Yesterday’s blog entry reported on an e-mail that I received from Academic Researcher Wade Pfau on August 12, 2011. The e-mail described the peer review report on Wade’s breakthrough research on long-term timing and Valuation-Informed Indexing. My response, sent later the same day, is set forth below.
Thanks for sharing that. It’s fascinating reading. The comments are intelligent.
I agree that the focus on the earlier paper understates the importance of your findings. I fully understand why you set it up that way. From an academic standpoint, you were right — your advance was to show how the Fisher study was flawed. But the implications of your study are so far-reaching that it sort of misses the point to suggest that all you are doing is pointing out limitations of the earlier study (which never got much attention in the first place).
I love the phrase “elephant in the living room.” That gets right to the heart of what is going on here. We are all going to a great deal of trouble to avoid talking about the elephant in the living room.
The elephant in the living room is that there has never been a valid study done showing that timing doesn’t work. That’s huge.
The significance of Fisher is that at least this study TRIED to make this showing. But your work shows where Fisher comes up short. So there is now not one study supporting the core tenet of Buy-and-Hold.
The guy is right to suggest that it is a little hard to know where to go from here.
My answer to that is — We need to launch a national debate on all the unanswered questions.
What happened historically is that people came to believe that there had been a showing that timing doesn’t work when in reality there has never been such a showing. That doesn’t prove beyond a reasonable doubt that long-term timing always works, as I believe. But it sure as shooting proves that we should not be discouraging people from engaging in long-term timing or at least exploring the possibility of doing so.
We cannot get from where we are (confusion) to where we want to be (confidence that we know what works) in one step. It must be done in two steps. Step One is to acknowledge that we do not know it all and that therefore discussion of all points of view should be both tolerated and encouraged. Then OVER TIME we will come to develop a consensus as to what works.
I of course believe that it is VIII that works. But we can never know until we have the discussion. Opening up the possibility of frank discussion is the step that leads us out of the darkness. So long as
Buy-and-Holders think there is no need for discussion, there is no hope of advancing knowledge.
Buy-and-Hold is a closed system. That’s what it comes to. There has never been any data showing that long-term timing doesn’t work. Buy-and-Holders believe this because they ASSUME it to be true. Buy-and-Holders and Valuation-Informed Indexers look at the same data and come to different INTERPRETATIONS of what it means.
What makes this hard for you as a researcher is that you are not supposed to discuss things like human psychology in your studies. You are supposed to report numbers. P/E10 reveals psychological realities so you are getting around the rules when you discuss P/E10. But you can never really nail things down without pointing out that the problem with Buy-and-Hold studies is that they rule out consideration of 70 percent of the investing story (the effect of investor emotions) in the setting up of the methodologies.
These discussions go around and around because the two camps start with entirely opposite premises (emotions cannot matter vs. emotions must matter) and all the findings are just the reflection of those differing premises.
In the end, we are going to have to come up with new research procedures. For example, I suggest that we look at how people behave on discussion boards to identify which strategies help people to feel genuine confidence and which only foster temporary bravado. The world is not ready for that one just yet! But it’s getting there!
You are like a spy in the investing research world who sneaks in consideration of investor emotions by making reference to P/E10, which is a number (acceptable to the Buy-and-Holders) which generates insights about investor emotion (taboo to Buy-and-Holders).
Watch your back, spy!