Investing–The New Rules: John Bogle’s Evil Twin?

John Bogle, Rob Bennett: Separated at Birth?

Stock investing will never be the same again. Why Rob Bennett thinks he might be John Bogle’s evil twin.

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Investing — The New Rules
John Bogle’s Evil Twin
June 7, 2010

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Stock investing will never be the same again.

I have in recent columns introduced you to The Stock-Return Predictor, a calculator that tells you whether stocks offer a strong long-term value proposition or not. It does this by running a regression analysis of the historical stock-return data and letting you know the most likely 10-year return on your purchase of a U.S. index fund for a purchase made at any of the various valuation levels.

Perhaps that doesn’t sound like such a big deal at the moment. In time, it will. The investing approach that I am describing to you represents a revolutionary change. It is so big a change that it doesn’t fully hit most people how big a change it is the first time they hear about it. This gets bigger and bigger over time. And better and better.

Everyone agrees that stocks offer great returns. The downside to investing in stocks has always been the risk attached to this asset class. In the years following the Great Crash of 1929, stock prices fell by 80 percent real. People don’t forget something like that. Those who lived through the experience not only vowed never again to invest in stocks themselves, they made their children vow never to invest in stocks and demanded of their children that they make their children take the vow too. Stocks are in ordinary circumstances a great choice, but when they are a bad choice, they are a very, very, very bad choice.

You now know how to invest in stocks so that they never become a bad choice for you.

Like Linda Ronstadt did, I’m gonna say it again. You now know how to invest in stocks so that they never become a bad choice for you.

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I am sharing with you the most important breakthrough in our understanding of how stock investing works ever achieved. I’m not really bragging. I didn’t come up with it. Yale Professor Robert Shiller came up with it (and lots and lots of smart people developed the ideas). I am a journalist. I am just reporting to you what these other people have taught us (and what too many other journalists in this field have thus far failed to report).

My assessment of how big this is is a reporter’s assessment. Take it or leave it, I am telling you what I truly believe. I write this column because I love a big story and this is one of the biggest I have come across in this lifetime. After spending the past eight years exploring all the implications, I have come to believe that it is up there with Watergate and man landing on the moon and the Clinton/Lewinsky mess and the Vietnam war and the 911 terrorist attacks and Britney Spears being seen at the beach that time with that fellow who wasn’t officially her boyfriend. Maybe it’s not quite as big as that last one. Perhaps that’s my bias showing through.

I am saying that all of us can invest in stocks with greatly diminished risk. And it’s not a small reduction in risk we are talking about here.

Risk is unpredictability, being hit with something you did not expect. John Walter Russell, the owner of the www.Early-Retirement-Planning-Insights.com site until his death in October 2009, did a statistical test to determine how much less risky stocks are for those following a Valuation-Informed Indexing strategy. He found that the P/E10 level that applies on the day you buy an index fund provides you with 78 percent of the information you need to know the return that will apply in 20 years. For those following this strategy, stocks carry only a 22 percent risk factor. Bonds are more risky than that! Certificates of Deposit are more risky than that! Let’s be real. Using your Saturday night to catch up on the laundry is more risky than that!

The biggest problem that I have convincing people of the merit of these ideas is that the news is just too darn good. One fellow said that my claims are “grandiose.” They’re grand claims. I’ll give you that. They’re not “grandiose.” The word “grandiose” suggests “not rooted in reality.” A claim is not grandiose if it stands up to scrutiny. I’ve put these ideas before lots of people who are highly motivated to shoot them down and they haven’t been able to come up with anything.

If someone can shoot holes in the ideas, I will stop making the claims. No one has been able to shoot any holes for eight years now. I think that tells us something important. It either tells us that the claims are valid or it tells us that our understanding of how investing works is today so weak that none of the “experts” in this field can figure out how to make a rational case that my claims are invalid (and, if that’s so, that’s a big story of its own).

We can eliminate roughly 80 percent of the risk of stock investing by paying attention to valuations before we buy. That’s the premise of this column. If you are not willing even to entertain such a revolutionary claim, we probably should part company now. That’s the claim that I am putting forward. That’s the claim on which all the rest of the columns will be rooted.

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ALSO at DBKP:
* Investing–The New Rules: Stock Return Predictor Not a Case of ‘Too Good to be True’
* Investing–The New Rules: The Stock Investor’s Weather Report
* Investing–The New Rules: Harness the Power of The Stock Return Predictor
* Investing–The New Rules: Get the Odds on Your Side
* Stock Investing: Much of Today’s Understanding is Primitive

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I won’t ask those who hang around to take anything on faith. I’ll prove it all one way and then I’ll prove it all a second way and then I’ll prove it all a third way. I invite challenges to the ideas. If I am wrong, I want to be proven wrong as soon as possible so that I can stop making a fool of myself and move on to more productive endeavors.

But please understand if you elect to continue the journey that there is no possibility that this is a ho-hum story. This column has been officially designated a Ho-Hum-Free Zone.

My claim can be reduced to five words — Valuations Affect Long-Term Returns. Is it true? Or is it not true? You decide. But, if you decide that it’s true, please don’t then say that you think Buy-and-Hold still makes sense. Buy-and-Hold is the strategy that says you do not need to change your stock allocation in response to changes in valuations. What’s being described at this place is the strategy that says you must do so. Buy-and-Hold is the opposite of what is being described here. I am John Bogle’s evil twin.

Are stocks risky? Sure, they’re risky. Just not for you anymore.

Or else I am an idiot. That’s the other live possibility. It shocks and amazes and astounds me but there are two or three otherwise smart and kind people who have come to the conclusion that that is the possibility that applies here. Oh my!

by Rob Bennett
images:
* Pop Economics– Guest post: The risks of buy-and-hold investing
* PBS
* DBKP file

Rob Bennett recently wrote a Google Knol entitled “Why Buy-and-Hold Investing Can Never Work.” His bio is here. And don’t even think about failing to read these Important Cautionary Words.

Want more? Check out the article that I had published at the Daily Caller today entitled “How We Invest Is a Political Question“.

Back to DBKP Front Page.

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