I’ve posted Entry #199 to my weekly Valuation-Informed Indexing column at the Value Walk site. it’s called Investing Strategies That Ignore the Effects of Stock Crashes Cannot Work.
Juicy Excerpt: You really only need to know one thing about stock market history to know that the market is not efficient. Prices crash from time to time. If prices were determined by economic realities, there would be ups and downs in prices. But there would never be crashes. The market lost over $9 trillion in value in the 2008 crash. There is zero chance that informed investors had in late 2008 taken note of changes in the economic realities serious enough to justify that sort of change. The market crashed because market prices are determined primarily by shifts in investor emotions and one of the characteristics of emotions is that they change suddenly and harshly.
Emotions are not rooted in logic. So they can do just about any crazy thing. It is critical that those studying stock investing come to a better appreciation of this seemingly obvious implication of Shiller’s “revolutionary” (his word) finding. When I tell people that the numbers show that it was the relentless promotion of Buy-and-Hold strategies that served as the primary cause of the economic crisis, they find it a hard reality to take in.
It doesn’t make sense! Surely investors would not let prices get so out of hand as to cause $12 trillion of consumer buying power to disappear from the economy as prices worked their way back to fair-value levels. No, it doesn’t make sense. But bull markets aren’t supposed to make sense. They are an emotional phenomenon, not a rational one. What would make sense is for the P/E10 always to remain at 15, the fair-value P/E10 number. Higher P/E10 values signify the presence of unhealthy levels of investor emotion and we need to pay attention to those readings if we are to invest effectively for the long-term and to avoid the sorts of economic crises that have followed every secular bull market experienced over the 140 years of stock market history available to us today.
So long as stock market prices are determined by emotional phenomena, we are going to see terrifying price crashes and the terrifying economic crises that inevitably follow from them. The other and more positive way of stating it is that, now that we are aware that market prices are determined by emotional phenomena, we are empowered to avoid crashes and economic crises by educating investors as to how they need to respond to bull-market prices to win higher lifetime returns and earlier retirements for themselves.
And, of course, the 2008 market drop had nothing to do with the real estate and debt market issues.
Rob, my 11 year old daughter knows more about evonomics than you do.
It was the promotion of Buy-and-Hold strategies that caused the real estate bubble, Anonymous.
Stocks were overpriced by a factor of three in January 2000. The Buy-and-Hold Liars told the fellow who had $200,000 of real value in his portfolio that he had $600,000 of real value in his portfolio. He spent some of the $400,000 in Pretend Gains buying real estate and thereby pushed up the price of real estate.
The real estate bubble was a bad thing. But the real estate bubble was a SECONDARY bubble. The primary problem was the continued promotion of the Buy-and-Hold Lies for 33 years after they were discredited by the peer-reviewed research in this field.
Does your 11-year-old daughter know about the laws making financial fraud a felony punishable by prison time? Does she care enough about you to fill you in as to where you are headed following the next price crash as I do on a nearly daily basis?
If not — Why not?
That’s the real issue here. In ordinary circumstances, 11-year-old daughters would not want to see their fathers taken off to prison cells. What is it about the Buy-and-Hold Lies that makes 11-yeaold daughters want to keep it zipped even though it means seeing their fathers land in prison cells somewhere down the road a piece?
That’s the issue that we all are struggling with. We all are ashamed of the human misery we have caused. Jack Bogle is ashamed. You are ashamed. And your 11-year-old daughter is ashamed.
And it won’t get better when our Buy-and-Hold Lies have put us all in the Second Great Depression. That will make it worse. That will make us MORE ashamed.
We need to see Jack flip and say the Three Magic Words. Then we will all feel safe telling the truth and thereby keeping our loves ones out of prison cells.
I am sure.
Rob
The purchase price of the home and the leverage price of the home was based entirely on the real estate market dynamics and not the stock market.
If you look at the FACTS, stocks were and continue to be held by the top 5% (70% of all holdings). Homes that went into foreclosure were mostly in the hands of those that had little to no stock. Look at the net worth data and you will see that is the case. The recovery has benefited the wealthy because THEY ARE THE ONES THAT OWN STOCK.
http://finance.yahoo.com/blogs/daily-ticker/for-most-families–wealth-has-vanished-172130204.html
As for my 11 year old, not only does she know more about economics than you, she also knows that your prison threats are just as silly and a fantasy as those of any other child she encounters on the school playground.
I don’t buy it, Anonymous.
If you had confidence in your claims, you could discuss these matters without resorting to 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.
The Buy-and-Hold Lies had created $12 trillion in Funny Money by January 2000. We are to believe that none of that money found its way to the purchase of real estate?
I don’t buy it.
The deeper reality is that YOU don’t buy it.
If you did, you wouldn’t behave the way you do.
You have managed to persuade yourself of the merit of the Buy-and-Hold Lies enough to enable you to risk your retirement money on them. I’ll give you that much. But I don’t see confidence. I don’t see anything approaching confidence. I don’t see that one as being even remotely a close call.
I wish you all the best things that this life has to offer a person.
I think it would be fair to say that we will see who is right when we see how the nation reacts to the next price crash.
Is that fair enough for you?
I don’t like the idea of waiting. But I don’t see that I have much choice. So I accept that that is where things are headed.
I hope that works for you.
I don’t see that you have too much choice either.
You have my best and warmest wishes in any event.
Rob
The recovery has benefited the wealthy because THEY ARE THE ONES THAT OWN STOCK.
So they are the ones who will be hurt the most by the next price crash.
And they are the ones who will be flipping from a belief in the Buy-and-Hold Lies to the first true research-based approach.
Wealthy people are powerful people.
So this is good news for all of us, no?
Rob
The promotion of Buy&Hold has behind every major calamity – economic or otherwise – that has beset mankind in modern times. The Red Sox 86 year championship drought? Buy & Hold! The sinking of the Titanic? Buy & Hold! The JFK assassination? Buy & Hold!
Please get a grip
I wouldn’t say it if I didn’t believe it, Interested.
There are some things in this world that are very, very, very bad. The idea that it is not necessary to exercise price discipline when buying stocks has caused a HUGE amount of human misery.
Say that we applied that rule in the market for any other good or service. Say that we passed a law saying that no one could consider price before buying a car. If you wanted a car, you just had to hand over over your checking account and the dealership would take the money. What would happen to our economy if we passed that law?
It would crash in a few years. In the beginning, the car dealerships would just be happy with the extra sales now that price resistance was not an obstacle they had to overcome. But within a few years one of the dealers would realize that there was no penalty attached to raising prices. He would be rewarded for doing that. So he would raise prices more. Word would get out. All the other dealers would raise prices too.
There would come a time when cars would be selling for $1 million each. Every other industry would collapse because people would have to spend all their money on cars to have any hope of getting to their jobs each day.
PRICE DISCIPLINE IS A CRITICAL ELEMENT TO ANY TRANSACTION MADE IN ANY MARKET FOR GOODS OR SERVICES.
We have experienced four economic crises in the United States since 1870. Each and every one of them was preceded by a time when the Wall Street Con Men were successful in persuading large numbers of people that there might be some mystery planet where a Buy-and-Hold strategy might work for one or two long-term investors. We have never once in those 140 years had an economic crisis that was not caused by the promotion of Buy-and-Hold strategies.
Yes, price discipline is a very, very, very, very big thing. The stock market is a bigger part of all of our lives today than it was in earlier times (because we are a richer people). It is more important than ever that honest posting re what the peer-reviewed research shows be permitted.
Look at what happened at the Motley Fool board. There was a day when the idea of early retirement was a joke for most people. That is not so today. We are a richer people today and millions of people could achieve this life-affirming goal if they put their minds to it. But the reality is that the Buy-and-Hold garbage pushed at that board ended up causing thousands of failed retirements. Huh? This is a good thing how?
We cannot achieve early retirements unless we open the internet to honest posting on safe withdrawal rates. People NEED that information. That’s why Greaney posted his study in the first place. The next obvious step is to correct the errors in it that he became aware of 12 years ago and thereby make it possible for the study to achieve its goal of HELPING PEOPLE rather than destroying their lives.
My parents lived through the First Great Depression. They told me many stories of what the Buy-and-Hold Lies did to their lives and to the lives of the people around them. Yes, I believe that it is a horrible thing that the Buy-and-Hold Liars are now in the process of bringing about the Second Great Depression, Yes, I am proud that for 12 years now I have led the effort to open every board and blog on the internet to honest posting re what the last 33 years of peer-reviewed research tells us all about how stock investing works in the real world.
I am not so sure about the Red Sox championship drought or the sinking of the Titanic or the JFK assassination. But I have zero doubt in my mind today that the Buy-and-Hold concept has caused more human misery than any other “idea” ever advanced in the history of personal finance. So I am 100 percent happy to devote the remaining years of my life to the project of getting the word out to the millions of middle-class workers as to why we are in an economic crisis today.
I hope that’s okay by you, Interested.
Okay or not, I will be continuing my good efforts.
But since you are a friend, I would like to think that it is okay by you.
I wish you all the best that this life has to offer a person in any event.
Rob
You have a classic Messiah Complex. You have literally taken a small little nugget of information, a interesting coincidence, of how the market has performed in the PAST and now are basically attributing the downfall of man to people not 100% subscribing to its predictive power.
Never mind that you did not even come up with this interesting historical coincidence and those that actually did have continued to move forward with their lives and continued to make meaningful contributions to financial research, it is you and you alone, Rob Bennet, our savior who will cure all that pains the world with his one little stolen technical metric.
The research-proven reality that price matters when buying stocks is not some small thing, Anonymous. It is 80 percent of the stock investing project. The peer-reviewed research that I co-authored with Wade Pfau shows that, by permitting honest posting on what we now know about how stock investing works in the real world, we will be reducing stock investing risk by 70 percent. That’s huge.
And it’s not just how the market has performed in the past. It is how the market performs, period. Price matters in ALL markets. There is no reason to believe that the stock market is in any way different or special in this regard. You don’t even need to look at the peer-reviewed research to see this. Your common sense tells you that it MUST be so. What the 140 years of historical data does is CONFIRM for us that what we know SHOULD be so really IS so.
The only reason why we even need this confirmation is because Fama made a mistake when he reported on the results of his 1965 research. Fama showed that short-term timing never works and should therefore be avoided. Fama never checked long-term timing. So he of course had no basis re which to speculate that there might be some mystical, magical alternate universe where long-term timing might not be 100 percent required or might not work in every case in which it was tried.
The mistake wouldn’t have been a big deal had he corrected it as soon as Shiller revealed (in 1981!) that it was indeed a mistake. Instead, he covered up the mistake and the Wall Street Con Men then joined in on the cover-up and then the Internet Goon Squads joined in too. So now we have an economic crisis to live through that may become the Second Great Depression before it is over. We have millions of unemployed. We have millions of failed retirements. We have tens of thousands of entrepreneurs who have seen their businesses fail. We have hundreds of you Goons headed off to prison. Huh? This is a good thing how exactly?
People in other fields of life endeavor correct mistakes ALL THE TIME. Accountants correct mistakes. Barbers correct mistakes. Flight attendants correct mistakes? But the Wall Street Con Men cannot correct mistakes. Huh?
If I ask for a Coke on an airplane flight and the flight attendant gives me a V-8 and I point out the mistake, she fixes it, right? So why shouldn’t Jack Bogle correct his mistake when he gets the numbers that millions of people use to plan their retirements wildly wrong? I say he should correct his mistake. I say all the Wall Street Con Men should do so. I see it as being imperative that the mistake be corrected. I don’t see this one as being a close call. I am sure.
I don’t ask that anyone who isn’t persuaded of the predictive power of P/E10 subscribe to it. But I do demand (NOT ask!) that they follow the laws of the United States and the rules of the boards and blogs to which they post. The problem here is not that millions of people believe in Buy-and-Hold. That is fine. I believed in Buy-and-Hold myself on the morning of May 13, 2002. The problem is that the millions of people who want to learn about what the last 33 years of peer-reviewed research says cannot do so because the Buy-and-Hold Mafia is a criminal enterprise. Financial fraud is a felony, Anonymous. That means prison time for you and the other Goons. We adopted the laws against financial fraud for good reasons and we all need to pull together to be sure that those laws are enforced.
I have never claimed that I was the one who discovered that valuations affect long-term returns. That was Yale Economics Professor Robert Shiller. Shiller won a Nobel Prize in Economics for his research in this area. Every citizen of this nation has the right to discuss the implications of Shiller’s research on every board and blog on the internet, Buy-and-Hold Goons be darned. You’re the one committing felonies on a daily basis, not me, Anonymous. You’re the one going to prison following the next price crash, not me. That reality tells a tale.
I do believe that opening the internet to honest posting re the last 33 years of peer-reviewed research will bring on the greatest advance in our understanding of how stock investing works ever achieved in history. I don’t at all say that I alone am responsible for this huge advance. Shiller obviously played a huge role. Bogle obviously played a huge role. John Walter Russell obviously played a huge role. Rob Arnott played a huge role. Wade Pfau played a huge role. Bill Bernstein played a big role. Scott Burns played a big role. Carl Richards played a big role. Todd Tresidder played a big role. Microlepsis played a role. John D. Craig played a role. And on and on and on and on. I played the lead role in arguing that we must open the internet to honest posting if we all are to learn what we very, very much need to learn. But this has been a community effort going back to the first day. And that is of course a message that I have been repeating over and over and over again since the first day.
The amazing reality is that even you Goons have played a positive role on many occasions. That’s why I let you post here. One of my jobs is to do what I can to get your prisons sentences reduced a bit. We need healing and showing kindness to our Buy-and-Hold friends is a great way to achieve it. I believe that the best way to get your prison sentences reduced is to build a record showing how you have made many positive contributions. I will be using the materials at this site to argue your case following the next price crash, when I think it will be fair to say that there will be no one else stepping forward to do so. What a mean, mean man I am!
Anyway, lots of people helped. Nothing could be more clear. It was by reading Bogle’s book that I learned about the errors in the Old School retirement studies! That was how I came to put forward the famous post of the morning of May 13, 2002. Bogle is the real troublemaker here, Anonymous! Go get him, Goons! All I am is a humble Boglhead who wants to see the man’s good stuff get as much play as the smelly Get Rich Quick garbage that you Goons have made your religion.
The hand of kindness remains outstretched. You don’t need to offer me anything in negotiations to persuade me to work my butt off on your behalf. I do it because I think love is the answer and because that is what I think is the loving thing to do in these circumstances. So that one is set in concrete and can never change no matter what sorts of vile acts of intimidation and deception you advance.
Just don’t ask me to post dishonestly re the numbers that my friends use to plan their retirements.
It is deception and intimidation that got us into this mess. More deception ands more intimidation takes us deeper into the pit.
Not this boy.
Please try to find somebody else.
I can’t go for that.
No can do.
I believe that we need to take this in precisely the opposite direction.
I want to see every board and blog on the internet opened to honest posting.
I want to hear Jack Bogle’s honest thoughts re these matters.
And Wade Pfau’s honest thoughts.
And Robert Shiller’s honest thoughts.
And Mike Piper’s honest thoughts.
And on and on and on and on and on.
I’ll let you in on a little secret. Bogle would like to be sharing his honest thoughts with us. So would Wade. So would Shiller. So would Mike.
They are all just waiting to see that it is safe for them to share their honest beliefs.
They will feel safe when Bogle gives his “I Was Wrong” speech and when it is written up on the front page of the New York Times.
We all should be working together to persuade Old Saint Jack to give that speech by the close of business today.
That’s my sincere take re these terribly important matters, in any event.
I naturally wish you the best of luck in all your future life endeavors in any event, my old friend.
Rob
those that actually did have continued to move forward with their lives and continued to make meaningful contributions to financial research,
No, they haven’t, Anonymous.
No one dares to publish honest research until Bogle gives the signal that it is again safe to do so.
95 percent of the research that has been published over the past 33 years is dishonest garbage.
That’s why there is so much leverage in opening the internet to honest posting.
Rob Arnott asked for a show of hands at a conference for academic researchers re how many still believed in the Efficient Market Theory (the cornerstone of the Buy-and-Hold strategy). Four or five hands went up in a room of hundreds of academic researchers.
Then he asked how many of the researchers would be basing the research they would be doing when they got back to their offices on a belief in the Efficient Market Theory. Hundreds of hands shot up.
Most academic researchers are like Wade Pfau. They LOVE, LOVE, LOVE the idea of helping people. That’s why they got into this field in the first place. So they LOVE, LOVE, LOVE the idea of publishing honest research,
But, like Wade, a lot of them have loved ones who are counting on them to bring in a few bucks from time to time. So they are compromised. They HATE, HATE, HATE the idea of the Buy-and-Hold Mafia destroying their careers.
So they go along with this stupid game of including charts and numbers and tables and graphics in their studies while leaving out the most critical element of any piece of research — PERSONAL INTEGRITY.
Bogle did a great thing in supporting the idea of rooting one’s investing choices in peer-reviewed research. But he undermined the project by joining in on efforts to destroy the reputations of all who dare to “cross” him by doing honest work. Honesty matters. Honesty is important.
We have seen an explosion of knowledge in the investing advice field over the past 33 years. There has been greater growth in this field since 1981 than there has been in the field of computer technology.
Why do so many still advocate the smelly Buy-and-Hold garbage? They have witnessed the brutal intimidation tactics of the Buy-and-Hold Mafia and do not want to see all that criminal power and money directed to the destruction of their careers. Death threats affect what people say! Who’d a thunk it?
Thousands of people will be doing honest work once again after the announcement of your prison sentence, Anonynous. We are going to see the biggest explosion of knowledge re how stock investing works ever seen in history.
Do you see?
The announcement of your prison sentence is going to help us all in a big way. That includes you. Prison sentences end. When your prison sentence ends, you will be released into a society peopled with a generation of investors that knows more about how stock investing works than did any prior generation of investors. Pretty darn cool stuff, no?
I see it as very, very, very cool stuff indeed.
I cannot wait.
Hang in there, Goon man.
Rob
You don’t believe those people have continued on successfully? Those people continue to be paid well to do what everyone else considers valuable hence the pay. While you continue to do something which everyone can agree is worthless hence your lack of pay.
No, it is not “success” to allow yourself to be corrupted because of your need to feed your family.
I had a Dylan quote that I used as the signature line to my posts during the Motley Fool days. Dylan said: “There’s no success like failure and failure is no success at all.” The greatest success in a field that is 100 percent corrupt is failure. To fail in such a field shows that you possess personal integrity. Good for you!
People don’t consider corruption “valuable,” Anonymous. They are not aware of the corruption. They are being tricked. Once they learn about the trickery, they will turn on those who defended the corruption. Do you think the investors who lost their life savings in the Madoff fund believe today that his efforts at deceiving them were “valuable”? Give me a freakin’ break.
My work has huge value. Bogle wants to be able to post honestly. His speeches and articles leave no doubt re this question. The same is obviously true of Bernstein and Pfau and Piper and on and on and on and on. When I win, all those people win. They will all be freed to do honest work from this point forward. There could be no bigger win.
When I win, we all win. If I were to lose, we would all lose. A Second Great Depression is one of the worst things that can happen to an economy, Anonymous. I mean, come on.
Personal integrity matters.
That’s my sincere take re this terribly important matter, in any event.
Rob
While you continue to do something which everyone can agree is worthless hence your lack of pay.
It might be better to make final determinations as to who has come up winners and and to who has come up losers re this matter following the next price crash, Anonymous. A 65 price drop on top of what we have seen over the past 14 years might alter some perceptions re the long-term merit of Buy-and-Hold just a wee bit.
My take.
Rob