Set forth below is the text of a comment that I recently put to a thread at the The Good Phight site, a site on the Phillies baseball team:
This is my life. I am happy to respond to any and all questions so long as the overall community continues to feel that that is a good thing to do.
Here is the paper:
http://arichlife.passionsaving.com/wp-content/uploads/MPRA_paper_35006.pdf
It’s all worth checking out. But it is Table One on Page 18 that absolutely blows my mind. Wade compares the Maximum Drawdown Percentage for Valuation-Informed Indexing and for Buy-and-Hold. The Maximum Drawdown is the greatest percentage loss in portfolio value that you will ever experience. For Buy-and-Holders, it is 60 percent. For Valuation-Informed Indexers, it is 20 percent. You reduce risk by two-thirds by being willing to take price into consideration when setting your stock allocation. Exercising price discipline pays off big time in the long run! Please understand that you do not give up anything in the return department to obtain this huge reduction in risk. In fact, you can play it the other way. By taking on the same amount of risk as Buy-and-Holders, Valuation-Informed Indexers can obtain far higher long-term returns. Or you can mix and match return and risk and do a bit better in both departments.
The biggest problem that people have with this is in trying to understand why everyone in the field isn’t talking about it. To get that, you have to be familiar with the history.
Stock investing generally was not the subject of sustained and systematic study until the 1960s. In 1965, University of Chicago Economics Professor Eugene Fama produced the breakthrough finding that is the basis for 90 percent of the investing advice you hear cited by experts today. Fama showed that “timing never works.”
Actually, he did NOT show that. That’s what he had THOUGHT that he had shown. He was a bit off the mark in his understanding of what he had done.
There are two forms of market timing, short-term timing and long-term timing. Short-term timing is when you change your stock allocation because of a belief as to where prices are headed over the next year or two. Long-term timing is when you change your stock allocation because of a big shift in valuations with the understanding that you may not see benefits for doing so for as long as 10 years.
Long-term timing is price discipline. Price discipline is the magic that makes all markets work. So it is not possible that long-term timing would not work. But long-term timing was not a practically viable strategy in 1965. Long-term timing works only with broad index funds, which did not become widely available until John Bogle founded Vanguard in 1974. So Fama did not even bother examining long-term timing. He looked only at short-term timing, found that it didn’t work and then improperly stated his finding as a finding that timing in general does not work.
Yale Economics Professor Robert Shiller was the first academic to examine long-term timing. He found in 1981 that long-term timing always works and is always 100 percent required for investors who hope to have any realistic chance of long-term investing success. There have been many re-examinations of this question in the 33 years since and all have confirmed Shiller’s finding that long-term timing always works. The other side of the story is that there has never been a single study showing that long-term timing might not work. Wade researched this question very carefully. He was so amazed by his finding that he went to the Bogleheads Forum to check whether anyone there was aware of a single study showing that long-term timing might not work. Some of the biggest-name Buy-and-Holders post there, including John Bogle himself. Neither Bogle nor any of the others had ever heard of a single study suggesting that long-term timing might not work.
Shiller’s 1981 finding was revolutionary. It changes everything that we once thought we knew about how stock investing works. As noted in the study linked above, it suggests that stocks need not be a risky asset class. For those who take valuations into consideration, risk pretty much disappears. Stock investing risk is VOLUNTARY.
It also suggests that risk is VARIABLE rather than constant. I am the person who discovered the errors in the retirement studies that millions of people have used to plan their retirements. These studies are called “safe withdrawal rate” studies. Every major publication has published an article on the errors in these studies in recent years, including the Wall Street Journal., The error was that they do not contain an adjustment for the valuation level that applies on the day the retirement begins. That’s not an error if Fama is right. It is a HUGE error if Shiller is right. The Old School studies reported that a 4 percent withdrawal is always safe (that means that a retiree with a $1 million portfolio can take $40,000 out to live on each year). The New School SWR studies (there’s only one, which was done by me and John Walter Russell) show that the SWR varies from 1.6 percent when stocks are priced as they were in 2000 to 9 percent when stocks are priced as they were in 1982. For a retiree with a $1 million portfolio, that’s the difference between living on $16,000 every year in retirement and living on $90,000 every year in retirement. If Shiller is right, we will be seeing millions of failed retirements because of our failure to demand corrections in the Old School SWR studies for so many years (I put up the post pointing out the errors to a Motley Fool discussion board in May 2002 and none of the studies have been corrected to this day, despite the Wall Street Journal article and articles published in many other big-name publications).
The biggest implication of Shiller’s work of all is that it is the promotion of Buy-and-Hold strategies that caused the economic crisis. If Fama is right, the concepts of overvaluation and undervaluation are exercises in silliness. An efficient market is a properly priced market. There can be no overvaluation if Fama is right. But if Shiller is right, we know that market prices always move in the direction of fair value in the long term. By calculating the dollar amount of overvaluation, we can know how much consumer buying power will be leaving the market as prices make their slow way back to fair value. The market was overpriced by $12 trillion in 2000. Shiller predicted in March 2000 an economic crisis that would hit by the end of he decade in which we might experience the loss of monetary value equal to the monetary value of all houses in the country. The economic crisis hit in September 2008. No economy is so strong that it can take a loss of $12 trillion in spending power and not collapse.
There have been four economic crises since 1870. Each followed a time when the P/E10 value (Shiller’s valuation metric) exceeded 25. There has never been an economic crisis in which the P/E10 value did not exceed 25. The correlation is perfect (although imprecise — we CANNOT say when a price crash or an economic crisis will come, only that one will come once we exceed a P/E10 value of 25). When large numbers of investors become persuaded to follow Buy-and-Hold strategies, there is no other way for the market to perform its essential function of setting prices properly EXCEPT by crashing. In all markets other than the stock market, it is the tension between the seller’s interest in a high price and the buyer’s interest in a low price that permits the market to set the price at a roughly right level. In a market in which a large number of investors are following Buy-and-Hold strategies, everyone is rooting for the same thing — a high price. There is no price discipline when investors are not willing to lower their stock allocations when prices get too high and when the long-term value proposition for buying stocks drops too low.. Such markets inevitably crash and the loss of consumer buying power resulting from the crash causes hundreds of thousands of businesses to fail and millions of workers to lose their jobs.
These are revolutionary advances in our understanding of how stock investing works. They were too much for most of the experts to take in when Shiller published his 1981 findings. The result was a widespread case of cognitive dissonance. Everyone acknowledges that Shiller did amazing work. He was awarded the Nobel Prize in Economics last year. But no one can point to a single change in the investing advice they give that was made as a result of Shiller’s findings. Shiller’s book was a bestseller and was reviewed in all the top publications. But he devotes only a few vague paragraphs to the question that everyone cares most about — how should investors change how they invest their money as a result of his revolutionary findings? This question is The Third Rail of Personal Finance — those who touch it experience career death. In fact, a number of Buy-and-Holders threatened to send defamatory e-mails to Wade’s employer in an effort to get him fired from his job when he showed up at the Bogleheads Forum and a number of community members there expressed great interest in our research. Wade agreed to stop telling people about our research findings.
I have spoken to many academics and practitioners about this stuff. Many have told me that they would LOVE to feel free to tell people about the implications of Shiller’s work but feel that the topic is too controversial today. I believe that interest in this research is going to explode following the next price crash. I saw a big change in public receptiveness to the new research following the 2008 crash. I would say that that crash pushed the door about one-third open. I believe that the next crash (which should come by the end of 2016 according to Shiller’s research) will push the door open the rest of the way.
The bottom line here is that we need to combine Fama’s finding that short-term timing never works with Shiller’s finding that long-term timing is always required to have an investing strategy that truly makes sense and that is truly research-backed. That strategy is Valuation-Informed Indexing, which is the same as Buy-and-Hold in all respects except that Valuation-Informed Indexers ALWAYS adjust their stock allocations in response to big price swings with the aim of keeping their risk profiles roughly constant over time. We need to quantify the long-term effects of valuation shifts and provide tools to investors showing them how much they hurt their hopes for achieving decent retirements by refusing to consider price when buying stocks.
Rob
Anonymous says
Gee, Rob, you were able to post a financial topic on a baseball article comment section. I will bet the fellow comment participants are all investing experts. Maybe you can find similar support on underwear chat boards or other similar venues as your next frontier to conquer. You must really be proud of yourself.
Rob says
Baseball fans have retirement dreams, Anonymous. And baseball fans have been affected by the Buy-and-Hold Crisis.
We very much need to have baseball fans learning about this stuff. And we need to have nurses learning about this stuff. And we need to have construction workers learning about this stuff. And we need to have accountants learning about this stuff. And we need to have geologists learning about this stuff. Why the heck not?
As for expertise — ANYONE WHO IS NOT COMPROMISED BY HIS ASSOCIATION WITH THE STOCK-SELLING INDUSTRY possesses more “expertise” than the Wall Street Con Men and their internet Goon Squads. True experts possess personal integrity. The money in this field has corrupted so many that I think it would be fair to say that there is less personal integrity in the investing advice field today than there is in any other line of endeavor that could be named.
I worked on Capitol Hill for many years and I have done work in the investing advice field for many years. Many people think that there is a good bit of corruption in the political field. You see comments all the time about the dishonesty and the trickery practiced by politicians. I am here to tell you that the investing advice field is 20 TIMES more corrupt than the political field. In politics, you have Democrats watching over Republicans to call them out on their b.s. and Republicans watching out over Democrats to call them out on their b.s. You don’t have that in the investing advice field. In this field, EVERYONE wants their piece of that $12 trillion in Funny Money that was created out of thin air by the Buy-and-Holders and their relentless promotion of the idea that stocks are the one thing you can buy where money doesn’t affect the value proposition you obtain from the purchase. I love the Wall Street Con Men for all the good they have done. But they are FAR more corrupt than the lawmakers that I dealt with when I worked in Capitol Hill. It is not a close call.
Go Phils!
Rob
Anonymous says
The vast majority of those fans do not own any stock to measurably impact their net worths, nor do they have that much investing knowledge. However, your expertise is not all that great either, so you probably fit better on that board versus the boards that have kicked your butt to the curb.
Rob says
It’s my belief that we may see a lot of this sort of thing following the next price crash.
The investing advice field has become hopelessly corrupted during the Buy-and-Hold Era. I think it would be fair to say that EVERYONE in this field is at least a bit corrupt today. Heck, I was corrupt prior to the morning of May 13, 2002. I knew about the errors in the Old School SWR studies when I put up my first post to the Motley Fool site in May 1999. For three years, I kept it zipped because I was afraid of what Greaney would do to me if I dared to “cross” him by telling the truth about what the last 33 years (it was 21 years back then) of peer-reviewed research says. I of course rationalized my cowardice. I didn’t intend to be corrupt. My intentions were good. But still….
One big problem that we have today is that people outside of the investing advice field are not corrupt and possess common sense but are inclined to defer to the “experts.” I did this for years. I could see holes in what the “experts” were saying but I figured that they must have known what they were talking about. I had to see a large number of people behave unethically to realize that that was not at all the case, that the idea that price doesn’t matter was just a sick marketing gimmick.
Now I know. But the millions of middle-class people whose lives are in the process of being destroyed do not. They have not had the time to study these matters in the depth at which I have studied them.
What happens after the next crash? Millions of people will have lost most of their life savings. They will naturally become suspicious as to whether the whole Buy-and-Hold thing was just a big lie. And all of the material at this web site will be available to them to show beyond any reasonable doubt that that is indeed the case. Plus we will have the internet available to us to spread the word to everyone who has lost money as a result of this massive act of financial fraud. And of course we will have lawyers getting involved to help us hold accountable those who have posted in “defense” of Lindauer and Greaney and Bogle while making tons of money for themselves, as is proper and right and expected under our system.
I believe that we are going to see a complete washing out of the investing advice field. New and more ethical people will come in and make tons of money providing us all with accurate calculations and truthful books and web sites that enforce their rules again abusive posting and all sorts of good stuff. It is by pulling together to bury the smelly Buy-and-Hold garbage 30 feet in the ground, where it can do no further harm to humans and other living things, that we open up space for the first true research-based investing strategy to grow and thrive and help millions to live far richer (in every sense of the word) lives.
My take.
Rob
Rob says
The vast majority of those fans do not own any stock to measurably impact their net worths, nor do they have that much investing knowledge. However, your expertise is not all that great either, so you probably fit better on that board versus the boards that have kicked your butt to the curb.
They are not corrupt, Anonymous. That puts them a huge step up.
You can have an I.Q. of 150 and, if you are compromised by your desire to turn a quick buck at the expense of millions of people’s financial futures, you are going to go with a pure Get Rich Quick approach over a true research-based approach every time. That’s why we are in an economic crisis today. We have to find a way as a society to open up some space for honesty in the investing advice field.
And yes, that certainly goes for me. I ain’t no genius. Perhaps I am a little bit above average in intelligence, nothing more than that. And I never went to investing school. And I never managed a big fund. But I am YEARS ahead of people like Jack Bogle and Bill Bernstein and Scott Burns. BECAUSE I AM NOT CORRUPT. I care about my friends. I cannot tell them that there is a valuation adjustment in the Old School retirement studies because I know it would be a Big Fat Lie to say that.
Integrity trumps everything else, Anonymous. People know that in every field other than the investing advice field. The full truth is that even people in this field kinda, sorta know it. That’s why it eats you up inside to participate in this massive act of financial fraud. That’s why you don’t like to hear me talk about the prison sentences. You remember your younger and better days when you did this sort of work with the aim of helping people. Now you are in a trap from which you feel that you can never get out. And it is killing you. That shows that there is a conscience buried deep down inside you. No?
I’m not smarter than my good friend Jack Bogle. But I am 12 years ahead of him in the investing advice that I offer. Because I figured out 12 years sooner how to pronounce the words “I” and “Was” and “Wrong.”
The people at that Phillies site are plenty smart enough to know that the price you pay for stocks affects the long-term value proposition you obtain from them. Every person on the planet capable of earning and saving some money to invest is smart enough to get that. The problem that we all face today is that there is so much money in Get Rich Quick that the “experts” in this field cannot resist it. And, once their names become associated with Buy-and-Hold, they feel embarrassed to tell the truth about the peer-reviewed research or even to hear anyone else tell the truth.
This has never been about I.Q. points. It has always been about emotional addictions and about the money that can be made exploiting them.
My best wishes to you and yours.
Rob
x says
“This has never been about I.Q. points.”
No, it’s about money. Making money is the one and only goal of investing. Good investors make money, and bad investors lose money.
And you will now blah blah about Madoff. Madoff wasn’t investing, he was stealing.
Anonymous says
To compare yourself to Jack or any of the other names you mentioned is laughable.
Rob says
And yet I put forward my first demand that the Old School retirement studies be corrected in May 2002 and Jack has not done so to this day.
Strange.
Rob
Rob says
Good investors make money, and bad investors lose money.
In the short term or in the long term? Gets Rich Quick strategies make TONS of money in the short term but always end up losers in the long term. So this distinction is important. Research-based strategies do best in the long term.
Madoff wasn’t investing, he was stealing.
That’s not what those who were emotionally invested in the lies he told to make that stealing possible said before his Get Rich Quick scheme collapsed. I saw a thread about Madoff when the fraud first came to public light. One guy said “oh, this isn’t fraud, I made two millions dollars investing in the Madoff fund!” He had gotten out before the collapse and so to him it was not fraud and it was not lies and it was not stealing. But for those who did not get out in time it was all those things.
And so it will be for the Buy-and-Holders following the next crash. Any strategy that cannot be defended in civil debate is a strategy not fit for human consumption. I was a Buy-and-Holder myself once upon a time. I gave it up on the night of August 27, 2002, when John Greaney threatened to kill my wife and children if I continued to “cross” him by posting honestly re what the peer-reviewed research shows re safe withdrawal rates and when 200 of my fellow community members endorsed his post.
And I have never looked back.
Madoff was stealing. And Bogle was stealing. The biggest difference is that Bogle’s act of theft was 500 times bigger. Bogle has hurt a lot more people.
Is Bogle suffering from cognitive dissonance? All signs are that he is. But so was Madoff. He told a reporter for New York magazine that he thought he was helping people. We all tell lies to ourselves to make ourselves feel that our behavior is acceptable when it is not. The fact that Bogle (like Madoff) is suffering from cognitive dissonance is an important fact. But we cannot let cognitive dissonance excuse 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. If we do, our laws protecting us from massive acts of financial fraud become a joke.
Madoff crossed the line when he created phony transaction statements.
Bogle and the other Buy-and-Holders crossed the line when they “defended” retirement studies that get all the numbers wildly wrong.
A society has to protect itself from fraud. There are millions of people whose lives have been destroyed by the Buy-and-Hold Lies. Those people cannot go back and live their lives over, this time planning effectively for retirement. To win back the confidence in our system of government of the millions of people whose lives have been destroyed by the Buy-and-Hold Lies, we are going to have to enforce the laws against financial fraud. I see no other realistic alternative.
My best and warmest wishes to you, X.
Rob
Anonymous says
Your voluminous responses indicate that you are afraid of the issues raised and that you want to avoid a direct debate on these subjects.
Rob says
They do not. They show that I want to tell the full truth and to present it in a fair manner.
The statement “Jack Bogle has committed the crime of financial fraud” is a true statement. But it is not a FULLY true statement. It is not a balanced statement.
To tell the full truth about my friend Jack, I need to point to his many genuine and important accomplishments and to explain why he held back from saying the words “I Was Wrong” back in 1981 and to describe the pressures he felt not to come clean after the evidence showing that Shiller is right became overwhelming.
My good friend Jack Bogle is a good and smart man who has committed financial fraud and who has ALSO done many wonderful things that have made it possible for all of us to live far richer (in every sense of the word) lives.
The second way of saying it takes more words. It is important to include those additional words. We need to open the internet up to honest posting re safe withdrawal rates and scores of other critically important investment-related topics. But we need to do so in a way that does not tear our country apart. We need to be as honest as it is possible to be without crossing the line and becoming uncharitable while also being as charitable as it is possible to be without crossing the line and becoming dishonest.
That’s my sincere take re this terribly important matter, in any event.
Rob
Anonymous says
“I think it would be fair to say that there is less personal integrity in the investing advice field today than there is in any other line of endeavor that could be named. ”
Fortune telling? Bank robbery? Child porn? Slave trading? Murder for hire? Embezzlement?
Anonymous says
“Madoff was stealing. And Bogle was stealing. The biggest difference is that Bogle’s act of theft was 500 times bigger. Bogle has hurt a lot more people.”
One of these days you might have to stand in account of the outright libelous trash you invent as some sort of attempted salve for you much-wounded and diseased ego. I’d love to see that happen.
(Not a death threat.)
Rob says
Fortune telling is not nearly as bad. Most people know to be skeptical of fortune tellers. Fortune telling is an innocent game compared to the investing advice field in the Buy-and-Hold Era.
Far fewer dollars are lost to bank robbery than to the continued promotion of long-discredited investing strategies. The direct losses resulting from Buy-and-Hold are $12 trillion. The total losses (both direct and indirect) exceed $20 trillion. The losses from bank robbery are not even remotely in the same neighborhood.
Child porn and slave trading and murder for hire are far, far, far worse for the people touched by them. But these horrors are not widespread enough to cause a loss of confidence in our political system. Following the 2008 crash, we saw political frictions on both the left (The Occupy Wall Street Movement) and the right (The Tea Party Movement). The next crash will greatly exacerbate this problem. Employers no longer provide for the retirements of their employees. We have moved the responsibility for the financing of workers’ retirements to the workers themselves. When we did that, we took on a responsibility to open up some means for the millions of middle-class workers affected to access honest and accurate reports re what the peer-reviewed research in this field reveals. Our system of government cannot retain the respect of the people unless we find some way to open the internet to honest discussion of safe withdrawal rates and scores of other critically important investment-related topics.
Embezzlement is akin to bank robbery. Obvious bad stuff. But not as bad as financial fraud precisely BECAUSE it is so obvious. Everyone opposes embezzlement. We are united in the view that we must work to stop it when we discover it. We cannot say the same about the continued promotion of Buy-and-Hold strategies for 33 years after they have been 100 percent discredited by the peer-reviewed research. We have highly revered people like my good friend Jack Bogle promoting Buy-and-Hold TO THIS DAY. That’s corrosive to our economic and political systems in a way that embezzlement could never be. Many people will find it hard to retain confidence in capitalism and in our democratic republic when they discover their life savings gone because of the lies about the peer-reviewed research that the Buy-and-Holders continued telling after the peer-reviewed research showed that there is precisely zero chance that this “strategy” could ever work for a single long-term investor.
I stand by my statement, Anonymous. This isn’t a case of one or two bad apples being discovered. The 12-year cover-up (it’s 33 years if you go back to when Shiller published his “revolutionary” [his word] research) couldn’t happen without support or tolerance of it from the journalism field. It couldn’t happen without support or tolerance from personal finance and political bloggers. It couldn’t happen without support or tolerance from academic researchers. It couldn’t happen without support or tolerance from economists. It couldn’t happen without support or tolerance from policymakers.
It’s bad.
The good news here is 50 times more good than the bad news here is bad. We now know how to reduce the risk of stock investing by nearly 70 percent while increasing long-term returns by enough to help investors retire five to ten years sooner. It’s important that we not lose sight of the fact that the economic and political system that failed us in permitting the continued and fraudulent promotion of Buy-and-Hold for 33 years after it was 100 percent discredited by the peer-reviewed research ALSO pointed the way to the biggest advance in the history of personal finance. This is overall a HUGELY positive story.
Still, the bad stuff is bad enough to make a lot of us uncomfortable confronting it. That’s the answer to the question you frequently ask as to whether there is some sort of “conspiracy” responsible for the 12-year (or 33-year) cover-up. The “conspiracy” is our human nature. We like to think well of others. We don’t like to call people out on their acts of financial fraud, especially well-respected and widely loved figures like Old Saint Jack. So we have let things slip and slip and slip and thereby pulled the trap tighter and tighter and tighter on Old Saint Jack and on all of our other Buy-and-Hold friends.
It’s a story that is incredibly bad and amazingly good at the same time.
That’s my sincere take, in any event.
Rob
Rob says
One of these days you might have to stand in account of the outright libelous trash you invent as some sort of attempted salve for you much-wounded and diseased ego. I’d love to see that happen.
I’d love to see my good friend Jack come clean.
I believe he will do so following the next price crash.
I will be honored to work with him to clean up this entire field.
But I will never agree to join him in his massive act of financial fraud. That would do harm to millions of middle-class investors. And it would do harm to me. And it would do harm to Old Saint Jack.
Not this boy.
Re that one, please try to find somebody else, Anonymous.
My best and warmest wishes to you and yours.
Rob
grandpop says
“Fortune telling is not nearly as bad [as buy and hold]…”
“fewer dollars are lost to bank robbery…”
“Child porn and slave trading and murder for hire… are not widespread enough to cause a loss of confidence in our political system….”
“Embezzlement is… not as bad…”
“I stand by my statement”
Wow. Well, you are certainly one sick puppy. That much at least is clear from your post.
Anonymous says
You are a disgusting individual and should be ashamed of your lies.
Rob says
Okay, Grandpop.
Just please don’t ever say that I am not the most severe critic of the smelly Buy-and-Hold garbage alive on Planet Earth today.
I’ve worked long and hard to win widespread recognition that there is no one even in a close second place.
Take care, man.
Rob
Rob says
You are a disgusting individual and should be ashamed of your lies.
I’m such a meanie!
At least we all agree re that much, Anonymous.
I naturally wish you all the best that this life has to offer a person.
Rob