A Rich Life

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

“Gains That Are the Product of Economic Developments Are Lasting. You Can Count on Those Gains in Planning Your Financial Future. Gains That Are the Product of Investor Emotion Are Fleeting. You Cannot Plan a Retirement Based on Those Gains Because They Could Disappear at Any Moment. Investors Need to Distinguish the Real Gains From the Emotional Gains.”

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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:

“look at the fact that Shiller was awarded a Nobel prize”

Shiller was awarded the Nobel prize for showing, in historical data, that valuations affect future returns. That’s as obvious as the nose on your face. That’s a long way from your “buy and hold is the enemy” stuff. I do realize I’m getting lower expected returns now than when bonds yielded 8%, and stock P/Es were at 12. So what? Buy and hold still made me rich. I rebalance regularly, and reduce risk as I age – I’ve got more in bonds now than my total portfolio value 10 years ago.

When Shiller showed that valuations affect long-term returns, he changed the world. He showed how price changes come about. They don’t come about just because of economic developments. That’s what the Buy-and-Holders thought. If price changes came about because of economic developments, prices would fall in the pattern of a random walk. Hence, the title of the book “A Random Walk Down Wall Street.” Shiller showed that that’s just not so.

Shiller showed that the primary cause of price changes is investor emotion. Economic developments have an effect because they influence investor emotion. But the revolutionary change in understanding is that we now know that we cannot treat all gains as equal. Gains that are the product of economic developments are lasting. You can count on those gains in planning your financial future. Gains that are the product of investor emotion are fleeting. You cannot plan a retirement based on those gains because they could disappear at any moment. Investors need to distinguish the real gains from the emotional gains.

Is Buy-and-Hold the enemy? It wasn’t intended to be. It is a model for understanding the world that was intended to help us all. There was no bad intent in the development of Buy-and-Hold. But the Buy-and-Holders obviously did not have access to research that had not yet been published when they designed Buy-and-Hold. Had they had access to Shiller’s research, they would have designed Valuation-Informed Indexing. Given how the research that they had available to them at the time limited their ability to think through this stuff properly, they designed Buy-and-Hold. Then they learned something new in 1981 and it became necessary to make a change. That’s where things got on the wrong track.

It’s hard for humans to acknowledge mistakes. It’s especially hard when those mistakes are over questions so important that they are likely to cause millions of people to suffer failed retirements. For 37 years now, we have been trying to get this mistake corrected so that the thing that the Buy-and-Holders designed — our model for understanding how stocks work — can do the work they intended for it at the time it was designed. The Buy-and-Holders wanted the model to help people and they need to make the correction that the last 37 years of research showed us is required for it to do that. We need to teach people not that the market is efficient and that investors may remain at the same stock allocation at all times but that valuations affect long-term returns and that investors MUST adjust their stock allocations in response to big shifts in valuations to have any hope whatsoever of keeping their risk profiles roughly stable over time.

You can’t reconcile what Shiller is saying with what Bogle is saying. They are saying opposite things. Obviously there are many points in common. Shiller only showed that Bogle was wrong about one thing (that price changes are caused solely by economic developments). But that one mistake causes a lot of problems. Buy-and-Hold is a numbers-based strategy. If you count gains that are not real as real, you get the numbers wrong. A numbers-based strategy that gets the numbers wrong is not a good thing.

Emotion has a huge effect on stock prices. We should all be doing all that we can to rein in that effect. We should want prices to be as real/unemotional/economic-based as possible. The way to do that is to make investors aware of the dangers of treating emotional gains as real. When we see something like what we saw in the late 1990s, we should be warning people how much suffering they will cause themselves if they treat the phony emotional gains that they are creating as something real and lasting. If we warn them, they will make an effort to rein in their destructive emotions and we will all be better off. The Buy-and-Holders CELEBRATE phony, emotional gains. They treat them as real. To a Buy-and-Holder, a real economic gain is equivalent to a phony, emotional one. There is no room in the Buy-and-Hold Model for emotion-based gains.

Buy-and-Hold hurts us because it fails to put a brake on the destructive human emotions that cause us great harm in bull markets. It doesn’t do this because the Buy-and-Holders are bad people. It does this because they made a mistake for the perfectly understandable reason that the research they needed to avoid the mistake was not available to them at the time. The mistake just needs to be corrected. That’s where we stand today. Had the Buy-and-Holders known when they were starting out that they were going to make a mistake, they obviously would have vowed to correct it as soon as they learned about it. Deep in their hearts, the Buy-and-Holders want the mistake corrected as much as the Valuation-Informed Indexers do.

What makes it hard is that stock investing is not a purely academic exercise. When we make mistakes in our model of how stock investing works, we hurt real live human beings, millions of them. And we build careers around those mistakes. We become reluctant to correct mistakes we make because we want to avoid the embarrassment associated with doing so. We trap ourselves.

Everyone needs to take a step back and calm down. We need to get it on the record that the Buy-and-Holders are good and smart people that advanced our understanding of how stock investing works in hundreds of important ways. The Buy-and-Holders are our friends. But they made a mistake. Or at least there is one school of thought as to how stock investing works that is rooted in a belief that the Buy-and-Holders made a mistake. We need to let people who hold to that school of thought speak about what they believe in clear and frank and unapologetic terms. If we do that, we will all learn from each other and over time we will make use of the magic of constructive communication to gradually move to a better place for all of us.

The Buy-and-Holders started a learning experience. That’s the most wonderful thing that they did. But you don’t always know at the starting point where a learning experience is going to take you. Robert Shiller taught us all things about how stock investing works that we never expected to learn back when we took on the learning experience. He didn’t do a bad thing by confounding our expectations. He did a good thing by pointing us to exciting new possibilities. We need to treat those who believe that Shiller is on to something important with the respect they merit as people seeking to join us in an effort to better our world. When we begin doing that, we will all feel better about ourselves and about our mutual learning project in about 500 different ways.

Shiller changed the world in a very positive way. You can invest however you please. That one is up to you. But you cannot tell other people what discussions they may have on internet discussion boards re the last 37 years of peer-reviewed research in this field. There’s 37 years of peer-reviewed research showing that valuations affect long-term returns. People have every right in the world to point out to their friends that the Buy-and-Hold retirement studies lack adjustments for the valuation levels that apply on the day the retirements begin and to fill people in on what the numbers are that come up if valuation adjustments are included. Each investor must decide for himself or herself which school of academic thought is for him or her. You cannot make that decision for others. You take on responsibility for any financial losses they suffer as a result when you do so. That’s not smart.

I hope that helps a small bit, Anonymous.

Rob

“We Have Published Posting Rules at Virtually Every Investing Site Prohibiting the Posting Tactics That the Buy-and-Holders Have Employed to Block Debate. That’s Huge. That Shows What Is in Our Hearts. That Shows How As a People We Believe Things Should Be Done. That’s What the Buy-and-Holders Are Ultimately Up Against — Our Fundamental Beliefs About How New Ideas Should Be Permitted to Grow Over Time in This Country.”

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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:

“So we are close. Very close…When I have a community of people helping me out, amazing and magical things will happen. ”

You’ve been saying that for many years. Even back in the days before you were banned from everywhere.

But after all this time, there’s still no community. Nothing amazing. No magic. So I guess you weren’t that close after all.

We’re close.

If one large site started reporting on what has happened over the past 16 years, we would see huge change in a short amount of time. We have seen thousands of our fellow community members express a desire that honest posting be permitted. Shiller published his research in 1981. We didn’t even have that in the days when the Buy-and-Hold strategy was developed. We have published posting rules at virtually every investing site prohibiting the posting tactics that the Buy-and-Holders have employed to block debate. That’s huge. That shows what is in our hearts. That shows how as a people we believe things should be done. That’s what the Buy-and-Holders are ultimately up against — our fundamental beliefs about how new ideas should be permitted to grow over time in this country. Shiller was awarded a Nobel prize. Could we send a bigger sign as to how we want things to go? I have had numerous professors tell me that they are now including my ideas about how stock investing works in the courses they teach in universities. We have had numerous researchers indicate that they would like to be free to do honest work in this field. We have even had a good number of the Wall Street Con Men slip in some honest advice along with the Buy-and-Hold garbage. That sort of thing doesn’t just happen by accident. Those people have consciences. Those consciences are going to be exerting an even stronger pull in the days following the next price crash. I mean, give me a freakin’ break.

It has taken longer than I thought it would take. A LOT longer. You’ve got me re that one.

But it remains a reality that we are very close. The issue is no less important today than it was on the morning of May 13, 2002. So this is certainly no time to be giving up hope on the future of this country.

We have a secret weapon, Anonymous. The Buy-and-Holders. The Buy-and-Holders love their country too. What do you think they are going to do in the days following the next price crash? They are going to flip to the side of the American people. If they felt that they could do it today, they would do it today. As soon as people start sensing that it is safe to tell the truth about what the last 37 years of peer-reviewed research teaches us about how stock investing works in the real world, there is going to be a run for the exits in Buy-and-Hold World. The thing will go viral at that time.

There has to a transition from one paradigm to another. The natural thing would have been for us to launch a national debate in 1981, when Shiller published his “revolutionary” research findings, and then for people to gradually make the transition to Valuation-Informed Indexing as they learned more. That would have been 100 percent groovy for every single person involved. It didn’t happen that way. But that doesn’t mean that the transition is not going to take place. It just means that, after 37 years, there is a huge amount of pent-up energy that thousands of people in this field want to put to use telling millions of investors the long-covered-up realities of how stock investing works.

When Bogle flips, it’s over. What the heck is Lindauer going to be able to do to hold back the tide once Bogle flips? There will be nothing that he will be able to do at that time. It will be over. I think Bogle will flip. If Bogle doesn’t, someone else will. It could be Bernstein. It could be Swedroe. It could be Schultheis. It could be Pfau. It could be Richards. It could be lots of people.

There are lots of people who work in this field who love their country, Anonymous. You can put forward your threats of physical violence and your threats of career destruction from now until doomsday, but there comes a point when you will not be able to hold back the love that many people who work in this field feel for their country. I think that all the magic is going to begin happening in the days following the next price crash. But we’ll see, you know? It is my sincere belief that we are very close indeed.

Eyes-on-the-Prize Rob

“If Cognitive Dissonance Blocked Bogle From Coming Clean re His Mistake When Shiller Published his ‘Revolutionary’ (Shiller’s Word) Research in 1981 (Which I Believe Is the Case), Then Bogle’s Friends Should Have Insisted That At a Bare Minimum He Acknowledge That There Were Now Two Schools of Academic Thought re How Stock Investing Works.”

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

“It sure won’t be me sending him to prison. I have zero power to do any such thing and zero desire to ever acquire such power.

I will tell the story honestly. I am required to say that Bogle was made aware of the Lindauer Matter by numerous posters at the Bogleheads Forum and did nothing about it. That’s a stone cold fact and that is what I am going to say. Financial fraud is a crime in the United States. That’s a stone cold fact too. The act of fraud does not cancel out the many good things he has done. But it is in the process of doing very serious harm to millions of people. So it is something that everyone in the nation needs to know about and come to terms with.”

You are the only one talking about fraud and prison, so you would have to be the one driving it for it to happen.

No.

I’ve spoken about the possibility on several occasions. But all of my energies for 16 years running now have been directed to avoiding the possibility that Bogle or anyone else will ever go to prison because of the mistakes that were made in the design of the Buy-and-Hold strategy. I find the prospect of Bogle or anyone else going to prison HORRIFYING.

If you see a friend of yours driving drunk and you become worried that he is going to go through a red light and kill someone and end up in prison for reckless manslaughter, would it be fair to say that, if you take him aside and warn him of that possibility, that shows that you are pushing for him to be put in prison? I sure don’t see how. It seems to me that the reality is just the opposite. You are doing all that is in your power to keep your friend OUT of prison. You are being a true friend.

I sent an e-mail to Motley Fool in June 2002 asking that John Greaney be removed from the Retire Early board for his insanely abusive posting practices, which were causing all of our best posters to leave the site. The response of Motley Fool’s site administrator was to thank me for my “thoughtful” e-mail and to pass along the observation that it would be “ideal” if Greaney were to permit honest posting re retirement planning at that retirement planning board. Motley Fool liked the money that Greaney brought in with his relentless promotion of his Get Rich Quick retirement study.

It’s Motley Fool that started Greaney down the road where he is now looking forward to a long prison sentence in the days following the next price crash. Had Greaney been banned, I would have put up a post six months later asking that our old friend be permitted to post again, everyone in the community would have endorsed it, and Motley Fool would have granted the request. By playing it the way that he played it, the site administrator made it almost inevitable that Greaney would be going to prison somewhere down the line. He couldn’t deny that he knew about the errors in the study at that point. So things just got worse and worse and worse for him. In time he found himself threatening to send defamatory e-mails to Wade Pfau’s employer in an effort to get him fired from his job.

Greaney is responsible for his own behavior. I am not saying that anyone else is responsible for him going to prison. But it is a reality that we live in communities and that we all have responsibilities to others who live in those communities with us. Greaney made a mistake. That sort of thing happens. Greaney gave in to a temptation to cover up the mistake rather than acknowledge it. That sort of thing happens too. The proper thing to do when something like that happens is to EXPOSE the cover-up so that it is brought to a full and complete stop before it can do more harm. Fail to expose a cover-up and it grows and grows and grows and the person at the center of the cover-up can never be free again because he now needs not only to cover up the original mistake but also the cover-up and the cover-up of the cover-up of the cover-up of the cover-up.

I acted like John Greaney’s friend when I asked that he be banned. That was the proper response to his insanely abusive posting. You hurt him in a very serious way by aiding his cover-up, Anonymous. You were no friend to him at all.

And of course the same basic realities apply with Bogle as well, just on a much bigger stage. In an ideal world, Bogle would have in 1981 made the changes in Buy-and-Hold required by Shiller’s publication of his “revolutionary” (Shiller’s word) research findings. If cognitive dissonance blocked him from doing that (which I believe is the case), then his friends would have insisted that he at a bare minimum acknowledge that there were now two schools of academic thought re how stock investing works and that no more would he act as if there were only one. That would have been enough to keep Bogle on the right side of the law. And that would have been enough for all of us to have learned amazing things over the past 37 years about how stock investing works and to be living far richer (in every sense of the word) lives today.

It didn’t happen. So now we have this huge mess to clean up. A mess that appears likely to get my friend John Greaney tossed in a prison cell in days to come. And a mess that may even possibly get my friend Jack Bogle thown in a prison cell in days to come. My voice has been the strongest and the firmest and the loudest and the clearest speaking in OPPOSITION to continuation of the massive cover-up of the errors in the Buy-and-Hold retirement studies for 16 years running now, Anonymous. There is no one else even in a close second place.

Are you joking?

I am the one who has been doing everything in his power for a long, long time now either to see that there are no prison sentences or that, if it is too late for that, that the prison sentences that we will be seeing in days to come will be as short as they can possibly be given the circumstances that prevail today. Please given me a freakin’ break.

My best and warmest wishes to you and yours, dear Goon friend.

Prison-Sentence Opponent Rob

“I Am Required to Say That Bogle Was Made Aware of the Lindauer Matter By Numerous Posters at the Bogleheads Forum and Did Nothing About It. That’s a Stone Cold Fact and That Is What I Am Going to Say. Financial Fraud Is a Crime in the United States. That’s a Stone Cold Fact Too. The Act of Fraud Does Not Cancel Out the Many Good Things He Has Done. But It Is in the Process of Doing Very Serious Harm to Millions of People. So It Is Something That Everyone in the Nation Needs to Know About and Come to Terms With.”

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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:

“I spoke to Bogle. He says that he is grateful for the show of support for Buy-and-Hold but wonders if going to prison for it might be taking things a bit too far.”

If you are still planning on sending Jack to prison, you better hurry up. The guy is 89 years old and probably doesn’t have too many years left.

I hope he lives forever. I love the man. I rate him as a Hero to the Middle Class.

It sure won’t be me sending him to prison. I have zero power to do any such thing and zero desire to ever acquire such power.

I will tell the story honestly. I am required to say that Bogle was made aware of the Lindauer Matter by numerous posters at the Bogleheads Forum and did nothing about it. That’s a stone cold fact and that is what I am going to say. Financial fraud is a crime in the United States. That’s a stone cold fact too. The act of fraud does not cancel out the many good things he has done. But it is in the process of doing very serious harm to millions of people. So it is something that everyone in the nation needs to know about and come to terms with.

I have learned many important things from Jack Bogle. There would be no Valuation-Informed Indexing without the many valuable contributions of Jack Bogle. I hope to be working closely with him in the days following the next price crash, when I am 100 percent certain that he will make a full and complete break with Mel Lindauer and with all those who have posted in “defense” of him. I think of Jack as a friend and always will.

I think of you as a friend too, Anonymous. I haven’t learned as much from you as I have learned from Jack Bogle. But I have indeed learned things from you over the years and I am grateful for that.

I naturally wish you all the best that this life has to offer a person.

Bogle-Loving (But Not Financial Fraud Loving) Rob

Valuation-Informed Indexing #406: It Doesn’t Matter All That Much How Long It Takes for Return Predictions to Work

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I’ve posted Entry #406 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called It Doesn’t Matter All That Much How Long It Takes for Return Predictions to Work.

Juicy Excerpt: I think we focus too much on when the prediction pays off rather than on why it pays off. Shiller says that stock price changes are caused by shifts in investor emotion. If that’s so, it’s easy to understand why it would be hard to get the timing of a prediction correct. Emotion is an irrational phenomenon. So who can say when it will shift? But, if price changes are caused by shifts in emotion, we can know for certain that there will at some time be a price movement in the opposite direction. It is the entire purpose of a market to get prices right. So, if they go wrong in one direction for a time, they have to reverse. The direction of the price movement is certain, only the timing of it is unpredictable.

“Buy-and-Holders Count All Gains As Real, Even Gains Attained at Times of Extreme Overvaluation. Valuation-Informed Indexers Do Not. We Believe That Those Gains Are the Product of Irrational Exuberance. A National Debate Should Be Raging re This Question on Every Site on the Internet. The Answer to the Question Affects the Future of Each and Every One of Us.”

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Set forth below is the text of a comment that I recently posted to the discussion thread for one of my columns at the Value Walk site:

The way we remove bias is looking at outcomes. With your VII strategy, you decided to pull out of stocks over 20 years ago. We can look back on your posts (which you have tried to revise) and see that you had lower returns versus the commonly used buy, hold and rebalance portfolios (such as those described on Simba’s list). Since you can no longer deny your failure, your most recent attempts at trying to soften the critics is that you think you did better from a “risk adjusted” basis. as any person grounded in statistics can tell you, you do not risk adjust historical returns as those are actual returns…….but as you admit, you are not really a “numbers” guy.

Buy-and-Hold has been performing poorly for 18 years running. From January 2000 forward, the annualized return has been 3.2 percent real. That means that millions of Americans are short of where they need to be for retirement. They were counting on returns of something in the neighborhood of 6.5 percent real (the long-term average return for 150 years now). So we are all paying a huge price for the out-of-control bull market of the late 1990s. When we push prices up so far above what the economic realities permit, we are borrowing returns from future years. It hurts to have to pay back the debt.

I have my money in TIPS and IBonds paying 3.5 percent real. So I beat the stock return from 2000 forward by a tiny bit. But I of course did so by taking on only a fraction of the risk. So I think it would be fair to say that I am a good bit ahead of the Buy-and-Holders from 2000 forward.

The Buy-and-Holders are a good bit ahead of me counting from 1996, when prices first reached dangerous levels. But stocks are today priced for a 50 percent crash. On the day after prices drop that much, I will be far ahead counting from 1996 forward as well. So the real question here is — When stock prices travel to levels of extreme overvaluation, are additional gains the product of economic developments (in which case they would be true and lasting gains) or at they the product of irrational exuberance (in which case they would be non-real and only temporary gains)? I believe that those gains are the product of irrational exuberance.

This is really the only difference between Buy-and-Holders and Valuation-Informed Indexers. Buy-and-Holders count all gains as real, even gains attained at times of extreme overvaluation. Valuation-Informed Indexers do not. We believe that those gains are the product of irrational exuberance. It seems to me that it is an issue of huge national importance to figure out whether it is Fama or Shiller who is right re this one. If Shiller is right, we will be seeing millions of failed retirements in days to come because millions of people planned their retirements in reliance on Buy-and-Hold retirement studies and calculators which are rooted in a belief that even gains attained at times of overvaluation are real and lasting gains. We will also be seeing a deepening of the economic crisis in the event that Shiller is right because a 50 percent price crash will cause trillions of dollars of consumer buying power to disappear from the economy.

This is the $64,000 question. Is Shiller right re this one or is Fama right re this one? It is my strongly held view that a national debate should be raging re this question on every discussion board and blog on the internet. The answer to the question affects the future of each and every one of us. I think Shiller is right. I find his case very persuasive. Of course, I acknowledge that 90 percent of the population is today inclined to believe that those gains are real. Shiller and I are very much in the minority.

My best and warmest wishes to you, Sammy.

Rob

“Does Shiller Think That the Safe Withdrawal Rate Is Always the Same Number or Does He Think That It Is a Number That Varies With Changes in Valuation Levels? Does Shiller Think That the Loss of Trillions of Dollars in Spending Power Caused by the Crash of 2008 (Which Was Caused by the Bull Market of the Late 1990s) Was the Primary Cause of the Economic Crisis? Does Shiller Believe That We Will Be Returning to Fair-Value P/E10 Levels in the Not-Too-Distant Future? ASK HIM!”

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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:

“presuming that Shiller is right that 50 percent of your stock portfolio is the product of irrational exuberance”

Shiller would be very surprised to hear that he said that. Because he never did. You interpret Shiller like a terrorist interprets Islam. Using and perverting a good name to suit your own foul agenda.

His entire book says that. The title of the book is “Irrational Exuberance.”

If Shiller is saying precisely what Fama is saying, then why did the New York Times article reporting on awarding of Nobel prizes to both of them on the same day comment on how strange it was that two economists saying opposite things about how stock investing works were both being given the highest honor in the field on the same day?

Shiller is a friendly guy. Bogle could invite him to a session at the Bogleheads Forum where you could ask him what he thinks re all these matters. Does Shiller think that the safe withdrawal rate is always the same number or does he think that it is a number that varies with changes in valuation levels? Does Shiller think that the loss of trillions of dollars in spending power caused by the crash of 2008 (which was caused by the bull market of the late 1990s) was the primary cause of the economic crisis? Does Shiller believe that we will be returning to fair-value P/E10 levels in the not-too-distant future?

ASK HIM! That’s the best way to find out if you really want to find out.

You’ll have to ditch the death threat garbage for a few days. I doubt very much that he is going to tolerate that garbage. If you want to know the answers to your questions, you will treat him with a measure of respect. And, if you treat him with a measure of respect, he will be willing to answer your questions.

You don’t want to know, Anonymous. That’s been the bottom line here going back to the first day. You want to believe that the numbers on your portfolio statement are real. So you don’t want to know about the 37 years of peer-reviewed research showing that overvaluation is the product of irrational exuberance, not economic realities. You hate me because I make that point over and over again in clear and simple ways. I don’t do it to hurt you. I think you are better off knowing the realities. I accept that you are free to disregard anything that I say — that’s up to you. But I insist on my right (and the right of all my fellow community members) to say what I believe without first having to ask “Mother May I?” of the Buy-and-Holders.

I say that Shiller was awarded a Nobel prize because he showed the stock overvaluation is caused by irrational exuberance, not economic realities, and because that finding stands everything that we once thought we knew about how stock investing works on its head. Why do you believe Shiller was awarded a Nobel prize, Anonymous? Please identify how in your view he changed our understanding of how stock investing works in a significant enough way to justify the awarding of a Nobel prize in economics.

Rob

 

“People Are Skeptical of All New Ideas. That’s Normal and Healthy. But the Discussion of New Ideas Is Permitted in This Country. So While We Should Expect Support for New Ideas to Grow Only Slowly in the Early Days, We Should Expect Support for New Ideas with Merit to Grow Gradually Over Time. Shiller’s Idea Has so Much Merit That He Was Awarded a Nobel Prize for It. And That Idea Has Been Public Knowledge for 37 Years Now. And Honest Posting re the Many Far-Reaching Implications of That Idea is Not Today Permitted at a Single Large Web Site. That Ain’t Normal.”

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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:

 

99.999999% of people didn’t respond to your tweets because they never saw them. The rest didn’t respond because you’re a nut.

You’re wrong. There are many cases in which people who did not respond have told me that they think my work has great value. There are cases that I have written about on the blog in which people who BANNED me told me that they thought my work has great value. That’s not the normal situation, Anonymous. It is because those people are afraid to speak up that we have this problem.

You are of course right that the vast majority of people don’t see a tweet. And it is also true that, when someone makes a claim that seems out there, most people are going to be highly skeptical even though they do not know the facts. That’s normal too. But it was not normal for Motley Fool to ban me when I was the most popular poster there in the days before I pointed out the error in Greaney’s study and when it was Greaney putting forward death threats and not me. And it was not normal for Wade Pfau to thank me profusely for teaching him more about how stock investing works than anyone he had run into before and to tell me how much he couldn’t stand you Goons and then to flip to the other side when you threatened (with Bogle’s implicit approval) to destroy his career. It’s not normal for someone like Bogle not to speak up when he sees threats of violence and career destruction at a discussion board with his name on it and not to do anything about it. None of this is normal.

People are skeptical of all new ideas. That’s normal and healthy. But the discussion of new ideas is permitted in this country. So while we should expect support for new ideas to grow only slowly in the early days, we should expect support for new ideas with merit to grow gradually over time. Shiller’s idea has so much merit that he was awarded a Nobel prize for it. And that idea has been public knowledge for 37 years now. And honest posting re the many far-reaching implications of that idea is not today permitted at a single large web site. That ain’t normal. It’s not a close call.

That’s where the financial fraud comes in. That’s where the criminal stuff comes in. The criminal stuff has blocked Shiller’s idea from gaining the level of support that it needs to attain for more and more people to get involved helping us to learn more about it. That has to change. Valuation-Informed Indexing will probably remain at a disadvantage to Buy-and-Hold for as long as prices remain high. We all have a Get Rich Quick urge within us and so Buy-and-Hold comes to the table when prices are where they are today with a big marketing advantage.

But the criminal stuff has to go. Get Rich Quick urge or no Get Rich Quick urge, there are lots of people who want to know what the peer-reviewed research says about how stock investing works. Those people have a right to be able to talk with others on the internet about what they want to learn. And, when we get to a point where they feel free to do that, support for Shiller’s work and interest in exploring Shiller’s work will grow dramatically. The hard part is getting the level of support up to a place where at least the criminal stuff is no longer a viable option for the Buy-and-Holders. We will all be living better lives once we get to that place. And a lot of people who today consider themselves confirmed Buy-and-Holders will begin rethinking their ideas about how stock investing works in those days. Hearing the ideas discussed by more people makes a difference. We may well be working on the same side in those days, Anonymous. I look forward to that.

We are in an ugly place today, Anonymous. I wish we weren’t. But we are on our way to a very magical place. We are close to making the transition. And all we need to do is to insist on compliance with the laws of the country we live in. People like me who believe that Valuation-Informed Indexing is the future need to work up the courage to stand up to you Goons no matter how brutal you are with your intimidation garbage. That’s what it takes to get us all to this much better place where we all would want to be were we only thinking clearly and sufficiently informed to know what is in our best interest. So I try to remain steadfast.

Why did the opposition to this one particular new idea become so intense? Because the change is so darn important. We all need to know how to invest our retirement money effectively and Buy-and-Hold and Valuation-Informed Indexing are about as different as it is possible for any two ideas to be different. So the people who advocate Buy-and-Hold feel a lot of shame and embarrassment over the idea of having their mistake exposed to the world. Their shame gets worse the longer the cover-up goes on. So none of us are doing them a favor by keeping our mouths shut. Things just get worse the longer the cover-up continues. The life-affirming thing to do here is to EXPOSE the cover-up and thereby to bring it to an end and thereby to help out our Buy-and-Hold friends as well as our Valuation-Informed Indexing friends.

The criminal stuff is over the top. It never should have been tolerated by even a single person for even a single day. That is not how we do things in this country. It is a shame that our Buy-and-Hold friends turned to criminal stuff in desperation and it is a shame that a good number of us Valuation-Informed Indexers failed to quickly work up the courage to call out those who had wandered onto that dark path in clear and firm language. This sort of thing is a lose/lose/lose/lose/lose/

When did 22 years become “short-term”? And what risk adjustment formula makes a 113% gain preferable to a 282% gain?

Everything is relative. Most of us invest over roughly a 60-year time period, from age 20 to age 80. 22 years is not a super long time-period considered in the context of a 60-year investing lifetime. It is how you do over the 60-year investing lifetime that matters, not how you do over any 22-year time period. It is the losses suffered over a 22-year time-period in which you go with a Get Rich Quick approach that can cause you to miss out on the progress that you could have made on obtaining strong lifetime numbers by following a more sensible (and research-based!) approach.

If you thought that the lifetime numbers didn’t matter, you wouldn’t be so angry, Anonymous. If you truly believed that all that mattered was putting up good-enough numbers for 22 years, you would be okay with letting others do as they pleased while you did what you thought was best for you. The rage comes from the part inside you that entertains doubts whether that really is the answer. You hate me because I stir up those doubts.

If I don’t do it, who is going to do it, you know? Someone has to stir up the doubts while you still have time to do something about them. Would you rather that I wait until after the crash and start telling you then how you could have protected yourself from it? My bet is that we will see a lot of people doing that and a lot of others complaining that waiting until after the crash hits to talk about this stuff was a pretty darn lame way of proceeding. I am proud that I had the courage to say some things when people still had time to put the knowledge to good use if they cared to (and of course to ignore it if they preferred to play it that way instead).

My best wishes to you and yours.

Recognized Tweeting Nut Rob

“There Are Cases in Which Someone Drinks Six Cans of Beer and Does Not Get in an Accident. So Those Who Follow the Buy-and-Hold Approach to Data Analysis Say: ‘You Cannot Look at the Number of Cans of Beer Consumed to Know If There Is Going to Be an Accident or Not! The Data Doesn’t Tell You the Precise Number of Cans of Beer it Takes to Cause an Accident in Each and Every Case! So We Cannot Draw Any Conclusions From This Data!”

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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:

“The reason why I changed the date is that we do not know the date.”

So you finally admit that you can’t time the market. Can you change the subject now?

I write this already knowing your mealy-mouthed response. You can’t time it SHORT TERM. Short term meaning within any time frame at all. Or in Shiller’s case, a whole decade. I would be simply thrilled if you would come back with something you haven’t written a hundred times before.

I cannot come back with anything different because the same story still applies, Anonymous. Short-term timing never works. That’s been true for 150 years of stock market history. Long-term timing always works. That’s also been true for 150 years of stock market history. That’s just the way it is. I didn’t create the stock market, you know. It’s not my doing that it is the way it is. I just report on what the peer-reviewed research says and the peer-reviewed research just reveals the realities.

Say that you were trying to figure out how many cans of beer a person can drink before he caused a car accident. And you accumulated data showing that drinking one can of beer has virtually no correlation with car accidents. Two cans has a slightly higher correlation but the odds are still strong that a person drinking two cans of beer is not going to get into an accident. And a person drinking ten cans of beer gets in an accident in the vast majority of cases. What conclusions would you draw from this data?

The way that the Buy-and-Holders analyze things, they would conclude: “You cannot tell whether a person is going to get in an accident by looking at whether he has consumed beer or not — there are many cases in which people consume beer and don’t get in accidents.” Is that true?

It’s true in some hyper-technical sense. There is no number of cans of beer that you can identify as the number that certainly causes an accident. You might look at someone who has drunk six cans of beer and say: “This guy is going to get in an accident for sure! He can barely stand up!” Still, there are cases in which someone drinks six cans of beer and does not get in an accident. So those who follow the Buy-and-Hold approach to data analysis say: “You cannot look at the number of cans of beer consumed to know if there is going to be an accident or not! The data doesn’t tell you the precise number of cans of beer it takes to cause an accident in each and every case! So we cannot draw any conclusions from this data!”

I just don’t buy it, Anonymous. You CAN draw conclusions. Drinking beer increases the risk of car accidents. The more cans you drink, the more risk there is. It’s the same with stock investing. Overvaluation causes price crashes. The higher the P/E10 level, the greater the risk.

Shiller looked at where things stood in 1996 and saw that we were in a situation where investors had drank six cans of beer. He concluded from the data that we would see a crash because the odds were strongly in favor of one. We didn’t have one within the time-frame of his prediction. The six-beer car driver got lucky. The Buy-and-Holders concluded: “Hey! We never need to worry about drinking beer again! Six cans won’t cause a crash! Neither will twelve cans! Neither will fifty cans! Beer-drinking doesn’t cause car crashes ! Shiller’s failed prediction proves it!”

It doesn’t. Shiller’s failed prediction shows that it is very hard to make precise predictions of WHEN overvaluation is going to cause a price crash. But it always does. There has never been one exception in the historical record. Overvaluation increases the risk of a price crash in each and every case. In some cases, the bad outcome pops up relatively quickly and in other cases it take more time than you would expect for the bad outcome to pop up. But it is not as if it makes much difference. The bad outcome still wipes you out. You still would be better off not drinking so much beer before driving. You still would be better off permitting investors to have access to the information they need to have access to to avoid letting valuations get so out of hand.

Stocks are risky for one reason. Buy-and-Hold strategies become popular from time to time and then valuations inevitably get out of hand. It’s not like there’s nothing we can do about it. We today have 37 years of peer-reviewed research showing us the dangers of Buy-and-Hold/Get Rich Quick. Why not tell people about it? Why not permit honest and accurate reports on safe withdrawal rates and lots of other critically important investment-related topics? Permit honest posting on the peer-reviewed research and stock prices become self-regulating. It seems to me that we will all live in a better world when stock prices will never again be able to go to these extreme highs or these extreme lows.

You absolutely can time the market. Not with precision. Buy you can time it. That’s been true for the entire history of the market. Just as it has been true that drinking beer has been causing accidents since the beginning of car-driving even though we cannot say with precision how many beers will cause an accident in a particular case. Overvaluation is risky. So we should all avoid it. And we should do everything we can to help others avoid it. Just because we cannot say with precision what day a crash will come in a particular case is not reason not to warn people on a daily basis of the dangers of buying overvalued stocks. The crashes caused by overvaluation hurt all of us in very, very, very serious ways. Those of us who love stocks as an asset class want to see Buy-and-Hold buried 30 feet in the ground where it can do no further harm to humans and other living things.

My sincere take.

Sober Driving Rob

“We All ‘Know’ That Valuations Affect Long-Term Returns. But We Know This Only in a Hyper-Technical, Intellectual Way. We Have Not Processed the Information and Integrated It Into Our Understanding of How Retirement Planning and Asset Allocation and Risk Management Works. To Integrate the Powerful Insight, We Need to Give Ourselves Permission to Talk It Over and to Explore the Implications of It From Hundreds of Different Perspectives.”

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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:

Everyone knows there will be a crash someday. Even Fama (whose ideas you clearly don’t understand.) Everyone knows valuations affect returns. You’re saying nothing that isn’t already common knowledge.

Oh, except that “long-term timing ALWAYS works.” I could give you a hundred links to that exact quote. Yes, ALWAYS works. Except for every time that it’s been actually tried. Those times, it didn’t work.

Now here’s where you babble incoherently about being right even though you were wrong. Take it away.

Buy-and-Holders acknowledge that there will be a crash someday. But they don’t acknowledge the implications of that reality. Buy-and-Hold survives today despite 37 years of peer-reviewed research showing that it could never work for even a single long-term investor because Get Rich Quick strategies possess a huge emotional edge. People cannot bear to acknowledge that the real, lasting value of their stock portfolios is only one-half of the number written on the portfolio statement. You get away with insanely abusive posting behavior because of the edge. That edge disappears when all portfolio values are reduced by 50 percent. At that point the emotional advantage shifts to those recommending research-based strategies. That will be a big change.

Everyone does not know that valuations affect long-term returns. Shiller wasn’t awarded a Nobel prize because he said something that everyone knew. He was awarded a Nobel prize because he said something “revolutionary” (his word), something that stands everything that we once thought we knew about how stock investing works on its head. Many Buy-and-Holders are okay with saying “oh, yeah, valuations affect long-term returns” because they are aware that there is 37 years of peer-reviewed research showing that and they don’t want to look foolish. But how many are willing to acknowledge the far-reaching implications of Shiller’s findings? If valuations affect long-term returns, there ain’t no way on God’s green earth that anyone could calculate the safe withdrawal rate accurately without taking the valuation level that applies on the day the retirement begins into account. But how many Buy-and-Holders objected when Greaney resorted to death threats to shut down the discussions about safe withdrawal rates that hundreds of us wanted to have back at the old Motley Fool board? If the Buy-and-Holders thought through what it means to say that valuations affect long-term returns, they would want those discussions to proceed so that we all could enjoy a learning experience together and save millions of people from suffering failed retirements.

If it were common knowledge that the Buy-and-Hold retirement studies were in error, my famous post of May 13, 2002, would not have generated any controversy. The reaction to that post tells the tale. Yes, we all “know” that valuations affect long-term returns. The evidence that this is so is overwhelming. 100 percent of the evidence available to us today shows that this is so and 0 percent of the evidence available to us supports the Buy-and-Hold strategy. But we know this only in a hyper-technical, intellectual way. We have not processed the information and integrated it into our understanding of how retirement planning and asset allocation and risk management works. To integrate the powerful insight, we need to give ourselves permission to talk it over and to explore the implications of it from hundreds or thousands of different perspectives. We need to open every discussion board and blog on the internet to honest posting re safe withdrawal rates and scores of other critically important investment-related topics. That’s the critical next step. That’s when Shiller’s breakthrough insight begins paying huge dividends for every investor alive on the planet. We don’t learn about something by reading a few words and then going about our business as if those words had zero significance. We learn by participating in discussions in which the many practical ways in which the new knowledge changes how we think about the subject matter in a fundamental and far-reaching way are explored.

Long-term timing is price discipline. Price discipline is the key to every market that has ever existed. It is not possible for the rational human mind to imagine circumstances in which long-term timing, reasonably executed, would not work. If you look at the historical record, you will see that long-term timing has produced results superior to Buy-and-Hold in 90 percent of the return sequences that have turned up. The fact that Buy-and-Hold produced better numbers in 10 percent of the return sequences doesn’t mean that Buy-and-Hold was the better choice in those cases. The investor didn’t know in those cases what sort of return was going to turn up in the particular case. He took a huge risk by going with a Buy-and-Hold strategy. Measured on a risk-adjusted basis, Valuation-Informed Indexing is ALWAYS better. And that shouldn’t be even a tiny bit surprising to anyone who has spent a little bit of time thinking this stuff through. Long-term timing is price discipline. How could exercising price discipline when buying something ever be a bad thing?

I wish you all good things, Anonymous. But I believe that Buy-and-Hold is the past and that Valuation-Informed Indexing is the future. I am 100 percent sure. Could it be that I am wrong? It has been known to happen. If it were the case that I was wrong, I would probably be the last to see it because my biases blind me more than they blind anyone else. So maybe I am wrong, you know? We will have to wait a bit and see how things play out to know for sure. But I believe that the last 37 years of peer-reviewed research is legitimate research and that Shiller merited his Nobel prize and that Greaney’s study got the numbers wildly wrong, putting the retirements of thousands of friends of mine at grave risk of failing somewhere down the line. I am going to continue saying what I believe in my posts. Even if there were not laws making it a crime to do otherwise, I would do that because I think it is the right thing to do. I don’t want to see my friends suffer failed retirements because I didn’t have the guts to stand up to you Goons so I am going to continue doing so. I believe that it will all work out in the end far better than any of us can even imagine today. But we are just going to have to wait a bit to see all the amazing and wonderful stuff take place in the real world.

I naturally wish you the best of luck in all of your future life endeavors, my dear friend. Please take good care.

Incoherent Babbling Rob