors demand for their time that an investment return before they are willing to buy something. William Bernstein has developed the general ideas in The Four Pillars of Investing, but I very much prefer gummy's derivation and his related discussions at his website.)

Dividend yields are well behaved, but dividend growth rates are not. Dividend growth is quite erratic unless you talk in terms of 50+ years. Earnings growth is a good substitute. Earnings, especially when averaged over ten years as in E10, is very well behaved and, of course, earnings support dividend payments.

Thus, John Bogle's modification of the Gordon Equation is a very good one:
Total return of the Enterprise component = Dividend Yield + Earnings Growth Rate.

The speculative component is the growth or decline in P/E multiples. The main reason that is usually cited for expecting lower returns in the next decade is the high P/E multiples in today's market.

I disagree with John Bogle on the appropriate formula on three fundamental points. First, I restrict myself entirely to using inflation adjusted returns. The inflation adjusted data are better behaved. Second, I use E10 rather than E. It is very well behaved. Finally and most important, I make an adjustment related to the low payout ratios of the past two decades.

This last point is somewhat controversial, but I will stand my ground because we are in uncharted territory regarding payout ratios. I have seen claims that the additional retained earnings of recent years were all wasted. Although some evidence has been supplied to support such assertions, I find it far from convincing. It is easy enough for me to point out why that evidence is weak. What is not so easy is to come up with an alternative estimate that can be supported in a convincing manner. I have seen lots of flippant remarks in this regard. They are not sufficient. The fact is that we are in uncharted territory. Extrapolations are too big to be done safely.

In terms of the speculative component, I have not included that adjustment directly in my calculations. I have simply pointed out the effects of time. It is not necessarily true that prices will drop to exceedingly low levels. The market may well go sideways as earnings grow and P/E multiples decline. I do focus on P/E10 in preference to P/E because of Professor Shiller's research. When you look at P/E10, current prices are not a benign as Jack Bogle suggests.

Have fun.

John R.
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Post by JWR1945 »

Mike
Corporate CEOs were fooled in large numbers by the false Y2K bug rumor.
I disagree with this interpretation.

We found lots of Y2K bugs. They were real. We fixed some. In some cases, we identified work-arounds. In other cases, we threw out the software entirely. We replaced a little of it, but not much.

My interpretation of what happened is that the information technology industry misinterpreted what was going on. Sales before Y2K ate up sales that would have happened after Y2K. Averaged over five to ten years, sales were behaving reasonably. The acceleration prior to Y2K was an illusion.

Have fun.

John R.
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Post by hocus »

I learned of the Scott Burns column linked below from an Ataloss post on the FIRE board. Ataloss picked it up from an RKMcDonald post over at the Motley Fool's Retire Early Home Pafe (REHP) board.

http://money.msn.com/articles/invest/ex ... pecial=msn

Excerpt:

Their findings, in a nutshell [Burns is referring here to the research paper linked below]: Stock returns from periods of high P/E ratios are lower than returns from periods of low P/E ratios. Stock returns are still higher, however, than competing returns on cash or bonds. In other words, stocks are less attractive as investments today, but they are still better than the common alternatives.

Here is a link to the research paper itself.

http://www.fpanet.org/journal/articles/ ... -art10.cfm

The paper appeared in the February 2002 issue of the Journal of Financial Planning. The Burns column also is from early 2002.

Here is an excerpt from the study.

"Our results indicate that the best estimate of future average returns is no longer the long-term average returns on stocks found, for instance, in the Ibbotson's series of 10 to 12 percent a year. An investment advisor can obtain a more accurate measure of expected returns by making expected returns conditional on the current P/E ratio. (the bolding was added by me)."

This last statement addresses the core dispute of the Great Debate. The important question has never been "Are stocks good or are stocks bad?" or "Is a personal withdrawal rate (PWR) of 4 percent reasonable or not?" The important question has always been, "Is it true, as intercst asserts, that any move away from a 74 percent S&P stock allocation requires the aspiring early retiree to delay his retirement?"

Intercst says that this is so as a matter of third-grade mathematics, presuming that the future is like the past. And he is right, if the conventional SWR methodology is analytically valid. He applied the methodology properly in his study, his calculations are accurate. If that methodology is a valid means of determining the SWR (as defined in the studies), then intercst is right to tell aspiring early retirees that it will take longer to achieve a safe retirement by going with alternate portfolio allocations.

If the methodology is invalid, then intercst is wrong to say this. The excerpt from the study that I have quoted above is strong evidence that intercst is wrong and that the conventional methodology is invalid. It does not state things in as strong terms as I would. But it makes the key point that it is "more accurate" to take into account changes in valuation levels than to not take such changes into account.

In one respect, the claim being made by the authors of the research paper is stronger than the claim that I have made that the conventional SWR methodology is invalid. The authors are saying that changes in valuation should be taken into account in all financial planning (they state that "financial planners can get a better estimate of future stock market average returns by using current market valuation conditions"). I have generally limited my assertions of this type to analysts preparing SWR studies, a particular type of financial planning tool that requires a particular concern re safety (conventional SWR studies purport to reveal the withdrawal percentage that is 100 percent safe, presuming that the future is like the past).

I believe that the authors are correct that all financial advisors need to take into account the message of the historical data, that changes in valuation levels affect future returns as a matter of mathematical certainty. But I also believe that SWR researchers have a special and greater responsibility to get this right. A financial advisor who gives bad advice on long-term stock returns to someone who is not going to retire for years does damage, but it may be possible for the person making use of the bad advice to recover from the effects of the bad advice by saving more in later years. Giving bad advice on SWRs to someone on the verge of handing in a resgination notice can cause the most severe life setbacks.

That said, I believe that the conclusions of this paper point to an aspect of the Great Debate that has been little considered until now but which may take on great importance in days to come. The reality is that it is not just SWR analysts like intercst who have misled investors as to what the historical data says about what sorts of long-term returns are likely for those investing in stocks. The basic approach used in the conventional SWR studies is used in all sorts of financial planning articles and products.

The paper states that: "Our results indicate that the best estimate of future average returns is no longer the long-term average returns on stocks found, for instance, in the Ibbotson's series of 10 to 12 percent a year. An investment advisor can obtain a more accurate measure of expected returns by making expected returns conditional on the current P/E ratio." If that is so, then the conventional SWR methodology is flat-out invalid. It is irresponsible to use anything less than the best available estimate of future long-term returns in an analysis of what is 100 percent safe for someone questioning whether he has saved enough to turn in a resignation notice or not. But that is not all that is so. If the claim made by the authors of this paper is correct, then there are all sorts of financial planning tools that need to be modified in the years ahead. SWR stuidies should be first on the list, in my view. But it may be that we can attract posters to this board by making our case for consideration of the effects of changes in valuation levels to a wider audience than those planning early retirements. Anyone hoping to invest effectively benefits from coming to terms with the questions that have been put on the table in the course of the Great Debate.

This paper is rich in implications, too many for me to examine in one post. I hope to be putting up follow-up posts on this paper at later dates. For now, though, I would like to draw attention to a statement by Scott Burns set forth in the column linked above. Burns has made approving reference to the intercst study in the past, and I have hopes that persuading Burns to condemn the deceptive claims that intercst has put forward citing his study as support may advance the debate considerably. At a mimimum, I hope to be able to persuade Burns that the conventional methodology is invalid, arguing in part that the uses to which intercst has put the methodology reveals the danger inherent in it in painful-to-consider real world terms. Given Burns' broad platform and longstanding interest in numbers-rooted financial analysis, I believe that he is probably the best expert to choose for our second Special Event Discussion at the SWR board, one that I hope to schedule after getting my web site up (the target date is May 13, 2004) and bringing some new posters to this board. Burns has great credibility, and a strongly worded statement from him may be what we need to bury the conventional SWR methodology 10 feet in the ground where it can not cause financial losses to FIRE communities of the future.

The following statement from Burns is highly encouraging to me in this regard. He says:

"The differences in return can be dramatic. If you buy stocks in a period of low P/E ratios (under 10), your average annualized return five years later will be 18.57%. Buy stocks in a period of high P/E ratios (over 15), and your five-year return will be about half as much, 9.28%. More important, the variability of your return will be nearly twice as great as in the low P/E period. (the bolding is mine).

We have seen lots of evidence during the course of the Great Debate that it is returns experienced in the early years of a retirement that determine whether the plan will ultimately go bust or not. Burns is saying here that the valuation level of stocks on the date you retire affects the variability of returns in the years to follow. It seems to me that he is saying that volatility is greater in the early years of retirement for those who retire at times of high valuation.

If that is so, that statement is the final nail in the coffin of the conventional methodology, in my view. If volatility is greater for those retiring at times of high valuation, then the SWR is different for those retiring at times of high valuation. There is no way that I can imagine that the SWR could possibly be the same for investors retiring at two different valuation levels, if what Burns is saying here (commenting on the linked research paper) is so.

I incorporated this post into the "Pizza Hut University" thread because it sheds light on the question that I was putting on the table in my first post on this thread. Much has been made at the FIRE board of my supposed "arrogance" in being the special one who brought this issue to the attention of the FIRE community (by putting up the May 13, 2002, post that kicked off the Great Debate). The reality is that I have not been arrogant in the typical ways in which that character trait is revealed. I have not claimed any special expertise in investing matters, and I have acknowledged a great lack of ability to deal effectively with numbers-related issues. So it is a strange sort of arrogance on display in my posts.

What I have been is forthright in stating that I brought to the FIRE community's attention an issue of earth-shaking importance, that the conclusions of the intercst study (a study so important in the formation of the FIRE movement that one poster at the REHP board has said that intercst should be considered the "inventor" of the Retire Early concept) are false claims. The study did not consider a critical factor that must be considered in any analysis of what is safe and therefore it provides the wrong answer to the question it poses, I said. After the claim was met with intense and prolonged challenge and attack, I stood in there and fought the good fight to permit this insight to be explored in depth by the FIRE community, and I continue to do this today.

I am not claiming to be smarter than others or more experienced on financial matters than others. I am claiming to be better informed on the question of SWRs than any poster who has contributed a post on the subject during the course of the Great Debate. I knew that the convetional methodology was invalid in 1995, so I have had eight years now to study the benefits of SWR analyses that provide accurate assessments of what is safe according to the historical data. There is no other poster in the FIRE community who can say that.

To be sure, there are some on this site who see the importance of valuation issues. But it is equally clear that these posters have not made the conceptual leaps necessary to understand the risks of getting the SWR number wrong and the benefits of getting it right.

I will offer one example, with no intent of making any sort of disparaging remark re the poster who will be named, whom I consider a fantastic addition to the posting community here. This particular poster has not engaged in the smears against me, so I hope that no one will make the mistake of thinking that I mention his name here because of some sort of personal hostility that I feel towards him as a result of the smesrs. This poster is a fine poster, and, from all appearnaces, a fine human being as well.

The poster I am referring to is Gummy. I am not providing an exact quote here, but he has said something to the effect that "I tell my children to plan on a 4 percent withdrawal and not to worry about the math." This is a statement that has been made in a variety of forms by dozens of posters at one time or another in the course of the Great Debate. It is this sort of statement that reveals to me the real damage that has been done by the intercst claims and by similar claims that have been made by other SWR analysts employing the conventional methodology.

I believe that the Gummy advice to not worry about the math re SWRs is bad advice. That is as simple as I can put it. There are times when taking a 4 percent withdrawal is a good idea. There are other times when those with a 74 percent allocation to S&P stocks need to move their withdrawal down to 2 percent. There are yet other times when those taking a 74 percent S&P allocation can achieve the level of safety that they seek with a withdrawal of 6 percent.

The SWR varies as valuation levels vary. This is a reality proven by a reasoned examination of the historical data. And it is a reality of immense importance to anyone aspiring to achieve financial independence early in life. Knowing how this number varies from time to time opens up all sorts of doors, doors that have never been opened on any FIRE board to date. These are doors that should be opend, doors that must be opened. The growing desire on the part of middle-class workers to learn how to achieve financial independence early in life will at some time force those doors open, in my view.

I cannot say when it is going to happen. The forces opposed to any opening of the doors are strong today. But I do see encouraging signs. The Peter Bernstein interview linked earlier in this thread was an encouraging sign. The publication of "The Four Pillars of Investing" was an encouraging sign. The publication of "Yes, You Can TIme the Market!" was an encouraging sign. The publication of the Ed Easterling research, and the comments he offered to us at this board, were encouraging signs.

There are encouraging signs everywhere mixed in with the less than encouraging signs that we here are all too aware of. I think that this thing is going to turn, not tomorrow, not next week, not next month. Perhaps next year. If not then, then certainly by the end of the 2005. The benefits to investors of knowing how the SWR changes from time to time as market valuations change are so great that the desire to learn the realtiies will in time become too great to be denied.

That's what I believe. I don't have a crystal ball, so if you want to find out for sure you will have to just wait and see. I will pursue my efforts with no hostility towards those who continue with the smears. I don't have the time, energy, or desire to get involved in that stuff. What I want to do is to lead this thing to where we can have an atmostphere that permits reasonsed debate on the realities of SWRs. When that happens, I don't think that there will be any saying that the long effort to get there was not worth it. I don't think that there will be any saying "Oh., hocus, your pre-SWR posts were better than your SWR posts" then. I don't think there will be any showing any reluctance to thank me for my efforts to make possible a civil disucssion of the realities of SWRs then.

We'll see. In the meantime, I hope that those who have not yet made up their minds one way or the other, those who see at least some possible value in exploring the questions of substance that have been raised in the Great Debate, will take a serious look at the study linked above and give some thought to the implications to your hopes of achieving financial independence early in life. I am here to tell you that I have been studying that question for eight years now, and the implications are huge. Charges of arrogance be damned, I will say it one more time so that there is no possibility that anyone here will not know what I think on the question--The SWR debate is the most important debate that has ever been held at any FIRE message board by a factor of at least 10. The personal attack stuff is an obvious waste of everyone's time. The issues of substance that I tried to bring to the table with the May 13, 2002, post are of great importance, and the entire FIRE community will see that clearly when the smoke clears.

The study linked above is further vinidcation of the point argued in the May 13, 2002 post. It is not possible to determine SWRs accurately without taking changes in valuation into account. The conventional methodology is invalid.

Saying so in public ain't no mistake! The Harvard guys know all sorts of things that I do not. But there are some things that they teach you at Pizza Hut University that those guys from Harvard never heard tell of. I majored in SWRs in my days at Pizza Hut, and I am glad I did; I would be unretired today if I has given any credence to the wild SWR claims made by intercst. When you are calculating numbers, there is a right and a wrong, and intercst happened to get it wrong. That's the way it is.

I've got my pizza-smeared notes from the classes I was taking back in the mid-1990s to prove it so.
JWR1945
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Post by JWR1945 »

In terms of the study itself, many of the points are similar to those made previously by others. Think about Crestmont's colorful chart, raddr's mean reversion graphs and Bogle's discussions related to multiple expansion and contraction.

It is worth noting that all of the numbers are in nominal dollars, not real dollars. That is, there are no adjustments for inflation. That distorts some effects.

It is highly significant that the P/E predicts the downside risk but not the upside opportunity. We normally focus on avoiding portfolio failure. Eliminating the downside risk does that. It sets a floor.

In terms of retirements and Safe Withdrawal Rates, the study fails to understand the implications of today's dividend yields. That is understandable since our results are brand new. (Other sources have pointed out the implications in terms of accumulation, not retirement.) Stocks no longer have the floor that high dividends used to provide. Dividend amounts have had a strong tendency not to fall (although they have at times). That has provided much more security during retirement than stock prices.

It is now possible for alternative investments to be superior to stocks during the distribution stage. Consistently so. At this point I am unaware of any Monte Carlo model that treats dividend statistics separate from price statistics. That is very important right now. We do not have analysis tools that can address low dividend yields directly. Yet, dividend yields are well outside of their historical range and they are critically important at high levels of portfolio safety.

Thanks for an important and interesting article.

Have fun.

John R.
hocus2004
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Post by hocus2004 »

Here is a link to an article at Morningstar titled "Stock Returns Are Likely to Disappoint."

http://news.morningstar.com/doc/article ... tion=Comm1

Juicy Quote: "Most investors would agree that even if the stock market has a tough year or two, if you hold on for 15 to 20 years you can count on an average annual return of at least 10%. Sounds about right, doesn't it? Unfortunately, this common assumption just isn't true."
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Post by hocus2004 »

Here's a link to an article from the International Herald Tribune by Mark Hulbert .

http://www.iht.com/articles/534115.html

I have been asked several times why I make such expansive claims for the power of the Data-Based SWR Tool. "Isn't what you are doing just good old-fashioned value investing?" I am asked.

There is a sense in which it is, but there is also an important sense in which it is not. Most stock analysts who suggest value investing are asking investors to analyze the value present in individual shares. I think that is a great idea, but it is an idea that takes a lot of work to implement. Index investing, on the other hand, requires little effort. With indexing, all you have to do is buy and hold, and you are promised strong long-term returns. That is a promise of great appeal to a large number of middle-class investors.

What the Data-Based SWR Tool does is impose a value screen on top of the indexing concept. It accepts the wisdom of buy-and-hold up to a point, but only up to a point. It says, yes, you can eliminate much of the risk of stocks by holding them through downturns, but for such a strategy to be realistic, it must include an appreciation of how changes in starting-point valuation levels affect the long-term return obtained.

We are not analyzing the value of individual shares with our tool. We are gaining the simplification benefits of indexing for ourselves. But we are not setting ourselves up for disappointment by falling for the error in logic that suggests that one can obtain the long-term stock return of 6.5 percent real from any valuation level starting point. We are valuation-informed index investors.

I believe that the "Stocks for the Long Run" paradigm is in its twilight, and that the investing paradigm that will take its place is the "Valuation-Informed Indexing" paradigm that is being developed at this board. It is simple enough for the average investor to employ. Yet it is realistic in a way in which the conventional indexing approach is not. The conventional indexing appproach makes a wonderful promise, but it is not going to be able to deliver on that promise because of the analytic flaw at its core (the failure to take into account the effect of changes in valuation levels). This new and improved buy-and-hold approach really works, according to the historical data.

The question to which this thread directs itself is, Why haven't others discovered this investing approach, given its great power? I believe that one of the answers to that question is that most investing analysis is a strange mix of objective references to data and subjective attempts at misdirection. Over and over again we see the same non-deliberate (in most cases) trickery play out. Analysts are forever pointing to data to back up their claims re stocks. Those references make the claims put forward seem realistic and significant and real. But the standards employed in making the references are so weak that the references in many cases mean just about nothing.

We see people refer to "returns" and we don't know whether they are counting dividends or not. We see people refer to "expected returns" and we don't know whether they are including the effects of changes in starting-point valuation or not. We see people refer to "PE" and we don't know whether they are talking about earnings that companies have already earned or earnings that some individual expects them to earn.

When there is no rigor in the references to data, the references are pointless, or, in some cases, outright dangerous. it is not hard to gain a sense of how stocks have performed in the past. There is lots of data available to use in figuring things out. But the average investor is exposed to so many conflicting statements about the same data that he or she cannot make sense out of it. Stock analysis is a field in which hard objective data is regularly used to serve soft subjective purposes.

The power of the Data-Based SWR Tool is that we avoid engaging in that nonsense. All people involved in research in this field have their personal biases. But those biases do not have a place in a piece of research claiming to be analytically valid. The idea of the work done at this board is to tell people what is, not what we would like to be or wish to be. That makes our project very different from the Conventional SWR Methodology project. The conventional methodology studies are products of a white-hot bull market, where the researchers are making decisions to include some factors that in the past have determined what is safe and ignoring others (not necessarily deliberately) or the purpose of pumping the number reported for stocks as high as possible. That's not our agenda.

Our agenda is to tell it like it is. Our agenda is not to pull the number for stocks down to artificially low levels either. Our agenda is just to tell it like it is. That's why we call this approach "data-based." That's why I often say that the tool is a descriptive tool, not a prescriptive tool. We leave it to the investor using the tool to make the decision as to what to do with the information. Our job is to REPORT what the data says, and then stand to one side. We may comment on stratagy questions, but we need to make clear that such commentary is not part of the data-based research project. Stratagy discussions complement data-based analysis, but they are not themselves data-based research..

Anyway, Hulbert in this article points to one of the examples of the trickery you often see in stock analysis where people point to data not for the purpose of revealing how stocks have performed in the past but for the purposes of "spinning." It is spin to compare a number developed by making reference to future earings and to compare it to a number developed by making reference to past earnings for the purpose of backing up a conclusion that "valuations are not so high." As is oberved in the Hulbert article, that is cheating. The power of the Data-Based SWR Tool is that it is a non-cheating analytical tool that makes use of historical data to inform investors re how stocks have performed in the past .

The non-cheating part makes all the difference. That is why I am so firmly opposed to the use of word games in these discussions. Word games do not have a place in reports on what the historical data says. Our board mission is to tell it straight. Telling it straight opens up some wonderful opportunities down the line, I believe.

Juicy Quote: "Asness concluded that "stocks ain't cheap, and you have to cheat to call them cheap." This does not guarantee that stocks will fall, he said, "since they could just return less than their historical average forever while staying expensive. But he said it does mean that, at current levels, "nobody should be calling stocks undervalued or even fairly valued."
Mike
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Post by Mike »

I believe that the "Stocks for the Long Run" paradigm is in its twilight...
You are probably right, but I am wondering where investors will go next. In the post depression era, investors required stocks to have a yield greater than "safe" bonds. In the post high inflation era, bonds are no longer considered safe. Investors bid up equity prices partly because their only choice in their 401k was an inflation adusted dividend from equities, or the dreaded "certificates of confiscation" that bonds had become in the popular mind.
JWR1945
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Post by JWR1945 »

Mike wrote:You are probably right, but I am wondering where investors will go next.
I don't know. Here are a few things to keep in mind.
1) The stock market is significantly smaller than the bond market and niches such as gold are much, much smaller. Effects on the bond market are likely to be subdued when compared to those in the stock market.
2) Historically, the stock market has found a variety of ways to absorb excess dollars, many of them turning out badly. Initial Purchase Order (?) or IPO stocks, new companies, become plentiful and most underperform the rest of the market. Existing companies sell new shares. Wall Street comes up with new financial products (most of which turn out badly).
3) Many investors will buy from foreign markets. I doubt that they will do so with any knowledge or understanding. They will be vulnerable or they will pay exceedingly high fees.
4) We are likely to see a lot a self-destructive behavior among investors such as chasing the latest fad. A variety of real estate investments come to mind.
5) I expect that there will be some long-term effects similar to those among survivors of the Great Depression.
6) I think that stock picking will return to favor.
7) Remember that a large fraction of investment returns is tied to multiple expansion and contraction (the speculative return) and that the stock market's performance is only loosely related to the underlying economy. Typically, such effects last for one or two decades.
8 ) Not all of the baby boomers are going to deplete their holdings. Many, if not most, will pass significant holdings to their heirs. Concerns about a steady selling by baby boomers are overstated.

Returning to my original comment: I don't know where investors will go next.

Have fun.

John R.
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Post by unclemick »

Hmmmmm - maybe a few will go back to the future and reread Ben Graham - his 50/50 defensive investor has worked thru all seasons(at least 30 yrs for me) so far including the minor warm up 2000-2003. Even though I do it with the modern balanced index funds - and the big dog 60/40 type has a SEC yield on the order of 2.2 - 2.3 %. That's a warning flag if I ever saw one.

The aggressive investor (ala Ben) would be thinking 25% stocks and waiting.
Mike
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Post by Mike »

The aggressive investor (ala Ben) would be thinking 25% stocks and waiting.
Ben seems to vary equity based upon valuation, sounds familiar.
Mike
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Post by Mike »

The stock market is significantly smaller than the bond market and niches such as gold are much, much smaller.
The destruction of bonds as an asset class has prevented many savers from keeping up with inflation. A large number seem to have found refuge in real estate, since they can keep the price going up faster than inflation by lobbying the local politicians to keep supply lower than demand. This keeps real estate prices rising to match local income, rather than slowly falling due to more efficient building methods. By absorbing a small fraction of former bond investors, equities have so far produced fabulous returns due to expanding multiples. It will be interesting to see how long these Ponzi schemes can continue, and what will be the next area to absorb former bond money.

Bond investors tend to be conservative by nature, and sometimes wind up making irrational choices when forced by desperation to take risks they don't want to take to keep up with inflation and taxes.
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