Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
“My fantasyland comes with a Nobel prize.
Yours comes with death threats” etc etc.
No, those are both your fantasies. That’s really the heart of the problem, isn’t it? Everything you write is fantasy. You used to toss in a bit of reality every once in a while. Back when people actually sent you emails. But those days are long gone. Your post-Wade psychotic break changed everything.
The bottom line is that the Buy-and-Hold retirement studies have not been corrected to this day. I pointed out in my famous post from the morning of May 13, 2002, that the Greaney study lacks an adjustment for the valuation level that applies on the day the retirement begins. All of the words that have been spilled over the following 16 years show that I was right. Thousands of people have looked at the Greaney study during that time. Not one has been able to identify a valuation adjustment. A failed retirement is a serious life setback. Greaney should have corrected his study within 24 hours of the moment when he learned of the error he made in it.
Now —
The backstory is that Greaney’s retirement study would be perfect in a world in which the market was efficient, which is the world that Bogle thought we lived in at the time when he developed the Buy-and-Hold strategy. The idea that the market is efficient was born in 1965, when Fama published research showing that short-time timing doesn’t work. Lots of good and smart people jumped to the conclusion that no form of timing works. Shiller showed in 1981 that this conclusion was a false one. He showed that long-term timing (price discipline) always works and is always required for investors seeking to keep their risk profile roughly constant over time. Shiller has described the intellectual leap from the finding that short-term price changes are unpredictable to the Buy-and-Hold conclusion that the market sets prices properly as “one of the most remarkable errors in the history of economics.” That’s the core dispute. Buy-and-Hold is rooted in error, the error was revealed by the peer-reviewed research in this field 37 years ago, and now that the error has been covered up for 37 years, the Buy-and-Holders are very, very, very, very much opposed to seeing it exposed.
I refuse to post dishonestly re the numbers that my friends are using to plan their retirements. So you see me as your enemy. I don’t see it that way. The way that I see it is that we all want the same things and so we all should be working together to learn how stock investing really works in the real world. But there are no words that I can put forward that can persuade you. You don’t want millions of middle-class investors to learn that you got the numbers they have been using to plan their retirements wrong and I am 100 percent unwilling to post dishonestly re the matter, no matter how much in the way of intimidation tactics are applied, so we work at cross purposes.
I don’t like that reality but it remains the reality that I must deal with all the same. I agree with what Wade Pfau said in the days before you Goons threatened him with career destruction and John Bogle failed to step in and help the man — the Buy-and-Hold retirement studies are “dangerous.” They should be corrected. At the very bare minimum, anyone who points someone to one of the Buy-and-Hold retirement studies for use in planning a retirement should let that person know that there are today two schools of academic thought as to how stock investing works, not one, and let that person make the decision as to whether to rely on the numbers generated by the Buy-and-Hold studies or the numbers generated by the Valuation-Informed Indexing studies.
We will learn together how it all plays out in the days following the next price crash. I can wish you the best of luck with it because I think of you Goons as friends. But that’s as far as I can go. I cannot post dishonestly re the numbers that my friends are using to plan their retirements. No way, no how. Zero chance. Not in 16 years, not in 16 billion years. I truly wish that you would make an effort to find somebody else.
I naturally wish you the best of luck in all your future life endeavors in any event, my dear Goon friend.
Fantasy Man Rob
Who says there are two schools. Are you the finance dictator of investing?
That’s a good question. It is unfortunate that it is phrased in a hostile way; I obviously am not the dictator of anything, nor do I care to be. But the question being asked is an intelligent one and an important one. It would be helpful for people concerned about these matters to think this one through.
I cannot link you to the New York Times article reporting on the awarding of Nobel prizes to both Eugene Fama and Robert Shiller on the same day; the Times keeps their articles behind a paywall. But I read the article in paper form and in real time. It remarked on how odd it was that the highest award in the field was being given to two men who had opposite ideas of how stock investing works. That’s the story.
Fama and Shiller cannot possibly both be right. Fama says that the market is efficient and Shiller says that valuations affect long-term returns. If valuations affect long-term returns, the market is not efficient. If the market is efficient, valuations cannot affect long-term returns. Fama and Shiller are saying opposite things. The name for the school of thought that believes that Fama is right is “Buy-and-Hold.” The name for the school of thought that believes that Shiller is right is “Valuation-Informed Indexing.” There are two schools. That’s just the way it is.
All of the friction that we have seen results from the unfortunate reality that we have as a people tried to paper over the differences between what Fama is saying and what follows from it and what Shiller is saying and what follows from it. Most Buy-and-Holders acknowledge that Shiller has done important work. But I have never seen a Buy-and-Holder integrate Shiller’s findings into his or her understanding of how stock investing works. Buy-and-Holders ignore Shiller. They credit him with having done important work. But then they go about their lives as if Shiller did not exist.
That’s why my famous post of the morning of May 13, 2002, caused so much controversy. What I said should not have been even a tiny bit shocking. If valuations affect long-term returns, then you OBVIOUSLY need to take valuations into consideration when calculating the safe withdrawal rate. But most Buy-and-Holders had never stopped to realize that. Most Buy-and-Holders don’t believe that the market is purely efficient. But they believe that it is LARGELY efficient. So they think that the numbers you get from a study that does not consider valuations are at least in the right ballpark. But they have never checked the numbers. They don’t in fact know how much of a difference it would make to count valuations. They react with shock when someone says that they should count valuations because doing that would put them in a different world than the one that they have always lived in and they don’t like the idea of going to that different world.
Shiller created that different world, I didn’t. I have done nothing but advance views that follow from a belief that Shiller’s research is legitimate, which is a perfectly reasonable belief given that he was awarded a Nobel prize for his work. But when I say the things that I say, Buy-and-Holders are shocked because they have not heard these things before. The things that I say sound outlandish to them because they have never heard them before. And they are not too cool with thinking them through for the first time because their entire lives are riding on their belief that Buy-and-Hold is solid.
I am not the dictator of anything and I do not want to be the dictator of anything. But it is a simple fact that you don’t get the same numbers when you include a valuation adjustment in your calculation of the safe withdrawal rate. If Fama were right, there would be no need to include such an adjustment. But, if Shiller is right, an adjustment is required. So there are two schools of thought, no? One school says that you need to include the adjustment (because it affects the result), the other says that you do not need to include the adjustment (because it does not).
People who belong to the different schools should not be enemies. We should be working together to try to arrive at the truth of things. It is the shock that causes the friction. And the shock is the result of the unfortunate reality that as a society we have developed the habit of sweeping these differences under the rug rather than speaking about them openly and frankly. I think that Fama was wrong. I think he merited his Nobel prize because I think he made huge contributions. But I do not believe that he was right because I do not believe that the market is efficient. But I sure am not angry about the fact that his beliefs about how stock investing works are different than my own. And I am not angry that anyone else’s views are different than my own.
Should I lie when I post at boards, Anonymous?
I obviously believe that valuations affect long-term returns. So I obviously don’t believe that the safe withdrawal rate is the same number at all times. Should I lie about that to make you Goons happy? You cannot possibly believe that I should do that. It would be an absurd thing to believe. But I have never been able to figure out anything else that would satisfy you. You want me to lie. And that just can’t be right. The better way to go would be to acknowledge that there are two schools of thought and be friends despite our differences.
It is the 37 years of peer-reviewed research showing that valuations affect long-term returns that says that there are two schools of thought. Buy-and-Hold was developed at an earlier time, a time in which is was believed that the market was efficient. If the market were efficient, Buy-and-Hold would be the ideal strategy. But those of us who believe that Shiller’s research is legitimate do not believe that the market is efficient. So we of course have different ideas.
I hope that helps a small bit, Anonymous.
My best wishes to you.
Finance Dictator (According to My Goon Friends But Not According to Me) Rob
“That’s just the way it is.”
It seems to be just your claim. One could say that there are 6 schools of thought or 8 or 12. People can claim any number.
That’s not so.
There are different viewpoints within the Buy-and-Hold school. And there are different viewpoints within the Valuation-Informed Indexing school. So it is not that there are only two viewpoints re how stock investing works.
But the two schools hold different views re the fundamental question of what causes stock price changes. The Buy-and-Holders believe that it is economic developments that cause stock price changes and the Valuation-Informed Indexers believe that it is shifts in investor emotions that cause stock price changes.That difference goes to the core of what people believe about stock investing. If price changes are caused by emotion, then today’s investors cannot count the full amount on their portfolio statements as real. They need to divide by two to identify the true and lasting value of their stock holdings. That’s a big, big, big, big difference from believing that the numbers of the portfolio statement are meaningful and are rooted in economic realities.
Your own behavior shows that there are only two schools of thought, Anonymous. Have you ever gotten so angry at someone with a different view on stock investing as you have been with me for 16 years running now? What I say drives you crazy because I root my beliefs in peer-reviewed research just as you believe you do and yet my beliefs are a world away from your beliefs. That’s disconcerting. That’s threatening. That’s scary.
You wouldn’t react with such anger if a fellow Buy-and-Holder expressed a preference for a stock allocation a little off from the one that you have chosen. You would just chalk that up to a little difference of opinion, no biggie. But I say that half of the amount listed on your portfolio statement is not real and lasting wealth, that it is just the product of irrational exuberance, a temporary, emotion-based fantasy. That’s a very, very, very big difference.
There are two schools of academic thought as to how stock investing works. There was only one school until 1981 — Buy-and-Hold. Then Shiller came along with his “revolutionary” (his word) research findings and upset the Buy-and-Hold apple cart. Since 1981, we have as a society been working very slowly toward the next step in our efforts to learn the realities, which it to figure out whether it is Fama or Shiller who is right. There is no third school today that has support in the peer-reviewed research. Everyone either believes that price changes are the product of economic developments or that price changes are the product of shifts in investor emotions.
Fama and Shiller were awarded Nobel prizes in recognition of the role their research played in providing the foundation stones for the two current academic schools of thought re how stock investing works.
All my best.
Second School Advocate Rob
“That’s not so.”
Yes it is. Your emotions confirm that.
Okay, Anonymous.
Please understand that I don’t deny my bias. I have 16 years of my life involved in building the Valuation-Informed Indexing model. So I have a deep emotional commitment to this model. I try to keep my emotions in check. I make an effort. But in the event that I sometimes let my emotional bias get the best of me, I wouldn’t know that that was happening, would I? So it is possible that your suggestion here is on the mark. Perhaps what I am seeing so clearly would not be so clear to me if I were capable of seeing things from a 100 percent objective perspective.
The only thing that I have been able to come up with to deal with that possibility is to make note from time to time that it is possible that I am wrong, that I am just another one of those flawed humans. I say that from time to time for that reason. I certainly don’t think that I am wrong. I believe strongly that I am right or else I would not have devoted 16 years of my life energy to this thing. But it is POSSIBLE that I am wrong and that I don’t see it. So I think that it is healthy for me to make note of that reality from time to time. As confident as I am, I am one of those darn flawed humans.
This line of discussion reminds me of the comment that one of the members of one of the peer-review committees that rejected the paper that Wade Pfau and I wrote together put forward. He said something to the effect of “it would be nice to know the ultimate criterion to look at to know which of the two strategies is the right one.” That’s a fair comment. It would be hard to argue with it. But I see that more as an argument in support of publishing the paper than as an argument for rejecting it for publication. There is no one ultimate criterion. There is a PROCESS in which humans talk things over and come to decide on things over time. The publication of peer-reviewed research is part of that process. You publish the paper not because it is ultimate truth but because it helps people to prepare themselves for the discussions that they need to have among themselves to arrive at truth over time.
I am emotional. You are emotional. We are both humans. So that one is a given. The difference, in my eyes, is that I favor permitting the debate to go forward and you favor shutting it down. The debate is the process by which we learn who is right and who is wrong. Shut down the debate and we are stuck with what we thought we knew before the last 37 years of peer-reviewed research was published, and that’s that the market is efficient and that Buy-and-Hold is the ideal strategy. I want to see the debate move forward because I want to move beyond that old and flawed (in my assessment) understanding. You don’t want to move forward. You like where things are today. So you do everything you can to shut down the debate. We work at cross purposes.
I could be wrong on the ultimate issue. I don’t think so. But you never know. But I don’t think that I am wrong on the process issue. The process issue — that new ideas may be discussed, whether advocates of the old idea want those discussions to take place or not — is what our country is all about. When you engage in criminal behavior to stop the debate from even taking place, you travel to a place where I just cannot go. I love this country. I love what it is about. If I am wrong and the debate goes forward, I will be discovered. Good. That’s the way it should be. If the debate is blocked — boo, baby!
That’s not me. That’s not what I am about. I love it that my country favors seeing such debates go forward and I don’t think that that one can ever change. I can say that it is possible that I am wrong re the substance issue but my love for what my country is all about runs too deep for me to say that the laws that my country has saying that such debates must be permitted to go forward are wrong. I think those are good and necessary laws regardless of whether I am being tripped up by my emotional weaknesses or not.
It will be interesting to see how it all plays out. I am voting for the people of the United States! No apologies.
Emotionally Influenced and Thus Possibly Wrong Rob