Set forth below is the text of a comment that I recently posted to another blog entry at this site:
These cover up folks are doing a pretty lousy job, given that you’ve recently admitted that most people do consider valuations when making asset allocation decisions, and there really are no Buy and Hold purists. And the fact that Shiller recently won a Nobel prize.
I agree with you that the cover-up folks are doing a lousy job, Anonymous. That’s why I don’t like to use the word “conspiracy.” The cover-up does possess many of the elements of a conspiracy. I am virtually certain that people are going to use that word to describe it following the next price crash. And I can to some extent see where they would be coming from in using that word. But I have never felt entirely comfortable using the word “conspiracy” to describe what is going on here. I prefer the phrase “cognitive dissonance.” I often say that I am okay with describing it as a “conspiracy of ignorance.”
Your point about Shiller winning the Nobel Prize is right on. That’s not evidence of a conspiracy. It’s strong evidence that this is NOT a conspiracy as that word is generally understood. And there is a lot more evidence pointing in the same direction. I learned about the errors in the Old School SWR studies by reading Bogle’s book. If there were a conspiracy, Bogle would be the leader of it. Why the heck would he be saying things in his book that help to expose the conspiracy? That makes no sense.
Similarly, Bernstein said a long time ago that anyone giving thought to using the Old School SWR studies to plan a retirement would have to be out of his or her mind. That’s not something that someone trying to cover up the errors in the Old School SWR studies would say. Again, it just makes no sense.
The other side of the story is that Bogle has for 12 years now not lifted a finger to help us get the Old School SWR studies corrected, despite what he wrote in his book. Nor has Bernstein, despite what he told us in his e-mailed response to Ataloss’s question as to whether Bernstein thought that the Old School studies were analytically invalid.
This isn’t precisely a conspiracy. But it is something. There is a LOT of funny business going on. What is this cover-up about?
You are looking in the right direction when you note that few investors follow Buy-and-Hold strategies in a dogmatic fashion. Just about everybody (the exception is Eugene Fama!) acknowledges that valuations matter. Judging by that, you would think that we could all get along just fine, right?
But we are obviously NOT all getting along just fine. I hope you will give me that much.
Why? What the heck is the problem?
The problem is that the middle ground on which most investors live today does not make theoretical sense. Buy-and-Hold makes perfect theoretical sense if the market is efficient. Valuation-Informed Indexing makes perfect theoretical sense if valuations affect long-term returns. Splitting the difference (what you call “Strategy B”) makes no theoretical sense.
Splitting the difference possesses great appeal to most investors. Most investors don’t care about theory. They like Buy-and-Hold. The Buy-and-Hold principles sound entirely sensible to most investors. And most experts endorse Buy-and-Hold. So most investors believe that they should generally follow those principles. But they do not feel comfortable following them in a dogmatic way. They feel that valuations must matter. So they choose to tailor Buy-and-Hold to better fit what their common sense tells them is probably the full truth — They follow Buy-and-Hold principles generally but also occasionally ignore the theory to make small adjustments in their stock allocations as a result of concerns they hold about valuations getting out of control.
That’s the reality today. We do not disagree re the reality.
We disagree about what works.
I believe in the original Buy-and-Hold idea that investors should be rooting their investing strategies in the peer-reviewed research. There is no research showing that valuations kinda, sorta matter and kinda sorta don’t matter. The research shows that, if valuations matter, they matter a whole big bunch. If we really believed that valuations matter and weren’t just paying lip service to the idea while generally holding tight to out belief in Buy-and-Hold principles, we would be looking to the research to determine HOW MUCH to change our allocations in response to changes in valuations.
That’s Valuation-Informed Indexing. That’s what I am arguing for.
I don’t say that you are lying when you say that you consider valuations to a small extent. I think you do that. I think that millions of people do that. I agree with you that MOST investors do that.
I don’t think that’s what works.
I certainly agree that we should be investing with valuations in mind. But I also think that we should be using the historical return data and the peer-reviewed research based on that data to determine HOW MUCH to change our stock allocations in response to valuation shifts.
That’s where the “conspiracy” stuff comes in.
The Buy-and-Holders do not want millions of investors to find out what the research says on this point.
Because it makes them look really, really bad.
People should have been using the research to determine their stock allocations all along and millions of people have lost huge amounts of money because the “experts” in this field told them that that was not absolutely required or, heaven help us all, perhaps not even a good idea. Those experts understand that they are liable for the losses they caused. They pretend to be “experts.” But they are today 33 years behind in their reading of the peer-reviewed research. Huh?
And, in extreme cases like with you Goons, they are guilty of financial fraud and are likely on their way to prison following the next price crash. That group really, really, really does not want the word getting out about the 12-year (or 33-year if you count back to when Shiller published his breakthrough research) cover-up.
I cannot change these realities, Anonymous. And I sure don’t intend to lie about them. I like to think of myself as an honest person. And, even if I didn’t, there are Post Archives! Old Farmer Hocus being persuaded to tell lies about what has been going on for 12 years now is not in the cards. It would help if you would get that foolish dream out of your head.
I have extended the hand of kindness to all my Buy-and-Hold friends. But I am not in a position to lie about what has been going on for 12 years now and I like to think that I would not be inclined to lie even if I were in a position in which doing so would benefit me.
You need to come clean.
Bogle needs to come clean.
J.D. Roth needs to come clean.
Mike Piper needs to come clean.
And on and on and on.
There is no other way.
I am telling you not just what is best for me and for the millions of middle-class investors. I am telling you what is best for you and for the Wall Street Con Men.
Everything needs to come out in the open. All the lies have to be acknowledged. All the Bans on Honest Posting need to be lifted. All the civil and criminal trials need to be held and brought to completion.
We need to put all this ugly stuff behind us so that we can move on to the wonderful learning experiences that we have been enjoying for 12 years now but that we have not thus far felt that we could share with the millions of middle-class investors because it would upset the Wall Street Con Men and their Internet Goon Squads too much for them to learn the realities. This field does not exist solely for the benefit of the Wall Street Con Men and their Internet Good Squads. It exists in part for the benefit of the millions of middle-class investors who need access to accurate and honest reports on what the peer-reviewed research says to be able to finance their retirements effectively.
Do you see?
What I am describing is what is best for ALL of us. We are all in the same boat. We need to knock off the funny business and begin moving forward TOGETHER.
There are things that can be done to make the transition less painful for the Wall Street Con Men and for you Goons. It makes sense for us to do those things. I am 100 percent happy to help out in any way possible.
BUT WE MUST OPEN UP THIS FIELD TO PEOPLE OF INTEGRITY. AND WE MUST BEGIN LETTING THE PEOPLE IN THIS FIELD WHO POSSESS INTEGRITY AND LONG TO EVIDENCE IT IN THE WORK THEY DO TO DO SO.
We MUST do this. This is NOT optional. This is 100 percent imperative.
Call the support of or indifference to dishonesty a “conspiracy” if that works for you. Call it “cognitive dissonance” if, like me, you are not quite able to accept that so many good and smart people could get themselves involved in so awful and damaging a conspiracy. The terminology you use is not what matters most here. What matters most here is that we bring the funny business to an end.
The funny business must come to an end. That’s the bottom line here. That must happen by the close of business today.
Can I count on your support, my old friend?