All industries would like to be able to persuade the people who buy their product or service that it is worth buying at any possible price. The Stock-Selling Industry is the only industry that has ever pulled off this act of marketing magic. Millions of investors today believe that it is not necessary to consider price when setting their stock allocations, that it is not possible to successfully time the market.
There is now 30 years of academic research showing that the claim that it is not possible to time the market is false. There really is a wealth of research showing that short-term timing (changing your stock allocation because of a guess at to how stocks will perform over the next year or two) does not work. There is zero research showing that long-term timing (changing your stock allocation in response to big valuation shifts with an understanding that you may not see a benefit for doing so for as long as 10 years) doesn’t work. To the contrary, there is now a mountain of research showing that long-term market timing ALWAYS works. There has never been one time in 140 years (that’s as far back as we have records) when long-term timing did not produce far higher returns at greatly reduced risk.
This article exposes the cover-up. It shows how the academic researchers in this field are pressured to perform only research that helps the industry big shots and to refrain from doing research that would help millions to invest more effectively when publishing such research would undermine the industry’s most cherished marketing slogans (the phrase “timing never works” has been repeated so many times that millions of investors assume that there MUST be research supporting the claim).
The public policy implications are huge. In ordinary circumstances, stock-market prices are self-regulating. When prices get high, the long-term value proposition of owning stocks drops. That should cause investors to sell and the sales should bring prices back to fair-value levels. The relentless promotion of Buy-and-Hold strategies made the market dysfunctional. Stock were overpriced by $12 trillion in 2000. Prices always return to fair-value levels over the course of about 10 years. So we knew in 2000 that consumers were going to lose about $12 trillion in buying power by the end of the first decade of the 21st Century. There’s your economic crisis!
Wade Pfau hold a Ph.D. from Princeton. He is an associate professor at the Graduate Institute for Policy Studies. He learned of my work developing the Valuation-Informed Indexing investing strategy and asked to pick my brain for the purpose of developing research that would confirm or deny my claims. He found that everything I said checked out. He was met with attacks on his integrity by prominent Buy-and-Holders and by indifference by Peer Review committees before getting his research published by a respectable but not stellar journal. When he sought a correction from the authors of a retirement study that got the numbers wrong because it failed to include a valuations adjustment, a group of Buy-and-Hold Goons threatened to send defamatory e-mails to his employer with the aim of getting him fired from his job.
Wade feared for his career. It was not only that he knew that the Goons were capable of following through on their threats (he has seen them do so in other cases). It was also that he knew that few or none of the “leaders” in this field would speak up for him if they did. These Goons have been smearing my reputation for 10 years now because I was the person who discovered the errors in the retirement studies. I have been banned from participation at 15 discussion boards and blogs at the insistence of Buy-and-Hold dogmatics. Numerous big names have failed for 10 years to speak up about the smear campaign, including: (1) John Bogle; (2) William Bernstein; (3) Larry Swedroe; (4) Rick Ferri; (5) Scott Burns; and numerous others.
Wade has announced that he will not be publishing further research showing the superiority of Valuation-Informed Indexing over Buy-and-Hold because it is too “controversial” a topic. He says now that he still believes that the Buy-and-Hold retirement studies get the numbers wrong but that he does not see any need for corrections as “that isn’t how research works” in this field.
The full version of this article contains much more background and detail than this teaser version. Please view it here.
Set forth below are 10 comments Wade advanced during our 16 months of e-mail correspondence. The links are to blog posts that report on the e-mails containing the comments.
1) “What you see in the top part of the graph for each year is the amount of wealth accumulated after 30 years for someone following Buy-and-Hold against someone following Valuation-Informed Indexing….Valuation-Informed Indexing provides more wealth for 102 of the 110 rolling 30-year periods, while Buy-and-Hold did better in 8 of the periods.”
2) “I will take steps in my final paper to test a wide variety of assumptions about asset allocation, valuation-based decision rules, whether the period is 10, 20, 30, or 40 years, lump-sum vs. dollar-cost averaging, and so on, and to show that the results are quite robust to changes in any of these assumptions.”
3) “The maximum drawdown from market timing is much less. That is how far the portfolio drops from past highs to current lows. The Buy-and-Holder once experienced a 60.96% drop, whereas the worst drop for market timing was 24.16%.”
4) “On a risk-adjusted basis, market-timing strategies provide comparable returns as a 100 percent stocks Buy-and-Hold strategy but with substantially less risk. Meanwhile, market timing provides comparable risks and the same average asset allocation as a 50/50 fixed allocation strategy, but with much higher returns.”
6) Valuation-Informed Indexing is much less risky by pretty much any standard I consider. I must wonder… did I make a mistake somewhere? Why haven’t academics already published research about this?”
7) ) “The traditional approach to retirement planning (as described on pages 10 and 11 of The Bogleheads’ Guide to Retirement Planning, for example) is counterproductive and possibly damaging.”
10) “I did warn the editor of the Journal of Financial Planning that they may receive some ‘hate mail‘ after I mentioned your name in the safe savings rate paper.”
Wade Pfau’s research paper showing the superiority of Valuation-Informed Indexing strategies over Buy-and-Hold strategies is here.
My e-mail address is: hocusreports@Verizon.net. My telephone number is: 540-751-0685. Every advance ever achieved in this world was achieved by a decision on the part of one of the humans to stick his or her neck out. Please help us all out if you are in a position to do so!
Addendum #1: After Kevin at the Invest It Wisely blog posted a link to this article at his site, Wade wrote him and asked that he remove it. I’ve posted Kevin’s words to me and my words in response to him at this blog entry.
Addendum #2: The Big Picture blog posted an article titled “Buy-and-Hold is Dead (and Never Worked in the First Place)”. Barry Ritholtz, the owner of the blog, followed two days later with a link to my article titled Why Buy-and-Hold Investing Can Never Work.
Addendum #3: Other blogs that have linked to this article include Juggling Dynamite, Washington’s Blog, Jesse’s Cafe Americain (the link was in the “Matters for Reflection” section), ZeroHedge and Financial Times: Alphaville.
Addendum #4: Business Week Columnist Vivek Wadwha tweeted a link to this article to his 32,000 followers.
Addendum #5: Law Lecturer and Integrity in Public Contracts Blogger Albert Sanchez Graells tweeted a link to this article. He told me in an e-mail that in his assessment “the situation seems well below any professional and academic acceptable standards.” I said in my response that, while this is certainly so in an objective sense, there are exceptional circumstances that in fairness also need to be taken into consideration in this particular case.
Addendum #6: Former Financial Analysts Journal Editor Rob Arnott copied Vanguard Founder Jack Bogle on an e-mail response he sent to me stating: “I’ve had similar experiences to those you describe. My work has often triggered overt hostility from guardians of the status quo. I’ve also had difficulties getting some of my more controversial articles published. And the journals that published some of my more controversial papers got hate mail.” Rob told me: “We part company on how to deal with this challenge. You seem to be stuck in a victim mindset. Characterizing one’s adversaries as Goons is also unhelpful to your cause.” I argued in a response e-mail to Rob (I also copied Jack Bogle) that: “The illustrations you offer of the problem of Buy-and-Hold dogmatism are shocking. I know from my discussions with financial planners and bloggers that many others have had similar experiences. This must stop. We are living through a public tragedy of epic proportions.” I also shared with Rob (and Jack) my view that the Goons are suffering intense emotional pain and that we all should be doing all we can to help them. Rob said in his reply e-mail that: “Your ideas [about Valuation-Informed Indexing] are sound.” He offered me his best wishes. Jack did not respond to any of these e-mails.
Addendum #7: University of San Diego Law Professor Ted Sichelman said: “Unfortunately, many academics can become quite strident when their views are challenged, which is why I was counseled not to tread on treacherous ground prior to getting tenure, Like most other fields, academia is often subject to self-serving bias that obliterates ethical bounds.”
Addendum #8: Jing Chen, an Assistant Professor at the University of Northern British Columbia, wrote: “It is natural that powerful people will do what they can to protect their interest. It is the norm in the academic world and in the broader world. I am grateful that you write about it.”
Addendum #9: Carol Osler, Program Director for the Lemberg Masters in International Economics and Finance at the Brandeis International Business School, wrote: “I certainly have seen the academic profession in action squelching unfashionable ideas and have often been on the wrong side of it…. Kuhn shows how most pathbreaking scientific ideas are rejected at first, usually for decades.”
Addendum #10: University of Siena Economics Professor Robert Reno wrote: “I don’t like too much the conspiracy idea. For what it may count, I am not pressured by anyone in my research.”
Addendum #11: Professor Jacob Goldenberg wrote: “Threats like this (if indeed it happened) are unjustified.”
Addendum #12: 25-Year CPA Lyn Graham wrote: “This sort of intimidation is not acceptable. The cigarette and pharmaceutical industries funded research supporting their products by funding it. But this is big money supporting outcomes, not dissuading others.”
Addendum #13: Director of the Center for Health Law, Policy and Practice Scott Burris wrote: “The fact that aggressive and short-term market timing was unproductive did not mean that there were never times that it would be wealth-maximizing to get out of the market.”
Addendum #14: Marcelle Chauvet, a Professor in the Department of Economics at the University of California at Riverside, wrote: “Why would your job be jeopardized by such a sensible claim?”
Addendum #15: Economics Professor Valeriy Zakamulin wrote: “We cannot assume the existence of predictability just because there are no studies that fully reject it.”