“I Have Come to Have Doubts As To How Much a Technical Background Counts for in This Field Today”

Set forth below is the text of a comment that I recently put to the Value Walk site:

I think your comment is super, Buzz. I am grateful to you for taking the time out of your day to share your thoughts with us. 

Also, I just want to note that I do not possess any particular “technical experience” in this field. My training and experience is as a journalist. I learned in the late 1990s (from reading a book by John Bogle — “Common Sense on Mutual Funds”) that Reversion to the Mean is an “Iron Law” (Bogle’s phrase) of stock investing. If this is so, then the safe withdrawal rate (SWRs are a retirement planning concept) cannot possibly be a stable number; SWRs must vary with changes in valuation levels. I reported this on a Motley Fool discussion board in May 2002 and two interesting things happened.

One thing that happened is that a large number of community members expressed an intense interest in learning more about how valuations need to be considered in putting together an effective long-term investing strategy. Another thing that happened is that another large group of community members became intensely concerned with blocking any further discussions on this topic. I found this all exceedingly strange and got about the business of trying to figure out what was going on.

It has become clear to me over the course of the following nine years that what is going on is that we are as a society on the threshold of learning more about how stock investing works than any group of people has ever known before. I believe that our mining of the insights that are available to us today from study of the last 30 years of academic research in this field are going to lead to the biggest surge of economic growth we have ever seen.

However, a large number of us very, very, very much does not want to move forward. We first started studying investing in a systematic way in the 1960s, we didn’t know everything when we initiated the project, and as a result we made some big mistakes in our thinking. There are thousands of people who have built careers promoting the now-discredited ideas. Many of these people don’t like the idea of moving forward one tiny little bit.

I think we are going to move forward. The economic crisis is helping. I have seen far more openness to the new ideas in the past two years than I saw in earlier days. We are struggling. But I believe that in the not too distant future we will be making amazing advances and we will all be looking back and laughing at the fact that we were so reluctant for so long to permit ourselves to become so much richer so much earlier in life. Humans!

Anyways, I never studied investing in school. And I never managed any big funds or anything like that. So I don’t think it is right to refer to me as some sort of technical expert. I have worked very hard to do a good job as a journalist. I have done lots of research to figure out what is going on and I have interviewed lots of people and I have followed the story where it has led me without fear or favor and all that sort of thing. I am not a slacker. I have worked this one very, very hard for a very, very long time. But at the end of the day I can really just point people to answers that people with more technical skill have come up with rather than claim any technical expertise of my own. My primary technical skill is in asking questions (and in refusing to take “no comment” as an answer when that is not an appropriate answer).

People looking for the technical support for the ideas I put forward at this column should check out Yale Economics Professor Robert Shiller’s research. Shiller focuses on theory. He rarely tells investors what they should do if they believe in his theory. That’s the niche that I have taken up. I aim to help people implement Shiller’s investing beliefs in practical terms.

Anyway, I have come to have doubts as to how much a technical background counts for in this field today. In ordinary circumstances, it would count for a lot. But if it is true that the Buy-and-Hold Model has failed (as Shiller’s work shows and as I believe to be the case), then people who have technical skills have been trained in things that don’t work. I am not sure that technical skill is all that good a thing to possess in such circumstances.

I think we need to get lots of people participating in a national debate of the realities of stock investing. We need people like me who agree with Shiller’s ideas participating. And we need people like Ss4johnny, who place their confidence in the conventional understanding of things, participating. And we need people like you, who are trying their best to make sense of things, participating. We should respect those who possess a technical background but we should not accept all they say as gospel, in my view. We all need to work together to try to understand the other fellow’s point of view and to over time come to some sort of consensus as to what works and what does not.

I think we’re getting there. Through a painfully slow process, to be sure. But I do believe that we have been seeing some forward movement in recent years.

That’s a drawn-out way of saying again “thanks for taking the time out of your day to help us all out a bit.” I can only put forward the words that someone who has undergone my particular set of life experiences is capable of putting forward. We need to hear from lots of others to be able as a society to make true sense of all this and to move forward to the good places that I know deep in our hearts we all very much want to move on to soon.

Rob

Comments

  1. says

    Hi, Rob

    One thing is for sure, there are far too many people that are still speculating on stock picks as opposed to actually investing time into understanding a company’s financial position. I have read all of Bogle’s books, but I hear that they all are great starts. As far as the education goes, I believe that anyone can teach themselves what they want to learn if they have the desire and drive to do so. Hell, all one has to do is pick up a couple of last year’s edition college finance books and they can be well on their way.

    Romeo

  2. Rob says

    Thanks for stopping by and helping us all out, Romeo.

    We agree in part and disagree in part.

    I agree with you that the information needed is easily accessible to anyone who puts the time into digging it up.

    I disagree that picking up a few college finance books will set you on your way.

    Most of the textbooks in the investing field teach principles rooted in Modern Portfolio Theory, the dominant model for understanding how stock investing works. Modern Portfolio Theory was discredited in 1981, when Yale Professor Robert Shiller published research showing that valuations affect long-term returns. So the ideas being put forward in those textbooks are dangerous!

    This is why we are in an economic crisis today. What we need to do is to get those textbooks corrected. Lots of people presume that, if they say it in a textbook, it must be so. Unfortunately, that is not the reality. Humans make mistakes and the people who came up with Modern Portfolio Theory are humans like the rest of us.

    Now it’s a question of persuading them to acknowledge their mistakes and thereby helping us all to overcome this economic crisis and getting things back on the right track.

    I hope we hear from you again, Romeo. I wish you the best of luck with your blog!

    Rob

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