An Interview with Ben Stein, Part 2

Here’s the next installment of Bottom Line/Personal’s interview with Ben Stein. In the previous post, we learned that Stein thinks that people should be saving/investing more, and that his non-retirement investments primarily involve variable annuities.

What mistakes have you made?

The mistakes I have made as an investor have come from ignoring my own advice. I bought Berkshire Hathaway when it was cheap — $900 a share — but I didn’t buy with conviction and should have scooped up a lot more. It’s now worth $82, 800 a share. I also got caught up a bit in the quest for Internet stock riches, even though my indicators told me that the market was overvalued.

You detailed those indicators in your book, Yes, You Can Time the Market. How do you use this strategy for retirement investing?

My definition of market timing bears no resemblance to that of most financial gurus. No one can consistently predict what will happen in the stock market within the next year or the next five, but you can identify when stocks are cheaper by historical standards. If you buy stocks in those periods, your likelihood of making money over 20 years or longer is far better than if you dollar cost average into stock investments year after year, as many advisers recommend.

Tell us more about your research.

I sifted through 100 years of stock market data and found four simple measurements, or “metrics, ” that indicate with uncanny consistency when the S&P 500 was over- or undervalued. They include the current
inflation-adjusted average price of stocks in the index… the index’s average price-to-earnings ratio based on the trailing 12 months… average dividend yield… and average price-to-book value. You can find current figures, along with historical returns, on my book’s web site.

Next, I compared each of these metrics to their own 15-year moving averages. The optimal time to buy is at market lows — when the dividend yield is above its moving average and the rest of the metrics are well below theirs. You avoid stocks when the situation reverses itself.

Following this strategy, you would have bought stocks in 15 out of 15 of the best years to invest since 1926 and would have avoided the worst 15 years.

What do you do during overpriced stock market cycles?

Stay invested in the stocks I own, but I use new money to buy bonds (or bond funds), REITs (or REIT funds) and shares in a money market fund.

What do your charts say now?

The broad stock market is moderately underpriced — add to equities.

My thoughts: I’ve never been one for timing the market, no matter how you define it. That being said, I haven’t read Stein’s new book. Perhaps it’ll change the way I think. But in the mean time, I’ll stick with my boring strategy of steadily investing in a mix of low-cost Vanguard index funds.

See also: An Interview with Ben Stein, Part 1

[Source: Bottom Line/Personal]

5 Responses to “An Interview with Ben Stein, Part 2”

  1. Anonymous

    It seems to me that investing in a portfolio composed of fixed-income and equities with some allocation, and rebalancing every so often to keep that same allocation would achieve almost the same thing. It would cause you to buy more fixed-income when the stock market is overvalued and pick up more stocks when it is undervalued. But it takes out the guesswork and explicit market timing.

  2. Anonymous

    With a sufficiently long time horizon and a behavior set like Stein describes, it’d be really hard to lose money with that kind of “market timing”. Of course, I wouldn’t think of that analysis as market timing…to me it seems like merely what anyone with common sense who looked at that set of data would do.

    It’s interesting to know, though, the particular statistics he considers worth watching.

  3. Anonymous

    I’ve never been one for timing the market, no matter how you define it.

    I hear you there… it takes just a time or two of mis-timing the market to turn a net gain into a net loss.

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