A Rich Life

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

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Get Rich Slowly Forum Discusses My Google Knol on the Big Fail of Buy-and-Hold

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I’ve added an addendum to my Google Knol entitled “Why Buy-and-Hold Investing Can Never Work” providing a link to a recent thread at the Get Rich Slowly forum discussing the arguments advanced in the Knol.

Juicy Excerpt #1: Alex Frakt, the admin of Bogleheads, called him “The most infamous troll in the history of investing forums on the internet.” His storied past goes way back to many prominent forums, including Bogleheads, Morningstar, Early retirement, and Motley Fool. Some say he was even instrumental in the creation of Bogleheads, as they split from Morningstar to seek a better refuge against trolls that went unchecked. The thing is, like any other good troll, Mr. Bennett talks a good game. Years and years of trolling will do that for a man. He’s highly informed , and can perhaps out-talk many of us here. But ultimately, like any other good trolls, he is one not because he can not be informative, but rather, because he simply refuses to see any evidence contrary to his position, in any way shape or form. Many have tried. All have failed.

Juicy Excerpt #2: When you make an absolute statement, such as “buy-and-hold investing can never work” then it is hard to take you seriously. All that one must do is provide a single instance in which the long-term strategy worked and it negates your entire argument. Now if you would like to say that buy-and-hold is inferior to other investment methods for the lay person then I would be greatly interested in your proposed alternatives. Otherwise this is just a poor troll attempt.

Juicy Excerpt #3: What is it that really works? There are alot of websites out there, what makes yours so special? Please use layman terms. For instance when I am able to invest i am looking at the drip investing plan, why are you for or against it?

Juicy Excerpt #4: He’s promoting market timing. Even though the smartest minds in the industry have clearly proven that market timing doesn’t work.

Juicy Excerpt #5: You, and everyone else on Earth, have no better than a 50% chance of guessing what the index will do. Period. End of story. No magic numbers will tell you otherwise.

Juicy Excerpt #6: But after a little more thought I gave up on this and ultimately decided to invest in a balanced fund. Why? I’m afraid that my algorithms were over-optimized for the given data. In hindsight it’s easy to say that you should sell your stocks when P/E 10 exceeds X. But if I looked at this data at a different point in time I might have decided on Y or Z instead. When I ran my algorithms over different (i.e. shorter) time periods they quite often failed to match the S&P 500 or a 60/40 mix. I simply can’t convince myself that the last 83 years will repeat themselves. Everything is the product of unique, unpredictable events (such as the 1970’s oil price shocks leading to unexpected high inflation). Anything could happen over the next 10, 20, 40 years. Why should we believe that there has not been, or will not be, a lasting change in valuation levels?

Juicy Excerpt #7: I think the OP does a huge disfavor by talking about Buy and Hold in the manner in which he does. It is much like those who really really get up in arms about Ramsey’s debt snowball. Sure, the math isn’t right, but personal finance is about much more than just mathematical numbers. We’re flawed human creatures. If Buy and Hold turns a 7% behavior gap into a 3% behavior gap, then that’s a huge step in the right direction of having our INVESTOR returns be close to our INVESTMENT returns. That’s like economists knocking Keynes or Friedman or something. Those guys got us somewhere better (our knowledge as a discipline increased greatly because of them). Sure, they have flaws, but come on.

“Liberals Should Be Concerned About the Financial Damage Being Done to Middle-Class Investors”

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Set forth below is the text of an e-mail that I sent to Jane Hamsher, owner of the FireDogLake.com blog, on Saturday, December 19, 2009: 

Jane:

My name is Rob Bennett. I write the “A Rich Life” blog (www.arichlife.passionsaving.com). I was encouraged to read your article entitled Left/Right Populist Outrage Will Defeat Senate Health Care Bill at the www.huffingtonpost.com site. I am a supporter of Sarah Palin. So we obviously do not agree on many political issues. However, I want to make you aware of an issue on which I believe a combined left/right populist outrage could do a world of good for millions of middle-class people and to ask your help in spreading the word.

The issue is — Buy-and-Hold Investing. The Buy-and-Hold Model was discredited by the academic research nearly 30 years ago. Yet The Stock-Selling Industry continues to spend millions today promoting this model because it has brought in hundreds of millions in profits. I have spent the last seven years of my life trying to get the word out to people through posts to discussion boards and blogs and have had much success with a small group. However, the far larger group finds it hard to believe that The Stock-Selling Industry would continue to promote this model for so long after it has been discredited and the owners of the big financial sites and blogs have banned honest posting on this matter rather than permit people to ask the questions they need to ask before becoming persuaded that there are far more effective ways to invest their retirement money. There are now bans in place at Morningstar.com, at Motley Fool, at IndexUniverse.com, at Bogleheads.org, and at numerous blogs.

The reckless promotion of Buy-and-Hold is the primary cause of the economic crisis. Several financial planners have told me that their clients are begging to hear of more realistic approaches. But the planners feel trapped. To go public with what they know about the flaws of the now-dominant model would in all likelihood mean the end of their careers. The failure of the Buy-and-Hold Model is The Truth That May Not Be Spoken today in InvestoWorld.

If you have an interest in learning more about this issue, I hope that you will direct some questions to me. It’s not complicated. And this is NOT an economic issue. It once was. With the ban on honest posting that now applies at all the large internet investing sites that I know of, this is today a POLITICAL issue. Liberals and conservatives should be united in opposing a ban on honest posting on so important a topic. Liberals should be concerned about the financial damage being done to middle-class investors and conservatives should be concerned about the harm done to the functioning of the market when people cannot gain access to realistic investing advice. We all should be concerned about bans on honest posting re ANY issue of public policy significance.

Here is a link to an article providing background that is entitled “The True Cause of the Current Financial Crisis Is Buy-and-Hold Investing”:

http://www.passionsaving.com/cause-current-financial-crisis.html

Here is a link to an article that provides links to 20 articles in which leading figures in the field decry the financial harm that has been done to us through the reckless promotion of Buy-and-Hold and the failure of “experts” in the field to take action for so long now (It’s entitled “Buy-and-Hold Investing Doesn’t Work — These Links Prove It!):

http://www.passionsaving.com/buy-and-hold-investing.html

Here is a link to an article giving brief snippets of 101 comments of my fellow community members expressing a desire that the smear campaigns that have been employed to block reasoned discussion of this matter be stopped and that honest posting be permitted (It’s entitled “Investing Discussion Boards Ban Honest Posting on Valuations!”):

http://www.passionsaving.com/investing-discussion-boards.html

If you want to check out my credibility, please go to the home page of the “A RIch Life” blog and scroll down to the section marked “People Are Talking” on the left-hand side of the page. There are a number of extremely kind comments about me and my work posted there along with links to the places where the comments were made. Some of the comments were made by ordinary people. Some were made by authorities in the field.

I hope that I will hear from you in the event that you have an interest in learning more. I of course wish you the best of luck in your future endeavors in any event. Your Huffington Post article was top notch stuff, in the assessment of this Palin supporter.

Rob
http://arichlife.passionsaving.com

Podcast #188 — Bogle’s Contradictions

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I’ve posted Podcast #188 to the “RobCasts” section of the site. It’s called Bogle’s Contradictions.

Vanguard Founder John Bogle often says that not only does he not know anyone who has successfully timed the market, he doesn’t even know anyone who knows anyone who has timed the market. Yet interviewers who have asked about Bogle’s portfolio have learned that valuation concerns prompted Bogle to dramatically reduce his stock allocation at the time when valuations were at insane levels and thereby protect himself from suffering as much as most of those who follow his investing advice did during the stock crash.

Bogle has also said in interviews that he believes that Valuation-Informed Indexing can work. Yet he has never publicly objected to the Campaign of Terror employed by Mel Lindauer (co-author of The Bogleheads Guide to Investing) to silence discussion of Valuation-Informed Indexing at the discussion boards at Morningstar.com and www.Bogleheads.org.

And Bogle has on numerous occasions argued that Reversion to the Mean is an “Iron Law” of stock investing and warned investors of the huge price drops likely to be experienced at times of insanely high valuations. Yet many of his followers portray Bogle as believing that it is not necessary for investors to change their stock allocations in response to big price changes (and Bogle has done little to change the impression thereby created that he believes that Buy-and-Hold Investing can work for long-term investors).

What gives?

Morningstar.com Reaffirms Its Ban on Honest Posting on Valuation-Related Topics

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Tar42 determined that the timing was right to test whether the rift between the Vanguard Diehards community and the Bogleheads.org community had grown wide enough to permit a lifting of the ban on honest posting on valuation-related topics at the Vanguard Diehards board.

Juicy Excerpt: It’s always good to hear both sides of an issue, whether it be Taylor’s books or a counter opinion such as this.

Petro firmly nixed the idea. The post is gone, but you can pick up the general drift by reading the one by BillPerk.

Juicy Excerpt:  If you really want to risk poking your eyes (and perhaps ears) out, try one of his 150 or so podcasts.

Sirschnitz nixed the nixing.

Juicy Excerpt: Rob’s and JWR’s active investing strategy using Shiller’s PE10 should have been fairly debated at the time, but wasn’t.

I thanked him for those kind words.

Full Text: Thanks for saying that. Russ. I think you have it exactly right. The key is permitting all points of view to be discussed. Here’s a passage from the book The Wisdom of Crowds that made a big impression on me: Mackay was right about the extremes of collective behavior: there are times–think of a riot, or a stock-market bubble—when aggregating individual decisions produces a collective decision that is utterly irrational. The stories of these kinds of mistakes are negative proofs of this book’s argument, underscoring the importance to good decision making of diversity and independence by demonstrating what happens when they’re missing. Diversity and independence are important because the best collective decisions are the product of disagreement and contest, not consensus or compromise. An intelligent group, especially when confronted with cognition problems, does not ask its members to modify their positions in order to let the group reach a decision everyone can be happy with. Instead, it figures out how to use mechanisms–like market prices, or intelligent voting systems–to aggregate and produce collective judgments that represent not what any one person in the group thinks but rather, in some sense what they all think. Petro is right, by the way, that I’ve never shot down any Germans and that I do indeed sometimes record those RobCasts in my pajamas!

Drip Guy freaked.

Full Text:  Tar42 – shame on you. You do yourself and this board a diservice by pretending that the much-disgraced, much-debunked, and BANNED Robert Michael “Hocus” Bennett is merely a voice providing another view of theoretical questions The man is a scourge on the entire internet, was a long-time troll and distractor of any useful dialog here, and was finally, and correctly, outright run out of town on a rail due to his nasty ways. Since then, he has wandered from finance board to finance board, wearing out his welcome rapidly in every new venue — never for the novelty of his ideas or argument, but for the signal inability to follow norms and rules established at those sites. The man is a complete flake. A crank. For you to bring up a thread solely designed to draw attention to this BANNED poster is beyond the pale. At some boards, even referencing banned posters is verbotten, and for good reason. If they were so noxious to the dialog, to the culture, to the body of the otherwise healthy board, why invite the disease back in? Shame. I am very disappointed. Hell, next thing you know, Rob will be getting a logon back, and here we go again!

I’ll post the text of my e-mail correspondence with Morningtar.com that followed (in which I was re-banned on grounds that the language of the post quoted above (the one quoting the book The Wisdom of Crowds, not the one referring to a fellow community member as a “scourge on the entire internet”) is “inflammatory”)  in Thursday’s blog entry.

“Integrity Issues Are Always On-Topic”

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Tuesday’s blog entry set forth the text of an e-mail that I received from Mike Piper explaining his decision to delete a comment that I put to a blog entry at his Oblivious Investor blog reviewing the Bogleheads’ Guide to Retirement Planning. The comment pointed out the role of the authors in imposing a ban on honest posting on safe withdrawal rates and other important investment topics at the Vanguard Diehards board and at the Bogleheads.org forum. Set forth below is the text of my response to Mike:

Mike:

I believe that you are trying to take things in a positive direction. I applaud you

for that.  We need some people from “your side” taking more constructive and

reasonable positions.

If you do not object, I will run the text of your e-mail as a blog entry at my site

(if you do object, I will summarize it). Your e-mail is news. It tells people how

those among the Passive Investing advocates who are trying to take things

in a positive direction are handling these sorts of issues today.

I would be grateful if you would include a note in the comments section of

the blog entry saying that Rob Bennett posted a comment that you deleted on

grounds that it was not on topic and that I will be reporting on the matter at my

blog.

My view is that integrity issues are always on topic. Mel and Taylor would

not have a book contract but for the work done at those boards by thousands of

good and smart and honest people. The ban on honest posting is a betrayal

of those people and their intent in building the board. People thinking of

taking the retirement advice offered in the book into consideration need to

know whether the authors can be trusted. The fact that they favor a

ban on honest posting on safe withdrawal rates (SWRs) goes to this question.

I am happy to hear that there are few references to SWRs in the book.

That is obviously a good thing and I think it would be fair to say that it is

my efforts (supplemented by the efforts of the thousands of community

members who have expressed a desire that honest posting be permitted)

that are primarily responsible for that encouraging reality of today. The darker

reality is that Taylor and Mel have not learned what they could have learned

from their discovery that the Old School SWR studies got all the numbers

wrong. Everything that I have learned about investing over the past seven

years followed from my discovery of the errors in the Old School studies

and what I learned by thinking through the implication of the reality that

so many good and smart people could get their retirement planning advice

so terribly and dangerously wrong and fail to fix things for so many years

after the errors were brought to their attention.

Thanks for the tone evidenced in your e-mail. I of course do not agree

with your decision to delete the comment. I certainly understand why

the comment causes discomfort. I interpret your reasonable tone as

evidencing a desire to see these matters handled in a constructive and

positive way. If that happens, I am confident that every single member of

the Indexing community (including Taylor and Mel and John Bogle,

to be sure) will be feeling a whole lot better about themselves and about

their advocacy of the indexing concept in days to come.

Rob

“It Brings Up Things That Happened at Another Forum, Which Most of My Readers Don’t Seem to Care About”

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Thursday’s blog entry reported on Mike Piper’s decision to delete a comment of mine from his blog. Mike’s blog entry reviewed a book by Taylor Larimore and Mel Lindauer, The Bogleheads’ Guide to Investing. The deleted comment pointed out the role that Taylor and Mel have played in imposing a ban on honest posting on safe withdrawal rates and other important topics at the Vanguard Diehards board and at the Bogleheads.org forum.

Set forth below is the text of the e-mail that I received from  Mike explaining his decision to delete the comment. I will post the text of my response to Mike in Thursday’s blog entry.

Hi Rob.

I’m sorry, but I’m not comfortable publishing that comment. The reason has nothing to do with the “respectful” part of the comment rules, as you were clearly made an effort to be respectful.

The issue is that I really don’t see it as “on topic.” It brings up things that happened at another forum, which, frankly, most of my readers don’t seem to care about.

Also, for reference, the book really is about far more than just investing. “Safe withdrawal rates” has precisely two entries in the index.

The first is for a discussion of how to apply a “safe withdrawal rate.” For example, should a person select a percentage, and withdraw that percent every year? Or should they start with a percentage, and adjust that dollar amount upward every year to account for inflation? It explains that the first method is far less likely to result in the investor running out of money, but it’s not entirely practical for investors who can’t adjust their expenses on an ongoing basis.

The second is a very brief mention in the chapter on early retirement. Basically, it says that an investor who retires at age 40 will have a lower SWR than an investor who retires at age 65 (assuming they both intend to spend the majority of their money over the course of retirement, rather than leave a significant amount to heirs).

Surely both of those points are ones we can all agree on, no?

“It Is a Black Mark on All in That Community (Including John Bogle) That This Wrong Has Not Been Rectified”

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Mike Piper of the Oblivious Investor blog deleted from the comments section of yesterday’s blog entry (“Review: The Bogleheads’ Guide to Retirement Planning”) a comment that I advanced pointing out the role that Mel Lindauer and Taylor Larimore have played in maintaining the ban on honest posting that applies today at both the Vanguard Diehards board (at Morningtar.com) and at the Bogleheads.org forum.

Set forth below are the words of the deleted comment. I will set forth the text of Mike’s explanation of the deletion as next Tuesday’s blog entry (he has given me permission to do so) and I will set forth my response to Mike as next Thurday’s blog entry.

Here is the text of the deleted comment:

I’m going to say some good stuff about the book because that’s the charitable and proper way to proceed. And then I am going to say some bad stuff because I believe we are all obligated to speak honestly re matters that affect people’s retirement planning.

The authors were given a book contract not because they personally possess skills as retirement planners. They were given the contract because of the wonderful communities that they played a big role in building at Morningstar.com (the Vanguard Diehards community) and at Bogleheads.org. The communities truly are wonderful. I actively participated at Vanguard Diehards until I was banned (I was banned at Bogleheads.org before putting forward a post — the board was formed to escape me). And I link to discussions held at these communities frequently at the “Today’s Passion” feature of my site.

Taylor and Mel obviously deserve credit for the work they did building learning resources that benefit us all. There are thousands of people who love them for having done this and not entirely without reason. John Bogle is today’s leading investment authority and he has endorsed the work done by Taylor and Mel. I have not read the book but I am certain that there is a lot of good stuff in it.

People also need to know about the bad stuff. I am the person who discovered the errors in the Old School safe withdrawal rate (SWR) studies. It is because I reported the accurate numbers at the Vanguard Diehards board that I was banned both there and at Bogleheads.org. This is wrong. It is not a wrong done only to me. It is a wrong done to all of the thousands of community members who expressed a desire that honest posting be permitted there. It is a black mark on all who participate in that community (including John Bogle) that this wrong has not been rectified for over two years now.

This failure to address the SWR topic and resolve it successfully affects the integrity of the book. I don’t know precisely what is said in the book re SWRs. But I know with 100 percent certainty that the book does not say the same things about retirement that it would say if Taylor and Mel had permitted honest discussions of the flaws in the Old School studies and had learned from those discussions. The book as it exists today is not the book that would exist had board “leaders” acted with integrity in their board administration actions.

That’s the right word — integrity. The reason why discussions of the errors made in the Old School studies have been so contentious is that there are integrity issues involved in the failure of the community of Passive Investing advocates to address these issues for over seven years now. We are not going to be able to duck these issues indefinitely. Our integrity is part of what makes us human. We cannot continue to function as humans if we do not address challenges to our ability to act with integrity. None of us should be recommending without reservation Investing guides that lack integrity in their discussion of important topics (it is of course possible that guides that lack integrity on some issues may do good service on other issues).

These words are going to upset some people. That’s proper and right. The realities here are unpsetting. We all have a role to play in getting things back on the right track.

Rob

Mike Piper of Oblivious Investor Bans Dicussion of Lindauer’s Campaign of Terror Against Diehards

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Mike Piper, owner of the Oblivious Investor blog, this morning imposed a ban on discussion of Mel Lindauer’s Campaign of Terror against the Vanguard Diehards board community. Mel is the author of The Bogleheads Guide to Investing. When the Vanguard Diehards community showed great interest in learning about the analytical errors made in the retirement studies widely cited by financial planners and in the Valuation-Informed Indexing strategy, he and his “defenders” engaged in viciously abusive posting on nearly every thread at which these topics were addressed. When Morningtar.com refused to ban honest posting, Mel urged community members at that board to abandon it and to move to the Bogleheads.org board, where honest posting on the effect of valuations on long-term returns has been banned from the first day of operation.

Juicy Excerpt: Several comments on this thread have now been deleted. For future reference, any discussions about what did or did not happen on somebody else’s blog or forum count as “off topic” and will be deleted. The place for those discussions is elsewhere.

The Campaign of Terror that has been led by Lindauer and John Greaney  (owner of the www.RetireEarlyHomePage.com site and the author of one of the now-discredited Old School safe withdrawal rate studies) is of obvious importance to middle-class investors trying to understand why they they have lost so much of their retirement money and why the U.S. economy is now suffering a crisis of confidence. Piper has made clear that he will continue to promote Passive Investing at his site even while permitting (and in some cases encouraging)  abusive posting aimed at silencing those who point out the grave dangers of this “strategy” and even while indicating that his mind is closed to the idea of informing his readers about the grave dangers of the Passive model. Mike said in response to my expression of hope that he would turn to the promotion of valuation-informed indexing strategies rather than passive ones that: “That is not going to happen.”

Mike said in an earlier blog entry that: “I do see (at least a potential) value in adjusting asset allocations as a function of current price levels. But to be honest, I see the misinformation spread by the financial services industry (about active management, picking stocks, etc.) as a far larger issue. And until that battle is won — which I doubt will ever completely happen — I don’t foresee myself taking on any other issues with my writings.”

My take on those words is that Mike has (at least for now) put marketing considerations above his desire to inform his readers what works in stock investing.  I do not believe that Mike possesses a full appreciation (or anything close to it) of the merits of the Valuation-Informed Indexing strategy. However, I also believe that he is aware of at least some flaws of the  Pasive model and has elected not to learn more primarily because of marketing considerations (with perhaps a good bit of cognitive dissonance thrown in).

Mike has not entirely banned honest posting on the grave problems with the Passive approach, according to my reading of his statement. My intent is to continue to post on these questions and others at his blog. If Mike continues to permit abusive posting by the Greaney Goons (both the poster named “Dylan” and the poster named “Linda” have long records of abusive posting at blogs and both appear to be associated with the Greaney Goons — John Greaney runs a discussion board at which those seeking to block honest posting at discussion boards and blogs meet each day to discuss strategies for destroying or compromising these communities), I will continue to object. In the event that his adoption of the new policy translates into a decision to take action against abusive posters, the new policy could end up being a positive step (most community members are more concerned with learning the realities of stock investing than in learning about the abusive practices used by Lindauer and Greaney to block knowledge of them and anything that helps middle-class investors learn the realities will ultimately help in the effort to get the various boards and blogs opened to honest posting once again).

I think it is fair to conclude that this development is one more demonstration of the reality that we have learned over and over and over again during the course of the first seven years of The Great Safe Withdrawal Rate Debate — there is no rational case that can be put forward in support of Passive Investing. There certainly was a time when many smart and good people believed that there was. But that was a long, long time ago. And the most important initiative for all indexers today should be to help us move to the next stage of The Indexing Revolution — the valuation-informed stage.

Addendum: Mike Piper has sent me an e-mail that combines frankness and kindness in a wonderful combination that impresses me greatly (although Mike is certainly not agreeing with all that I say in this blog entry). I will report on Mike’s e-mail in Thursday’s blog entry. If Mike gives me permission, I will run the full text of the e-mail. Mike is trying very hard and I am extremely grateful to him for his efforts at understanding the other point of view. He knows how to disagree with someone while remaining friendly to that person, an essential skill of the most successful long-term investors. The right stuff!

Bogle Says Valuation-Informed Indexing Can Work

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Vanguard Founder John Bogle in a recent video interview with the IndexUniverse.com site offered an almost-but-not-quite endorsement of the Valuation-Informed Indexing strategy, the investing strategy explored at this site. Bogle’s comments come in the wake of a growing wave of opinion that the Passive Buy-and-Hold strategy long advocated by Bogle has been proven a failure by last year’s stock crash.

“Big moves out of stocks should not be done at all,” Bogle told interviewer Jim Wiandt, publisher of the www.IndexUniverse.com site. But “tactical asset allocation — I should say strategic asset allocation rather than tactical — can be done at very rare times, so rare and so difficult to observe, maybe six times in an investor’s lifetime, three times when the market is stupidly high and three times when stupidly low.”

Valuation-Informed Indexing rejects the idea that Passive Investing (sticking with the same stock allocation even when stock valuations change dramatically) can ever work in the real world for the long-term investor. This strategy is rooted in the Rational Investing model (the alternative to the now-dominant Passive Investing model), a model that accepts the academic research of the past 28 years showing that valuations always affect long-term returns. Valuation-Informed Indexers adjust their stock allocations as needed to keep their risk levels roughly constant rather than keeping their allocation levels constant and thereby permitting their risk levels to get wildly out of whack from what they had determined was right for them when they set them. Thus, Valuation-Informed Indexers lost far less in the crash and will be benefitting from greatly enhanced compounding returns for decades to come. The historical stock-return data shows that there has never yet been a time in U.S. history when Passive Indexers have done better than Valuation-Informed Indexers although there have been many cases in which the valuation-informed strategy soundly beat the passive strategy.

Bogle distanced himself from the position advanced by Mel Lindauer (author of The Bogleheads Guide to Investing) during his Campaign of Terror against the Vanguard Diehards discussion-board community (which expressed great interest in learning more about Valuation-Informed Indexing); Lindauer said that those who follow valuation-informed strategies are not properly thought of as “Bogleheads” and that it is “dangerous” for indexing boards to permit civil and honest discussion of the academic research of the past three decades showing that valuations affect long-term returns. In contrast, Bogle invited those who find appeal in valuation-informed strategies to “be my guest” in following them (and presumably in discussing them amongst themselves and with any of their friends who happen to be Passive investors).

However, it cannot be said that Bogle gave a full and clear endorsement to the new indexing strategy, a strategy developed by the thousands of members of the Retire Early and Indexing discussion-board communities participating in the controversial series of discussions collectively known as “The Great Safe Withdrawal Rate Debate.” He expressed skepticism as to investors’ ability to take advantage of the message of the historical data, saying that Valuation-Informed Indexing works only “if you can pick the times” to make the necessary allocation shifts. “I don’t do it myself — I’m not smart enough to,” the Vanguard Founder (and father of the Indexing Revolution) added. Bogle did not offer any explanation of why he does not view himself as “smart enough” to follow this exceedingly simple strategy (but his expression of concern over picking the right times to make allocation shifts suggests that he may not yet possess a clear understanding of the key distinction between short-term timing and long-term timing — that picking market high and lows is not necessary for success as a long-term timer).

Still, Bogle made two major concessions that no big-name Passion Investing advocate has made before.

First, he conceded (in the words quoted above) that Valuation-Informed Indexing is a strategy, not a tactic. Passive dogmatists have often played word games in which they pretended (perhaps to themselves as well as to others) to acknowledge the academic research of the past three decades while ignoring a key finding of that research — that changing one’s stock allocation in response to price changes works only when applied strategically (to obtain long-term benefits) and not when employed tactically (to obtain short-term benefits). The historical data shows both that tactical (short-term) timing never works and that strategic (long-term) timing always works. Bogle’s acknowledgment that the benefits of long-term timing are strategic rather than tactical is potentially a highly significant development; Passive Investing dogmatists have long taken advantage of the general public’s confusion over what the academic research says about timing (that short-term timing is a bad idea and that long-term timing is required for long-term success) to thwart efforts of investors to learn the realities of stock investing by  planting the suggestion that advocates of Valuation-Informed Indexing are promoting a doomed tactical change rather than a common-sense strategic one.

Second, he noted that knowing when to lower or increase one’s stock allocation “might not be quite as difficult as it seems.” This statement suggests that Bogle has been educating himself about the message of the historical data in the months since the crash. There have been numerous good discussions of the merits of Valuation-Informed Indexing at the Bogleheads.org board since September 2008, when the ban on discussion of the academic research of the last 28 years was eased but not entirely lifted.

Wiandt imposed a partial ban on discussion of the investing realities at the www.IndexUniverse.com site after first expressing excitement about publishing articles on the Valuation-Informed Indexing strategy and then learning from his senior editor (who has ties to Mel Lindauer and other “leaders” of the Bogleheads.org board community) of Lindauer’s position. However, Wiandt too has evidenced a softening in recent months. His site recently published an article by Rob Arnott, former editor of the Financial Analysts Journal, arguing that most of the conventional investing wisdom of today (insights developed under the Passive Investing model) is the product of “myth and urban legend.” Arnott has said that we are today living in the early days of a “revolution’ in our understanding of how stock investing works.

“Holy Toledo! This Is Great Stuff!” —
The New Coffeehouse Investor Author Bill Schultheis

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“Holy Toledo! This is great stuff!”

So said Bill Schultheis, author of The New Coffeehouse Investor and a popular Passive Investing advocate, in an e-mail to me dated May 14, 2009. Bill was writing to me as the result of our joint participation in a discussion thread at the Get Rich Slowly blog.

Bill wrote a guest blog for the Get Rich Slowly blog entitled  How to Build Wealth, Ignore Wall Street and Get On With Your Life.

Juicy Excerpt: The problem is that we have been so inundated by the financial industry’s marketing machine over the past quarter century, that we have been brainwashed into thinking that the secret to our long-term financial well being lies in Wall Street’s hands, instead of our own hands. Nothing could be further from the truth.

I made clear in Comment #9 that I wasn’t buying.

Juicy Excerpt: The problem did not come about because most of us were trying to pick “hot stocks.” The “experts” have been pushing Passive Investing down our throats for three decades now and most of us bought in. That’s the problem.

Bill responded graciously in Comment #14, saying “you bring up some very interesting points” and then offered detailed observations in Comment #20.

Juicy Excerpt: I agree with you that prices matter in regards to future returns on equities. How do you suggest one integrates that into a portfolio? I am very familiar with the studies that recognize that valuations matter. Using that information to build portfolios and allocate assets is a challenge, and a slippery one at that.

I responded to that one in Comment #21.

Juicy Excerpt: The way to integrate this critically important reality into a portfolio construction strategy is to accept that to “Stay the Course” meaningfully one must keep one’s risk level roughly constant. An investor who stays at the same stock allocation when the risk of owning stocks has increased dramatically is NOT staying the course in a meaningful sense. He is staying the allocation. That’s not at all the same thing.

I followed up with an e-mail to Bill which I will post as Thursday’s blog entry. He responded with an e-mail to me offering his kind assessment of the investing materials at the site and expressing interest in entering into a more extended back-and-forth exploration of these matters. I of course expressed my gratitude and indicated that I too am looking forward to further conversations.

J.D. Roth (the owner of the A Rich Life blog) then threw us a curve ball. Without explanation, J.D. blocked me from posting further comments (I do not know whether the block applies site-wide or only to the one blog entry as I have not since had occasion to try to post a comment there). I let Bill know by e-mail and he expressed a desire to be able to read my comments. Two community members other than Bill expressly directed comments or questions to me. But J.D. did not respond to my two e-mail requests for help with what I presumed (until he failed to address the problem for several days) was a technical problem. [Note (added May 22): Subsequent events have shown that J.D. did NOT block my comments — the posting problem turned out to have been caused by a technical problem afterall]

To have yet another Passive Investing advocate act so defensively (J.D. joins the Bogleheads.org site, the Morningtar.com site, the Motley Fool site, the Early Retirement Forum and IndexUniverse.com in banning effective criticism of the Passive Investing model) is of course disappointing. But I view this chapter in the saga as being more encouraging than discouraging.

I believe that Bill is sincere in wanting to learn more about the flaws in the Passive Investing model (while also perhaps being reluctant to let in just yet just how extensive the problems with this model really are). I also believe that J.D.’s mind is not entirely closed. He permitted three comments by me before lowering the boom, and there were several comments by other community members expressing either skepticism re Bill’s message or support for mine. Most significantly, I am hearing more questioning of the Passive Investing marketing slogans from a larger number of middle-class investors all the time. In the old days, the Passive Investing dogmatists positively celebrated their bans on honest debate. I am sensing a feeling of defeatism re these “strategies” today. Even the dogmatists appear to be growing weary of the tactics needed to keep the dogmas in place after they have failed so many real-world tests and caused so much financial misery.

We’re not yet where we want to be. Not by a long shot. But I believe we are seeing some forward movement. Let’s just hope that it doesn’t take another 50 percent price drop to obtain the cooperation of the number of “experts” needed to move the ball into field goal territory!

I’ll send Bill another e-mail today and ask him whether he is okay with me posting his side of our correspondence here (if he is not, I will post only my own e-mails). I’ll let both Bill and J.D. know about this blog post. In the event that either feels that there is anything that I have said that is inaccurate or unfair, I will let him know that I would be happy to reserve next Tuesday’s blog for the presentation of his words. Finally, I’ll write a blog entry on the question raised by Bill in his Comment #20– how best to implement long-term timing — and ask J.D. whether he has an interest in posting it as a guest blog entry at his site.

I heard from two fellow blog owners yesterday focusing on the same question as Bill — the practical implementation question. One was Shadox, owner of the Money and Such blog (Please do  not click on this link as I believe that the blog is going to be featuring a Guest Blog Entry of mine today that I intend to feature here in a future blog entry of my own — it’s cheating to sneak a peak today!). The other was Frank Curmudgeon, at the Bad Money Advice blog (please feel free to click this one and to travel down to the comment that Frank put forward at 8:45 am on May 18).

Frank Curmudgeon: When I say that I am not saying you are right, I mean only that I am not yet convinced you have a powerful enough equity market prediction model.

Shadox (in an e-mail): The question is whether there is a problem with translating what may be a sound concept to a “real world” environment. I think this is where the real challenges are from your perspective.

If we are witnessing a shift in the focus of the “opposition” to the Valuation-Informed Indexing concept to a questioning of whether it can be implemented effectively, that is very good news indeed. Skepticism re the implementation question is entirely healthy and appropriate. It’s the threats to kill anyone who fails to genuflect upon hearing the pronouncement of one of the Passive Investing marketing slogans that have done so much damage to the various Retire Early and Indexing boards. If the focus turns to the feasibility of the ideas explored at this site, it will be almost like we are having a regular old investing discussion re these matters. We will have achieved Normalization of The Great Safe Withdrawal Rate Debate at last!

Mel hates it when I cite Beatles lyrics for the insights they offer us into the great stock investing questions of the day. Still, I really do think there’s something to be said for the observation that “there’s nothing you can do that can’t be done.”

And that “all you need is the historical data.”

Update: There have been two developments in this story as of the morning of May 20 (when I am posting this update).

I sent the e-mails to Bill Schultheis (author of The New Coffeehouse Investor) and J.D. Roth (publisher of the Get Rich Slowly blog) described in the blog entry. Both Bill and J.D. responded.

J.D. said that he has not banned me from posting at his blog. He said that he has never banned anyone. I am still not able to get my comments to appear on the thread relating to Bill’s guest blog entry. J.D. is out of town and away from his computer (he read my e-mails through use of his phone), so he has not yet been able to address the technical problem (J.D. had a site upgrade last week — my guess is that the problem relates to that). But he has indicated that he will get things fixed up in a few days.

Bill sent me an e-mail objecting to me quoting him as saying extremely positive things about my site without his permission. He did not claim that the quote I used was inaccurate. I responded with a long e-mail that aims to bring to the surface the underlying issues that gave rise to what I believe can fairly be characterized as an exceedingly odd complaint. I will post the text of that e-mail in a later blog entry. I told Bill that I am happy to give him space at the blog to comment on anything that I have said that he views as being either inaccurate or unfair or unkind. I also said that I am happy to quote the precise words that he used to express his objection to my use of the quote from him but only if he gives me permission to do so. I said in the earlier blog entry that I will provide the texts of Bill’s e-mails in our ongoing (I hope!) correspondence only if he gives me permission to do so.