Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on March 10, 2011. Wade sent his response later the same day.
Wade thanked me for the e-mail. He said: “I haven’t had a chance to read it carefully yet, but I will do that.”
He provided the following link:
He sent his next e-mail on March 16. He said that he would be visiting Iowa for three weeks. He also said that his safe savings rate paper had been revised for the Journal of Financial Planning and that the discussion of the effect of valuations had been made “more explicit.” He reported that the article by Dan Moisand was out and that “he did indeed make the valuations link on his own.”
He observed that: “That should make you happy.”
The e-mail also reported that the Fiser/Statman paper had been sent to a new journal, Applied Financial Economics.
Finally, Wade said that he hoped soon to have a rough draft of his “main valuations paper.” He explained: “It won’t be complete, but I hope it can be enough to at least post it online.”
I responded the same day. The text of my e-mail follows.
I was a little worried about you after hearing some of the reports. I like to tell myself that there is some long-term good that can come out of just about any bad situation. But I have to acknowledge that it’s hard to imagine what that might be in this case.
I have been pretty darn effusive about your research, but I am afraid that I am not going to be able to top “erotically appealing.” I know when I’m whipped! [This was in reference to a comment about Wade’s research advanced at a span-bit site.]
The Moisand article is nicely done. I especially like it when he says that on repeat readings he mines new insights. That’s the sign of work that genuinely says something important and new.
You don’t need to rush re the calculator. You obviously have lots of other matters on your plate at the moment. I just want to at some point hear some feedback from someone who understands numbers a lot better than I do.
John Russell used to fill that role. My mind generates lots of ideas that sound great to me but that need to be grounded in the reality of a numbers check before being taken on the road. I think the Reality Checker is a big deal. But I need to be careful that I am not just talking myself into believing that.
Wade’s next e-mail came the following day. He said that he now realized that he would not be able to finish the two articles he was working on until after he took the CFA exam in June. He pointed me to two recent blog posts he had completed.
I responded later that day. The text of my e-mail follows.
You are of course right to hold off until you can do things 100 percent properly. You are a workhorse in any event. It’s always the workhorses who worry whether they are working it quite hard enough!
The blog posts are of course stunning. I’ll link to them at my blog. I am going to hold off for a few weeks while I try to get caught up with entries relating to my columns. I have a big backlog today. I’ll be referencing the research in my columns too, of course. And I’ll be offering effusive quotes for inclusion in that New York Times article when it comes!
I’m glad that you addressed the Japan matter. I too have heard that question on occasion. I am reluctant to say anything about Japan because I don’t know hardly anything about the Japan market. But I like it that there is now research available to people who want to look into this.
I have two thoughts re possible follow-up research (by you or others) at some distant date.
I believe that the people who do not respond to these numbers with great enthusiasm are rationalizing. They are having a hard time making a paradigm shift (that’s how big this is). The job is to try to address the concerns that they feel, to the
extent that is possible.
One that comes up frequently is that people worry that, if they give themselves permission to “time the market,” they run the risk of making an allocation mistake. The thought here is that Buy-and-Hold is a neutral choice and any deviation from that is INHERENTLY risky regardless of what the numbers say.
My view is that there is nothing neutral about the Buy-and-Hold choice. It’s just a choice like any other. The aim should be to keep the risk profile constant and following a Buy-and-Hold strategy makes that a logical impossibility. So my view is that Buy-and-Hold is by definition a NON-neutral approach to asset allocation. But, strangely enough, there have been one or two who have not expressed 100 percent agreement with me re this one.
I think you did a fantastic job on the papers. You generally bend over backwards to be fair to the Buy-and-Hold perspective and that adds power to the presentation. Still, I think something can be said for being a bit more realistic (in my view!) and thereby making the numbers case even stronger.
The two things that I view as unrealistic (I don’t blame you for this, my sense is that you are proceeding pursuant to convention here) are: (1) using 6-month commercial paper as the non-stock choice; and (2) presuming that Buy-and-Holders will stick with their high stock allocations following big price drops.
I understand that it is tough to come up with a realistic and accepted number for the non-stock return. Still, I really do see a bias inherent in the convention of using 6-month commercial paper. I earn 3.5 percent real. Anyone following these strategies in the real world would have locked in such a rate when it was available.
I of course understand that that rate was not available at all earlier times. But it is hard for me to believe that there was ever a time when there wasn’t some non-stock option that offered a return better than 6-month commercial paper. Where did this convention come from? It’s not too hard to imagine that it was established by the people who backed Modern Portfolio Theory and all this sort of thing. Better numbers apply for the non-stock investor in the real world, whether the
research conventions that apply in this field permit us to formally acknowledge that this is so or not.
I also have a problem with the ASSUMPTION (that’s all it is) that Buy-and-Holders will stick with their high stock allocations in the face of big losses. The biggest reason why I like VII is that it makes it possible for the first time for middle-class people to stick with their allocation strategies (because the strategies are for the first time realistic and rational ones). I feel that it gives an unmerited benefit to the Buy-and-Hold strategy to suggest that many might stick to it. I have NEVER seen any research showing that Buy-and-Holders have been able to hold through a complete Bull/Bear cycle. So again I question this convention of the investment research field.
This was actually tested to a limited extent in the months following the first crash. Bill Bengen is an Old School SWR researcher. All his research in this field presumes that the investors following the recommended (Buy-and-Hold) strategy will stick with it following price drops. Guess what Bengen recommended for his clients following the crash? A zero percent stock allocation! (This when the P/E10 value was down to 12!)
Taylor Larimore, co-author of “The Bogleheads Guide to Investing” did something similar. He was asked a few months before the crash whether there were any circumstances in which he would lower his stock allocation. He said no, that would be unscientific. Following the crash, he said he was going to need to sell all his stocks so as not to imperil his retirement plan. Challenged as to how this idea fit with his advocacy of Buy-and-Hold, he explained that this was his “Plan B,” something he had in mind all along but never mentioned to anyone. Since it was the secret plan all along, it was 100 percent consistent with a Buy-and-Hold approach.
The problem with research in this field is that it does not take psychological realities into account. I understand that there are some good reasons for not doing that or for not doing too much of it. You run the risk of losing the objectivity that makes numbers-based research valuable in the first place. Still, my view is that investment research is going to need to move in this direction if it is to achieve its full potential for helping investors learn the realities. Psychological realities are real realities! Realities matter! They must be considered in efforts to come to a complete understanding of what is going on.
This is not your battle.I am not asking you to take on new battles. Perhaps it is better to play by the rules established by others until there is some softening in the opposition to consideration of new ideas or more acceptance of behavioral finance or whatever. I put these minor complaints forward for the purpose of stimulating thought as to possible approaches or implications or possibilities or whatever.
The bottom line is that your research is a huge advance and the findings are compelling EVEN THOUGH some dubious (at least in my mind) conventions that benefit the bad guys (I am joking here) are respected.
You deserve a month off to congratulate yourself over what you have accomplished. It’s too bad about that exam!
I wish that John could see what you have done. He would be thrilled.