Set forth below is the text of a comment that I recently posted to another blog entry at this site:
A lot of people think that I am pretty darn harsh in my assessments of the Buy-and-Holders. I say that there is zero chance that Buy-and-Hold can ever work for a single long-term investor. I say that the relentless promotion of Buy-and-Hold strategies was the primary cause of the economic crisis. I say that a good number of the Goons will be sent to prison following the next price crash. I say that Old Saint Jack himself is at risk of being found guilty of financial fraud. And on and on and on. You get the idea.
I stand by all those statements.I don’t make statements like that lightly. It took me years to understand what is going on here well enough to understand that statements like that MUST be said if we are to overcome this economic crisis. Once I saw clearly that that was the case, I started saying things like that and without apology.
Those statements are NOT truly negative statements. On the surface they obviously are. But when you acquire a deep knowledge of what is going on here, you come to see that those statements have a positive side to them. I am going to try to explain to you what I mean because you seem to have at least some willingness to learn the full reality here and this aspect of things is very, very, very important.
The Buy-and-Holders are good people. The Buy-and-Holders are smart people. Eugene Fama DESERVES the Nobel Prize he was awarded last year. Jack Bogle is properly viewed as a hero to millions of middle-class investors. He is a giant. He is the second most important figure in the investing advice field. The Goons who terrorize this board on a daily basis have helped me appreciate about a dozen different, important insights. They teach me new stuff all the time.
I thought I said that they threatened to kill my wife and children. Now I am saying that they teach me stuff all the time. That makes no sense. That cannot be. That’s crazy.
It is a little on the crazy side. But it is so all the same. To really understand why you were banned at that board, you need to go all the way back to Adam Smith. Adam friggin’ Smith! That’s colonial days! Adam Smith was a very smart guy who got one thing terribly wrong. And his mistake was copied by hundreds of thousands of economists through the years. And now, about two Centuries later, the false idea that Adam Smith has put in millions of minds had led to you, Canuck, being improperly banned from an internet discussion board. That’s really what happened.
Adam Smith is the guy who is credited with putting forward this idea that humans act in their self-interest when making money decisions. Our entire economic system is built on that idea. And it is wrong. It is not so! That’s why we are in an economic crisis today. We need to fix that error. And all the schools teach that error in all the textbooks. That’s why it is so hard to get it fixed.
The most likely annualized 10-year return on the purchase of an index fund in 2000 was a negative 1 percent real. That’s just math. You do a regression analysis on the 140 years of return data available to us and that’s the number you get. TIPS were paying 4 percent real at the time. So you gained 5 percentage points of return by switching from stocks to TIPS. Not for one year. For 10 years running. That’s a total differential of 50 percent of the initial portfolio value. Increasing your portfolio value by 50 percent lets you retire years sooner, even decades sooner. It’s investor heaven!
So why didn’t millions of investors make the switch?
And why didn’t thousands of experts tell them to do so? Experts want to become famous, right? Showing people how to retire years or even decades sooner would certainly do the trick. So why didn’t we have experts falling over each other to spill the beans back in 2000?
It’s that darn Adam Smith fellow who messed everything up!
Smith taught that we are all rational people making rational choices re our money. That was always wrong. We are PARTLY rational people but we are also largely emotional people. It didn’t matter so much for many years that the economists got this wrong because most people don’t pay all that much attention to what economists say. They say silly stuff all the time. But so long as it doesn’t hurt people, who really cares? They make up silly stories in their ivory towers and the world keeps on turning just as before. No biggie.
That was all so UNTIL EUGENE FAMA TOOK SMITH”S IDEAS AND APPLIED THEM TO HIS THEORY ABOUT HOW THE STOCK MAKRET WORKS.
That’s what Fama did. That’s what Buy-and-Hold is. Buy-and-Hold is the theory of how the market works that is rooted in the idea that investors are RATIONAL actors. They are NOT. But Buy-and-Hold PRETENDS (with no evidence whatsoever — there has never been a single study supporting the Buy-and-Hold concept and this reality can be checked by anyone who cares to know for sure) that they are. And, unlike the Rational Man theory of economics, when people invest their retirement money pursuant to this “idea,” real stuff happens. Real bad stuff.
Fama took Smith’s idea and gave it application in the real world. And the losses that inevitably followed have already been large enough to bring on the biggest economic crisis in U.S. history. And we have another 65 percent price crash on the upcoming agenda! Flawed ideas applied in the real world can have really, really, really bad consequences for millions of people.
I said that this stuff has a positive side to it.
The positive side is that at least the Buy-and-Holders were trying to make stock investing a scientific enterprise! No one had ever done that before. Prior to Fama, most investing advice was guesswork. That’s not so today. Today there are studies. The studies get all the numbers wrong. That’s unfortunate. But now that we all accept the idea (first advanced by our Buy-andf-Hold friends!) that investing analysis should be rooted in peer-reviewed research, what is to stop us from permitting HONEST AND ACCURATE research, research that corrects the errors made by the Buy-and-Holders and that thereby helps millions of middle-class people to invest far, far, far more effectively than they ever have before.
I am the co-author (with Wade Pfau — Wade holds a Ph.D. in Economics from Princeton) of peer-reviewed research showing investors how to reduce the risk of stock investing by 70 percent. Not bad for a fellow who never went to investing school and never managed a big fund and whose only expertise in this field is that he figured out how to get his words posted to the internet!
If I had shown people how to reduce the risk of stock investing by 10 percent, I would be the toast of the town. Everyone would love me to death. The Buy-and-Holders hate me with a burning passion because showing people how to reduce the risk of stock investing by 70 percent makes them “look bad.”
But so what, you know?
Are they going to be able to keep people from learning about that research after the next price crash? Somehow I doubt it. That research is going to get written up on the front page of The New York Times someday and then we are going to see the biggest Learning Experience ever achieved in this field. Everything is going to be turned upside down. And in a very, very, very positive way.
The Buy-and-Holders are good people. They WANT to do good.
They are in pain because they messed up in the creation of their first-draft effort at a research-based investing strategy.
We need to overcome the Goons. The sooner we do so, the shorter their prison sentences will be. So that’s a win/win/win/win/win.
Once we overcome the Goons, we are all going to some amazing places. Places where it is possible for us all to retire many years earlier and places where investing in stocks is no more risky than investing in Certificates of Deposit.
What I am saying here is not opinion. It is all research-based. It is freakin’ math!
How is it possible?
That’s the one that trips everybody up. No one ever points to any flaw in the Logic Chain I use. What people do is ASSUME that my claims are not good ones because they are so darn grand (so people call them “grandiose”).
How is it possible?
It’s possible because we are overturning that darn Adam Smith guy. We are keeping his good stuff, which is very good indeed. But we are adding a behavioral finance element to it so that the entire thing works for the first time in history. That’s no small change. That is the missing piece, the mistake that has been making stock investing unnecessarily risky for hundreds of years now, the piece that has caused four of the four economic crises suffering in the United States since 1870.
Remember, the Buy-and-Holders are good people. So the Buy-and-Holders want this.
We have no opposition. We cannot lose!
Our only opposition is a temporary force. It is that voice within the Buy-and-Holders that says: “I cannot acknowledge having made a mistake, it is too, too terrible a reality!”
All that shows is that the Buy-and-Holders deep in their hearts want to get it right.
Which is a good thing.
The Buy-and-Holders are going to be switching sides in the not-too-distant future.
I am going to take a break to cool off a bit. Then I will be back with some exploration of the question of HOW we are going to make the Buy-and-Holders flip.