Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on February 25, 2011. After doing research showing the huge advance that Valuation-Informed Indexing represents over Buy-and-Hold, Wade had expressed amazement that no one had done similar research before him. I offered two explanations: (1) The Social Taboo Against Pointing Out Flaws in Buy-and-Hold; and (2) Cognitive Dissonance.
In reaction to my first explanation, Wade said: “Perhaps it is good that I am not really a finance professor. I’m just an economics professor who dabbles in finance. I don’t personally know so many finance people, so I don’t feel the taboo. We’ll see if I can ever get these articles published in purely academic finance journals though. I think I will try that first.”
In reaction to my second explanation (cognitive dissonance), Wade said: “Yes, this makes sense.”
I sent my response later the same day. The text is set forth below.
I agree with your point about the Social Taboo. People get angry with the suggestion implicit in all I do that I know more about stock investing than most “experts” in the field. I do not have a higher I.Q. My edge is that I did not spend decades learning all the wrong beliefs. I’m just looking for what works. That’s a huge edge at a time when the fundamental premise of the dominant theory has been shown to be in error.
The difference between the two groups (those who have a professional stake in Buy-and-Hold and those who do not) can be seen in the Post Archives going back to the first day. There was HUGE interest in exploring the realities going all the way back to May 2002. Hundreds of people at Motley Fool said this was the most exciting discussion we had ever had. The trouble was that those with a professional interest in shutting down the discussions (if you can call a desire not to correct a study or calculator posted at an internet site a “professional” interest) are 50 times more intense in their desire to shut down the discussions than are most investors intense in their desire to learn the realities of stock investing. The positive desire is a casual one, the “professional” desire is felt as a life-or-death thing. That causes a HUGE imbalance in how the two groups respond to continued efforts to discuss the realities that are met with brutally abusive efforts to block those efforts.
I’m glad that you understand the cognitive dissonance point. The biggest problem I have is that, when I point out an error which is pretty darn obvious (there is nothing a tiny bit surprising in the claim that the price you pay for stocks affects the value proposition you obtain from them) and note that the error was publicly revealed by research done by Shiller 30 years ago, what people HEAR is that I am charging everyone who has advocated Buy-and-Hold with ethical corruption.
I am not doing that.
There has been ethical corruption with the tolerance of the defamation and death threats and internet harassment and this sort of thing. But advocacy of Buy-and-Hold is not evidence of corruption. Advocacy of Buy-and-Hold is just a MISTAKE, something very different. But my case is so clear and convincing and obvious that people cannot bear to let it in. It SOUNDS like I am suggesting massive corruption. The alternative explanation — the most widespread case of cognitive dissonance ever encountered on Planet Earth — is a highly counter-intuitive reality.