Set forth below is the text of a comment that I recently posted to another blog entry at this site:
Another lesson in basic, civilized behavior: Others’ opinions about asset allocation or the future are not errors.
There are responsibilities that come with being a person of Bogle’s stature, Anonymous. I have had people tell me that they find everything that I say about stock investing to be 100 percent sensible and compelling. Yet they say that there is one reason why they are not going to become Valuation-Informed Indexers. It is their retirement money at stake; they need to be careful. And they do not hear the people widely recognized as experts in this field saying the same things that I am saying. Investing experts have influence on people’s behavior!
Bogle says that there is never a need for an investor to lower his stock allocation by more than 15 percent no matter how high valuations go. The data says that a change of 60 percentage points is required to keep one’s risk profile roughly constant. The two numbers are nowhere even remotely in the same neighborhood. They cannot possibly both be right. One is right and one is wrong. We need to know which number is right and which number is wrong.
I looked at research and data to get my number.
All signs are that he did not.
Yes, you are right that an opinion is not an error. We agree. But Bogle is playing an irresponsible and dangerous game here. Bogle fills his books and speeches and articles with references to data. He promotes Buy-and-Hold as a research-based strategy. People have come to believe that, when Bogle speaks, they are being exposed to a viewpoint formed by making reference to research and data. If Bogle is not basing his statement re the 15 percent number on research and data, he is misleading millions of people about a very important matter in a very big way.
This must stop.
These sorts of misleading statements are what caused the economic crisis. People have common sense. Our common sense tells us that the sorts of gains we saw during the out-of-control bull market are not real. So people intuitively know to lower their stock allocations as valuations rise. People intuitively know to follow Valuation-Informed Indexing strategies and not Buy-and-Hold strategies.
But there are two problems.
One, while we do all have common sense, we ALSO all possess a Get Rich Quick urge. We WANT to believe that those bull-market gains are real. So we are vulnerable to any con man who comes along and tries to plant the idea in our heads that this might be the first time in history when lowering our stock allocation by only 15 percentage points during a wild bull might work out in the long run.
And, two, the Buy-and-Holders don’t distinguish when they are using data and when they are just pulling numbers out of their backsides. Bogle plants the idea in people’s heads that he is a research-based guy by citing data and research over and over and over again. But when it comes time to give advice on the most important and most practical investing question of them all — What should my stock allocation be? — all the research and the data goes out the window and he pulls a number nowhere even remotely in the same neighborhood as the research-based number out of his backside.
Is that financial fraud? Is that 500 times worse than anything Bernie Madoff ever did?
I’ll say this much for sure. Millions of middle-class investors are going to have a very different reaction to that question following the next price crash than they have today. Today, they see themselves as winners for using the number pulled out of Bogle’s backside. Following the crash, they are going to see that they destroyed their lives by thinking that loony tunes number was reasonable and they are going to be looking for someone to hang from a tree for having encouraged them to use it.
Who is Jack’s true friend? The fellow imploring him to come clean today? Or the people telling him to continue marching down the dark path he got on the first time he failed to take action re the Lindauer matter?
That 15 percent number had to come from somewhere, Anonymous. Bogle didn’t have a dream in which some Martian held up a sign with the number “15? written on it. Where the heck did that crazy number come from?
I’ll tell you what I think.
I think that Bogle once really believed in Buy-and-Hold. Before Shiller published his “revolutionary” (his word) research in 1981, there was good reason to do so. So be believed.
Then Shiller published the revolutionary research. If people were angels, Bogle would have dropped the Buy-and-Hold nonsense then. But people are not angels. People have a hard time accepting big changes. So Bogle dismissed Shiller’s breakthrough findings. He told himself that those findings didn’t really matter that much, that Buy-and-Hold worked just fine So he continued advocating it.
The long bull market encouraged him to continue living in that world of illusion. There weren’t too many people demanding changes in Buy-and-Hold. It wasn’t just in Bogle’s dream world that Buy-and-Hold was working just fine. For all appearances, Buy-and-Hold was working just fine in the real world too.
But Bogle’s conscience nagged him. It didn’t add up. We all consider price with every purchase of every other good and service we buy. It seemed so odd that with stocks it worked in just the opposite way! Bogle’s doubts caused a deep defensiveness to kick in. He didn’t like the feelings he experienced when he entertained doubts. So he made sure to associate only with True Believers. He stopped reading articles and books that cast doubt on all his wonderful insights. He grew to enjoy the abusive tactics employed by the sorts of individuals who have put up posts in “defense” of Mel Lindauer and John Greaney. Hate was good! It was through hate that you persuaded people to ignore the awful findings of the last 33 years of peer-reviewed research and persuaded them to continue following that great, proven Buy-and-Hold strategy, the one used by the truly successful people!
That’s where we are today, Anonymous.
Bogle made a mistake. There was no dishonor in that. LOTS of good and smart people made that mistake.
But now he has gone way past making a mistake. Now he is COVERING UP the mistake.
That is a dangerous business. When the tactics that have been used by the Buy-and-Holder for the past 12 years are employed, we are talking about financial fraud. Perhaps Jack will not be charged with this crime. We don’t know all the circumstances involved in his decision to work with you Goons. He will be asked questions under oath and perhaps there will be charges and perhaps there will not be charges. I think it is fair to say that as an objective matter the elements of the felony are all at least arguably present. That alone is pretty darn sick stuff. Bogle is a hero to a lot of people (Rob Bennett first among them!). To learn that there is even a hint of criminal activity associated with his name is to learn a profoundly sad reality. Yet here we are.
Why does he do this? Why does our mutual friend Jack Bogle continue to use that loony tunes 15 percent number when he knows that the research-based number is a number nowhere even remotely in the same neighborhood?
Because he is a human.
Because he hurts. Because his ego is invested in Buy-and-Hold. Because he cannot bear to think that his mistakes have caused millions of failed retirements. Because he cannot bear to accept that it was his continued promotion of the purest Get Rich Quick strategy ever concocted by the human mind that was the primary cause of our economic crisis. Because he hurt so many of his friends in so serious way.
He hurts, Anonymous. And the only way he can stop the hurting is by coming clean. And you encourage him NOT to come clean with your behavior. So you EXTEND Jack’s pain. Some friend, huh?
Everybody is entitled to an opinion. If Jack were to say “I don’t know why, I just have this funny feeling that no one should ever change his stock allocation by more than 15 percent,” that would of course be fine. But he doesn’t present the case in that way. He talks data, data, data, research, research, research and then he puts forward this loony tunes 15 percent number. And the millions of people hearing it and putting their trust in him and forming their retirement plans in accord with what Jack says are thinking that there is some sort of data or research that supports this 15 percent number. And that’s a lie. A lie that is in the process of destroying millions of middle-class lives.
This is not a joke, Anonymous. The destruction of millions of middle-class lives is a serious business.
You say that no one is a pure believer in Buy-and-Hold and that everyone accepts the reality that valuations matter. That’s to a large extent true. If Bogle had a pure belief in Buy-and-Hold, his number would be 0 percent, not 15 percent. Fama would say 0 percent. The 0 percent number at least makes sense. If the market were efficient, there would never be any need to change one’s stock allocation AT ALL. So you are right that Bogle is not a pure believer and that his advice reflects a belief that valuations matter at least a little.
But where the heck does that 15 percent number come from? Why didn’t he look at the data? Why didn’t he look at the research? Why does he just make things up?
He is trying to combine two beliefs that are impossible to reconcile. Yes, he accepts that valuations matter. He feels that he would sound like a crazy person to say otherwise. So he acknowledges that much . But he doesn’t want to give up on Buy-and-Hold. He is fighting hard to hold on to most of something he has long loved. So he gives up a little bit of his Buy-and-Hold beliefs while retaining a belief for the most part. The 15 percent number is the number used by a person who has acknowledged internally that a pure Buy-and-Hold belief cannot be justified but who is not yet willing to travel the distance one needs to travel to believe in Valuation-Informed Indexing, the model rooted in a belief in Shiller’s revolutionary findings of 1981.
It’s obviously not just Bogle that I am talking about here. I am talking about you. And I am talking about Mike Piper. And I am talking about Scott Burns. And I am talking about Wade Pfau. And on and on and on and on.
That’s where we are today as a society. Valuations matter. Pretty much all of us sign on to that one. But they don’t matter nearly as much as Rob Bennett says they do. That’s ALSO part of the currently prevailing belief. The prevailing belief is not dogmatic in saying that valuations have no effect. But it is dogmatic in saying that the effect is not as great as the data and research indicates. So we must stop people from exploring the data and the research.
That’s where things stand, Anonymous. My aim is to change things. I think change is needed. For reasons that should be obvious to any halfway reasonable person.
It hurts the feelings of Buy-and-Holders for them to hear the arguments for why they have made a terrible mistake. I get that loud and clear.
That is not an argument for not permitting discussion of the research findings of the past 33 years. It is an argument that goes in the other direction. We should all want to relieve the pain of the Buy-and-Holders. We do that not by ignoring the research but by exploring its implications in great depth.
Bogle has a right to his opinion.
He also has a RESPONSIBILITY to tell us all what that opinion is based on.
And all of his friends have a responsibility as friends of his to INSIST that he recognize that responsibility before he gets himself in even deeper trouble.
That’s my sincere take re these terribly important matters, Anonymous.
I wish you all good things.