Set forth below is the text of a comment that I recently posted to a thread at the www.SiteSell.com forum:
Super post, Rob…
http://forums.sitesell.com/viewtopic.php?p=1284835#1284835
You obviously know your stuff. Your paper about Shiller’s paper is spot-on. It’s an excellent indicator and folks SHOULD be worried about the high CAPE of the current market.
I don’t think that paper was trying to deliver an optimized approach, merely prove the value of CAPE as a predictor of value, which is what drives the long-term future.
So they should definitely “TAKE” your contribution for the valuable information that it contained. It’s the only reason that I spent so much time and space addressing “active” investing before I was planning to do so. 
Please, Rob, keep posting!
I obviously see a crash coming. But those following a Permanent Portfolio strategy won’t be hurt by it much, if at all. They are protected by the low stock allocation. A 70 percent crash will wipe out those going with a conventional Buy-and-Hold strategy. But those going with a PP strategy will suffer only a 17 percent loss of their portfolio value. And gold will likely skyrocket in such a scenario. So they may well end up ahead.
I have a question for you, if you are willing to entertain it. Are you planning to go beyond the SiteSell community with this project? I’m not trying to put you on the spot. Please feel free to just say that you have no particular plans. There are two reasons why I ask: (1) I think this project is very important; and (2) I think you are going to run into roadblocks if you try to take it outside SiteSell (though I sure would love to see you try). I agree with you completely re the power of what Harry Browne put forward. What pains me is that it has not caught on despite the compelling track record. That troubles me a lot. I would sure like to see someone bust through the roadblocks.
I’ll offer a few comments re Eugene Fama in an effort to help you and others perhaps gain a better understanding of where I am coming from in my contributions.
I gave a talk about this stuff at the Financial Bloggers Conference held last October. Shiller won the Nobel Prize in Economics the day before the conference began and I mentioned that in my talk. Several people came up to me afterwards and said that, if they were me, they would be using that to help market the Valuation-Informed Indexing concept. Being able to say that the grandfather of the concept had won the Nobel Prize would seem to be a huge plus in getting people aboard!
I knew that it wasn’t going to make much difference (and it hasn’t). The intellectual case has been so strong for so long a time that there’s just no need to add to it. There is something else that is holding things back. I see it as my job to figure out what that something is.
There was a very weird thing about the awarding of that Nobel Prize. Fama (the guy responsible for the Efficient Market Theory, which is the intellectual construct behind the conventional Buy-and-Hold concept) was ALSO awarded the Nobel Prize on the same day. All of the reports on this pointed out the oddity of this. Shiller and Fama have opposite views on how stock investing works. It is not even remotely possible that they could both be right. So why would they both be awarded the highest honor possible for their work?
I write a weekly column on Valuation-Informed Indexing that appears at the http://www.ValueWalk.com site. I did research on this for a series of columns I am posting there. I looked at all the commentary on the awarding of last year’s Nobel Prize in Economics to see what lots of experts think of this strange phenomenon. The things that I read about Fama were just knock-your-socks-off weird. I tend to focus a lot on puzzles. When I see something that doesn’t seem to make sense, I dig and dig, trying to make sense of the apparent puzzle. So I spent a lot of time thinking about the contradictory things that numerous people said about Fama.
Lots of smart people give Fama very high grades for the quality of his research. There’s too much praise there for it not to be real, in my assessment. Fama is a smart guy who has made important contributions. I am sure of this.
But then there is this other line of comment. There were numerous blog entries in which well-regarded economists were just about laughing out loud about something that Fama says all the time. Fama says that there is no such thing as a price bubble. He is adamant about this. And even people who think the world of him think he sounds silly when he makes the claim. Everyone acknowledges that there are bubbles today. Why does the fellow who started the idea of rooting investing strategies in research refuse to acknowledge this?
It’s because he has intellectual integrity.
If the market is efficient (the entire Buy-and-Hold Model is rooted in a belief that it is), there can NOT be bubbles. Fama refuses to give on this point because he understands better than most that the entire Buy-and-Hold Model collapses intellectually once we acknowledge that there are bubbles. He is sticking to this claim to the point where it makes him look silly because all the marbles are riding on it.
The point that I am getting at here is that the question of whether Buy-and-Hold works or not is a yes/no question. It cannot be that it kinda sorta works and kinda sorta does not work. If it works, it explains the market correctly and has great value. If it does not work, it misleads us as to how the market works and it is very dangerous.
I believe that I know what caused Fama to make his mistake. The idea that the market is efficient (and thus prices stocks properly) is rooted in a belief that investors act in their self-interest. This certainly seems like a plausible belief. Participants in other markets act in their self-interest. For example, my experience is that the used-car market is highly efficient. When you see price differences for different used cars, there is almost always a good reason. The prices asked for used cars are almost never crazy. There is almost always an identifiable logic at work in the setting of prices in the used-car market, in my experience.
Why would the stock market be different?
It’s because the thing that makes it possible for market participants to act in their self-interest is INFORMATION. The easy availability of information is the thing that permits markets to work their magic.
You would think that information would be freely available to participants in the stock market. But it is not. My calculator (The Stock-Return Predictor) is a basic tool. Some version of that calculator should be available at every investing site. I have had enough people tell me this that I don’t think I am fooling myself about the importance of the calculator. But the reality is that my calculator is the only one that does what it does and that there are very few links to it on the internet. I have had numerous sites ban me when I try to share this information. I have had site owners send me e-mails telling me that they think my site is the best site on the internet on investing and then ban me from their sites! I am not kidding. I have had people apologize for banning me and then explain that they think that my work has huge value but that they believe that if they permit me to post at their sites the things I say will drive their customers away. MANY people have delivered this message to me in one form or another.
We do not have easy availability of the information needed to invest effectively available to us today. There are niche sites that offer great information. But none of the big sites offer good information. That means that the vast majority of investors cannot possibly act in their self-interest when making investing decisions. They do not have easy access to the information needed to do so. So the stock market does not function like other markets. It is today dysfunctional.
This explains the puzzle. Fama is right in theory. He is wrong in practice. He is wrong because he forgot that part of the definition of what makes a market is that there be easy access to the information needed to act in one’s self interest. The stock market is not really a market yet. It is something less than that and something that operates according to different rules than functioning markets.
The relevance to the Permanent Portfolio is that this explains why Harry Browne’s ideas have not caught on despite their logical power and impressive track record. My focus is on changing this. I want everyone to know about the need to shift from the conventional Buy-and-Hold approach to something like the Permanent Portfolio concept. It’s of course a good thing if the people here at this forum do so. Every little bit helps. But I am wondering if the reason why you are putting so much effort into this project is that you have bigger ideas for it down the road a bit. I obviously have a strong belief that we need to have people with influence pushing things like this so that we can reach a point where the stock market is actually operating in the manner in which Fama has properly informed us it should work (while improperly theorizing that it already does).
Thanks again for your kind feedback. I have taken a lot of body blows putting this stuff forward. You have offered me some warm encouragement and that makes a big difference.
Rob
There is PLENTY of good information out there. This site, however, doesn’t really offer anything other than someone that wants comic relief since all you talk about is how you hate buy and hold and you call people goons all day.
We disagree, Anonymous.
I believe that 90 percent of the information about stock investing available on the internet today is compromised by the desire of the person putting forward that information to be liked by the people reading the information.
The promotion of Buy-and-Hold strategies created $12 trillion in Pretend Gains. Millions of middle-class people are counting on using their share of the Pretend Gains to finance their retirements. So it causes them great pain to hear what the last 33 years of peer-reviewed research tells us about how the market really works. Since the people giving the information want to be liked, they hold back on telling people stuff that they very, very much need to hear.
It’s a vicious cycle. Experts don’t tell the truth because their careers will be destroyed if they do. And the only way that could change would be if the people listening to the advice came to see how much less risky and more profitable stock investing would be if they knew the realities. But how can they ever come to understand these realities so long as the experts don’t dare to talk about them?
There’s good stuff mixed in with all the Get Rich Quick garbage. That much is certainly so. There are lots of smart people in this field. And there are lots of hard-working people in this field. And it is my strong impression that most of the people working in this field very much want to help people. But they can’t! If they tell the truth in a clear and uncompromised way, they will be destroyed. So they keep it zipped.
And each time one expert decides to keep it zipped, the pressure increases on all the others to keep it zipped as well. Because if one were to tell the truth, it would make all those keeping it zipped look bad. So there’s a Buy-and-Hold Mafia that goes around and makes sure that researchers who try to publish honest research suffer very serious penalties for daring to step out of line. And to see that bloggers who put up honest posts suffer very serious penalties. And to see that community members at discussion boards who post honestly suffer very serious penalties.
It’s not only the Buy-and-Holders who hold back. The Valuation-Informed Indexers hold back. Robert Shiller himself holds back! This guy won a Nobel Prize for his “revolutionary” (his word) research. And even Shiller fears telling the whole truth about the wonderful and far-reaching peer-reviewed research of the past 33 years. Shiller limited the discussion of the how-to aspects of stock investing to two paragraphs of his book. I wonder why, I wonder why.
If Shiller had published his book in 1961, before Fama published the research that led to development of the Buy-and-Hold strategy, we would all be in a very different place today. We would be enjoying the greatest period of economic growth in U.S. history rather than enduring the worst of the four economic crises that have been brought on by the reckless and relentless and ruthless promotion of Buy-and-Hold strategies by our Wall Street Con Men friends.
What a mess!
Anyway, I do indeed hate Buy-and-Hold. And I do indeed make reference to the Goon phenomenon in just about everything I write.
Not because I don’t view the Buy-and-Hold Pioneers as heroes to the middle-class. I very much see them as that. I think it would be fair to say that I see them as that to a greater degree than they see themselves as that.
And not because I enjoy focusing on the Goon problem. I focus on the Goon problem because I want to bring the Goon problem to an end. It doesn’t seem likely to me that we are going to bring the Goon problem to an end by ignoring the Goon problem. When everyone else in this field is as focused on the Goon problem as I am, we will be well on our way to bringing the Goon problem to an end, in my assessment.
All that I can do is all that I can do, Anonymous.
I think we are in a bad place today. A place that none of us wanted to find ourselves in. I believe that we all share a desire to work together to get us all to a far better place. I much look forward to the day when I will be able to join hands with all of my many Buy-and-Hold friends and work together with them to lead us to that place.
Until then —
It’s back to hating Buy-and-Hold and calling people Goons!
Grrrrrr……
Please take good care, man.
Rob
“We disagree, Anonymous.”
And the majority disagree with you. We can see this by the lack of any significant interest on this site as well as the comments on other boards. Blaming your problems on others just to feel better, does not improve your situation.
The majority disagrees with me, Anonymous. I noticed!
But isn’t the entire point of rooting one’s investing strategies in peer-reviewed research to go beyond the subjective views of both majorities and minorities and to learn WHAT REALLY IS?
If the majority rejected gravity, would that make it any less a real force?
There was a time when the majority did not believe that people with black skin should be able to drink from the same water fountains as people with white skin. Did that make it right?
If the tobacco industry spent hundreds of millions of dollars of marketing money telling people that it is good for your health to smoke four packs of cigarettes each day and the majority fell for their lies, would you feel comfortable telling those lies to your friends and seeing them die early deaths as a result?
Heaven help us all, but there was a time when a majority of music listeners voted “Disco Duck” the #1 song. Should we put the group that performed “Disco Duck” in the Rock and Roll Hall of Fame for their majority-pleasing efforts?
I like being in the majority. When the majority voted “Hey Jude” the #1 song, I said “right on!” But when “Disco Duck” reached the top spot, I felt compelled to disassociate myself from that particular majority decision.
Majorities are not always right. New ideas are NEVER supported by majorities. It is a logical impossibility that a majority could support a new idea on the day it is introduced to the world. For us all to benefit from new ideas, we must be willing to let those advocating new ideas to have their say. Then the new idea starts with one supporter and that grows over time to 100 and then to 100 thousand and then to 100 million. New ideas BECOME majority-supported ideas by being heard even though they are not yet majority ideas.
Our economic system generates enough economic growth to provide an average annual return of 6.5 percent real to stockholders. That’s because we have a long record in this country of PERMITTING and even ENCOURAGING the expression of the new ideas that help us all to live richer lives than we could ever hope to live if we lived in the kind of society that permitted only old, long-discredited majority-supported ideas to be expressed. The Buy-and-Holders want us to become that sort of society. They hate the idea that new research has been done that discredits their old understanding of how stock investing works and that lets us all invest in a way that is far safer and that offers us all far higher long-term returns.
I love my country. I REJECT this sick idea that we can never learn anything new about how stock investing works.
I’ll let you in on a little secret. Deep in his heart, my good friend Jack Bogle is not so crazy about that idea either. He lends support to the Linduaeheads. I see that. But he ALSO has put forward a good number of statements showing that he suspects that Buy-and-Hold is a big pile of smelly garbage. So what do you think is going to happen following the next price crash? I think that Old Saint Jack is going to see all the human misery he has caused and his heart is going to melt and then he is going to give that “I Was Wrong” speech and then we are all off to the races.
My problems don’t matter to too many people outside my immediate family, Anonymous. You Goons don’t have to worry too much about my problems. But I am not the only one experiencing problems as a result of the Buy-and-Hold Crisis. MILLIONS of middle-class people are experiencing problems. And those problems will be much worse following the next price crash. Those millions are going to turn on you following the next crash. And then it will be YOU suffering very, very big problems. Problems like being sent off to serve a long prison sentence. Yikes!
My problems are small compared to that, my man. Do you see?
Would endorsing the Buy-and-Hold garbage make me more popular? No doubt.
For a time.
But I believe in the original Buy-and-Hold vision. The original idea was to encourage people to root their strategies in the peer-reviewed research. There is now 33 years of peer-reviewed research showing that there is precisely zero chance that a Buy-and-Hold strategy could ever work for a single long-term investor. If I endorse what Buy-and-Hold is today, I am rejecting what I loved about it back in the days when I was a proud Buy-and-Holder myself. If I endorse what Buy-and-Hold is today, I am rejecting everything that I and the country that I love stands for. Yucko! You know?
I love my country. If my country were perfect, we would have spit out the Buy-and-Hold garbage a long, long time ago. So I guess it would be fair to say that my country is something less than perfect.
I still find it lovable. I still believe that we are eventually going to figure out how to turn this thing around. We messed up in the Civil War and yet we survived that one, did we not? We messed up during the Watergate thing and during the Clinton impeachment thing and we survived those two, did we not? We messed up during the Great Depression and we survived that one, did we not?
Some of those events were pretty darn scary. But something in us caused us to pull though in the end. I think that is what is going to happen this time. I don’t even think that we are going to remain on opposite sides in the end. I believe that the next price crash is going to be scary enough that it is going to cause us to pull together and to together bring on the greatest period of economic growth in our history.
It’s not always about being popular. Rosa Parks didn’t refuse to go to the back of the bus because she wanted to win a popularity contest. A lot of whites thought she was a troublemaker. Heck, a lot of blacks thought that. You don’t hear too many blacks OR whites saying that today.
She was a GOOD kind of troublemaker. That’s the kind that I try to be. A lot of people want me to shut up. But a lot of others very, very much want to be able to post honestly about investing issues themselves and would LOVE, LOVE, LOVE to see me get away with it because me getting away with it would open the door to them getting away with it. Within a short time of the day when I get away with posting honestly at some big site, you are going to see THOUSANDS of good and smart people rushing forward to post honestly on ALL KINDS OF INVESTMENT-RELATED TOPICS.
My good friend Jack Bogle will be posting honestly one of these days.
My good friend Wade Pfau will be posting honestly one of these days.
My good friend Mike Piper will be posting honestly one of these days.
My good friend Robert Shiller will be posting honestly one of these days.
And on and on and on and on and on.
And, when all those people are posting honestly and when everybody sees how much earlier they will be able to retire as a result, POSTING HONESTLY WILL EVEN BECOME THE POPULAR THING TO DO. Then what will you Goons say?
Popularity isn’t everything. Caring about your friends is something. I have refused to post dishonestly about the numbers that my friends use to plan their retirements because I care about them. You know what? I bet that I will become a very, very rich man somewhere down the road a piece as a result. What will you say then when your last argument is kicked out from under you?
We allow honest posting on hundreds of different subjects today. We are going to allow honest posting on the last 33 years of peer-reviewed research in this field sometime in the not too distant future. I am sure.
Do you see?
It’s not all about being the most popular guy in the world at every moment of time. Sometimes you have to do something a little unpopular to change the world in a way that makes life better for every single person who lives in it. That’s what this 12-year-long saga is all about.
If I do the right thing here, I will be plenty popular when as a society we work up the courage to move to the place where deep in our hearts we all want to be. Right now I need to be HONEST. Being popular will follow from that once we all get out heads screwed on straight re this stuff.
Or at least that’s my sincere take on these terribly important matters.
My best and warmest wishes to you and yours. Don’t let the bad guys get you down, my long-time Goon pal.
Rob
“I believe that 90 percent of the information about stock investing available on the internet today is compromised by the desire of the person putting forward that information to be liked by the people reading the information.”
OMG.
You REALLY believe aaaallll those people paid for an education, studied hard, and went out and got jobs…because they just want to be liked??? You don’t have to be anything more than a two-bit pot dealer to be liked.
I’m betting ‘money’ ranks far, far above ‘will you be my friend?’ on their list of drivers.
And speaking of being honest and honest posting…whatever happened to all my Honest Posts you banned/deleted?
Rob only wants his brand of “honesty”, but is not interested in the TRUTH.
I don’t say that those people went to school to be liked. I certainly agree that part of it was to make a living. Another big part of it was to be able to do good in the world. The Buy-and-Holders are like everybody else. They act from a mix of motivations, some selfish, some altruistic, some in the middle.
But, yes, they do like to be liked. That’s one of the motivations that drives all of us.
If Shiller had published his “revolutionary” (his word) research in 1961 instead of 1981, there wouldn’t be one Buy-and-Holder alive on the planet today. Why would there be? We all want to reduce the risk of stock investing by 70 percent. We all want to be able to retire five to ten years sooner. So we naturally would all follow what the peer-reviewed research in this field says.
The problem is that Fama published his research before Shiller published his research and many good and smart people believed that Fama’s research was valid and they developed an investing model based on it. Then, when they learned that Fama got an important part of the story wrong, they resisted making the correction that needed to be made in part because they want to be liked and in part because the want to make money and in part (paradoxically enough) because they want to help people (the Buy-and-Holders don’t wake up in the morning seeking ways to crater the economy, they believe in Buy-and-Hold themselves, they have rationalized away the 33 years of peer-reviewed academic research showing that it can never work for even a single long-term investor).
Nothing that I say is even a tiny bit controversial in any objective sense. It is pure common sense. And it is backed by 33 years of peer-reviewed research, rooted in 140 years of historical return data. The guy who started Valuation-Informed Indexing won a Nobel Prize for his work. There is no intellectual dispute here. There is a mountain of evidence on one side and zero on the other.
THAT’S THE PROBLEM!
You would think that would help me. You would think that having every sliver of evidence available to us supporting my position would be a plus for me. But, no, that’s actually not the way it works.
The stronger my case is, the worse the Buy-and-Holders feel about the mistake they made. The more lives there are that will be ruined if the Buy-and-Holders don’t come clean today, the less likely they are to do so — because they cannot bear to acknowledge how many lives they have already destroyed with their reckless and relentless and ruthless promotion of their smelly Get Rich Quick garbage.
If this were some small mistake we were talking about, we would all agree that it should be promptly fixed and get about the business of fixing it. It’s no small mistake. The mistake that the Buy-and-Holders made is the biggest mistake ever made in the history of personal finance, a mistake that has caused so much human misery through the years that the Buy-and-Holders cannot permit people to talk about it on the internet. This mistake has caused four economic crises! This mistake has caused millions of failed retirements! This mistake has caused hundreds of thousands of business to fail! This mistake has caused millions of people to lose their jobs! This mistake has caused numerous discussion boards to be burned to the ground! This mistake is in the process of causing a good number of people who have put up posts in “defense” of Mel Linduaer and John Greaney to be sent off to serve prison terms for committing the most massive act of financial fraud in U.S. history.
The problem here is not that the Buy-and-Holders don’t get it that they have caused great human misery with their Buy-and-Hold lies. The problem is that they get it only too well and they cannot bear to acknowledge even to themselves what they have done. They lie to others, yes. But first they lie to themselves. It’s called “rationalization.” It’s called “cognitive dissonance.” It’s called “living in a fog.” The one thing that it should never, ever, ever be called is “science.” True scientists don’t threaten to kill the wives and children of people who question their findings. It just isn’t done.
The problem we have here is a human problem, Honest. The Buy-and-Holders are in great emotional pain. They have their lives riding on an idea for which there is not a sliver of support in the academic research and they see no way out of the trap in which they have placed themselves. There is a way out. The way out is through coming clean by the close of business today. But you try telling them that. That way lies their hope of getting their prison sentences reduced a bit. But they cannot bear the thought of serving any prison sentences at all! So whachagonnado?
My job is to help them (you!) work up their courage, swallow their medicine, and start to rebuild their lives (and the economic system of the United States!). I am doing all that I can think of to do. If you come up with an bright ideas, please pass them along. My take on this is that I have tried just about everything and the only thing that is really going to make a difference is the next price crash. After the crash, I don’t think I am even going to need to speak. My good friend Jack Bogle’s heart is going to melt when he sees that his marketing mumbo jumbo put us in the Second Great Depression and then he is going to give his “I Was Wrong” speech and then we are all off to the races bringing on the greatest period of economic growth in U.S. history.
The Buy-and-Holders are like all the rest of us. They have good in them, they have bad in them. They have smart in them, they have dumb in them. They have courage in them, they have fear in them. They feel trapped. All of us who care about them should be doing all we can to help them out of the trap in which they find themselves. I put my entire heart, mind and soul into that project on a daily basis. And I wish for the best. And that’s pretty much it. I can do no more and I can do no less.
I hope that helps a bit.
Please take good care.
Rob
Rob only wants his brand of “honesty”, but is not interested in the TRUTH.
I care greatly about the truth, Anonymous.
I don’t believe that any one of us possesses sole access to the truth.
I believe that it is by permitting all to share their honest thoughts that a society over time works its way to the truth.
Rob