Response Article #13 argued that the ten-year cover-up of the errors in the Old School safe-withdrawal rate studies is the biggest news story of my lifetime (I’m 55). It sure hasn’t gotten that kind of play. What’s up?
People are expecting the story to be an investing story or perhaps an economics story. It is both of those. But at its core this is a political story. I say nothing “controversial” in any intellectual sense when I say that researchers need to take the valuation level that applies at the beginning of a retirement into consideration when calculating the safe withdrawal rate that applies for that retirement. This is an obvious implication of the research published by Yale University Economics Professor Robert Shiller in 1981. Everyone knows that you need to consider valuations.But no one does it. Why does no one do what everyone knows always must be done? That’s the meat of the story. Answering that one requires making reference to how The Stock-Selling Industry makes use of its power and money and influence and contacts in an effort to keep the Buy-and-Hold investing strategy alive another day, another week, another month, another year. That aspect of the story is political in nature.
Listed below are ten political questions that reporters covering this story need to address in their reports.
1) Why does Robert Shiller’s “revolutionary” book Irrational Exuberance not tell investors what to do? Shiller is masterful in describing the theory behind Valuation-Informed Indexing. But why does he not address the practical questions that are of greatest concern to most investors. It is politically incorrect to do so today? This is the line that may not be crossed. I have been told by the Goons on many occasions that it is not what I say that inflames them but how I say it. What they mean is that my criticisms of Buy-and-Hold are rooted in objective findings, not subjective impressions. I don’t say that I personally favor the use of a withdrawal rate lower than 4 percent for retirements that began at the top of the bubble. I say that the academic research in this field shows that the withdrawal rate for those retirements is 1.6 percent. That’s a far more powerful criticism. No one can prove the value of a subjective impression. Numbers can be checked. Every researcher who has employed an analytically valid methodology to identify the SWR that applied at the top of the bubble has generated a number close to 1.6 percent. No one has generated a number anything close to 4 percent. That’s because the 4 percent number is wrong.
Buy-and-Holders have no objection to people saying that they follow strategies other than Buy-and-Hold. They are intolerant of objective statements showing that their investing strategy never works in the long run. Buy-and-Hold is a marketing gimmick. The Stock-Selling Industry has always pushed Get Rich Quick investing schemes. The first rule of marketing is that people buy when you form an emotional connection with them. There is nothing that makes stock investors love you more than putting forward claims seeming to show that their Get Rich Quick dreams can come true. It never works out but such claims possess huge marketing appeal during out-of-control bull markets. There is obviously nothing wrong with those trying to sell stocks making such claims. Using puffery to sell stuff is part of how our economic system works.
But Buy-and-Hold advocates claim that their strategy is beyond puffery. They claim that the idea that there is no need for investors to adjust their stock allocations downward when prices rise to insanely dangerous levels is supported by research. This goes beyond the normal sort of puffery. This claim is demonstrably false. There is 30 years of academic research showing that stocks are more risky when prices are high. So investors who fail to adjust their stock allocations are permitting their risk levels to go wildly out of whack. That’s dangerous stuff and a good argument can be made that it is against public policy for “experts” in this field to advance such claims. We all lose when millions of middle-class investors see large portions of their retirement savings disappear and thus become unwilling to spend at earlier levels on goods and services; a broad unwillingness to spend always brings on an economic crisis. But even this could be tolerated so long as it remained possible for those seeking to offer better-informed and more realistic investing advice to challenge the claims of the Get Rich Quickers/Buy-and-Holders.
The Buy-and-Holders have gone a step further in their ten-year cover-up of the errors in the Old School SWR studies. They have put forward death threats. They have advanced tens of thousands of defamatory posts. They have demanded unjustified board bannings. They have threatened to get an academic researcher fired from his job. Wade Pfau described what he experienced when he posted at the Bogleheads Forum as a “hostile atmosphere.” It’s not just that Mel Lindauer (co-author of the Book The Bogleheads Guide to Investing) accused Wade of unethical research practices when Wade posted his breakthrough research findings at the board. It is that no one other than Wade objected when he did so. John Bogle posts at that board but he kept it zipped. Bill Bernstein posts at that board but he kept it zipped. Larry Swedroe posts at that board but he kept it zipped. Rick Ferri posts at that board but he kept it zipped. It became clear to Wade that his reputation would be destroyed is he continued to present research showing the superiority of Valuation-Informed Indexing over Buy-and-Hold and to state his honest belief that retirement studies that get the numbers wildly wrong need to be promptly corrected.
The Stock-Selling Industry today is like Penn State in the years when the Sandusky scandal was being hushed up. Lots of people want to talk. All know that to talk means career death. The investing advice field is today 100 percent corrupt. To fix the problem, we need to have big-name people speak out. Had Wade knew that there were big-name people who would speak out against the abusive posting practices of those who have posted in “defense” of Lindauer and Greaney, he would never have given ten seconds of consideration to flipping. Wade is responsible for two small children. No academic researcher responsible for two small children should be placed in the circumstances in which he was placed. No academic researcher should be forced to choose between doing his job with integrity or being able to make a living in his chosen field. Wade and all others in this field should be able to do both. That won’t be possible until the Campaign of Terror against our board and blog communities has come to a full and complete stop and posts pointing out the dangers of Buy-and-Hold strategies have become so commonplace that no one sees anything even the slightest bit “controversial” about them.
2) Why does the book The Myth of Rational Markets not tell investors how they should change their investing strategies now that the Efficient Market Hypothesis has been discredited? Shiller’s is not the only important book addressing these matters that strangely fails to address itself to the practical question of how to invest given what we have learned over the past three decades. You see the same thing in the book The Myth of Rational Markets. The book does a great job of explaining why the mistakes that made Buy-and-Hold so dangerous a strategy were made in the first place. We didn’t know it all. As we learn more, we need to make changes. Surprise! Surprise! Again, though, the book cops out on the question of how our investing strategies need to change now that we know what we have learned over the past 30 years. That’s what Wade Pfau’s research told us. That’s why Wade Pfau was singled out for “special treatment.” That’s why Wade Pfau has announced that he will no longer be doing research on the “controversial” question of whether Valuation-Informed Indexing has given superior results to Buy-and-Hold for the entire 140 years of stock market history now available to us.
We need to have these practical questions answered. We cannot even begin to answer them in a definitive way until we hear from hundreds if not thousands of people. We cannot hear from any until we make it clear to all that reporting on the 140 years of historical data showing that Buy-and-Hold has never worked well for any long-term investor is no crime against the state. Or is it?
3) What needs to be done to launch a national debate on the question of whether Buy-and-Hold or Valuation-Informed Indexing is superior? I have been saying for years now that the obvious way to bring the Campaign of Terror to an end is for John Bogle to give a speech in which he acknowledges that he was wrong about long-term timing (he said that it never works but the research shows that it always works) and for the New York Times to report on the speech on its front page. That would do it. I have had many middle-class investors tell me that the Valuation-Informed Indexing concept makes perfect sense to them but that they feel that, given that it is their retirement money that is at stake, they must place their confidence in “experts.” Bogle is the most respected expert in the eyes of middle-class investors. If Bogle were to acknowledge that long-term timing always works and in fact is required for those seeking a realistic chance of long-term investing success, that would trigger a national debate on the merits of Valuation-Informed Indexing. People are very interested in these questions. Hundreds of my fellow investors have told me so. But people are afraid to violate social taboos. People need reassurance that it is “okay” to talk about these matters.
4) To what extent did Bogle or other “experts” encourage the Campaign of Terror against our board communities? I have sent two e-mails to Bogle asking for his help in getting Lindauer banned from the Bogleheads Forum. He has not responded. This sends the worst possible signal to all my fellow community members. Say that Bogle were the head of a used-car lot and that he became aware that there were people using his name who engaged in all sorts of low practices of deception and defamation and intimidation. Would he not act quickly to see that the nonsense stopped so that further damage was not done to his good name? Bogle has not acted. It’s worse than that. Lindauer has suggested that he has Bogle’s support. He has said that “higher-ups” at Vanguard read the board on a regular basis and know what goes on there. The unspoken suggestion is that since Lindauer has not yet been banned, there are some powerful people who are just fine with the tactics he employs to intimidate those posting in opposition to Buy-and-Hold strategies. These things get noticed by the members of a board posting community. Those with bigger names have greater responsibilities than those with smaller names. Bogle should have disassociated himself from the Lindauerheads a long, long time ago. Why hasn’t he?
5) Do site owners have responsibilities to honor the promises they use to attract good posters to their discussion boards? I was the most popular poster at the Motley Fool site on the morning of May 13, 2002. I had built the site’s Retire Early board into the most successful board in the site’s history. The co-founder of the site thought so highly of my work that he wrote one of the blurbs that appears on the back of my book Passion Saving. Motley Fool hired me to teach its online retirement planning course. Motley Fool charges for admission to its boards and runs advertising at its boards. So my work brought money to the owners of Motley Fool. Motley Fool promised in its published site rules to protect me from the sorts of individuals who employ death threats and defamation and long-running smear campaigns to silence posters who offer views at odds with their own. When John Greaney threatened to kill my wife and children to stop me from posting honestly on the SWR matter, Motley Fool’s response was not to ban Greaney but to ban me. Greaney cited the ban at scores of other sites as evidence that I should not be permitted to post.
This general pattern has been repeated at many boards and blogs (Get Rich Quick investing strategies are insanely popular for so long as prices remain high). I have not been able to build my internet writing business for ten years because Greaney and his Goon Squad follow me to every site at which I post and intimidate community members who post in support of me and site owners who permit me to post. What are the responsibilities of internet site owners who post published rules not permitting defamation and intimidation on their sites but who either permit it or even encourage it by posters promoting Get Rich Quick investing schemes?
6) Why have so few (if any!) identified the obvious true cause of the economic crisis? I have been writing about the true cause of the economic crisis since before it happened. Yes, before! All Valuation-Informed Indexers saw it coming. We have had four economic crises since 1870 and each and every one of them was preceded by a P/E10 level of 25 or greater. Runaway bull markets always cause economic crises. It’s not even a tiny bit hard to understand why. Stocks were overpriced by $12 trillion in 2000. Reversion to the Mean is an “Iron Law” of stock investing — John Bogle, hardly an individual biased against Buy-and-Hold, says this! So we knew in 2000 that sometime before the end of the first decade of the new Century, $12 trillion of spending power would be disappearing from our economy. When millions of consumers see their retirement dreams deferred, they become afraid to spend money on goods and services. Tens of thousands of businesses fail. Millions lose their jobs.
Is this not a public policy issue? Only the biggest of our time! And yet who is writing about it? Valuation-Informed Indexing shows us how to avoid future economic crises. No investor wants to invest ineffectively. If we could show investors how much higher the returns are for Valuation-Informed Indexers and how much lower the risks are for Valuation-Informed Indexers, all investors would lower their stock allocations when prices first showed signs of getting out of control. That would bring prices down! So they would never actually get out of control! Stock valuations are self-correcting in a world in which those who have studied the academic research are free to report on what they have learned without needing to fear that their reputations and careers will be destroyed by Buy-and-Hold dogmatics.
It turns out that University of Chicago Economics Professor Eugene Fama was not so wrong. It was Fama who argued that the market is efficient (that is, priced properly) because all investors look for imbalances and quickly exploit them when they identify them. What Fama missed was the Campaign of Terror. People who understand the research do not tell others what they know so long as the penalties for doing so are as severe as they have become during the Buy-and-Hold Era. But there is every reason to believe that, once we do something about the death threats and the defamation and the board bannings and the threats to get people fired from their jobs , all this will change. This is a money field. Permit people to make money offering sound investing advice and thousands of new businesses will be formed to take advantage of the opportunity. But those promoting alternatives to Buy-and-Hold cannot succeed so long as the Buy-and-Holders have a monopoly on the academic research. The data supports Valuation-Informed Indexing, not Buy-and-Hold, and we need to be able to have researchers like Wade Pfau use his talents to educate millions of investors as to the realities without feeling that he is putting his career at risk by doing so.
7) How do we avoid the Second Great Depression? From the standpoint of those who are familiar with the message of the past 30 years of academic research, the response of policymakers to the economic crisis has been frighteningly inappropriate. Why is it that every runaway bull market has caused a series of price crashes that eventually brought the P/E10 level down to 8 or lower (one-half of fair value)? There is no rational reason why prices should fall to one-half of fair value. Prices must fall to fair-value levels for the market to continue to function. That drop makes sense. But why do prices continue to fall until they hit levels of one-half of fair value?
This question is of critical importance. The P/E10 level today is 22. If we fall to 15 (fair value), we will all be taking a big hit. But if we stabilize at 15, we may make it out of this economic crisis without it becoming the Second Great Depression. A drop all the way down to 7 or 8 would be catastrophic. That would represent a price drop of two-thirds from today’s levels. And that price drop would hit with much greater force than the price drop we experienced in 2008. In 2008, most of us had some slack in our budgets. The hit we took to our retirement accounts hurt. But most of us found ways we could cut back on spending and at least maintain some hope that we will be able to retire at a reasonable age. There’s no slack in most family budgets today. A 65 percent hit today would wipe many of us out. It would be emotionally devastating. So policymakers need to focus on the question — How do we stop prices from continuing to fall not just to fair-value levels but all the way down to one-half of fair-value levels?
This is a silly question to those who believe in the Buy-and-Hold Model. The Buy-and-Hold Model posits that prices are determined by each day’s unexpected economic and political developments (the effect of anticipated developments is priced in at the time the developments come to be anticipated). There’s obviously nothing we can do to affect what sorts of unexpected economic and political developments turn up in coming days. So Buy-and-Holders are not focused on avoiding a drop to price levels of one-half of fair value. And, indeed, no policymakers are talking about this question today.
It is essential that they begin talking about it. If we fall to price levels of one-half of fair value, we will enter the Second Great Depression. If we stabilize at fair-value prices, we can avoid the Second Great Depression. There is no more urgently important public policy question before us today.
Valuation-Informed Indexing posits that prices are determined primarily by investor emotions. So irrational price drops CAN be avoided. How? Be addressing the irrationality that would otherwise cause them to take place. We need to look at the investor psychology that causes prices to drop so low in the wake of huge bulls and change it.
The reason why investors become so depressed about their futures in the wake of huge bulls is that the money they were expecting to be able to retire on was phony and seeing it disappear is a mighty discouraging experience. At the top of the bull, stocks were priced at three times fair value. Prices stopped falling at the end of all earlier bears only when they dropped to one-half of fair value. Going from 3x (where “x” is the fair value of one’s portfolio) to .5x means losing five-sixths of the accumulated wealth of a lifetime. Is it any wonder that most investors become depressed in the wake of runaway bulls?
We need to tell investors the truth about stock investing. Once investors come to understand that there is 30 years of academic research showing that the prices achieved at the top of runaway bulls are not real, they will come to understand that the prices achieved at the end of runaway bears are not real either. It is insane for us to let stock prices fall to levels representing one-half of fair value. Why would we want to price our retirement portfolios at LESS than their real value (pricing them at more than their fair value is not a good idea but at least it makes sense from a short-term-thinking standpoint — pricing portfolios at lower than their fair value is truly crazy even if it has been a reality of every runaway bear in U.S. history).
Warren Buffett and John Bogle and Eugene Fama were telling investors to remain heavily invested in the stock market in the wake of the 2008 crash. That was bad advice. It is the standard Buy-and-Hold line, of course. But it is the wrong thing for investors to do. No, you don’t want to sell when prices are low. But guess what? Prices were not low following the crash. For most of the time that Buffett and Bogle and Fama were giving that advice, stocks were priced well above fair value levels. Prices dropped in the crash from the insanely high levels that had applied for many years but only for a very brief time-period (a few months) did they drop low enough to justify claims that they were fairly priced (it made sense to buy during that brief time-period). Today stocks are priced very high. Investors who buy at these levels should not be expecting good long-term returns. It is irresponsible for leaders in this field to encourage investors to once again buy overpriced stocks and thereby set themselves up for yet another big upset to their retirement plans.
Investors need to know the score. When you buy stocks at good prices, you get good returns. When you buy stocks at poor prices, you get poor returns. We need to get the word out on that. When prices first drop below fair-value levels, it is going to be imperative that we persuade investors that stocks finally represent a good buy, If the experts have been telling them that stocks always represent a good buy and they have seen with their own eyes that this claim is nonsense, they are going to tune out the message that they should buy stocks once prices drop below fair-value levels. We need to get the message out about how stock investing really works before we are at serious risk of seeing the price drop that will put us into the Second Great Depression. Investors will be extremely distrustful once things get to that point and will tune out even messages truly rooted in the academic research.
If we end up in the Second Great Depression, it will be because we did not abandon the Buy-and-Hold dogmas that have now caused four economic crises. We had an excuse the three earlier times. We didn’t have academic research teaching us the realities on those earlier occasions. Now we do. We should make use of it. Policymakers should be doing everything in their power to prepare investors for the price drops still to come and to explain to them why a drop to fair-value price levels is necessary and good but a drop to levels far below fair-value price levels is neither necessary or good.
8) Why do financial journalists not point out inconsistencies in statements by experts in this field? Journalists hold politicians’ feet to the fire. That’s the job. Voters need to know whether politicians are shooting straight with them or not.
Unfortunately, this practice is rarely followed in the investing field. Journalists in this area too often play the role of stenographers and happily report the words of investing “experts” as if they were filled with insight when the reality is that the statements are full of holes or even self-contradictory.
I’ll give a few examples.
Bogle has said that not only does he not know anyone who has successfully timed the market, he does not know anyone who knows anyone who has successfully timed the market. Cute. But Bogle has said in interviews that he himself successfully timed the market in 2000. He saw that stocks were priced too high, he lowered his stock allocation dramatically as a result, and he profited handsomely by doing so. You can’t recommend long-term market timing at the Bogleheads Forum even though there’s 30 years of academic research showing that those who engage in long-term timing earn far higher returns while taking on dramatically reduced risks. Yet the guy whose name is used in the board title follows the practice. This does not make sense.
Bill Bernstein (The Four Pillars of Stock Investing) has said that he does not view the Old School safe-withdrawal-rate studies as analytically valid. “Of course they are analytically valid!” he said when asked the question. But Bernstein then added that anyone who would use one of the Old School SWR studies to plan a retirement would be well-advised to “FuhDedDaBouDit!” Huh? Isn’t that what the phrase “analytically invalid” means? That the study uses such a bogus methodology that it would be dangerous for investors to place any confidence in its conclusions? Isn’t it the job of investing experts to warn their readers and clients about such studies? Why pretend that dangerous studies are analytically valid all the same? It’s this Old Boy’s Club way of doing business that brought on the losses that caused the economic crisis.
9. How will damages for the ten-year cover-up of the errors in the Old School retirement studies be paid? It’s hard for me to figure out what the motivation is for The Stock-Selling Industry to continue its cover-up of the errors in the Old School studies. I believe that in the early days it was mostly pride. People in this field like to give the impression that they are on top of things and acknowledging mistakes undercuts that impression (i don’t think this is strictly so, I respect people who acknowledge mistakes, but I believe that many in this field see it as a bad thing to acknowledge mistakes). But I don’t see how there would have been much risk of lawsuits had the studies been corrected when the errors in them first became publicly known (May 2002). The mistakes were rooted in a perfectly understandable analytical error that was made by lots of good and smart people and stock prices had not fallen much from their highs at the time. So retirees who had made bad investment choices because of the incorrect numbers reported in the studies could have at least partially recovered from the damage done.
The situation is different today. Today we are looking at the possibility of millions of failed retirements. This will be one of the worst social crises we have ever faced as a nation. And there is a ten-year record of posts showing the extreme efforts (including death threats!) of the Buy-and-Holders to cover up the errors. Lawsuit city! It’s hard for me to imagine that enterprising lawyers are not going to start bringing lawsuits after the next price crash disabuses the investors who today are trying to maintain confidence that Buy-and-Hold can work from any such notions. It’s not hard to imagine that the total damages awarded could be in the hundreds of billions of dollars.
Can the Stock-Selling Industry handle liabilities of that size? The liabilities could be even larger if lawsuits are also brought because of industry efforts to block the spread of knowledge of Valuation-Informed Indexing. There the liabilities could be in the trillions. The industry almost certainly cannot handle liabilities of that size.
Are we going to see more bailouts? Will there be congressional hearings on how this all happened? What policies will be adopted to insure that nothing like this ever happens again?
These are important public policy questions.
10. How will we get the word out about the Valuation-Informed Indexing concept? Millions of workers today finance their retirements largely thought investments in the stock market. If those people cannot obtain access to accurate and realistic guidance because of an industry too ego-obssessed to acknowledge its mistakes and too greed-infested to resist the temptation to push Get Rich Quick strategies over research-supported ones and too power-mad to speak out against vicious intimidation tactics employed by the gooniest of the internet goons among us, we have not just an investing problem on our hands but a political problem. People who invest in the stock market to finance their retirements will lose confidence in our political system if they find out that good information on how to invest for the long term has been held back from them for three decades. And this is of course precisely what has happened.
We could all get depressed worrying about these negative possibilities.
You know what? The transition from Buy-and-Hold to Valuation-Informed Indexing is going to bring on the greatest period of economic growth we have ever seen. Buy-and-Hold was a huge advance over what came before it. Valuation-Informed Indexing is an even bigger advance. Ours is a dynamic society. The story of the ten-year Campaign of Terror against our board and blog communities is a story at odds with our most fundamental social norms. Working together, we are going to find a way around the obstacles this industry has placed in our path. The industry leaders will come around. They will help us spread the word about the new investing strategies far and wide, creatively and effectively.
The nasty stuff that held us back for so long will get blown away in the wind. It is the wonderful insights that we developed together (with important contributions made by Valuation-Informed Indexers and Buy-and-Holders alike) that will be around for decades. The story of how we will pick ourselves up from the damage done during the Buy-and-Hold years and move on to our most productive and enriching days of all is a political story too. It is the way we do things. We are a rich nation because we have mastered the art of creative destruction. We will bury Buy-and-Hold 30 feet in the ground, where it can no longer do harm to humans and other living things, because we must bury Buy-and-Hold 30 feet in the ground, where it can no longer do harm to humans and other living things. We will move confidently into the better future that awaits us.
Until the next time the humans mess up something awful!