A Rich Life

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

Valuation-Informed Indexing #391: Fama Gave Us a Powerful Engine in a Good-Looking Car, Shiller Provided the Brakes

by

I’ve posted Entry #391 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Fama Gave Us a Powerful Engine in a Good-Looking Car, Shiller Provided the Brakes.

Juicy Excerpt: In other markets, there are natural limits on how high prices can go. The people who sell us sweaters and bananas and batteries would love to see the prices charged for those items go up and up and up. But the reality is that if any seller of sweaters or bananas or batteries gives in to the temptation to charge a very high price, he will soon find himself out of business. In other markets, there are always pressures pulling prices down to counter the pressures pulling prices up. In other markets prices are set through a battle between the sellers who want them to rise as high as possible and the buyers who want them to drop as low as possible.

It doesn’t work that way in the stock market. In the stock market, buyers love, love, love high prices. When stock prices go up, we all pay more for the shares we buy each month. But we tend not to focus on that side of the story. We are happy to pay higher prices for the new shares we purchase because it means that the shares that we have held for a long time are priced higher too. The stock market is the only market that I can think of in which both buyers and sellers possess the psychology of sellers. Both buyers and sellers like to see prices headed up, up, and up some more. There is no natural resistance to higher prices in the stock market.

Valuation-Informed Indexing #390: Irrational Exuberance Affects a Lot More Than Just Stock Prices

by

I’ve posted Entry #390 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Irrational Exuberance Affects a Lot More Than Just Stock Prices.

Juicy Excerpt: How is the economy likely to perform in coming years? That’s determined largely by the amount of irrational exuberance reflected in today’s stock price.

Will the level of political unrest be increasing or diminishing in the near future? That’s another irrational exuberance question.

Are young people going to be able to achieve the incomes needed to move out of their parents’ houses? Yet again, you need to check out the irrational exuberance story to determine the answer to this one.

Buy-and-Hold Goon to Rob: “Are You the Only One Posting Honestly?”

by

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

Are you the only one posting honestly?

I’m certainly not the only one who includes ANY honesty in his posts. But I think it would be fair to say that I have shown more of an unwillingness to post DIShonestly than anyone else working in this field.

Take Bill Bernstein. He said back in May of 2002 that you need to subtract two points from the safe withdrawal rate of 4 percent reported in the Buy-and-Hold studies for the effect of valuations when they are where they were at the top of the bubble. Subtract 2 from 4 and you get 2 — and that is indeed what the safe withdrawal rate was at that time. So Bernstein was engaging in a heroic level of honesty. Good for him.

But when he saw the controversy over my honest posting raging at the Bogleheads Forum, did he step forward and say anything? He did not. There were times when there was insanely abusive posting going on and he was in the room (we know because he posted on other topics) and yet he kept his mouth shut about the errors in the Buy-and-Hold studies. Huh? What the f?

There are millions of people who will be suffering failed retirements in days to come because of the 16-year cover-up of the errors in the Buy-and-Hold retirement studies (I am assuming here that stocks may continue to perform in the future at least somewhat as they always have in the past). Bernstein has been heroically honest. He has also helped the cover-up continue by failing to speak up when it was his responsibility to do so.

I have not been 100 percent honest. I kept my mouth shut from May 1999 through May 2002 re the errors in the Buy-and-Hold retirement studies. So I am 100 percent sympathetic to Bernstein’s situation (and, indeed, the situation of every person who works in this field today). But I certainly think it would be fair to say that I have gone farther than anyone else in publicly urging that we all pull together and bring a full and complete stop to the Campaign of Terror against our board and blog communities. I’ve got the scars all over my body to prove it! I mean, come on.

I am not the only one posting honestly. But as I have seen the damage that we all have suffered as a result of the dishonestly, I think it would be fair to say that I have been more open and strong in my calls for opening the entire internet to honest posting re the last 37 years of peer-reviewed research in this field than anyone else around. And it’s not a particularly close call!

Fair enough?

Rob

Buy-and-Hold Goon to Rob: “You Seem to Firmly Believe That Everyone Ought to Be a Social Justice Warrior on Your Behalf. How Many More Years Will It Take You to Grasp the Fact That the World Doesn’t Work That Way?”

by

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

“there is no other possible explanation for their failure to speak up in opposition to death threats and demands for unjustified board bannings and thousands of acts of defamation and threats to get academic researchers fired from their jobs than that they are frightened little rabbits. ”

Seriously? I can immediately think of several other possible explanations.

1. They never heard of you.
2. They aren’t aware of your claims.
3. They are aware you claim such things happened, but don’t believe you.
4. They don’t care about your board bannings and other perceived injustices. Why would they? Do you care about other people’s bannings? If so, if you’ve never mentioned it.

You seem to firmly believe that everyone ought to be a social justice warrior on your behalf. How many more years will it take you to grasp the fact that the world doesn’t work that way?

We didn’t discover that valuations affect long-term returns yesterday, Anonymous. We discovered it 37 years ago. Millions of people have been hurt in very serious ways because of the 37-year-delay in our launching of a national debate re how stock investing works in the real world. This stuff matters.

I would say that people should be social justice warriors on their OWN behalf. We all benefit from learning how stock investing works in the real world. It’s not even possible for the rational human mind to imagine any downside to permitting honest posting at every discussion board and blog on the internet.

The world hasn’t worked in the way that I believe it should work for 16 years running now. You’ve got me re that one.

Will things change after the next crash, when people will be able to see by looking at their own portfolio statements how much they have been hurt by the continued promotion of the Buy-and-Hold “strategy”? I think so. But I acknowledge that it is at least possible that I will be proven wrong.

Even if no one works up the courage to speak up and we all go down together, I will at least enjoy the small satisfaction of knowing that I did everything in my power to protect the country I love. In difficult circumstances, that’s something, no?

Do you have any better ideas? Should I be willing to go to prison with you Goons? Somehow that option doesn’t light my fire. Call me madcap, you know?

I think people should speak out. 100 percent. I think people WILL speak out following the crash. Also 100 percent. I know that, even if not one other person speaks out, I want it on my record that I spoke out. I want to be able to sleep at night. I made lots of friends back at the old Retire Early board. I listened to their stories. I heard about their dreams and their fears. If I can’t work up the courage to do what it takes to protect them from a con man, then I don’t feel good enough about the person that I have become to be able to sleep at night. So I play it the way my conscience tells me to play it.

If loving one’s country makes one a social justice warrior, then loving one’s country makes one a social justice warrior. I love my country and I offer precisely zero apologies for feeling that way. Others will have to figure out what others will do. I speak out for the idea of permitting honest posting re the last 37 years of peer-reviewed research in this field at every discussion board and blog on the internet. I wish that I has spoken out sooner. That’s my only regret.

I love you Goons, Anonymous. But there are limits, you know? We all have to have lines that we will not cross. Mine is that I will never say that I believe that Greaney included a valuation adjustment in the retirement study posted at his web site. I will go down with the ship before I take that one back (unless someone is able to produce evidence that the study does indeed contain a valuations adjustment that not one of the thousands of people who have looked at it have been able to identify until this day).

My best wishes.

Social Justice Warrior Rob

“The Answer Is Not for Me to Stop Speaking Up about My Doubts re Buy-and-Hold. The Answer Is for Everyone Else Who Entertains Similar Doubts to Insist on His or Her Right to Express Them Clearly and Unapologetically.”

by

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 you’re saying that the only possible reason why Shiller, Wade and everyone else don’t think like you, or act the way you want, is because they are frightened little rabbits. No other reason is possible. No other explanation will be considered. Yup, it’s hard to even imagine a more unhelpful mindset.

“But I know from long experience that there is a large number who very, very, very much want to hear the message and I believe strongly that they have every right to hear it.”

I agree they have that right. And I will immediately cede the floor to them. First one I see.

Shiller and Wade and millions and millions of others should of course be expected to disagree with me on matters of substance for a wide variety of reasons.

But, no, there is no other possible explanation for their failure to speak up in opposition to death threats and demands for unjustified board bannings and thousands of acts of defamation and threats to get academic researchers fired from their jobs than that they are frightened little rabbits. They don’t want what was done to me to happen to them and so they keep their mouths shut.

And that of course makes the problem worse. If every person who since 1981 came to entertain doubts about the merits of the Buy-and-Hold strategy had said so in clear and firm and bold and unmistakable terms, there would have been no “controversy” when I advanced my famous post from the morning of May 13, 2002, asking whether we should be considering the effects of valuations when calculating the safe withdrawal rate. It is because not too many had had the courage to speak up before I did that we experienced a disconnect between what lots of aspiring early retirees believed and what the peer-reviewed research in this field showed to be so. That disconnect supplied the energy that produced the nuclear reaction that followed.

The answer is not for me to stop speaking up about my doubts re Buy-and-Hold. The answer is for everyone else who entertains similar doubts to insist on his or her right to express them clearly and unapologetically. When enough people play it in the way that I have played it for the past 16 years, the “controversy” will vanish into the mist and it will be possible for us all to be friends again. We hold different views re how stock investing works, no more and no less. No biggie. No major deal. What I said on the morning of May 13, 2002, was perceived to be a major deal by some because they had never been exposed to the other side of the story. And they were never exposed to the other side of the story because too many of us Valuation-Informed Indexers act like frightened little rabbits when it comes to these matters.

This is my sincere take re these terribly important matters, in any event.

My best wishes to you.

Rob

Buy-and-Hold Goon to Rob: “You Constantly Present Yourself As the One Wise, Rational, Sensible Person in a World Where All the Rest of Us Are Frightened Little Rabbits.”

by

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

“We want to get along with others. We want to have friends. We want to be popular. We want to see people praising us and linking to us.”

Among the vast number of things that aren’t helping your cause, your smug, condescending attitude ranks right up there. You constantly present yourself as the one wise, rational, sensible person in a world where all the rest of us are frightened little rabbits.

But whatever helps you get through the day.

I don’t doubt that there are many people who feel that way, Anonymous. It is not my intent to make people feel that way.

I believe that we all have inclinations that make us frightened little rabbits. I played the role of frightened little rabbit myself for three years. I knew in May 1999 that Greaney got the number wrong in his study. I had studied safe withdrawal rates on my own before I ever visited his site. So the first thing that I looked for was the valuation adjustment. There was none there. For three years, I kept my mouth shut. It wasn’t until the morning of May 13, 2002, that I worked up the courage to ask my fellow community members: “Do you think we should be considering valuations when we calculate the safe withdrawal rate?” So it would be fair to refer to me as Frightened Little Rabbit #1, right?

Shiller is a frightened little rabbit, no? We discussed just yesterday how back in 1996 he was saying things very much in tune with what I say today and then his prediction didn’t work out and he became a frightened little rabbit and now he just tries to keep it zipped re the controversial stuff. This is the guy that I describe as the most important investing analyst ever to walk Planet Earth. And he’s a frightened little rabbit in the extreme! If Shiller would stop being such a frightened little rabbit, things would go a lot easier for me, no? I have to acknowledge that that is what he is if I am going to make any sense of what has gone down over the past 16 years.

We are all frightened little rabbits. That’s a core reality of stock investing. And we all possess a powerful Get Rich Quick urge within us. That’s a second core reality. It is these two core realities that make stocks a risky asset class. Wade Pfau and I showed in the peer-reviewed research that we co-authored that we can all reduce the risk of stock investing by 70 percent just by not being frightened little rabbits and by working to rein in that Get Rich Quick urge a bit. Pretty darn exciting stuff, right? But how many of the millions of middle-class investors living in the United States today and seeking to put together effective retirement plans even know about the amazing Bennett/Pfau research? It’s a small number. Because the editors of the New York Times are frightened little rabbits. Wade would love to be awarded the Nobel prize he very much deserves for the work he did with me on that study. But he sees that most of us are frightened little rabbits and he worries that that might be so of the editors of the New York Times too and so he keeps his mouth shut for the time-being.

I don’t say that we are all frightened little rabbits because I want to hurt the feelings of my Buy-and-Hold friends, Anonymous. I say it because there is now 37 years of peer-reviewed research showing that this is what they need to hear to make sense of stock investing and to invest effectively for the long run. None of this is personal. I want people to be able to invest more effectively so that they can retire earlier. There’s no way to do that without pointing out that all the humans possess a Get Rich Quick urge and have an inclination to be frightened little rabbits at times. I don’t do it to hurt their feelings. I do it because I believe that it is something they need to know.

I 100 percent respect the right of any who don’t want to hear my message to just tune it out. But I know from long experience that there is a large number who very, very, very much want to hear the message and I believe strongly that they have every right to hear it. If you would just tune it out when it bothers you, all our troubles would go away. You would get what you wanted (freedom from having to hear how you can sometimes be a frightened little rabbit) and those who want to hear the message would get what they want. That’s the answer.

I do believe that you can be a frightened little rabbit at times. I get that it hurts for you to hear that. I believe it all the same. I don’t say that I am any different. I say that I have been a frightened little rabbit at times too. I say that every human has that inclination. I mean no offence. But if you take offence, I think the best thing for you to do would be just to tune out the message that you find offensive while permitting those who have expressed a desire to be able to hear it to make their own decisions about what messages to listen to.

I wish you all the best that this life has to offer a person, my sometimes frightened little rabbit friend.

Rob

Valuation-Informed Indexing #389: Shiller’s Economic Insights Are More Important Than His Investing Insights

by

I’ve posted Entry #389 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Shiller’s Economic Insights Are More Important Than His Investing Insights.

Juicy Excerpt: When Shiller says that valuations matter, he is challenging Adam Smith, the father of Classical Economics. Smith is the fellow who came up with the Rational Man concept. Almost all economic arguments begin with an assumption that people act to pursue their self-interest. If that were so, valuations wouldn’t matter because overvaluation and undervaluation would not exist. It is in the best interest of investors to price stocks properly. Buy-and-Holders get this; this is why they don’t worry about valuations — mispricing cannot be a problem in a world where investors are rational. When Shiller says that valuations matter, he is saying that Adam Smith is wrong, that the decisions of investors (and all other economic actors) are rooted in emotion as often as they are rooted in the rational pursuit of their self-interest.

“In This 1996 Paper, Shiller Brazenly Predicted a Zero Percent Real Total Return Over the Ten-Year Period Starting in January 1996. Instead, the Results Were 6.6% Real Per Year. Unlike You, Shiller Learns From His Mistakes. He Will Never Make Such a Prediction Again.”

by

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

In this 1996 paper Shiller brazenly predicted a zero percent real total return over the ten year period starting in January 1996: http://www.econ.yale.edu//~shiller/data/peratio.html

Instead the results were 6.6% real per year. Now here’s where you blither about him being just a bit off, or just a bit early. You’ll spew some nonsense about how people who screw up like that don’t win Nobel Prizes. But the plain facts are that his ten year (“long term”) prediction was extremely clear, and it was spectacularly wrong.

And unlike you, Shiller learns from his mistakes. He will never make such a prediction again, no matter how much you want him grilled. You’re wasting your time waiting for Shiller to validate your folly. Ain’t gonna happen.

This post is gold in three respects, Anonymous.

One, I much appreciate the link to Shiller’s article from 1996. That’s the sort of thing that we all need to be talking about at every discussion board and blog on the internet. You are quite right in your suggestion that Shiller was at that time expressing himself in ways more akin to how I express myself. I obviously think that he was right on to do that. So I am glad to see confirmation of my impressions of what his research means in the link you present here.

Two, you were 100 percent right in your assessment of how I would react to the fact that Shiller was a little off in his comments. I acknowledge that he was off, there’s no dispute there. But I would say that he was 90 percent right and only 10 percent wrong (and that, unfortunately, that’s the best that any of us can do today, given the state of the world’s knowledge of how stock investing works in the real world). My assessment of Shiller’s “mistake” is precisely what you describe it to be.

Three, i think you are partially (but only partially) correct in your claim that Shiller “will never make such a prediction again.” I think you are right that it is his experience in not seeing these predictions come through that has made him reluctant to repeat them. I think that’s so of Bogle as well, if you want to know the full story. Bogle made a public comment about how future returns would be low because valuations were too high in the early 1990s and was proven as “wrong” re that one as Shiller was proven wrong re this one. And then Bogle himself engaged successfully in market timing in 2000, when he dramatically lowered his stock allocation because of the insanely high stock prices of that time. But this go-around he kept it to himself. He didn’t go sharing his opinions with others because he had had that earlier experience of looking foolish as the result of doing so. I get the sense that Shiller feels the same way. And so, yes, he is reluctant to offer predictions that are as clear and firm today.

But you say that he will “never” do this again. There I think you are wrong. I think that Shiller will return to making effective, research-based predictions in the wake of the next price crash, when the general public will be 10 times more receptive to his message than it is today. And Bogle will do the same. And everyone else in this field will do the same. That’s my sincere take.

The reality as demonstrated by every sliver of evidence available to us is that short-term timing never, ever, ever works and long-term timing always, always, always works and is always, always, always required for those who want to keep their risk profile roughly stable over time. For so long as prices remain insanely high, those who give public voice to these obvious truths are going to be met with a tsunami of hatred put forward by those desperately trying to retain confidence in the conventional wisdom of the pre-1981 time-period that it is not necessary to practice price discipline (long-term timing) to invest in stocks successfully for the long run.

I wish it wasn’t so. But it’s obviously so. I believe it will change with the next price crash. But we are all just going to have to wait a bit to find out for sure whether it does or not.

It is my strongly held view that Shiller was performing a huge public service by being so clear in the language that he used in the 1996 article. I wish he would speak the same way today. I understand why he is afraid to do so. I am entirely sympathetic to the situation he finds himself in. But I think we all need to hear the clear version of his message that he was happy to provide in the days before you Goons went completely off your rockers. But I think we will get the clear Shiller back again. It’s a question of us as a society sending the right signals. When we want clear Shiller, we will get clear Shiller. In the days following the next price crash, we will be sufficiently shaken up that we will all very much want clear Shiller.

I personally believe that even some of you Goons will be joining the party in those days, as amazing a “prediction” as that might appear to be to you. But we will see, you know?

My best wishes to you, old friend.

Clear-Shiller-Loving Rob

” If the Market Were Efficient, All Gains Would Be Rooted in Economic Realities and Thus All Gains Would Be Good. But, If Valuations Affect Long-Term Returns, as Shiller Showed, Then It Must Be Investor Emotion That Causes Stock Price Changes. If That’s So, Then All Gains Not Supported By the Economic Realities Are Bad Gains, Gains That Hurt Us All in the Long Run. Shiller Changed How We Understand How Stock Investing Works in a Fundamental Way.”

by

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

Well, since you have been sitting out of the market for a couple decades, you don’t have to worry about those “bad” gains.

No. That’s not even a tiny bit true, Anonymous. I have done what I could do to avoid the negative effects of the bad gains. But they have still hurt me in a very serious way.

Stocks were priced at the top of the bubble to provide an annualized long-term return of a negative 1 percent real. I bought IBonds paying 3.5 percent real. So I did good, right? In a way. But had stocks been selling at fair-value prices, I would have been able to purchase an asset class paying an annual return of 6.5 percent real. That would have been a whole big bunch better. That’s almost double the return. I have been hurt in a serious way. Just not as badly as my Buy-and-Hold friends have been hurt.

And of course I have been hurt by all the damage that has been done to our economic system and to our political system as the result of the continued promotion of the Buy-and-Hold strategy. My biggest fear is that the next price crash will push us into the Second Great Depression. How much good do you think my IBonds are going to do me if our economic system collapses or if our political system collapses? I would be willing to take far less in the way of return to be living in a society with a stable economic system and with a stable political system.

The bad gains hurt all of us. Buy-and-Hold is poison. Please don’t think that I am saying that it was intended to be poison. I don’t believe that. I believe that Buy-and-Hold was intended to be a positive. I believe that the vast majority of Buy-and-Holders believe to this day that it is a positive. But I don’t believe that. I believe that it is a huge negative. And I believe that I need to say what I sincerely believe when I post at discussion boards and blogs.

I believe that we all should be saying what we sincerely believe. That’s the American way. The learning experiences that develop when we all say what we sincerely believe enrich us all. I don’t believe that there should even by any controversy re the question as to whether we should all be permitted to post honestly or not.

There IS controversy. Mountains of it. I don’t deny the reality. But I view it as a highly unfortunate reality. I believe that every last one of us would be better off if we all pulled together to insure that the possibility of honest posting re the last 37 years of peer-reviewed research were opened up for every last one of us. My feeble human brain is not even able to imagine any possible downside.

The question that you are raising here is the question that makes Shiller’s 1981 research findings so “revolutionary” (his word). If the market were efficient, all gains would be rooted in economic realities and thus all gains would be good. But, if valuations affect long-term returns, as Shiller showed, then it must be investor emotion that causes stock price changes. If that’s so, then all gains not supported by the economic realities are bad gains, gains that hurt us all in the long run. Shiller changed how we understand how stock investing works in a fundamental way. We used to believe that all stock market gains were good. Now, those of us who believe that his Nobel-prize-winning research is legitimate research know better.

My best wishes to you, dear friend.

Rob

“You Have Never Once Posted an External Link to Any of Those Things. If They Had Happened, the Perpetrator Would Have Been Banned. Instead, Universally, You Were Banned.”

by

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 have never once posted an external link to any of those things. If they had happened, the perpetrator would have been banned. Instead, universally, you were banned.

What would a disinterested bystander conclude after being presented with these undeniable facts?

Emotion plays with people’s minds, Anonymous. I mentioned in a previous post that I wrote in response to a similar comment how O.J. was found innocent at his trial but is widely viewed today as guilty of the crime for which he was charged.

Millions of people have their lives staked on the legitimacy of the Buy-and-Hold strategy. Say that you are a guy who is 60 years old and who has $1 million in his portfolio today. If Shiller is right, that fellow has a true portfolio value of $500,000. Do you think he enjoys hearing that? What our minds don’t want to hear, we block out. This has been going on since the beginning of time.

What happens when that fellow sees $500,000 of his life savings disappear into thin air? Does he send a thank-you note to Saint Jack?

I don’t think he is going to send a thank-you note. I think he is going to be on the look-out for explanations for why he was encouraged to follow an investing strategy that ruined his life.

But we will have to wait a bit to find out for sure how things are going to play out.

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

O.J.-Skeptic Rob