I know what I have given you. I do not know what you have received.
~Antonio Porchia, Voces, 1943, translated from Spanish by W.S. Merwin
Well, it took about two weeks, but the Couch Potato cabal piled on all at once in response to my post on Why This Is No Market for Couch Potatoes. Unfortunately, they did so on the day I was out of town with my son for his follow-up surgery so I wasn't (and to some extent still am not) in the best condition to comment. I'm still busy with post-op pain management and preparing to move, so I'll have to make this quick, and therefore less thorough than I'd like.
While some fine points were made, I was fascinated by the number of people who commented and attributed a point of view to me that I didn't think I had put forth. I congratulate Dan Bortolotti (The Canadian Couch Potato) for keeping the discussion more or less “constructive” in his article. Whenever I get email questions from people wanting to learn more about passive investing, I usually tell them that an all-passive approach is not for me, and then I recommend Dan's site for more information on the details of the approach.
Two Rebuttals, One Day
Two Money Sense bloggers posted rebuttals to my article: Canadian Couch Potato and Canadian Capitalist wrote about it on the same day. You can read both articles and decide for yourself where you stand on the debate and to what extent they addressed the issues I raised.
The Canadian Capitalist article quoted the crux of my argument on how secular cycles could account for the lower than expected Potato returns over the past ten years. Then he described how not all Potato investors are 100% invested in stocks, which is not a claim I made in my article. He went on (in the comments section) to suggest I was “smoking” something in reference to my follow up post in response to a reader question.
For the record: 1) I don't smoke – anything. 2) It was not my intention to “beat up on” anyone, nor do I think that characterization captures the true tenor of my article. 3) The options I outlined in the follow-up article were not meant to be blanket recommendations, but ideas to consider once valuations come in – and they came in pretty nicely on Wednesday. The point of that second article was to control your risk by controlling your exposure to various asset classes – not to instruct readers on where to put their money at this moment. I'm sorry if that wasn't clear.
I saw nothing in the CC article to address the data on secular cycles. Rather, Mr. Capitalist cautioned that Potatoes should expect some years of modest returns and suggested that those who outperform the market are just lucky.
The Couch Potato article, which I thought was quite well done, hinted that I thought CP investors were lazy. That's not true. The intent of my article was to show that Couch Potato investing can be a good strategy, but that it's wise to fully understand its limitations before employing it.
On Secular Cycles
For those who are interested in learning the facts about secular cycles, please take some time and check out the information on the Crestmont Research site. There are charts, data, and detailed explanations on what a secular cycle is and how valuations affect subsequent investment returns. While there is ample historical data to support the type of ultra-long term returns Potatoes hope to garner, there is also plenty of data to show that taking valuations into consideration can help boost those returns further. Standing aside (even if only partially) when markets are overvalued is another approach that makes sense.
You can also take a look at some of Robert Shiller's work, which Rob Bennett recently summarized very nicely in a post at Out of Your Rut. It runs along the same lines and is backed by Shiller's empirical evidence. These are not fortune tellers. These are people using the same rationale (historical data) as Potatoes to invest – with a different twist. For the record, I am somewhat more skeptical of the reliance on historical data than either the Potatoes or the valuation-informed investing contingent for reasons that I can hopefully outline in a future post, but which are at least partially articulated in the quote contained in the next section.
Where We Agree
I agree with Potato arguments that we can't predict future market direction accurately and that we need a probability-based approach as a result of that. I guess the difference is in which data we look at to arrive at our probabilities, and perhaps in the probabilities we arrive at after we examine the data.
I don't think all Potatoes are lazy, dim-witted or Pollyana-ish. In fact, I admire the discipline that goes hand in hand with the strategy. I do think that some of them can be very dogmatic. Trying to make something that is essentially an art into a science seems unproductive, and dismissing every other approach as ridiculous is somewhere between inaccurate and arrogant.
It's easy for novice investors to stumble on the Couch Potato approach and swallow it whole without fully digesting its limitations. One comment summed up some of the challenges and critiques pretty well:
“I think that it is ironic that CCP says: “we cannot predict the future”, but then goes ahead and predicts it by saying that the future is rosier with passive index investing then anything else based on empirical evidence from the past! I think that CCP correctly indicates that one’s investment strategy must be based on determination of personal risk. I think that the risk of expecting the future to unfold like it has in the past is the major weakness of the couch potato passive investment strategy and requires incredible faith! When you are young this type of faith is easier but when you are older you will have found that evidence based research is only valid for today and may not hold for tomorrow which may unfold differently. Many of us believe that the market has changed significantly and that older studies looking at passive index investing may now no longer be valid going forward necessitating a valuation investing strategy.”
I am one of those who believe that the market has changed. Clearly, some agree with me on that, and some don't. That's what makes a market.
What's the Alternative?
A lot of the critiques of my article went along the lines of the following: “Do you think you can do any better?” “What's the alternative strategy?” If you've read this blog for very long, you know that I don't like to advocate one particular approach over another. There are lots of ways to make money in (and out!) of the market. Not all styles fit for all people.
My aim here is to showcase investment and macroeconomic information that I find compelling and let readers make informed choices for themselves. If your choice is the Potato philosophy, I hope you find it satisfactory. If it's not, I wish you well with that too.
I think the incorporation of other tools like technical analysis and macroeconomic information can be helpful as part of your overall strategy – if you have the time/inclination to stay informed. In terms of the active vs. passive debate, I still don't understand why it has to be one or the other. It's perfectly valid to choose both if that suits your age, risk tolerance and knowledge level.
As for the question Dan put back to me regarding “What if you're wrong?” I can see that he's not a regular Canadian Finance Blog reader. I ask that question all the time here and I'm never ever sure I'm right. That's why I like to look at lots of options and let people make their own choices.
For those who are only interested in one side of the story, there are plenty of blogs out there that deliver just that on a daily basis. I try to make this blog a place for discussion rather than instruction. As I've said before, I don't have all the answers, but I try to ask the important questions.
Your comments are welcome.