Arty posted two important comments to yesterday’s blog entry on my e-mail correspondence with Academic Researcher Wade Pfau. The texts of these two comments are set forth below.
Arty Comment #1:
The report is correct about start and end points mattering. After all, we know that this matters in any single regression, but especially in comparative strategy regressions, even if using only a single asset class for the “stocks”. It muddies further if using some slice/dice model. But this reviewer’s objection can be made on ANY regression! That is, the argument *always* holds. So now what? Don’t do any regressions of any sort? That would render Fama’s 3-Factor model useless too, and many other landmark works. So it kinda’ begs the question.
I especially disagree about the transaction costs objection in that any reasonable shifting strategy (where the shifts would be rare if using PE/10) should not incur any more costs than a buy-and-holder who does normal rebalancing when their allocation shifts outside the assigned ranges.
And if using a broad-range implementation, say a 25-50-75, with hold ranges once a segment was crossed, you would see even fewer rebalancing events than most who buy and hold. I’m not arguing the relative merits of the strategies here, just making this observation vis a vis the objections.
Indeed, in many accounts these days, there would not be transaction costs (say, between Vanguard funds held in a tax-deferred account). But even if we assume transaction costs, I don’t see this as a good objection.
Finally, a writer should be able to discuss the reviewer points. That is the essence of the peer-review process, when done properly. The above would have been my objections to the reviewer comments.
Arty Comment #2:
I am a big fan of Wade’s, albeit from afar. And maybe he can use these comments in future discussions with his peers.
But speaking only from a human point of view, if Wade requested you not share personal correspondence, I hope you can find a way to honor his request for those things he wishes to remain between the two of you only.
I know his work is exciting, and worthy of much discussion. And this particular reviewer commentary is a glimpse into a world that is opaque for many. I get that.
But we can discuss his work—as it should be on its own merits— without the private communications. Speaking only for myself here, I hope you can find a way to honor his request, Rob.
My responses to Arty’s comments are set forth in the comments section of the blog entry to which they were placed.