“Holy Toledo! This is great stuff!”
So said Bill Schultheis, author of The New Coffeehouse Investor and a popular Passive Investing advocate, in an e-mail to me dated May 14, 2009. Bill was writing to me as the result of our joint participation in a discussion thread at the Get Rich Slowly blog.
Bill wrote a guest blog for the Get Rich Slowly blog entitled How to Build Wealth, Ignore Wall Street and Get On With Your Life.
Juicy Excerpt: The problem is that we have been so inundated by the financial industry’s marketing machine over the past quarter century, that we have been brainwashed into thinking that the secret to our long-term financial well being lies in Wall Street’s hands, instead of our own hands. Nothing could be further from the truth.
I made clear in Comment #9 that I wasn’t buying.
Juicy Excerpt: The problem did not come about because most of us were trying to pick “hot stocks.” The “experts” have been pushing Passive Investing down our throats for three decades now and most of us bought in. That’s the problem.
Bill responded graciously in Comment #14, saying “you bring up some very interesting points” and then offered detailed observations in Comment #20.
Juicy Excerpt: I agree with you that prices matter in regards to future returns on equities. How do you suggest one integrates that into a portfolio? I am very familiar with the studies that recognize that valuations matter. Using that information to build portfolios and allocate assets is a challenge, and a slippery one at that.
I responded to that one in Comment #21.
Juicy Excerpt: The way to integrate this critically important reality into a portfolio construction strategy is to accept that to “Stay the Course” meaningfully one must keep one’s risk level roughly constant. An investor who stays at the same stock allocation when the risk of owning stocks has increased dramatically is NOT staying the course in a meaningful sense. He is staying the allocation. That’s not at all the same thing.
I followed up with an e-mail to Bill which I will post as Thursday’s blog entry. He responded with an e-mail to me offering his kind assessment of the investing materials at the site and expressing interest in entering into a more extended back-and-forth exploration of these matters. I of course expressed my gratitude and indicated that I too am looking forward to further conversations.
J.D. Roth (the owner of the A Rich Life blog) then threw us a curve ball. Without explanation, J.D. blocked me from posting further comments (I do not know whether the block applies site-wide or only to the one blog entry as I have not since had occasion to try to post a comment there). I let Bill know by e-mail and he expressed a desire to be able to read my comments. Two community members other than Bill expressly directed comments or questions to me. But J.D. did not respond to my two e-mail requests for help with what I presumed (until he failed to address the problem for several days) was a technical problem. [Note (added May 22): Subsequent events have shown that J.D. did NOT block my comments — the posting problem turned out to have been caused by a technical problem afterall]
To have yet another Passive Investing advocate act so defensively (J.D. joins the Bogleheads.org site, the Morningtar.com site, the Motley Fool site, the Early Retirement Forum and IndexUniverse.com in banning effective criticism of the Passive Investing model) is of course disappointing. But I view this chapter in the saga as being more encouraging than discouraging.
I believe that Bill is sincere in wanting to learn more about the flaws in the Passive Investing model (while also perhaps being reluctant to let in just yet just how extensive the problems with this model really are). I also believe that J.D.’s mind is not entirely closed. He permitted three comments by me before lowering the boom, and there were several comments by other community members expressing either skepticism re Bill’s message or support for mine. Most significantly, I am hearing more questioning of the Passive Investing marketing slogans from a larger number of middle-class investors all the time. In the old days, the Passive Investing dogmatists positively celebrated their bans on honest debate. I am sensing a feeling of defeatism re these “strategies” today. Even the dogmatists appear to be growing weary of the tactics needed to keep the dogmas in place after they have failed so many real-world tests and caused so much financial misery.
We’re not yet where we want to be. Not by a long shot. But I believe we are seeing some forward movement. Let’s just hope that it doesn’t take another 50 percent price drop to obtain the cooperation of the number of “experts” needed to move the ball into field goal territory!
I’ll send Bill another e-mail today and ask him whether he is okay with me posting his side of our correspondence here (if he is not, I will post only my own e-mails). I’ll let both Bill and J.D. know about this blog post. In the event that either feels that there is anything that I have said that is inaccurate or unfair, I will let him know that I would be happy to reserve next Tuesday’s blog for the presentation of his words. Finally, I’ll write a blog entry on the question raised by Bill in his Comment #20– how best to implement long-term timing — and ask J.D. whether he has an interest in posting it as a guest blog entry at his site.
I heard from two fellow blog owners yesterday focusing on the same question as Bill — the practical implementation question. One was Shadox, owner of the Money and Such blog (Please do not click on this link as I believe that the blog is going to be featuring a Guest Blog Entry of mine today that I intend to feature here in a future blog entry of my own — it’s cheating to sneak a peak today!). The other was Frank Curmudgeon, at the Bad Money Advice blog (please feel free to click this one and to travel down to the comment that Frank put forward at 8:45 am on May 18).
Frank Curmudgeon: When I say that I am not saying you are right, I mean only that I am not yet convinced you have a powerful enough equity market prediction model.
Shadox (in an e-mail): The question is whether there is a problem with translating what may be a sound concept to a “real world” environment. I think this is where the real challenges are from your perspective.
If we are witnessing a shift in the focus of the “opposition” to the Valuation-Informed Indexing concept to a questioning of whether it can be implemented effectively, that is very good news indeed. Skepticism re the implementation question is entirely healthy and appropriate. It’s the threats to kill anyone who fails to genuflect upon hearing the pronouncement of one of the Passive Investing marketing slogans that have done so much damage to the various Retire Early and Indexing boards. If the focus turns to the feasibility of the ideas explored at this site, it will be almost like we are having a regular old investing discussion re these matters. We will have achieved Normalization of The Great Safe Withdrawal Rate Debate at last!
Mel hates it when I cite Beatles lyrics for the insights they offer us into the great stock investing questions of the day. Still, I really do think there’s something to be said for the observation that “there’s nothing you can do that can’t be done.”
And that “all you need is the historical data.”
Update: There have been two developments in this story as of the morning of May 20 (when I am posting this update).
I sent the e-mails to Bill Schultheis (author of The New Coffeehouse Investor) and J.D. Roth (publisher of the Get Rich Slowly blog) described in the blog entry. Both Bill and J.D. responded.
J.D. said that he has not banned me from posting at his blog. He said that he has never banned anyone. I am still not able to get my comments to appear on the thread relating to Bill’s guest blog entry. J.D. is out of town and away from his computer (he read my e-mails through use of his phone), so he has not yet been able to address the technical problem (J.D. had a site upgrade last week — my guess is that the problem relates to that). But he has indicated that he will get things fixed up in a few days.
Bill sent me an e-mail objecting to me quoting him as saying extremely positive things about my site without his permission. He did not claim that the quote I used was inaccurate. I responded with a long e-mail that aims to bring to the surface the underlying issues that gave rise to what I believe can fairly be characterized as an exceedingly odd complaint. I will post the text of that e-mail in a later blog entry. I told Bill that I am happy to give him space at the blog to comment on anything that I have said that he views as being either inaccurate or unfair or unkind. I also said that I am happy to quote the precise words that he used to express his objection to my use of the quote from him but only if he gives me permission to do so. I said in the earlier blog entry that I will provide the texts of Bill’s e-mails in our ongoing (I hope!) correspondence only if he gives me permission to do so.