Yesterday’s blog entry reported on an e-mail sent to me by academic researcher Wade Pfau on February 24, 2011. My response is set forth below:
I’m responding before seeing the Bogleheads thread and the Drip Guyexchange. I want first to respond to the question “Why haven’t academics already published research about this?”
I have identified two reasons:
1) The Social Taboo against pointing out flaws in Buy-and-Hold.
We all live in communities. There are thousands of books and studies and calculators that were developed pursuant to the Buy-and-Hold Model, which is rooted in the Efficient Market Theory. Shiller’s research (showing that valuations affect long-term returns) discredits all that. The point is fundamental. If the market is really not efficient (if valuations really affect long-term returns), everything developed in the Buy-and-Hold Era is wrong in very significant ways. Shiller discovered that the earth is round instead of flat and all the old maps need to be redone. There is an intense reluctance among many to discuss these matters openly and plainly and clearly. It is widely viewed as “rude” to do so because so many will need to acknowledge having made mistakes when word gets out. We all are aware of these social pressures and make an effort to be responsive to them (even me! — the reason I am less responsive than most today is that I have seen through personal experience that tolerance for a lack of clarity can keep things going around in circles endlessly).
2) Cognitive Dissonance
It should not be concluded that because there are many who have a vested interest in blocking knowledge of how stock investing works that these many people are corrupt. Humans have an immense ability to rationalize — “a man hears what he wants to hear and disregards the rest,” according to famed asset allocation strategist Paul Simon. People don’t think about things they don’t want to know. Until the crash, most wanted to believe that Buy-and-Hold worked. So they avoided thinking about all the reasons why it cannot work. People can only come to learn about this stuff gradually over a long period of time by asking lots of questions and slowly taking in new ways of thinking about stock investing. Unfortunately, the Social Taboo has made this impossible for many years. The level of hostility that has been generated by challenges to Buy-and-Hold has made it difficult for those trying to understand both sides to make sense of things.
There are lots of signs that things are starting to change. Let’s hope that they change fast enough for us to be able to get the word out before a failure to address these matters puts us all in the Second Great Depression. I’m optimistic (perhaps willfully so).