Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on February 25, 2011. Set forth below is the text of another e-mail that I sent to Wade on the same day.
Wade:
Please save this for after you catch up on your sleep!
You’re right about the regret bias.
But it won’t be a problem once we are able to get the word out re the need for long-term timing. Say that Money magazine and all the experts and all the web sites all begin pushing that message. There will never again be another bull market. So there will never again be a need to lower one’s stock allocation too much. So there will never again be regret bias.
All of this is circular. People cannot learn about VII because of the Ban on Honest Posting. The Ban is needed to protect Buy-and-Hold. If we give up on the effort to protect Buy-and-Hold, we learn things that it was not possible to
learn in the days before indexing. Once we learn these things, we are never going to forget them. There are going to be books and magazines and calculators and web sites to constantly remind us.
Overvaluation is not a natural phenomenon. It is the product of our ignorance of how stock investing works. We are becoming less ignorant because of decades of academic research (including the research done by the Buy-and-Holders, to be sure — the finding that short-term timing does not work was a HUGE advance).
When the car was invented, one of the complaints was that there were not enough roads to ride it on. Once we all had cars, we solved that problem! When the internet was invented, people said “well, there’s not much there to look at really.” Once we all had computers, we solved that problem.
Once we all know how to invest effectively, no one is going to want to go back to experiencing insane bull markets followed by insane bear markets. For what purpose would anyone want to do that? Those days are over. It’s just a question of getting the word out at this point.
Future discussions will not be over whether to engage in market timing or not but over how best to engage in market timing. There are lots of fruitful discussions that can be held re that question. That’s a very different sort of discussion from the one we have been having for nine years. When we are all directing our energies in a constructive direction, the pace of progress is going to speed up considerably.
The question of whether people need to engage in market timing or not (whether people need to take price into consideration when buying stocks or not) is a time waster. The future of investing analysis will be aimed at answering a far more intelligent question — HOW should people engage in market timing?
As we move to the next stage, the investor regret matter becomes less of a factor. It’s helpful to keep in mind that we have just lived through the most out-of-control bull in U.S. history. Why was this one so bad? Investors have always been drawn to Get Rich Quick thinking (the idea that this might be the first time in history when the price paid for stocks turns out not to matter). But this time those drawn to Get Rich Quick could cite ACADEMIC STUDIES purporting to back up their Get Rich Quick inclinations. That’s why I say that Buy-and-Hold is the purest and most dangerous Get Rich Quick scheme ever concocted by the human mind (not intentionally so — but still).
Once we bury Buy-and-Hold 30 feet in the ground where it can do no further harm to humans and other living things, it is all downhill sledding. The investor regret matter was indeed a problem for those who attempted to invest rationally during the Buy-and-Hold Era. But it never needs to be an issue again once the dangers of Buy-and-Hold become widespread public knowledge.
Rob
Wade responded later the same day. He said: “I think you will find my new follow-up post even better than the first one”:
http://www.bogleheads.org/forum/viewtopic.php?p=974752#974752
In the material that appears at the link, Mel Lindauer, the co-author of the book The Bogleheads Guide to Investing, attacked Wade’s research for various perceived deficiencies. Wade responded: “Mel, thank you for the comment. If you think I am trying to be sneaky, I think you are missing something important.” When Mel escalated his attacks by observing “sure looks like data-mining to me,” Wade stated: “I take the issue of data mining very seriously, and with all due respect, any data mining that I am doing is in favor of buy-and-hold, not in favor of market timing. ”
Mel in a subsequent comment said: ” I’m just trying to get to the bottom of all the issues, before you attempt to publish what may be found to be inferior or incomplete work by your peer reviewers. You appear to honestly want to pick our brains, so I’m giving you the feedback you asked for. These are issues that will be raised later, so you need to face them now. However, it appears you’re getting just a little bit testy because I’m raising issues that you may not have considered and which could certainly change the results. Better to get the issues raised here and resolved instead of having your paper rejected because of these very basic issues which you haven’t addressed.
Wade responded: “I’ll try not to get testy. When we stop comparing apples and oranges, and instead compare two scenarios which offer broadly similar risks to investors: (1) the worst performing market timing scenario produced $94,866 ; (2) a 50/50 asset allocation produced $13,426; (3) the 50/50 asset allocation is also going to have to pay some capital gains taxes when it rebalances annually, but the market timer will surely have to pay more taxes over time. But do you honestly believe that the extra taxes paid by the market timer will wipe out the entire surplus gains it had provided at a broadly similar level of risk? ”
Your understanding of how ‘roads appeared’ is stunning!
I understand you are being sarcastic, What. But I wish you would give that up. The point I made about roads is an important one.
Today, there are a lot of people who are afraid because our economy does not seem to be working. The reality is that there is not a thing wrong with our economy. Our economy is a powerhouse. It is a powerhouse being held down by a failed investing model. If we replace the failed model with one supported by the academic research, we solve the problem and we all live happier, richer, more fulfilled lives.
THe thing holding us back today is false pride. We cannot bear to accept that we made this mistake. We need to understand that we humans are not perfect, that we do make mistakes. It has been known to happen!
I think it helps to let in that we are not merely mistake-makers. We are also problem solvers. There really was a time when we did not have enough roads for our cars to drive on. We built them! We came to perceive a problem and we directed our energies to overcoming it.
Why not do the same in the investing realm? Instead of ignoring our problem and trying to rationalize sticking with Buy-and-Hold another day or another week or another year, why not start building new roads? Doing something constructive and positive and life-affirming would make us all feel a lot better.
We would soon have lots of new books. And lots of new calculators. And lots of new podcasts. And they would work! They would help people, not destroy human lives.
And we would see the good side of the humans. We would be amazed at how quickly we could create all this wonderful new stuff, how quickly we could build all these exciting new roads.
A man can dream of a better world and a better life for himself and all his friends and neighbors and co-workers, can he not?
Please let some hope for better days ahead to enter that icy Buy-and-Hold heart of yours, What.
My best wishes to you in any event.
Rob
If your point about roads is important, its only because its completely wrong and shows great insight into how clueless you are.
And there is plenty wrong with our economy. Plenty.
There is plenty wrong with our economy. Plenty.
The numbers do not support this claim, What.
The losses directly attributable to Buy-and-Hold are in excess of $12 trillion. I find it hard to imagine that, if we could today add $12 trillion of spending power to our economy, things would not be groovin’.
Our economy has collapsed on each of the four times in U.S. history in which we have permitted widespread promotion of Buy-and-Hold strategies. Never once in our history have we seen an economic collapse without us first promoting Buy-and-Hold.
The picture is clear to those with eyes to see it, What. It is my belief that the reason why you cannot see it is that you are so emotionally addicted to a Get Rich Quick investing strategy that you cannot bear to look at the realities.
shows great insight into how clueless you are.
The nasty, put-down tone here is more evidence of an emotional addiction to Get Rich Quick, in my assessment.
I certainly wish you the best of luck in all your future endeavors in any event, What. Please don’t let the bad guys get you down.
Rob
I like the continued use of ‘totally made up numbers and assumptions’. Sometimes I think you get your source material from the onion.
How exactly did the economic crisis start with the stock market?
How exactly did the economic crisis start with the stock market?
Say that valuations affect long-term returns. There’s 30 years of academic research (based on 140 years of historical return data) showing that that is so. If you are persuaded by that research and that data (I am), the rest easily follows.
If valuations affect long-term returns, the valuation level that applies today tells you the price that will apply tomorrow. THen it’s just a math exercise. We were at the highest valuation level ever seen in history in 2000. So we had to see the biggest price drop in history going forward from 2000.
What do price drops signify? A price drop is a loss of buying power for those who hold stocks. A big price drop is a big loss of buying power. A loss of buying power means that people cannot buy things and businesses fail and workers are laid off. When a lot of that sort of thing happens, we call it an “economic crisis.”
There’s nothing even a tiny bit hard about this, What. You don’t see it not because you are not smart enough to see it but because you very, very, very much do not want to see it. If you acknowledge what happened, you will feel that you were a fool, that you were taken. And that hurts. You need to get over that feeling of hurt before you will be able to understand what has happened.
When the Bernie Madoff scandal broke, there was one fellow who said in the comments section of an article: “Oh, Madoff was legitimate. I invested in his fund. I made over a million dollars!” The guy made a lot of money in the fund and that’s all he could see. He was happy to have the money and so Madoff was a good guy and that was the end of it.
That is how many people feel about the portfolio numbers they saw in 2000. Those numbers promised to them that they could live the lives they wanted to live. So they were good! What many people don’t see is that good numbers that are a lie are not good numbers. When stocks are overvalued, the numbers are a lie. That’s what the word “overvalued” means. It means MIS-priced. To be MIS-priced is to be WRONGLY priced. To report the price of something wrongly is to LIE.
There’s a way to check whether this is so, What. We have records going back to 1870. We have seen four economic crises in that time. You could check what the P/E10 level was before each of those crises. You could see whether there has ever been an economic crises that was not preceded by a super-high P/E10 level. You will see that the entire historical record confirms what common sense tells us must be so. When we overprice millions of stock portfolios, we suffer an economic crisis. When we don’t do that, our economy thrives.
Overpricing stock portfolios — that is, telling LIES about the value of the asset we are hoping will finance our retirements — is a terrible, terrible, terrible idea. Lots of people make money from those lies. Including us! But the money we make is temporary. It goes “Poof!” in the economic crisis that inevitably follows every bull market.
The only way to stop economic crises is to stop believing the numbers on our portfolio statements. We all need to adopt a policy of adjusting those numbers for the extent of overvaluation in effect at the moment. We need to know the REAL value of our portfolios, not the phony, pretend price that we get if we look at unadjusted numbers.
That’s how I see it, What. Thanks for coming by and asking a good question. I don’t think your “Onion” comment was helpful. That sort of comment suggests a closed mind. I want to see your mind open to new ideas. I want to see you learn about this stuff. Because, when you learn, you become a more effective long-term investor.
Please take care.
Rob
This is such an amazingly wrong understanding of the world. I like your view of the stock market as a big ATM though. Horribly misguided, but funny.
This is such an amazingly wrong understanding of the world.
Are you sure?
but funny
If it turns out that this is all true, I believe there will come a time when you will acknowledge that what has happened is not even a tiny bit funny, What. Lots of people have been hurt by this economic crisis.
You have my best wishes for your future happiness, in any event.
Rob