Set forth below is the text of a comment that I recently posted to another blog entry at this site:
Rob, for your opinions need to be valid, all of these financial experts either need to be lying, part of a mass conspiracy or not smart enough to have figured things out……………or………….you are wrong.
It’s a combination of those, Anonymous.
We didn’t make a serious effort to figure things out until the mid-1960s. In earlier days, different people had different opinions on how the stock market worked. But it was generally not the subject of sustained and systematic academic study. The Buy-and-Hold Pioneers had the most important breakthroughs in the mid-1960s. It’s only from that point forward that it became reasonable to refer to the study of stock investing as any sort of science.
The Buy-and-Hold Pioneers got one important piece of the puzzle wrong. They showed that short-term timing never works and then jumped to the hasty, false conclusion that long-term timing also does not work. It wasn’t until 1981 that that question was tested by research. Shiller then showed that long-term timing always works and is always required.
From 1981 forward, the experts have been suffering from cognitive dissonance. The idea that timing doesn’t work is a fundamental belief. They are having a very hard time giving that one up. It’s not quite right to say that they are “lying.” They are saying wrong things. They should know that these things are wrong from following the research. But they simply are not able to process what they read in the research. If valuations affect long-term returns, long-term timing is required for any investor hoping to keep his risk profile stable over time. You don’t need to be a genius to see that. But the people who are “experts” in this field are blind to the implications of Shiller’s research because they cannot bear to question the core belief of the investing paradigm around which they have built their careers.
Cognitive dissonance is a real thing, Anonymous. Please check the literature in the field of psychology if you don’t believe me. This is a compelling illustration of the phenomenon. But it is certainly not the first time that we have seen something of this nature take place. It also would help to read the book “The Structure of Scientific Revolutions.” Several of the academics to whom I wrote referred to this book in trying to explain why the implications of Shiller’s revolutionary finding have been ignored for 33 years.
People have a hard time processing really big changes. The shift from Buy-and-Hold to Valuation-Informed Indexing is a HUGE change. There’s never been a change this big before in this field. So it is taking some time for people to process it. It’s actually HARDER for people who possess a high level of expertise in the field to process the changes. They have more of an emotional stake in the old paradigm.
I don’t feel comfortable saying that there is a “mass conspiracy.” There was never a day when a group of people got together in a smoke-filled room and decided on a plan to keep knowledge of the implications of Shiller’s findings from millions of middle-class investors. But the Buy-and-Hold Mafia is a real thing. Bloggers who push Buy-and-Hold know that they will not be able to persuade their readers to follow their advice if they permit honest commenting at their blogs. Mutual fund companies know that they will not be able to persuade their clients to remain fully invested in stocks if they learn the realities. Stock brokers know that they will make more money in the short term if people don’t learn about what the last 33 years of peer-reviewed research says. Lots of people benefit in the short-term from keeping millions of middle-class investors in ignorance.
And those people have been acting in the self-interest. They are telling untruths. For example, the claim that “long-term timing is not absolutely necessary” is an untruth. Long-term timing is price discipline. It is absolutely required. But the people who tell this untruth believe the untruth themselves, at least to some extent. They know that Shiller published research casting doubt on the fundamental principles of Buy-and-Hold. But they tell themselves that Buy-and-Hold probably kinda, sorta works. These are generally honest people telling untruths in this one particular area because the knowledge that was brought to light by Shiller is knowledge that millions of people wanted very much to ignore for so long as stocks were insanely overpriced.
Not all untruths are spoken by people with an intent to lie. When people said in pre-Civil Rights days that “blacks are better off with the world being the way it is than they would be if they were given equal rights,” many of them believed it on a least one level of consciousness. It wasn’t only whites that said that sort of thing. Many blacks said that sort of thing. There was a level of consciousness on which they wanted to see change (and there is a level of consciousness on which John Bogle wants to understand the implications of Shiller’s findings). But they were afraid to step into a new world; they were more comfortable staying in the old world despite its imperfections.
There’s something between telling truths and telling lies. There’s being too emotionally afraid to bear looking at new truths to be able to bear giving up old ones.
You Goons tell lies. You Goons have told many, many lies. But even you Goons rationalize your lies. You tell yourself that it is okay to tell them because you have to “protect” investors from hearing views that you believe are dangerous.
The Wall Street Con Men tell partial lies. Bogle says that it is not necessary for investors to change their stock allocations by more than 15 percent even when stock valuations reach insanely high levels. The historical return data shows that investors need to change their stock allocations by 60 percent when stock valuations reach insanely high levels. So what Bogle says is certainly not true. But I don’t think it is quite right to call it a “lie” in the way that the word is usually used. Bogle tells himself that 15 percent is enough. He tells himself that we are not going to see another crash anytime soon. He tells himself that the promotion of Buy-and-Hold was not the primary cause of the economic crisis. People tell themselves all kinds of things when they are working hard to ignore discoveries that they find it painful to confront, Anonymous. Humans do this sort of thing ALL THE TIME.
Bogle behaves with a greater level of dishonesty when he fails to respond to my e-mails seeking help with the Lindauer matter. He has a responsibility to take action when he learns that a discussion board with his name on it is being misused in that manner. I am not sure that this act of dishonesty can be excused with references to the cognitive dissonance phenomenon. That’s something that we are going to have to decide as a society. My job is to report the realities with honesty and charity. The decision as to what sorts of consequences will fall on Bogle as a result of that particular act of dishonesty is not mine to make.
That’s my sincere belief as to what is going on. I won’t say that it is not a strange story. I acknowledge that it is mighty strange. But things are not as black and white as you suggest. There is corruption present in our story. But the amount of corruption is not as great as one would intuitively think to be the case on first hearing that “experts” continue to advocate Buy-and-Hold strategies 33 years after peer-reviewed research was published showing that there is zero chance that they could ever work for even a single long-term investor.
These are big changes. And humans have a hard time processing big changes. And there are particular factors present here that makes these particular big changes particularly hard to process. One special factor is that the new understanding evidences itself only in the long term and for a good number of years Buy-and-Holders experienced a powerful amount of positive short-term feedback re the merit of their investing strategy. Another special factor is that the experts do not feel that they have available to them the option of saying that there are two schools of thought that lead to opposite strategic implications. That’s the truth here. But the experts in this field feel that to speak that truth plainly would cause people to question their expertise. A third special factor is that experts who give bad advice can be held financially liable for losses suffered as a result. That makes people in this field reluctant to acknowledge mistakes.
We are in a transition period. Buy-and-Hold is the past. Valuation-Informed Indexing (which is Buy-and-Hold with the Get Rich Quick element removed) is the future. Those are the realities.
Humans are imperfect creatures. It can take time for them them to acknowledge and correct mistakes. That’s another important reality.
We all should be working together to make the transition to the new model as painless as possible for as many people as possible. We should be trying to help heal wounded egos rather than trying to polarize debates and stir up trouble. That’s my sincere recommendation.
The world is not as simple as you once imagined it to be, Anonymous. You cause a lot of pain by ignoring the complexities, both to millions of others and to yourself.