A Rich Life

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

“I Don’t Think Buy-and-Hold Can Ever Work for a Single Investor in the Long Term and I Can Point to Academic Research Showing That to Be the Case. That’s the ‘Controversy'”

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Set forth below is the text of a comment that I recently put to the Invest It Wisely blog:

I found him to be…not insane.

Thanks, Kevin. I’m going to use that endorsement on the back cover of my book on investing!

I’m joking around, of course. I think it would be helpful if we all did our part to try to see the lighter side of this never-ending “controversy.” The reality, of course, is that there have been differences of opinion about stock investing going back to the day the first market opened for business, and that the entire idea that there is some sort of “controversy” here rather than just a difference of opinion is 100 percent manufactured. I don’t think Buy-and-Hold can ever work for a single investor in the long term and I can point to academic research showing that to be the case. That’s the “controversy.”

If you have a reasoned rebuttal of his views, I’ll be happy to link out to it as well.

These words are also exceedingly helpful. We need to hear BOTH sides. But of course we only want to hear those willing to construct civil and reasoned presentations of their case. Civil and reasoned criticisms of Valuation-Informed Indexing (the alternative to Buy-and-Hold that I advocate) help us all. I am obviously not God and I obviously am every bit as capable of getting things wrong as any Buy-and-Holder. I need to hear civil and reasoned criticisms of my work as much or perhaps even more than everyone else does.

Um — Thanks for your contribution too, Blogwatcher.

I think!

Rob

 

“The Answer Is for People to Accept That There Are Two Models and Not Be So Defensive. We All Need to Acknowledge That the Other Guy Is a Friend and Someone Who Is Trying to Help.”

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Set forth below is the text of a comment that I recently put to the Investor Junkie blog:

 can say from what I’ve seen people often claim you are let me put it in a nice way.. abrasive. While I have no issue with your viewpoint, I think many object to the methodology of how you do it.

Thanks for sharing your thoughts, Larry. There are lots of people who say that. Even people who support me say that. I’ll try to explain what I think is really going on.

I believe in 90 percent of what the Buy-and-Holders believe. There is only one point of disagreement. I say that valuations have to be taken into consideration in all calculations. They say that they should never be considered. If valuations were a small factor, this would not be a big deal. But the valuations effect is so big that whether you take them into consideration or not makes a HUGE difference.

I am 100 percent polite and warm and kind in my interactions with Buy-and-Holders. Always. No exceptions. The thing that is “abrasive” is that I say “Well, you got the numbers wildly wrong in that retirement study and the error is going to cause millions of people to suffer failed retirements.” It hurts people’s feelings for me to say that. But, if it is true that valuations matter, what I am saying is so. There’s no soft way of making the point. If you believe that valuations matter, you are either “abrasive” or dishonest. There are no other options.

I think the answer is for people to accept that there are two models and not be so defensive. We all need to acknowledge that the other guy is a friend and someone why is trying his best to help. I accept that there are lots of good and smart people who really believe in Buy-and-Hold. They have a right to believe what they believe. But if I were to say that I believe in Buy-and-Hold, it would be dishonest. There never should have been even a tiny bit of pressure applied to me to persuade me to post dishonestly. My right (and the right of all Valuation-Informed Indexers) to post honestly should be respected.

The Buy-and-Holders were the top dogs for a number of years. They are not accustomed to being challenged. They have to accept that those days are over. People learn new things over time and we move on to new and better ideas.

I say all the time how much I like and respect the Buy-and-Holders. It’s a rare event when one of them says that about me or about any of the Valuation-Informed Indexers. I have had Buy-and-Holders threaten to kill my wife and children. Never have I made any such threats in return. So who is truly the “abrasive” one?

People need to hear both sides to be able to make informed decisions of their own. As of today, the Valuation-Informed Indexers need to stand up for themselves to even be able to speak (as evidenced by the 15 bans!). I am 100 percent happy always to praise the Buy-and-Holders for their many legitimate insights and I always am sure to do so. I am NOT willing to say that I agree with them. I shouldn’t be pressured to do so. And my unwillingness to do so should not be perceived as “abrasive.” My view is that it is the abusive tactics of the Buy-and-Hold dogmatics that are truly “abrasive.”

Rob

“If We Cheered Strikeouts & Booed Home Runs, We Would Be Seeing Good Baseball Players Experience ‘A Crisis of Self-Worth and Confidence.’ “

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Set forth below are some words that I recently posted to the Goon Central board.Sounds like someone’s having a crisis of self-worth and confidence, doesn’t it?

All of the facts that you put forward in this post are accurate, GW. I post LOTS of columns. I see very few comments. Those are objective facts. And, yes, seeing that sort of reaction is discouraging. Highly discouraging. And it’s been going on for 10 years now!Am I experiencing “a crisis of self-worth and confidence”?

Yes and no.

All humans look to other humans for validation. Boys expect to hear their teammates cheer them when they hit a home run. If they hear no cheers, there is going to be a part of their brain that wonders whether they really did a good thing or not. If we somehow turned all the rules of the world upside down and cheered strikeouts and booed home runs, we would be seeing a lot of good baseball players experiencing “a crisis of self-worth and confidence.”

That’s what we have done in the investing realm, GW.

We made a mistake. It’s not true that the market is efficient. It WANTS to be efficient and it SHOULD be efficient, but it needs our help to get there. We are in the early days of our explorations of the subject of how stock investing works and so it happens that as a society we made a mistake. And, because it affected people’s financial circumstances and there was the chance of lawsuits and embarrassment if we acknowledged the mistake, we elected as a society not to do so. So the mistake grew larger and larger and larger. Today, it is Godzilla. We MUST fix the mistake. But we are scared to death even to talk about it.

There’s nothing wrong with my work of the past 10 years. The work is A++. Ten years ago, there were people saying I was wrong about safe withdrawal rates. There is no one saying that today (I am not counting Goons like you, GW!). Today there are people who doubt whether we really can reduce the risk of stock investing by 80 percent, but ten years from now there will be no one doubting that one either. That’s obviously huge. So there’s zero problem with the work.

But, yes, it does hurt that I don’t hear the cheers I am entitled to hear.

What you are leaving out is that the problem is not with the fellow who is hitting home run after home run and not hearing cheers, the problem is with the darn people not getting with the program and delivering those cheers! That’s what needs to change here!

Why don’t they cheer?

Those people are experiencing “a crisis of self-worth and confidence.”

We like to think that our society is a good one. That it helps people live in peace and happiness. That we are a smart and fair and forward-looking people. All these sorts of things.

The work I have done throws doubt on that. What kind of people is it that tolerates Wall Street spending hundreds of millions of dollars promoting the purest and most dangerous Get Rich Quick scheme ever concocted by the human mind, causing the biggest economic crisis in its history? For 30 years! What kind of people are we?

We’re mess-ups.

We need to acknowledge that to become empowered to move forward.

Once we do, we will also become able to acknowledge the good stuff. It is our society that produced Valuation-Informed Indexing (I obviously did not do it by myself). So there is nothing to be scared about here. We have indeed done bad stuff. But the good stuff counters the bad by a factor of 50 to 1. No other society has ever produced an investing strategy of one-tenth of the power of the one we have now produced. We need to let that in and to start feeling good about ourselves again.

I am a human, GW. So, yes, of course I feel bad when I do not hear the cheers that I have earned with my good work. But I know that the problem here is not with me. The problem is with you. You should care as much as I do about seeing that all your fellow community members have access to accurate retirement planning information. And you should care as much as I do about bringing this economic crisis to an end. And you should care as much as I do about investing effectively for the long-term.

There are no two sides, GW. When you (and others) act like there are, you create this messed-up situation. You make us all experience “a crisis of self-worth and confidence” (the economic term is “Great Depression”). I am the one saying to bring an end to that insanity. I am saying that we all should be applauding these amazing home runs that I’ve been hitting for 10 years now. And guess what? When we become honest enough to applaud those amazing home runs, it becomes possible to applaud contributions that others make too. We can applaud John Bogle. We can applaud Bill Bernsteinzz. Heaven help us all, but we can probably even applaud John Greaney and Mel Lindauer and GW.

We can’t applaud anyone for so long as we keep doing things that keep us all in the Great Depression, suffering “a crisis of self-worth and confidence.” God did not put us here to live this way, my long-time abusive-posting friend. Please go back to the Archives of the Motley Fool board for the years immediately prior to May 13, 2002. That’s what we were put here to create. Now multiply by 50. You can be part of that. And Greaney can be part of that. And Lindauer can be part of that. And Bogle can be part of that.

But not until you stop dumping garbage on us all, man. That stuff smells! No one is having a good time for so long as you keep dumping fresh garbage on us. No wonder no one is in the mood to cheer home runs. Everyone feels like he is about to throw up.The garbage tossing stuff must go!

That’s the story. You are proud of your abilities to mess up my deal. What you miss is that you mess up the deals of millions of others when you do that, and by messing up millions of deals, you ultimately mess up your own deal. You don’t get to live in a separate economy. Put the economy we both share in a Second Great Depression because you cannot stand the thought of that darn Rob Bennett fellow enjoying levels of fame and fortune you assume you will never see and you put your own economy in a Second Great Depression by doing it. That’s stupid, man. F_ing things up helps no one. The thing to do is to do whatever you can to move things forward and try to set things up so that you win some of the goodies for yourself while doing it.

You F’d up GW.

Deal with it. Then move on.

You only get so many years. Don’t give up more of them than you already have. I cannot get back for you the ones you have already thrown away. I can help only on a going forward basis and I have offered on numerous occasions to do so. Not a time-senstive offer, I always say. I repeat it so many times in the hopes that even the hard of hearing will get the message.

Anyway, that’s where things stand. I’m human. So, yes, I am one of the ones suffering the “crisis of self-worth and confidence” you have brought on with your massive garbage dumping endeavors. But at least I am on the record speaking out in opposition to further garbage dumping. At least I am trying to do something about the damn problem.

And you?

Rob
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“The Terms “Buy-and-Hold” and “Get Rich Quick” Are Synonymous. Virtually All of the Risk of Stock Investing Comes from the Human Inclination to Be Drawn to a Buy-and-Hold/Get-Rich Quick Strategy”

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Set forth below is the text of a comment that I recently put to the Goon Central board:

Do these concepts look the same to you, idiot?

Yes, Drip Guy. The terms “Buy-and-Hold” and “Get Rich Quick” are synonymous. Virtually all of the risk of stock investing comes from the human inclination to be drawn to a Buy-and-Hold/Get Rich Quick strategy.

I will make an effort to explain why this is so. If you make an effort to listen, I am confident you will get it. If you permit your rage at discovering that there was a time when you did not know everything there is to know about stocks overcome your reason, you obviously will fail to get it yet one more time. I can put forward the explanation. It is necessary for you to put a tiny bit of effort into this too for the back-and-forth to bear good fruit.

Here is your definition of “Buy-and-Hold:

used to describe the activity of investing in something and then keeping it for a period of time

That’s a good definition.

Now —

What’s wrong with the idea of investing in something and then keeping it for a period of time?

What’s wrong is that this definition says nothing about whether the thing invested in offers a strong long-term value proposition or not!

Warren Buffett holds his investments for a long time. But he sure as shootin’ ain’t no Buy-and-Holder in the way that it is practiced by Lindauer and Greaney and Bogle. Buffett buys things worth buying and holds them. Lindauer and Greaney and Bogle buy stocks when they are garbage and then refuse to consider selling no matter how much holding on to garbage depletes their portfolios.

Huh?

I am not overstating things when I say that stocks were garbage in January 2000, Drip Guy.

The most likely annualized long-term return was a negative 1 percent real. TIPS were at the time offering a positive 4 percent real. That’s a return differential of 5 percentage points per year. For 10 years running. That adds up to a total loss of 50 percent of the initial portfolio size.

You are telling me that this is an acceptable investment strategy? If you truly believe that, you are insane.

This is suicide investing.

There are ten different aspects of the Buy-and-Hold package that are pure gold. As you know, I praise these aspects of the Buy-and-Hold package to the sky all the time.

But the Get RIch Quick aspect is so devastatingly bad that it overpowers all that could be good about Buy-and-Hold.

There is not one person on Planet Earth who benefits from the continuance of this 10-year-long cover-up, Drip Guy. Certainly not any Buy-and-Holders.

The Buy-and-Holders should be dancing in the streets today. They are the ones who came up with the idea of rooting one’s strategies in the academic research. The research has now taught us how to reduce the risk of stock investing by 80 percent while delivering long-term returns far higher than most people ever thought possible. We should today be in the Golden Age of Stock Investing and celebrating the Buy-and-Holders for being the ones to have brought it to us.

Where are we instead? We are living through the worst economic crisis in U.S. history, one caused by Wall Street’s relentless promotion of an investing strategy that was originally intended to be research-backed but which became the opposite of that when research was published showing that the Buy-and-Holders got one thing horribly, horribly wrong and the Buy-and-Holders reacted not by fixing the mistake but by adopting a policy of engaging in defamation and death threats and board bannings and smear campaigns to block any of the millions of middle-class people whose lives are in the process of being ruined by this pure Get Rich Quick garbage from learning what they need to know to salvage what is left of their retirement hopes.

That’s brilliant work, Drip Guy. Congratulations! You’ve turned John Bogle into Bernie Madoff! You’re a true Boglehead through and though!

Heaven help us all.

Rob

“Successful Lawsuits Against the Internet Sewer Rats Is Just One of the Wonderful Things We Will Be Seeing in Days to Come”

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Set forth below is the text of a post that I recently put to the Goon Central board:

Oh, and good luck finding an attorney willing to sue people who disagree with you at online discussion boards!  

I’ve already spoken to more than one attorney who told me the case was strong enough to take on. That’s not an issue.

The issue today is that I have not found one to take the case on a contingency basis. There are five ways to solve that problem.

One is that the ban on honestzzz posting is an issue of huge public policy significance. There are millions unemployed today because of the Buy-and-Hold crisis. People are losing faith in our political system because the two political parties are in the pocket of Wall Street. When we go into the Great Depression, there is a good chance that there will be a world war and millions will die. In these sorts of circumstances, it is possible to find very good lawyers willing to take cases on a pro bono basis as a means of enhancing their reputations.

Two is that there is already a similar case that was brought by a Yale lawyer (to whom I have had conversations about how to proceed) which was taken on a pro bono basis. One of the issues here is that this is a new area of law and many lawyers are unwilling to take a case on contingency when the uncertainties always present in a new area of law are present. When the case taken by the Yale lawyer has finished its way through the courts, there will be precedent. Lawyers will be able to look at the damages obtained against people who engaged in defamation on discussion boards and see that similar amounts can be obtained in other cases where the facts are exceptionally strong.

Three is that, after the next crash, the anger at what the Buy-and-Holders have done to our society and to our financial futures is going to be very strong. It will be easy to connect with thousands of people on the internet with an interest in achieving justice against the people who have posted in “defense” of Lindauer and/or Greaney. There are no doubt lawyers today who would gladly take the case if I could reach them. My reach is greatly extended as the crisis worsens and as the number of people seeking to obtain justice for what has been done to us increases.

Four, there will in time be media lawyers who will want to take this on to be the first lawyers to have worked on a case dealing with the many unique fact patterns present here. The internet discussion board is an important communications medium of the future. This is a case where a tiny number of lawyers would very much want to be involved but the vast majority would not. Once I connect with the right people, I don’t anticipate problems.

Five, I will be connecting with lots of people of great influence as we spread the word re Valuation-Informed Indexing. A lot of people in the investment industry have done their reputations harm by getting involved in the promotion of Buy-and-Hold at times when they did not recognize the danger. The entire industry is going to need to take steps to restore the reputations of financial planners who fell for the mumbo jumbo. Those people have lots of money and they will be able to help me (and all of the thousands or tens of thousands who need to bring lawsuits because their retirements are failing after they believed claims promoted at boards that had banned honestzzz posting on what the historical data says) out. Maybe John Bogle will finance the lawsuits. That would be a nice Alfred Hitchcock ending to the story.

I believe that we will work it out one way or the other, Yip. Job #1 is bringing the economic crisis to an end and making all the powerful insights of the first ten years of our discussions available to everyone. All sorts of wonderful things follow from that. Successful lawsuits against the Internet Sewer Rats is just one of the wonderful things we will be seeing in days to come, in my assessment.

There was a day when there were people saying that I was crazy to believe that we would ever achieve a consensus in this field that the Old School studies get all the numbers wildly wrong. Some of the same people who said that are now expressing doubt that the lawsuits will be successful. My thought is — I’ll give it my best shot, I can do no more and I can do no less. Perhaps it is the people who put their financial futures at risk for the thrill of being able to use the internet to destroy millions of middle-class lives who were the crazy ones all along!

I don’t have a crystal ball. We’ll have to wait and see.

Rob

“Buy-and-Hold Is Promoted As Being Rooted in the Academic Research”

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Set forth below is the text of a comment by Drip Guy and my response, both taken from a recent thread at this blog.

Rob,

Your attempted analysis of me is wrong in about every way! But you believe what you want to believe; it’s no skin off my nose.

BTW, you say: “I have never seen this sort of behavior from people following any other investing strategy. ”

Well, I suspect that is becasue you simply have not imposed yourself other places. So, let’s wait until your market timing ideas lead you some where else, like a Quant analysis or TA forum or other ‘pet approach’, and then just be your usual self, Rob, and let’s watch to determine how those investors of other persuasions respond to you. Should be fun to observe from the sidelines!

The real reason you get heat from buy-n-holders, is because you for some reason have chosen to single out that very tame, baseline approach to rail against.

Go tell any other forum that they are all “doin’ it wrong” and I’m sure you will get similar replies to what you got when you were banned at those prior 15 finance forums! (laugh)

 

The real reason you get heat from buy-n-holders, is because you for some reason have chosen to single out that very tame, baseline approach to rail against.

I think you are making a reasonable point here, Drip Guy. But you are also leaving out an important part of the story.

Buy-and-Hold is not just any old “pet approach” (the phrase is from elsewhere in your comment). Buy-and-Hold is promoted as being rooted in the academic research.

But it is not!

There is now 30 years of academic research that shows that Buy-and-Hold is the purest and most dangerous Get Rich Quick scheme ever concocted by the human mind, one so dangerous that it is sure to wipe out most of the wealth that the middle-class has accumulated in recent decades and one so pure that it is likely to bring on an economic crisis that will take us all to the Second Great Depression.

All investing strategies are marketed. That’s part of the game. But Buy-and-Hold is special in this regard. Buy-and-Hold’s big marketing edge is the claim that it is rooted in academic research. And this is a demonstrably false claim. That’s over the line, Drip Guy. There are responsibilities taken on when you claim in your marketing materials to be following the academic research. The Buy-and-Holders have failed to honor these responsibilities.

An investing strategy that causes an economic and political collapse cannot fairly be referred to as a “very tame, baseline approach.” This Get Rich Quick garbage is pure poison. It has taken in millions of investors. It has delayed millions of retirements. It has caused huge unemployment numbers. It has caused the destruction of numerous blogs and discussion boards.

It is this claim that Buy-and-Hold is rooted in academic research that makes it different. Buy-and-Hold would not have 1/50th of the power to persuade that it today possesses if not for that claim. And that claim is demonstrably false. Shiller’s research is publicly available on the internet to anyone who cares to look for it.

Once the Buy-and-Holders learned that the entire historical record discredits their claims that there is no need to change one’s stock allocation in response to big valuation swings, they should have stopped making those claims. I did not cause this problem. I reported the safe withdrawal rate accurately. The reason why people were shocked to hear the accurate numbers is that The Stock-Selling Industry has directed hundreds of millions in marketing dollars promoting precisely the opposite of what the last 30 years of academic research says.

The boards that I have posted at are not even boards that were set up solely for Buy-and-Holders. The Motley Fool board was a Retire Early board. Accurate retirement numbers are obviously in place there. So the Buy-and-Holders had no right to burn that board to the ground. The Morningstar rules state clearly that all posters are permitted to post honestly on what the academic research says. Again, the Buy-and-Holders were 100 percent off base to destroy the integrity of that board with their abusive posting.

Why did they do it? Because it makes the Buy-and-Holders look absolutely horrible for people to learn that it is all a con, that there is no research showing that there is no need for investors to engage in long-term timing.

The problem needs to be fixed. We need to provide a means for middle-class investors to hear accurate and honest reports of what the academic research says re stock investing. I am happy to work with the Buy-and-Holders to make this happen so long as they are willing to honor the behavioral norms that apply in our society in discussions of every subject other than stock investing. I am not willing to post dishonestly on safe withdrawal rates or any other topic. The very fact that a good number of Buy-and-Holders demand this as a condition of posting to “their” boards illustrates how deep the problems go with this investing “strategy.”

Marketing tricks and claims of support in the academic research do not mix, Drip Guy. Valuation-Informed Indexing is what Buy-and-Hold started out being. Valuation-Informed Indexers report what the academic research says accurately and honestly. People need to know that and people need to know that the claims of Buy-and-Holders that they do that have been demonstrably false for 30 years now. Help me spread the word re that, and we will be best friends. Stand in my way and I think it would be fair to say that we will find ourselves working at cross purposes.

Rob

“Bill Bengen & Wade Pfau & John Bogle Should Not Be Forgetting About Those People. The Journalists & Economists & Politicians Should Not Be Forgetting About Those People”

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Set forth below is the text of a comment that I put to a recent blog entry here in response to a comment by Wade Pfau arguing that I had been unfair to Bill Bengen by saying that the mistakes he made in his Old School safe withdrawal rate study in all likelihood will cause millions of middle-class people to suffer failed retirements:

I am extremely grateful for your comment, Wade. I of course want to be fair in everything I say at the site and by challenging me you are adding some balance to the mix here. Your comment is important enough that I am going to run both your comment and my response as stand-alone blog entries on future dates. I am also going to send an e-mail to Bill letting him know of my blog entry and your comment to it and my response to your comment . In the event that Bill wants to add some words of his own, I will of course gratefully post here any comments he elects to add.

I don’t agree with your conclusion that my comment that Bill has in all likelihood caused many failed retirements is too harsh. I stand by that claim. There’s one aspect of my statement that was poorly stated. I describe below how that part of the statement should have been stated to be precisely correct.

I agree with all the points you made about the many valuable contributions Bill has made with this SWR studies.

Yes, he did effectively make the point that a withdrawal of 7 percent is not safe. That was an advance of huge importance. Bill is a pioneer in this field and we all should be grateful for his many valuable contributions. I like to think that in ordinary circumstances that would go without saying, but, given the circumstances that in fact prevail today, I don’t think it hurts to say it as often as possible.

Yes, he did show that 4 percent survived historically. We wouldn’t have the New School SWR research if we hadn’t first had the Old School SWR research. And we wouldn’t have Valuation-Informed Indexing if we hadn’t first had the New School SWR research. So Bill’s work has led us to some amazingly fruitful investigations. There’s no question whatsoever that this is so.

No, it is not certain that retirements that were initiated at the top of the bubble and that called for 4 percent withdrawals will fail. It is LIKELY that they will fail but not certain. This points to one element of my blog entry that is a bit overstated. The precise way of saying things is that the 4 percent rule caused millions to set up irresponsible retirement plans that are LIKELY in the process of going bust. The research shows that there is a 30 percent chance that those retirements will survive 30 years. That’s not a zero chance. But it is obviously a false claim to say that a retirement plan with a 30 percent chance of working out is “safe.”

Yes, Bill is evidencing an open mind on the valuations question. He said numerous encouraging things in his interview. I agree completely that “Mr. Bengen is recognizing that there is something going on here and he is still working on it.” That’s wonderful news. He could offer a huge help to our efforts.

Yes, you are 100 percent right that “researchers shouldn’t be blamed if they didn’t think of everything when producing their research.” Pioneers are people who go where none before them have dared to go. No human can be sure of getting everything right. It would be 100 percent wrong for someone to find fault with Bill for having made mistakes in his first draft effort at development of the safe withdrawal rate concept. His efforts taught us all important things about how stock investing works in the real world. They advanced the ball in highly significant ways.

All that said, it remains the case that there are millions of middle-class people who have been misled by the 4 percent rule into crafting dangerous and irresponsible retirement plans. In the event that stocks perform in the future anything at all as they always have in the past, we are going to see millions of people left destitute as a result of the errors that Bill made in his study (errors that were copied by many “experts” who followed Bill’s lead, to be sure). We are going to be seeing millions of people left without financial resources at an age at which they are too old to recover. We are seeing play out one of the worst social crises in the history of our nation.

What are we all doing to address this crisis?

I am trying to get attention drawn to the matter. I have been saying since the morning of May 13, 2002, (the day on which I put forward the post to the Motley Fool board pointing out the analytical errors in the Old School studies) that we should be permitting honest posting on SWRs and many other valuation-related topics on every board and blog on the internet. I have written John Bogle three times asking for his help with the Lindauer matter. I have written to numerous journalists, seeking to get these matters written up on the front page of the New York Times and the Wall Street Journal.

Is Bill doing that? If not, why not?

We all should aim to be fair to the financial planners who made mistakes while advancing our knowledge in significant ways. Should we not also aim to be fair to the millions of middle-class people who will in all likelihood be suffering one of the worst life setbacks imaginable as a result of the errors made by these financial planners? it certainly seems so to me.

I will do anything I can to help the financial planners who find themselves entangled in the mess that we as a society created when we pretended for a time that the market is efficient and that we know far more about how stock investing works than in fact we do know at this point in time. Part of that effort has to be doing things to get the word out to the millions of middle-class people who are suffering such terrible human miseries as a result of the very, very serious mistakes that have been made.

This is not a joke, Wade. This is very, very, very serious stuff. You know how much I respect your work and how much affection I feel for you as a person. But I also care about the people whose lives are being destroyed. I cannot forget those people. Bill should not be forgetting those people. You should not be forgetting those people. Bogle should not be forgetting those people. The journalists and the economists and the politicians should not be forgetting those people.

Again, thank you for posting your helpful and constructive and positive and life-affirming comments. I hope they help us all get about the business of taking the work that hundreds of us have been doing together over the past nine years to some wonderful and enriching places. I remain confident that, working together, we can take what we have learned and, by sharing it widely, bring on the greatest period of economic growth that we have ever seen. I certainly hope that that turns out to be the case.

Please keep fighting the good fight, my brave friend.

Rob

“Readers of the Studies Should Be Made Aware That They Are Not Reading Scientific Truths but Tentative Findings Depending on a Belief in One of the Two Models”

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Set forth below is the text of a comment that I posted in response to a question posed in the discussion thread for one of my Beyond Buy-and-Hold columns at the Out of Your Rut site:

I look forward to reading everyone’s thoughts on improvements that can be made to the methodology that goes in to these types of analyses

Re the methodology question, my take is that those who do studies of stock investing questions should always disclose what sort of methodology they are using. Buy-and-Hold studies are rooted in University of Chicago Economics Professor Eugene Fama’s Efficient Market Hypothesis and thus do not contain adjustments for the effect of valuations. Valuation-Informed Indexing studies are rooted in Yale Economics Professor Robert Shiller’s research showing that valuations affect long-term returns and thus always contain valuation adjustments. The two types of studies obviously always produce wildly different findings.

The important thing is that the readers of the studies be made aware that they are not reading scientific truths but tentative findings depending on a belief in one of the two models. The Old School safe withdrawal rate studies don’t reveal metaphysical truth re SWRs, they just tell us what those who believe in the Buy-and-Hold model believe the SWR to be. The New School SWR studies tell us what the SWR is for those who believe in the Shiller model.

All of the disputes that have raged for over nine years now are the result of the failure of researchers and investing experts to note that their studies are valid only if the premises on which the methodologies of those studies were built are valid. I believe in the Shiller model. So I obviously cannot say that I believe that the Old School studies are valid. It would be dishonest of me to do that. Each community member has to say what he or she sincerely believes to be the case. This should not be controversial!

Buy-and-Hold is rooted in a belief in the Efficient Market Hypothesis (Shiller had not yet published his research at the time Buy-and-Hold was developed). Buy-and-Hold is not Truth with a capital “T.” It is just an hypothesis that many smart people have over the years come to believe is true. All research done in this field should specify the model in which it is rooted. It is imperative that the investors making use of investing studies know that there is another model that produces research generating very, very different findings.

Rob

 

“A Few Years Back, I Was Blacklisted at Just About Every Personal Finance Blog on the Internet. Last Week, I Attended a Financial Bloggers Conference and Received a Warm Greeting from Everyone I Met.”

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Set forth below is the text of a comment that I recently put to Wade Pfau’s blog in response to a post in which he noted that “valuations and long-term investors is a rather controversial topic” and that he does not expect to be writing many more research papers on the topic.

Your contributions in this area are huge, Wade. So no one can find fault with you for taking a break from the valuations topic. I only hope it will not be a permanent break. We need you!

You are of course 100 percent right to describe this topic as “controversial.” You need to ask yourself why that is. It’s because this question is so darn important. This issue won’t go away. It is our lack of understanding of how valuations affect returns that is the primary cause of the economic crisis (in my view!) and, if the things that those who study valuations say is so, that crisis will be getting a lot worse before it comes to an end. I believe that as a society we will have no choice but to face up to this one, whether we like the idea or not.

One thing I can tell you as someone who has been fighting on the front lines for nine years now is that things are getting better. A few years back, I was blacklisted at just about every personal finance blog on the internet. Last week, I attended a financial bloggers conference and received a warm greeting from everyone I met. I cannot say that everyone agrees with me today. That’s not close to being true. But there has been a big change in the public mood over the past three years and my sense is that things are continuing to move in the right direction.

Once some of the pieces that have not yet clicked for you click into place, you will be able to think of hundreds of research papers to write in this field. I really mean that. Accepting that valuations matter will be the biggest advance in our understanding of how stock investing works in history. It is akin to the discovery of how electricity works and can be harnessed for the benefit of mankind. Think how many inventions followed from that! When we learn how to use valuations in setting our stock allocations, we are learning how to rein in the most dangerous investor emotions. Unexplored territory!

I wish you the best in all your future endeavors. I have already cited your work dozens of times and am confident that I will be citing it hundreds of times in the future. We have a tiger by the tale here!

Rob

“Buy-and-Hold Took Us Out of the Dark Ages…. Buy-and-Hold Has Killed Itself”

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Set forth below is the text of a comment that I put to the discussion thread for a Guest Blog Entry I recently wrote for the Invest It Wisely site:

But no matter what you tell people, there will always be run-away bear and bull markets–no matter what. You can’t change human emotions, after all, no matter what analyzing tool you try to convince them with.

There’s a mountain of historical evidence supporting what you are saying here, Andrew. I am just idealistic enough to believe that you are wrong.

Before man learned how to fly, there were people who said “man has never known how to fly and never will.” Before man learned how to harness the power of electricity, there were people who said “man has never overcome darkness with light and never will.” Before man began listening to the Beatles, there were people who said “man will always listen to Perry Como and there’s nothing that four moptops playing in German bars are ever going to be able to do about it.” Things change. Sometimes a lot. Sometimes for the better.

I take the other view. I say that there is zero chance that we will not make this change. The reason is that it is more important today to know how stock investing works than it has ever been in any earlier time in U.S. history. The same thing that caused today’s economic crisis caused the Great Depression — insanely overpriced stocks. But what we saw in the Depression was a small thing compared to what we have ahead of us if we don’t make this change within the next few years.

In the late 1920s, most stockholders were rich people. Few middle-class people invested in stocks. That wipeout of the rich did great damage to our economic system. But think how much worse it is going to be in day when middle-class people are required to invest in stocks to have any hope of being able to retire someday.

We have passed the point of no return with this thing. We either fix stock investing or we watch our entire economic and political system crumble to the ground. My bet is that, as conditions continue to worsen, there are going to be brave people who are going to step forward and make the case for fixing stock investing. And sooner or later the pain that the rest of us are experiencing will become great enough that we will gladly go along. Why wouldn’t we?

The Great Paradox is that Buy-and-Hold became impossible with the development of Buy-and-Hold. Buy-and-Hold took us out of the dark ages. It is the Buy-and-Holders who said that we should root our strategies in the historical data and the academic research. Once you do that, you have a way of testing whether strategies work or not. We are in the process of making stock investing a scientific enterprise.

So strategies that fail scientifically fail, period. Buy-and-Hold as put forward in its first draft incarnation is in the process of has failing scientifically. Buy-and-Hold has killed itself. The people who came up with the idea will be very happy about that when they gain some emotional distance and are able to think clearly about these things.

We are going to move from Buy-and-Hold to something better. The Buy-and-Holders are going to get credit for their huge contributions, contributions which made this forward movement possible. But we are going to move forward. Stocks are not going to be a risky asset class in the future. We are all going to be earning far higher returns at greatly diminished risk. We are going to see the greatest period of economic growth ever experienced in our history. And we are going to someday look back at the quarrels some of us are engaging in today and wonder whatever could we have been thinking?

The only thing that has held back this advance for 30 years is that the advance is so huge that it frightens people. There are lots of people who have grown accustomed to the old way of thinking about stock investing and it scares them to consider moving forward into a future so much brighter than anything we have ever seen before.

They’ll get over it. If you look at our history, you’ll see that people have resisted all such major advances. But we always get over our feelings of resistance. We always choose the light over the darkness, after lots of fretting and stammering and questioning and shyness and hesitation.

We are working our way through a process. Things need to get very, very, very bad before they can get very, very, very good. That’s because it is experiencing the bad that gives us the courage to accept the need to move forward into the good. It’s not an accident that it’s always darkest before the dawn. There’s a reason why it always plays out that way, why that is the only way it ever can play out.

Humans were created in such a way as to resist major change, even wonderful change, until things reach a point where they have absolutely no choice but to accept their good fortune. Look around you and you can see evidence everywhere you turn that conditions are getting to a point where we will soon have no choice remaining open to us but the one that makes all our lives better and richer and more fulfilled than we ever in earlier days imaged was possible. Such a fate! Why did this have to happen to us?

But I could be wrong, right? I’m biased. I never went to investing school. I never managed any multi-million-dollar fund. Im just some guy who figured out how to get stuff posted on the internet sharing with you what I have come over the first nine years of our discussions to believe about where all this stuff is headed. The true and complete answer is that we will all decide where this takes us by the decisions we make on a day-by-day basis. Maybe I am right, maybe I am wrong. We’ll see. It’s not knowing for absolute sure that gives living life its kick.

My bet is on the humans. I’ve come to know quite a few of them over the course of my 54 years and the encouraging truth is that, despite some truly horrifying flaws (Perry Como!), a good percentage of the humans end up not being such bad eggs in the final analysis.

Rob