Yesterday’s blog entry described an e-mail that I received on December 16, 2010, from academic researcher Wade Pfau. Set forth below are the words of my response.
Wade:
Thanks for your response.
All is forgiven from my end. All of the points you make in your response make sense to me. There is no question that this is explosive stuff and it is hard at times to say things perfectly. I of course struggle with that same issue. So long as there is good intent, things work their way to a good place. I can assure you that there is good intent on my end. I am reassured by the words of your response that there is good intent on your end.
Differences on fine points are of course not a problem. Those sorts of differences are to be expected and are healthy.
There has been HUGE interest at that board in SWRs in the past. I believe that the reason why you did not see a response is that people there feel shame over how the board has handled this issue. Part of it is how they interacted with me and part of it is how they misled people re the issue (it is a reality that people were misled — the best interpretation that can be put on it is that the people putting forward the misleading stuff were suffering from cognitive dissonance).
The personality clash is with SOME Bogleheads, not all Bogleheads. There are some great people over there who would love to have me participate in the discussions held there. They are (understandably) afraid to speak up. When a segment of a board community fears stating its honest views, the board had lost its intellectual integrity; people are not hearing both sides. It doesn’t make me happy to say this. But it needs to be said.
I am grateful for you spelling out the cause of your concern by saying: “The thing that troubled me was how sure you were about your predictions.” I believe that there is a misunderstanding here. I am NOT dogmatic about the particular predictions. I do not believe that dogmatism re that aspect of the question is justified. I love it when someone like yourself puts forward a different reasonable take. That gets people thinking. We need more debate, and dogmatism will not get us that.
My guess is that the thing that I was being dogmatic about in the comments you have in mind was the idea that SOME adjustment must be made for valuations. I do see it as being irresponsible to make no adjustment for valuations whatsoever given the consequences that follow for retirees who place their confidence in SWR studies that get the numbers wrong. My view is that there is an INSANE level of dogmatism coming from some of the defenders of the Old School studies. If they could just acknowledge that there is more than one reasonable point of view, we could all be friends.
Anyway, I very much do NOT believe that dogmatism is justified re these matters. It does indeed sting for me to hear myself described as being dogmatic here because I have invested so much in the way of blood, sweat and tears into efforts to bring the dogmatism to an end and to get things pointed in a more positive direction.
There’s an awful lot of material at those links. I certainly don’t expect you to look at all of it. You probably would prefer to focus on materials that deal with substantive matters (most of those materials focus on the process questions). I will get some links on substantive matters to you within the next few days.
Still, you might want to spend a little bit of time looking at the links that focus on the process questions. I have spent an awful lot of time on the SWR matter and on related matters and I have come to believe that the full reality is that there ultimately is a great deal of overlap between the substance issues and the process issues. I am going to put forward one illustration of what I mean by this just to give you a sense of what I am getting at.
You mentioned that you were not aware of the SWR controversy until September of this year. That should not have been the case! Bill Bernstein does rough calculations in his book “The Four Pillars of Investing” showing that the SWR at the top of the bubble was somewhere near 2 percent. Unfortunately, even most people who have read the book are not aware of this because he wrote it up in such a way as to downplay the finding. And of course the finding was not front-page news in the major papers, as I very much believe it should have been.
There are all sorts of issues like this. We “know” all sorts of things about investing today that we do not want to acknowledge that we “know.” My aim is to harvest this unappreciated knowledge. I do not by any stretch of the imagination believe that I have all the answers. But I do believe strongly that we need to launch a debate. I had a reputation prior to my involvement in the SWR debate of being a “teddy bear” poster. I am likely one of the least confrontational people you know. My problem re this matter is that there are a good number who object violently even to the idea of having a discussion. And discussion boards at which critically important issues may not be discussed rarely achieve their full potential.
I regret that you have had to sort through all this drama. But I will direct a phrase to you that you have used in reference to me. There is something in you that saw an issue of some importance when you happened across the thread on SWRs. YOU are really on to something in seeing the significance there (many smart people have failed to see it). I hope that perhaps I will be able to point you to some things that perhaps will spark further fruitful investigations.
No dogmatism. That’s out! The aim here is exploration of potentially exciting new realities. It’s been my goal since the first day to bring out the positive in all this (which in my assessment is so far-reaching that it is scary) and to leave the boring, time-wasting stuff behind. That’s what I’ll be trying to pull off in future communications.
Thanks again for responding to a challenging e-mail in a warm and honest and frank and encouraging way. That gives me some hope (combined with a few other recent developments) that this saga may be taking a bit of a turn in a life-affirming direction.
Rob
People (and so-called “experts”) differ on stock valuations and what they mean and what investors should do about them. As Grantham argues recently, it isn’t—and wasn’t—a question of ignorance regarding valuations that held the pros back in 2000, it was the FEAR of shorter term underperformance, with the consequence of losing their jobs due to it:
I found this an excellent read for many reasons:
http://www.gmo.com/websitecontent/JGLetter_ALL_4-12.pdf
The pros ain’t stupid, or ignorant of valuations. They are, however, mainly afraid. This is subtly different from being greedy, though their greed—and their fear of what not being greedy will cost them— conspire to hurt the common folk who are led by them.
Now, as inferred from Grantham, individual investors are not hampered by job loss due to temporary stocks mis-allocation; so they actually have an edge on the pros, were they informed similarly of valuations (even just the Shiller model).
Now, in light of Grantham’s article, this makes investing pro John Hussman a courageous fellow as his profound respect for valuations is likely losing him clients this year—so far. (He is very defensive at current valuations during this “bull”.)
I have followed Hussman’s weeklies (on his site) for years. I don’t act on what he thinks, greatly dislike his long-short approach and complications (I prefer long-only based on valuations), but I always respect his work and enjoy the read.
I discovered only recently that Hussman posts publically (his weekly column from his site) on Seeking Alpha. I haven’t read all his reposts there, but it appears Hussman has the good sense to avoid discussion, as doing so with the mammoth time commitment such would entail would likely make running his fund impossible.
Rob has no fund to run, hence he has—and does—have much to say (but no different than many who post on any investing forums who similarly have the time).
Here is the link, and now you can read the *discussion* to each of Hussman’s weeklies (which discussions never appear on his own site).
http://seekingalpha.com/article/520511-john-hussman-run-don-t-walk
The pros ain’t stupid, or ignorant of valuations. They are, however, mainly afraid. This is subtly different from being greedy, though their greed—and their fear of what not being greedy will cost them— conspire to hurt the common folk who are led by them.
This is possibly the best paragraph I have read in the 10 years, Arty. You say so much in so few words.
There is NO ONE involved in this matter who is stupid. NO ONE.
And it is not entirely right or fair to attribute this to greed either. Greed has some influence. But it is easy to fall into the trap of overstating the effect of greed here. There is lots of evidence that greed is NOT the primary problem.
FEAR is the primary factor. We didn’t know it all at one time and now we know more than we did before but we still do not know it all. If we could all just openly acknowledge that, we could make huge progress in a very short amount of time, progress that would enrich (in every sense of the word) all of us greatly.
Now —
How do we get from where we are today to where we ALL want to be tomorrow?
I would like to see every single person in every single community working toward the common goal of figuring how to make that transition so that EVERY SINGLE PERSON touched in any way by this issue (that’s every single person who lives under our economic and political system) benefits.
I wish I could broadcast these words of yours to every person who has ever participated in our discussions, Arty. You are helping us all out a great deal with the important distinctions you are drawing in the words quoted above.
Rob
Rob, I think people “get there” by reading more on their own, because the right stuff is not being taught in schools, and hardly mentioned at all, in fact. Our youth is hurt by that. We were hurt by that. But what motivates THAT reading/research, I am not sure. Possibly loss in one’s own savings, and the fear that comes with that. Fear, after all, can also be useful. Wish I had a better answer, or a more palatable one.
—
Hussman has the courage to stick to his principles even as his investors scream. And Grantham clearly understand all this, based on his article, above. The take home message is if one choses to respect valuations, one must be willing to earn less (than the broad market) at some times to avoid losing huge at other times. That takes understanding and guts; “investing is simple, not easy”, as Buffet says. I think Grantham explicated this version of fear better than anyone yet.
On Implementations
Even with their sound understanding of valuations, I think an indexing version (like a Bernstein-eque 25-50-75) would have outperformed the Hussman and Grantham investing implementations and stock picking. Such an approach would have been 25% from 2006 or so, and 75% at the March lows, before returning to a 50-50 after the following bull. That beats each of them handily, I think.
Certainly since 2008, such an approach would have trounced Hussman’s fund, if just using a simple allocation based on PE 10 only. Hussman’s response to high valuations is to add short positions whereas a long-only position with a lower allocation to stocks would have been superior—and far less costly.
Hussman does use Shiller— plus an “ensemble” of other historical variables that actually muddy the waters, rather than providing clarity—even if Hussman’s ensemble observations were “right” in the past. Much as I respect him, he is often too smart by half. And I can’t say I agree with his implementation, even if I agreed with his take on valuations.
Grantham uses Shiller, but then looks at multiple asset class valuations—which makes things tougher and less supported by data—even if he is right about the comparative valuations. Plus, he also picks stocks individually.
Grantham has a better handle on implementation, I think, but the costs hurdle (transactions) is a big one for both these guys, and even though individual stock-picking (they both use it) has the greater chance of producing outsized gains, it also has the greatest chance of catastrophic company loss.
So, IF one wanted to abandon a buy and hold strategy, an absurdly simple approach using an index S&P 500 would seem to be the best implementation method—and far and away the simplest (as has been recommended here).
(Picking the non-stock component is far trickier, based on valuations, yields, etc., but less important for obvious reasons. So even Cash or Short-duration high-quality instruments work, or TIPS at extremes.)
All this would therefore have the greatest chance of being understood— and actually followed— by non pros, even as taking charge of one’s own future (rather than letting a manager do it) can be a nervous thing, though not as fearful, apparently, as being a manager!
Peace.
Much as I respect him, he is often too smart by half.
This is a big problem in this field.
The thing I most love about Bogle is that I think he makes a highly effective case that it’s not being smart that matters. What matters is financing your retirement plan. You don’t need to be smart to do that in a time when index funds are available. And more often than not, adding more smartness to the mix hurts you more than it helps you!
The Lindaurheads say:”I don’t know and I don’t care.” I’m not willing to go quite that far. I’m not willing to turn off my brain. My brain is my friend! But I think Bogle was on to something very important when he put so much focus on tuning out all the noise.
The noise distracts you from what really matters. The key is keeping your focus on what matters. It sounds like it would be an easy thing to do. But tuning out the noise is a full-time job!
I have on occasion had people suggest that I create products that would help people invest effectively. But the suggestion is made that I not include any criticisms of approaches that don’t work because most people just want to know what DOES work, not criticisms of what doesn’t. The problem is that I can tell that story in about 15 minutes and then there is nothing more to say. The reason why there are 200 RobCasts at this site and the reason why I write three weekly columns is that there is so much garbage hitting people on a daily basis that they need to be warned about.
Investing effectively is simple. Tuning out the “experts” who devote hundreds of millions of dollars to steering you away from the simple truths is hard work.
It’s great to see you here again, Arty.
Rob