Academic Researcher Wade Pfau: “Because We Just Don’t Have Enough Historical Data to Be Really Sure About Valuations, I Think You Just Need to Be Satisfied With These Sorts of Statements”

Yesterday’s blog entry reported on an e-mail that Academic Researcher Wade Pfau sent me on December 20, 2011. I next heard from Wade on December 31, 2011.

He said: “It certainly has been a very interesting discussion on your blog these past few days.

He offered the following link:

http://www.fpanet.org/journal/CurrentIssue/TableofContents/RetirementIncomeResearchProvedFruitfulin2011/

Wade observed: “Because we just don’t have enough historical data to be really sure about valuations, I think you may just need to be satisfied with these sorts of statements.” He said that Harold Evensky, the author of the article, “really is one of the leading names in the retirement planning world.”

My response, sent the following day, is set forth below.

Wade:

Thanks much for letting me know about the article and for your comments about the blog thread.

I have some things I need to do this morning. So I won’t be able to read the article until later today. I’ll let you know my reaction when I get to it.

I do have an immediate reaction to your statement that “Because we just don’t have enough historical data to be really sure about valuations, I think you may just need to be satisfied with these sorts of statements.”

I have a catch phrase that I use from time to time — The Big, Black Mountain. The Big, Black Mountain is the Social Stigma that we have created as a society to block ourselves from raising the questions that would cause us to doubt the now dominant model for understanding how stock investing works. My core aim is to get us to the other side of The Big, Black Mountain. Once we get to the other side, all sorts of wonderful possibilities open up. I’m not even a tiny bit worried about what will happen once we make it to that good and fruitful and enriching and life-affirming place.

Please understand that I do NOT believe that everyone is going to agree with Rob Bennett’s views when we get to the other side. There are going to be many, many different viewpoints expressed. Some will conclude as I (tentatively) have that Valuation-Informed Indexing is the answer. Some will continue to believe in Buy-and-Hold. Some will make in-the-middle statements of the sort put forward in the article. There will be new variations that we are not even able to imagine today.

All of that is healthy. The more ideas people try out, the more we are going to figure out over time what ideas really make sense and what ideas really seem to turn the keys. We are not going to arrive at the final resting place in a day or a month or a year or a decade. We will be talking this stuff over for many years to come.

The thing that must go is the dogmatism. That’s all. That’s the entire problem.

Say that there is someone who sincerely believes that a 4 percent withdrawal will always work. That person should properly conclude at the end of his study that that is his belief. But he should also do something else. He should include in his study mention of the reality that there are good and smart people who believe that valuations must be considered and that studies that consider valuations come to different conclusions. If a researcher does that, he is off the hook. He has left it to the reader of the study to conclude for himself what to do with his retirement plan after informing him of the state of current thinking in the field.

The Old School studies now available on the internet do not do this. They present themselves as conclusive on the question of what withdrawal rate is safe. The reality is that there are two models that come to very different conclusions.

My aim is not to get everyone agreeing with me. My aim is get everyone giving voice to his or her sincere views. People who believe that valuations have an effect are not offering their sincere views today. They are  holding back for fear of offending the Buy-and-Holders. I have much experience with this. I know this to be so. This must stop. When people hear one point of view repeated over and over and rarely or never hear the other point of view expressed clearly and firmly and completely and boldly, they come to believe that the matter is  settled.

The matter is not settled. Our understanding of what works in stock investing is PRIMITIVE today. We are only just beginning the journey. We cannot learn if we act as if we already have it all figured out. All learning comes from a desire to add to one’s store of knowledge. We have to be able to accept that the storehouse is not full if we are to gain the ability to learn more than we know today.

It is taking on an awesome responsibility to tell people how much they need to save for retirement. People who do studies in this area need to show an appreciation of the dangers to which they are exposing people when they venture forth with
“scientific” conclusions about whether people are in a position to hand in resignations from well-paying jobs or not. Everyone should be contributing his or her sincere views. But everyone should be doing so in a spirit of humility. The proper measure of humility is sorely lacking in much of the work done in this field today, in my assessment.

That last comment is obviously (I hope!) not directed at you.  I am obviously grateful for your huge contributions and for your efforts to move things in a positive direction. The purpose of the comment is to indicate to you what I view as the most important need — a change in the TONE of the discussions. I believe that there are all sorts of wonderful things we are all (very much including the Buy-and-Holders) going to discover once we achieve a change in tone.

A Happy New Year to you as well!

Rob