A Rich Life

The Old Ideas on Saving & Investing Don't Work -- Here's What Does

“People Are Scared. An Irony of Economic Progress Is That, the Richer People Are, the More Vulnerable They Are to Setbacks. Lots of People Are Okay With How They Are Living Today. But They Feel That They Are on the Edge. They Do Not Feel Secure. So They Cannot Even Imagine How It Would Feel to Experience a Loss of 50 Percent of Their Life Savings. So They Block the Thought of Those Losses Out of Their Mind. So Long As People Do Not Think About the Losses, They Cannot Take Steps to Avoid Them.”

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Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

Why haven’t things worked out the way you said they would? Why didn’t we see the big crash?

This is a big question. If Shiller’s Nobel-prize-winning research is legitimate research (I believe that it is), then this is a question that we should be examining at every investing site on the internet on a daily basis. If Shiller is right, then when stocks are priced as they are today, half of our portfolio value has no economic substance to it and is comprised of nothing more than irrational exuberance. The question of when prices will return to reasonable levels is huge. Knowing that tells us when hundreds of thousands of businesses will fail and when millions of retirements will fail and when we will see a spike in political frictions and on and on. So we all need to come to a better understanding of why the crash has been delayed (this is the longest time-period in U.S. history in which prices have remained at super high levels).

The key to understanding this is to avoid falling into the trap of seeking economic explanations of what has happened. That’s pre-Shiller thinking. What Shiller showed is that much of what happens in the stock market has no economic foundation — it is rooted in investor mood swings. So we need to focus on investor psychology. What is different about investor psychology today that we have been able to keep stock prices up at super high levels for longer than ever before? That is what you are asking.

A book could be written on this question. But I think that the basic thing that is going on is that people are scared. An irony of economic progress is that, the richer people are, the more vulnerable they are to setbacks. Lots of people are okay with how they are living today. But they feel that they are on the edge. They do not feel secure. So they cannot even imagine how it would feel to experience a loss of 50 percent of their life savings, which is what we would see if today’s irrational exuberance were to disappear, as it must if the market is to continue to function.

So they block the thought of those losses out of their mind. So long as people do not think about the losses, they cannot take steps to avoid them. So people are not lowering their stock allocations. Which is what we would need to see for prices to come down. We are scared and paralyzed. If we were to act in our own best interests, we would lower our stock allocations. Doing that would bring on the price crash that we fear. So we don’t act. We cross our fingers and hope for the best.

I don’t favor this approach. I believe that it would be better to face our problems frankly. Then we could manage a price drop and keep it from getting out of control. But I am not seeing any signs that we are going to manage things. We are going to put off the day of reckoning just as long as we can. Then when it comes, we will panic. Not ideal. But panic is a natural result when we set things up so that the huge price crash comes as a surprise.

Think about an alcoholic, Anonymous. Say that at age 30 all bis friends predict that his life will crash by ago 40. But it doesn’t happen. The guy is very talented and has a will of steel. He makes it to 54. He still is in great danger of seeing his life fall apart but it hasn’t happened yet. To what would you attribute the long delay in his coming to terms with his alcoholism? I would say it is fear. The longer his addiction remains in place, the harder it is for him to fix his marriage and his career and his friendships and his health and his financial affairs. It doesn’t get easier over time, it gets harder.

But of course sooner or later he has to set things right. While it become harder to fact the addiction as time passes, it also become more imperative that the job be completed. We are deep into a price addiction today. It has gone on so long that it has become very, very hard even to think about what it would mean to permit prices to return to reasonable levels. But we know somewhere inside that we have no choice but to let this happen. But as of today, the thought is — put it off, put it off, put it off. It’s been like that for a long time now.

I hope that that helps at least a tiny bit.

Rob

Vakuation-Informed Indexing #519: Stock Investing Seems Safer If We Presume Rational Investors

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I’ve posted Entry #519 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stock Investing Seems Safer If We Presume Rational Investors.

Juicy Excerpt: Shiller’s research showed that the market is NOT rational, that prices were set by those highly emotional humans, who sometimes greatly overpriced it and on other occasions greatly underpriced it. I see great potential in Shiller’s research to enhance all of our lives because, once there is widespread acceptance that the market is not rational and that the numbers on our portfolio statement often do not reflect the economic realities at all well, we can all get about the business of making the market more rational than it is today. If we all faithfully practiced market timing, prices could never reach the levels where they reside today. Market prices become self-regulating in a world in which most investors understand the how-to implications of the last 39 years of peer-reviewed research in this field.

“We Cannot Have a Functioning Society If We Do Not Provide People With Some Access to Honest and Informed Reports re the Peer-Reviewed Research in This Field. We Just Cannot. The Situation That We Are in Today Is Not a Viable Long-Term Situation. We All Need to Pull Together and Put on Our Thinking Caps and Come Up With Some Way to Bring Things to a Better Place.”

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Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

Wade prefers that you do not speak about him any more. You have caused him too much harm already.

It’s the 39-year cover-up that has caused Wade (and many thousands of others) harm, not me. Bring the cover-up to an end, as I have been proposing relentlessly since the morning of May 13, 2002, and we are all free to say what we believe. What possible problem could there be for anyone at that point?

We cannot have a functioning society if we do not provide people with some access to honest and informed reports re the peer-reviewed research in this field, Anonymous. We just cannot. The situation that we are in today is not a viable long-term situation. We all need to pull together and put on our thinking caps and come up with some way to bring things to a better place.

Wade LOVED working with me on Valuation-Informed Indexing. Loved it, loved it, loved it. And the work we were doing would have benefited millions of people if only we could have shared it with those millions of people. Wade doesn’t mind doing amazing work that helps people. He just doesn’t want to see his career destroyed by the Buy-and-Holders as his penalty for doing it. So we all need to pull together and take action to bring the cover-up to end.

My sincere take.

Rob

“Wade Pfau Spent 16 Months Researching the Merits of Valuation-Informed Indexing and Loving Every Minute of It and Expressing His Amazement That Hundreds of Researchers Had Not Looked Into It Long Before He Came Along and Bafflement That Anyone Could Ever Have Concluded That Buy-and-Hold Was Superior and Excitement About How He Would Be Able to Help Millions to Live Better Lives As Our Research Became Known Throughout the Investment Community. Then You Threatened to Destroy His Career If He Kept At It.”

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Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

Wade Pfau’s research concluded that you did not understand the Greaney issue. Wade Pfau’s research into your “missing step” concluded that you would not get the $500 million. Wade Pfau’s research concluded that you caused him considerable harm.

Because he was threatened.

Wade spent 16 months researching the merits of Valuation-Informed Indexing and loving every minute of it and expressing his amazement that hundreds of researchers had not looked into it long before he came along and bafflement that anyone could ever have concluded that Buy-and-Hold was superior and excitement about how he would be able to help millions to live better lives as our research became known throughout the investment community. Then you threatened to destroy his career if he kept at it. And he told me that he was scared of you and wrote a few words to make you happy disowning his wonderful work. Gee, I wonder what was going on there.

Extortion is a crime, Anonymous. It is a felony. This particular act of extortion did harm to millions of people. I think it would be fair to say that you will be spending time in a prison cell in the days following the next price crash. Not this boy, you know? I don’t want to spend time in a prison cell and I do not want to see people who used to be my friends doing so either. So I have done everything in my power for 18 years now to persuade you to walk a different path and to persuade others to try to persuade you to walk a different path. When you discover that the only way that you can defend your favorite investing strategy is to engage in criminal acts, it is time to go looking for a new favorite investing strategy.

My sincere take.

Rob

“Say That Reason Is 50 Percent of Stock Investing and That Emotion Is 50 Percent. Then Half of Your Research Should Be Looking at Reason-Based Stuff (This Is the Sort of Research That the Buy-and-Holders Favor) and Half of Your Research Should Be Looking at Emotion-Based Stuff. A Showing That a Retirement Study Has Not Been Corrected for 18 Years After the Error In It Became Public Knowledge Is the Kind of “Research” That Shiller Showed We Need To Do If We Are To Come To a Full Understanding of How Stock Investing Works.”

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Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

Can you show us the research that proves your allegations of death threats? Can you show us the research behind getting a $500 million dollar windfall?

The fact that the Greaney retirement study hasn’t been corrected to this day proves it, Anonymous. Are you able to imagine a scenario in which a retirement study is not corrected for 18 years after the error in it becomes public knowledge and where there have not been death threats and other criminal acts used to block discussion of the error? It is not possible for the rational human mind to imagine such a scenario. Anyone who wants to know what happened knows that there were death threats and other criminal acts.

And, yes, that’s a kind of “research” into how stock investing works. The Buy-and-Holders think of research as involving rows of numbers. That’s how research into rational stuff looks. But what Shiller showed is that stock investing is not a 100 percent rational thing, it is instead at times a highly emotional thing. Say that reason is 50 percent of stock investing and that emotion is 50 percent. Then half of your research should be looking at reason-based stuff (this is the sort of research that the Buy-and-Holders favor) and half of your research should be looking at emotion-based stuff.

A showing that a retirement study has not been corrected for 18 years after the error in it became public knowledge is the kind of “research” that Shiller showed we need to do if we are to come to a full understanding of how stock investing works. We need to get over this thing of believing that reason-based research tells the full story. It does not. The emotional stuff plays a big role. And we need to look at things like death threats and acts of extortion to get a grip on how the emotional stuff is affecting us all.

Shiller changed out understanding of how stock investing works in a fundamental way. It is because his work is so important and so revolutionary that we are having a hard time incorporating it into our thought processes. But we need to do it. Stock investing affects all of our lives. We need as a society to come up with some way of providing access to honest and accurate reports re safe withdrawal rates and re scores of other critically important investment=related topics. That means coming to terms with the death threats and all the rest. Stuff that is not rational. Stuff that is emotional. Emotional stuff that matters every bit as much as the rational stuff.

That’s the future of investment analysis. Shiller showed us what we need to do to get the numbers right for the first time in history and we all need to pull together to figure out what we need to do to make that dream a reality.

I don’t know where you came up with this idea that the $500 million is a “windfall.” That’s the amount that I have agreed to settle for so that we can leave the lawsuits behind and just enjoy working together to help everyone alive on the planet lead better lives than they were able to live in the pre-Shiller era. The way you calculate that number is just to look at what I would have earned with my work if there had never been a criminal act holding me back from opening every discussion board and blog on the internet to honest posting re the last 30 years of peer-reviewed research.

Do you know how many businesses went under in the Buy-and-Hold Crisis of 2008? Save those businesses from going under and right there you’ve got a lot more than $500 million produced. So I don’t expect to have too much trouble supporting the $500 million number. This is the biggest advance in the personal finance field in the history of our nation and there is nothing else in a close second place. I mean, come on.

Rob

Valuation-Informed Indexing #518: Market Timing Is an Exciting Idea That Was Rejected in Haste

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I’ve posted Entry #518 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Market Timing Is an Exciting Idea That Was Rejected in Haste.

Juicy Excerpt: My problem with the idea that how the market works changed in 1996 is that no one has ever offered an explanation for what happened in 1996 to cause that change to take place. The alternative explanation of the strange price history that we have seen since then — that investors have become more emotional in the post-1996 years — makes more sense. Buy-and-Hold has never been pushed harder than it has been in recent decades. And we reached the highest CAPE value in history in January 2000. That told us that something strange was going on. Prices always return to fair-value levels. But it makes sense that it would take longer for that to happen following a time when prices reached levels never seen before.

Valuation-Informed Indexing #517: Did How the Stock Market Works Change in 1996?

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I’ve posted Entry #517 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Did How the Stock Market Works Change in 1996?

Juicy Excerpt: “Earlier in my career I was kind of more interested in that sort of approach. When we look at the historical data–and Robert Shiller has that historical data going back to 1871–it’s kind of remarkable how well future market returns related to, like Shiller’s CAPE ratio, the cyclically adjusted price/earnings ratio–that when it was above average, you lower your stock allocation and vice versa. And I think Shiller’s research on that was just in the late 1990s. Once he kind of identified how well that relationship worked, that’s pretty much the time it stopped working, because in the past 25 years or so, markets have been overvalued by that measure except for the brief period around the financial crisis in late 2008, going into 2009.

“If Market Timing Always Works and Is Always Required (It Does and It Is), That Changes Everything.”

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Set forth below is the text of a comment that I recently posted to the discussion thread for another blog entry at this site:

You’re the one making up stories about criminal behavior. Your opinions around the paper of one person foes not constitute 39 years of research.

The 39 years of research constitute 39 years of research.

There has never been a single paper published showing that long-term timing doesn’t work. So why make such a claim?

The claim is the product of a mistake. There was a time when people didn’t realize the need to distinguish short-term timing from long-term timing. And research was published showing that short-term timing doesn’t work. So people got in the habit of saying that timing in general doesn’t work. Which is a false claim.

We learned that it was false in 1981, when Shiller published his Nobel-prize-winning research. The national debate about how to move forward should have been launched then. It didn’t happen because of cognitive dissonance. So now we are stuck in a place where we not only need to persuade the Buy-and-Holders to acknowledge their initial mistake but also the 39-year cover-up. Making it a 40-year cover-up makes it worse for everybody.

Wade Pfau spent months trying to locate a paper justifying the claim that long-term timing doesn’t work. He came up empty-handed. Every investor on the planet needs to know that. If market timing always works and is always required (it does and it is), that changes everything.

Market timing is price discipline. Price discipline is what makes markets work. You can’t have stock investing without market timing. If you do, you will eventually bring on an economic collapse. Economic collapses are bad. We should be trying to avoid them, not to be bringing them on.

Rob

Valuation-Informed Indexing #515: Stock Returns Are Predictable But Not Rationally So

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I’ve posted Entry #515 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stock Returns Are Predictable But Not Rationally So.

Juicy Excerpt: However, a recent article in Advisor Perspectives — The Remarkable Accuracy of CAPE As a Predictor of Returns, by Michael Finke — has caused Rekenthaler to soften his skepticism a bit. Looking at Finke’s work, which looks at how CAPE has worked as a predictor of returns from 1995 forward, Rekenthaler declares: “Now that’s a correlation. Have you ever seen such a tight fit between a stock-market signal and future performance? If so, let me know because I cannot think of such an example.”

Valuation-Informed Indexing #516: Economic Developments Are Never As Big a Deal As Investment Analysts Make Them Out To Be

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I’ve posted Entry #516 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Economic Developments Are Never As Big a Deal as Investment Analysts Make Them Out To Be.

Juicy Excerpt: If the influence of irrational exuberance is much greater than we realized at earlier times (in the days when many academics believed that the market is efficient, it was thought that the influence of irrational exuberance was zero), the influence of economic developments must be much less. Yet the practice of explaining price changes by making reference to economic developments is ingrained in the thinking of investment analysts. We need to break the habit of assuming that economic realities drive the stock market.