I have been trying for several years now to get political and financial bloggers interested in the story of how leaders in The Stock-Selling Industry have for ten years suppressed the story of the errors that were made in the Old School safe-withdrawal rate studies. I haven’t had a great deal of luck. For an odd reason. The story is too big!
It’s a reporter’s dream to get a big story. But not this big! When a story is TOO big, people have a hard time believing it. When a story is TOO big, reporting it changes the society in which the story is being reported in fundamental ways. So it takes a lot to get people interested in a story like that.
When a story like that finally breaks, though — Yikes! This is going to be a big, big. big story when it finally breaks. It is my belief that this is the biggest story of my lifetime (yes, bigger even than Watergate). There are 10 reasons.
1) The Great Safe Withdrawal Rate Debate is a story that hits people in their pocketbooks. News junkies care intensely about politics. Ordinary people, not so much. Ordinary people care about things that affect their day-to-day lives. Everyone is looking for a smart, simple and safe way to invest in stocks. Valuation-Informed Indexing permits people to retire five to ten years sooner than they imagined was possible in the Buy-and-Hold Era. It permits them to obtain far higher returns from stocks while taking on greatly diminished risks. This is not boring, theoretical stuff. This is “News You Can Use” to the max!
2) That said, this story has huge political implications for conservatives. Conservatives love economic growth. One of the reasons why they vote down calls for greater government spending is that they believe that the private economy does a better job of creating wealth than do bureaucrats. The VII story is a story of a new stage of capitalism, a stage in which the decisions of thousands of entrepreneurs become more important and in which the decisions of central planners become less important. Why is it that free-market economies outperform command economies? The edge comes from the fact that, in command economies, resource-allocation decisions are made by “experts” rather than by the millions of people who make use of the goods and services being created by the economic system. Capitalism does a better job because the people affected by the goods and services being created call the shots as to which producers are rewarded for providing valuable goods and services and which are penalized for failing at the job. The promotion of Buy-and-Hold caused our economy to collapse because consumers lost influence over what goods and services were created. At the top of the bull market, stocks were priced at three times fair value and all investors came to believe that they had accumulated far more wealth than they had in fact accumulated. This misunderstanding caused them to reward a different set of companies than the companies they would have rewarded had they had access to realistic portfolio-statement numbers. Had the numbers on all portfolio statements been marked down by 65 percent during the bubble years, many companies providing luxury goods would have been put out of business and many companies providing well-priced goods and services that in a bubble environment failed would instead have thrived. The free market economy is the first victim of bull-market psychology. By making bull markets impossible, VII will make greatly expand the power of the free market to enrich all our lives.
3) This story also has huge implications for liberals. It’s not only conservatives who should be excited about the shift from Buy-and-Hold to Valuation-Informed Indexing. Liberals believe that those with power and wealth and the influence that goes with it should not be able to use that influence to obtain an edge over those who make important contributions by working hard for relatively small incomes. The promotion of Buy-and-Hold strategies greatly exacerbate unjust income and wealth disparities. Millions of middle-class investors have placed their trust in investing experts who have advised them to go with high stock allocations at times when stocks were selling at prices that insured they would receive poor long-term returns on their money. The super-wealthy have access to high-priced financial advice and financial advisors are more likely to report what we have learned from the academic research of the past 30 years in private sessions with their wealthy clients than they are in television or newspaper reports that would inflame Buy-and-Holders. The non-volatile markets facilitated by VII strategies provide an equal chance to investors of all income classes. The heavy promotion of Buy-and-Hold strategies exacerbates income inequalities.
4) The story has lots of the nasty stuff that I hate but that appeals to the base desire for sensationalism. The Great Safe Withdrawal Rate Debate is a story about the biggest advance in our understanding of how stock investing works in U.S. history. It’s good stuff piled on top of good stuff piled on top of good stuff. The nasty stuff — the death threats, the defamation, the board bannings, the threats to get academic researchers fired from their jobs — will get blown away in the wind once the good stuff comes out. Still, it would be naive of me to claim that sensationalism has never helped a news story from gaining traction. That nasty stuff is there for those drawn to that sort of thing. I’d like to think that we will see some good come of it in the end.
5) There’s a huge economics story here too. Buy-and-Hold caused the economic crisis. Of all our findings, that is the single most important one. How many news stories have been devoted to some angle of the economic crisis? Tens of thousands of them. The most important thing we need to know is what caused the crisis and what we need to do to bring it to a quick end. Those who have been following The Great Safe Withdrawal Rate Debate have known the answer to that one since before the crisis even began. In fact, Valuation-Informed Indexers knew the answer to that one since before the May 13, 2002, start to The Great Debate since Shiller predicted the economic crisis in his book Irrational Exuberance, published in March of 2000.
6) It’s better than that. There are TWO huge economic stories here. Conservatives favor Adam Smith Economics. Liberals favor Keynesianism. VII posits that there is some truth in both economic models and also some weaknesses in both models. Keynes was right that it takes a shock to the system to defeat the gloom that discourages consumers from spending once an economic crisis begins. He was wrong that a government stimulus can always provide that positive shock. Once deficits grow as large as they are today, deficit spending cannot do the trick because the increased deficit spending needed to finance the shocks generates enough new fears to counter any positive effect the spending might otherwise have achieved. But Keynes is right that we need some sort of shock to reestablish consumer confidence after an economic crisis has wiped out a big percentage of a society’s wealth. Valuation-Informed Indexing provides the needed positive shock in a way that does not add to the deficit. VII represents a huge advance in our understanding of how stock investing works that permits investors to retire five to ten years sooner than they earlier imagined possible. That should do the trick! Consumers are afraid to spend today because they have lost so much ground on their efforts to finance their retirement accounts. Once we permit them to learn the realities of stock investing that have been kept hidden from them during the Buy-and-Hold Era, consumer confidence should quickly be restored to the levels needed for an economic rebound.
7) This is a story of the dangers of placing too much confidence in elites. A theme that has popped up in a number of important news stories in recent years is the increasing power of elites and the dangers of placing too much confidence in them. This theme is core to the VII story. I have spoken to tens of thousands of middle-class investors about the dangers of Buy-and-Hold strategies. Many have told me that they find my investing ideas perfectly sensible but hesitate to take any steps not approved by the “experts.” This is a case where “expert” opinion has led millions astray. And it is fair to say that one of the reasons why so many experts got it wrong is that the experts stood to make so much money by endorsing Buy-and-Hold strategies that had never justified the level of confidence they were accorded by those who stood to make fortunes promoting them. The Buy-and-Hold story is a story of our society’s system of checks and balances breaking down. Where were the personal finance journalists to hold John Bogle’s feet to the fire when he spoke out of both sides of his mouth in so many of his speeches? Where were the policymakers to step in and insist that the Old School SWR studies be corrected once they were found to be in error? Where were the Peer Review Teams to approve quality research showing the holes in the Buy-and-Hold Model (Wade Pfau’s research showing the superiority of Valuation-Informed Indexing over Buy-and-Hold was rejected by two journals before finding a home at a journal he characterized as solid but as something less than one of the most influential journals in the field)? Where were the consumer watchdog groups to jump in and help Wade when The Buy-and-Hold Machine threatened to get him fired from his job if he continued to publish groundsbreaking research on Valuation-Informed Indexing and to push for corrections in the long-discredited Old School SWR studies?
8) The story has a compelling “Who Done It?” mystery element to it. Everybody loves a “Who Done It?” This story is a “Who Done It?” that would give Columbo a run for his money. There’s a temptation to lay the blame on the “experts” in The Stock-Selling Industry. They are the ones who got the numbers wrong in the Old School SWR studies, no? They are the ones who got the numbers wrong. But it is not fair to lay all the blame on the investing experts who pushed Buy-and-Hold. Look at what happened when I posted at Motley Fool about the errors in the studies. A significant percentage of the community that met there evidenced great excitement about the discussions that followed. But a larger and far more intense group demanded my head. It’s not just the stock-selling experts who are to blame. The stock-selling experts are telling us what we want to hear because that’s how you make a buck — All salesmen know that the key to success is getting the customer to like you. The Motley Fool site administrators did not ban me because I discovered the errors in the studies. They banned me because so many of their community members hated me for discovering the errors in the studies. This is a case in which to a large extent we done it to ourselves. That’s an Alfred Hitchcock twist if I ever heard of one!
9) There’s a big psychological dimension to the story. Our second most important finding (after the finding that Buy-and-Hold caused the economic crisis) was our finding that permitting honest posting on the academic research of the past 30 years would reduce the risk of stock investing by 80 percent. Even I find that one hard to believe, but that is indeed what the research shows. How is it possible? It’s possible because making reference to P/E 10 opens up an entire new world of investing insights. There have been two big risks to stock investing that have plagued investors for many years. One is that, when you pick individual stocks, you can pick wrong. That risk was made optional when John Bogle made index funds available to us all. The other risk is the risk that you will ignore valuations and thereby inevitably find yourself taking on dramatically more risk than you can handle. That risk ends once we permit honest posting re Shiller’s findings. Once it becomes possible to make a living promoting the Shiller model, there will be hundreds of businesses formed to help investors invest effectively and it will be impossible for Buy-and-Hold strategies ever again to gain a foothold. What’s really going on here is that we are learning how to control investor emotion through the use of the powerful P/E1o feedback mechanism. The behavioral finance people have been showing for decades how important it is for investors to become aware of their capacity for self-deception but until now there were no practical tools available by which we could do the job effectively. Now there are. That changes everything.
10) This is a story showing the power of the internet to change our lives for the better. None of this would have been possible without the internet. I have written a separate article exploring this aspect of the story in depth.