Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Your conditions for ending your wait are delusional. So you will wait forever. Because you have no choice. Doesn’t that make you sad? People, in general, like to have choices.
And what about that recent article about PE10 being above average over 95% of the time since 1990? When you bailed on stocks, you thought such a thing was utterly impossible. Because your read of Shiller’s book told you it was impossible. Isn’t your real beef with Shiller, for leading you astray?
I don’t believe that I will wait forever. I acknowledge that it is theoretically possible. Does it make me sad that this is so? It does. But not as sad as it would make me to not wait. Fate deals us a hand and out job is to play it the best of our ability. Yes, people like to have choices. But telling lies to ourselves that our choices are unlimited always take us to a very bad place. We have a limited number of choices. Some things are just outside the realm of possibility. For me, telling lies about the numbers that my friends use to plan their retirements is outside the realm of possibility. It is what it is, like the rain and the wind.
That last phrase comes from “Percy’s Song,” where Dylan discusses Fate and how it teaches us over time about the limits it places on our ability to choose where out lives will go:
I sat down and wrote the best words that I could write…
I stood up so slow with no other choice but for to go….
I walked down the courthouse stairs and I did not understand…
The only song my guitar could play was “Oh, the cruel rain and the cruel wind.
That’s the real turtle soup and not the mock, in this boy’s opinion.
I’ve written a number of columns about the research paper that you refer to that will be showing up at the Value Walk site in weeks to come. I have four prepared as of today. I have considered writing a fifth column re that paper but I am not sure whether the last one is a good idea or not, I am still thinking it over. The fact that I would devote four or five columns to that paper shows any reasonable person that I believe that its publication is an important development. I certainly do not agree with the conclusions stated by the authors of the paper. But I just as certainly believe that they have advanced the debate by putting their energies into writing the paper and I just as certainly am grateful to them for doing so. That research paper is good stuff.
I have also considered writing a column about the article in the Washington Post (by Barry Ritholtz) pointing out that the P/E10 has been above average 95 percent of the time since 1990. I agree with your suggestion that that is an important point. The reason why I am unsure whether to write a column on it is that the same basic point is made in the research paper noted above and I devoted one of the four columns on that paper to this particular point. So I tend to think that it would be redundant to write a column on the Ritholtz article as well. If I can think of a way to come at the point from a fresh angle I will add that one to my list of upcoming columns.
I hope that I would not have described what has happened from 1990 forward as “impossible.” Shiller’s research does not show it to be impossible. Nor does the 35 years of peer-reviewed research that confirmed and expanded on Shiller’s “revolutionary” (his word) findings. I would certainly agree that, if you had asked me in 1990 what the likelihood was that we would see what we have seen since 1990, I would have said that the odds of such an outcome were exceedingly low. That much I can agree to.
My take is that it is the promotion of Buy-and-Hold as a research-based approach to stock investing that caused the unlikely turn of events. People love, love, love the idea of rooting their investing strategies in research. The one thing that people don’t like about stocks is the risk. Root your strategy in research and you mitigate the risk of investing in stocks dramatically. So people have flocked to the Buy-and-Hold strategy.
But the people who do research are humans and we humans are flawed creatures. We make mistakes. Most of us understand that, when we do, it is critical to admit the mistake and get it behind us. But the hardest mistakes to acknowledge are the ones that hurt the most people. If I get a traffic ticket on my way home from the grocery store, it would not be too hard to tell my wife. I wouldn’t want to. I would be embarrassed that I had cost us that money by behaving irresponsibly. But if I had an affair, that would be about 500 times harder to acknowledge. The reason I would feel such an inclination to keep it zipped re the affair is not that the affair does not matter so much, it’s that the affair matters so terribly much more.
The bigger a mistake, the more harm it does, and the more harm a mistake does, the harder it is to come clean. The Buy-and-Hold mistake — the idea that it is not necessary to practice price discipline — is the biggest mistake ever made in the history of personal finance. So it is understandable that the Buy-and-Hold mistake has gone uncorrected longer than any earlier mistake and has thus caused more damage than any earlier mistake. We can measure how bad a mistake is by looking at how much resistance we feel to acknowledging it. Given what we have seen from you Goons over the past 15 years and from our tolerance of your insanely abusive behavior, I think it would be fair to conclude that the Buy-and-Hold mistake was a true whopper.
It’s because this mistake was such a whopper that I was not able to anticipate back in 1990 or even in 2002 where the mistake would take us. I am in good company re this one. Shiller predicted in 1996 that those sticking with high stock allocations would regret it within 10 years because Buy-and-Hold was in the process of bringing on the biggest economic crisis in U.S. history. He was right, but he was two years off. We did not see the Buy-and-Hold Crisis begin until September 2008. Shiller was not able to appreciate how high prices would go over the following four years because they had never gone that high before. We went into completely uncharted territory with this particular bull market and so there was simply no way for anyone who relies on the historical return data to anticipate how much harm we would do to ourselves.
Shiller uses the historical data to inform his thinking re how stock investing works. People followed Get Rich Quick strategies prior to 1965. But, until 1965, there was no one saying that there was peer-reviewed research supporting the pure Get Rich Quick approach (Buy-and-Hold). Shiller was not proven wrong re his take on how stock investing worked when we did not see an economic crisis by 2006. The way in which things have played out is 100 percent consistent with his take and 0 percent consistent with Fama’s take. But he was wrong on the details. We entered a new and more dangerous world in 1965, when people who put themselves forward as disinterested scientists started saying that the historical data supports the pure Get Rich Quick approach.
Those claims did not change the fundamentals of how the market works (valuations still affect long-term returns) but they did affect how high valuations can go before crashing and of course how much damage we can do to our economic and political systems by promoting the Buy-and-Hold “strategy.” Shiller got the important thing right and the details wrong. I have done the same. I don’t know of anyone who got the details right. What we saw in the late 1990s is something we have never seen before. Even the Buy-and-Holders acknowledge that. It has taken some time for us all to come to grips with how much damage we did to ourselves during those years of insanity. We will get there. We are coming around slowly (according to me!).
Now that I have written these words, I am thinking that I might have my fresh angle for the Ritholtz column. I am now leaning in the direction of writing that one up. So we are looking at four or five articles re the research paper and one re the Ritholtz article, both of which were brought to my attention by you Goons.
People ask me all the time why I even bother to talk with you given your obvious hate for the last 35 years of peer-reviewed research and all discussions of the implications that follow from it. I talk to you because, even though your hate is a huge negative, you truly do believe in Buy-and-Hold yourselves and you truly in your heart want to understand how stock investing works in the real world. The conflict between those two realities causes you to bring research papers and articles of this sort to my attention and my efforts to be responsive to your sincere questions help us all to come to a better understanding of this important subject matter (according to me!). I am grateful for your help in this regard. It makes a difference.
I hope all that helps a bit, my good friend.