Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:
Does Shiller even know you exist? If so, why hasn’t he reached out to you?
That’s a very good question, Anonymous. Shiller should be involved in this. Getting Shiller involved would be an obvious way to resolve matters. If Shiller said “Rob Bennett raises some excellent points and I do not think that he should be banned from participating at even a single site,” that would obviously help my case. And if Shiller said “Rob Bennett sounds like a dangerous nutcase,” that would obviously help your case. It is my belief that both sides should want to hear Shiller’s input. It is also my belief that, if both sides requested his input in a civil and respectful manner, he would be willing to provide it. So it is my recommendation that we do that.
John Walter Russell once wrote to Shiller to ask for help with a technical matter re the Shiller data-set. Shiller responded to that question in a helpful manner. i contacted Shiller once or twice (I believe that it was twice but I am not willing to swear to that without spending some time checking my records) to let him know about the stuff that has been going on for 17 years now and to in a quiet way ask for his help. He did not respond to those e-mails.
Shiller’s lack of involvement sums up the entire problem we face. Shiller used the word “revolutionary” in the subtitle of his book to describe his new understanding of how stock investing works. And he was awarded a Nobel prize for his research. So clearly he changed our understanding of how stock investing works in fundamental ways.
I am not able to imagine even a remote possibility that Shiller believes that the safe withdrawal rate is always the same number. If valuations affect long-term returns (Shiller’s research shows this), then stock investment risk is not a constant but a variable. The safe withdrawal rate is a risk assessment tool. So, if Shiller’s understanding of how stock investing works is legitimate, the safe withdrawal rate is a number that VARIES, not a number that is constant. That is inescapable ABC logic.
So, if Shiller believes in what I have been saying for 17 years now and if he knows that I exist (he should since I have contacted him and I know that he reads unsolicited e-mails because he read the one from John Walter Russell), he should have put forward a statement saying that “I agree with Rob Bennett that the safe withdrawal rate is a number that varies with changes in the valuation level.” That statement would help a great deal.
But leave me out of it. Say that I never once commented on safe withdrawal rates. Shouldn’t Shiller have addressed the question regardless? People at the Motley Fool board were using Greaney’s study to plan their retirements. If there is 38 years of peer-reviewed research showing that it is not possible to calculate the safe withdrawal rate accurately without taking valuations into consideration, should’t Shiller have spoken up long before I did? It’s a pretty darn serious thing to have one’s retirement fail. Shiller certainly should have spoken up.
And we can leave Shiller out of it too. Say that for some reason Shiller did not speak up. Shouldn’t people who believe in Shiller’s work have spoken up? How about the people who awarded him the Nobel prize? Shouldn’t they have said something? How about Shiller’s students at Yale? Haven’t any of them taken the time to realize that the Buy-and-Hold retirement studies get the numbers wildly wrong and, if they have, why the heck haven’t they spoken up?
These are all good questions and they are all hard questions. Shiller OBVIOUSLY should have spoken up. People who believe in Shiller’s work OBVIOUSLY should have spoken up. On safe withdrawal rates. And on scores of other critically important investment-related topics. We need to launch a national debate on these matters. The only way to get a debate going is for people to speak up. There is no other way. So people MUST speak up.
The reality, as you know, is that few people speak up. A few people have spoken up in limited ways. Bill Bernstein said in his book that the Buy-and-Hold studies get the safe withdrawal rate wrong. But he didn’t offer much follow-up. He didn’t try to publicize the matter as a means of protecting the people who used bad numbers to plan their retirements, as I have. Bogle advanced a statement indicating that he thought Valuation-Informed Indexing can work. But he put it in a form that made it come across as a sort-of foot-dragging endorsement of the concept. Bogle certainly did not say “Valuation-Informed Indexing works!” with an exclamation point, like Wade Pfau did.
There are scores and scores of examples of the same general phenomenon. Lots of people want to be associated with Valuation-Informed Indexing in a very limited way but they do not want to have the level of abuse that has been directed at me directed at them. So they offer tentative, limited, one-time endorsements. Those sorts of endorsements do not possess the power needed to get the national debate that I believe we desperately need to get launched.
I believe that the underlying problem is that Shiller’s advance is so big. If he had discovered some small thing, the Buy-and-Holders all would have reacted by thanking him and making the change needed and everyone would be happy. But showing that stock prices are determined by investor emotion rather than by rational assessments of economic developments is like discovering that it is the earth that revolves around the sun rather than the sun that revolves around the earth. People just cannot process that change. So we have been stuck for 38 years in this strange place where the dominant model for understanding how stock investing works has been discredited by new peer-reviewed research but where one becomes a social outcast if one dares to draw attention to this terribly important reality.
All that you have to do to see how this weird state of affairs is maintained is to read Shiller’s book. Irrational Exuberance is in my view the best book ever published on how stock investing works. But the strange reality is that there is not one word in it that tells people how to go about investing their money! And that’s what people who buy investing books want to find out when they buy them! Shiller wanted to avoid the red-hot controversies that I have provoked over the past 17 years. So he took a pass on all of the how-to-invest questions; those are the ones that the Buy-and-Holders don’t like being questioned on. So Buy-and-Hold remains dominant on the how-to questions nearly four decades after the research was published challenging the core premise of the Buy-and-Hold Model. It’s a mess!
I would like to hear Shiller address himself to all the questions that I have raised. I believe that he will do so in the days following the next price crash. Because I think that the tensions will grow sufficiently intense at that time that he will have no choice but to do so. It may seem safer to address those issues when people are no longer counting on Irrational Exuberance money to finance their retirements (the Irrational Exuberance money will have disappeared from people’s accounts in the days following the next crash).
I think it would be better to address these questions today. I believe that people are going to be pissed about the losses they have suffered in the days following the next price crash and they are going to get even more pissed when they learn that the people who get paid big salaries to know about this stuff have known for 38 years that major challenges have been raised to Buy-and-Hold. So I think we have as a society created a volatile situation, not just economically but also politically. But a decision to go forward with the national debate is a decision that we need to make as a society. We all get a vote. I get one vote, just like everybody else, and I have obviously been getting outvoted over and over again over the first 17 years of our discussions.
Rob
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