Set forth below is the text of a comment that I recently posted to another blog entry at this site:
People simply point out the facts – that valuations affect around 40% of the variability in out of sample returns in historical data sets, but that the future is a very unknown place. You can’t go beyond the facts – that would just be making up stories.
I am not in full agreement with what you are saying here, Anonymous. But I like it that you are talking in a real way. You are doing a decent job with these words of articulating the beliefs of many smart and good people. That’s obviously a positive thing to do.
The 40 percent number comes from the Vanguard study. I am not willing to sign on to it without giving the matter more study. But I don’t have a big problem with it. I am fine with accepting that number as a reasonable number. So we can call ourselves being close to agreement re that one.
I agree that the future is an unknown place. I wouldn’t go quite so far as to say “very unknown.” I think we know important things about how stocks are likely to perform in the future. But there certainly are big gaps in our knowledge and it certainly is better to be modest in one’s claims than it is to be dogmatic in them. So, again, I think it is fair to say that we are close to agreement.
Where I see a significant difference emerging is when you say: “You can’t go beyond the facts — that would just be making up stories.”
The problem we BOTH face is that we MUST go beyond facts.
We don’t have the option of putting off making decisions on investing questions until the scientific community achieves a consensus on all these matters. We have money that must be invested TODAY. Each and every one of us must choose Path A or Path B regardless of any doubts we entertain as to the ultimate merit of the choice. This is the biggest reason why discussions of these issues are so sensitive. People on both sides have a great deal riding on being right. And they MUST make a call based on limited information. We live in the present and we won’t know all the answers until sometime in the future.
You say: “You can’t go beyond the facts — That would just be making up stories.”
The Old School safe-withdrawal-rate studies go beyond the facts. They organize and interpret the facts in a manner that leads readers of those studies to the conclusion that a 4 percent withdrawal rate is safe at all times.
I organized and interpreted the same facts (the historical return data) in a very different manner and came to a very different conclusion when I built The Retirement Risk Evaluator.
Was John Greaney making up stories when he published his SWR study at his web site?
Was I making up stories when I published The Retirement Risk Evaluator at my web site?
Were we BOTH making up stories?
Were we both just reporting facts?
That’s the question you need to answer for the point you are advancing here to convey any message of significance in the real world.
If I say that the numbers in the Old School SWR studies are right, I am saying that the numbers in my SWR calculator are wrong. It obviously would be dishonest of me to say that. I believe that the numbers in my SWR calculator are accurate.
If Greaney says that the numbers in my SWR calculator are right, he is saying that the numbers in his SWR study are wrong. Perhaps he feels that it would be dishonest of him to say that.
So what do we do?
You say that going beyond the facts is “making up stories.” But one must go beyond the facts to offer investing advice. How the facts are organized makes a huge difference. Greaney and I organize the facts in very different ways.
Do I have the right to organize the facts in the manner in which I believe they should be organized and report on the conclusions that follow from that method of organization at every discussion board and blog on the internet or do I not possess that right, in your assessment?
I say that I possess that right. I’ll go further. I say that I possess a DUTY to INSIST on recognition of that right.
What say you?
Rob
We have money that must be invested TODAY. Each and every one of us must choose Path A or Path B regardless of any doubts we entertain as to the ultimate merit of the choice.
Right, and so we’ll each make decisions based on our individual situations and preferences. For example, I chose to increase my stock allocation in 2009. You didn’t. There are no two opposing “paths” or “sides”.
Your own behavior conflicts with the claim you make here, Anonymous.
If Buy-and-Hold and Valuation-Informed Indexing are not opposite models for understanding how stock investing works, why have we seen 12 years of death threats from the Buy-and-Holders? And 12 years of demands for unjustified board bannings? And 12 years of the Buy-and-Holders advancing tens of thousands of acts of defamation? And 12 years of threats against academic researchers doing honest work?
We believe different things, Anonymous. You believe that the market is efficient (Buy-and-Hold) or at least largely efficient (Strategy C). I believe that valuations affect long-term returns, which means that it is insanely NON-efficient a times when the P/E10 level goes far above above 15. We both invest pursuant to our beliefs. Which is of course 100 percent proper.
The difference is that ONLY the Buy-and-Holders advance death threats and demands for unjustified board bannings and tens of thousands of acts of defamation and threats to get academic researchers fired from their jobs. Only the Buy-and-Holders engage in massive acts of financial fraud. Only the Buy-and-Holders are going to prison following the next price crash.
You are right to the extent that “there are no two opposing paths or sides” signifies that we all want the same thing — we are all seeking a safe and simple and smart way to invest. But we cannot all move forward together until we work up the courage to bring the Campaign of Terror against our board and blog communities to a full and complete stop. We should all be certain to do everything in our power to make certain that that happens by the close of business today.
Fama was awarded a Nobel prize for his research.
So was Shiller.
The implications of BOTH research projects are proper subjects for discussion at every board and blog on the internet. That’s non-negotiable.
Or so Rob Bennett believes with his heart, mind and soul, in any event.
I naturally wish you all good things regardless of what investing strategies you elect to pursue.
Rob
A paltry amount of adults set aside money for retirement. Of that small amount even less implement a buy and hold strategy.
Average Joes’ retirement fund accounts for a very small portion of the overall market.
Market experiences 2% swings daily which by definition can’t be from Buy and Holders.
“Market is overvalued and completely manipulated by buy and holders!!” – Rob
DERRR!!!!
Maybe if you shout it louder or repeat it more times it will become true Rob.
DERRRRRP!!
“Market is overvalued and completely manipulated by buy and holders!!” – Rob
Yes, Anonymous, the market is overvalued and completely manipulated by Buy-and-Holders.
We now have 33 years of peer-reviwed research showing that 80 percent of stock investing is getting your allocation right. It is obviously not possible to do that if you refuse to exercise price discipline (long-term timing) when buying stocks. If you get that one right, it is almost impossible to imagine a scenario in which you would not do well in the long run. If you get that one wrong, it is almost impossible to imagine a scenario in which you would do well in the long run. Exercising price discipline (practicing long-term timing) is the name of the game. That one factor matters more than all other factors put together.
We live in a society in which there is huge wealth to be made by giving good money advice. There are thousands of people who would love to publish books giving research-based investing advice and make millions doing it. There are thousands of people who would love to create calculators based on the research that would help people invest more effectively and become famous doing it. There are thousands of researchers in this field who would love to publish honest research and win Nobel prizes doing it. There are thousands of journalists who would love to expose the Buy-and-Hold Mafia and the lies they have been telling for years now about how stock investing works and win Pulitzer prizes doing it. There are thousands of bloggers who would love to write honest and accurate reports of what the last 33 years of peer-reviewed research says and build big reputations doing it.
What’s stopping them?
The Buy-and-Hold Mafia.
People fear the Wall Street Con Men and their Internet Goon Squads for good reason. They are ruthless. They stick together. They lack consciences. They lie ten times before eating breakfast in the morning just to stay in practice. They advance threats to kill family members of anyone who posts honestly re what the research says. They have engaged in tens of thousands of acts of defamation. They have demanded unjustified board bannings. They threaten to destroy the careers of academic researchers who “cross” them by publishing honest research. They advocate the purest and most dangerous Get Rich Quick scheme ever concocted by the human mind, one that has caused four of the four economic crises experienced in the United States in the past 140 years. They have zero tolerance for people who possess modest amounts of personal integrity and who would like to work in this field. They laugh in the faces of the millions of middle-class people whose lives they have destroyed with their deceptions and acts of intimidation. They have been engaging in this behavior for 33 years, years that would have been the greatest years of economic growth in U.S. history if people who love their country had been able to get honest investment advice out to the millions of middle-class investors who desperately need access to it to plan their retirements.
It ends with the next price crash and the announcement of your prison sentence and the prison sentences of the others who have put up posts in “defense” of Mel Lindauer and John Greaney (and my good friend Jack Bogle) or who own sites that have permitted such individuals to post their words of poison and thereby extend the 12-year cover-up of the errors in the Old School retirement studies.
When those prison sentences are announced, the news will go viral all over the internet and there will be no more Buy-and-Hold. Buy-and-Hold will from that day forward be viewed by all as an obscene phrase.
The rest of us will all pull together and rebuild our country from the damage done to it by those who have posted in defense of Lindauer and Greaney and Bogle. We will work together in peace and in a spirit of mutual respect and friendship. Never again will someone who gives investing advice be intimidated into telling lies because saying what he believes wold hurt the profits and the feelings of those who made a mistake 50 years ago that was uncovered 33 years ago and has remained uncorrected to this day.
I can live with that.
I naturally wish you all the best that this life has to offer a person who will be spending the remainder of his days in a prison cell because of his betrayal of his country and all the basic principles for which it stands.
Please feel free to quote me all over the internet. I am working hard to build a reputation as the most severe critic of Get Rich Quick investing strategies alive on Planet Earth today. Every little bit helps.
Hang in there, man. It gets better. A LOT better.
Rob
Maybe if you shout it louder or repeat it more times it will become true Rob.
Maybe honesty triumphs over corruption in the end, even when the corruption is backed by massive amounts of money and power and influence.
I think it would be fair to say that we will all be finding out together in the not-too-distant future.
That’s the drama of the thing, no?
Rob
None of us has a crystal ball. None of us can say with 100 percent certainty.
Right?
Rob
We believe different things, Anonymous. You believe that the market is efficient (Buy-and-Hold) or at least largely efficient (Strategy C). I believe that valuations affect long-term returns, which means that it is insanely NON-efficient a times when the P/E10 level goes far above above 15. We both invest pursuant to our beliefs.
If you haven’t changed your stock allocation in almost 20 years, you probably believe markets are highly efficient, at least most of the time. Otherwise you’d be able to hop in and out of them at opportune times, and your family wouldn’t have to struggle financially.
As it is, you’ve been watching from the sidelines for almost two decades without a single day in which your stock allocation was worth changing by even 5%. Not many cases of “insane non-efficiency”, huh? If you’re waiting for stocks to get even cheaper than the Great Recession of a few years ago, you’ve got a long wait ahead of you.
If Buy-and-Hold and Valuation-Informed Indexing are not opposite models for understanding how stock investing works, why have we seen 12 years of death threats from the Buy-and-Holders?
I wouldn’t confuse any human action, real or imagined, with a model. A model is an abstraction. Models can’t make death threats.
Why do you say “otherwise you’d be able to hop in and out of them at opportune times”? That’s the OPPOSITE of what I believe. The two key principles of Valuation-Informed Indexing are that: (1) Long-term timing always works and is always required (Shiller’s research); and (2) Short-term timing never works and should never be attempted (Fama’s research).
I haven’t been “watching from the sidelines” for one day. I have always been invested in superior asset classes, asset classes that are likely to provide better returns for less risk. That’s not watching from the sidelines. That’s doing what is in my best interests. I believe that ALL investors should be acting in their best interests and that the market cannot function UNLESS all investors act in their self-interests. That’s how it works in all other markets. That’s how it SHOULD work in the stock market. That’s why I make such a fuss about opening the internet to honest posting re the last 33 years of peer-reviewed research.
As I was typing, I thought of a possible reason why you said that the fact that I haven’t changed my stock allocation in 18 years shows that I don’t think it is possible to jump in and out of the market at opportune times. I think you are making the same mistake that Fama made. He showed that you cannot jump in and out of the market at opportune times. That is a legitimate finding. But then he jumped to a hasty conclusion as to WHY that is so.
There are two possible explanations of why investors would not be able to jump in and out of the market at opportune times. One is that the market is efficient. The other is that market prices are driven by emotion, not economic developments. If market prices are driven by emotion, the market is essentially a crazy person. The moves of crazy people are UNPREDICTABLE, just as unpredictable as the moves of highly rational people. The market really is unpredictable in the short term. But it is not unpredictable because it is so rational, as Fama thought. It is unpredictable because it is so NON-rational, so NON-effcient.
But the market cannot remain non-rational and non-efficient indefinitely. The very purpose of a market is to set prices properly. So eventually the market must do this. Otherwise, it would collapse. So eventually the market sets prices at fair-value levels. Market prices are always moving in the direction of fair value over the long term. So risk VARIES. The farther away you are from fair value in one direction, the greater the risk of owning stocks. The farther away you are from fair value in the other direction, the less the risk of owning stocks. It is the valuation level that applies at the time you purchase stocks that determines how risky stocks are FOR YOU.
I have elected to invest in stocks in a way that is far less risky and that provides far higher returns. That’s all. That makes you angry because you have chosen an extreme high-risk, low-return approach. The proper response to learning of a better way to invest is not to threaten to kill my wife and children. The proper response is to MAKE THE SWITCH to the better way.
The last 33 years of peer-reviewed research does not support your claim that it will be a long time before stock prices are lower than they were in early 2009. Every secular bear market in history has continued until the P/E10 level hit 8. That’s a 65 percent drop from where we are today and a P/E10 level FAR below what we saw in 2009.
You need to become familiar with the research. This is one of the reasons why we need to open every board and blog on the internet to honest posting on the last 33 years of research. The shift from Buy-and-Hold to Valuation-Informed Indexing is the biggest advance in the history of personal finance and you and lots of other Buy-and-Holders need to know all about it. You need to be able to ask questions and have them answered by a multitude of Valuation-Informed Indexers. You need to see Buy-and-Holders give up the fight and explain why they did that. You need to see how much different the numbers are when they are calculated properly. You need to see how accurate calculators work. And on and on and on. All the good stuff begins when the internet is opened to honest posting on the last 33 years of research.
Models are how we understand how things work. I don’t know what you are getting at when you say that human actions should not be confused with a model. The model is built by making reference to human actions. The 140 years of stock market history are 140 years of human action. A model built on the historical record is a model that reflects human actions. We need to find out how humans act to build accurate models. That’s why we do research.
Fama’s belief (NOT Fama’s finding!!!) that the market is efficient was part of his model for explaining the data. It was a surface-plausible explanation. The thing you do in science is to CHECK your beliefs against the data. If the market really were efficient, price changes would be RANDOM. That’s why the name of the famous book is “A RANDOM Walk Down Wall Street.”
Shiller was the first researcher to check whether the assumption works in the long run. He found that it does NOT. Long-term prices are NOT random. There is a STRONG correlation with the P/E10 value that applies on the day the purchase was made. This has been so for 140 years now. The odds that that could continue to remain true for 140 years without a single exception are one in one-billion. This CANNOT be a coincidence.
Lots of smart and good people BELIEVE that it is not necessary to change their stock allocations in response to big price swings. That is so beyond any doubt. But they do not believe what they believe because of peer-revewed research that has been published showing this. There is zero such research. ALL of the research on this question shows the OPPOSITE — that investors MUST change their stock allocations in response to big price swings to have any hope of keeping their risk profiles roughly constant. ALL of the research supports VII. NONE of the research supports BH.
Every investor on the planet needs to know this. It is the retirement money of millions that is at risk here.
The only reason why every investor on the planet does not know this is that the Buy-and-Hold Mafia is a brutally abusive and CRIMINAL institution. We adopted the laws against financial fraud to protect ourselves from people like you, Anonmous. We need to ENFORCE those laws. I believe that those laws WILL be enforced following the next price crash, when millions of middle-class investors see what following Buy-and-Hold strategies means when it comes to their hopes of realizing their retirement dreams.
Having an accurate model is of critical importance. If your model is rooted in a false assumption, everything you produce from that model is in error. Everything that the Buy-and-Holders have said for 33 years now is in error. Because the Buy-and-Hold Model was SHOWN to be in error in 1981 and Old Saint Jack failed to walk to the front of a large room and say the words “I” and “Was” and “Wrong.” Old Saint Jack caused this problem, not me.
Models don’t make death threats. But people who suffer embarrassment when they are publicly exposed for getting the numbers wildly wrong in retirement studies published at their web site sure do make death threats. Perhaps you’ve noticed.
My best wishes to you and yours.
Rob
That makes you angry because you have chosen an extreme high-risk, low-return approach.
So long as we agree that a buy and hold stock portfolio has returned 10% per year, on average, over the last few decades, I’m happy. Call it low return if you want – I’d call the 2% the bond market is currently returning “low-return”.
If you really do believe you’ve discovered the key to low risk, high return investing, post your net worth. Thousands of buy and hold investors at Bogleheads have posted theirs, and most are well into 7 figures as they approach age 60. I guess that stuff really works!
The 10 percent from stocks is better in the short-term. The 2 percent from bonds is better in the long term. That’s what the last 33 years of peer-reviewed research shows. VII is purely a long-term strategy. No one has ever said different.
Do the Buy-and-Holders who post high net worths adjust for the 65 percent crash that the last 33 years of peer-reviewed shows is coming? We both know that they do not. I wonder why.
If Buy-and-Hold were a legitimate strategy, we never would have seen a single death threat or a single demand for a single unjustified board banning or a single act of defamation or a single threat to get a single academic researcher fired from a single job. The abusive tactics are employed ONLY by Buy-and-Holders, NEVER by Valuation-Informed Indexers. I wonder why.
My best wishes to you and yours, Anonymous.
Rob