Set forth below is the text of a comment that I recently posted to another blog entry at this site:
| So basically the difference is that he doesn’t believe in a global conspiracy that somehow subconsciously acts in a coordinated way
If you can put forward a better explanation of the realities that have appeared before us, I would sure like to hear it, Laugh. Greaney’s retirement study does not contain a valuations adjustment. That’s a stone cold fact. So the study obviously gets the SWR number wildly wrong. Why did no one point this out until the morning of May 13, 2002? And why do so few object that the study has not been corrected to this day? We should all want to know the answers to these questions. There are millions of people affected by this. So we ought to be able to agree that it would in ordinary circumstances be impossible to keep the errors in the Old School SWR studies covered up this long. Yet the reality remains that they have not been corrected to this day. How do you explain this? Yes, there is a sort of conspiracy. All people who have either advocated Buy-and-Hold strategies or followed Buy-and-Hold strategies feel emotional pain in coming to terms with the mistake they made. They have delayed their retirements by many years. They have hurt their friends. They have been taken for fools. It hurts to accept these realities. So they rationalize away what the research says and try desperately to hang on to their long-discredited beliefs about how stock investing works. That’s a conspiracy in the sense that lots of people with similar interests are acting in the same way. But it is not a conspiracy in the way that the word is usually used. No one met in a smoke-fiilled room and arranged for people to act in concert. And the people who are engaging in deceptions and making use of intimidation tactics follow Buy-and-Hold strategies themselves. They are hurting others. BUT THEY ARE ALSO HURTING THEMSELVES. That’s not the way that we generally think of conspiracies playing out. We usually think of conspirators as people acting in their self-interest. This is a case where the conspirators are hurting themselves financially because they cannot bear the emotional pain that follows from learning what the last 33 years of peer-reviewed research tells us about how stock investing works. That’s “a global conspiracy that somehow acts in a coordinated way.” You try to make it sound as if this is an incredible event. It IS strange stuff. But it is by no means unprecedented stuff. I have heard that Galileo was put under house arrest for saying that the earth revolves around the sun rather than the other way around. Would it be fair to say that he lived at a time when there was a global conspiracy to tell people that the sun revolves around the earth that somehow acted in a coordinated way? It’s easy to get lots of people to act in a coordinated way when lots of people believe the same thing. And, whenever there is a huge advance in human knowledge, we have lots of people believing in the same WRONG thing. That’s what we have here. People really believed in Buy-and-Hold for a long time. Many staked their retirements on it. Many staked their careers on it. Many devoted years of their lives writing books about it or developing calculators rooted in a belief in it. Then this Shiller fellow came along and published peer-reviewed research showing them that they were wrong. Not by a little bit. Shiller showed that the Buy-and-Hold concept is the OPPOSITE of what works. His research implies that exercising price discipline is the key to long-term investing success. Practicing long-term timing is 80 percent of the game. Shiller showed something very, very important. The implications of his insight are so far-reaching that he caused a lot of good and smart people to feel an intense emotional pain. So, yes, they looked the other way. They patted him on the head and said “Shiller is great” and then returned to what they were doing before he came along as if his research didn’t exist. There is not one way in which Buy-and-Hold changed as a result of Shiller’s “revolutionary” (his word) findings. The huge bull market aided those who looked the other way. No one was mad at them for doing so because everyone was enjoying the Pretend Gains of the runaway bull. To recognize the import of Shiller’s findings would be to acknowledge that those gains were Pretend. Who needed that? Everyone was “successful.” Everyone was rich. Everyone was having a ball. The Buy-and-Holders had figured it all out and were not to be questioned. Now we are in the early years of paying the price for looking the other way. We have intellectually achieved the greatest advance in the history of personal finance over the past 30 years. But anyone who either advocated Buy-and-Hold or followed a Buy-and-Hold strategy does not want the word getting out. They feel shame because of how they have hurt themselves and millions of others. Looking the other way caused an economic crisis. Buy-and-Hold is the lie so huge that it cannot be acknowledged. Humans don’t like to think that they have been responsible for so much human misery. So they tell themselves stories. They rationalize. They say “Sure, valuations matter, but it is impossible to take advantage of this reality.” It’s a claim that makes zero sense in the logical sphere and that enjoys zero support in the historical data but one that offers some temporary emotional relief to those who have been looking the other way for so long now that they cannot bear the thought of ever acknowledging the obvious (and highly encouraging once you accept them!) truths. Most of us are engaged in a “global conspiracy that somehow unconsciously acts in a coordinated way.” That’s because most of us are ignorant of the realities. That’s because most of us continue to look the other way. That’s because most of us DON’T WANT TO KNOW how stock investing works in the real world. None of that is criminal behavior. It’s sad. But human beings have been ignorant of lots of important truths at earlier times in history. It happens. It’s one of those things. Fortunately, we have means to overcome our ignorance over time. We have discussion boards. We have blogs. We have newspapers. We have magazines. We have studies. We have calculators. This is where the criminal stuff — my focus nowadays because it must be addressed before we can all enjoy the wonderful blessings that have been bestowed on us as a result of the last 33 years of peer-reviewed research in this field — comes in. Those who want to continue looking the other way have seen what happens when the truths are spoken in clear and firm and direct and understandable ways. PEOPLE OVERCOME THEIR IGNORANCE. The horror! Something must be done. That’s where you Goons come in. Punish people who dare to “cross” the Buy-and-Holders by reporting honestly and accurately what the last 33 years of peer-reviewed research says severely enough and you can stop them from continuing to do so. You can stop others who have similar ideas as well. As the holes in the Buy-and-Hold concept get more and more noticeable, it takes harsher and harsher pubishments to keep the house of cards from collapsing to the ground. But the Wall Street Con Men have lots of money and power and influence and the majority of middle-class investors remain largely ignorant of the realities today. So this remains a viable strategy for keeping people in the dark. Less and less so all the time. But still at least barely viable as of this morning. I am not playing this stupid game, Laugh. I am telling. That’s my job. That’s what I am going to do. I naturally wish you the best of luck in all your future endeavors regardless of what investing strategies you elect to pursue. Rob |
Using one of a million different technical metrics to time the market is not a huge advancement in human knowledge. Cue your inane response about long term timing.
I’m glad to see that I have repeated the answer to your question enough times now that you knew what was coming, Anonymous.
There is 55 years of peer-reviewed research showing that short-term timing never works. So it is not too terribly surprising that there are 999,999 short-term timing metrics that don’t work, is it? Have you ever heard me say different?
In contrast, there is now 33 years of peer-reviewed research showing that long-term timing always works and is always 100 percent required (and there never was even the slightest indication that that might not be so — Fama’s idea that long-term timing might not be 100 percent required has been shown to have always been a MISTAKE).
So is it really so remarkable that the metric that is used for long-term timing is the one that works?
There’s nothing insane in anything I say about long-term timing. What I say is common sense. Long-term timing is price discipline. Price discipline is the magic that makes markets work. The insane thing is the thought that the stock market might be the one exception to the rule.
I am not saying that the Buy-and-Holders are insane. I am saying that this one idea of theirs — this idea that long-term timing might not be 100 percent required — is insane. No one would have ever thought that there was any chance whatsoever that that was so had it not been for Fama’s mistake. Considered objectively, the idea that price discipline might not be required really is insane.
People make mistakes. So it didn’t start out as insane in this particular case. But it has been 33 years since this mistake was uncovered. I think it would be fair to say that covering up that mistake for 33 years rather than acknowledging it and moving forward was a pretty darn insane thing to do. We can talk about why things played out that way and try to come to a fuller understanding of this strange reality. And I of course think that that’s what we all should do. Things that seem insane on the surface sometimes are the product of factors other than insanity when you dig down deep. It wasn’t insane for people to believe for a long time that the earth was the center of the universe either.
But we are going to have to move on.
There’s no getting around it.
And, yes, all the evidence shows that acknowledging this mistake will bring on the biggest advance in the history of personal finance. The peer-reviewed research that I co-authored with Wade Pfau showed that acknowledgment of this mistake reduces the risk of stock investing by 70 percent. Is there any other advance that you are aware of that comes anything close to this one?
There isn’t.
Valuation-Informed Indexing rocks. Buy-and-Hold is a big pile of smelly garbage (not intentionally so — but still…).
It’s not just me who says that Valuation-Informed Indexing rocks. Wade made clear how he felt about the advance in scores of e-mails he sent me at the time he was exploring the matter. And of course we have people like Robert Shiller and Rob Arnott and Michael Kitces and John Walter Russell and thousands of our fellow community members telling the same story.
Love has defeated hate.
Once again.
The forces of love are happy to help you get your prison sentence reduced a bit.
But that’s as far as it goes.
The forces of love are not interested in joining you in your massive acts of financial fraud.
There is a great power in The Three Magic Words.
You can experience that power by the close of business today or you can experience that power following the next price crash. The biggest difference for you personally will be the length of the prison sentence you will be given.
I wish you all good things, my long-time abusive-posting friend.
Rob
I see now that you said “inane” rather than “insane.”
It works that way too.
There’s nothing insane about the idea of permitting honest posting on the last 33 years of peer-reviewed research and there’s nothing inane about the idea of permitting honest posting on the last 33 years of peer-reviewed research.
That’s my sincere take re this terribly important matter, in any event.
Rob
What you fail to realize is there is no difference between what you consider short term metrics and your single long term metric. All those 999,999 other metrics that failed do the exact same thing as your PE10. It sends a signal when to get into the market and when to get out. This is the exact same thing that every metric you deem to be short term timing does.
You say long term timing never fails. Do you honestly believe that PE10 is the only long term metric ever thought up? Your ignorance shows with every statement you make.
P/E10 is not the only long-term metric. But it is one of very few.
Tobin’s Q works. That’s the long-term metric promoted by Andrew Smithers. John Walter Russell tested both P/E10 and Tobin’s Q and found that P/E10 did better. But Tobin’s Q does the job.
We couldn’t possibly disagree more about the 999,999 metric aimed at helping investors engage in short-term timing. They cannot possibly work because short-term timing doesn’t work. There’s 50 years of peer-reviewed research showing that.
You need to get back to first principles, Anonymous. You need to understand WHY short-term timing never works. Once you understand the why, all else will follow easily.
Fama jumped to a hasty conclusion re WHY short-term timing doesn’t work. He said that the market is efficient (that is, perfectly priced). He said that investors are rational and that rational investors would naturally exploit any mispricing and thereby eliminate it.
That’s a surface-plausible claim. But Shiller’s finding (that valuations affect long-term prices) discredited it. What Fama showed — that short-term timing doesn’t work — really is so. But we need a new explanation of Fama’s finding. His explanation has failed.
The other possible explanation for why short-term timing does not work is that investors are highly emotional, NOT rational. It is not only an efficient/rational market that cannot be short-term timed. An emotional/irrational market cannot be short-term timed either. Mr. Market is a crazy man. The actions of a crazy man cannot be predicted. Short-term timing doesn’t work not because investors are so rational but because they are so irrational.
But investors ARE rational in the long-term. They MUST be or else the market would collapse. So we can always know the direction in which prices are headed in the long term. Stock prices are always headed from whatever irrational place they are in the present to the rationality that the market always tries to achieve in the long term.
That’s not a big deal when the market is only a little irrational. So long as irrationality is contained, Buy-and-Hold can work. But when irrationality gets totally out of hand, as it does in bull markets, Buy-and-Hold is an unmitigated disaster. In those circumstances, staying at the same stock allocation is insane. In those circumstances, there is zero chance that a Buy-and-Hold strategy could ever deliver good long-term results.
Fama was right about short-term timing. But he was wrong about the reason why short-term timing doesn’t work.
The real reason why short-term timing doesn’t work is that stock investing is a highly emotional endeavor. The only counter to investor emotionalism is price discipline/long-term timing. We MUST encourage ALL investors to practice long-term timing if we want our economic system to survive.
Or at least that’s Rob Bennett’s sincere take re these terribly important matters.
I naturally wish you all good things, my longtime Goon pal.
Rob
Your ignorance shows with every statement you make.
That explains the death threats.
And the unjustified board bannings.
And the tens of thousands of acts of defamation.
And the threats to get academic researchers fired from their jobs.
Truly outstanding!
Rob