Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Don’t you care about SWR at all? If so you would have some insight or opinion on the substance of Wade’s article. Assuming you even read it.
It’s cool that Wade is getting deeper into this stuff. I am not persuaded by every word that he wrote. But that doesn’t matter much. What matters is that he is digging. That’s how we all learn. So my first reaction is just to be excited that he continues to dig deeper into this stuff.
This paragraph sounds like a cop-out to me: “It is not a conservative guess about a safe withdrawal rate, but rather it is the best guess based upon the historical relationship between withdrawal rates, market valuations, and interest rates. It could end up being more or less (we won’t know which for another thirty years).”
It’s fine to calculate the “best guess” rather than the “safe” number. I have zero problem with that. John Walter Russell and I did that with the Retirement Risk Evaluator. The withdrawal rate that has only a 50 percent chance of working out (rather than a 95 percent chance — defined as “safe”) is the “best guess” number because factors that cannot be known can push it in either direction.
But people want to know the “safe” number to plan their retirements. It is hard for me not to speculate that the reason why Wade does not want to give that number is that he knows that you Goons will come after him if he writes honestly about this question. This is an important matter. He should not permit your intimidation tactics to influence him.
We obviously do not know what number will barely work at the end of 30 years. But we know what the odds are of various possibilities. He should be willing to identify the “safe” number (the number that is virtually certain to work (John and I defined “safe” as the number with a 95 percent chance of working out).
Wade is trying to stay out of trouble and he is putting millions of middle-class retirements at risk to do so. This is where we part company. There’s still good stuff in the article and I think we all should be grateful that Wade continues to do the good work he does. But he is not being fully honest here. He is playing games. I find it highly offensive and irresponsible and, frankly, shameful.
People don’t behave like this in other fields of human endeavor. People shouldn’t behave like this in the investing advice field either. I of course have sympathy for the fact that Wade has kids to feed and he fears the consequences of behaving in a fully honest manner re these questions. But there are responsibilities attached to putting yourself forward as an “expert” in this field. Wade knows about the history of this question and he knows how dangerous the Old School SWR Studies are and I am not able to feel good about his ducking of this very important question.
That’s my sincere take re that one, in any event. We won’t KNOW what will survive for 30 years. OBVIOUSLY. No one ever thought we could know such a thing. But we know the worst case scenario today. And we should tell people that. To duck the question just extends the cover-up to the great harm of every single person involved.
I don’t personally buy what he is saying about interest rates. It seems to me that the effect of interest rates would be factored in to the price. So you don’t need to separately count that. Mispricing is the product of emotion, which by definition CANNOT be factored in (investors cannot be aware of their own irrationality — if they were they would stop being irrational!). It’s possible that I am wrong. I certainly don’t object to Wade looking at the question. But I am not personally convinced at this point in time.
Saying that “investors should remain cautious and flexible” is just verbiage. It tells us nothing. The Old School SWR studies were promoted in thousands of places. The numbers in those studies are wildly off the mark from the numbers you get from an accurate and honest analysis. That’s the headline here. Wade should be focused on warning people about the dangers of the Old School studies and about the need to get them corrected immediately and about the 14-year cover-up and about the intimidation tactics that have been employed to keep him from promoting the research that I co-authored with him. AND he should continue digging, as he does in this article. That’s my take.
What I am saying here benefits ALL of us, Anonymous. Including you Goons. The worst thing for all of us is continuation of the cover-up. You don’t see it and Wade is afraid to take you on at this point in time. But I am pretty darn sure that we will all be breathing a lot easier when this massive act of financial fraud comes to a full and complete stop.
My bottom line is that there is a mix of good and bad in this article. The continued probing will yield good fruit in time, I have no doubt of that. But Wade is ducking the most important issues. And that’s a darn shame. For everybody.
Again, thanks for bringing the article to my attention. I am happy to know about it even if I am not 100 percent thrilled with the content.
I guess those observations ended up not being so terribly brief after all!
Rob
Why do you think Wade took an unusual step in writing an article specifically calling you out as to why you are wrong on SWRs. If he was really scared, wouldn’t he just stay silent?
He felt that he needed to justify it somehow. He had written hundreds of e-mails saying that I was right and he had written a large number of discussion-board posts saying that and he had put his name to research that was based on the work we did together and on the things he learned from me and now he was backing away from all that because of the threats made by Jack Bogle and Mel Linduaer and John Greaney.
He wanted me to give up on my efforts to open every discussion board and blog on the internet to honest posting because it is obviously unethical and criminal behavior for him to participate in the massive 14-year cover-up. So he tried to discourage me.
It obviously didn’t work. I have every right in the world to do honest work in this field. So does Wade. When others who know about the last 14 years of peer-reviewed research in this field speak up in opposition to the financial fraud practices by you Goons, you will be sent to prison and we will all be free to do honest work from that point forward. That’s the best thing for every single person involved. That’s a win/win/win/win/win.
Rob
Jack made a threat?
Implicitly, yes.
Wade was very proud of the peer-reviewed research paper that he co-authored with me. He put up several posts sharing our findings at the Bogleheads Forum. The general reaction of the board community was strongly positive. Posters pointed out that our research challenged the most basic tenets of the Buy-and-Hold Model. Community members expressed excitement over the idea of discussing our research in depth and teasing out its many far-reaching implications.
Mel Lindauer responded by making false claims that Wade had engaged in unethical practices in preparation of the research. Wade called Lindauer out on his b.s. The Lindauerheads responded by threatening to send defamatory e-mails to Wade’s employer, aiming to get him fired from his job. I wrote to Bogle asking his help. Bogle did not respond.
Bogle has a long history of signaling his support for Lindauer, the most abusive poster in the history of the internet. He permits his name to be used at a board at which Linduaerheads are permitted to post. He failed to speak up on numerous occasions on which Lindauer employed threats of physical violence to intimidate community members who dared to “cross” him by posting honestly re the last 35 years of peer-reviewed research in this field. He permitted Lindauer to us a blurb with his name attached to it to promote Lindauer’s book. My strong hunch is that Bogle played a role in getting Lindauer his column at Forbes. Numerous community members wrote to Bogle asking his help with the Lindauerheads and he failed to respond to their entreaties.
Bogle is a wealthy and powerful and influential man. There is no other field in which people of Bogle’s stature interact with the sorts of individuals who have put up posts in “defense’ of Mel Lindauer. That sends a powerful signal to those with a desire to post honestly that there will be a big price attached to doing so. Wade Pfau wrote to me and told me that he was frightened by you Goons. Given that his first reaction to Lindauer’s attacks was to stand up to him, I think it would be fair to conclude that a big part of his fear was a fear that Bogle would not step forward to protect him if the attacks continued. Bogle has not behaved in an ethical manner re these matters.
That’s my sincere take re these terribly important matters in any event, Anonymous.
I naturally wish you all the best things that this life has to offer a person.
Rob
Can you post links to the Boglehead forum posts you speak of as I am not familiar with those.
Your lawyer will be provided everything that he or she needs to prepare your defense case, Anonymous.
I wish you the best of luck with it.
Rob
My lawyer says there is nothing to back up your claim.
My lawyer says there is nothing to back up your claim.
Then it sounds like you are set, my good friend.
My best wishes both to you and to your lawyer.
I read a relevant line the other day:
It all works out in the end.
So, if it hasn’t worked out yet, we must not quite be at the end.
Rob
Uh Oh, Rob. CAPE doesn’t work.
http://aswathdamodaran.blogspot.com/2016/08/superman-and-stocks-it-not-cape-cape-it.html
It looks like your life’s work has gone down in flames.
That settles it!
Thanks for posting the link, Anonymous.
I just looked it over. I don’t have time at the moment to read the article. It appears that the fellow spent some time on it. So I view this as probably helpful. A debate has to have two sides arguing their case to provide a learning experience. When people who don’t like CAPE put their energies into writing a critique, it helps people on both sides to better understand the arguments. That’s a win/win.
In the event that I find some of the issues compelling, I will consider writing a column responding to the article.
Rob
I’ve now read the article.
This is the key sentence, in my assessment:
“Relative to the full history, the CAPE looks high today, but relative to the last 20 years, the story is much weaker.”
The question is whether we can trust the record of the last 20 years considered in isolation to tell us something meaningful about how stock investing works. If you believe that valuations affect long-term returns, you note that stocks have been selling at insanely high prices for almost that entire time-period and tune out that 20 years of noise. You don’t want to know how stocks do during time-periods in which investors have temporarily lost their minds, you want to know how they do during the longer time-periods that matter to investors who expect to be investing through investing lifetimes of perhaps 60 years (from age 25 to age 85).
Is 20 years long-term? It certainly is long-term relative to the one-year time frame employed by many investors. It is not long-term relative to the investing lifetime of most investors. Bull markets always produce good results for a time — Investors elect to engage in irrationality because they enjoy those good times so much!
He is essentially putting forward a tautology. The question at issue is: “Are the prices assigned to stocks a reflection of the economic realities or do we need to make an adjustment for investor irrationality to know the real value of stocks at any given moment in time?” His response is: “At the times at which stocks are insanely overpriced, the prices of stocks tend to be high so long as you don’t make an adjustment.” What would you expect to be the case? He is saying “Investors have been so irrational lately that they have kidded themselves into thinking that they have more money than they do — this proves that it is a good idea for investors to fool themselves about how much money they have.” Huh?
If you want to understand how stock investing works in the real world, you have to be willing to look outside the 20 years in which we have seen more investor irrationality than we have ever seen before. The past 20 years is hardly representative of how stocks ordinarily behave. He is looking at the most extreme outlier available to us and saying “this is what we should go by.” Those who believe that valuations affect long-term returns see it just the other way. We are alarmed that we are living through the most extreme outlier years in the history of the market.
The one argument that I find somewhat persuasive (he doesn’t say this explicitly but I see this point as being implicit in his entire argument) is that “20 years is a long time; if valuations really mattered, it should not have taken 20 years for their effects to evidence themselves.” It was 20 years ago that Shiller made his famous prediction to the Federal Reserve that investors who were heavily invested in stocks in 1996 would come to regret it within 10 years. We saw the crash 12 years later, then prices returned to insanely overvalued levels and have remained there ever since.
Most Buy-and-Holders do not regret their decision to stick with their high stock allocations during those 20 years. Some do. Some got out in 2008 and would have been better off heeding the warning implicit in Shiller’s prediction. But most Buy-and-Holders stuck with stocks during what turned out to be a temporary (at least from today’s perspective) price drop. Those investors do not today regret going with a Buy-and-Hold strategy. The P/E10 level today is roughly where it was in 1996. Stocks earn 6.5 percent real when the P/E10 level is stable. So those investors have earned more in stocks than they could have earned in other asset classes. In that sense, Shiller has been proven wrong.
It is not a trivial sense in which Shiller has been proven wrong. No one put a gun to his head and forced him to use 10 years as his time-period for making assessments of which strategy is superior. His strategy failed according to his own test. I can give the Buy-and-Holders that much.
But I continue to believe that Shiller was more right than wrong. Predictions that go less than 10 years out have a poor track record. And Shiller’s very public prediction shows that even predictions that go out 10 years may well fail in the real world. The signals for stocks were very bad in 1996; that’s why the usually cautious Shiller was willing to stick his neck out and make such a provocative prediction. I think it would be fair to say that valuations have mattered less over the past 20 years than they have ever mattered before (this is the core argument being made in the article, in my assessment). I don’t see this as a silly point. It is an important point and a valid point, and I believe it is this point that does more than anything else to convince most investors that Buy-and-Hold works.
My problem with buying into the argument is that logic demands that one believe either that valuations always matter or that they never do. Most investors don’t accept that this is a binary choice; most investors lower their allocations just a little when prices get very high on the thinking that it is never a good idea to be too extreme. I understand the appeal of moderation that drives that choice but my brain is not able to accept it as a logical way of proceeding. My view is that this is a yes or no question.
If valuations matter, you have to tune out the results achieved over a time-period in which valuations have remained high. If valuations do not matter, Buy-and-Hold is the ideal strategy; I certainly do not say different. But to say that Buy-and-Hold has performed well over a time-period in which valuations have remained insanely high just does not address the question that matters — Do valuations matter or not? OF COURSE a strategy that ignores valuations is going to perform well during a time period when prices are out of control. It could not possibly be any other way.
Pointing out that ignoring valuations hasn’t hurt investors during the most extreme outlier time-period for out-of-control investing that we have ever seen in history is like a man who is 100 pounds overweight saying that being overweight hasn’t killed him yet because he takes his diabetes medications and his organs are still functioning despite all those grave warnings from those nervous Nelly doctors telling him that he had better shape up. The real question is how does the guy who is 100 pounds overweight do compared to people who are not 100 pounds overweight. The guy’s stubborn insistence that being 100 pounds overweight doesn’t matter doesn’t bear up to scrutiny when you look at people who follow less insane eating practices. He can convince himself because he so much wants to convince himself but it is not science to use such limited data sets to make grand claims that defy common sense (price matters when buying anything other than stocks).
So I remain unconvinced.
However, I do acknowledge that the fact that Buy-and-Hold still appears at least on the surface to be working 20 years after Shiller made a very public prediction that it would not continue to appear to be working 10 years later is a significant fact. Valuation-Informed Indexing needs to survive forward testing to become the dominant strategy. My view is that it HAS survived forward testing because Shiller published his research in 1981 and in the 35 years since stocks have performed in a manner consistent with his findings. So I am more convinced today than I would have been in 1981.
But if you start with the belief that stock prices are set by economic factors, Buy-and-Hold looks good both from 1981 forward and from 1996 forward and most certainly from 2008 forward. It all depends on one’s belief re the core point — Do valuations matter or is the market efficient? If the market is efficient, it is okay to use today’s price as your measuring stick. Buy-and-Hold looks okay using today’s price as the measuring stick (to be fair, Valuation-Informed Indexing looks okay too, especially if you look at risk-adjusted returns).
If you believe that valuations matter, the results of the last 20 years are not reassuring but alarming. For those coming at things from this perspective, ignoring valuations always produces long-term negatives. Thus, the fact that insanely high prices have remained in effect longer than at any earlier time in the historical record is not an argument in favor of the Buy-and-Hold Model but an argument against it. We should all want to see rational prices, not insanely dangerous ones that wipe us out in the long term.
My take is that it is the mistake that Fama made in 1965 that CAUSED this crazy 20-year time-period in which insane prices have remained in effect longer than ever before. Investors have always been irrational, according to the historical return data. But never before have they been this irrational. The highest P/E10 level we ever saw in the pre-Fama era was the 33 that caused the Great Depression. Buy-and-Hold took us to 44! Holy moly! And the Buy-and-Holders count the 20-year time-period in which we saw the 44 as a feather in their cap! I think about the long-term human misery caused by the 44 and cannot help bear to put human faces to the story being told by the insanely inflated portfolio statement numbers.
The bottom line is that the Buy-and-Holders and the Valuation-Informed Indexers are talking past each other. It’s the root assumptions of the two models that produce the entire case for both of them. For the person who goes to the data looking for support for a belief that the market is efficient, the entire record shows this. For the person who goes to the data looking for support for a belief that valuations matter, the entire record shows this. The data itself does not speak. It is the human interpreters of the data who speak and by some strange coincidence they always come to “findings” that support the belief they held when they turned to the data for support. Humans!
If valuations continue to matter as much as they have in every time-period in history except the last 20 years, the damage to our economic and political system will be so great that the phrase “Buy-and-Hold” will be viewed as an obscenity for many, many years to come. If this ends up being the first time in history when a belief that “it’s all going to turn out different this time!” really does pay off, Buy-and-Hold is going to grow in popularity and properly so. Investors want results and Buy-and-Hold has produced not-bad results during this extreme outlier time-period even when the effects of the massive crash of 2008 are factored in.
Given that both Fama and Shiller have been awarded Nobel prizes, I believe that every American citizen has a right to post honestly at every investing discussion board and blog on the internet. The Ban on Honest Posting is supported ONLY by Buy-and-Holders; I have never seen a non-Buy-and-Holder say a word in favor of it. That tells us something important, in my view. It tells us that the confidence of the Buy-and-Holders is a shaky confidence. They can strut about proudly about their genius so long as those informed about the last 35 years of peer-reviewed research are either silenced or kept out of the room. The Buy-and-Holders themselves don’t believe that Buy-and-Hold can survive reasoned debate.
Why? Because it just doesn’t add up. Price matters in every other market that exists. It just doesn’t make sense to believe that it doesn’t matter when buying stocks. We are all influenced by 20-year time-periods in which common sense takes a vacation. But there is more history available to stock analysts than the time-period from 1996 forward and that 145 years of stock history tells us that it is a very, very bad idea to fail to exercise price discipline when buying stocks. That’s my sincere take, in any event.
All that said, the guy who wrote the article went to the trouble to put together a sincere argument stating his case and his doing so prompted me to do the same in response. He enriched his understanding of the issues by doing so and I enriched mine by responding to him. Investors can look at both arguments and make up their own minds. That’s the beauty of our system when our laws are being followed. Our system works. It can take time for it to bear fruit. But it works well in the long run.
This is why my focus today is on getting prison sentences announced for you Goons. Once your prison sentences are announced, we will be seeing many more articles of the type written by this fellow and many more responses of the type that I developed in response to his words. We ALL benefits from the experience that follows from reasonable enforcement of the laws prohibiting the tactics employed by those posting in “defense” of Mel Lindauer, John Greaney and Jack Bogle over the first 14 years of our discussions re whether or not to permit discussion of the last 35 years of peer-reviewed research.
Again — that’s my sincere take re these terribly important matters in any event.
My best and warmest wishes to you and all my other Goon friends. Anonymous. I am grateful for your willingness to take time out of your day to bring this article to the attention of the readers (both current day and future day ones!) of this blog.
Take good care, man.
Rob