I’ve posted Entry #201 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Shiller Doesn’t Dare Say What He Believes Is the True Cause of the Economic Crisis.
Juicy Excerpts: Samuelson hints at the true cause of the crisis without quite becoming so bold as to identify it bluntly.
He tells us: “We were victims of success. The crisis originated from 25 years of prosperity, from roughly the end of 1982 to the end of 2007. This conditioned people — bankers, regulators, economists, almost everyone — to take stable growth for granted. The longer the prosperity continued, the more it inspired the risky behaviors that ultimately wrecked the economy. These included over-borrowing by consumers and financial institutions, housing speculation and loose regulation. The ‘causes’ cited by left and right were usually the consequences of a delusional mind-set: a belief that once-risky practices were prudent in a world of near-perpetual prosperity.”??It all began in 1982, huh? I wonder if there was anything relating to the stock market that began in 1982? I have a feeling that that might be the case. The words are on the tip of my tongue. I just cannot quite bring the thought to mind.
That phrase “delusional mind-set” might be a clue. It reminds me of a similar phrase. Irrational Something or Other. Again, I just don’t seem to be able to pin it down. Some sort of unease about saying the words out loud is holding me back.
High-sight sure is 20/20. It’s not going to help you buy your family a vacation however. For that, you need to know the future.
We know the future in part, Anonymous. There is 33 years of peer-reviewed research, based on 140 years of historical return data, showing that.
It’s not a black and white thing. I cannot tell you precisely what your return is going to be in 10 years. But, looking at today’s P/E10 level, I can identify a range of possibilities that will be very different from the range of possibilities that applied when prices were where they were in 1982. And I can assign rough probabilities to each point on the range.
That’s not a small thing. It’s a very, very big thing. Doing what we became able to do in 1981 permits us to reduce the risk of stock investing by nearly 70 percent while also increasing returns enough to permit us to retire five to ten years sooner than we were able to in the Buy-and-Hold Era.
None of this is complicated. If we know that valuations affect long-term returns (and we have known this intellectually if not emotionally since 1981), we know what we need to know to know our future stock return to a significant (but less than perfect) extent. The task before us all today is making the transition from possessing this ability only intellectually to possessing it in a practical and real way by overcoming our emotional resistance to acknowledging that there was a time when we did not know all that we know today.
We can know the future to a considerable extent. I make use of that knowledge when setting my stock allocation. I urge all of friends to make use of that knowledge. I offer no apologies whatsoever for doing so. I care about my friends. I want to see them succeed. I want to see them making use of all knowledge available to them.
You hate the idea of people learning how to invest more effectively with a burning hate. Because you were taken in by a Get Rich Quick approach. And you are ashamed of that. And you want to cover it up so that people don’t see your shame.
I didn’t do that to you. Jack Bogle did that to you. Take it up with him.
I have tried to help you get past your shame and become a more effective investor. I have extended the hand of kindness to you for 12 years now and I extend it again today and I will continue to extend it for so long as I walk the Valley of Tears. You have the option of engaging in further destruction (along with further destruction of many others). That’s your call. I will never be associated with further destruction of you and millions of others in any way, shape or form. I will continue to post honestly re safe withdrawal rates and scores of other critically important investment-related topics.
You are hate and I am love. Love wins in the end. Always. At least until the day we all go down together. Either I win or we all lose. Because even Jack Bogle believes deep in his heart that it makes sense to consult the peer-reviewed research when making investing decisions. You will either someday give in to the spark of love that still resides within you and keeps you alive or you will be consumed by the raging hate that you for 12 years now have not been willing to rein in.
I naturally wish you all the best that this life has to offer a person in any event.
Rob
You always seem to read everyone’s mind since you know what they are thinking and when they are lying. Perhaps you should have a second career as a mind reader .
Do you not know when politicians are lying to you, Anonymous?
We all do. Give me a break.
Ataloss sent Bill Bernstein an e-mail asking him if he agreed with me that the methodology used in the Old School retirement studies is analytically invalid or not. Bernstein said that “of course” the methodology was valid but that anyone who used the numbers generated by those studies to plan a real retirement would have to be out of his or her mind. Does that sound like straight shooting to you?
Bernstein’s lie is almost a charming one. He is pretty much holding up a sign when he tells it that says “Don’t believe a word I say!” I mean, come on.
The lie is easy enough to see. A child could see it. BUT ONLY IF HE CARED TO SEE IT.
You are capable of seeing every lie that I see. YOU JUST DON”T WANT TO SEE THEM.
You have a large percentage of the accumulated wealth of a lifetime rising on Buy-and-Hold. YOU ARE COMPROMISED. I could show you a mountain of lies told by the Buy-and-Holders and you would shrug your shoulders. You want it all to be true. So for you it is true.
The question is — How are you going to feel about all those lies after the next price crash. Suddenly, the lies will all become visible to you. Suddenly, this massive act of financial fraud won’t seem like such a big joke to you anymore.
The lies that Bernie Madoff told were obvious. Some very smart people lost money by investing in his fund. How did this happen? Being smart doesn’t make you immune from Get Rich Quick pitches. If anything, it makes you better skilled at rationalizing away the lies that would otherwise serve as warning signs.
You WANT to be tricked, Anonymous. There is nothing difficult in tricking somone who wants to be tricked.
I notice when people are lying by comparing what they say in different circumstances and checking whether the stories match up. Jack Bogle says that investors should use the historical data as a guide to how to invest. The data says that a 60 percent reduction in one’s stock allocation is needed when prices go from where they were in 1982 to where they were in 2000. But Bogle says that a reduction in stock allocation of 15 percentage points is plenty. Huh?
It doesn’t take any superhuman power to see that the people who advocate Buy-and-Hold strategies are telling lies (often to themselves as well as to others). I don’t need to be a mind reader to pick up on lies that obvious. But I do need to know what the last 33 years of peer-reviewed research tells us about how stock investing works.
That’s why the Buy-and-Holders feel such a burning hate toward anyone who reports on what the peer-reviewed research says. The story told by the peer-reviewed research and the story told by the Buy-and-Hold advocates do not match. It’s not a close call. The two stories are OPPOSITE stories. One says that price always matters when buying stocks. The other says that it is okay to ignore price when buying stocks. Huh?
I hope that helps a bit.
Rob
But, looking at today’s P/E10 level, I can identify a range of possibilities that will be very different from the range of possibilities that applied when prices were where they were in 1982.
That’s like saying: I can look at current interest rates and give you a range of future bond returns that will be very different from 1982. Well, so can a five year old. Expected nominal stock and bond returns are low now, and they were high then. Everybody knows this. What’s your point?
The point is that the safe withdrawal rate cannot possibly be the same when the expected return is high as it is when the expected return is low. The safe withdrawal rate varies depending on the valuation level that applies on the day when the retirement begins.
And we should all be permitted to post honestly re that reality at every discussion board and blog on the internet. When a marketing gimmick comes to destroy so many lives, that marketing gimmick needs to be put aside.
Rob
Rob,
One major thing you might have failed to ever take note of is that you can get a safe withdrawal rate of 3% for 30 years while earning nothing on your money. Nothing. So upping that to 4% more or less by including some stocks is hardly brain surgery. BUT, if some individual is worried about that possible apocalyptic stock crash due to ??? (global warming? space aliens? PE10 something-something-something? Whatever.), just put it in munis, or CDs or under the mattress, and you can PLAN on 3%.
Another thing you seem to fail to realize is the significance and use of this planning number, in the first place. Most people find their needs fall well short of that amount. My actual WR is maybe 1.5 to 2%. So the “SWR” is like a world cruiser stocking the larder in their boat before the journey– he knows it’s unlikely he will have to survive on those canned goods alone, due to fishing, and incidental markets at ports of call, etc, but for worst case planning, you run some numbers, and then act conservatively, living without constant fear as you mind how things actually unfold in your personal unique situation.
There are no ‘millions of smashed retirements’ because someone’s worst case planning was off by a percent, especially since people both adjust, and also don’t consume at or beyond the max level all day every day (well, unless you are the Bennett household). You have been boxing at shadows of your own creation for a decade and are STILL too stupid to comprehend even the most basic points about planning for retirement, or worse still, about basic personal finance.
And that’s just sad.
I fully get the point that the SWR is 3.3 percent for those who invest in an asset class that has a return of zero.
Stocks earn an average long-term return of 6.5 percent real.
Yet the SWR for a portfolio of 80 percent stocks for someone who retired in 2000 is 1.6 percent.
What does that tell us, Anonymous?
I believe that it tells us something very, very important. It tells us something that we should be discussing at every board and blog on the internet.
The valuation question is 80 percent of the stock investing story.
When we take valuations into consideration, stock investing becomes easy and safe.
When we ignore valuations, we ruin ourselves. We increase risk dramatically. We diminish return dramatically. We cause millions of failed retirement and tens of thousands of failed businesses, we bring on unemployment for millions of workers. This is a good thing? This is science? Huh?
I believe in HONEST investing advice. I think it is the future.
I am sure.
Rob
There are no ‘millions of smashed retirements’ because someone’s worst case planning was off by a percent
If your numbers are off by 1 percent, they aren’t really worst-case numbers, are they? Claims that those numbers are worst-case numbers are a lie. Personal integrity matters, Anonymous. Even in the investing advice field. Or at least it certainly SHOULD matter.
And when your withdrawal rate is off by 1 percent and you are taking a 4 percent withdrawal, the amount you have to live on in each year of retirement is off not by 1 percent but by 25 percent. If you have a portfolio of $1.5 million, you are taking out $60,000 each year when the most that you can take out each year safely is $45,000. Huh?
And of course the Old School retirement studies were off by a whole big bunch more than 1 percent at the top of the bubble. The SWR in January 2000 was 1.6 percent. So the guy who was taking out $60,000 because these lies persuaded him that it was safe to do that could not safely take out more than $24,000, according to the historical data.
Prison.
It’s not worth it, Anonymous.
It’s better in the long run just to tell the truth.
Rob
You have been boxing at shadows of your own creation for a decade and are STILL too stupid to comprehend even the most basic points about planning for retirement, or worse still, about basic personal finance.
I’m SO stupid!
That’s why you are still posting here on a daily basis 12 years after I put my famous post of the morning of May 13, 2002, to the Motley Fool board.
Makes sense!
I believe you, Anonymous.
No — Really!
Take care, man.
Rob
Why would anyone have an 80% stock portfolio at retirement? Your examples are always so off.
John Greaney’s retirement study (the one that I commented on in my famous post of the morning of May 13, 2002) reports that the “optimal” stock allocation at all times is 74 percent.
Jeremy Siegel’s book Stocks for the Long Run says that the optimal allocation for those with a 30-year holding period (that’s all of us who are investing to finance our retirements) is in excess of 100 percent (he says that the historical data supports the idea of going into debt to buy more stocks than one can afford with just one’s savings).
Both Greaney’s numbers and Siegel’s numbers would be accurate if the market were efficient (that is, if we lived in a world in which risk were stable and in which Buy-and-Hold might end up working out well for one or two long-term investors).
Prior to the 2008 crash, it was common for Buy-and-Holders to recommend stock allocations of 80 percent. Many have changed their tune in recent years. But that’s ALWAYS the story for those promoting Get Rich Quick strategies. Following the next crash, we will be hearing that middle-class investors should not invest in the stock market AT ALL.
Con men change their story every time circumstances change. The story told by the peer-reviewed research always remains the same. We now have 140 years of data showing that Buy-and-Hold is the purest and most dangerous Get Rich Quick scheme every concocted by the human mind.
Jack Bogle’s greatest insight was when he argued that all investors should be using the peer-reviewed research as their guide to how to invest in stocks. If only Jack followed his own advice and warned those who read his work of the dangers of Buy-and-Hold!
When stocks are selling at reasonable prices, an 80 percent stock allocation makes all the sense in the world for those investing to finance an old-age retirement. When prices reach insanely dangerous levels, even a stock allocation of 50 percent is foolish. As with anything else that can be purchased for money, it is the price at which stocks are selling that determines whether they offer a strong long-term value proposition. Those investing for the long term must always, always, always be certain to consider valuation levels when making stock purchases.
My take.
Rob
The point is that the safe withdrawal rate cannot possibly be the same when the expected return is high as it is when the expected return is low. The safe withdrawal rate varies depending on the valuation level that applies on the day when the retirement begins.
Most assuredly so, just as the SWR varies greatly based on adding fixed annuities to the model. And whether you’re male or female. And many other things. These items are of course discussed daily on Bogleheads and elsewhere. Nothing new here.
There is a lot new here, Anonymous.
There was a time when the Buy-and-Holders were saying that the Old School safe-withdrawal-rate studies were not in error. I know! I was there! I was banned at 15 different sites for posting honestly on safe withdrawal rates.
And those Old School SWR studies still have not been corrected to this day. And there has never been a national discussion about why the errors were made in the first place or about how we are going to compensate the millions of middle-class people who were taken in by those lies for the damages they suffered.
And we are still seeing new lies about SWRs today! There was a Vanguard analysis that came out recently that said the Old School studies were in error because the authors didn’t consider the effect of different return sequences. Huh? That’s exactly what they DID consider. The authors of the Old School SWR studies are the people who TAUGHT us all about the effect of different return sequences. That was the gold in those studies.
And of course we have not as a society decided on the length of the prison sentences for those (like you!) who led the 12-year cover-up. And Jack Bogle has not yet given his “I Was Wrong” speech. So the academic researchers in this field do not yet feel safe to do honest work again. Nor do the financial magazines feel safe publishing honest articles. Nor do bloggers feel safe permitting honest comments at their blogs.
I am of course pleased that you now acknowledge that Greaney’s study is in error. It’s good of you to do that 12 years after I brought the matter to your attention. But I think it would be fair to say that we all still have a long ways to go before we will be able to bring this economic crisis to an end and get down to the business of enjoying the reality that we are the luckiest generation of investors ever to walk Planet Earth.
And there is of course no need to add fixed annuities to “the model.” There are times when buying annuities can be a plus. And there are times when buying fixed annuities can be a negative. To know which sort of circumstance applies, you need to calculate the SWR honestly and accurately.
It always comes back to that, you know?
Valuations matter. Price matters. Personal integrity matters.
That’s always the story. For obvious reasons.
I understand that you are in great pain. I cannot change that by myself. I need your cooperation. When the pain gets so great that you feel able to swallow your pride and say the words “I” and “Was” and “Wrong,” I will be there for you. This is not a job that I can do by myself.
No honest words are posted today on Bogleheads. It is not possible for anyone to post entirely honest words for so long as people who make use of 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 control the place. I mean, come on.
I naturally wish you all the best that this life has to offer a person regardless of what investing strategies you elect to pursue.
Rob
There was a time when the Buy-and-Holders were saying that the Old School safe-withdrawal-rate studies were not in error.
And would you say studies not factoring in fixed annuities are in error? They clearly change SWRs dramatically.
Those studies are obviously not even a tiny bit in error.
A study is in error if it contains false claims. Greaney’s study says that the SWR is 4 percent for a portfolio that he describes in the study. That’s a false claim.
You are saying that some different portfolio has a different SWR. Well, Duh!
John Walter Russell published an analysis back in the early years of our discussions showing that the SWR for TIPS purchased in early 2000 was 5.8 percent. You can calculate SWRs for any asset class you choose.
Greaney’s study got the numbers wrong for the portfolio he described in the study. That’s an error that he should have corrected within 24 hours of the time he learned of it.
Greaney’s own behavior shows that he understood that his study was in error. If he didn’t think the error needed to be corrected, he would not have advanced death threats on the evening of August 27, 2002. That showed his state of mind. It showed that he possessed a criminal state of mind.
And you have devoted years of your life to aiding him in his criminal cover-up of the errors in his retirement study.
My best wishes to you and yours.
Rob
A study is in error if it contains false claims. Greaney’s study says that the SWR is 4 percent for a portfolio that he describes in the study. That’s a false claim.
Greaney’s study said only that 4% has been safe historically during the period of the study. Where is the false claim?
There were several times during the period of the study (times of high valuations) when the 4 percent withdrawal was anything BUT safe. For example, the odds that a 4 percent withdrawal would survive for retirements that began in 1929, when the P/E10 level was 33, was about 50/50. That ain’t safe.
The 4 percent withdrawal survived in the several time-periods in which it was unsafe. But the fact that risky behavior does not produce a negative result does not retroactively render that risky behavior “safe.”
Rob
There were several times during the period of the study (times of high valuations) when the 4 percent withdrawal was anything BUT safe.
Sounds like now you’re merely arguing over the word “safe”, which in the study (and in SWR papers generally) clearly means “survived the 30 year period with a balance above zero” .
It’s deceit. It’s deception. It’s trickery. It’s fraud.
It’s like everything else that goes under the name “Buy-and-Hold.”
It’s a Big Lie.
The people who used those studies to plan their retirements thought that the people who wrote them were being honest in using the word “safe.” They didn’t know that these people were using the word “safe” to describe a withdrawal rate that the historical data reveals to be insanely dangerous.
That’s why the Buy-and-Holders need to make use of 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. This is all standard Con Man stuff.
Criminal charges will be brought following the next price crash. You will be permitted to present your case and the state will present its case and a jury of your peers will decide on the length of your prison sentence, Anonymous. That’s how our system works.
I naturally wish you all the best that this life has to offer a person.
Rob
The people who used those studies to plan their retirements thought that the people who wrote them were being honest in using the word “safe.” They didn’t know that these people were using the word “safe” to describe a withdrawal rate that the historical data reveals to be insanely dangerous.
The problem is that these people exist only in your head. Provide evidence that a single person ever misunderstood a SWR study, withdrew too much based on it, and went broke. Show me a single link. You can’t.
In practice, nobody has ever even withdrawn a mechanical 4%. People draw down their portfolios at variable rates based on returns and spending needs.
I can point you to thousands of people, Anonymous.
Greaney’s retirement study was discussed on a daily basis back at the Motley Fool’s Retire Early board. People there were trying to decide whether they had enough saved to hand in their resignations or not. Most had high-paying jobs, jobs they could not get back if they realized a few years down the line that they had made a mistake. So they needed a tool to tell them whether they had enough resources to finance a safe retirement or not. Greaney’s SWR tool was the tool that most of that community used to answer that question.
You ask for names of people who “went broke.” Most have not yet gone broke. We are in the early stages of this financial crisis. Stocks have not been performing as Buy-and-Holders expected to see them perform since January 2000. We had a slow-leak crash from 2000 through 2008. Then we had a dramatic crash in 2008. Then prices went back up to insanely high levels (but not as insanely high as what applied in 2000) and have pretty much stayed there. The return on stocks from 2000 forward has been a low positive number. It hasn’t been good enough to meet the expectations of most of those who invested in stocks in 2000. But it has not been poor enough to cause too many retirees to go broke.
But we still are due for another 65 percent price crash. That’s when the real pressure is brought to bear. When you adopt a dangerous retirement plan, you don’t necessarily pay the price for having done so within a few years. You can have years where you don’t see the growth you should see or years where you incur losses that are less than devastating. Those sub-par years can position you for a later time-period where you will experience losses that you cannot handle. We haven’t experienced most of the losses yet. We are today still at P/E10 levels that ALWAYS produce massive crashes (we have not in 140 years seen a single exception) even though we have already lived through 15 years of sub-par returns.
I presume that most people don’t withdraw a mechanical 4 percent. But that’s irrelevant. People can only cut their spending so much. The Greaney study isn’t a little off. It is WILDLY off the mark of the numbers you would obtain if you used an analytically valid methodology. The true SWR in January for a high-stock portfolio was 1. 6 percent. That permits spending each year of $24,000 for a retiree with a starting-point portfolio of $1.5 million. People who were tricked into believing the numbers in Greaney’s study would be taking out $60,000. You are suggesting that these people lowered their annual spending by $36,000 per year starting in 2000. Give me a freakin’ break. Not one retiree has reduced his spending by that amount in response to the sub-par returns of the past 15 years. And those who spent more than that are spending more than they can spend if their aim is to maintain a safe retirement as they age.
Millions and millions and millions of people are in very serious trouble. Our entire society is in very serious trouble. If a few retirees go broke each year, that’s a sad thing but it is not a public policy concern. When millions go broke even though they followed the conventional advice in forming their retirements, we have a very serious problem. We cannot throw those people out on the streets. They did nothing wrong. It is the authors of the Old School SWR studies who caused those millions of failed retirements. And the people who either in some way supported the authors of those studies when they refused to correct the errors that were brought to their attention or who failed to speak up when they saw that those authors were not willing to correct the errors in their studies. That’s most of us.
The root problem of course goes back even farther. Greaney is not some evil genius who plotted to destroy our economic system by getting the numbers wildly wrong in his retirement study and then by employing death threats and other insanely abusive tactics to block people from learning about those errors. Greaney took his methodology from the Trinity study. The Trinity study was peer-approved. How is it that none of the people who performed peer review for the Trinity study noticed that it lacked an adjustment for the valuation level that applied on the day the retirement began?
That was the result of the much bigger con, the 33-year cover-up of the errors in the Buy-and-Hold Model for understanding how stock investing works that dates back to 1981, when Nobel Prize Winner Robert Shiller published research showing that there is precisely zero chance that a Buy-and-Hold strategy could ever work for even a single long-term investor. Academic researchers have for 33 years failed to do their jobs by exploring the implications of Shiller’s “revolutionary” (Shiller’s word) finding. Newspapers have failed to do their job for 33 years. Economists have failed to do their job. Policymakers have failed to do their job. Bloggers have failed to do their job. We have failed ourselves as a nation. We are the luckiest generation of investors ever to walk Planet Earth. And we are suffering through the worst economic crisis in our history. Huh?
The root problem is a power imbalance. The Wall Street Con Men have lots of money and lots of influence and lots of contacts. They possess a ruthless willingness to crush anyone who stands in the way of their efforts to promote the purest and most dangerous Get Rich Quick scheme ever concocted by the human mind. I of course didn’t know this on the morning of May 13, 2002. But I have documented the realities for 12 years now at this site. It’s not a pretty picture. John Greaney did some very wrong things. But John Greaney is not the only one who has done some very wrong things. John Bogle is in a much higher position of responsibility than John Greaney. And Bogle’s behavior is not that much better. Bogle never himself put forward death threats. But he encouraged those who did. Huh?
The 12-year cover-up of the errors in the Old School SWR studies is the biggest act of financial fraud in U.S. history, Anonymous. There is nothing else even in a close second place. No one will be asking the sorts of questions you ask here in the days following the next price crash. The question that you are asking is one that most people view as a hypothetical. Ask most people what they will do if their stock returns are not what they expected and they will say “I will tighten my belt a bit and get by.” So long as the losses remain hypothetical, that answer satisfies them. Most people cannot imagine losses of the size that the last 33 years of peer-reviewed research tells us are inevitable once large numbers of people come to believe in the merit of Buy-and-Hold strategies. People won’t be thinking of tightening their belts following the next price crash. People will be thinking of hanging Buy-and-Hold advocates up from trees following the next price crash. The idea of belt tightening is a sick joke when we have put ourselves in this sort of situation.
I wrote a lot of words here. But I could have put forward a much briefer response to your question, Your suggestion is that the errors in Greaney’s study are not such a big deal, that we will all pull through somehow. The brief response to that suggestion is to point out that Greaney himself does not believe that on a deep level of consciousness. If Greaney believed that we could all pull though in the event that his numbers turned out to be off, he would have said that when I raised an objection to his failure to consider valuations in his study. He could have put up a post saying: “Rob makes an interesting point here. But please remember that my study contains some very conservative assumptions. I use a worst-case scenario. I didn’t want to go overboard in my conservatism by also including an adjustment for valuations. If we see worse returns than we have ever seen in the past because of the valuations factor, retirees who used the study can always tighten their belts a bit.”
He didn’t do that, did he? He advanced death threats. He demanded unjustified board bannings. He put forward tens of thousands of acts of defamation. He threatened to get academic researchers fired from their jobs. Why do you think he handled it that way, Anonymous?
Because he KNOWS. He knows that it is all b.s. ALL of the Buy-and-Holders know that it is all b.s. Just as all the investors in the Madoff fund knew that it was all b.s. When people follow Get Rich Quick strategies, they KNOW on one level of consciousness. Just as alcoholics know on one level of consciousness that they are destroying their lives even while they bang the table and insist they can quit anytime they like. Just as addictive gamblers know they are destroying themselves. And just as people in bad relationships know that they are destroying themselves.
We are trying as a society to recover from a sickness. That is what is going on here.
Buy-and-Hold has not destroyed out economic system one time. It has done so four times. It is our good fortune that in 1981 we learned HOW Buy-and-Hold has destroyed our economic system four times. The earlier three times we eventually went back to Buy-and-Hold after suffering the pains that inevitably follow from making use of it. We had no other options. We were living in ignorance of how things work in those years. We are not living in ignorance (at least not intellectual ignorance) today. Today we have 33 years of peer-reviewed research showing us how things work. So today we have the ability to climb out of the ignorance that produced the Trinity study and the Greaney study and move on to something better.
We will see following the crash which path we choose. It is at least theoretically possible that Jack Bogle will decide that even condemning millions of people to live through the Second Great Depression is better than having to walk to the front of a room and to say the words “I” and “Was” and “Wrong.” I don’t believe that that is the choice that Jack is going to make. But I acknowledge that perhaps I have misjudged the man. That outcome is at least a theoretical possibility.
The other path is the path that leads us to the greatest period of economic growth that we have ever seen in our history. That’s the path in which we elect to stop all this idiotic talk of belt-tightening and vow instead just to report the retirement numbers accurately in the future so that no belt-tightening is required.
The thing that Shiller showed us in 1981 is that investor emotion plays a role in stock investing. The Buy-and-Holders are repulsed by the reality that emotion plays a role and so they leave consideration of investor emotions out of all their calculations. The Valuation-Informed Indexers share the belief of the Buy-and-Holders that it is emotion that causes investing plans to fail. But we have a very different approach to dealing with the problem. We don’t ignore emotion. We CONFRONT it. We COPE with it. We OVERCOME it by facing it and calculating its effect and by managing it. The only difference between the Buy-and-Holders and the Valuation-Informed Indexers is in how they deal with the emotional aspect of the investing project.
The idea that we will deal with the problems we have caused for ourselves by following the purest and most dangerous Get Rich Quick strategy ever concocted by the human mind by tightening our belts is itself an emotional phenomena. The rational way of dealing with the problem is to quantify the effects of the fraud we have worked on ourselves and to take the steps we need to take to see that nothing like this ever happens again.
The question is whether the next crash provokes a reaction in which we become even more hateful or a reaction in which we elect to begin a healing process that takes us all to a much better place, a place where belt-tightening isn’t needed because we are willing to be honest with ourselves re what the last 33 years of peer-reviewed research has revealed to us. I know which outcome I am hoping for, Anonymous.
Belt-tightening is not needed when you calculate the numbers properly. The entire freakin’ point of safe withdrawal rate analysis is to identify the numbers you should use if you do not want to have to rely on belt-tightening in your old age. Belt tightening is for those who don’t bother to plan. SWR analysis is for planners, people who disdain belt tightening and therefore do what is needed to avoid it. We should permit honest posting re the numbers obtained by making use of the last 33 years of peer-reviewed research when developing a methodology for identifying the SWR.
My take.
Rob, the Fellow who Prefers Honest Reporting of the Numbers to Endless Belt Tightening
But we still are due for another 65 percent price crash.
This was your prediction within 3 years, about 2 years ago. But the market’s up 40% or so since then, so we’re looking at a 85% drop within about a year, if your system works.
Stocks have not been performing as Buy-and-Holders expected to see them perform since January 2000.
But that’s just cherry picking a date. They’ve done better than expected since March 2009. The real date you should look at is the day you went 100% bonds in 1996, no?
This was your prediction…
It was not a prediction. It was a report. Shiller’s research provided the missing piece to our understanding of how stock investing works. I have reported on what will happen if the last 33 years of peer-reviewed research if valid.
But the market’s up 40% or so
That’s bad news. The fact that Buy-and-Holders don’t see it as bad news is the entire problem. We should all want stocks to be properly valued at all times. All mispricing hurts us all. It is emotional to be happy about mispricing, not rational. We should be encouraging investors to be more rational, not to be more emotional.
so we’re looking at a 85% drop within about a year
I haven’t done the math. But this number sounds exaggerated to me. We should be expecting a drop in the P/E10 value to 8. That’s a huge drop. But I don’t think that it is 85 percent. It might be a bit more than 65 percent today. But I don’t think too much more. A 65 percent drop is bad enough!
if your system works.
Your use of the word “system” to refer to the peer-reviewed research shows how emotional you are in your approach to stock investing. Only a Get Rich Quicker would refer to the research-based approach as a “system.”
But that’s just cherry picking a date.
ANY one date that is picked is the product of cherry picking. It is not possible to look at all dates simultaneously.
This is why it is good to use a research-approach. The research looks at every date from 1870 forward. In that 140-year time-period, Buy-and-Hold has NEVER worked and Valuation-Informed Indexing has ALWAYS worked. I wonder why.
The real date you should look at is the day you went 100% bonds in 1996, no?
I didn’t go to bonds. I went first to CDs. Then to TIPS and IBonds. But you of course knew that. The fact that you engage in such deceptions so frequently reveals how emotional you are in your approach.
The 1996 date is a good date to look at. That’s when the P/E10 level went so high that it became insanely dangerous to go with a high stock allocation.
TIPS and IBonds have done better than stocks since 1996. And they will of course be much, much farther ahead following the next price crash. And then they will go even farther ahead as the research-based investor experiences decades of compounding on the differential.
That is how it has been working for 140 years now. Buy-and-Holders experience the illusion of success for a number of years. Then Valuation-Informed Indexers go ahead and see their differential grow bigger and bigger over the years.
Get Rich Quick has a marketing edge.
But research-based is what works in the long run.
Buy-and-Hold is a lie, a trick, a marketing gimmick, a fraud, an illusion, a Get Rich Quick scheme. a Ponzi scheme. a big pile of smelly garbage, a crime, a felony, a prison term, a mistake.
I want no part of it. I have hopes of becoming known as the most severe critic of the Buy-and-Hold Con alive on the planet today.
My best wishes to you and yours, Anonymous.
Rob
It was not a prediction. It was a report.
You can’t report on the future, Rob. You can only predict it. Even your addled mind should understand that.
We don’t agree, Anonymous.
Casinos are businesses, are they not?
They are businesses because things are set up so that the house reliably brings in a profit.
There are times when the customers of a casino get lucky and the casino LOSES money.
But in the long-term the casino ALWAYS ends up ahead. The odds favor the casino. It is math that says the casino will always end up with a profit.
The visitors to the casino are gambling.The owners of he casino is operating a business. He may have losses from time to time. But the math says that he will always end up ahead in the long run.
That’s the distinction between Buy-and-Hold and Valuation-Informed Indexing. The odds favor VII. That’s why VII ALWAYS ends up ahead in the long run. That’s been so for 140 years running now.
The Buy-and-Holders will always zero on in some short-term result and say: “Do you see? This can work!” But it never works in the long run. VII has been reliably beating Buy-and-Hold for 140 years running now.
I am not making a prediction when I say that that will continue to be the case going forward anymore than the casino owner is making a prediction that the house will beat the gamblers over the long term. It’s math. When the odds favor you that much, you are certain to end up ahead.
We cannot say on what day or week or month the Valuation-Informed Indexers will go ahead any more than we can say precisely when the gamblers in a casino will end up losers. But if you gamble long enough with the odds against you, you WILL end up losers. You cannot beat the math, Anonymous.
I CAN report on the future in which the future is determined by the laws of mathematics. Get Rich Quick investing strategies NEVER work. They cannot beat the math aligned against them.
I hope that helps a bit.
Rob