Set forth below is the text of a comment that I recently put to another blog entry at this site:
Would you agree that your inital response in this thread can be reduced to the following dilema:
Either nearly every finance author, lecturer, blogger, advisor, and commenter on the planet is purposely corrupt and involved in a single-minded tight and as-yet completely unbreached unreportred and ongoing conspiracy against the truth that caused a major economic meltdown…
OR…..
a single unemployed layman blogger in Virginia has a profound [willful?] misunderstanding of mathematics and investing principles.
What really happened is that Shiller’s findings came as a shock. He turned what we believe about how stock investing works on its head. It takes some time for people to process such a fundamental change in our understanding of so important a matter. I don’t think it would have been too strange for it to have taken five or ten years for Valuation-Informed Indexing to catch on. That would have taken us to 1986 or 1991.
By that time, a huge bull market had been established. People did not want to hear that Buy-and-Hold does not work. They were getting daily feedback that it was working very well. And it wasn’t until late 2008 that the bull market ended in the popular perception. So it has only been for five years that most people have been open to questioning of Buy-and-Hold. And we HAVE seeing the door begin to open during that time. We are not yet where we need to be. But we are making slow but steady progress.
Another big factor here is that investing is too important to get wrong. Intuitively, you would think that that would make people super cautious about making dogmatic claims. The reality is that it has worked the other way around. Because investing is so important, experts feel that they need to demonstrate confidence in what they say. And the Buy-and-Hold and Valuation-Informed Indexing models often lead to OPPOSITE strategic recommendations. Experts feel that it would sound funny to say: “I believe that you should be at an 80 percent stock allocation but I also want you to know that there are good and smart people in this field who follow research that indicates that 20 percent stocks is a much better choice.”
That’s what people should be saying. There are two models for understanding how stock investing works and anyone who is educated re the research has a responsibility to let his clients or readers know that there is another school of thought that leads one to very, very different conclusions. But the experts feel that their clients and readers won’t think of them as experts unless they say something more definitive than “80 percent stocks might be good but 20 percent stocks might be good too.” The REALITY is that we are as a society today at a primitive level of understanding of how stock investing works. But the experts have to give advice on how to invest TODAY — they cannot tell their clients and readers to wait 20 years until we figure out whether it is Fama or Shiller who got things right. So they IGNORE Shiller. They act like he doesn’t exist. It’s a terribly irresponsible thing to do. But when you think this through carefully you can begin to see why things happened as they did.
It is certainly not the case that everyone in the field is purposely corrupt. That is OBVIOUSLY not true. Even people like Bogle and Bernstein and Swedroe include LOTS of honest and accurate comments in their books and articles and speeches. They even include comments that argue against their Buy-and-Hold recommendations. I learned about the errors in the Old School safe-withdrawal-rate studies by reading Bogle’s book. If he were 100 percent corrupt, he would not include that sort of language in his book. It would make no sense for an entirely corrupt person to do so.
What is going on is that we are living through a state of transition from Buy-and-Hold to Valuation-Informed Indexing. Bogle (and all the others) understands that there are problems with Buy-and-Hold. He is DEFENSIVE about the many obvious weak points in his model. But he has a lot invested in Buy-and-Hold and he once truly believed in it. So he is highly reluctant to give up on the model. So he downplays the weaknesses. Not only in his public comments. My sense is that he does this even in his own mind. He has convinced himself that Buy-and-Hold can at least kinda sorta work. He has convinced himself that he is not doing anything too horrible in failing to explore the challenges that have been presented to his model.
There is now a mountain of evidence that he IS doing something truly horrible. The relentless promotion of Buy-and-Hold strategies was the primary cause of the economic crisis. Bogle has caused tens of thousands of businesses to fail. He has caused millions of people to lose their jobs. He has caused millions of retirements to fail. He has even caused a significant number of people on both the left (The Occupy Wall Street Movement) and the right (The Tea Party Movement) of the political spectrum to begin to lose confidence in our system of government. That’s very bad stuff. But it does NOT amount to financial fraud so long as Bogle (or any of the others) is suffering from cognitive dissonance, a condition that afflicts all of us humans from time to time.
Death threats? Demands for unjustified board bannings? Tens of thousands of acts of defamation? Threats to get academic researchers fired from their jobs? We cannot excuse those sorts of things with stories about people suffering from cognitive dissonance. There are reasons why we have rules and laws protecting us from those sorts of behaviors. Those sorts of behaviors make our system unworkable. We all are capable of making mistakes and those sorts of behaviors make it impossible for us to discover our mistakes through civil and reasoned discussion. Those who engage in those sorts of behaviors or who see others engage in those sorts of behaviors and fail to take prompt action are guilty of financial fraud, a felony under the laws of the United States. Of that there can be no doubt whatsoever.
And there can be no doubt whatsoever that it is no act of kindness to cover up such acts of financial fraud or to fail to work hard to have them discovered and prosecuted. When we tolerate financial fraud, we insure that additional acts of financial fraud will take place by people who feel threatened by the findings of the last 33 years of peer-reviewed academic research in this field. The people who fail to speak up are insuring that more people will go to prison and that the prison sentences will be longer.
We are the luckiest generation of investors ever to talk Planet Earth. Once we make it to the other side, we will all know how to obtain far higher returns from stocks while taking on dramatically reduced risk. That’s investor heaven! It is because the advance we have achieved (at least intellectually!) is so great that as a society we have been slow to make the transition. We are naturally skeptical of such huge changes and so it is proper that we have proceeded cautiously. It is of course NOT proper that some of us have engaged in acts of financial fraud to block the change from taking place.
We are not a bad people. But we have made some bad choices that have caused huge amounts of human misery. We need to turn things around. We all should be doing everything in our power to insure that we do so by the close of business tomorrow.
That’s my sincere take re this terribly important matter, in any event.
Rob
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