A Rich Life

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

“If Shiller Now No Longer Believes in Market Timing and Bogle Before His Death Had Come a Long Way to Endorsing It, We All Need to Be Reconsidering the Question Until Our Thinking Is Clearer.”

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

Rob,

You have been pushing this story for a long time. Shiller even warned that you shouldn’t use CAPE to time the market. It is bad enough that you have been misleading people with your crash predictions that have failed time after time.

Look at how this has impacted you. In 2002, you posted your retirement plan in which you had a nest egg of $400k invested (as you claim) in i bonds, TIPS and CDs and your spending budget was $30k/ yr. You have reported a real return of 3.5 percent (which is probably even embellished based on other comments you made. You made several other statements that you would be transitioning into stocks along the way. In 2005, you provided an update that your spending was up to $38k, which is a large percentage increase over the 2002 budget. You told people that you were not concerned because the market returned 7% real and that with your VII strategy, you would get a return in excess of the 7%. It has now been 17 years since the launch of your 2002 plan. Your VII strategy has kept you out of the market and you have missed out on the large gains. You have acknowledged that you now have to return to the job market. Clearly, your plan with VII failed. Even if there was some huge drop today, your nest egg has deteriorated, so there is not much left to put back into the market. It is just simple math, but as you say, you are not a math guy.

All of Shiller’s work supports market timing. If the market is efficient, as was widely believed when Buy-and-Hold was being developed, timing is not required and it is not even a good idea because stock investing risk is constant over time. But if valuations affect long-term returns, as Shiller showed, then stock investing risk is not constant but variable. In that case, timing is required for all investors seeking to keep their risk profile roughly constant over time.

Shiller has advocated market timing on several occasions. He was clear as clear can be in 1996. He said that investors who stuck with their high stock allocations despite the high prices that applied at that time would live to regret it within 10 years. If that’s not advocating market timing, I don’t know what is.

However, Shiller did make an offhand comment in an interview he did a few years ago in which he suggested that he no longer believes in market timing. I very strongly believe in market timing. I think it is the key to successful long-term stock investing. And it is the key to stabilization of the economy. Market timing is price discipline. A market in which price discipline has been removed is a market that is on its way to collapse. And, when the stock market collapses, so many people lose so much spending power that the economic system always collapses as well. So I strongly advocate market timing.

Is it possible that Shiller no longer supports market timing? I can’t entirely rule out the possibility given that he did make that one off-hand comment that suggested he was experiencing doubts. I want to know more about Shiller’s views on this question and about the views of hundreds of other experts in this field. We need to have a national debate on this question. What does Shiller really believe? Why does he believe that? What do others believe? Why do they believe that? John Bogle once came within an inch of endorsing Valuation-Informed Indexing, which of course is all about market timing. If Shiller now no longer believes in market timing and Bogle before his death had come a long way to endorsing it, we all need to be reconsidering the question until our thinking is clearer.

I would be a multi-millionaire today if it were not for the abusive posting of you Goons. I mean, please give me a break. There is huge interest in this stuff. I have had hundreds of people tell me that I am the first person who has written about stock investing in a way that makes complete sense. Say that that is 10 percent of the population. That’s millions of people. I have a funny feeling that I will have no problem bringing in a mountain of money after prices have crashed and I am able to reach all of the people who want to learn more about how stock investing works in the real world. My plan hasn’t failed at all. I saved like a madman in earlier days because I wanted to be able to do work like this and not need to worry about money coming in immediately and that plan has worked like a dream. I haven’t cashed in yet. But if you go by the 200 rave endorsements on the home page of my web site, I think it would be fair to say that things are looking very good.

I think that LOTS of people will be making money doing this in the days following the next price crash. If valuations really affect long-term returns (Shiller was awarded a Nobel prize for his work), then any investment strategy that does not call for market timing is dangerous. A strategy that does not call for market timing is a strategy that does not call for price discipline. Huh? Price discipline is wonderful. Price discipline is what makes markets work. I believe that Valuation-Informed Indexing is the future and that Buy-and-Hold is the past.

I believe that launching a national debate on this stuff will end up helping every investor on the planet in a very big way. The key is getting the Buy-and-Holders to acknowledge at least the possibility that they made a mistake re market timing. I love that the Buy-and-Holders recommended using the peer-reviewed research to guide one’s investment strategy. But it’s just a reality of the scientific process that no finding is ever the final say. We are always in the process of learning new things and I believe that the last 38 years of -peer-reviewed research in this field is amazing stuff. We need to be talking about it at every site on the internet.

My best and warmest wishes to you, my old friend.

Rob

Valuation-Informed Indexing #470: The Economic Crisis Did Not End, It Has Been in Remission

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I’ve posted Entry #470 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Economic Crisis Did Not End, It Has Been in Remission.

Juicy Excerpt: So the economic crisis never really ended. It went into remission. If the economy was booming with stock prices at reasonable levels, we could take comfort that good times really had returned. But I don’t feel able to trust a recovery that is financed by an overpriced stock market. Overpriced stocks makes us feel that it is safe to spend again. But the financial security pushing spending forward is illusory. There is no “there” there when stock prices could fall to fair-value levels at any moment and trillions of dollars of spending power could be taken off the table again.

“Shiller Showed Us How to Translate the Emotional Piece of the Stock Investing Puzzle Into Numbers With His CAPE Metric.”

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

I would call you May 2002post as “famous”. Instead, it was one of several significant catalysts in your humiliation. You really didn’t know what you were talking about and that post just kind of highlighted it. As you have admitted, you are not a numbers guy. It is hard to know much about investing if you are not a numbers person as it comes down to math/statistics.

I am not a numbers guy. I am an emotions guy.

Stock investing does NOT just come down to numbers. Emotions play a big part in it. It was Shiller’s revolutionary insight to see that.

Shiller showed us how to translate the emotional piece of the stock investing puzzle into numbers with his CAPE metric.

Include the numbers relating to investor emotion in your calculations and you get very, very different results. The safe withdrawal rate is always 4 percent if you ignore the numbers showing the emotional effect. Include all the numbers and the safe withdrawal rate is a number somewhere between 1.6 percent and 9.0 percent, depending on the emotional component to the stock price at the time the retirement begins.

Every post that followed the post of May 13, 2002, showed that I very much knew what I was talking about. Wade Pfau would not have concluded that “Yes, Virginia, Valuation-Informed Indexing works!” had he not concluded from his 16 months of research into the issue that I very much knew what I was talking about. And you would never have risked going to prison for extortion if you were able to think of any other way of stopping these ideas from reaching the millions of investors who very much want and need to hear about them.

I think we are a good people. I think the ideas will get out. Not as soon as I wanted, for sure. Not anything close to as soon as I wanted. But I think that the ideas will get out in the days following the next price crash, when the investor psychology will change.

I wish you the best of luck with it, Anonymous. That’s all that I am able to do for you. The ideas need to get out. In an ideal world, the national debate on Shiller’s revolutionary research findings would have been launched in 1981. But we will all end up a heck of a lot better off launching it in the days following the next price crash than not launching it at all. So that’s what I am aiming for at this point in the proceedings.

Emotions Guy Rob

“The American People Need to Know This. This Sort of Thing Needs to be Written Up on the Front Page of the New York Times. If Researchers Are Afraid to Do Honest Research Because of What the Buy-and-Holders Will Do to Them If They “Cross” Them, Then the Entire Field Is Corrupt. We Would Be Better Not to Have Any Academic Researchers Than to Have Academic Researchers Feeling Free to Publish Research Supporting a Get Rich Quick Approach but Afraid to Publish Research Challenging That Approach.”

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

Who, specifically, threatened Wade’s career?

Ask him.

He wrote to me and told me that he was scared of what you Goons would do to him if he continued doing honest work. He had posted our research at the Bogleheads Forum and a number of people there responded in a very positive way. And then Mel Lindauer accused him of following unethical research practices. Wade took great exception to that. He shot back at Lindauer and I was very proud of him because so few people have the courage to do that. But soon after that he wrote to me and said that he did not want you Goons following him around the internet and destroying his career. He told me that he warned the journal that published one of his papers to expect hate mail; I am sure that it embarrassed him that he had to do that. And he said that he was concerned that defamatory e-mails would be sent to his employer and that his employer would not want to go to the trouble of figuring out if the charges were legitimate but would just fire him to remove themselves from the controversy.

My personal theory (Wade did not say this) is that Wade expected Bogle to come to his defense when Lindauer attacked him and that it frightened him to see that Bogle was not going to do anything to rein in Lindauer. It’s very scary to fight you Goons alone. We live in a society that has laws and for years we have seen those laws enforced in a reasonable manner. So it comes as a shock to learn that, when it comes to the right to explore the implications of the last 38 years of peer-reviewed research in this field, there are lots of highly respected people who have no desire or intention to do anything to see the laws enforced. It shocked me when Motley Fool did not take action against Greaney after he posted his first death threats. By failing to take action they were sending a signal that death threats are okay when it come to the promotion of Get Rich Quick investment strategies; there’s money in it, so the usual rules just don’t apply. I think that is how Wade felt when he was attacked and saw that Bogle took no action. He knew that, if defamatory e-mails were sent to his employer, he would not be able to count on Bogle’s help. That’s a scary feeling. Again, the Bogle part of this is a personal theory of mine, Wade did not tell me that Bogle’s failure to act responsibly was the reason why he went to the dark side.

Wade was scared on the day he contacted me 16 months before. He was always trying to appease you Goons while always also wanting to dig deeper and do important work developing and promoting the Valuation-Informed Indexing concept. I remember one time he saw how you Goons invaded the Early Retirement Forum with out-of-control hate when my name was mentioned and he just couldn’t believe it. He had never seen anything like that before. I am sure that that left an impression on him. And on numerous occasions he would try to explain himself at the Bogleheads Forum. He would say how Valuation-Informed Indexing is completely in accord with many Buy-and-Hold principles (which is of course so) and that he did not think that Buy-and-Holders should be hostile to hearing about it (and of course most are not — you Goons comprise about 10 percent of the population of Buy-and-Holders). But of course none of that had any effect on you Goons. That scared him. He couldn’t figure out how to do work advancing the world’s knowledge of how stock investing works without losing his ability to earn an income in this field.

It took me some effort to persuade Wade to contact the Trinity study authors about the error that they made in their study. It is a scandal that that study passed through the peer-reviewed process. Shiller’s peer-reviewed work showing that valuations affect long-term returns had already been published at the time the Trinity study was presented for review. And it passed! It is impossible to explain that one. The very purpose of peer-review is to catch those kinds of errors. Wade saw the need to contact the authors of the Trinity study and he eventually did so (I do not believe that he ever received a response but it is possible that he heard something after he flipped to the dark side). Wade was very worried that calling the Trinity authors out on their error was going to hinder his career advancement. After he flipped to the dark side, he told me that it is not reasonable to expect errors in retirement studies to be corrected — that “that’s just not the way that research works.” (that’s a paraphrase but close to his actual words). That’s s chilling statement. I am 100 percent certain that close to 100 percent of the investing population would like to think that errors in retirement studies are corrected when they are discovered. But the threatened and frightened version of Wade Pfau says, no, that is not the way it is done. Of course he thought that corrections were entirely appropriate in the days before his career was threatened. The views that he expressed in public changed dramatically as a result of his personal experience of seeing what happens to people who dare to do honest work in this field.

I now know that this sort of thing goes on all the time. Rob Arnott said that he has had experiences similar to my own. He has known of researchers who wanted to prepare research relating to his investing beliefs (which are similar to my own) who were taken aside and told that publishing such research would do damage to their careers. The American people need to know this. This sort of thing needs to be written up on the front page of the New York Times. If researchers are afraid to do honest research because of what the Buy-and-Holders will do to them if they “cross” them, then the entire field is corrupt. We would be better not to have any academic researchers than to have academic researchers feeling free to publish research supporting a Get Rich Quick approach but afraid to publish research challenging that approach.

I suspect that there were e-mails from you Goons to Wade in which more threats were conveyed. But I of course did not see them and cannot say what was contained in them. I believe that there were such e-mails because the statement that Wade put forward when he flipped to the dark side contained language that was so dumb that it could not possibly have come from his own mind. He had that absurd stuff where he said that Greaney had solved the entire problem when he said that people could in the privacy of their own homes elect to go with a withdrawal rate lower than 4 percent. That of course has never been in question. The issue has always been whether people can point out on discussion boards and blogs where the Greaney retirement study is being relentlessly promoted that that study lacks a valuation adjustment. Wade obviously knows that that is the dispute. That crazy language had to have been suggested by one of you Goons. But I have never seen the e-mail in which that suggestion was made.

The peer-reviewed research that Wade and I co-authored is the most important research published in this field in 30 years. Every investor alive has a right to see it and to use it to inform his investment decisions. It is a national scandal that Wade was threatened and that millions of people have been denied access to that amazing piece of work. Neither Wade nor any other researcher should have to live in fear of a gang of internet goons. But that’s where we are today. The cover-up has been going on for 38 years now and so there are a lot of powerful and wealthy people who very, very, very much do want to see it exposed.

I believe that we are a good people. I believe that this will all come out in the days following the next price crash. We’ll see.

My best and warmest wishes to you and yours, Anonymous.

Rob

“If Shiller Is Right, It Was the Promotion of Buy-and-Hold Strategies That Was the Primary Cause of Both the Great Depression and of the Economic Crisis of 2008. The Overall Effect of Promotion of the Strategy Was Catastrophic When You Consider That It Caused Millions of Failed Retirements and Hundreds of Thousands of Business Collapses and Millions of People To Be Thrown Out of Their Jobs. I Don’t Call That “Working.” People Need To Know About That Side of Buy-and-Hold Too.”

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

Can you show just one example where VII has worked for anyone?

It obviously couldn’t work for anyone before anyone knew about it. Shiller only published his “revolutionary” (his word) research showing that valuations affect long-term returns in 1981. And by 1981, Buy-and-Hold had become popular. A lot of people were overtaken by cognitive dissonance and stuck with Buy-and-Hold. And there was a huge bull market that made Buy-and-Hold look really good for a time. So there is only a small percentage of the population that has tried Valuation-Informed Indexing. I have never heard of anyone who tried it and was dissatisfied. The numbers show that it has worked for those who have tried it (presuming that you adjust for valuations, as Shiller’s research shows you must). It couldn’t possibly have done any better given the criminal behavior that we have seen from the Buy-and-Holders to keep people from learning what the last 38 years of peer-reviewed research have taught us about what works.

It’s not your place to deny people the information they need to make decisions for themselves. If you prefer Buy-and-Hold, that’s obviously fine. Follow it. And you should of course feel free to tell people that you don’t think that Valuation-Informed Indexing has been sufficiently tested and that they should avoid it. That’s also fine. Large numbers of people are going to listen to that advice, which if of course also fine. But, if you play it by the laws of the United States, there will also be large numbers of people who will choose to switch to Valuation-Informed Indexing once they hear the case for it advanced in civil and reasoned discussions. And that is of course also 100 percent fine. That’s how our system works. That’s how we come to enjoy learning experiences. We all say what we believe and some of us take one path and some of us take another path and over time we compare notes and as a society we advance to better places step by step.

If we followed a policy that no new idea could ever be considered until 100 percent of the population embraced it and had success with it, we would never benefit from any new ideas. We would not be the nation that we are if that were the policy that we followed. Did the committee that awarded Shiller his Nobel prize hold it back because less than 100 percent of the population today follows Valuation-Informed Indexing? They did not. They saw that he had discovered some amazing things about how stock investing works and went ahead and awarded him for helping us all out. Well, I believe that I should make use of the amazing things that I learned as the result of Shiller’s work and that’s 100 percent my choice, not yours. And there are millions of other investors who today would like to make use of Shiller’s work and that is their choice to make, not yours.

None of us has perfect knowledge. None of us is never wrong. None of us has the right to crush those who offer viewpoints other than our own so that no one else can hear them.

Valuation-Informed Indexing has worked in a general sense for as far back as we have records of stock prices. The peer-reviewed research that I co-authored with Wade Pfau shows that beyond any reasonable doubt whatsoever. The findings set forth in our research are stunning. Every investor alive should know about those findings and anyone who blocks people from learning about those findings through criminal behavior is responsible for any losses suffered as a result. In the event that stocks continue to perform in the future anything at all as they have always performed in the past, those losses will be in the trillions of dollars. So that’s bad stuff.

It’s not your place to tell others what to do. It’s your place to offer your thoughts. That’s helpful. But death threats are over the line. Demands for unjustified board bannings are over the line. Thousands of acts of defamation are over the line. Threats to get academic researchers fired from their jobs are over the line. If you reach a point where you believe that the only way in which you can defend your favorite investment strategy from research-based challenges to it is to engage in criminal behavior, it is time to go looking for a new favorite investment strategy. That ain’t the way, Anonymous.

I think that Shiller gave us all a great gift with his Nobel-prize-winning research. I have seen more than enough to become a devoted follower. You don’t feel the same. So be it. That doesn’t mean that you cannot be my friend (at least it doesn’t mean that from my end). But it means that I cannot today say the same things about stock investing that I would have said about it in 1980. Shiller changed the world’s understanding of how stock investing works in a fundamental way. I am part of the world and it is my job to tell people what I truly believe about this subject when I discuss it. So that is what I do.

If Shiller is right, it was the promotion of Buy-and-Hold strategies that was the primary cause of both the Great Depression and of the economic crisis of 2008. Was Buy-and-Hold “working” at those times? I say “no.” You will say that there were some individual investors in those times who declared that Buy-and-Hold was working for them. But the overall effect of promotion of the strategy was catastrophic when you consider that it caused millions of failed retirements and hundreds of thousands of business collapses and millions of people to be thrown out of their jobs. I don’t call that “working.” People need to know about that side of Buy-and-Hold too. Shiller’s work changes our understanding of how stock investing works in hundreds of ways and each and every one of us needs to hear about all of them (we of course all have the right to decide how much of what we hear is legitimate or not).

My best wishes to you, my skeptical friend.

VII Advocate Rob

“Most Investors Are Fine With Being Misled. That Doesn’t Make It Okay. But It Does Make It a Viable Marketing Strategy to Mislead Investors About the True and Lasting Value of Their Portfolios.”

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

So, what you are saying is that buy and holders did well after those drops, but VII investors missed out yet again.

Obviously I am not saying anything even remotely like that.

I am saying that stock price increases of 6.5 percent real per year are rooted in economic realities and that investors may count on them to finance their retirements but that price increases of more than that are rooted in irrational exuberance and investors should NOT count on those amounts to finance their retirements. I am also saying that everyone who works in this field should be telling investors that every day.

Investors have not been told that. Investors have been terribly misled. This is a national tragedy.

The biggest reason why The Great Buy-and-Hold Con has continued for so long is that all investors possess a Get Rich Quick urge and Buy-and-Hold appeals to it. The vast majority of investors like thinking that the amounts on their portfolio statements are real and that they do not need to divide those amounts by two at times when stocks are priced at two times their fair value. Most investors are fine with being misled. That doesn’t make it okay. But it does make it a viable marketing strategy to mislead investors about the true and lasting value of their portfolios.

When nominal portfolio values are lower than their real values, the psychology changes. When stocks are priced at one-half of their true value, I will be telling investors that they need to multiply the nominal value by two rather than divide it by two. That’s a much more appealing message. I believe that enough investors will listen to that message for us to open every site on the internet to honest posting re the last 38 years of peer-reviewed research. Then we are home free.

There’s no reason for anyone to go back to Buy-and-Hold once they have discovered Valuation-Informed Indexing. One is research-based, one is not. One is real, one is not. One works, one does not, We are all going to be Valuation-Informed Indexers in the future. But for now, these high prices are an obstacle to progress. They appeal to our Get Rich Quick impulse, which is our weakness.

No one ever “misses out” by knowing what the peer-reviewed research says, Anonymous. That’s like saying that people who didn’t invest in the Madoff fund “missed out” on a great opportunity to get rich quick. Huh? The peer-reviewed research is our friend. It is the marketing slogans of the Buy-and-Holders that hurt us and cause us to miss out on better investment strategies and the many benefits that flow from them. It is absurd to think that someone could miss out by giving up a Get Rich Quick strategy for a research-based strategy. Perhaps in the short-term, when irrationality can prevail, but never in the long-term, when rationality always reasserts itself.

My sincere take.

Rob

“Your Abusive Posting Is Evidence That Shiller Is Right. To Post Abusively Is To Give In To Emotional Impulses. We Should Be Talking About This Stuff On Every Site. The Buy-and-Holders Cannot Imagine Talking About Abusive Stuff Because They Cannot Imagine Talking About Emotional Stuff. But This Is the Stuff That Drives Stock Prices, According to Shiller’s Nobel-Prize-Winning Research.”

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

You have said that we should avoid retirement failures and (as said above) be focused on effective investing. Those are your words. Why do you avoid taking about your track record and your own experiences? Don’t you think people can learn from your failures?

My investment strategies have worked fine, Sammy. If you presume that we are going to see a 60 percent price drop sometime over the next year or two or three, I am ahead of the game because I locked in a return of 3.5 percent real from TIPS and IBonds back when that was available.

The only reason why I need to reenter the work force is because of the insanely abusive posting of a small number of Buy-and-Holders (and because of the reluctance of the larger community of Buy-and-Holders to call them out on their abusive and in some cases criminal behavior.) The conclusion that people should draw from that is that there is something wrong with the Buy-and-Hold strategy. If advocates of the strategy believed that they could defend it in civil and reasoned discussion, they would avoid abusive tactics.

You follow the strategy, I am sure of that. To that extent, you have confidence in it. But you believe that the strategy will lose supporters if people who do not believe in it are permitted to make the case against it in civil and reasoned discussions. So your level of confidence is not at all high. That’s the worst of all worlds. You have enough confidence to go with the strategy but not enough to stick with it when your belief in it is tested, which is what will happen in the next price crash.

Please consider for a moment what it means that stock prices always drop to a CAPE value of 8 at the end of a bull/bear cycle That’s crazy. Why would we as a people elect to price our holdings at one-half of their fair value, making ourselves feel like we are much poorer than we are in reality? That’s just as crazy as the irrational exuberance we are living through today. It’s irrational depression. Do you know what brings that on? We get to those crazy low prices when the last Buy-and-Holder gives up and sells.

Shiller’s breakthrough is to show that stock investing is primarily an emotional endeavor, not entirely a rational endeavor. Your abusive posting is evidence that Shiller is right. To post abusively is to give in to emotional impulses. We should be talking about this stuff on every site. The Buy-and-Holders cannot imagine talking about abusive stuff because they cannot imagine talking about emotional stuff. But this is the stuff that drives stock prices, according to Shiller’s Nobel-prize-winning research.

Emotional (But at Least I Am Aware of It and Try to Rein It In) Rob

“We Should All Be Jumping Up and Down in Excitement that Shiller Provided Us the Missing Piece of the Stock Investing Puzzle.”

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

You have written this same stuff thousands of times. Why don’t you try writing something new that people can learn from and actually see value. Use your own life experiences. Tell people about how your retirement plan failed and what you learned from it. Tell them about how you have to go back to work and how you are looking for a job. Give tips to those that are over 60 and are like you in having to return to the job market. Tell them about how market timing failed for you. Tell them how they should not listen to predictions of the stock market as they are mostly wrong. Try being real instead of living in an imaginary world. We have enough people faking out there.

There’s only one issue in the stock investing realm that I have ever written about, Sammy. I don’t believe that I have anything special to offer re any other issue and so I just keep my mouth shut on all of the other issues. But I believe that the one issue that I write about is huge. The one issue that I write about is the far-reaching implications of Robert Shiller’s Nobel-Prize-winning research showing that valuations affect long-term returns.

If that’s so, it changes everything that we once believed about how stock investing works. We all want the same things. We all want to become effective investors. So you would think that there wouldn’t be one dissenting voice to my proposal that we permit open and frank discussion of the how-to implications of Shiller’s “revolutionary” (Shiller’s word) research findings at every discussion board and blog on the internet. I am here to tell you that there is a whole big bunch more than one dissenting voice to that one. About 10 percent of the population loves my stuff. But another 10 percent hates it so much that they cannot stand it. The 80 percent in the middle is okay with the idea of permitting me to talk. But they don’t feel strongly enough about it to object too much when the 10 percent of super intense Buy-and-Holders demands that I be banned. So I almost always end up being banned sooner or later.

Why the super intense reactions? Paradoxically, it is because Shiller’s research is so darn wonderful. If Shiller is right, it was the relentless promotion of Buy-and-Hold strategies that caused the 2008 economic crisis. If Shiller is right, most of the gains that we experienced in the late 1990s were not real and lasting but just the product of irrational exuberance. When those trillions of dollars disappeared, we were going to see consumer spending power diminish by trillions of dollars. Obviously, that caused an economic crisis because the loss in consumer spending power puts hundreds of thousands of companies out of business and left millions of workers jobless. Bad stuff. That’s the power of a bull market to hurt us all. That’s the power of Buy-and-Hold (which caused the bull market by assuring investors that there is no need to practice market timing when buying stocks) to hurt us all.

We should all be jumping up and down in excitement that Shiller provided us the missing piece of the stock investing puzzle. But the reality is that it is hard to make a transition like this. The vast majority of people who are viewed as experts in this field became experts pushing Buy-and-Hold. They don’t want people to explore the research showing that they got it wrong. And the vast majority of investors bought into the Buy-and-Hold idea and have felt great gratification seeing the strategy appear to work. They don’t like the idea of admitting a mistake either. So we are caught in an in-between place. Those who pay attention to the peer-reviewed research know what works. But very few are willing to “cross” the Buy-and-Holders by speaking openly and frankly about what the last four decades of peer-reviewed research teaches us all.

I think this is the biggest public policy issue facing the United States today. I could write about it for another 10 years and never run out of material. It is fascinating to explore all the ways in which Shiller revolutionized the field. I believe that lots of people will be getting in on this in the days following the next price crash, when lots of people who bought into the Buy-and-Hold concept will be more open to hearing challenges to it. We’ll see.

My best wishes to you and yours.

One-Issue Rob

Valuation-Informed Indexing #469: Shiller’s Breakthrough Was Not to Show Us How Stock Investing Works, It Was to Show Us How to Change How It Works

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I’ve posted Entry #469 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Shiller’s Breakthrough Was Not to Show Us How Stock Investing Works, It Was to Show Us How to Change How It Works.

Juicy Excerpt: Shiller did indeed describe how stock investing works. But his primary accomplishment reaches far beyond the descriptive. He showed us how to make stock investing a less risky and more profitable investing choice. His research does not just describe what is going on in the market. It gives us all the tools we need to change what is going on in a very big and very positive way. Three cheers for market timing!

Buy-and-Hold Goon to Rob: “I Can’t Find One Single Piece of Evidence That Backs Up a Thing You Say.”

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

Wade said his job was never threatened. As we have all learned by now, you made up the story about death threats. I can’t find one single piece of evidence that backs up a thing you say.

It will be interesting to see what the members of your jury say, Anonymous.

I wish you the best of luck with it, in any event.

Rob

A) Academic Researcher Wade Pfau’s Statements Showing Interest In and Confidence in Rob Bennett’s Work

1) “I do cite you and John Walter Russell in my paper as the earliest and strongest advocates of this approach [New School safe-withdrawal-rate research].

2) “Are you aware of Shiller offering asset allocation advice based on PE10? …. If you read Rob Bennett’s stuff carefully, I think he did provide an important contribution in terms of describing a way for PE10 to guide asset allocation for long-term conservative investors. I also think he was right on the issue of safe withdrawal rates.” — Posted at the Bogleheads Forum discussion board.

3) “I am also extremely grateful to Rob Bennett for motivating this topic and contributing his experience and encouragement.” — Written in Acknowledgments section of Wade’s breakthrough research paper.

4)”You deserve much of the credit as the whole idea of Valuation-Informed Indexing belongs to you.”

5) “I definitely need to cite some of your work as the founder of Valuation-Informed Indexing, as I have not found anyone else who can lay claim to that. Shiller pointed out the predictive power of PE10 but never discussed how to incorporate it into asset allocation, as far as I know.”

B) Academic Researcher Wade Pfau’s Statements on the Superiority of Valuation-Informed Indexing Over Buy-and-Hold

1) “What you see in the top part of the graph for each year is the amount of wealth accumulated after 30 years for someone following Buy-and-Hold against someone following Valuation-Informed Indexing….Valuation-Informed Indexing provides more wealth for 102 of the 110 rolling 30-year periods, while Buy-and-Hold did better in 8 of the periods.”

2) “I will take steps in my final paper to test a wide variety of assumptions about asset allocation, valuation-based decision rules, whether the period is 10, 20, 30, or 40 years, lump-sum vs. dollar-cost averaging, and so on, and to show that the results are quite robust to changes in any of these assumptions.”

3) “Any data mining that I am doing is in favor of buy-and-hold, not in favor of market timing.”

4) “The findings for “market timing” are so robust anyway, that it hardly matters how we do it.”

5) “The maximum drawdown from market timing is much less. That is how far the portfolio drops from past highs to current lows. The Buy-and-Holder once experienced a 60.96% drop, whereas the worst drop for market timing was 24.16%.”

6) “Market timing provides signficantly higher returns at a comparable level of risk.”

7) “The market timer enjoys a far less risky strategy.”

8) “On a risk-adjusted basis, market-timing strategies provide comparable returns as a 100 percent stocks Buy-and-Hold strategy but with substantially less risk. Meanwhile, market timing provides comparable risks and the same average asset allocation as a 50/50 fixed allocation strategy, but with much higher returns.”

9) “If everyone increased exposure after a market fall and vice versa, then this would dampen out the big swings in the market aggregates, and we might get shallower boom/bust cycles.”

10) ““‘I’m excited about this, as depending on what you have already done, I think I can design a study using the Shiller data to provide historical simulations of Valuation-Informed Indexing strategies against fixed Buy-and-Hold strategies and also lifecycle strategies (declining allocation to stocks as one ages). If Valuation-Informed Indexing consistently outperforms fixed and lifecycle strategies, then the proof is in the pudding so to speak. Given how well valuations help to explain withdrawal rates, I think there is a lot of potential for this topic.”

11) “Yes, Virginia, Valuation-Informed Indexing Works!”

12) “It makes complete sense to have an equity allocation that is in some way flexible. Having a completely inelastic demand for equities is a bit bonkers; no-one acts that way with life’s other important commodities.”

13) “I wrote up the programs to test your Valuation-Informed Indexing strategies against Buy-and-Hold, and I must say that the results look very promising…. I am quite excited about the findings so far. As you say in the podcast, Valuation-Informed Indexing should beat Buy-and-Hold about 90 percent of the time, and I am getting results that support this for various strategies.”

14) “I have been toying with the idea of sending the paper to the Journal of Finance, which is the most prestigious journal in academic finance.”

15) “Now that I am accounting for risk, I am even more amazed by how well Valuation-Informed Indexing works.”

16) You shouldn’t be too excited with great wealth accumulations if they happened due to unusually high valuations, and low wealth accumulations shouldn’t be as scary if valuations are also quite low.”

17) “My idea is to show many different tables with results over the whole period for returns and risks. Valuation-Informed Indexing always provides more returns for often less risk.”

18) “No matter what I try, Valuation-Informed Indexing will still perform better in 85-95% of cases for 30 years.”

19) “I have a new figure for showing this as well. And a nice figure showing the outperformance percentages across rolling periods of lengths between 1 and 40 years. I think it is all quite persuasive.”

20) “You haven’t seen anything yet! This was just the secondary study. I’m still working on the main one!”

C) Academic Researcher Wade Pfau’s Statements of Incredulity That He Was the First Academic Researcher to Examine the Valuation-Informed Indexing Strategy

1) ” I know that there is an extensive literature about the predictability of long-term stock returns dating back to Campbell and Shiller’s work in the mid-1990s. I also know that there is an extensive literature about short-term market timing strategies…. But my question is about LONG-TERM market timing strategies. In other words, using market timing over periods of at least 10 years to obtain better returns than a Buy-and-Hold strategy. The literature seems slim.”

2) “Let me just explain a bit more why I posted about this here. Valuation-Informed Indexing has had critics for years, but until Norbert did it in 2008, nobody seemed to have provided a serious investigation of it. I just couldn’t understand why. And that bothered me.”

3) “Two papers by Fisher and Statman are still all I can find that provide evidence against long-term market timing.”

4) “I’m so confused by why Fisher and Statman didn’t consider risk in their idiot switching tests. Valuation-Informed Indexing is much less risky by pretty much any standard I consider. I must wonder… did I make a mistake somewhere? Why haven’t academics already published research about this?”

D) Academic Researcher Wade Pfau’s Statements on the Dangers of the Conventional Retirement Planning Advice

1) “The traditional approach to retirement planning (as described on pages 10 and 11 of The Bogleheads’ Guide to Retirement Planning, for example) is counterproductive and possibly damaging.”

2) “Retirees now frequently base their retirement decisions on the portfolio success rates found in research such as the Trinity study…. This is not the information that current and prospective retirees need for making their withdrawal rate decisions.”

3) “This article provides favorable evidence based on the historical record for long-term conservative investors to obtain improved retirement planning outcomes (lower savings rates, higher withdrawal rates) using valuation-based asset allocation strategies.”

4) Wade sent me a link to an article in Business Week that was published more than eight years after my post pointing out the errors in the Old School retirement studies and which he characterized as “quite sympathetic to the point you were trying to make all along”.

5) “Though I was only trying to do an Old School safe-withdrawal-rate study, all that I ended up doing was showing in a different way what you had been saying all along: the safe withdrawal rate changes with valuations.”

6) “Valuations are the driving factor. ”

7) “This is similar to your drunk driving analogy, which I agree with.” The discredited but uncorrected retirement studies find that in most circumstances a 4 percent withdrawal rate provides a huge cushion for the retiree using it. However, in each of the three cases in history when stocks reached insanely high price levels, retirements using a 4 percent withdrawal came within a whisker of failing. To say that this shows that a 4 percent withdrawal is “100 percent safe” (these words are used in the Greaney study) for a retirement beginning at a time of insanely high price levels is like saying that driving drunk is “100 percent safe” because 97 sober drivers drove their cars 20 miles without incident while 3 drunk drivers were paralyzed for life in car accidents but did not die. The fact that 4 percent only worked by a whisker in the cases in which valuations were high at the beginning of the retirement shows that a 4 percent withdrawal is high-risk at times of high valuations, not that it is “100 percent safe.”

8) ” Actually, this issue shouldn’t really even be all that controversial. It’s just common sense that the probabilities from the Trinity study shouldn’t be interpreted as forward-looking probabilities for new retirees.”

9) Naturally, I am finding that Valuation-Informed Indexing can allow you to reach a wealth target with a lower savings rate, use a higher withdrawal rate, and also have a lower “safe” savings rate, than a fixed allocation.

E) Academic Researcher Wade Pfau’s Statements Showing His Concerns that Continuing to Report Honestly on the Investing Realities in the Face of the “Hostile Environment” for Doing So Created by Buy-and-Holders Would Harm His Career

1) “I was trying to pay tribute to your accomplishments in what I knew would be a hostile environment.”

2) “Valuations and long-term investors is a somewhat controversial topic.” Wade posted these words to his blog in October 2011 as his explanation of why he was abandoning his plan of doing further research on the superiority of Valuation-Informed Indexing strategies over Buy-and-Hold strategies. He had told me in earlier days that “You ain’t see nothing yet!” when I praised his breakthrough research in this area. After his flip to the dark side, Wade removed the page containing this blog entry from his site.

3) “We have both read and met to discuss your paper. Unfortunately, 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. Thus sending the paper to a reviewer would be inefficient.” These words are from an academic journal’s “desk reject” of Wade’s breakthrough research.

4) ) ““ I was discouraged when I first received the “desk reject” by the editors of the same journal that published the Fisher and Statman paper. I realized that I didn’t have a chance with one of the top journals.”

5) “I think I should stay publicly quiet for a while, as I really don’t want anyone sending messages about any topics to officials at my university.”

6) I don’t want them [the Goons] working behind the scenes to derail me.”

7) “I did warn the editor of the Journal of Financial Planning that they may receive some ‘hate mail‘ after I mentioned your name in the safe savings rate paper.”