Set forth below is the text of a comment that I recently posted to the discussion thread for one of my columns at the Value Walk site:
Or to put it another way, all those experts are lying and only Rob Bennett is truthful, or it is just the opposite.
Have you ever heard the term “cognitive dissoance,” Sammy? It’s a real thing. It would be helpful if you would use the term “cognitive dissonance” rather than the word “lying.” It would greatly facilitate progress in these discussions if you used the less inflammatory terminology.
I became famous (infamous?) on the internet for pointing out that the Old School safe-withdrawal rate studies get the numbers that people use to plan their retirements wildly wrong because they do not contain adjustments for the valuation level that applies on the day the retirement begins. Shiller showed that such adjustments are required. If you don’t include the adjustments (they would not be required if the market were efficient, which is what people believed prior to the publication of Shiller’s “revolutionary” (his word) research, the safe withdrawal rate is always 4 percent. If you do, the SWR goes as low as 1.6 percent (when stocks are priced as they were in 2000) and as high as 9.0 percent (when stocks are priced as they were in 1982).
In the days prior to my famous post of the morning of May 13, 2002, I often PRAISED John Greaney’s retirement study, a study which does not contain a valuations adjustment. Was I a “liar” in those days?
It would not be entirely unfair to say that. I knew about Shiller’s research the entire time. I had roughly calculated the safe withdrawal rate for my own planning purposes and had determined that it was a number a good bit below 4 percent. So I knew that Greaney’s study got the numbers wrong. And yet I praised it. I encouraged my friends to use this dangerous study to plan their retirements. I was a liar, was I not?
My problem with the use of the word “liar” in this case is that I had no intent to hurt anyone. Greaney’s study was a big advance over what came before it. Peter Lynch at one time was telling people that the safe withdrawal rate was 7 percent. It was the Old School safe-withdrawal-studies that showed why Lynch was wrong. The true SWR at the top of the bubble was 1.6 percent. The Greaney study was a whole big bunch closer to getting the number right than Lynch was and Lynch himself is of course a highly respected expert in this field.
The reason why I didn’t tell people that Greaney got the number wrong is that Greaney and his study were very popular at the board at which I was posting and I feared that I would be criticized and attacked if I told people what I knew about the flaw in the study. I was of course ultimately proven right about those concerns. I have been attacked viciously by the Buy-and-Holders in the days since I put forward my post pointing out that the Greaney study does not contain a valuations adjustments, which is of course a 100 percent valid claim.
Why did I tell these “lies” for three years? I wanted to be popular. We all do. It’s human nature to want to be popular. And I was able to come up with a pretty darn good rationalization for the “lies” that I was telling. The Greaney study was a huge advance. “It’s better to focus on the positive rather than the negative” I told myself. “Why cause people to lose confidence in a study that is doing a lot of people a lot of good?”, I asked myself.
I was a “liar.” That’s a fact. But still I put the word “liar” in quote marks. Because it is a funny sort of lie. I was facing intense social pressures not to tell the full truth. And I had a rationalization at hand to justify my behavior that I think it would be fair to say made a pretty darn compelling case for the lie. So I did what I did.
That’s what all of the experts in this field are doing today.
Buy-and-Hold is rooted in the research of Eugene Fama. Valuation-Informed Indexing is rooted in the research of Robert Shiller. Both men have been awarded Nobel prizes. They say opposite things. That cannot both be right. Our entire nation needs to know which Nobel prize winner is right and which Nobel prize winner is wrong. We need to launch a national debate aimed at getting to the bottom of this question.
I really was a liar for those three years. But there were circumstances which to a large extent explained the lies I told. The people who today fail to point out the dangers of Buy-and-Hold given what the last 34 years of peer-reviewed research tells us about how stock investing works in the real world really are liars. But they face those same circumstances that pressured me into telling the lies that I told. I think it would be better to refer to the problem as “cognitive dissonance.” I think that that way of handling things helps us all to pull together to solve the problem rather than to split apart in anger.
Shiller’s findings advanced the ball in a major way. We all want to enjoy the benefits of that advance. To get what we all want, we are going to need to start speaking in ways that don’t put people on the defensive. We absolutely need to say that retirement studies that don’t include valuation adjustments are dangerous and irresponsible. But we do not need to by nasty about it. We should be trying to soften the blow that we deliver to the Buy-and-Holders when we point out their errors by noting the huge number of genuine insights that they advanced and by noting that it is a universal human phenomenon that we all tend to rationalize when we are emotionally invested in an idea and then see evidence come in showing that that idea is not as strong as we once believed it to be.
I hope that helps a bit, my long-time Buy-and-Hold friend. I think your investing beliefs are in error. But I do not dislike you as a person. I am trying to give you something to think about that I think might end up doing you a lot of good down the road a piece.