A Rich Life

I’m some guy who posts stuff on the internet.

Some people think that I should learn my place. Some people think that I should stop talking back to my betters.

I can’t do that. I think of my fellow community members as my friends. When you learn things that can help out your friends in a big way, you let them know. I will continue to report the safe withdrawal rate accurately. I will continue to post honestly on what the historical stock-return data says about the effect of valuations on long-term returns.

I’ll continue to get flak for doing so too. I think that much is more than fair to say.

The fellow who runs the Clever Dude blog came up with a great solution to the abusive posting problem a few weeks back. There were some abusive posters posting comments on a guest blog entry that I wrote for that blog and the guy who runs it said: “I’d like to invite any and all of you to submit guest posts as well (go to my Contact page) to counter Rob’s article or to write about any other topic you like.”

That’s the right stuff. Civil and reasonable humans work out their differences by talking them over, not by participating in never-ending smear campaigns. I followed by putting forward a similar invitation of my own. I said: “I extend the same offer re space at my blog. I would love to see people contributing guest blogs that offer ideas counter to my investing views. I of course have strongly held views and I of course am obligated to state my sincere views. So I see the biggest weakness of the Financial Freedom Blog [now the A Rich Life blog] being the lack of balance in perspectives being shared. I get some comments putting forward other points of view, but not enough of them. So if Schroeder or others would like to make some points in a guest blog, I very much encourage them to send me some words.”

There have been no takers. None of the Passive Investing enthusiasts who have terrorized the Retire Early and Indexing communities over the past six years have written up any words explaining their case in civil and reasoned language. Surprise! Surprise!

I say “Surprise! Surprise!” because I have made similar offers on a number of earlier occasions. I asked Greaney to participate in a debate of the safe-withdrawal-rate topic at the Motley Fool board in which only he and I would post and members of his Goon Squad would not be permitted to disrupt. No dice. I offered to appear on a radio show with Greaney at which he would argue in support of the Old School SWR studies and I would argue in support of the New School SWR studies. No dice. I included in an article that I posted to the web site several years back an offer to provide space for Greaney or Sholar or any of the other “defenders” of the Old School studies to make their case. No dice.

I want dice!

I want dice because it is important to be fair and balanced. I say that the demonstrably false claims advanced in the Old School studies are likely going to cause millions of busted retirements in days to come. That’s a startling claim. If it is true, I have absolutely no choice but to advance it. To fail to try to get the word out to millions of people whose retirements are likely to fail would be an unforgivable dereliction of my responsibilities to the community. On the other hand, if there is something wrong with the claim, I have a responsibility to let people know that and to correct my words. So I should be doing all that I can both to publicize the flaws of the Old School studies and to learn of any flaws in the New School concept (the New School argues that it is impossible to calculate the SWR accurately without including an adjustment for the valuation level that applies on the start date of the retirement).

How are we all to learn whether the “defenders” of the Old School studies have any justification for not calling for the correction of them unless they tell us what it is? I believe that the reason why they have not offered any justification is that there is no possible justification. Still, I don’t think it hurts to open this blog space to anyone willing to take a stab at defending the Old School methodology. Hence — the Rob Bennett Challenge to Passive Investing Enthusiasts.

I hereby challenge any defender of the Old School studies to write up a blog entry explaining why he or she thinks it is a good idea not to include an adjustment for the effect of valuations in an SWR study. Send it to me (please note the “Contact Rob” tab at the left-hand side of this page) and I will schedule it for posting at the A Rich Life blog.

We’ve gone well beyond discussion of the flaws of the Old School SWR studies in recent years. So I would like to make the Challenge broad enough to cover more than the topic that kicked off The Great Debate. I believe that the truly core issue is the Passive Investing issue. Does it make sense to urge investors to stick with a stock allocation elected when prices were reasonable when prices have reached dangerously overvalued levels? I say “no way!” If you say “yes, way!” please give some thought to writing up some words and passing them along for posting where your fellow community members can read them and learn from them.

I will not comment on any blog entries submitted within the text of the blog entries themselves. I may or may not comment in a subsequent blog entry posted under my own name. I won’t offer the first comment to any blog entry posted as part of The Rob Bennett Challenge. If others comment, I may or may not offer my views in response to those comments, as I would re comments posted in reaction to my own blog entries.

I’m not expecting to receive any blog entries in response to the challenge. I would love to be surprised.

There’s no deadline. I’m happy to see your reasoned defense of either the Old School SWR studies or the Passive Investing concept whenever time opens up in your schedule for you to do us all the favor of writing one up.

As Clint Eastwood nearly said:

Ya feeling challenged today, Goon?
Well, are ya?

Note: I am of course with the references to “Goons” having a little fun with those good friends of mine who have been terrorizing the Retire Early and Indexing boards for six years now. Non-Goon submissions are both welcomed and encouraged. They will be pushed to the top of the list! They are preferred!

Today’s Passion: When I’m not caught up in the important business of challenging Goons, I often spend my time coming up with saving advice sayings. My favorites are collected in an article entitled Rob Bennett’s Favorite Saving Advice Sayings.

I recently posted a guest blog entry at the Generation X Finance blog entitled Price Drops are Good for Young Investors in the Stock Market.

Juicy Excerpt: The answer is to learn how valuations affect long-term stock returns, to lower our stock allocations to more reasonable levels, and to come to appreciate the long-term benefits that come from big price drops starting from the sorts of price levels that apply today. You’ll view big price drops very differently when your stock allocation is lower. Those with reasonable stock allocations are able to see that low stock prices are the key to long-term wealth accumulation.

There were several good comments filed in response to the blog entry.

Juicy Excerpt: Agree with the premise and all the comments so far, but the original poster is (in a not so subtle way) advocating market timing. There’s an inherent contradiction here: you can’t take advantage of lower prices through the dollar-cost-averaging long-term investing philosophy if you’re waiting for the “Stock Market Predictor” to tell you what to do. Thanks, but I’ll pass.

Today’s Passion: If you want to know more about our unique investment return calculator, please consider checking out the article entitled About Our Unique Investment Return Calculator.

A recent Washington Post article argues that: “Humans, no matter how hard we try, act in ways that cause us to make the wrong investment decisions almost all the time.”

I like the lyrics but not the melody to which they are attached.

The guy writing the article describes how he made a poor investing decision. He looked into Behavioral Finance and concluded that his problem is that even the smartest among us are not capable of making good investing decisions, that “when it comes to investing, people aren’t that smart.”

That’s dumb.

Some of us are not capable of smart investing. Some of us are. Why the generalizations? Those of us who are not as smart as some should be trying to learn from those who possess the edge, not denying that it exists to save our pride.

The fellow is on the right track. The Efficient Market Theory is the past, Behavioral Finance is the future. I think he takes a wrong turn, however, when he concludes that: “I’m going to push the money into an index fund.”

It’s not that that is a bad decision. Index funds are a good thing. The fellow who wrote the article probably belongs in an index fund. Most of us probably do. All that is fine.

All that is humble. That’s why it is fine. If you don’t know how to pick stocks effectively, you shouldn’t be trying to pick them.

What gives me the creeps about the article is the suggestion that none of us can pick stocks effectively. I’ve not seen any convincing evidence that this is so. I’ve seen lots of people say it, but I’ve never seen anyone make an effective case. What appears to me to be going on is that many people have quite properly concluded that they cannot pick stocks effectively and have jumped from that bit of useful self-knowledge to the unwarranted conclusion that no one else can pick stocks effectively either.

That’s not humility. That’s arrogance. That’s arrogance parading as humility.

No one can pick stocks effectively? No one? There are millions doing it. There have always been millions doing it.

Let’s say that it is 20 percent of the investing population that possesses the skill needed to pick stocks. Is it the right thing for the 80 percent who do not to pretend that no one possesses this ability? I sure do not think so.

If you stop picking stocks because you lack the ability but acknowledge that others possess this ability, you leave open the possibility of gaining this skill somewhere down the line. Pretend that since you can’t do it, no one else can either, and you doom yourself to a lifetime of indexing. Why? For what purpose?

To flatter yourself. That’s what is going on here. The people who promote indexing noticed that it goes against human nature to be humble and so many who do not possess the skill needed to pick stocks do not want to admit that they there are others who do. So we are told stories, we are assured that there are “studies” showing that no one can pick stocks effectively. We hurt ourselves by believing in those stories. It’s a small-minded thing to do.

Indexing is wonderful. It is the right choice for the majority of investors. It’s not the only choice, it need not be a forever choice. There are a good number of investors who can enhance their returns by putting their experience and knowledge to use picking stocks effectively.

As a promoter of indexing, it embarrasses me that a good number of my fellow indexing promoters feel that they need to overstate the case for this investing approach. Indexing is good just as it is, without the overreaching.

Indexing works. But it is not the only thing that works. I wish that indexers would stop arguing that it is. The message that I hear when they do so is not “I’m so humble that I can admit that I cannot do something” but “I’m so arrogant that I cannot admit that there are many who possess a skill that I do not now possess.”

Index while you learn. But don’t buy into flattery that causes you to give up on the learning process. The rational and emotionally healthy investor indexes for so long as indexing is right and graduates to effective stock picking when that becomes the better choice. You don’t have to choose teams and wear the indexing jersey for life or the stock-pickers jersey for life. There is a time and place for every good investing approach under heaven.

Today’s Passion: The Income and Dividend Investing board is discussing Why Do People Ignore Valuations?

I recently wrote a guest blog for the plonkee money blog entitled Saving 10 Percent Is Death.

Juicy Excerpt: It is a bad idea to consult a rule of thumb when deciding how much to save. Effective saving plans are customized saving plans, not prefab saving plans. What you need to determine is, what percentage of income should someone pursuing your particular Life Goals and faced with your particular financial circumstances be saving?

Today’s Passion: Saving Too Much Is a Big Problem. Or so I say.

I’ve added Elizabeth’s story to the Middle-Class Millionaires section of the site.

Juicy Excerpt: I woke up around DJI 13200, realized I had a lot to learn and had better learn it fast, and found this site. I now have cash sitting in MMFs that has not disappeared out of my retirement funds. I also have much more confidence in my ability to understand what is happening and to respond appropriately as the situation evolves…. I thank you for your public service and, in another dimension, for the personal courage it took to make it happen.

Today’s Passion: We do not learn solely by examining logic chains. We need to hear stories of people like us doing the sorts of things we are thinking perhaps we should be doing to gain the confidence to act on what the logic chains tell us; hearing the words that give us the courage to act on the information bits supplied by the logic chains is a form of learning of its own. You will find many stories of ordinary investors like you coming to terms with the realities of stock investing at times when prices are where they are today at the Letters to the Editor section of John’s site.

Passive Investing is an approach in which you stick with the same stock allocation despite wild price swings. It became hugely popular during the wild bull. Its popularity is now in the process of bringing about the largest loss of middle-class wealth in the history of the United States (presuming that stocks perform in the future anything at all as they always have in the past).

The Stock-Return Predictor tells us that, at a time when the P/E10 value is 8 (the value that applied at the beginning of the huge bull), the most likely 10-year annualized real return for stocks is 14.5 percent. At a time when the P/E10 value is 44 (the value that applied at the end of the wild bull), the most likely 10-year annualized real return for stocks is a negative 1 percent. There is no stock allocation that makes sense both at a time when the likely 10-year return is 14.5 percent and at a time when the likely 10-year return is a negative 1 percent. Passive Investing is irrational.

Lots of smart people think it is a great idea. How come?

Say that you began investing in stocks at the time when the P/E10 value was 8. You obviously enjoyed great returns for a number of years. As prices climbed, your common sense told you that you should lower your stock allocation a bit. A voice from your dark side (you greedy cuss!) said “no, hang on, this money for nothing business is too cool!” The Passive Investing enthusiasts told you to pay attention to that voice. You did. You enjoyed more years of great returns.

Passive Investing is addictive. It works. And it works. And it works. And it works.

And then it doesn’t.

That’s how it has always happened. There’s an important sense in which what we are going through today is nothing new.

There’s another sense in which it is new, however. What is new is that this time Passive Investing paid off bigger and for a longer period of time than ever before. We never reached a P/E10 value of 44 before. The number that applied in the month before The Great Crash of 1929 was only 33. We shot way past that bad boy in late 1999.

So Passive Investing worked better this time than ever before, right?

Not right.

Extreme valuations are bad for middle-class investors. Yes, you make lots of money on the up. You then give it back on the down. The end result is not that you break even. The end result is that you are conned into believing that you are wealthier than you are, you make plans for the future based on what you believe your accumulated wealth to be, and then you see those hopes crushed. Middle-class investors are better off if stocks go up a steady 6.5 percent real per year.

Our belief in Passive Investing caused the huge bull. Rational investors would never have permitted valuations to climb so high. Our belief in Passive Investing put our minds in a collective fog. We let things get more carried away than we ever have before.

Most are going to wait until prices crash to term Passive Investing a loser. Not me. The financial losses we are suffering now are just the inevitable result of the crazy price jolts we saw in the late 1990s. The real problem is the craziness that Passive Investing injects into the investing system during up times, not the financial losses that inevitably follow when we are seeking to find our way back to sane price levels.

That’s my take. I don’t need to see the price drops to conclude that Passive Investing hurts humans and other smart, fun-loving mammals. My view is that the losses we suffer in a wild bear are just a natural consequence of the insanity we yield to during a wild bull. The damage has already been done. Passive Investing failed in my eyes when it caused the insanity of the late 1990s.

Please don’t think that I wish these losses on anyone. That’s always the accusation leveled at those who talk straight on stock investing. I want us to learn enough about stock investing to avoid both the insane price jumps of times like the 1990s and the painful aftermath of such eras of insanity. I focus on the cause of the pain rather than the pain itself because it is only by focusing on the cause that we can hope to help people. Bemoaning the price drops accomplishes nothing unless we use that pain to change our behavior during price cimbs.

Passive Investing causes the insanity that does in stock investors. The insanity is behind us; we are now in the early stages of recovery from it. That’s why I say that we do not need to see the price drops to conclude that Passive Investing has failed. This low idea has already accomplished its dirty work.

Today’s Passion: The article entitled Rational Investing vs. Passive Investing offers even more mean-spirited commentary about the most popular investing strategy in the history the world.

Intimidation undermines science.

Intimidation interferes with the reasoning process.

Intimidation causes confusion.

Intimidation turns friend against friend.

Intimidation biases research.

Intimidation can trump logic for a time.

Intimidation causes worry about the long term because intimidation cannot trump logic indefinitely.

The use of intimidation reveals the weakness of an argument.

Intimidation is bad manners.

The desire to make use of intimidation comes from a dark place in the human psyche.

Intimidation has a bad track record.

Everyone notices intimidation.

Many of us ignore intimidation in the hope that it will go away by itself without our needing to get involved.

Intimidation serves no constructive purpose.

Participating in intimidation or tolerating intimation causes us to feel shame.

Intimidation is often the product of defensiveness.

Intimidation is a form of power favored by those who do not possess access to more legitimate forms of power.

We all have lots of experience with intimidation, both using it and having it used on us.

Intimidation feeds on itself — one act of intimidation brings on other acts of intimidation to block discovery of the first.

I cannot recall ever hearing anyone argue that intimidation is a good thing.

Intimidation hurts both those to whom it is directed and those doing the directing.

Intimidation is both non-feeling and non-thinking.

Intimidation is a common rhetorical device.

Many people have done things to limit intimidation or to put an end to it, but it always reappears.

Intimidation has no place in discussions of what the historical stock-return data says about the effect of valuations on long-term returns.

Or maybe it does. Maybe we just do not yet fully understand what influences stock prices. Maybe emotions play a big role and wherever emotions come into play intimidation sooner or late comes into play too.

Intimidation is the use of fear by fearful people.

Most of us do not like talking about or thinking about intimidation, especially in the discussion of investing strategies.

Today’s Passion: The Terrible Truth About Cute Fuzzy Bunny is that he’s not even a little bit cute, he’s not particularly fuzzy, and serious people have raised questions as to whether he is even a true bunny!

Please don’t come to this site looking for advice on sophisticated investing transactions. I’ve got my hands full changing how the world thinks about the basics!

In all seriousness, I do not study the sophisticated stuff. If there were more hours in the day, I would have a go at it. The basics matter to more people and I happened to discover that there are serious weaknesses in the basic investing advice being offered by most of the “experts” in this field. So that’s where I direct my energies.

I put the word “experts” in quote marks because I don’t view most of the people offering investing advice today to be truly qualified to do so. I don’t intend that as a dig. It’s just a remarkable reality. What I have discovered is that our collective understanding of how stock investing works is primitive. We think we know a lot more than we do, and that’s dangerous. We all need to work on being more humble in the advice we put forward.

The problem is that we have to a large extent ignored the emotional side of the stock investing project. Most of today’s advice is rooted in something called “The Efficient Market Theory.” It posits that the market price is always in some mystical sense “right.” I have come across a great deal of evidence that this is not so. The market price is often wildly wrong. Since most of today’s investing advice is built on a faulty foundation, most of today’s investing advice is flawed in serious ways.

Please do not think that I am saying that I am the only one who knows it all. There are others who know what I know, and I do not come close to knowing it all. I think I know a good bit more than most who today call themselves investing “experts,” however. That’s my sincere belief.

I have in recent years developed some valuable clues as to what is really going on with stocks, thanks to the contributions of thousands of fine members of the Retire Early community and in particular to the amazing research done by John Walter Russell, owner of the www.Early-Retirement-Planning-Insights.com site. I’ve learned pretty much everything I know through my interactions with John and the many others who have helped us out from time to time.

The investing advice that I offer is not the conventional advice. You may take that as a caution or a brag, depending on where you are coming from. It is my belief that as a result of the errors in the conventional advice we now are living through what is likely going to turn out to be the greatest loss of middle-class wealth in the history of the United States. If that statement turns you off, I am probably not the right guy for you. If you have some suspicions along these lines yourself, you might want to check out some of the articles at the site.

My area of expertise is valuations. I say that, when stocks produce the sorts of returns we saw in the 1990s, the money has to come from somewhere. I say that it is borrowed from future returns. That’s why returns have been so poor for the last eight years or so. I use the historical stock-return data to form assessments of how long returns will remain poor. You can check out these assessments by working with the three calculators now available at the site (see the tabs at the left-hand side of the page).

Please do not take anything I say on investing or any other subject on faith. Doing that would hurt you for sure. Even if it turns out that I am right in all I say, you won’t see the benefits unless you check out what I say carefully because you will not have confidence in claims that you did not check out carefully. Knowledge not backed by confidence doesn’t help much in the investing field, in my assessment.

That said, I believe that what I say about valuations is important (I’m confident!) When we use the word “valuations,” what we really are talking about is the effect that human emotions have on stock returns. My assessment is that the effect of human emotions is at least 50 percent of the ballgame, and there is little in the existing literature dealing in an in-depth way with this aspect of the investing project.

So my view is that what you get by coming here is an understanding of the 50 percent of the stock investing project not often addressed elsewhere. Mix what you learn here with what you learn at all the other spots on the internet and you will possess a good understanding of the full realities of stock investing.

I think.

I believe.

I hope.

Today’s Passion: I tell you what my wife thinks is one of my bad traits in the article entitled Rob Bennett’s Weaknesses as a Money Advisor.

I take dips into the Post Archives of The Great Safe Withdrawal Rate Debate from time to time, just to see. It can be a weird experience. I’ve learned a lot during the past six years. Going through the archives often puts me face to face with an earlier version of me. Sometimes I am impressed. Sometimes not so much.

One time I came across a thread in which people were hitting me with a stick, demanding that I tell them what stock allocation I recommended given that I didn’t think that Greaney’s claim that 74 percent stocks is always right held water. I knew that the right number had to be something less than that because Greaney’s study didn’t include an adjustment for valuations and valuations were sky-high at the time. But I didn’t want to suggest anything that sounded too extreme. So I went with 50 percent.

John Walter Russell was only beginning his research at the time. So we didn’t know what the historical data said on this question when examined using an analytically valid methodology. In other words, I didn’t know what I was talking about.

I didn’t know what I was talking about! We hadn’t even done the research yet. Why did I feel a need to answer the question when doing so required me to give investing advice at a time when I didn’t know what I was talking about?

Today we have research. Today I say that, when stocks are at the valuation levels that now apply, the typical investor should probably be going with a stock allocation of about 30 percent. There are still lots of things we do not know. We are still very much in the early stages of learning what the data says and what strategies make sense given what the data says. At least today I can say that I am basing that number on something solid. At least today I can say that I am not just pulling it out of the air.

The 50 percent number was just pulled out of the air. It’s disgraceful, you know? No one who does not have any idea what he is talking about should be offering investing advice.

How many others do you think are doing that? My guess is that it’s a whole big bunch.

How many of the people offering investing advice today know even as much as I did when I put forward that 50 percent number? At least I knew at that point that studies not including an adjustment for valuations are analytically invalid. I didn’t know much, but I knew a little bit. Most of those giving investing advice today don’t know that much. Most of those giving investing advice today do not know what they are talking about. I think that’s fair to say.

Our understanding of how stock investing works is at a primitive stage of its development. There is not a consensus on even the most basic issues. People disagree about what risk is, for heaven’s sake. Risk is the whole story. If we don’t know for sure what risk is, we really do not know much of anything. We’re guessing. Some of the guesses are probably in the right neighborhood. Some of the guesses are without a doubt wildly off the mark. Hoo boy!

I believe that I am doing a little bit better than guessing today. But not all that much. The ideas put forward at this site need to be examined by lots of smart people before I would consider it safe for you to put your full confidence in them. We’re just not there yet.

But don’t let the other guys fool you. They are not there yet either. It is the ones who pretend that they know more than they do who you need to be particularly cautious of. I shouldn’t have to mention names. You know the sorts of characters to whom I am making reference here. Those guys (and witches) can get you into some big trouble.

We’re babies. We’re learning to crawl. We should not pretend otherwise. Yes, it’s scary to admit this reality. The only thing more dangerous is to put your retirement money on the line while living in denial of it.

Today’s Passion: The article entitled Why Is Today’s Investing Advice So Poor? argues that today’s conventional wisdom about stocks is the end result of events we saw transpire in Invasion of the Body Snatchers.

1) I write a guest blog entry at the Clever Dude blog entitled A New Approach to Staying the Course. I say: “If you, like me, believe that it is possible for prices to be too high, then you should not be sticking with the same stock allocation in your effort to Stay the Course. For investors like us, changes in prices are causing the course to always be in motion. Risks are greater at times of high prices and long-term returns are lower.”

2) CapitalSpectator.com publishes an article backing the investing ideas explored at this site entitled “Back to the Future Again — The Financial Literature Now Favors Active Asset Allocation, But It’s Still Risky.” The article states that: “Securities markets appear to be at least partially predictable after all.

3) CapitalSpectator.com publishes an article supporting our idea that Value Investing and Modern Portfolio Theory make a powerful combination entitled “Rethinking Modern Portfolio Theory.” The article states that: “Although academics are latecomers to the party, the fact that they’ve arrived only adds more credibility to what Graham taught: valuation matters.”

4) The Get Rich/Get Right blog links to the article “Getting Over Your Fear of Money.”

5) I post a Letter to the Editor at the Early-Retirement-Planning-Insights.com site entitled More Regarding the International Dimension. I say: “There is reason to believe that Robert Shiller (author of “Irrational Exuberance”) believes that it is possible at least to some extent to avoid the risks of overvaluation in the U.S. market by moving funds to non-U.S. markets.”

Today’s Passion: “You’re nuts, Rob.” Sure. That’s like, so totally obvious. But precisely how am I nuts? What are the drivers of these unusual behavior patterns? To figure that one out, you might want to take a look at the article entitled Money and Personality — Is There a Retire Early “Type”?