Friday’s blog entry set forth the text of an e-mail that I recently received from the author of the Pop Economics blog. Set forth below is the text of my response, sent on March 16, 2010.
Pop sent me a reply to the words posted below, but asked that I not post it. I will post my response to his reply as tomorrow’s blog entry.
Thanks for your response.
I am fine with the idea of just writing a stand-alone Guest Blog Entry that is not structured as a response to your earlier blog entry. If I were writing it that way, I would not even mention the earlier blog entry.
I would be writing a piece advocating not Value Investing, as Warren Buffett practices it. I would be writing a piece advocating Valuation-Informed Indexing. VII is an approach that combines the best advice of Buffett and Bogle,. It is aimed at the typical middle-class investor, not at the sophisticated investors who practice Value Investing as Buffett practices it.
Since you like the first argument, I think it would make sense to make the entire piece a presentation of the first argument.
I entirely disagree with the point you make in the paragraph of your e-mail beginning “I think we have to assume…” You are putting forward a self-fulfilling prophecy. VII is superior to Buy-and-Hold in about 10 different ways. The only reason why everyone doesn’t practice it today is that everyone who understands the benefits is waiting “for everyone else to catch up.” Everyone will start catching up when we make the case effectively. There should be nothing “contrarian” in the idea of considering price when buying stocks. Most middle-class people consider price when making every other purchase they make. The only reason why they fail to consider price when buying stocks is that The Stock-Selling Industry pushes Buy-and-Hold so hard and many believe that there must be something to it. I have had many people tell me that they take seriously what the “experts” promoting Buy-and-Hold say. Most investors DO follow the Buy-and-Hold idea that there is no need to change your stock allocation when prices reach dangerously insane levels. That is the ONLY difference between Buy-and-Hold and VII.
I disagree with you that permitting investors to hear about rational investing strategies would not lead to an efficient market. You have to ask yourself WHY the market is not efficient today. Other markets are reasonably efficient. For example, the market by which we buy cars prices things fairly efficiently. The same is true of the market by which we buy groceries. What is so different about the market by which we buy stocks? The difference is that this is the only market in which most participants disdain the idea of exercising price discipline. The obvious reason why is that The Stock-Selling Industry has spent hundreds of millions promoting Buy-and-Hold. What other reason could there be? If we warn people about the dangers of Buy-and-Hold, people will naturally be drawn to rational investing strategies, will apply price discipline, and the market will indeed become reasonably efficient from that time forward. The only thing causing the market to remain so inefficient today is the continued promotion of Buy-and-Hold for 30 years after the academic research was published showing that valuations affect long-term returns.
Thank you for your kind assessment of the comments that I have put to your blog. That makes my afternoon!
I certainly don’t believe that everything needs to be turned into a Buy-and-Hold vs. Value debate. And I of course have commented on topics that have nothing to do with that debate and will continue to do so. That said, I think it is fair to say that the reckless promotion of Buy-and-Hold for 30 years after the academic research showed that there is precisely zero chance of it working in the real world has already caused the second biggest economic crisis in U.S. history. That economic crisis has caused a great deal of human suffering. So I think this topic could certainly be said to be the single most important topic being discussed in personal finance circles today.
On top of that, the resistance we have seen to honest discussion of the topic has been a thing to behold! Holy moly! The story of the resistance to honest discussion of this critically important topic has become an important discussion topic of its own in recent years. No? Can you think of any other topic that has generated as many bans or as many smear campaigns or as much in the way of intimidation tactics or deception or word games? Why? What is that all about?
Figuring that out is important, Pop. And we don’t figure it out by ducking the question.
I’ll bring up the Campaign of Terror when it is appropriate to bring it up and not otherwise, Pop. I certainly agree that it is an exceedingly ugly business and I certainly agree that most people are repulsed by it. Still, there is no magic wand that you or I or anyone else can wave to make it all go away. John Bogle himself was involved in the Campaign of Terror in an indirect way (he of course did not participate himself but he has associated with Mel Lindauer and that has given Lindauer a power to do harm to the various board communities that he would not otherwise possess).
I participated in a great thread at the Budgets Are Sexy blog this past weekend. One of the Greaney Goons came over to disrupt by bringing up the fact that the Monevator blog had banned honest posting the day before. How would you have me respond to that comment other than by explaining to people that our collective tolerance for the continued promotion of Buy-and-Hold has caused us all to feel a great shame, which evidences itself in the behavior that we have seen from Bogle and the author of the Monevator blog and Lindauer and lots and lots of others?
I would of course like to see the Campaign of Terror put behind us. I think it is fair to say that I would like to see that about 1,000 times more than you would like to see it. But ducking the problem has obviously not worked for the eight years that we have tried that. I put a post to the Motley Fool board on November 23,. 2000, urging Greaney’s removal from the Motley Fool board and asking my fellow community members to contact the site administrator there to take action. Had that step been taken at that time, we wouldn’t be talking about this matter eight years later and all of the boards and blogs that have either been burned to the ground or that have compromised their integrity would not be in the circumstances they are in today.
Humans live in communities, Pop. When people in the communities adopt an “it’s not my battle!” attitude, the bad guys who are present in every community see the way open to destroying those communities in pursuit of their self-interested agendas. I think that those of us who learn so much through our interactions with our fellow community members owe something to those who build the boards and the blogs — and that ain’t the abusive posters!
I am going to continue to speak up in defense of the thousands of my fellow community members who have expressed a desire to be able to speak honestly on investing topics at all of the boards and blogs. In cases in which people ask me why it is that so many boards and blogs have adopted a ban on honest posting, I will do my best to respond in a fair and frank and constructive and life-affirming way. And I will urge those who care about the future of our boards and blogs to do what they can to restore the integrity of the boards and blogs which have given up their integrity in deference to the lowest and most mean-spirited (and least informed!) among us.
Do people want to read about it? No. What people want is to see responsible people bring the funny business to an end. Once we get a few responsible people to take constructive action, there of course will be no further NEED for people to read about the ugliness. It will have been dealt with effectively, as it should have been back on the afternoon of May 13, 2002, when it first became apparent that this was a matter that was going to require action by the people who care about the future of our communities.
I would like to post both your e-mail and my response to it at my blog. Please let me know if it is okay for me to post your words (if it is not, I will of course post only a paraphrased description of its contents, with perhaps a few quotes of short passages needed to provide color or context).
I will aim to get you a new Guest Blog Entry by early next week. Please let me know if anything I say above causes you any concern or prompts any questions on your part. I would love to see you get involved in a positive way, Pop. You write a great blog and I think that many people respect and admire you for the positive work you do.