I like Benjamin Graham’s shifting equity/bond allocation strategy. Tweaks like that…

This is Rob Bennett, author of the Guest Blog Entry. Thanks for your kind words and for sharing your thoughts, Monevator.

I strongly agree with you about Benjamin Graham. I think he was about 80 years ahead of his time.

For those not familiar with Graham’s teachings (he was Warren Buffett’s mentor), Graham advised going with a 75 percent stock allocation when stock valuations are low and the long-term value proposition is extremely high, a 50 percent stock allocation when prices are moderate and the long-term value proposition is good, and a 25 percent stock allocation when prices are insanely high (as they were from 1996 through 2008) and the long-term value proposition is very poor. Think how much closer we all would be to retirement if only today’s “experts” possessed Graham’s courage to speak up in opposition to the idea of “Passive Investing” (sticking with the same stock allocation regardless of how overpriced stock become)!

Two points.

One, following Graham’s wisdom is a lot easier today than it was in the day when Graham put it forward (in the early 1930s). Today, we have index funds. So you can invest pursuant to the most successful strategy known without even having to take the time to research stocks! All that you need to do is to buy index funds and be sure not to fall for the marketing slogans advising you that stocks are always best for the long run and that it is possible to achieve long-term success without “timing” the market and so on.

Two, I would characterize following the Graham approach as amounting to a lot more than “tweaking.” I have several calculators at my web site that reveal to investors how much they can increase returns and reduce risk by following the Graham strategy (I call it “Valuation-Informed Indexing”). Valuation-informed Indexing has beat Passive Indexing throughout the entire historical record, often by large margins; there is not yet one exception on record. Investors willing to give up Passive Investing and take price into consideration when buying stocks (as we of course all do with our purchases of everything else we buy) can realistically expect to be able to retire five years sooner than those following Passive strategies.

That’s a tweak worth taking, in my assessment!

Rob
Rob Bennett´s last blog ..Podcast #137 — Nine Valuation-Informed Indexing Portfolio Allocation Strategies

Will:

Please check out The Intelligent Investor, the fourth revised version, pages 4 and 5 and also page 74.

Rob
Rob Bennett´s last blog ..Rational Investing In Irrational Markets

Thanks for providing the link to the page of the book, Will. That’s extremely helpful.

The material at the link does NOT say that one approach is superior to the other. It says that rebalancing is simpler. It does not say it is better. Each of the two approaches described (Rebalancing/Passive Investing and Valuation-Informed Indexing) are described as alternatives to the other.

Graham is here endorsing Valuation-Informed Indexing. He is saying that it is a perfectly reasonable approach and that it works. That’s very important, given the reaction that we have seen to Valuation-Informed Indexing at numerous web sites in recent years. Discussion of Valuation-Informed Indexing has been banned at the following sites: (1) Motley Fool; (2) Morningstar.com; (3) IndexUniverse.com; (4) The Early Retirement Forum; and (5) Bogleheads.org. The readers of all of these sites have missed out on learning about this Graham-endorsed approach because of the blind dogmatism of many Passive Investing advocates. That’s a damning reality.

Graham is not condemning Passive Investing with the strong language that I often use to condemn it. That’s fair to say. Please keep in mind that we have learned much about the emotional dangers of Passive Investing in the years since Graham wrote those words. Much of my criticism is the result of behavior I have seen among Passive Investors during the insane bull market of the 1990s. We had never before in U.S. history reached valuation levels anywhere close to the levels reached in the late 1990s. How was Graham to know before it happened how dangerous stock investing was to become as the result of the massive promotion of Passive Investing in recent decades?

Now we know. I put a post to the Motley Fool board in May 13, 2002, reporting that the studies that financial planners use to help advise us on retirement questions fail to include an adjustment for the valuation level that applies on the day before the retirement begins and therefore get all the numbers wildly wrong. We have calculated the safe withdrawal rate accurately in the time since. We learned that retirees who used the Old School SWR studies to plan retirements beginning at the top of the bubble have only a one in three chance of seeing their retirements survive 30 years. The strong likelihood is that the errors made in those studies are going to result in millions of busted retirements in days to come. Not one of those studies has been corrected as of today.

It is this sort of thing that has caused me to take so strong a position in opposition to Passive Investing. We know today to an extent that we did not know when Graham was writing those words just how dangerous this investing strategy is when tried in the real world. All investors are human and all humans are drawn to Get Rich Quick schemes. Passive encourages the belief in the fantasy that stocks can provide reasonable returns even at times of insane valuations. Making investing a far more emotional endeavor than it needs to be is not a good idea, in my assessment.

I find no fault with Graham for not possessing a complete understanding of the dangers of Passive Investing. The evidence on this point available to us today was not available to him when he wrote those words. My question is — Given that Graham endorses Valuation-Informed Indexing in the words of the Bible of stock investing, why is it that discussion of this approach is banned at numerous discussion boards and blogs?

The only possible answer to this question is — Following Passive strategies makes investing so emotional an endeavor that those who have been taken in by the claims of this “strategy” find themselves unable even to tolerate civil and reasoned discussion of the pros and cons of the two alternatives described by Graham in the words that appear to us when we click the link above.

I stand by the claim made in this Guest Blog Entry, Will. Passive Investing is emotional investing. Passive Investing is irrational investing. I have seen thousands of Passive Investing advocates insist on a ban of civil and reasoned discussion of one of the two alternatives endorsed by Graham. I have never seen even one Valuation-Informed Indexer ask for a ban on discussion of Passive Investing. That reality tells a tale, in my assessment.

Rob
Rob Bennett´s last blog ..Rational Investing In Irrational Markets

The Scott Burns quote is accurate. And I feel great respect and affection for Scott. I agree with the words that Will uses to describe him.

My view is that that quote sums up why we are in an economic crisis today. I was the first person to point out the errors made in the Old School retirement studies and to urge that they be corrected. Scott (and Will) says that that effort is “catastophically unproductive” work. I view it as the most important work I have ever done. I believe that we need to begin shooting straight with people about what we have learned about how stock investing works over the past three decades or the entire U.S. economy may go over a cliff in not too long a time.

What works is not Passive Investing. Thousands of smart and good people have put out books and calculators and blogs and all this sort of thing endorsing Passive Investing and, if we are to turn this thing around, they are going to need to learn how to pronounce the three magic words (“I” and “Was” and “Wrong”). I think they need to do it. I don’t see that there’s any other way in which we can all get from the place where we are today to the place where we all deep in our hearts ultimately want to be.

We should be loving in our efforts to move things forward. It is not a small group of people who caused this economic crisis — just about all of us contributed in at least some small way. But we also need to be firm. Tolerating more words games will not get the job done. It is my sincere belief that a combination of honesty and charity is the only way to go at this point.

Human have made big mistakes at earlier times in history. And human have recovered from those mistakes. We are not perfect today and we never were. And we are not incapable of setting things right today anymore than we ever have been incapable of doing so in the past. We all need to reach down deep and come up with something good.

Rob
Rob Bennett´s last blog ..Podcast #149 — Rebalancing Never Works