Set forth below is the text of a comment that I recently posted to the SiteSell.com discussion forum:
Rob, I have much respect for your work and you have a lot of valuable knowledge to share, but I would not bet that human nature will change and people will stop making decisions based on greed and fear.
The words above are from a post by Dave put to the Passive thread. I thought it would be better to respond to them here.
Your comment gets right to the core of things, Dave. Investors have for a long time been acting in one way and I am proposing that we all (I don’t mean all of us at this site, I mean all of us in this country) pull together to help them act in a very different way. It would be fair to describe this as an ambitious undertaking!
That granted, have people’s actions not changed in fundamental ways before? There was a time when people with black skin could not drink from the same water fountains as people with white skin. That changed, didn’t it? And there was a time when there were advertisements in magazines arguing for the health benefits of smoking (Google it if you don’t believe me). That changed, didn’t it? And there was a time when after a picnic people just tossed all the trash on the grass (there was a scene depicting this on Mad Man — I remember this sort of thing really happening when I was a child in the 1960s). That changed, didn’t it?
There’s a thing called Progress. Our country is pretty much built around a belief in it. I understand that it is an ambitious undertaking to try to change how people think about investing in a fundamental way. But I believe that things have reached a point where we have no choice and I believe that millions of people are up to making the change if only the need for it is presented to them in the right way.
You have to do the math to appreciate the fix we are in today. Stocks were priced at three times fair value in 2000. We always drop to one-half of fair value before the secular bear market that inevitably follows a secular bull market comes to an end. That means that people who were invested in stocks heavily in stocks in 2000 are going to lose five-sixths of their accumulated life savings before this economic crisis comes to an end. Someone who had saved for years and years to accumulated $600,000 is going to end up with $100,000 (in real terms). Defined benefit pensions are pretty much a thing of the past. We have given to workers the responsibility of financing their own retirement plans. And the investment advice that is pushed relentlessly is going to cause them to lose five-sixths of their accumulated life savings. Is our political system even going to be able to withstand the stresses that are going to be placed on it as a result?
And how about when the millions of people who end up losing most of their retirement money learn that there is 33 years of peer-reviewed research showing them how to invest in a way that would prevent this from ever happening while also permitting them to retire five to ten years sooner than they ever imagined possible? When the Buy-and-Holders spent millions of dollars promoting the idea that investment strategies should be rooted in peer-reviewed academic research, they changed this field forever. We now HAVE to provide a means for people to have access to accurate and honest reports of what the research says. We’re not there yet. But we have no choice but to go there. Events are going to push us there no matter how much we try to avoid it. And in the end we are of course all going to be very happy we made the trip.
I have a lot of experience talking to people about the Valuation-Informed Indexing concept. I can tell you that people LOVE learning about it. That’s been so going back to 2002, when I began this journey. People also HATE the friction that comes up when conventional Buy-and-Holders become defensive about what the last 33 years of research says. So I have not been successful in spreading the word far and wide. But I know from the reactions that I have seen that there are MILLIONS of people who would like to know the truth about stock investing. The market is huge. Someone is going to figure out a way to serve this huge market.
When they do, a lot of people who today advocate the conventional Buy-and-Hold strategy are going to flip. I know because a good number have told me so. There are economists who want to be reporting the realities. There are journalists who want to be reporting the realities. There are investing advisors who want to be reporting the realities. There are researchers who want to be reporting the realities. There are bloggers who want to be reporting the realities.
The hard part is going first. Those who go first get their heads chopped off. Everybody knows this and so everybody holds back. But once the dam breaks, watch out! Once the dam breaks, lots of people are going to flip in a short amount of time. My guess is that this will happen shortly following the next price crash. Shiller’s research shows that we should see that crash within the next year or two or three.
Please understand that I am NOT saying that the Permanent Portfolio concept is the problem. The Permanent Portfolio concept is a HUGE improvement over the conventional Buy-and-Hold concept. The reality here (in my view) is that the Permanent Portfolio concept and the Valuation-Informed Indexing concept solve the same problem (the danger of the conventional Buy-and-Hold strategy) in slightly different ways. PP has you invest in asset classes that will do very well in stock crashes and thereby protect you from their impact. VII has you lessen your participation in stocks when the odds of seeing a crash grow too high. Both approaches represent huge advances. An argument could be made that BOTH require a change in human behavior. Both are going to seem highly appealing to lots and lots of people following the next crash, and for good reason. My personal take is that it may be too soon to say with certainty which is better. But both represent huge advances. That’s what matters.
Investor behavior will change because it must if our free-market economy is to survive. We all want it to survive and so we are all going to pull together to achieve some changes when it hits us that we have no practical choice. There was a day when only very rich people had money in stocks. That’s not the case today. Middle-class people fund their retirements by investing in stocks. They must have accurate information. There’s just no other way. We are a richer people than we were in earlier times. That changes the realities. I believe that we are ready for this change and I believe that, when we are faced with no option but to move ahead with it, we will pull together to help bring about the change.
It is NOT true that middle-class investors are governed entirely by greed and fear.I have talked to THOUSANDS of people who are seeking a smart and safe and simple way to invest in stocks. The problem today is that most people are intimidated by the subject of stock investing and put too much belief in what “experts” tell them and the primary expertise of many of the people who work in this field is in marketing. Once a small number of people stick their necks out and try to make names for themselves pushing strategies that help people avoid the pitfall of giving in to feelings of greed and fear (whether by recommending PP or by recommending VII or by recommending some third approach that achieves the same ends), the wall is going to break and we are going to see that millions of middle-class people are willing to work hard to avoid fear and greed if only they can find some people to help them understand better what they need to do.
That’s my sincere take, in any event, Dave. There are lots of smart and good people who think I am a dreamer. I guess we will find out for sure when that next price crash hits and we see how people react.