Set forth below is the text of a comment that I recently posted to another blog entry at this site:
Rob,
They quoted Wade in this article:
http://www.usatoday.com/story/money/columnist/tompor/2014/06/15/boomers-cant-spend-too-much-too-quickly/10520085/
Why didn’t they quote you? I thought you were the SWR expert.
They didn’t quote me because I am the person who discovered the errors in the Old School SWR studies, Anonymous. I put up the post pointing out those errors on the morning of May 13, 2002. The Wall Street Journal didn’t report on them until nearly 10 years later. So I am Enemy #1 for the Buy-and-Hold Mafia.
I am still telling the truth re these matters. The Buy-and-Hold Mafia has directed everything it has got against me and they haven’t stopped me. I think it’s fair to say that the 12-year cover-up will be exposed following the next price crash. Who will be in better shape then?
Wade may be in prison then. I am going to tell people about his great research. I am going to say that he merits the Nobel Prize for the work he did with me. But I also am going to tell people that he committed financial fraud because of the threats that were made to destroy his career.
Is he better off being quoted in all these places now and getting all these big job promotions now and going to prison then or would be be better off taking his story to the New York Times today and avoiding the years of financial fraud? I think he would have been better just playing it straight. I told him so. In one of my e-mails to him I told Wade that I thought he was “insane’ to get involved in any way, shape or form with you Goons.
Wade is a grown man and he took the path he took. I still love the guy. I always will. But I wouldn’t be willing to trade places with him today for all the money in the world.
My contributions have been recognized by thousands and thousands of people (including Wade Pfau, to be sure). People fear you Goons because you have the backing of Jack Bogle and others of the Wall Street Con Men, But the whole corrupt industry will be doing down when millions of middle-class people find out what has been done to them. I am not going down. I have never posted in “defense” of Mel Lindauer or John Greaney or Jack Bogle. I am clean, Anonymous. So I will be getting a lot more recognition following the next price crash, when you are sent to prison.
It’s obviously not the way I wanted to see things play out. But there is no one on Planet Earth who has done more to rein in you Goons. So I have whatever satisfaction comes from knowing that I have put my very best efforts into this. And I will of course continue to do so.
I hope that helps a bit, Anonymous.
Rob
I take it you don’t much agree with the phrase “The best revenge is to live well.” Because wasting years longing for prison sentences for everyone who ever done you wrong is not living well.
Wade didn’t just do me wrong, X. He did himself wrong. He did his profession wrong. He did millions of middle-class investors wrong. He did his country wrong.
There is no law that says: “It is a felony to do Rob Bennett wrong.” There IS a law that says: “It is a felony to commit financial fraud.”
There are lines that may not be crossed.
The responsible among us now need to figure out a way to put things back together while causing the least harm possible given the circumstances that apply for all concerned.
I’m doing my level best on a daily basis.
What the f are you doing?
Rob
I take it you don’t much agree with the phrase “The best revenge is to live well.”
I take it that you don’t much agree with the phrase “Honest is the best policy.”
Rob
is not living well.
Now is trying to survive the Second Great Depression living well.
My parents lived through the First Great Depression. They told me stories.
I love my country.
Deal with it.
Rob
140 years is really not that long of a time and the economy is an ever evolving entity. It is therefore unreasonable to assume PE levels have to act in the way they have in the past. The PE ratio hasn’t been at the historical average in the last 25 years. Maybe it doesn’t make sense to use data from the 1800s to predict a reasonable PE level today.
These are legitimate points. If I were on your side of the table, these are the sorts of points that would be the focus of my critique.
You say that it is not reasonable to assume that PE/10 levels “have to” act in the future as they have in the past. That’s an odd way of putting it. P/E10 levels are not living actors. They cannot be compelled to do anything.
The core question here is — How are stock prices determined?
The conventional belief is that it is economic developments that cause stock prices to change. If that’s so, future prices are not predictable. If future prices are not predictable, risk is a constant. If risk is a constant, Buy-and-Hold is the ideal strategy. All of that follows.
But do we know for certain that it is economic developments that cause stock price changes? Could it not be investor emotion that causes stock price changes? If that’s the case, then economic developments would still have a secondary effect because economic developments influence investor emotion. But if investor emotion is the dominant determinant of stock price changes, then long-term returns should be highly predictable. If that’s so, risk is variable and Buy-and-Hold is a very dangerous strategy.
I believe that investor emotion is the dominant determinant of stock price changes. I freely acknowledge that I could be wrong. Can you say the same, Anonymous? The difference in opinion is understandable. The difference in tactics employed to make one’s point is not tolerable. Your tactics are criminal under the laws of the United States. Mine are customary in every area of life endeavor outside of the investing advice field and even there only the most dogmatic Buy-and-Holders object to them.
The question is not whether the economy is an ever-evolving entity. The question is how stock investing works. If changes in investor emotion are the primary determinant of stock price changes, that needs to be taken into consideration by investors regardless of what is going on in the economy. We are trying to figure out how stock investing works. You behave as if the matter is settled. The matter remains very much unsettled. If the matter were settled, you wouldn’t have seen both Eugene Fama and Robert Shiller, two economists who have opposite ideas on how stock investing works, being awarded Nobel prizes for their work.
Is 140 years a long time? VII has provided a better risk-adjusted return than BH for 140 years out of the 140 years available to us. That’s impressive. I would prefer to be able to say that VII had performed better for 1,400 years. That would be more impressive. But we only have 140 years of return data available to us. Given that that is the amount of data available to us, it is pretty darn impressive that VII has proven itself superior for 140 years running.
If we are going to say that 140 years of data is not enough to tell us anything, we need to shut down the entire Buy-and-Hold Project, which is rooted in a belief that peer-reviewed research has value. I believe in the Buy-and-Hold Project. So you are going to need to make some kind of case that 140 years of data is not enough to persuade me of the claim. Do you believe that there is no reason to say that short-term timing doesn’t work? If 140 years of data is not enough to show anything, then the 140 years of data showing that short-term timing doesn’t work is not credible evidence. Are you willing to apply the same claims to the findings that the Buy-and-Holders appear to have gotten right as you are to the ones that they appear to have gotten wrong?
The book Stock Cycles (by Michael Alexander) discusses this point. Alexander shows that the statistical odds of stock returns continuing to fall into the same general pattern for 140 years by pure coincidence are more than 1 million to one. Those are pretty darn long odds. Are you willing to risk your retirement money on a million-to-one bet? I am not.
All that said, it is a good thing to point out that we only have 140 years of return data to go on. That is indeed a limitation in our investigations that people need to know about.
The case that valuations have SOME effect on long-term returns is so strong that I cannot believe that there is even one reasonable person who would dispute the point. Bogle certainly doesn’t. He says that Reversion to the Mean is an “Iron Law” of stock investing. There aren’t many iron laws in this field. So that is a pretty darn strong statement.
Where the 140-year limitation comes into play, in my assessment, is in the level of confidence that one can apply to various strategy calls. Wade Pfau changed his stock allocation as a result of the work he did with me. He said one time that he was dropping his stock allocation to 50 percent. He did not say what he was dropping it from, but the suggestion was that he was at perhaps 70 percent before the change. 70 percent stocks is a common BH stock allocation. I recommend 30 percent stocks for the typical investor at the sorts of valuation levels that we have seen in recent years. So I think it would be fair to say that Wade moved halfway from the BH position to the VII position. Wade is either a Strategy C investor (one who generally believes in BH principles but who holds some doubts) or a Strategy D investor (one who generally believes in VII principles but who holds some doubts). His position is reasonable. Wade DOES NOT support a Ban on Honest Posting is discussions of investment-related topics held on the internet.
The core reality is that our understanding of how stock investing works is today primitive. 20 percent stock allocations are entirely reasonable for Valuation-Informed Indexers. 80 percent stock allocations are entirely reasonable for Buy-and-Holders. 40 percent stock allocations are entirely reasonable for investors who generally like VII but who hold some doubts. 60 percent stock allocations are entirely reasonable for investors who generally like BH but who hold some doubts.
It is PERFECTLY reasonable to believe in VII and to invest accordingly. I personally do not find it reasonable to believe in BH. If I did, I would follow BH strategies. But I certainly acknowledge that there are millions of good and smart and reasonable people who do believe. I certainly want to hear from all those people. I certainly want all of them to feel 100 percent free to express their honest views on every board and blog to which they post. Can you make the same statement coming from the other direction, Anonymous?
You suggest that the fair-value level P/E10 value may have changed in recent decades. That’s possible. It could be so.
But how can anyone know for sure?
If one invests as if the fair-value P/E10 level has changed dramatically and that turns out not to be the case, one could be financially ruined by the mistake. You don’t want to do something like this lightly. The consequences of getting this one wrong could be very, very, very severe indeed.
I don’t believe that the fair-value P/E10 level has changed dramatically. Given that I do not believe that, I feel compelled to tell people that I do not believe that when I post on discussion boards and blogs.
If I lie re this matter, I could cause friends of mine to suffer very serious negative consequences. I could even go to prison for financial fraud. I prefer to post honestly.
If I am wrong (as I of course acknowledge might be the case), I am confident that my many Buy-and-Hold friends will be able to expose the weaknesses in my case. So no harm will be done. In fact, the exposure of the weaknesses of my case will be a positive because it will help us all develop a firmer understanding of these matters.
If I am right, I could help my many Buy-and-Hold friends — who are good and smart people who deserve to enjoy all the best things that this life has to offer, in my assessment — in very important ways. So we come up winners in that event too.
My feeble human brain is not able to come up with any scenario in which permitting honest posting could be a negative. Has your far superior Goon brain been able to come up with anything over the course of the first 12 years of our Debate About Whether or Not We Should Permit a Debate, Anonymous?
My best wishes to you and yours.
Rob
What buy and hold has going for it is theoretical underpinnings. So when we say that the market has historically returned 8% we can lend more credence to this observation because we believe in an economy that will always continue to grow in the long run. If you asked someone who had never looked at financial data if companies today were making more money today than they did 50 years ago and will they be making even more money 50 years from now they would of course say yes.
The same can’t be said for VII. There is no theoretical underpinning to support the idea that a fair PE/10 is about 15. If again you asked someone who had never looked at financial data do you think 15x the 10 year average of earning is a fair price to pay for stocks they would say um I have no clue. There is no logic behind that number it is simply what has been observed in the past. There are literally millions of interesting coincidences that exist in the data similar to to this PE/10.
I certainly agree that the economy grows over time and that stock investors benefit from that growth. I use real numbers. So I would say that the average long-term annual return is 6.5 percent real. We have no dispute re that much.
I don’t agree even a tiny bit with the idea that the theoretical support for VII is anything less than rock-solid. The difference between Buy-and-Hold and Valuation-Informed Indexing is that VII posits that the price you pay for stocks matters. Buy-and-Hold posits that price does NOT matter, that stocks are worth buying at any possible price. Price matters with every good and service that people purchase for money. What is the theoretical underpinning for the Buy-and-Hold claim that stocks are worth purchasing at any possible price? I would very much like to hear that one, Anonymous.
That’s the entire dispute. If you can offer me some theoretical underpinning for acting as if price does not matter when buying stocks that persuades me, then I’ll become a Buy-and-Holder. I’ve never heard one.
I know how that idea became popular. Eugene Fama did research showing that short-term timing doesn’t work and then mistakenly described his finding as a finding that timing in general does not work. He made the mistake because Bogle had not yet founded Vanguard at the time and so long-term timing was not a viable option at the time and so Fama did not see it as important to examine whether long-term timing (the exercise of price discipline) works or not. Shiller was the first to do that and of course he found that long-term timing always works and is always 100 percent required. Every researcher who has double-checked Shiller’s work has confirmed the finding.
The P/E10 of 15 is the P/E10 that applies in a market that provides an average long-term annual return of 6.5 percent real. If our economy became stronger and generated a long-term return of more than that, the fair-value P/E10 number would increase. If the economy became weaker and generated a long-term return of less than that, the fair-value P/E10 number would drop. It is certainly possible that that could happen.
If you believe that the growth in the U.S. economy is going to be greater than what it has always been in the past or less than what it has always been in the past, you are of course free to change the numbers used in VII analyses to fit your beliefs. The core principle of VII would not change. Valuations would still matter. The numbers would just be different because you used a different assumption that I use in the calculators available at this site that presume that the long-term average return will remain roughly what it has been for 140 years.
The fact that for 140 years out of the 140 years of stock market history available to us, it is investor emotions that have determined short-term stock prices (while long-term prices were determined by the economic realities) is not an “interesting coincidence.” That reality is the reality that revealed to us HOW STOCK INVESTING WORKS. If the market were efficient, as the Buy-and-Holders claim, returns would play out in a random walk pattern both in the short term and in the long term. The fact that long-term returns have never once in history played out in the way that they must play out if Buy-and-Hold properly explains how stock investing works tells us that Buy-and-Hold strategies are exceedingly dangerous and do NOT possess sound theoretical underpinnings.
You are wrong, Anonymous.
And you know it.
Otherwise, you would not behave as you do.
If you had confidence in your strategy, that would show in your posting behavior.
No?
Rob
“You are wrong, Anonymous.”
Yes, only Rob is right all the time. Hail King Rob!
I’m not always right, Anonymous. And I know it.
That’s why I never demand that anyone be banned because they offer a different opinion.
That’s why I call all posters “friend” so long as they follow the rules of the sites at which they post.
I am not a king. But I believe that the rules by which we run our communities are “king.”
I do believe that you have doubts about your strategy. I believe you follow it. And I believe that if you were asked during a lie detector test whether you believed in it, you could say “yes” and pass the test. But if you were asked whether you hold any doubts and said “no” you would fail the test.
I think you have some doubts. I think that is why you get angry when you hear me make my claims. You are trying to silence your doubts because you want to believe. And I am highlighting those doubts and shoving them in your face and that makes you angry.
Is it better that you confront your doubts now or after prices crash?
I believe that you (and all others) are better off confronting your doubts now. That’s why I do what I do.
I don’t believe that I am right all the time. I don’t believe that I am a king.
I believe that every community members has a right to post his or her sincere views at every board and blog on the internet no matter how that makes other community members following other strategies feel. There’s a part of you that believes that too. There’s a part of all of us that believes that. If there weren’t, our posting rules and indeed the laws of our nation would not reflect that belief.
It is not Rob Bennett who is king. It is our country’s bedrock belief that every man and woman has a right to make up his or her own mind that is king.
I love that about us.
I will not be intimidated into giving up that basic right.
I would be hurting not only myself if I did that. I would be hurting you too. I would be hurting my country.
That’s where I am coming from.
When you ridicule that foundational belief of our nation’s culture and laws, you ridicule something that means something to me. I am willing to bet that there have been times when it meant something to you too. So you should knock off the funny business.
Now.
That’s my sincere take re this terribly important matter, in any event.
Rob
I don’t say “you are wrong” to hurt your feelings.
I say “you are wrong” to get you to consider the POSSIBILITY that you are wrong.
If there is even a tiny possibility that you are wrong, you should mot be behaving in the manner in which you are behaving.
Rob
” The difference between Buy-and-Hold and Valuation-Informed Indexing is that VII posits that the price you pay for stocks matters. Buy-and-Hold posits that price does NOT matter, that stocks are worth buying at any possible price.”
Actually no that is not what B&H posits. It says it is impossible to know if the current stock price is over or under valued. VII on the other hand, erroneously, claims to know when stocks are over or under priced using a little coincidence that exists in the historical data of which there are millions.
I don’t see the difference between how you are saying it and how I am saying it.
If it is impossible to know whether stocks are overvalued or not, risk is a constant. If risk is a constant, Buy-and-Hold is the ideal strategy.
If risk varies with changes in valuations, you need to be willing to adjust your stock allocation in response to big changes in valuations to have any hope of keeping your risk profile roughly constant.
That’s the entire deal, is it not?
One model says that it is impossible to know whether stocks are overpriced or not. The other says it is entirely possible.
That’s the entire thing in a nutshell.
Can we know when stocks are overpriced or can we not?
Rob