Valuation-Informed Indexing is Buy-and-Hold with Valuation-based market timing added to the mix. Valuation-Informed Indexers don’t go with the same stock allocation at all times, as Buy-and-Holders do. We go with higher stock allocations when stock valuations are low and with lower stock allocations when stock valuations are high. This permits us to obtain higher long-term returns while taking on far less risk. Investor heaven.
I’ve been promoting the idea on the internet for 22 years now. It’s rooted in Robert Shiller’s Nobel-prize-winning research showing that valuations affect long-term returns. If Shiller’s research is legitimate, stock investing risk is variable, not constant. If stock investing risk is variable, investors need to change their stock allocation in response to changes in valuation levels to keep their risk profile constant. Valuation-Informed Indexers Stay the Course in a meaningful way.
Do investors like the idea?
They love it.
And they hate it.
Both things are so.
On the first day that I advanced the idea (May 13, 2002), I had people telling me that I had launched the most exciting debate ever held at the discussion board to which I posted it. One guy became so excited that he spent the next eight years of his life researching the concept without receiving a dime in compensation. An academic researcher asked me if it would be okay with me if he prepared research for publication in a peer-reviewed journal. His conclusion after spending 16 months looking at the concept from every possible angle was that: “Yes, Virginia, Valuation-Informed Indexing works!”
So, despite its bad reputation in many circles, people who examine market timing closely fall in love with it.
That’s true of some people.
Other people, not so much.
I won’t tell you what some of my critics have said about the concept because it would be just too darn upsetting and depressing. But please don’t think that there are not critics. There are lots and lots and lots of critics. I am a mild-mannered reporter. And I have been banned from more investing web sites than most people have visited. So this is not a thing where I can tell you that “50 Million Elvis Fans Can’t Be Wrong!”
The concept of valuation-based market timing
What do these dramatically contrasting reactions tell you about the concept of valuation-based market timing?
If all of the reactions were negative, the message might be that the idea is just a stinker. If absolutely nobody likes an idea, there’s probably a good reason.
If all of the reactions were positive, I would be too busy fielding questions about the idea at places all over the internet to find time to write the article that you are reading about it. If the reactions were all positive, I wouldn’t have to persuade you. There would be lots of friendly voices willing to perform that task on my behalf.
What does it tell you that some people love the idea and some others (a far greater number) hate it?
My thought is that this tells you that Valuation-Informed Indexing is the investing strategy of the future.
Not enough people love it for it to have become the investing strategy of the present. Buy-and-Hold, which argues against market timing, remains top dog.
But enough people like the new flavor to show that there is something important there. It’s not some silly idea. It’s the real thing. People don’t elect to devote eight years of their life to researching something without seeing considerable substance to it. People with doctorates from Princeton don’t put their names behind controversial ideas until those ideas have passed every test they can imagine to put them to.
Buy-and-holders hate valuation-based market timing
There’s another thing.
Why do the Buy-and-Holders hate it to much?
If market timing truly were not a plus, the Buy-and-Holders would not become angry when people make the case for it on the internet. They would have a live-and-let-live attitude toward it. Most Buy-and-Holders do not feel that way about Valuation-Informed Indexing. They see it as a life-and-death matter to keep discussion of the merits of market timing suppressed. Why?
I think it’s because even the most confirmed Buy-and-Holder at times experiences doubts. Valuation-Informed market timing is price discipline. Price discipline is required in every other market that exists. The claim that market timing doesn’t work has been advanced millions of times. What if it is wrong? What if that claim was rooted in a misunderstanding of the realities that Shiller brought to light for those open to seeing it?
That’s the only thing that would explain the crazy disparity in reactions, in my assessment. Valuation-based market timing is absolutely critical. It is through valuation-based market timing that investors fix the mistakes they make when they push stock prices up too high. There has to be a way available to us to correct those mistakes. The mistake made by the Buy-and-Holders shut down our means of correcting those mistakes and made stock investing more risky and less profitable for all investors.
But now we have the research we need to get things back on the right track. So all is good. If we can just get past our personal defensiveness about mistakes made a long time ago and focus on what’s important for everyone –becoming the best investors we can possibly be for the remainder of our days.
Rob’s bio is here.
