I’ve been sending e-mails to various people letting them know about my article describing the intimidation tactics used by Buy-and-Holders to stop Academic Research Wade Pfau from publishing further research showing the superiority of Valuation-Informed Indexing investing strategies over Buy-and-Hold strategies. University of New Hampshire Law Professor Tom Field responded: “You seem to be a class act, Rob, but I’m not sure of the sense in which you want to pull me in.” The text of my reply is set forth below:
Tom:
Thanks for your exceedingly kind words.
There is no particular way in which I am trying to pull you in. It’s perfectly fine with me if you just take in the information, conclude that it is “interesting” in some way, and move on with your life. That’s how the vast majority of the people who receive the e-mail are responding. In fact, the vast majority do not go to the trouble to send such kind words my way. So you have provided help by lifting my spirits a bit. That’s real. That counts.
The entire situation is so “out there” that almost no one can believe the plainly stated facts. The Buy-and-Holders did a wonderful thing. They turned investing analysis from guesswork into a scientific enterprise. Our free market economic system (and all those of us trying to make a living within it!) is going to benefit in huge ways in days to come as a result of what people like John Bogle and Eugene Fama and Burton Malkiel and all these others did. That’s the good news. It’s important that everyone keep the good news foremost in mind when trying to make sense of all this.
The bad news is that the people who developed Buy-and-Hold made a mistake. They made it for perfectly understandable reasons. The research they needed to get everything right was not available to them at the time they did the development work. So they got one important thing wrong while getting lots of other important things right for the first time anyone got these things right. Then Shiller published his research filling us in on the important thing they got wrong.
If only he had done this 10 years earlier we would all be living in an economic Garden of Paradise today! Unfortunately, lots of people had already staked their careers on the accuracy of the Buy-and-Hold Model and millions of dollars had been spent promoting it. So a decision was made (not formally and never publicly articulated) to pay lip service to Shiller’s findings, to acknowledge that he had done something but to pretend that what he had done was not a big deal and could be ignored for practical purposes.
In 2008 that unfortunate call caught up with us. We now are in an economic crisis as a result and, in the event that Shiller is right (there is today a mountain of evidence showing that he is), the crisis will become the Second Great Depression over the course of the next few years. There is obviously not one person alive who wants to see that happen. But there are also very few who dare to give voice to the truth of the matter in clear and firm and bold and understandable and uncompromising terms. So we keep drifting downward even though there is not one soul alive who wants to see that happen.
My blog entry from yesterday reporting on Rob Arnott’s reaction to the e-mail tells the story well:
Rob is a highly influential thought leader in the field. He served as the editor of the Financial Analysts Journal for four years. He reports that he cannot get an article that he co-authored with a Nobel Laureate published in a journal because it discredits the Buy-and-Hold orthodoxy. Even with my ten years of experience with similar realities, I find that one hard to accept. He reports that he knows of young professors who wanted to do honest research on important new ideas and who were warned that their careers would be derailed if they did so. Yikes!
I’ve tried all the normal ways of getting the message out. I built a discussion board that in 2000 was the most important board in the personal finance area available on the internet. We had hundreds of people at that board who wanted to explore these issues. But the Buy-and-Holders just would not permit it. They burned the entire board to the ground. The level of emotional pain that they are experiencing is just off the charts. There’s never been anything like this. The closest analogy I have been able to make is to the way people felt about segregation in the early 1960s. Every single person knew in his or her heart that it was wrong. But few dared to speak out because “that’s just the way it is.” The feeling was — There is nothing that can be done, so why try? And so the problem continued to eat our society alive.
We eventually overcame segregation and we eventually are going to overcome the Get Rich Quick aspect of the Buy-and-Hold concept. It’s going to be people who are going to make the difference. There is going to come a time when the human misery will become so great that people are just going to work up the courage to speak out. Once a number of us do, there will be a tipping point and then we all will speak out and share what we know and there will never be one person who will ever want to return to the dark economic times we are living through today.
Here’s what I ask. Keep this in the back of your mind as you go about your daily affairs. If at some point in your travels, you run into someone who you think might have an interest in this, share the e-mail or a link to my site with him. It might be a journalist. It might be a policymaker. It might be an economist. It might be an investing expert. It might just be an ordinary middle-class person trying to plan for a decent old-age retirement. Just pass the information along. You don’t even need to endorse it, just let the person know that you saw this and that you think that perhaps he or she would want to see it too.
That’s how I believe we will turn this around. We cannot count on the experts re this matter because they are compromised. They are not compromised because they want to be be. They just are caught up in circumstances beyond their control. People have families to feed. People feel that they cannot afford to destroy their careers by being too honest. Everyone is on the same side. There are no two sides to this. So we just need to find some means to gradually spread the word over time and then one day the ones who are holding things back will just wake up in the morning wanting to help move things forward. Then it’s all over! The good stuff is so good that it will make the bad stuff seem insignificant in comparison in not too long a time. This is a positive story!
Anyway, that’s where I am coming from. Please help in whatever way you can and please don’t worry about it at all if there is nothing that occurs to you at this moment. I have confidence that something will occur to enough of us somewhere down the line to get things back on the right track. We will collectively figure out a way to make all of our lives better and to live up to the ideals we all struggle to follow to the best of our abilities.
Thanks also for giving me a reason to structure these thoughts in a way that I hope makes at least a tiny but of sense.
And please enjoy a safe and warm and loving holiday season!
Rob
Programming Note: The blog will return on Wednesday, January 2, 2013. I wish all my internet friends (both the Valuation-Informed Indexers and the Buy-and-Holders!) a peaceful, happy and friend-filled Christmas.
Did Tom respond to your email?
He did not, Evidence.
Is there some reason why you believe he should have or why you believe that I should have expected him to respond?
I was grateful for the one response he provided. I viewed that as a sufficient kindness on his part.
Do you feel that I was wrong to see things that way?
Rob
Let me get this straight. After pillorying pour WP during your month-long screed on your blog, you have now taken to spamming people with your vendetta against him. Can’t you just leave poor WP alone?
You are engaging in obvious dishoesty here, Trebor.
I love Wade Pfau. I much enjoyed our 16 months of e-mail correspodence and learned a great deal from it. Wade is a smart and generous-spirited and hard-working individual who has produced fine research on a number of important questions. He was the first researcher to show the superiority of Valuation-Informed Indexing strategies over Buy-and-Hold strategies in peer-reviewed research (John Walter Russell did this years earlier in research that was not peer-reviewed). We all owe Wade a big debt of gratitude for the huge contributions he had made, contributions that will win him a Noble prize in days to come if I have anything to say about it.
I wish you well.
Rob
No dishonesty here. I just grow weary of your perpetual attack on a decent and hardworking individual.
And while you are so busy attacking him, WP continues to publish meaningful articles on generating retirement income
Just two of many articles by WP. Note, he even disagrees with John Greaney in one of them.
http://www.fpanet.org/journal/currentissue/tableofcontents/safesavingsrates/
http://www.marketwatch.com/story/retirement-withdrawal-rates-and-the-markets-2012-12-18
I obviously love Wade and I obviously love his work, Trebor.
I don’t have time at the moment to look at what he said about my friend John Geaney and his work. I will certainly do so later today. I hope that any criticism that my friend Wade offered re my friend John was put forward in a kind and constructive manner. My strong hunch (knowing Wade) is that this was indeed the case.
I wish you all good things, old friend.
Rob
I’ve read the article that refers to Greaney. It contains some good but it also contains a lot of garbage. The bad in this article outweighs the good, in my assessment.
It’s good that he says that John was wrong to deny that the numbers in his study couldn’t possibly be right, given that he failed to consider the most important factor affecting the safe withdrawal rate — the valuation level that applies on the day the retirement begins. There was a day when there were “experts” in this field not willing to acknowledge the errors in the Old School studies. We have made important steps forward.
It’s bad that he fails to mention John’s 10-year Campaign of Terror against the Retire Early and Indexing discussion-board communities. That’s obviously a fact that people need to know about because it goes to the level of integrity of the “expert” in question and it goes to the level of emotionalism being evidenced in that “expert.” John has evidenced an insane level of emotionalism on the topic of SWRs for 10 years now and people hearing about his views need to know that. Wade is well aware of the history and yet fails to make note of it. That’s gross dishonesty on Wade’s part.
Wade also fails to note that Greaney threatened to send defamatory e-mails to his employer to get him fired from his job because for a time Wade posted honestly on the SWR matter (he asked the authors of the Trinity study to correct the errors in their study). This is another case of gross dishonesty and this one reflects on the character of Wade, which again readers of this article obviously need to know about.
The errors in the Old School studies should have been corrected within 24 hours of the time they were discovered. Our problem is that the “defenders” of the Old School studies have engaged in tens of thousands of layers of deception trying to cover up the errors and then trying to cover up the cover up. I think it would be fair to say that in this article Wade is seeking to cover up the cover-up of the cover-up. Not good.
The cover-up has put millions of middle-class workers at grave risk of suffering failed retirements in days to come. This is the biggest social problem that we have yet experienced as a nation. We all have an interest in getting the Old School SWR studies corrected or taken down by the close of business today.
Wade advances the ball in small ways in this article. He also adds a new layer of deception to the thousands of layers of deception that have already caused so much human misery. My friend Wade should be ashamed of himself for having permitted his name to be put to this piece of deceptive garbage.
That’s my sincere take re this important matter, in any event.
Rob
Here is the text of a comment that I put to Wade’s article at Market Watch:
I am the person who discovered the errors in John Greaney’s safe withdrawal rate study. I put up a post reporting on them at a Motley Fool board that we posted at together on the morning of May 13, 2002, many years before any of the experts in this field were saying that it is not possible to calculate the safe withdrawal rate accurately without taking into account the valuation level that applies on the day the retirement begins.
A fantastic discussion followed in which hundreds of us learned some amazing things about how stock investing works. Unfortunately, John and some others did not want the learning experience to continue and engaged in abusive posting tactics to destroy the board. The comments of hundreds of our fellow community members who wanted this learning experience to continue are detailed in this article:
http://www.passionsaving.com/investing-discussion-boards.html
Wade is familier with this history. I have discussed different aspects of it with him in great depth on numerous occasions.
Stock investing is an intensely emotional endeavor. It is not possible to make sense of any element of the stock investing project without taking the effect of investor emotions on stock prices into account. The P/E10 metric has been shown in research to be the best tool for doing this. There was a time when we didn’t know this but that was 30 years ago. Shiller showed in research published in 1981 that valuations (emotions) must always be considered.
We will not get the SWR (or retirement planning in general) right until we work up the courage to acknowledge that investing is not strictly a numbers game. This is a numbers plus emotions game. P/E10 is the metric that permits us to take valuations into account. It is my strongly held belief that valuation-informed retirement planning strategies are the future.
Rob
Rob,
For Christmas, why don’t you give Wade a nice gift and leave him alone. Just stop posting about him. Secondly, people are only ‘friends” if the other one considers the other one a friend. I am still hoping you can get the mental help that you so urgently need.
What Wade really wants is to be able to craft honest research and to post his honest views re how stock investing works, Sparky. I know this from my 16 months of e-mail correspondence with him. The guy believed at that time that honest posting was permitted (this was before you and the other Goons threatened to get him fired from his job and our friend Jack Bogle did nothing about it). Wade was like a kid in a candy store in those days, discovering one amazing investing insight after another after another after another.
Jack Bogle wants the same thing. Look at any of his speeches, which are available on the internet. He always combines lots of statements indicating that he understands what the academic research of the past 30 years shows with lots of statements indicating a belief that a pure Get Rich Quick approach might work for the first time in history. He hates feeling that he has to speak out of both sides of his mouth. Wouldn’t you? There is nothing that my friend Jack would like better than to be freed to post and write honestly. He’s much like Wade and I (and Sparky!) in that regard.
And the same is of course true of Bill Bernstein and Larry Swedroe and Scott Burns and J.D. Roth and on and on and on and on. We all want the same things, Sparky. We are all sick of this economic crisis. We are all sick of the ten-year Campaign of Terror against our board communities. We are all sick of having to degrade ourselves by posting dishonestly and by threatening those who post honestly. We all like the idea of early retirement. We all want to be able to tell our friends how to reduce the risk of stock investing by 70 percent. It’s not too hard to understand why, is it?
My feeble brain is not able to imagine a single reason why we shouldn’t give Wade and Jack their #1 Christmas wish and open up every board and blog on the internet to honest posting on safe withdrawal rates and scores of other critically important investment-related topics by the close of business today. Is your far superior brain able to come up with anything?
Rob
I don’t buy what you are saying re the friend thing, Sparky.
First of all, I obviously understand that you put forward the idea that you do not like me as a pose. You want to intimidate people who dare to “cross” you by posting honestly. So you have to act very, very, very angry and nasty. Yikes! I better not ever post honestly again! You might come to my house and actually follow through on your threats to kill my wife and children!
Why should I give up my friendship for you and all the benefits it has brought me over the years because you are acting like a doofus? This I do not get.
You’re the pretend-rage doofus, Sparky, not me. I’m your bud for life, like it or not. You’re stuck with me, man!
Rob
Rob,
Now you are just making stuff up and you are playing the victim. I could not be more serious when I say you need some help.
That makes good sense, Sparky.
Rob
An interesting discussion on SWRs with Michael Kitces.
http://www.morningstar.com/cover/videocenter.aspx?id=553594
Thanks, Trebor.
Rob
Good Day to you Mr. Bennett,
I’m come from the Philippines, pretty new to the world of investing in terms of in practice. I read your articles with regards to VII for the past 2 weeks and I have to say that I’m very interested about it.
I have some concerns with regards investment products available in my home country which the majority of them are actively managed and there are only 4 are index tracker funds (2 of them tracks the local index benchmark, one is a bond index and the other is a dollar bond index fund)
Is it possible for me to apply VII with these funds because I want to learn more from this method.
Happy New Year!
Monique:
Thanks for stopping by and thanks for your interest.
Please understand that I am not an investing expert. I am a journalist. I report at this site what I have learned about investing from examining the research and from talking both to experts in the field and to lots of ordinary investors. I possess a strong confidence in the ideas explored at this site. But I of course don’t want to give anyone the wrong idea about my background.
I do not believe that Valuation-Informed Indexing would work with the sorts of funds you describe. The idea has been tested with broad U.S. index funds. The U.S. market is a well-established and well-researched market and therefore a largely predictable market. I would not personally feel confident applying the concept outside the context of a broad U.S. index fund (such as a Total U.S. Stock Market Fund or an S&P 500 fund).
The idea that valuations matter of course in a theoretical sense applies in all markets. But smaller markets or newer markets or less researched markets are not going to be as predictable. So in a practical sense I think that application of the concept needs to be somewhat limited, at least until there has been more research and more discussion and more exploration.
I wish you the best of luck with your investing strategies in any event!
Rob
I see,
What I understand about it is regards Wade Pfau’s research of allocation when valuation went insanely up or down.
Right now that I have to gather my resources for my investment experiment after all I just turned 24 last October 2012 and I have the time to wait to bear fruit.
Yes, the peer-reviewed academic research shows that you are taking on more risk when you overpay for stocks. All that the research is showing is what common sense tells us must be so in any event. The thing that got us on the wrong track was an academic construct called the Efficient Market Theory, which ASSUMES that investors are always collectively rational and thus always sure to collectively see that stocks are priced properly. It was Shiller who discredited this assumption with his 1981 research.
The problem with applying the concept to indexes for which we do not have much history is that our best valuation metric (P/E10) relies on the historical record to tell us when prices have become dangerous. The U.S. economy has for 140 years been sufficiently productive to support an average annual return of 6.5 percent real. An emerging economy might support a higher return. A declining economy might not support that high a return. You need a relatively stable economy to be able to generate numbers that provide effective guidance.
The theoretical principle behind Valuation-Informed Indexing (price matters) always applies. It is not always possible to put the theoretical principle to practical use. This is why as a society we are only learning about this in recent years. VII didn’t work in the days before indexing. Bogle founded Vanguard in 1976. So VII has only been possible for 36 years. And there wasn’t hardly any interest in a valuation-based approach during the insane bull market. So it is really only since the 2008 crash that we have seen enough interest in this idea for word about it to begin to spread.
My best wishes to you.
Rob
Alright then, finding the historical record of the local economy will be a good starting point. (I found out that price-to-earning ratio of the Phil. market as of Dec 2012 is 18 which make it Asia’s most expensive equity and I just have a feeling that it’s not a good sign)
Might as well use myself as a investment guinea pig. By the way, is it ok that I can use the parameters that Wade Pfau use on his research? (e.g. P/E10 value above 21 means 30% stock allocation and P/E10 value below 12 means 90% stocks)
To be honest that his research regarding with stock allocation really fascinates me.
You need to have a high level of confidence in a strategy for it to have a realistic chance of working in the long-term, Monique. Your comments evidence that you do not possess that level of confidence today. My advice to you is to hold off, to continue to educate yourself until you are on a much more sure footing.
Please check out this article:
http://www.passionsaving.com/valuation-informed-indexing-case.html
Rob
Got it
I much appreciate your interest in the ideas, Monique.
I certainly wish you the best of luck with whatever choices you make.
Rob