Economics Professor Valeriy Zakamulin: “If Stocks Are No Longer Risky, They Should Provide the Same Return As Money Markets.” Rob Bennett: “You Are Touching on the White-Hot Core of the Dispute.”

I have been contacting numerous people to let them know about my article reporting on The Silencing of Academic Researcher Wade Pfau by The Buy-and-Hold Mafia.

Yesterday’s blog entry reported on the correspondence with Economics Professor Valeriy Zakamulin. Set forth below is the text of the e-mail sent to me by Valeriy in response to the e-mail of mine detailed in the earlier blog entry:




My comment on the following: “My view is that we are on the verge of a huge breakthrough. We now know how to assess risk effectively (look at the P/E10 value!). Once we know how to assess risk effectively, we know how to eliminate risk. There is no reason why stocks need to be a risky asset class. We made them a risky asset class for many years because of our ignorance of the realities. “


You see, the basic postulate in finance, and it is completely rational, is that “no reward without risk”. Since stocks are risky, then they need to provide a higher (expected) rate of return than money markets. This is what we actually see looking back at the history, namely, stocks provided higher returns than bonds and money markets. Without any risk, if stocks are no longer risky, they should provide the same return as money markets. What is the point to invest in stocks in this case?




I replied:




You are touching on the white-hot core of the dispute with this one.
I don’t agree that the thing that stock investors are being paid for is a willingness to take on risk. I believe that this idea became popular in the days before index funds. Then there really was risk — the investor was sharing in the fortunes or lack thereof of the company in which he bought shares of ownership. Indexing changes all that. When you buy an index fund, you are buying a share in the productivity of the U.S. economy. That economy has been sufficiently productive to produce an annual return of 6.5 percent real for 140 years now. So in all likelihood that’s roughly what you are going to get (provided you don’t overpay or underpay for your shares). The number could change a small bit in either direction. But with an advanced economy dramatic changes in either direction are unlikely. The investor is being paid for the use of his money, which is put to productive uses. His money is essentially being rented and his return is the rental fee. You give up control over the money for a period of time and in return you get an annual return of 6.5 percent real, plus or minus whatever adjustment is needed to reflect the fact that the shares were overpriced or underpriced at the time you made the purchase.
It’s true that, when investors come to realize that index funds purchased in a valuation-informed way are not significantly more risky than Certificates of Deposit (CDs), the disparity in return on stocks and on CDs will need to tighten. But this doesn’t necessarily mean that the return on stocks will drop; the tightening can be achieved by a rise in the return on CDs. The return on stocks is set by the productivity of the U.S. economy. The return on CDs is set by the need of the banks offering them for sale to offer a return high enough to attract the investors needed to purchase their offerings. Here it is the PERCEIVED risk (NOT the actual risk) of stocks that matters. Stocks have never in history been as risky as they were in 2000 (when prices are at three times fair value, prices are certain to fall hard in coming years). So, according to the conventional theory, stocks should have been offering amazing returns at the time to compensate for the insane level of risk being taken on by investors. The reality is that the most likely annualized return 10-year return on U.S. stocks at the time (as determined by a regression analysis of the historical return data) was a negative 1 percent real (See The Stock-Return Predictor). TIPS and IBonds and CDs were at the time offering a return of 4 percent real. That’s a differential of 5 points real of return each year for 10 years running, a total penalty for the stock investor of 50 percent of his starting-point portfolio value. Where’s the compensation for buying stocks at the riskiest time to own them in U.S. history?
The reason why we had an equity risk PENALTY at the time is that the PERCEIVED risk of stocks was low. Buy-and-Hold was being pushed relentlessly at the time and millions of investors had become convinced that there was no need to consider price when setting their stock allocations. In fact, many investors had come to believe that the only possible risk in stock investing was the risk associated with a lowering of one’s stock allocation! Investors act on perceived risk, not real risk. In 1982, when risk was nil (prices cannot drop lower when they are already at one-half of fair value and the investor obtains a return of 6.5 percent real when prices remain at fair-value levels), the most likely annualized 10-year return was 15 percent real. There was no need to compensate stock investors for taking on actual risk at this time. But there was a great need to compensate them for taking on perceived risk. Perceived risk is always greatest when real risk is lowest (because it is low prices that cause investors to fear stocks).
If we educate investors to the realities and stock valuations stabilize, the risks of stock ownership will drop to levels not much higher than the risks of owning CDs. Banks will no longer be able to sell CDs providing returns far below the returns available from stocks in an environment in which stocks are no longer perceived as carrying much more in the way of risk (the appeal of CDs today is their low perceived risk). So they will have to increase the returns paid by CDs. They of course can do this since the money obtained by selling CDs can be put to equally productive uses as the money obtained by offering shares of stock. Banks indeed HAVE paid high returns on CDs at times like the late 1990s when the perceived risk of stocks was so low that there was no other way to market the CDs. The reason why CD rates are so low today is that the perceived risk of stocks in the minds of many investors is high and these investors are willing to accept low returns to escape that perceived risk.
It is true that on an overall basis the historical record shows a higher return for stocks and more risk for stocks. This is why many have come to believe that stocks pay higher returns BECAUSE of the higher risk attached to them. But index funds have only been available since 1976. We are still in the early stages of thinking through how this entirely new asset class operates. And the historical record does NOT support the conventional view of risk when you compare risk and return offered at particular times. At particular times, there is a negative correlation. High prices mean high risk and low returns. Low prices mean low risk and high returns.
Again, these are merely the sincere views of a non-expert who has spent a lot of time trying to understand conflicts and weaknesses in the conventional understanding of stock investing. I believe what I am saying here. But I am just one guy who never studied investing in school and who never managed a fund and I of course could be partly or entirely wrong.
I thank you again for your willingness to engage in a back-and-forth discussion that I find highly stimulating.


  1. The Pink Unicorn says

    Rob said:

    “Again, these are merely the sincere views of a non-expert who has spent a lot of time trying to understand conflicts and weaknesses in the conventional understanding of stock investing. ”

    But Rob…….you said you are more of an expert than Jack Bogle, William Berstein, etc…………what are you saying?????

    You are the one that is to be saving millions of people in the middle class from impending doom, yet now you say you are a non-expert.

    Say it isn’t so.

    I only hope you can give me an answer and not delete my post yet again, but do understand you have such limited space given the activity on this site.

  2. Rob says

    Both things are so, Pink.

    I never went to Investing School. I never managed a big fund. I am no investing expert.

    But, yes, I am 11 years ahead of Jack Bogle and Bill Bernstein and Larry Swedroe and all the other Buy-and-Holders.

    They aren’t experts either, Pink.

    There’s no such thing as an “expert” in a field in which we are as a society only beginning to come to terms with the most fundamental questions. Do valuations affect long-term returns or do they not? That’s the ABCs. When Buy-and-Hold was developed there were smart people who thought that it wasn’t necessary to change your allocation in response to valuation shifts. They didn’t know. If you don’t know the ABCs, you are obviously not an expert.

    Now they know.

    Now we all know. Now that Shiller has published his research and now that Wade and I have published the research that shows clearly the huge practical implications of Shiller’s revolutionary theoretical findings, we all know. Or at least we all should know.

    But Bogle and Bernstein and Swedroe cannot today bear to admit that they don’t know it all. So they play stupid games. And thereby get themselves deeper and deeper into the mess that they created by pretending to know things that they in reality did not know.

    I am not an expert. But I am 11 years ahead of those who haven’t even yet acknowledged that they were wrong about safe withdrawal rates and why.

    I gave up on Buy-and-Hold on the evening of August 27, 2002, when John Greaney threatened to kill my wife and children if I ever dared to “cross” him again by putting up another honest post on safe withdrawal rates. I never looked back.

    When did you come to see that Buy-and-Hold is a big pile of smelly garbage, Pink?

    If you haven’t done that yet, why haven’t you? What do you need to see?

    What is Bogle waiting for? What is Bernstein waiting for? What is Swedroe waiting for?

    It’s one thing not to be an expert. It’s not possible for any of the humans to be true investing experts today. Our knowledge of the realities simply is not yet sufficiently advanced for anyone to claim that title.

    It’s something else to be corrupt. If you don’t speak out against death threats and board bannings and tens of thousands of acts of defamation and threats to get academic researchers fired from their jobs, you are a corrupt non-expert.

    Is that not so, Pink?


  3. The Pink Unicorn says

    I think millions would disagree with your level of knowledge versus those you have listed.

    Secondly, you keep repeating the same lines about death threats and threats to get Wade fired, yet your statements lack any confirmed 3rd party support. To the opposite, we see threats from you that have been documented and Wade has made comments that you have caused him greater harm than anyone else. That seems to undercut your credibility.

  4. Rob says

    Millions would disagree with what I say about my level of knowledge TODAY, Pink. We agree re that one.

    How about tomorrow? What happens tomorrow matters.

    Bogle does not believe that he can respond effectively to my questions about Buy-and-Hold, Pink. We know that beyond any reasonable doubt.

    I announced plans to ask Bogle questions at one of the Bogleheads annual meetings and he responded fearfully. And, when Rob Arnott copied Jack on his e-mail to me saying that my views on investing are “sound.,” Jack did not respond. Nor has Jack responded to my e-mails to him.

    Jack sees the entire Buy-and-Hold house of cards collapsing before his eyes and can’t figure out where to turn.

    What are the millions going to say about who is better informed re the realities of stock investing following the next price crash, Pink? I think it is fair to say that there will be few calling Bogle an “expert” tomorrow. And, once word gets out all across the internet that I discovered the errors in the Old School safe withdrawal rate studies a full 10 years before any of the big-name “experts” in this field, who do you think is going to be perceived as the true expert in the eyes of millions of middle-class investors?

    Now —

    The full truth is that people will be overstating my expertise then as much as they are understating it today. That’s unfortunate. The reality is that I know lots of things that Bogle and Bernstein and Swedroe do not know. But Bogle and Bernstein and Swedroe also know lots of things that I do not know.

    If those guys were as smart as they pretend to be, they would acknowledge what they do not know. They would stop playing this stupid little-boy game of pretending that they knew it all on the day they were born. Everyone sees through that garbage. Many have been reluctant to say they see through it for so long as they have continued hoping that Buy-and-Hold might work out okay for the first time in history. But, if Buy-and-Hold destroys as many lives this time as it has on every earlier occasion it was tried, millions are going to acknowledge that they have at least suspected for a long time now that a lot of the “experts” possess an expertise primarily in marketing.

    Get Rich Quick sells, Pink. I get that loud and clear.

    Research-based strategies work.

    I am the most knowledgeable person today on the subject of how average middle-class people should invest in stocks not because I spent 20 years in school or possess a genius level I.Q. I am the most knowledgeable today because I am honest, because I care about what will happen to the people who will follow my advice.

    That’s gives me a huge edge in a field that I think can fairly be described as 100 percent corrupt today, Any field in which errors in retirement studies have been publicly revealed but not corrected for 11 years is 100 percent corrupt. No?

    I ain’t no great shakes in my knowledge of stock investing. And, in fairness, I learned most of what I know from people like Bogle and Bernstein and Swedroe. But the full reality here is that I am 11 years ahead of those guys today. Because when I saw the reluctance of the Buy-and-Holders to acknowledge their errors, I abandoned ship and got about the business of figuring out why the “experts” in this field are so arrogant and puffed-up and defensive.

    It’s not all a math exercise.

    Honesty matters. Caring about what happens to the people who follow your advice matters.

    This is a field in which you can quickly go to the head of the class just by being honest and by caring about what happens to the people who follow your advice.

    I look forward to the day when my good friends Jack and Bill and Larry catch up to me and then surpass me. Nothing would make me happier. I pray every day for that to happen.


  5. The Pink Unicorn says

    Rob said:

    “I look forward to the day when my good friends Jack and Bill and Larry catch up to me and then surpass me. Nothing would make me happier. I pray every day for that to happen.”

    Surpass you? I hate to break it to you Rob, but you are not even in the same zip code as these guys.

    We have already seen the market in good times and bad times. We know the risks. Don’t hold your breath for the millions to come beating down your door. One point of commonality :The millions of people people in the middle class that you after refer to have a similiar problem as you. They have never really saved enough money.

  6. Rob says

    We know the risks.

    I don’t think you do, Pink. We disagree re this point.

    I wish you the best of luck with whatever strategies you elect to pursue, in any event.


  7. what says

    If CDs returned the same as stocks, the real return of stocks would be 0 due to inflation.


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