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

Look at your long diatribe. You still don’t think you have a problem?

I answered your question to the best of my ability, Anonymous. That’s obviously the appropriate thing to do.

The problem is the 37-year cover-up. Had Bogle given a speech shortly after publication of Shiller’s “revolutionary” (his word) 1981 research saying either “I Was Wrong” or “i’m Not Sure,” there never would have been any problem. We all would have been discussing both Buy-and-Hold and Valuation-Informed Indexing at every discussion board and blog on the internet for the past 37 years and not one person would have expressed the slightest surprise when I put forward my post from the morning of May 13, 2002, saying that I thought that Shiller’s research was valid and that the safe withdrawal rate is a number that changes with changes in valuation levels.

All of the controversy that we have seen stems from the 37-year cover-up. All of the problems that we have seen stem from the 37-year cover-up. I didn’t cause the 37-year cover-up. I have been doing everything in my power for 16 years now to bring the cover-up to a full and complete stop. How is the cover-up ever going to end unless those of us who believe that Shiller’s research is legitimate don’t start insisting on our right to post honestly at every investing discussion board and blog on the internet? That’s the only way that we can get to the place that deep in our hearts we all want to be. So that’s what I do.

There is not one academic school of thought as to how stock investing works. There are two. That’s been so for 37 years now. Every investor alive needs to know that. Honest posting should be permitted at every site on the internet.

That’s my sincere take re these terribly important matters, in any event.

My best and warmest wishes to you.

Problematic Rob

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

“I can use all the help that I can get.”

Yes, you do. We have suggested many times that you need to seek the help of a qualified mental health expert.

That suggestion is one of the things showing me that Buy-and-Hold is rooted in emotion, Anonymous. If Buy-and-Hold were real, it would be possible to engage in civil and reasoned discussions re its merit. But Buy-and-Holders go nuts when someone challenges their belief in their strategy because there is nothing behind it but a shaky emotional desire that gains produced by irrational exuberance count for as much as gains produced by economic realities.

I think about how I would react if someone on the Valuation-Informed Indexing side behaved the way you Goons behave. If someone on the VII side said that Bogle needs to consult a mental health professional, I would be horrified. I would distance myself from the comment in every way possible because I would feel that all reasonable people would conclude that reliance on that tactic showed that the research-based case for Valuation-Informed Indexing must be weak. Most Buy-and-Holders don’t personally employ such tactics. Only a small percentage are outright Goons. But the vast majority of Buy-and-Holders TOLERATE the employment of such tactics by you Goons. That’s why we are where we are today.

When I point out that there is no valuation adjustment in the Buy-and-Hold retirement studies even though we have 37 years of peer-reviewed research showing that valuations affect long-term returns, there should be a universal acknowledgment that that point is of huge importance. If the Buy-and-Holders got the numbers that people use to plan their retirements wrong, what else did they get wrong? Probably everything. The entire point of investment analysis is to help people finance their retirements. If you are that careless about retirement planning, you just shouldn’t be working in this field. You may be as smart as the dickens (most Buy-and-Holders are indeed very smart). But you haven’t achieved the level of control over your emotions that you need to possess to offer helpful investment advice if you don’t appreciate the need to get the numbers right in retirement studies.

The Great Safe Withdrawal Rate Debate has never been an intellectual debate. There have been good intellectual points made on both sides. But the core dispute has never been one that could be resolved by making reference to data or research or logic or common sense. The core dispute is emotional in nature. The Valuation-Informed Indexers say that we should consult the peer-reviewed research in this field to determine the true and lasting value of our stock portfolios. The Buy-and-Holders say that we should go by the numbers printed on our portfolio statements, that the validity of those numbers may not be questioned in public discussions. 90 percent of the population wants those numbers to be real, 90 percent of the population desperately needs those numbers to be real.That’s the story and that has always been the story.

Will the story change when prices fall by 50 percent or more? I think it will change. I don’t think there is going to be much interest then in maintaining a belief that the earlier numbers were real. When the numbers no longer appear on portfolio statements, most reasonable people are going to come to accept that those numbers were fantasy numbers all along. If they were real, they wouldn’t change so dramatically in such a small amount of time. And then the learning process will go into hyper-drive. We will have 37 years worth of powerful stock investing insights opened to us all at once. My guess is that we will as a nation of people learn more about how stock investing works in the year following the next price crash than we learned in the preceding 37 years (or whatever it turns out to be) in which Shiller’s “revolutionary” (his word) research findings were available to us for our review and consideration.

But I could be wrong. That’s always the curve ball. I thought that Greaney’s smear campaign would be shut down after two days, three at the most. The joke was obviously on me re that one. If I could be wrong about that one, I obviously could be wrong re this one too. But I just am not able to play it any other way. In a debate between reason and emotion, I am going to take the side of reason. It’s what I am, right down to the core. I was a Buy-and-Holder myself for several years and the thing that drew me to the strategy was its claim that it was a strategy rooted in research (I believe that the Buy-and-Holders were being sincere in making that claim even though I also of course believe that they have been proven wrong).

I think that stock investing strategies should be rooted in peer-reviewed research and I think that in future days they will be. I believe that there will come a day when every investing discussion board and blog on the internet will permit honest posting on the last 37 years of peer-reviewed research in this field. I believe that it is going to take a price crash that is going to cause an ocean of human misery to get us there and that reality of course breaks my heart in a thousand pieces. But I do think we will get there all the same. And, as John Walter Russell suggested many years ago, I believe that in the end The Great Safe Withdrawal Rate Debate will end up helping us all in many ways that today we cannot even imagine.

I vote for reason over emotion in stock investing. Every time. I offer no apologies whatsoever.

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

Reasonable Rob

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

The 81 paper did not address using PE10 to predict future stock returns. That was the 88 Shiller Campbell paper.

The 81 Shiller just addressed stock price volatility. “Do Stock Prices Move Too Much to Be Justified by Subsequent Changes in Dividends”.

Sean:

You are making a helpful point. I am grateful.

I think it is important to understand, though, that it was the 1981 research that was “revolutionary” (Shiller’s word) in its implications. The Wikipedia article notes that it was the 1981 article that challenged the Efficient Market Hypothesis. That’s what changed the world. It is universally accepted that price discipline is needed in every market other than the stock market. The thing that threw everybody off re stocks was the Efficient Market Hypothesis. If the market truly were efficient, Buy-and-Hold would be the ideal strategy. But Shiller showed in 1981 that that is not so. He removed the foundation stone of the Buy-and-Hold concept.

Once you know that Buy-and-Hold does not work, the next step in the logic chain is to determine what DOES work. That’s where using P/E10 to predict future stock returns comes in. The 1988 research builds upon the 1981 research. Shiller would not have even thought to look at that question had he not first discredited the Efficient Market Hypothesis/Buy-and-Hold. Wade Pfau and I went another step down the logic chain when we showed with our research that a 30 percent/60 percent/90 percent Valuation-Informed Indexing strategy has performed better than Buy-and-Hold on a risk-adjusted basis for all 30-year time-periods in the historical record (there were a small number of 30-year time-periods in which Buy-and-Hold did better on a nominal basis). And other researchers will of course explore other aspects of the question in days to come and we will all live better lives from that point forward as a result.

The most important research was the 1981 research. That’s what changed the world. Buy-and-Hold cannot work if what Shiller showed in 1981 is real. If the market is not efficient, common sense tells you that you need to exercise price discipline when buying stocks. Why wouldn’t you? The only reason anyone ever gave not to do so was the Efficient Market Hypothesis, which was just a mistake.

The bottom line on all this is that we all need to be talking about this stuff at every discussion board and blog on the internet. We made a great leap forward intellectually in 1981 and we made additional big leaps forward in 1988 and in 2011, when Wade and I published our paper. We all should be doing everything in our power to keep the ball rolling. We all should want to see as much research on these questions as possible and we all should want to see as much discussion of the implications of the research published as possible. Learning experiences are the one true free lunch in this world.

Do you agree?

Does it concern you that Shiller challenged/discredited the Efficient Market Hypothesis in 1981 and yet there are still people promoting the investment strategy that follows from that hypothesis today, in the year 2018? It scares the beejeebers out of me. If the market is efficient, the safe withdrawal rate is always 4 percent. If valuations affect long-term returns, as Shiller’s work (BOTH the 1981 and 1988 papers) showed, the safe withdrawal rate for those who retired in January 2000 was only 1.6 percent and those who retired at that time and were persuaded by the Buy-and-Holders to take a 4 percent withdrawal have only a 30 percent chance of seeing their retirements survive 30 years. That scares me to death. That means that we will likely be seeing millions of failed retirements in days to come. This will be one of the greatest public policy crises in the history of our nation. How do you think people are going to feel when they learn that those millions of failed retirements could have been avoided just by us electing as a nation of people to open every discussion board and blog on the internet to honest posting re the last 37 years of peer-reviewed research in this field?

I can use all the help that I can get. If you are prepared to sign up for The Cause, we have plenty of room for you, my new friend!

Recruiter Rob

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

“Shiller showed that long-term timing always works and is always required in 1981. ”

Do you have a link to the 1981 paper?

I read it once years ago, Sean. You can find it on the internet if you are interested. He wrote the paper with Campbell.

And he talks about it in his book Irrational Exuberance. And of course there are mentions of it in articles and in the newspaper reports on why he was awarded the Nobel prize and so forth.

I find your question interesting in way because it mirrors a question that I often want to ask the Buy-and-Holders. They say that there is research showing the market timing doesn’t work and I always want to ask them to provide a link to the paper showing that. The closest thing that we have is a paper published by Eugene Fama showing that SHORT-TERM timing doesn’t work. There has never been a paper showing that long-term timing (price discipline) doesn’t work. Wade Pfau spent months searching the literature to see if he could find such a paper and he came up empty-handed. There is zero evidence in the literature showing or even suggesting that long-term timing either might not work or might not be required. And of course, if valuations affect long-term returns, as Shiller showed, long-term timing MUST work and is ALWAYS required by every investor seeking to keep his risk profile roughly constant over time.

There can of course be legitimate differences of opinion as to how to practice long-term timing. We don’t know everything there is to know about the subject of stock investing. So we are not able to give perfect guidance today. My guess is that we will never be able to give perfect guidance. But we are able to say that those who absolutely refuse to practice long-term timing even at times of extreme overvaluation are dramatically reducing their lifetime return by doing so while also dramatically increasing the risk they take on with their investment decisions.

Just because we do not know everything does not mean that we do not know anything. We know that valuations affect long-term returns. So we know that dogmatic Buy-and-Hold strategies are dangerous strategies. Those who used a 4 percent withdrawal rate for retirements that began at the top of the bubble have only a 30 percent chance of seeing those retirements survive 30 years. I think we should be telling those people the realities at every investing discussion board and blog on the internet.

My best and warmest wishes to you.

Rob

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

“After the crash, I’ll have Jack Bogle.

Is that a big enough name for you?

Boglehead Rob”

Uhm….Jack did not make any death threats of job threats. Come on now, Rob. If those threats really happened, you should have a link, right??? You would have the ability right here and now to set the record straight and show everyone after all these years that there was an actual death threat. Why would this situation be any different than any other situation? We always require proof of an allegation in every other situation. Why would this particular situation be any different. Go ahead, Rob. Show us the links.

Greaney’s study is posted at his web site, Anonymous. Anyone who cares to can take 10 minutes and see if he can find a valuations adjustment in the study.

Greaney himself hasn’t been able to find one. If there truly were a valuations adjustment in that study, we never would have seen a single death threat or a single demand for a single unjustified board banning or a single act of defamation or a single threat to get a single academic researcher fired from a single job.

Those who follow the peer-reviewed research have known for 37 years that Buy-and-Hold is a scam. Permit honest posting on safe withdrawal rates and the entire house of cards comes tumbling down. So you Goons fight like crazy to block honest posting on safe withdrawal rates at every site on the internet.

Will you still be able to pull it off following the next crash? I don’t think so. But you are not going to go by what I say. We will have to wait a bit to see how it all plays out.

I will do anything that I can to help you out. But I cannot say that I see a valuations adjustment in the Greaney study. I have zero desire to join you in prison. So we will see what we will see.

This entire site is your link. Start anywhere and then just go where your fancy takes you. If your mind is 1 percent open, you will get the general idea in time. And then as you go deeper, the story will become clearer and clearer until you will never again be able to think about how stock investing works in the old way again.

There’s a reason why I am banned at every major investing site on the internet. That sort of thing doesn’t happen by accident.

Hang in there, man.

Link-Crazy Rob

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

Mike Piper just wrote an article that helps break things down in very simple terms so that maybe you can finally understand how the market works.

https://obliviousinvestor.com/stock-prices-still-volatile-efficient-market/

Thanks for the link, Anonymous. As you know, I love Mike’s stuff (while not agreeing with every last word of it).

I agree with the words in this particular article. I think he is describing properly the sense in which the market is indeed efficient.

The dispute that I have with Mike and with you and with Bogle and with lots of other good and smart people is that I do not believe that the market is efficient in all respects. The market is efficient when it is rational. The market is generally rational. So the market is generally efficient. But in areas in which the market has lost its capacity for rationality, it loses its capacity for efficiency. This is what has happened in cases in which the market is either overpriced or underpriced. The rational/efficient thing to do would be to price stocks properly. When the market goes nuts and prices stocks too high or too low, it is behaving irrationally. That’s where inefficiency comes in. You can’t have efficiency without rationality.

Say that you have an engineer friend who is an alcoholic. If you followed him around all day, you would see him perform hundreds of rational acts during the course of the day. He is CAPABLE of great levels of rationality. He calculates. He reasons. He judges. He disciplines himself. All of these things are undeniably true of many alcoholics. But when he reaches for that glass at the end of the day, he is not acting rationally. He is destroying his life. He has lost the capacity to act rationally in that one area of life and that weakness has the potential to destroy all the good done by the many acts of rationality he engages in on a regular basis.

I believe that Shiller’s work permits us to become more rational/efficient investors than we have ever been in the past. If we all explored the implications of Shiller’s findings in depth and took the message they are delivering to us to heart, we would never again see the level of overvaluation that we have experienced in recent years. Each time the overall market price became irrational/inefficient, investors acting in their own self-interest would sell some stocks and those sales would act to pull prices back to more rational/efficient levels. Market prices are self-regulating so long as investors have access to the information they need to make rational choices.

The trouble today is that we do not have access to the information we need to act rationally in response to overvaluation or undervaluation. Prior to 1981, Shiller had not yet published his research. So it was just one of those things. The information needed was not there and so investors continued acting irrationally and stocks remained a high-risk asset class. From 1981 forward the information was available to us but we collectively forbid ourselves from learning about it because learning about it would have required that we acknowledge having made a mistake in earlier days and it would caused us pain to acknowledge having once made a mistake re so important a matter.

The rational thing is to acknowledge the mistake or, at the very least acknowledge the possibility of a mistake, so that we can all move forward. I believe that we are in the process of getting to a higher level of rationality/efficiency re our stock investing behavior. It has been hard to achieve the advance because the advance is such a big one; the bigger an advance, the more scary it is to acknowledge that there was once a time when we did not know everything and therefore made bad decisions re important matters. But we are getting there, you know? It has been a painful process but we are in the process of getting there and there won’t be one of us who will not celebrate the advance once we all make it safely to the other side.

The mistake that the Buy-and-Holders made was in thinking that efficiency is automatic. Efficiency has to be ACHIEVED. The market is us. The market is comprised of human actors. Human actors become capable of making rational choices by learning what the peer-reviewed research says about the subject. We need to permit ourselves to discuss ALL of the peer-reviewed research, including the 37 years of peer-reviewed research that the Buy-and-Holders were not expecting to see in the days when they were putting together their model for understanding how stock investing works.

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

Rational (I Hope! — But Who Can Ever Be 100 Percent Sure?) Rob

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

Making things a ‘matter of opinion’ when they are logically false/true….

I feel a need to offer a second response to your comment focusing on these particular words.

Buy-and-Holders say that investors are always collectively rational in their pricing of stocks. Valuation-Informed Indexers say that there are times when investors are collectively irrationally exuberant re stocks and other times when investors are collectively irrationally depressed re stocks. You are saying that not only do you personally believe that the Valuation-Informed Indexing view is wrong but that the Buy-and-Hold view is true as a matter of pure metaphysical logic, that there can be no legitimate questioning of it.

Buy-and-Holders say that stock investing risk is stable, that there is only one safe withdrawal rate that applies at all valuation levels and that investors should remain at the same stock allocation at all times so long as their personal life circumstances remain stable. Again, you are saying that this view is true as a matter of pure metaphysical logic, that there can be no legitimate questioning of it, that there is nothing that those who believe that Shiller’s Nobel prize was merited can contribute to any discussion of stock investing.

Buy-and-Holders say that no form of market timing can work and that therefore stocks are the only thing that can be purchased in this world in which there is no need for the person doing the purchasing to exercise price discipline when doing the purchasing. Again, you are saying that this is so as a matter of pure metaphysical logic, that it is an axiom beyond question or dispute or challenge.

Why is it an axiom beyond question or dispute or challenge? In the world of science, things can be questioned. If Buy-and-Hold is beyond question, Buy-and-Hold is not the product of science. Once the claim that price discipline is not required when buying stocks is advanced as dogma, we have left the realm of science.

If Shiller had published his Nobel-prize-winning research showing that valuations affect long-term returns in 1961 rather than in 1981, we would all be Valuation-Informed Indexers today. Buy-and-Hold left the realm of science and became dogma in the 16 years between when Fama showed that short-term timing never works in 1965 and when Shiller showed that long-term timing always works and is always required in 1981. Our dispute is not one rooted in differences over what the historical return data says. Our dispute is a turf fight. There is a lot of money in Buy-and-Hold and the people who make that money were embarrassed when those engaging in science uncovered their error and have become increasingly desperate to cover it up as more and more time has passed and more and more lives have been destroyed by it.

I am grateful to the Buy-and-Holders for establishing the ideal that stock investing claims should be rooted in science. But they fail to honor their own ideal when they advance death threats and demands for unjustified board bannings and thousands of acts of defamation and threats to get academic researchers fired from their jobs. That stuff ain’t science. That stuff is the OPPOSITE of science. That stuff represents a running away from science. That stuff is rooted in an emotional desire to avoid a developing science that in recent decades has been saying something that the Buy-and-Holders did not expect it ever to say and that the Buy-and-Holders very, very, very much do not want to hear (or even to permit others to hear).

There is nothing illogical in a belief that price discipline is required when buying stocks just as it is when buying anything else. The illogical thing is to believe that, just because humankind did not always know everything there was to know about how stock investing works, we must all remain ignorant of the realities for all time so as not to upset those who made a mistake over 50 years ago. Mistakes are part of the scientific process and correcting mistakes when they are uncovered is also a part of the scientific process.

That’s my sincere take, Laugh.

I do wish you all good things.

Former (Because I Am a Believer in Science and Science Permits Us to Learn New Things Over Time) Buy-and-Holder Rob

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

“look at the fact that Shiller was awarded a Nobel prize”

Shiller was awarded the Nobel prize for showing, in historical data, that valuations affect future returns. That’s as obvious as the nose on your face. That’s a long way from your “buy and hold is the enemy” stuff. I do realize I’m getting lower expected returns now than when bonds yielded 8%, and stock P/Es were at 12. So what? Buy and hold still made me rich. I rebalance regularly, and reduce risk as I age – I’ve got more in bonds now than my total portfolio value 10 years ago.

When Shiller showed that valuations affect long-term returns, he changed the world. He showed how price changes come about. They don’t come about just because of economic developments. That’s what the Buy-and-Holders thought. If price changes came about because of economic developments, prices would fall in the pattern of a random walk. Hence, the title of the book “A Random Walk Down Wall Street.” Shiller showed that that’s just not so.

Shiller showed that the primary cause of price changes is investor emotion. Economic developments have an effect because they influence investor emotion. But the revolutionary change in understanding is that we now know that we cannot treat all gains as equal. Gains that are the product of economic developments are lasting. You can count on those gains in planning your financial future. Gains that are the product of investor emotion are fleeting. You cannot plan a retirement based on those gains because they could disappear at any moment. Investors need to distinguish the real gains from the emotional gains.

Is Buy-and-Hold the enemy? It wasn’t intended to be. It is a model for understanding the world that was intended to help us all. There was no bad intent in the development of Buy-and-Hold. But the Buy-and-Holders obviously did not have access to research that had not yet been published when they designed Buy-and-Hold. Had they had access to Shiller’s research, they would have designed Valuation-Informed Indexing. Given how the research that they had available to them at the time limited their ability to think through this stuff properly, they designed Buy-and-Hold. Then they learned something new in 1981 and it became necessary to make a change. That’s where things got on the wrong track.

It’s hard for humans to acknowledge mistakes. It’s especially hard when those mistakes are over questions so important that they are likely to cause millions of people to suffer failed retirements. For 37 years now, we have been trying to get this mistake corrected so that the thing that the Buy-and-Holders designed — our model for understanding how stocks work — can do the work they intended for it at the time it was designed. The Buy-and-Holders wanted the model to help people and they need to make the correction that the last 37 years of research showed us is required for it to do that. We need to teach people not that the market is efficient and that investors may remain at the same stock allocation at all times but that valuations affect long-term returns and that investors MUST adjust their stock allocations in response to big shifts in valuations to have any hope whatsoever of keeping their risk profiles roughly stable over time.

You can’t reconcile what Shiller is saying with what Bogle is saying. They are saying opposite things. Obviously there are many points in common. Shiller only showed that Bogle was wrong about one thing (that price changes are caused solely by economic developments). But that one mistake causes a lot of problems. Buy-and-Hold is a numbers-based strategy. If you count gains that are not real as real, you get the numbers wrong. A numbers-based strategy that gets the numbers wrong is not a good thing.

Emotion has a huge effect on stock prices. We should all be doing all that we can to rein in that effect. We should want prices to be as real/unemotional/economic-based as possible. The way to do that is to make investors aware of the dangers of treating emotional gains as real. When we see something like what we saw in the late 1990s, we should be warning people how much suffering they will cause themselves if they treat the phony emotional gains that they are creating as something real and lasting. If we warn them, they will make an effort to rein in their destructive emotions and we will all be better off. The Buy-and-Holders CELEBRATE phony, emotional gains. They treat them as real. To a Buy-and-Holder, a real economic gain is equivalent to a phony, emotional one. There is no room in the Buy-and-Hold Model for emotion-based gains.

Buy-and-Hold hurts us because it fails to put a brake on the destructive human emotions that cause us great harm in bull markets. It doesn’t do this because the Buy-and-Holders are bad people. It does this because they made a mistake for the perfectly understandable reason that the research they needed to avoid the mistake was not available to them at the time. The mistake just needs to be corrected. That’s where we stand today. Had the Buy-and-Holders known when they were starting out that they were going to make a mistake, they obviously would have vowed to correct it as soon as they learned about it. Deep in their hearts, the Buy-and-Holders want the mistake corrected as much as the Valuation-Informed Indexers do.

What makes it hard is that stock investing is not a purely academic exercise. When we make mistakes in our model of how stock investing works, we hurt real live human beings, millions of them. And we build careers around those mistakes. We become reluctant to correct mistakes we make because we want to avoid the embarrassment associated with doing so. We trap ourselves.

Everyone needs to take a step back and calm down. We need to get it on the record that the Buy-and-Holders are good and smart people that advanced our understanding of how stock investing works in hundreds of important ways. The Buy-and-Holders are our friends. But they made a mistake. Or at least there is one school of thought as to how stock investing works that is rooted in a belief that the Buy-and-Holders made a mistake. We need to let people who hold to that school of thought speak about what they believe in clear and frank and unapologetic terms. If we do that, we will all learn from each other and over time we will make use of the magic of constructive communication to gradually move to a better place for all of us.

The Buy-and-Holders started a learning experience. That’s the most wonderful thing that they did. But you don’t always know at the starting point where a learning experience is going to take you. Robert Shiller taught us all things about how stock investing works that we never expected to learn back when we took on the learning experience. He didn’t do a bad thing by confounding our expectations. He did a good thing by pointing us to exciting new possibilities. We need to treat those who believe that Shiller is on to something important with the respect they merit as people seeking to join us in an effort to better our world. When we begin doing that, we will all feel better about ourselves and about our mutual learning project in about 500 different ways.

Shiller changed the world in a very positive way. You can invest however you please. That one is up to you. But you cannot tell other people what discussions they may have on internet discussion boards re the last 37 years of peer-reviewed research in this field. There’s 37 years of peer-reviewed research showing that valuations affect long-term returns. People have every right in the world to point out to their friends that the Buy-and-Hold retirement studies lack adjustments for the valuation levels that apply on the day the retirements begin and to fill people in on what the numbers are that come up if valuation adjustments are included. Each investor must decide for himself or herself which school of academic thought is for him or her. You cannot make that decision for others. You take on responsibility for any financial losses they suffer as a result when you do so. That’s not smart.

I hope that helps a small bit, Anonymous.

Rob

Set forth below is the text of a comment that I recently posted to the discussion thread for one of my columns at the Value Walk site:

The way we remove bias is looking at outcomes. With your VII strategy, you decided to pull out of stocks over 20 years ago. We can look back on your posts (which you have tried to revise) and see that you had lower returns versus the commonly used buy, hold and rebalance portfolios (such as those described on Simba’s list). Since you can no longer deny your failure, your most recent attempts at trying to soften the critics is that you think you did better from a “risk adjusted” basis. as any person grounded in statistics can tell you, you do not risk adjust historical returns as those are actual returns…….but as you admit, you are not really a “numbers” guy.

Buy-and-Hold has been performing poorly for 18 years running. From January 2000 forward, the annualized return has been 3.2 percent real. That means that millions of Americans are short of where they need to be for retirement. They were counting on returns of something in the neighborhood of 6.5 percent real (the long-term average return for 150 years now). So we are all paying a huge price for the out-of-control bull market of the late 1990s. When we push prices up so far above what the economic realities permit, we are borrowing returns from future years. It hurts to have to pay back the debt.

I have my money in TIPS and IBonds paying 3.5 percent real. So I beat the stock return from 2000 forward by a tiny bit. But I of course did so by taking on only a fraction of the risk. So I think it would be fair to say that I am a good bit ahead of the Buy-and-Holders from 2000 forward.

The Buy-and-Holders are a good bit ahead of me counting from 1996, when prices first reached dangerous levels. But stocks are today priced for a 50 percent crash. On the day after prices drop that much, I will be far ahead counting from 1996 forward as well. So the real question here is — When stock prices travel to levels of extreme overvaluation, are additional gains the product of economic developments (in which case they would be true and lasting gains) or at they the product of irrational exuberance (in which case they would be non-real and only temporary gains)? I believe that those gains are the product of irrational exuberance.

This is really the only difference between Buy-and-Holders and Valuation-Informed Indexers. Buy-and-Holders count all gains as real, even gains attained at times of extreme overvaluation. Valuation-Informed Indexers do not. We believe that those gains are the product of irrational exuberance. It seems to me that it is an issue of huge national importance to figure out whether it is Fama or Shiller who is right re this one. If Shiller is right, we will be seeing millions of failed retirements in days to come because millions of people planned their retirements in reliance on Buy-and-Hold retirement studies and calculators which are rooted in a belief that even gains attained at times of overvaluation are real and lasting gains. We will also be seeing a deepening of the economic crisis in the event that Shiller is right because a 50 percent price crash will cause trillions of dollars of consumer buying power to disappear from the economy.

This is the $64,000 question. Is Shiller right re this one or is Fama right re this one? It is my strongly held view that a national debate should be raging re this question on every discussion board and blog on the internet. The answer to the question affects the future of each and every one of us. I think Shiller is right. I find his case very persuasive. Of course, I acknowledge that 90 percent of the population is today inclined to believe that those gains are real. Shiller and I are very much in the minority.

My best and warmest wishes to you, Sammy.

Rob

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

“stocks are more risky when prices are high”

This is the kind of thinking that lead you to confidently predict the market was going fall 50% within three years a few years ago. The rest of us stuck to our buy and hold strategies, and were rewarded for it.

Financial markets have no memory, and don’t adhere to any fixed scientific rules of nature.

You were not rewarded, Anonymous. If you want to say that you were TEMPORARILY rewarded, I could go along with that. Your portfolio number is bigger than it would have been had you lowered your stock allocation. But if 50 percent of the portfolio number represents irrational exuberance rather than economic realities, then any rewards that you have experienced are only temporary. When they go “poof!,” where are you going to be then? You will be down financially and you will have lost years that could otherwise have been put to use making up for those losses. A good argument could be made that, the longer it takes for the temporary gains to go “poof!”, the worse off you are.

I don’t want temporary gains. I want real gains. I don’t think that others should want temporary gains either. Now, it is not for me to tell others what to do. There are lots of good and smart people who love Buy-and-Hold. I wish them the best of luck with it. But it’s something else for me to endorse this strategy that I find so dangerous. People should do what they think is best. But no one has a right to demand my endorsement for something that I find dangerous. That’s a bridge too far.

Financial markets DO have a memory. That’s precisely what Shiller showed. If markets did not have a memory, returns would play out in the pattern of a random walk. That’s why the famous book that popularized Buy-and-Hold was titled “A Random Walk Down Wall Street.” Shiller’s book has a different title. Shiller’s book is titled “Irrational Exuberance.” Shiller showed that valuations affect long-term returns. That couldn’t happen unless the market had a memory. Do you think that valuations have just randomly been affecting long-term returns for 150 years now? Valuations affects long-term returns because the market remembers when prices go up due to irrational exuberance rather than economic realities and then it erases those temporary gains in time because the market’s ultimate objective is to get prices right.

I don’t quite get what you are trying to say when you say that markets don’t adhere to fixed scientific rules of nature. Markets operate in some way. The question that we all should be trying to determine is — HOW do they operate? We need to know how the stock market operates if we want to invest effectively.

The Buy-and-Holders advanced a theory as to how the stock market operates. They said that the market is efficient. That means that all factors known to affect price are taken into consideration in the setting of the price. Another way of saying it is that the market price is determined by rational actors, people trying to achieve their best interests. Shiller’s wife is a psychologist. So he knows that humans are not purely rational actors. He knows that they can be swayed by emotion. So he had doubts about this idea that investing is a purely rational business and he tested it scientifically. He found that, indeed, stock prices are set by a HIGHLY emotional process. And he gave us a tool (P/E10) to determine how emotional the market is at a given point in time so that we can protect ourselves from the effects of all the craziness.

If the market were rational, do you think we would have seen death threats? Board bannings? Thousands of acts of defamation? Threats to get academic researchers fired from their jobs? Those are emotional phenomena, Anonymous. We see that stuff because the Buy-and-Holders cannot bear to hear what the last 37 years of peer-reviewed research tells us about how stock investing works. The rational response would be for the Buy-and-Holders either to integrate the new research into their thinking or to try to form a rational case for why they reject it. A death threat is not a rational case. Neither is a board banning. Neither is an act of defamation. Neither is a threat to get an academic researcher fired from his job. The behavior of you Goons shows that Shiller was right. You would not be so upset if you were confident that your investment strategy was a realistic one.

There is going to be a national debate re these issues, Anonymous. The matters in dispute are too important to the futures of too many people for there not to be a national debate. If I were king of the world, that debate would have been launched on the afternoon of May 13, 2002. Or, better yet, in 1981, when Shiller’s “revolutionary” (his word) Nobel-prize-winning research was revealed to the world. We all would be better off today had the national debate been launched at one of those earlier times.

But here we are, you know? We cannot hold off on the launching of the national debate indefinitely. It is just too important for that national debate to take place. So we will launch it in the days following the next price crash. Not my preference, you know? Not by a long shot. But it’s an outcome a lot better than any alternative realistically available to us at this point in the proceedings. It appears to me that we are just going to have to accept these somewhat mixed realities, make the best of it that we can, and move on to a better place for each and every one of us.

The market has a memory. Otherwise prices would play out in the pattern of a random walk. That’s my sincere take, in any event.

National-Debate Launching Rob