A Rich Life

The Old Ideas on Saving & Investing Don't Work -- Here's What Does

Podcast #137 — Nine Valuation-Informed Indexing Portfolio Allocation Strategies

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I’ve posted Podcast #137 to the “RobCasts” section of the site. It’s called Nine Valuation-Informed Indexing Portfolio Allocation Strategies.

You could follow a cliff approach to changing your stock allocation in response to price changes. Or you could follow a gradual approach. Or you could follow the model suggested by Benjamin Graham. Or you could….

Comments

  2. It of course makes me happy to hear you say that, John.

    I like to point out frequently that we will never bring the Valuation-Informed Indexing strategy to its full potential until we have millions of people discussing it and sharing their insights as to how best to implement it. If this gets people thinking about this stuff and coming up with their own strategy ideas, that’s good. But I don’t want people to get the idea that I see this as a finished product. These are just ideas that I am putting forward with the hope that millions of other smart people will get involved and offer enhancements and caveats and all that sort of thing.

    It gets better and better and better!

    Rob

  3. Rob,

    You don’t need any of this if you have Plan B.

    Except it isn’t called Plan B anymore. It’s stay-the-course again, and although Plan B was always part of stay-the-course anyway, it’s really stay-the-course time again. Got it?

    And if you point out discrepancies, as MurrayPhillip does, they rally ’round the guru, get mad at you, and make personal attacks (tell you to “grow a pair,” on page 2) that would otherwise be edited-out.

    http://www.bogleheads.org/forum/viewtopic.php?t=41240&start=51&postdays=0&postorder=asc&highlight=&sid=656b23ce48ba650765e36a67411a048d

    Of course, the original Plan B discussion had many more strong dissenting voices. But that’s what a nice 49% rally can do for you; happy times are here again, and so is stay-the-course!

    Plan B was a nice fellow in his own way. But we don’t need him anymore…

    Arty

  4. Thanks for joining in, Arty.

    It’s sad.

    Making mistakes does not need to be a bad thing. it is by making mistakes that we learn. It is by learning that we achieve our goals.

    For the magic to happen, we need to be able to acknowledge our mistakes. Being unwilling to acknowledge mistakes is a lose/lose/lose.

    Rob

  5. Rob,

    Heard the podcast. I agree with John. Maybe my favorite to date. I thought it answers what people have repeatedly asked you—giving numbers—but also showing how individual preferences can modify those numbers. What you did was provide a framework(s) into which various personalities can insert themselves and modify to taste. And you also discussed various life issues that might impact these choices.

    “Gradual Shift” has appeal, and while it is more frequent than other variations, it really requires no more attention or costs than a buy-and-hold rebalancer who checks-in maybe several times a year for that purpose. I think what Norbert Schlenker described in his post is more like this variant in that he makes more frequent jumps at every 3 PE/10 levels:

    ” 1. A higher PE10 means less stocks, lower PE10 means more. Hocus provided a few anchors, so I ended up with a scale that is 100% stocks at PE10=5 and 0% stocks at PE10=35.
    2. Small variations in PE10 are unimportant, so the stock allocation steps by 10% at intervals of 3 in PE10. For example, 60% stocks at PE10=17 is reduced to 50% at PE10=20, or increased to 70% at PE10=14.
    3. Rebalance if you’re more than 5% off the target, which may have changed because of a PE10 change. ”

    I’m not endorsing it. Just saying that the movements are really not very frequent–often, it takes time to move 3 pips of PE 10 at, other times, like the last 4 months, not. “Gradual Shift” has the attraction of having a smooth curve and not big jumps, thus it *might* be more emotionally efficient (never having to make a big jump in equities), or logical, for some personalities.

    Of course, I like rational passive—using a 30-40% equity allocation, size and value tilted to my taste, and the highest quality fixed income I can find. Mind you, *even then*, if PE became truly insane—on the high side—I’d trim equities some. (Being conservative, I fear high valuations much more than I see great opportunity in low valuations.) My personality is such that I would never going higher than 60% equities but never out of equities entirely. But these are all my preferences and rational implementations of passive/buy-and-hold, and not for everyone.

    Finally, your advice to find what you can stick with is essential. That is what I do, though it be different than what you or another may prefer. Having *conviction* in some rational approach best avoids the capitulation that ruins portfolios.

    Arty

  6. Thanks both for your kind words and for your thoughts re the strategic questions, Arty.

    I am of course happy if people find some value in the thoughts that I put forward. However, I continue to believe that it is dangerous and foolish to limit discussion on these important questions to a small number of people. I do what I can. But one person can obviously only do so much.

    I would like to see the entire internet (especially the Retire Early and Indexing boards) opened up to honest posting on these questions. I understand that it causes some people anguish to acknowledge that valuations affect long-term returns. But it would not be much of an overstatement to say that I find it insane that honest discussion of the realities of stock investing has been banned at so many otherwise fine communities.

    Who benefits?

    I am not able to imagine how one person on Planet Earth benefits. Yet it goes on.

    Anyway, thanks. I do hope that I offered something that possesses at least a little value for those interested in learning about more realistic strategies than those that have been so heavily promoted by The Stock-Selling Industry over the past 30 years.

    Rob

  7. Being conservative, I fear high valuations much more than I see great opportunity in low valuations.

    I fully understand where you are coming from, Arty. My instinct leads me too to be more concerned about the effect of high valuations than excited about the effect of low valuations. I worry, though, that this is just an unjustified bias.

    “Conservative” mean to want to avoid risk. If it could be conclusively shown that a 80 percent stock allocation at a P/E10 level of 8 is no more risky than a 40 percent stock allocation at a P/E10 level of 24, it seems to me hard to justify going with something less than 80 percent stocks when prices are low on grounds that it is “conservative” while viewing a 40 percent or 50 percent stock allocation as sufficiently “conservative” when prices are sky-high.

    If your response is that this is not yet conclusively shown, I have no problem with that.

    But I also think it is fair to say that a claim that this is notso has certainly not been conclusively shown to be so.

    My bottom line is that it is amazing that these sorts of things are open questions in the year 2009. If valuations really do affect long-term returns, our policy of prohibiting discussion of what that means for the past 30 years has left us all ignorant of even the most basic of investing realities. Yikes!

    It is exciting to be learning all this new stuff. But it is scary to realize how little we know for sure today. We messed up big time when we fell for that efficient market junk.

    My point here is — we don’t really even know at this point why certain things strike us as “conservative.” We tend to think of high stock allocations as being risky. But the message of the historical data is that there’s really no need to think of things that way — the historical data indicates that paying attention to valuation reduces the risks of stock investing so much that high allocations are really not that big a problem anymore (No one has ever gotten truly bad long-term results by investing heavily in stocks at times of low or moderate prices).

    I think you’re smart to be skeptical of going too far. I just wish that we all had a better handle on all this. And I find it amazing that it is such a struggle to get people who claim to be “experts” interested in learning more. I view learning more as a good thing.

    Rob

  8. “Gradual Shift” has the attraction of having a smooth curve and not big jumps, thus it *might* be more emotionally efficient (never having to make a big jump in equities), or logical, for some personalities.

    That makes sense to me.

    I find myself becoming more drawn to a Gradual Shift approach over time. I think that perhaps I have in the past permitted myself to be too influenced by a desire to limit allocation shifts (probably in deference to the Passive Investing dogma that allocation shifts are somehow bad or yucky.

    Rob

  9. My personality is such that I would never going higher than 60% equities but never out of equities entirely.

    The numbers say that it is better at times to go with a higher stock allocation. But I think that it is entirely possible that the numbers are misleading re this one. Your rule may be the better rule when the emotional factors are taken into consideration (I don’t mean just for you, I mean for most of us) and that means that it may be the one that yields better long-term results.

    Getting better long-term results is a good thing!

    Rob

  10. Having *conviction* in some rational approach best avoids the capitulation that ruins portfolios.

    An absolutely key consideration.

    And one rarely addressed in the Passive Investing literature.

    Rob

  11. Rob wrote: “If your response is that this is not yet conclusively shown, I have no problem with that.

    But I also think it is fair to say that a claim that this is notso has certainly not been conclusively shown to be so.”

    This is a good example that subsumes many other potential questions in various fields. I deal with this all the time.

    In science, and law, the “burden of proof” is bedrock material, but many people misunderstand its real meaning.

    The burden of proof is *always on the claimant*. Always. If I tell you that my exercise program is better—it builds more strength and muscle than others—the burden is on *me* to demonstrate such, through comparative work (in this case, through peer-reviewed studies). It is *not required* by others who doubt to disprove my unsupported claim. They may assume what they will with no burden whatsoever.

    Now, I might produce the required evidence to support my position. Then, it would be up to others to provide evidence that might refute my now supported work, either by showing flaws in my work or provide new work that refutes my claims.

    The concept of burden of proof is extended to other fields like investment (science), various legal fields, and even “space aliens living among us”, etc.

    Arty

  12. Arty wrote: “Having *conviction* in some rational approach best avoids the capitulation that ruins portfolios.”

    Rob wrote: “An absolutely key consideration.

    And one rarely addressed in the Passive Investing literature.”

    Rob,

    Absolutely. I think that omission from the literature goes to the heart of the matter and explains, in part, why stock allocations were/are often too high if determined mainly by what was read “in a book”. (Obviously, as you mention often, other forces also conspire to push equities higher.)

    But back to the language, as pointed out by a poster at Bogleheads, “risk tolerance” does not say it like “capitulation risk,” especially if the latter is fully explicated. This would at least make for a better chapter in a book.

    Again, I like what you did in this podcast and hope you attach numbers to each strategy, as you said you might at a later time. in doing so, don’t forget also to create “benchmark” allocations (like a 60/40 or 40/60) against which to compare. I look forward to that podcast. This one was fun…

    Arty

  13. The burden of proof is *always on the claimant*. Always. If I tell you that my exercise program is better—it builds more strength and muscle than others—the burden is on *me* to demonstrate such, through comparative work (in this case, through peer-reviewed studies). It is *not required* by others who doubt to disprove my unsupported claim.

    You’ve hit on something of huge importance here, Arty.

    Which side bears the burden of proof re the question of whether valuations affect long-term returns?

    The Passives would say that the burden is on the Rationals. They would say that Passive is the dominant model and so if the Rationals want to question it they need to prove their case beyond any doubt whatsoever before they will be permitted to ask any questions about it.

    The Rationals look at it from a different perspective. The Rationals would argue that the price that one pays for an asset affects the value proposition for everything else on Planet Earth than can be bought or sold and that the working assumption should be that this is so for stocks too. We would put the burden on the Passives to provide some justification for believing that stocks are the only exception. The Passives obviously are not able to do this.

    The root problem here is that Passive really is the dominant model but it is a model that became dominant without anyone ever having put forward any logical reason for believing that it could work. The history is that some academics noticed that it is not possible to engage in short-term timing effectively and they tried to come up with a reason why that is so.

    There are two possible explanations. One is that stocks are always properly priced (the Efficient Market Theory) and that thus predicting prices is not possible. The other is that investing is a highly emotional endeavor and that thus prices are usually nutso and thus predicting prices is not possible. The academics went with Door One (which really would justify Passive Investing if it were the right explanation) but the correct door turned out to be Door Two.

    Now that we know that Door Two is the right explanation, we know that Passive Investing can never work. It is a logical impossibility. But acknowledging that we chose the wrong door on that fateful day when the Efficient Market Theory was first put forward would require that all those who advocated Passive Investing over the past 30 years made a mistake that has caused more human misery than any other mistake ever made in the history of personal finance. That’s been the rub for close to 30 years now.

    The Passives insist that the Rationals carry the burden of proof, but what is it that we are supposed to prove? There was never any evidence put forward to support the Efficient Market Theory. It was always just a theory. How the heck can you marshall evidence to dispute something that never was anything more than a thought that passed through someone’s head? If there were evidence for this idea, it could be disputed. But there has never been even a sliver of evidence supporting this “idea.”

    There is of course lots of peer-reviewed research showing that valuations affect long-term returns. But this means nothing to the Passives. If valuations affect long-term returns, then Passive is obviously wrong. But they just say that it is possible that the Rationals might have gotten something wrong. And of course that is so. Anyone can get something wrong. The missing link in the logic chain is how that justifies the Passives failing to correct advice that have been known for 28 years to be wrong. We’ve known that valuations affect long-term returns since 1981!

    The Rationals are being asked to prove the non-existence of a ghost. The Passives have never put forward even a sliver of evidence showing that long-term timing does not work. They of course never will be able to do so since it is impossible for the rational human mind to imagine a world in which long-term timing would not work. So the Rationals are never going to be able to meet the challenge put to them.

    But how does it help anyone for the challenge to be to disprove something that has never been proven in the first place? It is the Passives making the fantastic claim that stocks are the only asset class that ever existed for which price does not matter. If they want people to believe this fantastic claim in the face of 139 years of historical data showing it to be pure nonsense, I think that the burden of proof should be on them to put forward some argument why they believe this crazy thing.

    If they put forward a rational argument, then I think it might make sense to demand that the Rationals put forward an effective response. But until they put forward an argument, I don’t see how anything they say can be “disproven.” How can you effectively prove that a ghost does not exist? Nobody can see it whether it exists or not! What sort of proof is it that we would be trying to develop when the thing we are trying to disprove does not exist in any real sense in the first place?

    Rob

  14. The short version of what I said in the post immediately above is —

    Those claiming that timing does not work are implicitly saying that the price you pay for stocks is immaterial to the long-term return obtained from them. This claim is preposterous and absurd. If people are going to invest their retirement money pursuant to this “idea,” it is incumbent on those putting forward this “idea” to offer some intellectual justification for doing so. This the Passives have never done.

    I wonder why.

    Rob

  15. The concept of burden of proof is extended to other fields like investment (science), various legal fields, and even “space aliens living among us”, etc.

    Yes.

    The question is — Who is it who is asking middle-class investors to believe in little green men?

    I say that it is those who are claiming that it is not necessary to consider the price you pay for stocks when setting your stock allocation.

    Rob

  16. I look forward to that podcast.

    It’s certainly encouraging to hear you say that, Arty.

    Still, I feel a need to point out whenever someone says something like this that I am just some guy who posts stuff on the internet. I work this stuff hard, I don’t say different. But I am limited by my particular background and my particular set of life experiences. No one human can overcome the limitations of being a “one” rather than a community of ones.

    I enjoy putting forward my take. But I would feel a lot better about things if there were thousands of people putting forward thousands of takes and mine were merely one among many. It’s only when that becomes possible that people will be able to possess a strong confidence that any particular take they hear has been effectively challenged.

    I’ll keep doing what I do. But I am also going to keep crying out for responsible people to step forward and do what needs to be done to get us to a place where there are thousands or tens of thousands or millions of us directing our energies to figuring out this stuff.

    You of course have been a help by putting forward your thoughts in posts to the blog, Arty. All community members should be grateful for you taking the time out of your day to do so, in my assessment. When others offer other takes, it takes a bit of the weight off of my shoulders. I ain’t no guru and I ain’t got no intention of playing one on the internet either!

    Rob

  17. Rob wrote: “I ain’t no guru and I ain’t got no intention of playing one on the internet either!”

    Rob,

    Careful, Rob. Many people seem to need their gurus. And maybe there is some group of “Bennettheads” right now sizing you up for nice, sleek robes! HA HA!
    —

    Basically my point was first to establish what should be an obvious maxim. And we are agreed (as should any rational humans be) on the principle that the burden of proof lies with the claimant. From there we can then ask the sorts of questions, above, and countless others. For each question we must ask: what is claimed? And then, what evidence, if any, is presented?

    You asked a good question: “Which side bears the burden of proof re the question of whether valuations affect long-term returns?”

    I think there are some answers to that question, though the definitive endpoint answer that many investors wish to hear has not yet been fully-formulated or published in a professional venue wher the rigors of peer-review should be applied.

    For example, Shiller made a claim about valuations and how present valuations affected longer-term values through reversions (as constrained to his PE/10 model). Thus claimed, the burden was now on him. He then provided evidence for his specific claim in professional papers. To date, I’ve not read any serious refutation of Shiller’s particular claim and his evidence (but I have not read everything and may have missed some good papers). So, I think Shiller’s specific thesis—as he defined it—remains valid.

    It is critical to note that Shiller did not make any claim to have created a better method of investing than some other method. Had he made such a claim, he would have needed to supply comparative evidence for that. That is hugely important.

    As you know and mentioned, there are many papers showing that a simple passive strategy can beat active market timers/tactical asset allocators on a cost-adjusted basis. This is a case(s) where studies have refuted the *unsupported implied claim* that active management is superior. And, there are few, if any, studies showing otherwise (that is, little support for market timing). And the preponderance of evidence lies against active management/market timing.

    Now, in theses papers, collectively, the time frames varied, and you might say they are short-term only (and therefore only partially convincing), and another might say they just looked at timing only and are wholly convincing. I saw all the arguments in back-reading.

    Now, I have not seen a strategy put forth in peer-review that was founded on, say, Shiller’s PE 10. Say, something like Schlenker’s VII analysis, with a firm approach, put into a professional forum where it could be analyzed and criticized, much like Shiller’s original work. Such a work may exist but I have not read it. But if such a claim for superiority is made—by either side—the burden, as always, shifts to the claimant.

    Arty

  18. Careful, Rob. Many people seem to need their gurus. And maybe there is some group of “Bennettheads” right now sizing you up for nice, sleek robes! HA HA!

    Maybe I can be The Guru for People Who Don’t Need a Guru. Maybe something like that will work.

    Rob

  19. Rob wrote: “The root problem here is that Passive really is the dominant model but it is a model that became dominant without anyone ever having put forward any logical reason for believing that it could work.”

    Rob,

    Interesting point.

    In many fields, sometimes implied models arise with no specific claim but they become “convention”,

    In investing, look at the CAPM model. So, Fama and French make a claim that 3-Factor model has greater explanatory value than CAPM. They supported that claim with their famous work, and they are correct.

    But again, nowhere do they make a specific claim about a particular *investing implementation* being superior to another. Had they made such a claim, they would have needed to supply comparative evidence for that. Indeed, Fama has often said that “tilting” *one way or the other* is a “preference”. Yet many use his work to support tilted portfolios, and there IS some evidence to that, historically provided by F&F.

    Give you a different example from another field. You’ll like this. When strength training, are you better off doing 1 set per exercise or 3 sets? Most assume 3 sets. Why? Well, it’s “more” and more of everything is usually better, right? What about evidence? Well, since the beginning, someone arbitrarily used 3 sets when establishing a training regime to rehab wounded soldiers post WW-2. It’s just what he did to do *something* with no other motivation. Why “3”? Well , who knows? Maybe 3 is a magic number, the holy trinity, whatever.

    Now, much later (the late 90s), we found through comparative evidence (if looking at *all* evidence fairly) that they produce equal results! Naturally, this means one can be more time efficient with 1 set per exercise, and more sets are not better, as was assumed!

    There are religious wars over this still—just as we see in investing. Point is, the 3-sets-as-model came about only because somebody post-WW-2 arbitrarily used the method, and it became convention—**and still is convention** in most gyms despite it being shown to be wrong!

    So what’s the big deal?

    One outcome of this is that many people do not strength train at all because they mistakenly believe it requires lots of gym time. Think of what that means not to receive those benefits. Think of what it could mean if they knew they could get similar results in 1/3 the time.

    So, sometimes convention becomes the norm. It sucks. And if we want to displace convention, I fear we need evidence (burden of proof).

    Arty

  20. It is critical to note that Shiller did not make any claim to have created a better method of investing than some other method. Had he made such a claim, he would have needed to supply comparative evidence for that.

    We disagree on this, Arty.

    If valuations affect long-term returns, why the heck would you not want to change your allocation in response to price changes? What would be the purpose?

    Shiller did not explicitly describe the investing model that follows from his research (that’s what I try to do in the work that I do at this site). But a necessary logical follow-up to the finding that valuations affect long-term returns is a conclusion that Passive Investing cannot possibly work in the real world. If valuation matters, you obviously need to take valuation into account if you are rational.

    Logic trumps “comparative evidence.” If something fails logically, it makes no sense to follow it even if there is some “comparative evidence” supporting it.

    The reality of course is that the comparative evidence shows that Valuation-Informed Indexing always beats Passive Investing. But say that it were different. Say that there were evidence supporting Passive? Would that be a good reason for going Passive?

    I sure don’t think so. It could be that there was just one funny period in history where Passive happened to win out despite the odds (known through logic) against it. That’s never happened. But if it did, it wouldn’t impress me.

    Lottery tickets sometimes make people rich. Does that make lottery tickets a good thing to invest in? Not in my book. There is no logic to investing in lottery tickets. It makes no sense. The fact that there is some “comparative evidence” supporting it does not change that.

    If there were a lot of comparative evidence going against what logic told you, that would be a reason to question whether there was some flaw in your logic. I certainly don’t say that those who have logic on their side should become dogmatic. But in this case logic and the comparative evidence are both lined up on the same side — both show that Passive can never work.

    Passive has only one thing going for it. Emotion. There are people who made a horrible mistake who do not want to acknowledge it despite a mountain of evidence showing that they are wrong. Emotion is a factor that influences our discussions. But it is not evidence. The fact that people are intensely emotional about Passive Investing does not indicate that it works.

    In my mind, the reality is just the other way. I view the intensity of the emotion evidenced by the Passives as evidence that they are wrong. It shows that even the Passives have been experiencing deep doubts for a long time. If they possessed internal confidence in what they were saying, they would not be so defensive.

    Rob

  21. there are many papers showing that a simple passive strategy can beat active market timers/tactical asset allocators on a cost-adjusted basis.

    There are studies showing that short-term timing does not work. You could create 500,000 such studies because it is so.

    You could also create 500,000 studies showing that long-term timing always works because that is also so.

    The error was looking at evidence that short-term timing does not work and concluding from that that long-term timing does not work. It was that mistake that caused this economic crisis and that caused the greatest loss of middle-class wealth in the history of the United States.

    Passive Investing is a big mistake. Nothing less, nothing more.

    There is nothing to “disprove” in a mistake.

    For there to be something to disprove, that Passives would have to put forward some sort of case that it makes sense to invest passively. They have never done this. It is not even possible for the rational human mind to imagine circumstances in which they could do such a thing. It is a logical impossibility for the price paid for something not to affect the value proposition obtained from buying it.

    Say that I ask you “what is 2 plus 2?” and you say “22.” That’s a mistake, right?

    Would I have to present some sort of peer-reviewed research to show that you are wrong?

    I say “no.” All that I need to do is to point out the mistake you made. That puts an end to the claim that 2 plus 2 is 22.

    The claim that long-term timing does not work is a mistake. There is absolutely nothing to it. So there is no way to disprove it. There is no “there” there.

    Stock investing works the way that our common sense tells us it must work and the way in which the entire historical record confirms it really does work. To invest passively is an act of insanity. To buy something without taking the price being asked for that something into consideration makes no sense.

    Rob

  22. Now, in theses papers, collectively, the time frames varied, and you might say they are short-term only (and therefore only partially convincing),

    It’s not that they are “only partially convincing,” Arty. They are totally convincing re the point that Passive can never work.

    It is the same data that shows that short-term timing never works that also show that long-term timing always works. The only possible objection that Passives could offer to the studies showing that long-term timing always works is that the data is no good. But they can’t say that when the entire reason for believing in Passive is the same data that shows that Passive can never work!

    It would be logical to say that the data cannot be trusted and that we should not go with Rational just because the data shows that it always works. But if you went with that, you would need to reject Passive too because the entire case for Passive is a data-based claim.

    So those saying that you cannot trust the data are forced to rely on common sense. And common sense says that Rational must work and that Passive never can work. You end up at the same place through a different method.

    There is no case for Passive. There never has been one. There never can be one.

    The entire problem we have experienced is that there are people who don’t want to acknowledge this, people who want to pretend that there is some sort of big investigation needed to determine that Passive does not work. We should never have believed in it in the first place. No evidence was ever put forward in support of it. We believed in it because we made a mistake and that is no reason to continue believing in it 28 years after the mistake was identified.

    Rob

  23. another might say they just looked at timing only and are wholly convincing.

    The studies either looked at long-term timing or they did not, Arty.

    If there is a study somewhere showing that long-term timing does not work, I would sure like to see it. I say that such a study is a logical impossibility. Looking for such a study is like looking for a study that shows how to build a perpetual motion machine. If valuations affect long-term returns, how could there ever be circumstances in which it would be a good thing not to take valuations into account?

    Is it ever a good idea not to take price into consideration when buying a car or a comic book or a banana? Can it ever be a good idea to buy anything other than stocks passively?

    Rob

  24. I have not seen a strategy put forth in peer-review that was founded on, say, Shiller’s PE 10.

    The Old School safe-withdrawal-rate studies were peer-reviewed, Arty.

    We discovered the errors in the Old School SWR studies in May 2002 and not one of those studies has been corrected in the seven years since. So much for the magical power of a “Peer Reviewed” stamp.

    The historical data is public information. Anyone who cares to can check it out. We know that Passive Investing defies common sense. We know that the entire historical record shows that there has never been a time-period in which Passive worked. We know that many of the big names in the field have endorsed the principles on which the Rational model is built. We know that in seven years of discussions there have been thousands of people who very much wanted to come up with a defense for Passive and that not one has ever been able to do so.

    That’s enough for me.

    I don’t say that we should become dogmatic. I certainly remain open to hearing any arguments going the other way if any are ever developed.

    But I need to make investing decisions today. We all do. Given that there is a mountain of evidence supporting the Rational model and precisely zero supporting the Passive model, I have made a tentative decision to go with Rational.

    I would very much like to see the Peer Review people catch up with the work that we have been doing in the Retire Early and Indexing discussion board communities for over seven years now. I have done my part to get them involved. I have contacted people liken Bogle and Bernstein and Burns and Clements and Kitces and Schultheis and so on. Those people have ties to the people who do Peer Reviewed research and they certainly could put a suggestion in their ears if they thought there was a hope that research could be developed supporting Passive.

    I think it would be fair to say that not one of these people felt even the tiniest bit of enthusiasm for the idea of having Peer Reviewed research done on this question.

    I’m all for having Peer Reviewed research. But while these people are waiting to get their acts together, we have an economy headed over a cliff because of the demonstrably false claims put forward in the Peer Reviewed research of an earlier day. Doing something to pull the economy back from the cliff is my top focus today. Peer Reviewed research can come when some time opens up in the schedules of these Important People, in my assessment.

    I think it would be fair to say that every reasonable and non-emotional person who has looked at this matter in any depth has a pretty good idea what the Peer Reviewed research is going to say when the Important People who do it are able to find time in their schedules to put it together. We know what the data says.

    What do you think they are going to base the Peer Reviewed research on if not the historical stock-return data?

    Rob

  25. if such a claim for superiority is made—by either side—the burden, as always, shifts to the claimant.

    I claim superiority.

    I clam that Valuation-Informed Indexing is superior in every possible way to Passive Indexing.

    I don’t think that’s the kind of claim that you are talking about. But I put the claim forward in the public square all the same.

    I wrote an e-mail to Bogle last week making this claim of superiority. I have not yet heard a response.

    I wonder why.

    Rob

  26. if we want to displace convention, I fear we need evidence (burden of proof).

    Evidence we have coming out of our ears. We’ve had evidence coming out of our ears for seven years now (if not 28 years).

    I say that what we need is a willingness on the part of the Big Shots in the field to say The Three Magic Words.

    Rob

  27. I’m home alone today with a Summer cold. Never get one!

    Rob wrote: “If valuations affect long-term returns, why the heck would you not want to change your allocation in response to price changes? What would be the purpose?”

    You might want to. You might not want to, providing you have a rational alternative. There have been many passive alternatives that work well and these are easy to show; I’ve shown them; they work nicely (most investors don’t use them but that is another point). I can’t claim them to be the “better” nor have I seen others that are “better”.

    Rob wrote: “Shiller did not explicitly describe the investing model that follows from his research…”

    That’s my point. It has not been done professionally—yet. There is a huge difference between saying “valuations matter” vs. proving a better particular investing strategy to be better than the others. Rob, if you guys have the work done already, just submit it to a journal. I think many journals would love to have Shiller-inspired professional work. After that, we can watch you give it to Kudlow on CNBC!

    Rob wrote: “If valuation matters, you obviously need to take valuation into account if you are rational.”

    I don’t agree that this MUST be true and I have data that shows an entirely passive approach (really, just being “conservative” at all times) can work very well over the long haul, suffering little in downturns and having nice returns. And there is nothing saying I can’t employ *both* concepts (they are not mutually exclusive)—but that may be a choice based only on my *opinion* and feeling, which may be no better than another’s opinion.

    Rob wrote: “Logic trumps “comparative evidence.” ”

    There is a problem with that statement. Surely you agree that different camps can each use the terms “logic” and “common sense” for their own purposes. Happens all the time. In doing so, all they are doing is being manipulative. Each side can say the other is being illogical. But saying it alone means nothing. In fact, these appeals are well-known rhetorical fallacies. And logic rests on evidence; the word alone is meaningless and is often used manipulatively—by many.

    Rob wrote: “The reality of course is that the comparative evidence shows that Valuation-Informed Indexing always beats Passive Investing. But say that it were different. Say that there were evidence supporting Passive? Would that be a good reason for going Passive?”

    1. I am reasonably convinced that Shiller’s thesis remains valid. But I’m not convinced about what the reality shows as a comparatively superior investing *strategy*. I’m not sure the models on your site do that (see even Schlenker’s objections), and I’d rather see what other professionals who crunch numbers think in a professional venue. All I’m saying is that I’m unconvinced, at present, about what method is best. But I’m interested in your work…

    2. If there is a preponderance of *evidence* that supports a claim, it is wise to consider the evidence. There is a preponderance of evidence that shows smoking causes health problems. But “logic ” might tell some smoker in their 90s, who is still healthy (due, perhaps, to lucky genetics), that the “evidence” is irrelevant. Obviously, that is a problem. There is a preponderance of evidence that shows “buckling up” makes for a safer ride—by far. My father knew one person who was miraculously thrown clear from a car that then exploded; had he been belted in he would have died. Surely this does not mean the evidence should be discarded.

    Rob wrote: “There are studies showing that short-term timing does not work. You could create 500,000 such studies because it is so.”

    I agree. Because I read some of them.

    Rob wrote: “You could also create 500,000 studies showing that long-term timing always works because that is also so.”

    I don’t know that. Because I’ve seen none of those comparative studies—yet.

    Rob wrote: There is no case for Passive. There never has been one. There never can be one.

    I disagree. It depends largely on the specific implementation used. Again, there are many examples of intelligent implementations of passive/buy-and-hold or whatever semantics you want to call it. And there have been many poorly-constructed implementations.

    I’ve seen equity allocations of just 30%-40%—without alteration—provide excellent long-term returns (in excess of 9-10% yearly average) with little downside harm. Those are good results. Most “passives” don’t do that but that need not be so. I don’t claim there isn’t a better way than that. Just have not seen it.

    Rob wrote: “I claim superiority.

    I clam that Valuation-Informed Indexing is superior in every possible way to Passive Indexing.

    I don’t think that’s the kind of claim that you are talking about. But I put the claim forward in the public square all the same.

    I wrote an e-mail to Bogle last week making this claim of superiority. I have not yet heard a response.”

    I wonder why.

    Cool! It’s not your claim that is my problem. It is the way I’d like to see the comparative evidence presented to support that claim. I hope you do it and that doing so will be helpful to many in an even broader circle. If John already has the data, there are many journals that would be interested in Shiller-inspired work. Man, I’d love to see you guys do that.

    Regarding Bogle, maybe he has yet to respond to your letter. Maybe he gets lots of letters and simply chooses not to respond to many of them. And on a personal observation, his fingers look horribly arthritic on camera, and that might limit any personal (un-dictated) responses. So, I don’t know why he has not responded.

    Arty

  28. There have been many passive alternatives that work well

    You gave an example of someone using the Permanent Portfolio, which calls for a stock allocation of 25 percent at all times.

    Sticking with a 25 percent allocation obviously protects you from the devastating losses suffered by Passive Investors who go with higher stock allocations. That’s a plus.

    But for this approach to “work” you would need to get good returns from the other asset classes (bonds, gold, and cash). I find some theoretical appeal in the Permanent Portfolio concept and I certainly think it is fine for people to try it. But I have a hard time imagining that millions of middle-class investors are going to go with a strategy that calls for never having a stock allocation greater than 25 percent.

    If you are going to go with higher stock allocations, you need to pay attention to valuations or sooner or later you are going to experience a wipeout. The risk of holding stocks is far, far greater at times of insanely high prices than it is at times of normal or low prices. There is no rational case that can be made for failing to adjust one’s stock allocation in response to price changes.

    The only reason why the losses are not devastating for the Permanent Portfolio investor is that the stock allocation is so low. That hardly shows that Passive Investing works. What it shows is that going with a super-low stock allocation at all times protects you enough from the dangers of Passive Investing to make them bearable.

    Rob

  29. There is a huge difference between saying “valuations matter” vs. proving a better particular investing strategy to be better than the others.

    Both the Retire Early and Indexing communities have done the latter, Arty.

    If both communities had not shown beyond any reasonable doubt that Rational Investing is superior to Passive Investing, the Passive Investing dogmatics would not have insisted on a ban on honest posting at all the boards. I mean, come on.

    Rob, if you guys have the work done already, just submit it to a journal.

    I’ve done better than submit it to a journal, Arty. I submitted it to my fellow community members.

    The verdict of that segment of the community interested in learning how to retire early and how to index effectively was a huge thumbs up. The verdict of the Passive Investing dogmatics was to acknowledge to themselves that there was zero hope of making an effective counter-argument and therefore to insist on a ban on honest posting. I think it would be fair to characterize those two reactions as two different ways of saying the same thing.

    I think many journals would love to have Shiller-inspired professional work.

    I am not the first person who came to understand that valuations affect long-term returns, Arty. People have known this since the first market opened for business. There have obviously been many articles showing this already published (these are available to anyone who does an internet search and have been discussed many times during our community discussions) and there have no doubt been many that should have been published but that were not published because they told a story that The Stock-Selling Industry would prefer not be told.

    The goal is not to publish articles. The goal is to help the millions of middle-class investors who have suffered devastating financial losses as a result of the hundreds of millions of dollars that have been directed to the promotion of Passive Investing over the past 30 years. If we pass legislation compelling The Stock-Selling Industry to spend an equal amount promoting Rational Investing in coming years, our economic problems are solved.

    After that, we can watch you give it to Kudlow on CNBC!

    Why only “after that”? We showed beyond any reasonable doubt that the Old School SWR studies get the numbers wildly wrong in mid-May of 2002. I would think that the time at which our findings should have been widely publicized would have been May or June of 2002. That would have given people time to lower their stock allocations before the crash. What constructive purpose was served by waiting?

    Rob

  30. It has not been done professionally—yet.

    The professionals have failed us, Arty.

    Bogle is a professional, is he not? Bernstein is a professional. Clements is a professional. Burns is a professional. Bengen is a professional. Schultheis is a professional. Kitces is a professional. Lindauer is arguably a professional (his book was published by a large publishing house). Greaney is arguably a professional (his study was endorsed by numerous professionals).

    PeteyPerson is miles ahead of the professionals. JohnDCraig is miles ahead of the professionals. BenSolar is miles ahead of the professional. Microlepsis is miles ahead of the professionals. FoolMeOnce is miles ahead of the professionals.

    The idea is to get it right, not to get it wrong.

    What are these professionals profesional at?

    Passive Investing helps sell stocks at times when they are dangeorusly overpriced.

    Are you able to point to something else that Passive Investing does for any of us?

    The “professionals” need to put the interests of the people following their advice higher up on the priority list.

    That’s my sincere take, Arty.

    I don’t believe that these “professionals” got in the business with the goal of causing huge amounts of human misery and bringing the strongest economy in the world to its knees. But that is how it has played out. They need to reflect on the role they played in making this happen and on what needs to be changed in InvestoWorld so that nothing like this ever, ever, ever happens again.

    Yes, they are smart people. Yes, they are good people. Yes, they are also human. Yes, that mean that they too can make mistakes. Yes, they need to take that into account when deciding how dogmatic to be when offering investing advice.

    They are capable of learning what they got wrong. The first step is wanting to learn. Each month that goes by without them taking the most basic first steps is a month in which the entire U.S. economy moves closer to going over a cliff.

    It’s not a joke.

    There are responsibilities that go with making a living offering investing advice.

    My sincere take.

    Rob

  31. I don’t agree that this MUST be true and I have data that shows an entirely passive approach (really, just being “conservative” at all times) can work very well over the long haul, suffering little in downturns and having nice returns. And there is nothing saying I can’t employ *both* concepts (they are not mutually exclusive)—but that may be a choice based only on my *opinion* and feeling, which may be no better than another’s opinion.

    You are of course entitled to your opinion, Arty.

    My opinion is that it is not possible for the rational human mind to imagine a circumstance in which it would be a good thing to ignore price when setting your stock allocation (that is, to invest passively).

    You are of course right that there are approaches that are sufficiently conservative that they would not cause a wipeout for the investor who failed to change his stock allocation. You could say that of someone who went with a zero stock allocation. That person would in a sense be investing passively and yet he would never suffer a wipeout. That person diminishes the danger of investing passively by having such a low stock allocation. He is more properly termed a conservative stock investor than a passive stock investor. It is his conservatism saving him, not his attraction to Passive.

    If you are going to invest in stocks, you need to learn the ABCs before doing so. The lesson of the historical data is that the most important ABC is that valuations affect long-term returns. There is zero evidence that this is not so. There is a mountain of evidence that it is so.

    It is not my intent to be argumentative. But I don’t want to leave any community members thinking that there might be some rational case that can be made for Passive Investing if in fact there is none. If there is a rational case, I of course hope that someone comes forward with it. That would be a wonderful development. What I can say with certainty is that I have devoted seven years of my life going many different places and speaking with many different people and have never been able too find even a sliver of an argument that can be made in defense of Passive Investing.

    I wish that I could find something. I think that would help because if I could say something positive about Passive Investing it might help the Passive dogmatics save face and bring peace to our boards. But I am failing my fellow community members if I post deceptively on this point. I have studied this matter in great depth and I have never found even a tiny sliver of an argument.

    I am not saying that the people who advocate Passive do not believe in it. I am convinced that the vast majority who advocate it do indeed believe in it. That’s something different.

    Lots of people believe in it because lots of people believe in it. That’s what it comes to. That doesn’t change the reality that there has never been any reason to believe in it. Nor can there ever be. An alternate universe in which Passive Investing worked for the long-term investor is a logical impossibility.

    Or so says Rob Bennett (widely known as one of those darn fallible humans) in any event.

    Rob

  32. but that may be a choice based only on my *opinion* and feeling, which may be no better than another’s opinion.

    You certainly need to invest your own money pursuant to your own beliefs, Arty.

    The Passives go far, far beyond that.

    They presume to tell others what the historical data says about how to invest effectively and they use analytically invalid methodologies for doing this. They ignore factors that if included would cause their studies to tell a story that the Passives do not want people to know about.

    These are Peer Reviewed studies I am talking about.

    I say that, when you report a number, you need to report it accurately. And when you learn that you got it wrong, you need to fix the mistake.

    I also say that this view of mine would not be even the tiniest bit “controversial” if we were talking about any subject other than stock investing. The idea that it is a good thing to report numbers inaccurately and a bad thing to report numbers accurately is unique to this field, in my experience.

    Rob

  33. Surely you agree that different camps can each use the terms “logic” and “common sense” for their own purposes.

    The safe withdrawal rate is the product of a numerical calculation, Arty.

    The historical data is publicly available data.

    Anyone who cares to can determine the realties for himself or herself.

    Given that the Passives got the numbers that people use to plan their retirements wildly wrong and failed to make corrections for over seven years, how can we trust them to have gotten anything right?

    Rob

  34. I’m not sure the models on your site do that (see even Schlenker’s objections)

    Part of my job is to find out whether there are any holes in any of the stuff that I put forward at the site.

    I have tried very. very hard to meet my responsibilities in this regard. I presented my stuff to some of the most dogmatic Passives in the world. None found any problems (other than the caveats that I acknowledge myself in the materials at the site). In fact, the dogmatics were so frustrated in their inability to find anything that they demanded that a ban on honest posting be imposed at all of our boards. That tells a tale, Arty.

    and I’d rather see what other professionals who crunch numbers think in a professional venue. All I’m saying is that I’m unconvinced, at present, about what method is best. But I’m interested in your work…

    Skepticism is healthy, Arty. Please don’t ever cease expressing a skeptical view unless you become 100 percent convinced (and even then it wouldn’t hurt us for you to play the role of devil’ advocate).

    Please understand that part of my job is to try to provoke a counter argument from those who are skeptical. One way I do that is to state things as clearly and firmly and strongly as I believe them.

    If you don’t believe, you don’t believe. Hearing why you don’t believe may help me come to understand why many others don’t believe.

    I believe. But it could be that I am wrong.

    Rob

  35. I am reasonably convinced that Shiller’s thesis remains valid. But I’m not convinced about what the reality shows as a comparatively superior investing *strategy*.

    Going from Sentence One to Sentence Two is what the “Revolution” that Rob Arnott spoke of is all about.

    Lots of big names recommended Shiller’s book. So there are lots who would not have too much problem with your Sentence One.

    But rarely do we hear big names in the field saying what I say at this site. That’s Sentence Two stuff.

    So you are in good company, Arty.

    My take is that all that I say at the site is merely the practical implementation of Shiller’s hugely important finding that valuations affect long-term returns. Learning that was like learning that E=MC Squared. It changed everything. We can never go back to that safe, comfortable world that existed before Shiller’s finding ever again.

    I say that Shiller is right and that all sorts of exciting stuff follows from what he said. I say that this Revolution is a very good thing. I say that it is going to lead us all to retirements earlier than what we dreamed possible in the pre-revolution days.

    There are magic words that we need to say to get to all the good stuff. The magic words are “I” and “Was” and “Wrong.”

    I believe that it is exactly that simple. When we work up the courage to say those words, all the bad stuff comes to an end and all the good stuff begins.

    Rob

  36. Talking about published works

    Consider Warren Buffett’s challenge to the Efficient Market Hypothesis: The Super Investors of Graham and Doddsville.

    It was in their face. It has never been answered.

    How about Smither’s work on Tobin’s q. How to Value Wall Street (?title uncertain?). Unanswered.

    James O’Shaughnessy’s book What Works on Wall Street. Unanswered.

    There is plenty of evidence, unanswered in the academic arena.

    Instead, we read academic articles that say “I didn’t find anything.”

    Have fun.

    John Walter Russell

  37. Regarding Bogle… I don’t know why he has not responded.

    Me either. And it is of course the right thing to assume the best of people, especially of people who are heroes to our community and whose work has helped all of us (me more than anyone else).

    But this is not the first time that Bogle has failed to take action. Mel Lindauer led one of the most vicious Campaigns of Terror ever seen on the internet against the Vanguard Diehards Community for two years. Bogle said at one time that he used to check in on that board regularly. It is hard for me to imagine that Bogle was not aware of what was going on in at least a vague way.

    Do you think that Bogle had a responsibility to speak up in defense of that board community, Arty?

    I do.

    I was afraid to speak up when John Greaney was leading an equally vicious Campaign of Terror against the Retire Early Community. So I can fully understand why Bogle and a good number of others might have been reluctant to get involved for a time. But there comes a time when you simply must speak up or stop pretending that you think of the people in the community under attack as your friends.

    Bogle failed us when he failed to speak up against the Campaign of Terror. It’s the same with Bernstein. It’s the same with Swedroe. It’s the same with Schultheis.

    I don’t say that these people have not done good things. I say that they failed us all (and themselves) when they failed to speak up against the Campaign of Terror that was waged against us.

    This is part of the story. Investing is a human act. Humans do good things, humans do bad things. Thus it has always been and thus it always will be.

    Some think that you can learn how to invest effectively without commenting on the human decisions that generate the investing advice we all rely on to plan our retirements. I think it is a mistake to think that that is possible. We learn from humans. How we interact with them affects what we learn.

    We’ve done some wonderful, wonderful things during the first seven years of our discussions. We’ve also done some horrible, horrible things. Both things are so. Both things are part of the story that must be told and understood and that will ultimately lead us all to a much better place than where we stand today.

    It’s on the other side of that black mountain that the true fireworks (the good kind!) begin! I very much look forward to the day when we walk together to the other side of the black mountain. I hope that I will be able to shake John Bogle’s hand on that day. I think that would be a fitting way to make clear to all the significance of what we have achieved together.

    Rob

  38. Rob,

    Regarding publishing….If you have the data, and you’ve had for years, you can publish professionally anytime if you want to do so. Obviously, far more people could benefit now and in the future through the added exposure and discussion that a good professional paper can provide. If you don’t wish to do so, for whatever reasons, that’s up to you.
    —

    Rob wrote: “You gave an example of someone using the Permanent Portfolio, which calls for a stock allocation of 25 percent at all times.”

    The Permanent Portfolio is not the only example I provided. In fact, the other portfolio (30″ highly-tilted equities, below) had better returns than the PP with a lower Standard Deviation. Yes, they all had 30-40% equities. They provided excellent returns for risk and had very little downside loss—which is essential to *emotionally comitting* to a long-term strategy. And they did that without once altering the composition of the portfolio.

    This portfolio had just 30% equities and actually had *gains* in 2001-2002:

    (1972-2008)
    Cost adjusted Gross Return: 9.6%
    Standard Deviation      7.56%

    Biggest losing years:
    2008: -7.59%
    1973: -1.19%
    1974 -0.67%
    (small *gains* in 2001 and 2002).

    By any fair judgment, this portfolio “works”.

    Want even higher return? Here is another example using 40% equities, drawn from various asset classes.

    (1972-2008)
    Cost adjusted Gross Return:   11.38%
    Standard Deviation   8.46%

    Biggest losing years:
    2008: -8.76%
    1974     -3.97%
    1994     -3.46%
    (This portfolio had an average *gain* of 8% in 2001 and 2002, and just 4 small down years in 37 years).

    Rob wrote: “But for this approach to “work” you would need to get good returns from the other asset classes (bonds, gold, and cash). I find some theoretical appeal in the Permanent Portfolio concept and I certainly think it is fine for people to try it. But I have a hard time imagining that millions of middle-class investors are going to go with a strategy that calls for never having a stock allocation greater than 25 percent.”

    The PP has done this over 37 years. So did the other portfolios, through different means. I’m “OK” with the PP; certainly one way to try a passive approach. I agree that many have not been rationally conservative with their buy and hold/passive strategies, for a variety of reasons. But that does not mean we, who understand the issues, need be as foolish.

    Rob wrote: “If you are going to go with higher stock allocations, you need to pay attention to valuations or sooner or later you are going to experience a wipeout.”

    No kidding! That’s why I don’t recommend sticking with high equity allocations unless you have 30-40 years AND a cast-iron stomach, even then, I’d say don’t…

    Rob wrote: “There is no rational case that can be made for failing to adjust one’s stock allocation in response to price changes.”

    Well, you *can* do it at throughout various market cycles with the examples I provided that showed real results with real funds that anyone could have accessed. These allocations survived brilliantly in the some of the worst periods we’ve seen—from the tech bubble pop to 2008.

    Rob wrote: “The only reason why the losses are not devastating for the Permanent Portfolio investor is that the stock allocation is so low. That hardly shows that Passive Investing works. What it shows is that going with a super-low stock allocation at all times protects you enough from the dangers of Passive Investing to make them bearable.”

    Survival is the first order of business. If we capitulate (sell-out low), we lose. We also need to define what “works”. I would say that the returns from any of the portfolio designs I offered (I didn’t invent them, just ran the data) were quite good while also providing a smooth investing experience over time. The downside losses work well from an emotional standpoint and enabled an investor to stay with that plan. Those are three important points and that works for me.

    I never claimed this was the best way, or the only way. But clearly, buy and hold/passive can work quite well (providing cost-adjusted nominal returns of 9.6%-11.3%, which by any realistic standards are very good). But one must be smart about *how* the portfolio is constructed.

  39. Obviously, far more people could benefit now and in the future through the added exposure and discussion that a good professional paper can provide.

    Where do you get the idea that Peer-Reviewed research that shows that Passive Investing does not work gets “exposure”?

    There is already lots of Peer-Reviewed research that shows that Passive Investing does not work. If it got lots of exposure, you would know about it. So would everyone else.

    If it were Peer-Reviewed research that didn’t show that Passive Investing works but that could be said to do so by those with a vested interest in making claims that Passive works, then it would get lots of exposure. I obviously do not believe that we need more such “research,” Arty.

    Who do you think it is that needs to give the realities of stock investing “exposure”? It is The Stock-Selling Industry.

    If The Stock-Selling Industry wanted to give the lessons taught by the academic research of the past 30 years exposure, it wouldn’t need to wait for Rob Bennett’s go-ahead to do do. It could have been giving all these studies exposure since the day they were published.

    I do more important work when I prepare a podcast or an article or a guest blog entry or a calculator than I would preparing some Peer-Reviewed research that no one would ever hear about. People who have an interest in learning the realities can come here and see what I have come up with and see what other community members have come up with and share their own thoughts with all the rest of us. That’s the real turtle soup and not the mock, Arty.

    I do the best I can in figuring out the realities and in reporting on them to my fellow community members. That’s it.

    If the day comes when The Stock-Selling Industry regrets the massive financial destruction it has caused by failing to act on the realities we learned about 28 years ago, all of this material will be here to help people learn the realities and invest more effectively than they ever have before. That’s what I do, nothing more and nothing less. I don’t have hundreds of millions of dollars to devote to “exposure.” But I have the skills of a reporter and there are lots of places on the internet today where people can learn the realities and I think it is fair to say that there are millions of middle-class investors who very much want to learn and who are happy to take time out of their days to help us out.

    I think all that is wonderful. So I make that my focus.

    I think that The Stock-Selling Industry has made a terrible mistake in turning its back on all that. I have said so. I have urged leaders in The Stock-Selling Industry to help us get things on a better track. I can do no more and I can do no less. It’s up to them to decide whether to take me up on the offer or not.

    The offer will always remain open. There is no deadline for acceptance. The “Yes” decision is something that I can urge on people but not something that I can force people to act on. It takes a community to save an economy.

    Rob

  40. But that does not mean we, who understand the issues, need be as foolish.

    How about the millions of middle-class investors who have never even been permitted to hear what the issues are, Arty?

    Those are the people I write for.

    If the entire U.S. economy goes over a cliff, nothing works. We all go down.

    That’s where the further promotion of Passive Investing takes us. Over a cliff.

    I vote “no.”

    Rob

  41. But one must be smart about *how* the portfolio is constructed.

    One must be permitted to hold conversations with others to become smart about how to construct portfolios.

    I favor the idea of opening the internet up to honest posting on the realities of stock investing so that we all (including “experts” like John Bogle) can begin to educate ourselves re the ABCS. I’d like to see that happen by the close of business today.

    Rob

  42. Here is a link to a blog entry at The Incidental Economist that argues in favor of the Efficient Market Theory:

    http://theincidentaleconomist.com/efficiency-and-rationality-in-financial-markets/

    I posted a comment there this morning pointing out that the Efficient Market Theory was discredited by the academic research in 1981 and that Rob Arnott recently described today’s conventional investing wisdom as being rooted in “myth and urban legend.” The comment has disappeared.

    This is what the “defense” of Passive Investing is today.

    The tag line for the blog describes it as “musings of a curious mind.”

    This fellow is an economist?

    Do you detect a disconnect?

    Rob

  43. “One must be permitted to hold conversations with others to become smart about how to construct portfolios.”

    I am just an ordinary guy who educated himself, Rob. I did that by reading and having discussions, and many others have done the same. From what I learned, I then took personal responsibility for my investments. I believe people should tale personal responsibility for their actions, Rob.

    Sure, I see attitudes I don’t like on boards, like Bogleheads. But I also see lots of posts on valuations, and other topics unpopular to those board leaders (like the 3-Factor model vs. Total Markets). Many people are discussing investing issues freely. Very many more probably don’t care about the nuances of investing.

    You claimed that passive investing can not possibly work. That is obviously incorrect. I have shown, repeatedly, with multiple examples, allocations, and funds that anyone can access, and that can be clearly viewed by normal folks, that passive investing has and can work very well.

    I didn’t invent any of the data. They are not future projections. They are not simulations. They are real, precise, year-by-year data that were available to real people who took personal responsibility and had a good understanding of themselves.

    I’ve met some of these people and viewed their allocations. Really simple stuff. They were people who took responsibility for their own knowledge. They were people who made rational allocation decisions. Above all, they were people who knew themselves, which is maybe the biggest reason their allocations worked well.

    It is possible that various approaches can work, to varying degrees of success (including yours). It is naive to think otherwise. But to damn *all* “passive” strategies with the same brush is obviously wrong.

    Intelligently applied, passive investing has, can, and does, work well. The evidence for that is overwhelming.

    Arty

  44. I believe people should tale personal responsibility for their actions, Rob.

    Does this include the big-name “experts” who endorse Passive Investing, Arty?

    Millions of middle-class investors believe that when they hear something repeated thousands and thousands of times, there must be something to it.

    The academic research showing that valuations affect long-term returns was published in 1982. My post pointing out the errors in the Old School SWR studies was posted in May 2002.

    Rob

  45. Many people are discussing investing issues freely.

    They are not, Arty.

    There are people taking tentative little steps and I of course applaud them.

    But those people would argue the case a lot more forcefully if they were not being intimidated into not doing so.

    And lots of others would join in if they were not being intimidated into not doing so.

    Intimidation inhibits learning.

    The Bogleheads.org board (and all other boards discussing investing issues) should both permit and encourage posts pointing out the flaws in the Passive Investing model. It is by hearing the other side of the story that we all learn. Those who are not willing to follow the rules of the communities should be asked to take a hike. They hold the rest of us back. We don’t need the business that bad.

    My sincere take.

    Rob

  46. to damn *all* “passive” strategies with the same brush is obviously wrong.

    I don’t damn all passive strategies. But I certainly damn promotion of the idea that it is not necessary to adjust one’s stock allocation in response to price changes. I believe that there is no other idea in the history of personal finance that has caused so much human misery.

    I agree with you that those who go with low stock allocations can avoid the financial devastation that is inevitably experienced by those following Passive strategies and going with moderate or high stock allocations.

    I say that Passive Investing is not an investing strategy but a disease. I would certainly never say that it is impossible for someone suffering from a terrible disease to live a rich and fulfilled and significant life. All the same, I would never wish a terrible disease on someone. It is possible to invest passively and survive. But I sure do not see why anyone would deliberately choose to walk that path if they had other options available to them. You could get to the same place quicker and with less worry if you just opened yourself to the consideration of Rational Investing ideas. (which are the opposite of Passive Investing ideas).

    I can see many ways in which investing Passive can subtract from one’s investing experience. I am not able to imagine any in which it would add anything. I do acknowledge that one could survive investing passively if one took a very conservative stance. But in that case I feel that it is the conservative stance making the survival possible and the passive stance requiring a conservatism that would otherwise not be necessary.

    It could be that you are right and that I am wrong. There’s a reason why God made both chocolate and vanilla (and Rocky Road too!).

    I am grateful to you for taking so much time to engage in back and forth on these questions. I hope that there are people listening in who are forming a better-informed take as a result (whether they happen to end up agreeing with you or with me).

    Except they better not agree with you! Grrrr…..

    (That’s a joke.)

    Rob