Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on February 25, 2011. Set forth below is the text of another e-mail that I sent to Wade on the same day.
Please save this for after you catch up on your sleep!
You’re right about the regret bias.
But it won’t be a problem once we are able to get the word out re the need for long-term timing. Say that Money magazine and all the experts and all the web sites all begin pushing that message. There will never again be another bull market. So there will never again be a need to lower one’s stock allocation too much. So there will never again be regret bias.
All of this is circular. People cannot learn about VII because of the Ban on Honest Posting. The Ban is needed to protect Buy-and-Hold. If we give up on the effort to protect Buy-and-Hold, we learn things that it was not possible to
learn in the days before indexing. Once we learn these things, we are never going to forget them. There are going to be books and magazines and calculators and web sites to constantly remind us.
Overvaluation is not a natural phenomenon. It is the product of our ignorance of how stock investing works. We are becoming less ignorant because of decades of academic research (including the research done by the Buy-and-Holders, to be sure — the finding that short-term timing does not work was a HUGE advance).
When the car was invented, one of the complaints was that there were not enough roads to ride it on. Once we all had cars, we solved that problem! When the internet was invented, people said “well, there’s not much there to look at really.” Once we all had computers, we solved that problem.
Once we all know how to invest effectively, no one is going to want to go back to experiencing insane bull markets followed by insane bear markets. For what purpose would anyone want to do that? Those days are over. It’s just a question of getting the word out at this point.
Future discussions will not be over whether to engage in market timing or not but over how best to engage in market timing. There are lots of fruitful discussions that can be held re that question. That’s a very different sort of discussion from the one we have been having for nine years. When we are all directing our energies in a constructive direction, the pace of progress is going to speed up considerably.
The question of whether people need to engage in market timing or not (whether people need to take price into consideration when buying stocks or not) is a time waster. The future of investing analysis will be aimed at answering a far more intelligent question — HOW should people engage in market timing?
As we move to the next stage, the investor regret matter becomes less of a factor. It’s helpful to keep in mind that we have just lived through the most out-of-control bull in U.S. history. Why was this one so bad? Investors have always been drawn to Get Rich Quick thinking (the idea that this might be the first time in history when the price paid for stocks turns out not to matter). But this time those drawn to Get Rich Quick could cite ACADEMIC STUDIES purporting to back up their Get Rich Quick inclinations. That’s why I say that Buy-and-Hold is the purest and most dangerous Get Rich Quick scheme ever concocted by the human mind (not intentionally so — but still).
Once we bury Buy-and-Hold 30 feet in the ground where it can do no further harm to humans and other living things, it is all downhill sledding. The investor regret matter was indeed a problem for those who attempted to invest rationally during the Buy-and-Hold Era. But it never needs to be an issue again once the dangers of Buy-and-Hold become widespread public knowledge.
Wade responded later the same day. He said: “I think you will find my new follow-up post even better than the first one”:
In the material that appears at the link, Mel Lindauer, the co-author of the book The Bogleheads Guide to Investing, attacked Wade’s research for various perceived deficiencies. Wade responded: “Mel, thank you for the comment. If you think I am trying to be sneaky, I think you are missing something important.” When Mel escalated his attacks by observing “sure looks like data-mining to me,” Wade stated: “I take the issue of data mining very seriously, and with all due respect, any data mining that I am doing is in favor of buy-and-hold, not in favor of market timing. ”
Mel in a subsequent comment said: ” I’m just trying to get to the bottom of all the issues, before you attempt to publish what may be found to be inferior or incomplete work by your peer reviewers. You appear to honestly want to pick our brains, so I’m giving you the feedback you asked for. These are issues that will be raised later, so you need to face them now. However, it appears you’re getting just a little bit testy because I’m raising issues that you may not have considered and which could certainly change the results. Better to get the issues raised here and resolved instead of having your paper rejected because of these very basic issues which you haven’t addressed.
Wade responded: “I’ll try not to get testy. When we stop comparing apples and oranges, and instead compare two scenarios which offer broadly similar risks to investors: (1) the worst performing market timing scenario produced $94,866 ; (2) a 50/50 asset allocation produced $13,426; (3) the 50/50 asset allocation is also going to have to pay some capital gains taxes when it rebalances annually, but the market timer will surely have to pay more taxes over time. But do you honestly believe that the extra taxes paid by the market timer will wipe out the entire surplus gains it had provided at a broadly similar level of risk? ”