A Rich Life

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

“If You Run Into Someone Who You Think Might Have an Interest in Valuation-Informed Indexing, Share the E-Mail With Him. You Don’t Even Need to Endorse It, Just Pass the Information Along. That’s How We Will Turn This Thing Around.”

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I’ve been sending e-mails to various people letting them know about my article describing the intimidation tactics used by Buy-and-Holders to stop Academic Research Wade Pfau from publishing further research showing the superiority of Valuation-Informed Indexing investing strategies over Buy-and-Hold strategies. University of New Hampshire Law Professor Tom Field responded: “You seem to be a class act, Rob, but I’m not sure of the sense in which you want to pull me in.” The text of my reply is set forth below:

Tom:

Thanks for your exceedingly kind words.

There is no particular way in which I am trying to pull you in. It’s perfectly fine with me if you just take in the information, conclude that it is “interesting” in some way, and move on with your life. That’s how the vast majority of the people who receive the e-mail are responding. In fact, the vast majority do not go to the trouble to send such kind words my way. So you have provided help by lifting my spirits a bit. That’s real. That counts.

The entire situation is so “out there” that almost no one can believe the plainly stated facts. The Buy-and-Holders did a wonderful thing. They turned investing analysis from guesswork into a scientific enterprise. Our free market economic system (and all those of us trying to make a living within it!) is going to benefit in huge ways in days to come as a result of what people like John Bogle and Eugene Fama and Burton Malkiel and all these others did. That’s the good news. It’s important that everyone keep the good news foremost in mind when trying to make sense of all this.

The bad news is that the people who developed Buy-and-Hold made a  mistake. They made it for perfectly understandable reasons. The research they needed to get everything right was not available to them at the time they did the development work. So they got one important thing wrong while getting lots of other important things right for the first time anyone got these things right. Then Shiller published his research filling us in on the important thing they got wrong.

If only he had done this 10 years earlier we would all be living in an economic Garden of Paradise today!  Unfortunately, lots of people had already staked their careers on the accuracy of the Buy-and-Hold Model and millions of dollars had been spent promoting it. So a decision was made (not formally and never publicly articulated) to pay lip service to Shiller’s findings, to acknowledge that he had done something but to pretend that what he had done was not a big deal and could be ignored for practical purposes.

In 2008 that unfortunate call caught up with us. We now are in an economic crisis as a result and, in the event that Shiller is right (there is today a mountain of evidence showing that he is), the crisis will become the Second Great Depression over the course of the next few years. There is obviously not one person alive who wants to see that happen. But there are also very few who dare to give voice to the truth of the matter in clear and firm and bold and understandable and uncompromising terms. So we keep drifting downward even though there is not one soul alive who wants to see that happen.

My blog entry from yesterday reporting on Rob Arnott’s reaction to the e-mail tells the story well:

http://arichlife.passionsaving.com/2012/12/11/former-financial-analysts-review-editor-rob-arnott-to-rob-bennett-ive-had-similar-experiences-to-those-you-describe-my-work-has-often-triggered-overt-hostility-from-the-guardians-of-the-status-q/

Rob is a highly influential thought leader in the field. He served as the editor of the Financial Analysts Journal for four years. He reports that he cannot get an article that he co-authored with a Nobel Laureate published in a journal because it discredits the Buy-and-Hold orthodoxy. Even with my ten years of experience with similar realities, I find that one hard to accept. He reports that he knows of young professors who wanted to do honest research on important new ideas and who were warned that their careers would be derailed if they did so. Yikes!

I’ve tried all the normal ways of getting the message out. I built a discussion board that in 2000 was the most important board in the personal finance area available on the internet. We had hundreds of people at that board who wanted to explore these issues. But the Buy-and-Holders just would not permit it. They burned the entire board to the ground. The level of emotional pain that they are experiencing is just off the charts. There’s never been anything like this. The closest analogy I have been able to make is to the way people felt about segregation in the early 1960s. Every single person knew in his or her heart that it was wrong. But few dared to speak out because “that’s just the way it is.” The feeling was — There is nothing that can be done, so why try? And so the problem continued to eat our society alive.

We eventually overcame segregation and we eventually are going to overcome the Get Rich Quick aspect of the Buy-and-Hold concept. It’s going to be people who are going to make the difference. There is going to come a time when the human misery will become so great that people are just going to work up the courage to speak out. Once a number of us do, there will be a tipping point and then we all will speak out and share what we know and there will never be one person who will ever want to return to the dark economic times we are living through today.

Here’s what I ask. Keep this in the back of your mind as you go about your daily affairs. If at some point in your travels, you run into someone who you think might have an interest in this, share the e-mail or a link to my site with him. It might be a journalist. It might be a policymaker. It might be an economist. It might be an investing expert. It might just be an ordinary middle-class person trying to plan for a decent old-age retirement. Just pass the information along. You don’t even need to endorse it, just let the person know that you saw this and that you think that perhaps he or she would want to see it too.

That’s how I believe we will turn this around. We cannot count on the experts re this matter because they are compromised. They are not compromised because they want to be be. They just are caught up in circumstances beyond their control. People have families to feed. People feel that they cannot afford to destroy their careers by being too honest. Everyone is on the same side. There are no two sides to this. So we just need to find some means to gradually spread the word over time and then one day the ones who are holding things back will just wake up in the morning wanting to help move things forward. Then it’s all over! The good stuff is so good that it will make the bad stuff seem insignificant in comparison in not too long a time. This is a positive story!

Anyway, that’s where I am coming from. Please help in whatever way you can and please don’t worry about it at all if there is nothing that occurs to you at this moment. I have confidence that something will occur to enough of us somewhere down the line to get things back on the right track. We will collectively figure out a way to make all of our lives better and to live up to the ideals we all struggle to follow to the best of our abilities.

Thanks also for giving me a reason to structure these thoughts in a way that I hope makes at least a tiny but of sense.

And please enjoy a safe and warm and loving holiday season!

Rob

Programming Note: The blog will return on Wednesday, January 2, 2013. I wish all my internet friends (both the Valuation-Informed Indexers and the Buy-and-Holders!) a peaceful, happy and friend-filled Christmas.

“Since There Is Only One Person Taking in the Idea When I Send an E-Mail Describing Valuation-Informed Indexing, There Is None of the Negative Group Dynamics That Has Poisoned Discussions So Many Times in the Past”

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I’ve been sending e-mails to various people letting them know about my article on the tactics used by Buy-and-Holders to intimidate Academic Researcher Wade Pfau into not publishing further research showing the superiority of Valuation-Informed Indexing investing strategies over Buy-and-Hold investing strategies. I recently received a response from Brad Borden, a law professor at Brooklyn Law School, saying: “This is interesting. I’m curious, however, to know why you chose to contact me.” My response is set forth below:

Brad:

Thanks for your response.
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There is no particular reason why I contacted you in particular.
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The entire story is very strange. I have been working on this for 10 years. I have had mixed reactions to the work I have done.
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Those who “get it” (a small number in percentage terms) view this as the most important advance ever achieved in the investing field. There are numerous smart and good people who see the implications as being very positive and very far- reaching. Those reactions naturally make it impossible for me to give this up. I want this work to be recognized and to help people live better lives.
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Those who do NOT get it (a high percentage of the population, perhaps 90 percent, and a group that also includes many very smart and very good people) see only limited value here or (in not a small number of  cases) react with hostility.
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The high percentage of indifferent and (especially) hostile reactions has made it impossible for me to spread the word effectively. For example, I built a very large Retire Early discussion-board community at the Motley Fool site. The board was destroyed by arguments over the merits of these ideas. A small group thought these ideas generated the best discussions ever held at the board. A large group preferred to see the entire board destroyed rather than to permit the discussions to continue.
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The short version of all this is — These ideas generate intensely emotional reactions. To spread the ideas, I need to find a way to work around this problem.
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My current effort is to contact all sorts of people by e-mail and to answer any questions they have and to try to gain support that way. Since it is only one person taking in  the idea, there is none of the negative group dynamics that has poisoned discussions so many times in the past. If the people who I win over are as intense in their enthusiasm as some of those I have won over in the past, even a small number of supporters might make a huge difference.
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I am not focusing on one type of person because I have not found any one type of person that is particularly open to hearing about the ideas. Some investing experts love this stuff and some hate it. Some journalists love this stuff and some hate it. Some economists love this stuff and some hate it.
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I fully understand that my explanation sounds odd. This entire matter is very odd. I have never seen anything remotely like it. If the ideas are sound (there is a mountain of evidence that they are, at least in my assessment), it is imperative that I spread the word before more damage is done to our economy through the promotion of the discredited conventional investing ideas. But the normal ways of building support for personal finance ideas (getting experts on board, writing articles, going to blogs, etc.) just do not work for this particular concept. I am trying something different just to see whether the effort bears good fruit or not.
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You don’t possess any particular characteristics that make you a good person to contact other than that you obviously possess a strong intellect and are involved in at least a tangential way with some matters that relate in some way to public policy. If you end up feeling that you learned something, I will of course be 100 percent happy. If you  prefer that I not contact you again, I am of course okay with that. If you ask questions, I will do what I can to respond effectively. If somewhere down the line you become a supporter, I will be thrilled about anything you can do to move the ball forward. I of course understand that that’s an extreme long-shot. My belief is that I only need a  small number of those extreme long-shot bets to come through to make a big positive difference. And I think that in time I will see a small number of these “bets” come through for me.
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Sorry for the long explanation. I feel that you merit as clear an answer as I am able to provide. Please don’t feel any obligation at all to do anything further. The vast majority of those I contact do not respond in any way. You have already made me feel good by saying “this is interesting.” If by any chance you feel a desire to explore any aspect of this in greater depth, certainly feel free to shoot me back a follow-up e-mail with more questions or concerns or reactions or whatever.
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And thanks for giving me an opportunity to work that all out on paper!
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Rob

“I’ve Essentially Promoted Valuation-Informed Indexing in My Work Over the Years, Although I’ve Never Called It That.”

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I’ve been sending e-mails to various people letting them know about the threats used by Buy-and-Holders to intimidate Academic Researcher Wade Pfau into not publishing further research showing the superiority of Valuation-Informed Indexing strategies over Buy-and-Hold strategies. I report below on some of the responses I have received.

1) Dave Landry of www.DaveLandry.com: “Thanks for the article. I think you’re preaching to the choir. A lot of my work centers around the fact that Buy-and-Hold does not work. Keep up the good fight!”

2) Tom Brakke, CFA: I appreciate you tracking me down and sending me those links. I’ll take a look at them. I’ve essentially promoted Valuation-Informed Indexing in my work over the years, although I’ve never called it that. You can see it thematically in an early blog post of mine, from that fateful Fall of 2008 — The Famous Nine Percent.

3) Bob Krumm at www.BobKrumm.com said:” It’s not something I know a lot about, but interesting nonetheless.”

4) Michael Harr, Founder of Walden Advisors, said: “That was a good read. Keep it going.”

5) Catherine McCauliff, a law professor at Seton Hall, said: “I’m afraid I don’t know anyone in my life who plans to retire early. If you meet such a one, send him my way so he can send me some of his extra dollars! Best of luck in rounding up the dreamers.” I responded: “Will do! Thanks for your response, Catherine.”

Former Financial Analysts Journal Editor Rob Arnott to Rob Bennett: “I’m Too Embroiled in My Own Controversies to Magnify Them Further With Collaboration. Your Ideas [About Valuation-Informed Indexing] Are Sound.”

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My last two blog entries reported on e-mail correspondence between Former Financial Analysts Journal Editor Rob Arnott and I in which we discussed the brutal (my word) intimidation tactics that have been employed by Buy-and-Holders in recent years to block the publication of academic research revealing the deficiencies of the “status quo” (Arnott’s phrase) thinking on how the stock market works. He reported that he has had difficulty finding journals to publish his more controversial work and that articles of his that challenged the conventional thinking of today have generated hate mail. In fact, he has not yet been able to find a journal to publish an article on an important topic that he co-authored with Nobel Laureate Harry Markowitz! (I checked his e-mail three times when writing these words to be sure that I did not just imagine this part while experiencing a fever.) I expressed my shock at this report and noted that I believe that the reason why I feel a greater sense of urgency re solving the problem is that  my perspective is that of a journalist rather than that of an investing expert and I thus tend to focus on the public policy implications of the 30-year cover-up of Yale Economics Professor Robert Shiller’s “revolutionary” (Shiller’s word) findings showing how stock investing really works (not at all how the Buy-and-Holders have been for many years now telling millions of middle-class investors it works).

Late in the afternoon of December 6, 2012, Arnott replied to my e-mail of that morning. He wrote: “I am very pleased that you were not offended at my frank advice.  I’m too embroiled in my own controversies to magnify them further with collaboration.  Your ideas are sound.  Your stridency is unhelpful to your cause.  Anyway, all the best.”

I immediately sent back the following words: “I understand. I hope that I am not guilty of stridency. You are certainly not the only person who has said that I am. So I am going to need to work harder to examine my own behavior. I wish you all the best as well.”

I then sent an e-mail to Vanguard Founder John Bogle, Four Pillars of Investing Author William Bernstein, and Academic Researcher Wade Pfau saying: “Since the three of you were copied on the e-mail that I sent to Rob Arnott this morning, I wanted you to see the resolution of our conversation as set forth in his e-mail to me this afternoon and then my response to him. And I of course wish the three of you all the best that this life has to offer as well. Please take good care.”

The following afternoon I received a final e-mail from Rob Arnott containing the following warm message: “Have a wonderful holiday season!”

Rob Bennett to Former Financial Analysts Journal Editor Rob Arnott: “The Illustrations You Offer of the Problem of Buy-and-Hold Dogmatism Are Shocking. I Know From My Discussions With Financial Planners and Bloggers That Many Others Have Had Similar Experiences. This Must Stop. I Feel More of a Sense of Urgency re This Matter. My Focus Is On the Public Policy Implications. We Are Living Through A Public Tragedy of Epic Proportions.”

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Yesterday’s blog entry reported on an e-mail that I received from Former Financial Analysts Journal Editor Rob Arnott describing the hostility that his research has generated among “guardians of the status quo” in the investing field. Commenting on my report of how Buy-and-Hold Goons threatened to get Academic Researcher Wade Pfau fired from his job after he published research showing the superiority of Valuation-Informed Indexing strategies over Buy-and-Hold strategies, he said that he has on occasion experienced difficulty in getting his work published (in fact, he has not yet been able to find a journal to publish an article co-authored by Nobel Laureate Harry Markowitz!) and that journals that have published his work have received “hate mail” after doing so. Rob castigated me in his e-mail for embracing “a victim mind-set” and for characterizing those who threatened to send defamatory e-mails to Wade’s employer  as “Goons.” He copied Vanguard Founder John Bogle and The Four Pillars of Investing Author William Bernstein, whom he described as personal friends and whom I noted had failed to speak up on Wade’s behalf when he was under attack, on his response to me. Set forth below is the reply that I sent early on the morning of December 6, 2012 (I also copied Bogle and Bernstein, as well as Wade Pfau):

Rob:

Thanks much for your response. I have been a huge admirer of your work for years. So it was a thrill to receive it. Your frank and balanced and helpful words have added a nice bit of good cheer to my Thursday morning.

I understand that all you know of my work is the one article that I linked to in the e-mail. It pains me to think that the words of that article may have planted the idea in your head that my respect and affection for John Bogle might be any less than your own. In my ranking of the most important investing analysts of all time, Bogle ranks second only to Robert Shiller. I love the man. I admire his accomplishments. I don’t want there ever to be any doubt in anyone’s mind re that aspect of the question. I also of course feel a good bit of respect for the others mentioned in your e-mail, and, in full truth, for all of the Buy-and-Hold pioneers. All of the work that I have done is built on the Buy-and-Hold Model. There would be no Valuation-Informed Indexing today had a number of smart and good people not rolled up their sleeves and did the work needed to generate the many powerful insights that have helped millions to come to a better understanding of how stock investing works.

The illustrations you offer of the problem of Buy-and-Hold dogmatism are shocking. I know from my discussions with financial planners and bloggers that many others have had similar experiences. This must stop.

You say that “that’s life” and that “life isn’t always fair.” That’s so. But our job is to spend every waking hour pushing in the direction of fairness, no? That’s the struggle. That’s what the work that we all do is all about. We will never succeed entirely. But we always keep pushing in that direction. That’s how Bogle achieved what he achieved, is it not? Bogle met resistance in his early days. He soldiered on. The spirit that he possesses that caused him to fight is the cause of much of my admiration of the man. If I were to give up in the face of frustrations, I wouldn’t in the end be much of a friend to our mutual friend John Bogle, in my own assessment. So I always fight on with the aim of bringing things to a better place over time.

I of course agree that Bogle (and all others) must be true to his own beliefs. If he didn’t criticize the aspects of my work that he does not find convincing with as much gusto as I criticize the aspects of his work that I do not find convincing, I couldn’t feel the respect for him that I want him to feel for me. A friend criticizes perceived deficiencies in a friend’s work not out of any animus but out of a desire to help the friend become his better self. That’s the spirit in which I have found fault with one aspect of Bogle’s teachings (the idea that long-term timing is not required for investors seeking to Stay the Course in a meaningful way) and that’s the spirit in which I hope in days to come he will be finding fault with whatever aspects of my teachings he finds unpersuasive.

My sense is that there is only one point re which you and i have a different take of some consequence. We are both seeking to push the general understanding of how stock investing works in the same direction. But I think it would be fair to say that I feel more of a sense of urgency re this matter. My guess is that the reason for this lies in our different backgrounds. I am NOT an investing expert and I do not pretend to be one. I am a journalist. My focus is on the public policy implications of the dogmatism. I would be grateful if you would take a look at two articles that I have written that argue that the heavy promotion of Buy-and-Hold strategies was the primary cause of the economic crisis: (1) The True Cause of the Current Financial Crisis; and (2) The Bull Market Caused the Economic Crisis.

Say that there is some truth to what I argue in these articles. We are living through a public tragedy of epic proportions. One the one hand, Wade’s research tells us what we need to know to reduce the risk of stock investing by nearly 70 percent (he shows that the maximum portfolio drawdown percentage is 60 percent for Buy-and-Holders and only 20 percent for Valuation-Informed Indexers). On the other, we are on our way to the Second Great Depression because we have as a society elected to impose a Social Taboo to block the frank discussion of these matters. We all want the same things. There is not one person alive, Buy-and-Holder or Valuation-Informed Indexer, who wants to see us fall into the Second Great Depression or who doesn’t want to know how to invest effectively. How did we ever get ourselves into such a crazy fix? It’s all a quirk of history. Had Shiller published his research showing that valuations affect long-term returns in 1971 rather than in 1981,the name of the book would have been “A Valuation-Informed Walk Down Wall Street” and we would today be living in the greatest period of economic growth in U.S. history. How do we get from this awful place where we are today to the wonderful place where we all deep in our hearts want to be tomorrow?

We don’t get there by calling each other “Goons” — I think that much is fair to say!

I don’t want to call anyone names, Rob. It’s the last thing I want to do. If you read my interactions with the Goons carefully (I post daily at the Goon Central site), you will see that I call those who attack me so relentlessly and in such brutally personal terms “friend” more often than I call them “Goon.” The Goons are my friends, Rob! These are people I know from the days when we worked together to build the Motley Fool’s Retire Early Board into the most successful board in that site’s history.

Why do I EVER call them “Goons? I am trying to draw attention to a problem. The death threats really did happen. The tens of thousands of acts of defamation really did happen. The board bannings really did happen. The threats to get Wade fired from his job really did happen. These people are in emotional pain. If you have any doubts whatsoever about this, please take a look at the article I wrote detailing the efforts of hundreds of non-Goons to keep the Retire Early and Indexing boards and blogs open to civil and reasoned and honest discussion of all investing issues. 

We shouldn’t be ignoring this emotional pain. We should be trying to help our friends overcome their pain. THAT”S PART OF THE JOB OF AN INVESTING ADVISOR.

Many of the experts in the field don’t see it that way today. They feel that investing analysis is a numbers exercise, that there’s no place in this field for the discussion of human emotions. This is the core mistake that caused all the trouble, in my assessment. When we see people engage in the sorts of behavior that I am referring to here (and which you have obviously experienced as well in somewhat different form because your work is not as internet-based as mine), we need to try to figure out what is going on and to address the problem. I don’t want to ever have to use the word “Goon” again. I won’t ever need to if people like Jack Bogle and Bill Bernstein and Wade Pfau make clear that they expect the published rules of all of the boards and blogs to be followed. When they fail to do this, they send a signal that in this one area the normal rules of social intercourse that keep us all human do not apply. WE NEED TO STOP SENDING THAT SIGNAL. When we start sending the right signals, good things will start happening. Lots of people want to learn but are afraid to speak up. As more and more people come to feel safe in speaking up, the entire social dynamic will change. We will reach a tipping point and things will begin getting better and better and better each day rather than worse and worse and worse. New ideas cannot grow until we create an environment in which sincere and polite and respectful questioning is permitted. And even encouraged!

That’s where I am coming from, in any event. I detect a suggestion in your e-mail that you would be willing to help in an effort to pull things in a positive direction if I would be willing to engage in private discussions. Of course! Why the heck not? I want to know about any ideas that you or Jack or Bill or Wade (I added him on the Cc for my reply) have for the five of us working together to transform these discussions into something viewed as a 100 percent positive for every single person involved in them. Let’s make that happen! Please be assured that I will do anything that I view as even remotely reasonable that you or Jack or Bill or Wade suggest. Please just shoot me back an e-mail with any suggestions or questions or concerns or thoughts or proposals.

Thanks again for getting the ball rolling on this, my plain-speaking friend.

Rob

Former Financial Analysts Journal Editor Rob Arnott to Rob Bennett: “I’ve Had Similar Experiences to Those You Describe. My Work Has Often Triggered Overt Hostility from the Guardians of the Status Quo. I’ve Also Had Difficulties Getting Some of My More Controversial Ideas Published. And the Journals That Published Some of My More Controversial Papers Did Get Hate Mail.”

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I’ve been sending e-mails to various people letting them know about my article on The Silencing of Academic Researcher Wade Pfau, who showed the superiority of Valuation-Informed Indexing strategies over Buy-and-Hold strategies. Set forth below is the text of an e-mail response that I received on the night of December 5, 2012, from Former FInancial Analysts Journal Editor Rob Arnott. I will provide the text of my response to Rob in tomorrow’s blog entry. Thursday’s blog entry will report on a few brief e-mails that Rob and I exchanged with each other in wrapping up the conversation.

Rob Anott wrote:

I’m copying Jack and Bill [the reference is to Jack Bogle and Bill Bernstein] , who you mention in your article.

I’ve had similar experiences to those you describe; so, I can empathize with you for your travails.  HOWEVER, we part company on how to deal with this challenge.  I roll with it and move on.  You seem to be “stuck” in a victim mind-set.  Characterizing one’s adversaries as Goons is also unhelpful to your cause.

Jack Bogle is a dear friend; he attacks some of my ideas with relish, and it doesn’t bother me.  He’s entitled to a different view, and he’s never personalized his attacks.  Bill Bernstein and I have co-authored one journal article, while agreeing to disagree on a couple of other issues.  I remain good friends with both, with ample mutual respect.  I know Rick, Scott and Larry less well, but I know that we agree on some things and not others.

As you can probably imagine, my work has often triggered overt hostility from the guardians of the status quo.  And, as one of the “godfathers” of Tactical Asset Allocation and of the Fundamental Index® concept, which are kissing-cousins to your work on Valuation-Informed Indexing, it’s clear that you and I both think the markets are inefficient in much the same way.

I’ve also had difficulties getting some of my more controversial ideas published.  For instance, I’m having a dickens of a time getting any journal to publish my work with Harry Markowitz, Jason Hsu and Jun Liu, which shows that a modest amount of error in stock prices would create – and fully explain – the Fama-French size and value effects.  Journals turning down a Nobel Laureate?  Yep, it happens.  And the journals that published some of my more controversial papers did get “hate mail” for doing so.

I also know of two young professors who wanted to do research on Fundamental Index® and reported to me that their colleagues advised them that this line of research could derail their career prospects.  Outrageous?  Not necessarily:  in the early days of Fundamental Index®, people weren’t yet sure whether this was the investing equivalent of “cold fusion”!

These are the same kinds of problems that you describe.  That’s life.  Life isn’t always “fair,” nor is our own perception of “fair” necessarily correct.

In summary, I will not be available to help you protest the injustice of it all.  Feel free to add me to the list of those who declined to help, alongside Jack, et al, as long as you’re also prepared to provide your readers access to this email.

I would strongly encourage you to *not* abandon your ideas, but to find other ways to make your case, and to give up on the name-calling with those who disagree with you.  Best wishes on pursuing a constructive path, exploring new ideas and accepting criticism from others with civility and perhaps even relish.

Law Lecturer Albert Sanchez Graells: “The Situation [Referring to the Intimidation Tactics Used to Silence Academic Researcher Wade Pfau’s Reporting of the Dangers of Buy-and-Hold Investing Strategies] Seems Well Below Any Professional and Academic Acceptable Standards”

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I have been sending e-mails to various people re my article describing the intimidation tactics used to silence Academic Researcher Wade Pfau’s reporting on the dangers of Buy-and-Hold investing strategies. In response, Legal Lecturer Albert Sanchez Graells posted a tweet saying: “An interesting independent vision on personal finance strategy, well worth a read” and linking to the article telling the Wade Pfau story.

Graells is not only a law lecturer. His Twitter profile reveals that he is also a Spanish exile, a runner, a jazz fan, a frustrated musician, and a vocational cook. He authors two blogs: (1) Integrity in Public Contracts — Turin 2012; and How to Crack a Nut. 

Albert told me in an e-mail that: “I have read your post and the situation seems well below any professional and academic acceptable standards. I am tweeting your  link. I hope it gives it some extra visibility.”

I responded with the following words:

Albert:

Thanks for the kindness of posting the tweet. I am certain it will help. It may be that we will not see an immediate reaction. But it will cause people to begin thinking about the matter in the back of their minds. And down the road it will cause them to be more open to hearing other points of view.

I certainly agree that in an objective sense “the situation seems well below any professional and academic acceptable standards.” In fairness, I think I need to add that there are some unusual circumstances that apply. What we are seeing here is what they refer to in the psychological literature as “cognitive dissonance.” The Buy-and-Holders made major advances in our understanding of how stock investing works. They made one mistake (for perfectly understandable reasons). By the time we discovered the mistake, they had made a career commitment to  an approach that doesn’t work. They are having a hard time accepting that they made a mistake and the millions of investors who bought into the idea are ALSO having a hard time accepting it and are encouraging those who promote the idea to continue doing so.

We need to get a national debate launched. That’s how we will achieve a healing process. I thought that the publication of Wade’s research would get us there and then this exceedingly unfortunate development closed that natural path to a good place. Now I am stumbling around in the dark trying to figure out what alternate path might help us all get to the place where deep in our hearts we all really want to be.

Your encouraging note brought a nice measure of cheer to my Monday morning.

Rob

Albert wrote back: “Glad to have contributed a drop in the ocean of debate need. Best wishes.”

“Wade Pfau Is a Very Smart Fellow. He Just Had Never Thought About These Things From the Perspective That I Suggested.”

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Yesterday’s blog entry reported on Financial Philosopher Blog Author Kent Thune’s thoughts on my article reporting on The Silencing of Academic Researcher Wade Pfau.  Set forth below are the words that I fired back to Kent in reply:
Kent:

Thanks for your helpful and informed and intelligent and kind response. I wish that I could figure out how to get lots of others to respond in this way!

I certainly do not claim to know all the answers. What I believe is that the people who came up with Buy-and-Hold achieved many breakthroughs but made an entirely understandable mistake on one point. It’s the failure to correct that mistake that has been holding us back. My aim is to get people talking about this so that we can determine as a society whether there really is something to what I am saying or whether I got on the wrong track in my thinking somehow.

You bring up a great point re the definitions. I LOVE most of what Buy-and-Hold stands for. The one thing I disagree on is the idea that it is okay for investors to stay at the same stock allocation at all times. My view is that investors should be aiming to stay at the same RISK PROFILE at all times. If Shiller is right that valuations affect long-term returns, then the risk associated with stock investing is ever-changing (with changes in valuation levels). People do not need to change their stock allocations frequently because most changes in valuation levels are small. But they MUST respond to big changes in valuation levels or their failure to act will  cause their risk profiles to get wildly out of whack and that dooms their chances of long-term success.

Everything else follows from that. Buy-and-Hold was developed at a time when people thought that the market was efficient. If the market were efficient, Buy-and-Hold would be ideal. I acknowledge that. My take is that the market is NOT efficient, that valuations affect long-term returns and that the risk associated with stock investing is thus much greater at times of high prices. It is my belief that the entire Buy-and-Hold thing was just a mistake. Index funds were not available at the time the early research was being done. Long-term timing works only with indexes. So the early researchers did not bother looking at long-term timing. If Bogle had founded Vanguard in 1966 rather than 1976, I believe that the name of the book published in 1974 would have been “A Valuation-Informed Walk Down Wall Street.”

I think that the most revealing comment that Wade Pfau made to me was his statement that: “I must wonder …did I make a mistake somewhere? Why haven’t academics already published research about this?” Wade is a very smart fellow. He just had never thought about these things from the perspective that I suggested. I think that is what is happening with just about everybody on the Buy-and-Hold side. It was the foundational belief (that timing isn’t required) that was wrong. We tend not to reexamine our foundational beliefs frequently.

We move on to other things. I think what happened is that people failed to distinguish short-term timing from long-term timing (because long-term timing was a physical impossibility at the time), found (correctly) that short-term timing never works, and concluded mistakenly and tragically that “timing never works.” Now we need to persuade people to reconsider that false step made 40-some years ago.

If you want to read about the false step, you might want to read the book “The Myth of the Rational Market.” It goes into detail on the history of the mistake. Unfortunately , the book does not say how we need to change the investing advice we give people now that we know that the idea that the market is rational/efficient has been discredited. That’s the question I try to answer at my site. My premise is that Shiller is right with his “revolutionary” (his work) new understanding of how stock investing works.  Building on that premise, I try to tell people how they should invest differently PRESUMING that Shiller is right.

Your e-mail brought a good bit of cheer to my Monday morning. I am most grateful for your willingness to  give the ideas a hearing.

Rob

Kent replied by saying:  Perhaps you might call yourself a “tactical asset allocator?”  I’m more of a philosopher than anything else.  Rather than asking “What is the best way to make money?” I ask “What is the meaning of life?” and allow financial decisions to branch out from there.  I believe that financial pursuits have a way of drawing people away from their life purpose.  This is not necessarily the “life planning” idea that is popular now but somewhat close to it. I believe we both agree, at a minimum, that conventional wisdom is not something an individual should mindlessly accept or adopt as their own.  This article I wrote for The Big Picture sums up my thoughts here (and align with yours): http://www.ritholtz.com/blog/2009/12/the-greatest-deception-in-the-history-of-finance/ On a similar note, I’ve recently entered the MarketWatch “World’s Next Great Investing Columnist” competition.  Thus far, I’ve advanced to the second round!  I’ll e-mail you a link to my Round 2 article once it is published. Have a great week…”

I wrote back to Kent a message stating: “Please do that. You are doing important work and making important points that people need to hear.” Kent did indeed send me his Round Two article and I gave it my vote of confidence.

Kent Thune of The Financial Philosopher Blog: “Your Argument That Buy-and-Hold Caused The Financial Crisis Is Interesting But Not Entirely Accurate. The Buy-and-Hold Phenomena Is Certainly a Player in the Crisis But Not a Primary Cause.”

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I have been sending e-mails to various and numerous people in an effort to spread the word re The Silencing of Academic Researcher Wade Pfau. Set forth below are the words of  response that I received from Kent Thune, who writes The Financial Philosopher blog:

Greetings, Rob.  I recall your passion on the potential problems with “buy and hold” on the Get Rich Slowly blog.  I looked at your article on your site and see that you’ve made some good points.  However, as you may recall in my past reasoning, the “buy and hold” concept is extremely abstract, which makes it a difficult concept to argue for or against.  The concept of “market timing” is also abstract.

In a sense, every investor is buying and holding and every investor is timing the market; buying a security, holding it, and selling it at a later point is both “buy and hold” and “market timing.”  Your argument can be made stronger if you define Buy-and-Hold and market timing in a more concrete way.  Then build your case from there.

It seems you point your argument primarily at 401(k) investors and the Boglehead crowd that buys index funds and then plans to leave their savings untouched until retirement.  Is this correct? If so, you will need to prove that dollar-cost averaging is also bad for the investor and for the economy at large.  You will also need to provide a viable alternative that is feasible for the “average” person.  Otherwise, your ideas may be dismissed by the same crowd you wish to hear your argument.

I also believe your argument that Buy-and-Hold caused the recent financial crisis is interesting but not entirely accurate.  In my view, and this is a generalization that is widely accepted, most Buy-and-Hold investors are individuals saving for long-term goals, such as retirement or college education.  I recall from various studies in my experience as an investment advisor that these individuals collectively combine to represent roughly 30% of the entire “market”, whereas institutional traders represent 70%.  It seems the latter was the largest factor in the Great Recession, especially with their use of derivatives and the prevalence of hedge funds.

I have not studied in depth the cause of the Great Recession, but I believe it to have been primarily driven by the housing market and secondarily by the financial sector of the economy.  How do you explain millions of people using their 401(k)’s as “Buy-and-Hold” instruments but using their homes as equity taps?  Those people were not taking equity out of their homes and placing it in their 401(k)s; they were using the cash-out-refi money to enhance a lifestyle—the clothes, the cars, the bigger houses, the social club memberships and so on.  The creation of the financial bubble, the so-called credit crisis, was largely enabled by rising home prices—the stock market prices were actually a reflection of this extreme growth, not directly a cause of it.

In summary, I believe the “Buy-and-Hold” phenomena is certainly a player in the crisis but not a primary cause.  In other words, the capital created by the money flowing into the market certainly enabled corporations to inflate the economic bubble but the market did not create all of the fuel for the crisis.  For example, stock prices have doubled over the past 3.5 years but the economy (GDP) has been essentially flat over that time frame. If the stock market (all investors, including the Buy-and-Hold crowd) is a leading economic driver, the economy would be in much better shape by now.  Would it not?  I’m no economist, but you may need to address this point as well in your argument.

I’d love to know more of your thoughts.  As I have said before, at a minimum, your ideas provoke thought (as you can see by my long response) and I appreciate your view even if I do not completely agree.  If you ask me, “None of the Above” caused the credit crisis; it was caused by natural and unavoidable human emotion (i.e. complacency, greed, and hubris).  But I digress…

Thanks…

Kent

Rich Toscano at Pacific Capital Associates: “It’s Great to See a Finance Journalist Who Understands that Valuations Matter. It Seems That Efficient Market Zealotry Is Rampant in the Journalism Community. So You Are Doing a Great Service.”

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I have been sending e-mails to various people to let them know of my article on the silencing of Academic Researcher Wade Pfau. Set forth below are descriptions of some of the responses I have received.

1) William Cohan said: “Thank you, Rob. Will take a look.”

2) Rich Toscano at Pacific Capital Associates in San Diego, said: “Haha… that’s a funny coincidence… real estate is just a side interest for me; my “day job” is investing and I am also a big fan of Shiller’s CAPE.  (The coincidence is that there’s not very many of us!)  I’ve written articles on it somewhat regularly; here is the last (admittedly out of date) one: http://pcasd.com/us_stocks_overpriced_once_again . I think it’s time for another!  In fact I was planning on writing an article soon to address some of the critcisms of the CAPE (it’s nice that enough people are finally paying attention to it that it is getting critics).  Some criticisms are good but predictably most come from stock touts simply misunderstanding it. Anyway, it is GREAT to see a finance journalist who understands that valuations matter!  It seems that efficent market zealotry is rampant in the journalism community (even after everything that happened last decade).  So you are doing a great service.  I just love your valuation-based return calculator.  I’ll look forward to checking out your site and blog in more detail.”

3) Edwin Hamilton said: “This is compelling but so far I have only been able to ‘talk to myself.’ Serial herd behavior by the American people — need to expose this deception!”

I traded a number of e-mails with Edwin re my efforts to get the word out. At one point, he suggested checking into whether Lindsey Lohan would be willing to co-blog on the issue. I wrote back: “I tried hooking up with Lindsey. It turns out that she’s a confirmed Buy-and-Holder. Go figure!”

4) David Clay Johnson, an investigative journalist, said: “Thanks. I will take a look at this after I finish my next book.”

5) J.D. Roth, the personal finance blogger who started the Get Rich Slowly blog, wrote (in an e-mail dated January 21, 2011, that I failed to report on at the time): “I keep thinking about ways I can write about this subject so that it makes sense. That is, I *do* agree that when the market is high, it makes less sense to blindly invest than when the market is low. But how does one determine what is high and what is low? (I know you have a formula that you like — PE10? — but that’s something experts could argue about for years, right?) I tend to think that’s where re-balancing comes in. If, in a theoretically neutral market, you’re targeting an asset allocation of, say, 50-50, and then stocks grow so that your allocation is 70-30, rebalancing should, in theory, act somewhat like value-informed investing, right? Anyhow, it’s something I’m thinking about, and not just theoretically. It has practical applications to my own portfolio! 🙂