Set forth below is the text of an e-mail that I sent on October 27, 2009, to Mike Piper (author of the Oblivious Investor blog) in response to the e-mail set forth in yesterday’s blog entry.
Neal and you are writing about different investing approaches. He is not part of the same community.
You and I are writing about the same approach. Both of us are writing about the approach based on Bogle’s idea to use the academic research to formulate a long-term approach to the use of index funds. We are part of the same community.
The friction comes from the fact that The Stock-Selling Industry failed to reform its description of what works in response to Shiller’s research showing that valuations affect long-term returns. When your model is rooted in the academic research, you need to keep up with the academic research and let people know when ideas you once believed in have been discredited by the research. This was not done back in 1981 and it is the failure of a large number of Passive Investing advocates to do this that has caused all this friction.
This cannot be put off indefinitely. If you are going to have base your model on academic research, you need to report what the academic research says accurately. The academic research shows that valuations affect long-term returns. If valuations affect long-term returns, Passive obviously cannot work. If valuations affect long-term returns, investors need to change their allocations or else they are permitting their risk profiles to get wildly out of whack. That is obviously not Stay the Course investing.
If you have some personal theory that it is better for investors not to change their allocations despite changes in valuations because you think that they will make bad decisions, it is of course proper for you to share your theory with your readers. But that doesn’t change the fundamental reality that the theory on which Passive Investing is based (that the market is efficient and thus sets the price properly) was discredited by the academic research 28 years ago. I can point you to scores of articles published since the crash that note that the Efficient Market Theory has been entirely discredited.
Rob Arnott has said that the conventional advice of today is rooted in “myth and urban legend.” I think it is fair to say that that Bogle was not seeking to promote myth and urban legend in the early days of his promotion of the indexing concept. The Passive Investing of today is a betrayal of Bogle’s vision in the days when he kicked off the Indexing Revolution (because what the academic research tells us about the realities of long-term indexing has changed so dramatically).
All of the friction results from the fact that this reality is not widely enough known. We all need to be spreading knowledge of this reality as widely as we possibly can. Once everyone is up to speed, the problems all go away. Right now, we are living in a twilight zone in which the academic research has shown that Passive cannot work but many of the people using this approach do not know this. That’s not my doing, Mike. I am doing all that I can to make people aware of the realities.
If you don’t want people at your blog to point out that Passive does not work, you need to make claims re Passive in a reasonable and fair and accurate way. For example, you should not be saying “timing doesn’t work” but that “short-term timing never works and long-term timing always works.” If you say it that way, there is nothing for anyone to take issue with. It is the slippery way of putting things that has become characteristic of the promotion of Passive Investing in recent years that is causing the trouble. If you say things properly, I do not have to point out the problems in my comments.
The historical data is available for anyone to check, Mike. We all should be reporting what the historical data says accurately. I hate to think that even the idea of reporting accurately what the historical data says has become a matter of “controversy” among advocates of Passive at this point! If so, I think it is fair to say that someone somewhere put the Passive Investing Train on a terribly, terribly, terribly wrong track.