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

“Which strategy do you think it is that gets the numbers right?”

I think the markets for bonds, cars, apples, houses, and everything else is rational. Assets are priced based on their value to people, and that value may fluctuate.

When the price of apples change, I don’t ascribe that to grocery store emotion. Not do I look for patterns in the past 140 years of apple prices and assume they must repeat. I assume there’s a rational, economic reason for the price change. Maybe more people are eating fruit. Maybe there was a drought. What am I missing?

I agreed with most of what you said in that comment but not quite with 100 percent of what you said, Anonymous.

I agree when you say that “assets are priced based on their value to people and that value may fluctuate.” I don’t agree when you say that “the markets for bonds, cars, apples, houses and everything else is rational.” Prices definitely fluctuate. But not all price changes are rooted in rational causes. Say that you like beanie babies. And the price of a beanie baby is $3. You make it a practice to buy one every month and you are happy with that purchase. But then the price starts heading upward. The price goes to $6. You enjoy your beanie baby habit. So you continue buying at $6. But then the price goes to $12 and then $24 and then $48 and then $96. Should you just say “oh, well, I know that the price for beanie babies must be rational, so I am just going to keep buying”? Should you say: “If the price for a beanie baby goes to $500, I’ll pay $500. I like buying beanie babies. The people who make a living selling beanie babies have said that beanie babies are a great buy at any possible price. So I am just going to ignore price and continue buying”?

For markets to remain rational, there must be some rationality applied to purchasing decisions. I think that you are right that prices are GENERALLY set by a rational process. So, if weather conditions cause apples to become more scarce, the price goes up and the market thereby addresses the scarcity problem. Or, if apples become plentiful, prices go down. I think that what is going on here is that Buy-and-Holders are looking at these rational processes that really do exist and are becoming impressed by them and jumping to the hasty conclusion that prices are ALWAYS rational. That’s the thing that is not so. Prices CAN be rational and markets serve a great purpose in facilitating the process by which rationality is reflected in prices. But prices can also go nuts for emotional reasons. In those cases, great harm can be done unless steps are taken that permit rationality to reassert itself.

You need to go a step beyond just saying “oh, prices are usually rational, there’s nothing to worry about here.” You need to ask yourself WHY prices are usually rational. How is it that the prices of apples and other things are set properly and effectively? It happens through the exchange of information. The price of the apple is marked at the grocery store. Consumers make a mental calculation as to whether apples are “worth it” or not and then decide whether to make a purchase or not. Prices that are set improperly will not stand because the market will punish the owners of stores that set arbitrary prices. The people buying apples act in their own self-interest. They purchase apples when it makes sense to do so and they refrain from purchasing apples when it does not make sense to do so.

For people to act in their self-interest, they need access to information about the purchase they are making. In January 2000, the most likely 10-year annualized return for stocks was a negative 1 percent real. The guaranteed return for TIPS was 4 percent real. Investors who were acting in their self-interest would have lowered their stock allocation and increased their TIPS allocation. Millions of transactions of that nature would have caused the return on TIPS to drop and the return on stocks to increase. So eventually prices would again have been rational and the market would have been working effectively.

But we had a Ban on Honest Posting in effect that kept the market from working as we want it to work. Magazines could have made a lot of money by telling their readers how they could retire so much sooner by taking the simple step of moving a portion of their money from the poor-value-proposition stock class to the strong-value-proposition TIPS class. But the Buy-and-Holders had become insanely emotional by this time (as evidenced in the P/E10 level that caused that negative 1 percent long-term return!). The Buy-and-Holders were going to punish any magazine that published articles helping out the millions of middle-class people seeking to choose what asset class to invest in to finance their retirements.

There were little newsletters that published that sort of information. Shiller published his book in March 2000. But the big magazines stayed away from telling people how they could increase their return by 5 full percentage points real per year for 10 years running. Buy-and-Holders would have been threatening to destroy the careers of any editors who permitted articles helping their readers to run in their publications. Most editors picked up on the vibes, which were not exactly well hidden, and did not what would have helped their readers but what spared their own careers. They ran headlines screaming “Buy-and-Hold!” They pushed more of the Get Rich Quick garbage that caused the problem in the first place rather than the how-to-act-in-your-own-self-interest stuff that we all need if we are to invest effectively and if the market is to price things rationally.

Markets are usually rational. You could say that markets want to be rational. But rationality must never be ASSUMED. For rationality to apply, market participants need access to the information they require to act in their self-interest. Take that information away and you take rationality away. The Buy-and-Holders have taken rationality out of the stock market by ASSUMING that it will always be present and using that assumption to justify engaging in outrageous behavior aimed at insuring that investors do not have access to the information they need to invest effectively. Investors need to know the true safe withdrawal rate at each valuation level. This is essential information. We have seen thousands of our fellow community members express a desire to have access to this information. But the Buy-and-Holders have shut down all efforts to transmit such information widely. So the market has become more and more irrational as the Buy-and-Hold Era has continued.

If it were not for the Ban on Honest Posting, stock market prices would be set rationally. But that’s not the world we live in. We live in a world of death threats and demands for unjustified board bannings and tens of thousands of acts of defamation and demands that academic researchers who do honest work on safe withdrawal rates be fired from their jobs. We live in a world in which Buy-and-Hold has become the dominant investing strategy. We do not live in a rational world in the investing realm today. And so the market is not able to serve its purpose of setting prices rationally at this point in time.

I don’t look for patterns in the past 140 years of stock prices for the purpose of making predictions as to whether they will repeat or not. I look for patterns to determine HOW THE STOCK MARKET WORKS. There are two schools of thought in the academic literature in this field re that question. One is rooted in a premise that the market is efficient. One is rooted in a premise that investor emotion is the dominant factor in the setting of stock prices. The two schools lead to very different strategic recommendations.

If you believe that the market is efficient, Buy-and-Hold is the ideal strategy. If you believe that investor emotion is the dominant factor, Buy-and-Hold is the most dangerous strategy ever concocted by the human mind. I look to the 145 years of historical return data to figure out which school is the correct one. If the market were efficient, we should see prices falling in the pattern of a random walk both in the short term and in the long term. If investor emotion is the dominant factor, we should be seeing a random walk only in the short term and a strong, repeating hill-and-valley pattern in the long run. What we see is a random walk in the short term and a strong, repeating hill-and-valley pattern in the long run. So I subscribe to the Valuation-Informed Indexing school of academic thought.

That’s what I think you are missing, Anonymous. I think you are ASSUMING rationality rather than checking to see if it is really there. I think that’s a dangerous way to proceed. It is investors who impose rationality on the market through their millions of daily investing choices. We keep the emotion of the market to a minimum by acting rationally over and over and over again. To do that, we need to check things out. We need to look at research. We need to talk things over calmly with others looking at research. We need to quantify things. We need to challenge conventional wisdom. We need to put investing experts on the hot seat to determine whether their ideas really hold water or not. We need to question, question, question, question and question some more.

The Buy-and-Holders don’t do that. The Buy-and-Holders ASSUME. They HATE questioning. They want everyone to invest blindly based on research that was published over 50 years ago and to ignore the 36 years of research discrediting those earlier findings. That’s not me. I question. I don’t always get them right. I don’t claim to. But I do aim to always question. That’s my “crime” in the eyes of the Buy-and-Holders.

I was once one of them because I heard some rhetoric in which the Buy-and-Holders CLAIMED to be open to the scientific process for discovering truth and that’s what I believe in and so I went that way. I stopped believing in Buy-and-Hold on the evening (August 27, 2002) when Greaney put forward his first death threat and 200 of my fellow community members endorsed it (50 endorsed a post condemning the death threats). Death threats are not part of the scientific process. Most Buy-and-Holders no longer possess confidence that their ideas re how stock investing works can prevail if they are exposed to the questioning that is a critical part of the scientific process. So I am no longer a Buy-and-Holder. I believe in Valuation-Informed Indexing, the investing strategy for those who still believe in the things that the Buy-and-Holders once believed in but no longer do now that Shiller’s “revolutionary” (his word) research has been awarded a Nobel prize in Economics.

Rationality is not automatic. Rationality has to be provided by the humans. Humans need access to information, preferably in the form of peer-reviewed research, to behave rationally. The Ban on Honest Posting, which has been enforced so brutally by our Buy-and-Hold friends for 15 years running now, is killing us all.

My sincere take.

Rob

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:

It wasn’t a question, Rob. It was reposting a statement made by Dan that highlights some of your nonsense. In fact, you cannot even point to one successful example of anyone using VII.

As to buy and hold, that is just a convenient catch phrase you use as part of your ongoing shtick.

It was not possible for Valuation-Informed Indexing to exist prior to 1981, when Shiller published the peer-reviewed research (for which he was awarded a Nobel prize) providing the piece of the investing puzzle that had been missing until that time (that exercising price discipline when buying stocks is the key to long-term success). And from 1981 through today, the Buy-and-Holders have been brutally abusive in blocking people from learning what the last 36 years of peer-reviewed research says. But we can say that, had we all known in 1870 what we know today, every investor who had ever invested in stocks would have earned far higher returns while taking on only a tiny fraction of the risk that in the real world has always been associated with this asset class because of our regrettable ignorance of the realities. That ain’t bad!

When I use the term “Buy-and-Hold,” I am referring to any strategy in which the investor does not exercise price discipline when buying stocks. A Buy-and-Hold strategy is a strategy in which the investor sticks with the same stock allocation regardless of the price at which stocks as selling at the time, as evidenced by the P/E10 level that applies.

I think it would be fair to say that Buy-and-Hold is an exceedingly counter-intuitive strategy. We all have experience buying lots of things. In every market that has ever existed other than the stock market, we accept that is is absolutely essential to exercise price discipline when making purchases. It is the exercise of price discipline that allows markets to work their magic. If people did not exercise price discipline when buying cars or bananas or sweaters, those markets would collapse. So the natural belief would be that the stock market would collapse if a large number of investors became persuaded that a Buy-and-Hold strategy might work.

That is of course precisely what we have seen happen throughout the history of the market. There have been four times in the history of the stock market for which we have good records of prices in which large numbers of investors have become convinced that a Buy-and-Hold strategy (a strategy in which price considerations are ignored) might work. And we have experienced four economic crises during that time. I don’t think that it’s a coincidence that the four economic crises came about as a result of the huge loss in consumer buying power we saw when stock prices crashed after the promotion of Buy-and-Hold “strategies” pushed them up to obviously unsustainable levels. Our common sense tells us that Get Rich Quick investing strategies are not the answer but in fact are the problem and the entire history of the market confirms that common-sense insight.

The puzzle here is — How did anyone ever come to believe that a Buy-and-Hold strategy might produce good results in the long term?

The answer is that index funds were not widely available until Bogle founded Vanguard in the mid-1970s. Valuation-Informed Indexing only works with index funds. So the strategy that you are finding fault with for not having worked for hundreds of years wasn’t even a practical option for investors until recent years! However, it is of course a completely practical option since the mid-1970s. And the entire historical record shows that, had index funds always been available, Valuation-Informed Indexing would have been BY FAR the best option available to investors going back to the first day on which the market opened for business.

The confusion re whether price discipline is required or not came about because Fama published research in the 1960s showing that short-term timing doesn’t work. Fama did not test long-term timing (price discipline) because index funds did not exist at the time. Soon after Bogle founded Vanguard, Shiller became the first researcher to test long-term timing (price discipline) and the rest is history. Now we know what works and the only remaining task is to get the word out. Unfortunately, Buy-and-Hold came along first and it makes the Buy-and-Holders feel bad to acknowledge having made a mistake back in the days when it was not even possible to perform the tests needed to learn what really works.

There’s one definition of “Buy-and-Hold” in which this strategy becomes the ideal choice. It was from Bogle that I learned the importance of using the peer-reviewed research as a guide to what works. It is by referring to peer-reviewed research that we tap into objective insights not poisoned by our own subjective, emotional predispositions. Had Bogle followed his own advice, he would have incorporated valuations adjustments into every strategic calculation back in 1981, when he learned about Shiller’s “revolutionary” (Shiller’s word) research findings. Had Bogle maintained his belief in the value of peer-reviewed research when the new research was published showing the mistake he had made in earlier days, we would all be Valuation-Informed Indexers today.

What I now refer to as “Valuation-Informed Indexing” I used to refer to as “Buy-and-Hold 2.0” or “The New Buy-and-Hold” because everything in the Valuation-Informed Indexing model comes from the Buy-and-Holders. The only difference between the two models is that Valuation-Informed Indexing incorporates the last 36 years of peer-reviewed research and of course the idea of incorporating new peer-reviewed research into one’s thinking is an idea that I learned about from Bogle. All that Valuation-Informed Indexing is is a fulfillment of Bogle’s original vision for how investing analysis should be conducted!

Of course, Bogle does not follow his original vision today. That’s why we have see the confusion that evidences itself in comments like the ones that you have put to this thread, Sammy. It’s all as simple as simple can be. The stock market works like every other market that ever existed. The confusion stems from the sad reality that we once thought that the stock market was the one big exception and that price discipline was not truly required in only this one odd case. We now know that the stock market is not the one exception, that price discipline is as much required when buying stocks as it is when buying anything else that can be offered for sale. Investors who understand and appreciate this reality are referred to as “Valuation-Informed Indexers’ because those who call themselves “Buy-and-Holders” have not yet been able to let into their consciousness the practical, how-to implications of the last 36 years of peer-reviewed research done in this field.

I hope that helps a small bit, my good friend.

Rob

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

“But there’s a big difference between something being so “at least since 1975? and something being so for the entire history of the stock market.”

The stock market pre-1975 has no relevance to today. Those were horse and buggy days. Stocks were on paper certificates. No internet, hardly any mutual funds, no index funds. The few computers that existed ran on punch cards.

No, I’ll stick with what works now. I’m calling it GPI (Gold-Platinum Indexing.) The peer-reviewed paper discussed in that article was written by a real professor. It has lots of numbers and charts and funny math symbols. So it must be right. Any goons with me? Only takes one to double the number of VII followers.

Rob, when I take over Bogleheads I’ll be sure to mention that the GPI movement started on your site.

Okay, Anonymous.

If I believed that the stock market pre-19775 had no relevance today, I would be a Buy-and-Holder too.

I don’t believe that. I look to the entire market history for guidance re what works.

But I certainly don’t take it personally that you hold a different belief. God made both chocolate ice cream and vanilla ice cream because the earth is inhabited by people who come to have confidence in different sorts of takes on things. It’s always been chocolate for me, man. And I’m right about that one, of course. Chocolate is obviously and truly superior! But if you prefer vanilla, I wish you the best of luck with it all the same and consider you a goofy, sort of mixed-up friend.

Please take good care.

Rob

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 gold to platinum price ratio is at a ten year high:

http://www.marketwatch.com/story/gold-and-platinum-are-giving-the-all-clear-to-stock-market-investors-2017-07-11

The article even mentions Shiller and CAPE:

“Professor Huang found that, at least since 1975, the gold-platinum ratio has had a significantly better track record than the CAPE of forecasting the stock market’s subsequent one- and five-year returns. In fact, he found the gold-platinum ratio to have a superior track record than any of nine other well-known indicators that researchers previously found to have predictive ability.”

Based on this stunning information, I’ve decided to go 100% into stocks. Not only that, today begins my 15 year jihad demanding that all finance boards talk about nothing but this topic. Any advice?

You should do what sounds good to you, Anonymous. It’s your money.

But there’s a big difference between something being so “at least since 1975” and something being so for the entire history of the stock market. Shiller was awarded a Nobel prize in Economics for his “revolutionary” (his word) 1981 research findings. That gives the Valuation-Informed Indexing project a credibility that no other investing advice project possesses today (the key claims of the Buy-and-Hold Model are also supported by Nobel-prize-winning research but Shiller’s 1981 research discredited the research that supports Buy-and-Hold.).

And I’ve never said that finance boards should talk about nothing but Valuation-Informed Indexing. What I say is that those who believe in Buy-and-Hold should post their honest beliefs and that those who believe in Valuation-Informed Indexing should post their honest beliefs. There are today two schools of thought in academia re how stock investing works. That reality should be reflected in the discussions held at every finance site. The problem for 15 years is that many Buy-and-Holders find it unsettling for those who believe in the minority school-of-thought to be heard. But it is financial fraud to present debates in which the claim is made that discussions of the peer-reviewed research are permitted when in reality only discussions of peer-reviewed research supporting the dominant school of thought are permitted and discussions of research supporting the newer, minority school of thought are banned. Those engaging in or supporting such fraudulent acts are obviously responsible for any losses suffered by those who believe the false claims of the site owners that the sites permit honest posting re the peer-reviewed research.

You believe in Buy-and-Hold. I believe in Valuation-Informed Indexing. You have as much right to post honestly as I do. But I also have as much right to post honestly as you do. I don’t advance death threats and demands for unjustified board bannings and tens of thousands of acts of defamation and threats to get academic researchers fired from their jobs to suppress discussions of Buy-and-Hold. And I don’t approve of you engaging in those abusive and criminal tactics to suppress discussions of Valuation-Informed Indexing. So I call you out on your b.s. when I see those sorts of smelly garbage appear before me.

If it is true that valuations affect long-term returns (I believe that it is true — I believe that Shiller merited his Nobel prize and that his powerful work and the powerful work done by hundreds who have come after him are in the process of bringing about a paradigm change in our understanding of how stock investing works in the real world), then the strategic recommendations of the Buy-and-Holders are dangerous. Every investor alive on the planet needs to know that. I don’t tell them that to hurt your feelings. I tell them that because it is simple human decency to protect people from acts of fraud practiced on such a widespread scale when opportunities to do so present themselves.

I hope that helps a small bit.

I naturally wish you all good things.

Rob

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 seem to recall that you felt that Jack Bogle was a bigger con man then Bernie Madoff and that Vanguard funds are basically Ponzi schemes. Do you still hold those views or have you softened your views on those topics?

I haven’t softened my views even a tiny bit. I always make an effort to present a BALANCED view. I think that’s very important.

Say that I was on the Madoff jury. Would I have found him guilty? I don’t feel that I would have had any choice. The guy created fake transaction statements. He was telling his investors that they had profited from transactions that never even took place. That’s as clear a case of fraud as I can imagine.

Bogle’s claims are rooted in peer-reviewed research. I always point out how Shiller was awarded a Noble prize. Well, Fama was too! Buy-and-Hold is rooted in very solid stuff. And the claims that the safe withdrawal rate is always 4 percent follows logically from Fama’s research. If the market is efficient, Buy-and-Hold is the ideal strategy. It logically follows. So there are many important distinctions between what Bogle did and what Madoff did.

Now —

Say that there is an investor who suffers a failed retirement because of the demonstrably false claims made in the Buy-and-Hold retirement studies. I am sitting on the jury. His lawyers points out that there is no valuations adjustment whatsoever in the Buy-and-Hold retirement studies. He points out that Shiller published peer-reviewed research in 1981 showing that valuations affect long-term returns. Yet the errors in the Buy-and-Hold retirement studies were never corrected. He points out that there was a poster at an internet discussion board who pointed out these errors in 2002 and that hundreds of members of the board community said that this was the most exciting discussion they had ever seen appear at this board. He notes that the author of the study with the error in it responded by threatening to kill the family members of any poster who posted honestly on the matter.

Then this discussion goes to a community in which Bogle participates. He sees the same behavior take place in this community — thousands of obviously false claims, threats of physical violence, the usual drill. And Bogle does nothing, Then an academic researcher with a Ph.D. in Economics who has studied the matter in great depth for months says that he is absolutely certain that the Buy-and-Hold retirement studies are in error. He writes to the authors of the Trinity study asking for a correction. A group of internet Goons who cite Bogle as their hero threaten to get this fellow fired from his job if he continues to do honest work and the guy says that he is afraid of what these people could do to him and he relents and issues a few statements that are 100 percent the opposite of scores of statements he had been making for months.

A case of financial fraud as bad as the one led by Madoff? It sure seems so to me. And I of course have only provided a very short sketch of all the ugly stuff that has gone on. I think it would be fair to say that this is the clearest case of financial fraud in the history of the United States, at least as clear as the Madoff case, which is as clear a case of financial fraud as I can imagine.

Which case is worse? The Madoff case affected thousands of people. Very, very, very bad. This one affects MILLIONS of people. Shiller wrote in his book that we would suffer an economic crisis late in the first decade of the new Century if we continued to push Buy-and-Hold so relentlessly. And that economic crisis caused millions of people to lose their jobs. It has been cited as a big reason for the political frictions we have seen on both the left and the right in recent years.

The Bogle fraud has done us more harm than the Madoff fraud. By a factor of 500. It’s not even possible to compare the two cases of fraud. The Buy-and-Hold fraud is far, far, worse.

Flipping back to the other side of the story again, we wouldn’t have Valuation-Informed Indexing — which reduces the risk of stock investing by 70 percent, according to the peer-reviewed research that I co-authored with Wade Pfau — had Buy-and-Hold not come before it. All that Valuation-Informed Indexing is is Buy-and-Hold with the one error that has been discovered in it fixed. I have never seen any evidence that the Buy-and-Holders were intending to commit fraud when they started out. They did have peer-reviewed research supporting their claims from 1965 through 1981. All of the Buy-and-Holders are good and smart people. It’s hard not to have sympathy for their positions. A good number of the Buy-and-Holders have even put their necks on the line by trying in subtle ways to rein in you Goons. They have not been willing to stick to it long enough to get the job done. But it is not hard to sympathize with people who went along with an act of financial fraud because they had to feed their families and knew that their ability to do so would be destroyed if they insisted on their right to do honest work in this field.

Ultimately we will have to decide as a society which act of fraud was worse. I would say that the number of lives destroyed by Buy-and-Hold was far, far, far greater. But the circumstances in which the Buy-and-Hold fraud took place are far more sympathetic. I see it as my job to report the story fairly and completely and honestly and charitably so that the people of the United States can come to understand exactly what happened and why and what we need to do to be certain that something like this never, ever happens again. That’s why I solder on.

We are going to need a full account of what caused this economic crisis when we see it deepen in the days following the next crash. I want to say everything that I can possibly say that is supportive of my Buy-and-Hold friends without ever crossing the line and engaging myself in criminal behavior. There are lots of good things that can be said about my Buy-and-Hold friends without crossing that line. I intend to say those things. There is nothing positive that can be said about failing to speak out when one discovers an important error in a study that one knows people are using to plan their retirements. So I hope to be able to say when I am called to testify that I have for at least 15 years been 100 percent unwilling to engage in dishonest behavior re these matters regardless of what threats were made to influence me to do so.

I hope that helps a small bit, Zippy.

Rob