“All Good Things Are Shocking When They Are New. There Will Come a Day When the Idea That Valuations Affect Long-Term Returns and That Valuation Adjustments Are Required in Retirement Studies Will Not Be So Shocking Anymore. The More We Talk About the New Ideas, the Less Shocking They Will seem.”

Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

“Huh? What the f?”

That’s what people say when they read your posts.

I think it’s true that many do indeed do that, Anonymous. If I could go back in a time machine to when I was 45 (the age I was on May 13, 2002) and then read one of these posts that my age-62-year self wrote in the year 2019, I think that would be my reaction. The story of what has gone down over the past 17 years is as crazy as all get-out. But it’s an important story. It’s a story that very much needs to be told.

I don’t know how much you know about psychology. I don’t know very much, I took a few courses and read articles about it from time to time, that’s all. Everyone has heard of Freud. He changed the world. Not all of his ideas are 100 percent accepted today. But everyone who works in the field must learn Freud. His work is the foundation of this discipline that employs hundreds of thousands of people and which affects every last one of us at one time in our life or another. What do you think of the “Projection” concept? Somebody accuses another person of something not because the other person has done the thing but because the person making the accusation has inclinations in that direction. Huh? What the f? That’s pretty darn weird stuff. It’s not intuitive that things would work that way. The normal expectation would be that someone would accuse another person of doing something because there is evidence that the other person did that thing. This projection concept argues that there can be very strange motivations driving human action. Freud taught us important things about how the human being operates in this world. He advanced knowledge by pointing us to some important truths.

That’s what Shiller did. I point out over and over and over again that Shiller describes his insights as “revolutionary” in the subtitle to his book. His ideas really are revolutionary. They are shocking to the pre-1981 mind, which is the Buy-and-Hold mind. The Buy-and-Holders presumed that investors are trying to maximize personal profit when they set stock prices. That sure seems to make sense. People want money for thousands of reasons. Why wouldn’t they act to maximize profit? If they did act to maximize profit, then they would collectively consider every bit of evidence bearing on what the price of stocks should be when setting the price of stocks. The market would be “efficient.” No investor would be able to do a better job than the market as a whole at identifying the true value of stocks at any point in time. Timing would not work. Investors could count on the number on their portfolio statement to represent something real and lasting, something rooted in economic realities. If that number showed that you were on track to meet your retirement goals, then it would indeed be so. That’s Buy-and-Hold.

Shiller said something very different. He said that investors are human and therefore not entirely rational. Investors at times become highly emotional. When they do, they do not act in their self-interest. They do crazy, self-destructive things. Their irrational exuberance causes them to set prices at crazy places where the number on the portfolio statement is not at all reflective of the long-term realities, where using that number to decide when to hand in a resignation to a high-paying corporate job would cause the investor to suffer horrible life setbacks in years to come, where the collective craziness would cause an economic contraction or even a great depression when the time came when the market had to set prices properly again by crashing them (because the investors making up the market refused to exercise price discipline and thereby to set prices properly without a crash and an economic crisis).

Shiller changed the world, as Freud did before him. He showed us how our emotions play a role in the setting of the stock price and why we need to take the role of emotion into account in every strategic choice we make as investors. He helped us. We should be celebrating his work at every discussion board and blog on the internet. We should be trying to mine new insights out of it so that we can live better, richer lives in the future than we are able to live today. To ban discussion of the implications of Shiller’s Nobel-prize-winning research is like banning the use of electricity. If we banned the use of electricity, we would all suffer. The discovery of electricity liberated us all to live better lives. So did Shiller’s amazing research findings. We need to be making greater use of them.

The problem that we are facing as a society is that we did not always have Shiller’s amazing research findings available to us. There was a day when Buy-and-Hold looked like the real thing and we built an entire industry around it. The people who advocate Buy-and-Hold strategies to investors feel highly threatened by the discussion of Shiller’s insights. If the last 38 years of research in this field is legitimate, they have been getting it all wrong for years now. They will end up looking foolish. They may get sued in civil proceedings by investors who have suffered losses because they offered bad advice. In extreme cases, they might even go to prison for financial fraud. It’s a bad scene.

What to do?

Some of us are blissfully unaware of the far-reaching implications of Shiller’s work. That group just continues preaching Buy-and-Hold and thinks no more of it.

Another group possesses at least a dim understanding that this Shiller fellow did some important work. People in that group drop hints from time to time as to how investor emotion might influence things. But, when they see investors who follow Buy-and-Hold strategies getting angry because they say scary things, they back off and wait for a time when exploring Shiller’s ideas will not cause so much damage to their own careers.

I say what I believe. Period.

I acknowledge that the Buy-and-Holders offered many amazing insights of their own. That’s part of our history and I certainly don’t see that any benefit would be obtained from denying that part of the story But I do not hold back from pointing out ways in which the continued promotion of Buy-and-Hold will hurt us all if it turns out that that Shiller fellow is on to something. I made friends with a lot of the people at the old Motley Fool board. Those people used Greaney’s retirement study to plan their retirements on a daily basis during the years when I posted actively at that board. Thousands of friends of mine are likely to see their lives ruined because of the errors in his study that have remained uncorrected for the 17 years since he learned about them. Criminally abusive tactics have been employed by Greaney’s Goon friends to keep the word from getting out to the people who need to know about the errors in the study (which is every last one of us). I am outraged and horrified by this reality. So I do what I can to expose it.

The ordinary thing would be that every last person on the planet would thank me for discovering the errors in the study and for pointing them out. Including Greaney.

That’s obviously not the way it played out. So we are in this strange place instead.

I cannot commit felonies. I love my country. It is not in me to break its laws, certainly not the ones important enough to be classified as felonies. So what you Goons want of me is 100 percent out. It has been a non-starter from Day One. It is just not in the cards.

I am open to absolutely anything else. Anything that is on the right side of the felony line, I am in on in three seconds and you won’t have to ask a second time. Anything on the wrong side of the felony line, I won’t even look at. Not for 17 years. Not for 17 billion years. That’s me.

Where you stand is that you are looking at a long prison sentence beginning in the days after prices crash. I would be happy to let you out of the prison sentence in exchange for you helping me to get the word out about the far-reaching implications of Shiller’s Nobel-prize-winning research to every investor alive on the planet. I think you would be happy to agree to that deal if only I could offer it. But I obviously am not able to offer it. It is your jury that will decide the length of your prison sentence, not me. So my hands are tied re that one.

I have offered to do the best that I am able to do. I can tell people about cognitive dissonance, I can explain to people that Greaney follows Buy-and-Hold strategies himself and personally believes that a 4 percent withdrawal is safe. I can point out that we had a responsibility to rein in the abusiveness when we saw it and so it was not you Goons alone that caused the problem. I can explain why I believe that the Greaney study and all the other Buy-and-Hold studies were an advance over the retirement analyses that came before them (Peter Lynch once wrote that the safe withdrawal rate was 7 percent — it was the Trinity study that helped him to see his mistake). I can say that the Buy-and-Holders are good and smart people and that we all should be grateful for the many ways in which they advanced our understanding of how stock investing works. I can point out that there would be no Valuation-Informed Indexing had Buy-and-Hold not come along before it to set the foundation for the first true research-based strategy.

Those things I can do. I cannot say that Greaney’s study contains a valuation adjustment. Those are the realities we face.

All of the nastiness is of course as crazy as all get-out. Learning how stock investing works in the real world helps each and every one of us to live a better life. This stuff is all good. It is not possible for the rational human mind to imagine any way in which opening every investing site on the internet to honest posting could do harm to a single soul. But the Buy-and-Holders feel very, very, very threatened. That’s a reality too. We need to do what we can to help them adjust. It is their fear of what this amazing advance for the human race will mean for them that is causing all the craziness that we see before us.

I am happy to do anything in my power to help ease the pain of the transition. I am not willing to travel to the wrong side of the felony line. I know with 100 percent certainty that that cannot be the answer here. It is because good and smart people hesitate to speak up and to do what they know is right that we are all in the mess we are in today. So having one more of us hesitate to speak up is surely not the answer. Kindness is the answer. I can agree to that one. But the kindness must be mixed with a measure of honesty. We need to permit enough honesty to allow millions of middle-class people to learn what the last 38 years of peer-reviewed research teaches us all about how stock investing works in the real world.

Freud shocked people in the early days. People got over it in time. All good things are shocking when they are new. There will come a day when the idea that valuations affect long-term returns and that valuation adjustments are required in retirement studies will not be so shocking anymore. The more we talk about the new ideas, the less shocking they will seem. It is not talking about them that makes them seem shocking, not talking about them. Talking about them over time makes them become familiar and reduces all the craziness that we have seen over the first 17 years of our discussions. Permitting honest posting will normalize the discussions.

You know when lots of people will be saying “Huh? What the f?”? When they see 50 percent or more of their life savings disappear into thin air. That’s going to cause a reaction. When millions of people are left wondering how it is that their lives were destroyed by following the “experts,” I will tell them the story of how the experts were taken in by an idea (that the market is efficient) that was never supported by the peer-reviewed research but which was never anything more than an assumption that became popular many years ago among economists. I will tell them that I believe that it is Shiller who is right, that investors really are humans and humans are emotional and thus the market is not efficient at all and that stock prices are often the product of irrational exuberance rather than of reason and that they need to make the necessary adjustments to the numbers on their portfolio statements when that happens.

The situation is crazy. But it is a good crazy. When we all lose a good portion of our retirement savings, we are going to have to come to terms with what happened. We cannot just give up because we made a mistake and it hurt us. We are going to need to brush ourselves off and get back on the bicycle. The purpose of my work is to help us do that. Sometimes crazy things happen in this big old goofy world of ours. We cannot always just ignore the craziness and walk on. Sometimes we need to come to terms with the craziness. When Greaney advanced his first death threat on the evening of August 27, 2002, that was truly crazy stuff. A good number of us elected to ignore that craziness, to just act like it had not happened. So the craziness did not stop but instead spread and grew worse over time. And here we are.

Permitting honest posting on the last 38 years of peer-reviewed research will not make us more crazy. It will make the craziness go away. Knowing how stock investing works in the real world helps us all. We need to stop being so crazy as to deny ourselves the benefits of that deeply normal and healthy and smart and good and life-affirming course of action.

My sincere take.

Crazy (But Maybe Not!)Rob