“When You Mix Research and Emotion, You Don’t Get Something Better Than Emotion Alone. You Get Something Far, Far Worse. Mix Research and Emotion and You Get Investors Who Not Only Are Emotional But Who Have Lost the Ability to Question Their Emotional Strategies Because They Believe That They Are Research-Based.”

Set forth below is the text of a comment that I recently posted to the Goon Central board:

Hocus, you’ve been predicting the stock market (which of course we know on HocoWorld refers solely to the S&P 500 Index) will drop by 65% within three years. I just wanted to establish a firm date, since we know you to be less than truthful after the fact on various issues. Goes with the territory when you’re a Habitual Liar like Rob “hocus” Bennett I guess! 
 
I believe you made your bold prediction based upon your reading of the Lucky Seven BatSignal™ sometime last year. That would mean you’re saying the crash will occur by the end of 2015. To help you with the arithmetic; 2013 = 1 year, 2014 = 2 years, 2015 = 3 years. And we’ll give you a few months free since I don’t recall exactly when or where you first made your claim, it could have even been prior to 2012.  
 
By the way hocus, I see from the Google if one searches “Stock Market Crash” you’ll find there is no shortage of folks also predicting the same event. Alas, it seems like you not the only person workin’ this prognostication beat so you may not get the attention you so desperately crave even if your call turns out to be correct. By the way, you’ll also find many folks when you do that search saying just the opposite, that a crash is unlikely. 
 
I think it’s fair to say the only thing for certain even in the event your prediction pans out is that if stocks perform somewhat like they have in the past, people holding diversified portfolios of stocks and fixed income commensurate with their risk tolerance and who stay-the-course will do fine. And people who panic and sell at market bottoms will do poorly. Just like what happened to Rob “hocus” Bennett back in 1996 when he panicked and sold all his stocks. 
 
You bailed out of the S&P 500 Index in 1996. In January 2000 you missed the high of 1498.58. But you did miss out on the low in July 2002 of 815.28. Why didn’t you buy?  No BatSignal™ clanging for you back then? Again in July 2007 the S&P 500 reached an all time high of 1,526.75. Too bad, you missed out again on all the market gains. But you did miss the downturn of January 2009 when the market dipped to 797.87. Still no buy? Or did the BatSignal™ fail you again. From that low the market rebounded to 1,569.19 in January of 2013. Again, you missed out on the opportunity. The next low? Stay tuned.  
 
Hocus, what makes you think you’ll be able to gather the courage to buy stocks this time in the event your prediction comes to pass? You were to scared in 2002 and again in 2009 when the S&P 500 Index hit lows. Why will the next time, if that next time happens per your schedule, be any different that the previous two times you failed to take action since 1996? You just blowin’ smoke? Shocked
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It’s a painful experience for me to read this post, Yip.There’s enough nasty, stupid stuff in it to make me want to refuse to reply at all unless you rewrite it.But there are also a few sections that sound to my ears to have enough sincerity in them to justify a response. So I will respond, knowing how hard it is for you to hear the words I say rather than the ones that your emotional defenses throw up to turn what I say into something else.Your strongest point is where you say that there are lots of “experts” predicting a crash and lots of other “experts” predicting just the opposite. You are 100 percent right about this. And we are in 100 percent agreement about this. We are in agreement not only re the factual matter. We are in agreement re the disgust we feel for this sad state of affairs. It doesn’t do any good to root your strategies in the advice of experts if the expert are all over the map! In this field, one can use “expert” assessments to justify any course of action imaginable. Huh?

This is the problem that rooting one’s strategies in the academic research was supposed to solve!

You hear me say all the time how much respect and affection and gratitude I feel toward the Buy-and-Hold pioneers. This is why. My journey down the path I am on today began with the observation you are making here. I started compiling material for my binders. I discovered that there was “expert” opinion on both sides of every question. I felt that I was going around in circles. Then I discovered the school of thought (Buy-and-Hold) that says that you should root your strategies in the academic research. This was the answer! Now I had something solid to hold on to. We are starting from the same place, Yip.

If you had asked me on the morning of May 13, 2002, what school of investing analysis I favored, I would have said “Buy-and-Hold.” Yes, I thought that the safe withdrawal rate had been miscalculated. But I didn’t see it as being some huge, big deal. I figured that a mistake had been made and that it would be recognized and corrected. I was glad to be able to do what I could to advance knowledge in the field. I expected the community at Motley Fool would discuss it for a bit and then we would move forward with the project of getting all the Old School studies corrected. I did not know whether John Greaney would participate in that effort or not. I certainly hoped so. I thought the odds favored it. I thought that, once the community made clear what it wanted, he would go along. But I wasn’t sure re that particular point. I was pretty sure about what the community would do, however. I didn’t expect instant agreement. I expected two or perhaps three days of debate. But I wasn’t able to imagine that we could not reach agreement in three days on the calculations of a freakin’ number.

And here we are. We are now 11 years down the road.

The idea of using research to guide you is A++ stuff. But there is a problem. The idea has to be executed by the humans. The same darn humans that have been investing emotionally ever since the first market opened for business. When you mix research and emotion, you don’t get something better than emotion alone (what we had in the pre-research days). You get something far, far worse. Mix research and emotion and you get investors who not only are emotional but who have lost the ability to question their emotional strategies because they believe that they are research-based.

We are on a journey from emotionalism to research-based investing strategies. The first draft of the research-based approach contains an error that turned it into the first super-emotional strategy. That’s why we are in an economic crisis. The good news is that Version 2.0 is the first true research-based strategy and the research shows that moving to a true research-based strategy will reduce investing risk by 70 percent. That breakthrough will bring on the greatest economic advance in our history. So we are on a good course if we can just work up the courage to do what it takes to avoid falling into the Second Great Depression.

The point of all this preface is to explain that we are on the same page on the most important issues. We both want to be effective investors. We both hate the baloney we hear from most “experts” in this field. We both favor research-based strategies. The only difference is this question of whether valuations/emotions need to be taken into consideration or not. You should put all your mental energies into figuring that one out. That is the entire deal. Get straight on that one and you will be asking very different questions than the ones you ask here. Get that one straight and all the rest will easily follow.

You always focus on the wrong thing, looking at things from my perspective.When you want to make the point that Buy-and-Hold works, you tell me where your portfolio stands TODAY. From my perspective, that is a foolish way to look at things. To quote today’s value is to focus on the short-term. Jack Bogle himself says that only long-term thinking works in this field. So why are we arguing over whether short-term demonstrations of success are the right way to measure success or not? We need LONG-TERM demonstrations of success. It is the long-term that matters. We should be in agreement on that point.The Investor’s Scenario Surfer tells the long-term story. You should run scenarios with it. That would help you learn what you need to learn. You would be able to see with your own eyes that what we are going through today is in no way, shape or form special. There is nothing even a tiny bit Black Swanish about the 2008 crash. The 2008 crash was typical. It is what has happened EVERY TIME Buy-and-Hold has become popular. It is a logical impossibility that anything else could ever happen. To understand why, you just need to understand what causes price changes in the first place.You are thinking that market prices are real or official or reason-based or some such thing. You are taking them seriously. There is nothing serious about short-term market prices. They are the product of emotion. They are nothingness. I would be grateful if you would just stop looking at them and just stop quoting them to me. I don’t take cotton candy seriously.

The market wants to get the price right. That’s the entire purpose of a market. So that can never not be true.

This is why I can be so certain that there is going to be a crash. Markets MUST ultimately price things properly. This is an Iron Law of Stock Investing. It’s not Rob Bennett alone who says that. Freakin’ Jack Bogle says that! It’s so! Please forget the idea that we can avoid a crash. It’s not that your friend Rob thinks it won’t happen. It’s that there is an Iron Law that even Jack Bogle acknowledges that it CANNOT happen.

You want to know precisely WHEN this crash will take place. I can understand why you would want to know. You could make millions if you knew. You can’t know, Yip. Since we are in agreement re this point, I would think I would not need to explain to you why you can’t know. If you could say in advance when price changes are going to take place, you could engage in short-term timing. There is as much peer-reviewed research showing that short-term timing never works as there is showing that long-term timing always works. So why even discuss this question? I cannot tell you what you want to know. I do not know what day or week or month or even year the next crash is going to take place. I only know that it is coming.

That is a very, very, very, very, very big deal.

Use the Surfer and you will see why. VII beats BH in 90 percent of the scenarios I have run. In a large percentage of those scenarios, there were times when BH was ahead by a lot. How does VII always catch up and surpass BH? VIIers are protected from crashes. And crashes are absolutely devastating to BHers. It is impossible for me to say with words how damaging they are to your long-term financial health. You have to run the numbers. The effect is huge. You lose not only the dollars, you lose all the compounding on those dollars FOR DECADES TO COME. It’s impossible to recover from the sort of hit you insure for yourself from following a Buy-and-Hold strategy within the course of a single investing lifetime. The numbers are just too big. It cannot be done.

A mind that was not addicted to GRQ could see this easily just by comparing where we were in 2000 with where we will be at the end of this secular bear market. We were at three times fair value in 2000 — Call that 3x. Every secular bear in history has ended at 0.5x. That’s a loss of five-sixths of one’s accumulated life earnings. The fellow who had $600,000 of wealth in 2000 will end up with $100,000. The fellow with $1.2 million will end up with $200,000.

Getting control of your emotions is 80 percent of the stock investing project. Get that one right and you cannot lose, regardless of what else you mess up. Get that one wrong and you cannot win, regardless of what else you get right. Reining in the GRQ impulse is the entire game.

To get control of your emotions, you must be willing to look at the metric that tells you how emotional the market is at any given time. That’s P/E10. There is no other way, Yip.

I don’t know when the crash will come. I don’t think anyone knows. I believe that the people who pretend to know are fooling themselves.

I know that there is 32 years of peer-reviewed academic research (NOT opinion) showing that a crash is coming.

I was asked to give a time frame and  felt that that was a reasonable thing to demand of me. So I gave it my best shot. I said that, if we do not see a crash by the end of 2015, that would be grounds to question this VII stuff. I think that is fair. We cannot say when it will come but there are lots of reasons to believe that it should come by the end of 2015. If it doesn’t, that would suggest that we are missing a big piece of the puzzle and I think it would be fair for my critics to point that out. That’s all I can say on the matter.

I can give the reasons why I view the end of 2015 as being an outside date. But they don’t matter. You’ve heard them before. The bottom line is that we cannot give a precise date. Emotions are not predictable to that extent. But the entire historical record indicates we should see the crash by the end of 2015. I don’t have a crystal ball. I am just reporting what the data tells us. WHICH WAS THE ENTIRE IDEA OF THE BUY-AND-HOLD PROJECT ONCE UPON A TIME.

Rob

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