A Rich Life

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

Bogleheads Forum Poster in Thread Discussing Academic Researcher Wade Pfau’s Finding that Valuation-Informed Indexing Strategies Have Provided Higher Returns Than Buy-and-Hold at Lower Risk Throughout the Entire Historical Record: “The Paper Refutes a Central Tenet of the Boglehead Investing Philosophy. It’s a Big Deal.”

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Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on May 18, 2011. My next e-mail from Wade arrived on May 31, 2011.

Jacob Irwin, publisher of the My Personal Finance Journey blog, posted an analysis comparing Valuation-Informed Indexing with what he calls “Passive Investing” (what I call “Buy-and-Hold” — sticking with a single stock allocation in the face of big changes in the price being charged for stocks):

http://www.mypersonalfinancejourney.com/2011/05/valuation-informed-indexing-vs-passive.html

Jacob sent a link to me and Wade and Wade copied me on his reply to Jacob.

Wade said: “VII tends to work as long as there is mean reversion in PE10, which there usually is.  The unprecedented run-up of PE10 in the 1990s makes it hard for VII to compete then.  I think there is not much else that can be done about that.  But I don’t think this means that VII has permanently stopped working. Trying to find a specific strategy for VII to have worked in this 1990-2011 period sounds too much like data mining.  Though in other time periods, it hardly matters which strategy you choose as it is hard to find a period in which VII does not work.”

He also linked to a discussion at the Bogleheads Forum that he said he thought might be of interest to us:

http://www.bogleheads.org/forum/viewtopic.php?t=75585&postdays=0&postorder=asc&start=0

In the Bogleheads discussion, a poster using the name “Fred Flintstone” said that Wade’s research showing the superiority of Valuation-Informed Indexing over Buy-and-Hold “refutes a central tenet of the Boglehead investing philosophy. It’s a big deal.”

“I Was Thinking About Taking Taylor [Larimore] to Task for This [Mischaracterizing Bogle’s Position]…. Other People Have Already Pointed It Out to Him and He Doesn’t Seem to Care.”

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Yesterday’s blog entry reported on an e-mail that I sent to academic researcher Wade Pfau on January 20, 2011. Wade responded the next day.

He said: “If you do have any suggestions about how I explained why long-term market timing works, but not short-term market timing, I would love to hear it.” He added, though, that he did not want me to have to retype points I had already made in materials at my web site. He explained that: “I think this is something you’ve addressed in your various articles, and I will read everything before finalizing my paper.”

Re Larimore’s mischaracterization of Bogle’s position, Wade said: “I was thinking about taking Taylor to task for this, but in the end I’ve decided not to. That guy is over 80 years old and he seems to be a bit of a follower. I don’t really feel a need to argue with him at this point. Especially since other people have already pointed it out to him and he doesn’t seem to care.”

Wade told me that he had “big news.” He had posted preliminary results of his research:

http://www.bogleheads.org/forum/viewtopic.php?t=67093

He noted that “Richard disappeared after I took him to task about being full of it with regards to ‘standard statistics.’ ” He explained that: “I think on those message boards that all those guys repeat that mantra so much that they do not think it is standard statistics, when in fact the issue of rolling periods is a rather advanced topic well beyond the reaches of Statistics 101, and their assumptions are not necessarily right.”

“Unless Taylor Larimore [Co-Author of the Book The Bogleheads Guide to Investing) Has Had Some Secret Discussions With Bogle That No One Knows About, He Is Mischaracterizing Bogle’s Position.”

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Yesterday’s blog entry reported on an e-mail that academic researcher Wade Pfau sent me on January 20, 2011. My response is set forth below.

Wade:

That’s super. I am grateful for your constructive efforts.

1) CJKing is an awesome poster, probably the best I have ever seen on this topic. If it’s possible to contact him through a private e-mail system there, he can probably be of help. He is extremely knowledgeable re this topic and also has spent
years thinking carefully through all the angles.

2) His recommendation to read Valuing Wall Street was a great one. Smithers uses a different valuation metric. John Russell did some research seeking to determine which metric worked best (P/E10 or Tobin’s Q). He ultimately went with P/E10 but my recollection is that he also had generally good things to say about Tobin’s Q.

3) John Russell wrote an article making the point you were making re the size of the data set. He certainly agreed with your intuitive sense re this. I will try to track down that article.

4) Richard’s point is the most important, in my view. People need to understand WHY long-term timing works but short-term timing does not. I struggled with this for a long time. Once I was clear on the premises of
the new model, I was able to understand all sorts of aspects to the question that I had been blind to before. If you want me to say more on this (now or later), please just let me know and I will expand on the point.

5) Norbert Schlenker’s behavior is inexplicable. He banned me from his board. However, I think his substantive comments on the thread where he supplied the graphic were perfectly fair. He expressed a certain skepticism but it was more a cautious skepticism than a rigid skepticism. And the one big negative he pointed to — the success of Buy-and-Hold in the late 1990s — no longer applies since the crash. It’s of course not his fault that he happened to prepare the graphic prior to the crash.

6) You described Benjamin Graham’s take properly. I will try to track down an article that quotes his words.

7) Bogle has said that Valuation-Informed Indexing can work:

http://arichlife.passionsaving.com/2009/07/28/bogle-says-valuation-informed-indexing-can-work/

Unless Taylor Larimore has had some secret discussions with Bogle that no one knows about, he is mischaracterizing Bogle’s position. In fact, Bogle warns about the effect of overvaluation in nearly every speech he gives. Bogle himself timed the market successfully! He has said in published interviews that he lowered his stock allocation to about 30 percent at the top of the bull partly because of valuation concerns. He obviously is ahead
today because of his decision to do that. Taylor is of course aware of this. These points were made dozens of times to him in threads that reside today in the Post Archives of the Vanguard Diehards board.

That’s a great thread! I am sure that that is going to help some people gain a better sense of the realities.

Rob

Wade Pfau: Bogle in Many Cases Has Said Things “Not All That Different From What You Said”

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Yesterday’s blog entry set forth the text of a an e-mail that I sent to academic researcher Wade Pfau on December 16, 2010. Wade responded the next day.

Wade said in his December 17 e-mail that: “In thinking about it further, I owe you further apology as my comment was based on a misunderstanding about your past claims.” He explained that: ” I understood that you meant this as the safe
withdrawal rate, but somehow I still confused myself into thinking that this number represented your prediction for the actual withdrawal rate.  If it was a prediction, then naturally you would need to indicate the uncertainty surround it.  But it is not a prediction.  It is just a lower bound that should be safe. So you don’t have to be so worried about its precise value. ” He speculated that the person who had suggested in an earlier thread at the Vanguard Diehards board that I had been dogmatic in my posting “made a similar mistake” and that this mistake “confused my ability to understand your response.”

He added that “actually I am a neophyte to the whole withdrawal rate debate.  I didn’t even know about Bengen or the Trinity study until July” but “now I am quite interested in this topic.”

Wade expressed confusion over “why some Bogleheads are so threatened by using valuations.” He noted that John Bogle has in many cases said things “not all that different from what you said.”

He concluded the e-mail with a kind compliment. He said: “I should also just say that you are a very good writer….Your writing really commands attention.”

The text of my response is set forth below:

Wade:

That all sounds good.

Please enjoy your week away. I expect to send you an e-mail next week that will provide a link re your question about the timing of John’s work and perhaps address a few other substantive points. But I of course understand that you will not see it until the following week.

Bernstein’s discussion of SWRs is on Page 234, if I recall correctly. I have cited it so many times over the years that I have the page number memorized. The claim that I often make is that the Old School SWR studies are “analytically invalid” and I often cite Bernstein’s words in support of this claim. One of my fellow community members who does not like me using that phrase sent Bernstein an e-mail asking him if he agrees that the Old School studies are “analytically invalid.” Bernstein said that “of course” they are analytically valid. But he followed that up by saying that anyone giving thought to using one of them to plan a retirement would be well-advised to “FuhGedDaBouDit!” That’s the point that I mean to convey with the claim that they are “analytically invalid”! The purpose of the studies is to help people plan retirements. They are not designed in such a way as to be able to do that effectively. So in my eyes they are analytically invalid. They do not the job that they were set up to do.

It may make you feel better to know that John Walter Russell also made the mistake of confusing the number that is at the lower bound of the confidence interval (the SWR) with the number most likely to turn up. John and I exchanged about 10 e-mails on this point a long time ago. I agree with you that there’s a good chance that the other poster in the thread you read was making a similar mistake. This is not intellectually difficult stuff (at least not the parts that I understand — I have no background with the statistical tools). But there is an undercurrent here that is EXTREMELY counter-intuitive. I have seen it throw many smart and good people off track. I of course would like to be able to figure out how to communicate the points in a way that avoids the confusion that enters into just about every discussion of these matters. I have picked up some clues as to how to do that over time. But it is the hardest job that I have ever tackled in my life. The way to spin this in a positive way is to observe that, if the confusion is today very deep, the prospect of making a giant leap forward in our understanding of how stock investing works once we overcome the confusion is also great.

Your words about John Bogle are 100 percent right on! It was by reading Bogle’s “Common Sense on Mutual Funds” in the mid-1990s that I got on the track that I am now on. I am the biggest Boglehead in the world. The investing strategy that I recommend is called Valuation-Informed Indexing. It is a mix of Bogle’s best ideas and Shiller’s best ideas. I say that Bogle and Shiller go together like chocolate and peanut butter. The thing that I say that some view as anti-Bogle is that Bogle made the biggest mistake in the history of personal finance when he said that it is possible to “Stay the Course” without being willing to change your stock allocation in response to big valuation shifts. But I don’t see it as being such a big deal that Bogle made a mistake. We obviously all make mistakes and Bogle’s ideas have led to many breakthroughs (including Valuation-Informed Indexing — there clearly would not be any VII today without the insights contributed by Bogle).

It may be that some of the anger felt by some of the Bogleheads is BECAUSE my ideas are so influenced by Bogle’s. The angry ones could dismiss my ideas easily if they differed in many ways from Bogle’s. Because they are so closely related,
it is hard for them to dismiss them. Yet the strategy recommendations are very different. In January 2000, a Valuation-Informed Indexer would probably have been going with a stock allocation of about 10 percent. A Buy-and-Holder would
probably have been going with 70 percent. That’s a big difference! My only difference with Bogle is over the valuations question, but valuations are so important that we often end up in very different places.

As you note, it’s not that Bogle rejects the idea that valuations affect long-term returns. I learned this from him! It’s that Bogle does not IMPLEMENT the insight. He SAYS that valuations matter. But his allocation recommendations do not take valuations into account. That’s the entire deal. That’s the only real question in dispute in the eight-year-long debate.

Bogle said in an interview that he thinks VII can work:

http://arichlife.passionsaving.com/2009/07/28/bogle-says-valuation-informed-indexing-can-work/

But when I sent him an e-mail asking for his help in dealing with the abusive posting, he did not respond:

http://arichlife.passionsaving.com/2009/07/30/my-hope-is-to-persuade-you-to-steer-the-indexing-revolution-to-a-more-promising-path/

Please have a great week away from all this and perhaps we will be able to talk over some ideas for further research when you get back. There are all sorts of possibilities. I can assure you that I had zero idea what I was getting into when I put up that first post back on the morning of May 13, 2002. This is a deep well!

One last point. Over the years I have had a number of people ask me about international SWRs. It sounds like your recent paper will go a long way to answering their questions. I will definitely be checking it out and linking to it in future days.

Rob

“There Was a Day When Old Saint Jack Dreamed of Coming Up With an Investing Strategy of One-Tenth the Power of Valuation-Informed Indexing”

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

I think John would have had the decency to attend and just listen to their honored guest like everyone else. I think it’s fair to say at least half of the once DynamicDuo had at least a smidgen of decency. Alas, not the Rob “Hocus” Bennett half!

I would have put Old Saint Jack on the Hot Seat, Yip. You sure got that one right.

If he gave good answers to the questions, I would have applauded him and written it up at my blog.

If he evaded the questions, I would have drilled and demanded clarity. Relentlessly.

If he acknowledged his mistakes, I would have praised him as a Hero to the Middle Class.

The suggestion in your words is that you know darn well that he cannot give good answers to the questions and so you consider it “rude” to ask them. The implication is that he is 100 percent corrupt and we all should be doing what we can to cover up his corruption.

This I do not buy.

There’s a chapter in my book titled “Jack Bogle Started Out as a Little Boy.” There was a day when Old Saint Jack dreamed of coming up with an investing strategy of one-tenth the power of Valuation-Informed Indexing. The man is responsible for dozens of hugely important contributions. I love him enough to think that he is entitled to see that dream come true in his Autumn years.

The guy is not dead yet, Yip. These should be the years of Bogle’s greatest accomplishments, the years he corrects the terrible mistakes he made in his First Draft Effort and sets things right and finally gets to put his name on a strategy that really does make stock investing simple and profitable for the middle-class investor.

I intend to shake him up with some hard and pointed questions. That part is so.

You think he is corrupt. You think he is incapable of caring about the millions of people whose lives he has ruined with his mistakes. That’s 50 times worse.

No. It’s 500 times worse.

I want to shake him up because I want to bring out the good that I know must be inside him for him to have accomplished all the great things he truly has accomplished. You want him to go down in history as the person primarily responsible for putting the United States in the Second Great Depression, an economic collapse that could well end up being bad enough to bring on a third world war.

You’re a great friend, Yip! A true and fine Boglehead! Dues all paid up!

God spare me from friends like you, Yip.

Bogle deserves better than friends like you and the other LIndauerheads, Yip. Lots better. You have delayed my efforts, but I intend to see that he gets lots better.

Here’s Elvis:

If you don’t believe me, baby, why don’t you just count the days that I’m gone?

Mystery Train.

Rob

“It’s Not a Mistake When John Bogle Fails to Do Anything About the Lindauer Matter After I Have Sent Him Three E-Mails Asking for His Help”

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Set forth below is the text of a comment that I recently put to the Goon Central board in response to a question from Drip Guy.

Before you came to enlighten the World, everyone who mentioned SWRs before you was lying?

Was everyone who believed years ago that the earth was the center of the universe lying, Drip Guy?

Humans don’t know everything. We learn over time. I was certainly the first person who reported the SWR accurately.

Now — was Greaney lying when he said that I was on medications and that I stalked women?

Obviously.

So he made a mistake and then lied to cover up the mistake.

How about Scott Burnszzz and the other “experts” who made clear that they are aware of the research showing that valuationszzz affect long-term returns and yet have done little or nothing to get the Old School studies corrected?

Are they lying? I think it would be fair to say that they are not behaving with a high degree of integrity. How would you feel if you were one of the millions of middle-class investors who will be suffering a failed retirement because of their failure to speak up?

Our economic crisis started with a mistake, the idea that the market is efficient. But it’s not a mistake when John Bogle fails to do anything about the Lindauer matter after I have sent him three e-mails asking for his help. If Bogle were a used car salesman, I think it is clear that he would not permit the sorts of people who have put up posts in “defense” of Lindauer to post at a board with his name in the title. Why does he do it as an investment expert in which millions of middle-class people have placed their trust? Should the ethical standards that apply in The Stock-Selling Industry be that much below those that apply in the used car business?

I say “no.”

I find no fault with those who developed mistaken ideas about how stock investing works in the days before all of the research was available to us. I view that as just one of those things.

But, yes, I absolutely think that people should correct their mistakes when they learn of them.

If you want to say that the errors in the Old School studies were just mistakes in early 2002, I have no problem with that. That’s what I think too.

But I put forward the post that kicked off The Great Debate nearly ten years ago. Are we to believe that it’s all just an innocent mistake to this day?

We are going to need to rebuild the economy that was destroyed through the relentless promotion of Get Rick Quick strategies for 30 years after the research was published showing that Get Rick Quick never works. I am going to do my part to defend those whom I view as pioneers in the field. I certainly include people like Bogle and Burns in that group. But I am not going to lie in their defense. I am going to spin things in their favor to the greatest extent possible. But I am not going to say that Burns wrote a series of articles demanding that the Old School studies all be corrected as soon as he received my e-mail or that Bogle demanded the removal of all posters who had posted in “defense” of Lindauer or Greaney as soon as he became aware of what the Sewer Rats were doing to the Vanguard Diehards board.

What I conclude about these matters is not going to count for all that much in the grand scheme of things, Drip Guy. It’s what millions of middle-class investors whose lives are in the process of being destroyed in this economic crisis conclude that matters.

I will be in there pitching, putting things in the most positive light possible for the Buy-and-Holders. But there are limits to my powers of persuasion, Drip Guy. I think it would be fair to say that the Buy-and-Hold dogmatics are not exactly making my job an easy one.

If you cared about your long-term self-interest one-tenth as much as I care about your long-term self-interest, I think it would be fair to say that these matters would have been put to rest in the Spring of 2002.

I will continue to extend the hand of kindness to you and to all others who have gotten caught up in all the ugliness visited on us by the Internet Sewer Rats who have elected of their own volition to put up posts in “defense” of Lindauer and Greaney. But I won’t post dishonestly on SWRs. If you think I will, you’re living in a dream world. It would be cruel of me to suggest to you that any fantasies you are counting on in this regard have even the tiniest chance of ever coming true.

Be well, my old friend.

Rob

“I Have Never Seen Bogle Correct the Lindaurheads. That Suggests That He Does Not Have a Big Problem With What They Tell People.”

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Set forth below is the text of my response to a comment advanced by “Arty” to the discussion thread or a recent blog post here:

But just so we are on the same page, what are the precise quotes from, say, Bogle, that are “get rich mumbo jumbo”?

Please understand that Bogle is one of my heroes. I view him as a giant in the field. There would be no Valuation-Informed Indexing without John Bogle. I learned as much from Bogle as I learned from any other expert, including Shiller and Russell.

That said, the sort of thing that Bogle says that causes huge trouble for millions of middle-class investors is his injunction to “Stay the Course!” What does that mean?

If it means “try to keep your risk profile roughly stable,” Bogle is the leading advocate of Valuation-Informed Indexing alive on Planet Earth today. It’s not possible to keep your risk profile stable without changing your stock allocation in response to big valuation shifts. So, if that’s what the phrase means, Bogle and I are soul brothers.

But that’s not how the Lindauerheads interpret “Stay the Course.” The Lindaurheads say that it means to stay at the same stock allocation. That’s the opposite of maintaining the same risk profile.

Bogle won’t tell us what he means. I offered to make a presentation to the annual Bogleheads conference and to ask him that question and find out what he thinks and the owners of the forum elected to start a new forum to escape me and my annoying questions rather than to permit me to ask those questions in a public meeting. So I think it would be fair to say that there is some funny business going on re these matters, Arty.

I know that the Lindaurheads interpret what Bogle says in very dangerous ways. I don’t know precisely what Bogle thinks because he won’t answer questions about these matters. I have sent him three e-mails trying to learn more about what he really believes. But he has not responded to those e-mails.

I have never seen Bogle correct the Lindauerheads. That suggests that he does not have a big problem with what they tell people.

That’s pretty much all I can say about this topic, Arty. I wish that some others would get involved and try to find out in more detail precisely what Bogle believes. We need Bogle promoting Valuation-Informed Indexing. That would be huge. And he has indeed said many things supportive of VII. But I don’t think that I can quite say today that The Big Guy has endorsed VII. I wish I could.

If anybody has any ideas as to what I might do to persuade him to make a flat-out endorsement, I would be grateful to hear them. Once we get that endorsement from The Big Guy, I believe that we are on our way to bringing this economic crisis to an end.

Rob

“Bogle Is Going to Get a Huge Portion of the Credit for Valuation-Informed Indexing. I Am Going to See to It”

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Set forth below is the text of a comment I put to the thread associated with my recent Guest Blog Entry titled What Bogle Says About Valuation-Informed Indexing:

To me, Bogle’s remarks are cryptic and vague. It does him injustice to speculate what he is really thinking. Would he not be interested to explain these remarks more fully if asked?

This is the best we are going to get out of Bogle for the time-being, Jon. I have written him three e-mails asking for clearer statements and not received a response. I also offered to make a presentation to one of the annual Bogleheads meetings at which Bogle appears and have Bogle respond to the points made. The leaders of the group responded to that one by shutting down the board and moving it to a new place where they could control who was permitted to speak and then banning me.

Bogle says opposite things on valuations in almost every speech he gives. He always says that valuations affect long-term returns, which is true. But he also always says that investors do not need to change their allocations in response to big valuation swings, which cannot possibly be true if valuations affect long-term returns.

The root problem here is that our understanding of how stock investing works is primitive. We put some important pieces together in the days when Buy-and-Hold was developed (for example, it really is so that short-term timing doesn’t work), but we did not at that time know all there was to know. In later years, we got more pieces to fit in an intellectual sense. But the people who had been promoting Buy-and-Hold did not want to admit that they had made mistakes in their first-draft effort. So we got no corrections. We are today in a strange Twilight Zone in which those who are familiar with the academic research know (at least intellectually) that Buy-and-Hold can never work but dare not say so publicly. Those who say so publicly are shunned by everyone else in the field because all feel embarrassed for the human misery they have caused (not by being wrong, which is nothing, but by not acknowledging the mistakes when they were brought to their attention).

There is no injustice being done to Bogle by quoting his words. He sounds confused because he is confused. He very, very, very much wants to believe that Buy-and-Hold can work. He feels that his entire reputation is riding on this. But he is not able to explain the academic research of the past 30 years. Contrary to popular belief, there has never been a single study showing that timing doesn’t work. There are lots of studies showing that short-term timing doesn’t. But every study of long-term timing shows that it always works. So the statement “timing always works” is every bit as true as the statement “timing never works.” Whether timing works or not is entirely dependent on what form of timing it is that you are practicing.

It is the people who advise Bogle to keep this covered up who are doing him a great injustice. Bogle is a giant in this field. He is responsible for perhaps a dozen of the most important insights in the history of stock investing. Valuation-Informed Indexing is the future. VII is as much John Bogle’s creation as it is Rob Bennett’s creation. All I did to develop VII was to take Buy-and-Hold and drop out the Get RIch Quick stuff (Bogle did not know it was Get Rich Quick stuff at the time he adopted it because the research showing this had not yet been done at the time). VII is going to permit all middle-class investors to retire five to ten years sooner than they can hope to today. It is a huge advance. And Bogle is going to get a huge portion of the credit for it. I am going to see to it.

The only thing Bogle ever did wrong was to fail to make the changes when the research showed that they were needed. Bogle talks about this sort of possibility in one of his books. He says that, if ever he makes a mistake, he hopes that his friends will point it out to him. I am the biggest Boglehead in the world. I am the man’s friend. So I have done what he has said he wants me to do and what I would want him to do if the places were changed.

Bogle is hurting himself today. He is human and he has given in to feelings of pride. We all are capable of doing such a thing. We all should be seeking clear answers from him, not to embarrass him but to get things back on the right track for him and for all the rest of us too.

Bogle is in pain at the moment. He has done wonderful work for us for many years. He made one perfectly understandable mistake (there are lots of smart and good people who made the same mistake). He is now engaged in rationalization aimed at keeping knowledge of the mistake from others and even from himself (cognitive dissonance is a real phenomenon down here in the Valley of Tears). And the worse the economic crisis gets, the more pressure he feels.

Bogle very much needs to offer a fuller explanation and to respond to questions and all this sort of thing. But he does not today possess the courage to do this. All of those who care about him (and about the survival of our economic system) need to do what we can to push him into doing what needs to be done as soon as possible. On the day Bogle walks to the front of the room and says those three magical words “I” and “Was” and “Wrong” (or even just “I’m” and “Not” and “Sure” — those slightly less magical words would also be enough to get the job done), all sorts of wonderful things begin to happen.

We have dover the past 30 years developed hundreds of insights about how stock investing works that we are not today able to share with others because to do so would embarrass the Buy-and-Holders. The Buy-and-Holders did not mean to cause an economic crisis when they were starting out. They never imagined things turning out this way. We need to open the floodgates of knowledge and launch a national debate on what works in stock investing that will generate the greatest period of economic growth in our history. I have studied this subject in great depth for nine years now and I can tell you that the numbers suggest that, within six months of the day Bogle gives that speech, we will all be looking at the economic crisis in the rear-view mirror.

We need to stop looking backward and start moving forward again. Bogle is a leader in this field and we need his help to get this done. Bogle wants to help, at least part of him does. We need to place our confidence in the better part of the man and implore that better part of him to get up on that stage and say what needs to be said. If enough of his friends get to work on this, it will happen. I have seen the last page of the book and I am pleased to be able to report that this one has a happy ending.

Rob

What Bogle Says About Valuation-Informed Indexing

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I’ve posted a Guest Blog Entry at the Balance Junkie site called What Bogle Says About Valuation-Informed Indexing.

Juicy Excerpt: The purpose of this post is to describe and comment on Vanguard Founder John Bogle’s views on Valuation-Informed Indexing. Bogle is widely recognized as the primary advocate of Buy-and-Hold alive on Planet Earth today, as I am the primary advocate of Valuation-Informed Indexing. The surprising truth is that, despite common misperceptions, the two of us are not all that far apart in our investing views!

Juicy Comment #1: To me, Bogle’s remarks are cryptic and vague. It does him injustice to speculate what he is really thinking. Would he not be interested to explain these remarks more fully if asked?

Juicy Comment #2: Regarding some ‘buy and holders’ with whom I have engaged they don’t necessarily completely practice what they preach. They do in fact take advantage of market downturns to time their rebalancing of their asset allocations and when confronted they get angry and say it’s just common sense!

Juicy Comment #3:  I don’t think I’m smart enough to know when stocks are at fair value and when they’re at double fair value.

Juicy Comment #4: VII is as much John Bogle’s creation as it is Rob Bennett’s creation. All I did to develop VII was to take Buy-and-Hold and drop out the Get RIch Quick stuff (Bogle did not know it was Get Rich Quick stuff at the time he adopted it because the research showing this had not yet been done at the time). VII is going to permit all middle-class investors to retire five to ten years sooner than they can hope to today. It is a huge advance. And Bogle is going to get a huge portion of the credit for it. I am going to see to it.

Juicy Comment #5: As you note, even the Buy-and-Holders see that Buy-and-Hold does not jive with common sense. So, just as you say, they make a million exceptions to the “rules” of the Buy-and-Hold approach. You’ll note that Buy-and-Holders never object to people who don’t follow the rules. It doesn’t bother them. Why? Because those people are not pointing out that there are no studies. So they represent no threat. It’s the people who take Buy-and-Hold seriously and ask to see the studies that are trouble.

The Bogleheads Forum Discusses the Pros and Cons of Valuation-Informed Indexing

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The Bogleheads Forum has been discussing the merits (or lack thereof) of Valuation-Informed Indexing again.

The discussion is wildly imbalanced. The Bogleheads Forum was created to permit Buy-and-Hold advocates in that community to escape the Morningstar Forum, where honest posting on Valuation-Informed Indexing was permitted for two years. Those discussions were some of the best investing discussions we have ever seen on the internet (a good number of those who were trying to defend Buy-and-Hold from the challenges put to it do not agree, to be sure). The first action taken upon formation of the new forum was to ban honest discussion of Valuation-Informed Indexing. So those listening in to that thread are obviously not getting to hear both sides of the story.

That said, there are lots of smart people in the Bogleheads community and there are some positive as well as negative comments contained in the thread. That’s to the forum’s credit. Also, some of the negative comments are worthy of consideration. You want to explore the pitfalls of a strategy before adopting it. There’s no place where you are more likely to hear a well-crafted criticism of Valuation-Informed Indexing than at the Bogleheads Forum.

Juicy Excerpt #1: You say “You’re right, you are smart and I admire you and you are a sharp dresser. Indexing is great. And we like it so much that we’ve developed something much better than that moldy old indexy indexing. It’s…. active indexing, yeah! It’s Indexing Plus! Or Indexing-X-Treme! Or enhanced indexing or fundamental indexing. It’s indexing, but it’s better! And because it’s better, and only we have it, we get to charge high fees….”

Juicy Excerpt #2: A lot of people on this Forum are skeptical of valuation-informed allocation. I am in the minority. I recently revised my IPS to take into account valuations of both stocks and bonds when making allocation decisions. The algorithm I use is very simple.

Juicy Excerpt #3: Notice that even if he were right that indexing is not the best strategy, it would not follow that his own specific strategy is better.  Differences in opinion is what makes horseracing, and difference in opinion on valuation is what makes the stock market. The case against “valuation-informed” anything is that it is hard to value assets correctly. Even in the year 2000, people were arguing dead seriously that Stock Prices Are Still Far Too Low.  I just don’t believe that a few simple rules based on numbers that are easily available to everyone will substantially improve your risk-adjusted returns.

Juicy Excerpt #4: To RB’s credit, I’d love to see even an incoherent 18-point list titled, “The Case Against Pyramiding Up”

Programming Note: The blog will return on September, 12. Goodbye, Summer of 2011!