Author Topic: What Warren Buffett Said in 1999  (Read 11330 times)

tooqk4u22

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What Warren Buffett Said in 1999
« on: July 01, 2015, 11:08:29 AM »
When I was reading the post about Shiller http://forum.mrmoneymustache.com/investor-alley/robert-shiller-doesn't-know-what-to-make-of-the-cape/

I thought of this article that I read - to me it makes a lot of sense given current state of interest rates....gets a little ugly if rates rise and the thesis holds I suspect.


http://www.thestreet.com/story/13202707/1/what-warren-buffett-said-in-1999-can-help-you-right-now.html

Aphalite

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Re: What Warren Buffett Said in 1999
« Reply #1 on: July 01, 2015, 11:24:39 AM »
Depends on how fast interest rates rise. If it's gradual, then growing earnings should compensate for that effect

Another big factor honestly is the strength of the USD. Because so many US companies obtain their revenues from international sources, if for some reason USD starts falling, you'll see much higher earnings reports which will still send stock prices up even with increases in the interest rate

leostrauss

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Re: What Warren Buffett Said in 1999
« Reply #2 on: July 01, 2015, 06:53:34 PM »
Excellent link. It exposes the kind of delusional thinking that permeates this board where some people assume 7-8 or even 10% annualized returns from the U.S. Market going forward. Every way one looks at the current valuations they scream 'stay far away!' Alas there are always dozens who will pounce on this to tell you why this time it's different.

I remember the dot com bust and the housing bust way too vividly to get suckered into buying any equities at these levels.

johnny847

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Re: What Warren Buffett Said in 1999
« Reply #3 on: July 01, 2015, 08:10:44 PM »
Excellent link. It exposes the kind of delusional thinking that permeates this board where some people assume 7-8 or even 10% annualized returns from the U.S. Market going forward. Every way one looks at the current valuations they scream 'stay far away!' Alas there are always dozens who will pounce on this to tell you why this time it's different.

I remember the dot com bust and the housing bust way too vividly to get suckered into buying any equities at these levels.

It's not the actual value of the return of US stocks going forward that is important. It's whether or not they will have higher returns than bonds for an appropriate increase in risk (under some definition of risk that you choose).
So long as this is true in the long run,  we should continue to invest in stocks


Of course the actual value of the returns going forward does matter in guessing at how much longer each of us has to FIRE. But any guess we make today is probably going to be wrong anyways for reasons other than the stock market not performing as predicted
« Last Edit: July 02, 2015, 05:36:56 PM by johnny847 »

waltworks

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Re: What Warren Buffett Said in 1999
« Reply #4 on: July 02, 2015, 07:50:05 AM »
Sure, but you need some alternative that has a better risk/reward ratio, in that case. The market doesn't have to "crash", it can just grow at, say, 4 or 5% annual until it's back at whatever you have decided the underlying trend should be. Then you'll *never* buy in, and you'll lose money to inflation every year, unless you've got something else to do with your money.

PE and CAPE and other metrics have a numerator AND a denominator, folks.

-W

Excellent link. It exposes the kind of delusional thinking that permeates this board where some people assume 7-8 or even 10% annualized returns from the U.S. Market going forward. Every way one looks at the current valuations they scream 'stay far away!' Alas there are always dozens who will pounce on this to tell you why this time it's different.

I remember the dot com bust and the housing bust way too vividly to get suckered into buying any equities at these levels.

Heckler

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Re: What Warren Buffett Said in 1999
« Reply #5 on: July 02, 2015, 09:33:02 AM »
All I got out if that techno-garble was the stock market will go up, and it will go down. 

Telecaster

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Re: What Warren Buffett Said in 1999
« Reply #6 on: July 02, 2015, 10:04:32 AM »
Sure, but you need some alternative that has a better risk/reward ratio, in that case. The market doesn't have to "crash", it can just grow at, say, 4 or 5% annual until it's back at whatever you have decided the underlying trend should be. Then you'll *never* buy in, and you'll lose money to inflation every year, unless you've got something else to do with your money.

PE and CAPE and other metrics have a numerator AND a denominator, folks.

-W


This.   We should reasonably expect lower returns for some period of time in the future.   But what else are you going to do?  Sit on the sidelines for 15 years?   

leostrauss

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Re: What Warren Buffett Said in 1999
« Reply #7 on: July 02, 2015, 10:36:35 AM »
I don't know what to do tbh. But I know that just like in 1999 the wrong posture is to be heavily in equities. Maybe some barbell strategy with leveraged ETFs could produce a better risk/reward ratio say, a 25% 2x equities ETF and 75% short term treasuries... not a clue if that would limit the downside enough to be worthwhile...

waltworks

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Re: What Warren Buffett Said in 1999
« Reply #8 on: July 02, 2015, 11:18:51 AM »
You might get more useful feedback on those ideas at Seeking Alpha or something. People here are just going to keep dumping in money at their chosen AA, because, you know, if you do that, you eventually win.

Equities aren't all boom/bust. There are plenty of historical periods when things just stagnate or grow slowly. People have forgotten that in the last 15 years.

-W

Retire-Canada

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Re: What Warren Buffett Said in 1999
« Reply #9 on: July 03, 2015, 11:28:58 AM »
Excellent link. It exposes the kind of delusional thinking that permeates this board where some people assume 7-8 or even 10% annualized returns from the U.S.

I read a lot of posts on this board and I do not see what you are describing above at all.

What I do see is a lot of people that believe in the 4% SWR based on the Trinity Study and other similar research. Implicit in that belief is that there will be periods of high growth, no growth and crashes. Which to me seems like a very rational view of market behaviour.

People argue whether 3% or 4% or 5% is a better target WR and they argue about flexible withdrawal plans and how much cash/bonds to hold.

But no significant group of people on this board is saying we'll get 7-8% returns every year for decades.

hodedofome

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Re: What Warren Buffett Said in 1999
« Reply #10 on: July 03, 2015, 01:31:09 PM »

Sure, but you need some alternative that has a better risk/reward ratio, in that case. The market doesn't have to "crash", it can just grow at, say, 4 or 5% annual until it's back at whatever you have decided the underlying trend should be. Then you'll *never* buy in, and you'll lose money to inflation every year, unless you've got something else to do with your money.

PE and CAPE and other metrics have a numerator AND a denominator, folks.

-W


This.   We should reasonably expect lower returns for some period of time in the future.   But what else are you going to do?  Sit on the sidelines for 15 years?

This is one of the Big reasons I've adopted a trend following approach to my investments. That way, if stocks continue to rise, I'll be invested. If they fall, I'll be out, and if they go sideways, hopefully I won't lose too much.

Strang times we live in when everything seems expensive and there aren't very many good options for buy and holding to turn to.


Sent from my iPhone using Tapatalk

tooqk4u22

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Re: What Warren Buffett Said in 1999
« Reply #11 on: July 06, 2015, 02:59:27 PM »
Excellent link. It exposes the kind of delusional thinking that permeates this board where some people assume 7-8 or even 10% annualized returns from the U.S.

I read a lot of posts on this board and I do not see what you are describing above at all.

What I do see is a lot of people that believe in the 4% SWR based on the Trinity Study and other similar research. Implicit in that belief is that there will be periods of high growth, no growth and crashes. Which to me seems like a very rational view of market behaviour.

People argue whether 3% or 4% or 5% is a better target WR and they argue about flexible withdrawal plans and how much cash/bonds to hold.

But no significant group of people on this board is saying we'll get 7-8% returns every year for decades.


I agree with VikB but don't discount what Leo is saying...just think it would have been better said by him that people on this board blindly follow/believe in the 4% SWR figure that is sprinkled with some debate on the bookends about whether or not the SWR could be higher or lower.  Of course nobody wants to break stride from the 4% Rule so it the discussion usually is followed with scoff's and claims of blasphemy to the gods of the FIRE religion.....and it usually ends with a does of "Remain flexible in your expenses and willingness to work and all will be fine" ....and while I agree with that statement doesn't it then defeat the purpose and meaning of a SWR, doesn't it........?

4% is the stated number that will be ok for 95% of the scenarios....but there are elements with consistencies within the 5% failures that should be focused on more heavily. 

I just don't see how we can be in investing environment with historically low (or well below historical averages) interest rates, inflation, and dividend yields all while stock valuations based on PE/CAPE or other measures are will above historical averages and still expect the 4%SWR rate to hold up (at least without any real confidence).....its just not logical or rational to think that.   These things will at best stay the same or more likely will revert back to the line.....this all hits to the heart of sequencing risk. 

So then the answer has got to be to aim for a lower SWR (which people don't want to hear because it requires a much greater number) and/or remain flexible in your expenses and income, but you still must invest and maintain your asset allocation and do all the other stuff that is frequently cited.   

This link gets into more of what I am saying above.....I do like toward the end when it is basically dumbed down to use common sense.
http://financialmentor.com/retirement-planning/how-much-money-do-i-need-to-retire/safe-withdrawal-rate/13192

sirdoug007

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Re: What Warren Buffett Said in 1999
« Reply #12 on: July 06, 2015, 04:03:24 PM »
Excellent link. It exposes the kind of delusional thinking that permeates this board where some people assume 7-8 or even 10% annualized returns from the U.S. Market going forward. Every way one looks at the current valuations they scream 'stay far away!' Alas there are always dozens who will pounce on this to tell you why this time it's different.

I remember the dot com bust and the housing bust way too vividly to get suckered into buying any equities at these levels.

Average and worst-case predictions are two entirely different things.

The Trinity Study (and other similar studies) define the worst case retirement year and recommend withdrawing no more than the maximum rate for that worst case year (to date 1966 or 1929 depending on asset allocation).  The 10 year S&P500 real returns from 1966-1976 were -0.6% and from 1929-1939 were 0.81%.  2000-2010 was even worse at -2.02%. 

Average returns for US equities from 1950 to 2014 have been 11.4% nominal and 7.5% real (inflation adjusted).  The real return of the S&P500 from 2008-2014 was 5.6%, which includes the great recession!

So plan for the worst (4% SWR) and hope for average returns.  Doesn't' seem delusional to me. 

At the end of the day, the market will do what the market will do.  Our only choice is in how we react to it.

Telecaster

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Re: What Warren Buffett Said in 1999
« Reply #13 on: July 06, 2015, 05:35:04 PM »

This link gets into more of what I am saying above.....I do like toward the end when it is basically dumbed down to use common sense.
http://financialmentor.com/retirement-planning/how-much-money-do-i-need-to-retire/safe-withdrawal-rate/13192

I agree the article was dumbed down.  I could have reduced that whole article to one sentence:  If you think the future will be worse than the past, use a lower withdrawal rate.  Boom! Done.  Just saved you from reading 12,000 words.

Yes, of course, one should understand the basic assumptions behind the 4% rule.   But just because there are assumptions, it doesn't follow they are bad assumptions. Note that the main criticism seemed to be that Pfau concluded that the future might be worse than the past.   Hold the presses!   That assumption is presented front and center in every discussion of the SWR.   And by the way, if you remove the high fees Pfau assumes, the SWR becomes 4% again.  Hmm.

One other thing.  The article refers to Rob Bennett several times.   Do you know who Rob "Hocus" Bennett is?   He is very possibly, in fact almost certainly,  insane.  He claims to have invented a SWR calculator based on stock valuations (referenced in your article).   There is no such calculator, at least not the way he claimed.    He claims he co-authored an academic paper with Wade Pfau, and in fact Pfau's work is based on his ideas.   Uh, not true either.   Bennett's pattern of harassment got him banned from every FIRE board I'm aware of.  Morning Star, Bogleheads, Motley Fool, etc.  You name it, he's been banned.   

Here is some of his advice regarding withdrawal rates, right during the peak of the housing bubble:

Quote
Instead of ignoring your home equity or depending on housing wealth to carry retirement, maybe it's best to take an approach in the middle, said Bennett, of PassionSaving.com.  Because he retired early, Bennett withdraws no more than 4 percent of the value of his investments. But if he needs more money, "I allow myself to take up to 2 percent of my [home] equity."

Bennett keeps a running tab on his home's value. He considers this a conservative strategy, because he will only spend 2 percent of equity if his home value keeps climbing more than 2 percent. Moreover, equity represents less than half of his assets. And, he said, he might ultimately sell his house and realize some cash gain.

http://articles.baltimoresun.com/2005-10-02/business/0509300140_1_retirement-experts-retirement-income-retirement-fund

Sounds like a good, conservative strategy to you?  Sounds in-fucking-sane to me.   Your retirement strategy is to sell your house AFTER you spend the equity?   What do you do then, live in a box?   There is no possible way the guy could be more full of shit.   I mean c'mon, that's just stupid advice.  And then you have an article that quotes him as an expert....uh, kind of makes me wonder about the guy who wrote the article.   








forummm

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Re: What Warren Buffett Said in 1999
« Reply #14 on: July 06, 2015, 05:45:20 PM »
Excellent link. It exposes the kind of delusional thinking that permeates this board where some people assume 7-8 or even 10% annualized returns from the U.S. Market going forward. Every way one looks at the current valuations they scream 'stay far away!' Alas there are always dozens who will pounce on this to tell you why this time it's different.

I remember the dot com bust and the housing bust way too vividly to get suckered into buying any equities at these levels.

I've repeatedly said on this board that valuations are high and to not expect historical rates of return the next 10 years. And lots of people agree with that.

forummm

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Re: What Warren Buffett Said in 1999
« Reply #15 on: July 06, 2015, 05:47:44 PM »
I don't know what to do tbh. But I know that just like in 1999 the wrong posture is to be heavily in equities. Maybe some barbell strategy with leveraged ETFs could produce a better risk/reward ratio say, a 25% 2x equities ETF and 75% short term treasuries... not a clue if that would limit the downside enough to be worthwhile...

PE was like 35 in 1999. It's like 20 now. Not the same.

Cycling Stache

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Re: What Warren Buffett Said in 1999
« Reply #16 on: July 06, 2015, 06:55:33 PM »
But no significant group of people on this board is saying we'll get 7-8% returns every year for decades.

I've always understood the historic stock market growth assumption in the calculations MMM and others use to be 7%.  4% is considered the net growth rate after subtracting 3% for inflation. 

Of course, it's unlikely to be 7% every year, just on average over long periods of time. 

For what it's worth, I think that stocks are currently overvalued, but I buy every time I have money (including today and tomorrow).  I don't think I'm smarter than $1 trillion invested in the market, so I operate on the assumption that whatever I think I know is most likely priced into the market.

leostrauss

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Re: What Warren Buffett Said in 1999
« Reply #17 on: July 06, 2015, 06:59:30 PM »
The P/E may have been 35 in 1999 but 10 year paper was yielding 6% or better. So there was something to carry the portfolio (assuming some sane asset allocation like 60/40 or 70/30). If stocks fall on their ass what's going to carry the portfolio?  Bonds with 2% yield and 15% theoretical upside?

Cycling Stache

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Re: What Warren Buffett Said in 1999
« Reply #18 on: July 06, 2015, 07:02:04 PM »
If stocks fall on their ass what's going to carry the portfolio?

Time.

forummm

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Re: What Warren Buffett Said in 1999
« Reply #19 on: July 06, 2015, 07:10:51 PM »
But no significant group of people on this board is saying we'll get 7-8% returns every year for decades.

I've always understood the historic stock market growth assumption in the calculations MMM and others use to be 7%.  4% is considered the net growth rate after subtracting 3% for inflation. 

Of course, it's unlikely to be 7% every year, just on average over long periods of time. 

For what it's worth, I think that stocks are currently overvalued, but I buy every time I have money (including today and tomorrow).  I don't think I'm smarter than $1 trillion invested in the market, so I operate on the assumption that whatever I think I know is most likely priced into the market.

Historically, stocks have returned over 10% nominal, and 7% real. So that's much more than 4%. The 4% SWR is because of the volatility of the market decreases portfolio returns when you're withdrawing (and increases them when you're contributing) and that it's very conservative (it would survive 95% of the historical scenarios).

The P/E may have been 35 in 1999 but 10 year paper was yielding 6% or better. So there was something to carry the portfolio (assuming some sane asset allocation like 60/40 or 70/30). If stocks fall on their ass what's going to carry the portfolio?  Bonds with 2% yield and 15% theoretical upside?

The 6% bonds made bonds a much more attractive option than the PE 34. Bonds had an expected return that exceeded stocks by quite a bit. But that is not the case now.

leostrauss

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Re: What Warren Buffett Said in 1999
« Reply #20 on: July 06, 2015, 07:20:56 PM »
> The 6% bonds made bonds a much more attractive option than the PE 34. Bonds had an expected return that exceeded stocks by quite a bit. But that is not the case now.

Right, that's my point. Given that stocks and bonds are both overpriced at the moment we should assume pretty abysmal returns for the next decade or so. Perhaps even worse than 2000-2010. It wouldn't shock me if a 100% SHY portfolio outperforms 100% SPY or even 60/40 SPY/BND.

waltworks

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Re: What Warren Buffett Said in 1999
« Reply #21 on: July 06, 2015, 07:49:31 PM »
I think there should be some secret code word hidden in the Trinity study so that when you post something about it, and don't include the code word, we can all ignore you.

Trinity study and 4% SWR= WORST CASE SCENARIO. You might think the future sucks ass. I might even agree with you, if you're talking stupid humans creating environmental catastrophe. But you have to really, really believe that right now is a worse time to buy stocks than September 1929, if you are sitting on the sidelines. If you're a serious pussy (guilty, as charged), then DCA.

Seriously, STFU about the 4% rule unless you actually read the damn study.

-W

forummm

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Re: What Warren Buffett Said in 1999
« Reply #22 on: July 07, 2015, 05:31:47 AM »
> The 6% bonds made bonds a much more attractive option than the PE 34. Bonds had an expected return that exceeded stocks by quite a bit. But that is not the case now.

Right, that's my point. Given that stocks and bonds are both overpriced at the moment we should assume pretty abysmal returns for the next decade or so. Perhaps even worse than 2000-2010. It wouldn't shock me if a 100% SHY portfolio outperforms 100% SPY or even 60/40 SPY/BND.

It depends what you mean by "abysmal". I think a couple percent real for stocks is very possible. And certainly it could be negative. But CAPE has stayed around 20 or higher for most of the last couple decades. Maybe valuations will stay at this level going forward and returns will be at historical averages. You just don't know.

tooqk4u22

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Re: What Warren Buffett Said in 1999
« Reply #23 on: July 07, 2015, 07:28:13 AM »
Here is some of his advice regarding withdrawal rates, right during the peak of the housing bubble:

Quote
Instead of ignoring your home equity or depending on housing wealth to carry retirement, maybe it's best to take an approach in the middle, said Bennett, of PassionSaving.com.  Because he retired early, Bennett withdraws no more than 4 percent of the value of his investments. But if he needs more money, "I allow myself to take up to 2 percent of my [home] equity."

Bennett keeps a running tab on his home's value. He considers this a conservative strategy, because he will only spend 2 percent of equity if his home value keeps climbing more than 2 percent. Moreover, equity represents less than half of his assets. And, he said, he might ultimately sell his house and realize some cash gain.

http://articles.baltimoresun.com/2005-10-02/business/0509300140_1_retirement-experts-retirement-income-retirement-fund

Sounds like a good, conservative strategy to you?  Sounds in-fucking-sane to me.   Your retirement strategy is to sell your house AFTER you spend the equity?   What do you do then, live in a box?   There is no possible way the guy could be more full of shit.   I mean c'mon, that's just stupid advice.  And then you have an article that quotes him as an expert....uh, kind of makes me wonder about the guy who wrote the article.

Sounds like stupid advice in hindsight but at the time it was almost a given that houses appreciated above inflation on average.....so taking out 2% if needed when values historically rise on average 2-5% may not be terrible advice historically...just like the trinity study. What it didn't factor in was that values rose considerably more than 2-5% for a few years then had revert back to the mean.   

Aphalite

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Re: What Warren Buffett Said in 1999
« Reply #24 on: July 07, 2015, 08:42:42 AM »
> The 6% bonds made bonds a much more attractive option than the PE 34. Bonds had an expected return that exceeded stocks by quite a bit. But that is not the case now.

Right, that's my point. Given that stocks and bonds are both overpriced at the moment we should assume pretty abysmal returns for the next decade or so. Perhaps even worse than 2000-2010. It wouldn't shock me if a 100% SHY portfolio outperforms 100% SPY or even 60/40 SPY/BND.

I think you are misunderstanding the way to look at PE vs bond returns

2000: Bond yield = 6%, PE = 34 so Stock yield = 3% (100/34)

2015: Bond yield = 2%, PE = 20 so Stock yield = 5% (100/20)

The situation is reversed here, a higher bond yield doesn't justify a higher PE, it justifies a LOWER PE. What you should have seen is PE of 20 (stock yield at 5) with bond yield at 6 and PE of 34 (stock yield at 3) with bond yield at 2. Plus you have the growth factor on stocks whereas bond yield is all you get. Returns on stocks are typically yield+earnings growth, and if you're assuming growth will be 3-4% in the future, you get 8-9% return anyways. You could have PE compression down from 20 if interest rates rise which eats into your returns. But overall, stocks in general (minus the troubling valuations on some tech/bio stocks) are very safe right now (from a perspective protection of buying power) when compared to the alternative - investors who buy 30 year bonds are looking only at currency and not purchasing power - over time, that investment is going to erode purchasing power, not increase it. In which case, why save at all? No need to delay gratification if your money isn't going to be worth more in the future.

If interest rates/inflation continue to stay low, CAPE/PE will continue to stay higher than historic numbers
« Last Edit: July 07, 2015, 08:48:00 AM by Aphalite »

Telecaster

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Re: What Warren Buffett Said in 1999
« Reply #25 on: July 07, 2015, 09:42:59 AM »

Sounds like stupid advice in hindsight but at the time it was almost a given that houses appreciated above inflation on average.....so taking out 2% if needed when values historically rise on average 2-5% may not be terrible advice historically...just like the trinity study. What it didn't factor in was that values rose considerably more than 2-5% for a few years then had revert back to the mean.

I thought it was stupid advice at the time (I remembered it because the astonishing idiocy made a lasting impression on me), and it is nothing like the Trinity study.  The Trinity study looked at actual data.  Bennett assumed a short term trend would continue on for the length of his retirement.   Wishful thinking in other words.  And this type of thinking makes this guy an expert in safe withdrawal rates? 

And by the way, how do you spend the equity in your house?   Unless you take out a HELOC, you can't.  And even then you are just borrowing against future income.   Not great financial advice, I'm sure you'll agree. 

tooqk4u22

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Re: What Warren Buffett Said in 1999
« Reply #26 on: July 07, 2015, 10:11:36 AM »

Sounds like stupid advice in hindsight but at the time it was almost a given that houses appreciated above inflation on average.....so taking out 2% if needed when values historically rise on average 2-5% may not be terrible advice historically...just like the trinity study. What it didn't factor in was that values rose considerably more than 2-5% for a few years then had revert back to the mean.

I thought it was stupid advice at the time (I remembered it because the astonishing idiocy made a lasting impression on me), and it is nothing like the Trinity study.  The Trinity study looked at actual data.  Bennett assumed a short term trend would continue on for the length of his retirement.   Wishful thinking in other words.  And this type of thinking makes this guy an expert in safe withdrawal rates? 

And by the way, how do you spend the equity in your house?   Unless you take out a HELOC, you can't.  And even then you are just borrowing against future income.   Not great financial advice, I'm sure you'll agree. 

First I didn't say or agree that it was sound advice, but yes a HELOC would be the most efficient/cost effective way to extract 2% equity at a time out of your house.  It is similar (not the same) to the trinity study given the historical aspect of it relative to the historical trends in housing prior to the run up from 2005-2007 before that housing had never experienced a fall on a national basis.

Your quote regarding bennett suggested nothing of the sort that there was reliance on a short term trend, which I suspect you are eluding to when housing was rising at 10% or more every year and almost everywhere.  Prior to the housing run up it would have been unheard of to not expect your house to grow in value by 2% or more a year on average....and your qoute indicates he would only do it if the value rose.  Shit that is the whole premise of reverse mortgages, which is a meaningful part of people's retirement strategy. 

Quote
because he will only spend 2 percent of equity if his home value keeps climbing more than 2 percent.



I fully plan to use my HELOC when needed to bridge large expenses when needed or when the time is right to downsize and redeploy some of that equity if I can many years from now (not relying on it, but its an option) - falls under that whole be flexible thing. 

So again, the advice may not be sound but there are some merits to it and if take out the timing bias that you are applying the advice wouldn't sound unreasonble say prior to 2005.


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Re: What Warren Buffett Said in 1999
« Reply #27 on: July 07, 2015, 11:17:51 AM »

Sounds like stupid advice in hindsight but at the time it was almost a given that houses appreciated above inflation on average.....so taking out 2% if needed when values historically rise on average 2-5% may not be terrible advice historically...just like the trinity study. What it didn't factor in was that values rose considerably more than 2-5% for a few years then had revert back to the mean.

I thought it was stupid advice at the time (I remembered it because the astonishing idiocy made a lasting impression on me), and it is nothing like the Trinity study.  The Trinity study looked at actual data.  Bennett assumed a short term trend would continue on for the length of his retirement.   Wishful thinking in other words.  And this type of thinking makes this guy an expert in safe withdrawal rates? 

And by the way, how do you spend the equity in your house?   Unless you take out a HELOC, you can't.  And even then you are just borrowing against future income.   Not great financial advice, I'm sure you'll agree. 

First I didn't say or agree that it was sound advice, but yes a HELOC would be the most efficient/cost effective way to extract 2% equity at a time out of your house.  It is similar (not the same) to the trinity study given the historical aspect of it relative to the historical trends in housing prior to the run up from 2005-2007 before that housing had never experienced a fall on a national basis.

Your quote regarding bennett suggested nothing of the sort that there was reliance on a short term trend, which I suspect you are eluding to when housing was rising at 10% or more every year and almost everywhere.  Prior to the housing run up it would have been unheard of to not expect your house to grow in value by 2% or more a year on average....and your qoute indicates he would only do it if the value rose.  Shit that is the whole premise of reverse mortgages, which is a meaningful part of people's retirement strategy. 

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because he will only spend 2 percent of equity if his home value keeps climbing more than 2 percent.



I fully plan to use my HELOC when needed to bridge large expenses when needed or when the time is right to downsize and redeploy some of that equity if I can many years from now (not relying on it, but its an option) - falls under that whole be flexible thing. 

So again, the advice may not be sound but there are some merits to it and if take out the timing bias that you are applying the advice wouldn't sound unreasonble say prior to 2005.

I have to agree with Telecaster, the conclusions of the trinity study are done over a much larger time period than that of Bennett. From the research that I have been doing historically house prices have followed the rate of inflation pretty closely. It's not until 2000 that there is a deviation from this trend. Claiming that houses appreciate in value by 2%-5% seems completely unfounded by the long-term historical data. As an example here is a picture that shows house prices and inflation on the same graph for 1970-2014:


Xlar

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Re: What Warren Buffett Said in 1999
« Reply #28 on: July 07, 2015, 11:25:19 AM »
Here is an even better graph that shows the inflation adjusted price of homes since 1890! As you can see the price of houses has remained very constant throughout this time period with a few minor deviations and the major current deviation.


tooqk4u22

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Re: What Warren Buffett Said in 1999
« Reply #29 on: July 08, 2015, 09:43:36 AM »
I have to agree with Telecaster, the conclusions of the trinity study are done over a much larger time period than that of Bennett. From the research that I have been doing historically house prices have followed the rate of inflation pretty closely. It's not until 2000 that there is a deviation from this trend. Claiming that houses appreciate in value by 2%-5% seems completely unfounded by the long-term historical data. As an example here is a picture that shows house prices and inflation on the same graph for 1970-2014:



Actually, your chart complete contradicts what you are saying and supports what I said. 

Per the chart, over the 44-year period the nominal price rose by about 5% on average annually (from about $25k in 1970 to about $212k in 2014) over the 44-year period depicted by the chart.  The other line (red) is not the inflation rate, it is the inflation adjusted house prices which shows that "Real" house prices grew at about 0.7% above inflation over the last 44 years (from about $155k inflation adjusted at the start to $212k in 2014)....and this is after the housing boom/bust.

 
« Last Edit: July 08, 2015, 09:45:09 AM by tooqk4u22 »

Xlar

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Re: What Warren Buffett Said in 1999
« Reply #30 on: July 08, 2015, 11:13:10 AM »
I have to agree with Telecaster, the conclusions of the trinity study are done over a much larger time period than that of Bennett. From the research that I have been doing historically house prices have followed the rate of inflation pretty closely. It's not until 2000 that there is a deviation from this trend. Claiming that houses appreciate in value by 2%-5% seems completely unfounded by the long-term historical data. As an example here is a picture that shows house prices and inflation on the same graph for 1970-2014:



Actually, your chart complete contradicts what you are saying and supports what I said. 

Per the chart, over the 44-year period the nominal price rose by about 5% on average annually (from about $25k in 1970 to about $212k in 2014) over the 44-year period depicted by the chart.  The other line (red) is not the inflation rate, it is the inflation adjusted house prices which shows that "Real" house prices grew at about 0.7% above inflation over the last 44 years (from about $155k inflation adjusted at the start to $212k in 2014)....and this is after the housing boom/bust.

 


Maybe I'm misunderstanding my own graph, hahaha. I was interpreting the red line as the inflation adjusted prices of houses. If we look at this line there is a general cyclical pattern overlaid on an upwards trend. With the boom in the 2000s appearing as an outlier. From your numbers (155k in 1970 up to 212k in 2014) this gives an increase of 0.7% above inflation. How would this justify extracting 2% of the houses equity every year as a retirement plan? I feel like I'm missing something from your conclusion, hahaha.

Are you saying that your plan is to remove the growth from inflation from the house as income?  So that you'd always owe the same, inflation adjusted, amount on the house?

tooqk4u22

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Re: What Warren Buffett Said in 1999
« Reply #31 on: July 08, 2015, 12:44:36 PM »

Maybe I'm misunderstanding my own graph, hahaha. I was interpreting the red line as the inflation adjusted prices of houses. If we look at this line there is a general cyclical pattern overlaid on an upwards trend. With the boom in the 2000s appearing as an outlier. From your numbers (155k in 1970 up to 212k in 2014) this gives an increase of 0.7% above inflation. How would this justify extracting 2% of the houses equity every year as a retirement plan? I feel like I'm missing something from your conclusion, hahaha.

Are you saying that your plan is to remove the growth from inflation from the house as income?  So that you'd always owe the same, inflation adjusted, amount on the house?

First, it is not my plan.....Telecaster was using the plan to discredit Bennett because Bennett was on record saying that was his plan....and for the record I don't give a shit about Bennett or know anything at all about him or his views, all I was doing was positing that it would not have been a ridiculous concept.  Here is one of my responses, I did say 2-5% - I'll admit that the chart surprised me that it was 5% annually and that it implies that inflation averaged 4.3% over the last 44 years vs. the more common estimate of 3%:

Quote
Sounds like stupid advice in hindsight but at the time it was almost a given that houses appreciated above inflation on average.....so taking out 2% if needed when values historically rise on average 2-5% may not be terrible advice historically...just like the trinity study. What it didn't factor in was that values rose considerably more than 2-5% for a few years then had revert back to the mean.


Second, what Bennett had said per Telecaster's quote was that he would take out 2% of his home equity to support his expenses only if the house went up in value by 2% or more - so if houses go up 2% then it takes about 30 years to crap out on the equity assuming a 5% interest rate (my HELOC right now is 2.5%) with all interest rolled into the HELOC.  But if house go up 5% as the chart indicates is the historical average then your equity would never run out (obviously this there are so many assumptions for this to work).  So in the case of the chart in 1970 Bennett would have taken out

I don't think the plan as stated is prudent but there is merit to including part of the concept into your plan, especially as you get later in your years. 

Xlar

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Re: What Warren Buffett Said in 1999
« Reply #32 on: July 08, 2015, 02:53:14 PM »

Maybe I'm misunderstanding my own graph, hahaha. I was interpreting the red line as the inflation adjusted prices of houses. If we look at this line there is a general cyclical pattern overlaid on an upwards trend. With the boom in the 2000s appearing as an outlier. From your numbers (155k in 1970 up to 212k in 2014) this gives an increase of 0.7% above inflation. How would this justify extracting 2% of the houses equity every year as a retirement plan? I feel like I'm missing something from your conclusion, hahaha.

Are you saying that your plan is to remove the growth from inflation from the house as income?  So that you'd always owe the same, inflation adjusted, amount on the house?

First, it is not my plan.....Telecaster was using the plan to discredit Bennett because Bennett was on record saying that was his plan....and for the record I don't give a shit about Bennett or know anything at all about him or his views, all I was doing was positing that it would not have been a ridiculous concept.  Here is one of my responses, I did say 2-5% - I'll admit that the chart surprised me that it was 5% annually and that it implies that inflation averaged 4.3% over the last 44 years vs. the more common estimate of 3%:

Quote
Sounds like stupid advice in hindsight but at the time it was almost a given that houses appreciated above inflation on average.....so taking out 2% if needed when values historically rise on average 2-5% may not be terrible advice historically...just like the trinity study. What it didn't factor in was that values rose considerably more than 2-5% for a few years then had revert back to the mean.


Second, what Bennett had said per Telecaster's quote was that he would take out 2% of his home equity to support his expenses only if the house went up in value by 2% or more - so if houses go up 2% then it takes about 30 years to crap out on the equity assuming a 5% interest rate (my HELOC right now is 2.5%) with all interest rolled into the HELOC.  But if house go up 5% as the chart indicates is the historical average then your equity would never run out (obviously this there are so many assumptions for this to work).  So in the case of the chart in 1970 Bennett would have taken out

I don't think the plan as stated is prudent but there is merit to including part of the concept into your plan, especially as you get later in your years.

Ah ha, that's what I was missing. I can see how that would make sense and provide a bit of a cushion later on in life. Particularly when you're not concerned about paying back the loan and if the interest rate is low.

Thank you for delving deeper into this discussion with me :)

BTW: I have no idea who the Bennett guy is either, hahaha.

StacheEngineer

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Re: What Warren Buffett Said in 1999
« Reply #33 on: July 08, 2015, 04:20:59 PM »
Could I just say that fitting an exponential curve with a linear fit is ludicrous? Rates of inflation like growth compound and so are exponential trends not linear trends.

tooqk4u22

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Re: What Warren Buffett Said in 1999
« Reply #34 on: July 10, 2015, 11:11:09 AM »
Could I just say that fitting an exponential curve with a linear fit is ludicrous? Rates of inflation like growth compound and so are exponential trends not linear trends.

While I don't specifically know what you are attacking and your statement may be technically correct, the fact is the is generally the basic and accepted way to approach things whether it be investments, housing, SWR, GDP or otherwise anything with a growth component.  Conversely, anything with a growth element can't grow forever, so there are hiccups such as declines or slowdowns making them inversely exponential possibly. The linear lines help normalize/smooth the reality to aid in establishing a baseline projection, which again is a fairly common application.


tooqk4u22

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Re: What Warren Buffett Said in 1999
« Reply #35 on: July 10, 2015, 11:12:24 AM »
Ah ha, that's what I was missing. I can see how that would make sense and provide a bit of a cushion later on in life. Particularly when you're not concerned about paying back the loan and if the interest rate is low.

Thank you for delving deeper into this discussion with me :)

BTW: I have no idea who the Bennett guy is either, hahaha.

Yup - if you're are 6' under who cares about the debt. ;)