There’s good stuff going on at the Vanguard Diehards board lately. Petrocelli offers us a dose of The Common Sense That May Not Be Spoken when he says: “My conclusion after all these years is this: the focus on active/passive is a distraction. The focus should be on buying low-cost funds and diversifying. That’s all. The active/passive distinction can make for some fine pissing contests, but it doesn’t really accomplish a lot in the end.”
That’s good stuff.
I see Passive Investing as the Devil With a Blue Dress On of InvestoWorld. I say “don’t even start up a conversation, you’ll end up in the gutter with a bottle in your hand.” But Passive Investing didn’t get to be so popular just by being evil. There’s got to be some serious good in there or there wouldn’t be so many smart people who have fallen for it. Petro is pointing us to two of the obvious good points when he notes that those who push Passive argue for diversification and for keeping costs down. The other obvious good is that those who push Passive push sticking with a plan for the long term. Those three goods are a very big three goods.
That’s the blue dress part. I believe that God put me on earth to warn you about the devil part. So we better get to that.
Petro is proposing a non-dogmatic approach to Passive Investing. That makes sense. Apply the principles of Passive Investing in a non-dogmatic way and you can enjoy the three goods without falling into the pit. Where I might take issue with Petro a bit is re his possibly too glib suggestion that there are a good number of investors who can pull this off in the real world.
Delete the dogmatic from Passive Investing and you’ve got the one you’ll be proud to bring home to meet your parents. But what are the odds of getting Ms. Passive to go along? Is the Petro vision a fantasy?
I think the Petro vision can be realized. But I think we need to think it through a bit to make it happen.
You can avoid becoming dogmatic about Passive Investing by knowing its limitations. I think that’s the key. In order to make Passive Investing work out in the real world, you need to go in with a peaceful easy feeling, with both feet planted firmly on the ground.
Passive is dangerous in its suggestion that it is okay or acceptable or (heaven help us all!) even a good thing to stick with the same stock allocation when prices go through wild swings. Petro doesn’t care about that rule. He’s a practical guy. He wants what works. So I don’t think he would be opposed to the idea of people hearing why it’s critical that they lower their stock allocations when prices get to the sorts of levels that apply today. So Petro’s vision can work.
People need to be told about the realities, though. We’re born with evil hearts. We all feel temptations to buy into Get Rich Quick schemes. We all possess a desire to hurt ourselves, and unless we are warned about it in no uncertain terms, we will bite into the apple. We need all this stuff spelled out.
We need articles warning us of the dangers of failing to make adjustments in our stock allocations when price changes require it. We need calculators using the historical data to prove the point. All that good stuff. With all that good stuff, I think we can make some changes in the conventional approach to Passive to make it a workable investing strategy.
A generally Passive approach can work. A reformed Passive approach can work. A non-dogmatic Passive approach can work. A valuation-informed Passive approach can work.
A fellow named “Heaths” zeroes in on the good side of Passive a few posts later when he asks: “it seems that you agree that the degree of active is important and more than a distraction. Is that right?” Yes, that’s right. Investors should aim to limit the number of allocation changes they make. And beginning investors should limit the extent to which they engage in stock picking. Those Passive rules are good rules. it is the dogmatic jive talk of The True Believers that causes all the trouble.
Heaths focuses in on an extremely important point a bit later on. He says: “Most investors do not have the skill and/or temperament to actively invest, except perhaps in very modest ways. Because of this most should follow the basic tenets of passive investing: low cost, diversification, and stay-the-course. Some modest active investing might be desirable provided the investor fully understands all of the pros and cons of his investment decisions, but when in doubt most should err toward the passive.”
That’s stated reasonably. It’s not the crazy dogmatism that has made such a mess of so many of our boards over the past six years.
I don’t entirely agree with Heaths, however. I agree that there are important goods in the Passive model and that all investors should be taught about them. I don’t agree that we are not capable of knowing when we need to make changes in our stock allocations, however. All of us have experience paying attention to price when we buy cars and houses and bananas. I am highly skeptical of the claim that we are not capable of doing the same when buying stocks.
It’s true, though, that most of us do not possess this ability today. Heaths nails the current state of play.
You know why? It’s because nobody talks about these realities! When was the last time you heard Bogle give a speech telling us how to know when prices have reached a point where we need to lower our stock allocations? Or Bernstein? Or Burns? Or whoever?
When the Big Shots get down to the business of telling us what we need to know, we will listen. And we will learn. It’s not that we can’t do it right. It’s that the “experts” are so afraid of talking straight about this stuff that they never give us a chance to take the good stuff in.
I know whereof I speak. I have been talking about the effects of valuations on long-term returns on a daily basis for over six years now. Thousands of community members have either expressed gratitude or expressed a desire to learn more. These are ordinary people. These are Normals. These are “most investors.”
We are perfectly capable of learning. What we need today are some “experts” possessing the courage to get about the business of doing some honest and informed and non-dogmatic teaching.
Good job, Petro! Good job, Heaths! Let’s see more of the same!
Today’s Passion: The non-dogmatic Passive Investor is free to do all sorts of things that the dogmatic type dare not even think about. He can pick stocks! No, really. Read all about it in the article entitled Stock Picking for Indexers. Please don’t let any friends of Mel Lindauer know that I wrote that one. I’m in enough trouble as it is.