My friend Mike Piper, author of the Oblivious Investor blog, has written a book called Oblivious Investor and was kind enough to send me a review copy. It recommends Passive Investing. To the bonfires with it!

Or maybe not.

I bill myself as the most severe critic of Passive Investing alive on Planet Earth today (and I don’t think you would hear an argument from Mel Lindauer, another friend of mine who wrote a book endorsing Passive Investing — Mel’s book is The Bogleheads Guide to Investing ). Still the full truth of the matter is that the reason why I so strongly oppose the current incarnation of the Passive model is that I see tremendous potential in many of the concepts wrapped up together in the package of strategies that we refer to collectively as “Passive Investing.” My goal is to save the good ideas by pointing out the flaws and getting them fixed. So I need to point out what I like about Mike’s book before turning to the part that in my view is wrongheaded.

The middle-class investor must invest in stocks to finance his or her retirement. Mike makes this point effectively. He’s right.

The middle-class investor needs a simple way to invest or else he is going to get it wrong. Again, Mike makes the point effectively. Again, he’s right.

The middle-class investor becomes hopelessly confused about what works when he tries to make sense out of the tons of junk generated by the media reports on the gyrations of the stock market. Yet again Mike makes the point effectively. Yet, again, he is right (at least that’s my take).

Oblivious Investor presents the case for Passive Investing in an extremely non-intimidating way. The book can be read in a short amount of time yet addresses all of the issues that need to be addressed. The focus is on investor emotions, which is exactly where the focus needs to be. The book makes a point of telling the reader what matters and what does not and of reassuring her that she need not concern herself with all the jizz-jazz that doesn’t amount to much in the long run.

Good.

The trouble for me comes at the bottom of Page 93. That’s where Mike is talking about Mr. Market and where he explains correctly that he is a manic depressive and advises the investor to “just ignore him.”

The trouble is — we can’t.

Mr. Market is indeed a nutcase. I do not agree with Mike (or with John Bogle or Mel Lindauer or any of the other Passive Investing advocates) that Mr. Market is a nutcase that we can safely ignore. Mr. Market at times becomes the sort of nutcase who burns the building down if not asked where he is going with the can of gasoline and the box of matches.

Mr. Market also determines whether our retirement accounts go up over time or go down over time. Nutcase that he is, Mr. Market matters. We cannot ignore him. We need to come to terms with him. We need to learn how to keep him in line.

Mr. Market is the fellow who crashed the U.S. economy. Mr. Market brought stock prices to three times fair value, which assured that the inevitable return to fair value (where we are today) would wipe us out. The wipe-out caused us to cut back on spending, which sent the entire economy into free-fall. No, we cannot ignore this fellow. He is seriously twisted. He is dangerous. This fellow is worse than Bernie Madoff. This guy should be arrested! This guy needs to be put under lock and key.

How do we do it? By being just a tiny bit less oblivious, by being a little more willing to take common sense into consideration than is permitted under Bogle’s gravely flawed first-draft cut at development of the Passive Investing package.

We need to let people know about the academic research of the past 30 years showing that valuations affect long-term returns and explain that that means that long-term investors need to adjust their stock allocations once every eight or ten years on average to keep their risk levels roughly constant. When Mr. Market gets stone drunk while driving the car carrying our retirement money, we don’t enable him by acting like nothing is wrong and saying a survival prayer. We take away the keys. We tell him in no uncertain terms what we think of such reckless behavior. We insist that he go sleep it off and not show up in public again until he’s got it under control.

That’s the change we need to make. With that change, the rest works. Without that change, the economy goes over a cliff. We cannot continue to advise people to buy stocks without telling them what they need to know to keep the car from crashing. It’s just not responsible. It’s just not right.

Mike is right to advise you to be oblivious of the short-term noise. There’s great power in that idea.

But there’s oblivious and then there’s oblivious, you know?

You must never be oblivious of the price you pay for the stocks you buy. You must go with a lower stock allocation when prices are insane than you do when prices are reasonable or low.

Otherwise, Mr. Market the Manic Depressive puts us all in a ditch. We all lose if that happens, the Rationals and the Passives both. It’s our economy. We need to start taking care of it in the manner of a people who want it to remain around for awhile.

Read the book. Learn from what is good in it. Also note what is lacking. Then talk it over with your friends with the goal of getting things back on the right track. We all benefit from having available to us an investing model that doesn’t just almost work or that doesn’t just sound like it might work but that actually does work in the real world.