Set forth below is the text of a comment that I recently posted to another blog entry at this site:
Thanks for asking an intelligent question, Z.
You are right that the money is real for practical purposes in the short term.
This is an important fact. This is probably the single most important reason why so many smart and good people are taken in by Buy-and-Hold. It creates temporary wealth that is treated as real by banks and airlines and other institutions.
It never lasts. We have 33 years of peer-reviewed research based on 140 years of historical return data showing that. It’s not real.
I am telling you what the peer-reviewed research shows us. If you don’t want to believe it, you are of course free to believe whatever you prefer to believe. I am not free to lie about this matter. It would be fraud for me to do so. I am going to continue posting honestly. I don’t dare to consider the possibility of playing it any other way.
Yale Economic Professor Robert Shiller was awarded a Nobel Prize for his work in this area. You don’t receive a Nobel Prize for repeating the conventional wisdom. Shiller taught us something very important and very new. Shiller’s work has far-reaching implications. All of my work explores those implications.
There are thousands of economists who would like to be exploring these implications and writing about what they come up with on a daily basis. They do not feel free to do so because the Buy-and-Holders will destroy their careers if they do so. This is going to have to change. We are headed to a dark place if we do not make this change soon.
I believe that we will make the change following the next price crash. Once we do that, the problem will go away. Once investors know what the research says, most will be happy to take into consideration the findings of the past 33 years. Once most investors are taking those findings into consideration, there will never again be insane overvaluation. It’s just not something that we will ever again need to worry about. It’s crazy to have the amount of your accumulated life savings jumping all around. We all should be happy that the days in which we need to endure such nonsense are in the process of coming to an end.
The fact that as a society we have not been able to accept what the research says or even permit open discussion of what the research says does not suggest that these findings are unimportant. The reality is entirely to the contrary. It shows that we understand on some level of consciousness that these findings are of HUGE importance. It is because they are so important that they are so disconcerting to the millions of people who built their retirement plans pursuant to the very different findings of preceding years.
The people who owned stocks in early 1929 were able to buy things that they were not able to afford in late 1929 because of one of our earlier experiences with the wonders of Buy-and-Hold strategies. The banks and airlines accepted those portfolio values at face value for a time. But then, when the Pretend Money disappeared, the value assigned those portfolios changed in a dramatic way. That’s the way it works. That’s what we have up ahead of us again when we experience the next price crash.
Stock crashes are a horrible, horrible thing. We all should want them to be brought to an end. Shiller showed us how to do that. To bring stock crashes and the economic crises that inevitably follow them to an end, we need to stop encouraging people to believe in the Pretend Money. We need to do just the opposite. We need to DISCOURAGE belief in the Pretend Money. We don’t want to ban honest posting re the past 33 years of peer-reviewd research, we want to ENCOURAGE honest posting about the past 33 years of peer-reviewed research. It is by being exposed to honest posting re the peer-reviewed research that we all advance in our understanding of how stock investing works.
We are the luckiest generation of investors ever to walk Planet Earth. Why? Because we are the first generation to have the last 33 years of peer-reviwed research, the research that puts the final puzzle piece into place, available to us. I think we should be taking advantage of our good fortune rather than pissing it away.
It makes you happy to have banks and airlines recognize Pretend Money. Why? How does it help you to have that money credited to you ONLY FOR A SHORT TIME. It is my belief that that hurts you. If you knew the true value of your portfolio, you could plan your financial future far more effectively. I see no benefit to being tricked. Which is what is happening if you come for a time to believe that Pretend Money is real. If short-term timing worked, you could cash out just at the right moment. But it doesn’t. So how does this fantasy belief help you?
What do you think it means to say “valuations affect long-term returns” if it does not mean that a portion of investors’ current portfolio value is Pretend Money? My feeble brain is not able to come up with any other way to interpret the statement. If your far superior Goon brain is able to come up with something, I would sure like to hear about it.
We once thought that stock returns were random. That’s why they named the famous book “A Random Walk Down Wall Street.” Then Shiller showed that valuations affect long-term returns. That means that long-term return are NOT random. Shiller’s research changed our fundamental beliefs about how stock investing works in a “revolutionary” (his word) way. We all need to recognize that and to begin reaping the benefits that follow.
That’s my sincere take re these terribly important matters, in any event.
I wish you all the best that this life has to offer a person.
Rob
“There Are Thousands of Economists Who Would Like to Be Exploring The Implications of Shiller’s Research and Writing About Them on a Daily Basis.”
Thousands of Economists? Can you even name 10 of them? I would like to check in with them to see if they agree with you.
Drop the death threats, drop the demands for unjustified board bannings, drop the tens of thousands of acts of defamation, drop the threats to get academic researchers fired from their jobs, and you will hear from all of them, Pink. There are lots of good and smart people in this world. Many of them would be thrilled to do honest work in the investing advice field. But they want to know that they will be protected from Goons like you before they do so. That’s why as a society we enacted laws against financial fraud. Until those laws are enforced, we cannot persuade people to say publicly what they truly believe about the Buy-and-Hold garbage.
Academic researchers have degrees in economics. Rob Arnott asked a group of them attending a conference how many still believed in the Efficient Market Theory, the core principle of the Buy-and-Hold Model. Three or four hands went up. Then he asked how many still did research rooted in an assumption that the Efficient Market Theory is valid. Nearly every hand in the room shot up. All of those researchers would LOVE to feel free to do honest work. Once prison sentences are announced for you and the other Goons, they will feel safe to do honest work again. We all should want to see that.
There were a number of economists at the Wharton School who published an open letter in the days following the crash of 2008 saying that they would like to see a code of ethics adopted in the economics profession so that those working in that field would tell people when once-popular ideas have been discredited by subsequent research. Buy-and-Hold was discredited by Shiller’s 1981 findings and, had economists called out the Wall Street Con Men who continued to push their smelly Buy-and-Hold garbage even after we learned that there is precisely zero chance that it could ever work for a single long-term investor, we wouldn’t be in the mess we are in today.
I agree that economists should follow some minimal standards of integrity. However, I don’t really think that they need to adopt a code of ethics before telling the truth about these matters. I have run into LOTS of people who very, very much would like to warn people about the Buy-and-Hold Lies. I think people should just DO IT without waiting to get “permission” via some fancy code of ethics. We have seen in our 12 years of discussions re whether we should be permitted to post honestly re the last 33 years of peer-reviewed research that there are MILLIONS of middle-class people who would like to hear the truth (most believe that they ARE hearing the truth, as I did prior to the evening of August 27, 2002, when Greaney put forward his first death threats).
We all are in the same boat. We all want to overcome the economic crisis. We all want to be able to achieve decent middle-class retirements. We just need to work up the courage to stand up to the Wall Street Con Men and their Internet Goon Squads and all of the nasty, ugly part of this is over. The Wall Street Con Men are paper tigers. They have lots of money and lots of power and lots of influence. But those of us who want to engage in honest discussions far outnumber them. If the Wall Street Con Men had total control, we never could have had laws enacted calling for prison sentences for those who engage in financial fraud. Is that not so?
“Checking in” won’t get the job done without the announcement of prison sentences. I once checked in with the board community at the Motley Fool site as to whether they thought honest posting re the errors in the Old School retirement studies should be permitted. Outside of you Goons, it was unanimous. But those people are not willing to stick their necks out without seeing that they will be protected from you Goons when they do so. Having laws against financial fraud is great. But those laws don’t help us in any practical way until they are ENFORCED.
I hope that helps a bit, Pink.
My best and warmest wishes to you and yours.
Rob
What do you think it means to say “valuations affect long-term returns” if it does not mean that a portion of investors’ current portfolio value is Pretend Money?
The price of apples fluctuates based on many factors. If today’s price is $1, I have an asset worth $1, and can sell it for that price. There’s no pretend money at all.
“Drop the death threats, drop the demands for unjustified board bannings, drop the tens of thousands of acts of defamation, drop the threats to get academic researchers fired from their jobs, and you will hear from all of them, Pink. ”
I am not aware of any economists that are banned from any of the main boards.
The price of apples fluctuates based on many factors. If today’s price is $1, I have an asset worth $1, and can sell it for that price. There’s no pretend money at all.
If today’s fair price for an apple is $1 and someone tries to sell an apple for $3, there are ways to find out that that person is overcharging. People do that. They compare prices. Then they refuse to buy apples that are being sold at insanely inflated prices. It is that process of comparing prices that is the magic that makes free markets work. Price discipline is the magic that permits markets to get prices right. Deny the participants in a market the information that they need to act in their own self-intersts and you destroy that market.
The stock market is just like any other market. The market participants are naturally drawn to correcting mispricings because it is in their self interest to buy more stocks when prices are good and to buy fewer stocks when prices are insanely inflated. The difference in the stock market as it has come to operate in the Buy-and-Hold Era is that the Wall Street Con Men and their Internet Goon Squads have made it impossible for market participants to obtain the information they need to act in their self-interests and thereby to exercise price discipline and set prices properly. It is because of the massive act of financial fraud that we have seen in the 33 years since Shiller published his research showing that there is precisely zero chance that a Buy-and-Hold strategy could ever work for even a single long-term investor that we are in an economic crisis today and that we have millions of people on the way to experiencing failed retirements.
It is not reasonable to compare the stock market with any other markets until we work up the courage as a society to enforce the laws against financial fraud. Once your prison sentence is announced, “Buy-and-Hold” will become an obscene phrase among investors. Investors who are able to engage in discussions of what the last 33 years of peer-reviewed research tells us about how stock investing works in the real work will act in their self-interests and will see that mispricings are corrected.
Was there no Pretend Money in the Madoff fund?
The only difference between the Madoff fund and Buy-and-Hold is that in the promotion of Buy-and-Hold we have seen financial fraud on a scale 5,000 times bigger. Madoff’s lies causes thousands of failed retirements. The Lindauer/Greaney/Bogle lies are in the process of causing MILLIONS of failed retirements. There is no comparison re the scope of the two acts of financial fraud. But the core principle — a mountain of deceptions that aims to exploit the Get Rich Quick impulse that resides within us all — is identical.
Rob
I am not aware of any economists that are banned from any of the main boards.
There are HUNDREDS of articles at this site exploring the threats that were made to destroy Wade Pfau’s career if he continued to publish honest research on the superiority of Valuation-Informed Indexing over Buy-and-Hold. Wade holds a Ph.D. in Economics from Princeton University. Wade is not banned from any board so long as he is willing to commit financial fraud. But he made clear in scores of e-mails to me that he believed that he was bound by the ethical standards of his profession to publish honest research. Wade made clear in those e-mails that he came to understand when Jack Bogle did nothing about the Mel Linduaer matter that he would indeed be banned from every board and indeed from doing any further work in the field in which he was schooled if he continued to publish honest research and to promote it to the millions of middle-class workers who had been taken in by the Buy-and-Hold Lies from 1981 forward.
Once your prison sentence is announced, Wade will be posting honestly again. Wade will be testifying at your trial. And the e-mails in which he expressed a desire to publish honest research and in which he expressed his excitement about his discovery of the danger that continued promotion of the Buy-and-Hold Lies posed to millions of investors will be presented to the members of your jury.
I am sure.
Rob