California Financial Planner Bill Bengen, the author of an influential Old School safe withdrawal rate study (it was Bengen’s study that popularized the infamous “4 percent rule” that has caused millions of middle-class investors to set up wildly irresponsible retirement plans that are now in the process of going bust), was interviewed in the December issue of the Financial Planning Journal. The interview is titled William Bengen on Risk, Volatility, and Safe Withdrawal Rates in Today’s Environment.
Juicy Excerpt #1: Buy-and-Hold in these environments is an invitation to disaster.
Juicy Excerpt #2: We’d have to go much, much lower than we are now, or we did in 2009 even, to consider a higher withdrawal rate. That’s how ridiculously overvalued the stock market has been for 20 years.When something like this goes on for such a long time, people accept it as normal. This is not normal. This is an outlier that has basically been exacerbated by massive deficit spend- ing and borrowing, which is all now coming to its final conclusion. We’ll probably produce some great stock and market values down the road if people are prepared to take advantage of them.
Juicy Excerpt #3: Wade Pfau … I find [Pfau’s ideas] very interesting. Of course, Michael Kitces. Jonathan Guyton has done some excellent stuff. There are other people who have sometimes produced interesting material but those three I think have consistently produced some good stuff.
Juicy Excerpt #4: I’m still recommending 4.5 per- cent from a tax-deferred portfolio, if you think you’re going to live 30 years. I think that’s fair. Of course, it depends on the individual circumstances…. But the basic principle, I think, is sound. I haven’t seen anything yet that would invalidate it. But that doesn’t mean something can’t happen. I don’t know where this financial crisis is taking us. This could be very, very bad. It could be unprecedented.
Juicy Excerpt #5: My research is based on a buy-and-hold approach because it was easy to analyze. I think that more and more, if this situation deteriorates and Europe blows up, the emphasis is going to be more and more on the investment manager, as I mentioned before, to preserve capital and not follow a buy-and-hold approach.
Juicy Excerpt #6: I think that was something … where you vary, now, the investment approach based on some criteria that have yet to be defined, whether it be value or something else. I believe that buy and hold is appropriate under certain circumstances; other circumstances, it’s not. And timing, if you need to depart from it…. So, that’s where I’m looking at, basically, by varying the investment approach, the variable that really hasn’t been explored. I think all the research done has pretty much assumed a portfolio with a pretty constant stock- bond ratio throughout the whole time of the client’s retirement. I think that’s a big key. That’s the one variable you can control. You can’t control what the economy does, you can’t control what stocks return. But you can control how much you own of them. And when you own them.
Hi Rob,
I know you like getting to the point, but I think your comment about Mr. Bengen causing failed retirements is too harsh. Just a couple of things to keep in mind:
1. As you know, he was the one to point out that 7% is not safe because of sequence of returns risk. In that regard, he made a very positive contribution by bringing expectations down from 7% to 4%.
2. He notes that 4% is the worst-case scenario from history. Though he puts more faith in the idea that history already provided some bad situations (Great Depression, Great Stagnation) and so we are unlikely to get an outcome even worse, I am comfortable with the way that he does highlight 4% as the SAFEMAX. I like this approach better than the probability tables in the Trinity study.
3. It still isn’t obvious that 2000-era or more recent retirees will have withdrawal rates below 4%. It is likely, but not guaranteed, so in that regard your comment is too strong.
4. Mr. Bengen is keeping an open mind about valuations. I think there is still some confusion since Michael Kitces 2008 article didn’t recognize that high valuations could cause even lower withdrawal rates (that is something he corrected in a later blog post). Financial planners seem to be most familiar with Michael’s article and not his follow-up. But Mr. Bengen is recognizing that there is something going on here and he is still working through it.
5. Researchers shouldn’t be blamed if they didn’t think of everything when producing their research. He made a great contribution, and others are extending his work. He is keeping an open mind and not dismissing these extensions.
Best wishes and happy holidays.
I am extremely grateful for your comment, Wade. I of course want to be fair in everything I say at the site and by challenging me you are adding some balance to the mix here. Your comment is important enough that I am going to run both your comment and my response as stand-alone blog entries on future dates. I am also going to send an e-mail to Bill letting him know of my blog entry and your comment to it and my response to your comment . In the event that Bill wants to add some words of his own, I will of course gratefully post here any comments he elects to add.
I don’t agree with your conclusion that my comment that Bill has in all likelihood caused many failed retirements is too harsh. I stand by that claim. There’s one aspect of my statement that was poorly stated. I describe below how that part of the statement should have been stated to be precisely correct.
I agree with all the points you made about the many valuable contributions Bill has made with this SWR studies.
Yes, he did effectively make the point that a withdrawal of 7 percent is not safe. That was an advance of huge importance. Bill is a pioneer in this field and we all should be grateful for his many valuable contributions. I like to think that in ordinary circumstances that would go without saying, but, given the circumstances that in fact prevail today, I don’t think it hurts to say it as often as possible.
Yes, he did show that 4 percent survived historically. We wouldn’t have the New School SWR research if we hadn’t first had the Old School SWR research. And we wouldn’t have Valuation-Informed Indexing if we hadn’t first had the New School SWR research. So Bill’s work has led us to some amazingly fruitful investigations. There’s no question whatsoever that this is so.
No, it is not certain that retirements that were initiated at the top of the bubble and that called for 4 percent withdrawals will fail. It is LIKELY that they will fail but not certain. This points to one element of my blog entry that is a bit overstated. The precise way of saying things is that the 4 percent rule caused millions to set up irresponsible retirement plans that are LIKELY in the process of going bust. The research shows that there is a 30 percent chance that those retirements will survive 30 years. That’s not a zero chance. But it is obviously a false claim to say that a retirement plan with a 30 percent chance of working out is “safe.”
Yes, Bill is evidencing an open mind on the valuations question. He said numerous encouraging things in his interview. I agree completely that “Mr. Bengen is recognizing that there is something going on here and he is still working on it.” That’s wonderful news. He could offer a huge help to our efforts.
Yes, you are 100 percent right that “researchers shouldn’t be blamed if they didn’t think of everything when producing their research.” Pioneers are people who go where none before them have dared to go. No human can be sure of getting everything right. It would be 100 percent wrong for someone to find fault with Bill for having made mistakes in his first draft effort at development of the safe withdrawal rate concept. His efforts taught us all important things about how stock investing works in the real world. They advanced the ball in highly significant ways.
All that said, it remains the case that there are millions of middle-class people who have been misled by the 4 percent rule into crafting dangerous and irresponsible retirement plans. In the event that stocks perform in the future anything at all as they always have in the past, we are going to see millions of people left destitute as a result of the errors that Bill made in his study (errors that were copied by many “experts” who followed Bill’s lead, to be sure). We are going to be seeing millions of people left without financial resources at an age at which they are too old to recover. We are seeing play out one of the worst social crises in the history of our nation.
What are we all doing to address this crisis?
I am trying to get attention drawn to the matter. I have been saying since the morning of May 13, 2002, (the day on which I put forward the post to the Motley Fool board pointing out the analytical errors in the Old School studies) that we should be permitting honest posting on SWRs and many other valuation-related topics on every board and blog on the internet. I have written John Bogle three times asking for his help with the Lindauer matter. I have written to numerous journalists, seeking to get these matters written up on the front page of the New York Times and the Wall Street Journal.
Is Bill doing that? If not, why not?
We all should aim to be fair to the financial planners who made mistakes while advancing our knowledge in significant ways. Should we not also aim to be fair to the millions of middle-class people who will in all likelihood be suffering one of the worst life setbacks imaginable as a result of the errors made by these financial planners? it certainly seems so to me.
I will do anything I can to help the financial planners who find themselves entangled in the mess that we as a society created when we pretended for a time that the market is efficient and that we know far more about how stock investing works than in fact we do know at this point in time. Part of that effort has to be doing things to get the word out to the millions of middle-class people who are suffering such terrible human miseries as a result of the very, very serious mistakes that have been made.
This is not a joke, Wade. This is very, very, very serious stuff. You know how much I respect your work and how much affection I feel for you as a person. But I also care about the people whose lives are being destroyed. I cannot forget those people. Bill should not be forgetting those people. You should not be forgetting those people. Bogle should not be forgetting those people. The journalists and the economists and the politicians should not be forgetting those people.
Again, thank you for posting your helpful and constructive and positive and life-affirming comments. I hope they help us all get about the business of taking the work that hundreds of us have been doing together over the past nine years to some wonderful and enriching places. I remain confident that, working together, we can take what we have learned and, by sharing it widely, bring on the greatest period of economic growth that we have ever seen. I certainly hope that that turns out to be the case.
Please keep fighting the good fight, my brave friend.
Rob
Set forth below is the text of my e-mail to Bill Bengen:
Bill:
This is Rob Bennett. We have corresponded before re the SWR matter.
I am writing to let you know of a blog post that I recently posted about your
recent interview with the Financial Planning Journal. Wade Pfau posted a
comment to my blog questioning some language contained in it and I posted
a response to Wade generally standing by the original language (with one
exception). Given that the discussion relates to your work, I felt that you should
know about the exchange.
Here is the URL for the blog entry (the comments appear at the bottom):
http://arichlife.passionsaving.com/2011/12/27/bill-bengen-buy-and-hold-in-these-environments-is-an-invitation-to-disaster/comment-page-1/#comment-7728
If you have any questions or if there is any way in which I can help advance the ball re these
matters, please let me know. If you would like to have your own words appear as a separate blog
entry, please let me know that and they will be promptly posted. If you would like to make a response
that you do NOT want to see appear publicly, please be sure to let me know that in any response
e-mail you direct to me.
As I noted in my comments to Wade, I am a big fan of your work (I have spent nine years studying
the SWR concept in great depth and I don’t think there are many people who appreciate its significance
to the extent I do today) and am greatly encouraged by most of the comments you made in the
interview. The one element of the interview to which I take exception is the claim that the
4 percent rule does not need to be corrected. It would not be possible for me to overstate how huge
a mistake I think it would be for us (I mean all of us working in this field, not just you and me) to fail to get the
word out to the millions of middle-class investors affected by the mistakes that have been made about what
they need to do to protect themselves from suffering further financial losses. This MUST be done
and the sooner it is done, the better things will turn out for all concerned, in my sincere assessment.
I hope that we will be able to work together to take things to a much better place.
Rob
I have received a response from Bill saying: “Thanks for letting me know about your post, Rob.”
Rob
Rob,
Thanks for addressing my concerns.
I think the real problem is that so many Americans have not saved enough that they would be okay even with a 20% withdrawal rate.
For people who did save enough so that 4% allows them to meet their spending goals, well with some gradual cutbacks these folk should be able to muddle through even if the sustainable withdrawal rate only ends up being 2% or 3%. Most people hopefully at least have Social Security in any event.
But yes, let’s all keep working toward developing retirement income strategies that will keep people above the substinence level no matter how bad future market returns may be.
I think the real problem is that so many Americans have not saved enough that they would be okay even with a 20% withdrawal rate.
I view this as blaming the victim, Wade.
I obviously agree that most people don’t save enough. But I think it is fair to say that the hundreds of millions that The Stock-Selling Industry directs to promotion of Buy-and-Hold is one of the biggest reasons why the saving rate is so low.
Consider a 60-year-old worker in the Year 2000. He is thinking that he is five years away from retirement. He calculates that he needs a portfolio of $1 million to cover his needs. He looks at his portfolio statement and it says that he possesses $900,000. All of the Buy-and-Hold calculators tell him that he is going to make his goal even if he contributes not another dime to the portfolio over the next five years. He relaxes. He determines that he can spend more on cars and houses and vacations without worry.
Now consider the reality. Stocks were overpriced by 300 percent in 2000. His lasting wealth is $300,000, not $900,000. He is $700,000 short of his goal. He has a lot to worry about.
How are we ever going to persuade people to do what’s right when we are not even willing today to provide people with accurate numbers? It cannot be done.
I participated at numerous Retire Early boards for years and I can tell you the defining characteristic of the sort of person who becomes able to retire early. The early retiree is someone who plans his financial affairs. That’s what it takes. That’s all it takes. Planning is magic.
But how the heck can anyone plan effectively when The Stock-Selling Industry is spending hundreds of millions of dollars telling us all about the wonders of Get Rich Quick investing strategies? It cannot work. We need to get accurate investing information out to people if we are to have any hope whatsoever of bringing this economic crisis to an end.
That’s my sincere take, in any event. I am extremely grateful to you for presenting a different point of view and thereby adding some balance to discussions that otherwise are unfortunately far too much slanted in favor of the views of the guy who runs the site.
Please take care.
Rob
Wade said: “I think the real problem is that so many Americans have not saved enough that they would be okay even with a 20% withdrawal rate.”
Hear, hear!
Especially unemployed folks who tried to retire too early in life, with only a half-way plan, and far too little actual savings.
Actually Rob, it is probably correct to blame the ‘victims’ here. A savings rate of 0% for decades is simply inexcusable, especially as we will probably look back at those decades and realize they were part of the peak of the US economy.
Lots of irresponsible people, such as yourself except not as lucky to inherit someone else’s hard earned money, are probably going to end up as elderly poor people.
Especially unemployed folks who tried to retire too early in life, with only a half-way plan, and far too little actual savings.
My view is that you are angry because you have followed a Get Rich Quick investing approach and you have natural worries that it is not going to work out, Drip Guy. This causes you to lash out at anyone or anything that causes you to feel discomfort with your big bet on the Get Rich Quick/Buy-and-Hold approach.
My view is that you and many other Buy-and-Holders are in emotional pain. Drip Guy. I see it as the job of all in this field trying to offer helpful advice to do all they can to steer people away from Get Rich Quick/Buy-and-Hold while of course being aware of the need to be as warm and kind as possible while doing so. We should be as honest as it is possible to be while still being loving and as loving as it is possible to be while still being honest.
From the standpoint of logic it would not matter if people had saved so little that an 80 percent withdrawal rate wouldn’t be enough. There is no savings rate that could ever justify reporting incorrect numbers in a retirement study. Once the people who prepared the Old School studies learned of the errors they made in them, those studies should have been corrected. The fact that we are even discussing such a question nine years after the errors were publicly brought to light reveals in compelling fashion just how destructive a force Get Rich Quick investing strategies can be.
That’s my sincere take re this one, for good or for ill. I of course wish you well.
Rob
A savings rate of 0% for decades is simply inexcusable
According to what standard, Drip Guy?
What sort of standard could there be that says that it is wrong not to save money but that it is not wrong to publish retirement studies that get all the numbers wildly wrong and then not correct them when the errors in the studies are brought to light?
Both actions reveal a disregard for The Reality Principle. That’s the real issue here.
I have spent a good number of years of my life studying what makes people effective savers. A healthy regard for The Reality Principle is key. A Stock-Selling Industry that spends hundreds of millions of dollars promoting the purest and most dangerous Get Rich Quick investing strategy ever concocted by the human mind is not helping matters one tiny little bit.
The middle-class people whose lives have been destroyed during the Buy-and-Hold years are not blameless here. There is an old saying that “you cannot cheat an honest man.” Lots of us were taken in by flim-flam talk of some mystical “study” somewhere that supposedly lent support to all the mumbo jumbo but which for some never-well-described reason could never be produced for public inspection. No one pointed a gun to our heads and forced us to fall for the garbage marketing tactics. But we fell for them all the same. So we do indeed carry a measure of the blame both for our own ruined financial circumstances and for the economic crisis that inevitably followed from the financial ruin of so many.
But ordinary middle-class people are not being paid big money for their “expertise” re these matters, are they? So who is more to blame for their unwillingness to adhere to The Reality Principle? The Stock-Selling Experts are 10 times more to blame than the ordinary middle-class investors taken in by their garbage marketing tactics, in my assessment.
That’s not to say that I do not have sympathies for the “experts” here as well. I do. But I think it would be fair to say that it will become possible to put those sympathies to uses a whole big bunch more productive than those to which they can be put today when we have opened the internet to honest posting on SWRs and many other critically important investment-related topics and are in the process of recovering from the tsunami of financial destruction experienced by all of us (experts and middle-class investors alike) during the Buy-and-Hold/Get Rich Quick Era.
Your anger doesn’t help even a tiny bit, What. Your anger at yourself doesn’t help. And your anger at the millions of middle-class investors taken in by the garbage marketing tactics doesn’t help.
Do you want to know what I think would help?
Rebuilding.
Getting involved in a rebuilding project would help you to start feeling better about both yourself and the world around you. All of those who in earlier days have associated themselves in some way with the Buy-and-Hold mumbo jumbo should be making efforts to get involved in rebuilding projects, in my sincere assessment.
It’s not all about you, What. Your ego is not the only thing that matters here. Your pain is not the only pain that counts. The pain of those millions of middle-class people who you mock is real too. Doing something about their pain instead of focusing so intensely on your own bruised ego is the way out of this mess for you (and from a big picture perspective for all of us).
Please think it over, my old friend.
Rob
Lots of irresponsible people, such as yourself except not as lucky to inherit someone else’s hard earned money, are probably going to end up as elderly poor people.
You need to look at the numbers, What. The hour is getting late.
When we enter the Second Great Depression, it is not only others who are going to end up “elderly poor people.” You have bragged about your fancy cars on earlier posts here. Where do you think you are going to take those fancy cars after we enter the Second Great Depression?
You might want to take some books out of the library and read up on what followed from the First Great Depression (brought on by our second test of whether a Buy-and-Hold strategy can ever work in the real world despite the mountain of historical data showing the logical impossibility of this outcome). It was something called “World War II.” It wasn’t fun.
New and even stranger weapons have been invented in the time since. In the event that we remain much longer on the path we are walking today, you might get to learn more about them in days to come than you ever could hope to learn about them by checking out library books. I don’t wish this fate on you or on any other reader of these words. I bring the point up in an effort to make clear the possible consequences of your burning hatred of the “irresponsible people” who have been taken in by the Get Rich Quick Garbage to which you have become so irrationally attached over the years.
Those “irresponsible people” are part of the world you inhabit, What. Lash out at that world in an effort to dull the pain you brought on yourself with your embrace of Get Rich Quick investing strategies and you may end up making that world inhabitable for more than just the “elderly poor people” whom you feel so pleased to denigrate. It’s one world, What. One big world, of which you are but a small (but important, to be sure) part.
I’m right abut this one, What. I wish I weren’t. If it had been left to me, I would have tried to set things up differently. It wasn’t left to me. I am telling you the straight story. World War II is going to hurt you just as it much as it hurts the elderly poor people for whom you feel such obvious contempt. Heaven help us all, but it might end up hurting you (and me) more. THe elderly poor people for whom you feel such obvious contempt might be fortunate enough to die sooner.
Hey! No fair! Some people have all the luck!
Rob
Rob claimed: “…you are angry because you have followed a Get Rich Quick investing approach and you have natural worries that it is not going to work out, Drip Guy. This causes you to lash out at anyone or anything that causes you to feel discomfort with your big bet on the Get Rich Quick/Buy-and-Hold approach. My view is that you and many other Buy-and-Holders are in emotional pain. Drip Guy.”
Rob, I don’t count on you to be able to use logic and reason, but you might consider this:
I retired permanently, much earlier in life than you quit work yourself, and yet I had not risen as ostensibly far up the corporate hierarchy as you did, but I am still a millionaire in NW, and anticipate maintaining that status even as I continue to withdraw up to 4% SWR for the next 30 years or more.
You, OTOH, to all external appearances and information that can be gleaned directly from you as primary source, appear to have tried to make a ~7% WR work, tried to retire on a nest egg of $400K or less, for a young family of four, and are now having to try to augment that in various ways — none of which have borne any external signs of fruition.
So, I’m sorry to disappoint you Rob, but I’m not angry a bit. To the contrary: I am well satisfied with my own life’s trajectory, choices, and future prospects.
I do honestly think you need to read up on the psychological transference and projection.
Good luck with your schemes, whatever they may be.
I didn’t read most of your replies Rob because they seemed to consist nearly 100% of nonsense. For example, I don’t understand the reference to WWII at all. So now you are attributing WWII to buy and hold investing? This is really entertaining stuff!
I am not angry, I am having a good time poking holes at your ridiculous ideas. Otherwise, I would not waste my time posting on your wasteland of a website.
So now you are attributing WWII to buy and hold investing?
I am. I am obviously not saying that it was the only factor. But it was a significant factor.
The research showing that Buy-and-Hold strategies can never work was published in 1981. So we did not know of the problem at the time. But the last 30 years of academic research does indeed show that valuations affect long-term returns. If that is so, then high valuations are an extremely destabilizing factor in any economy.
As valuations work their way downward, the people living in the society affected lose a large percentage of their accumulated wealth of a lifetime. This causes them to fear for their financial futures and to stop spending. The spending cutback causes large numbers of businesses to fail. The business failures cause huge increases in unemployment.
There has never been a time when we went to stock valuations of two times fair value and did not see an economic crisis. In the years leading up to the Great Depression, we went beyond that. We saw the highest valuations in our history prior to the 1990s in 1929.
In the late 1990s, we left the valuation levels of the late 1920s in the dust. A P/E10 value of 25 has always caused an economic crisis (that’s the P/E10 value that produced the stagflation of the 1970s). In 1929, we went to 33. In 2000, we went to 44. In the event that stocks continue to perform in the future anything at all as they always have in the past, we are looking at a Second Great Depression of far greater magnitude than what we saw in the 1930s.
And all of this is 100 percent optional. As a result of the 30 years of academic research that may not be discussed at any board or blog at which a significant number of Buy-and-Holders reside, we now know more about how stock investing works than any group of people coming before us has ever known. That means that we can obtain far higher returns at greatly diminished risk and enjoy retirements starting years or in some cases even a decade or so sooner. We give up all that when as a society we determine that the Buy-and-Holders should never be expected to acknowledge a mistake.
This is really entertaining stuff!
“Entertaining” is not the adjective I would use to describe most of what I have seen over the first nine years of our discussions, What.
I am not angry, I am having a good time poking holes at your ridiculous ideas.
I don’t buy it. Not for two seconds. You are as angry as angry can be, What. Do you know what that tells us? It tells us that you yourself lack confidence in your investment strategies. If you had confidence, it wouldn’t bother you what I said. So the “experts” are encouraging you to continue following something that you show by your behavior at this blog and elsewhere that you don’t believe in. Some experts!
Otherwise, I would not waste my time posting on your wasteland of a website.
If you were not burning with hatred and anger and shame, you would find other things to do with your time. That much is certainly fair to say.
Heaven help us all!
Rob
I am well satisfied with my own life’s trajectory, choices, and future prospects.
I’m not seeing it, Drip Guy.
I’m happy to take you at your word re your financial accomplishments, which appear to be impressive. Unfortunately, impressive financial accomplishments alone do not a happy Drip Guy make. There’s something missing in your life or you wouldn’t behave in the manner in which I have seen you behave on numerous boards and blogs.
It’s not my job to fix you. But it is my job to point out the dangers of Buy-and-Hold/Get Rich Quick investing strategies. Your behavior is one of the downsides of this approach. I wouldn’t say that if it were only you. You are one of the extreme cases, but it is by no means only you. So there is something sick going on here.
I have never seen this sort of behavior from people following any other investing strategy. It’s always the Buy-and-Holders. I have seen the same general phenomenon too many times to be able to chalk it up to coincidence.
I believe that you care about these issues. That part considered alone is a plus and could be a basis for you and I forming a friendship in different circumstances.
I also believe that your belief in Buy-and-Hold is sufficiently genuine that you would be able to pass a lie detector test in which you were asked “Do you sincerely believe in Buy-and-Hold?” and answered “Yes.”
Those are two good things. You believe. And you care.
Then things go haywire.
You feel a burning hatred of those who express different viewpoints. That ain’t normal. That ain’t healthy. It’s not a close call.
I believe that you have inner doubts. If you were asked in the lie detector test “has Rob ever said anything that struck you as being a reasonable point?” the buzzer would go off if you answered “no.”
You believe that Buy-and-Hold is going to work enough to invest your money according to its principles. But you have inner doubts that you work hard to silence. I bring those doubts to the surface with just about every word I put forward. So you hate me.
I don’t see it the way you see it. I know that it hurts you to be forced to cope with the doubts. But I think it will be 50 times better for you to cope with the doubts because of what some fellow says on the internet than to have to cope with the doubts because of what The Reality Principle ends up dishing out to you. I sincerely think of myself as your friend (I get it that the feeling is not mutual).
I was friends with Greaney in the days before the May 13, 2002, post. There’s no reason to believe that I would not have been friends with you if you had gotten to know me in some other environment. You hate one thing about me, Drip Guy. You hate it that I cite historical data and academic research as making the case against Buy-and-Hold.
That’s a mighty poor reason to hate a fellow human.
My sincere take.
Rob
Rob,
Your attempted analysis of me is wrong in about every way! But you believe what you want to believe; it’s no skin off my nose.
BTW, you say: “I have never seen this sort of behavior from people following any other investing strategy. ”
Well, I suspect that is becasue you simply have not imposed yourself other places. So, let’s wait until your market timing ideas lead you some where else, like a Quant analysis or TA forum or other ‘pet approach’, and then just be your usual self, Rob, and let’s watch to determine how those investors of other persuasions respond to you. Should be fun to observe from the sidelines!
The real reason you get heat from buy-n-holders, is because you for some reason have chosen to single out that very tame, baseline approach to rail against.
Go tell any other forum that they are all “doin’ it wrong” and I’m sure you will get similar replies to what you got when you were banned at those prior 15 finance forums! (laugh)
The real reason you get heat from buy-n-holders, is because you for some reason have chosen to single out that very tame, baseline approach to rail against.
I think you are making a reasonable point here, Drip Guy. But you are also leaving out an important part of the story.
Buy-and-Hold is not just any old “pet approach” (the phrase is from elsewhere in your comment). Buy-and-Hold is promoted as being rooted in the academic research.
But it is not!
There is now 30 years of academic research that shows that Buy-and-Hold is the purest and most dangerous Get Rich Quick scheme ever concocted by the human mind, one so dangerous that it is sure to wipe out most of the wealth that the middle-class has accumulated in recent decades and one so pure that it is likely to bring on an economic crisis that will take us all to the Second Great Depression.
All investing strategies are marketed. That’s part of the game. But Buy-and-Hold is special in this regard. Buy-and-Hold’s big marketing edge is the claim that it is rooted in academic research. And this is a demonstrably false claim. That’s over the line, Drip Guy. There are responsibilities taken on when you claim in your marketing materials to be following the academic research. The Buy-and-Holders have failed to honor these responsibilities.
An investing strategy that causes an economic and political collapse cannot fairly be referred to as a “very tame, baseline approach.” This Get Rich Quick garbage is pure poison. It has taken in millions of investors. It has delayed millions of retirements. It has caused huge unemployment numbers. It has caused the destruction of numerous blogs and discussion boards.
It is this claim that Buy-and-Hold is rooted in academic research that makes it different. Buy-and-Hold would not have 1/50th of the power to persuade that it today possesses if not for that claim. And that claim is demonstrably false. Shiller’s research is publicly available on the internet to anyone who cares to look for it.
Once the Buy-and-Holders learned that the entire historical record discredits their claims that there is no need to change one’s stock allocation in response to big valuation swings, they should have stopped making those claims. I did not cause this problem. I reported the safe withdrawal rate accurately. The reason why people were shocked to hear the accurate numbers is that The Stock-Selling Industry has directed hundreds of millions in marketing dollars promoting precisely the opposite of what the last 30 years of academic research says.
The boards that I have posted at are not even boards that were set up solely for Buy-and-Holders. The Motley Fool board was a Retire Early board. Accurate retirement numbers are obviously in place there. So the Buy-and-Holders had no right to burn that board to the ground. The Morningstar rules state clearly that all posters are permitted to post honestly on what the academic research says. Again, the Buy-and-Holders were 100 percent off base to destroy the integrity of that board with their abusive posting.
Why did they do it? Because it makes the Buy-and-Holders look absolutely horrible for people to learn that it is all a con, that there is no research showing that there is no need for investors to engage in long-term timing.
The problem needs to be fixed. We need to provide a means for middle-class investors to hear accurate and honest reports of what the academic research says re stock investing. I am happy to work with the Buy-and-Holders to make this happen so long as they are willing to honor the behavioral norms that apply in our society in discussions of every subject other than stock investing. I am not willing to post dishonestly on safe withdrawal rates or any other topic. The very fact that a good number of Buy-and-Holders demand this as a condition of posting to “their” boards illustrates how deep the problems go with this investing “strategy.”
Marketing tricks and claims of support in the academic research do not mix, Drip Guy. Valuation-Informed Indexing is what Buy-and-Hold started out being. Valuation-Informed Indexers report what the academic research says accurately and honestly. People need to know that and people need to know that the claims of Buy-and-Holders that they do that have been demonstrably false for 30 years now. Help me spread the word re that, and we will be best friends. Stand in my way and I think it would be fair to say that we will find ourselves working at cross purposes.
Rob
Go tell any other forum that they are all “doin’ it wrong” and I’m sure you will get similar replies
It is of course a false claim to say that I am telling the Buy-and-Holders that they are doing it all wrong. I have written entire columns listing all the important things that I believe the Buy-and-Holders got right, all the wonderful advances they achieved and all the ways in which they made our lives better. I did not learn that the Old School safe withdrawal rate studies got the numbers wildly wrong by sitting in a room thinking up grand thoughts. I learned that the Old School studies got the numbers wrong by reading John Bogle’s book.
Valuation-Informed Indexing is Buy-and-Hold with the Get RIch Quick mumbo jumbo subtracted from the picture. The Buy-and-Holders did not get it all wrong. They got the most important thing wrong. Get Rich Quick doesn’t work. The damage that has been done by the Get RIch Quick element of the Buy-and-Hold strategy is making the entire strategy look bad to millions of people.
If anything, I am the person working hardest to save Buy-and-Hold. VII is essentially the new Buy-and-Hold, Buy-and-Hold as revised to conform to the academic research of the past 30 years.
If you don’t believe that Buy-and-Hold can be revised when mistakes are discovered, you need to read Bogle’s book. He addresses this point. He says in the book that he thinks that mistakes should be corrected. I am the true Boglehead here. You are a Lindaurhead. That’s something very, very, very different.
There are two possibilities. One is that the Buy-and-Hold advocates intended to cause the economic crisis and just went ahead and did it to make a quick buck. The other is that these people are suffering from cognitive dissonance and would be horrified to see how much financial destruction they have caused if they were capable of thinking clearly about these matters.
Your suggestion is that it is the first possibility that applies. Otherwise, why the strong belief that a cover-up is needed here?
My belief is that it is the second possibility that applies. In that event, it is those of us who are arguing that honest posting should be permitted who are the true friends of all the Buy-and-Hold advocates. The Buy-and-Holders did not intend to cause this destruction when they started studying how stock investing works. You insult them to suggest that such is the case. I appeal to their better selves in demanding that they live up to the standards that they would insist on themselves in any other area of life endeavor — honesty, integrity, decency, reasonableness, and a willingness to acknowledge errors when discovered.
You’re wrong, Drip Guy. I’m right. And more and more people are seeing it every day. You are on the wrong side of the history train and as a friend my advice to you is to change course. I am offering good advice whether you care to take it or not. I can do no more and I can do no less.
Rob
I again did not read most of you responses but I can assure you that I am not angry. If I was angry I would not be entertained in seeing you write 100000 paragraphs that no one reads, including myself.
You say you’re not angry and I say that I don’t believe you. I believe that what we have here is what is called a standoff, What.
Rob
It is entertaining to see WHAT and DRIPGUY return here—with baffling consistency—to inform ROB that he’s all screwed up.
You do seem to own those two, Rob. What DID you do to them in years past that earns you such devotion?
Arty the Enabler!
Tell us why *you* continue to egg on a clearly psychotic individual? The reason people follow Rob has nothing to do with agreeing or disagreeing with PE10, or SWRs. It has to do with the fascination of watching a long, slow, cruel, train wreck in progress.
We ‘haters’ or ‘goons’ as Rob calls those who follow his exploits may go to the hot place for watching and enjoying his public melt down, but there ought to be a special uber hot spot reserved there for anyone who would actually encourage his manic cycle by pretending to support him. Shame on you, Arty.
Hi, Dripguy,
Years ago, I discovered Shiller, by accident, via Rob’s site, which led me to lots of peer-reviewed research, and authors, that helped me understand investing better. So, I visit with him every so often during breaks.
I lack your longer history with him but I have no problems with Rob, save I think he could go about things better, and briefer—more effectively. In fact, I think he makes some good basic points re: valuations (of course, many others, even pros, seem to share these views, in principle).
Now, I strongly disagree with Rob regarding the “honest posting” issues as I do not see the topic (valuations and potential implementations) proscribed, and I don’t care about the “goonery” or any of that stuff.
If anyone follows Rob because of the “fascination of watching a long, slow, cruel, train wreck in progress,” I’d suggest their problems—their personal train wrecks—are far greater than his.
Now, you seem a reasonably intelligent guy. Think of the power this man has over you, that you continue in this way?
I do indeed watching a train wreck, especially one as entertaining as Rob Bennett.
Additionally, Rob is a very good example of what NOT to do in terms of his own ‘retirement’ planning (poverty planning?) and serves as a sober reminder from time to time.
And BTW, it is fairly natural to enjoy watching train wrecks and the like. Just check TV ratings.
I am not sure why but it could be the ‘better them than us’ perspective.
What DID you do to them in years past that earns you such devotion?
I put up a post on the morning of May 13, 2002, at Motley Fool’s Retire Early board suggesting that it is necessary to consider the valuation level that applies on the day a retirement begins to calculate the safe withdrawal rate accurately. Hundreds of community members jumped in, saying it was the best discussion we had ever had at that board, which was at the time the most successful board in Motley Fool history.
Rob
I don’t care about the “goonery” or any of that stuff.
You’re in good company, Arty. Millions feel as you do about this subject. My take is that you and the millions are wrong.
I have reported here on the numbers that show that investors who are willing to take valuations into consideration thereby reduce the risks of stock investing by 80 percent. The obvious question is — Why doesn’t everyone do this?
THe obvious answer is — Most investors are driven by emotion, not reason. Another way of saying it is — Most investors are ruled by self-destructive urges. The primary aim of investing advice should be to help people overcome these urges. That’s what Valuation-Informed Indexing is all about.
These urges are Goon urges, okay? Goons are damaged souls who destroy things, themselves and others. Good investment advice is investment advice that helps people overcome their Goon urges, that helps people become more human. It is my job to help the Goons. And that means helping all of us because we all have a bit of goonishness within us.
This is the whole story, Arty. Good and smart people like you hate it that that is so. Good and smart people don’t want to talk about Goons, they want to talk about numbers and strategies and economic updates and all sorts of “clean” subjects. I want to talk about what helps, I want to talk about what matters. What matters is Goonishness. This is the thing that it killing us, this is the thing that brought on the economic crisis. This is the problem we must solve if we are all to realize our hopes of seeing the sunshine again.
You have a Goon urge within you, Arty. I have a Goon urge within me. And Drip Guy and What obviously have big-time Goon urges within them. What are we all going to do about it? — that’s the question.
We can fiddle away our time talking about Sharpe ratios or we can can about the business of doing the work that matters in this field — developing tools to tame our inner Goons. That’s what the Stock-Return Predictor is. It is a tool designed to help investors tame their inner goon.
On the morning of May 13, 2002, I put forward the first post reporting accurately and honestly on safe withdrawal rates. That was a 100 percent positive thing. The Old School studies got the numbers wildly wrong and caused millions of failed retirements by doing so. My post showing us how to get the numbers right was a win, win, win, win, win. We now know how to obtain far higher returns from stocks while taking on greatly diminished risk. We all know how to retire many years sooner. We all have before us the opportunity to make millions of dollars in profits by developing tools that show people for the first time how to invest effectively. We know that there is a huge market for these tools because thousands of our fellow community members have expressed a desire that honest posting be permitted during the first nine years of our discussions.
And what are we doing instead? We are wondering why Drip Guy and What are such Goons. This makes sense? We should be helping Drip Guy and What and thereby helping ourselves. But to help ourselves we must first become able to acknowledge our own inner goonishness and we pull back from doing so. We are cowards. Which is of course part of the whole Goon profile anyway.
We are going to have to work up the courage to deal with the Goon issue. There is no other way. That’s the thing standing in our way. That’s the thing holding us back. It’s not going to go away by itself.
Bill Bengen could get an article published in the New York Times reporting on what caused him to get the SWR numbers so wildly wrong. He could explain what was going through his mind. He could explain to people what he has learned from his experiences. He could warn people who based their retirements on his mistaken numbers that they need to make changes in their retirement plans. He could save millions of lives. He could point us all to a better future. He could become rich and famous doing so.
He cannot work up the courage to do it. Why?
It’s for the same reason why the rest of us have not done the same. I knew about the errors in the Old School SWR studies long before the morning of May 13, 2002. I was afraid too. So I know what’s going on here. I have known from the first day. Nobody is fooling me. And I don’t believe that anybody is really fooling you or Bengen or Pfau or Drip Guy or What or Bogle either. I think we are all fooling ourselves.
One day, one of us will wake up and conclude that the human misery has grown too great and he will take the appropriate steps. Then we will begin rebuilding our horribly damaged economic and political systems.
There is no one else who can do this job but us. Either we do it or the job doesn’t get done.
I didn’t ask for this job. It was one of those things where they say “Step forward if you volunteer” and everyone else took one step backwards and I just continued standing in the same spot like a dummy.
Anyway, that’s the deal, for good or for ill.
Some monster thread, huh?
Rob
We ‘haters’ or ‘goons’ as Rob calls those who follow his exploits may go to the hot place
I like to think that all reading these words will say a quick prayer that it doesn’t come to that, Drip Guy. I certainly will do so, my old friend.
Rob
I actually read Rob’s entire last post and I can’t stop laughing! Great stuff Rob!
The trouble is that, if everything I say is so, that’s the sort of response we should expect to see from you, What. People in deep denial don’t often publicly state “Oh, I now see how wrong I’ve been!” when called on it.
The hope is that there will come a day when they will indeed do so. In the investing realm, this happens after crashes (sometimes it takes multiple crashes for the full effect to be obtained). If you look at the historical stock-return data, you see that Buy-and-Hold is always extremely popular in the years leading up to crashes/economic crises and then not popular at all in the years after the widespread financial devastation has been experienced by all.
We are about halfway to that point today. The highest P/E10 value we saw was 44. We always end up at about 7 or 8. We are today at about 21. So we are gradually working our way downward. When we get to 7, we will almost certainly be in the Second Great Depression. I think it is fair to say that you won’t be hearing anyone speak up in defense of Buy-and-Hold then. Buy-and-Hold will be a dirty phrase when we reach the point at which we have all seen up close and personal just how much we have all destroyed our hopes for the future with this fourth try at seeing whether there are some magic words we can say to make the pure Get Rich Quick approach to investing work in the real world.
When you WANT to understand what I am saying, you will have zero problem getting it. You have no intellectual deficiencies. Your problem is that man is by nature The Rationalizing Animal. He believes what he wants to believe and disregards the rest. Your intellect actually works against you (by helping you develop ever more complex rationalizations) for so long as you are emotionally committed to Get Rich Quick thinking.
For so long as that is so, academic research alone cannot save us. The 30 years of academic research and the 140 years of historical data doesn’t stop the Buy-and-Holders from going down the same dark path that has been leading stock investors to ruin since the first day the market opened for business. But once things reach a point where you start to feel a desire to bring the economic crisis to an end, we are all off to the races! So let’s all pray for worse economic times!
Thanks for reading the entire comment in any event. And please take care. I have a funny feeling that we are going to be fast friends when we meet on the other side of this Big Black Mountain with a mutual desire to do all that we can to bring the crisis to an end, to learn how to invest more effectively and to become able to retire many years sooner than it has ever been possible for any earlier group of investors to retire.
To better days! And warmer friendships!
Rob
I think he makes some good basic points re: valuations (of course, many others, even pros, seem to share these views, in principle).
Many “experts” in this field believe that valuations affect long-term returns, Arty. How many of them have publicly demanded that the Old School safe withdrawal rate studies be corrected so that no more middle-class lives are destroyed by the demonstrably false retirement claims contained within them? That’s the question on the table.
I am not just some guy who says that valuations affect long-term returns. I am a guy who says that we should do something about that reality now that we have learned it. I say that we should open the internet to honest posting on SWRs and scores of other critically important investment-related topics. I challenge you to provide a URL where one of the “experts” you refer to above has done the same.
Robert Shiller is the grandfather of Valuation-Informed Indexing and he hasn’t done it. You won’t find one paragraph in his book pointing out the dangers of Buy-and-Hold in direct and clear language (the implication is present on every page, to be sure). I am saying that it is time to stop putting forward implications and start putting forward direct and clear language about the realities of stock investing as revealed by the last 30 years of academic research.
If you want to say I am wrong, say I am wrong. If the market is efficient, I really am wrong. But please don’t say that I am doing the same thing that all those others are doing. I am not. They developed the insights. I learned the insights from them. I took the insights I learned from them and posted about them on public discussion boards. I made an attempt to spread the word. They performed an academic function by performing studies. I performed a journalistic function by telling people the story of what they had uncovered.
I am not an academic. I am a journalist. I don’t say which is the more important function. I admire the academics for their contributions. GOd did not give me the gifts needed to perform that function. God gave me the gifts needed to perform a journalistic function and I perform that function to the best of my abilities, for good or for ill. I make no apologies for trying to make use of the gifts I was given to make the world a better place. I see no one else on the scene today doing what I am doing (while I of course acknowledge that there are hundreds of big-name experts in the field who have done work showing that Buy-and-Hold is indeed the purest and most dangerous Get Rich Quick scheme ever concocted by the human mind).
The difference is — I don’t hint at the realities, I state them plainly enough for ordinary middle-class people to understand how they need to change their investment strategies. I bow to no one on that score. There is no one even in a close second place to me re that one (for good or for ill — I think for good, but you are of course entitled to your own point of view re that one).
Rob
WHAT and DRIPGUY:
What do you think about Shiller’s PE/10? Is there any utility in this metric for ordinary investors, even at the extremes? Do you consider valuations (of any sort) as part of your investing plans? What authors, if any, have helped you the most and why? Just trying to get a sense on how you view investing.
—
ROB: I understand the valuations points you and others make. There are some good points there. But I can’t take the goonery stuff seriously. Partly this is because I haven’t seen evidence for it (e.g., proscriptions on the topic of valuations and implementations of same) on the boards as you describe, though I don’t go back as far as you guys and don’t visit the boards as much.
I’m all for improving the lot of the common investor, but I see that happening slowly anyway, especially via lower cost options and more useful published source materials. My guess is it will take a long time for things to get close to your ideal, and this would likely require at least another one (or two) big crashes. That would impel greater writing for the public on the topic, and that helps create change.
Happy New Year to all you guys!
I can’t take the goonery stuff seriously. Partly this is because I haven’t seen evidence for it
I put up the post pointing out the errors in the Old School SWR studies on the morning of May 13, 2002. I write these words on the morning of December 31, 2011. Not one of the Old School studies has yet been corrected.
Is that not compelling evidence that there is some sort of funny business going on? It sure seems so to me.
Rob
My guess is it will take a long time for things to get close to your ideal
Every advance in human knowledge ever achieved took time. But it seems to me that, the more people we have pitching in and helping out, the less time this one will take. So I want to have as many people helping out as possible.
When we don’t say anything in response to those threatening and harassing and defaming those who post honestly, many honest posters leave the community in disgust and others either keep silent or are more cautious about what they dare to say than they would be if those who engaged in abusive behavior had been removed from the discussions, as the posting rules at every site assure us will be the case.
The more we tolerate Goon behavior, the more we see of it. And the more we tolerate Goon behavior, the fewer people of intelligence and integrity we have participating in our discussions. Our most important insights were all put forward and developed by people of intelligence and integrity. So I want to see as many of those sorts of people in the mix as possible.
Rob
Happy New Year to all you guys!
Happy New Year to you, Arty.
Rob
Arty,
‘Ordinary’ investors can’t stop themselves from bleeding all over the floor, I am not sure if using PE/10 (or anything) will help them. As far as ordinary investors go, the best thing that could happen to them is that companies go back to having fully funded pensions and get rid of 401k plans.
If you are asking about its utility in principal then yes, it probably has some but its not a real good formula either. For a couple of reasons:
1) It weights the older years the same as the most recent. This is clearly not a good idea.
2) It does not say anything about making actual investment decisions. So, valuations in equities are high – what should I invest in then? I can see ‘ordinary; investors hanging themselves on that question.
3) Implementing this in large taxable accounts like mine is a mess.
4) It assumes a relationship between PE and returns that may not be true going forward.
5) It has no relationship with forward looking prospects, most proponents of it don’t quite understand that it assumes the behavior of the #1 equity market for the past century. I am not very confident that will continue indefinately.
As far as my general investing approach I use common sense, the historical record and do not prescribe to any particular timing strategy.
What:
Your comment as submitted contained statements that are not permitted under the published rules of every investing board and blog at which I have posted. These rules reflect the social norms of our community. The vast majority of community members have an intense dislike of the garbage tactics frequently employed by Internet Sewer Rats like you to disrupt the efforts of constructive community members to have fruitful discussions.
In ordinary circumstances, I would delete the comment.
In this case, the comment also contains a significant amount of language that is responsive to Arty’s question and that language could end up being helpful both to Arty and perhaps to others listening in. So I am highly reluctant to delete the entire post.
I elected instead to delete only the abusive language.
I don’t recall ever before following this policy. I believe that all community members have the right to present their arguments as they see fit. If you elect to be abusive, your comment should be deleted. But I don’t think it is generally a good idea for me to be modifying posts that appear under your name.
If you don’t want the comment to appear in the modified form in which it appears above, please just let me know and I will delete the entire comment.
Other than the abusive comments that have been deleted, I am grateful for your response. I encourage all community members to give their careful consideration to the points you advance in the words that appear above.
Rob
What,
I think you raised some fair criticisms shared by a number of popular authors (Bogle excluded who is on record as liking Shiller’s PE/10 work). Swedroe, for example argues that due to the last 2 recently-placed Bears, earnings are depressed, and so the current PE/10 level may not be giving a fair read. I’m not sure, as there have been situations in past where normal business cycles have produced similar situations.
If the critique is correct, it would mean that a person would make less than he otherwise would because his commitment to equities would be down. Some might then believe “better safe than sorry”; others might believe this would hurt long term gains.
And, of course, things are different for a young professional vs. a retired individual who can’t afford to make mistakes or wait ten years for things to rebound. This is something rarely mentioned when discussing the general concept of timing implementations.
But many do agree price matters. If so, then what of it? So either one invests (perhaps more conservatively) with the understanding that Bear markets will happen, or one looks at historical prices and makes a guess based on… But that things might be different going forward is certainly fair. After all, things became different from the past during the 90s, in the sense that PE/10 achieved levels not before seen—by far. If one got out of equities at the cry of “Irrational Exuberance”, one missed another several stellar years. Personally, I don’t think it is ever a good idea to be entirely out, if using this metric (retirees or special cases aside)
The issue of how to modify allocation was not Shiller’s problem nor do I think he should have said anything about it. Though, I strongly agree that the issue itself—the actual percentage implementation of what-to-do—can and would befuddle many, including pros.
Not sure what you mean by “forward looking prospects”. I think one-year forward earnings that are typically cited are far more dangerous metrics than Shiller’s. Bogle seems to think so also.
By “historical record,” then, it seems you do use past performance, yes? Do you not similarly doubt that past performance will continue?
Not sure if PE/10 is a big problem in taxable as it all depends on how frequently one adjusts allocation. If one uses PE/10 to help make shifts, based on its historical valuations *extremes* (my preference is to view it that way), then I don’t see many shifts happening in a given year and not more than normal “rebalancing”. But that assumes one uses it that way.
Dripguy,
I don’t see this as being about Rob at all, even as he is a strong advocate of using PE/10 to implement strategy. I don’t care how he invests or if he ever did. I don’t care that he annoys people. In fact, I don’t care what most internet folks claim they do with their money, for obvious reasons. I’m just looking at an argument (here, PE 10), best as I can reason it.
Even some pros, like Hussman and Grantham and Bogle regard Shiller’s metric with respect and at least two of them use it to help implement. (That they use it, of course, doesn’t make it the better way.) Still, I’m looking at the quality of the idea and wanted to get your views and What’s on it since I don’t see many other posters here.
I can’t disagree with your take that humans (including many money managers) have been “spotty” in capitalizing on valuations. The preponderance of studies seems to support that. And there are many examples of how a prudent investor, using buy-and-hold-rebalance, has managed good returns over the last four decades. Hell, even a boring combo of 40% S&P 500 plus 60% Intermediate Treasuries did rather well since 1972 with about a:
CAGR 9%
Standard Deviation 8%
And not many down years, the worst being about a 7% decline.
The big trouble comes when investors seem to overestimate their appetite for equity risk, which, in turn, can cause added problems. This is common, according to some advisors like Larry Swedroe.
Rob might say that not enough studies have been done using longer-term metrics like Shiller’s and that such work is only now beginning (like Wade’s) that seems to show some advantage using the particular comparatives he chose. That is true.
WHAT’s point, is that strategy implementation (in all its possible forms) would stymie most investors. And that may be true even if this were somehow judged a superior model. I tend to agree that such is the problem, as a choice to buy or sell a portion of one’s lifetime savings is rather different than judging the fair value of a car or sweater. Price matters in both cases but there is a complexity (emotional and consequences) in one that does not exist co-equally in the other.
Yet, I still believe cost matters, and I think at historical extremes that must be respected with implementation (I haven’t ever done that yet, though, just watching it and thinking a lot about it). But, as with using the historical model for anything, such is backward looking, with all the limitations that entails.
I’ve deleted a comment by Drip Guy because there were several statements in it which are deliberate deceptions (false claims that Drip Guy knows are false because this has been pointed out to him by dozens of different community members on hundreds if not thousands of different occasions).
There were other statements in the Drip Guy comment that were constructive. If Drip Guy wants to repost the comment with the garbage removed, that would make me happy.
I did not follow the practice that I followed on the ‘What” post of making the necessary edits to the comment and leaving it up in revised form. That approach creeps me out. I would not want someone editing my comments and so I do not feel right editing other people’s comments. There may be rare circumstances where I will follow that approach (I will always let people know when I am doing it). But I do not want to make that a habit. Since I have already done it once in this thread, I do not feel comfortable doing it again here.
Rob
I can’t disagree with your take that humans (including many money managers) have been “spotty” in capitalizing on valuations. The preponderance of studies seems to support that.
If you are talking about studies showing that short-term timing doesn’t work, I of course agree 100 percent.
If you are aware of a study showing that Valuation-Informed Indexing has ever failed to provide far higher returns at greatly diminished risk, I sure would like to know about it.
It seems to me that it would be a logical impossibility that there could ever be such a study. Valuation-Informed Indexing is taking price into consideration when setting your stock allocation. Are you saying that you believe that it is possible that there might be circumstances where this would be a bad thing? I truly am not even able to imagine how that could be so.
It is possible that you could end up with a lower portfolio value at the end of 30 years using VII. That happens in about 10 percent of the tests that I have seen. It’s important to understand that in those cases the VII investor took on less risk than the Buy-and-Hold investor. A strategy that only provides superior results in one out of 10 cases is far more risky than one that provides superior results in nine out of 10 cases.
When I say that VII always beats Buy-and-Hold in the long term, I mean that it always prevails on a risk-adjusted basis. If valuations truly affect long-term returns (the evidence that they do is at this point overwhelming), I believe that it is a logical impossibility that Buy-and-Hold could ever perform better on a risk-adjusted basis. By agreeing to follow a Buy-and-Hold strategy, you are insuring that your allocation will be dramatically wrong two-thirds of the time. How could that possibly be a good thing?
Rob
I don’t care that he annoys people.
I may have to add that one to the “People Are Talking” section, Arty. “I don’t care that he annoys people” — What a testimonial!
I am joking around, Arty. I of course understand how you meant it. I of course understand that there really are some people who are annoyed. I just thought it was too funny of a point not to highlight it here.
Thanks again for your many super contributions, especially the outstanding ones appearing on this particular thread.
Rob
And there are many examples of how a prudent investor, using buy-and-hold-rebalance, has managed good returns over the last four decades.
The problem here is that the bull/bear cycle that began in 1982 has not yet come to an end, Arty. We always end a bull/bear cycle at a P/E10 of 7 or 8. That’s a 65 percent price drop from where we are today. Reduce those portfolios by 65 percent and you have another horribly bad performance for Buy-and-Hold.
An investor who begins investing at age 25 and dies at age 85 invests for 60 years. There has never in U.S. history been a 60-year time-period where we did not complete an entire bull/bear cycle. So, to get a sense of how dangerous Buy-and-Hold is, you need to consider where the investor stands at the end of the cycle.
You are also ignoring the economic crises brought on by Buy-and-Hold. Buy-and-Hold has now caused four economic crises since 1900 (that’s the total number of economic crises we have experienced in that time), including one that became known as The Great Depression. The current Buy-and-Hold Crisis (#4) began from P/E10 levels far higher than those that caused The Great Depression. So we are looking at a Second Great Depression likely to be of far greater depth and far greater length than the earlier one.
The First Great Depression played a significant role in bringing on World War II. So it is entirely possible that the Second Great Depression will bring on World War III. Are you counting the vast financial devastation and loss of life associated with living through a world war when you assess whether Buy-and-Hold is “worth it” or not?
I don’t think it’s worth it. I don’t think it’s a close call. My view is that not only is Get Rich Quick not the answer, but that Get RIch Quick is actually the problem.
Rob
WHAT’s point, is that strategy implementation (in all its possible forms) would stymie most investors. And that may be true even if this were somehow judged a superior model.
Implementation will remain a problem for so long as the Ban on Honest Posting remains in place. I have a hard time seeing how it could be a problem once we begin permitting people to talk openly and freely about the last 30 years of academic research on stock investing.
After the ban is lifted, we are going to have hundreds if not thousands of boards and blogs at which people will be discussing the implementation issues on a daily basis. Every possibility will be explored and all investors will be free to choose the approach best suited to their needs.
In the Buy-and-Hold Era, there was never a consensus reached as to the best stock allocation. Some favored 60 percent stocks, some 70 percent, some 80 percent, some 50 percent. Did that cause horrible problems? It did not. People gave the reasons in support of different approaches and individual investors went with what they thought best given all that they heard.
The problem we face today is that discussion of all approaches other than the pure Get RIch Quick one has been prohibited. So, yes, it is so today that there are many people who do not understand how to properly implement VII. That changes once we lift the ban.
The key thing to keep in mind here is that the two models say opposite things about the most fundamental investing question — how to set your stock allocation. Buy-and-Holders and Valuation-Informed Indexers agree that the goal is to “Stay the Course.” In the event that the market is efficient, the way to do that is to stay at the same stock allocation at all times (Buy-and-Hold). In the event that valuations affect long-term returns, the way to do that is to make whatever adjustments in your stock allocation are needed to remain at roughly the same risk level (Valuation-Informed Indexing).
One of these models is right and one of them is wrong. If valuations affect long-term returns, there is zero possibility that Buy-and-Hold is right. It’s a logical impossibility. Even many good and smart people continue to make convoluted excuses for Buy-and-Hold. But no one has ever put forward any reasonable explanation for how Buy-and-Hold could ever work in the long term or pointed to any historical data showing that there has ever been a time in which it did indeed work in the real world.
If VII failed every test to which it was put, people would reject it out of hand. Why is it that we continue to apply a very different standard to Buy-and-Hold?
Rob
Happy New Year, Rob.
I think the biggest problem that contributed to losses is an over-commitment to equities due to an overestimation of one’s ability to take risk. There are many examples where more conservative portfolios–using buy-and-hold did fine. I’ve no doubt, though, that most people were not holding those portfolio types unless their specific need to take risk was lower. Still, I think many, if not most, overestimate their abilities to do that.
I agree with WHAT that even if we believe some version of a valuations-informed investing plan is superior, that many would bog down in the implementation of it. Remember, most folks lack your understanding (or What’s or Dripguy’s) or experience in all this, and many don’t want to fuss about it anyway. But the implementation aspect, is at present, something of a hurdle.
I have no idea what Dripguy said, but given your description above I’m not sure his opinion should have been deleted, even if it was wrong (“false claims”), unless it was about you personally and not some general investing concept. I do know you don’t want to be accused of preventing honest posting. Again, don’t know so can’t comment. From what I read, I think both of them (WHAT and DRIPGUY) have made some reasonable comments, and similar to those I’ve heard before.
I tend to agree that such is the problem, as a choice to buy or sell a portion of one’s lifetime savings is rather different than judging the fair value of a car or sweater. Price matters in both cases but there is a complexity (emotional and consequences) in one that does not exist co-equally in the other.
I was very happy to see you put forward these words, Arty.
I don’t agree. I think that the two situations are precisely the same. A sweater offers a different value proposition at different price points. And stocks offer a different value proposition at different price points. It’s the same thing.
Of course there are factors that need to be considered when buying stocks that you don’t consider when buying a sweater. But the opposite is also true. There are factors that need to be considered when buying a sweater than you don’t consider when buying stocks. The important point here is — the mental analysis that you need to go through when buying stocks is precisely of the same nature as the one you go through when buying a sweater.
This is why all those implementation problems go away as soon as we open the internet up to honest posting. Can you imagine how hard it would be to get a good deal on a car if honest posting on the car buying process were banned on the internet? There would be no Edmunds. There would be no way to compare prices. There would be no boards where you could ask people more experienced than you whether the deal you were offered was a good one or not.
In a world where honest posting on car purchases was prohibited, we would all need to rely on the car salesman to shoot straight with us. And he stands to make a lot of money by doing just the opposite. That’s the spot we have put the investing “experts” in by banning honest posting on the academic research on stock investing. How can they possibly shoot straight when there are hundreds of millions to be gained by urging people to follow Buy-and-Hold strategies?
It all flips when the ban is lifted, Arty. The answer is not for me to post less, as you have suggested. The answer is for us to find 10 of me or 100 of me or 1,000 of me or 10,000 of me so that the number of posts supporting Valuation-Informed Indexing becomes so great that the site owners can no longer deny us our right to participate in the discussions. At that point, people will be choosing to go with Buy-and-Hold or VII based on the quality of the cases made rather than because they have only heard one point of view and presume because they have never heard the other side of the story that there is no other side to the story.
All middle-class people have bought sweaters and cars. Letting them know that the precise same analysis of value propositions comes into play when buying stocks eliminates 80 percent of the complexity and confusion that now surrounds the stock investing subject. This stuff is not hard. It is the salesman who make it hard with all their mumbo jumbo.
When stocks offer a strong long-term value proposition, you buy. When stocks offer a poor long-term value proposition, you don’t buy. Nothing could be more simple or more obvious. And that is the way it really does work.
At least that’s so according to the 140 years of historical data available to us today. If there is ever any evidence that it works some other way, I am 100 percent confident that the Buy-and-Holders will be quick to bring it to our attention.
Rob
I think the biggest problem that contributed to losses is an over-commitment to equities due to an overestimation of one’s ability to take risk.
What risk are you talking about, Arty?
Stock investing risk pretty much disappears for investors willing to take valuations into consideration when setting their stock allocations. Stocks have always provided strong long-term returns when priced well. Stocks have always provided poor long-term returns when priced poorly.
If you go with a high stock allocation when stocks are priced insanely high, is that risk? Or it is just an incredibly dumb mistake?
It seems to me that it is an incredibly dumb mistake. And, yes, I believe that the hundreds of millions of dollars that The Stock-Selling Industry spent trying to persuade people to follow Buy-and-Hold strategies is what caused millions of middle-class people to make that incredibly dumb mistake.
Middle-class people take price into consideration when buying sweaters and cars and comic books. Why is it that they lose their common sense when it comes times to buy stocks?
I think it is a combination of the hundreds of millions of dollars in marketing money used to promote Buy-and-Hold combined with the ban on honest posting on what the academic research of the past 30 years tells us about how stock investing works in the real world.
Rob
I think both of them (WHAT and DRIPGUY) have made some reasonable comments
I agree, Arty. I think both What and Drip Guy have made good points in this thread, points that readers of this blog need to see to b able to gain a balanced perspective on these important questions. I encourage Drip Guy to resubmit his comment in acceptable form. I regret that I had to delete the version he submitted.
I certainly did not delete the comment because he was “wrong” on a substantive point. I am not God. It is possible that I am the one who is wrong on the substantive points. It has been known to happen.
The comments that I delete at the blog are the sorts of comments that could leave people subject to lawsuits. I believe that blog owners who permit such comments are opening themselves to lawsuits themselves. I think playing that game is a risky sort of business, one in which I do not want to be involved in any way, shape or form.
There were good comments in the deleted post, comments that we need to hear. I was tempted once again to edit the post rather than delete it. The majority of the post was good stuff.
I just don’t feel comfortable going down this road of editing comments. I did it in the one case. If I do it two times, am I then going to need to do it three times? Thirty times? 300 times? Where will it end?
Drip Guy and What are going to need to think over whether they want to participate here or not. They are warmly welcomed to do so if they are willing to follow some minimal rules of civility. If even that is too much for them, I think that we all are going to need to accept that we just don’t need the business that bad and wish them both a fond farewell.
Thanks for expressing your concern. I share your regret re the behavior we have seen evidence itself here today.
Rob
The analogy contains important differences that you do not choose to recognize are present for many folks. They are not the same. They are similar in that some concept of “fair value” might be present in both. But the differences in weight and consequence and implementation are enormous.
Rob wrote: “When stocks offer a strong long-term value proposition, you buy. When stocks offer a poor long-term value proposition, you don’t buy. Nothing could be more simple or more obvious. And that is the way it really does work.”
If it were that simple and obvious, then all the professional money-managers and ordinary investors would have enjoyed far greater timing success. This has not been so for many reasons. Hell, even Buffet says it is simple but not easy (and he scrutinizes valuations all the time). Having the nerve to make big allocation changes is ONE reason that makes it “not easy”. There are others, though, within the specific area we are discussing here.
I don’t think some ban on “honest posting” issue is one of those reasons, though. My guess is that you have focused on this because of your many personal bans (which you’ve cited), right or wrong though they were. I’ve looked carefully at this, because you’ve mentioned it often. But I just don’t see this as a problem and certainly not one that holds sway over otherwise rational investing.
I agree that useful information spread more liberally is potentially a good thing and may help educate and inform investors. And maybe in the future, the implementation obstacles I view (what WHAT mentioned) may abate.
They are similar in that some concept of “fair value” might be present in both. But the differences in weight and consequence and implementation are enormous.
I am grateful to you for stating things in a fair and balanced way, Arty.
It is my belief that the problems you see are problems that would go away soon after we transitioned to the new model.
I do think it is fair to say that there are many more people who see it your way than there are who see it my way. Many of those people have first-class intellects and are widely and properly known as fair-minded people.
Rob
If it were that simple and obvious, then all the professional money-managers and ordinary investors would have enjoyed far greater timing success.
Say that you wanted to read a book in bed before drifting off to sleep tonight? Would it be hard for you to do that?
It wouldn’t be even a tiny bit hard.
Say that someone who lived in the days before the invention of the lightbulb wanted to do it?
It would have been flat-out impossible for someone living at that time, right?
Valuation-Informed Indexing was flat-out impossible until index funds were created. That was the mid-1970s.
It remained flat-out impossible until 1981, when Shiller published his research showing that valuations affect long-term returns.
It remains practically impossible for most today because there is today a ban on honest posting on the implications of Shiller’s research.
Many professional money managers believe in Buy-and-Hold, okay? VII is flat-out impossible for such people. Doing it successfully requires belief in a fundamentally different understanding of how stock investing works.
It’s not going to remain impossible after we get the word out and permit people to ask their questions and have warm and fruitful discussions on hundreds of different questions and develop scores of powerful tools that help people make the right decisions and all the rest.
All of this good stuff begins happening when we lift the ban. It’s not fair to use the state of knowledge that exists today to say whether VII will work in a world in which we permit people to educate themselves about it.
People failed at timing before because they did not know how to do it. The finding by the Buy-and-Holders that short-term timing never works was a huge breakthrough. The finding by Shiller that long-term timing always works was an equally huge breakthrough. What I am proposing is that we begin making use of both breakthroughs. We should disdain the form of timing that never works and be certain always to engage in the form of timing that always works.
Why the heck not? What possible reason could there be for doing otherwise?
Rob
even Buffet says it is simple but not easy (and he scrutinizes valuations all the time).
Buffett is aiming for a high return. I believe that I may have read somewhere that he aims for 15 percent. Is that right? If not, I still believe that he is aiming for a return a good bit higher than 6.5 percent real.
I am saying that it can be as easy for a middle-class person to earn a lifetime return of 6.5 percent real as it would be for him or her to eat a piece of apple pie with vanilla ice cream. 80 percent of the complexity of stock investing is put there by The Stock-Selling Experts as a result of their efforts to confuse us as to what works for the purpose of selling stocks at times when they are not worth buying.
If you are aiming to earn returns of 15 percent, stock investing is going to be extremely difficult. But middle-class people don’t need to do that to be able to finance their retirements.
Rob
Having the nerve to make big allocation changes is ONE reason that makes it “not easy”.
It doesn’t take any nerve if you are hearing on the television every 15 minutes why it is so imperative that you do this!!
I want to flip it all, Arty. We are today directing hundreds of millions of dollars to persuading middle-class people to follow a pure Get Rich Quick approach. I am suggesting that we flip it – that we spend hundreds of millions promoting Valuation-Informed Indexing.
Do you not see how that changes everything?
Once we open up the internet to honest posting, middle-class people will be a able to learn the realities. At that point The Stock-Selling Industry will have no choice but to go along. Problem solved!
Rob
I just don’t see this as a problem
Here’s an article at the site at which I quote 101 of my fellow community members who have come to a very different conclusion:
http://www.passionsaving.com/investing-discussion-boards.html
Rob
I agree that useful information spread more liberally is potentially a good thing and may help educate and inform investors.
There you go!
That’s the way we achieve advances in all fields other than stock investing. I think it would work with stock investing too.
Rob
To respond to Arty’s last comment directed to me:
Its a problem in taxable. If I implemented some of the strategies bandied about I would have a tax burden that far exceeds my income (3-5x). Frequency has nothing to do with it and in fact a higher shifting frequency would at least avoid cataclysmic tax events such as exiting a percentage of equities in 1998 was.
Forward looking prospects refers to the fact that pretty much all this PE/10 stuff is based on the US equity market which has been an absolute outlier. By accepting Rob’s methodology you accept the assumption that the US market will continue to perform at the far right side of the tail. It precludes looking at the current state of the US market and making intelligent judgement about whether that 6.5% is really feasible going forward.
“Historical record” needs to be taken into context. When people like Rob say ‘historical record’ he basically is referring to something like a 6.5% real return of the US market – which again has been a complete outlier. When I say ‘historical record’, I pretty much mean the complete historical record of all equity/non-equity markets. Including the ones that blew up, permanently.
My family’s fortunes have been very up/down/up/down/up the past 6-7 generations or so across the world from Eastern Europe to Western Europe to South America to North America and now in Asia so I have a different perspective than most.
What’s comment was edited.
Rob
By accepting Rob’s methodology…
I question whether there is one particular “methodology” associated with my name. I say that people who publish safe withdrawal rate studies should report the numbers accurately. That’s a common sense observation, not a methodology.
Some might say that I am the person who discovered the error in the Old School studies and that the error was not to include a valuations adjustment and so the idea of including valuations is my methodology. If that’s the case, then there is nothing specific to the U.S. market in that methodology. I believe that all research in all fields should be done honestly and accurately and realistically. Does that idea really constitute a new methodology?
It is true that I have criticized the methodology used to create the Old School studies. Since the studies claim to identify the SWR and yet ignore the most important factor with a bearing on the SWR, the methodology used is analytically invalid. It’s a mistake, though, to think that the error was due to an intellectual deficiency on the part of the people doing the studies. The mistake was political.
There was a time when we thought that the market was efficient. An entire industry was developed based on that belief. There were thousands and thousands of books that were published based on that belief. There were thousands and thousands of studies prepared based on that assumption. There were thousands and thousands of calculators developed based on that assumption. All of those work products need to be discarded and replaced as a result of Shiller’s finding that valuations affect long-term returns.
The idea that the SWR studies suffer from a deficient methodology is outdated. It is of course true that the methodology is analytically invalid. But the fuller reality is that the methodologies of all studies prepared under the Buy-and-Hold model are analytically invalid. There’s nothing special about the Old School SWR studies, we just happened to discover the problems with those studies first.
It is not really a single methodology that is the problem here. It is the model that most of us are using today to try to understand how stock investing works. The model is flawed right to its core. The market is not efficient. Valuations affect long-term returns. We now have a opportunity and the responsibility to redo all the work that has been done under the assumption that the market is efficient and this time to do it accurately and honestly and realistically.
At any rate, I am a journalist, not a methodology maker. I have criticized methodologies used by others when I have discovered errors in them that are likely to cause horrible life setbacks for millions of middle-class investors. That doesn’t put me in the methodology making business.
I have also worked as co-developer of a number of calculators that use proper methodologies. I suppose it could be said that that DOES put me in the methodology making business. I don’t really think so. In each case, I worked with someone who had the statistical skills to develop valid methodologies. I lack those skills. So I do not feel comfortable being described as someone with a methodology. I asked lots of questions while those calculators were being developed in an effort to see that the methodologies used in them were valid. But it was never me alone creating the methodologies.
And I would not have gotten involved in the creation of the calculators at all had it not been necessary to do so to advance my journalistic goals. After I pointed out the errors in the Old School studies, there were a number of Buy-and-Holders who said that, since I had discredited the existing calculators, I should develop one of my own that got the numbers right. I saw this as a reasonable point given the great need for such a calculator, so I did indeed get to work producing such a calculator (and then followed with others when our discussions turned to questions that the Buy-and-Holders got wrong outside of the SWR context). I question whether than makes me a methodology maker.
If it does, it at best makes me a methodology maker only under duress. Once we open the internet to honest posting on SWRs and scores of other critically important investment-related topics, my strong expectation (and hope!) is that there will be hundreds of web sites producing accurate and honest materials for the use of people trying to learn how stock investing works in the real world and that I will be able to get out of the methodology making business altogether (that’s accepting that I am even a little bit in that business today, which I am not entirely sure is the case since my role has been to ask questions of the people building the methodologies rather than to build them solely with my own hands).
The bottom line is that it makes Rob feels a wee bit uncomfortable to hear something described as “his” methodology. I did a little research into SWRs before handing in my resignation in an effort to make sure I didn’t screw up my retirement and then shared what I learned with my fellow community members at the Motley Fool board. I had no intent on the morning of May 13, 2002, to get in the methodology making business. If I have inadvertently done that, then I guess it would be fair to say that strange things have been known to happen in this mixed-up, goofy old world of ours from time to time. But I strongly think we will all be better off when the internet is opened to honest posting on investment-related topics and when it is the people who are skilled in the production of methodologies who are creating methodologies and when Rob gets back to doing whatever it is he used to do (it wasn’t creating methodologies, I am sure!) in the days before John Greaney learned that he got the numbers wildly wrong in the retirement study posted at his web site and promptly flipped his freakin’ wig.
Whew!
Rob
you accept the assumption that the US market will continue to perform at the far right side of the tail.
No! This is false! This is why we need to be careful when throwing around words like “methodology”!
The Stock-Return Predictor does indeed assume that U.S. stocks will continue to perform in the future at least somewhat as they always have in the past. But I have on hundreds of occasions pointed out that there is no need to buy into this assumption to be able to make use of the academic research and the historical data as a guide in formulating rational investment choices.
If you think that the U.S. economy will be less productive in the future than it has ever been in the past, you can subtract something (whatever you choose!) from the numbers generated by the calculator. If you think the U.S. economy will be more productive in the future than it has even been in the past, you can add something (whatever you choose!) to the numbers generated by the calculator. It’s a free country! Have it your way!
There’s a huge difference between developing a calculator that permits people to do that and developing a calculator that purports to report what the historical data says on the subject of safe withdrawal rates and gets all the numbers wildly wrong. In the case in which people are changing the numbers because they expect to see U.S. stocks to perform in ways never seen before, the people making the changes are aware of the assumptions they are making to generate the numbers they are using. In the case where people are publishing retirement studies that get all the numbers wildly wrong and then not bothering to let people know this after the errors are brought to their attention, there are acts of deception present, acts of deception that are likely to cause the people making use of the calculators to suffer some of the most horrible life setbacks that the human mind can imagine.
Greaney did not tell us that the numbers in his study were the numbers that would apply in the event that the U.S. market in the future performed in ways totally unlike how it has always performed in the past. He told thousands upon thousands of my fellow community members the precise opposite! He said that his numbers assumed that U.S. stocks would perform something along the lines of how they have always performed before, the precise opposite of the reality.
Huh?
I favor the idea of people making whatever adjustments to the numbers they use in planning their investment choices that they care to make. I say that researchers should not be reporting funny numbers and failing to warn their readers that the numbers being put forward are wildly different from the numbers that would have been obtained by employing an analytically valid methodology. Those two things are not at all the same thing. It’s not a close call.
Rob
It precludes looking at the current state of the US market and making intelligent judgement about whether that 6.5% is really feasible going forward.
Again, this is a 100 percent false statement.
The data shows that the most likely annualized 10-year return on an index fund purchased in January 2000 is a negative 1 percent real. The Get Rich Quickers were telling millions of middle-class investor that it was wise to stay at a high stock allocation at that time, that there was some magical, mystical study somewhere that says so (the URL of which has never once in 10 years of discussions been produced). The Valuation-Informed Indexers were telling people that the wiser choice was to lower their stock allocations to something in the neighborhood of 20 percent in an effort to keep their risk profiles roughly stable.
If it is true that the U.S. economy is going to be less productive in the future than it has ever been in the past, the exceedingly dangerous advice advanced by the Buy-and-Holders will be discovered to be even more dangerous than we today understand it to be!
If stocks indeed perform worse in the future than they have ever performed in the past, it may well turn out that those who went with a 20 percent stock allocation in 2000 will live to regret the choice and will wish that they had gone with 15 percent of 10 percent or 5 percent. But those who went with 20 percent are not going to regret their choice even a fraction as much as those who went with 80 percent when they should have been going with 15 percent or 10 percent or 5 percent.
There are no circumstances in which it is a good idea to report wildly wrong numbers in studies that people are using to plan their retirements. It is a logical impossibility that such circumstances could ever exist. It is always better to produce studies that report numbers honestly and accurately and realistically.
This is my sincere take on this highly important topic.
Rob
WHAT: On taxes: I don’t see tactical adjustments to PE/10 occurring with any greater frequency than normal rebalancing—providing one makes adjustments only at valuations historical *extremes*. Of course, this assumes that one wishes to use the metric at all, and use it in that conservative way.
Given the returns range predicted in Rob’s calculator (useful for only the S&P500), I don’t think “his approach” is any more unreasonable than the Gordon Model (which lacks ranges) or what Grantham does (He gives a large + or – to his asset class predictions). What metric, if any, do you use to establish your various risk premia?
Again, I can see using PE/10 as a *tool* that might help inform implementation, or I can see going with a more conservative approach (buy-and-hold) that takes into account the Bears.
I understand what you mean regarding historical record. It is sobering view of the way things have been, and might be, in toto. But not sure how you decided on your implementation and allocation to equities/fixed income with this in mind. Do you use different equity asset classes (beyond Total Market funds) and do you use an indexing (generally passive) approach or do you use active management?
—-
ROB: What were the nature of the edits to What’s comments?
ROB: What were the nature of the edits to What’s comments?
Trivial personal attack junk. A small number of words.
Rob
Given the returns range predicted in Rob’s calculator (useful for only the S&P500)
There is a sense in which what you say here is so. But my view is that there are more important senses in which it is not so.
It is true of course that the calculator was developed using the S&P. So it has direct application only to those who buy the S&P.
But the S&P is intended as a proxy for the entire market and serves that purpose reasonably well. So you can use the calculator to invest in a Total Stock Index.
John Walter Russell did research showing that significant segments of the Total Stock Index (large caps, value. etc) perform to a large extent in accord with the S&P. I am personally a bit skeptical re this finding. It’s out there and it’s worth reporting. But I would like to see more evidence before forming an investing strategy pursuant to this finding.
The more important point is that the primary purpose of the calculator is not to help investors identify their proper stock allocations (as important as that purpose is). The primary purpose is to serve as a teaching tool. The Return Predictor shows us how stock investing works in the real world.
The mistake at the core of Buy-and-Hold is that the market is efficient. If the market were efficient, Buy-and-Hold would be the ideal strategy. If the market were efficient, stocks would always be priced properly and risk would be a constant. What purpose would be served by changing your stock allocation in such a world?
The Return Predictor reveals in compelling fashion that we do not live in such a world. Using the 140 years of historical return data as its source, it reports that there has never yet in history been a time when the U.S. market has performed in the way in which it must always perform in the event the market is efficient.
This is why I say it is a logical impossibility that Buy-and-Hold could ever work. Buy-and-Hold is rooted in an understanding of how stock investing works (that risk is stable, not dependent on changes in valuation levels) that is the opposite of the reality. Basing all your strategies on an understanding of the market that is the opposite of the reality can not possibly be a good idea.
This finding — demonstrated in compelling fashion by the Predictor — applies to ALL investors, not just investors in the S&P.
Say that you are a stock picker. You don’t need to make the same adjustments in your stock allocation as indexers because those who are effective in picking stocks are able to protect themselves from the negative effects of high valuations to an extent than indexers cannot. However, it doesn’t follow that stock pickers should not be making use of the Return Predictor to assess how risky stocks are at a given time and where stock prices are headed down the road.
A stock picker who used the Return Predictor to inform his strategies knew that a crash was coming before the September 2008 crash hit. How else could the long-term returns that were being reported by the Predictor from 1996 through 2008 have been so low?
This information is of huge value. An investor who knows that a crash is coming can prepare for it strategically, financially and emotionally. This gave those who used the Predictor a huge edge over the Buy-and-Holders, who were shocked by the economic crisis and who have been wandering in an emotional wilderness ever since it began.
The Predictor is a tool that should be used by every investor alive. It is NOT just for those investing in the S&P. Not by a long shot.
The Stock-Return Predictor is the price-tag for stocks. No consumer should ever buy a car or a camera or a comic book without first looking at the price tag. Nor should any investor make a single investing choice without first looking at the price tag for stocks.
Rob
What metric, if any, do you use to establish your various risk premia?
I love this question.
The proper way to examine any investing strategy is by comparative analysis.
I hear Buy-and-Holders say all the time “I would never dare go with a VII strategy because there is only 140 years of data supporting it and that is not even close to being enough.” And then you ask them what strategy they follow and they say it is the one that has zero years of data supporting it! Huh?
We always need to compare one thing against the other. I don’t say that the case for VII is perfect. I have an article at the site listing 20 caveats that I believe people should be taking into consideration. But those caveats all added up together amount to a drop of water in the Atlantic ocean compared to the case made against Buy-and-Hold by the hundreds of thousands of intensely defensive and emotional comments we have seen put forward by Buy-and-Holders during the first 10 years of our investing discussions.
Buy-and-Holders apply a standard of perfection to VII. If they are able to find one tiny flaw, they use it as an excuse to discard the idea. VII is not perfect. We will not be able to offer a perfect strategy until we possess perfect knowledge.
But VII is superior to Buy-and-Hold in scores of possible ways. There is no comparison. To see that, you need to compare the two strategies, not start out with an agenda of clinging to one and attacking the other with a savage emotional force.
Rob
I can see using PE/10 as a *tool* that might help inform implementation, or I can see going with a more conservative approach (buy-and-hold) that takes into account the Bears.
You often make this point about a low-stock- allocation approach to Buy-and-Hold, Arty. The idea as I understand it is that an investor who sticks with a 40 percent stock allocation at all times won’t get wiped out in a crash to the same extent as the conventional Buy-and-Holders and therefore it can be said that for this type of investor Buy-and-Hold can be said to “work.”
I of course have no objection to people following such a strategy. Each investor has to decide for himself what strategy to follow.
I don’t personally like the strategy, though, because it leaves so much money on the table and thereby delays the investor’s retirement by many, many years. Stocks pay a 10-year annualized return of 15 percent real when priced as they were in 1982 (and in all likelihood will be priced again soon). Why go with a 40 percent allocation in such circumstances? For what purpose?
I feel okay saying that this strategy makes sense for the investor who does not possess strong convictions re how stock investing works — someone who is sort of halfway between the views of the Buy-and-Holders and the views of the Valuation-Informed Indexers. If that’s where you are, perhaps that’s what you should go with.
I believe, however, that our goal should be to learn more so that we are able to develop stronger convictions. It’s a logical impossibility that Buy-and-Hold is half right and that Valuation-Informed Indexing is half right. One of the two models is right and the other is wrong. I think we all should be working as hard as we can to figure out which model it is that is right and which one is wrong and then proceed as makes sense from there.
This is where I get back to my boring riff about the need to open the internet to honest posting re SWRs and scores of other critically important investment-related topics. I am not able to see how we can ever advance the ball until we acknowledge the need to do that. It’s pretty darn hard to develop useful knowledge about subjects re which you do not permit yourself to engage in honest and civil discussion.
Rob
Arty: To answer your questions –
1) No. rebalancing changes at most a few percentage points one way or the other so its easy to manage tax lots in such a way as to avoid capital gains. The common shifts discussed by Rob involve 25% positions. If what Rob was advertising was rebalancing, it would be called rebalancing, no?
2) When referring to Shiller’s PE/10, it is a semi-useful tool. I don’t see a useful ‘approach’ from Rob that uses this tool. Do you?
3) For my personal portfolio I use passive investment vehicles with an allocation and rebalancing band setup I constructed based on many many factors none of which I would try to sell as a general way to help the ‘millions of middle class investors’ that Rob is attempting to help. Most of my actual wealth is tied to businesses my family owns directly. In any case, I have only a 30-40% exposure (as a percentage of my total equity holdings, not portfolio) to US stocks.
What’s comment was edited. The editing was heavier than it was for the earlier comments in this thread that were edited. I would estimate that I deleted one-third of the words in his submission.
Rob
Rob: Of course, we remain apart on the “honest posting” issues, as I just don’t see evidence for that problem.
I agree with some of what you say, here. Yes, the returns predictor can be used for TSM. But I would hesitate to use it for portfolios that contain massive tilts to Small, Value, and International, and REITS, even if sometimes, these asset classes move in lockstep.
And yes, problems with any “conservative” approaches is that you sacrifice the right fat tail (bigger upside gain) by cutting the left (reducing downside loss). The tradeoff intends to “leave money on the table” to avoid having it knocked OFF the table! Clearly, it is not for everyone.
—
(How do you make italics here?)
If what Rob was advertising was rebalancing, it would be called rebalancing, no?
I view this as a fair comment.
I certainly do not claim to support rebalancing. The way that I would put it is that I oppose rebalancing, that I view rebalancing as dangerous.
My view is that investors should be trying to maintain roughly the same risk profile at all times. Since risk changes with changes in valuations, it is obviously not possible for a rebalancer to do this.
Valuation-Informed Indexing is the anti-Rebalancing strategy. It’s the idea that rebalancing is a reasonable strategy that was the primary cause of the economic crisis.
To rebalance a stock portfolio is akin to going on cruise control when driving a car. Sooner or later those sticking with cruise control or rebalancing no matter what will get themselves and lots of others killed. Everyone accepts that, If you are driving on cruise control at 60 MPH when you approach a toll booth and refuse to lower your speed, you will be killed. I look forward to the day when it becomes common practice to follow the same common-sense policies when investing in stocks as we all do when driving cars. When stock prices reach insanely dangerous levels, we should apply the brakes and lower our stock allocations.
How curiously controversial!
Rob
How do you make italics here?
To start the italics, put a small letter “i” within the symbols that appear on your computer keyboard above the comma and the period.
To end it, do the same with a hash mark (the symbol below the question market on your computer keyboard) prior to the small letter “i”.
Rob
Of course, we remain apart on the “honest posting” issues, as I just don’t see evidence for that problem.
Here’s the link to the article setting forth the comments of my 101 fellow community members re this question:
http://www.passionsaving.com/investing-discussion-boards.html
Rob
I don’t see a useful ‘approach’ from Rob that uses this tool. Do you?
My view is that the most useful approach is to use it to inform yourself as to the realities and thereby empower yourself to invest rationally. I think it would be fair to say that the Get Rich Quick garbage pushed so heavily by The Stock-Selling Industry has an exceedingly poor track record.
But there I go giving voice to The Investing Truths That Must Not Be Spoken once again! Yikes!
Rob
none of which I would try to sell as a general way to help the ‘millions of middle class investors’ that Rob is attempting to help.
I believe that opening the entire internet up to honest posting on SWRs and scores of other critically important investment-related topics would work out great for these people.
In fairness, I think it would be fair to characterize the above comment as another case of Rob being Rob.
Rob
But I would hesitate to use it for portfolios that contain massive tilts to Small, Value, and International, and REITS, even if sometimes, these asset classes move in lockstep.
I’m with you re this one, Arty.
I’d like to see more research indicating when it can be used and when it cannot be used, however.
Rob
The tradeoff intends to “leave money on the table” to avoid having it knocked OFF the table! Clearly, it is not for everyone.
I mean no personal offense, Arty. But it strikes me as sort of funny that the only strategy that anyone has come up with to make a case that Buy-and-Hold can “work” in the real world causes the investors using it to delay their retirements by many years. If that’s what “working” looks like, I pray that I never fall for marketing pitches for any investing strategies that do not work. Holy moly!
Rob
WHAT: I know Rob was not advertising “rebalancing”. I was just trying to understand your tax problem given that one possible application of PE 10—done at valuations extremes only—would not incur many capital gains events or problems over years, perhaps fewer re-allocations than even traditional rebalancing would require. But I respect that you understand your own position best.
Rob’s return calculator seems closely based on Shiller’s data, when referring to “most likely” outcomes. In that sense, it seems a simplification for the mob, or those who may not read Shiller’s work. Again, for me, I see Shiller’s work as useful mainly at valuations extremes and not for making small moves every 3 PE/10 units or so.
I believe I have a sense of how you view things. Thanks for the discussion.
——
ROB: I think Shiller’s work can be done for other (foreign) markets, though I’m less certain his approach can be applied for Small and Value asset classes. Sure, these classes also experience reversions to a mean, but trying to time these premia has been brutally hard to do, even as there exist many who continue to try.
I’ll read the community comments on “Honest Posting”. But regardless of what they say, I still have not personally seen where valuations or implementations of those guesstimations have been proscribed. And depending where you go, the main view on investing style varies. With BOGLEHEADS, there are many who seem to be passive investors (though many of them are un-Bogle-like in their approach). In other places, like SEEKING ALPHA, market timers of all sorts abound.
Finally, I don’t think that many investors who actually implemented conservative, low-cost approaches for many years (during which time there has been a Bull Market in Treasuries) had broken or delayed retirements. (Many of them had returns averaging 9-10% per year). Whether that would be true in the future, absent a Bond Bull, is another question.
I see Shiller’s work as useful mainly at valuations extremes and not for making small moves every 3 PE/10 units or so.
I’m with you, Arty.
However, it could turn out that we are both wrong, that the proper thing to do is to make small changes on a yearly basis or something like that. Theoretically, that makes sense. I wonder sometimes whether my preference for the idea of making only rare allocation changes is rooted in my longtime interest in (and, in earlier days, belief in!) Buy-and-Hold principles.
This is another one re which I expect we will come to a firmer and clearer understanding with the passage of time.
Rob
these classes also experience reversions to a mean, but trying to time these premia has been brutally hard to do, even as there exist many who continue to try.
I don’t believe that it will ever be possible to identify when price changes will take place. I am not aware of any research indicating that this can be done.
It might be possible in time to identify when these asset classes represent a strong value proposition or not. Or perhaps the asset classes are too small for that to work. I don’t believe that it will ever be able to use these tools to identify which individual stocks are worth buying.
Rob
I’ll read the community comments on “Honest Posting”.
Thanks, Arty.
But regardless of what they say, I still have not personally seen where valuations or implementations of those guesstimations have been proscribed.
Well, you wouldn’t, would you? Discussions that are prohibited are not “seen” by anyone. For you to be able to see the discussions that are not permitted, we first would have to permit them!
In other places, like SEEKING ALPHA, market timers of all sorts abound.
The key phrase here is “of all sorts.”
There are many approaches to market timing that do not work. These do not represent any threat to The Stock-Selling Industry or to Buy-and-Hold, so they are permitted. Valuation-Informed Indexing is different. There is 30 years of academic research showing that Valuation-Informed Indexing always works. Hence, the widespread ban on discussion of it.
If only I could come up with a strategy that works no better than Buy-and-Hold, I’d be the toast of the internet again!
Rob
Finally, I don’t think that many investors who actually implemented conservative, low-cost approaches for many years (during which time there has been a Bull Market in Treasuries) had broken or delayed retirements. (Many of them had returns averaging 9-10% per year). Whether that would be true in the future, absent a Bond Bull, is another question.
Okay.
My problem with this strategy is that I cannot see the sense in it. If stocks are offering a mouth-watering long-term return at virtually zero risk, why the heck not take advantage of the opportunity? I’ll take your word that this strategy produced good numbers on this one occasion. But did anyone have any reason to believe in advance that it would do that? If not, how would you know to go with it at the time you needed to make the decision?
The benefit of VII is that it is in 100 percent conformity with that common sense tells us must be so (the price you pay for something must affect the value proposition you obtain from it). And then you have that 140 years of historical data confirming that what common sense says always must be so really has always been so for as long as the stock market has existed.
I have a hard time imagining how anything is ever going to top that. I believe that there will be refinements in the VII concept as we all learn more about it and talk it over and do new studies and all that sort of thing. My guess is that the core concept will stand up to all challenges for many, many years. Humans would have to be a different sort of creature for this not to work, in my assessment.
The approach you describe might might going forward or it might not. I don’t understand the logic behind it, so I am personally not able to have confidence in it. And I don’t like to invest without confidence in my strategy because I think it would be hard to stick with something for the long term if you did not possess confidence in it. If I followed something that produced good numbers one time but which did not make logical sense, I would be inclined to abandon it when it first appeared not to be working well.
If Shiller’s research truly describes the reality of stock investing, there are no developments that could ever cause VII to stop working. The strategy that is in accord with the realities is always going to be the easiest to understand and the most likely to produce good long-term results.
Rob
[i]The benefit of VII is that it is in 100 percent conformity with that common sense tells us must be so (the price you pay for something must affect the value proposition you obtain from it). And then you have that 140 years of historical data confirming that what common sense says always must be so really has always been so for as long as the stock market has existed.[/i]
Rob, you seem to have two different theories which I can’t get reconciled. I’m on board with this one.
But then you are also worried that the stock market will drop another 65% because a PE10 cycle is never finished until it gets down to 7 or 8. I can’t get on board with that. And I’ve never looked at what happens to an investor who made their asset allocation decisions with such a view in mind. It may not be good, because the general tendency for stocks to grow over time will overwhelm the slow downward trajectory in PE.
And that is why I can’t get myself nearly as worked up or worried about the future as you are. I think this may be a stumbling block for many people, which is why you can never be satisfied about whether others are making enough effort to warn about valuations.
Rob, “…on this one occasion” lasted four decades, and still counting. Of course, it is highly doubtful anyone could have predicted the Bond Bull and most would have been terrified (talking emotions) to initiate a strategy that committed lots of money to bonds when that Bull began. (Same is true for equities, again, talking emotions.)
Indeed, every year for the past X years folks have incorrectly been predicting the Bond Bull demise. One day they will be right. And, of course, going forward, there are no assurances that the next 40 years will resemble the last.
I agree fully that one must have confidence in a strategy—conviction, as I say—since there are always challenges that occur that might cause one to make a bad decision.
I think Shiller is correct in that there will always be some reversion following a Bear or Bull cycle. Perhaps we will see deeper single-digit lows or heights even greater than PE 44, but there would likely be some reversion from those emotional extremes. The questions, as always, are what precisely to do and exactly when and to precisely what degree in response to the given that “valuations matter” (and they surely do). This will stymie most investors, perhaps forever, since even pros seem to get flummoxed and usually fail to beat simple benchmarks.
I would never say something “always works” if basing that on past data. So I’d not say that regarding a Shiller-inspired strategy as the only investing history we don’t know is that to come. Conceptually, we may assume similarities, but I would not do so with any precision.
I think WHAT is correct in that frequent adjustments to PE 10 may be disatrous for taxable accounts, even if they are do-able in tax deferred. Personally, I would advise simplicity here for most people who choose to use Shiller-inspired models, and shift less frequently.
Let me state the “honest posting” issue differently. I have seen numerous conversations that discussed PE/10 (other metrics too) and specific implementations based on it. And I’ve never heard any posters on those boards say the topic had been proscribed. It clearly has not been proscribed, as I’ve read the relevant discussions with details on implementations.
Rob, you seem to have two different theories which I can’t get reconciled.
That’s a super comment, Wade. Thanks so much for stopping by.
I agree with all you said. The way I would say it is that the two lines of thought are different aspects of a single theory. But you are right that there is a seeming conflict in the two lines of thought. That’s a great point to bring out.
I also agree with you that differences in takes re these two lines of thought are probably a big part of the reason why I am exceedingly concerned re where things are headed and many other smart and good people don’t appear to be too concerned. I often find fault with what I call “The Stock-Selling Industry.” I do NOT believe that people in the industry deliberately caused the economic crisis or have any intent of seeing it continue or anything along these lines. What we are dealing with here is confusion, uncertainty, and cognitive dissonance.
I’ll try to explain how the two lines of thought work together in my mind in a follow-up comment. I’d like to do what I can to avoid having this one get too long because the point being made here is sufficiently important that I want to be sure that people are willing to read this one.
Rob
One line of thought argues that overvaluation is the product of emotion. Thus, we can count on P/E10 values coming down over the long term once they reach super-high levels. We were at a P/E10 value of 44 in January 2000. Rationality demands that we can not go up from there or even stay at that level for too long. So we knew in 2000 that stock valuations would be coming down. The natural resting place is a P/E10 value of 15 (fair value). So there was good reason to believe that stock prices would not only be coming down over the long term but that they would be coming down hard.
Say that we were to get to 15 over the next year or so (we are now at about 21). The logic that says that the P/E10 value should drop from far above fair value to fair value would seem to also argue that it should stabilize at fair value. If irrationality on the up side is corrected, why wouldn’t irrationality on the downside be corrected? Once the P/E10 value fell below 15, the pull should be upward. So predictions that the P/E10 value is ultimately going to fall to 7 or 8 would seem to be out of place.
The thing that I am focusing on that others are not is the question of whether stock price changes affect the economy.
The conventional idea is that it works the other way around: It is economic developments that affect stock prices. This is why Buy-and-Holders believe that prices cannot be predicted. If price changes are determined by economic developments as they play out, there is no way to know in advance where prices are headed.
I of course reject this idea (the efficient market concept). It would be rational for economic developments to determine stock prices. If the market were rational, there would be no overvaluation (the rational thing is to price stocks properly). We have seen huge amounts of overvaluation in recent years. So we know that the market is not efficient. We know that economic developments are not the primary influence on stock prices. Investor emotions are the dominant influence.
So —
Where is investor emotion headed? Answering that question will tell us where stock prices are headed.
The rational thing would be for investors to pull prices down until we get to a P/E10 value of 15 and then stop. But we have already rejected rationality as the dominant influence. We need to focus on investor emotion, not human reason, to understand how the stock market works.
We have a history to look at. The same pattern has been repeating over and over again. It is an exceedingly odd pattern. After bull markets, prices never stop at fair value, they always continue downward until they reach one-half of fair value. This is crazy. Why should things play out this way? Things have always played out this way. We must try to come up with some explanation of what we see in the historical record.
I believe that the explanation is that it is not so much that economic developments affect stock prices but that stock prices affect economic developments.
Take a step back and think through what it means to each individual investor to live through a bull market. Say that you were 60 years old in 2000, had determined that you needed $1,000.000 to retire and had a portfolio valued at $900,000 in 2000. You thought you were set. The growth in your portfolio would permit you to retire at 65 even if you never made another contribution to your portfolio. So you were comfortable with buying new cars and going on expensive vacations and all that sort of thing.
Now consider what happens as the P/E10 value drops to fair value. Since stocks were priced at three times fair value, that’s a drop of two-thirds. The real, lasting value of your portfolio was not $900,000 but $300,000. How do you think that investor feels as over the next 10 or 15 years his portfolio value works it way back to its real value of $300,000? He feels sick to his stomach.
He does not panic all at once. This is not how humans react to bad news. We rationalize small bits of bad news, we tell ourselves it really isn’t true. Only as the evidence that the bad news is true becomes overwhelming do we let it in. Gradually, this guy goes from feeling that he is on top of the world to feeling that he is doomed. And it is not just one fellow going through this slow-motion agony. It is MILLIONS of people, all the people who buy the goods and services offered by the companies trying to earn profits in a consumer-oriented economy.
These millions all cut back on spending. Dramatically. Tens of thousands of businesses fail. Millions lose their jobs. It is bull markets that cause economic crises. A bull market is the taking of wealth from one decade and the moving of it to another decade. The decade in which the crushing losses are felt is a decade of economic retrenchment, a decade or recession or depression.
How do recessions or depressions end? Eventually, stock prices are as insanely low as they once were insanely high. At that point there are people willing to buy them no matter how depressed they are. That causes prices to go up. That puts money in the hands of consumers, just as the earlier price drops took money out of the hands of consumers. That causes an economic recovery just as the earlier price drops caused an economic collapse.
Millions of investors are today close to giving up on stocks but are desperately trying to hold onto their belief in Buy-and-Hold. The fall to a P/E10 value of 15 will vanquish their remaining hopes. The loss of the remaining hopes will cause prices to fall to one-half fair value. Bull markets cause bear markets. Bear markets cause economic crises. Economic crises causes P/E10 values not of fair value but of one-half fair value.
I’ll continue in a follow-up comment.
Rob
How can we know these things for sure? Can we do studies?
We sure can. But they won’t be the kinds of studies that you are accustomed to executing, Wade. We are talking about human emotion here. We need to talk about human emotion because it is the dominant influence on stock prices. But guess what? The “experts” in this field do not recognize the types of studies we need to perform to be able to analyze human emotion.
Sharpe ratios do not help us examine human emotion. What would help? Take a look at that link a little bit higher in this thread to the 101 community members who said they would like to see honest posting on stock investing permitted at all of our boards and blogs. Read those words and you will come to see how emotion influences stock prices. Forget Sharpe ratios for a time (I don’t mean just you, Wade, I mean all of us) and look at what you need to look at to understand the piece of the puzzle we have denied ourselves access to for many years now.
Death threats. Smear campaigns. Board bannings. Deception. Intimidation. Word games.
What do these things tell us?
They tell us that it is not only Rob Bennett who gets it that bull markets are as dangerous as all get-out. We all get that on some level of consciousness. Lindauer gets it. Greaney gets it. Bogle gets it. Everyone gets it.
We don’t let it in. Why? Because we all love us some Get Rich Quick. And, if we allow honest posting, Get Rich Quick is finished. How the heck can you push stock prices up to three times fair value when there is 30 years of research showing that stocks are not worth investing in once prices get to two times fair value? Our retirements are important to us. And we are generally rational people. If we permit honest posting of what the data says, Get Rich Quick is finished.
This is where Fama comes in.
Fama says that the market price must be right because investors would step in to exploit any discoverable mispricings. That makes perfect sense. That is indeed what should happen. Why doesn’t it?
What Fama missed is the Ban on Honest Posting. Millions of us understand the dangers of investing in stocks when they are priced at insanely high levels. But millions of us also love the thrill that comes with Get Rich Quick investing. So we create a Social Stigma that teaches all involved that there is one thing that must never be done — under no circumstances may anyone tell the truth about stock investing during a bull market. It is not done! We now have 10 years of Post Archives showing in great detail precisely how the Social Stigma put into effect.
So all of us both know what is going on and do not know what is going on at the same time. We know that valuations matter. And we know that we don’t want to know any details. So we shun those who attempt to fill us on on the realities. So we go deeper and deeper into the darkness.
This is the history of stock investing. Shiller gives the numbers for the three 20-year time-periods following big bulls. The average return for those three 20-year time-periods is roughly zero percent. We are of course seeing the same thing play out this time.
But the economic crises are not all equal in length or depth. The more wealth we gained in the bull market, the more we lose in the aftermath (because the wealth was being borrowed from the subsequent time-period). This bull of the 1990s was by far the greatest we have ever seen. So we should be expecting an economic crisis of far greater magnitude than what we saw in the 1930s.
We cannot let it in. It is terribly painful. Asking Buy-and-Holders to accept how much economic destruction they have caused is like asking an alcoholic to acknowledge how his drinking problem caused him to lose his job and his house and his family and his self-respect.
But the healing process only begins when the alcoholic acknowledges the problem!
I need to break for lunch.
Rob
I think Fama’s EMH is basically correct on the security level. There isn’t much evidence for profitable exploitation of the supposed inefficiencies.
What some don’t seem to understand (probably because they misunderstand what “efficient” means is this context) is that booms and bubbles and crashes are all consistent with EMH. Irrationality is irrelevant because there has been very little evidence for its abnormal exploitation.
Regarding emotions, there are studies that examine investor returns vs. the very funds into which they invested—the investors underperformed their own funds. This shows one aspect of emotional investing in peer-research. I think there are other studies too.
Nothing against Bill Sharpe but I agree that things like Sharpe Ratio are less useful things to examine the big picture issues.
Say that there is a one in a hundred chance that what I am saying above is so.
Our normal means as a society of dealing with that possibility would be to permit discussion of the idea by any parties who chose to participate in such discussions. If the idea were of value, we would expect it to catch on. If the idea were not of value, we would expect it not to catch on.
This is not the procedure we have followed in this case. Thousands of community members have expressed a desire that honest posting be permitted. But the Buy-and-Holders have insisted that bans be adopted at every major blog and board. Why? When something so out of the norm in our society happens, we should want to develop explanations.
The obvious explanation is that all perceive the weakness of the case for Buy-and-Hold and most cannot bear to hear the horrible truths spoken out loud. So we prohibit even discussing the matter. Which means that, if the ideas discussed above are valid, we will not know that until it is too late to stop our economy from falling into the Second Great Depression. This is not the kind of decision that a reasoning people would make. But the entire bull market phenomenon is not something that can be explained solely through an appreciation of human reason.
Shiller has said in interviews that he has never told us all he knows about stock investing. He is a leader in the field. You would think we would all want to benefit from his insights. But no one pressed him to tell what he has not said when he revealed that he has not done so. He even told us why he has not revealed all he knows. He would not be considered “professional” anymore if he did so.
We have turned off the fire alarm before going to bed for the night. Perhaps what I say is so, perhaps it isn’t. If it isn’t, our entire economic and political system goes under. Because we have made a decision as a society that our social norm of permitting discussions of whatever people want to discuss cannot apply in this case. This case is different, for some reason.
I think it is different because on some level of consciousness we all know. It is eating away at our insides because we all know. The more destruction we see, the greater our confidence in what we know. The greater our confidence that all these things are so, the more certain we all are that we must never permit discussion of them.
The other side of the story is that, if Shiller is right, it is possible today for us to reduce the risk of stock investing by 80 percent, to transform stocks into an essentially risk-free asset class. We face the greatest dangers we have ever faced. And we have before us the greatest economic opportunities that any people has even been blessed enough to enjoy.
I’ll continue to post honestly on safe withdrawal rates. I’ll continue to push for an opening of the internet to honest posting. If I am wrong, I would sure like to see someone show me and all the rest of us why. If I am right, I would sure like to see that come out before it is too late for us to take advantage of those wonderful opportunities.
Do I care about the Buy-and-Holders? Obviously. My love for them comes through in the words of every post I put up. Sometimes you show love by telling your friend the thing he very, very much does not want to hear. Sometimes it is only your best friend who is willing to take on the risk involved in doing that.
Rob
the general tendency for stocks to grow over time will overwhelm the slow downward trajectory in PE.
This is certainly so. We cannot say when the downward trend will stop and the upward trend will begin.
So I certainly don’t recommend that anyone wait until we are at 7 to start buying stocks. Shiller said that he would start buying once we go below 10. I think a case could be made to start buying once we go below 15. The long-term value proposition is strong enough at that point that a 50 percent drop that remains in place for a few years is not that big a deal.
This is the smaller issue. The bigger issue is — Is there going to be a U.S. economy after the Second Great Depression? If there is not, the Buy-and-Holders and the Valuation-Informed Indexers all lose together.
Stock investing is not a solo activity. It is a community endeavor. We all have a stake in the protecting our economy from further shocks. The more we tolerate and encourage insane levels of emotionalism, the greater the chances that the shocks we will see in future days will prove fatal to the overall project and that these questions about where we should set our stock allocations in various circumstances will show themselves to have been nothing more than the means we elected to divert our attention from the issues that truly mattered.
Rob
Rob, “…on this one occasion” lasted four decades, and still counting.
You present that as if 40 years is a huge amount of time in investing. It is not. Most investing lifetimes last something in the neighborhood of 60 years. A strategy that lasts 40 years and then yields horrible losses is an investing strategy that does not work.
We should be trying to build strategies that work for an entire investing lifetime. Anything less just doesn’t do the trick.
Rob
which is why you can never be satisfied about whether others are making enough effort to warn about valuations.
I’m not too worried about other people warning about valuations. I do enough of that to satisfy most community members!
My concerns relate to integrity issues. Say that we use markers to indicate the spectrum of opinion on valuations. The full range of opinion stretches from a 1 (Drip Guy) to a 10 (Rob Bennett). But today we do not permit those holding views associated with markers 7, 8, 9, and 10 to post and we intimidate those holding views associated with marker 6 to pretend that their views are in line with marker 4 or 5.
People are not logic machines. We all look for social cues to determine what to believe. So long as the only views heard expressed are those from Market 1 through 5, most community members are going to adopt views in accord with Marker 3 as their personal viewpoint.
If we were to permit honest posting by all, we would be seeing a lot more community members go with Markers 5 and 6 and 7. Over time, that makes a difference.
Every new idea started with one believer. Then it was 2. Then 4. Then 40. Then 100. Then 1,000. Then 1,000,000.
We have cut off the growth process for Valuation-Informed Indexing. We have violated our social norms to do so. I believe this was a terrible, terrible, terrible mistake.
It’s an integrity issue. Buy-and-Holders and Valuation-Informed Indexers should all share a concern with protecting the integrity of our board discussions. Re that one there should be a 100 percent consensus.
If we handle that one properly, the rest will just follow naturally. We won’t all agree and we shouldn’t want to all agree. It is because we disagree that we are able to use our discussions to learn.
Rob
And I’ve never heard any posters on those boards say the topic had been proscribed. It clearly has not been proscribed, as I’ve read the relevant discussions with details on implementations.
No. you haven’t, Arty.
You read something. But you didn’t read the threads that you would have read had honest posting been permitted. You didn’t read anything close to that.
John Colvin was voted one of the most popular posters in the history of the Vanguard Diehards board by the members of that community. He was banned for life upon formation of the Bogleheads Forum because the “leaders” of that forum knew how popular he was and how effective he was in challenging their weakest arguments. The same was true of Microlepsis. The same was true with John Walter Russell. The same was true with Rob Bennett. The same was true with Retiredby40. The same was true with many, many others. We don’t even know the names of most of those banned because there is no need for the “leaders” there even to acknowledge a ban anymore. They just ban the questions they cannot answer effectively and you are none the wiser.
You’re fooling yourself if you think you know what community members there believe, Arty. Once a board loses its integrity, nothing said there can be trusted from that day forward. The entire purpose of the formation of the Bogleheads board was to ban honest posting. The “leaders” have said this publicly! They demanded that Morningstar ban me because I posted honestly on SWRs, Morningstar refused because their published rules did not permit a ban in circumstances in which all the poster had done was post honestly on a matter of great importance to the community, and the “leaders” moved the board off Morningstar so that they could compromise the integrity of the discussions held there from that day forward.
You shouldn’t be defending a corrupt enterprise, Arty.
Rob
booms and bubbles and crashes are all consistent with EMH.
They are not, Arty.
An efficient market is defined as one in which all factors bearing on price are taken into consideration by the investors setting the prices. It is the processing of information that is being said to be “efficient.”
The most likely annualized 10-year return on stocks in 2000 was a negative 1 percent real. That information bit was obviously not taken into consideration by investors at that time. If it had been, millions of investors would have sold their stocks and the price would have collapsed.
The market is not efficient. The reason why is that investors can only set prices properly if they are able to gain access to the information needed to do so. So long as the Ban on Honest Posting remains in place, this is impossible. We are living in a Fool’s Paradise.
The market could be efficient. The market should be efficient.
But we will not see efficiency until we provide investors with some means to learn the realities of stock investing. The internet is the perfect medium for doing this.
Let’s Get Efficient!
Rob
Rob: 40 years is indeed a long time, especially when the effectiveness of the strategy has not yet ended. I am not saying that allocation (conservative strategy) will work forever, just that it is a buy-and-hold strategy that has worked well for a long time—longer even than investable indexes have been around.
But more importantly, and regardless of strategy, a smaller number of years becomes significantly more important as one ages. So, longer-term research (beyond 40 years) does not mean as much to one in retirement as it might for a young professional—for obvious reasons. And obtaining accurate data that goes very far back can become problematic too.
I agree with Wade on the larger problem being one of not saving enough, and also his point about it not being inevitable that a PE/10 cycle must re-enter single digits. The metric may be a useful adjunct and tool; it’s hardly a crystal ball.
—-
What is the longest thread (comments) you’ve had here? I don’t recall one this long.
and also his point about it not being inevitable that a PE/10 cycle must re-enter single digits.
It’s certainly not inevitable.
I am trying all the time to make the case that we are the luckiest group of investors that ever lived. We know more (at least intellectually — not in practical terms) about how stock investing works today than any group of investors has ever known. If we were to share what we have learned (or could have learned) from the academic research with the millions of investors who very much need to hear about the realities, we would be heading into the most exciting period of economic growth in history.
Will we do it, though?
I believe we will do it. But I predicted that the Campaign of Terror against our board communities would end on the morning of May 14, 2002, or at the latest perhaps the morning of May 15, 2002. My record on predictions re all this jizz jazz is less than super. So I am not wiling to say that I am 100 percent sure that we will share that information. I put the odds at perhaps two in three.
If we do that, we’re all going to be reaping the rewards for many decades to come.
If we fail to do that — No one is going to be able to say that Rob Bennett didn’t make a major pain out of himself pushing the idea at every blog and board willing to tolerate his presence for a few moments!
I like to think that we can all (Buy-and-Holders and Valuation-Informed Indexers alike) agree re at least that much!
Rob
What is the longest thread (comments) you’ve had here? I don’t recall one this long.
This is the record.
I’m getting old. In the early years of our discussions, we were breaking records left and right and it never phased me. Now I feel it, you know? I hate to think what shape I’m going to be in after another ten years of this stuff!
Rob
Rob, thanks for the explanations. You deserve a break!
It sure is going to be tough if PE10 keeps heading south. But, as I think you are suggesting, someone shouldn’t necessarily make asset allocation strategies under the assumption that PE10 will keep falling into the single digits. Basically, PE10 is just a bit overvalued these days, which means that for many VII style strategies, VII users will have the same strategic asset allocation as their buy-and-hold counterparts.
The issue of SWRs goes beyond valuations though. I think the message is getting out that the 4% rule may be partly based on the historical accident that US financial markets performed quite remarkably in the 20th century, and that the numbers from the Trinity study and its brethren do not apply when bond yields and dividend yields are so low with respect to their historical averages. Retirees need to remain flexible.
Rob, thanks for the explanations.
Thanks for listening, Wade.
as I think you are suggesting, someone shouldn’t necessarily make asset allocation strategies under the assumption that PE10 will keep falling into the single digits. Basically, PE10 is just a bit overvalued these days, which means that for many VII style strategies, VII users will have the same strategic asset allocation as their buy-and-hold counterparts.
You and I are not in complete agreement, Wade. But there is no dogma here, you know? We don’t know everything. So it would be foolish to insist on one approach.
Yes, if you went strictly by P/E10 level, you might go with the same stock allocation as a Buy-and-Holder today. I could see how someone would come to that conclusion.
Personally, I am at zero stocks. I believe we will be going a lot lower. I have probably been influenced by the interactions I have had with tens of thousands of investors over the past 10 years. I have seen a lot of emotionalism. That scares me. If I were to see investors calm down a good bit, that would cause me to feel a lot better about where things are headed.
Even if we were all in perfect agreement re that aspect of things, there would be more than one reasonable stock allocation choice. We can assign rough probabilities for what the 10-year return will be. But we can never know the precise returns sequence we are going to see (that is, even if we knew what P/E10 level we were going to end up at, we would not know how long it was going to take to get there or to come back up) and that makes a difference. So people always need to consider their personal circumstances. People with different financial circumstances should choose different stock allocations. It’s the same for people with different financial goals and for people with different risk tolerances.
The bottom line is that there is no One True Path. Let a thousand flowers bloom!
Rob
I think the message is getting out that the 4% rule may be partly based on the historical accident that US financial markets performed quite remarkably in the 20th century
This sounds like an excuse to me. The Old School studies are analytically invalid and have not been corrected in the 10 years since this became public knowledge. There are millions of middle-class people who are likely to suffer failed retirements as a result of the demonstrably false claims put forward in these studies. These millions of people should be in years to come pursuing legal actions against those who published the studies or promoted them or permitted promotion of them or whatever. This is one of the ways that as a society we will take a stand against the reckless promotion of Get RIch Quick strategies that has been characteristic of the Buy-and-Hold Era.
We knew all about the “historical accident” to which you refer when the studies were first prepared. So that is no excuse for getting the numbers wildly wrong and for failing to correct the studies when the errors were discovered.
Also, the studies would not be analytically invalid if the only problem were the “historical accident.” The studies claim to show what withdrawal rate would be certain to work in the event that U.S. stocks continued to perform in the future as they have always performed in the past. So investors knew they needed to consider the possibility that U.S. stocks might not perform as well as in the past and to make any necessary adjustments (this is of course 100 percent optional as there is obviously no way of knowing whether U.S. stocks will in fact be performing differently than they ever have in the past — the idea that they will is pure speculation and many of those pushing this sort of speculation today were heavily pushing the opposite sort of speculation during the Get Rich Quick years).
The failure to include a valuations adjustment is a very different type of matter. The failure to include a valuations adjustment means that the Old School studies do not do what they purport to do. They do not tell what withdrawal rate will work in the event that stocks perform as they always have in the past. They tell what withdrawal rate will work if stocks perform as they never in the past have performed (valuations have ALWAYS affected long-term returns and anyone claiming to “expertise” in this field should be aware of the 30 years of research showing this to be so).
I find the excuse-making being advanced in this post disheartening, Wade. I have strong feelings of respect and affection for many of the “experts.” I expect that, as the Buy-and-Hold Crisis worsens, we are going to see a lot of angry investors seeking to bring a lot of lawsuits and seeking political action and all this sort of thing. A certain measure of that sort of thing is 100 percent healthy. But I can easily see it going too far. I see it as my job to do what can be done to keep things balanced and positive and life-affirming. My guess is that that means that I will be doing a whole big bunch of “spinning” on behalf of The Stock-Selling Experts and the people who have failed to take action against the Internet Sewer Rats or who have promoted the discredited studies or who have failed to speak up against the discredited studies and so on.
Spinning is one thing. Engaging in outright deception is another. If I were to say that there was not a pressing need for these studies to have been corrected 10 years ago, I would be engaging in the most wildly irresponsible deception imaginable. I won’t be doing that and I don’t want any of the people who have behaved in such a manner as to take on legal liabilities here to be thinking that I will be engaging in such a manner. One thing we need to do to protect out political system from complete collapse is to win back people’s belief in the integrity of our leaders, which is obviously and properly at a low point today after years of heavy promotion of all this Get RIch Quick garbage.
I have responsibilities to the millions of middle-class people whose lives have been ruined beyond repair by these garbage studies. I intend to honor those responsibilities. I hope people understand that and I hope that people act responsibly both to help themselves and to help the people whose lives they have ruined and to help all of us affected by the economic crisis. The hand of kindness is outstretched to all these people. But phony baloney excuses don’t help. I hope that we will be seeing a whole big bunch less of the mumbo jumbo gibberish that gets us all absolutely nowhere in days to come.
Rob
Retirees need to remain flexible.
Yes. And the sorts of people who promote themselves as possessing “expertise” in this field need to keep up with the literature and to make whatever corrections are needed in their studies to reflect the current state of knowledge of how stock investing works. There are responsibilities on both sides. I think it would be fair to say that the millions of middle-class people who were taken in by these phony studies have done a far better job honoring their responsibilities than have the millionaires who have made big salaries pushing Buy-and-Hold strategies for 30 years after the academic research showed that there is precisely zero chance that they could ever work out for the long-term investor.
Integrity matters, Wade. When people offer retirement advice, they take on certain responsibilities. When people make mistakes in their retirement studies, they are obligated to make corrections as promptly as is humanly possible.
It pains me to see you making excuses for behavior for which there can be precisely zero good excuse, Wade. The sort of suggestion that I am picking up in your words above is beneath you, according to the work I have seen you produce before. Please let me know in the event that I am reading you wrong and if you indeed feel as strongly as I do that all of the Old School studies must be corrected by the close of business today, if not sooner.
Rob
You deserve a break!
We all do!
I look forward to the day when we put all the Get Rich Quick garbage behind us and move on to working together to develop the investment strategies that will help us and our readers and clients enjoy far higher returns while taking on dramatically less risk.
It will all be worth it when we get to that magical place. I cheated. I took a look at the last page of this little saga before I dared to put forward my famous (infamous?) post of the morning of May 13, 200. The good guys win in the end.
I just thought that it would be the fair thing to let you all in on the secret. So you can rest assured that we are in the process of working together to take this all to a highly satisfying and life-affiming place.
What do you know? Sometimes the humans do good!
Rob
Rob: “The entire purpose of the formation of the Bogleheads board was to ban honest posting. The “leaders” have said this publicly!”
That is a lie, and another lie.
I thought you called yourself a Christian man, Rob? If so, then it seems you need to repent of such wickedness.
Here’s the link that I provided up above to Arty, Drip Guy:
http://www.passionsaving.com/investing-discussion-boards.html
Integrity matters, Drip Guy. Yes, that applies for those giving retirement planning advice too.
Rob
Please let me know in the event that I am reading you wrong
Yes, I think you were reading me wrong. I’m not sure what got you offended. All I was trying to say is that there are a whole host of reasons why the 4% rule is questionable. Valuations is one of many possible reasons to cite.
Here is another very big and important reason: real investors pay fees, and those not using index funds may be paying very high fees!
In your responses here, you are getting back into the topic that the original SWR researchers should be blamed for producing bad studies. This gets back full circle 100 comments back to my comment #1. I think it sets a horrible standard to blame people for producing research which may subsequently be overturned by later research. What’s going to happen when someone produces a 4rth generation study that discredits the 3rd generation studies (using Todd Tresidder’s terminology).
You must also consider: even if someone knows that their 30 year withdrawal rate will be 2%, for instance, they may still choose to use a 4% withdrawal rate in order to enjoy their early retirement more, as the probability they will last 30 years may be small anyway, and if they do make it that long then they will deal with the consequences later. That can be a rational decision.
I think it sets a horrible standard to blame people for producing research which may subsequently be overturned by later research.
I responded to this when you brought it up above, Wade.
There is not a thing wrong with producing research that is subsequently overturned by later research. That’s all part of the wonderful game.
The issue here is that I made Greaney aware of the errors in his study in May 2002. His response was to threaten to kill family members of any community member who posted honestly on the SWR topic. He then organized a Goon Squad to attack all community members who expressed a desire that honest posting be permitted at the board.
Motley Fool did not ban Greaney or the members of his Goon Squad. It banned me because I made clear that I intended to continue to post honestly on the SWR topic.
I then took the matter to other boards and blogs. About 15 additional boards banned me solely because I posted honestly on the SWR topic or related matters, always at the insistence of Buy-and-Holders. The Buy-and-Holders argued in their posts that “experts” in the field endorsed these studies. So I asked numerous experts for help in getting the studies corrected and in getting the word out to the millions of middle-class investors who were taken in by the demonstrably false claims in the studies. This group included: John Bogle, William Bernstein; Larry Swedroe, J.D. Roth, Scott Burns,Bill Bengen, yourself, and a number of others. None of these “experts” has taken effective action until this day, Wade.
Now —
In our legal system, things are often decided by juries. Public opinion obviously plays a role in the passage of new legislation. In earlier economic crises, we have seen congressional hearings called.
Where do you think the sympathies of juries are going to lie as the economic crisis worsens and as more and more people learn about how the reckless promotion of Buy-and-Hold caused the crisis and how numerous “experts” in the field failed to take action to get the studies corrected or to inform the people hurt by the studies of what had been done to them?
If you think nobody is going to care, then you think nobody is going to care.
I do not think nobody is going to care, Wade. I do not think this is a joke.
I will work with anyone who is trying to take responsible steps.
I will never agree to post dishonestly on the SWR issue. I will seek to let all middle-class investors learn what has been done to them and I will do what I can to help the millions of middle-class investors who have been taken to seek recourse. All of our ten years of discussions have been preserved in Post Archives.
If you think this is all a big joke, you think this is all a big joke.
I have a very different take, Wade.
I do wish you the best in all your future endeavors in any event.
Rob
Rob, you are now including me in the list of people who fails to take steps to correct the original studies? I’ve never endorsed an original study, and I’ve been busy publishing studies which question some of the conclusions of the original studies. I respect Bill Bengen’s work and think his SAFEMAX concept is sound and helpful. But when applied to other countries, we find much lower SAFEMAXs. I don’t particularly care for the approach taken in the Trinity study. I don’t remember now what distinguishes the Greaney study from the Trinity study (was it just that he added TIPS too?), so I don’t have any comment on it. I don’t think any of this is a joke. But I think there are many facets of this issue and it is important not to get too bogged down on one aspect (valuations).
I wonder how different your life would have turned out if your 2002 post had been about fees instead of valuations. At the end of the day, fees may be more important than valuations. Don’t you care about how investors are being gouged by the actively managed mutual fund industry?
I don’t think any of this is a joke.
Actions speak louder than words, Wade.
Say that tobacco companies put out studies showing that smoking four packs of cigarettes a day improved one’s health. They do this by leaving out the cancer factor. They offer no reason for leaving out cancer, they just do it. Then, when called on it, they take aggressive action against those who ask the questions. They send Goon Squads to threaten to kill their family members. They engage in extensive defamation of them, seeking to ruin their careers. They demand that others shun them, making clear that the others will be subject to the same treatment if they fail to do so. They try to get those who show integrity re the matter fired from their jobs, as the Greaney Goons tried to get you fired from your job when at an earlier time you did the right thing re this matter.
Now — You, as a professional in the field, are called to testify.
Do you speak the obvious truth that the studies need to be corrected? Or do you engage in word games out of fear of what the people with big bags of money will do to you if you express your sincere opinion?
We all face these choices in the course of a lifetime, Wade. I faced such a choice when I was at the Motley Fool board and the author of one of the Old School SWR studies was engaging in vicious smear campaigns of those who questioned his extreme views on investing. I thought about how hard I had studied these matters before I handed in my resignation, knowing that I did not want to suffer the sort of life setback that follows from coming to a false belief re SWRs. I thought about how careful I was in posting my own ideas on investing, knowing that, if I ever discovered that I had gotten the numbers wrong in a retirement study, I wouldn’t be able to go to bed that night without knowing that the error had been corrected.
You are today on notice that the errors in these studies have been public knowledge for 10 years now. You have yourself acknowledged that the studies are in error. You have seen the viciousness of the Lindaurheards and the Greaney Goons up close and personal. They have even directed their threats at you personally. We are living in the early days of the economic crisis, so you know the political frictions that follow when an industry continues to direct hundreds of millions of dollars to the promotion of a pure Get Rich Quick approach for 30 years after that approach has been discredited by the academic research.
And you play word games? And you make excuses?
You say you respect Bill Bengen. I do too. So that is not an issue. I would think that, if you respect him, you would come to care for him as a person, at least a small bit. If you care for someone as a person a small bit, do you want to see that person going down the road that Bill Bengen is going down today?
I was personal friends with John Greaney before he became upset that I had posted honestly on safe withdrawal rates and threatened to kill my wife and children to show me what happens to those who step outside the lines. Given that I was friends with him, do you think I was right or wrong to post honestly? I think I was right. I put myself in his shoes and asked myself what I would want my friend to to do if I were the one who had gotten the numbers wildly wrong in a retirement study. I would want to know. I would want to save myself further embarrassment and further financial penalties. I would say “Thanks, friend” to the person who let me know that I had gotten the numbers wildly wrong in a retirement study.
I am John Greaney’s friend and I urge him to correct his study before the close of business today and to do all he can to help the people who have suffered very serious setbacks as a result of his error. I am Bill Bengen’s friend and I urge him to correct his study before the close of business today and to do all he can to help the people who suffered very serious financial setbacks as a result of his error.
I am John Bogle’s friend and I urge him to get on a very different course from the one he is on today. Buy-and-Hold is the past of investing analysis. Valuation-Informed Indexing is the future of investing analysis. Bogle laid the foundation for Valuation-Informed Indexing. He is a hero. He should be using his heroic talents to build the investing model that will cement his reputation as a giant in this field, not messing about with the sorts of Internet Sewer Rats who put up posts in “defense” of Lindauer and Greaney. What do you think the photos that have been taken of him standing in the same room as numerous Lindauerheads is going to do to Bogle’s reputation as the Buy-and-Hold Crisis worsens?
I am your friend, Wade. I don’t like seeing you post some of the words you have posted in this thread. Those words remain in the Post Archives forever. People taken in by Get RIch Quick investing schemes often defend those schemes stridently for a long time. The people in Bernie Madoff’s fund thought he was the the tops. They do that until the losses grow so large that they understand they have been taken. Then you see a very, very, very different sort of reaction from them to the sorts of people who promoted or defended the GRQ scheme.
Listening to your comments in your most recent post makes me feel like I am having a dream in which you are stuck in a burning building and come running out, only to turn around and run back in again for reasons that I cannot fathom. Buy-and-Hold is dead, Wade. We haven’t held the funeral yet. The body is stinking up the joint something awful. But the thing is dead. It was the Buy-and-Holders themselves who killed it. Once you heavily promote the idea that investment strategies should be rooted in the academic research, you cannot get away with continuing to push a strategy that has been discredited by the research for 30 years. It will not fly. It is beyond reasonable understanding that it has continued to fly this long. But it cannot continue to fly too much longer in any event. The next crash is the final stop before the burial grounds.
You are positioned to be the top guy taking us all away from this garbage and showing the path to the investing model that the Buy-and-Holders had intended Buy-and-Hold to be when they developed it. Your study is Shiller-level work. Nothing you say here or anywhere else is ever going to change that. But you are putting me in a hell of a position by pretending that you believe that Bengen’s mistakes just do not matter all that much.
I am the guy who is going to have to try to calm people’s anger so that we can put our economic and political system back together. I am obviously not in a position where I can speak dishonestly about the things that appear in the Post Archives. So when millions of people are looking for someone to hang and they come across Wade Pfau’s words acting like getting the numbers wildly wrong in a retirement study is some big joke, what would you have me say? I will point to the breakthrough research. You can count on it. But I am a man of limited powers, Wade. We will have to wait a bit to see how that flies in a very different public environment from the one we are in today. I would prefer not to be placed in the difficult position.
I like to think that all of the people who have behaved badly during our ten-year saga first got into this field with the intention of doing good. My strong sense is that that is indeed the case. Everyone I have met in this field is hardworking and smart. My sense is that they have standards of integrity that they apply to themselves and to others when they are acting outside of their capacity as investment advisors. Then they take off their ethics like they are taking off a shirt when it comes time to worry about committing any Career Limiting Moves like speaking honestly about the 30 years of research that shows Buy-and-Hold to be a big bunch of hooey.
We’re going to have to change this, Wade. There is no way to the other side of the Big Black Mountain except through it. The men who landed in Normandy didn’t want to be spending their limited number of days on Planet Earth having walls of bullets fired at them. They were placed in circumstances in which there was no choice. They did what they had to do. Some of them really did die. Some ended up heroes. That’s the way it goes sometimes.
You might get killed if you speak honestly. I cannot guaranty that that won’t happen. I personally believe that the forces of darkness are too weak at this point to take you on. That’s my sincere take, but I can offer no absolute promises. I do know that, if you work up the courage to post honestly, you will be recorded in the books as a Hero of the First Rank. There’s really no doubt about this whatsoever since I am the one writing the books! The entire rotten edifice of Buy-and-Hold is close to toppling. All it would take is one or two good pushes from a person of some influence. God put you on this earth for a reason, Wade. That’s my sincere belief.
Rob Arnott tells a story about a conference of investment researchers at which he asked for a show of hands re how many believed in the Efficient Market Theory. A tiny number of hands went up. Then he asked how many of the researchers would be basing the research they would do when they got back to the office on the Efficient Market Theory. Nearly every hand in the room went up.
You dare to tell the truth about SWRs and other critically important investment-related topics, and all of your fellow researchers can stop being useless, foolish, ethically challenged puppets and can resume directing their talents to good and useful and exciting and life-affirming work. There is huge leverage in this, Wade. Once the rotten edifice topples, we will be seeing hundreds of the sorts of research papers that were not permitted over the past 30 years, hundreds of the sorts of calculators that give legitimate guidance instead of Get RIch Quick garbage, hundreds of web sites where people talk things over without hate and anger and smear campaigns but in a spirit of mutual affection and respect and on a mutual quest for learning and discovery of promising new ideas.
You’re our man, Wade! If you can’t do it, no one can!
I’ve convinced me ten times over. I hope I have touched your heart just a tiny bit.
Be bold, man. The years pass and you end up on your death bed wondering what it was all about. No one ever looked back and wished he had engaged in one more word game response on a discussion board. The thousands of community members who have expressed a desire that honest posting be permitted turn their lonely eyes to you. We love you, man. And we need your help today.
The Goons are so 2002. Live for the future.
Rob
Rob,
I’ll just make one last comment and then I’m out of here.
The only truly safe withdrawal rate is 0%.
So what we try to figure out instead is what is a reasonably safe withdrawal rate.
Lower withdrawal rates are clearly safer, but they have the cost of reducing a retiree’s spending and increasing the chance of leaving a lot on the table at the end.
Retiree’s try to balance these tradeoffs: to find the highest withdrawal rate possible while still remaining “reasonably” safe.
Many people who have kept up with the literature still conclude that 4 or 4.5% is reasonably safe. That is the exact thinking process which can be seen in Bill Bengen’s interview.
Now, the 4% rule has many problems:
-it looks at the probability of failure and not the magnitude of failure (i.e. 1 year of failure is more manageable than 10 years of failure)
-it ignores the missed benefits of higher spending: people may be willing to spend more now even though it increases the probability of having less later
-it ignores other income sources such as Social Security, annuities, and pensions
-it doesn’t account for fees or taxes
-it assumes that retiree’s can actually earn returns that match the index returns
-it assumes retirees need inflation-adjusted withdrawals (i.e. spending doesn’t decline as people get older)
-it doesn’t account for valuations
I suggest you are focusing too much on the last point and ignoring everything else. Some of those other factors allow higher withdrawal rates, while others support lower withdrawal rates. A complete withdrawal rate study must account for all of this.
Many people who have kept up with the literature still conclude that 4 or 4.5% is reasonably safe.
The New School SWR research shows that those people are wrong, Wade. The New School SWR research (which is analytically valid, in marked contrast to the Old School research) shows that a retiree who began his retirement in 2000 and took a 4 percent withdrawal has a 30 percent chance of having that retirement survive 30 years. That ain’t “reasonably safe,” Wade. It ain’t a close call.
That is the exact thinking process which can be seen in Bill Bengen’s interview.
Bengen suggests in the interview that there is a chance that the retirements will survive. There is a chance. There is a one in three chance. That ain’t reasonably safe. The millions of people who were taken in by these studies need to be warned of how dangerous they are. We need to get those warnings out today, not tomorrow. Each day we wait worsens the problem for every single one of us.
If were were talking about studies that got numbers wrong in any field other than stock investing, we wouldn’t be having this discussion. There would be a 100 percent consensus that the studies should be corrected. What is it that makes stock investing so different other than our desire for Buy-and-Hold/Get Rich Quick not to be challenged for so long as we are trying to maintain our fantasy belief in it?
I suggest you are focusing too much on the last point and ignoring everything else.
There would have been no death threats had I focused on fees or taxes, Wade. Buy-and-Holders don’t live in fantasy worlds re fees or taxes. They live in fantasy worlds re valuations. It is the Buy-and-Hold fantasy re valuations that caused the economic crisis. That is the problem that I am trying to address. I go where the action is.
A complete withdrawal rate study must account for all of this.
You could get all of those other factors 100 percent right and your numbers would still be wildly off the mark if you failed to include a valuations adjustment, Wade. And as of today there is still a wall of denial re this question among the “experts” in this field. None of us have even a tiny chance of developing true expertise until we agree to work together to give ourselves permission to talk about the investing topic that matters most.
Valuations is the Number 1 consideration in any legitimate investment analysis. Why? Because it is our emotions that cause us to act in self-destructive ways. It is only by studying investor emotion (evidenced by overvaluation and undervaluation) that we can work our way out of the dark ages of investing analysis.
I am looking to move forward. I am very excited about the things we all will be learning together in days to come. Despite your words here today, my personal hunch is that you are going to be playing a big role helping us all out and that you will be having the time of your life doing so.
Here’s to better days and more fruitful and life-affirming discussions than this process-oriented junk we all need to wade through as we try to make our way to the other side of the Big Black Mountain!
I’ll just make one last comment and then I’m out of here.
It was kind of you to take the time to visit here, Wade.
I hope that, while I have obviously not convinced you of all that I would like to convince you, perhaps I have put a few thoughts in your head that will grow into something bigger over the course of time. I promise to go back a few times and reread your words with the hope of seeing in them the second or third time things that my blockheaded nature refuses to let me appreciate on the first run-through.
We cannot solve all of the problems of the world in a single day. My hope and belief is that we have advanced the ball a tiny bit and that we should take our leave of this record-breaking thread in a spirit of good cheer. We’re not where we all want to be. But there are many signs that we are gradually getting there. That’s not nothing. That’s good stuff, big good stuff.
Rob
Hi, Rob,
I hope you read Wade’s comments again. I thought Dripguy and What also had some good things to say.
A good, long thread.
Happy New Year!
Yes, I was being sincere in saying that I would read Wade’s comments again, Arty. I often do that. I go back to threads where there were interesting discussions and try to see if there were points made that i didn’t focus on the first time around. I also take walks and think over the threads, trying to see things from different perspectives (to the extent that I am able to do so — none of us is perfect at doing this).
I agree that DripGuy and What make good points. I think it would be more honest on your part if you would acknowledge that they are both often horribly abusive. They both need to cut out the garbage posting. They both need to take a vow to do that starting tonight.
I agree that it was a super thread. A good thread is always a community effort and we have a number of people coming at things from different points of view. I think that newcomers could learn a lot by taking in that thread. Thanks for your contributions to it.
Rob
It is true that I still don’t understand why anyone would bother to visit here repeatedly just to attack you. I don’t get the “trainwreck” stuff and don’t watch any of it on TV either, though I don’t doubt it is popular viewing. That aside, I can’t naysay much of what they believe that was relevant to investing.
I think Wade made strong points. And I hope that at least some of the points some of us made might prove helpful to you on reflection.
It is true that I still don’t understand why anyone would bother to visit here repeatedly just to attack you. I don’t get the “trainwreck” stuff and don’t watch any of it on TV either, though I don’t doubt it is popular viewing.
I mean no offense. But my view is that, if you don’t understand the Goon phenomenon, you don’t understand the dangers of Buy-and-Hold Investing. The Goons are outliers, Arty. Most people are like you. But ALL of us (this includes me) have a little of what drives the Goons so nuts inside us.
We need to understand Goonishness to understand stock investing. The Get Rich Quick urge (Goonishness) is part of the story. It’s a BIG part of the story.
We need tools to protect ourselves from ourselves. This is the power of P/E10. P/E10 is essentially a Goon meter. It tells us when we are becoming too Goonish for our own good. Buy-and-Hold lacks that Goon meter and that is why it never works in the long term. It works for a time and then the Goonishness grows and no alarm goes off and everything goes to hell.
Valuation-Informed Indexing will change the history of investing because it will provide us with tools to keep our Inner Goon in check. This is the idea. This is what makes VII different.
Rob
I can’t naysay much of what they believe that was relevant to investing.
I naysay some of what they say and I agree in part with some of what they say and I agree strongly with some of what they say.
I like it when they post in a civil and reasonable manner because it supplies a balance to the discussions that does not exist when I am hogging all the words.
I hope that at least some of the points some of us made might prove helpful to you on reflection.
I’m good with those words, Arty. But I hope it works the other way around too. I put a good measure of effort into being sure that I reflect on these matters and remain open to views that I don’t at the time share. I like to think that I am not the only one doing that. Reflect, Arty! Reflect, Wade! Reflect, What! Reflect, Drip Guy! Reflect, Greaney! Reflect, Lindauer! Reflect, Bogle!
And so on.
Investors of the World, Reflect!
You Have Nothing to Lose But Your Economic Crisis!
Rob
I still can’t take “goonery” seriously in the forms you articulate it here. Maybe that is because I come from a world where dealing with what I see as the real thing was a way of life. I don’t see these guys you mention as barriers to learning on any of the forums. And to the degree their views dominate (if they are “bad” views), that is on the other members. I have no patience for abusiveness, though. Still, it was nice to see these other voices chiming-in.
Rob, if we all didn’t reflect on at least some of what you’ve said we would not visit here.
I suggest you call it Valuation-informed *investing*. Investing gets to the core of it. The term still works without the “indexing,” and note that many passive funds—perfectly suitable to the purpose—are not actually index funds (DFA, etc.)
I come from a world where dealing with what I see as the real thing was a way of life.
That comes through all the time. I like that about you. A lot.
I don’t see these guys you mention as barriers to learning on any of the forums.
I see them as huge barriers, virtually insurmountable barriers (at least until the Normals (you!) accept that they must be deal with.
Most people don’t pay as much attention to things as you do, Arty. They see the surface and they form impressions according to that. I’ll give you an example.
One of the things that Normals would often say is “Rob seems like a nice guy and he makes lots of good points but I agree that he posts too much and so I guess I can see a little bit why some think he should be banned.”
Now —
It’s a reality that I had a large numbers of posts on threads relating to valuation topics. So they were seeing something real.
They were not seeing something that in any way, shape or form was the product of any improper posting on Rob Bennett’s part. I have rules that I follow to make sure that I NEVER cause any disruption in community conversations. One of those rules is that you get one post to make your point and then you let it go and let other people have their say.
So how is it that I had so many posts on those valuation threads?
A standard Goon trick is to assault me with dozens of posts in response to my post and to include in each of them at least one legitimate question as well as lots of abusive garbage. My standard practice is to ignore the tons of abusive garbage and respond as effectively as possible to the legitimate question. This is a RESPONSIBILITY that applies for those who bring new ideas to the table. The Normals have every right in the world to be able to hear the responses to those questions. So I provide them.
The problem, of course, is that the questions are 100 percent insincere. The Goons have zero interest in hearing the answers, their intent is 100 percent to disrupt. THe Normals don’t know that because they do not follow things closely enough. But those of us who have seen this stuff play out thousands of times sure know it.
Another trick is to put threats of physical violence and acts of defamation in the abusive part of their posts. This drives the best posters in a community away and helps the Goons “win” future discussions because the people capable of responding effectively to them are now out of the room. I spent several years of my life building up the Motley Fool board. I watched the Greaney Goons work 24/7 to drive away every poster in that community who possessed even a tiny interest in the subject of early retirement.
Why should that be permitted? We had thousands of people at that board with an interest in the subject of the board. There was one guy who got an important number wrong in his retirement study. Why should the thousands of us with an interest in the subject lose the asset we worked hard to create because of this fellow’s shame over the mistake he is not man enough to acknowledge? I don’t buy it. Not by a long shot.
There are good reasons why the rules of every board and blog I have ever posted at prohibits the tricks used by the Lindauerheads and the Greaney Goons to destroy the board communities at which they have been permitted to participate. I support the thousands of community members who honored their promises to abide by those rules and agree with them that the sorts of individuals who need to rely on death threats to make their “points” should be promptly shown the door. We just don’t need the business that bad, in my humble assessment.
Rob
And to the degree their views dominate (if they are “bad” views), that is on the other members.
It’s not anybody’s views that are at issue here, Arty. A death threat is not a “view.” An act of defamation is not a “view.” A smear campaign is not a “view.” These are not views. They are acts. Acts of hate and acts of anger and acts of contempt.
The Lindauerheads and the Greaney Goons have made a number of suggestions to me that I would be permitted to post at all of the boards if I would just be willing to post dishonestly on safe withdrawal rates. Say that I go along with this demand. What happens down the road?
Down the road I would have thousands of lawsuits filed against me. There’s an extensive record on the internet showing that I have looked at the historical data. So I obviously know that the historical data doesn’t say anything even remotely close to what the Old School SWR studies say it says. There are obviously going to be millions of people suffering failed retirements as a result of these demonstrably false claims. So if I post in “defense” of these long discredited studies, I open myself to billions in lawsuit liabilities.
I am a Normal, Arty. I don’t want to open myself to billions in lawsuit liabilities. Guess what? The other Normals (90 percent of the boards) feel just like me. They don’t want Goon Squads showing up at their houses with baseball bats. They are not interested! So, when you let the sorts of individuals who post “defenses” of Lindauer and Greaney on your board, you lose the people of intelligence and integrity who could make the board hum if only you were willing to honor the promises you made to protect them from such ugliness back when you were trying to entice them to participate.
The LIndaurheads had a trick they would play when someone posted honestly of using information they picked up on the internet to find out where they worked and then calling their bosses and trying to get them fired. Most people of intelligence and integrity are ashamed to be part of a community that does that sort of thing because a few Big Shots got important numbers wrong in retirement studies. So they leave the community when the site owners make clear that they have no intent of honoring their promises to them.
Larry Swedroe once posted honestly at Vanguard Diehards. It was before my time but I read posts there where people discussed it. The Lindauerheads had him banned and he wanted to use the board to promote his business so he came back on his knees. I think it would be fair to say that he has never dared to make that “mistake” again, Arty.
Look at Bogle. Bogle is a giant in this field. I don’t think there is anyone who says different. Should he have to live in fear of a Goon like Mel Lindauer? I mean, come on. If Bogle were the head of a used car lot, he would be on the phone demanding that Lindaurer he given the boot within 24 hours or that his name be taken off that board. But because people like you are afraid to stand up to Lindauer, Bogle lives in fear of what Lindauer will do to him if he dares to post his sincere views. Not good. Not good at all. Not a close call.
The rules at the boards are there because there are thousands of years of civilization that have taught us that we need some minimal protections against the low part of human nature that causes some of us at times to feel a temptation to post in “defense” of a Lindauer or a Greaney, Arty. I am a Retire Early guy and an Indexing guy, Arty. I want no part of this Goon garbage. I was promised that I would be protected from it when I agreed to spend my energies building up the boards and I expect those promises to be honored by the people making a buck off of my good efforts.
I can’t go for that. Not this boy. No can do. Find someone else.
It’s not my particular cup of tea.
It’s not a close call.
Rob
I have no patience for abusiveness, though.
Actions speak louder than words, Arty.
Rob
arty TRIED to get Rob to understand: “I suggest you call it Valuation-informed *investing*. Investing gets to the core of it. The term still works without the “indexing,” and note that many passive funds—perfectly suitable to the purpose—are not actually index funds (DFA, etc.)”
Exactly, arty.
My own moniker (DRiP Guy) comes from “DRiP plans” — decades ago, I used to invest exclusively in Direct Re-investment Plans, which were a no-to-low cost way to purchase individual dividend-bearing stocks directly from the company, and have your dividends automatically reinvested.
In the days before the internet was popular, and online investing was common, companies such as Coca Cola, Gillette, Proctor and Gamble, Dial, Duke Energy, Walmart, etc would create and manage these programs you could do by mail. You could get companies from all the major sectors — Energy, REITs, consumer goods, industrial, medical, even international via ADRs I purchased like Novo Nordisk
This was long before I heard of Bogle, and before Bogleheads existed, and I did copious research before I bought, creating a broadly based portfolio of individual stocks, by applying a personal stock screen for valuation that I developed by reading Peter Lynch, Graham, Buffet, and other gurus. As some stocks soared, I would sell some or all and reinvest (rebalance) the proceeds in other DRiP stocks. They did charge a nominal fee to sell, and they all made clear that the intent was not for traders, but for long term holders, but with no broker fees it was a very nice way to invest, apply your own strategy, and create a balanced portfolio.
Eventually, as I learned more, and became aware of Bogleheads, I realized that although quite successful to date, my own approach was foolish compared to just fully participating in a broad market basket of global stocks, as was by then available very economically and immediately on line.
I no long try to value individual issues ( or the whole market for that matter!) but if a person really believes in “Valuation Based Investing” then they really should NOT use indexes, IMHO, but should look at individual securities. If they are unable to make the right decisions there, then I can;t imagine how they think they could value a larger mix of a multitude of companies, whether it’s by PE10, or any other single ‘value’ metric.
Still, it was nice to see these other voices chiming-in.
Not when they posted abusively, it wasn’t.
Forget the damage they have done to the people who were fooled by their “Studies” and the numerous board and blog communities they have destroyed or compromised. Look at the damage they have done to their own personalities and to their own souls.
You want to be a part of that? You are going to sit in silence while that plays out in front of your eyes?
Again, not this boy. I build these boards for positive and constructive and life-affirming purposes.
No sale. I’m not in the hate and anger and contempt producing business. Nothing that I have seen over the past 10 years has caused me to want to look into the details of signing up.
Rob
Rob, if we all didn’t reflect on at least some of what you’ve said we would not visit here.
Those are encouraging words, Arty.
Now if only I could manage to attract more than a single visitor!
Rob
I suggest you call it Valuation-informed *investing*. Investing gets to the core of it. The term still works without the “indexing,”
I have mixed feelings re what you are saying here, Arty. You are making a legitimate point. But indexing really is key to this. So for now I intend to stick with the current name.
Names I have considered or tried out over the years are: (1) Rational Investing; (2) Probability Investing; and (3) Valuation-Informed Indexing.
It’s true that investors who are not indexers benefit from this. So the name is a bit limiting. However, my primary aim is to help the middle-class investor. I am a Bogle guy through and though (remember, it was by reading Bogle’s book that I learned that the Old School studies get the numbers wrong). I think Bogle changed the world of investing in as fundamental a way as Shiller did with his promotion of index funds for the ordinary investor. Indexing changes everything.
We have diminished the risk of stock investing by 80 percent for those willing to acknowledge that Buy-and-Hold is a failed experiment. That’s huge. And you can’t do that for non-indexers.
So indexing is a huge part of this story. I see VII as primarily an indexing thing. There are some implications that go beyond just indexers. But the big story here is what we have done for the typical middle-class investor. And I agree with Bogle that most of those people would be better off in index funds than picking individual stocks.
Rob
if a person really believes in “Valuation Based Investing” then they really should NOT use indexes, IMHO, but should look at individual securities.
You are entitled to your opinion, Drip Guy, and I thank you for taking the time to share it here. But we could not possibly disagree more re this particular point.
I am obviously the #1 advocate of Valuation-Informed Indexing in the world. And I would never tell anyone that tools like The Stock-Return Predictor would work nearly as effectively for those buying individual stocks.
I think those buying individual stocks should look at the Predictor before doing so. I think it has value for them. But I would never say that we have reduced the risk of stock investing by 80 percent for stock pickers. Maybe 20 percent, something like that. The primary risk for stock pickers is that they will make bad choices. Indexers obviously don’t need to worry about that. So it’s a very different story for them. For them all the risk is concentrated in the valuations area.
Rob
DRIPGUY:
Thanks for your explanations. It was interesting to hear how your own investing developed. Right now, in fact, there are very many who have been involved in your old dividend-payer stock approach (you can see and hear examples of this everywhere, especially on sites like Seeking Alpha). Indeed its popularity being at high tide makes me wonder if it is about to be arbitraged away. Still, I can see why folks do that, research, fundamentals, dividends, balance sheets, etc.
I hear you about the ways folks should manage their portfolios, were they to employ a value-based strategy. Indeed, many do this now—on the security level—as mentioned. We both agree that is not practical for most.
The question becomes if one were using, say just the S&P 500 in conjunction with PE/10 (no balance sheet or fundamental analyses), could there be at least principles that would allow for a simple way to guide their equity commitments?
It is fair that you, and others, believe that even this simpler approach is not feasible for most, even if everyone understood the basic concepts of buy low/sell high, and some rough estimate historical “fair value”.
At present, and given the way emotions can hold sway over even knowledgable and disciplined investors, I tend to agree with you (and WHAT) in that even if they (the average folk) absorbed the “price” premise, strategy *implementation* would likely befuddle or paralyze them. (After all, it seems to confuse even many pros!) This is why I tend to think it a useful adjunct only at the *historical extremes*, and even there, these may shift in future, as they did in past.
But I’m not certain of the utter impracticality of the concept. Perhaps in time, and with enough crises and books and other info to help impel change, things may change on that front. After all, aren’t more people using indexing today, which was once decried as being “Un-American”)? So while I agree with you now, and maybe ten years from now still, I remain a bit more open to the question.
After all, aren’t more people using indexing today, which was once decried as being “Un-American”)?
Precisely!
I have a quote from Machiavelli at the “People Are Talking” section of the blog. He says:
“There is nothing more difficult to plan, more doubtful of success, nor more dangerous to manage than a new system. For the initiator has the enmity of all who would profit by the preservation of the old institution and merely lukewarm defenders in those who gain by the new ones.”
That’s the story of our first 10 years of investing discussions, in a nutshell.
Rob
ROB: Note that DRIPGUY is not advocating picking individual securities as he no longer recommends that approach. But there are successful “value” investors doing that on the security level. I think we ALL agree this is not the way for most. And I think DRIPGUY’s hypothesis regarding individual securities (and valuations) goes beyond just using PE/10, if using it at all. But again, the point is moot since he is not advocating it.
I understand you re: “indexing” but it simply no longer serves and likely will not serve in future. What you are describing is “passive basket investing”. Today, there are many funds that do precisely this that are not index funds because they contain internal screens to help improve the efficiency of the basket.
And the PE/10 approach works with active funds too, just less so due to higher cost. No huge deal but I think the word “investing” is better here for its general utility and clarity. Any work that explicated the approach would then recommend passive vehicles.
Today, there are many funds that do precisely this that are not index funds because they contain internal screens to help improve the efficiency of the basket.
I have my doubts about the efficacy of those internal screens, Arty. But I haven’t studied the matter in any great depth. I certainly have no objection to people looking into the matter or advocating that approach or anything along those lines. I am sufficiently excited re what can be done today with simple and broad index funds that getting the word out about that remains my focus.
And the PE/10 approach works with active funds too, just less so due to higher cost.
Wouldn’t it depend on how diversified the active fund is? If the fund is not sufficiently diversified, it seems to me that it would not work. The beauty of broad index funds in my eyes is that they give you the ultimate in diversification.
No huge deal but I think the word “investing” is better here for its general utility and clarity.
It could be that you are right, Arty. I am not wedded to “Valuation-Informed Indexing.” I’ve grown to like it. But I think the point you are making is a legitimate one. I’ve never been 100 percent thrilled with the VII name, just happy enough with it that I don’t worry too much about the matter.
Rob
Rob: Yes, what you are questioning is “manager risk” in all the forms that takes. Note that even this is subordinate to the costs hurdle the managers must overcome—that being the chief problem, as Bogle correctly surmised decades ago. But, if possible, it is best to avoid manager risk too, in my view and that of many experts.
The funds I described above, like DFA, are index-like in their passivity and broad basket approach. Others are copying their use of screens that help reduce turnover costs and improve the efficiency of the otherwise passive fund. I think you will be seeing many of these funds in the future; they make a good deal of sense when you see what they do. Currently, DFA (which must be accessed through an advisor) is the leading name in this. I would not be surprised to see Vanguard with its own offering soon.
Way above, I think you (they) may be wrong on Larry Swedroe. You”ll have to show me in those posts. Larry has his own approach to passive investing which is quite un-Bogle-like, yet he continues to post his views. My guess is that the boards desire high profile guys like him to add prestige more than he needs them to sell books–which amounts to pennies to him. He is already quite wealthy.
I think you (they) may be wrong on Larry Swedroe.
I’ve read things by Larry that I think are top notch. So it’s not that I am anti-Larry.
I don’t believe that any of these people do what they do strictly for the money. That charge is a bit too cynical for my tastes. But I can imagine that Larry likes to sell his books because he believes that they carry a good message. And that he sees posting at Bogleheads as a good way to do that.
The factual issue here is — Was he banned or was he not?
I was not there when it happened. But there was more than one poster who referred to the incident. People were afraid to talk too openly about it. The idea that I picked up was that he was banned at the insistence of the Lindauerheads and then later reinstated after some sort of deal was forged.
If that’s true, you cannot trust anything he says, can you? And that applies not just to Larry. You cannot trust anything that anyone who was there says. Once intimidation tactics are applied, honesty goes out the window. People who live in fear don’t dare to express their sincere thoughts.
Even Larimore doesn’t express his sincere thoughts at that board, Arty. There was a thread in which Larimore tried to play the role of peacemaker. He put forward a message with the theme that it is okay for people to disagree and that we should all try to treat each other with respect. Numerous posters from both “sides” expressed agreement and tried to seal the deal. Then one of the Lindaurheads showed up and put the kibosh on it and Taylor dropped the idea.
Taylor wasn’t in favor of the idea of abandoning Morningstar. That was another case where it was Lindauer calling the tune and no one who had seen him in action dared to say anything.
Once death threats are employed to keep people in line, a board becomes a corrupt enterprise, Arty. That’s why we have rules dealing with that sort of thing. We had lots of people at Morningstar expressing support for the idea of allowing honest posting. That’s why Lindauer encouraged the Greaney Goons to start posting there. Everyone knew about Greaney’s reputation for using death threats to keep a board under his control. When Lindauer saw that his Goons were losing control, he went to someone more experienced and the Greaney Goons came through for him.
I don’t think you can say that there is one poster there who is not compromised today. Once you see these things (and anyone who has been there for any length of time has obviously seen these things) and fail to speak up, you are compromised. Once you are compromised, you don’t even want others posting honestly because it makes you feel bad that you sacrificed your own integrity just to be able to post on some discussion board.
Lindauer challenged Wade’s ethics. He said that he was doctoring his studies.You say that they like to have big names participating because it adds prestige to the board. If that were true, they wouldn’t be insulting people like Wade. What they want is academics that go along with the Get RIch Quick garbage. They don’t want academics reporting honestly what the data says. No way, no how.
Can you name me one person posting there today who regularly makes the case that the Old School studies should be corrected? Once they banned all the people who were effective in making the case that valuations matter, no one has dared to speak up in any sort of sustained way. There were some who left to go to the Morningstar board, but Mel stepped in there. He went to the big shots at Morningstar and got those people banned too.
There are some people who wonder why Morningstar even cares what some jerk named Mel Lindauer wants. Some speculate that it is Bogle that gives Lindauer his power and Lindauer certainly brags all the time that that is the case. Do you think that’s so? Do you think that Bogle, who gives the impression of being such a nice guy, is a Lindauerhead behind the scenes?
I hate to think that that is so.But, given what I have seen, I cannot rule it out 100 percent. I have sent Bogle three e-mails asking for his help with the Lindauer matter. I have not received a response. I think it’s fair to say that there is some sort of funny business going on.
I intend to continue to post honestly on safe withdrawal rates, in any event. I am very, very very sure that that’s the right way to play it, the way that is in the best interests of every single person involved, including Lindauer and Greaney and Bogle.
Rob
If you really wanted to know the true story re the Swedroe banning, there would be an easy way to find out, Arty. You could go over there right now and put up a post asking about the incident.
I have a pretty darn strong hunch that you are not going to do that. And I think it would be fair to say that, if you were honest with yourself, you would acknowledge that you know as well as I do why you wouldn’t consider doing such a thing.
Death threats and investing discussions don’t mix. No way, no how.
My sincere take.
Rob
I’m not member of the site. I don’t need to know or care that much. The story just sounded odd.
Death threats? Wow these investment posters are tougher than I thought! Kind of reminds me of my old nabe. Almost…
I don’t need to know or care that much.
I of course understand that it’s only a niche topic, Arty. It’s only something that would be of interest to those who see a benefit in our not falling into the Second Great Depression.
Death threats? Wow these investment posters are tougher than I thought!
It’s not so much that they are tough. It’s that they are desperate.
If you were trying to convince people that Buy-and-Hold is superior to other investment strategies because it is supported by the academic research and someone came on the board who knew about the 30 years of academic research showing that it has precisely zero chance of working out for any long-term investor, what would you do?
The one thing re which the Goons and I are in complete agreement is that, the day the boards are opened up to honest posting is the day that Buy-and-Hold goes down. What divides us is that they want to delay the coming of that day as much as possible and I want to see that day arrive as soon as possible. We are working at cross purposes.
I’ve got common sense and the academic research on my side. They’ve got The Stock-Selling Industry and the use of death threats and other intimidation tactics on their side.
Death threats can be pretty darn effective stuff in the short term when you are living in a era when The Stock-Selling Industry has been spending hundreds of millions of dollars promoting the purest and most dangerous Get RIch Quick scheme ever concocted by the human mind. But I think it would be fair to say that the Goons are now starting to wish that they had given some thought to the long term before they elected to go down the path that they elected to travel.
I’ve extended the hand of kindness to them many, many, many times. But I think it would be fair to say that I have been a wee bit stubborn re the dishonest posting thing. So thus far it’s been No Sale.
Rob
The story just sounded odd.
Understatement is my favorite rhetorical device.
Rob
It sounds odd because it is told from the perspective of a seriously odd person.
I’ve violated the Social Taboo that says we are not to tell the truth about stock investing during an out-of-control bull market, What.
You see that as a bad thing. I get that loud and clear.
You know what? I see it as a good thing.
I have seen the research showing that, once our right to post honestly re stock investing (we all possess this right, whether we today appreciate that we possess this right or not) is recognized, we will be able to diminish the risk of stock investing by 80 percent, to transform stocks into a virtually risk-free asset class. If you don’t see how cool that is, you don’t care nearly as much as I do about helping middle-class people achieve financial freedom early in life.
“Odd” means “out of the norm.” I was the first person to describe how stock investing works in the real world in clear and bold and simple terms. I didn’t do anything that you didn’t have the intellectual ability to do or that millions of others didn’t possess the intellectual ability to do. It’s not a superior intellect that made me “odd” re this matter. I’ll tell you what it was.
I spent nine years saving every dime, paying off my mortgage early and dreaming of achieving the level of financial freedom that would permit me to do the kind of work I do today. My wife home-schools my two boys, so she is financially dependent on me. I of course want to give my two boys all the head-starts in life that my parents sacrificed to provide me. So I thought things over 5,000 times before I felt I knew enough about how to invest my money properly to dare to hand in a resignation from a high-paying job and count on the earnings of my savings to support me and three other human beings.
That’s why I didn’t just buy into the “findings” of the Old School safe withdrawal rate studies on the grounds that after all the people who prepared those studies were “experts.” I checked the methodologies. I checked enough of the literature in the field to find out whether the methodologies were analytically invalid. I read John Bogle’s book and I pondered the implications of the most important and the most startling things he said in it. It was not intellect that drove me to do that. It was love. And it was love that drove me to share what I learned with my fellow community members at the Motley Fool board despite all I knew about how viciously abusive John Greaney (the author of the phony baloney SWR study that was being pushed at Motley Fool on a daily basis) was.
My love overcame his hate.
And in the following 10 years my love overcame the hate of lots of other “experts” in this field who think it is okay to leave retirement studies that get the numbers wildly wrong uncorrected for so long as there is another dirty and smelly dollar to be made from doing so.
Love overcame hate in the end, What. Imagine that.
It’s been known to happen. None of us would be here today if love never overcame hate. You were a baby once, right? You wouldn’t be driving around in all those fancy cars today if there hadn’t at one time been a fellow human who directed some love in your direction. So you possess at least a foggy recollection of how things really work down here in the Valley of Tears.
Maybe it’s not all so “odd” after all. Maybe the humans have a force within them that makes them want to tell the truth about safe withdrawal rates that in the right circumstances can become even stronger than the force within them that makes them want to tell tall tales about safe withdrawal rates to “earn” a quick buck. That’s what I think.
I could be wrong.
But I’m not.
Rob
Rob: Inferring a positive from WHAT’s post, I agree you could be more effective at communicating the very same ideas, even if we may strongly disagree with some of your claims.
It isn’t your argument on valuations (for example) that is the biggest issue, in this context. It is the manner in which you dialogue that can be improved. Because at present, I think many are thinking more about your manner than your arguments.
Point being, your arguments could become more persuasive with some rhetorical modification. This is a potentially good thing; all good writers face it.
I agree you could be more effective at communicating the very same ideas
By “more effective,” do you mean that I would be better able to bury Buy-and-Hold 30 feet in the ground, where it could do no further harm to humans and other living things?
Rob
It isn’t your argument on valuations (for example) that is the biggest issue, in this context.
I get it that I could say “valuations matter” but not say “the Old School SWR studies need to be corrected” and no one would be troubled, Arty. I got that on the morning of May 13, 2002.
But would doing that lead to Buy-and-Hold being buried 30 feet in the ground, where it could do no further harm to humans and other living things? My guess is that the answer is “no.” Why? Because lots of people have said that valuations matter and not followed up with a demand that the Old School SWR studies be corrected and Buy-and-Hold still lives today.
We need to take it to the next strep to get anywhere with this thing, Arty. We need to open up the internet to honest posting on important investment-related topics. Nothing short of that is going to get the job done, in my assessment.
Rob
It is the manner in which you dialogue that can be improved.
Is there any manner of dialoging that you are able to imagine that would contain the statement “the Old School SWR studies must be corrected before they cause even more failed retirements” that the Buy-and-Holders would find acceptable?
I’ve been working this one for 10 years now and I have tried lots of possibilities. I have never come up with anything. My very strong sense is that that one is a deal-breaker on both sides of the table. The Buy-and-Holders are 100 percent opposed to the idea of permitting honest posting on SWRs and I am 100 percent opposed to the idea of me posting dishonestly on SWRs.
If you are able to find any room for compromise re that one, you are a better man than I am, Arty.
Rob
I think many are thinking more about your manner than your arguments.
There’s a lot of evidence in the record to support what you are saying here, Arty.
Say that we were living in the days before civil rights for blacks. Say that someone came out with the statement “I think blacks should be able to vote and I think they should be able to go to the same schools as whites and drink from the same water fountains.” Do you think most people would have openly said “we oppose those ideas”.
I very much doubt that. My guess is that people would have said “well, I can understand why you would say this sort of thing, but these issues are complicated and there are reasons why things must be done the way they are being done today and this is the way it is and the way it always has been and the way it always will be and you need to be very careful about the manner in which you say things,” and all this sort of mumbo jumbo.
I know that people get upset when I refer to Buy-and-Hold as a Get Rich Quick scheme, Arty. Do you think I am a moron?
I think they are going to get more upset when the continued promotion of Buy-and-Hold puts us in the Second Great Depression.
I think the gig is up. I think that all that further consideration of Buy-and-Hold can bring us today is more pain. My aim is to keep the pain to a minimum by pushing the day when we ALL accept that the gig is up a wee bit forward on the calendar.
If we could save Buy-and-Hold, it might make sense to play it the way you are suggesting, Arty. Prudence is a virtue. I am 100 percent in support of the idea of proceeding with prudence when tackling such huge issues.
But here’s the thing. I tried prudence. I view John Bogle as a hero to the middle-class. I went to a board with John Bogle’s name on it and told people about a way to make John Bogle’s name go down in history as the #1 liberator of the middle-class in history. I told the people there how to take Bogle’s ideas and make them ten times more powerful than they have ever been.
And hundreds of my fellow community members thought that was a fantastic idea. But some didn’t. And Bogle has never come to the aid of those who were trying to win him a whole big bunch of fame and fortune. What does that tell you, Arty?
It tells me that we are going to need to find a different path to the other side of the mountain.
If Bogle sends me an e-mail this afternoon saying that he is on board, I am in, okay? One of the titles that I considered for my book is “The New Buy-and-Hold.” If there are influential people who want to play it that way, they can count of me to do everything in my power to make it happen.
My strong sense today is that it is not going to play out that way. The Buy-and-Holders don’t want an honest Buy-and-Hold. You cannot force somebody to do something that they don’t want to do, no matter how much it pains you to see them piss away a golden opportunity.
They were there first. So they get the name “Buy-and-Hold.” We take the name “Valuation-Informed Indexing.”
Do we give them credit for building the foundation on which the VII concept sits? Of course. Obviously.
But we use a different name for the version of Buy-and-Hold that does not contain the Get Rich Quick garbage that renders the entire thing unworkable. They get to keep the old name for the thing that doesn’t work and we employ a new name to describe the thing that does work.
It wasn’t my choice to take it that way, Arty. It was Bogle’s choice. If you don’t like the way it is playing out, please take it up with him. If you win him over, you will win a whole big bunch of applause from me. That’s the way it should have been done all along. There’s nothing that would make me happier than to get to work with Bogle turning this thing around starting tomorrow.
I’ll say a prayer to The Really Big Guy that The Other Big Guy responds to your e-mail.
Rob
Point being, your arguments could become more persuasive with some rhetorical modification.
Do you think it would help if I started saying “It is my intent to bury Buy-and-Hold 30 feet in the ground, where it can do no further harm to human beings and other living things” and then to say some words of praise for the people who came up with the First Draft approach to Valuation-Informed Indexing?
I have a funny feeling that it wouldn’t help all that much. That’s why I don’t usually bother to take the time to say it that way. I have zero problem with the idea of praising them to the skies, however. I can type up thousands of words of praise for their breakthrough findings and put my name to them with a confident feeling that the words to which I am putting my name are 100 percent honest words.
None of that impresses the Buy-and-Holders. It’s dishonest posting on SWRs or bust for them.
Not this boy. I can’t go for that. No can do. Find someone else.
It’s just not my particular cup of tea.
Rob
There are good minds here who, in their various ways, are trying to help you with this (Wade, to whom I think you owe apology, and Dripguy and That also make the points, albeit perhaps less nicely).
It seems you confuse adjustments to manner, persuasion, tone, and rhetorical adeptness with “burying things” or utter compromises. That isn’t what I am saying at all. But I think it may be all you hear, at present. In sum, I’m talking about doing precisely what you want—but more effectively.
I’m talking about doing precisely what you want
When do we start work on getting the article on the front page of the New York Times that is needed to warn the millions of middle-class investors who were taken in by the Old School SWR studies of the dangers of those studies and to tell them what they need to do today to protect their retirements from going bust?
Rob
(Wade, to whom I think you owe an apology)
I wasn’t the one who threatened to organize a Goon Squad campaign to get Wade fired from his job when for a time he was posting honestly on safe withdrawal rates, Arty. That was the other fellow. The fellow who I worked up the courage to stand up to on the morning of May 13, 2002.
Rob
It is the manner in which you dialogue that can be improved.
Rob has been getting that message from numerous people over the last 10 years. Every time he ignores it.
It’s true that many, many people have put forward suggestions along these lines, Evidence.
It’s also true that for 10 years I have been responding in the same way. I always say that I am open to anything that does not require me to post dishonestly on safe withdrawal rates.
Could it not be said that the people seeking a change in tone are ignoring the problem I cite with doing this, that if we define a “change in tone” as “agreeing to post dishonestly on SWRs,” millions of middle-class people will in years to come be suffering one of the worst life setbacks imaginable because of our failure to honor our responsibilities?
Not this boy. Evidence. Please try to find somebody else. I have made many good friends on all of the various boards and blogs. I view a failed retirement as a serious life setback.
Rob
if we define a “change in tone” as “agreeing to post dishonestly on SWRs,”
And there is the problem right there. You are the only one who thinks that a “change in tone” means “agreeing to post dishonestly on SWRs”.
I’m the one who has to accept responsibility for the words that appear associated with my name, Evidence.
The hand of kindness is extended. I will do anything that I can do short of agreeing to post dishonestly re SWRs. That I will not do. Not 10 years ago. Not now. Not ever.
At least it’s not a complicated situation! (That’s a joke, kinda, sorta.)
Rob