A Rich Life

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

Scott Burns Complains About Low IBond Returns
That He Himself Helped Bring About

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Scott Burns is not pleased with the zero return being paid by IBonds.

Juicy Excerpt: By having a premium of zero over inflation, the Treasury is sending a simple message to savers: Drop dead.

Scott needs to spend some time studying The Stock-Return Predictor.

IBonds obviously are not offering as good a deal today as they were back when investor emotions re stocks were more out-of-control than they are today. In relative terms, though, they are still offering a strong value proposition.

The most-likely annualized 10-year return on stocks is 1.55 percent real. That’s for an asset class that on the three earlier occasions it was at these price levels suffered an average price drop of 67 percent. Is increasing your return by 1.55 percent per year worth taking a risk of a 67 percent loss? Not in this boy’s estimation, at least not for a large portion of one’s portfolio.

You also need to consider that stocks provide a most-likely annualized 10-year return of 6.3 percent real if prices drop to fair-value levels. So those holding zero-return IBonds are setting themselves up for far higher returns a bit down the road while those holding stocks are setting themselves up for permanenet losses, losses that will grow over the years as the compounding returns effect kicks in.

It certainly can be argued that a zero percent return for IBonds is “irrational.” But so is a 1.55 percent return for stocks. The root problem is that the investors choosing between these asset classes have been making irrational choices ever since stocks went to wildly overpriced valuation levels.

Investors’ emotional take on stocks dominates decision-making in InvestoWorld. When the stock market is priced as absurdly as it is today, other asset classes feel the effect. Today’s IBond return is nuts. But, compared to today’s likely stock return, it’s great. Smart investors are looking at the relative value proposition and their demand for IBonds has brought the return down to a level that appears absurd when considered in isolation but that makes a good bit of sense when viewed in comparison to the return now available from stocks.

If the “experts” gave us the straight story re how valuations affect long-term stock returns, most investors would have abandoned stocks when the long-term return went negative back at the top of the bubble. That would have brought the price down to reasonable levels and we would as a result be enjoying good long-term returns on stocks today. In the world in which we actually live, we have to figure out the truth about stocks for ourselves in this crazy way in which we see prices go down a bit and then hold stable or go up a bit, and then eventually go down a bit more. All that the “experts” accomplish by ignoring the message of the historical data is to stretch out a painful process of price adjustment.

Investors do not have the same confidence in stocks today that they had back at the top of the bubble. That’s a good thing. That’s a step in the right direction. That’s one of the reasons why the return on IBonds is so low. Investors have been gradually moving from stocks to safer asset classes offering a better long-term deal, and the increased demand for those asset classes brings down the return they need to offer to attract money to them. Zero-return IBonds are not entirely irrational; there’s an element of rationality mixed in with the overall irrationality that governs all investing decisions for so long as stock prices remain where they are today.

I certainly would not describe today’s IBond return as exciting. The informed investor was loading up on IBonds back when they were paying a return of over 3 percent real and stocks were offering an even worse deal than they are today. However, IBonds are still a good bit more attractive than stocks.

That’s irrational, and I would like to see that situation change; stocks are the riskier asset class and stocks are the asset class that should be offering the better value proposition for investors willing to take on reasonable amounts of risk. To get to where we all want to be, we all need to get about the business of accepting that the absurdly oversized returns handed out to stock investors of the late 1990s were borrowed from the returns available for stock investors of today and that it is only by acknowledging that reality that we can get to a place where stocks will once again offer a superior long-term value proposition to even zero-return IBonds.

It is the irrationality of Passive Investing enthusiasts (I think it would be fair to describe Scott Burns as such a one) that is causing the problem. When Scott Burns is looking around for people to blame for the unfortunate message being delivered to savers today (zero-return IBonds do indeed send a discouraging message) he should look first at the face of the man in the bathroom mirror.

Today’s Passion: The article entitled IBonds are New and Improved Cash argues that cash is not only for sissies anymore.

We’re Not Feeling as Fearful As We Think We Are

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Many investors acknowledge that we all were feeling greedy back in the 1990s. But now that stocks have performed poorly for over eight years, those days are behind us. The problem today is that, if things keep going like they have been going lately, it is our feelings of fear that will be getting out of control.

Right?

Not right.

Today’s P/E10 value is 25. We are now at one of the highest valuation levels experienced in the history of the U.S. market. Stocks have never given a strong long-term performance starting from these valuation levels. We are not today living in times of extreme fear or even moderate fear. We are today living in times of extreme greed.

It doesn’t feel that way because things were so out of control in the late 1990s that even eight years of poor performance have not been enough to get us back to reasonable price levels. The P/E10 level in the month before The Great Crash of 1929 was 33. We were at 44 in January 2000. Today we are at 25. Yes, we are moving in the right direction. No, we are not even close to where we need to be for stocks to begin offering a strong long-term value proposition once again.

This came up in the interview that Fortune recently did with Warren Buffett.

Here’s what the interviewer said:

“By your rule, now seems like a good time to be greedy. People are pretty fearful.”

Here’s what Buffet said:

“You’re right. They are going in that direction. That’s why stocks are cheaper. Stocks are a better buy today than they were a year ago. Or three years ago.”

There’s not one word in Buffett’s response that is incorrect. Stocks are a better buy than they were a year ago or three years ago. Stock prices are moving in the right direction.

But the interviewer is wrong to say that “now seems like a good time to be greedy” and “people are pretty fearful.”

If people were truly fearful, they would lower their stock allocations. There would be massive sales of stock. That would bring prices lower. It is not right to say that people are fearful at a time when stock prices are at one of the highest price levels in history.

There’s a bit of fear mixed in with the greed today, that’s all; the greed is no longer a pure greed. We are in the process of moving from a greed-based market to a fear-based market. We’ve got a long way to go. We have so far traveled perhaps halfway to completion of the journey.

I wish that Buffett had corrected the misimpression voiced by the interviewer. I wish that he had said: “No, that’s not right, prices are scary today, those who have not yet lowered their stock allocations need to do so immediately.” The sooner that message gets out, the better.

The interviewer’s comments are not fearful comments. They are greedy comments. It is greedy to expect strong long-term stock returns starting from these price levels. When we are truly feeling fearful, interviewers won’t be making comments like that. When we are truly feeling fearful, interviewers will be mocking anyone who says that stocks can ever offer a strong long-term value proposition. That’s when the long-term value proposition will be the strongest it can be.

Don’t be fooled by false fearfulness.

Become truly fearful.

Make greed fun again.

Today’s Passion: The article entitled Woody Allan’s Take on the Efficient Market Theory argues that we lie to ourselves about how stock investing works because — well, we need the eggs!

Podcast #46 — Investing Is a Science (When It Isn’t Science Fiction)

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I’ve added Podcast #46 to the “RobCasts” section of the site. It’s called Investing Is a Science (When It Isn’t Science Fiction).

The idea of making the study of investing more scientific is a good one. The idea that we’ve already got it all figured out is a bad one.

Programming Note: I am taking January off to concentrate on non-blog projects. A Rich Life returns on Monday, February 2, 2009.

Hate Is Not a Sound Long-Term Investing Strategy

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I’ve seen loyalty. I’ve seen deception. I’ve seen friendship. I’ve seen intimidation. I’ve seen responsibility. I’ve seen willful ignorance. I’ve seen generosity. I’ve seen arrogance. I’ve seen courage. I’ve seen cowardice.

And that’s just on internet discussion boards dealing with the topic of stock investing!

It’s humans who buy stocks. That rarely noted fact explains why the conventional advice re how to invest for the long term does not work. The conventional advice is rooted in an assumption that investing is primarily a rational endeavor. Humans are emotional. Since it is humans who buy and sell stocks, it is not possible for investing ever to become primarily a rational endeavor, no matter how much some ivory-tower eggheads might long for it to be so.

There are important things to study and there are easy things to study. Emotions are hard. Many stock analysts have elected to study only those aspects of the stock-investing project that are easy to study. We possess little understanding today of how our emotions save us or ruin us. We need to learn more.

Discussion boards are the perfect communications medium for studying the human side of the investing project. Many of the people who post to boards are human. Not all, to be sure. Humans are making new inroads at discussion boards all the time, however. I have heard reports that at some of the better administered boards, humans now comprise a majority.

You’ve heard that fear and greed are the two most important investing emotions. Greed prevails in bull markets, fear prevails in bear markets. What emotion do you get when a major bull is preparing itself for its journey to Bull Heaven and a major bear is still just learning how to walk and say “goo-goo-ga–ga”? What emotion pops up when greed is in the early stages of the process of being transformed into fear?

Anger.

In the worst cases, hate.

What do today’s stock investors have to feel angry or hateful about? Plenty. Today’s P/E10 value is a bit under 28. The fair-value P/E10 is 14. If stock prices were to return to reasonable levels (it’s been known to happen), those going with high stock allocations today would see their financial freedom dreams go “poof!”. You would cry too if it happened to you.

The anger today is not directed at a price drop. Wer’e not there yet. The anger today is directed at explanations of why the economic realities require a price drop or to mentions of the historical stock-return data, which shows that big price drops have always been the result when we have found ourselves in similar circumstances at earlier times in history.

The point of today’s anger is to scare away reality. You can’t scare away reality. But it’s just the sort of thing that those darned humans would want to take a stab at all the same!

I hope that not everyone is feeling angry or hateful. If everyone is feeling angry or hateful, there is no one left to read this blog, which is guaranteed to be at all times 100 percent anger-free.

My strong sense is that most of today’s investors are experiencing mostly healthy emotions and would like to gain a better sense of how stock investing really works before it is too late for the new information to help them avoid the pain of the big price drop. Those investors are unsure of their footing, however, while the investors feeling anger and hate are intense in their conviction that discussion of the realities must be forbidden. So the investor emotions that matter today are the emotions of anger and hate. It is those who feel anger and hate who control the agenda, not just in the Financial Freedom Community but in the Big Bad Outside World too.

Hate is not a sound long-term investing strategy. Don’t let those feeling the most negative emotions block you from learning what you need to learn to become a successful long-term stock investor. Respond to anger with humor. Confront hate with compassion and concern (both for those who feel the anger and hate and for those at whom the anger and hate is directed).

Please try not to be too discouraged. I’ve sneaked a quick look at the last page of our little drama. Love conquers all in the end.

No, honestly!

Unmentionables

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Scott Burns puts forward tantalizing hints but doesn’t dare to tell the full story.

William Bernstein took a chance by stating it pretty darn clearly one time and is not inclined to take a bigger one by stating it pretty darn clearly a second time.

John Bogle says enough to permit those who want to know the realities figure them out for themselves, but holds back enough to permit those who do not to remain in the temporary comfort of the darkness.

Jonathan Clements knows enough to see that there is a big story out there, but elects to spend his time pursuing less controversial topics.

I mentioned in yesterday’s blog entry that: “We don’t want it shoved in our faces just how bad things have gotten, just how irresponsible we have been in bidding up stock prices to such absurd levels in recent years.”

It’s a big story that as of yet has not been widely reported. I don’t mean the fact that stocks are overvalued. That’s been written about some. I mean how upset it makes people to think about it, and how much anger some experience when they hear it discussed in a clear and direct and understandable and undeniable way.

The conventional thinking on stocks is that stock investing is primarily a rational endeavor. I challenge anyone to devote 15 minutes to reading the transcript of The Great Safe Withdrawal Rate Debate and to continue to maintain afterwards that stock investing is primarily a rational endeavor. The debate transcript shows that stock investing is primarily an emotional endeavor. I mean, come on.

What are we going to do about it?

I propose that we learn more about it.

Learning that stock investing is primarily an emotional endeavor changes everything. It compels a different starting point for the analysis of every possible investing question. Change all of the starting points, and you change all of the end points.

It would not be overstating things all that much to say that everything we thought we knew five years ago about investing has turned out to be at least a little bit wrong. We’ve got some challenging work ahead of us. Some exciting opportunities to make the world a better place now appear before us too.

Burns, Bernstein, Bogle and Clements are four of the best. Each of them has played a role in the development of the insights we have generated during The Great Safe Withdrawal Rate Debate. Thanks, guys!

Each of them has pulled back from exploring in depth those insights on his own. Way to drop the ball, guys!

I have hopes that we are not going to drop the ball. I have hopes that we are going to hold onto the ball for a run all the way into the end zone.

If it were easy to tell the full truth about stock investing, Burns, Bernstein. Bogle and Clements would have already done it. It’s not easy. We’re going to do it anyway. That’s why we set up this community in the first place, is it not? That’s the job we have taken on, is it not?

The first step is to figure out why Burns, Bernstein, Bogle and Clements have shied away from the task. What are they afraid is going to happen if they tell it straight, with no chaser?

My sense is that they are afraid that telling the stock investing story straight and full and true would make make their readers angry at them. It’s one thing to talk about how stocks work. It’s a very different thing to talk about how people work, especially when part of the story that needs to be told relates to how people sometimes mess up.

People got us to the P/E10 level that we are at today. Isn’t it just like those darn humans to do something like that? Look into a problem deeply enough, and it always seems to turn out that it’s the humans who are at the center of the mess-up!

The humans messed up in a big way. That’s the big Unmentionable in the field of investing analysis today. The human factors are the Unmentionables because it’s humans who buy the newspapers and attend the speeches and subscribe to the newsletters and all that sort of thing.

We all want our fellow humans to like us, and, if we start telling them that they messed up, they might not. So many of the best investing analysts have elected not to say too much about it and to be less than clear and direct in what little they do say.

We need to be charitable. We need to be balanced. We need to be diplomatic. We need to tell the story, though. We need to mention the Unmentionables. It’s an important part of the investing story. The story as a whole does not make sense unless this aspect of it is addressed in some depth.

You might want to click on your seat-belt. It promises to be a rocky ride. We’re going to be doing some truth-telling around this place in the days and weeks and months and years to come.

Our mission, if we elect to accept it (and we have so elected) is — To tell the part of the stock investing story that Burns and Bernstein and Bogle and Clements have never quite possessed the courage to tell.

Wish me — I mean us! — luck!

The Community Toilet Is Overflowing

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I drove my mother to Atlantic City on Saturday. I don’t gamble (except in poker games with friends) So I spent much of the day sitting on a bench on the boardwalk writing articles for the web site.

One of them is entitled “Investor Emotions.” The article attempts to correlate the emotion with the greatest influence on investor psychology at a given time with the P/E10 value that applies at that time. It’s highly tentative stuff. But it’s potentially highly significant stuff too.

Our most important finding of recent years is that investing is primarily an emotional endeavor and only secondarily a rational endeavor. Most investing guides focus on the rational side of the equation. So most investing guides miss the most important part of the story. Our job is to address the issues that have been widely overlooked and that are thus not yet well-understood.

When the job is done right, there are great rewards. I believe that we will be able to help many people win financial freedom many years sooner than would otherwise have been possible.

There’s a certain Yuckiness Factor that goes with the job, however.

There was a time in my life when I was visiting a shrink on a weekly basis. I recall telling him about a dream in which a toilet was overflowing and I was trying to take care of it but the water level just kept rising and eventually there was water and feces flowing all over the floor and there was nothing I could do. He told me that this was the result of my efforts to examine the questions that I was talking over with him. I was making an effort to look at the dark stuff that people ordinarily don’t like to think about but that we all know is there and must be dealt with all the same.

That’s what I think has been going on at our Retire Early boards in recent years. We all know that the stuff being put forward by the Greaney Goons is sewage. We all hate it. In ordinary circumstances, we wouldn’t remain long at a party that Greaney Goons were permitted to crash. We would ask the host to take care of the problem, and, if he failed to do so, we would walk. Most of us view our self-respect as being of greater value than whatever enjoyment we get from attending even the swingingest party.

Most of us view our self-respect as being of greater value than whatever enjoyment we get from participating at even the swingingest discussion-board too. So why the heck do we tolerate the Goons? Why have we permitted them to continue their Campaign of Terror against us for over four years now? Why is it that we fail to take action when it is brought to our attention that the community toilet is overflowing?

It’s because of the emotions that the longest and strongest bull market in the history of the United States has caused us to feel in response to discussions of the realities of stock investing. We all know on some level of consciousness that, when prices get out of hand, they must at some point return to reasonable levels. We don’t enjoy contemplating this reality, however. We certainly don’t like looking at the numbers. We don’t want it shoved in our faces just how bad things have gotten, just how irresponsible we have been in bidding up stock prices to such absurd levels in recent years. We don’t want to think about how many people we have hurt by doing this, and we especially don’t want to think about how much we have hurt ourselves.

We need to think about it, though. Broken toilets must be repaired. Broken stock markets must be repaired too. Not thinking about the problem doesn’t solve it. Not thinking about the problem causes the problem to get worse.

We need to get about the business of fixing the toilet. Actually, there is more than one toilet that we need to fix. We need to fix the community toilet. We also need to fix the Big Bad Outside World’s stock-market toilet (or at least make the necessary change in our stock allocations so that the continued overflowing of that toilet doesn’t do us more harm).

We are looking at some dirty and unpleasant-smelling things. Not because we enjoy looking at dirty and unpleasant-smelling things. We are doing this for a bright and good and healthy reason. We are doing it because we want to win financial freedom early in life and because that requires investing effectively for the long term and because that in turn involves dealing with human emotions, which are the driver of changes in the prices paid for our stocks.

Plumbers get their hands dirty from time to time. That’s a fact. But plumbers do work that very much needs to be done. Plumbers are a good people, a kind people, a generous people.

We are a community of plumbers.

So let’s plumb!

Stocks Are Not as Risky As You Think

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You often hear stocks described as a risky asset class. What people are getting at when they say that is that stock prices at some times go dramatically up and at other times go dramatically down. Most observations that stocks are risky are more properly viewed as observations that stock prices are volatile.

It’s not the same thing.

The risk that you are worried about as a middle-class investor seeking financial freedom early in life is that investing in stocks will cause you to lose money and thereby not make the progress on attaining your financial freedom goals that you were hoping to make. If you can invest in stocks in a way that provides a good deal of protection against the possibility that you will lose money, you have transformed the stock investment class from a risky one to a non-risky one.

You can do this.

Please take a quick look at The Return Predictor (click the button with that title on the left side of this page). The Predictor tells us that the most likely 10-year annualized real return for a stock purchase made today is 1.3 percent. That number suggests that there is a good deal of risk attached to buying stocks at today’s prices.

Stocks are not going to provide an even 1.3 percent return for 10 years in a row. There will be some years in which the return will be a good deal better than that. That obviously means that there will also be years in which the return will be a good deal worse than that. There could be some awful years in a 10-year patch of returns generating an overall return of only 1.3 percent (and it is possible that the 10-year return could drop as low as a negative 4.7 percent).

So stocks today are risky, no?

No.

Look at the Predictor’s number for the most likely 30-year return — 5.4 percent. That’s not bad at all. That’s more than double what you can get today from Treasury Inflation-Protected Securities (TIPS).

So stocks are not risky today then, right?

Not right.

Stocks are both risky and non-risky today. The level of risk depends on the mix of purposes to which you will be putting the money you are investing in stocks.

If the only possible purpose to which you will put the money is to finance your old-age retirement, and you are today decades away from retirement, it’s the 30-year number that matters. For you, stocks are not too risky today, despite their high valuations.

The flaw in most of the conventional investing advice is the assumption that most middle-class workers invest only to finance their old-age retirements. We all do indeed invest for that purpose. For most of us, though, the money in our portfolios serves multiple purposes. Perhaps we want to have money available to help our daughter get through college. Perhaps we want to have money available to start a business if our job turns sour. Perhaps we like the idea of having a healthy amount of savings because of the feeling of financial security it provides.

If those sorts of purposes apply for you, then looking just at the 30-year return number does not do the job for you. You should look at the 30-year number because you are investing partly to finance your retirement and the 30-year number tells you something important about how stocks can help you to attain your retirement financing goals. But you need to look at the 10-year number and the 20-year number too, if you are investing partly to advance non-retirement purposes.

For most of us, it is not too risky to direct a small percentage of our portfolio to stocks today because it would not cause us panic to see a large percentage loss in an investment class that comprises only a small percentage of our portfolio. For most of us, it is too risky to direct a large percentage of our portfolio to stocks today because it would cause us panic to see a large percentage loss in an investment class that comprises a large percentage of our portfolio.

Stocks are risky and non-risky at the same time. They are non-risky when held in small amounts, and the risk grows as you allocate more of your portfolio to stocks. It is your personal financial circumstances and life goals that determine how much of your portfolio you can direct to stocks before they become too risky.

You are in control. That’s why I say that stocks are less risky than you think. It’s not really a risk if you control it. Just lower your stock allocation to the point at which stocks are no longer risky for you and the risk attached to stock ownership for you has gone “poof!”

Stocks are a high-risk investment class for others. Stocks do not need to be a high-risk investment class for you. You are in control. Say “no” to high-risk stocks. Don’t buy stocks to the point at which you transform what should be a low-risk or moderate-risk asset class into a high-risk one.

In Defense of Mary Poppins

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This time The Little Stinkers have gone too far.

They are now directing their Smear Campaigns against Mary Poppins!

Here is a sampling of community comments put forward during recent discussions of The Poppins Matter:

JohnYaker: As far as John Greaney’s article referenced in the original post, I found it cruelly mean-spirited.

Gregory: You’re right, the article about Rob is very mean-spirited. It’s too bad the author feels the need to do this sort of thing.

OUJohnNasr: That link is mean-spirited, hateful, degrading, but above all, it’s true. Rob, if you are reading this, please do the right thing and get back in the work force. Leaving a $100,000+ a year job at the age of 43 was financial suicide considering the size of your nest egg.

Radioman: When, how and if to retire are determined solely by individual circumstances.

JohnYaker: The article says more about the character of the author than the subject. Reminds me of schoolyard bullying.

Earnabuck: I think Greaney is still steaming because Rob exposed him and his 4% SWR. He gave bad advice and attempts to change the spotlight off of his own recklessness. What a shame, quite petty.

Allan: I think Greaney’s website is full of excellent, specific information, while Rob’s website is like watching Mary Poppins.

CashNCarry: Why on earth would someone advertise their personal life the way he has, I mean he’s created his own personal Truman Show. It would be funny if it wasn’t so sad.

Clemcs06: Dude, get a freakin job so you can take your kids to Disney World.

Hocus: Many sites in the personal finance area are far too stuffy. Mary Poppins is the voice of common sense in comparison to some of the oh-so-grave-and-oh-so-self-important voices being heard on Planet Internet today.

Jason375: I am not sure Rob intends for his “advice” to be taken seriously. He likes to challenge the conventional wisdom (lots of posts with titles like “work is not a four letter word”) and get reactions.

Tc101: It takes all kinds. Maybe hocus adds some flavor to the mix.

Allan: The problem I have is that Rob is putting himself out to the general public as a financial expert, questioning the real experts like Bernstein and Scott Burns.

Greg24: I wouldn’t call it retirement to quit your job so you can post 12 hrs a day on the internet. [Editors Note: Ouch!]

Jason375: Greaney is single and managed to accumulate several million dollars for a secure retirement. Rob has millions less and dependents. I guess everyone is free to choose their own experts, lol.

CashNcarry: I hate to admit it, but hocus brings out the worst in me (and some others as well). He reminds me of one of those lifesize inflatable clown balloons I had as a child. You’d step on it’s feet, and whack the tar out of it, and it would go down and spring back up again ready for the next whack.

Arrete: I will not respond to any post directed at me by Rob because I already know he will either play the injured innocent, pretend we’re friends, or twist my words.

Hocus: My friendships are not dependent on what the individual who I have come to think of as a friend believes about safe withdrawal rates or any other investing topic.

My Obsession

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There’s a fellow (“Allan”) at the Vanguard Diehards board who describes my interest in knowing whether the stocks that I buy will be able to provide an acceptable long-term value as an “obsession.”

Is he right?

In a way, I guess.

There’s no question but that I wouldn’t think of putting money down on stocks without first taking into consideration the price at which they are being offered. My desire to know the price I pay for stocks, and whether the stocks will be able to provide an acceptable long-term value given the price paid, affects all of my investing decisions. Price and value are pervasive concerns of mine. I suppose that some would say that any pervasive concern can fairly be characterized as a bit of an “obsession.”

We don’t use the word “obsession” when people ask questions about the prices they pay for other sorts of assets they buy, however. Why is it that some employ words with negative connotations to describe the idea of looking at the price offered and the value obtained from purchases of stocks but not from purchases of other assets?

Say that a car salesman talked up the benefits of a particular car and asked you kindly to sign your name to the bottom of the piece of paper he was holding in his hand? Suppose that you asked to know the price that you were agreeing to pay before signing and he responded that this request was a sign of an “obsession”? Would you go ahead and sign the piece of paper without knowing the price, as he was aiming to pressure you to?

I wouldn’t. I would wonder why he was pressuring me. In fact, there’s a good chance that I would walk away even if he agreed to reveal the price at that point. His reluctance to tell me the price would make me concerned whether he was the sort of person with whom I would want to strike a deal. I don’t even like to get involved with people who become hostile when I ask simple questions that anyone putting money down has an obvious need to have answered prior to signing on the dotted line.

Say that it was a house you were buying. Again, say that you asked to know the price and the response of the real estate agent was to say: “This is going to turn out to be a fine purchase for you in the long run, I am sure of it, now please just go ahead and sign without requiring us to waste further time dealing with this obsession of yours to know the price of the house you buy.”

Would that give you a good feeling about the house purchase?

It wouldn’t give me a good feeling. The reality, of course, is that the amount of money you will direct to buying stocks over the course of your lifetime will be a far larger sum than the amount that you will direct to buying cars or houses. The fact that those selling stocks are so defensive about discussions of price should alarm you. Your common sense should tell you that this is an extremely bad sign.

I want to know the price of something I buy before I buy it. You can call me obsessed. You can call me madcap. You can call me O.J or you can call me Ray; you can call me anything, what’s the difference what you say? It ain’t gonna change my take on this one. I want to know the price of something I buy before I buy it. That’s not a rule that applies just to stocks. It applies to stocks too, though. I am not aware of any reason why I should be willing to grant an exception to the usual rule for stocks.

Here is the portion of the article by Cliff Asness entitled Bubble Logic that inspired the riff that I am fumbling around with in this blog entry:

“Let us put our cynical hats on for a moment. Wall Street (buy and sell side) is in the business of selling you stocks, and they do not want you to leave the market. Let us rephrase the advice ‘Do Not Try and Time the Market’ another way. How about, ‘Ignore the Price of What I am Selling You and Buy No Matter What.’ If you think about it, it is the same advice.

“If your salesman told you to ignore the price of any other purchase than common stocks because it will all work out over the long run, you would run clutching your wallet. While perhaps usually good advice, ‘Do Not Try to Time the Market’ cannot mean ignore prices entirely, as in the extreme this is obviously silly. However, making great long-term returns without any imposition of effort or vigilance (i.e., having to watch prices for opportunities or bubbles) is obviously a seductive siren’s call.

“If being price sensitive means timing the market, and timing the market is a cardinal sin, then prices have no anchor to reality. If one is looking for possible causes of a financial bubble, then the ban on market timing must be a prime candidate.”

I see nothing bearish or obsessive in those words. Those are just plain old common-sense observations.

That’s the sort of investing advice that I would like to see a whole bunch more of in days to come. Cliff Asness is telling it straight, and today’s middle-class investor would be well-advised to pay heed to this speaker of straight-talk trying to break through the noisy salesmanship being put forward by too many of the best-known investment advisors (real-estate agents and used car salespeople like to put themselves forward as helpful advisors rather than pushy salespeople too, of course — Are those telling us not to worry our pretty little heads about the prices at which stocks are being sold today all that different?) regularly featured in newspapers and magazine articles and television programs.

I hereby declare Cliff Asness a Hero of the First Rank to the Financial Freedom Community and to the Retire Early Movement.

Thinking Like an Employee

by

I’ve written an article for the www.writershelper.com site entitled “Book Marketing and the Proposal Doctor.”

Juicy Excerpt: “She strongly urged me to write a more conventional money management book, one that would focus on tips for reducing spending. (My book is more of a “why to” than a “how to” as it argues that the motivation behind the saving effort determines its success or failure and rejects the goal of saving for an old-age retirement as generally ineffective)…. It was her comments that made me decide not to even submit my book to publishers but instead to publish it myself.”

Most first-time authors very much want a contract from a big publisher. It gives them credibility in the eyes of potential readers. I had dreams about the day that I would receive a letter making me an offer to publish Passion Saving. From that day forward, I would have a good answer to the question “What do you do?” The response “Random House is coming out with my book in January” sounds a whole bunch better than the response “I’m trying to sell books from my website.” For obvious reasons.

It sounds better. But I’m not at all sure that it is better.

The reality is that a first-time author usually obtains an advance of perhaps $20,000 or $30,000. If you spent years generating the ideas that drive your book (as I did and as many other authors do), that’s a very small payment on a per-hour basis.

The instant credibility you get from going with a big publisher is worth a lot. That’s for sure. That’s the best argument for going the big publisher route.

The problem is that credibility alone does not sell books. Most books sell few copies. Publishers don’t expect most books they publish to make money. Publishing a book to them is something akin to buying a lottery ticket. They’re looking for the one big one that makes them a million. They know that they need to publish hundreds of others to discover the one that clicks. So they do.

If you end up being one of the hundreds of others, you end up on the remainder table. What does that do for your credibility?

And the credibility you get from going with a big publisher does not come cheap. You give up control over the book. They decide on the cover. They decide on the title. They decide how to promote the book. The author is a hired-hand, and a poorly paid hired-hand at that.

After talking things over with the proposal doctor, I came to have doubts about the idea of trying to entice a big publisher to buy my book. The book argues that saving is the path to freedom, to getting to a point in life at which you begin to call the shots about your future. But here I was, the guy putting forward this argument, begging for crumbs from “the big boys.” Something didn’t fit.

I was thinking like an employee.

By seeking a publisher’s approval of my book, I was giving them power over what would be said in the book in exchange for money. There’s nothing wrong with doing that in the right circumstances. But it should not be the automatic choice.

I decided that the circumstances were not right in the case of Passion Saving. If the book is as good as I think it is, the big publishers will someday come to me. If they come to me, I’ll get a whole bunch more money. And I’ll be able to retain some control over how the book is sold.

You’re not selling books. But you are doing some sort of work in exchange for money. How many of the shots do you call?

As you gain experience and build contacts in your field, you should be becoming more independent, you should be gaining more control over how the work you do is completed. If that’s not happening, you need to be thinking about what you need to do to make it happen.

The point of the Passion Saving approach is that we don’t save money to have our expenses covered when we get old. We save to be free.

It makes sense for us to give up our freedom when we are young because it’s by working for others that we learn what we need to know to do important and profitable work. It’s a mistake to let those years of working for others cause us to think that we always need a sign-off from some higher-up to know which way is the best way to proceed with the work we do.

Sometimes we enslave ourselves. There’s a time for thinking like an employee and there’s a time for going beyond thinking like an employee.