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

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A Poster Finds Fault with Boglehead Dogmatism — and the Post Remains Up!

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A community member named “Bad Move” yesterday posted the following words to a Bogleheads Forum thread titled What Are the Biggest Criticisms About the Boglehead Way?:

“My biggest criticism of the Boglehead way is that its biggest advocates of it (who I think are the same people invented the term “Boglehead”) are not trustworthy:

“1. They engage in extensive “hero worship” in which they try to convince others to blindly follow the advice of famous investors, investment authors, and investment advisors…most of which have a conflict of interest due to their financial connections (ie with the investment firms they recommend, the royalties they collect from the books they sell, the advisement fees they collect from clients, etc). This is a common strategy used to take advantage of weak minded individuals (for example, by crooked religious leaders).

“2. They insulate their teachings from factual criticism by appealing to higher standards (ie the future is distinct from the past), but then they go on to justify their more specific recommendations (the point where fees are collected, of course) with historical circumstances. This is another typical huckster strategy: tell a half truth and you can get people to believe whatever lies you choose to mix in.

“3. They furiously censor anyone who calls attention to the above, erasing all discussion of it without any trace or fanfare. They even somehow negotiate to have negative reviews of their books removed from independent sources. For example, if you try posting a negative review of one of their books on Amazon then you will see why their books are so highly rated….the negative reviews get deleted!

“I can’t say who these people are since naming names is against forum policy (or at least it’s supposed to be…it’s actually only enforced when these specific hucksters are caught with their hands in the honey pot), but if you stick around this forum long enough and keep careful watch then you will see for yourself who they are.

“The funny thing about it is that I actually agree with 95% of Boglehead ideals, but seeing the poor character of those who advocate it makes me truly fear that I’ve somehow been bamboozled.

“Caveat Emptor.”

The post remains open to view of other community members as of this morning. This is obviously to the credit of the “leaders” of the board. This is how we all begin moving forward together.

Site Administrator Alex Frakt Doubles Down on Defamation/Intimidation/Deception Strategy at Bogleheads Forum

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Site Administrator Alex Frakt  is doubling down on the Defamation/Intimidation/Deception strategy he has employed to block honest posting on the dangers of Buy-and-Hold Investing at the Bogleheads Forum in the wake of the posting of research by Wade Pfau, Associate Professor of Economics at the National Graduate Institute for Policy Studies in Tokyo, Japan, showing that Valuation-Informed Indexing beats Buy-and-Hold in 102 of the rolling 30-year periods while Buy-and-Hold did better in 8 of the periods. Frakt revealed the decision to double down in a recent post put to a discussion-board thread started by Pfau.

Here are Frakt’s words: “We’ve had to remove a couple of comments and posts from this thread regarding Rob Bennett. I have been in contact with the OP offline and he is now fully aware of hocus’ modus operandi, so there is no further need for these posts. Let’s continue to keep this forum a hocus-free zone. P.S. For anyone confused by this message, I’ll suggest googling “hocomania”.”

Oh, my!

I sent an e-mail to Vanguard Founder John Bogle on July 30, 2009, asking for his help with this matter. I will send John another e-mail today letting him know about this new development and again imploring his help to get the Bogleheads Forum back on a good and productive and honest and life-affirming track.

In the event that there are newcomers reading these words who can make no sense of the insanity, here are some links that provide some background (without quite being able to make it all seem anything less than 100 percent insanity all the same):

1) Here is my bio:

http://knol.google.com/k/rob-bennett/rob-bennett/1y5zzbysw7pgd/4#

2) Here is an article at which I quote the comments of 101 of my fellow community members expressing a desire that honest posting on the flaws of the Buy-and-Hold strategy be permitted at the Bogleheads Forum and indeed at all investing boards and blogs on the internet:

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

3) Here is a blog entry reporting on an interview in which Bogle (Mr. Buy-and-Hold himself!) says that he believes that Valuation-Informed Indexing can work:

http://arichlife.passionsaving.com/2009/07/28/bogle-says-valuation-informed-indexing-can-work/

4) Here is the blog entry at Pfau’s site describing his preliminary research:

http://wpfau.blogspot.com/2011/01/valuation-informed-indexing-preliminary.html

5) Here is my Google Knol explaining the mistake (the Efficient Market Theory) that led people to believe for a time that Buy-and-Hold could work and how the research of Yale Economics Professor Robert Shiller has led us to a better way (if only we could find a way to get the word out to middle-class investors!):

http://knol.google.com/k/why-buy-and-hold-investing-can-never-work#

6) Here is my Google Knol explaining how the bull market caused the economic crisis:

http://knol.google.com/k/rob-bennett/the-bull-market-caused-the-economic/1y5zzbysw7pgd/3

7) Here is a Q&A treatment (more concise!) of how Buy-and-Hold caused the economic crisis:

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

8 ) Here is an article setting forth links to comments by 20 experts illustrating why Buy-and-Hold cannot work and how it caused the crisis:

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

9) Here is an article setting forth links to 20 studies showing the Buy-and-Hold is dead:

http://www.passionsaving.com/buy-and-hold-is-dead-part-one.html

10) Here is the blog entry in which I reported on Wade’s research. There are 71 comments to the blog entry, a good number by several of the internet sewer rats and a good number by Wade in which he indicates uncertainty as to whether he faces greater personal risk by aligning himself with the internet sewer rats (obviously not a good idea in the event that word eventually gets out to middle-class investors about their nine-year-long Campaign of Terror against our board communities) or by aligning himself with those who have expressed a desire that honest posting be permitted (obviously not something that is going to make the internet sewer rats and their supporters in The Stock-Selling Industry happy):

http://arichlife.passionsaving.com/2011/01/21/wade-pfau-associate-professor-of-economics-at-the-national-graduate-institute-for-policy-studies-valuation-informed-indexing-works/

11) Here is a blog entry reporting on an earlier statement by Frakt describing me as “a threat to the [Bogleheads] community” because of my firm opposition to Buy-and-Hold Investing:

http://arichlife.passionsaving.com/2011/01/19/bogleheads-org-site-administrator-says-i-represent-a-threat-to-the-community/

12) Here is a blog entry from last week titled “The Mother of Those Two Boys Did Not View Those Death Threats as ‘Alleged.'” One of those cases in which the name says it all, eh?:

http://arichlife.passionsaving.com/2011/01/18/the-mother-of-those-two-boys-did-not-view-those-death-threats-as-alleged/

We can do better than this, people. A lot better!

Rob

Bogleheads Forum Examines Research Showing Valuation-Informed Indexing Beats Buy-and-Hold in 102 of 110 30-Year Periods

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Wade Pfau, Associate Professor of Economics at the National Graduate Institute for Policy Studies in Tokyo, Japan, has started a thread at the Bogleheads Forum for discussion of his recent research showing that 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.

Juicy Excerpt #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.

Juicy Excerpt #2: If you have 130 years of data, then that means you have 120 overlapping 10 year periods, or 13 independent 10-year observations. I know 120 overlapping 10-year periods is not the same as 120 independent observations. I’m not comfortable with theoretical statistics, and my intuition may be wrong, but my intuition is that 120 rolling 10-year periods still provides more information than does 13 independent observations.

Juicy Excerpt #3: About Mr. Bogle’s quotation, I have the feeling that he is referring to short-term market timing, right?

Juicy Excerpt #4: What studies show this [that long-term market timing doesn’t work] ? In particular, are there some academic studies that I haven’t found yet? That’s all I want to know. At this point, the two papers by Fisher and Statman do support your view. I already have some concerns about their methodology though, and I am not convinced by their findings. I am looking for other studies that support your view.

Juicy Excerpt #5: Because the precise timing of this mean reversion is not known in advance, and is indeed random, expecting the result to happen in the short-term will not be possible. But long-term investors who can be patient can wait for this mean reversion, while they may lag behind buy-and-holders for years at a time, will eventually come out ahead by the end of the game.

Juicy Excerpt #6: I am quite surprised 30 years produced such good results. I examined 10-year periods and the number of “Lost Decades” were relatively small.

Juicy Excerpt #7: After 10 years, VII is just starting to work.

Juicy Excerpt #8: Since your own work is overtly at odds with the ethos of the board — here, the theme is John Bogle’s philosophy, which eschews market timing, I myself will no longer obliquely support it by giving you a whetstone on which to sharpen your knife. You must certainly know that this very board came into existence in order to ESCAPE the lunatic behaviors of one individual — the very individual with which you have publicly and openly aligned yourself, and who you are openly quoting and sourcing in your column and are forming your intended paper around.  While there is much merit in open discussion of competing, differing, and varied approaches, as to you, sir, I personally will have no more of it here on this forum, given the poison well from which you are now openly drawing your own water.

Juicy Excerpt #9: As a relatively new person on this forum, I have no idea what you are talking about. There is someone, not Wade, whose “lunatic” behavior lead to the existence of this board? I can understand avoiding the classic abusive internet behavior of toxic contributors. However, that is a far cry from having no more of open discussion of competing approaches. From what little I have seen on this forum and Wade’s site, I don’t see anything harmful.

Again, I am new here, but I hope people can post ideas that do not conform to others ideas of what Bogle would say. After all, this is finance, not religion. Bogle is a smart guy who has done a tremendous service to American investors, including the majority who do not do business with Vanguard. Does that mean no one is allowed to disagree with him on any topic?

Juicy Excerpt #10: VII switches to 90% only at low P/E10 levels. Which tend to forecast higher future returns. However, keep in mind the reason why P/E10 might have fallen to low levels in the first place: the economic environment was more uncertain than usual.

Juicy Excerpt #11: It was the third case I know of where a new board was created to be just like the old board only without that person. He said he made up the name of his investing system so that people will google it and end up at his site. As far as I have been able to tell, his system is basically his name applied to Shiller’s work and he does not follow the system himself…. Last I read, a newspaper reporter interviewed him and he said he may have to return to work because his website hadn’t taken off.

Juicy Excerpt #12: I believe that there are occasional periods when the broad stock market is overvalued enough that one might choose to reduce exposure or step aside completely. However, I don’t think this long-term timing idea will work well for most investors.

Juicy Excerpt #13: The problem with long-term market timing is it  takes too long to find out if your right or wrong.

Juicy Excerpt #14: WHY IS IT SUCH AN ODIOUS VIOLATION OF THE TENETS OF BOGLEHEADISM TO EXPLORE WHETHER SOMEONE WHO HAS ENOUGH PATIENCE AND ENOUGH TIME ON THEIR HANDS MIGHT BE ABLE TO BENEFIT FROM THE TRANSITORY NATURE OF SPECULATIVE RETURNS (I.E. THE IDEA THAT THE P/E RATIO EVENTUALLY ENDS UP WHERE IT STARTED)?

Juicy Excerpt #15: Are you aware of Shiller offering asset allocation advice based on PE10? And other studies like Stein and DeMuth, and the two papers by Fisher and Statman only consider all-or-nothing stocks or bills strategies. 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. Even if VII ends up being wrong-headed, his heart does seem to be in the right place no matter whatever it is YOU might think about other aspects of his personality.

Juicy Excerpt #16: I think this is long-term timing in the sense that it is based on PE10, and PE10 best predicts what will happen on average over the long term. What PE10 predicts is sometimes inconsistent with current prices, so this is a failure of market efficiency. Given that timing is supposed to be impossible because of market efficiency, the name therefore identifies the fact that the exception to market efficiency requires you to use the long-term.

Having said that, I think we should call PE10 approaches “valuation-based” (or “valuation-informed” or valuation-something) because that’s exactly what they are. This is not to deny that they are “timing”, but it really doesn’t help discussion to use a term that lumps them together with a hundred other ways of varying exposure, which advocates of valuation-based investing would have as little interest in as you presumably do.

Juicy Excerpt #17: Just substitute the lowest equity allocation you’d be comfortable with for his 30% level, the highest one for his 90% level, and the mid-point for his 60%, then you will always have an allocation that’s satisfactory for you, and it doesn’t matter if the timing method fails to add value. If it does, that’s a bonus.

Juicy Excerpt #18: If you look at the top chart, with all the talk of poor market
performance, and all the talk of great depressions, the market
is still relatively expensive.  We certainly didn’t put in a 1982 type bottom.

Juicy Excerpt #19: As for his heart being in the right place, honestly I have no idea. At one time he’ll say that God sent him to save the economy and at other times he’ll be talking about how how he quit to make money on the internet and how to get enough page hits to sell ads. I really can’t tell where his heart is.

Juicy Excerpt #20: The data always looks credible in hindsight, the problem is with the real world implementation.

Juicy Excerpt #21: Let me just explain a bit more why I posted about this here. VII has had critics for years, but until Norbert did it in 2008, nobody seemed to have provided a serious investigation of it. I did see a few other investigations, but they just focused on the most recent 20 years or so of data. I just couldn’t understand why. And that bothered me.

Juicy Eexcerpt #22: If you really don’t like market timing in any and all forms, you may not see any point in an empirical investigation. You don’t trust the data to provide proper guidance about how the strategy might work in the future. In that regard, you view me as one of a long line of hucksters trying to sell you some snake oil. I don’t want to be such a person.

Juicy Excerpt #23: Cjking makes an important point. And if I may extend it… if after taking valuations into consideration, you decide that the proper 3 parameters for you are all the same number, then that is okay.

Juicy Excerpt #24: Wade, to be honest, I thought you might be a person who had been lured into spamvertising for a huckster who was banned here. But even if so, I wouldn’t blame you. Personally I’m open to “anything that works”, but whenever someone (not you) tries so so so hard to sell it to me and doesn’t even use it himself, then I get suspicious. I’ve told Rob several times that he is own worst enemy in this respect. He once said “I irritate on purpose. That’s the job.” I don’t think that’s working for him. On the other hand I welcome your explorations.

Juicy Excerpt #25: This strategy brings our the “it’s all backtesting” vitriol like no other . . . and small/value tilters get away without any criticism at all (even though that strategy is pure datamining with no valid economic theory behind it).

I think you have to always consider the issue of macro-consistency: or, what if everyone did it?

If everyone tilted to small/value, then the markets would cease functioning properly. I’m yet to see a Fama French advocate who says, “Well I am very risk-averse, so I’m going to have a significant overweight in large-growth!”

On the other hand, 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.

I think it’s pretty clear that expected returns are higher the lower markets are valued. There’s the original Campbell/Shiller papers on this, or you can just use some common sense to see that expected returns were surely higher in 2009 than in 1999.

If this is the case, and you can avoid behavioural errors in implementation, then 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.

In Strategic Asset Allocation, John Campbell advocates a linear valuations-based strategy, so that you wouldn’t be making big changes in allocation (unless the market had moved in a big way), and this would be just like your usual rebalancing strategy but a bit more flexible.

Juicy Excerpt #26: I don’t think anyone really likes market timing in practice – look at the number of people on this board that loaded up on equities in 2009. Zero?

Juicy Excerpt #27: Wade, as you may be aware, John Bogle has mentioned what he calls tactical asset allocation in his book, Common sense on Mutual Funds (pg 66-67). He suggests that it may be used in response to very high stock allocations, with limits of +/- 15%. He also stresses that it should be done very infrequently.

J. Bogle quote: Cautious TA may have a lure for the bold. Full blown TA lures only the fool.

The problem with moving AA based on valuations is if you do it enough, you will be wrong. Not you might be wrong–you will be wrong. The cost of being wrong at 90% equity outweighs the potential reward in my opinion. At 15%, there is damage control.

This quote from Benoit Mandelbrot is relevant: The market is full of almost-patterns.

Bogleheads.org Site Administrator Says I Represent a “Threat to the Community”

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Alex Frakt, site administrator for the Bogleheads.org forum, acknowledged in a recent post to that forum that I was banned from posting there even though I never violated any of the site’s posting rules. He said that I was banned because I represent a “threat to the community.”

Frakt offered his comments on this thread. The post referring to me (I posted as “hocus” in that community) is the one put forward on January 13, 2011, at 4:14 pm. After saying that the norm in the community is to ban only those who violate posting rules, Frakt writes: “Hocus is the great counterexample, of course. Which is part of the reason why we have an Advisory Panel: to give us the flexibility to deal with threats to the community that do not clearly fall under one of our posted guidelines.”

The history that explains the banning dates back to the morning of May 13, 2002. On that morning, I put a post to the Motley Fool’s Retire Early board asking whether the valuation level that applies on the day a retirement begins needs to be taken into consideration in calculations of the safe withdrawal rate (the inflation-adjusted percentage of his portfolio value that a retiree may use each year to cover living expenses with virtual certainty that his retirement plan will survive 30 years, presuming that stocks perform in the future at least somewhat as they always have in the past). Extensive research was done on this question in the following years in both the Retire Early and Indexing communities and every analysis showed that a valuation adjustment is indeed required. Background on the safe withdrawal rate matter is available at the Google Knol that I wrote on this topic.

I have seen two reactions to my advocacy of  New School (valuation-adjusted) safe withdrawal rate research at every community in which I have posted on this topic. Many community members respond with excitement to learning for the first time how retirement planning (and, by extension, stock investing in general) really works. Thousands of community members have expressed a desire that honest posting on safe withdrawal rates and other important investing topics be permitted at our boards (an article setting forth of the comments of 101 community members expressing this desire is here).

However, there has also always been intense opposition to the idea put forward by individuals who have written books or prepared studies or calculators rooted in the Buy-and-Hold Model of understanding how stock investing works (Buy-and-Hold is rooted in the research of University of Chicago Economist Eugene Fama and posits that investors do not need to change their stock allocations in response to valuation swings). Discussion of the implications of the research of Yale Economics Professor Robert Shiller, who found that valuations affect long-term returns and thereby discredited Fama’s Efficient Market Hypothesis, has been banned not only at the Bogleheads forum but at every large investing board on the internet as well as at numerous influential personal finance blogs. The result of the Social Taboo that has developed since The Stock-Selling Industry elected to spend hundreds of millions of dollars promoting the now (but not then) discredited approach is the investing crisis we are living through today (for more on how the promotion of Buy-and-Hold caused the economic crisis, please check out this article).

I had a long reputation for posting honestly in support of the Shiller model (Valuation-Informed Indexing) even in the face of brutally abusive posting by those seeking to “defend” the Buy-and-Hold Model at the time I put my first post to the Vanguard Diehards forum (the community that meets now at the Bogleheads forum met at the Vanguard Diehards forum before moving to the new site to avoid my postings). My first post generated a hostile response and the site administrators failed to take action to rein in the hate and anger and contempt that came from Buy-and-Holders as discussions over whether valuations matter in stock investing came to dominate the forum over the next several years (I am not able to recall a single time in which a Valuation-Informed Indexer posted abusively).

Matters came to a head in February 2007. Vanguard Founder John Bogle planned to speak at the indexing community’s annual conference. I announced plans to attend. Many expressed excitement that I would be able to put to Bogle the questions that had caused such controversy among indexers for so many years. At this point, the Lindauerheads (Mel Lindauer, the co-author of the book “The Bogleheads Guide to Investing” was the leader of the Goon posters seeking to intimidate those who dared to post their honest view that valuations matter in stock investing) formed a new site where they could be free of the relatively even-handed site administration policies of Morningstar.com. Thus was the Bogleheads forum born. Posters who oppose honest posting have remarked on numerous occasions in the time since how lucky the board community was that their desire to escape my posting freed them from the reach of responsible site administrators. Those advocating Buy-and-Hold at the Bogleheads forum no longer have to deal with those annoying questions about the 140 years of historical stock-return data showing that Shiller is right and Fama is wrong!

Is what Frakt says so? Am I a threat to the Bogleheads community?

By no means. A community that closes itself to questioning is a community in the process of experiencing a slow and painful death. There has never in the history of the indexing community been an issue that has generated even a small fraction of the genuine interest that we saw generated by our explorations of the effect of valuations on long-term returns during the years when such explorations were tolerated. Community members have now suffered huge losses because of the ban and many feel even stronger doubts about Buy-and-Hold today than they felt in the days when questioning of the strategy was permitted. Even Taylor Larimore, another co-author of  “The Bogleheads Guide to Investing,” at one point shortly after the crash acknowledged that he had abandoned Buy-and-Hold in favor of a mysterious “Plan B” because of concerns that his retirement would be in jeopardy if he stuck with the strategy he had advocated for many years at the board (Larimore today has at least for a time returned to generally favoring Buy-and-Hold strategies). Allowing honest posting by all community members would save the community, not do harm to it. It is the ban that is killing the indexing community.

That said, I do represent a threat of a different kind. I represent a threat to Buy-and-Hold. Another way of saying it is that I represent a threat to Get Rich Quick. A strategy that tells investors that they do not need to change their stock allocations even at times of insane overvaluation is a Get Rich Quick scheme no matter how it is promoted in the marketing materials. Where do the Buy-and-Holders think that the money used to send stock prices so high in the late 1990s came from? Was it printed up by Milton Bradley? The money was being borrowed from future investors (Today’s investors! Us!). The unwillingness of the Buy-and-Holders to acknowledge the need to pay back the $12 trillion debt incurred during the Buy-and-Hold years is typical of Get Rick Quick thinking.

I am no threat to indexing or to any indexing community. I aim to become the greatest threat to Buy-and-Hold and to all other Get Rich Quick investing schemes that I can possibly be. Why? Because I don’t believe in Get Rich Quick. Because I believe in long-term investing, data-based investing, intelligent and honest and realistic investing,  investing rooted in the academic research. Why do I believe in these things? Because of the persuasive arguments advanced in support of these preferences put forward by people like John Bogle, Eugene Fama, Burton Malkiel, William Bernstein, and many, many other Buy-and-Holders.

John Bogle does not object to discussions of Valuation-Informed Indexing. He has said publicly that he believes that the concept can work. To be sure, Bogle has shamed himself by failing to stand up to the Lindaurheads in defense of the community that meets at a board bearing his name (and, yes, I have made a personal plea to him to do so). But Bogle himself is not a Lindauerhead, at least not according to his public statements. It is of course absurd that discussion of an investing strategy that Bogle himself says can work is prohibited in a community bearing his name. I think it is fair to say that Bogle’s name is being dragged through the mud each day that the ban remains in place. It casts doubt on all his good work for those who claim to post in his name to make a daily implicit statement that Bogle is not up to the task if defending his investing advice in civil and reasoned discussion.

He’s not up to it, of course! The Lindauerheads are right to be alarmed at the prospect of Rob Bennett asking John Bogle questions re his longstanding investment advice in a public forum. But that should not be such a big deal. The mistake that Bogle and Malkiel and Fama and all the others made is not the first mistake that has ever been made in the history of humankind. There are procedures that we all learn about in kindergarden that we know to follow when we make mistakes that harm so many of our friends in such serious ways. We acknowledge the mistakes! We apologize for the human misery caused by the mistakes! We vow to do better! We move on with our lives!

And do you know what happens when we follow those procedures? The people harmed by the mistakes forgive us. And in time they come to recall that it is not only our mistakes that define us. The humans who make the biggest mistakes are often the same humans who bring about the greatest advances in human knowledge. Why? Because they stick their necks out. Because they take chances in going where none have gone before them. Because they are pioneers.

Bogle is a pioneer. Fama is a pioneer. Malkiel is a pioneer. The thousands of others who have advocated Buy-and-Hold are pioneers. How does the indexing community insure that these pioneers ultimately obtain the respect and gratitude and affection they merited through their hard and well-intentioned work despite the huge losses they have caused through their inadvertent advocacy of the purest and most dangerous Get Rich Quick scheme in history? We insure it by turning the focus away from the ugliness and deception and intimidation and word games we have seen during the Campaign of Terror against our board communities and by placing it instead on a constructive and healing and life-affirming transition from the failed Buy-and-Hold Model to the investing model of our future, Valuation-Informed Indexing.

Valuation-Informed Indexing could not exist but for the contributions of Bogle and many other Buy-and-Holders. But the longer the ban on honest posting on safe withdrawal rates and other critically important investment-related topics remains in place at our boards, the more difficult it becomes to make the case for Bogle and the other Buy-and-Holders to the millions of middle-class investors who have been done such harm by the failure of The Stock-Selling Industry to back down on its dogmatism for three decades after the academic research showed that there is precisely zero chance that Buy-and-Hold could ever work for the long-term investor.

No one posting honestly on what the academic research of the past 30 years says about the dangers of Buy-and-Hold represents any sort of threat to the indexing community. It is the ban on honest posting that represents a threat to us. The ban on honest posting makes us look absolutely awful in the eyes of the millions whose financial futures have been destroyed by our too easy acceptance of Get Rich Quick thinking during a time when it seemed to be paying off (Get Rick Quick of course always performs like gangbusters during out-of-control bulls).

I pray that I will over time come to represent a huge threat to the continued promotion of Buy-and-Hold. I represent zero threat to the promotion of indexing or to the advocacy of any of the many powerful insights through which Bogle and the other Buy-and-Holders have been enriching all of our lives for many, many years. I am the true Boglehead. Lindauer represents only the man’s dark side (at least this is so at the times when Lindauer is playing the role of Enforcer of the Buy-and-Hold dogmas). The future of indexing lies in the promotion of Valuation-Informed Indexing, not Buy-and-Hold.

This is my sincere take re these important matters, in any event.

Hang in, there True Bogleheads! We see signs of a growing interest among middle-class investors in learning the realities of stock investing as revealed in the academic research of the past 30 years on an almost daily basis. As famed portfolio strategist Sam Cooke once put it: “It’s been a long time coming, but Lord I know that someday soon now A Change Is Gonna Come.”

Larimore Acknowledges Errors in Bogleheads Guide, Then Retreats into Further Defensiveness

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Taylor Larimore, co-author of The Bogleheads Guide to Retirement Planning, on Wednesday acknowledged that his book contains errors in its discussions of stock investing risk.

He didn’t say the Three Magic Words. But he inched up closer to doing so than any long-time advocate of the Buy-and-Hold Model has done before (to my knowledge).

Taylor’s words came in a thread at the Bogleheads.org board entitled “The 50 Percent Fallacy.” A community member named “Tadamsmar” launched the thread, saying: “I wonder if there are any Bogleheads here who have made an attempt to square their philosophy of investment risk on the facts rather than on a fallacy?  If so, please speak up.”

Tadamsmar  noted that Page 142 of the Bogleheads Guide asserts that a 50 percent loss is the maximum loss that can be suffered by stock investors. This is of course a wildly false claim. The average loss on the three earlier occasions when stock prices went to double fair value is 68 percent real. On the one occasion when the P/E10 level went above 30, we saw a drop in stock prices of 80 percent real. In the late 1990s, the P/E10 level went to 44, far above what we have ever before seen in U.S. history.

Larimore responded defensively. He claimed that: ” Nowhere does the book say stocks (or any investment) can’t fall more than 50%.”

Numerous other defensive comments were posted. But some reasoned points were offered as well. “DBR” said: “Whether the Bogleheads book literally presents false information at that point is arguable. On re-reading, I can certainly see how a reader relying on no other sources of information could be mislead by the discussion presented there.”

After extensive discussion and obfuscation, Larmore acknowledged: “You are right. Figure 9.1 in the book should not use the words ‘Maximum Loss.’ Thank you for the correction.”

It’s a start. Eight years after we discovered the analytical errors in the Old School Safe Withdrawal Rate Studies, we have not heard any of the authors of the Old School studies or calculators make that clear an acknowledgement of their mistakes.

A few posts later, Taylor returned to Defensive Mode. He said: “Over two dozen Boglehead retirement and financial experts contributed their time and knowledge to our second Bogleheads’ Guide without renumeration. Like any book, it contains mistakes and some things may not be perfectly clear to every reader. Despite its shortcomings, customer reviews at Amazon give our book a 5-STAR rating and it is recommended by many reviewers, including Vanguard. Please tell us what you like about the book.”

Tadamsmar observed in response to one of the many defensive comments put forward by Boglehead.org community members that: “If I make a correct statement and people keep coming back and telling me I am wrong, then I guess this might continue forever.”

Taylor has claimed on earlier occasions that the reason why he favors a ban on posts pointing out the flaws in the Buy-and-Hold Model is that Buy-and-Hold is the only investing approach rooted in “science” and “academic research.”

The Author of the Bogleheads Wiki
Statement on SWRs Speaks Out

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A fellow going by the name “SWR Lover” has posted a comment to Tuesday’s blog entry on the Bogleheads wiki statement on safe withdrawal rates (SWRs), saying that he is the author. We of course do not know this for certain to be so. I find it believable. The group that controls what goes into the Bogleheads wiki has strong connections with John Greaney and with the abusive posters who congregate at Goon Central to organize their work destroying Retire Early boards and Indexing boards. One of the regulars there is “Drip Guy,” and the wording of SWR Lover’s post suggests that he could well be “Drip Guy” under another name. Certainly the reasoning employed by SWR Lover is the reasoning that I witnessed often being put forward by Mel Lindauer (co-author of The Bogleheads Guide to Investing) and his “defenders” during his campaign to block honest posting on SWRs at the Vanguard Diehards board. If SWR Lover is not in fact the author of the flawed wiki statement, he is certainly guilty of possessing the same mindset as the author of those hard-headed and hard-hearted words.

First, a word on why you should read what follows. The Old School SWR findings have over the years been cited in tens of thousands if not hundreds of thousands of newspaper articles on retirement planning. It is rare to hear retirement advice today that was not influenced in some way by these studies. That means that you have been influenced by them. We all take in what we hear thousands of times and all of us have been influenced in some way by these claims. If the Old School SWR studies got the numbers wrong (and they did), we are all at risk of suffering busted retirements somewhere along the line as a result. And the false reasoning that led to the errors in the Old School studies led to errors in the investing advice you have heard and accepted as true in many other areas. SWRs matter. It is critical that they be reported accurately. That’s why I often spend time analyzing carefully statements of the sort we saw put forward by SWR Lover last night. His errors are our errors. When we come to understand why SWR Lover has gotten it all wrong, we come to learn where the rest of us have gotten it all wrong too.

Here is what SWR Lover said in his comment to the earlier blog entry:

“Rob,

“I personally wrote the initial article for the Wiki section on SWR. I also purposely included the statement you see there now:

“Original Author, in Wiki: “…one should always be sure to be clear whether the use is in reference to past or projected SWRs, so that unnecessary argument can be prevented.”

“I did that to illustrate there is no need to misunderstand history versus future. Most folks handle that concept quite nicely and naturally without needing to see such a clause, but I thought it added a nice closed loop to that potential argument(!). It certainly does not mean what you ascribe to it:

“RB on his blog: “This statement implicitly (but not explicitly, to be sure) acknowledges that [“old school studies”.. are not [correct].”

“It does not mean that in any way, shape or form. I know what it means, because I wrote it. My intent was to make sure the record is plain as can be, and I think it actually is. (Well, perhaps except for one person. We do what we can, but sometimes there are limits…).”

These are word games. People use SWR studies to plan their retirements. It is important that people planning retirements have access to correct numbers. Otherwise, they are likely to suffer busted retirements. The historical stock-return data shows that the biggest factor affecting the safety of a retirement is the valuation level for stocks that applies on the day the retirement begins. The Old School studies contain no adjustment for this factor. Thus, the Old School studies get the numbers wrong. At times when valuations are extremely high (as they have been for a good time now), they get the numbers wildly wrong. Those are the realities.

The key phrase in SWR Lover’s comment is: “Most folks handle that concept quite nicely and naturally without needing to see such a clause.” There is a sense in which that statement is 100 percent false and there is a sense in which that statement is largely true.

The “concept” he is referring to is the word game. Do most folks view the Old School studies as trickery? Do they know right off the bat that they are exercises in word gaming? Do they get it that we have about as much chance of learning the SWR by using the methodology employed in the Old School studies as we have of getting the SWR right by picking numbers out of a hat?

They do not. There were hundreds of SWR threads that appeared at the Motley Fool board in the days before I first reported what I knew about SWRs (that was on the morning of May 13, 2002). In none of those threads did anyone ever say that he knew that the Old School methodology was just a sick joke and that the numbers were wildly off and that these numbers were in no circumstances to be used to plan a retirement taking place on Planet Earth (William Bernstein has said that anyone giving thought to using one of the Old School studies to plan a retirement would be well-advised to “FuhGedDaBouDit!”). Every member of that discussion-board community thought that the Old School studies were legitimate (even I thought at the time that the studies were the product of honest effort). Those threads remain available today. What I am saying here can be checked. People have planned retirements by making reference to the Old School studies.

There is a sense, though, in which what SWR Lover is saying here really is so. People thought at one time that the methodology used in the Old School studies was analytically valid. Now they know that it is not. But a good number of the people who have learned as a result of our discussions that the Old School studies get the numbers wildly wrong still use the Old School studies to plan their retirements! This also can be verified by looking at the Post Archives of The Great Safe Withdrawal Rate Debate. This also can be checked.

So we have learned two important things. One, we have learned that our thinking on what it takes to plan a retirement effectively is hopelessly confused. We got it all wrong, and we need to go back to the beginning and start again (that’s what The Retirement Risk Evaluator, the world’s first New School SWR calculator, is all about). Two, we have learned that discovering that a methodology gets the numbers wrong does not necessarily hit investors where they live. It might be that people want accurate numbers when analyzing things in other fields (that certainly has always been my experience!). When it comes to investing, though, an entirely different set of rules applies. In the investing field, people love to be deceived. In the investing field, people applaud inaccuracies. In the investing field, people react with shock and anger and hostility to the idea that a false number might be corrected. Stock investing generally does not work according to the rules of reason.

The latter finding is the more important one, in my assessment. It is of critical importance that the Old School studies be corrected, to be sure. But it is of even greater importance that we come to a deeper understanding of why it is that people want to be deceived in the investing advice they read. That’s more important because doing the work it takes to get the numbers right is a waste of time if people are not responsive to what we come up with.

I say above that in earlier days I believed that the Old School studies were the product of honest effort, suggesting that I do not believe that to be the case today. Am I saying that I think that all the authors and promoters of the Old School studies are engaged in fraud? Yes and no. It is fraud to advise people to use numbers you know to be wrong to plan their retirements (and the errors in these studies are so basic that it is more than a little hard to imagine that I am the first person who has noticed them). But it is a very strange and special kind of fraud we are dealing with. Many of the people advocating that others use the Old School studies to plan their retirements are using them themselves to plan their own retirements. This too can be verified by making reference to the Post Archives of our discussions. So this is an act of fraud in which the person engaging in the fraud is himself a victim of the fraud. Holy moly!

Self-deception is the primary problem here. The deception of others is of course a big problem too. But, if we want to help the people whose retirements are at risk, we need to be practical in our approach. And the practical reality is that we need to deal with the self-deception matter to get to first base. When the people telling lies about SWRs (word games are essentially lies, are they not?) realize that they are destroying themselves by using bad numbers to plan their own retirements, they will stop urging others to use bad numbers to plan their retirements. Does that not make sense?

I of course believe that we should continue to do what we can to get the word out about the false SWR claims advanced in the Old School studies. There are hundreds of community members who have responded with great enthusiasm to our findings, showing that the level of self-deception practiced by stock investors varies greatly; some are capable of seeing that it is a bad idea to use wildly wrong numbers when deciding when to hand in a resignation to an employer. Many others are not capable of seeing this, however. Those many others include (not entirely, but to some extent) big names like John Bogle, William Bernstein and Scott Burns. So our most urgent task today is to come to a better understanding of why even powerful minds feel such a strong draw to self-deception when forming ideas about how to invest. That’s a big story in its own right, bigger than the story about the Old School studies getting the numbers wrong, in my estimation.

I referred to SWR Lover’s comments as “repulsive” in my response in the comments section for the earlier blog entry. The reason why I find the word games repulsive is that word games feed right into this self-deception disease that we all seem to suffer from in the area of investing. We very, very, very much want to believe that things that cannot possibly be so about stock investing really are so. I see it as the most important work project of my lifetime to come to a full understanding of why it is that stock investors destroy themselves in this way over and over again (this is the fourth time in history in which valuations have risen to what they are today — the first three trips ended in bone-crushing losses to all who invested heavily in stocks despite what their common sense told them about the risks of doing so at these sorts of price levels). Those who are engaging in word games are doing the opposite of what I am seeking to do. I am trying to make things more clear to people, they are trying to make things less clear. It is in this sense that I view the use of word games in this area as “repulsive.”

I do not view SWR Guy repulsive as a person. I am grateful that he let us know a little bit of what was going on in his mind when he wrote the gibberish that now serves as the Bogleheads wiki statement on SWRs. I contest the ideas put forward by SWR Guy to the strongest extent imaginable. He and I are coming at this from entirely different places. I hope that our personal interactions can be warm ones and civil ones and friendly ones and helpful ones. That’s because I want them to be learning ones. SWR Lover is not just destroying others with his word games. He is destroying himself at the same time. I think if benefits all aspiring early retirees for us to learn what it is that makes it seem in his eyes that that is an appealing thing to do.

Today’s Passion: I argue in an article entitled Does John Greaney Believe His Own Safe Withdrawal Rate Claims? that, if John’s best friend asked him about SWRs, John would probably say the same sorts of things that he says in his study and on our boards.

The Boglehead Wiki Statement on Safe Withdrawal Rates

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The Bogleheads wiki contains the following statement on safe withdrawal rates (SWRs) under the heading “Controversy”:

“Unfortunately, the term ‘Safe Withdrawal Rate’ is necessarily an ambiguous term. This is because initial methods utilized historical data to statically determine what would have been safe given the actual results that past portfolios would have generated with the variables given. The next logical step, of course, was to use that information to predict future SWRs. Either use is technically correct, but one should always be sure to be clear whether the use is in reference to past or projected SWRs, so that unnecessary argument can be prevented.”

Set forth below are my reactions:

1) The statement is a positive development. There was a time when “defenders” of the Passive Investing approach were asserting that the Old School SWR studies are accurate. This statement implicitly (but not explicitly, to be sure) acknowledges that they are not. The SWR is the product of a mathematical calculation. It is obviously not possible for the Old School studies (which include no adjustment for the valuation level that applies at the beginning of the retirement) and the New School studies (which do) to both be accurate. For years, the Goons have asserted that anyone arguing that an adjustment for valuations is needed is “mentally ill.” This statement says that the New School studies are “technically correct.” This is a big advance from the former Goon position and represents an implicit acknowledgment that the Old School studies are analytically invalid (if it is “technically correct” to include a valuation adjustment to calculate the SWR, it is analytically invalid not to include such an adjustment).

2) The statement is logically incoherent. It is obviously not possible for both the Old School studies and the New School studies to be “technically accurate.” Either an adjustment for valuations is required to determine the SWR or it is not. The historical stock-return data shows beyond any reasonable doubt that a valuations adjustment is required. Many experts have confirmed this. For example, William Bernstein, author of The Four Pillars of Investing, has advised any investor giving thought to using one of the Old School studies to plan a retirement to “FuhGedDaBouDit!”

3) The statement is disingenuous. The statement asserts that the New School studies are “technically correct.” Yet the remainder of the wiki article contains references only to Old School studies. Did the Bogleheads that crafted the remainder of the article not bother to read the “Controversy” statement?

4) The statement is unhelpful to its readers. The statement does not include a link to The Retirement Risk Evaluator, the first New School SWR calculator. There is no excuse for the failure to provide such a critical link in a wiki treatment of this topic.

5) The statement is false. It is not so that the SWR phrase is “ambiguous.” The “safe withdrawal rate” is the withdrawal rate that is safe presuming that stocks perform in the future at least somewhat as they always have in the past. I have seen thousands of discussion–board threads in which investors saw references to safe withdrawal rates and were quite naturally led by them to believe that the matter being discussed was what withdrawal rate was safe. The Old School studies identify the withdrawal rate that would be safe in an imaginary world in which valuations have zero effect on stock returns. There is nothing “ambiguous” about the error made in these studies. It is a clear error and an obvious error and a highly significant error.

6) The statement is reckless. The statement appears in a wiki article that contains links (without warnings) to both the Greaney SWR study and to the FIRECalc SWR calculator. I notified Greaney of the errors in his study six years ago. I notified Bill Sholar, author of FIRECalc, of the errors in his calculator not too much later. Neither the Greaney study nor FIRECalc have been corrected in the time since. Both Greaney and Sholar have advocated bans on honest posting on SWRs at discussion boards at which they participate.

7) The statement is silly. It urges that “unnecessary argument” be avoided. I have had a front-row seat to the first six years of The Great Safe Withdrawal Rate Debate. I am not able to recall a single incident in which a poster supporting the idea that honest posting on SWRs be permitted on our boards engaged in any “unnecessary argument.” I witnessed tens of thousands of cases in which “defenders” of the Old School studies engaged in endless rounds of word games and abusive posting. The way to avoid unnecessary argument is for those now “defending” the Old School studies to urge corrections of the errors in them. Once the Old School studies are corrected, there is nothing to argue about.

8 ) The statement provides a false history of the development of our knowledge of how to calculate SWRs. Investing experts have been using the Old School studies to advise aspiring retirees for a good number of years now. The claim has always been that these studies report the SWR, not “what would have been safe” under the convoluted scenario described in the wiki statement. This is so for obvious reasons. An aspiring retiree is not seeking to learn what withdrawal rate “would have been safe” under some convoluted scenario; she is seeking to learn what withdrawal rate is safe for someone beginning a retirement at the time she is planning to begin her retirement. Even Ataloss, one of the lead Goons, has said that, if the Old School studies get the SWR number wrong, they are “worthless” (I view this as an overstatement, but I certainly do not believe that aspiring retirees should be using the Old School studies to determine what withdrawal rate to use in their plans).

9) The statement contains no apology to the thousands of fine community members in the Retire Early and Indexing communities who either participated honestly in our discussions or expressed a desire that honest posting be permitted. Given what these community members have been put through for six years now by the “defenders” of the Old School studies, an apology is obviously appropriate.

10) The statement does not explain the importance of our discovery that the Old School studies are analytically invalid. The Old School studies are the product of a Passive Investing mindset. Passive Investing advocates recommend that investors not adjust their stock allocations when valuations move from reasonable levels to dangerously overpriced levels. The Old School studies posit that the SWR is a constant number. The connection is clear; the idea that the SWR is a constant number follows from the idea that one’s stock allocation need not be adjusted when stocks go through dramatic price changes — the flaw in both claims is a belief that valuations don’t matter. Our finding that the Old School studies are analytically invalid throws serious doubt on all valuation-related claims made by those advocating Passive Investing, not just the Old School SWR claims.

11) The statement contains no discussion of a publicity campaign to warn the retirees taken in by the false claims of the Old School studies. This is our most pressing need today. The point of learning about investing is to help investors to avoid falling into traps. The point of SWR analysis is to prevent retirees from suffering busted retirements. What purpose is served by talking about the “controversy” without outlining the steps that need to be taken for the controversy to lead to positive action?

12) The statement does not explore the implications of our SWR findings. Our finding that the Old School studies get the number wrong served as the beginning of The Great Safe Withdrawal Rate Debate, not as its ending. The Stock-Return Predictor is the product of these discussions. We have been using what we learned about retirement investing from our examination of the flaws in the Old School studies to develop tools and strategies to help investors in the asset accumulation stage for some time now.

13) The statement ignores the Goon phenomenon. It is impossible to discuss The Great Debate in a fair and complete and accurate and balanced way without making reference to the role played by the Goons and by the site administrators, experts, and ordinary investors who have tolerated their presence in our community for so long now.

14) The statement fails to discuss investor emotions. It is clear from our discussions that many of today’s stock investors are emotionally invested in stocks and in all likelihood will remain so for so long as prices remain at sky-high levels. This is a reality of critical importance to any informed understanding of the “controversy” that has evidenced itself in our investing discussions of recent years.

15) The statement offers no recommendations for dealing with the abusive posting that has destroyed or damaged a number of Retire Early and Indexing boards. Again, why not address the practical?

It’s not a perfect statement. The reality remains, however, that it evidences an inching in the right direction. At this rate of progress, honest posting will be permitted at all the boards well before the close of the 23rd Century.

I’m joking! I do see positive signs and I think it is fair to classify this statement as one. We need more, a lot more. But progress is being made over time and it’s every bit as much a mistake to become too pessimistic as it is to become too optimistic. Let’s hope that a good number of our fellow community members are taken aback by this wiki statement and prompted by it to study the SWR matter in a good bit more depth. I see it as being entirely possible that that will happen and in that event the statement will end up pushing things forward. Let us pray!

Today’s Passion: Dallas Morning News Columnist Scott Burns has described my efforts to get the Old School SWR studies corrected as “catastrophically unproductive.” No, honestly!

“The Problem Is Human Nature.”

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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:

The investment community kicked you out. Wade Pfau stopped talking to you. The Bogleheads never let you in. Your wife divorced you.
You still think the problem is everyone else and not you.

The problem is human nature. We all have a Get Rich Quick/Buy-and-Hold urge. The job of investment experts is to help us overcome that urge, to engage in valuation-based market timing to the extent needed to keep irrational exuberance under control. There was a time when we didn’t know how stock investing worked and some people thought that Buy-and-Hold might be okay. Now we have 44 years of peer-reviewed research showing us otherwise. But of course we can’t get to the place where we all deep in our hearts want to be without the Buy-and-Holders learning how to pronounce the words “I” and “Was” and “Wrong.”

We are close. I think we are going to get there. If there had never been any abusive posting or any criminal behavior, we would have gotten to where we need to go many years ago. People who work in this field are like people who work in any other field — they want their work to help people. I say that we should let them. We will all be living better and richer and fuller and freer lives once we do.

I sincerely believe that the Greaney retirement study lacks a valuation adjustment. I believe that more strongly today than I did on the morning of May 13, 2002.

My best wishes to you.

Rob

“The Extreme Isolation That You Are Referring to Just Makes Me Feel All the Stronger That We Need to Open Every Site to Honest Posting re the Peer-Reviewed Research. It Shows How Messed-Up Things Have Gotten in the Buy-and-Hold Era.”

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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:

How many years has it been since you have had an actual conversation with anyone from the investment community?

There is a guy from California who liked my Value Wslk columns. He used to write to me to comment on them on a fairly regular basis.

Outside of that, it’s been a long, long time. Probably since Wade Pfau flipped, which was the same time at which I was banned from Bogleheads.

There shouldn’t be any isolation whatsoever for those who believe that Shiller’s Nobel-prize-winning research is legitimate research. You’re trying to make some negative point by bringing this up. And of course it’s true that the isolation is very painful for me. I certainly don’t say different. But I want to end that. I want to see everyone who believes that Shiller’s research is legitimate participating at every site with no worries whatsoever that they will encounter any sort of abusiveness so that we all can learn from them. The extreme isolation that you are referring to just makes me feel all the stronger that we need to open every site to honest posting re the peer-reviewed research. It shows how messed-up things have gotten in the Buy-and-Hold Era. I think we draw opposite sorts of conclusions from the phenomenon to which you are referring.

If everyone who believes that Shiller’s research is legitimate had insisted on his or her right to post honestly going back to the first day, I obviously would have not run into any trouble when I pointed out the error in the Greaney study. In all likelihood, someone would have pointed it out long before I came on the scene. So it seems clear to me that living in fear is not the answer. It’s too many people living in fear that caused this crazy, dangerous situation. So I make an effort not to do that.

Rob