Friday’s blog entry set forth the text of an e-mail that I received from Edwin at the Finantage blog. Set forth below is the text of my reply e-mail.
Thanks for your note. Reading it cheered my morning!
I am excited to hear about your plans. I think you are handling this in a positive and constructive and life-affirming way.
I would like to post the words of your e-mail at my blog. I like to expose my readers to the words of smart and good people who offer a different take than the one that I put forward. Please let me know if you have any objections.
I don’t think that it is my “style” that you are taking issue with, Edwin. My sense is that your real objection is to matters of substance. You mention “Taking a long time to come to an answer” and “not answering the person’s question,” but give no examples of why you feel a concern about these style questions. But when you turn to matters of substance that cause you concern, you get specific — you refer to my assertion that Buy-and-Hold led to the Great Depression and to the current economic crisis. My sense is that these assertions re matters of substance cause you to become dismissive of me in a general sense and that, once you have become generally dismissive, you look hard enough and long enough for matters of style to object to to be able to find some.
Questions about style go around and around in circles. A person from one perspective will say “you didn’t answer my question” and the other person will say “yes, I did” and they are both speaking the truth from their perspective. I can assure you that I make a serious effort to respond effectively to every question put to me. It may be that many Buy-and-Holders don’t feel that I have answered their questions. Valuation-Informed Indexing starts from opposite premises. When two people are talking about two models that start from opposite premises, communication is often difficult. You didn’t make it this way and I didn’t make it this way. It’s just the way it is.
I stand by the claims that I have put forward to which you object. I say that Buy-and-Hold analyses do not incorporate the effect of changes in valuation levels. And I say that the idea that investors do not need to take the effect of valuations into consideration when setting their stock allocations was probably the primary and certainly a highly significant cause of both the Great Depression and the current economic crisis.
I would be thrilled if you would devote one of your blog entries to the question that I pose in the first few paragraphs of the Google Knol arguing that “The Bull Market Caused the Economic Crisis” — How can an economy lose $12 trillion in spending power and NOT suffer an economic crisis? I see that as a clarifying question. No one yet has attempted to grapple with it in a serious way.
You are not the first person who has in a spirit of charity made these sorts of suggestions to me, Edwin. I have had a good number of people tell me “I see merit in much of what you are saying, but you must do so in a less extreme way if you are to persuade people.” I understand the point. I get it that many are shocked by things that I say and that they stop listening once they are shocked. If I thought there were a way to get the job done that did not require shocking people, I would go with it. I don’t believe that such an option presents itself to me in this case.
I think the problem is not that I am extreme but that Buy-and-Hold is extreme. There is room for reasonable differences of opinion on HOW MUCH of an effect valuations have. To open the boards and blogs to discussion of the EXTENT of the effect of valuations would be a middle-ground solution, one that I would endorse. But the dogmatics are never going to go for this. They have been asked by thousands of community members to permit something like this and have never shown the slightest interest even in giving the idea any consideration. The dogmatics believe strongly that to permit any discussion of the effect of valuations would eventually lead to a widespread loss of confidence in the Buy-and-Hold concept and from a strategic standpoint I have to acknowledge that they are probably right. I would be happy to go with a moderate solution to our troubles. But you ain’t never going to get the dogmatics to the table re something like this. I take note that, while many have tried to get me on board with something like this, NO ONE has ever tried to get the dogmatics aboard. I see that as a telling reality.
The Buy-and-Hold dogmatics feel strongly that they cannot permit discussion of such questions. The analyses rooted in Buy-and-Hold (for example, the safe withdrawal rate studies) contain NO adjustment for valuations and the Buy-and-Hold dogmatics have not been willing to acknowledge the analytical errors in these studies in the eight years since they were made public. Buy-and-Holders never give an inch, even when the dogmatic Buy-and-Hold position is causing great human misery. And the Buy-and-Hold non-dogmatics never insist that the dogmatics give an inch. That is the primary reason was our discussions of the past eight years have been fractious.
We need people in the middle to try to heal the wounds of the various communities. I will bend over backwards to help. Not by saying things I do not believe. But by being warm and polite and kind in my interactions with those who have different beliefs. I didn’t always have such strong views Edwin. I started out a believer in Buy-and-Hold. I became radicalized by seeing how hateful and stubborn and frightened and irrational a belief in Buy-and-Hold can make a person. It doesn’t do this to every person. Not all Buy-and-Holders are dogmatics. But many are. And many of those who are not have become sufficiently compromised in their standards of integrity (at least re this particular issue) that they are today unable to speak up in objection to some truly horrible things.
If you want to understand where I am coming from, I suggest that you focus on the safe withdrawal rate matter. There is no dispute today but that the Old School SWR studies get the numbers wildly wrong. Even the Goons acknowledge that those studies contain no valuation adjustment. And big-name Buy-and-Hold advocates like Bill Bernstein and Larry Swedroe have acknowledged that the Old School studies and calculators are “garbage” (Swedroe’s phrase). Yet not one of the studies or calculators has been corrected. And Bernstein and Swedroe have done nothing to warn the millions who are going to suffer failed retirements.
That’s Buy-and-Hold in a nutshell, Edwin. That’s not what it started out to be, but that’s what it has become. These people didn’t start their careers with the idea of ruining millions of lives. But they rationalize doing so today because — What alternative do they have? If they acknowledge that a belief in Buy-and-Hold caused millions of failed retirements, it has to be replaced. And as of today they cannot bear to force that recognition on people.
I admire Bernstein and Swedroe and certainly Bogle and all the other Buy-and-Holders. My aim is to help them to get back on the track they were on when they started their careers and when Buy-and-Hold was being developed. The INTENT behind Buy-and-Hold was good, I have no trouble saying that loud and clear. I believe that all of the friction will dissipate when we all get back to the original intent of this investing model. We should be working together to find out what works. There’s wonderful stuff in the Buy-and-Hold package and we should of course retain that and always be grateful to the wonderful people who developed it for us. But the first-draft version contained a major error — Valuations really do affect long-term returns! We need to rewrite every book to reflect that reality and reformulate every calculator to reflect that reality. When we do so, we are all on the same side again.
What people miss is how big the valuations factor is. It is 70 percent of the stock investing project. The Buy-and-Holders got 30 percent perfectly right. If they had gotten that last step right, they would have created the best investing
strategy ever known to mortal man. But by getting 70 percent wrong, they created a monster that has proceeded to destroy the U.S. economy and all the middle-class workers in it. It is the mistake that is extreme, not the person pointing it out. My words sound extreme because the problem to which I am drawing attention is causing such terrible damage.
That’s my take in any event, Edwin. I think of you as a friend despite the fact that we disagree on a few investing issues (while agreeing strongly on a good many others). I hope (and believe) that the feeling is mutual and will remain so. I of course wish you the best of luck with development of your blog entries and very much look forward to reading them.