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.
Huh?
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.
Okay.
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.
Rob
There were crashes before and after Fama. So net-net he has had no effect in that respect. We can credit him with getting a bunch of buy and holders and DFA fund holders very good long term returns.
The cause of crashes is the Get Rich Quick impulse that resides within all of us, Laugh.
Fama did not create the Get Rich Quick impulse. We all had a Get Rich Quick impulse within us before he came along. So I can agree with you that Fama did not cause the crashes that we experienced before he came on the scene.
But he certainly played a big role in the slow-leak crash that we experienced from 2000 through 2008 and in the dramatic but temporary crash that we experienced in late 2008./early 2009. Those two crashes came after Shiller showed us how to avoid crashes — to always, always, always emphasize the importance of price discipline (long-term timing) in every article or book discussing investing strategy. Fama said that it was not 100 percent necessary to always, always, always practice long-term timing. So he was very much responsible for the two crashes that brought on today’s economic crisis.
And Fama obviously did not help anyone obtain good returns. It was the U.S. economic system that did that. Fama made a mistake that brought on the biggest economic crisis in our history. How could making such a horrible mistake ever help anyone? That makes no sense at all. Fama hurt us all by making that mistake. He hurt us in a very serious way. He should have corrected the mistake as soon as it was brought to his attention. And all the rest of us should have demanded that he do so.
All that said, I am fine with Fama being awarded the Nobel prize. The mistake he made re long-term timing is not the only thing with his name on it. Fama also showed the short-term timing never works. That was huge. There would be no Valuation-Informed Indexing today had Fama not done the research that generated that breakthrough insight. So Fama did help us all in a very very big way.
He hurt us more than he helped us. On a net basis, Fama’s role has been a negative one. But once the mistake is corrected (Dear Lord, please let it happen soon), Fama’s role will change from being a very, very negative one to being a very, very positive one.
There were crashes before Fama. But never in the past have we experienced a crash equal to the one we are in the process of enduring today. Fama is one of the people most responsible for that.
Also, we are a far richer people today than we were in pre-Fama days. So crashes did not hurt us as much. They hurt us big-time. The Great Depression caused a vast amount of human misery But the P/E10 level that caused the Great Depression was not nearly as insane as the P/E10 level that brought on today’s economic crisis. Fama has done a great deal of harm to millions of people.
And, no, his Get Rich Quick stuff added nothing. All of the people who earned big returns by investing in stocks would have earned even bigger returns had they not gone with a pure Get Rich Quick strategy.
To the extent that Fama steered people away from short-term timing, he helped people. He helped millions of people in that respect. But that’s as far as the positive side of the Eugene Fama story goes. He needs to correct the error to make his contribution an overall positive one.
I hope that helps a bit.
Rob
I have been building my portfolio for 25 years, just like many others. Hardly a get rich quick scheme………unlike market timing.
So, you are saying any crashes post-Fama research can be attributed to Fama’s research.
The empirical evidence is otherwise. There were crashes before and crashes after. The research did nothing to change that, and neither does your ‘research’.
All of the research (Shiller/Wade/Fama/etc) has the benefit of the Internet and is publicly available. It changes nothing with respect to market crashes.
Your ability to post long meandering meaningless posts on message boards has even less effect on market crashes.
I have been building my portfolio for 25 years, just like many others. Hardly a get rich quick scheme………unlike market timing.
You’re wrong, Anonymous.
Going 25 years back takes us to 1980. Stock prices at that time were insanely low. So the gains you experienced for the first 15 years were real enough. I will give you that one.
But the gains from 1996 through 1999 were mostly emotion. Those gains were not real and it was a mistake for you to treat them as real.
From 2000 forward stocks have offered a return of half of what you could have gotten from a risk-free asset class (TIPS). So you were not effectively building your portfolio in those years.
We exercise price discipline by engaging on long-term market timing. It’s 80 percent of the game. There is now 34 years of peer-reviewed research (based on 140 years of historical return data) showing this.
Your own behavior shows that yo have doubts re Buy-and-Hold. If you had confidence in it, you would not behave this way.
Rob
There were crashes before and crashes after. The research did nothing to change that, and neither does your ‘research’.
The entire point of research is to help people learn the realities, Laugh.
Fama’s mistake caused millions to have confidence in a Get Rich Quick approach to stock investing. Yes, we were drawn to GRQ even before Fama came along. But his mistake made things far, far worse. The highest P/E10 level we ever saw before Fama was 33 (that P/E10 level caused the Great Depression). Fama. This time we went to 44. How is that not worse?
Humans have always been drawn to GRQ. But we have also feared it. We all possess a GRQ urge. But we all also have common sense. So the usual rule is that we go to a P/E10 of 25 and then crash. The losses in that case are much less than what they were in the Great Depression, when we went to 33, or than what they will be in the current economic crisis, which was caused by a P/E10 of 44.
The difference is that Fama told people that there was research supporting the pure GRQ approach. That caused us all to go more insane than we have ever gone before. There are millions of middle-class people who want to invest safely. So they aim to follow the research. The Wall Street Con Men have been lying to them for 34 years now, telling them that there is research supported Buy-and-Hold when of course there is none.
GRQ Sells/ Research-based works The Wall Street Con Men are torn. They want to help people. But they also want to make a buck. Telling people that Buy-and-Hold can work is the easiest way in the world to make a buck. But it destroys the economic system. They were able to get away with it for years because prices were so insanely low when Shiller published his “revolutionary” (his word) research. But now the decades of relentless promotion of the purest GRQ scheme ever concocted by the human mind has caused millions to lose their jobs and is in the process of causing millions to suffer failed retirements. Not good.
The errors in Fama’s research made things much, much worse.
My research, and the research of lots of other people who have done honest work in this field, would help. But we need to get that research before people for it to do any good. For that, we need to hear announcements of prison sentences for you Goons. The announcement of those prison sentences will flip everything. I am sure.
All of the research (Shiller/Wade/Fama/etc) has the benefit of the Internet and is publicly available.
Yes and no. The product of Fama’s discredited research (Buy-and-Hold) is discussed at hundreds of discussion boards and blogs. Discussion of the implications of Shiller’s “revolutionary” advance is banned at every large board and blog on the internet. Again, the announcement of your prison sentence will change that dramatically. The announcement of your prison sentence is the critical next step in humankind’s effort to learn how stock investing works in the real world.
My best and warmest wishes to you.
Rob
“You’re wrong, Anonymous.”
No, you are wrong, Rob. Would you like to compare numbers? I am happy to share my financials if you share your financials. Are you man enough to do that?
I go by peer-reviewed research, Anonymous.
That’s what I believe in.
If you want to believe in something different, feel free.
But I wouldn’t be even a tiny bit convinced that VII is superior to BH even if my portfolio were 20 times the size of yours. I would need to see peer-reviewed research to have confidence in it.
If I saw peer-reviewed research supporting Buy-and-Hold, that would cause me to adjust my views. But nothing else can do the trick.
I believe that we all should be using the peer-reviewed research in this field as a guide re how to invest. Guess who taught me that one? A fellow named Jack Bogle. Nice guy. Smart too. You should check him out.
Rob
Internet discussion boards are irrelevant to market crashes. Crashes occurred before Internet discussion boards and occurred after. People learned things about investing before message boards and learn things after without using them.
The information you refer to as groundbreaking etc is publicly available and is totally irrelevant to market crashes. It was publicly available before the Internet even existed, just like Fama’s.
Your entire campaign is completely and utterly irrelevant.
I disagree, Laugh.
Yes, there have been crashes before the internet came along. But Shiller’s “revolutionary” (his word) findings of 1981 made market prices self-regulating so long as investors had some means to gain access to honest and accurate reports of what the research says. The Wall Street Con Men engaged in a cover-up. But it became impossible to continue that cover-up once the internet became available to us all.
Then you Goons stepped in to continue to cover-up, the most massive act of financial fraud in U.S. history. Without the criminal acts of you Goons, Buy-and-Hold would have died 13 years ago. There would have been no economic crisis. We would today be enjoying the greatest period of economic growth in U.S. history had you Goons been sent to prison when your crimes became public knowledge to many of the top names in this field.
The information that people need to know is NOT publicly available. I did not know that Buy-and-Hold was a Get Rich Quick scheme in April 2002. Not did John Walter Russell. Nor did Wade Pfau. Nor did the thousands of others who have expressed a desire that honest posting be permitted on the internet.
We didn’t know because we thought that the investing industry was operating on the level. We need to get the word out that that is not so to every investor on the planet. The story will go viral when your prison sentence is announced. Then every investor who has suffered losses as a result of the massive cover-up will know who to sue for the recovery of damages. There will be hundreds of law firms formed just to take these cases. Our nation will rebuild. I am sure.
I naturally wish you the best of luck with all your future life endeavors regardless of what investing strategies you elect to pursue.
Rob
Um, except the papers are all available publicly and have been read by thousands and tens of thousands of people without any barriers. There is no cover up. The information is freely available and well known (as well known as any Nobel prize winning research). It has had no effect on market crashes.
You say there is a cover up but any individual in the world can download the information and act upon it without any inhibitors. The barriers you have created you have built yourself within the confines of your fevered mind.
If financial fraud did not make any difference, we would not have enacted laws protecting ourselves from the sorts of individuals who engage in acts of financial fraud.
Following the next crash, you Goons will be sent to prison and the rest of us will do just fine taking advantage of what we have learned from the last 34 years of peer-reviewed research.
I wish you well, Laugh.
Rob