Wade Pfau: Bogle in Many Cases Has Said Things “Not All That Different From What You Said”

Yesterday’s blog entry set forth the text of a an e-mail that I sent to academic researcher Wade Pfau on December 16, 2010. Wade responded the next day.

Wade said in his December 17 e-mail that: “In thinking about it further, I owe you further apology as my comment was based on a misunderstanding about your past claims.” He explained that: ” I understood that you meant this as the safe
withdrawal rate, but somehow I still confused myself into thinking that this number represented your prediction for the actual withdrawal rate.  If it was a prediction, then naturally you would need to indicate the uncertainty surround it.  But it is not a prediction.  It is just a lower bound that should be safe. So you don’t have to be so worried about its precise value. ” He speculated that the person who had suggested in an earlier thread at the Vanguard Diehards board that I had been dogmatic in my posting “made a similar mistake” and that this mistake “confused my ability to understand your response.”

He added that “actually I am a neophyte to the whole withdrawal rate debate.  I didn’t even know about Bengen or the Trinity study until July” but “now I am quite interested in this topic.”

Wade expressed confusion over “why some Bogleheads are so threatened by using valuations.” He noted that John Bogle has in many cases said things “not all that different from what you said.”

He concluded the e-mail with a kind compliment. He said: “I should also just say that you are a very good writer….Your writing really commands attention.”

The text of my response is set forth below:


That all sounds good.

Please enjoy your week away. I expect to send you an e-mail next week that will provide a link re your question about the timing of John’s work and perhaps address a few other substantive points. But I of course understand that you will not see it until the following week.

Bernstein’s discussion of SWRs is on Page 234, if I recall correctly. I have cited it so many times over the years that I have the page number memorized. The claim that I often make is that the Old School SWR studies are “analytically invalid” and I often cite Bernstein’s words in support of this claim. One of my fellow community members who does not like me using that phrase sent Bernstein an e-mail asking him if he agrees that the Old School studies are “analytically invalid.” Bernstein said that “of course” they are analytically valid. But he followed that up by saying that anyone giving thought to using one of them to plan a retirement would be well-advised to “FuhGedDaBouDit!” That’s the point that I mean to convey with the claim that they are “analytically invalid”! The purpose of the studies is to help people plan retirements. They are not designed in such a way as to be able to do that effectively. So in my eyes they are analytically invalid. They do not the job that they were set up to do.

It may make you feel better to know that John Walter Russell also made the mistake of confusing the number that is at the lower bound of the confidence interval (the SWR) with the number most likely to turn up. John and I exchanged about 10 e-mails on this point a long time ago. I agree with you that there’s a good chance that the other poster in the thread you read was making a similar mistake. This is not intellectually difficult stuff (at least not the parts that I understand — I have no background with the statistical tools). But there is an undercurrent here that is EXTREMELY counter-intuitive. I have seen it throw many smart and good people off track. I of course would like to be able to figure out how to communicate the points in a way that avoids the confusion that enters into just about every discussion of these matters. I have picked up some clues as to how to do that over time. But it is the hardest job that I have ever tackled in my life. The way to spin this in a positive way is to observe that, if the confusion is today very deep, the prospect of making a giant leap forward in our understanding of how stock investing works once we overcome the confusion is also great.

Your words about John Bogle are 100 percent right on! It was by reading Bogle’s “Common Sense on Mutual Funds” in the mid-1990s that I got on the track that I am now on. I am the biggest Boglehead in the world. The investing strategy that I recommend is called Valuation-Informed Indexing. It is a mix of Bogle’s best ideas and Shiller’s best ideas. I say that Bogle and Shiller go together like chocolate and peanut butter. The thing that I say that some view as anti-Bogle is that Bogle made the biggest mistake in the history of personal finance when he said that it is possible to “Stay the Course” without being willing to change your stock allocation in response to big valuation shifts. But I don’t see it as being such a big deal that Bogle made a mistake. We obviously all make mistakes and Bogle’s ideas have led to many breakthroughs (including Valuation-Informed Indexing — there clearly would not be any VII today without the insights contributed by Bogle).

It may be that some of the anger felt by some of the Bogleheads is BECAUSE my ideas are so influenced by Bogle’s. The angry ones could dismiss my ideas easily if they differed in many ways from Bogle’s. Because they are so closely related,
it is hard for them to dismiss them. Yet the strategy recommendations are very different. In January 2000, a Valuation-Informed Indexer would probably have been going with a stock allocation of about 10 percent. A Buy-and-Holder would
probably have been going with 70 percent. That’s a big difference! My only difference with Bogle is over the valuations question, but valuations are so important that we often end up in very different places.

As you note, it’s not that Bogle rejects the idea that valuations affect long-term returns. I learned this from him! It’s that Bogle does not IMPLEMENT the insight. He SAYS that valuations matter. But his allocation recommendations do not take valuations into account. That’s the entire deal. That’s the only real question in dispute in the eight-year-long debate.

Bogle said in an interview that he thinks VII can work:


But when I sent him an e-mail asking for his help in dealing with the abusive posting, he did not respond:


Please have a great week away from all this and perhaps we will be able to talk over some ideas for further research when you get back. There are all sorts of possibilities. I can assure you that I had zero idea what I was getting into when I put up that first post back on the morning of May 13, 2002. This is a deep well!

One last point. Over the years I have had a number of people ask me about international SWRs. It sounds like your recent paper will go a long way to answering their questions. I will definitely be checking it out and linking to it in future days.



  1. what says

    “Yet the strategy recommendations are very different. In January 2000, a Valuation-Informed Indexer would probably have been going with a stock allocation of about 10 percent. A Buy-and-Holder would
    probably have been going with 70 percent”

    Your propensity to ‘make stuff up’ is astounding Rob! How can you pretend to know what stock allocation a buy/holder would go with?

  2. Rob says

    I do this wild and crazy thing I learned from many years of journalism work, What. I talk to people.

    It’s cheating, I know. But the full truth here is that I am bad to the bone. Everybody knows it too.


  3. arty says

    What is correct in that appetites for risk will vary among all investors.

    Though, it is probably not unfair to say that many buy and holders were in high allocations of stocks at that time—growthy ones too. That is because the perception was they were safe by then, and there was lots of active managers who were not going to be caught underperforming for their clients (fear of job loss). So lots of pressure to allocate heavily there.

    But guys like Hussman and Grantham (valuations guys) were probably quite defensive in their long exposure, by contrast, as would be one following a Shiller-inspired model, but who used used only an S&P index for exposure.

  4. Rob says

    That’s all so.

    But that’s the tip of the iceberg, in my assessment, Arty.

    It’s not just that some understand valuations and do better than some others who do not. The bigger thing is that, as a bull market develops, a Social Taboo is put into effect via which those who understand valuations either silence themselves or are silenced by others.

    A bull market is a liar’s market. You cannot have a huge bull market without a huge number of lies (to misprice something is to tell a lie about it, no). And each time some “expert” in this field tells a lie, he becomes increasingly defensive about the practice. So the Social Taboo against speaking out against the lies grows stronger and stronger.

    The Buy-and-Holders came up with the idea of rooting one’s strategies in research and data. That’s the answer. We need to get past all this emotional junk. That’s how we become effective investors. That’s how we fix our broken economic system.

    To do that, though, we have to call out the lies. There is no other way.

    And it is the “experts” who dedicated their careers to spreading the lies. The people we turn to for advice are the last people we can trust to tell us the straight story. Their advice caused the freakin’ bull market in the first place!

    The Buy-and-Holders were 100 percent right about the importance of rooting one’s strategies in research and data. Now we need to take it to the next step. We need to permit honest reporting of what the research and the data says.

    Valuation-Informed Indexing is what Buy-and-Hold was intended to be in its early days. Valuation-Informed Indexing is rooted in ALL the research, not just the pre-1981 research that has been discredited for 30 years now. Valuation-Informed Indexing is Buy-and-Hold without that horrible Get Rich Quick element through which the personal integrity of the researcher and the “expert” was removed from the equation.

    Buy-and-Hold was a great idea. But the concept became the opposite of what it was initially intended to be when The Stock-Selling Industry elected to ignore the research from 1981 on and continue spending hundreds of millions of dollars promoting a “strategy” that was at that time revealed to be the purest and most dangerous Get Rich Quick scheme ever concocted by the human mind.

    The good news is that we now have available to us both the pre-1981 research and the post-1981 research. Taking all the research into consideration, it is not at all hard to develop the BEST investment strategy ever concocted by the human mind, one that permits us all to retire five to ten years sooner and one that will in all likelihood lead us to the greatest period of economic growth we have ever experienced within a year or so of the day we reach a consensus re the need to open every board and blog on the internet to honest posting on safe withdrawal rates and many other critically important investment-related topcis.

    Exciting times!


  5. arty says

    My point was that the ones who get the valuations–and act on it–didn’t get crushed, were at low allocation in 2000, and higher at 2009 lows. I mentioned those two guys only because other folks know them.

    But yeah, anyone can do it well using a simple shifting allocation as discussed by Bernstein 25-50-75, say, and using Shiller PE 10. It really is that simple for those who want a simple implementation. And in fact, simple often means best.

    Though doing that, as suggested by you and Grantham, does mean getting past the “emotional junk”.

  6. Rob says

    Though doing that, as suggested by you and Grantham, does mean getting past the “emotional junk”.

    That’s always my focus, Arty.

    I think of P/E10 as the market’s way of letting us know when we are causing it to go mad. I think it is very kind of the market to provide us with this information and I believe we all have a responsibility to listen as carefully as we can to what it is telling us.


  7. arty says

    Based on Wall Street, earnings suggest adding to positions!

    Based on Shiller, in a short while (PE 24), it would be worth considering a large reduction in stocks.

    Based on Hussman, that has already happened.

  8. Rob says

    Based on Wall Street, earnings suggest adding to positions!

    Based on Wall Street, something or other ALWAYS suggests adding to positions!

    Complaining about how people who make millions selling stocks devote 80 percent of their mental energies to selling stocks is like complaining about dogs chasing cats.

    What gives me hope is seeing how the Personal Finance Blogosphere helps its readers manage their money effectively even though The Credit Card Industry spends hundreds of millions trying to get us all to take on more debt.

    What if we all began playing it the same way re stock investing? What if we all pointed out frequently how the “Experts” in this field talk out of both sides of their mouth nearly every time they get on a stage? What if we wrote to HELP our readers achieve their financial freedom dreams rather than to flatter their Get Rich Quick fantasies?

    I see better days up ahead, Arty.


  9. says

    Hussman is a good guy and a smart guy. I applaud him.

    But –

    For my money, Sam Cooke tells the story with 10 times more fire and with a whole big bunch fewer words.

    I go to the movie and I go downtown.
    Somebody keeps telling me “don’t hang around.”

    I relate!


  10. arty says

    Curiously, though it will be guys like Hussman and Grantham– because of their high-profile but contrarian status–that can get more folks looking at valuations.

    Funny, but the individual value stock pickers look at valuations (the individual prices) all the time. But they are decried as morons by the passive investing crowd.

    Thought you’d like Sam…


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