Wade believes in Valuation-Informed Indexing. He was dancing around like a kid on Christmas morning in his e-mail correspondence with me. He said in a post at the Bogleheads Forum that he was going to put what he learned from his correspondence with me to personal use by following a Valuation-Informed Indexing strategy himself. Face in, Goons! This guy’s a believer!
But the word on the street is that some sort of rift has developed between Wade and Old Farmer Hocus. What’s the deal?
Wade found out that the world’s first true research-based stock investing strategy is controversial. The Old Boy’s Club hates it because it’s death for Buy-and-Hold if the plebes find out what the last 30 years of academic research really says about how stock investing works in the long run. And the plebes don’t generally get too excited about the idea either. They’ve been taken and it hurts to find out you have been taken. They’re in denial and there’s not much of a buck to be made today telling them the news.
Wade still believes, though. And it really is true that he is a good guy who wants to do fine research that helps people. He’s not going to promote the in-your-face version of Valuation-Informed Indexing that I push. But he’s not abandoning the general concept. His plan is to push a softer version of Valuation-Informed Indexing, a VII Light. His aim is to avoid setting people off by incorporating valuations adjustments into his work in ways that don’t draw attention to themselves. People will be eating their spinach. But it will be mixed in with chocolate ice cream so they won’t notice it so much.
It’s not a totally bad idea. There is no one who has ever participated in our discussions who I respected more than John Walter Russell and he used to try to do things along these lines. I’ve been banned at every major investing discussion board at which I have ever posted. John did the research that supports the Valuation-Informed Indexing strategy I espouse. And John was never once banned! Hey! Maybe he understood something about human interactions that I do not. Maybe Wade is on the right track and I should just lay off the poor guy.
But I don’t think so.
It’s good to try to get along with people. I believe that 100 percent. And I have done a lot of things that in ordinary circumstances would help me get along with the Buy-and-Holders. I have praised the Buy-and-Hold concept to the skies (there would be no Valuation-Informed Indexing had Buy-and-Hold not come before it — powerful Buy-and-Hold insights provide the foundation for all my work). I have said that I do not believe that the mistake the Buy-and-Holders made re long-term timing was intentional (there’s no evidence that it was and a good bit of evidence that cuts the other way). I have said that I believe that the Buy-and-Holders are sincere in their recommendations of Buy-and-Hold (it is possible for humans suffering the effects of cognitive dissonance to ignore the 30 years of research showing that it cannot work in the long run). I have said that the Buy-and-Holders are smart and good and hard-working and nice people. I believe all those things. So, to the extent that saying those things could win me some favor with the Buy-and-Holders, I am of course happy to say them.
In ten years of discussions, never once has saying any of those sorts of things won me a tiny bit of openness or tolerance or kindness from the Buy-and-Holders. They are not looking for warm words or kind words or sympathetic words. They are looking for something else.
They have never told me precisely what they are looking for. But they have dropped some pretty darn clear hints. The message that has been delivered to me on numerous occasions is: It’s not what you say, it’s how you say it.
If I said things the way John said them, I would not have been banned. If I said things the way Wade now says them, I would not have been banned.
You are allowed to say “I don’t feel comfortable going with a high stock allocation.” You are allowed to say “valuations matter.” You are allowed to say “I am not going to take a 4 percent withdrawal.” You are allowed to say “I am worried that stock prices are going to fall.”
The types of things that I say that you are not allowed to say are: (1) Buy-and-Hold is a Get Rich Quick scheme; (2) The Old School SWR studies get the numbers wildly wrong; (3) The relentless promotion of Buy-and-Hold strategies was the primary cause of the economic crisis; (4) The errors in the Old School SWR studies need to be corrected; (5) Shiller’s research shows that there is precisely zero chance of Buy-and-Hold working for any long-term investor; and (6) Stocks are priced today for a 65 percent price drop.
These are strong statements. I’ll give them that.
Many people, including people who do not think of themselves as Buy-and-Holders, view these statements as rude. They’ve told me so.
As someone who likes to get along with people and who hates to think of himself as someone who indulges in rudeness, I have some sympathy for why Wade would want to try a softer approach to encouraging people to follow Valuation-Informed Indexing strategy than the one I follow.
That said, I cannot in good conscience follow the path Wade has chosen for himself. I think it is important that Buy-and-Holders hear these truths and that they hear them unvarnished.
Consider what I said about the Buy-and-Holders being good and smart people. Consider that statement in connection with my claim that it was the relentless promotion of Buy-and-Hold strategies that served as the primary cause of the economic crisis. Do you see the disconnect? Good and smart people don’t go around doing things that cause economic crises. So why did the Buy-ad-Holders do it? Because they didn’t know. Why didn’t they know? Because all of us who know are so worried that saying what we know in clear and firm and uncompromising language will hurt their feelings that we avoid telling them what they need to know to do what they would want to do as good and smart people if only they knew.
No one wants to invest ineffectively. No one wants others to invest ineffectively. No one wants to cause an economic crisis. Teaching people about Valuation-Informed Indexing should be easy. People should be lined up for blocks around to get into talks to hear more about it. Valuation-Informed Indexing is a wonderful advance in about 50 different ways. This shouldn’t be so hard. This should be easy.
I’ve never had any problem making the intellectual case for Valuation-Informed Indexing. The intellectual case is so strong that it is simply undeniable. That’s the problem. The resistance to the idea is emotional. It hurts Buy-and-Holders deeply for them to learn that they have been following a Get Rich Quick scheme for years. They do not want to hear this. They block out the information. They seek to ban the fellow giving voice to the information, however polite he might be or however many warm words he might add to the mix when conveying that information.
Consider the argument about the economic crisis. Nothing could be more obvious than my point that Buy-and-Hold caused the economic crisis. Stocks were overpriced by $12 trillion in 2000. Stocks always return to fair-value price levels in about 10 years. So we knew in 2000 that over the course of the next 10 years something close to $12 trillion of spending power was going to be removed from our economy. An economy that loses $12 trillion of spending power collapses. There is no way to imagine any other possible outcome. The economic crisis was assured when we permitted stocks to reach the price levels they reached in the late 1990s.
How many times have you heard anyone other than Rob Bennett blame the economic crisis on the Buy-and-Hold investing strategy (Buy-and-Hold teaches that there is no need to lower one’s stock allocation when prices rise to insanely high levels — that’s why prices got so out of hand)? I’ve never heard anyone else say it. I know that lots of people understand the point because I have read the work of many who do and I have spoken to many who do. Why don’t we hear people making this point? Lots of people who understand that Buy-and-Hold can never work are following the path elected by John and Wade.
John and Wade and all these others are nice people. I get why they play it the way they do.
But guess how the Buy-and-Holders respond when I say that Buy-and-Hold caused the economic crisis? They say that that can’t be so because I am the only one saying it!
When people don’t hear an argument being made, they assume that that is because there is not much to the argument. When John and Wade and all the others elect not to hurt the feelings of the Buy-and-Holders by not telling them things they very much need to know (we are all worried about the economic crisis and we all need to know what caused it to have any realistic hope of bringing it to an end), they hurt the Buy-and-Holders in a different way. We tell our friends things they need to know. When we don’t tell the Buy-and-Holders things they need to know, we leave them in ignorance. Friends don’t do that to friends.
We are going to hurt the Buy-and-Holders one way or the other. Tell them the truth and we hurt their feelings. Hold back from telling them the truth and we will cause them to suffer huge financial losses. Isn’t there some rudeness in that too? The soft way of telling the story ends up having some unanticipated hard edges to it.
If the people who developed the Buy-and-Hold Model had gotten things just a little wrong, there would be no problem. We would make note of the problem and they would fix it. Easy, peasy. Our problem is that the error made by the people who developed the Buy-and-Hold Model was not small thing. It was a gigantic error, an error big enough to cause millions of middle-class people to suffer failed retirements somewhere down the line. We are doing the Buy-and-Holders no kindness by letting it slide. They do not want to cause millions of failed retirements and they do not want to suffer failed retirements themselves. They object when we tell them the truth. But there is part of every Buy-and-Holder that thirsts for the truth, that wants to be treated with respect and that wants to be forced to cope with the realities however unsettling they are on first hearing.
The soft approach will never reach the Buy-and-Holders. They are master rationalizers. It was ten years ago that I put up the post pointing out the errors in the Old School safe withdrawal rate studies and not one of those studies has been corrected to this day. This is not a group that responds well to soft approaches.
I’ve tried hitting the Buy-and-Holders over the head with what the academic research of the past 30 years says about stock investing and that approach has not exactly lit up the sky in fireworks either. I don’t say that what I have done has been a big success. Still, I think the direct approach holds more promise. An approach more direct than mine waits on the horizon. If no one other than me gets about the business of telling the truth to the Buy-and-Holders soon, they are going to be seeing Truth with a capital T making a showing on the final line on the final page of their portfolio statements. Now that’s rude! The kinder thing is to tell them what they need to know today to avoid being hit with that rude surprise a bit down the line.
Here’s the good news.
As noted above, the Buy-and-Holders deep in their hearts want to know the truth about stock investing. Remember, they fell in love with Buy-and-Hold because they were drawn to its claims to being a research-backed approach. If we hit them with the truth in creative (and always kind and warm and respectful ways), they will in time hear it. I have seen this magic happen. Not often enough for my tastes, but I have seen it happen. I am sure that, if more of us worked together to deliver the message more forcefully than we have so far, we would see it happen more frequently.
Once the idea builds up some momentum, it will start generating some amazing leverage effects.
I’ve told you how Wade was jumping around like a kid on Christmas morning when he learned the realities of stock investing. Wade is not the only academic researcher out there who enjoys that feeling. If more of us got in the habit of delivering the truth about stock investing straight and unvarnished, we would begin to flip some Buy-and-Holders and then the idea of doing that sort of thing would spread and then soon we would have hundreds of Wade Pfaus competing with each other to be the next researcher to put out fresh and amazing stock research.
We would learn and learn and learn and learn. And we would feel better and better and better and better about ourselves.
The Buy-and-Holders are in great emotional pain. The soft approach leaves them in pain. It’s kind only in a surface sense.
When people have come to believe in something terribly wrong and dangerous, their friends should want to see them give it up as soon as possible. If that means saying some things that hit with a bit of a snap, so be it. I’d prefer that the reality were otherwise. But it is what it is. The kind thing is to bring the Buy-and-Hold madness to an end quickly. It is killing us. We are in an economic crisis. We need to act with polite and kind and warm firmness.