Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Most people just go to the grocery and buy whatever is there. So it sounds like you fully support buy and hold.
I’ll make another point that relates to your “buy whatever is there” comment.
People are looking for something when they buy milk. Let’s say that they are looking for something to put on their cereal. When milk prices rise too high, they look for alternatives. Perhaps they buy that powdery stuff that you mix with water to get milk but that is not quite the same thing as milk sold in bottles and which thus might not be affected by the price increase for milk. Or perhaps they give up eating cereal for breakfast and switch to English muffins. Milk sales go down and English muffin sales go up until the price of milk returns to reasonable levels.
That’s how markets work. It is the demand for a good value proposition on the part of people buying a product offered for sale that creates the magic by which the market is able to set the price properly. This is how it works in every market that exists except the stock market. In the stock market, there is no price resistance. The newspapers report that the price of stocks has doubled over the past year and people throw parties to celebrate the good news. A market becomes dysfunctional when the people being hit with increased prices jump for joy about it. When the people buying the product refuse to do their job of looking for alternatives to a product that becomes overpriced, the only way that the market can get prices down is to crash them. And that hurts all of us in very big ways.
People buy milk to have something to put on their cereal. People buy stocks to create an income stream that will support them in their old age, when they can no longer work. When the price of milk rises so high that English muffins offer a better value proposition, people switch from milk and cereal to English muffins. When the price of stocks rises so high that alternative asset classes offer better income streams, people need to switch from stocks to those other asset classes. In January 2000, stocks were offering a likely 10-year real return of a negative 1 percent. IBonds were offering a certain return of 4 percent real. Yet people continued to shove money into stocks and ignored IBonds. What the h?
They did that because of social pressure. Every newspaper they picked up told them how there was some mystical, magical “research” that showed that stocks are worth buying at any price. It was an obvious lie but it was not a lie that many of the people who refer to themselves as “experts” in this field dared to give voice to. The other “experts” (in marketing!) were making millions pushing the smelly Buy-and-Hold garbage. If someone came forward and told the truth about what the peer-reviewed research shows, it would blow their deal. So, to keep our well-paid careers humming, most of us agree either to lie about this stuff or at the least to pull our punches and put forward lots of word-game statements about how “market timing doesn’t work” (without specifying whether we were talking about short-term market timing or long-term market timing).
I don’t play that game, Laugh. I tell it like it us, to the best of my ability. You hate me for it. So be it. I don’t hate you. I love you all the same and I believe that there will come a day when you will love me too. It will happen following the next price crash when you will no longer possess a motive to lie to yourself about the value of your stock portfolio. You won’t need to divide by two to know the accurate numbers in those days; the next price crash will perform that tricky mathematical step for you.
I buy stocks in the same way that I buy everything else I buy. I compare the value proposition being offered with the value proposition being offered by alternative purchases and I go with the best one. That’s what I advise all my friends to do. The Buy-and-Holders say that we should never, never, never do the comparison, that we must always just take it on faith that stocks are best regardless of the price at which they are being sold. This lie has done more harm to human beings than any other lie ever told in the history of personal finance. I want nothing to do with it. I have hopes of going down in history as the one person who did more than any other to EXPOSE this ugly Buy-and-Hold/Get Rich Quick lie.
We all will be free to discuss THOUSANDS of exciting investment-related topics once this Buy-and-Hold Lie has been fully exposed far and wide. I can’t wait, you know? I built the Retire Early board to facilitate discussion of just those sorts of issues and I know from the reaction to my May 13, 2002 post that a good percentage of that board community was as excited about that prospect as I was. It’s not a majority of investors that is interested today, not by a long shot. But it is perhaps 20 percent of the community of investors that has an interest in hearing these issues explored. 20 percent of the community of all investors is millions of people. That’s good enough for me. I am on the side of those millions. I will continue to speak up on behalf of those millions when their right to hear both sides of the story is attacked by the members of Jack Bogle’s various internet Goon squads.
We will see how it all plays out, my good friend.
Rob
Sensible Investor says
How could Jack Bogle be so high on your top ten list of greatest investor minds of the modern era while at the same time have this need to employ internet Goon Squads?
Rob says
How could Nixon open relations with China and take us off the gold standard and get us out of Vietnam and win re-election in a landslide and greatly expand the Great Society programs and then also engage in crimes that forced him to resign the Presidency? Humans are complicated creatures, Sensible.
I could write one of those book-length posts listing all of the amazing things that Bogle has done for us all. Suffice it to say that there would be no Valuation-Informed Indexing were it not for Jack Bogle. He is as much the godfather of VII as Shiller is. The man is a giant.
And, yes, his name appears on a blurb on the back cover of Mel Lindauer’s book.
Both things are so.
You figure it all out, you know?
I just know that I love the man and that I believe that we all should be urging him to come clean. I’ve written The Big Guy three times and I intend to write him again shortly after the onset of the next price crash. I believe that I will have better luck then.
But we’ll have to wait a bit to find out for sure.
Rob
Not John says
Who else will you be writing to if there is a crash?
Rob says
I’ll write to everybody.
I’ll write to those 30,000 academic researchers again. It took me months to get those e-mails out. I received 150 responses. That’s a response rate of 0.5 percent. Most of the responses were amazing stuff, including the ones that made the case for Buy-and-Hold. How much do you want to bet that the response rate at least doubles following another crash? It’s surely my belief that that is what we will see. A higher response rate will advance the ball, which is obviously what we need to do to get to the other side of The Big Black Mountain.
This is what I mean when I say that I love my country. We have always allowed progress in this country. We didn’t get that 6.5 percent annual real return on stocks by accident. We have that amazing return because we permit advances in every field of human endeavor. We should be permitting advances in the investing advice field, just as we do in all others. When we do, we will see this economic crisis come to an end. I believe that we will even see an easing of political tensions when people are living better and are seeing economic developments that given them more hope for a better future for everyone.
These are my sincere thoughts re these terribly important matters in any event.
Not a Financial Fraud Advocate
Not John says
.5 percent is a low response rate. Mass mailings average 2.5%.
By the way, what is the big black mountain you refer to?
Rob says
I certainly considered it a low response rate. By rights, the response should have been at least 50 percent. This is the most important public policy issue facing the people of the United States today. And people doing academic research were directly affected by the issues discussed in the e-mail. So I found that response shocking. However, it was of course consistent with other things we have seen during the first 15 years of our discussions.
The Big Black Mountain is the wall of resistance/indifference/fear that caused that low response rate.
We all benefit from what we have learned from the last 36 years of peer-reviewed research. Investors are able to retire many years sooner than they ever could before while taking on dramatically less risk. Stocks are a much more appealing asset class now that we know how to reduce risk by 70 percent — so everyone who works in the industry should be making more money as a result of the widespread exploration of the new research. Researchers of course have a chance to make reputations for themselves by doing work in this exciting new area. Buy-and-Holders have been vindicated in a huge way — by making the one change required by the new research, they achieve their dream of developing the first true research-based investing strategy and of having it work in a long-term sense in the real world. Policymakers get to see political frictions eased. Book publishers will of course see profits from the publication of numerous best sellers. Hundreds of blogs will take off and become wildly successful. And on and on and on and on and on.
And yet we find ourselves quarrelling over a lot of nonsense for 15 years. Huh?
We very much need to move forward and yet there is something holding us back from doing so. I refer to that something as “The Big Black Mountain.” We all deep in our hearts long to get to the other side and to tap into all the good stuff waiting there. But thus far we have not been able as a society to figure out how to make it happen.
Rob
Anonymous says
Uh, oh. Michael Kitces just called Rob a liar. He said that there is a floor to the SWR and that 4% is still safe.
http://www.madfientist.com/michael-kitces-interview/
You better go set him straight, Rob.
Rob says
Thanks for the link, Anonymous.
I don’t have time to listen to the podcast at the moment but I certainly intend to do so. I love Michael’s stuff, as you know. And I certainly do not believe that 4 percent is safe at today’s valuation levels. I am intrigued by the idea that there might be a floor to the SWR. I will have to listen to find out more! This one looks very much to be column material.
Please take good care, my old friend.
Rob
Anonymous says
Wow, so it seems that you have been wrong on the SWR issue like others have said.
Rob says
The way I would say it is — Wow, it seems that we need to launch a national debate on these questions, just like I have been saying for 15 years now.
Kitces’ views on SWRs are not identical to mine. But they are certainly not identical to Greaney’s views either. And the same is true re Wade Pfau. And the same is true of Todd Tressider. And the same is true of Bill Bernstein. And the same is true of Carl Richards. And on and on and on and on and on.
Prior to May 13, 2002, no one had raised these questions. My post got things going and we have learned a LOT as a result of the limited debate that we have been able to have. But none of these questions are any any means settled. So we need to be inviting lots of people to comment and we need to be 100 percent sure that each and every person who comments feel 100 percent free to say exactly what he or she believes to be the reality. We should be in 100 percent agreement that there is no place whatsoever in discussions of stock investing for death threats or for demands for unjustified board bannings or for tens of thousands of acts of defamation or for threats to get academic researchers fired from their jobs.
These are my sincere thoughts re these terribly important matters in any event. I naturally wish you all good things, my long-time Goon friend.
Rob
Anonymous says
With both Kitces and Pfau disagreeing with you on SWRs, I guess you won’t get that New York Times article and you won’t get your $500 million.
Rob says
I think I’ll get it, Anonymous.
Wade agrees with me. He told me so dozens of times and in dozens of different ways and everything he said was documented in real time. The fact that he was threatened by you Goons and then pretended to believe something else just adds spice to the story. That fact is going to make this a BIGGER story than it would otherwise be in the days following the next price crash.
Michael agrees with at least 80 percent of what I say re safe withdrawal rates and he has also said so on dozens of occasions. And, again, everything that he said was documented in real time. And Michael does NOT agree with what most Buy-and-Holders were saying in those days. He certainly does not agree with ANYTHING that you Goons were saying. And again the fact that he disagrees on one or two relatively small points adds spice to the story.
It makes the story less cut and dried. And it is stories that are not cut and dried that have the most staying power. The fact that serious people have disagreements re these matters to this day shows how important it is that we open every discussion board and blog on the internet to fully honest posting so that we can hear from everyone and get the benefit of every possible perspective. That has been my most important point going back to the morning of May 13, 2002. That’s a point re which the entire nation agrees with me. That point is the foundation stone of our economic system and of our political system. So I think it would be fair to say that I am on very safe ground re that point.
So I think we (the people of the United States) are in good shape.
That said, I naturally wish you Goons all the best of luck with it.
Please take good care.
Rob