Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
“The title is “Irrational Exuberance.”
What exact words in the book talk about death threats, job threats, jury trials, prison sentences and $500 million windfalls?
Shiller was awarded a Nobel prize because he published research that discredited the Efficient Market Theory. If the market were efficient, stock price changes would be caused by economic developments and would reflect reality. He showed that, when the market is overpriced, it is irrational exuberance that causes price gains and that those gains thus cannot be counted on to finance a retirement.
All of the things that you refer to in your post are things that follow if a person points out what Shiller’s research shows in a community frequented by a significant number of Buy-and-Holders. It hurts the feelings of Buy-and-Holders for them to hear that they made a mistake in thinking that the market is efficient and that it is not necessary for them to exercise price discipline when buying stocks.
I don’t do it to hurt their feelings. I do it because people need to have accurate numbers to plan their retirements. If there were a way to give accurate numbers without hurting the feelings of the Buy-and-Holders, I would make use of it. But there isn’t. This is the risk that goes with the use of any research-based strategy. New research is published all the time. When we learn new things, we need to update our understanding of a subject. We need to acknowledge that we didn’t always know it all.
I am grateful for all that the Buy-and-Holders taught us. They of course got many things right. But not the efficient market thing. Not according to the last 37 years of peer-reviewed research in this field. I think that the Buy-and-Holders have hurt themselves and many others by failing to acknowledge the mistake they made re that one. The safe withdrawal rate is not always 4 percent. It is a number that changes with changes in valuation levels.
That’s my sincere take re these terribly important matters, in any event.
I naturally wish you all the best that this life has to offer a person, Anonymous.
Irrational Exuberance Reader (and Death Threat Receiver) Rob
Anonymous says
Do you think people should follow your example when it comes to planning their retirement?
Rob says
Sure.
I think that people should use the peer-reviewed research in this field as a guide on how to invest. I learned that one from my main man Jack Bogle. That’s one of many re which I believe that The Big Guy was right on.
You are obviously suggesting that people should not follow my example because your criminal acts have blocked me from earning money in this field for the past 17 years. When I collect my $500 million settlement check, my setting myself up so that I could go 17 years without a paycheck is going to look very, very good. This isn’t the way that I intended to go. I obviously would have preferred you not to have engaged in criminal actions or for responsible people to have taken effective steps to rein in your criminal behavior when it first evidenced itself. But $500 million ain’t a bad payday any way you look at it.
Someone had to expose The Great Buy-and-Hold Con. It turned out to be me. I wish it had been someone else, you know? I don’t think that anyone would choose 17 years of this for any amount of money in the world. But it’s more than a little gratifying to know that my work will help millions and millions of people to plan their retirements more effectively for many years to come. I earned that $500 million. I like it that our system provides that sort of payment to people who love their country enough to put up with the sort of garbage that you Goons have directed at me.
So, yes, I think that people should aim to save effectively and I think that people should aim to invest effectively. The thing that I very much think people should NOT do is to engage in criminal acts that end up causing them to spend the last decades of their lives in prison cells. Huh? What the f? Not this boy, you know?
I’d take the cards that I am holding over the cards that you are holding every time, my dear Goon friend. And I can’t say that it’s a terribly close call either.
My best wishes.
Felony-Avoiding Rob
Evidence Based Investing says
“The safe withdrawal rate is not always 4 percent. It is a number that changes with changes in valuation levels.”
But for some reason you think the fair value PE10 figure is always the same.
Rob says
The average daily high temperature in New York City in January is 39 degrees. Can that change? Sure. But only very slowly. Ten years from now it might be that the average daily high temperature in New York City is 40 degrees or 38 degrees. That can happen.
But if the daily high for one January day is 3 degrees, you don’t start acting as if the daily high temperature for January has dropped to 3 degrees. You certainly don’t bet your retirement savings on such a belief.
That’s the equivalent of what the Buy-and-Holders do in their retirement studies. The fair-value CAPE value of 16 is based on 150 years of stock market history. Could it change to 17 or to 15? Sure. But those sorts of changes happen very slowly. All investors should be highly suspicious of retirement studies based on an assumption of huge changes in the fair-value CAPE number.
Stock prices went up by 126 percent from 1996 through 1999. The normal price rise for four years would be 26 percent. So it was irrational exuberance that caused the other 100 percent of the total price rise. Could it be that irrational exuberance was responsible for only 98 percent of the total price rise or for 102 percent of it? Those are possibilities. But Greaney didn’t base his study on a belief that irrational exuberance was responsible for only 98 percent of the price rise. His study was set up to show zero effect for irrational exuberance! He told aspiring retirees that they could treat the entire 126 percent price rise as real and that their retirements would be “100 percent safe” all the same.
Huh? What the f?
And he showed that he knows that this position cannot be defended in civil and reasoned debate when he responded to questioning about the methodology used in his study with death threats and demands for unjustified board bannings and thousands of acts of defamation and threats to get academic researchers fired from their jobs. He’s a con man, Evidence. I mean, please give me a freakin’ break.
And it is not just Greaney. Lots of people saw what he did. And either supported him or ignored his behavior. Those people AIDED the con.
We WANT to be conned about how stock investing works when prices are where they are today. We LIKE believing that we have more money in our accounts than we really do have in them, we LIKE thinking that we can retire early many years before we have saved enough to do so responsibly.
The question is — Should people who participate on discussion boards make note of the 38 years of peer-reviewed research showing that Buy-and-Hold is a con, that the market is not efficient and that instead valuations affect long-term returns? I think that those of us who believe that Shiller’s Nobel-prize-winning research is legitimate research should make note of that. Shiller discredited Buy-and-Hold. And I believe that Shiller is onto something. So that’s what I tell people when I post on discussion boards and blogs.
It’s up to them whether they go with what I say or with what the Buy-and-Holders say. It’s not my place to tell people what to do. But it IS my place to post honestly. And I sincerely do not believe that Greaney included a valuation adjustment in his study. So that’s what I tell people. No apologies whatsoever.
I wish you all the best that this life has to offer a person.
Con Man Exposer Rob
Evidence Based Investing says
“The fair-value CAPE value of 16 is based on 150 years of stock market history”
The average CAPE value over the period was 16
That does not mean that 16 is the fair value at every moment in time.
Rob says
The entire question that we are trying to determine is what IS the fair value of stocks at every moment in time.
The Buy-and-Holders say that the best indicator of fair value is the price assigned by the market. If the market were efficient and investors were engaged in an effort to set prices properly through a rational process, I would agree with that. Shiller showed that the market is NOT efficient and that investors do NOT set prices rationally. So that doesn’t work.
How would you calculate the safe withdrawal rate if you don’t want to use the average CAPE value and you are aware that there is 38 years of peer-reviewed research showing that the Buy-and-Hold approach doesn’t work, Evidence?
If there is an investor who believes that the fair-value CAPE number is really 17, I have no problem with that. Perhaps that investor believes that our economy will be more productive in the coming years than it has been on average over the past 150 years. That would bring the CAPE value up. Going with a different number makes sense if you hold that belief.
I don’t have a belief as to whether the economy will be more or less productive in the future than it has been in the past. So I use the CAPE value that has been the average for 150 years. I think that that’s a sensible default number.
What I don’t feel even a tiny bit comfortable doing is assuming that the number that will apply in the future will be nothing even close to the number that has applied for 150 years. When you use the 16 number, the safe withdrawal rate you get for a retirement beginning in 2000 is 1.6 percent real. Greaney says that the safe withdrawal rate at the time was 4 percent. Huh? What the f? That’s not exactly close, you know? He is assuming that stocks will perform in the future nothing at all as they have always performed in the past. Based on what?
And does he tell people about these crazy assumptions that he makes that stocks are going to perform in the future in ways in which they have never performed in the past? He does not. He tells people that his crazy assumptions produce numbers that are “100 percent safe.” And, when he is questioned about the methodology that produced the crazy numbers, he responds with death threats. And when we get a fellow with a Ph.D. in Economics to help us out and he spends 16 months researching these questions and concludes that the Buy-and-Hold studies are “dangerous,” Greaney responds by threatening to get the guy fired from his job if he continues to do honest work in this field. Are you freakin’ telling a joke?
That’s a con, Evidence. Bernie Madoff is in prison today for financial fraud. What John Greaney has done is 500 times worse than anything that Bernie Madoff has ever done. Not this boy, you know? I don’t want to be associated with a criminal enterprise. Not no way, not no how.
If Greaney were saying that he thought that 1.7 might be safe in 2000, and if he presented a reasonable case for that number, I could say that that’s not crazy even if I didn’t personally agree. The criminal stuff is something very, very different. I don’t want my name associated with that sort of thing except as the name of the person who EXPOSED this massive act of financial fraud. If you don’t feel that you can report the safe withdrawal rate accurately and honestly, you are better off just not reporting it at all. That’s my sincere take.
I hope that that helps a small bit.
Crime Exposing Rob
Evidence Based Investing says
“Greaney responds by threatening to get the guy fired from his job if he continues to do honest work in this field ”
Completely made up nonsense for which you have produced no evidence.
Rob says
A) Academic Researcher Wade Pfau’s Statements Showing Interest In and Confidence in Rob Bennett’s Work
1) “I do cite you and John Walter Russell in my paper as the earliest and strongest advocates of this approach [New School safe-withdrawal-rate research].
2) “Are you aware of Shiller offering asset allocation advice based on PE10? …. If you read Rob Bennett’s stuff carefully, I think he did provide an important contribution in terms of describing a way for PE10 to guide asset allocation for long-term conservative investors. I also think he was right on the issue of safe withdrawal rates.” — Posted at the Bogleheads Forum discussion board.
3) “I am also extremely grateful to Rob Bennett for motivating this topic and contributing his experience and encouragement.” — Written in Acknowledgments section of Wade’s breakthrough research paper.
4)”You deserve much of the credit as the whole idea of Valuation-Informed Indexing belongs to you.”
5) “I definitely need to cite some of your work as the founder of Valuation-Informed Indexing, as I have not found anyone else who can lay claim to that. Shiller pointed out the predictive power of PE10 but never discussed how to incorporate it into asset allocation, as far as I know.”
B) Academic Researcher Wade Pfau’s Statements on the Superiority of Valuation-Informed Indexing Over Buy-and-Hold
1) “What you see in the top part of the graph for each year is the amount of wealth accumulated after 30 years for someone following Buy-and-Hold against someone following Valuation-Informed Indexing….Valuation-Informed Indexing provides more wealth for 102 of the 110 rolling 30-year periods, while Buy-and-Hold did better in 8 of the periods.”
2) “I will take steps in my final paper to test a wide variety of assumptions about asset allocation, valuation-based decision rules, whether the period is 10, 20, 30, or 40 years, lump-sum vs. dollar-cost averaging, and so on, and to show that the results are quite robust to changes in any of these assumptions.”
3) “Any data mining that I am doing is in favor of buy-and-hold, not in favor of market timing.”
4) “The findings for “market timing” are so robust anyway, that it hardly matters how we do it.”
5) “The maximum drawdown from market timing is much less. That is how far the portfolio drops from past highs to current lows. The Buy-and-Holder once experienced a 60.96% drop, whereas the worst drop for market timing was 24.16%.”
6) “Market timing provides signficantly higher returns at a comparable level of risk.”
7) “The market timer enjoys a far less risky strategy.”
8) “On a risk-adjusted basis, market-timing strategies provide comparable returns as a 100 percent stocks Buy-and-Hold strategy but with substantially less risk. Meanwhile, market timing provides comparable risks and the same average asset allocation as a 50/50 fixed allocation strategy, but with much higher returns.”
9) “If everyone increased exposure after a market fall and vice versa, then this would dampen out the big swings in the market aggregates, and we might get shallower boom/bust cycles.”
10) ““‘I’m excited about this, as depending on what you have already done, I think I can design a study using the Shiller data to provide historical simulations of Valuation-Informed Indexing strategies against fixed Buy-and-Hold strategies and also lifecycle strategies (declining allocation to stocks as one ages). If Valuation-Informed Indexing consistently outperforms fixed and lifecycle strategies, then the proof is in the pudding so to speak. Given how well valuations help to explain withdrawal rates, I think there is a lot of potential for this topic.”
11) “Yes, Virginia, Valuation-Informed Indexing Works!”
12) “It makes complete sense to have an equity allocation that is in some way flexible. Having a completely inelastic demand for equities is a bit bonkers; no-one acts that way with life’s other important commodities.”
13) “I wrote up the programs to test your Valuation-Informed Indexing strategies against Buy-and-Hold, and I must say that the results look very promising…. I am quite excited about the findings so far. As you say in the podcast, Valuation-Informed Indexing should beat Buy-and-Hold about 90 percent of the time, and I am getting results that support this for various strategies.”
14) “I have been toying with the idea of sending the paper to the Journal of Finance, which is the most prestigious journal in academic finance.”
15) “Now that I am accounting for risk, I am even more amazed by how well Valuation-Informed Indexing works.”
16) You shouldn’t be too excited with great wealth accumulations if they happened due to unusually high valuations, and low wealth accumulations shouldn’t be as scary if valuations are also quite low.”
17) “My idea is to show many different tables with results over the whole period for returns and risks. Valuation-Informed Indexing always provides more returns for often less risk.”
18) “No matter what I try, Valuation-Informed Indexing will still perform better in 85-95% of cases for 30 years.”
19) “I have a new figure for showing this as well. And a nice figure showing the outperformance percentages across rolling periods of lengths between 1 and 40 years. I think it is all quite persuasive.”
20) “You haven’t seen anything yet! This was just the secondary study. I’m still working on the main one!”
C) Academic Researcher Wade Pfau’s Statements of Incredulity That He Was the First Academic Researcher to Examine the Valuation-Informed Indexing Strategy
1) ” I know that there is an extensive literature about the predictability of long-term stock returns dating back to Campbell and Shiller’s work in the mid-1990s. I also know that there is an extensive literature about short-term market timing strategies…. But my question is about LONG-TERM market timing strategies. In other words, using market timing over periods of at least 10 years to obtain better returns than a Buy-and-Hold strategy. The literature seems slim.”
2) “Let me just explain a bit more why I posted about this here. Valuation-Informed Indexing has had critics for years, but until Norbert did it in 2008, nobody seemed to have provided a serious investigation of it. I just couldn’t understand why. And that bothered me.”
3) “Two papers by Fisher and Statman are still all I can find that provide evidence against long-term market timing.”
4) “I’m so confused by why Fisher and Statman didn’t consider risk in their idiot switching tests. Valuation-Informed Indexing is much less risky by pretty much any standard I consider. I must wonder… did I make a mistake somewhere? Why haven’t academics already published research about this?”
D) Academic Researcher Wade Pfau’s Statements on the Dangers of the Conventional Retirement Planning Advice
1) “The traditional approach to retirement planning (as described on pages 10 and 11 of The Bogleheads’ Guide to Retirement Planning, for example) is counterproductive and possibly damaging.”
2) “Retirees now frequently base their retirement decisions on the portfolio success rates found in research such as the Trinity study…. This is not the information that current and prospective retirees need for making their withdrawal rate decisions.”
3) “This article provides favorable evidence based on the historical record for long-term conservative investors to obtain improved retirement planning outcomes (lower savings rates, higher withdrawal rates) using valuation-based asset allocation strategies.”
4) Wade sent me a link to an article in Business Week that was published more than eight years after my post pointing out the errors in the Old School retirement studies and which he characterized as “quite sympathetic to the point you were trying to make all along”.
5) “Though I was only trying to do an Old School safe-withdrawal-rate study, all that I ended up doing was showing in a different way what you had been saying all along: the safe withdrawal rate changes with valuations.”
6) “Valuations are the driving factor. ”
7) “This is similar to your drunk driving analogy, which I agree with.” The discredited but uncorrected retirement studies find that in most circumstances a 4 percent withdrawal rate provides a huge cushion for the retiree using it. However, in each of the three cases in history when stocks reached insanely high price levels, retirements using a 4 percent withdrawal came within a whisker of failing. To say that this shows that a 4 percent withdrawal is “100 percent safe” (these words are used in the Greaney study) for a retirement beginning at a time of insanely high price levels is like saying that driving drunk is “100 percent safe” because 97 sober drivers drove their cars 20 miles without incident while 3 drunk drivers were paralyzed for life in car accidents but did not die. The fact that 4 percent only worked by a whisker in the cases in which valuations were high at the beginning of the retirement shows that a 4 percent withdrawal is high-risk at times of high valuations, not that it is “100 percent safe.”
8) ” Actually, this issue shouldn’t really even be all that controversial. It’s just common sense that the probabilities from the Trinity study shouldn’t be interpreted as forward-looking probabilities for new retirees.”
9) Naturally, I am finding that Valuation-Informed Indexing can allow you to reach a wealth target with a lower savings rate, use a higher withdrawal rate, and also have a lower “safe” savings rate, than a fixed allocation.
E) Academic Researcher Wade Pfau’s Statements Showing His Concerns that Continuing to Report Honestly on the Investing Realities in the Face of the “Hostile Environment” for Doing So Created by Buy-and-Holders Would Harm His Career
1) “I was trying to pay tribute to your accomplishments in what I knew would be a hostile environment.”
2) “Valuations and long-term investors is a somewhat controversial topic.” Wade posted these words to his blog in October 2011 as his explanation of why he was abandoning his plan of doing further research on the superiority of Valuation-Informed Indexing strategies over Buy-and-Hold strategies. He had told me in earlier days that “You ain’t see nothing yet!” when I praised his breakthrough research in this area. After his flip to the dark side, Wade removed the page containing this blog entry from his site.
3) “We have both read and met to discuss your paper. Unfortunately, we did not find the paper’s incremental contribution to the academic finance literature, assuming the analysis proved to be correct, rose to the level that we are seeking for papers in the JFR. Thus sending the paper to a reviewer would be inefficient.” These words are from an academic journal’s “desk reject” of Wade’s breakthrough research.
4) ) ““ I was discouraged when I first received the “desk reject” by the editors of the same journal that published the Fisher and Statman paper. I realized that I didn’t have a chance with one of the top journals.”
5) “I think I should stay publicly quiet for a while, as I really don’t want anyone sending messages about any topics to officials at my university.”
6) I don’t want them [the Goons] working behind the scenes to derail me.”
7) “I did warn the editor of the Journal of Financial Planning that they may receive some ‘hate mail‘ after I mentioned your name in the safe savings rate paper.”
My best and warmest wishes to you and yours.
Cutting and Pasting Rob
Evidence Based Investing says
Excellent cut and paste job.
A lot of stuff there.
Nothing about Greaney threatening anyone.
Rob says
That’s what Section E is about, Evidence.
Wade described the Bogleheads Forum as a “hostile environment.” Huh? What the f?
We are all in this together. We all need to know as much as we can re the subject of how to invest for retirement. There’s no one who did more to cause stock prices to zoom in the 1990s than Jeremy Siegel. He’s a pure Buy-and-Holder right? But it was Siegel who suggested to Shiller that he should write a book about his ideas re how stock investing works. That’s the spirit! That’s what we should be seeing when Rob Bennett or John Walter Russell or Wade Pfau or Microlepsis or John D. Craig shows up at Bogleheads. We should be welcomed warmly as friends so that we all can enjoy a great learning experience together.
A hostile freakin’ environment? What the f is that all about?
It was the hostile freakin’ environment that I witnessed at Motley Fool that caused me to give up on Buy-and-Hold myself. I was a Buy-and-Holder until the night of August. 27, 2002, when Greaney put forward his first death threat and it was endorsed by 200 Buy-and-Holders. Buy-and-Hold is promoted as a research-based strategy. That’s research? Death threats? Buy-and-Hold is the most emotional strategy ever concocted by the human mind. As has been demonstrated by you Goons on a daily basis for 17 years running now.
Not this boy, you know? I have never seen a Valuation-Informed Indexer advance a death threat. We really have research on our side. It’s not just a story that we tell ourselves, it’s a reality. If you thought that you had research supporting your claims, you would behave very, very, very differently. There would be no “hostile environment” at the Bogleheads Forum if Buy-and-Hold were a true research-based strategy.
That’s my sincere take. I love my Buy-and-Hold friends for all of the great contributions that they have made. But I think they need to stop and take a step back when they see themselves tolerating the sort of behavior that we have seen from you Goons for 17 years running now. It’s not my particular cup of tea. That’s not a terribly close call.
And of course this is just the sort of thing that we should expect to see in the event that Shiller’s research is on the right track. Shiller showed that it is investor emotion that causes insanely high stock prices. And what do we see from thousands of Buy-and-Holders at the time when stock prices are at the highest levels ever seen in history? All of this garbage. Gee, I wonder what is going on here.
I do wish you all good things, in any event.
My best to you.
Disillusioned Rob