Yesterday’s blog entry reported on an e-mail sent to me by Academic Researcher Wade Pfau on March 10, 2011. My response, sent later the same day, is set forth below.
The Fisher/Statman paper is stunning.
My personal view is that this may be the most important piece of investment research ever published. I don’t care that that sounds wildly overstated. My experience with these matters tells me this is so.
Is it not so that your results challenge fundamental principles of Modern Portfolio Theory? You show that an investor does not need to take on added risk to justify a realistic expectation of added return. It is possible to both increase return AND lower risk with the same act — moving to a valuation-informed strategy for setting one’s stock allocation. An entire book could be written exploring the many far-reaching theoretical and practical implications of this finding. Even Shiller has not yet stated things in quite as compelling a manner as you state them in this paper, in my assessment.
You have an amazing work ethic. If I had produced one paper with the significance of the several you have churned out in recent days, I would need to take six months to come to terms with what I had done before feeling grounded enough to move forward again. You have been generating breakthrough research at a breakneck pace. I salute you!
The single thing that most excites me about the paper is the comparison of greatest portfolio value drops. In my eyes this is the best measure of risk. Small amounts of volatility can be endured. And volatility that is endured doesn’t matter in the long run. But crushing price drops cause investor bailouts. And none of the long-term returns that apply theoretically apply in the real world for investors who bail out. A price drop of over 60 percent is certainly going to cause a bailout in most cases. A price drop of 20 percent or so is a significant hit but in most cases would not cause a bailout. So I see this difference between the two approaches as being huge.
That’s very interesting about Japan. I have gotten a good number of questions about foreign markets myself over the years. I have zero knowledge about foreign markets. So I just say that I don’t know. It will be good to see some research on the question (although I will need to be much more cautious in my assessments of this kind of research because my knowledge base is so limited).
The Retirement Risk Evaluator was posted to my site in April 2007. John Walter Russell and I were co-developers (or co-authors if you prefer). John was a retired government systems engineer. He did all the research that appears today at the www.Early-Retirement-Planning-Insights.com site. He owned the site until his death in October 2009, at which point it passed to me. I have not added or deleted any material. I keep the site up so that people can see the research.
I am grateful for your acknowledgment in your paper of whatever help I have been able to offer you. I am pleased that you also acknowledged a good number of community members who participate at the Bogleheads board. That is appropriate and kind and helpful. There have been a few statements you have made there regarding me that I did not think were proper. But I of course understand that the “controversy” aspect of all this is an exceedingly delicate matter. You have done as good a job of walking the difficult line as anyone else and in some cases (as in your citing of both me and several Bogleheads Forum participants) I think you have pushed things a bit in the direction in which they need to go for a healing process to begin. That will end up being very important work if it ends up bearing good fruit. So your efforts in that direction are much appreciated.
I’m sorry to hear about the rejection and glad to hear about the acceptance at the Journal of Financial Planning. I’m always wondering what is going on in people’s heads when they make these decisions. I puzzle over that one EVERY DAY.
I have three new things going on.
One is that I have just begun posting at www.Quora.com. It’s a question- and-answer site of considerable potential. It has attracted a more intelligent group of participants than earlier Q&A sites. I had big hopes for the Google Knol site a year ago because that site took a more intelligent approach to things and I hoped to be able to avoid the harassment and abusiveness that has held us back at so many lowest-common-denominator sites. Google has abandoned Knol (without shutting it down). So I have given up on that. But I am hopeful that Quora may over time come to permit these ideas to get a wider hearing. I’ll have to see what the reaction is when I post more.
Two, I am working with two marketing people to develop some products (CD sets and this sort of thing) getting these ideas out to people. The thought there is that I might be able to offer personal finance bloggers a cut of the profits for helping to sell the products to their readers. One big edge that Buy-and-Hold has going for it is that people make money from it. If I can find a way to make VII a money maker, I think I may be able to open some minds (I don’t mean that cynically, I am making a serious point here — people will listen more carefully to a new idea if they see profit potential in it).
Three, I have made a request to speak at a personal finance bloggers convention that has been scheduled for the weekend of October 1 in Chicago. Some of the big players will be there. Getting just one or two of the big players on my side would help deal with the blacklisting and bans that apply at many blogs today. I have seen a far more positive reaction among bloggers in the past six months than I had ever seen at earlier times. There are today several places where I can put up honest and uncompromised Guest Blog Entries. The next step is to get one of the heavy hitters to himself either endorse the ideas or say that there is enough merit in them that people should be talking about them.