A Rich Life

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

Value Walk.com Article #3 — The Effect of Valuations on the Safe Withdrawal Rate

by

The Value Walk site has posted my article entitled The Retirement Risk Evaluator: Part Two — The Effect of Valuations on the Safe Withdrawal Rate.

Juicy Excerpt: At this valuation level, the safe withdrawal rate drops with increases in the stock allocation, moving from a high of 3.9 at a 20 percent stock allocation to a low of 3.1 at an 80 percent stock allocation. While this result is in accord with the conventional idea that adding stocks to a portfolio increases the risk associated with the portfolio, it does not offer support for the conventional explanation of why this is so. The conventional idea is that stocks are more risky because they provide higher returns (the theory is that investors are being compensated for being willing to take on added risk). The data shows the safe withdrawal rate dropping as the stock allocation goes higher (in cases in which the valuation level is high) because returns being generated are poor! Investors are not rewarded for taking on the added risk that comes with investing heavily in stocks at times of high valuations, according to the Risk Evaluator. They are penalized! We need to begin examining the concept of an Equity Risk Penalty.

Financial Uproar Blog — Rob Bennett: Crazy? Or Crazy Like a Fox?

by

The Financial Uproar blog has posted an article about my efforts to get the errors in the Old School safe withdrawal rate studies corrected entitled Rob Bennett: Crazy? Or Crazy Like a Fox?

Juicy Excerpt #1: I’ve always liked what Rob had to say. He has well thought out opinions about everything he writes. He’s clearly a very intelligent guy. So I decided to click through to his blog (A Rich Life) to see what he writes about. Turns out Rob is just a little crazy.

Juicy Excerpt #2: Anyone who pisses off the establishment piques my interest. Nothing ever worth accomplishing was ever achieved without bucking conventional thinking. I started reading more into Rob’s archives. Rob is doing his best impression of Galileo or Bill Gates, except his cause is the withdrawal rate on retirement calculators.

Juicy Excerpt #3: I do have to give Rob credit for writing stuff that no one else is writing about…. Maybe the problem is that Rob is so intelligent that what he says goes right over my head. Or, maybe he’s batshit insane. I honestly don’t know. What I do know is that the world of personal finance blogging needs more Rob Bennetts. He’s passionate. He’s intelligent. He’s writing things that go against the grain. I’d much rather read one of Rob’s posts than another piece on emergency funds or frugal ways to spend the summer. Keep on keeping on my crazy friend.

ValueWalk.com Article #2 — Why We Need a New Type of Retirement Calculator

by

The www.ValueWalk.com site today published my article entitled The Retirement Risk Evaluator: Part One — Why We Need a New Type of Retirement Calculator.

Juicy Excerpt #1: It is true that the historical record does not today contain a returns sequence in which a retirement plan calling for a 4 percent withdrawal failed within 30 years. However, this reality should offer small comfort to retirees who took withdrawals for retirements beginning at the valuation levels that have applied since 1996. From 1900 forward, there have been only two cases in which we have seen the insane levels of overvaluation that applied from January 1996 through September 2008. In each of those two cases, retirements calling for a 4 percent withdrawal came within a whisker of falling. The fact that 4 percent withdrawals have come close to failing in both of the two cases in which they were attempted for retirements beginning at times of high valuations shows not that this withdrawal rate is safe in these circumstances but that it is risky in these circumstances.

Juicy Excerpt #2: The studies and calculators have not been fixed because fixing them would require a widespread public acknowledgment of the flaws of the popular Buy-and-Hold model for understanding how stock investing works. Buy-and-Hold was developed at a time of widespread confidence in the Efficient Market Theory, which posits that stocks are always priced more or less properly. Yale Professor Robert Shiller’s 1981 research showing that valuations affect long-term return challenges this belief (if stocks were always priced properly, the concept of overvaluation would be meaningless and valuations could not predict long-term returns). From 1981 through today, we have been living through a transition period in which the experts’ confidence in the Buy-and-Hold Model has been greatly diminished but in which most experts have felt too cowed by the continued popularity of Buy-and-Hold to develop alternative models more in accord with our new understanding of the message of the historical data.

Daily Caller Article #4 — Facts Don’t Matter

by

I’ve authored Article #4 for the Daily Caller site. It’s entitled Facts Don’t Matter.

Juicy Excerpt: We all need to let it in that a lot of our beliefs about current developments are more rooted in an effort to justify our preexisting biases than they are informed and objective assessments of reality. Conservatives and liberals have “explained” the economic crisis primarily by filtering developments through their biases about the ineffectiveness of government (when it comes to conservatives) and the greed of bankers (when it comes to liberals). There’s no conventional political point pressed by placing the primary blame where I think it belongs — on the overvalued stock market of the late 1990s and the loss of wealth that took place with its inevitable collapse. A positive way to spin the Boston Globe article is to see that there may be solutions to our problems that we do not yet recognize because we are too caught up in efforts to put new problems into old pigeonholes.

What the Stock Investing Experts Don’t Want You to Know

by

I recently posted a Guest Blog Entry at the Future Storm blog. It’s entitled What the Stock Investing Experts Don’t Want You to Know.

Juicy Excerpt: The experts are experts in selling first, second, third and fourth. They don’t tell us what we need to know about stocks but only what we want to know about stocks. We all wanted to think that those insane prices could continue indefinitely. That was of course a hopeless dream. But the experts did not want to be the ones to let us know. They wanted us to like them. They wanted to complete the sale.

Investing: The New Rules #11 — Why Can’t Buying Stocks Be More Like Buying Peanut Butter?

by

I’ve posted Entry #11 in the Investing: The New Rules column at the Death by 1,000 Papercuts site. It’s called Determining Stock Value Using P/E10 and asks why buying stocks cannot be more like buying peanut butter.

Juicy Excerpt: When you pay $14 for each dollar of annual earnings, it will take 14 years for you to break even on the investment. Once you reach the break-even point, every dollar of earnings generated from that point forward is pure profit. From the break-even point forward, your gains just grow bigger and bigger and bigger. An index fund with a P/E10 of 14 represents a very good deal indeed. Buying into value propositions like that will in time make you rich.

ValueWalk.com Article #1 — The Stock-Return Predictor

by

I recently authored a Guest Blog Entry posted at the ValueWalk.com site. It is entitled The Stock-Return Predictor.

Juicy Excerpt #1: Could it be that the price that the market is trying to tell us is the true market price is the nominal market price as adjusted for the effect of overvaluation or undervaluation? The market generates the P/E10 figure as much as it does the nominal market price. Perhaps all the confusion over whether the market is efficient or not, and if not, why not, stems from a failure to appreciate that the market is reporting the true market price in two steps.

Juicy Excerpt #2: The suggestion here is that the only thing that has been keeping us from enjoying an efficient market is the insistence of the believers in the efficient market theory that market timing is not needed for the market to become efficient. Markets in which investors do not change their stock allocations in response to big valuation shifts cannot achieve efficiency because valuations affect long-term returns and it is irrational for investors to ignore this reality when setting their stock allocations. The market is not automatically efficient. But investors can make it efficient if they are willing to change their stock allocations in response to valuation shifts.

Daily Caller Article #3 — The Economic Crisis Is Trying to Tell Us Something (and We’re Not Listening)

by

I recently published my third opinion piece at the Daily Caller site. It’s entitled The Economic Crisis Is Trying to Tell Us Something (and We’re Not Listening).

Juicy Except: The economic crisis is trying to tell us something. We need to change how we think about economics and about investing. It would have been nice if we could have learned this lesson the easy way. But lots of people have tried in recent years to get the word out and have been ignored. So the reality principle came to assert itself in this other way.

Investing: The New Rules #10 — The Monster That Ate the U.S. Economy

by

I’ve posted Entry #10 for my Investing: The New Rules column at the Death by 1,000 Papercuts site. It’s entitled The Monster That Ate the U.S. Economy.

Juicy Excerpt: Consider the alcoholic. He ruins his health. He loses his job. His money is washed down the drain. His wife walks out on him. His kids cannot stand him. Was there ever a moment in which he formed a deliberate intent to cause all this self-destruction? Of course not. The fellow was feeling a little down, he took a few extra drinks for the temporary comfort they brought him and then over time it became a habit. So it is with Buy-and-Hold and our economic crisis. No one planned to let stocks get overvalued by $12 trillion. The level of overvaluation that was certain to crash our economy just sort of snuck up on us, you know? These things happen from time to time down here in the Valley of Tears.

Financial Samurai: “How Come I Continue to Not Understand What the Debate Is About?”

by

Yesterday’s blog entry set forth the text of a comment put to this blog by the author of the Financial Samurai blog. Set forth below is a follow-up comment that Sam put to a different blog entry thread, the thread relating to the blog entry called “We Don’t Want to Know What Works, We Want to Hear What Makes Us Feel Good.” Below that is the text of my response.

Sam:

How come I continue to not understand what the debate is about? Seems like nobody else can either, which is why there are no comments?

Rob:

Thanks again for helping out, Sam. You are a smart guy and you ask questions that get to the heart of things.

Say that you lived in pre-Civil Way days and say that you opposed slavery. Say that you noticed what happened to other people who spoke out against slavery. They were beat up. They were turned down for jobs for which they were well-qualified. Their families were shunned. All this sort of thing. Would you conclude that it was the better thing to speak out against slavery or to keep your mouth shut?

To be able to function, societies need to develop Social Taboos. We think of our society as an open society and we indeed are more open than most. But no society is totally open. A society that was totally open would collapse. There are things that cannot be said in our society and in all societies.

For a long time now, one of the things that could not be said in our society is that Buy-and-Hold Investing does not work. The question is of huge importance. Millions of people have their retirement money invested pursuant to Buy-and-Hold principles. This is why a Social Taboo has developed that says — You Cannot Go There, This Is a Third Rail. This taboo was needed (or at least we as a society came to believe that it was needed) for social stability.

The Social Taboo has outlived its usefulness. Today, it is the unwillingness of many to question Buy-and-Hold that is causing social instability. The promotion of Buy-and-Hold is the primary cause of the economic crisis. If people could learn about Valuation-Informed Indexing, we could get out of the economic crisis and we could enter The Golden Age of Middle-Class Investing. It’s a win/win/win, with no possible downside.

So why don’t we make the shift?

There have been thousands of books written promoting Buy-and-Hold. Academics have produced thousands of studies. There are hundreds of blogs that promote Buy-and-Hold. Reputations are tied up in retaining a public belief in Buy-and-Hold. And on and on.

We maintain the Social Taboo because pointing out the dangers of Buy-and-Hold is going to cause a huge social upheaval. Just as doing away with slavery caused a huge social upheaval. The people who failed to speak out against slavery were not bad people any more than the people who fail to speak out against Buy-and-Hold are bad people. They had lives to live. We cannot always be taking on every battle. If we did that, we would never get our jobs done or our families fed.

That said, there comes a time when one of these things must be taken on. Please understand that I did not volunteer for this assignment. If it had been up to me, I would have continued writing solely about saving and I would still today be the most popular poster at the Motley Fool site. That’s not the role that the Fates had carved out for me. I was to be the one who would take on the Buy-and-Hold Monster, whether I liked the idea or not. I feel into all this with zero desire on my part to walk this road.

It had to be someone, eh? Someone has to do it, Sam, We need to make this transition. Buy-and-Hold was a mistake. It can be reformed into something wonderful and all the people who promoted Buy-and-Hold can have their reputations saved by us all pointing out that we wouldn’t have that something something wonderful if it had not been for the amazing work done by the Buy-and-Holders, who laid the foundation for the Second Draft approach, the approach that actually works. But we MUST make this transition if our economic and political systems are to survive. For us to continue to promote Buy-and-Hold today is for us to commit national suicide, Sam. I can work through this step by step and show you why this is so with numbers.

I am very much aware of the need not to tear our social fabric apart making this transition. This is why you always hear me singing the praises of Bogle and Fama and Malkiel and all the other pioneers. We need to applaud the good work they have done while also moving onto a better path for the future.

I need some help in pulling this off successfully! That’s what it all comes down to,. I know what needs to be done. There is not one person who loses out from this. It is just all winners, all big winners. But one person cannot make this happen. It is a community project. I need at least a small number of responsible and loving people to step forward and then all the rest will just sort of go. Once people see that it really is going to happen, everyone will be pitching in and we will be picking up steam. The next thing you know we will be meeting with Bogle and he will be making the speech he needs to make and we all (including Bogle, to be sure!) will be heroes!

We are trying to move humanity forward, Sam. The Buy-and-Holders were trying to do a wonderful thing. The root ideas were gold. They made a mistake. This happens from time to time with the humans. Perhaps you’ve noticed. If we fix that mistake, we all get to learn how to invest far more effectively than we ever have before. We all get higher returns at less risk and we all achieve financial freedom years sooner. We all have wildly successful blogs.

The rub is the three words “I” and “Was” and “Wrong.” There is no way that a group of people can make a mistake that causes this much human misery and then just cover it up. The Three Magic Words must be said. It is the magic that comes from the voicing of those three words that open the door to all the good stuff. So long as there are millions of people trying to pretend that Buy-and-Hold can work, they are not open to be learning about what really does work. Buy-and-Hold is today sucking all the oxygen out of the room. We need to let it die.

That’s why you don’t understand, Sam. You can’t permit yourself to understand until you are ready to act. Once you (and a small number of others) act, it’s one good thing after good thing after good thing and never a negative thing. We are lucky/unlucky enough to be living at a key turning point in U.S. history. We can take things up or we can take things down by the actions we choose re whether to permit honest posting on the Big Fail of Buy-and-Hold or not.

I am voting for taking things up. I could use your help, Sam.

Rob