I’m going to let you in on a little secret. Ssssh! You must promise not to tell. I will no longer be the golden boy of the Big Shots in The Stock-Selling Industry if this one gets out.
I’m not the only one who has been thinking in recent years about where this industry is headed. Lots of people are having that thought. Buy-and-Hold died intellectually 30 years ago and the only thing that has been keeping it alive for a long, long time was that it had not yet brought on the economic crisis that always follows a time-period when a good number of the rubes buy into the Buy-and-Hold mumbo jumbo. Now that the crisis is here, the smart people are plotting their next move. When the next crash comes, the music stops for the Greatest Get Rich Quick scheme ever concocted by the human mind, Rob Bennett or no Rob Bennett.
Wade asked me about this in one of the response comments he posted to my blog. He said: “Rob, suppose the stock market does drop 65% as you are expecting. It might happen, who knows? Step 1: Stock Market Drops 65%. Step 2: ?? Step 3: Rob wins $500 million settlement from the Goons, the Goons are sent to prison, the investing public learns about and adopts VII. What is Step 2? There isn’t one. You will still be in the same position as you’ve been in for the last 10 years. Why didn’t something happen for you after the 2008 financial crisis? You are like the guy who keeps predicting new ends for the world as each previous prediction date passes by.”
Wade loves Valuation-Informed Indexing. He said it in twenty different ways in his e-mail correspondence with me. So his concern is not that the academic research doesn’t support the new strategy. His concern is that it gets the members of The Old Boy’s Club angry if we spill the beans. Showing that the academic research doesn’t support a strategy that has been marketed as a research-supported strategy hurts the marketing effort. People love jazzy slogans. But they lose their pop when it becomes widely known that they are not rooted in truth.
If things were going to change, he could sit tight for a year or two. But are things going to change? When? How? Can we be sure?
We cannot be sure of anything down here in the Valley of Tears. But my feeble brain tells me that things are going to change. Why? Because they cannot stay the same. There aren’t too many other alternatives.
My sense is that Wade thinks of the problems with Buy-and-Hold as being similar to the problems with the deficit. Smart people keep saying that the deficit is not sustainable. Yet it sustains! Smart politicians don’t offer specific statements on how they would reduce the deficit. Because what you say about reducing the deficit can and will be used against you. And nothing ever happens anyway. So why stick your neck out? The budget deficit issue is referred to on Capitol Hill as The Third Rail of American Politics. I think it would be fair to say that Wade Pfau has come to perceive the core error of the Buy-and-Hold Model as The Third Rail of Personal Finance.
I’ve been foreseeing a Wave of community members rising up against the Lindaurheads and Greaney Goons going back to sometime in 2003. This is one movie in which the posse never shows up just in the nick of time. The posse is always to be found taking a nap in the guest room while I am left alone with my six-shooter against a gang of guys in black hats. These fellows are not gentlemen. Wade doesn’t like the sight of blood when it is on him and when it is his blood. In fairness, there are moments when I can kinda, sorta see the point.
Still, I think this one comes to a head soon.
Stock prices always end up at one-half of fair value in the wake of a huge bull. There’s not one exception in the historical record. That’s 65 percent down from where we are today. Bear markets usually last about 15 years. We are now 12 years into this one. Do the math. It’s not a pretty picture for those who have been telling tales about how stocks are always a good buy for the long run.
The Buy-and-Holders say they will never cry “uncle!” Watch their actions, not their words. Taylor Larimore (co-author of The Bogleheads Guide to Investing) was on the verge of selling in the months following the first crash. Some Diehard! Bill Bengen’s retirement study presumes that the retiree will never sell, no matter what. What did Bill tell his retiree clients in the months following the first crash? Sell! Sell! They always promise never to sell. They always sell. Buy-and-Hold advocates are like politicians. Their promises come with expiration dates.
This isn’t speculation. We know this to be so. What do you think always pulls the P/E10 value down to 7 or 8? Stocks sales do that. The reason why it takes years to get there is that the Buy-and-Holders always resist for a time. It is their sales that end the thing and permit prices to start working their way up again.
The next drop will hurt more than the first one. The first one came in the wake of a huge bull. People had slack in their budgets in those days. No one has slack today. Big price drops that take place when feelings are as raw as they are today hurt. People are going to be angry following the next crash. They are going to be looking for people to whom to direct their anger. Something tells me that I don’t want to have posts in my file saying that there is no need for corrections for retirement studies that get the numbers wildly wrong when those dark days arrive.
The experts in this field are smart people. They are already positioning themselves.
What do you think that Brett Arends fellow at the Wall Street Journal is up to? He says: “For years, the investment industry has tried to scare clients into staying fully invested at all times, no matter how high stocks go….It’s hooey…. They’re leaving out more than half the story.” That was a trial balloon. I hoped the article would go viral. It did not. But that doesn’t mean that it is not going to go viral someday. I’ll bet that I wasn’t the only one watching to see the reaction to that one. Everyone wants to be the new John Bogle. No one wants to stick his neck out too soon. Everyone wants to see someone else stick his neck out and live before sticking his own out too far. Most are cautious today. But wait. Wait until someone gives a big speech telling Truth and is applauded rather than jeered. Then comes the deluge.
Shiller didn’t include any discussion of how investors should adjust their stock allocations in his book. He left it to Old Farmer Hocus to tell the juicy part of the story. But how much do you want to bet that he’s already got a second book ready to send to the printers when the coast is clear for discussion of the practicalities?
And how about that Michael Kitces individual? He says: “There are time-periods where stocks are a terrible addition to that portfolio. Yet inexplicably, we as planners STILL tend to suggest that it is ‘risky’ to not own stocks when in reality the only material risk is to our business and ability to keep clients, NOT to the client’s goal.” Positioning, well-timed and well-executed. Did I mention that people in this field are smart?
Could it be that the rains will never fall hard enough to require the abandonment of Buy-and-Hold?
I believe that the Buy-and-Holders believe that.
I’ve looked at the data. It tells a different story than the one the Buy-and-Holders believe.
The Buy-and-Holders hate me with a burning passion. I do not think they should. I believe that, once you know you must make a change, the thing to do is to make the change as quickly as possible and thereby get that nasty transition period behind you. Things always look better when you wake up with the hard part of the hike behind you.
I’m trying to help the Buy-and-Holders. They don’t see it, but I am. I say that they got it almost right and that that is better than what just about any other group of investing analysts has managed. I am trying to persuade them to fix that one teensy little error so that they can continue to get credit for all the truly good stuff they have contributed. But do they thank me? Nooooo.
Wade is wrong when he suggests that nothing changed for me after the price crash. He wasn’t around before the crash. He thinks I am hated today. He doesn’t know what hate is! I was hatefully hated in a hateful way before the crash. Today you can tell that even the Goons are putting on an act. They try. The fire is just not there. Paul McCartney still sings “I Saw Her Standing There” today. And the words are all the same. But…. Well, you know.
Get Rich Quick schemes are a con. I saw a movie once where there’s this fellow selling snake oil and the townspeople catch on. Come back, Wade! Think it over!
I don’t think Wade is right that this is never going to flip. I think it is going to flip and I think it is going to flip hard when it does.
I think this is a Tipping Point thing. You can’t say anything real about Buy-and-Hold today. Because the Buy-and-Holders are the experts. No one cares what the research really says today. They are the experts. They get to decide.
People care about the numbers they see on their portfolio statements. When the numbers they see on their statements come to match the realities that they have not been told for years now, the word “expert” is not going to impress anymore. It’s going to be too late then to switch sides. People are not dumb.
We’ve never done this before. We’ve built stocks up to crazy prices and then watched those prices tumble. But never on this scale. Never with so much middle-class money (in the old days, only rich people could afford stocks). We certainly never did it with the internet available for the checking of stories. All those posts that argue that there’s no need to correct retirement studies just because the numbers in them are wildly wrong will sound different on the other side. They were meant as jokes! Funny, funny! But jokes that were once widely thought funny can fall flat in changed circumstances.
Wade says that it is unclear what will happen in Step Two. He writes the words “Step Two” and follows them with a question mark.
Not this boy. I follow them with an exclamation point.
I’ve been seeing Step Two coming from the distance for a long time. I hope I’m well-positioned. I hope people don’t say I was too soft on the Buy-and-Holders!