A Rich Life

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

Rob Bennett’s Responses to Academic Researcher Wade Pfau: #12 — We Need to Attack the Valuations Topic Head On

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Wade believes in Valuation-Informed Indexing. He was dancing around like a kid on Christmas morning in his e-mail correspondence with me. He said in a post at the Bogleheads Forum that he was going to put what he learned from his correspondence with me to personal use by following a Valuation-Informed Indexing strategy himself. Face in, Goons! This guy’s a believer!

But the word on the street is that some sort of rift has developed between Wade and Old Farmer Hocus. What’s the deal?

Wade found out that the world’s first true research-based stock investing strategy is controversial. The Old Boy’s Club hates it because it’s death for Buy-and-Hold if the plebes find out what the last 30 years of academic research really says about how stock investing works in the long run. And the plebes don’t generally get too excited about the idea either. They’ve been taken and it hurts to find out you have been taken. They’re in denial and there’s not much of a buck to be made today telling them the news.

Wade still believes, though. And it really is true that he is a good guy who wants to do fine research that helps people. He’s not going to promote the in-your-face version of Valuation-Informed Indexing that I push. But he’s not abandoning the general concept. His plan is to push a softer version of Valuation-Informed Indexing, a VII Light. His aim is to avoid setting people off by incorporating valuations adjustments into his work in ways that don’t draw attention to themselves. People will be eating their spinach. But it will be mixed in with chocolate ice cream so they won’t notice it so much.

It’s not a totally bad idea. There is no one who has ever participated in our discussions who I respected more than John Walter Russell and he used to try to do things along these lines. I’ve been banned at every major investing discussion board at which I have ever posted. John did the research that supports the Valuation-Informed Indexing strategy I espouse. And John was never once banned! Hey! Maybe he understood something about human interactions that I do not. Maybe Wade is on the right track and I should just lay off the poor guy.

Maybe.

But I don’t think so.

It’s good to try to get along with people. I believe that 100 percent. And I have done a lot of things that in ordinary circumstances would help me get along with the Buy-and-Holders. I have praised the Buy-and-Hold concept to the skies (there would be no Valuation-Informed Indexing had Buy-and-Hold not come before it — powerful Buy-and-Hold insights provide the foundation for all my work). I have said that I do not believe that the mistake the Buy-and-Holders made re long-term timing was intentional (there’s no evidence that it was and a good bit of evidence that cuts the other way). I have said that I believe that the Buy-and-Holders are sincere in their recommendations of Buy-and-Hold (it is possible for humans suffering the effects of cognitive dissonance to ignore the 30 years of research showing that it cannot work in the long run). I have said that the Buy-and-Holders are smart and good and hard-working and nice people. I believe all those things. So, to the extent that saying those things could win me some favor with the Buy-and-Holders, I am of course happy to say them.

In ten years of discussions, never once has saying any of those sorts of things won me a tiny bit of openness or tolerance or kindness from the Buy-and-Holders. They are not looking for warm words or kind words or sympathetic words. They are looking for something else.

They have never told me precisely what they are looking for. But they have dropped some pretty darn clear hints. The message that has been delivered to me on numerous occasions is: It’s not what you say, it’s how you say it.

If I said things the way John said them, I would not have been banned. If I said things the way Wade now says them, I would not have been banned.

You are allowed to say “I don’t feel comfortable going with a high stock allocation.” You are allowed to say “valuations matter.” You are allowed to say “I am not going to take a 4 percent withdrawal.” You are allowed to say “I am worried that stock prices are going to fall.”

The types of things that I say that you are not allowed to say are: (1) Buy-and-Hold is a Get Rich Quick scheme; (2) The Old School SWR studies get the numbers wildly wrong; (3) The relentless promotion of Buy-and-Hold strategies was the primary cause of the economic crisis; (4) The errors in the Old School SWR studies need to be corrected; (5) Shiller’s research shows that there is precisely zero chance of Buy-and-Hold working for any long-term investor; and (6) Stocks are priced today for a 65 percent price drop.

These are strong statements. I’ll give them that.

Many people, including people who do not think of themselves as Buy-and-Holders, view these statements as rude. They’ve told me so.

As someone who likes to get along with people and who hates to think of himself as someone who indulges in rudeness, I have some sympathy for why Wade would want to try a softer approach to encouraging people to follow Valuation-Informed Indexing strategy than the one I follow.

That said, I cannot in good conscience follow the path Wade has chosen for himself. I think it is important that Buy-and-Holders hear these truths and that they hear them unvarnished.

Consider what I said about the Buy-and-Holders being good and smart people. Consider that statement in connection with my claim that it was the relentless promotion of Buy-and-Hold strategies that served as the primary cause of the economic crisis. Do you see the disconnect? Good and smart people don’t go around doing things that cause economic crises. So why did the Buy-ad-Holders do it? Because they didn’t know. Why didn’t they know? Because all of us who know are so worried that saying what we know in clear and firm and uncompromising language will hurt their feelings that we avoid telling them what they need to know to do what they would want to do as good and smart people if only they knew.

No one wants to invest ineffectively. No one wants others to invest ineffectively. No one wants to cause an economic crisis. Teaching people about Valuation-Informed Indexing should be easy. People should be lined up for blocks around to get into talks to hear more about it. Valuation-Informed Indexing is a wonderful advance in about 50 different ways. This shouldn’t be so hard. This should be easy.

I’ve never had any problem making the intellectual case for Valuation-Informed Indexing. The intellectual case is so strong that it is simply undeniable. That’s the problem. The resistance to the idea is emotional. It hurts Buy-and-Holders deeply for them to learn that they have been following a Get Rich Quick scheme for years. They do not want to hear this. They block out the information. They seek to ban the fellow giving voice to the information, however polite he might be or however many warm words he might add to the mix when conveying that information.

Consider the argument about the economic crisis. Nothing could be more obvious than my point that Buy-and-Hold caused the economic crisis. Stocks were overpriced by $12 trillion in 2000. Stocks always return to fair-value price levels in about 10 years. So we knew in 2000 that over the course of the next 10 years something close to $12 trillion of spending power was going to be removed from our economy. An economy that loses $12 trillion of spending power collapses. There is no way to imagine any other possible outcome. The economic crisis was assured when we permitted stocks to reach the price levels they reached in the late 1990s.

How many times have you heard anyone other than Rob Bennett blame the economic crisis on the Buy-and-Hold investing strategy (Buy-and-Hold teaches that there is no need to lower one’s stock allocation when prices rise to insanely high levels — that’s why prices got so out of hand)? I’ve never heard anyone else say it. I know that lots of people understand the point because I have read the work of many who do and I have spoken to many who do. Why don’t we hear people making this point? Lots of people who understand that Buy-and-Hold can never work are following the path elected by John and Wade.

John and Wade and all these others are nice people. I get why they play it the way they do.

But guess how the Buy-and-Holders respond when I say that Buy-and-Hold caused the economic crisis? They say that that can’t be so because I am the only one saying it!

When people don’t hear an argument being made, they assume that that is because there is not much to the argument. When John and Wade and all the others elect not to hurt the feelings of the Buy-and-Holders by not telling them things they very much need to know (we are all worried about the economic crisis and we all need to know what caused it to have any realistic hope of bringing it to an end), they hurt the Buy-and-Holders in a different way. We tell our friends things they need to know. When we don’t tell the Buy-and-Holders things they need to know, we leave them in ignorance. Friends don’t do that to friends.

We are going to hurt the Buy-and-Holders one way or the other. Tell them the truth and we hurt their feelings. Hold back from telling them the truth and we will cause them to suffer huge financial losses. Isn’t there some rudeness in that too? The soft way of telling the story ends up having some unanticipated hard edges to it.

If the people who developed the Buy-and-Hold Model had gotten things just a little wrong, there would be no problem. We would make note of the problem and they would fix it. Easy, peasy. Our problem is that the error made by the people who developed the Buy-and-Hold Model was not small thing. It was a gigantic error, an error big enough to cause millions of middle-class people to suffer failed retirements somewhere down the line. We are doing the Buy-and-Holders no kindness by letting it slide. They do not want to cause millions of failed retirements and they do not want to suffer failed retirements themselves. They object when we tell them the truth. But there is part of every Buy-and-Holder that thirsts for the truth, that wants to be treated with respect and that wants to be forced to cope with the realities however unsettling they are on first hearing.

The soft approach will never reach the Buy-and-Holders. They are master rationalizers. It was ten years ago that I put up the post pointing out the errors in the Old School safe withdrawal rate studies and not one of those studies has been corrected to this day. This is not a group that responds well to soft approaches.

Now —

I’ve tried hitting the Buy-and-Holders over the head with what the academic research of the past 30 years says about stock investing and that approach has not exactly lit up the sky in fireworks either. I don’t say that what I have done has been a big success. Still, I think the direct approach holds more promise. An approach more direct than mine waits on the horizon. If no one other than me gets about the business of telling the truth to the Buy-and-Holders soon, they are going to be seeing Truth with a capital T making a showing on the final line on the final page of their portfolio statements. Now that’s rude! The kinder thing is to tell them what they need to know today to avoid being hit with that rude surprise a bit down the line.

Here’s the good news.

As noted above, the Buy-and-Holders deep in their hearts want to know the truth about stock investing. Remember, they fell in love with Buy-and-Hold because they were drawn to its claims to being a research-backed approach. If we hit them with the truth in creative (and always kind and warm and respectful ways), they will in time hear it. I have seen this magic happen. Not often enough for my tastes, but I have seen it happen. I am sure that, if more of us worked together to deliver the message more forcefully than we have so far, we would see it happen more frequently.

Once the idea builds up some momentum, it will start generating some amazing leverage effects.

I’ve told you how Wade was jumping around like a kid on Christmas morning when he learned the realities of stock investing. Wade is not the only academic researcher out there who enjoys that feeling. If more of us got in the habit of delivering the truth about stock investing straight and unvarnished, we would begin to flip some Buy-and-Holders and then the idea of doing that sort of thing would spread and then soon we would have hundreds of Wade Pfaus competing with each other to be the next researcher to put out fresh and amazing stock research.

We would learn and learn and learn and learn. And we would feel better and better and better and better about ourselves.

The Buy-and-Holders are in great emotional pain. The soft approach leaves them in pain. It’s kind only in a surface sense.

When people have come to believe in something terribly wrong and dangerous, their friends should want to see them give it up as soon as possible. If that means saying some things that hit with a bit of a snap, so be it. I’d prefer that the reality were otherwise. But it is what it is. The kind thing is to bring the Buy-and-Hold madness to an end quickly. It is killing us. We are in an economic crisis. We need to act with polite and kind and warm firmness.

 

Rob Bennett’s Responses to Academic Researcher Wade Pfau: #11 — Many of Today’s Investing Advisors Are Positioning Themselves for the Post-Buy-and-Hold Era

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I’m going to let you in on a little secret. Ssssh! You must promise not to tell. I will no longer be the golden boy of the Big Shots in The Stock-Selling Industry if this one gets out.

I’m not the only one who has been thinking in recent years about where this industry is headed. Lots of people are having that thought. Buy-and-Hold died intellectually 30 years ago and the only thing that has been keeping it alive for a long, long time was that it had not yet brought on the economic crisis that always follows a time-period when a good number of the rubes buy into the Buy-and-Hold mumbo jumbo. Now that the crisis is here, the smart people are plotting their next move. When the next crash comes, the music stops for the Greatest Get Rich Quick scheme ever concocted by the human mind, Rob Bennett or no Rob Bennett.

Wade asked me about this in one of the response comments he posted to my blog. He said: “Rob, suppose the stock market does drop 65% as you are expecting. It might happen, who knows? Step 1: Stock Market Drops 65%. Step 2: ?? Step 3: Rob wins $500 million settlement from the Goons, the Goons are sent to prison, the investing public learns about and adopts VII. What is Step 2? There isn’t one. You will still be in the same position as you’ve been in for the last 10 years. Why didn’t something happen for you after the 2008 financial crisis? You are like the guy who keeps predicting new ends for the world as each previous prediction date passes by.”

Wade loves Valuation-Informed Indexing. He said it in twenty different ways in his e-mail correspondence with me. So his concern is not that the academic research doesn’t support the new strategy. His concern is that it gets the members of The Old Boy’s Club angry if we spill the beans. Showing that the academic research doesn’t support a strategy that has been marketed as a research-supported strategy hurts the marketing effort. People love jazzy slogans. But they lose their pop when it becomes widely known that they are not rooted in truth.

If things were going to change, he could sit tight for a year or two. But are things going to change? When? How? Can we be sure?

We cannot be sure of anything down here in the Valley of Tears. But my feeble brain tells me that things are going to change. Why? Because they cannot stay the same. There aren’t too many other alternatives.

My sense is that Wade thinks of the problems with Buy-and-Hold as being similar to the problems with the deficit. Smart people keep saying that the deficit is not sustainable. Yet it sustains! Smart politicians don’t offer specific statements on how they would reduce the deficit. Because what you say about reducing the deficit can and will be used against you. And nothing ever happens anyway. So why stick your neck out? The budget deficit issue is referred to on Capitol Hill as The Third Rail of American Politics. I think it would be fair to say that Wade Pfau has come to perceive the core error of the Buy-and-Hold Model as The Third Rail of Personal Finance.

Perhaps.

I’ve been foreseeing a Wave of community members rising up against the Lindaurheads and Greaney Goons going back to sometime in 2003. This is one movie in which the posse never shows up just in the nick of time. The posse is always to be found taking a nap in the guest room while I am left alone with my six-shooter against a gang of guys in black hats. These fellows are not gentlemen. Wade doesn’t like the sight of blood when it is on him and when it is his blood. In fairness, there are moments when I can kinda, sorta see the point.

Still, I think this one comes to a head soon.

Stock prices always end up at one-half of fair value in the wake of a huge bull. There’s not one exception in the historical record. That’s 65 percent down from where we are today. Bear markets usually last about 15 years. We are now 12 years into this one. Do the math. It’s not a pretty picture for those who have been telling tales about how stocks are always a good buy for the long run.

The Buy-and-Holders say they will never cry “uncle!” Watch their actions, not their words. Taylor Larimore (co-author of The Bogleheads Guide to Investing) was on the verge of selling in the months following the first crash. Some Diehard! Bill Bengen’s retirement study presumes that the retiree will never sell, no matter what. What did Bill tell his retiree clients in the months following the first crash? Sell! Sell! They always promise never to sell. They always sell. Buy-and-Hold advocates are like politicians. Their promises come with expiration dates.

This isn’t speculation. We know this to be so. What do you think always pulls the P/E10 value down to 7 or 8? Stocks sales do that. The reason why it takes years to get there is that the Buy-and-Holders always resist for a time. It is their sales that end the thing and permit prices to start working their way up again.

The next drop will hurt more than the first one. The first one came in the wake of a huge bull. People had slack in their budgets in those days. No one has slack today. Big price drops that take place when feelings are as raw as they are today hurt. People are going to be angry following the next crash. They are going to be looking for people to whom to direct their anger. Something tells me that I don’t want to have posts in my file saying that there is no need for corrections for retirement studies that get the numbers wildly wrong when those dark days arrive.

The experts in this field are smart people. They are already positioning themselves.

What do you think that Brett Arends fellow at the Wall Street Journal is up to? He says: “For years, the investment industry has tried to scare clients into staying fully invested at all times, no matter how high stocks go….It’s hooey…. They’re leaving out more than half the story.” That was a trial balloon. I hoped the article would go viral. It did not. But that doesn’t mean that it is not going to go viral someday. I’ll bet that I wasn’t the only one watching to see the reaction to that one. Everyone wants to be the new John Bogle. No one wants to stick his neck out too soon. Everyone wants to see someone else stick his neck out and live before sticking his own out too far. Most are cautious today. But wait. Wait until someone gives a big speech telling Truth and is applauded rather than jeered. Then comes the deluge.

Shiller didn’t include any discussion of how investors should adjust their stock allocations in his book. He left it to Old Farmer Hocus to tell the juicy part of the story. But how much do you want to bet that he’s already got a second book ready to send to the printers when the coast is clear for discussion of the practicalities?

And how about that Michael Kitces individual? He says: “There are time-periods where stocks are a terrible addition to that portfolio. Yet inexplicably, we as planners STILL tend to suggest that it is ‘risky’ to not own stocks when in reality the only material risk is to our business and ability to keep clients, NOT to the client’s goal.” Positioning, well-timed and well-executed. Did I mention that people in this field are smart?

Could it be that the rains will never fall hard enough to require the abandonment of Buy-and-Hold?

I believe that the Buy-and-Holders believe that.

I’ve looked at the data. It tells a different story than the one the Buy-and-Holders believe.

The Buy-and-Holders hate me with a burning passion. I do not think they should. I believe that, once you know you must make a change, the thing to do is to make the change as quickly as possible and thereby get that nasty transition period behind you. Things always look better when you wake up with the hard part of the hike behind you.

I’m trying to help the Buy-and-Holders. They don’t see it, but I am. I say that they got it almost right and that that is better than what just about any other group of investing analysts has managed. I am trying to persuade them to fix that one teensy little error so that they can continue to get credit for all the truly good stuff they have contributed. But do they thank me? Nooooo.

Wade is wrong when he suggests that nothing changed for me after the price crash. He wasn’t around before the crash. He thinks I am hated today. He doesn’t know what hate is! I was hatefully hated in a hateful way before the crash. Today you can tell that even the Goons are putting on an act. They try. The fire is just not there. Paul McCartney still sings “I Saw Her Standing There” today. And the words are all the same. But…. Well, you know.

Get Rich Quick schemes are a con. I saw a movie once where there’s this fellow selling snake oil and the townspeople catch on. Come back, Wade! Think it over!

I don’t think Wade is right that this is never going to flip. I think it is going to flip and I think it is going to flip hard when it does.

I think this is a Tipping Point thing. You can’t say anything real about Buy-and-Hold today. Because the Buy-and-Holders are the experts. No one cares what the research really says today. They are the experts. They get to decide.

People care about the numbers they see on their portfolio statements. When the numbers they see on their statements come to match the realities that they have not been told for years now, the word “expert” is not going to impress anymore. It’s going to be too late then to switch sides. People are not dumb.

We’ve never done this before. We’ve built stocks up to crazy prices and then watched those prices tumble. But never on this scale. Never with so much middle-class money (in the old days, only rich people could afford stocks). We certainly never did it with the internet available for the checking of stories. All those posts that argue that there’s no need to correct retirement studies just because the numbers in them are wildly wrong will sound different on the other side. They were meant as jokes! Funny, funny!  But jokes that were once widely thought funny can fall flat in changed circumstances.

Wade says that it is unclear what will happen in Step Two. He writes the words “Step Two” and follows them with a question mark.

Not this boy. I follow them with an exclamation point.

I’ve been seeing Step Two coming from the distance for a long time. I hope I’m well-positioned. I hope people don’t say I was too soft on the Buy-and-Holders!

 

Rob Bennett’s Responses to Academic Researcher Wade Pfau: #10 — Brief Responses to Miscellaneous Points

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Set forth below are my responses to a number of points made by Wade that can be addressed with a limited number of words.

It is hard to have public communications with you after all the attacks you made toward me at your blog following the Bill Bengen incident.

I said that Wade was not posting with complete honesty. His position was that Bengen got the numbers wrong in his retirement study (Bengen himself acknowledges this) but that there was not need for Bengen to correct the study.

I do believe I am still on the Good Side.

I believe that Wade believes this. I believe that Wade has done a huge amount of very important and grounds-breaking work. I have fond feelings re the 16 months we were working together. I learned a lot from him. I know he will be successful in days to come. I certainly wish him all good things.

Planners have been receptive to the idea that 4% is not safe in recent years. I’m getting the message out. 

Both of these statements are true.

There are many people who think that the whole idea of 4% being a safe withdrawal rate is just ridiculous.

Why didn’t any of these people speak up during the nine years when I was on my own trying to get the discredited retirement studies corrected? There are millions of people who will likely be suffering failed retirements in days to come because of our failure as a society to get those studies corrected promptly. A failed retirement is a serious life setback.

Drawdowns from a volatile portfolio are inherently risky. 

Wade’s own research shows that this is not necessarily so. Wade’s study on Valuation-Informed Indexing shows that the maximum drawdown for a Buy-and-Hold portfolio is 61 percent. But the maximum drawdown for a Valuation-Informed Indexing portfolio is only 20 percent. There’s not that much risk associated with stock investing for those who follow a strategy that even in a worst-case scenario (we are talking about the worst case seen in 140 years) causes a portfolio drawdown of only 20 percent.

Volatility on the upside presents zero problem. Valuation-Informed Indexers subject themselves to only a very limited amount of volatility on the downside. Stocks are an insanely risky asset class for those who ignore valuations. But there is no law of the universe that requires retirees to do this. All responsible investment advisors should be imploring their readers not to do this.

Your insight about valuations is important and useful and I still discuss it, but it is ultimately just one piece of a much broader story.

I certainly agree that valuations is not the only thing investment analysts need to look at. But Wade’s own research shows that it is by far the most important factor. I think it would be fair to say that valuations is 80 percent of the stock investing story. An investor who gets valuations right and gets everything else wrong will probably end up okay. An investor who gets valuations wrong and gets everything else right will almost certainly not do well in the long term.

Current conditions matter more than historical averages

Bogle’s most important insight was that investors need to focus on the long term. I view Bogle as the second most important investing analyst of all time largely because of the far-reaching implications of this all-important insight. Wade is rejecting that insight with these words. He is saying to focus on “current conditions.” It is the focus on current conditions that makes investing so emotional an endeavor. Conditions are never as bad as they look when they look bad and conditions are never as good as they look when they look bad. The key to success is getting over the natural inclination to focus on current conditions by using the historical record to come to an informed and emotionally balanced understanding of how things always play out over the long run. It is not that you want to look at “historical averages.” It is that you want to learn from history how stock investing works and then use that knowledge to help you keep your head when others are freaking out over current conditions.

It is why financial economists find it so perplexing to discuss the concept of a safe withdrawal rate. There isn’t one. The U.S., even since 1871, represents a rather unique period in world history.

Everybody understands this. Every SWR study, both Old School and New School, comes with a caveat that the number being reported is safe only if stocks perform in the future somewhat as they always have in the past. There is of course no guaranty that this will be the case. But the historical record is all we have to go by in trying to employ human rationality to understand stock investing. Rule out consideration of the historical record and you leave academic researchers like Wade with nothing to do. Wade himself made this point in his correspondence with me when Buy-and-Holders faulted his research on grounds that it studied “only” 140 years of data (that’s the entire record available to us today).

The worst-case that showed up during this time can hardly be expected to be representative of the future.

Properly calculated SWRs have always provided powerful insights in the past. The P/E10 value that applies today identifies a range of possible returns that will apply in 10 years. Where the actual return will fall on that range is determined by investor emotion and thus is unknown in the current day. So properly calculated SWRs do not tell you all you would like to know. But identifying the range of possibilities is a huge help. For a retiree to fail to take the properly calculated SWR ito consideration when putting together his retirement plan is a big mistake, in my view.

I do think valuations may help gain insights about what the withdrawal rate will be, but this certainly does not make the estimates safer.

This statement self-contradicts. He is saying that added knowledge is a plus but that added knowledge is not a plus.

The relationship between valuations and withdrawal rates can change as well. We are still prone to black swans.

Wade asserts this without offering support for the statement. If we were to see a 65 percent drop in stock prices next year, that would not put us in black swan territory. That’s what you would expect to see, given the valuation levels we saw in the late 1990s and early 2000s. The crash of the early 1930s was not a black swan event to those who understand the effect of valuations. Given the valuation level we saw in 1929, the path that returns took in the following years was what you would expect; the losses were not much less than the losses that were most likely or much greater than what was most likely.

I am not aware of any showing that the relationship between valuations and safe withdrawals has ever changed. The only thing that changes is the spot where we happen to land on the range of possibilities. That spot is unknown in advance because it is determined by investor emotion. We can only identify the range of possibilities. But that’s a very big help to investors who make use of knowing it.

Trying to estimate safe withdrawal rates after incorporating valuations does not “correct” anything. End of story.

If you say so, Wade.

It is dishonest for you to pull out all these 1.5 year old quotes from me and ignore what I’ve learned and said since then.

Wade possessed a Ph.D. in Economics from Princeton at the time he made those statements.

I did not write to the Trinity authors to ask for a correction, I wrote to apologize to them for being too publicly critical of their study

The Goons certainly didn’t read Wade’s comments that way. Drip Guy went off his rocker when he saw Wade say that he had asked the Trinity authors for a correction. His comment is at the thread on my blog where Wade told us that he had contacted the Trinity authors. Wade reported to me a few days later that he had not yet received a response. He was telling me this because he knew how long I had worked to get a correction in the discredited retirement studies. Why would I want to know whether or not the Trinity authors had responded to an “apology”? I think it is possible that there was some sort of apology contained in Wade’s e-mail. I am certain that he took a soft approach in asking for a correction. But the entire context of his comment “I’ve taken care of it” was that he had requested a correction. This comment came after long discussions of whether a correction was needed or not and immediately following a post of mine in which I argued that we will be seeing a political explosion when middle-class investors learn of the 10-year cover-up of the errors in the studies.

I’ve said the Trinity study is not helpful for new retirees. You’ve said that this doesn’t go far enough because the study needs to be corrected. But what you really mean is: you want to become rich and famous and you think this will happen if there is a formal process to republish old studies acknowledging you for “discovering” an “error” in them and providing your proposed “correction.” 

I am the person who discovered the errors in the studies. I did this 10 years before a consensus was achieved in this field that the studies are in error. Had the errors been corrected at the time I first requested corrections, millions of people would have been spared one of the worst life setbacks imaginable and the people who have participated in the 10-year cover-up would have been spared billions of dollars in legal liabilities. Is there something bad about giving me the credit I merit for the role I played here? We all want to spare people from suffering failed retirements, no? Sure, I want to be paid for the good work I have done. The people who produced the discredited studies won a great deal of fame and wealth for causing the millions of failed retirements. The people who participated in the 10-year cover-up have been rewarded handsomely. I think it would be fair to say that things are more than a little mixed-up in InvestoWorld when the only one in this field who is singled out as not deserving of fame and wealth is the one who spoke up about the need for the studies to be corrected.

Wade is here acting like he wants to be part of a Boy’s Club in which all members of the club protect the other members of the club when doing so works to the detriment of the investors that the club members are supposed to serve. I care about my readers. I want them to have access to good information. Those leading the cover-up have denied me the ability to make a living for 10 years as part of their effort to keep information about the errors in the retirements studies from the middle-class investors who need to know about them. Yes, I would like to be paid for the good work I have done and to receive all the credit that is due me for discovering these errors ten years before any of the big names in the field. I did not feel that I was hurting the feelings of the people who made the errors. I presumed that they would want to know about them as soon as possible because that’s what I would want if the tables were turned. Should I apologize for discovering the errors in the retirement studies? Would that make the people who covered up the errors for ten years feel better about the great amount of human misery they have brought on with their supreme acts of irresponsibility?

How does a person get to a place where he gives voice to these sorts of words? What is it about the Buy-and-Hold model that drives so many otherwise good and smart people off the deep end?

intercst knows how to push your buttons. 

Threats to kill my wife and children push my buttons. I’m funny that way.

My research has not been impacted by any alleged threats, and it is really insulting and disgusting all of the times you’ve suggested otherwise. 

Wade’s decision not to do more research on the superiority of Valuation-Informed Indexing was affected by the “hostile atmosphere” (Wade’s term) he encountered when in the presence of Buy-and-Hold advocates. He said that he was not going to do that research because it was “controversial.” It was the hate directed at him by the Buy-and-Holders, combined with the failure of big-name Buy-and-Hold advocates like Bogle to offer their support, that persuaded Wade that this issue was too hot for him to handle. Wade’s change in position re whether the discredited retirement studies should be corrected was obviously affected by the pressures applied to him. It is not possible that anyone not feeling intense pressures to believe otherwise would not believe that discredited retirement studies should be promptly corrected. The praise that Wade directed to John Greaney, the fellow who threatened to kill my wife and kids if I continued to post honestly on SWRs, was obviously a result of pressures applied to him. My guess is that those words were written by Greaney and that Wade merely put his name to them in exchange for a promise on the part of the Goons not to continue to try to destroy his career.

I certainly do not say that Wade has doctored his research, either before or after he was threatened. I believe that there is zero chance that anything along these lines ever happened.

You owe Mr. Bengen an apology, because it does look like the 2000 retirees are going to be okay after all with 4%.

This is not so. The retirements that began in 2000 and were based on the Old School SWR studies are in serious trouble. Even if this were so, I would not owe Bill Bengen an apology. His study got the numbers wrong. If the retirements survive, that doesn’t change that. If someone is irresponsible enough to tell someone that it is safe to drive drunk and the person follows this advice and lives, the person who gave the bad advice still gave bad advice. The historical data shows that a retirement beginning in 2000 and using a 4 percent withdrawal has only a 30 percent chance of surviving 30 years. That’s not “safe” according to any reasonable understanding of the word.

Again, it’s all about covering up for one’s friends in the Boys Club. Does the effect on the retirees even get considered by the “experts” in this field? These sorts of comments evidence a very serious public policy problem. If anyone had told me on the morning of May 13, 2002, that this callous indifference to human suffering is this common in this field, I would have rejected the possibility out of hand. What sort of madness is it that causes people to create a “controversy” over whether errors in retirement studies should be corrected or not? Is that a hard one? We really need as a society to get to the bottom of this and fix the problem. There are millions of investors who place their trust in “experts” in this field. I put the word “expert” in quote marks because I don’t see how the word applies to people who do not understand the need to get numbers in retirement studies accurate. This is the ABCs.

I’m not sure if you can even distinguish a mean from a median.

I can distinguish a mean from a median. Just barely. The numbers stuff is not my strong point. I think it would be fair to say that I do a much better job than most of the big shots in this field of distinguishing honesty from dishonesty, responsible behavior from irresponsible behavior, courage from cowardice. That’s the job that has been assigned to me. I did not ask for that job. It was assigned to me when the reaction to my May 13, 2002, post was not “Wow, thank you Rob for letting us know about those errors so that we can quickly correct them before our retirement studies do even more harm to even more people!” but instead “We are going to kill your wife and children, Rob, if you continue to talk about this!”

Wade obviously did not create this problem. The full reality is that he has done much more than most to fix it. Still, Wade will presumably be working in this field for many years to come. He should be as concerned as I am that it soon become possible once again for people of intelligence and integrity to feel comfortable working in this field. We should ALL want that. We should ALL be on the same side re issues of personal integrity. Means and medians are not the only things that matter in this world of ours.

I’m not sure how a properly calculated lower confidence bound for a 2000 retiree could have been higher than zero.

This is an uninformed and confused statement. The SWR for an asset class that provides a long-term average return of zero is 3.33 percent (SWR studies presume that the portfolio will be reduced to zero over the course of 30 years). The 1.6 percent SWR that applied for an 80 percent stock portfolio in 2000 is a shockingly low number. The number is so low because the first 10 years of a retirement has a disproportionate effect on the retirement’s long-term survival prospects. For Wade’s claim that the SWR for an asset class that provides a long-term average return of 6.5 percent real is zero is not a serious one.

In January 2011 I still thought that Valuation-Informed Indexing I was all your creation, and it was only later that I internalized that this is old stuff since the stock formula plans of the 1940s and 1950s. VII is Lucille Tomlinson’s variable-ratio plan from 1953.  

If all that I have argued for 10 years was known to all on the morning of May 13, 2002, what has all the noise been about?

Benjamin Graham argued in his book Security Analysis (written in the 1930s) that investors should be going with a 75-percent stock allocation when prices are low, a 50-percent stock allocation when prices are moderate, and a 25-percent stock allocation when prices are high. That’s Valuation-Informed Indexing! The idea of investing rationally has obviously been around since the first market was opened for business. The problem we have today is that for the past 30 years the “experts” in this field have been telling millions of middle-class people that it is okay for them not to consider price when setting their stock allocations (the claim is that long-term market timing is not required or even that there might be circumstances in which long-term market timing might not work). This demonstrably false and dangerously irresponsible claim has caused millions to suffer huge losses. The collective losses have grown so large that we are now in an economic crisis, a crisis that will likely become the Second Great Depression in the event that stocks continue to perform in the future anything at all as they have always performed in the past.

Investing analysis was not an academic pursuit in Benjamin Graham’s time. At the time Buy-and-Hold was developed, there were many smart and good people who believed that the market is efficient. If that were so, Graham’s insight that it is necessary for investors to change their stock allocations in response to big price swings would not be valid. Graham’s insight is valid. There is now a mountain of research showing this. The problem we have today is that thousands of investment advisors have for three decades now been advancing demonstrably false claims about how investing works and about what the academic research of the past three decades shows us about how stock investing works. The collective legal liability for this mountain of demonstrably false claims is now in the trillions of dollars. The question at the root of our discussions is — How do we as a society make the transition from this dark place we are in today to the very bright place we will be in when we work up the courage to permit honest posting on SWRs and many other critically important questions.

Valuation-Informed Indexing marries the powerful insights of the smartest investors who have ever lived (the Value Investors, who root their ideas in the teaching of Graham and Warren Buffett) with the three breakthrough ideas of the Buy-and-Holders: (1) the idea of using academic research to guide one’s investing decisions and to avoid emotional responses; (2) the idea that average investors, people who do not have the time or inclination to do much research, should invest in indexes rather than in individual stocks; and (3) the idea that investors should focus on long-term results. That’s it. It is a simple concept. But it is a very, very, very powerful concept. Wade’s research and the excitement he felt when he produced the research showing that Valuation-Informed Indexing always provide far higher returns at greatly reduced risk, shows this. Investors who make the switch from Buy-and-Hold to Valuation-Informed Indexing to Buy-and-Hold thereby reduce the risk of stock investing by 80 percent. That’s no small thing.

We certainly should be grateful for the contributions made by Lucille Tomlinson. We should also be grateful for the contributions of John Bogle. We should also be grateful for the contributions of Warren Buffett. We should also be grateful for the contributions of John Walter Russell. We should also be grateful for the contributions of William Bernstein. We should also be grateful for the contributions of Wade Pfau. We should also be grateful for the contributions of Eugene Fama. We should also be grateful for the contributions of Rob Arnott. We should also be grateful for the contributions of Jeremy Siegel. We should also be grateful for the contributions of Andrew Smithers. We should also be grateful for the contributions of Benjamin Graham. We should also be grateful for the contributions of Michael Kitces. We should also be grateful for the contributions of Scott Burns. We should also be grateful for the contributions of Ed Easterling. We should also be grateful for the contributions of Cliff Asness.

Oh.

And we should also be grateful for the contributions of that passionate fellow whose only claim to expertise in this field is that he happened to figure out what buttons he needs to push to get his words to appear on the computer screens of internet searchers everywhere. I cannot remember the fellow’s name. But we probably should say a hearty “Thank You!” to that fellow as well. He put up a post on the morning of May 13, 2002, pointing out the errors in the Old School safe-withdrawal-rate studies 10 years before any of the big shots in this field caught on to the concept. Boring, I know. But still… It never really hurts to say a hearty “Thank You!” to someone trying to help out, does it?

Here’s one thing I know for sure. We will begin making a whole big bunch more progress in a whole big bunch less time when we start devoting a little less mental energy to worries over who is going to get the credit for the transition from Buy-and-Hold to Valuation-Informed Indexing and a little more mental energy to what we need to do to get the word out about what works to the millions of middle-class investors who today are in desperate need of this information. That’s my sincere take re that one, in any event.

Rob Bennett’s Responses to Academic Researcher Wade Pfau: #9 — The Ten-Year Saga Demonstrates the Power (and Risks) of the New Internet Communications Medium

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Going back to the first day, the Great Safe Withdrawal Rate Debate has been a story demonstrating the power (and risks) of the new internet communications medium.

Set forth below are ten illustrations of the point.

1) We have never seen as much support for discussions of Valuation-Informed Indexing as we saw in the early months of the Motley Fool stage of the discussions (May through August 2002). This tells us something important. Investors have a great deal of interest in these ideas so long as the discussions are held in a civil and reasonable way. There were detractors from the first days, to be sure. The first abusive post appeared on the morning of May 13, 2002. But there were limits to what the Goons could get away with in those days. I was the most popular poster at the Motley Fool’s Retire Early board. So the detractors couldn’t get away with death threats and defamation and board bannings at that time. The confusion over these issues is real and deep and many Buy-and-Holders feel genuine emotional pain to learn that a strategy they have been following for years to finance their old-age retirements is a Get Rich Quick scheme. But those early Motley Fool discussions teach us that, despite the sensitivity of the issue, interest in the topic is real and broad under the right conditions.

There’s never before been a communications medium that let us test things like this. If these discussions had been proceeding through newspapers or magazines or books, perhaps we could say that there is some interest in the new ideas as well as a great deal of reluctance to giving up on Buy-and-Hold. With the new communications medium, we can draw sharper and more edifying conclusions. We know how deeply people feel about various issues, we know what the hot buttons are, we know what sorts of arguments ring true and what sorts of arguments are ignored. It’s exciting stuff. I obviously view the transition from Buy-and-Hold to Valuation-Informed Indexing as being a very big deal. Could it be that the birth of this new communications medium will end up being an equally big deal in the end?

2) I met John Walter Russell through the internet. I’ve said that Wade Pfau’s research merits a Nobel prize. The same is true of the research of John Walter Russell. John spent the last eight years of his life working these issues 50 to 60 hours per week. One of the funny things (perhaps not to the Goons!) about the story is that I dropped out of the discussions on Day Five. I was fed up with the abusive posting. It was a sensitivity study that John posted on Day Six and the community’s strong positive reaction to it that pulled me back in. And I of course could never have developed the five unique calculators available at my site without John’s help. I don’t have the numbers skills to develop calculators on my own. So those calculators wouldn’t exist but for John’s efforts. And a good percentage of the insights that I have developed over the course of the ten years came to me as a result of work I did either building the calculators or playing with them after they were developed. It’s not possible to overstate the extent of John’s contributions.

My partnership with John was a 100 percent internet phenomenon. He lived in Florida. I live in Virginia. We did not have similar backgrounds or interests. Our chances of coming to know each other were virtually nil on the morning of May 13, 2002. John has just retired from his job as a government systems engineer. He was looking for something productive to do with his time. I put up the famous May 13, 2002, post, John saw merit in the core idea and decided to spend some time researching the question (my guess is that he was thinking a few days, not eight years!) and things took off from there. We were able to run ideas past each other at discussion boards and through e-mails. John published his most important research in real time at The SWR Research Group; has anything like that ever even been tried before?

3) I met Wade Pfau through the internet too. The story repeated itself with Wade. Wade is a young guy who sees the potential of the internet to change the job of the academic researcher. The internet provides a means to run ideas past interested parties and thereby refine them before setting one’s research in concrete. I always thought that Wade was smart to see the potential in that way of doing things. He learned of my work by my posts at the Vanguard Diehards. You never know who is reading your stuff on the internet! Wade never commented when he was reading my stuff. He saw the merit in the ideas and he saw the vicious reaction of the Buy-and-Holders. And he pondered. Eventually he formed the idea of going ahead and doing research to test the ideas and made contact with me.

Both Wade and John of course saw the negative side of the internet too. The negative side is those darn Goons! Anything that carries the potential to do great good when it is put to constructive uses carries the potential to do great bad when put to destructive uses. Wade and John possess creative minds. Creative minds enrage the Goon personality. There’s nothing that a Goon will not do to stop a Wade Pfau or a John Walter Russell from teaching new ideas that make the relatively ill-informed Goons look bad in comparison. If the internet is going to achieve its potential as a communications medium, we are going to need to do something about the Goon problem. We have rules at all our boards and blogs that protect us. But the site owners obviously do not feel much obligation to honor their promises to us. It is my hope that the lawsuits that will be brought as a result of the losses suffered due to the 10-year cover-up of the errors in the Old School SWR studies will be the catalyst for teaching site owners all over the internet of the need to exercise some responsibility in their site administration practices.

4) I’ve been able to detect what brings on changes in support for the new investing ideas by watching changes in the reactions to my writings. Again, this is cool stuff. People talk about how ideas achieve a Tipping Point and achieve popularity or even dominance. When Valuation-Informed Indexing becomes the hot thing, we will be able to identify what made it happen by reviewing the ten years of Post Archives. I know the event that caused the biggest change so far: The 2008 price crash. I couldn’t get a Guest Blog Entry accepted in the days before the crash. There were times when I couldn’t get a comment accepted in a blog thread! Those were dark days. I am not Mr. Popularity today. I remain frustrated the other bloggers do not write about the Goon phenomenon, which I see as an important part of the story (research-based strategies should make those who follow them confident and the Buy-and-Holders obviously cannot be confident about their strategy if they engage in or tolerate the behavior we have seen from the Goons). But today I can get Guest Blog Entries accepted at numerous quality blogs. When I appeared at the Financial Bloggers Conference last year, most of my fellow bloggers were wary of me but friendly to me. This year I was invited to speak at the conference. The price crash scared people and the fears generated opened some minds to at least some tentative consideration of new investing ideas.

So it is almost certainly going to be the next crash (Shiller’s work says that we should be seeing another 65 percent price drop in coming days, perhaps all at once, perhaps in stages) that is going to give Valuation-Informed Indexing the big push it needs to finally supplant Buy-and-Hold as the dominant model for understanding how stock investing works. But I don’t think that we should conclude at that time that it was only the second crash that did the trick. Ideas don’t achieve the Tipping Point in one big rush. There are lots of preliminary steps. For example, John’s research was essential. That research gave my rough concepts (all that I am capable of on my own!) credibility with people who believe that numbers rule. We would not today be in a position to hit pay dirt with the next crash were it not for the calculators. When people get interested in these ideas, they are going to need to explore them in depth before they become converts. The five calculators facilitate lots of exploration. Wade’s work was of huge importance too. Wade’s research went through the Peer Review process. A lot of people won’t take John’s research seriously because he is not an “official” academic researcher (I don’t go along with this prejudice, I think the work should be judged on its own merits, but attitudes are what attitudes are). The testing of my ideas that has been going on in the Personal Finance Blogosphere for four years or so is going to be a factor in the end. People know that I am not some Johnny Come Lately. They know that I have been pushing these ideas for a long time. When the bottom falls out of the market, they are going to go looking for answers and the first place they go (I hope!) will be to that nice fellow who has been trying to interest them in some new ideas for years now and who has been getting shot down again and again and yet has never given up.

None of this stuff would be in place without the internet. The calculators reside on the internet. The research resides on the internet. There would be no Personal Finance Blogosphere without the internet.

5) The entire ten years of my work is time-stamped because of the internet. I have generated a huge amount of material on Valuation-Informed Indexing. I have produced 200 one-hour-long podcasts. I have produced over 100 investing articles. I have produced half a dozen of the in-depth articles that I wrote for the Google Knol site and that are now housed in the “The Buy-and-Hold Crisis” section. I have produced 100 entries for each of the three weekly columns I write. I have produced scores of Guest Blog Entries. I have produced hundreds of entries at my own blog. I have produced five unique calculators. I have produced hundreds of thousands of discussion-board comments. None of this material has received the attention it merits. Why do I keep producing more and more material?

There are two possibilities re Valuation-Informed Indexing. One is that I am wrong about it. In that event, the whole thing has been a waste of time. The other is that this is the most important advance in our understanding of how stock investing works ever achieved in history.

All of the evidence points to the latter possibility.

The problem in getting VII the attention it merits is the hostility that the Goons feel toward it and the less intense hostility or indifference that many ordinary investors feel towards it (it is because of this less intense hostility or indifference that I have not been able to do anything to limit the negative effect of the Goons). We have hugely important material that cannot receive a fair hearing.

If that is going to always remain the case, the sensible thing is to throw in the towel and move on to other endeavors.

I do not believe that that is always going to remain the case. I know what the numbers say. The numbers say that, if we continue on our current course, we are going to end up in the Second Great Depression. I cannot bear to see that happen if I can do something to fix it. I didn’t ask for the job of saving us from the Second Great Depression. But I think it would be fair to say that I have been selected for the position.

Our knowledge of how investing works has advanced over the years. We were at the 25-yard line prior to the development of Buy-and-Hold. We had never studied investing in a systematic way before. So we didn’t know much more than the basics. Buy-and-Hold was a huge advance that pushed us forward another 25 yards. Shiller’s research was another huge advance that pushed us forward yet another 25 yards. And Valuation-Informed Indexing has taken us to the 99-yard line. We are so close to entering a new age where a smart, simple and safe investing strategy will be available to all investors. The only thing holding us back is the Goon problem. And that will go away when things get bad enough that the Buy-and-Holders swallow enough of their pride to look at what the academic research of the past 30 years really says about how investing works.

I don’t have all the answers. But I believe that I have a lot of the answers. I like the idea that when things reach a point where large numbers of people are willing to listen to answers not rooted in the Buy-and-Hold Model, I will be able to point to the answers that I have developed and point to time-stamps that will show when each of the answers was developed. There’s transparency in that. People will know that Valuation-Informed Indexing is not something that I cooked up only when it became popular to diss Buy-and-Hold. My answers were developed at a time when Buy-and-Hold was all the rage, not to sell something but to figure out this investing project for the benefit of all of us. I like it that my answers will come with time-stamps. It is the internet that makes that possible.

6) I have been able to test the strength of the Valuation-Informed Indexing concept by putting it before its harshest critics to see what they can come up with. Many people wonder why I post at the Goon Central board. I don’t want to make the mistake that the Buy-and-Holders made of coming to believe my own press releases because I only associate with people who flatter me. The Goons want to prove me wrong in the worst way. If there are holes in my ideas, they are the most likely ones to identify them.

I am of course not saying that I approve of the Goon phenomenon. Their behavior causes our best contributors to leave our boards. So they hurt us in very serious ways. But it’s an ill wind that carries no good whatsoever. As twisted as is the way the Goons present their case, the reality is that they do believe in Buy-and-Hold in at least one important sense; they follow its dictates themselves. They are highly motivated to find holes in VII. They have not found any major holes. That gives me confidence that I am on the right track.

7) I have been ale to test the strength of Valuation-Informed Indexing by putting it before the smartest experts in the world. The internet permitted me to put these ideas before the following people: (1) John Bogle; Wade Pfau; John Walter Russell; Bill Bernstein; Rick Ferri; Larry Swedroe; Jonathan Clements; Scott Burns; Michael Kitces; Adam Butler, Rahiv Sethie; Mel Lindauer; John Greaney; Taylor Larimore; Felix Salmon; Michael Harr; Jim Wiandt; J.D. Roth; Norbert Schlenker; Bill Shultheis; Chuck Yanikoski; Tom Behlmer; Neal Deustch; Todd Tresidder; Kay Conheady; Larry Evans; Sam Parler; and Carl Richards. None of these people has found any significant holes. A good number of them have expressed huge enthusiasm for the Valuation-Informed Indexing concept. Again, I could never have received this sort of feedback in pre-internet days and it has made a big difference in helping me to know where I have gotten things right and where I needed to go back to the drawing board and do additional work on particular points.

8) I have been able to keep a record of the contradictions in the thinking of Buy-and-Holders. Buy-and-Holders contradict themselves all the time. The ultimate example is with the safe withdrawal rate studies. For years, they said the studies contained no errors. Now they acknowledge the errors but say there is no need to correct the studies. I have identified scores of such contradictions over the years. I would not have believed that Buy-and-Hold was so full of holes had I only seen one or two of the contradictions. The internet permits me to keep a record of all of them and thereby to present a much more powerful case.

9) I have been able to keep a record of the research supporting Valuation-Informed Indexing. There are not just one or two studies supporting Valuation-Informed Indexing. There are scores of them. And there are scores of statements by experts in the field expressing grave doubts about the validity of Buy-and-Hold. Again, seeing one or two of these studies or statements would not make much of an impression. It is by pulling them all together in one place that their collective power can be experienced. The internet makes it possible for us all to see how widespread the doubts about Buy-and-Hold have become in recent years.

10) The internet gives us access to informed people who do not have ties to The Stock-Selling Industry. Anyone who makes money selling stocks is compromised when the question is “Is it always a good idea to buy stocks?” We cannot trust the experts in this field to tell us the straight story. But of course we do need to talk to informed people. The internet lets us do this. All sorts of people who we would not have known to contact in earlier days have set up web sites or blogs in the internet age.

Rob Bennett’s Responses to Academic Researcher Wade Pfau: #8 — What Caused Good Guy Wade to Do Such a Horribly Bad Thing?

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Academic Researcher Wade Pfau is a good guy. I told you that story in Response #1.

Academic Researcher Wade Pfau has done a horribly bad thing in switching over to the Goon side. He has empowered the Goons. He has extended the economic crisis. He has delayed the correction of the Old School safe withdrawal rate studies. He has caused even more harm to come to the reputations of the Buy-and-Holders when we all should be working to rebuild the reputations of our Buy-and-Hold friends by getting those darn Old School safe-withdrawal-rate studies corrected and making it possible for people of intelligence and integrity to make a living in the investment advice field once again.

What happened?

Why do bad decisions get made by good academic researchers?

This is an investing question. During the Buy-and-Hold Era, it has become common practice to view effective investment as a numbers exercise. It’s all about wrestling with tables and charts and data. No. That’s the mistake. The academic research of the past 30 years shows that 80 percent of the risk of stock investing lies in the temptation we all feel to fall under the spell of Buy-and-Hold/Get Rich Quick strategies. No one purposely destroys his or her hopes for a successful retirement. We mess up because Get Rich Quick calls out to us and our friends in The Stock-Selling Industry have learned over the years that there is an awful lot of money to be made by advising us to answer the call. Valuation-Informed Indexing is what works. But Buy-and-Hold is what sells. Compare John Bogle’s bank book to mine if you have any doubts. There is a good reason why the people who sell stocks for a living love Buy-and-Hold so much.

But The Stock-Selling Industry is far from the only industry that stretches the truth a wee bit to sell us junk. The car dealerships would tell us that cars are worth buying at any price if they thought they could get away with it. The fashion designers would tell us that clothes are worth buying at any price if they thought they could get away with it. The toy companies would tell us that toys are worth buying at any price if they thought they could get away with it.

It’s not just that The Stock-Selling Industry tricks us. It’s that we want to be tricked!

And it’s not just Wade Pfau who has compromised himself in response to enormous pressures to do so. Just about everyone in this field has done that to some extent (I knew that the Old School SWR studies got the numbers wrong when I put forward my first post to the Motley Fool board in May 1999 but I didn’t tell my friends what I knew until the morning of May 13, 2002 — that’s financial fraud!). It is the social pressure to not point out the dangers of Get Rich Quick schemes and the human inclination to respond to social pressures that makes stock investing risky. When we figure out why Wade Pfau (and many, many, many others) did what he did, we have come to understand the true nature of investing risk and have at least begun an effort to avoid investing risk in the future.

I’ve come up with ten reasons for why Wade did what he did.

Reason One is that there was money to be made. This is the obvious one. Wade has seen lots of links to his site since he flipped. He has seen job offers come his way since he flipped. He has seen the Goons agree to leave him alone since the flip. All those things have put money in Wade’s pockets. I need to include this one on the list because it obviously was a factor. I think it is a mistake to make too much of it. We are all a little corrupt. I have never seen any signs that Wade Pfau is more corrupt than the average bear. In other circumstances, the average bear doesn’t do what Wade Pfau did. So we know there are other factors are work here. Sure, Wade likes money. Who doesn’t? In ordinary circumstances, he would have put his reputation for personal integrity above his financial concerns. There is precisely zero evidence indicating otherwise.

Reason Two is that Wade wants people to like him. We want academic researchers telling us the truth about stock investing. We don’t want them saying whatever they need to say to be popular. But we need to accept that academic researchers are not robots. They are people. They want to be liked. We humans hate with a burning passion those who tell us the truth about stock investing at times when stocks are insanely overpriced. So long as that remains true, using the academic research as our guide to how to invest is not going to work out so hot. The best trained and smartest researchers in the world won’t tell us the truth if we make clear to them that we will hate them for doing so. There is no one alive on Planet Earth who has taken a firmer stand about telling the truth re stock investing than Old Farmer Hocus. I gained 60 pounds as a result of the extra chocolate-chip cookies I ate to soothe the pain I felt from the endless storm of rage directed at me by the Goons (I’ve lost 20 of those 60 pounds in recent months). Maybe Mrs. Pfau doesn’t like fat boys. Maybe Wade feels that he just cannot afford to take the path that Old Farmer Hocus has taken. None of us want to be hated. If we want to obtain better investing advice from the experts in this field, we had better start giving some thought to not directing so much hate to those who dare to “cross” us by telling the truth re what the data says.

Reason Three is that Wade wants to do good work. What a horrible man that Wade Pfau is — he wants to accomplish good things in this world! Wade has spent years developing the skills that made him a researcher capable of doing research worthy of a Nobel prize. He naturally doesn’t want to waste that talent. He knows what has happened to me. It was because he recognized the great power of my work in this field that he sought to establish a relationship with me and learn more about my ideas. I think it would be fair to say that he noticed early on that my web site is, as one visitor told me in an e-mail, “the best kept secret on the internet.” Wade doesn’t want his investing insights to be kept secret. He wants his stuff out there, influencing lots of people for the good. I think this is the biggest factor. I believe that Wade’s desire to leave a positive mark on the world counted for a lot more in his decision than did the dollar bills that he knew would be coming his way if he agreed to compromise himself. We all want to do useful work. If our free market system is to survive, we are going to need to find a way to make it possible for people to do good work in this field without compromising their personal integrity.

Reason Four is that Wade wants the Goons off his back. The Lindauerheads and the Greaney Goons are vile. If you don’t know what I am talking about, please spend ten seconds reviewing Greaney’s site (please be sure to wear protective clothing). It’s obviously no big deal that there are vile people posting vile stuff on the internet. We all know about that unfortunate reality of modern life. The point here is that the way we handle the vile stuff in the investing field is very, very different from the way we handle the vile stuff when we see it appear before us in all other areas of human endeavor. In all other areas of human endeavor, we protect the people making positive contributions from the reach of the Internet Sewer Rats. John Bogle knows about the Goons. I sent him two e-mails asking for his help with the Lindauer matter. He hasn’t responded. Wade knows that. Wade sent me an e-mail once when he saw the Goons put up a string of abusive posts at the Early Retirement Forum on a thread discussing his research. He understands that, when the Goons smear you with feces, it takes a long time for the smell to wear off. If it weren’t for the 30 years of academic research showing that Buy-and-Hold can never work in the long run, we would still know how dangerous it is just by observing the behavior it has prompted among the Goons and our tolerance of that behavior for ten years now. Wade wants to stay clean. That’s a big part of the explanation of why he is no longer willing to state plainly and clearly and firmly what his research shows about how stock investing works in the real world.

Reason Five is that Wade does not fully understand Valuation-Informed Indexing. Wade gets it that investors who make the shift from Buy-and-Hold to Valuation-Informed Indexing greatly increase their returns by doing so while also greatly reducing their risk. That can be shown with numbers and Wade is a magician with the numbers. There are many other elements of the new model that he does not yet fully understand. I know this because of things he said to me. For example, he once expressed uncertainty as to whether the continued promoted of Buy-and-Hold will cause another price crash. He doesn’t rule out the possibility. He gets it that on all earlier occasions on which Buy-and-Hold became popular, we saw multiple crashes that eventually brought stock prices down to one-half of their fair-value level. The part he doesn’t yet fully grasp is why.

I’m not making a dig in saying this. It took me years to grasp this stuff (and I’m still learning something new nearly every week). It took John Walter Russell years to grasp this stuff. It’s not intellectually hard. It’s just that Valuation-Informed Indexing is rooted in very different premises than Buy-and-Hold and it takes some time to get used to thinking with the new mindset. Because Wade does not get it all, he does not feel comfortable placing all his chips on a VII bet. I believe that he feels that he is hedging his bets by first posting research showing the superiority of VII and then shifting his positions to make them more acceptable to Buy-and-Holders. If he grasped how imperative it is that as a society we begin making the shift to VII, he wouldn’t give two seconds thought to the idea of promoting Buy-and-Hold no matter how much money he would earn by doing so. But he doesn’t see the full extent of the peril our economy is in today or appreciate fully how the promotion of Buy-and-Hold caused the problem and how the promotion of Valuation-Informed Indexing would overcome the problem.

Reason Six is that Wade has friends who have promoted Buy-and-Hold strategies. One of the reasons why ordinary investors get sucked into trying out Buy-and-Hold strategies despite their horrible track record is that we humans are not logic-processing machines. We make many decisions by checking out what our friends do and doing likewise ourselves. That’s why celebrity endorsements are a regular feature of television commercials. The way to persuade people of the merit of something is not to hit them with facts and data. It it to let them see that people they like have checked out the product or service or investing strategy and found it promising. There’s something in our minds that tell us “if lots of other good people like this, it’s probably at least okay.”

Wade obviously has friends in The Stock-Selling Industry or at least among other academic researchers who do investing research. We live in the Buy-and-Hold Era. So those friends have either endorsed Buy-and-Hold strategies or published Buy-and-Hold research. Wade’s brain is telling him that, if these other good people find Buy-and-Hold acceptable, he should too. Wade is a human. That’s how the humans operate.

Reason Seven is that Buy-and-Hold has never been permanently defeated in the past. Say that Wade has learned enough from his research to be able to resist the social pressures to believe that Buy-and-Hold is at least an acceptable strategy. Say that he believes that it really is going to bring us to the Second Great Depression. My sense is that he is not convinced of that (my sense is also that he does not dismiss the possibility out of hand). But let’s assume for purposes of discussion that this is the case. In those circumstances, would be be willing to become as much of an evangelist for Valuation-Informed Indexing as I have become?

Not necessarily.

To become an evangelist, he would need to believe two things: (1) that Buy-and-Hold is very bad and that Valuation-Informed Indexing is very good; and (2) that it is at least possible that Buy-and-Hold will be replaced by Valuation-Informed Indexing. My sense is that Wade does not believe that Buy-and-Hold will be replaced by Valuation-Informed Indexing.

Buy-and-Hold has caused four economic crises over the past 140 years. It wiped out a lot of investor portfolios the first time and then came back into popularity a few decades later. It wiped out a lot of investor profiles and then came back into popularity a few decades later. It wiped out a lot of investor portfolios the third time and then came back into popularity a few decades later. If Wade believes that on the fourth time it became popular Buy-and-Hold is going to wipe out a lot of investor portfolios and then come back into popularity a few decades later, should he position himself as a harsh critic of Buy-and-Hold? Not if he wants to continue working as an academic researcher in the investing field. Unless Buy-and-Hold is buried 30 feet in the ground, where it can do no further harm to humans and other living things, it will return to destroy many more investor portfolios a few decades from today.

I think this is the end for Buy-and-Hold. I think the Buy-and-Holders are sincere in believing that one should root one’s investing strategies in the academic research and that, once they see what Buy-and-Hold always eventually produces in the real world, they are going to take a serious look at the 30 years of academic research showing why a Buy-and-Hold strategy can never work in the long run. The Buy-and-Holders are not our enemies. Valuation-Informed Indexing is the first true research-backed strategy and the Buy-and-Holders really do believe in using the research as a guide. So this time is different. When Buy-and-Hold fails this time, it fails for good. Once we fix the mistake that the Buy-and-Holders made in the early 1970s, when all the research was not yet available, there will be no reason for anyone to return to a belief in Buy-and-Hold a few decades down the line. All of the textbooks and all of the research and all of the web sites will be singing the praises of Valuation-Informed Indexing as loudly as today they sing the praises of Buy-and-Hold.

So says I. But the future world I am describing here has never yet existed in the flesh-and-blood world. I have reasons for believing that things will turn out as I say but perhaps those reasons do not seem as persuasive to Wade or perhaps he has not spent as much time contemplating the possibilities and has just fallen into an assumption that Buy-and-Hold will recover this time much as it always has in the past. This investing research gig is his life. He has put a lot of effort and time into developing his career. He doesn’t want to blow it all because of what some crazy guy on the internet says is going to happen. These are not entirely unreasonable considerations for him to ponder.

Reason Eight is that Wade does not want to appear extreme. Extremism is bad. Pretty much all reasonable humans agree. Wade acknowledges that there is a ton of evidence that Valuation-Informed Indexing beats Buy-and-Hold. Wade acknowledges that valuations affect long-term returns. Wade acknowledges that the Old School safe withdrawal rate studies get the numbers wildly wrong. Isn’t that enough?

I don’t think it is enough. I think our perception of what is extreme goes totally haywire in a runaway bull market. A stock allocation of 80 percent was insane at the top of the bull. But lots of otherwise smart and good people were saying it was not out of line at the time. Bull markets mess with our ability to process information rationally. The extreme comes to be seen as non-extreme and the non-extreme comes to be seen as extreme.

There’s nothing extreme about Valuation-Informed Indexing. It is the most emotionally balanced investing strategy that exists. It is the first strategy that is truly rooted in the academic research. But for so long as prices remain high (the P/E10 value is far above fair-value levels today), the non-extreme Valuation-Informed Indexing is going to be perceived by many as more extreme than the very extreme Buy-and-Hold.

Wade does not think of himself as an extremist. He has a hard time placing himself firmly on the VII side of the line when the battles between Buy-and-Hold and VII are waged about him.

Reason Nine is that Wade believes a softer version of VII can work. Wade has never said that the Old School safe withdrawal rate studies are analytically valid. He doesn’t believe that. What he has tried to do is to incorporate the effects of valuations into his research without saying that Buy-and-Hold is dangerous or wrong. The Buy-and-Holders can live with that. The Goons tell me all the time that it is not what I say that inflames them but the way I say it. What they mean is that I say that the Old School SWR studies get the numbers wrong. They hate that. They hate, hate, hate, hate, hate it. The Buy-and-Holders believe in the power of numbers. They see themselves as the kinds of people who make a big deal out of getting the numbers right. They don’t want to hear that they got such important numbers wrong. It hurts too much even to consider the possibility.

Wade is trying to get good information out to the readers of his research without inflaming the Buy-and-Holders. If he were writing this article, he would add the word “needlessly.” He would say that he is trying to get good information out to the readers of his research without needlessly inflaming the Buy-and-Holders.

I believe that we must inflame the Buy-and-Holders. I don’t like it. I see their pain. But the only way I see to relieve them of that pain is to confront them with the truth and help them to cope with it and move on. I believe that we will continue spinning our wheels re the economic crisis until we do that.

My sense is that Wade does not agree with me re this point. He sees a softer way to help people understand the effect of valuations and that’s the approach he wants to employ with his future work.

Reason Ten is that Wade is more comfortable working with numbers than with emotions. Most of today’s researchers are numbers people. The numbers support Valuation-Informed Indexing. So it is entirely possible for a numbers guy like Wade to make a strong case for the superiority of Valuation-Informed Indexing. Ultimately, however, Valuation-Informed Indexing is a strategy rooted in an understanding of the emotional realities of stock investing. We don’t cite numbers for the sake of citing numbers. We cite numbers to warn ourselves when our emotions have gotten out of control and to know when to make adjustments in our stock allocations to get things back on track.

My sense is that Wade is out of his element when the discussion turns from numbers to emotions. He is a numbers wiz. Working the numbers makes him feel highly competent. He feels less skilled when the discussion turns to emotions. He was excited to see that the numbers support Valuation-Informed Indexing and so he worked hard to make the numbers case for the new strategy. But he would feel more comfortable seeing other researchers take the lead on the many emotions-rooted research questions that need to be explored in coming days to make the case complete and even more convincing. The emotions thing is not Wade’s thing, at least not to the extent that the numbers thing is Wade’s thing.

Rob Bennett Responds to Academic Researcher Wade Pfau: #7 — Will the Power and Wealth of The Stock-Selling Industry Be Employed to Crush Me Through Lawsuits?

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This one addresses a sensitive issue that is often wondered about by people thinking of endorsing Valuation-Informed Indexing but rarely mentioned aloud. Wade never told me that he was afraid of getting sued. I don’t think he was. But he was clearly afraid of how “crossing” the industry leaders could do harm to his hopes for career advancement. What happens to those who ignore the friendly advice to back off? Do we get sued?

People worry about this. Here are some words from a blogger who is sympathetic to my investing ideas: “As your promotion of Valuation-Informed Indexing gathers steam–and I fully expect it will–you have to be prepared for The Backlash. Every concept has entrenched interests, and they’ll fight ugly if they feel threatened.  What you have to be careful about is that you don’t provide fodder for future lawsuits.  When you’re a voice in the woods, no one is paying much attention to what you say.  But when your ideas gain acceptance, the technocrats (hitman in business suits working for the entrenched interests) will be out scouring the countryside (and the world wide web) for anything they can go after you for legally. Legal action is the last preserve of the doomed, and they will use it as a last desperate attempt to stay afloat. Attack ideas, and you’ll invite debate; attack people, and you’ll invite lawsuits.  I’m not saying you’re attacking people, but you want to avoid the appearance that you are.  The web may be the bastion of free ideas, but it’s also a rich source of legal evidence.”

No one else has phrased things quite as directly and darkly as that.  But others have expressed concerns to me that they don’t want to call out the Goons on their tactics because they may have friends in high places and you never know.

I’ve described Mel Lindauer and John Greaney and those who post in “defense” of their terrorist tactics as “Goons.” I’ve said that Wade Pfau engaged in an act of financial fraud when he said that there is no need for the Old School safe-withdrawal-rate studies to be corrected. I’ve characterized John Bogle’s failure to help us with the Lindauer matter as “shameful.” So I’ve named some names. Could lawsuits be directed at me?

I don’t think it is likely. But I don’t rule it out. I do think it is possible.

I understand the issue about naming names. When it is possible to avoid doing that, it’s better to avoid doing that. But I am a journalist and this is an important story (I view it as the most important economic and political story of our day). Journalists have to name some names to tell the full story they are telling. The Goons didn’t threaten just anyone with the loss of a job. They threatened an academic researcher who has published research showing the dangers of Buy-and-Hold. They saw a threat and they went after the guy who posed the threat. If we cannot trust academic researchers to tell us the straight story about stock investing, we are in big trouble. This is a public policy issue and the names of the persons making the threats and being threatened are part of it.

In my pre-investing days I was described as a “teddy-bear-type poster.” I am by nature a person who avoids conflict. So I am not somebody who likes the nastiness in which my efforts to tell people about the realities of stock investing have become embroiled. But that’s the story, isn’t it? No one has been able to identify any flaws in the Valuation-Informed Indexing concept. The problem for ten years has been that people who gained fame or money promoting Buy-and-Hold want the contender to the throne to go away. As a society, we cannot let that happen. We need to get the word out to middle-class investors re the first true research-based strategy. To the extent that that absolutely requires the telling of some unpleasant truths, we need to be willing to go there. We should never spend more time there than necessary. But we need to go there when there is no other way to get the job done.

But there is a risk of lawsuits when you step on big toes. And the toes of the Big Shots in The Stock-Selling Industry are some of the biggest toes around. So, even though there is no legitimate case against me, there is a risk here. I have already been denied the ability to make a living for 10 years by the Goons and the web sites that have permitted their use of brutally abusive tactics. It is possible that leaders in this field will try to crush me financially with lawsuits. It is possible they will succeed.

I don’t have any choice but to proceed to make the case for the first true research-based approach. Shiller’s research shows that our free-market economy cannot long stand unless we make the change. We need to move ahead. Of course, I am not the only one who is scared about what will happen to me if I do the right thing. Lots of people who in other circumstances would be helping me have refrained from doing so because they are scared too. Shiller published his research in 1981. We wouldn’t be still fighting these battles in 2012 if there were not a lot of people who are very scared to give public voice to their true beliefs on how stock investing works.

That’s both a discouraging thought and an encouraging thought.

It’s discouraging because it is the decision of many good and smart people to silence themselves that has caused this problem. In ordinary circumstances, the idea that anyone could be financially ruined because he presented the world with a superior investing strategy would be outlandish. Valuation-Informed Indexing lets people earn far higher returns at greatly reduced risk. It shows people how to retire years earlier. It takes most of the emotion out of the investing experience. If we could publicize this approach, we could greatly stabilize the economy. How could there be even one person who could object to all this, much less think of bringing lawsuits to stop it?

The problem is that there is so much money in this field. Where there is money, people become associated with particular ways to bring in money. And, when those ways work, the people who receive the money don’t like the idea of those ways being challenged. Buy-and-Hold is a gravely flawed strategy. It has caused more human misery than any earlier idea in the history of personal finance. But it has brought a lot of wealth to the people who have promoted it. Those people don’t view the question of whether Buy-and-Hold or Valuation-Informed Indexing is superior as an interesting intellectual puzzle. They see my efforts to get the word out to middle-class people re what really works in the long run as a threat to their gravy train. They don’t like me. And there’s not much they would not do to stop me.

But how much can they do?

I see risks in lawsuits for those trying to keep people from learning about the dangers of Buy-and-Hold.

The biggest risk is that the filing of lawsuits will generate publicity. I have a lot of material at this web site documenting the research and the many expert statements that have been made supporting Valuation-Informed Indexing. The Buy-and-Holders don’t want that getting out. Bringing lawsuits might start a chain of events that would lead to it getting out.

The other thing is that lawsuits often proceed slowly. Buy-and-Hold was much more popular before the price crash than it is today. It is much more popular today than it will be after the next price crash. It might be that there will be a lot of people angry at the Buy-and-Holders after the next crash. Things might not turn out well for the Buy-and-Holders if they bring lawsuits today that are not resolved until after the next crash. And there’s no way of knowing when that next crash will come.

Yet another factor is that there are today a lot of experts in this field who are anxious to move on to the post-Buy-and-Hold Era. Lots of people know that Buy-and-Hold doesn’t work in the long run. They see opportunities to establish themselves as experts in whatever strategies will become popular next. These people may help lots of investors to learn how they were fooled by the marketing tricks that were used to sell Buy-and-Hold. That could make lawsuits problematic.

My bottom line on this matter is that I see no way to avoid moving forward. The Goons have made clear that there is zero chance that they will let me post at any investing board or blog without harassing me until I agree to post dishonestly on safe withdrawal rates (they want me to say that there is no need for the discredited studies to be corrected). If I refuse to go along with the Goons, I might get sued. But what if I DO go along? I might get sued in that event too! It would be an act of financial fraud for me to say that I believe that the discredited retirement studies don’t need to be corrected when I obviously do believe that they need to be corrected. Couldn’t someone whose retirement failed because I agreed as part of a deal with the Goons not to post honestly sue me to recover his losses? It sure seems so to me.

This possibility reveals the complete craziness of our current circumstances. Buy-and-Hold was discredited by the academic research 30 years ago and yet its advocates continue to this day to promote it as a research-based strategy. That’s dishonest. Engaging in dishonesty about a money-related matter always brings with it the risk of being sued. But being honest is risky too so long as The Buy-and-Hold Machine possesses enough power to silence those trying to get the word out about the last 30 years of research. Hoo boy!

My view is that our problem is a political problem, not just an economic problem. If every investing expert who has advocated Buy-and-Hold were sued for the damages he caused to millions of investors, the large group sued would collectively not have enough money to cover the bill. My guess is that we are going to need legislation to work out these problems. Significant sums of money will be collected from the industry as partial payment to those who have been done financial harm. But we won’t be able as a society to offer full compensation because it is just not possible to do so. You’ve heard of how some banks are too big to fail? Perhaps it could be said that The Stock-Selling Industry is today too unethical to be held accountable for the results of its huge act of collective fraud.

It depresses me to talk about this aspect of the question. My guess is that it depresses you to hear about it.

Every time I start to feel down, I try to focus on the positive side of the story. We are the most blessed group of investors who ever lived. Valuation-Informed Indexing is going to change all our lives for the better in many important ways. All the ugly aspects of the story are going to be forgotten in a short amount of time while the life-affirming parts will be enriching all our lives for many years to come.

And please understand that the people who I am worried today may sue me are heroes of this story for what they did on the substantive side in the days when it really did look like Buy-and-Hold was the real thing. I need to act tough when the Goons come around because Goons don’t respond positively to polite behavior. But as a society we need healing. We don’t get healing by hating those who have attacked us. We get healing by reaching out and trying to understand where they are coming from. The way I sometimes put it is that we need to be honest up to the point at which it becomes unloving and we need to be loving up to the point at which it becomes dishonest.

I might get sued by my friends (I am not being sarcastic here) in The Stock-Selling Industry. But the full truth is that I think of many of those people as heroes. If they don’t sue me or if they try to sue me and fail, I am going to have a blast working with my smart and good Buy-and-Hold friends to rebuild our broken economy and to spread the word far and wide about what really works in stock investing.

Pray for me! And please pray for Bogle and all the others too! We are all in this together. We all are fighting for the same things in the end. There’s plenty of credit it go around.

Don’t sue me, Jack! I love you, man!

 

Rob Bennett’s Responses to Academic Researcher Wade Pfau: #6 — The Investing Advice Field Is Today 100 Percent Corrupt

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First, I will set forth seven factual statements that support the remarkable assertion advanced in the headline.

Then, I will set forth seven caveats that provide the context needed to come to a full appreciation of the unfortunate reality.

1) I put a post to a Motley Fool discussion board on May 13, 2002, pointing out the errors in the Old School safe-withdrawal-rate studies. These are studies that people use to plan their retirements. That the studies were in error was confirmed five days later, when John Walter Russell posted a sensitivity analysis on the studies. The studies have not been corrected to this day.

2) For nine years, both experts and ordinary investors denied that the Old School safe-withdrawal rate studies are in error.

3) In the past year, numerous big-name publications have acknowledged that the studies are in error. Yet they STILL have not been corrected.

4) Academic Researcher Wade Pfau wrote to the authors of the Trinity Study asking that they correct the errors in their study. They did not respond to the e-mail.

5) A group of internet Goons led by the author of one of the discredited studies threatened to send defamatory e-mails to Wade’s employer to get him fired from his job.

6) Wade relented. He now says that, while the studies are in error, there is no need for them to be corrected.

7) I have reported these facts on numerous occasions and tried to get others to do so. No one other than me has reported on the intimidation tactics.

Each of those seven factual statements on its own supports a conclusion that the investing advice field today is 100 percent corrupt. The combined effect of all seven is to leave no reasonable person in any doubt (so says I!).

It’s not just that I say that the Old School retirement studies are in error. That is acknowledged! There is today a widespread consensus on this point.

Yet the studies remain uncorrected! How could that not be financial fraud?

But even that reality does not convey the full extent of the corruption. No one has reported on the intimidation tactics that were employed to get Wade to flip to the Goon side.

Are these intimidation tactics not news? Do we not want academic researchers to give voice to their sincere beliefs?

Before I depress you too much, I rush to add the caveats, which also need to be considered by those wishing to understand the full reality.

1) There is no reason to believe that Buy-and-Hold was intended to be a Get Rich Quick scheme. It IS that. But the reason it is that is that the concept was developed at a time when all of the research needed to construct the model properly was not available.

2) Millions of smart and good people possess a sincere belief in Buy-and-Hold.

3) The experts in this field acknowledge that valuations affect long-term returns.

4) A minority of experts have in recent years given voice to doubts about Buy-and-Hold.

5) Making the transition from Buy-and-Hold to Valuation-Informed Indexing will require a rewriting of all the textbooks in the field. Yale Economics Professor Robert Shiller was not kidding when he described his findings as “revolutionary.”

6) “Cognitive dissonance” is a real phenomenon. It is written up in the psychological literature.

7) There is much evidence that experts in this field and publications in this field would do more to tell their clients and readers about the implications of Shiller’s findings if they would not lose business and/or readers as a result. Many influential people are waiting for their clients or readers to show an openness to hearing the message before presenting it to them.

In an objective sense, the investing advice field is 100 percent corrupt.

But one element of the crime of financial fraud is a negative subjective intent. It is clear that that negative subjective intent is not present in most cases. The confusion that millions of people are experiencing over the implications of Shiller’s findings is so great that my personal belief is that the crime of financial fraud should be found to exist only in those cases in which some element of negative subjective intent is demonstrated, such as cases where there are death threats or acts of defamation of improper board bannings or threats to do harm to the employment prospects of honest researchers.

Still, to have the investing advice field found to be 100 percent corrupt even in just an objective sense is unsettling stuff.

The good news is that the future is bright. Shiller’s insights are the most important insights in the history of this field. We fight discussion of them and we fight discussion of them and we fight discussion of them and we fight discussion of them. One fine day we will stop fighting discussion of them and begin enjoying the benefits that come from having the discussions we need to have to come to an acceptance of these powerful and enriching insights.

We humans are corrupt. Bad humans! Very, very, very bad!

But we’re redeemable.

I think!

 

Rob Bennett’s Responses to Academic Researcher Wade Pfau: #5 — “It’s So Implausible”

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I have two reactions to this observation.

One, there is a sense in which I agree. I said in one of my e-mails to Wade that my 10-year experience of trying to bring an end to the Campaign of Terror against our board and blog communities while developing the Valuation-Informed Indexing concept has seemed more amazing to me than the moon landing. Yes, the words we have seen appear before us when we have turned on our computers have been implausible. Yes, the words we have seen appear before us when we have turned on our computers have been strange and unsettling at times.

There’s another way to look at it, however.

The Wright Brothers once entertained an idea that man could fly. That was an implausible vision too. But we are all a lot better off as a result of the Wright Brothers’ unwillingness to give up on the vision because it was widely viewed as implausible.

The idea that the earth is round was once viewed as implausible.

The idea that the earth revolves around the sun rather than it being the other way around was once viewed as implausible.

The idea that rock and roll would turn out to anything more than a fad was once viewed as implausible. The company that had the rights to release the Beatles’ first three singles in the United States didn’t do so. Why bother? Four moptops couldn’t produce music that would last. What an implausible notion!

The greatest advances in human history begin as implausible ideas. The idea that Yale Economics Professor Robert Shiller’s finding that valuations affect long-term returns will stand up to scrutiny is today an implausible idea to Buy-and-Holders.  I believe that in days to come it will be the Valuation-Informed Indexing Model that will be the dominant model and that it is the idea that there is no need for investors to change their stock allocations in response to big price swings that will be recognized as implausible.

Valuation-Informed Indexing is a huge change from Buy-and-Hold. The change is so dramatic that it shocks people. The idea that we all really can obtain far higher returns while taking on greatly reduced risk really does strike many good and smart people as implausible on first impression. So I think it might be helpful for me to go through the history of how the good and smart people who came up with the Buy-and-Hold Model made the mistake that caused today’s economic crisis and that transformed an investing strategy that was intended to be the first research-based strategy into the purest and most dangerous Get Rich Quick scheme ever concocted by the human mind.

The story has ten chapters.

The first chapter, the first thing you need to understand to make sense of why all the academic research supports Valuation-Informed Indexing while most of the experts in this field continue to maintain that Buy-and-Hold must work, that it just must, is that today’s understanding of how stock investing works is primitive.

We didn’t begin studying how stock investing works as an academic discipline until the 1960s. I doubt that there is one academic discipline in which the good and smart people who performed the research got everything right starting on the first day and never once had to acknowledge a mistake in order to free themselves to get back on the right track and move forward again. People mess up. People make mistakes. That’s the way it is. We should stop thinking that the study of stock investing is going to go down as the first exception to the rule.

We are in the process of learning how to crawl. We need to stop talking as if we know it all. We need to chill. We need to take humility pills. We need to make more of an effort to tone down the dogmatism, listen to the other guy to the best of our ability and try to learn.

They didn’t know it all in the 1960s and early 1970s, when they developed Buy-and-Hold. They were taking guesses as to how stock investing might work. They got lucky with a few guesses and hit it on the head. They got unlucky on one big guess and caused an economic crisis some 40 years later. Oopsi! It happens. The Big Shots in this field need to take their Big Egos out for a walk and come to accept that they are humans too. They are capable of goofing up and that’s what they did. It would be no biggie if it weren’t for the 10-year cover-up.

Chapter Two of the story of how we got to the implausible place where we are today is that indexing didn’t exist at the time Buy-and-Hold was being developed.

Buy-and-Hold was developed in the late 1960s and early 1970s. John Bogle launched the Vanguard Group in 1976.

Valuation-Informed Indexing is a practical impossibility in the absence of index funds. We know today that Valuation-Informed Indexing always beats Buy-and-Hold by a very large margin in the long run. But there was zero chance that the people who developed the Buy-and-Hold Model were going to discover that given that the investing vehicle that makes this wonderful advance possible did not even exist at the time. Oh, those horrible Buy-and-Hold creators! Why didn’t they get into their time machine, travel to 1976, and come back and tell the researchers of that day about the wonders of Valuation-Informed Indexing? Bad Buy-and-Hold creators! Bad, bad, bad!

The people who developed Buy-and-Hold didn’t know what they were doing (because knowledge in this field is primitive) and didn’t have available to them the investment vehicle needed to make effective long-term stock investing possible. We’ve already explained why they messed up! But let’s go on. What’s Chapter Three?

Chapter Three is that they got excited about a very powerful insight that they were capable of discovering despite all the limitations that held them back. The Buy-and-Holders discovered that short-term timing never works. That’s only the second most important discovery in the history of investing analysis. Can we begin to develop some understanding of why they made that finding the core principle of the model they were creating? Short-term timing really doesn’t work. The only mistake they made was in improperly writing up the finding that “short-term timing doesn’t work,” which is what the research really showed, as “timing doesn’t work,” something very, very different. They didn’t know it was different because long-term timing wasn’t possible at the time because long-term timing only works with index funds and index funds were not then available. That’s the mistake. That’s what all the noise is about.

Okay then. They made this terrible mistake, which can only be seen as terrible today, 40 years later, because it was a practical impossibility to get it all correct at that time in any event. What comes next?

What comes next is Chapter Four. Chapter Four is Shiller’s research showing that valuations affect long-term returns. Published in 1981. Not available to people creating the Buy-and-Hold Model in the late 1960s and early 1970s. Are you beginning to get the picture?

Chapter Five is the revolutionary nature of  Shiller’s work. In an ideal world, Shiller would have published his research in 1981 and all the Buy-and-Holders would have smacked their foreheads with their palms and declared “Oh, now I get it! Short-term timing never works, but long-term timing ALWAYS works and is in fact required for investors who seek to have any realistic chance of long-term success. Buy-and-Hold isn’t the answer! Buy-and-Hold is a Get Rich Quick scheme. Buy-and-Hold undermines price discipline, rendering the market dysfunctional. So THAT”S why each of the four times in U.S. history when Buy-and-Hold strategies became popular we saw the portfolios of all those who followed the strategy wiped out and an economic crisis to boot! What a mistake we almost made! It’s not Buy-and-Hold we want to spend hundreds of millions of marketing dollars promoting, it’s Valuation-Informed Indexing! It’s lucky for us that that Shiller fellow is so on the ball.”

That’s the way it would have worked in an ideal world. We don’t live in an ideal world. In the world we live in, people fall in love with their theories and become reluctant to abandon them when new research comes in the door. That’s doubly the case when the new research doesn’t say that the original idea is a wee bit off but wildly off. People become defensive. People fall prey to cognitive dissonance. People tune out discussions of the new research People dig in their heels.

You have interacted with the humans from time to time. Surely you have seen this on display by the portion of the population that is not comprised of investing experts. Well, in Chapter Five of our story we learn that the same defense mechanisms that are available to all the humans who do not go to Investing School apply to those who go to Investing School as well.

In Chapter Six, we experience the biggest bull market in U.S. history. Guess what effect that has on the people who developed Buy-and-Hold and then told people they had found the answer to our investing woes?

They call John Bogle “Saint Jack.” That should give you an idea. People feel in love with Buy-and-Hold during the bull. It’s not that it outperformed Valuation-Informed Indexing. It didn’t, except from 1996 through 1999 (and Buy-and-Hold is now down for the entire time-period from 1982 through today). Valuation-Informed Indexing did not exist. So there was no reason for anyone to make comparisons. What people knew is that Buy-and-Hold worked just great. Those people who developed the Buy-and-Hold Model were geniuses! No mistake-makers in that group!

And so we turn to Chapter Seven. Shiller appears at a hearing of the Federal Reserve and reports that Buy-and-Hold is in the process of causing an economic crisis the likes of which we have never yet seen in the United States. This Buy-and-Hold idea that there is no need for investors to lower their stock allocations when prices rise to insanely dangerous levels isn’t working out so hot.

How many of the humans wanted to hear it? I did! I did! Greenspan, not so much. Bogle, not so much. Millions of middle-class investors who saw the nominal values of their retirement portfolios soar during the 1980s and 1990s, not so much.

So the mistake remained unfixed. So the mistake grew ever larger.

In Chapter Eight, Old Farmer Hocus enters the picture. I put a post to a Motley Fool discussion board noting humbly that, if this Shiller fellow knows what he is talking about, those crazy safe withdrawal rate studies are going to cause millions of failed retirements in days to come. The safe withdrawal rate isn’t 4 percent, as thousands of financial planners have been telling aspiring retirees every chance they get. It’s 1.6 percent! For a retiree with a $1 million portfolio, that’s the difference between taking out $40,000 every year to cover living expenses and taking out $16,000 each year to cover living expenses. A wee calculation error! We now get to see in dollars-and-cents terms what it means to look at research showing that short-term timing never works and mangle the message in millions of marketing brochures into “timing isn’t necessary” or even “timing doesn’t work.”

Chapter Nine is when our good friends in The Stock-Selling Industry elect not to fix the mistake but to cover it up, thereby leaving themselves subject to hundreds of billions of dollars in legal liabilities after stocks crash and then crash again (Shiller’s research tells us to expect prices to fall 65 percent from where they stand today). Lots of people ask me why people make such a fuss over correcting the discredited retirement studies. Why not just correct the darn things? That certainly is what they should do. But, if you know anything about the humans, you know that, once they have taken on hundreds of billions in legal liabilities, they become shy about acknowledging mistakes openly and frankly and clearly and cleanly. The studies need to be corrected. But the experts in this field have a very big personal financial incentive to pretend otherwise. It’s a big mess!

And it gets worse as time goes on. It’s one thing to cover up errors in retirement studies for a month. It’s something else to cover them up for a year. It’s really, really something else to cover them up for five years! It’s really, really, really, really something else to cover them up for ten years! Oh, my!

Chapter Ten is Wade’s chapter. He came into our story seeing that the 140 years of historical data really did say everything I have been telling people it says for ten years now. He’s a smart guy and a fine researcher. Why not write some studies up telling the people how retirement planning and stock investing really work? What harm could come of it?

The Buy-and-Hold Goons and their friends in the industry know what harm can come of it. That Wade Pfau fellow can ditch the Nobel-prize-worthy research anytime he pleases. And, if he knows what is good for his career in this field, he will please very soon.

Is the story plausible or is the story implausible?

My take is that the the one-line summary of the story — Internet Goons Threaten Academic Researcher Who Publishes Research That Could Lead to Hundreds of Billions of Dollars in Legal Liabilities for InvestoWorld Big Shots — is implausible as all get-out.

None of the ten chapters taken by itself is all that hard to swallow, however.

Our society is in a big mess. Fix the mistakes and we are on the road to the biggest surge in economic growth we have ever seen. Fail to fix the mistakes and we are on the path to the Second Great Depression.

Fix the mistakes! Fix the mistakes!

But Wade tried. And he couldn’t take the abuse that was dished out to him.

Does any other bright boy or girl want to step up to the plate? Do we have any long-ball hitters sitting on the bench today?

Rob Bennett’s Responses to Academic Researcher Wade Pfau: #3 — Those Infuriating Peer Review Reports That Crushed Wade’s Hopes of Revolutionizing the Field of Investment Research

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The Greaney Goons threatened to send defamatory e-mails to Academic Researcher Wade Pfau’s employer to get him fired from his job. Wade had seen how the Goons operate up close and personal at the Bogleheads Forum and at Goon Central and at my site. He knew they were capable of following through on their threats and desperate enough to try just about anything. He expressed his worries to me re how the Goons might destroy his career.

All that said, I do not believe for two seconds that the threats made by the Greaney Goons were Wade’s only concern with publishing more research showing that Valuation-Informed Indexing has throughout the 140 years of stock-market history available to us always provided far higher returns than Buy-and-Hold at greatly reduced risk. Wade had LOTS of concerns. And properly so. There are lots of powerful people who have made careers pushing Buy-and-Hold. They are lots of powerful people who have made many millions of dollars pushing Buy-and-Hold. There are lots of powerful people who will be faced with billion-dollar lawsuits if middle-class investors learn what the last 30 years of academic research really says about the chances of Buy-and-Hold strategies ever working out well for long-term investors.

Wade’s research promised to revolutionize the field. There are a good number of people who do not want to see the field revolutionized. Wade was stepping on the toes of people who have demonstrated for many years now that they have ways of teaching a lesson to those who step on their toes.

Academic researchers live or die by their Peer Review reports. Wade shared with me two Peer Review reports for his revolutionary research. He was greatly discouraged by the words he read in those reports.

One of the reports was flat-out insulting. It stated: “We did not find the paper’s incremental contribution to the academic finance literature, assuming the analysis proved to be correct, rose to the level that we are seeking for papers in the JFR.” There’s nothing that can be said re that one. That one is a sick joke.

My sense is that it was the second Peer Review report that hit Wade harder. When he learned from our discussions how stock investing really works, he had big dreams for what he could do with this knowledge. He envisioned himself being published in the Journal of Finance, the most prestigious journal in the field. I told Wade that he was on his way to winning a Nobel prize. He didn’t permit himself to enjoy that crazy a dream. But he didn’t entirely rule out the possibility. He held it at a distance. Had his research really been published in the Journal of Finance, I am confident that he would have begun to seriously entertain hopes of winning a Nobel prize.

He was planning on doing lots of follow-up research. He told me when I praised his initial study comparing Valuation-Informed Indexing and Buy-and-Hold: “You ain’t seen nothing yet!” He wanted to see that initial research win at least a small percentage of the praise it merited. Then he would take things to the next step. That’s how bright, ambitious (in the good way) and prudent people proceed.

That second Peer Review Report killed that dream. The first one could be explained away as a quirk of one particular Peer Review team. But two negative reports? Given to a guy who was not accustomed to hearing negative words about his research work product? When Wade saw that second discouraging report, he realized that the mountain he was attempting to climb was a lot higher than he had anticipated. He was either going to have to prepare himself for an ordeal or — Move over to a mountain a bit less steep. He elected to move over to a mountain a bit less steep. He was probably thinking in the back of his mind that he could return to the first mountain at a later time if circumstances changed enough to make that one appear more imminently climbable.

What is the story with that Peer Review report? That’s a public policy issue. We need to teach millions of middle-class investors how stock investing really works if we are to overcome the economic crisis and get things back on the right track. If the best work of the best researchers gets shot down in Peer Review, we’ve got a serious problem on our hands, Houston.

There’s part of me that is enraged that Wade’s work did not receive a more enthusiastic reception. The research revolutionizes the field. It tells us the things about stock investing that we should have learned 30 years ago but did not because no researcher prior to Wade picked up on the implications of Shiller’s amazing 1981 findings.

There’s another part of me, though, that is not so shocked by the language in the Peer Review report. I have been writing about these matters on the internet for 10 years. I have seen lots of reactions that were 50 times worse than what Wade saw in that Peer Review report. The people who serve on Peer Review committees are humans too. They are subject to the same fears as the rest of us. They are subject to the same prejudices as the rest of us. They are subject to the same emotional addictions as the rest of us. My guess is that Wade was just unlucky enough to have one of those darn humans assigned to the Peer Review Committee for his research paper!

I like the comment that one of the peer reviewers made on Wade’s paper. He said: ““The elephant-in-the-room question is — What is the ultimate criterion for one to conclude with confidence that one strategy is better than the other?” That’s a pretty darn intelligent question. I have been promoting Valuation-Informed Indexing strategies on the internet for 10 years now. I’ve heard lots of reactions to the concept. I’ve heard many reactions less intelligent and less on the mark than that one. So I don’t feel entirely right slamming the Peer Review Team that so discouraged Wade. That comment indicates to me that the team approached the paper in at least a somewhat serious way.

I do slam the Peer Review Team for their conclusion, however. Their conclusion does not follow from the analysis evidenced in that comment. Yes, it is true that we need to identify with confidence the superior strategy. That’s the ultimate goal. But what if we genuinely do not know today whether Buy-and-Hold or Valuation-Informed Indexing is superior? What do we do, fake it? Do we pretend that we maintain confidence in Buy-and-Hold even though we have seen research that shakes that confidence?

What we must do is launch a national debate on this question of which strategy is superior. This question is far, far, far too important to duck. We need to resolve the question. No one investing expert, no one journalist, no one academic researcher, no one Peer Review Team can do that. We all have biases. We all have come from different sets of life experiences. To come to a conclusion re which strategy is superior, we must stage a national debate in which we all work together and we all get to have our say.

Yes, we must ultimately identify one strategy as superior. But that’s a process that will take time. To identify one strategy as superior prior to having the debate is to short-circuit the learning process. Is there some reason to believe that Buy-and-Hold is superior? There is not. Buy-and-Hold was developed at a time when long-term timing was not a practical option (index funds had not yet been created). So the researchers responsible for development of the Buy-and-Hold Model never tested whether long-term timing works. Wade did. He found zero reason to believe that Buy-and-Hold can work. Given that there is zero reason to believe that Buy-and-Hold can work and a great wealth of evidence showing that Valuation-Informed Indexing can work, it is not even remotely reasonable to conclude prior to any discussion or consideration of the issue that Buy-and-Hold is superior.

We need a national debate to tackle the question raised by the peer reviewer. And that’s just the purpose that peer reviewers should understand that academic journals serve! By publishing Wade’s research rather than rejecting it, the journal would have been making a statement that the critically important question of whether Buy-and-Hold or Valuation-Informed Indexing is superior was being put on the table for consideration. We would have seen many research articles submitted to many academic journals as a result. We would have had a great discussion. And, when the time was right, the issue would have been brought to a successful resolution.

The rejection of Wade’s paper didn’t help us answer the question raised by the Peer Review Team. It kept us in the dark regarding that important question. The Peer Review Team properly identified the question that matters and then failed to execute its duties in the manner required to see that that question received a good answer.

That said, I believe that Wade permitted himself to be overly discouraged by the two rejections.

Wade made a great comment in one of our conversations. He noted that there is a saying among academic researchers that all truly worthwhile papers are rejected at least once. That’s it! That’s the insight that applies!

Why is it that all truly important papers are rejected at least once? It’s because most papers are ordinary stuff, stuff that is perfectly fine in its way but stuff that is not going to change the world in any significant sense. Peer reviewers don’t experience much difficulty seeing the value of those papers because those papers conform to their expectations about how stock investing works. Papers that change history don’t fit the mold. Papers that change history are hard to accept. Papers that change history are unsettling. Papers that change history threaten to make you look like a fool if you endorse them because others may see them as strange and weird and different.

I run into this sort of concern all the time. People say my investing views are “controversial.” They say it in a way that suggests that that’s a bad thing. Huh? I’m a journalist. We live for controversy, Nobody reads newspapers that hint at no controversies. Controversy is good!

If a controversial claim ends up not being true, that’s no good, to be sure. But controversy by itself is not a bad thing. A controversial claim must be scrutinized carefully. Controversy for the sake of controversy serves no good purpose. But a controversial claims that stands up to scrutiny is the best sort of claim there is. It is controversial claims that stand up to scrutiny that change the world in a positive and constructive and life-affirming way.

Wade should have hung in there. Support for Buy-and-Hold is fading. Support for Valuation-Informed Indexing is growing. I have been taking vicious hits for 10 years now. I feel that Wade had it relatively easy. I essentially handed him a Nobel prize in Economics on a silver platter. He was going to need to demonstrate a little bit of patience before raking in all the praise and glory. But, presuming that Shiller is right, we will be seeing the next price crash within a few years. That’s when I expect to see a big change in public opinion on the question of whether honest discussion of the last 30 years of academic research should be permitted or not.

The Peer Review process has certainly let us down. The purpose of academic research is to teach us new things and Wade’s research showing the superiority of Valuation-Informed Indexing over Buy-and-Hold puts us on a path to discovering an entire universe of new things. His work should have been accepted immediately at the most important journals in the world. Still, the research was accepted — after two rejections, Wade was published by a perfectly acceptable journal. Had Wade stuck at it, his reputation would have grown and his follow-up studies would have been published by ever more prestigious journals. When you are publishing change-the-world stuff, you have to understand that it takes time to persuade the world that it needs changing.

Rob Bennett’s Responses to Academic Researcher Wade Pfau: #2 — “I Really Don’t Know How You Think You Come Out of This Whole Episode Looking Like the Good Guy”

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My first reaction to this comment of Wade’s is that it is an odd one for an academic researcher to be putting forward. The value of academic research is that those who produce it are given tenure so that they can report honestly what the historical data reveals. Those trying to make a buck in this field are inevitably going to be drawn to doing the popular thing, which often translates into doing the thing that appeals most to the Get Rich Quick urge that exists within all of us. The reason why we turn to academic research for the straight story is that we imagine researchers to be beyond all that. Their jobs are safe. They are not caught up in the dog-eat-dog world of commerce. They are not salesmen. They can tell the truth because they do not need to worry about whether what they say will make them popular or not.

I think it would be fair to say that we have overestimated the extent to which living the life of the academic can insulate one from financial considerations, especially in a field in which there is so much money floating around. Wade has produced amazing research. But he wants its both ways. He wants to produce great research and to be popular too. He wants the links to his blog that go to those who play ball with The Buy-and-Hold Machine. He wants the job referrals that go to those who play ball with the Buy-and-Hold Machine. He wants the applause that goes to those who flatter investors who have bought into the marketing pitches advanced by The Buy-and-Hold Machine.

Make no mistake. I want those things too. I want links. I want job referrals. I want applause. I want bucks.

But I take strong offense at the idea that I need to post dishonestly on the numbers that my friends use to plan their retirements to get those things. I have seen little bits of corruption at every job I have worked, going back to my fast food days. That’s the way it is with the humans. You take that sort of thing in stride. You understand that humans have a lot of good in them and a bit of bad in them as well and you make the best of things as they are. Fine. But I have never experienced anything like what I have experienced in the ten years since I put forward that fateful post of May 13, 2002, pointing out the errors in the Old School safe withdrawal rate studies. What I have seen in the past ten years has been special and in a very, very bad way. Tens of thousands of links are not payment enough to persuade me to betray my friends. And I consider it a fresh insult every time I am asked.

That said, there is a practical point that Wade is making here that is worthy of some consideration.

I am trying to sell something. I am trying to persuade people of the merits of a new investing strategy. No one buys anything from anyone whom he doesn’t like. Gaining the customer’s respect and affection comes first. When they like you and respect you, they listen to your pitch. If your product is good enough, they buy it. If they hate your guts with a burning passion, as many Buy-and-Holders hate my guts with a burning passion, no amount of historical data will win them over.

I need people to like me. Wade is right about that. And Wade needs people to like him. He cannot do the good work he wants to do if people hate him with a burning passion. One of the things he learned during his 16 months of e-mail correspondence with me is that lots of Buy-and-Holders hate me with a burning passion.

Here are some words that Drip Guy wrote to the Bogleheads Forum when Wade posted about his research showing that Valuation-Informed Indexing has provided far higher returns than Buy-and-Hold at greatly reduced risk for the entire 140 years for which we now possess return data: “Since your own work is overtly at odds with the ethos of the board — here, the theme is John Bogle’s philosophy, which eschews market timing — I myself will no longer obliquely support it by giving you a whetstone on which to sharpen your knife. You must certainly know that this very board came into existence in order to ESCAPE the lunatic behaviors of one individual — the very individual with which you have publicly and openly aligned yourself, and who you are openly quoting and sourcing in your column and are forming your intended paper around.  While there is much merit in open discussion of competing, differing, and varied approaches, as to you, sir, I personally will have no more of it here on this forum, given the poison well from which you are now openly drawing your own water.” That’s hate. And there’s a threat implicit in those words. Drip Guy is telling Wade “We will destroy you if you associate with Rob Bennett.” And Wade knows that Drip Guy is prepared to follow through with the threat.

He knows something else. He knows that no one at the Bogleheads Forum is willing to speak up in opposition to the threat. Not John Bogle. Not Bill Bernstein. Not Larry Swedroe. Not Rick Ferri. Not anyone.

If Wade posts honestly on Valuation-Informed Indexing and on my role in developing the concept, he is finished in this field. That’s what his experiences posting at the Bogleheads Forum taught him. I don’t approve of his behavior. But it would not be fair to him to fail to point out that the opposition to anyone who sings my praises is rooted in nothing short of blind rage. If we are to make the transition from Buy-and-Hold to Valuation-Informed Indexing and thereby bring this economic crisis to an end, we are going to need to come to a understanding of the cause of that blind rage.

There are three elements.

First, I put forward insights. In ordinary circumstances, that is seen as a good thing. I know that because I put forward many important insights in the days before I posted about investing and I was the most loved poster at the Motley Fool site because of them. Putting forward insights does not by itself cause rage. But in the particular circumstances that apply in the investing realm, it does. The particular circumstances that make something that is ordinarily seen to be a good thing (advancing insights) to become viewed as a very bad thing are contained in the remaining two elements of the story.

The second element is the core of the problem. The insights are of earth-shaking significance. Making the shift to Valuation-Informed Indexing reduces investing risk by 80 percent. Buy-and-Hold caused the economic crisis and making the shift to Valuation-Informed Indexing would bring it to an end. All four economic crises that we have experienced since 1870 were caused by the widespread adoption of the Buy-and-Hold “idea” that there is no need for investors to lower their stock allocations when prices rise to insanely dangerous levels. Once we open the internet to honest posting, millions of middle-class people will be able to retire five to ten years sooner than they imagined was possible during the Buy-and-Hold Era. Valuation-Informed Indexing takes the emotion out of stock investing. It is the first truly research-based investing strategy and the first emotionally balanced investing strategy.

When someone gives you directions to the restaurant you are trying to locate, you thank them. They obviously possess some piece of information about the world that you lacked but you don’t see that as being a big deal. By sharing the information with you, they make your life better. They are doing you a favor! You say “thank you” and you go on your way.

It’s different when someone says you are living your life wrong. You don’t thank someone when they tell you that you married the wrong person. You don’t thank someone when they tell you that you are going about this business of raising your children all wrong. You don’t thank someone when they tell you that you have wasted 20 years of your life doing work for which you are not suited and which has little value in this world. You don’t thank someone when they tell you that your religion is a false one, that you are on the road to hell and you had better make some changes pronto.

We like people who help us out in small ways. We do not like people who offer to shake up our foundations and change our lives around from top to bottom.

I thought I was offering the ordinary sort of insight on the morning of May 13, 2002. I read some things in John Bogle’s book about how stock prices are determined and what I read told me that studies that did not contain adjustments for the valuation level that applies on the day the retirement begins could not possibly get the number right. I told my friends what I thought I had learned. I didn’t do it in even a slightly arrogant way. I didn’t even put forward a declarative statement. I posed a question. I asked my friends at the Motley Fool board: “Should we be considering valuations when calculating safe withdrawal rates?” I obviously believed we should be doing that, but I wasn’t certain and I didn’t pretend to be certain.

So I did nothing offensive. Zero. Nada. Zilch. There are Post Archives. This can be checked.

The problem is that the Buy-and-Holders had formed doubts in their own minds about those Old School safe withdrawal rate studies long before I came on the scene. They didn’t want to think about those doubts. They wanted things to go on as they had been going on during the huge bull. There were implications to what I was saying that they did not want to entertain. They wanted me to drop it and they made that clear. I didn’t want to drop it. I wanted to learn. I took the defensiveness as a sign that there was a lot to learn here. And the more I explored, the more I did learn. I learned amazing things. I generated insight after insight after insight.

In ten years, I revolutionized our understanding of how stock investing works.

I feel like I should apologize for that statement.

None of us are supposed to stand above all the others to that extent. None of us are supposed to be smarter or better or more ethical or whatever.

I cannot apologize. The insights that I have generated are too important. I am happy and proud to have produced them. So no apologies.

I can share credit. That’s honest. I obviously could not have done what I have done without huge amounts of help from people like Robert Shiller and John Bogle and Bill Bernstein and John Walter Russell and Wade Pfau and hundreds of other fine people. By no wild stretch of the imagination am I saying that I produced these amazing insights on my own or that I am smarter or better or more ethical than these other people. But I cannot deny the power of the insights. If our free market system is to survive, we need to make the shift to Valuation-Informed Indexing. I love our economic system. I cannot betray it by pulling a Wade Pfau and doing the popular thing and saying that perhaps Buy-and-Hold is not really all that dangerous, perhaps we will find a way to muddle through without Bogle ever having to say The Three Magic Words (“I” and “Was” and “Wrong”).

I violated a Social Taboo. I did too much. I generated investing insights of far too great a power. I made lots of smart and good and hard-working people look bad by doing so.

I cannot change that. I can offer the hand of kindness to these people. I can praise them to the skies. Because they have achieved things that justify me praising them to the skies. I can say that I love them and respect them and am grateful for all the things they have taught me over the years. But I cannot deny the power of the insights themselves. The insights are our salvation. The insights are the means by which we bring an end to the financial misery we brought on because of the ignorance about how investing works into which we were born and which we have only begun to rise above in recent decades.

People hate that. People are small that way. It’s one of the deficiencies of the humans. Some people will no doubt hate me even more for stating things so frankly here. Again, I cannot apologize. We need to get over the hate and start enjoying the benefits that come from learning about the insights. So it is my job to help interested parties understand where all this hate comes from. It comes from a place in the human psyche that hates, hates, hates, those of us who get too big for our britches. I am no investing expert. I am some guy whose only claim to expertise in this field is that I figured out what buttons to push to get my words to appear on other people’s computer screens. I am not supposed to know things that John Bogle does not know. And I obviously do. And so a good number of people hate me with a burning passion and for ten years now have not been able to give it up.

The third element is that the manner in which I tapped into all these powerful insights makes it seem so darned unfair that I was the one to develop them.

I contacted Dallas Morning News Columnist Scott Burns about my safe-withdrawal-rate findings in February 2005. The first two words of Scott’s response to my e-mail were: “You’re right.” He asked me in that e-mail for my telephone number so that he could interview me for an article. Then he got cold feet. Five months later, he published an article on the SWR findings but did not mention my name or include a link to my New School SWR calculator (“The Retirement Risk Evaluator”). Nor did he note his personal belief that I was right in my criticisms of the Old School studies; he presented the findings as if they had just appeared on the internet somewhere and as if he was not able to verify whether they were solid or not. This strange reaction on Scott’s part led us into an exchange of e-mails in which he offered a number of inappropriate personal comments.

Scott said that my efforts to get the discredited studies corrected would prove to be “catastrophically unproductive.” He said that the enthusiasm I evidenced re my efforts to give investors accurate SWR numbers demonstrated a desire for “personal aggrandizement.” Huh? Why would it be a bad thing to try to get discredited retirement studies corrected? And why would it be a bad thing to develop a calculator that offered access to the correct numbers?

The “problem” was that Scott knew for years that valuations matter. Shiller published his research showing that valuations matter in 1981. Scott was angry that I was using information that had been readily available to him for decades to produce the most powerful investing insights in history. How dare I? That could have been Scott Burns doing that!

Except it would have taken a level of courage that Scott Burns did not possess at that time for Scott Burns to have done that. What we have learned over the past 10 years is that offering good investing advice is not primarily an intellectual endeavor. The thing that makes stock investing hard is that we all possess an inclination to fall for Get Rich Quick strategies, and, once we fall for them, we become emotionally addicted to Get Rich Quick thinking. But we never lose the common sense that tells us that Get Rich Quick approaches always turn out badly in the long run. The true investing experts are not those who promote Buy-and-Hold strategies but those who warn us of their dangers.

The “experts” in this field are envious of Rob Bennett and the mountain of investing insights he has generated over the past 10 years by ignoring the ruthless attacks of The Buy-and-Hold Machine and by following the academic research where it led him. It would be dishonest of me to deny the power of the insights. So that cannot happen. It is the experts who have rationalized their continued promotion of the purest and most dangerous Get Rich Quick scheme ever concocted by the human mind for 30 years after the research showed that there is precisely zero chance that it can ever work for any long-term investor who need to make some changes.

These people are great people. They have a lot to offer. They have done good work in the past. They are smart. They are hard-working. They are good.

But they are going to need to get over their anger and envy and hate if they are to going to continue to do good work in the Valuation-Informed Indexing Era.

My hand is outstretched to all of them. There is nothing I would rather do than to work with them to help the millions of investors who were taken in by the Buy-and-Hold mumbo jumbo to learn what really works.

But I cannot bring about healing by agreeing to post dishonestly about the Old School safe withdrawal rate studies or any other critically important investment-related topic. It is the Buy-and-Holders who got it wrong. It is the Buy-and-Holders who have been behaving uncharitably and in fact shamefully for ten years now. It is the Buy-and-Holders who at this point need to extend the hand of kindness to get us out of the economic crisis brought on by their relentless promotion of dangerous and irresponsible and research-discredited investing strategies.

In the long run, all the ugly stuff will get blown away in the wind. It is the insights we have generated together over the past 10 years that will live on forever. We need to have the smartest people in this field united in their effort to spread knowledge of those insights to every middle-class investor. We need to get over our personal regrets over our earlier bad behavior and move on to better things and better days. All of us have a role in helping the Buy-and-Hold advocates come to recognition of why it is so important that they take that step soon.

We will all be viewed as Good Guys when we make it together to the other side of The Big Black Mountain!

The short version?

Some people need to get over themselves.