Set forth below is the text of the response that I offered at the Quora forum to the question “Why Is Rob Bennett Opposed to the Buy-and-Hold Strategy for Investing in Equities?”:
Finally a question re which I can feel confident that I possess the expertise needed to rise to the task of venturing forward with a response!
The backstory here is that I was a Buy-and-Holder myself until the evening of August 27, 2002. The Buy-and-Holders did something very important that had never been done before — they developed a long-term investing strategy suitable for use by ordinary people (non-experts) that was rooted in the peer-reviewed academic research in this field. The idea of doing that was a hugely liberating idea for all of us. We all owe the Buy-and-Holders a huge debt of gratitude.
I came into the story on the morning of May 13, 2002. I had been posting on saving strategies at the Motley Fool site for several years and had become the most popular poster at the site as a result of those posts. I posted at a board at which a fellow who had published a retirement study also posted. I noticed that his study did not include an adjustment for the valuation level that applied on the day the retirement begins. There was at that time 20 years of peer-reviewed research showing that such an adjustment is needed. I put up a post pointing out that there appeared to be some problems with the study.
The discussion that followed has over the years become the most controversial debate on a personal finance topic ever held on the internet. There have been MILLIONS of posts advanced on both sides. If Nobel Prize Winner Robert Shiller is right that valuations affect long-term returns, just about everything we hear about how stock investing works on the internet and in books and in speeches and in calculators is wrong. Shiller’s breakthrough findings turn the world of investing analysis on its head. On the other hand, if Nobel Prize Winner Eugene Fama is right, then Buy-and-Hold is the ideal strategy and there is no problem. But which is it?
We saw scores and scores of amazing threads back at the old Motley Fool board. It was the greatest learning experience that any of us at that board had ever enjoyed. At some point, the Buy-and-Hold camp decided that they couldn’t bear being challenged any more. On the night of August 27, 2002, the author of the study that I questioned threatened to kill my wife and children if I continued to “cross” him by posting about the Shiller research. 200 community members (people who had been friends of mine) endorsed his post. I found this very, very, very, sad. I concluded on that night that Buy-and-Hold is the most emotional investing strategy ever concocted by the human mind (unintentionally so, but still….).
I believe that Shiller is right. I believe that investors need to take valuations into consideration in every strategic choice they make. I don’t believe that it is possible to invest effectively in the long term if you don’t do this. I am now the co-author of peer-reviewed research showing this to be so in a most compelling way. Wade Pfau (Wade has a Ph.D. in Economics from Princeton) and I spent 16 months together developing research showing that investors who are willing to take valuations into consideration when setting their stock allocations are thereby able to reduce the risk of stock investing by nearly 70 percent while also dramatically increasing returns. That’s the fountain of youth for stock investors! That’s investor heaven!
A good percentage of the Buy-and-Holders who see that research end up converting to Valuation-Informed Indexing as a result. The abusive Buy-and-Holders were so upset by how people reacted to it that they threatened to send defamatory e-mails to Wade’s employer in an effort to get him fired from his job. Wade agreed to stop promoting the research in an effort to appease these people.
All bull markets are the result of investor emotion. People naturally want to see their portfolio values rise and so most applaud during times of rapidly rising prices. But the entire 140 years of stock market history shows that we always pay back any gains experienced beyond those justified by the economic realities (the economic realities support a gain of 6.5 percent real per year). So all that we are doing in bull markets is borrowing from our future selves.
When we borrow too much from our future selves, we bring on an economic crisis by putting such a payback burden on our future selves. There has never been a single exception in the 140-year history of the U.S. market. In 2000, stocks were overpriced by $12 trillion. As that money disappeared from our portfolios (it usually takes about 10 years for this process to complete itself), we became less and less able to spend on goods and services and thousands of businesses failed and millions of workers lost their jobs. Bull-market fantasies hurt lots of people in very, very serious ways.
Lots of people know this, at least in part. Shiller was awarded the Nobel Prize in Economics for his work. But most people who have tried to tell the story have found that the Buy-and-Holders become very, very upset to hear what the last 33 years of peer-reviewed research says. So most tell the story in tentative ways that don’t persuade too many people. We need to make those who believe in Shiller’s version of the story to feel every bit as comfortable expressing their sincere views as we make those who believe in Fama’s version of the story.
It is fair to characterize me as the most severe critic of Buy-and-Hold alive on Planet Earth today. But the totally fair way to tell the story is to say that the reason why I am so opposed to the version of Buy-and-Hold promoted today is that it conflicts so sharply with the original aim of the Buy-and-Hold Project. The initial idea was to root one’s strategies in the peer-reviewed research. When the research findings changed, the strategy should have been updated to reflect the new findings. John Bogle still recommends the same strategies he recommended in 1980, the year before Shiller published his “revolutionary” (Shiller’s word) research.
I oppose Buy-and-Hold as it is promoted today because Buy-and-Hold as it is promoted today is anti-research. Valuation-Informed Indexing incorporates every aspect of the Buy-ad-Hold strategy but one, the one that has now been discredited by 33 years of peer-reviewed research. I promote Valuation-Informed Indexing, the NEW Buy-and-Hold, Buy-and-Hold 2.0.
It’s not possible to believe in both the old Buy-and-Hold and the new Buy-and-Hold because they are opposites. Whether you take valuations into consideration when setting your stock allocation or not makes a HUGE difference. Sticking with the strategies that have now been discredited by 33 years of peer-reviewed research will cause you to delay your retirement by many years while taking on far more risk than is necessary, according to the peer-reviewed research of the past 33 years.
I of course believe that we all should feel gratitude to our Buy-and-Hold friends for the many wonderful insights they have developed and shared with us. But I very strongly believe that we need to move forward. I believe that deep in their hearts that’s what our Buy-and-Hold friends want us to do. I believe that it was a belief that the peer-reviewed research can help us that got them started on their journey. So I believe that moving forward by correcting the perfectly understandable errors that were made in earlier days helps us all.
Rob
It’s not possible to believe in both the old Buy-and-Hold and the new Buy-and-Hold because they are opposites.
You’ve already agreed that nobody actually uses these strategies as you define them. Instead, everyone makes individual allocation decisions based on their unique situations. You didn’t increase your stock allocation in 2009, but I did for example.
So why keep talking about two imaginary strategies?
You overstate things as is the usual Goon practice, Anonymous.
You are right (and it is an important point) that few investors follow Buy-and-Hold dogmatically or Valuation-Informed Indexing dogmatically. Some do. But they are in the minority.
But there are many investors who follow a somewhat softer version of Buy-and-Hold (what I call Strategy C). And there are a good number (but a much smaller number) who follow a somewhat softer version of Valuation-Informed Indexing (what I call Strategy D).
Neither of the two strategies are “imaginary.” Both have had great influence. Buy-and-Hold has had far more influence than Valuation-Informed Indexing thus far. But it is my belief that Valuation-Informed Indexing will have more influence in the future. It was the intent of the people who developed both strategies to develop a research-based strategy. That is a huge advance. So both strategies are of huge historical importance. Both increased our knowledge of how stock investing works. I don’t see how it is fair to refer to either strategy as “imaginary.”
I DO think it would be fair to say that the vast majority of investors find limited appeal in theory. Most investors live in the practical realm. They want to know what works, not what the research says. I think it is a mistake to ignore the theoretical. I think that the research can be a great guide to learning what works in the long term and that placing too much focus on what works can cause one to place too much focus on short-term results. But I do think that it is fair to say that most investors do not focus too much on the theoretical appeal of either of the two models.
Even investors who focus on the practical are unknowingly influenced by the theoretical. You believe with all your heart, mind and soul that the numbers on your portfolio statement are real. That is probably largely because you are drawn to the practical and accepting a number on a portfolio statement as real is a practical thing to do. But the bigger reality is that, if all the experts in this field told you that you need to make an adjustment to those numbers to obtain accurate numbers suitable for serving as the basis of your financial planning efforts, you would come to view the idea of making the adjustments as a practical thing to do and would begin doing it.
The line between the practical and the theoretical is not a thick, bold line. The one realm bleeds into the other. Even people who think of themselves as not interested in theory are influenced by it because they are influenced by the teachings of others who are influenced by theory in a more direct way.
I mentioned the other day that there was a time when physicians used bleeding as a cure for all sorts of illnesses for which it is not an appropriate remedy. Say that you were a doctor in those days and that you had developed an effective cure not involving bleeding for an illness conventionally addressed with bleeding. If you tried to apply that cure, you would have been attacked by those using the bleeding cure. You would be viewed as a threat by them. It would be said that your treatment was “dangerous.” Patients who didn’t care at all for theory and just wanted to be cured would run from you because they would view your methods as “dangerous” from a practical standpoint even though your methods were the proper ones. The continued reliance on the discredited theory would be holding back progress by holding back acceptance of a perfectly practical course of treatment by causing it to be perceived as less than practical.
That’s where we stand in the investing realm today. The theory behind the Buy-and-Hold strategy has long been discredited. But in the practical realm Buy-and-Hold remains dominant. There are few pure Buy-and-Holders. But the vast majority of investors follow stock allocation strategies more in line with the theory behind Buy-and-Hold than in line with the theory behind Valuation-Informed Indexing.
That’s what I want to see change. I want people to follow the strategies that appeal to them. But I want them to be able to hear about the strengths and weaknesses of both theories before making a choice. So it is important to me that I and all other community members who believe in Valuation-Informed Indexing be permitted to post honestly. If we all post honestly, I believe that knowledge of how the VII theory works will spread over time and stock allocation choices that are at least somewhat influenced by that theory will become more popular. For so long as we defer to the intimidation tactics of the Buy-and-Holders and hold back from giving complete and clear explanations of why we favor the theory behind VII, Buy-and-Hold will remain dominant and VII will not experience the growth that I want to see it experience.
I hope that helps a bit.
Rob
Do you insult everyone that comments?
I am the Voice of the Normals, Anonymous.
It is the Normals who wrote the published rules that apply at all of our boards and blogs. It is the Normals who adopted the laws against financial fraud that apply in the United States. It is the Normals who will be serving on your jury and deciding on the length of your prison sentence following the next price crash.
Your comment contained a question that was worthy of discussion. So I discussed it. I paid you a compliment by doing that.
But your comment also contained a small amount of smelly Goon garbage. I helped you out by pointing that out in a quick and entirely appropriate way in my response.
I didn’t insult you by doing that. I would have insulted you had I failed to do that. The implication of a response that did not comment on the goonish aspect of your post would be that I do not think you are capable of better. I DO think you capable of better. I want to see you take it up several notches. So I made sure to include that comment.
YOU are the one who insulted you. You are the one who gave in to the low emotions that tempted you to state things in a goonish way. The words you use here reflect on the person you are. Take it up a few notches! Do better! Try harder! Work it until you are capable of doing the job properly!
Do you see?
I want better of you. I DEMAND better of you. Because I care.
Rob
You overstate things as is the usual Goon practice, Anonymous.
Can you name a single person who’s either pure BH or pure VII as you define them? A person who would never, ever change his allocations under any circumstances, or one who is forced to mechanically make changes based on valuations, with no consideration of other factors?
Of course you can’t. No such person exists. Even theoretically there’s no sane person who believes valuations can never have an effect on future returns, or one who says they must always. The data is clear – historically, valuations have had some effect on future prices, some of the time. Shiller will tell you that. Vanguard will tell you that. Fama will tell you that. There are no two “opposite” (your word) views.
The retirement study posted at John Greaney’s web site does NOT contain an adjustment for the valuation level that applies on the day the retirement begins. Greaney often referenced that study in his posts at the Motley Fool board. I put forward a post on the morning of May 13, 2002, that asked whether we should be considering valuations when we identified the safe withdrawal rate. You say here that: “Historically, valuations have had some effect on future prices, some of the time.”
So should SWR studies include an adjustment for the valuation level that applies on the day the retirement begins or not? I say they should. What do you say, Anonymous?
Rob
The retirement study posted at John Greaney’s web site does NOT contain an adjustment for the valuation level that applies on the day the retirement begins.
So long as you agree with my point of there being no BH or VII investors in reality, I’ll happily agree that not all studies involve all variables the people not making the study might want to see.
I don’t think Greany’s study factored in the option of an SPIA in late life, for example, which surely affects SWRs. I didn’t pay for the study, so I have no right to demand that it does.
Greaney engaged in deliberate deception.
He could have said: “Rob is right, my study does not contain an adjustment for the valuation level that applies on the day the retirement begins, why don’t we all look at that aspect of the question now?”
Instead, he threatened to kill family members of any poster who noted (correctly) that his study got the numbers wrong.
That’s financial fraud.
That’s a crime. A felony.
That means prison time.
I want no part of it, Anonymous. I don’t even want to ever think about taking part in something like that.
I’ll continue posting honestly re SWRs and re many other critically important investment-related topics.
I wish you all good things.
But I want no involvement in the greatest act of financial fraud in the history of the United States.
Your jury will decide on the length of your prison sentence. It’s not for me to say.
But I know that I do not want to go to prison.
So I will have no part of this massive act of financial fraud.
I hope that helps a bit.
Rob
So long as you agree with my point of there being no BH or VII investors in reality
I do not agree with this.
Greaney engaged in this massive cover-up because he was embarrassed to have gotten the numbers wrong.
He got the numbers wrong because he believed in the Buy-and-Hold Model.
If he understood what the last 33 years of research says, he never would have left out the valuations factor in the first place. It is the most important factor by far. What possible motive could he have had to leave out the most important factor? Greaney used his study for his own planning. He wanted to get it right. He didn’t.
That’s the difference between BH and VII. BH leaves out the most important factor. So calculations done under the BH model always get the numbers wildly wrong.
Investors who follow the BH Model get their allocations wrong. Their risk profiles jump all over the place as valuations change.
Investors who follow the VII Model get their allocations roughly right. They make the allocation changes needed to keep their risk profiles roughly constant.
There is all the difference in the world between these two types of investors.
Buy-and-Hold investors become emotional when told what the peer-reviewed research of the past 33 years says. This is why so many of the experts lie to them. These investors get angry and upset when told the truth about how stock investing works.
Did you ever see a Valuation-Informed Indexer behave in the manner in which we see you Buy-and-Hold Goons behave on a daily basis? It has never happened. Valuation-Informed Indexers possess confidence in their strategy because it conforms to common sense and to the last 33 years of peer-reviewed research.
Please don’t ask me again to join you in your massive act of financial fraud, Anonymous. I have zero internet. You insult us both when you ask me.
Rob
That’s the difference between BH and VII. BH leaves out the most important factor. So calculations done under the BH model always get the numbers wildly wrong.
Ok, but again, being able to purchase a single premium immediate annuity late in life allows for a higher SWR. So would you agree all studies not including this critical factor get the numbers wildly wrong and should be corrected immediately? Simple question.
See for example:
“The results were rather striking; on a Monte Carlo basis, the 4.5% withdrawal rate for a moderate growth portfolio had a 12.6% risk of depletion, while annuitizing 25% of the assets dropped the risk of failure to 7.8% and annuitizing half the portfolio dropped it down to only 3.3%”
https://www.kitces.com/blog/understanding-the-true-impact-of-single-premium-immediate-annuities-on-retirement-income-sustainability/
I don’t say that a study that fails to account for the effect of buying an annuity is wrong or needs to be corrected.
But I DO say that someone who employs death threats and demands for unjustified board bannings and tens of thousands of acts of defamation and threats to get academic researchers fired from their jobs to block people from learning about the effect of buying an annuity is guilty of financial fraud and is on his or her way to life in a prison cell.
Intent to deceive is an element of the crime of financial fraud.
The person who leaves out a discussion of annuities in an SWR study has no intent to deceive. So there is no crime. If that person engages in the behaviors listed above, then he DOES evidence an intent to deceive. Then you have a crime.
John Greaney did not wake up one morning and say to himself:”I know what I will do. I will craft a retirement study that gets all the numbers wrong and thereby cause millions of people to suffer failed retirements and bring down the U.S. economy.” He made a perfectly understandable mistake. If he had acknowledged that mistake, we all would have moved forward in our understanding of these issues and we would not be living through an economic crisis today. It is the cover-up that is the crime here, not the mistake.
You are suggesting that people can leave things out of studies and that that’s okay. I don’t agree that something as big as the valuations factor should ever be left out. But I also believe that there are millions of people who do not view valuations as being as important as I believe them to be and I obviously believe that those people have a right to produce retirement studies. There are lots of people who like Greaney’s study and the other Old School SWR studies even after learning that those studies do not contain an adjustment for the valuation level that applies on the day the retirement begins. I believe that there is a way for those people to produce and share the retirement studies that they want to produce and not end up going to prison.
The way to do it is to produce the study the way that Greaney did and then to add a note saying: “This study does not contain an adjustment for the valuation level that applies on the day the retirement begins. There is peer-reviewed research indicating that that is an important factor. Studies containing such adjustments produce very different numbers. To get a full explanation of why some people think the valuations factor is so important, please go to the page [provide link here] where my friend Rob Bennett sets forth his Retirement Risk Evaluator calculator and read the materials at his site explaining why he thinks this is a better way to identify the safe withdrawal rate.”
When you do it that way, you are not deceiving anyone. You are presenting the case for what you think the SWR is with your own work but you are also putting your reader on notice that there is another school of thought in the academic community re how such calculations should be made. You are shifting the burden to the reader of the study to decide which model to follow when crafting his retirement plan. Take subterfuge out of the picture and you take prison sentences out of the picture.
It is not possible to make sense of any of this without taking into consideration the broader context in which all the events that have taken place have taken place. Humankind did not come into existence with complete knowledge of how stock investing works. We have been picking things up day by day for a long time now. We achieved a huge advance in 1965 when Eugene Fama discovered that short-term timing never works. I view that insight as the second most important insight in the history of investing analysis.
Fama made a mistake. Bogle had not yet founded Vanguard. So long-term timing was not a practical option in 1965. So Fama did not think to examine whether it works or not. If he knew what Shiller was going to discover years later, he would have announced his finding by saying that “Short-term timing never works.” But he didn’t appreciate the significance of the distinction between short-term timing and long-term timing. So he just said: “Timing never works.” That got us onto a path that led to an economic crisis more than 40 years later.
If these matters were not so important, the mistake would have been corrected in 1981, when Shiller showed that long-term timing always works and is always 100 percent required. But these matters are terribly important. They affect people’s life savings and people’s hopes for their futures. An entire industry had been built up promoting the Buy-and-Hold strategy between 1965 and 1981. The good and smart people who worked in this industry were too embarrassed to acknowledge their mistake. A common human defense mechanism that comes into play in such circumstances is cognitive dissonance. They rationalized the mistake away. They told themselves that it wasn’t that big a deal. And then they rationalized not pointing out the defect in their strategy to others on grounds that it was not such a big deal.
I believe that it is a very, very big deal. I believe that the mistake needs to be acknowledged and corrected.
Millions of good and smart people don’t see it. They think that Buy-and-Hold works well enough.
The answer is not to suppress discussion of the differences between the two models. If it is ENCOURAGE exploration of the differences between the two models. It is by talking these things over that we all learn. I believe that the result of a national debate is that we all are going to become Valuation-Informed Indexers. But I am of course as prone to errors and misunderstandings as any of my other fellow humans. So I have to acknowledge that there is at least a theoretical possibility that it could go the other way, that the national debate could lead to an enhanced confidence in the merits of Buy-and-Hold.
Either way, having the debate is a positive. If the dominant model is flawed, we need to warn people of the dangers of following that model. If the dominant model is perfect in every way, people need to hear that so that they will appreciate the dangers of going along with what this Shiller fellow says and what this Bennett fellow says.
It is not possible that the right thing for me to do here is to agree to keep quiet about what I have learned about what follows from Shiller’s “revolutionary” (his word) findings. All of the scores of powerful insights that our communities have developed together (with me playing the lead role in encouraging the debate to go forward) need to be debated on a national scale, at every discussion board and blog on the internet.
Will there still be prison sentences after that is done?
If I had the power to make a deal where we would drop all the prison sentences in exchange for having the national debate, I would take that deal in two seconds. I would be a fool not to do so for a host of reasons.
I don’t have that power, Anonymous. I can advance lots of words making the case that we are all capable of making the sorts of mistakes that you Goons made and that we all should be merciful in our judgments and all that sort of thing. I am 100 percent happy to do that. So my willingness to do that is not an issue here.
I do not get to set the length of the prison sentences. That is done by the millions of middle-class Americans who are in the process of seeing their retirements fail. I have obligations to those people every bit as strong as my obligations to you Goons and to the Wall Street Con Men. I need to BALANCE the competing interests.
I am 100 percent happy to do everything in my power to help you out. That’s not an issue. But you have to understand that my power to help you out diminishes with every passing day that the Ban on Honest Posting remains in place. You are going to go to prison not just because you committed all the elements of the crime of financial fraud. You are going to go to prison because you committed all the elements of the crime of financial fraud AND because millions of people are angry about it.
There are not millions of people angry about it today. That’s why you are not in prison today. There are going to be millions of people angry about it following the next crash. I don’t believe that at that time any words that I put forward to appease the anger of those millions of people are going to make much difference. So the time available to us to work together to get your prison sentence shortened a bit is running out. That’s my sincere take.
I hope that all helps a bit.
Please let me know if you want to work together. If you do NOT want to work together, the sensible play for you is just to wait this thing out. If I am wrong and Bogle is right, we probably will not even see another price crash. So you are off the hook in that case. I obviously believe that we are going to see a crash and so I frequently warn you and others of the dangers of letting this thing play out in the way in which it is appears likely it will play out. But if I am wrong, nothing that I say matters, you know? It’s your life. Please feel free to play it whatever way you think best. But please understand that I intend to do the same from my side of the table. I think it would be best for all of us to come clean re these matters by the close of business today.
My best and warmest wishes go out to you and yours during this holiday season. Love is the answer. It’s not a close call.
Rob