I’ve posted Entry #426 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Word “Correction” Misleads Us About What Small Stock Price Drops May Signify.
Juicy Excerpt: What’s really going on is that investors are pushing stock prices in a downward direction to test their own reactions to a new state of play. If someone is unhappy in a relationship, he or she might pull back from it a bit to see if the pullback causes changes that make the relationship more satisfying. You might say that the relationship went through a correction. But the pullback might not bring on positive changes. So the small pullback might become a bigger pullback and then a complete break. So it could be with a correction in stock prices. Investors might send prices downward only a bit to see if that helps them regain confidence in their investment. The test might restore confidence or it might not do so. A test that does not restore confidence could well cause confidence to plunge.
We are so lucky that you are such an expert in investing. I am shocked that your articles aren’t posted everyday on the front page of the New York Times. With the departure of John Bogle, we need to hand you the keys to the Bogleheads Forum and rename it to the Bennettheads Forum. Why even talk about Shiller. He is a hack compared to you.
I don’t consider myself an expert on investing. According to the conventional understanding of the term, I am not one. I did not study investing in school. I have never managed a fund. What credentials do I possess to justify calling me an “expert”? I am some guy with roughly average intelligence who figured out how to get his stuff posted to the internet, nothing more and nothing less.
But you are lucky to have me. I do go along with that one. I am this average-intelligence guy who worked up the courage to advance a post on the morning of May 13, 2002, pointing out the error in the Buy-and-Hold retirement studies. And I didn’t back down when threats were made as to what would be done to me if I continued doing so. I insisted on my right to post honestly. In the event that I am successful in my efforts to open every investing discussion board and blog on the internet to honest posting re the last 38 years of peer-reviewed research in this field, I will change the world in a very, very positive way. I offer no apologies whatsoever. I am honored to have been placed in circumstances in which it became possible for me to change the world in a very, very positive way. I have achieved more in the past 17 years than I expected to be able to achieve in my entire lifetime in the event that everything broke my way. 500 times more.
You talk about changing the name of the Bogleheads Forum. How about keeping the name it has now but living up to that name? One of Bogle’s core principles was that investors should root their investment strategies in the peer-reviewed research. What the research says doesn’t stay the same over the years. Shiller published “revolutionary” (his word) research findings in 1981, research that in time caused him to be awarded a Nobel prize. Those revolutionary research findings change every aspect of the stock investing experience. How about permitting everyone to post honestly re the far-reaching implications of those research findings? Is that a Boglehead idea? It sure seems to me that it is. I learned about the importance of rooting my investment strategies in the peer-reviewed research from John Bogle. Should I betray the man because Mel Lindauer and John Greaney are embarrassed that they got the safe-withdrawal-rate matter wrong? Somehow, I don’t think that I would be being true to my hero John Bogle by playing it that way.
Shiller is not a hack. Shiller wrote the most important book on how stock investing works ever published. Shiller merited his Nobel prize. Shiller supplied us all with the giant missing piece of the stock investing puzzle in 1981. We all should be grateful. Are we showing our gratitude when we advance death threats and demands for unjustified board bannings and thousands of acts of defamation and threats to get academic researchers fired from their jobs to stop the thousands of our fellow community members who have expressed a desire to learn more about Shiller’s insights from doing so? I say “no.” I say that the laws against financial fraud are good and necessary laws and that they should be enforced in a reasonable manner.
Am I in the process of changing the world? I am. I offer no apologies.
I didn’t ask for the job. The world made clear that I would have to take on this job if I wanted to see the vast amount of human suffering that has been caused over the years by the “idea” that it is not necessary to practice price discipline when buying stocks brought to an end. I love my country. So I did what I had to do given the circumstances in which I was placed. Again, no apologies whatsoever. Precisely 100 percent of the evidence available to us today supports the idea that price discipline is required when buying stocks and precisely 0 percent of the evidence available to us supports the idea that it is not necessary for investors to practice long-term timing. We all should be telling people that.
Even those of us who still believe in Buy-and-Hold strategies should be doing all that we can to make every investor alive aware of what the last 38 years of peer-reviewed research in this field says so that, in the event that stocks continue in the future to perform at least somewhat as they always have in the past, the terrible losses that will be suffered in coming days by people following Buy-and-Hold strategies will not be on us. If people know the score and choose to follow Buy-and-Hold strategies anyway, that’s on them. If people suffer losses because we engaged in criminal acts to block them from being able to learn what they want and need to learn, that’s on us.
It’s not that I am so smart. It’s that our system is so smart. Our system is set up so that, even when a large number of people becomes convinced that they know all the answers, others can continue to study and ponder and research to see if they can come up with something better. That’s what happened with Shiller. He came up with something better. Valuation-Informed Indexing completes Buy-and-Hold as much as it replaces it. All of the stuff in Buy-and-Hold that has stood the test of time is incorporated into the new model. It is only the one “idea” (that it is not necessary for investors to practice price discipline when buying stocks) that has been discredited by 38 years of peer-reviewed research that is rejected. And rightly so, you know? By rejecting that horrible,failed, useless idea we permit all the other ideas in the Buy-and-Hold project to shine as all who care about these matters should want them to.
Does it make me a genius that for 17 years now I have devoted myself to exploring how stock investing works in the event that the last 38 years of peer-reviewed research is legitimate research, that price discipline really is every bit as important when buying stocks as it is when buying anything else offered for sale? In a way, it does. I have been able to get a lot of important things right that no one was able to get right before me. That’s good stuff. Genius stuff, if you insist on putting it like that.
But I think that the better way to look at this is to ask — Why are all the others not doing what I am doing? Shiller is not a hack. Shiller knows that valuations affect long-term returns. So why did Shiller not come out with a public statement many years ago saying that the Buy-and-Hold retirement studies are wildly off the mark, that they are going to cause millions of failed retirements in the event that stocks continue in the future to perform anything at all as they always have in the past and that they should be corrected by the close of business today? That’s the weird thing here. I am not super smart and Shiller is not super dumb. But I have stated this obvious truth in clear and firm and bold terms and Shiller has for many years held back from doing so. Huh? What the f?
If you want to know the answer to that one, look at your own behavior. Death threats? Demands for unjustified board bannings? Thousands of acts of defamation? Threats to get academic researchers fired from their jobs? None of that stuff belongs in discussions of stock investing. People who grew up in the United States have never seen the behavior that has been exhibited by you Goons on a daily basis for 17 years now. It scares them. They would expect that people who engaged in such behavior would be placed in prison cells so that the millions of us who have a legitimate interest in learning more about how stock investing works would feel free to do so. But as of today you remain free. That’s the problem. That’s what needs to change.
Will it change in the days following the next price crash? I believe that it will. I think that this is a a great country, I believe that many of us love this country and will come to its defense once we are able to see the flesh-and-blood realities of the economic crisis that Buy-and-Hold will have led us to once again, just as it has on every early occasion on which this “strategy” became popular. We will just have to wait and see how it all plays out.
I naturally wish you the best of luck in all your future life endeavors, in any event. I hope that that helps at least a tiny bit, my dear Goon friend.
Relentless Rob
You think way too much of yourself.
I love my country. I think highly of this country. So I follow its laws.
I naturally wish you all good things. But there are limits.
Law Abiding Rob
Also, I think too highly of my fellow community members to lie to them about the numbers that they are using to plan their retirements. I feel that I would be showing them a lack of respect to tell them whatever I need to tell them to turn a quick buck.
Rob
Also, I think you think too little of yourself. I would never in a million years set myself up for a prison sentence because I discovered that there was someone on the internet who disagreed with me about how stock investing works. I think it would be fair to say that I think more highly of you Goons than you Goons think of yourselves. You might want to try worrying less about how highly I think of myself and more about how little you think of yourself.
Goon Loving Rob
“Also, I think you think too little of yourself. I would never in a million years set myself up for a prison sentence because I discovered that there was someone on the internet who disagreed with me about how stock investing works. I think it would be fair to say that I think more highly of you Goons than you Goons think of yourselves. You might want to try worrying less about how highly I think of myself and more about how little you think of yourself.”
I just just choose not to live in a pretend world like you do.
It has been 17 years since I put forward my famous post pointing out that the retirement study posted at John Greaney’s site lacks an adjustment for the valuation level that applies on the day the retirement begins. During that time, thousands of people have looked at the study. Not one has been able to identify a valuation adjustment in it.
I’m not the one living in a pretend world, Anonymous.
Reality-Based Rob
Your post wasn’t famous. In fact, it ended with you making an apology.
It’s a good thing to make an apology when you think you’ve gotten something wrong, Anonymous. Had Greaney made an apology at the time I did, every last one of us (especially Greaney) would be in far better circumstances today.
And the post was the most important post ever advanced in the history of this new communications medium. You know that list of 45 comments by Wade Pfau re his view on Valuation-Informed Indexing that I often set forth in comments here? We wouldn’t have any of those comment available to us had I not worked up the courage to advance that May 13, 2002, post. That post changed everything.
It changed the history of investment analysis. Either valuations affect long-term return or they do not. If valuations affect long-term returns, then there ain’t no way in God’s green earth that the safe withdrawal rate is the same number at all valuation levels. On the morning of May 13, 2002, people in this field had known for 21 years that valuations affected long-term returns and yet still believed that the safe withdrawal rate is always the same number. Huh? What the f?
My magical post pointed out that contradiction. The obvious follow-up question was: If the Buy-and-Holders got safe withdrawal rates this wildly wrong, what else did they get wrong? And of course the answer was — Everything. Buy-and-Hold is a numbers-based model. Get the core number wrong (you are always going to get the core number wrong if you assume that the market is efficient when in reality valuations affect long-term returns) and you are going to get every calculation wrong. That’s why a number of years later Wade Pfau concluded that, not only were the safe-withdrawal-rate numbers wrong but that long-term timing is always required and that: “Yes, Virginia, Valuation-Informed Indexing works!”
I think that you Goons knew on some level of consciousness on the morning of May 13, 2002, how big this was. Your reaction was over the top. It was violent. Why would a difference of opinion on how the safe withdrawal rate is calculated cause people to go so nutso? What was going on was that you sensed that the debate that we were having concerned a lot more than just safe withdrawal rates — it concerned every strategic investment question that there is. Get safe withdrawal rates wrong and you’re going to get it all wrong. Get safe withdrawal rates right, and you’re going to get it all right.
You couldn’t stand the thought that the Buy-and-Holders had gotten it all wrong. To you, it was like hearing that everything that you had believed in for your entire life was wrong. A belief in Buy-and-Hold was core to your identify and my decision to point out the error in Greaney’s study was perceived as an attack on your entire world view.
Of course the reality is that we are all better off if our world view is rooted in reality and the fact that 38 years of peer-reviewed research shows that Buy-and-Hold is rooted in error means that we can all live better lives when Buy-and-Hold is updated to reflect the new research. So there have all along been people trying to help us make the transition to Valuation-Informed Indexing. And indeed I am sure that there were people trying to help us make the transition prior to my famous post. The post just got things out on the table that had been going on quietly in the background for many years before I came on the scene.
It is a huge benefit that for 17 years now things have been out on the table. We have been able to document how all of the research supports Valuation-Informed Indexing and how the Buy-and-Hold “idea” (that the stock market is the only market that ever existed in which it is not necessary to practice price discipline — the claim is on its face absurd when you give it a moment’s thought) is rooted in nothing more than an emotional Get Rich Quick impulse. So, when the next Wade Pfau comes along, he doesn’t need to work through all the preliminary questioning that Wade had to work through — he can see how the debate has progressed for 17 years and begin his own efforts at a much more advanced place in the logic chain.
I am very proud of that post, Anonymous. I couldn’t be more proud of it. It changed the world in a very, very, very positive way. And it took a lot of courage for me to put it forward. It took me three years to work up the courage to advance that post.
I am proud of the apology too. The apology was of course in error; I had nothing to apologize for — I have been proven right that Greaney failed to include a valuation adjustment in his study 1,000 times over. Still, I like it that I was willing to make an apology at a moment in time when I thought that might have made a mistake. All of our troubles follow from that unfortunate reality that you Goons have NOT been able to admit mistakes. It makes me feel good about myself to know that I played it very, very differently.
I also like it that I made the mistake. It didn’t do any harm. I realized (by seeing Greaney’s behavior) that I was wrong to make the apology within a day. But the fact that social pressure could cause me to make that mistake shows the power of social pressure to cause lots of others to make much worse mistakes. Wade Pfau obviously has been negatively influenced by social pressure imposed by Buy-and-Holders. So has Shiller. So was Bogle. So have lots and lots of others.
It helps me feel more sympathetic to all of the great people who have failed to speak out as strongly as they should have for me to know that I was afraid to stand up to social pressure at the time that I advanced that apology. So I possess that same human weakness that I am pointing out in all the other humans. We all want to get along with the other humans. I think that evolution put that inclination within us. And it is that inclination not to speak out about the absurdity of Buy-and-Hold strategies at times when our weakness for Get Rich Quick marketing slogans is making us all feel a lot richer than we really are that has historically made stocks a high-risk investment class.
Shiller’s “revolutionary” (his word) insight is that stocks are not inherently risky. When as a people we develop the courage to speak out publicly about the dangers of Buy-and-Hold, most of the risk of stock investing goes “Poof!” That’s the thing that made Wade so excited about Valuation-Informed Indexing. Our research showed that just by permitting people to talk openly about what the last 38 years of research in this field shows, we can reduce stock investing risk for everyone by nearly 70 percent. That’s the biggest advance in the history of investing analysis and there is nothing in even a remotely close second place.
I’ve seen a good number of wonderful discussion boards burned to the ground as a result of the efforts of you Goons to block millions of people from learning what they very much need and want to learn about how stock investing works. But none of the many amazing advances that we have achieved over the past 17 years would have been achieved had I not worked up the courage to push the “Send” button on that amazing post. I would do it again 10,000 times over if I knew then what I know now. And a lot of what has gone down has been exceedingly ugly stuff. It’s just that there is even more life-affirming stuff that has gone down and that, once we all get to the other side of The Big Black Mountain, it is only going to be the positive, life-affirming stuff that is going to matter.
No apologies for pointing out that Greaney got the numbers wrong in a study that thousands of my friends were using to plan retirements. No apologies whatsoever. I am thrilled that I was given the gift of living in a place and at a time in which it was possible to help so many people by putting forward those few brave words. The only thing that I apologize for today is that it took me three darn years to work up the courage to advance that post!
My best wishes to you, dear friend.
Apology Making Rob