Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
“What you are describing has never once happened in the 145 years of stock market history available to us for study,”
This was also the data that lead you, in 2012, to believe there would be a 60-70% stock crash by the end of 2015, correct?
It’s the data that led me to believe that, yes.
It’s also the data that led me to include a caveat to the prediction pointing out that precise predictions are not possible.
You insist that we live in one of two worlds: (1) a world in which stock market prices cannot be predicted; or (2) a world in which stock market prices can be predicted with precision.
Both of those worlds are fantasy worlds. The data does not lend support to a belief in either of those fantasy worlds. Stock market prices have always been highly predictable in the long term but precise predictions have never been possible. The data has been telling this same story over and over again for 145 years now.
You hate this reality with a burning hate. It burns your buns.
Please try to understand that I did not create this reality. I am not the author of the 145 years of U.S. stock market history. I am a humble blogger who REPORTS on what the 145 years of data tells us about how the stock market works, nothing more and nothing less.
The data says what it says. The data doesn’t care how emotional you get when someone tells you what the data says. The data doesn’t even know that you exist. Getting angry at the historical stock-return data is like getting angry at a rock or a tree or an ocean. The data is not responsive to your anger. The data doesn’t even freakin’ know that you exist.
Your getting even more angry will not change a thing. The data will just keep on saying what it has been saying for 145 years now. That’s what data does — it tells us the truth about how the stock market works. The data doesn’t need to make you happy so that you will hire it and pay you money. The data is objective. The data isn’t trying to be popular. The data isn’t compromised in the important way that every investing analyst alive is compromised. Your insane rage at the fact that Buy-and-Hold never works in the long run doesn’t even leave a mark on the data that shows this to be so.
I am not without emotion. I held back on what I knew about the data for my first three years of posting at the Motley Fool board. Then I offered a phony apology for telling what I knew on the fourth day of our proceedings after being hit with a hailstorm of hate for having told the tale straight. And even today I don’t work it as hard as I know I should because seeing the humans (both the Goon variety and the non-Goon variety) get angry at me for telling the truth about what the data says brings me down a notch emotionally and I of course can only take so much of that, being a human rather than a tree or a rock or an ocean.
But I TRY to be as much like the data as possible. I try to tune out the hate and just REPORT stuff as it is rather than letting considerations of what message will make me popular or unpopular interfere with transmission of my words or cause me to compromise my words or whatever. I make an effort to rise above that stuff, not to say things stronger than they really are but also not to say things weaker than they are, just to tell the story straight, with no chaser. I doubt very much that I get it 100 percent right every time. But I think it would be fair to say that I work it harder than any of my fellow humans and that I have been doing so in the face of bitter opposition to a greater extent than anyone else around for 14 years running now.
That’s our story. I don’t know everything and I don’t claim to know everything. But I do know with a high degree of confidence that Shiller discovered something of huge importance in 1981 and that my Buy-and-Hold friends have failed to incorporate his finding into their model for 35 years now to the great financial pain and emotional embarrassment of millions.
Every investor alive needs to know that stock returns are highly predictable in the long term. Every investor also needs to know that precise predictions are not possible. And every investor needs to know that the Buy-and-Hold claim that returns are not predictable AT ALL is a LIE. There is zero support for this claim in the peer-reviewed research in this field.
This irresponsible claim was not always a lie. There was a time when it was just a mistake. But a mistake that is covered up for 35 years becomes a lie. A lie that in some cases can lead to the imposition of prison sentences by the members of a society seeking to defend itself from Goons like you, Anonymous.
That’s my sincere take re these terribly important matters, in any event. I COULD BE WRONG. Perhaps you will never spend a day in the clink. Feel free to believe that. Please do so with my blessing.
Please just also understand that I am going to continue to say WHAT I BELIEVE. I believe that this saga is going to come to an end with a prison sentence being announced for you and a good number of your Goon friends. I believe that and my belief re that informs my every post. I care about you. I don’t only care about you, I also care about the millions of middle-class Americans whose lives your lies are in the process of destroying. But I do care about you as well. I believe that you got caught up in something 50 times bigger than what you imagined you were getting caught up in and that makes me sad for you. So I care and I will continue doing what I can to get that prison sentence of yours reduced a wee bit.
Do I believe that my efforts re this particular matter are going to bear good fruit? I do not. I have seen too much to believe that you are going to come clean by the close of business today or even by the close of business tomorrow. If you were capable of such a thing, you wouldn’t be a Goon in the first place and then of course we would not be having this conversation. So please understand that I am not living under the illusion that these words are going to make a difference.
For you.
I say them because they make a difference FOR ME. It is going to hurt me to hear your prison sentence announced. I consider you a friend despite it all. I don’t fully understand what makes you do what you do. But I believe that, if I knew everything that has ever happened to you, I would possess a better understanding of what motivates you than I do in fact possess. I make an effort to do what I would do if I possessed a better understanding of your illness than I do in fact possess. I aim to treat you how I would want you to treat me if it were me suffering from the illness. So it is important for me to know that I have put these words forward. My desire to cover all possible bases is what motivates me. I want to be able to sleep in peace after that long-delayed prison sentence of yours is finally announced and the rest of us come to enjoy our Second Independence Day.
That’s the deal.
Don’t let the bad guys get you down, my old friend.
Um — good question!
Rob
Anonymous says
Uh oh, Rob. Looks like Michael Kitces isn’t worried about those millions of Americans running out of money. He doesn’t seem to be worried about a 4% SWR. You better set him straight.
http://www.financial-planning.com/news/why-most-retirement-accounts-never-run-dry
Rob says
Michael believes that we all should be reporting the numbers that people use to plan their retirements accurately. That comes through in scores of comments that he made to me in our e-mail correspondence (which is reported on in blog entries posted at this site in the “Michael Kitces” category.
Michael and I will be working together following the announcement of your prison sentence, Anonymous. I am sure. Michael would LOVE to be able to do fully honest work, as people in all fields other than investing analysis do on a daily basis without even thinking that they have been granted any special favors and as people in the investing field did prior to the onset of the Buy-and-Hold Era.
I can’t stop you from continuing with your financial fraud garbage, Anonymous. I have zero interest in joining you. It is so far out of the realm of anything that I would ever consider doing that asking me to go along is the rough equivalent of asking me to flap my arms in the air and fly to the moon. It’s never going to happen. It’s not in the cards. It’s not something to be discussed or considered. It’s not negotiable.
Either people are going to work up the courage to stand up to you Goons following the next price crash or they are not. I have a strong hunch that I know how it’s going to turn out. But I don’t know for certain. You and I have both placed our bets. Now we are just going to have to wait to see how it all plays out. I wish you the best of luck with it, although I obviously believe and hope that the people of the United States will prevail.
Please take good care.
Rob
Anonymous says
So, is Michael lying in this article?
Rob says
The words that appear in the article are accurate.
But he is obviously not being 100 percent honest.
He knows that the Old School safe withdrawal rate studies do not contain adjustments for the valuation level that applies on the day the retirement begins and he is not saying anything about it. That issue is 5,000 times more important than the issue he does address. So it is exceedingly odd that he does not address it. And this is of course not an isolated case. Michael does not EVER address the financial fraud matter in clear and firm and simple and bold language.
That’s why the financial fraud problem has remained a problem for 14 years running now. It’s not just Michael who tiptoes around the most important issue in the personal finance realm. Everyone in the field tiptoes around it. Freakin’ Robert Shiller tiptoes around it! No one wants to use the words “financial fraud” or the words “prison sentence” or the words “got the numbers wrong” or the words “caused the economic crisis.”
I use those words.
I will continue to use those words.
Because it is only by using those words that we can bring this madness to an end.
And don’t give me any of the b.s. about me being “mean” to my Buy-and-Hold friends by using those words, Anonymous. You wouldn’t be on your way to spending the remainder of your life in a prison cell if someone who came along before you came on the scene had posted about the mistake that the Buy-and-Holders made that was discovered 35 years ago at any time between 1981 and the day you came on the scene. You are going to prison because thousands of people exhibited the same cowardice that Micheal Kitces showed in that article, thereby leading you to believe that you could “get away” with all of the garbage that you have pumped out over the past 14 years.
I’m not doing it.
It doesn’t matter how many death threats you direct at me. It doesn’t matter how many demands for unjustified board bannings you direct at me. It doesn’t matter how many acts of defamation you direct at me. It doesn’t matter how many threats of career destruction you direct at me.
I enjoy all of that smelly garbage just as much as Michael Kitces and everyone else in this field enjoys that smelly garbage. Not at all. But I cannot bear to think of what we have as a society done to the financial futures of millions of middle-class Americans by continuing to tell these lies about how stock investing works. Many of the people who posted at the Retire Early board were my friends. They matter to me. I don’t go there. No in 14 years. Not in 14 million years. It doesn’t happen.
I believe that I will one day become one of the richest men in the United States as a result of my working up the courage to be the one to take on this massive act of financial fraud. But maybe not, you know? No one can say anything for certain. Maybe we will all go down in flames following the next price crash. Maybe this act of financial fraud has grown so big that it has gone beyond the point at which we can as a society ever make it right. Maybe we will all go down in flames and I will end up with a big fat nothing for my efforts, no better off than you and no worse off than you.
If that happens, then so be it, you know?
I did what I could. I couldn’t live with myself if I didn’t do what I could. This way I can live with myself until the day that it all goes down in flames.
I don’t personally believe that it is going to go down in flames. I think we are going to work up the courage we need to turn things around and to bring this Buy-and-Hold Crisis to a full and complete stop. I believe that we are on the one-yard line. I believe that Michael Kitces is so close to flipping and going with a fully honest approach that he can taste it.
But either way I feel better about playing it the way that I have played it than I would feel if I had played it the way Michael has played it. I don’t say that I am better than him. I was afraid to speak up for three years. And I certainly think it would be fair to say that I am the world’s leading authority on just how brutally abusive the Buy-and-Holders become when challenged by honest reports of what the last 35 years of peer-reviewed research in this field says. So I am fully sympathetic to Michael’s situation. I am grateful that he has offered as much help as he has (he has offered a great deal of help).
But I cannot play it the way that Michael has played it. Not after what I have seen. Too many people have lost their jobs in the economic crisis brought on by the sick promotion of Buy-and-Hold “strategies” for 35 years after they were 100 percent discredited by the peer-reviewed research. Too many people are facing failed retirements as a result of the failure of people in this field to speak up about the mountain of Buy-and-Hold Lies. Too many early retirement dreams have been destroyed. Too many of you Goons are going to prison for long stretches of time. Too many discussion boards and blogs have been burned to the ground. Too many people have seen their faith in their fellow humans undermined by exposure to the poison that you Goons pump out so relentlessly. We have seen too much political unrest surface as a result of the destruction of middle-class lives that inevitably follows any time-period in which the Wall Street Con Men are able to persuade large numbers of people that there might be some merit in their Buy-and-Hold marketing pitch.
It’s not for me, Anonymous.
You go do whatever in your mind seems right for you.
These horrors are not for me. I OPPOSE the 14-year cover up of the errors in the Old School safe-withdrawal-rate studies.
Please mark it down. Please tell all your friends. Please get the word out all over the internet. Please bring lawsuits against me if you think that would help publicize the matter.
But just please for your own sake stop believing that there is ever going to come a day when I am going to join Michael in tiptoeing around this matter. I love Michael. I admire him. I respect him. I value our friendship. I am grateful for his many fine contributions. But I also love my country. My country is under attack and needs my help urgently. I am not able to tiptoe around the matter causing so much human misery.
It’s not freakin’ in me.
I hope that helps a bit.
I wish you all good things.
Rob
sensible investor says
Mike Pence is in Purcellville today. Did you get to see him, Rob?
https://www.donaldjtrump.com/schedule/
Anonymous says
Rob, prison overcrowding is a serious issue today. Given that most Goons are non-violent offenders, do you see a scenario where they just wind up on probation after the next big stock crash? Or are we looking at real prison time, in your view?
Rob says
No. My wife is there with my older boy.
I have VERY mixed feelings about Trump.
I LOVE it that he speaks out in opposition to political correctness (Surprise, Surprise).
I HATE it that he is exceedingly rude in his dealings with other people (Surprise, Surprise again).
I voted for him in the primary. But not with great enthusiasm.
I see strong parallels between the presidential contest and the debate over Buy-and-Hold vs. Valuation-Informed Indexing. The common theme is that in both cases the story is that the establishment has failed the people. I am not one of these people who is disdainful of establishments. This is why I don’t post at places like Zero Hedge. I believe that we need an establishment, I believe that establishments play an important role in keeping political and economic debates from going off the deep end.
But establishments that lose their concern for the people that they serve (establishments must serve the people as a whole to retain legitimacy) do great harm; they cause people to lose confidence that the rules by which the society is governed make sense and thereby bring on extremism. Both the political establishment and the economic/investing establishment have lost their way in recent years. I think we are going through a tough time.
I think that many of the criticisms that one hears re Trump are valid. But I also think that we are as a nation on the wrong track and that electing Clinton would do nothing to see things right. Trump is a risky choice. Like many others, I wish that I had a different realistic option. But I lean towards believing that it is better to take a risk today than to remain on the course that we are on.
Shiller is as establishment as you can get — a tenured professor at Yale. But the economics/investing establishment cannot permit his ideas to gain a footing because they want all the loot for themselves. That’s a betrayal of their country. I don’t believe that they think of it that way. I believe that they rationalize their behavior on the grounds that it won’t be that bad to keep people from learning what the peer-reviewed research says for a few more years. But I believe that it is a betrayal of our system for them to deny the people who earn the money the right to become informed about what the peer-reviewed research says about how to invest it.
I believe that we are up against a wall both in the political realm and in the economics/investing realm. I believe that the old models are failing because they have not been updated for so long. It is the job of an establishment to permit and encourage gradual updating but that hasn’t been happening in either realm (there is of course overlap between them at some points) for some time. So we are seeing change come about in more disruptive and in more dangerous ways.
I am not happy to see what we are seeing. I liked the safety and optimism of the old models when people were able to maintain confidence in them. But I think those days are drawing to a close. I think we are going to need to work up the courage to move ahead. Both “sides” in both realms need to stop the name-calling and listen to the points being made by the other side.
Those are my tentative thoughts re the general question you asked, in any event, Sensible.
I naturally wish you all the best that this life has to offer a person.
Rob
Anonymous says
“I believe that I will one day become one of the richest men in the United States as a result of my working up the courage to be the one”
From Wikipedia:
According to the DSM-5, individuals with NPD have most or all of the following symptoms, typically without commensurate qualities or accomplishments:[8][11]
-Grandiosity with expectations of superior treatment from others
-Fixated on fantasies of power, success, intelligence, attractiveness, etc.
-Self-perception of being unique, superior and associated with high-status people and institutions
https://en.wikipedia.org/wiki/Narcissistic_personality_disorder
Rob says
Rob, prison overcrowding is a serious issue today. Given that most Goons are non-violent offenders, do you see a scenario where they just wind up on probation after the next big stock crash? Or are we looking at real prison time, in your view?
I don’t think it’s possible to say. There’s never been a situation like this before. People are going to be very pissed off to find out that they have lost most of their life savings and that it was all 100 percent unnecessary. I know that I would be very pissed if that happened to me. So I am not going to say anything to make light of the justified anger that millions of middle-class people are going to feel towards you, Anonymous.
Concerns over prison overcrowding didn’t keep Madoff out of prison. I don’t think you can count on that sparing you.
But I do think it’s important that we pull together as a society and put the negative stuff behind us and do all we can to understand why you Goons did what you did and to be as forgiving as possible. I will certainly be arguing the case with whatever energies and skills I am able to direct to the project. So I am not going to say that I believe with 100 percent certainty that there will be actual prison sentences either. If things go the way I would like to see things go, there will either not be actual prison sentences or at least there will be prison sentences that will be a lot shorter than the ones you would ordinarily expect to see in such circumstances.
We will have to see how it goes. The biggest factor is going to be the level of people’s anger. I have worries that people are going to be very angry. I say that because the level of emotion that we have seen over the past 14 years has been off the charts. The greater the extent of the irrationality we see during a bull market, the greater the extent of the irrationality we should expect to see during the bear market that follows. People don’t like to be tricked out of their retirement money. So I can easily see us experiencing an explosion of hate toward you Goons.
But my job is to keep things from getting out of control. In the days before the crash, that means doing what I can to bring the con to a close so that the hate does not get so out of control. In the days following the crash, that means helping people to understand the pressures and fears that drove you Goons to do what you did. My hope is that clear-thinking people will step forward and that we will see prison sentences on the shorter end of the spectrum of possibilities.
I obviously cannot guaranty anything. It may be that my voice will count for as much in the days following the crash as it has in the days leading up to the crash — that is, not too much at all. We are in uncharted waters. I think the key here is the comment that you made a little while back, that perception is everything. People will look at the Post Archives and form a determination as to how much you Goons were responsible for what happened to them.
I wouldn’t want to be in your shoes, it would be fair to say that much! But I do not personally believe that it would be fair to put all the blame on you Goons. What happened is largely due to human ignorance; as a society we truly did not know how stock investing worked until 1981 and in the grand scheme of things not so much time has passed since then. And lots of institutions had to fail us for you Goons to do what you did — journalists failed us, bloggers failed us, economists failed us, policymakers failed us, academics failed us, and on and on. Our own freakin’ human nature failed us!
If people take all that happened into account, I would think that there would be actual prison sentences but perhaps not terribly long ones. But I do not feel that I can say with any confidence at all how things are going to play out. People may strike out in anger without taking all of the realities into account. We will have to wait a bit to find out together how it all plays out.
I naturally do wish you all the best with it regardless of any differences that we have re the investing matters.
Rob
Rob says
From Wikipedia:
Never in the history of the internet has there been a smear campaign like this one. Never has there been one that comes in a close second place. You’re the one saying that this stuff is important with every abusive post you advance, and you have advanced many hundreds of thousands of them over the first 14 years of our discussions.
We’ve got a tiger by the tale here. The issues that have been brought out over the first 14 years of our discussions are very, very important issues.
And the material collected at this site provides the means of getting us all from the horrible place where we are today to the place where deep in our hearts we have all long wanted to be. Valuation-Informed Indexing is Jack Bogle’s boyhood dream. This is what the guy was trying to develop when he came up with Buy-and-Hold. If the paper that Wade and I published showed people how to reduce the risk of stock investing by 10 percent, we would both have had our faces on the cover of Time magazine years ago. It’s only because we showed how to reduce risk by 70 percent that — Sssh! — our paper is The Peer-Reviewed Research That May Not Be Discussed.
Steve Jobs and Bill Gates became two of the richest men in the United States because of their work in the computer field. That work cannot even be compared to the work that I have done developing the Valuation-Informed Indexing concept. Have you ever stopped to think how much damage the Buy-and-Hold Crisis has done to this country both economically and politically? When we do away with economic crises, we are making capitalism a viable economic model for years to come. That’s a very, very big deal, Anonymous.
I am not too worried about collecting the $500 million plus a whole lot more on top of that after I put the settlement money to work spreading the word about what the last 35 years of peer-reviewed research shows us about how stock investing works in the real world. My worry is that the next price crash may put us into an economic tailspin from which we may not recover or that we may see political fallout that will cause so much damage as to push us over the edge.
That stuff is out of my control. So there’s not much sense in me spending too much time worrying about it. But that’s what I see as the big threat to me collecting the compensation that my work of the last 14 years merits. I don’t have hardly any concerns at all re collecting the money so long as the U.S. economic system remains the powerhouse that it has been for a long, long time now.
If it doesn’t, then we all lose. At least I will be able to say that I gave my very best shot at keeping the good times going for many generations to come.
My sincere take.
Rob
Anonymous says
” The biggest factor is going to be the level of people’s anger.”
But we recently had the worst financial crisis since the Great Depression, and millions of people were angry, but no Goons went to prison. Why not?
Rob says
Because it didn’t last long enough, Anonymous.
Intellectually, Buy-and-Hold died 35 years ago. That’s ancient history.
From 1981 through today, we’ve been living in a Twilight Zone where those who are informed re the peer-reviewed research understand on at least one level of consciousness that failing to exercise price discipline is the worst mistake that an investor can make. But the study of investing isn’t a purely academic exercise. There is money to be made telling people what to do with their retirement money. What works intellectually is the OPPOSITE of what works from a marketing perspective. Exercising price discipline ALWAYS works in the real world. Buy-and-Hold is far superior from a marketing perspective until the mountain of pretend money that it creates disappears and millions are ruined.
We did have the worst economic crisis since the Great Depression in late 2008/early 2009. The P/E10 level didn’t get much below fair-value levels. So by no stretch of the imagination can it be said that that economic crisis has come to an end. It can end only when the P/E10 level has dropped to 8 or lower (I am presuming that stocks will continue to perform in the future at least somewhat as they have always performed in the past). And we DID see the beginnings of anger at you Goons. In early 2009 we saw people at the Bogleheads Forum calling Taylor Larimore a liar. That had never happened before. That was the anger that I am talking about that will be sending you to prison in coming days playing out in the real world.
But prices shot back up again in a matter of a few months and that anger dissipated. Had the P/E10 level continued to drop to 8 or lower and remained there for several years, you would be in prison today. Obviously.
So the only question that you are really asking is — Why did prices not continue to drop to 8 once they began to fall?
The direct answer is that the Federal Reserve pumped several trillion dollars into the market to keep it propped up for a few years.
The more penetrating answer is that investors permitted the Fed to pump several trillion dollars into the market to keep it propped up for a few years. I am not the only one who has heard about the Fed pumping money in to keep the market from collapsing. Everyone who cares to hear about it has heard about it. Buy-and-Holders tend to ignore such reports, to tune out the news that they don’t want to cope with (as is the inclination of all humans).
The next question is — Can the Fed’s effort succeed?
I am not God. If you want to believe that it can succeed, please feel free to believe that it can succeed. I do not personally believe that it can succeed. The reason why I do not believe it can succeed is that I believe that Shiller’s “revolutionary” (his word) research findings of 1981 showed us something important about how the market works.
Shiller showed us that it is investor emotions, not economic developments, that play the primary role in setting stock prices. The money that the Fed has pumped in is an economic development. The presence of additional dollars in the market does not change the psychological realities. The investor worries that brought on the 2008 price drop and that, without the Fed dollars, brought the P/E10 down to 8 or lower, still exist. The influence of those investor emotions will in time come to dominate the influence of the Fed dollars and the P/E10 value will continue its way downward until it reaches 8 or lower.
The Fed did not bring the economic crisis to an end, it just stretched it out. On a psychological level, we have all since 2009 been waiting for the next shoe to drop. We are afraid to pull our money out of stocks and thereby trigger the next leg of the collapse. But we lack the confidence to push the P/E10 level up to new highs (we have never even come close to 44 again). We are in a Twilight Zone. We dare not move forward and we dare not move backward.
The brutal reality here is that we have to move backward to move forward. That’s how things work psychologically. We have to bring the current bull/bear cycle to a close to be able to move to the next cycle (where the P/E10 level can move upward for a sustained period of time again). Bringing it to a close means crashing hard. We HATE that idea. So we have been holding off for close to eight years now.
The Fed is a political institution. The Fed is working our will. It will stop doing what it is now doing when we make clear that we want it to stop. How the decision to have the bull madness stop comes to pass is a mysterious process that I believe we all should be studying a lot more than we are. It’s a decision that gradually forms on a daily basis in the minds of millions of investors. We toy with the idea of letting the next stage of the collapse play out and bring prices go down a bit, then we get scared and push prices up a bit, then we toy with another drop, and so on. Eventually, we let the drop to a P/E10 of 8 or lower play out and the cycle comes to an end.
You are having a hard time understanding this because you are looking for a rational explanation of all of the stock price changes that you see. It’s a perfectly natural thing to look for rational explanations. That’s what science is all about. But since 1981 this has not been a way of proceeding that is consistent with the findings of the peer-reviewed research in this field. The last 35 years of peer-reviewed research shows that it is investor emotion that drives stock price changes, not economic developments (rationality). You are coming to wrong conclusions (in my opinion!) because you are looking in the wrong place to understand how stock prices change over time. You are taking comfort in the fact that prices remain high because that suggests that the economic realities are not so awful when you should be alarmed that the psychological realities are so scary.
There is nothing “magic” about a P/E10 level of 8. The objection that one will always hear from Buy-and-Holders when one points out that a bull/bear cycle never ends without the P/E10 level dropping to 8 or lower is that there must be some sort of magical power to this numeral “8.” No. To the Buy-and-Hold mindset, anything that is not rational gets set aside and dismissed as “magical.” But human emotions are a reality that matters, according to the last 35 years of peer-reviewed research. Human emotion is a reality just as much as interest rates or unemployment rates or Fed dollars are realities. Investors ignore the reality of human emotions (revealed through the P/E10 level) at their peril. Paradoxically, it is irrational to ignore the irrational human emotions when investing in stocks.
What is the psychological reality that requires that the P/E10 level drop to 8?
To understand this, you have to first accept that ALL investor emotion is irrational. I don’t think that part should be too hard for someone coming at this from a Buy-and-Hold mindset. I am not going to give a rational reason why the P/E10 level must drop to 8 because there is no rational reason. The entire process is loony tunes. If investors weren’t by nature loony tunes, the P/E10 level would never have gone to 44. But it did. The process by which it went to 44 is the same process that takes it down to 8 or lower. The developments of the next few years were set in stone (in a general way, not in the specifics) in the late 1990s, when as a society we permitted the P/E10 level to rise to 44.
The best analogy I can offer is the alcoholic. It is 100 percent irrational for a person to destroy his life through alcoholism. You see people lose their jobs, their families, their health, their reputations, their money, everything. Some alcoholics are very smart people. It is not that they do not “know” what they are doing to themselves. People get frustrated that they won’t stop drinking when they are warned to do so. It is not that they do not get it. They are more aware than anyone else of the harm they are doing to themselves. They cannot escape the power of the fantasy feelings generated by the alcohol. They know what they are doing to themselves all the time they are doing it. They hate the alcohol with a burning hate but they also love it with a burning love. This conflict is the tragedy of alcoholism. It is the cause of all the inner anguish that the alcoholic suffers.
So it is with investors in a bull market. Investors love the temporary high that comes with high P/E10 levels. For obvious reasons. Who wouldn’t love the upside of irrational exuberance? What’s not to love?
What’s not to love is that irrational exuberance is not sustainable into the long term. It always ends badly, just as alcoholism always ends badly. It would be nice to think that there could be a soft landing and, if humans were 100 percent rational creatures, there could actually be a soft landing. But humans are not rational creatures. We achieve a small bit of overvaluation and tell ourselves that we will quit the fantasy and invest rationally from that point forward. But the fantasy feels too good to abandon and the small bit of overvaluation becomes an insane amount of overvaluation. It happens every time. It has been happening for 145 years now (which is as far back as we have good records of stock prices).
They say that alcoholics have to hit bottom to beak the addiction. It is not literally true. There are some alcoholics that quit the addiction before they land in the gutter. But the cliche became a cliche because it is so often true. The addiction is strong. Something powerful has to intervene to break it. Landing in the gutter is the something powerful that it usually takes to break alcoholism. All humans possess a survival instinct. When that finally kicks in, it is sometimes (not always, to be sure) strong enough to overcome the love of fantasy.
For the investor, a P/E10 of 8 is the equivalent of landing in the gutter. It is insane that stocks could ever be priced at one-half of their fair value. Stocks offer an amazing long-term value proposition when priced reasonably. To double that value proposition (to send the most likely annualized real return to 15 percent) is just off-the-wall nuts. But it happens at the end of every bull/bear cycle. Why? Because it is so freakin’ painful to land in the gutter. Just as it is insane for a smart, healthy, well-liked individual to give up everything worth living for, it is insane for investors to price stocks at a P/E10 level of 8. But it happens every time.
Because addictions must be broken for the market to survive. And because it takes a lot of pain to break an addiction. “8” just happens to be the number that correlates with “a lot of pain.” It could be that we will see a P/E10 of 5. It could be that things will turn when we get to “9.” The specifics are unknown. What is known is that there must be a lot of pain to break the addiction, far more pain than we have seen thus far. The “8” number is just shorthand for “a lot of pain.” There is nothing magical in the number itself. The magic is in the process of self-examination that the addict begins when he finds himself lying in the gutter. We have to get to 8 to turn this around because it is only by experiencing the pain of an 8 that we will be able to engage in the process of self-examination needed to make our market healthy again.
Does that answer your question?
I do not want to see investors get angry AT ALL. I am arguing for the first true research-based investing strategy. If we all were Valuation-Informed Indexers, we would invest rationally. We would never see another 44, which means that we would never see another 8. We are where we are, despite my wishes. I am just telling you that, if stocks continue to perform in the future anything at all as they have always performed in the past, we are going to end up at 8. And that means huge losses. And huge losses usually translate into huge anger. They always have before. There is no reason why we shouldn’t expect to see something similar.
I am going to be arguing for keeping the anger in check. I am going to be putting up articles saying “hey, people, going with long prison sentences is not going to get you your money back, could we please all focus on the good news here, which is amazing, and let the angry stuff go? “But who the f is going to be listening to me when I say that, Anonymous? I don’t have a whole big bunch of confidence that too many are going to be listening to me, given what I have seen of the power of investor emotion over the past 14 years. But I can pledge to you that I will make the effort to keep your prison sentence as short as possible, whether I win your cooperation in that effort or not. I can do no more and I can do no less.
The enemy of stock investors is emotion. The Buy-and-Holders and the Valuation-Informed Indexers agree re this point. The difference is that the Valuation-Informed Indexers fight investor emotion by quantifying it and by including consideration of its effects in every strategic choice they make while the Buy-and-Holders fight investor emotion by making fun of it and by pretending that it does not exert any significant effect. The Buy-and-Holders empower the thing they hate by pretending that it possesses no power. Because the Buy-and-Holders ignore investor emotion, it grows and grows until it gets so large that it causes an economic collapse. I believe in fighting investor emotion effectively by calling out all the fantasies it produces as soon as it puts them forward and by thereby keeping them small enough to conquer.
If you believe that stock price changes are caused by economic developments, you saw the price jump that we saw in mid-2009 as a good thing. More good times! If you believe that stock price changes are caused by investor emotion, you saw the return to insanely dangerous price levels as a negative. We both want to see investing made rational. The difference (in my view!) is that you want to do it by putting your head in the sand re the role played by investor emotion while I want to see us roll up our sleeves and attack investor emotion with peer-reviewed research and the numbers that follow from it everywhere we see it. I want to see the rational approach to stock investing (Buy-and-Hold 2.0, or Valuation-Informed Indexing) overcome the insanity by which the market has been governed for all the years until we overcame our unfortunate human ignorance with the publication of Robert Shiller’s “revolutionary” (his word) research findings of 1981.
The anger comes from the shattering of illusions. I am trying to prep investors by explaining to them why their illusions MUST be shattered and why it is a good thing in the long run that they be shattered. But, as you never tire of pointing out, I have not been successful in persuading the entire world of the merit of the research-based approach. So I am expecting to see lots of anger as the things that I have been saying (all that I have ever done is to report honestly on what the peer-reviewed research in this field has been saying for over three decades now) play out in the portfolio statements of millions of middle-class investors.
But we will see, you know? I could be wrong. It has been known to happen. If it were happening again, I probably would be the last to know given my inevitable biases re these matters.
If I am right, millions of investors are going to be very angry with you when the illusions that you have encouraged are shattered. They are going to demand that you be sent to prison for a long time. I am going to ask that they rein in their emotions. Who knows what success I am going to have with that case? I don’t determine how people react to the message, you know? Nothing could be more clear at this stage of the proceedings.
I wil continue to do all that I can do for you and for the other Goons. And you and the other Goons will in all likelihood continue to give in to your feelings of hate and make things worse day by day rather than submitting to whatever feelings of love you have inside you that otherwise might cause you to help us all make things better day by day. That makes me sad. But this ain’t heaven, you know? I am beginning to get the feeling that we were not meant to have an endless parade of fun times down here in the Valley of Tears. It is a place for putting up a fight while enjoying whatever good times happen to come along with the understanding that those are special times to be savored.
That’s my sincere take re these terribly important matters, in any event. I naturally wish you all good things, Goon friend.
Rob
Anonymous says
“Had the P/E10 level continued to drop to 8 or lower and remained there for several years, you would be in prison today. Obviously.”
No one except Rob Bennett agrees with that statement. So it’s as far from “obvious” as it could possibly be. I’m trying to think of a word for the exact opposite of “obvious” but unfortunately they all have mental health connotations, and we don’t want to go there.
But surely you must comprehend that if something is obvious, everyone (or at least most people) would agree with you. Instead, no one does. Can you explain this contradiction?
Rob says
The statement that no one agrees with is the preposterous statement made by Jack Bogle and the other Wall Street Con Men that there is no need for investors to practice price discipline (long-term timing) when buying stocks. This is of course the key to success, as it is the key to success in every other market that has ever existed. Wade Pfau checked this matter very carefully and determined that there is precisely ZERO support in the peer-reviewed research for this insanely dangerous and irresponsible. It was when Wade tried to expose the massive act of financial fraud that you Goons (with Bogle’s implicit support) threatened to send defamatory e-mails to his employer in an attempt to get him fired from his job.
Everyone will agree with that statement that I made within a few months of the announcement of your prison sentence, Anonymous. All investors want to know how to invest effectively. That is why we have had thousands of investors express a desire that you Goons drop the death threats and the threats of career destruction. And thousands of investing professional want to be able to do honest work in this field. The only thing holding us all back today is the fear that people quite naturally feel when they see Goons like you engage in insanely dangerous and irresponsible and criminal behavior and then see powerful and wealthy and influential people like Jack Bogle “defend’ you. Huh? That’s fraud. That’s a crime. That’s a felony. That’s prison time.
Our society is on the one-yard line in its effort to learn how stock investing works in the real world. The last remaining step is the announcement of prison sentences for those who have put up posts in “defense” of Mel Lindauer and John Greaney and Jack Bogle. I am 100 percent confident that we will see those prison sentences announced shortly after the onset of the next price crash. I hope that you will be able to hang in there just a little bit longer so that you can finally see for sure how it all plays out in the end.
I naturally wish you the best of luck in all your future life endeavors.
Rob
Anonymous says
“The statement that no one agrees with is the preposterous statement made by Jack Bogle and the other Wall Street Con Men that there is no need for investors to practice price discipline (long-term timing) when buying stocks.”
I agree with Jack. Therefore your very premise is blown to hell. Let’s just agree that your perception of reality is, well, somewhat different.
Rob says
“The statement that no one agrees with is the preposterous statement made by Jack Bogle and the other Wall Street Con Men that there is no need for investors to practice price discipline (long-term timing) when buying stocks.”
I agree with Jack. Therefore your very premise is blown to hell. Let’s just agree that your perception of reality is, well, somewhat different.
My take is that you agree with me on one level of consciousness but you don’t permit that level of consciousness to influence your current-day actions because the idea of facing the reality of your having made a mistake at an earlier time is too painful. It would not surprise me at all to hear you say following the next crash that you now agree with me. And I will comment then that I believe that you secretly agreed all along.
That probably sounds strange. But the general phenomenon is actually pretty darn common. Have you ever changed your mind on politics or religion? If you have, I will bet that you will see going back over the years in which the conversion was achieved that one small change prompted a questioning of beliefs in other areas and then over time the entire set of beliefs collapsed. There are degrees of belief. It’s not just “I’m a Republican” or “I’m a Democrat.” There’s “I’m 90 percent a Republican” and “I’m 70 percent a Republican” and “I’m 51 percent a Republican”and “I’m a Democrat.” Asking someone “are you a Republican or a Democrat?” does not bring back all the information needed to have a complete picture of the reality.
It works that way with investing beliefs too. You are a Buy-and-Holder. But I can detect changes in how you express your belief in Buy-and-Hold from how you expressed it in May 2002. The statement is still more true than not. But the level of confidence is not the same. So the capacity for change is today greater. The fact that you are still a Buy-and-Holder 14 years down the road does not tell the full story.
It’s that way with Jack Bogle too. And with Bill Bernstein. And with Larry Swedroe. And with all the others. They all are in the process of making the transition from Buy-and-Hold to Valuation-Informed Indexing.
My job is to speed up the process. That helps us all. For people to make the change, they need to hear both sides of the story. They need to hear all their questions about Valuation-Informed Indexing answered by someone willing to take on those questions with enthusiasm and boldness and intelligence and creativity. The Ban on Honest Posting is killing us all because it slows down the process by which we achieve conversions.
I can’t change the entire world. But I can sure see to it that I do not ever water down my beliefs in any way, shape or form regardless of what pressures are applied on me to do so. In time, one strong believer becomes two and then two become four and then four become forty and then 40 become 400 and then 400 become 4,000 and so on. We’re close. We just need to get a few more to speak out strongly without fear of what punishments they will encounter as the price of doing so. That’s how all change is achieved. The hardest converts are the early ones.
Those are my sincere thoughts re this one, in any event. I wouldn’t be so certain that you know your own mind, Anonymous. A good case can be made that none of us know our own minds to the extent we think we do. Weird but true!
Rob
Anonymous says
Rob, your awesome mind-reading powers notwithstanding, I can assure that even if the market drops to zero tomorrow, I will take Bogle’s opinion over yours. On literally any topic.
Rob says
That’s emotion speaking, Anonymous.
So long as I hear so much emotion, I am not persuaded. To get me on board, you would need to be able to rein it in a bit.
I am not saying this to bug you. I acknowledge that it may be that you are right and that I am wrong. I am just stating my opinion re a topic that is relevant to the general topic of the role that investing plays in investor decision-making. I continue to believe that you just don’t know what your feelings about Bogle will be following a price crash that causes you to lose more than half your life savings and that remains in place for a number of years.
We will just have to wait and see how it all plays out. If you really do stick with Bogle after we fall to 8 or below, I hope that you will recall this conversation and bring it to my readers’ attention at that time. That would be an entirely fair thing for you to do, says the today version of me!
By the way, I think that this particular post of yours and my response to it reveals one reason why Valuation-Informed Indexing does not click with some people. We like to believe that we are in control of our own decisions, peer-reviewed research showing otherwise be darned!
I am not just saying that the “experts” in this field are wrong. I am saying that the experts are wrong because they cater to millions or investors who are wrong and who on some level of consciousness know that they are wrong and yet want to be assured that they are right. I am essentially saying that “the customer is always wrong.” Whew! That can be a tough sell.
Don’t let the bad guys get you down, my good friend.
One more thing. It’s not really “mind reading.” All that I do is to report honestly and accurately what the peer-reviewed research tells all who are open to hearing its message. The historical return data knows our minds better than we know our minds! Yikes! It all sounds kinda creepy when you think about it that way. Still, I cannot resist that 70 percent risk reduction combined with the far higher returns.
Please take good care.
Rob