Rob Bennett’s Responses to Academic Researcher Wade Pfau: #8 — What Caused Good Guy Wade to Do Such a Horribly Bad Thing?

Academic Researcher Wade Pfau is a good guy. I told you that story in Response #1.

Academic Researcher Wade Pfau has done a horribly bad thing in switching over to the Goon side. He has empowered the Goons. He has extended the economic crisis. He has delayed the correction of the Old School safe withdrawal rate studies. He has caused even more harm to come to the reputations of the Buy-and-Holders when we all should be working to rebuild the reputations of our Buy-and-Hold friends by getting those darn Old School safe-withdrawal-rate studies corrected and making it possible for people of intelligence and integrity to make a living in the investment advice field once again.

What happened?

Why do bad decisions get made by good academic researchers?

This is an investing question. During the Buy-and-Hold Era, it has become common practice to view effective investment as a numbers exercise. It’s all about wrestling with tables and charts and data. No. That’s the mistake. The academic research of the past 30 years shows that 80 percent of the risk of stock investing lies in the temptation we all feel to fall under the spell of Buy-and-Hold/Get Rich Quick strategies. No one purposely destroys his or her hopes for a successful retirement. We mess up because Get Rich Quick calls out to us and our friends in The Stock-Selling Industry have learned over the years that there is an awful lot of money to be made by advising us to answer the call. Valuation-Informed Indexing is what works. But Buy-and-Hold is what sells. Compare John Bogle’s bank book to mine if you have any doubts. There is a good reason why the people who sell stocks for a living love Buy-and-Hold so much.

But The Stock-Selling Industry is far from the only industry that stretches the truth a wee bit to sell us junk. The car dealerships would tell us that cars are worth buying at any price if they thought they could get away with it. The fashion designers would tell us that clothes are worth buying at any price if they thought they could get away with it. The toy companies would tell us that toys are worth buying at any price if they thought they could get away with it.

It’s not just that The Stock-Selling Industry tricks us. It’s that we want to be tricked!

And it’s not just Wade Pfau who has compromised himself in response to enormous pressures to do so. Just about everyone in this field has done that to some extent (I knew that the Old School SWR studies got the numbers wrong when I put forward my first post to the Motley Fool board in May 1999 but I didn’t tell my friends what I knew until the morning of May 13, 2002 — that’s financial fraud!). It is the social pressure to not point out the dangers of Get Rich Quick schemes and the human inclination to respond to social pressures that makes stock investing risky. When we figure out why Wade Pfau (and many, many, many others) did what he did, we have come to understand the true nature of investing risk and have at least begun an effort to avoid investing risk in the future.

I’ve come up with ten reasons for why Wade did what he did.

Reason One is that there was money to be made. This is the obvious one. Wade has seen lots of links to his site since he flipped. He has seen job offers come his way since he flipped. He has seen the Goons agree to leave him alone since the flip. All those things have put money in Wade’s pockets. I need to include this one on the list because it obviously was a factor. I think it is a mistake to make too much of it. We are all a little corrupt. I have never seen any signs that Wade Pfau is more corrupt than the average bear. In other circumstances, the average bear doesn’t do what Wade Pfau did. So we know there are other factors are work here. Sure, Wade likes money. Who doesn’t? In ordinary circumstances, he would have put his reputation for personal integrity above his financial concerns. There is precisely zero evidence indicating otherwise.

Reason Two is that Wade wants people to like him. We want academic researchers telling us the truth about stock investing. We don’t want them saying whatever they need to say to be popular. But we need to accept that academic researchers are not robots. They are people. They want to be liked. We humans hate with a burning passion those who tell us the truth about stock investing at times when stocks are insanely overpriced. So long as that remains true, using the academic research as our guide to how to invest is not going to work out so hot. The best trained and smartest researchers in the world won’t tell us the truth if we make clear to them that we will hate them for doing so. There is no one alive on Planet Earth who has taken a firmer stand about telling the truth re stock investing than Old Farmer Hocus. I gained 60 pounds as a result of the extra chocolate-chip cookies I ate to soothe the pain I felt from the endless storm of rage directed at me by the Goons (I’ve lost 20 of those 60 pounds in recent months). Maybe Mrs. Pfau doesn’t like fat boys. Maybe Wade feels that he just cannot afford to take the path that Old Farmer Hocus has taken. None of us want to be hated. If we want to obtain better investing advice from the experts in this field, we had better start giving some thought to not directing so much hate to those who dare to “cross” us by telling the truth re what the data says.

Reason Three is that Wade wants to do good work. What a horrible man that Wade Pfau is — he wants to accomplish good things in this world! Wade has spent years developing the skills that made him a researcher capable of doing research worthy of a Nobel prize. He naturally doesn’t want to waste that talent. He knows what has happened to me. It was because he recognized the great power of my work in this field that he sought to establish a relationship with me and learn more about my ideas. I think it would be fair to say that he noticed early on that my web site is, as one visitor told me in an e-mail, “the best kept secret on the internet.” Wade doesn’t want his investing insights to be kept secret. He wants his stuff out there, influencing lots of people for the good. I think this is the biggest factor. I believe that Wade’s desire to leave a positive mark on the world counted for a lot more in his decision than did the dollar bills that he knew would be coming his way if he agreed to compromise himself. We all want to do useful work. If our free market system is to survive, we are going to need to find a way to make it possible for people to do good work in this field without compromising their personal integrity.

Reason Four is that Wade wants the Goons off his back. The Lindauerheads and the Greaney Goons are vile. If you don’t know what I am talking about, please spend ten seconds reviewing Greaney’s site (please be sure to wear protective clothing). It’s obviously no big deal that there are vile people posting vile stuff on the internet. We all know about that unfortunate reality of modern life. The point here is that the way we handle the vile stuff in the investing field is very, very different from the way we handle the vile stuff when we see it appear before us in all other areas of human endeavor. In all other areas of human endeavor, we protect the people making positive contributions from the reach of the Internet Sewer Rats. John Bogle knows about the Goons. I sent him two e-mails asking for his help with the Lindauer matter. He hasn’t responded. Wade knows that. Wade sent me an e-mail once when he saw the Goons put up a string of abusive posts at the Early Retirement Forum on a thread discussing his research. He understands that, when the Goons smear you with feces, it takes a long time for the smell to wear off. If it weren’t for the 30 years of academic research showing that Buy-and-Hold can never work in the long run, we would still know how dangerous it is just by observing the behavior it has prompted among the Goons and our tolerance of that behavior for ten years now. Wade wants to stay clean. That’s a big part of the explanation of why he is no longer willing to state plainly and clearly and firmly what his research shows about how stock investing works in the real world.

Reason Five is that Wade does not fully understand Valuation-Informed Indexing. Wade gets it that investors who make the shift from Buy-and-Hold to Valuation-Informed Indexing greatly increase their returns by doing so while also greatly reducing their risk. That can be shown with numbers and Wade is a magician with the numbers. There are many other elements of the new model that he does not yet fully understand. I know this because of things he said to me. For example, he once expressed uncertainty as to whether the continued promoted of Buy-and-Hold will cause another price crash. He doesn’t rule out the possibility. He gets it that on all earlier occasions on which Buy-and-Hold became popular, we saw multiple crashes that eventually brought stock prices down to one-half of their fair-value level. The part he doesn’t yet fully grasp is why.

I’m not making a dig in saying this. It took me years to grasp this stuff (and I’m still learning something new nearly every week). It took John Walter Russell years to grasp this stuff. It’s not intellectually hard. It’s just that Valuation-Informed Indexing is rooted in very different premises than Buy-and-Hold and it takes some time to get used to thinking with the new mindset. Because Wade does not get it all, he does not feel comfortable placing all his chips on a VII bet. I believe that he feels that he is hedging his bets by first posting research showing the superiority of VII and then shifting his positions to make them more acceptable to Buy-and-Holders. If he grasped how imperative it is that as a society we begin making the shift to VII, he wouldn’t give two seconds thought to the idea of promoting Buy-and-Hold no matter how much money he would earn by doing so. But he doesn’t see the full extent of the peril our economy is in today or appreciate fully how the promotion of Buy-and-Hold caused the problem and how the promotion of Valuation-Informed Indexing would overcome the problem.

Reason Six is that Wade has friends who have promoted Buy-and-Hold strategies. One of the reasons why ordinary investors get sucked into trying out Buy-and-Hold strategies despite their horrible track record is that we humans are not logic-processing machines. We make many decisions by checking out what our friends do and doing likewise ourselves. That’s why celebrity endorsements are a regular feature of television commercials. The way to persuade people of the merit of something is not to hit them with facts and data. It it to let them see that people they like have checked out the product or service or investing strategy and found it promising. There’s something in our minds that tell us “if lots of other good people like this, it’s probably at least okay.”

Wade obviously has friends in The Stock-Selling Industry or at least among other academic researchers who do investing research. We live in the Buy-and-Hold Era. So those friends have either endorsed Buy-and-Hold strategies or published Buy-and-Hold research. Wade’s brain is telling him that, if these other good people find Buy-and-Hold acceptable, he should too. Wade is a human. That’s how the humans operate.

Reason Seven is that Buy-and-Hold has never been permanently defeated in the past. Say that Wade has learned enough from his research to be able to resist the social pressures to believe that Buy-and-Hold is at least an acceptable strategy. Say that he believes that it really is going to bring us to the Second Great Depression. My sense is that he is not convinced of that (my sense is also that he does not dismiss the possibility out of hand). But let’s assume for purposes of discussion that this is the case. In those circumstances, would be be willing to become as much of an evangelist for Valuation-Informed Indexing as I have become?

Not necessarily.

To become an evangelist, he would need to believe two things: (1) that Buy-and-Hold is very bad and that Valuation-Informed Indexing is very good; and (2) that it is at least possible that Buy-and-Hold will be replaced by Valuation-Informed Indexing. My sense is that Wade does not believe that Buy-and-Hold will be replaced by Valuation-Informed Indexing.

Buy-and-Hold has caused four economic crises over the past 140 years. It wiped out a lot of investor portfolios the first time and then came back into popularity a few decades later. It wiped out a lot of investor profiles and then came back into popularity a few decades later. It wiped out a lot of investor portfolios the third time and then came back into popularity a few decades later. If Wade believes that on the fourth time it became popular Buy-and-Hold is going to wipe out a lot of investor portfolios and then come back into popularity a few decades later, should he position himself as a harsh critic of Buy-and-Hold? Not if he wants to continue working as an academic researcher in the investing field. Unless Buy-and-Hold is buried 30 feet in the ground, where it can do no further harm to humans and other living things, it will return to destroy many more investor portfolios a few decades from today.

I think this is the end for Buy-and-Hold. I think the Buy-and-Holders are sincere in believing that one should root one’s investing strategies in the academic research and that, once they see what Buy-and-Hold always eventually produces in the real world, they are going to take a serious look at the 30 years of academic research showing why a Buy-and-Hold strategy can never work in the long run. The Buy-and-Holders are not our enemies. Valuation-Informed Indexing is the first true research-backed strategy and the Buy-and-Holders really do believe in using the research as a guide. So this time is different. When Buy-and-Hold fails this time, it fails for good. Once we fix the mistake that the Buy-and-Holders made in the early 1970s, when all the research was not yet available, there will be no reason for anyone to return to a belief in Buy-and-Hold a few decades down the line. All of the textbooks and all of the research and all of the web sites will be singing the praises of Valuation-Informed Indexing as loudly as today they sing the praises of Buy-and-Hold.

So says I. But the future world I am describing here has never yet existed in the flesh-and-blood world. I have reasons for believing that things will turn out as I say but perhaps those reasons do not seem as persuasive to Wade or perhaps he has not spent as much time contemplating the possibilities and has just fallen into an assumption that Buy-and-Hold will recover this time much as it always has in the past. This investing research gig is his life. He has put a lot of effort and time into developing his career. He doesn’t want to blow it all because of what some crazy guy on the internet says is going to happen. These are not entirely unreasonable considerations for him to ponder.

Reason Eight is that Wade does not want to appear extreme. Extremism is bad. Pretty much all reasonable humans agree. Wade acknowledges that there is a ton of evidence that Valuation-Informed Indexing beats Buy-and-Hold. Wade acknowledges that valuations affect long-term returns. Wade acknowledges that the Old School safe withdrawal rate studies get the numbers wildly wrong. Isn’t that enough?

I don’t think it is enough. I think our perception of what is extreme goes totally haywire in a runaway bull market. A stock allocation of 80 percent was insane at the top of the bull. But lots of otherwise smart and good people were saying it was not out of line at the time. Bull markets mess with our ability to process information rationally. The extreme comes to be seen as non-extreme and the non-extreme comes to be seen as extreme.

There’s nothing extreme about Valuation-Informed Indexing. It is the most emotionally balanced investing strategy that exists. It is the first strategy that is truly rooted in the academic research. But for so long as prices remain high (the P/E10 value is far above fair-value levels today), the non-extreme Valuation-Informed Indexing is going to be perceived by many as more extreme than the very extreme Buy-and-Hold.

Wade does not think of himself as an extremist. He has a hard time placing himself firmly on the VII side of the line when the battles between Buy-and-Hold and VII are waged about him.

Reason Nine is that Wade believes a softer version of VII can work. Wade has never said that the Old School safe withdrawal rate studies are analytically valid. He doesn’t believe that. What he has tried to do is to incorporate the effects of valuations into his research without saying that Buy-and-Hold is dangerous or wrong. The Buy-and-Holders can live with that. The Goons tell me all the time that it is not what I say that inflames them but the way I say it. What they mean is that I say that the Old School SWR studies get the numbers wrong. They hate that. They hate, hate, hate, hate, hate it. The Buy-and-Holders believe in the power of numbers. They see themselves as the kinds of people who make a big deal out of getting the numbers right. They don’t want to hear that they got such important numbers wrong. It hurts too much even to consider the possibility.

Wade is trying to get good information out to the readers of his research without inflaming the Buy-and-Holders. If he were writing this article, he would add the word “needlessly.” He would say that he is trying to get good information out to the readers of his research without needlessly inflaming the Buy-and-Holders.

I believe that we must inflame the Buy-and-Holders. I don’t like it. I see their pain. But the only way I see to relieve them of that pain is to confront them with the truth and help them to cope with it and move on. I believe that we will continue spinning our wheels re the economic crisis until we do that.

My sense is that Wade does not agree with me re this point. He sees a softer way to help people understand the effect of valuations and that’s the approach he wants to employ with his future work.

Reason Ten is that Wade is more comfortable working with numbers than with emotions. Most of today’s researchers are numbers people. The numbers support Valuation-Informed Indexing. So it is entirely possible for a numbers guy like Wade to make a strong case for the superiority of Valuation-Informed Indexing. Ultimately, however, Valuation-Informed Indexing is a strategy rooted in an understanding of the emotional realities of stock investing. We don’t cite numbers for the sake of citing numbers. We cite numbers to warn ourselves when our emotions have gotten out of control and to know when to make adjustments in our stock allocations to get things back on track.

My sense is that Wade is out of his element when the discussion turns from numbers to emotions. He is a numbers wiz. Working the numbers makes him feel highly competent. He feels less skilled when the discussion turns to emotions. He was excited to see that the numbers support Valuation-Informed Indexing and so he worked hard to make the numbers case for the new strategy. But he would feel more comfortable seeing other researchers take the lead on the many emotions-rooted research questions that need to be explored in coming days to make the case complete and even more convincing. The emotions thing is not Wade’s thing, at least not to the extent that the numbers thing is Wade’s thing.