Set forth below is the text of a comment that I recently posted to another blog entry at this site:
The stock market continues to drop and it is being blamed on the drop in oil, the slowdown in China and the change in interest rates. For your plan to work, the blame needs to be pushed on buy and hold. What will cause people to blame buy and hold versus economic issues, such as what is being blamed in the current market?
What you say here is correct. It is the overvaluation caused by the continued promotion of Buy-and-Hold strategies that is the primary cause of the price drops. Prices ALWAYS drop hard once they reach insanely dangerous levels. Economic factors can be a secondary factor. For example, changes in interest rates can be the precipitating factor in changing investor psychology. But it is the investor psychology itself that is the primary factor causing stock price changes. When prices are as high as they are today, we are going to see price drops. The economic factors can of course influence the timing of the price drops.
Everyone will properly blame the promotion of Buy-and-Hold strategies once they are educated as to the implications of the last 34 years of peer-reviewed research. To educate people, we need to open every discussion board and blog on the internet to honest posting on safe withdrawal rates and scores of other critically important investment-related topics. That’s it. No one wants to endure a deepening of the economic crisis. We just need to collectively permit ourselves to benefit from the reality that we are the luckiest generation of investors ever to walk Planet Earth and then we make it over the Big Black Mountain and bring on the greatest surge of economic growth ever seen in our history.
The key is getting people to abandon their Buy-and-Hold fantasies. So long as people continue to delude themselves into thinking that the numbers on their portfolio statements are real, they view the last 34 years of peer-reviewed research as a threat to their ability to fool themselves. Once the Pretend Gains are gone, there will no longer be any appeal in self-delusion. Then we will all be working together to achieve learning experiences, just as we today do in every field of human endeavor other than stock investing.
We obviously would have been better in about 500 different ways if we had launched a national debate re these matters back on the morning of May 13, 2002. That said, the good news here is 50 times better than the bad news here is bad. It takes what it takes. No one is going to question whether this was worth the effort it took to get us turned around after we get to the other side and we are all obtained far higher returns at greatly reduced risk. It’s a process. We are today on the one-yard line. We are a blessed people.
I hope that helps a bit, my long-time Goon friend.
I naturally wish you the best of luck in all your future life endeavors.
Rob
Anonymous says
If everyone keeps blaming other issues (oil, China, etc), how will they ever come to your conclusion and be “educated” as you state?
Rob says
Look at how we all become educated re every other subject under the sun, Anonymous.
We talk about stuff. We learn new things and we share what we have learned with each other. That’s how it works with everything other than stock investing. That’s the only way it can work. We will all learn everything that we need to learn about stock investing when we treat stock investing like every other subject.
Why don’t we treat stock investing like every other subject? That’s the $600,000 question.
Ironically, it’s because investing is so darn important.
You would think that we would want to learn about subjects that are super-important even more than we want to learn about subjects that are of just average importance. But the reality is that it works out just the other way. When something is as important as how we go about investing for retirement, we cannot bear the pain of coming to realize that we have for a long time been getting it very, very wrong. Incorporating new knowledge requires an acknowledgment that for a time we did not possess perfect knowledge. It is relatively easy for us to acknowledge that re subjects of ordinary importance. It is brutally hard to acknowledge that re subjects of great importance.
Have you ever had a friend who became an alcoholic? It’s hard to convince alcoholics that they need to make changes in how they live their lives. Many alcoholics are smart people. Their friends see that they are destroying their lives. They want to help. The things that they are telling the alcoholics are perfectly obvious. Why can’t the alcoholics see that? Why can they understand lots of things and yet not understand this perfectly obvious and terribly important thing?
They cannot bear to see how much they have hurt themselves and others with their alcoholism.
To say “I am an alcoholic” means accepting that you have done great harm to yourself and to your loved ones for many years. The alcoholic gets this intellectually. He cannot act on the knowledge because he cannot bear to accept what his mind tells him. He lives in denial of obvious realities.
So it is with Buy-and-Holders. You understand that Shiller’s 1981 finding that valuations affect long-term returns truly was a “revolutionary” (Shiller’s word) finding, that nothing in our understanding of how stock investing works will ever be the same again. You get it that, if Shiller is right, Bogle’s investing advice is insanely dangerous and is in the process of destroying millions of lives. But you cannot bear to let this knowledge into a part of your consciousness where you could act on it any more than an alcoholic could accept that his drinking has caused him to lose his health and his family and his career and his self-respect.
There’s a saying about alcoholics that they need to hit bottom before they can begin rebuilding their lives. When someone lands in the gutter, he loses his pride enough not to care anymore about the pain associated with acknowledging mistakes. At that point, he becomes so desperate that he will do anything to overcome his problem.
So it will be with Buy-and-Holders. If stocks continue to perform in the future anything at all as they have always performed in the past, the continued promotion of the smelly Buy-and-Hold garbage will put us in the Second Great Depression. That’s a lot of pain for millions of people. We will all want to end that pain. We won’t be so worried anymore about the loss of pride associated with having made a mistake. We will just want the mistake to be fixed. We will see that we are all in this together and we will all pull together to get the word out about what the last 35 years of peer-reviewed research tells us. We will all be on the same side at that point. There will be no more friction.
We will achieve 35 years of insights overnight. It will be amazing.
I wish that we could have done this properly back on the morning of May 13, 2002, or, even better, back in 1981, when we first gained the one big piece of the puzzle that had been missing since the day Buy-and-Hold was born back in 1965. But of course the alcoholic wishes that he had never lost his health or his family or his career or his self-respect. Things are what they are. Looking backwards doesn’t serve any constructive purpose.
We need to look forward. We all benefit from learning about Shiller’s findings. We are the luckiest generation of investors ever to walk Planet Earth.
But some of us are not today able to accept our good fortune. Doing so requires saying the words “I Was Wrong” or at the bare minimum “I’m Not Sure.” When things get dark enough, I believe that my good friend Jack Bogle will say those words. Then it all flips. Then the long national nightmare comes to an end. Lots of people want to make reputations for themselves and become multi-millionaires helping people learn how stock investing works in the real world. They don’t want to see their careers destroyed in the process of doing it. Once Bogle acknowledges his mistake, people will not be afraid anymore and the long-delayed national debate we all need to see take place will begin.
My take.
Rob
Anonymous says
I thought you always said that the ban on open posting would take a crisis to be relaxed. And this relaxation of the ban is what it takes to educate people. However, if the crisis is never assigned to buy-and-hold because people are not educated, then how or why will the ban be lifted?
Rob says
Shiller’s book sold millions of copies, Anonymous.
There were hundreds of posters at Motley Fool who responded to my May 13, 2002, post pointing out the errors in Greaney’s retirement study by saying that I had kicked off the most interesting discussion we had ever had at that board.
Wade Pfau loved the idea of doing honest research before you Goons threatened to destroy his career if he continued and Bogle indicated that he would back you up.
Shiller was awarded a Nobel prize for his “revolutionary” (Shiller’s word) research.
John C. Craig and Microlepsis were two of the most popular posters at the Morningstar board. People LOVE posters who post honest, research-backed stuff. Outside of you Goons, people absolutely LOVE them.
We have laws making the tactics employed by you Goons felonies punishable by prison time.
All of these realities evidence a society that hates the tactics that are employed by the Buy-and-Holders. We are not far away re this one. We are on the one-yard line.
The tactics employed by the Buy-and-Holders are desperation tactics. People don’t employ death threats when they perceive that they are holding a winning hand. People employ death threats when they perceive that their position is hopeless. The Buy-and-Holders themselves have zero hope that they can hold up in their end of the argument in a reasoned debate.
People are afraid. The Wall Street Con Men have lots of money and power and influence and have shown a ruthless willingness to do anything to destroy those who “cross” them by telling the truth about what the last 35 years of peer-reviewed research tells us. People don’t want to see their careers destroyed. People don’t want to see their loved ones threatened with physical violence. That fear is the only thing keeping Buy-and-Hold going at this point in the proceedings.
The calculation changes following the next price crash.
There are millions of dollars to be made promoting the first true research-based strategy. The downside is that the Buy-and-Holders will do everything in their power to destroy you if you dare to “cross” them. Part of the reason why they can get away with making threats is that millions of middle-class people don’t like to hear criticism of Buy-and-Hold because they are following it themselves and cannot bear to acknowledge the mistake they have made. Do you think that those people are going to feel the same way about it after they have lost most of their retirement money? I sure don’t.
You should look at what happened with the people who fell for Bernie Madoff’s Get Rich Quick scheme. Those people “knew” on one level of consciousness that he was working a con before it was publicly exposed. The numbers did not add up. There were people who publicly said that he was working a con. Anyone who wanted to could have figured that out. The problem is that the many people who had been taken in by the con didn’t want to know. So they pretended that they didn’t know. And the con continued.
When the Madoff con was exposed, there was a guy at a discussion board who said: “Oh, the Madoff fund wasn’t a con — I made millions!” He got out before the Get Rich Quick scheme collapsed and so to his mind it was all legitimate. He said all of the same things that you Goons say about Bogle every day — ‘I’ve got my money so this guy is aces!’ But what happens when you don’t have the money anymore? Does the appeal of Get Rich Quick fade when you see that you have been taken?
That’s what happens, Anonymous. You are not going to be a Bogle fan following the next price crash. You won’t hate Rob Bennett after most of your retirement money is gone. Do you know who you will hate then? Jack Bogle. Mel Lindauer. John Greaney. The thing that binds you to them today (your desperate hope that this will be the first Get Rich Quick scheme that will pay off in the long term) will be gone when the money is gone. The appeal of Get Rich Quick schemes is the Pretend Money that the marks convince themselves they have been smart enough to “earn” for themselves.
When you are angry at Bogle, you are not going to be posting abusively to block the millions of people who want to know what the peer-reviewed research says from hearing it. There’s not going to be any trouble getting the word out then. This site is going to take off like a shot. It will be the #1 personal finance site on the internet.
Live by emotion, die by emotion. The appeal of Buy-and-Hold is 100 percent emotional. There is no there there. It is a con. A Ponzi scheme. A Get Rich Quick scheme. A lie. A fraud. A felony. Prison time. We all know this intellectually. It’s not hard to figure it out. Thousands of people have taken a look at the Greaney retirement study. Not one has ever found an adjustment for the valuation level that applies on the day the retirement begins. That’s because there isn’t one. The entire thing is a con. That’s not even a tiny bit hard to see.
The hard part is getting people to acknowledge the con for so long as their ability to retire at a reasonable age depends on the Pretend Money being real. People will tell themselves any sort of lie to keep from acknowledging that they have been taken. But marks don’t remain marks after the Pretend Money is gone. The con men need that Pretend Money to remain in place to be able to keep the con going. Following the next price crash, the Pretend Money is gone. So the con goes down.
I hope that helps a bit. I knew that Buy-and-Hold was going down when Greaney put forward his first death threat and when 200 of my friends at Motley Fool endorsed the post. It’s all over when the Pretend Money disappears. And that happens with the onset of the next price crash.
Do you know what my biggest problem will be then? Keeping the millions of people who will have lost most of their retirement money from becoming TOO angry at the Buy-and-Hold advocates. I need them to see the truth. But I also need to keep them restrained enough not to pull our entire system down. That’s one of the reasons why I report on our Goon Conversations. I want people to feel some sympathy for you Goons. I want them to see that you were taken in yourself, that you too were conned.
I want them to see that that’s so at least in part for people like Bogle and Shiller and Wade Pfau and on and on (and, yes, once upon a time for Rob Bennett too). I want people to get angry enough to stand up to the Wall Street Con Men and their Internet Goon Squads but no more angry than that. If people get too angry, we lose all that we otherwise would have gained by becoming just angry enough to insist on reasonable enforcement of our laws against financial fraud.
It’s not easy to find that middle ground. My job is to steer things to that middle ground. If I manage to pull it off, we all end up in a magical place. The good news here is 50 times more good than the bad news here is bad. We can not only survive this economic crisis, we can bring on the greatest surge of economic growth ever seen in our history. We just have to keep our anger under control. That won’t be easy to do once we see how we have been taken. But that’s the job.
This is why I call it a Conspiracy of Ignorance. The Buy-and-Holders are not bad people. They are imperfect people, people who at times let their emotion overcome their reason. We have all been guilty of that from time to time. We need to feel sympathy for the Con Men and for the members of their Goon Squads. They are humans underneath their goonishness. They have been taken too. They started out this journey not knowing how stock investing works — Buy-and-Hold started in 1965 and Shiller didn’t publish his “revolutionary” (Shiller’s word) research findings until 1981 — and got caught up in something bigger than them.
The bottom line is that everything changes following the next crash. We are fighting a wall of emotional resistance and the wall falls when the Pretend Money disappears. Then we have to pull things together. We need to avoid the inclination to want to get even or to want to hurt the people who have lied to us. We need to enforce the laws, of course. But we need to do so in a reasoned and restrained and charitable way. We need to keep out negative emotions in check. We need to empower our better selves.
Get Rich Quick schemes fail in the end. Always. There has never been an exception. Buy-and-Hold is not going to be the first exception. I am sure.
Rob
Anonymous says
“The bottom line is that everything changes following the next crash.”
Why? Nothing changed after the last crash. Wade himself pointed that out to you. You said “it’s a process”. But you never explained the process. Explain why the 2008-09 crash brought exactly no one to your side, but the next crash of that magnitude (should you even live that long) will bring everyone to your side.
Rob says
The 2008 crash brought Wade Pfau to my side, along with lots of others. There were a few people at the Bogleheads Forum openly calling Mel Lindauer and Taylor Larimore liars following the 2008 crash. Not enough to get them removed. But that was a big change. We had never seen that before. Had prices not gone back up quickly, they would have been removed and the posters who wanted the board opened to honest posting would have overcome you Goons.
The next crash will be lasting years, not months (I am presuming here that stocks may in the future continue to perform at least something as they always have in the past). And of course we will be dropping to much lower prices. We went to fair-value P/E10 levels in early 2009. No secular bear market has come to an end without us going down to half that.
That will of course affect the feelings that the millions of investors whose lives have been destroyed will have toward the Wall Street Con Men and toward those who have put up posts in “defense” of Mel Lindauer and John Greaney or who have permitted those sorts of individuals to participate at their web sites.
We’ll see how it all turns out in not too long a time. I don’t envy you, Anonymous. I wouldn’t trade places with you for all the money in the world. But I do wish you the best of luck with it, my long-time Goon friend.
I tried to help you out at every stage of the process. I did everything that I was able to do, not a bit more and not a bit less. I knew where this was headed and I felt that I owed even a Goon that much. That probably doesn’t matter much to you at this point. I take note of it because it matters a whole big bunch to me.
Hang in there, man.
Rob
Anonymous says
Prior to the most recent crash, has the market ever crashed over 50% and then recovered to new all-time highs within five years? No? Well, then maybe stocks don’t always “continue to perform at least something as they always have in the past”. Uh oh.
Rob says
The short-term patterns differ. But the long-term patterns repeat over and over again. It’s been playing out that way for 145 years now, as far back as we have records.
That’s because short-term patterns are determined by investor emotion. Emotion is irrational and cannot be predicted.
But the core purpose of any market is to set prices properly. So in the long term the emotion is overcome and we return to fair-value prices. There has never been a single exception. Valuation-Informed Indexing explains the historical record. Buy-and-Hold does not.
Now —
You are of course free to believe in Buy-and-Hold. Lots of smart and good people do. I consider those people friends. So that’s not an issue.
But, if you use abusive tactics (death threats, threats of career destruction, etc.) to block people from learning what the last 35 years of peer-reviewed research says, that’s something different. That crosses a line. That’s financial fraud. That’s a felony. That’s prison time.
If I were to say that I believe that Buy-and-Hold can work for even a single long-term investor, I would myself become guilty of financial fraud. Not interested, you know? Please try to find someone else.
Perhaps you are right. Perhaps I am wrong. It has certainly been known to happen.
But being wrong won’t get me sent to prison. So long as I post HONESTLY, I am on the right side of the line. That’s where I intend to stay.
We will find out together how things play out following the next price crash. Fair enough?
Rob
Anonymous says
145 years is too short to be making these kinds of conclusions. Far too short.
Rob says
I don’t agree.
But I wouldn’t say that the point that you are making here is entirely unreasonable. This is the biggest reason why I say that it is possible that I am wrong. I would like to have ten times the data. I would like to have 1,450 years of returns to look at instead of 145 years. I would be a lot more confident if I had 1,450 years of returns to look at rather than 145 years.
The bottom line remains the same. I believe that the 145 years of historical data available to us tells us something important. I believe in research-based strategies. All of the research available to us is based on that 145 years of returns. Robert Shiller holds a Ph.D. in Economics and he believes that the 145 years of returns tells us something important. Wade Pfau holds a Ph.D. in Economics and he believes that the 145 years of returns tells us something important. Rob Arnott holds a Ph.D. in Economics and he believes that the 145 years of returns tells us something important.
I am going to continue to post honestly re safe withdrawal rates and re all other critically important investment-related topics. Non-negotiable. I have zero willingness to negotiate re this matter.
And I wish all of you Goons the best of luck in all your future life endeavors.
I hope that works for you.
Rob
Laugh says
I think the more likely scenario is that those folks have to work with the data they have and make conclusions with it.
Rob says
It’s not entirely clear to me who you are referring to when you make reference to “those folks.” Do you mean Shiller and Pfau and Arnott? Anyway, I will give the best response that I am able to provide given my uncertainty as to precisely who it is that you are making reference to here.
You are certainly right that we need to work with the data we have and draw the best conclusions we can given what we have to work with. That’s a sensible way to go. Frankly, that’s probably the only sensible way to go.
Still, the reality mentioned above is an important one. We have a limited data set. How does that reality influence this conclusion-drawing process? It means that we should draw tentative conclusions only, not dogmatic ones.
Jack Bogle is a very smart man. Eugene Fama is a very smart man. You Goons are plenty smart enough. So we are dealing with smart people.
But people who don’t know everything. People who don’t always get it all right. Bogle can make mistakes. Fama can. You can.
And we only have 145 years of return data. And we have only been studying that data in a systematic manner since the 1960s. That’s not a very long time for the development of a new field of science. We are in the very early days of this discipline of studying how to invest in a systematic and research-backed way.
So we have to be tentative in how we state things. Greaney shouldn’t have said “4 percent is safe.” He should have said “I think 4 percent is safe.” Or he could have said “there is some reason to believe that 4 percent is safe.” Or he could have said “there is one school of thought that 4 percent is safe.” Or he could have said “there is one school of thought that says that 4 percent is safe and there is another school of thought that says that 4 percent is very risky at today’s valuations — I personally belong to the former school.”
That’s how it has to be done, Laugh. That’s how it is done in every other field of human endeavor.
Buy-and-Hold is one school of thought re how stock investing works, the school that is rooted in the research of Nobel Prize Winner Eugene Fama. Valuation-Informed Indexing is another school of thought re how stock investing works, the school rooted in the research of Nobel Prize Winner Robert Shiller. Both schools are legitimate. I believe strongly in VII and you believe strongly in BH. Neither of us today can say with absolute certainly that we are right. The field is not sufficiently developed today to permit such claims. We can only express tentative conclusions, not dogmatic ones.
If you want to add language to the bottom of every post that I write saying “this guy acknowledges that it is possible that he is wrong about everything he believes about stock investing,” I have no problem with that. I think it is healthy for the people reading my stuff to be reminded of that as often as possible. But I think that in fairness we should also add that language to the posts put forward by Bogle and Lindauer and Greaney. They are flawed humans too. They are working with a limited data set too. The can get things wrong too.
That’s the answer, Laugh.
One of the guys on one of the peer-review committees that rejected the research that I co-authored with Wade Pfau said (I am paraphrasing): “It would be nice if we knew which of the two schools of thought is the right one.” Wouldn’t it indeed!
That guy was mentioning the uncertainty that every honest person in this field experiences as a reason to NOT publish the research that Wade and I prepared. His observation is a reason TO publish it, not to elect not to publish it! We get over this uncertainty by publishing stuff that addresses it, not by putting our heads in the sand.
Yes, we all need to work with the data we have and draw conclusions from it. But we all need to understand that all the others doing this are not going to draw the SAME conclusions. Different people are going to look at the same data and come to DIFFERENT conclusions. We all need to respect that. We all need to ENCOURAGE each and every person looking at this stuff to say exactly what he or she believes. No one who is not being candid is helping. We help by contributing our own perspectives and if we pretend to believe things we don’t we are not doing that.
I don’t believe what you do about stock investing. It shouldn’t follow that I cannot be your good friend. You should be able to respect what I say even while not sharing the beliefs behind what I say. And of course the same goes the other way around.
Perhaps some day we will all agree. I think that will happen. But we are not there today. That is obvious. And the way to resolve matters is not to silence those holding the minority view. We need to encourage those holding the minority view to speak up and not to censor themselves one tiny bit and to speak with full confidence that those in the majority will extend to them the same respect and affection that they extend to those on “their side.”
That’s it. That’s the answer. That’s the ONLY answer.
I am your friend and I try to show it with all my words. You need to do the same. EVERYONE needs to feel free to post their honest views. There is not one legitimate school of thought here. There are two. That’s where things stand in this field of scientific inquiry today.
Please take good care.
Rob