Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
I seem to recall that you felt that Jack Bogle was a bigger con man then Bernie Madoff and that Vanguard funds are basically Ponzi schemes. Do you still hold those views or have you softened your views on those topics?
I haven’t softened my views even a tiny bit. I always make an effort to present a BALANCED view. I think that’s very important.
Say that I was on the Madoff jury. Would I have found him guilty? I don’t feel that I would have had any choice. The guy created fake transaction statements. He was telling his investors that they had profited from transactions that never even took place. That’s as clear a case of fraud as I can imagine.
Bogle’s claims are rooted in peer-reviewed research. I always point out how Shiller was awarded a Noble prize. Well, Fama was too! Buy-and-Hold is rooted in very solid stuff. And the claims that the safe withdrawal rate is always 4 percent follows logically from Fama’s research. If the market is efficient, Buy-and-Hold is the ideal strategy. It logically follows. So there are many important distinctions between what Bogle did and what Madoff did.
Say that there is an investor who suffers a failed retirement because of the demonstrably false claims made in the Buy-and-Hold retirement studies. I am sitting on the jury. His lawyers points out that there is no valuations adjustment whatsoever in the Buy-and-Hold retirement studies. He points out that Shiller published peer-reviewed research in 1981 showing that valuations affect long-term returns. Yet the errors in the Buy-and-Hold retirement studies were never corrected. He points out that there was a poster at an internet discussion board who pointed out these errors in 2002 and that hundreds of members of the board community said that this was the most exciting discussion they had ever seen appear at this board. He notes that the author of the study with the error in it responded by threatening to kill the family members of any poster who posted honestly on the matter.
Then this discussion goes to a community in which Bogle participates. He sees the same behavior take place in this community — thousands of obviously false claims, threats of physical violence, the usual drill. And Bogle does nothing, Then an academic researcher with a Ph.D. in Economics who has studied the matter in great depth for months says that he is absolutely certain that the Buy-and-Hold retirement studies are in error. He writes to the authors of the Trinity study asking for a correction. A group of internet Goons who cite Bogle as their hero threaten to get this fellow fired from his job if he continues to do honest work and the guy says that he is afraid of what these people could do to him and he relents and issues a few statements that are 100 percent the opposite of scores of statements he had been making for months.
A case of financial fraud as bad as the one led by Madoff? It sure seems so to me. And I of course have only provided a very short sketch of all the ugly stuff that has gone on. I think it would be fair to say that this is the clearest case of financial fraud in the history of the United States, at least as clear as the Madoff case, which is as clear a case of financial fraud as I can imagine.
Which case is worse? The Madoff case affected thousands of people. Very, very, very bad. This one affects MILLIONS of people. Shiller wrote in his book that we would suffer an economic crisis late in the first decade of the new Century if we continued to push Buy-and-Hold so relentlessly. And that economic crisis caused millions of people to lose their jobs. It has been cited as a big reason for the political frictions we have seen on both the left and the right in recent years.
The Bogle fraud has done us more harm than the Madoff fraud. By a factor of 500. It’s not even possible to compare the two cases of fraud. The Buy-and-Hold fraud is far, far, worse.
Flipping back to the other side of the story again, we wouldn’t have Valuation-Informed Indexing — which reduces the risk of stock investing by 70 percent, according to the peer-reviewed research that I co-authored with Wade Pfau — had Buy-and-Hold not come before it. All that Valuation-Informed Indexing is is Buy-and-Hold with the one error that has been discovered in it fixed. I have never seen any evidence that the Buy-and-Holders were intending to commit fraud when they started out. They did have peer-reviewed research supporting their claims from 1965 through 1981. All of the Buy-and-Holders are good and smart people. It’s hard not to have sympathy for their positions. A good number of the Buy-and-Holders have even put their necks on the line by trying in subtle ways to rein in you Goons. They have not been willing to stick to it long enough to get the job done. But it is not hard to sympathize with people who went along with an act of financial fraud because they had to feed their families and knew that their ability to do so would be destroyed if they insisted on their right to do honest work in this field.
Ultimately we will have to decide as a society which act of fraud was worse. I would say that the number of lives destroyed by Buy-and-Hold was far, far, far greater. But the circumstances in which the Buy-and-Hold fraud took place are far more sympathetic. I see it as my job to report the story fairly and completely and honestly and charitably so that the people of the United States can come to understand exactly what happened and why and what we need to do to be certain that something like this never, ever happens again. That’s why I solder on.
We are going to need a full account of what caused this economic crisis when we see it deepen in the days following the next crash. I want to say everything that I can possibly say that is supportive of my Buy-and-Hold friends without ever crossing the line and engaging myself in criminal behavior. There are lots of good things that can be said about my Buy-and-Hold friends without crossing that line. I intend to say those things. There is nothing positive that can be said about failing to speak out when one discovers an important error in a study that one knows people are using to plan their retirements. So I hope to be able to say when I am called to testify that I have for at least 15 years been 100 percent unwilling to engage in dishonest behavior re these matters regardless of what threats were made to influence me to do so.
I hope that helps a small bit, Zippy.