Set forth below is the text of a comment that I recently posted to another blog entry at this site:
I like how every post is now about yourself. And I am sure you have a 20-30 paragraph explanation for it and it all makes sense.
I do.
The posts that write today are intended for viewing after the next crash, Laugh.
We need to help people understand what happened to them. We don’t just want to say “oh, people messed up, sorry!” We need to go into as much detail as possible. Not because we want to linger over bad stuff. Because we want to AVOID bad stuff in the future. We have to make a complete case as to why it is important that investors focus on valuations ALL THE TIME and why it is critical that they make whatever adjustments in their portfolio allocations AS SOON AS THEY ARE CALLED FOR because, if they wait, it will get harder and harder to make those adjustments.
Buy-and-Hold is a trap. It does seem to work for periods of time. But the more people there are who come to believe in it, the higher valuations go. The higher valuations go, the more frightened people become that everything is going to collapse. And the more frightened people become that everything is going to collapse, the more people suppress any honest, research-based comments. Each aspect of the thing feeds into all the others.
And the more you struggle to get out of the trap, the tighter it pulls in on you. I believe that you Goons would permit honest posting on SWRs today if we could do it over. But to come clean today would require more than that. You would have to own up to the threats made to silence Wade Pfau and lots of other stuff. If you didn’t want to own up to the errors in the Old School SWR studies, you REALLY don’t want to own up to threatening academic researchers. The evidence that the numbers in the Old School SWR studies are wrong is now a mountain. But the trap is harder to get out of than ever before.
Not all of the posts are about me. But a lot of them are. My story is a compelling illustration of how things work when a large number of investors come to believe that Buy-and-Hold strategies might work. I should pose no threat to anyone. I possess no expertise in this field and I don’t claim to possess any. So why would my words pose a threat to the Buy-and-Holders? Why would they care enough to threaten to kill my wife and children if I continued posting honestly?
The threat exists because long before I came on the scene lots of other good and smart people tried to tell us all the truth about stock investing and were suppressed. By the time I came along the Buy-and-Holders were already insanely defensive. I didn’t know it. My sense is that a lot of them didn’t really know it. But they sensed that Shiller’s work was dangerous stuff and that anyone trying to discuss it had to be silenced pronto. So Buy-and-Holders started lashing out at me within five minutes of my famous post of the morning of May 13, 2002.
This is not an intellectual debate. There are important points of an intellectual nature in play. But all the evidence re the intellectual matters are on one side. So that part is easy. The reason why things have played out as they have is that the emotion is 50 times more intense on the Buy-and-Hold side than it is on the Valuation-Informed Indexing side, which has not yet won the strong loyalty even of those who generally believe in it.
My story illustrates well all the points that most need to be heard.
Other stories do too. Wade’s story obviously makes very important points.
And even the stories of you Goons make important points.
All of those stories are more important today than the substantive, intellectual points. The substantive, intellectual points are the good stuff. That’s the stuff we want to work up to. But we need to clear out the emotional stuff to get to the place where we all deep in our hearts want to go.
I wish you well, Laugh.
Rob
What do you define as buy and hold? What does that portfolio (in your mind) contain? What percent stock, bond, cash? How do you compare that to buy, hold and rebalance?
Buy-and-Hold is an investing strategy that posits that price discipline does not matter when buying stocks. It is the most dangerous investing strategy ever concocted by the human mind. There is now 34 years of peer-reviewed research showing that this core “idea” is wrong. That research is based on 145 years of historical return data.
Different Buy-and-Holders go with different stock allocations. But all Buy-and-Holders believe that it is not necessary to change one’s stock allocation in response to changes in stock valuations in order to keep one’s risk profile roughly constant (that is, to “Stay the Course” in a meaningful way). Once an investor accepts that he MUST change his stock allocation in response to big valuation shifts to have any hope whatsoever of long-term investing success, he is a Valuation-Informed Indexer.
Buy-and-Holders obviously have many other beliefs than the incorrect one they have about valuations not affecting long-term returns. Their other beliefs are research-based and have stood the test of time. So I agree with all of those and have incorporated them into the VII Model. The only difference between BH and VII is that VII accepts the last 34 years of peer-reviewed research in this field and BH does not.
The problem is that the thing that the Buy-and-Holders got wrong is the most important thing. The way that the Wall Street Journal said it is that the Buy-and-Holders “are leaving out half the story.” When you leave out half the story, everything you say is wrong. When you leave out half the story, you cause millions of failed retirements. When you leave out half the story, you are committing financial fraud. When you leave out half the story, you cause an economic crisis. When you leave out half the story, you go to prison.
My job is to persuade the Buy-and-Holders to stop leaving out half the story so that we all can begin to enjoy the benefits of being the luckiest generation of investors ever to walk Planet Earth, the first that knows how to reduce the risk of stock investing by 70 percent while earning returns sufficiently enhanced to permit us all to retire five to ten years earlier than we imagined possible in the days when we had not yet become aware of the significance of Shiller’s “revolutionary” (his word) findings of 1981.
I hope that helps a bit, Anonymous.
Rob
You continue to say that VII outperforms buy and hold. What is the mix of stock, bonds, cash and what are the specific stock holdings in which you are using as a comparison?
There is no one allocation mix that can work for all investors. The idea that there ever could be one is of course 100 percent absurd.
VII has beat Buy-and-Hold for 145 years because exercising price discipline is essential. Different people buy different cars because they are in different circumstances just as different people go with different stock allocations because they are in different circumstances. But there has never been a car buyer or a stock buyer who did well by failing to exercise price discipline. The investing strategy that posits that there is no need for stock investors to adjust their stock allocations in response to big shifts in valuations is the most dangerous investing strategy ever concocted by the human mind.
Buy-and-Hold is a con. Buy-and-Hold is a marketing gimmick. Buy-and-Hold is a Ponzi scheme. Buy-and-Hold is a Get Rich Quick scheme. Buy-and-Hold is a fraud. Buy-and-Hold is a lie. Buy-and-Hold is a felony. Buy-and-Hold is a prison sentence.
There is a reason why Buy-and-Holders feel a need to employ 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 to “defend” their strategy. They have no other options available to them.
I hope that helps a bit, Anonymous.
Rob
I don’t think you are understanding me. When you say VII always beats buy and hold, there has to be a comparison. What are the specific assets in each portfolio that you are including in your analysis?
I did understand you and I did answer your question, Anonymous. I think you have a hard time hearing and accepting my answer.
The only difference between BH and VII is that VII calls for the exercise of price discipline and BH does not. There is no one BH portfolio and there is no one VII portfolio. But every BH portfolio is comprised with the thought in the background that market timing should be avoided. And every VII portfolio is comprised with the thought in the background that price discipline is essential. That’s the only difference. But that is a very big difference.
Wade Pfau changed his stock allocation because of the work we did together. His stock allocation was about 70 percent when we first started exchanging e-mails. He was amazed by what he found from the research he did examining the merits of Valuation-Informed Indexing. He lowered his stock allocation to 50 percent.
That’s the answer to your question. There is no one answer that applies in every case. There are particular answers that apply to particular investors. In Wade’s case, the change was a change in stock allocation of 20 percentage points. That’s the change that learning about VII brought about in that one person’s portfolio.
Now —
If Wade asked me whether I thought that the allocation was right for him, I would have suggested a lower stock allocation for him. I would have recommended 30 percent stocks for him. I think I am right. He thinks he is right. It’s his money. So it’s his decision.
You could make a case that Wade’s portfolio today is a mix of BH and VII. You could say that, when he was pure BH, he was at 70 percent stocks and that, if he were pure VII, he would be at 30 percent stocks, and so he is in the middle of those two at 50 percent stocks. I have no problem with saying it that way.
Or it could be that I am flat-out wrong with the 30 percent stocks thing and that Wade is the ideal VII investor. I don’t think that’s right. But of course I am one of those flawed humans. So it is possible that I am wrong about this.
The conflict that I have with you Goons is that you want me to say something that I don’t believe. You want me to say that Wade should be at 70 percent stocks. Perhaps you would find it tolerable if I said that he should be at 50 percent stocks. I cannot say either of those things. I feel strongly that I need to say what I truly believe, that Wade should be at 30 percent stocks.
I am 100 percent comfortable saying that I could be wrong. But I am not even a tiny bit comfortable saying something that I don’t believe.
VII itself doesn’t give those sorts of specifics any more than BH does. Bogle has never identified any one stock allocation that all BH investors should use. There isn’t one There isn’t one VII portfolio that is right for all investors either. The thing that distinguishes the two models is that the VII model says that all investors should exercise price discipline when buying stocks and the BH model says that investors should instead avoid market timing.
My best wishes to you and yours.
Rob
You still don’t fully get it. What stocks? Large cap, mod cap, small cap? Domestic, European, APAC, Emerging market. What about bond holdings? corporate, Govenment, high yield, domestic, international?
Same goes for your VII.
Specifically, what are the holdings, what are the comparative returns, etc.
All I see is your claim and nothing to back it up with any details on what you are really comparing.
Everything is the same as Buy-and-Hold except that Valuation-Informed Indexers take into consideration the 34 years of peer-reviewed research that shows that investors always, always, always MUST take price into consideration when setting their stock allocations.
Buy-and-Hold is a marketing gimmick that caused an economic crisis. Valuation-Informed Indexing is the first true research-based strategy.
That’s it, Anonymous.
I naturally wish you all good things.
Rob