A Rich Life

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

Ed Rager, Mel Lindauer and Taylor Larimore to Rob Bennett: “You’ve Constantly Misquoted, Distorted, and Disrespected Jack Bogle and Bill Bernstein. Your latest Post “Jack Bogle’s Big Mistake” Was, in Our Opinion, the Final Straw. Jack and Bill Both Join Us at Our Private Events Because They Enjoy Meeting with Friendly, Like-Minded Diehards in a Relaxed and Secure Atmosphere….You Will Not Be Allowed to Attend.”

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While I was looking through my old e-mails to recover the ones that I sent to the Morningstar site administrators and reported on in the last few blog entries, I came across the e-mails that I sent to sign up to attend the Vanguard Diehards Conference with John Bogle in 2007. I had intended to ask Bogle questions about the cover-up of the errors in the Old School safe-withdrawal-rate studies, which I had reported on at a Motley Fool discussion board on May 13, 2002, and which have not been publicly acknowledged by the “experts” in the investing advice field until recent months. I thought that these e-mails too were worth reporting on. I did not receive a response to the question I posed in the last e-mail.

Set forth below are the texts of three e-mails: (1) the e-mail that I sent to Ed Rager on February 17, 2007; (2) the response that I received from Ed on February 18, 2007; and (3) the reply that I sent on Feburary 19, 2007.

Ed:

This is Rob Bennett (“hocus” on the boards). I’d like to make my reservation to attend Diehards VI.

I live in the area. So I do not need a hotel reservation.

My personal information is:

[….]

Please let me know what I need to do to transfer the registration fee of
$189.

Thanks for all the work you did putting this together.

Rob

Hi Rob:
Our Diehards get-togethers are private social meetings of friends and like-minded souls who love, admire, and respect Jack Bogle and his teachings.  You’ve constantly misquoted, distorted, and disrespected Jack Bogle and Bill Bernstein.  Your latest post “Jack Bogle’s Big Mistake” was, in our opinion, the final straw.  Jack and Bill both join us at our private events because they enjoy meeting with friendly, like-minded Diehards in a relaxed and secure atmosphere.  We want them to continue to enjoy and attend our private social events.  Therefore, we regret to inform you that you will not be allowed to attend.
Ed, Taylor and Mel
<br>
Ed, Taylor and Mel:Boo, baby!These statements are of course absurd.Have you notified Jack Bogle of what you have done?

If you have notified him, would you please let me know his reaction?

Rob

Morningstar Site Administrator to Rob Bennett: “If the Post Where You Were Threatened Did Not Occur on the Morningstar Boards, Then Why Bring It Back to Life on the Morningstar Boards?….Consider This a Formal Warning.”

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Yesterday’s blog entry reported on an e-mail that I sent to Morningstar.com site administrators on April 18, 2006, reporting on death threats advanced by John Greaney at an earlier time that were being used by Mel Lindauer, co-author of the book “The Bogleheads Guide to Investing” at that time to intimidate Vanguard Diehards community members into not posting honestly on the errors in the Old School safe-withdrawal-rate studies. Set forth below is the text of the response I received from Morningstar on April 18, 2006, followed by my reply to that response. I did not receive a response from Morningstar to the question I posed in that reply.

Hello Rob,

Thank you for writing.  Unfortunately we are not concerned with the goings-on in other forums outside of Morningstar and have no control over other forums.  If the post where you were threatened did not occur on the Morningstar boards, then why bring it back to life on the Morningstar boards?  As far as we can tell, this constitutes as a posting of misleading information.  Consider this a formal warning.

If you have any additional questions or comments, please don’t hesitate to reply to this email and I will be happy to further assist you.

Best Regards,
Matthew B
Morningstar Support

Matthew:

I certainly agree that the Greaney matter should not be brought to the Morningstar boards. The reality is that it has been brought up there by a number of posters. My post was an attempt to explain to my fellow community members the background as to why this was happening. I did this only after the matter had been injected into discussions held at Morningstar on numerous occasions.

I certainly am okay with the idea of not making further reference to the Greaney matter at the Morningstar boards.

Would it be helpful if I were to notify you on future occasions on which the Greaney matter is brought into the discussions at Morningstar by other posters?

Rob

Rob Bennett to Academic Researcher Wade Pfau: “I Strongly Believe That There Are Things You Must Do and Things You Must Not Do to Protect Your Reputation As An Ethical Person. I Believe Today That There Is Serious Reason to Question Whether You Have Managed to Stay on the Right Side of the Line…. Are You Insane, Man? Please Think!”

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Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on January 1, 2012. My next e-mail to Wade was dated April 5, 2012, and was titled “Concerns Re You Going to the Dark Side.” The text is set forth below.

Wade:

I hope things are going well with you.

This e-mail will not be a pleasant one to write (or to read). I don’t think I have any choice but to write it, given recent developments.

Before I start, I want to state the obvious preface. I have great feelings of respect and affection for you personally and I admire your research work probably more than anyone else alive on Planet Earth today. In ordinary circumstances, that would be the basis for a wonderful relationship. As you know, there have been things that stood in the way of that since our first communications. Those obstacles have always saddened me. My strong sense is that the problem side of the relationship has grown much worse since your postings at my blog re whether Bill Bengen should correct the errors in his SWR study. The purpose of this e-mail is to (1) attempt to confirm whether that is indeed the case or not; and (2) get some things off my chest that I need to get off my chest to fell that I have always dealt with you in good faith.

You are of course aware that there has been an organized effort on the internet to destroy my reputation which has been led by Mel Lindauer and John Greaney  and which has made it impossible for me to earn a living for 10 years now. I believe you know that I plan to bring lawsuits against the sites that have permitted the Lindauerheads and the Greaney Goons to engage in defamation and death threats and other tactics to block numerous board and blog communities from learning what they need to learn what the last 30 years of academic research says about safe withdrawal rates and other important investment-relarted topics.

I believe that we all have a responsibility as part of the ethical demands of our respective professions to speak up when we see this sort of behavior. I have of course spoken up. You have spoken up on a few occasions in small ways but generally have kept quiet re this aspect of things. It’s not easy to say where precisely the line should be drawn re speaking up or not speaking up. My problems are of course not your problems and I of course do not expect you to feel as  great a concern re this aspect of the question as I feel since I am directly involved. That said, I strongly believe that there are things you must do and things you must not do to protect your reputation as an ethical person. I believe today that there is serious reason to question whether you have managed to remain on the right side of the line.

I was questioned the other day by one of the Goons as to whether we were still in e-mail communication. My answer was that I presumed we were. I don’t recall us having a back-and-forth discussion since the day you posted on the Bengen blog post. My recollection is that I sent you a copy of an e-mail that I sent to a visitor at my site because he referenced you in the e-mail and I wanted you to see both his words and my words. I did not receive a response to you re that e-mail but I did not see that as being a big deal.

Today, I was communicating with another financial blogger and wanted to send him a link to the blog post in which you explored Valuation-Informed Indexing and found that it beat Buy-and-Hold in 102 of 110 of the rolling 30-year time-periods in the historical record. As you obviously know, this post of yours was a big help to me in trying to overcome the Campaign of Terror against me and the many board communities in which numerous community members have expressed a desire that honest posting on SWRs and other valuation-related topics be permitted. The goal of the Internet Sewer Rats has been to persuade my potential readers and customers that I have not done important work and your mention of my name in a post that shows that I was right all along made it impossible for them to continue to maintain that position.

You have removed my name from the post. Why?

You of course have a right to re-write posts. In this case, however, the action is an exceedingly odd one. You have been attacked by Lindauer yourself. You have acknowledged in posts that Drip Guy has sent you e-mails and you have changed positions you have taken in discussions at the Bogleheads board as a response to his threats. When you contacted the Trinity authors about correcting the errors in their SWR study, the Greaney Goons put up posts threatening to get
you fired from your job if you followed through and you then retreated from your position after letting me know that you were indeed concerned that you might lose your job as a result of their actions. We of course both know that the Sewer Rats have employed similar tactics in numerous other cases.

I believe you are making a huge mistake, Wade.

Please don’t hear that as a threat. I hope you will hear it as a friend speaking to a friend. I said similar words to Greaney 10 years ago and he is where he is today because he ignored those words (Greaney was my personal friend in earlier times). I said similar words to Lindauer. It breaks my heart to see another one of my friends take this horrible path. Are you insane, man? Please think!

I am a journalist, Wade. My job is to tell this story in as honest and as complete and balanced way possible. I take the responsibilities of my profession seriously and I will honor them. I WILL let personal friendships influence me (I have done
this with Greaney on many occasions). I think it would be inhuman of me not to do so. But I WILL also honor my responsibilities to my readers.

There are millions of middle-class people who have been done great harm by this economic crisis. They need to know the story here. The hardest question for them to understand is — Given that the academic research has shown for 30 years that Buy-and-Hold can never work for any long-term investor, why are there still people today advocating it? I need to tell BOTH sides of that story. That’s my job.

My strong hunch is that you would prefer to stick to the research and keep away from all this ugly junk. Guess what? Every single one of us feels the same way. The full reality here is that the reason your research has not received the attention it merits (I understand that you have received a great deal of attention and that that attention is fully deserved) is because people cannot come to terms with the ugly, emotional side of all this. If our free market economy is to survive for much longer into the future, we all need to work up the courage to deal with that side of things. We need to do so with love, to be sure. But we need to do so with honestly as well. There is no other way.

If I hear a response from you that indicates that you want to deal with the issues at stake here in a responsible way, I will do whatever I can to put in place a process that will work to help every single person involved come out of this looking as good as it is today possible for them to look. That’s the love part of the formula.

The honesty part of the formula is that, if I do not hear from you, I need to report on what you have done in this case and in your other interactions with the Goons on the Bogleheads Forum and elsewhere. I hate being put in these circumstances as I know you hate being put in these circumstances. The bottom line here is that these are the circumstances into which we were born and we both need to work up the courage to make the best of them.

Please always know that, if you see something that I have written and you feel that I have not told things in a precisely fair way, I will be thrilled to give you space in the article or blog post to tell your version of events in your own words. My preference is that it be done in that way.

Please also know that I will of course always respect the work you have done. I very much still believe that you are someday going to win that Nobel Prize and that we are going to see your name on the front page of the New York Times. It will be a great day for all of us when that happens.

Please also know that I will do everything I can to slant things as much as I can in your favor without failing to honor my obligation to my readers to provide them with the detail they need to hear to  make sense out of the amazing circumstances that apply in InvestoWorld today.

Please also know that I will always think of you as a friend and will always wish the best for you and will always be\ honored to be associated with you in any way (even if this crazy mixed-up world of ours puts me in circumstances in which I need to name you in lawsuits at other times!).

I will close by letting you know of three things that I have in mind at the moment (the purpose of this e-mail is to assure myself that I have done every last thing that I can do to avoid going ahead with these steps):

1) I am going to start a thread at the Goon Central board letting them know that I have sent you this e-mail (without posting the text).  Drip Guy asked me about you directly yesterday, which suggests to me that he feels you have been compromised. I argued yesterday that this was not the case. I don’t want the Goons thinking that I play games re this sort of thing and I have been careful always to respond honestly to their questions. So I think I need to let them know that my sense of where things stand has changed as a result of what I learned today;

2) I expect to post the text of this e-mail at my blog within another week or two. This is obviously an important development in the saga. If you have indeed gone to the Dark Side, that is a major win for the Goons, who have been feeling greatly weakened in recent months aside from this development; and

3) I am in the process of writing a long article that will detail 101 incidents of this nature (you are not the only one who is afraid of what the Goons will do to your reputation if you state your honest beliefs about investing in clear terms!). You are certainly not the focus of the piece. But my expectation is that you will be mentioned in five or so of the incidents. I just want you to know that that is in the works as I feel that each time we go a step down the dark path, it makes it harder to move to the better path for all concerned. How I wish that others could see this point as clearly as I do!

The Goons are not going to win, Wade. They CANNOT win. If we don’t help people learn what they need to learn about stock investing, the numbers show that the whole thing is going to go down (please ask if you have questions about this
aspect of things). There was a big change in people’s attitudes after the 2008 price crash. I’ve been doing this for 10 years and I can tell you that nothing had as much impact as that. The next crash is going to hurt worse (because it follows on
so many down years) and is going to cause a much bigger change in public opinion. You want to be positioned on the right side of things when that happens. We are going to need to act quickly then and we need you working with us!

If you have particular concerns or questions, please let me know of them and we can do out best to resolve them when they can be resolved with relative ease.

I cannot post dishonestly on safe withdrawal rates. It is insane that I was ever asked to do this and it is insane that there is even one responsible person who ever thought that it might be possible that I would go along with such a demand. Just
about anything else is negotiable because, once we achieve the right to post honestly on that topic, a lot of the ugly feelings of shame will dissipate. I cannot give an inch on that one. For reasons that should be obvious to all reasonable people.

Sorry for the long e-mail. I hope it leads to good things!

I wish you the best in all your future endeavors, my good (non-Goon, please?) friend!

Rob

Academic Researcher Wade Pfau: “This Is a Real and Unavoidable Concern. Someone Has to Be Strongly Committed to the [Valuation-Informed Indexing] Strategy to Not Deviate at the Worst Possible Time.”

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Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on February 25, 2011. He sent his response later the same day.

Wade thanked me for my messages, saying that our correspondence “gives me a lot to think about.”

He offered an observation regarding one potential pitfall for those following a Valuation-Informed Indexing strategy. He said: “The worse thing would be if he abandoned the valuations strategy in 1999 to join his friends with 100% stocks.  I
think this is a real and unavoidable concern.  Someone really has to be strongly committed to the strategy to not deviate at the worst possible time.  But I think people can do it if they get a firm understanding about the historical data.”

I sent an e-mail to Wade on that day offering further comments on his exchanges with Drip Guy and other Goon posters. The text is set forth below.

Wade:

You’ll never find consistency in the statements of Drip Guy and the other Goons. Their primary aim is to block fruitful discussions and they will say whatever needs to be said to achieve that aim.

I was FORCED to put up the post of May 13, 2002, that kicked off The Great Safe Withdrawal Rate Debate. Greaney founded the Motley Fool’s Retire Early board. I built the board into the most successful board at the site (posting only about saving). I had to take time off to write my book and a fellow named “Wanderer” became the best poster. Wanderer committed the “crime” of saying that he thought investing in real estate (instead of stocks) could make sense at times. Greaney signaled to his Goons that he wanted Wanderer gone and the deed was done. Greaney’s SWR study was the tool used (if the SWR can never drop below 4 percent, the long-term return for stocks is implicitly always 6.5 percent real and stocks thus can never be beat on a risk-adjusted basis (no need to study anything to invest in a stock index) by other asset classes. If I did not do something at that point, the board could never again serve as a useful place to learn about planning for an early retirement.

By pure coincidence, John Walter Russell had retired the week I put up the first post and was looking for something constructive to do. He did the first New School research on the sixth day of the discussions (May 18, 2002) and found that the sensitivity numbers for the Old School SWR studies were poor. Lots of community members got very excited about learning more.

From that point forward the battle has been over whether honest discussion should be permitted or not. Mel Lindauer (co-author of “The Bogleheads Guide to Investing”) and others knew who I was when I put my first post to the Vanguard Diehards board in July 2005. So my first post was met with abusive posting. Lindauer and others demanded that Morningstar ban me because I was not willing to post dishonestly but Morningstar was not willing to go along given that I had never violated any posting rules. When I announced an intention to appear at one of the annual meetings (where I would be able to direct questions to Bogle), the Lindauer group formed the new Bogleheads board off the premises of Morningstar.com and encouraged people to switch boards. Now the Lindauer/Drip Guy group does not need to get an independent site administrator to impose board bannings and they can maintain the ban without anyone being able to ask embarrassing questions.

You’ll never get anywhere with Drip Guy. I don’t mean to say that he does not follow Buy-and-Hold principles in his own investing. I believe he does. I asked Greaney how much he lost in the crash and he said “well in excess of $1 million.” That persuades me that they personally follow what they preach. But they have zero willingness to entertain the possibility that they have made mistakes. That by itself is not a problem (except for them). The problem is that they also have zero willingness to permit the hundreds of community members there who would like to be able to discuss both sides in civil and reasoned discussions to do so. I see that as a BIG problem in scores of different ways.
There are smart people in the community who say helpful things. But once honest posting is banned the thing becomes a corrupt enterprise.

It might be that Drip Guy and the others would play it a different way if they had a chance to do it over. But they now have to deal not only with having been wrong on SWRs but also with having destroyed numerous boards and blogs in their efforts to block community desires that honest posting be permitted. Drip Guy doesn’t feel even a tiny bit inclined to own up to that, according to every sign I have seen from him. So he often talks incoherent babble. He doesn’t see himself
as having any other choice at this point.

Sorry for the long answer. But I see no other way to help you make sense of the Drip Guy matter and of the fact that a good number of smart community members fail to speak up about it when it becomes an obvious issue.
They know that Drip Guy is in the Lindauer camp. That’s what matters as a practical reality, not whether what he says makes sense or not. And Bogle appears with Lindauer at the annual meetings. Community members there have noted that Bogle allows photos to be taken of him and Lindauer standing next to each other. That sends a signal to people as to what can and cannot be said at the forum.

That’s what needs to change. The entire Campaign of Terror against our board and blog communities comes crumbling down on the day that Bogle appears in a public forum and says the magic words “I” and “Was” and “Wrong” or the somewhat- less-helpful-but-still-magic words “I’m” and “Not” and “Sure.” When those words are said, all of the negative energy converts to positive energy and from that point forward everyone is working together to learn how stock investing works in the real world instead of pursuing counter-productive political agendas. No one gets left behind then. Learning how stock investing works (for the first time — the study of stock investing was
never a systematic academic enterprise before the research was done on the efficient market theory) is a win/win/win/win/win with no possible downside for anyone.

Rob

“The Regulars (at the Bogleheads Forum) Did Not Want This Message (That the Old School Safe Withdrawal Rate Studies Get the Numbers Wrong) Being Heard Because of the Board’s History re This Message”

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Yesterday’s blog entry reported on an e-mail that I received from academic researcher Wade Blog on January 5, 2011, in which he expressed the view that an appropriate title for a thread at the Bogleheads board would be “Yes, Virginia, Valuation-Informed Indexing Works!” My response is set forth below.

Wade:

I obviously would love to see you use that title, Wade. And I think that would do a lot to move things in a positive direction.

As I am sure you understand, there are some delicate matters in play here. I am of course grateful for anything you are able to do to open things up and I will of course participate in a constructive way to the extent that it ever becomes possible to do so.

People are defensive and embarrassed (and even ashamed and even fearful of facing legal liabilities). I think that’s the true reason why there were so few views on your third thread. What usually happens in that a few of the regulars posts to a thread and then the far larger number of non-regulars feels comfortable joining in. In the case of that third thread, the regulars did not want this message being heard (because of the board’s history re this message). So they let the thread die. There was a day when every SWR thread got HUNDREDS of posts in that community.

It has never been my intention to make anyone feel bad. That community has huge potential. I have learned a great deal from lots of people there and I have lots of friends there who have said many kind thing about me and my work. The problem is that some have taken dogmatic positions and feel that they cannot back down no matter what. I believe that everyone should be expressing his or her sincere views, but “everyone” obviously includes me and the others who believe that valuations affect SWRs.

I believe that it will all get worked out in the end. The sooner that happens, the better it will be for every single person involved. But there are limits to what I can do to make good things happen. I need to wait for events to turn in a positive direction. When that happens, I will be doing all that I can to bring things to a better place for every single person involved.

Rob

Wade Pfau: Bogle in Many Cases Has Said Things “Not All That Different From What You Said”

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Yesterday’s blog entry set forth the text of a an e-mail that I sent to academic researcher Wade Pfau on December 16, 2010. Wade responded the next day.

Wade said in his December 17 e-mail that: “In thinking about it further, I owe you further apology as my comment was based on a misunderstanding about your past claims.” He explained that: ” I understood that you meant this as the safe
withdrawal rate, but somehow I still confused myself into thinking that this number represented your prediction for the actual withdrawal rate.  If it was a prediction, then naturally you would need to indicate the uncertainty surround it.  But it is not a prediction.  It is just a lower bound that should be safe. So you don’t have to be so worried about its precise value. ” He speculated that the person who had suggested in an earlier thread at the Vanguard Diehards board that I had been dogmatic in my posting “made a similar mistake” and that this mistake “confused my ability to understand your response.”

He added that “actually I am a neophyte to the whole withdrawal rate debate.  I didn’t even know about Bengen or the Trinity study until July” but “now I am quite interested in this topic.”

Wade expressed confusion over “why some Bogleheads are so threatened by using valuations.” He noted that John Bogle has in many cases said things “not all that different from what you said.”

He concluded the e-mail with a kind compliment. He said: “I should also just say that you are a very good writer….Your writing really commands attention.”

The text of my response is set forth below:

Wade:

That all sounds good.

Please enjoy your week away. I expect to send you an e-mail next week that will provide a link re your question about the timing of John’s work and perhaps address a few other substantive points. But I of course understand that you will not see it until the following week.

Bernstein’s discussion of SWRs is on Page 234, if I recall correctly. I have cited it so many times over the years that I have the page number memorized. The claim that I often make is that the Old School SWR studies are “analytically invalid” and I often cite Bernstein’s words in support of this claim. One of my fellow community members who does not like me using that phrase sent Bernstein an e-mail asking him if he agrees that the Old School studies are “analytically invalid.” Bernstein said that “of course” they are analytically valid. But he followed that up by saying that anyone giving thought to using one of them to plan a retirement would be well-advised to “FuhGedDaBouDit!” That’s the point that I mean to convey with the claim that they are “analytically invalid”! The purpose of the studies is to help people plan retirements. They are not designed in such a way as to be able to do that effectively. So in my eyes they are analytically invalid. They do not the job that they were set up to do.

It may make you feel better to know that John Walter Russell also made the mistake of confusing the number that is at the lower bound of the confidence interval (the SWR) with the number most likely to turn up. John and I exchanged about 10 e-mails on this point a long time ago. I agree with you that there’s a good chance that the other poster in the thread you read was making a similar mistake. This is not intellectually difficult stuff (at least not the parts that I understand — I have no background with the statistical tools). But there is an undercurrent here that is EXTREMELY counter-intuitive. I have seen it throw many smart and good people off track. I of course would like to be able to figure out how to communicate the points in a way that avoids the confusion that enters into just about every discussion of these matters. I have picked up some clues as to how to do that over time. But it is the hardest job that I have ever tackled in my life. The way to spin this in a positive way is to observe that, if the confusion is today very deep, the prospect of making a giant leap forward in our understanding of how stock investing works once we overcome the confusion is also great.

Your words about John Bogle are 100 percent right on! It was by reading Bogle’s “Common Sense on Mutual Funds” in the mid-1990s that I got on the track that I am now on. I am the biggest Boglehead in the world. The investing strategy that I recommend is called Valuation-Informed Indexing. It is a mix of Bogle’s best ideas and Shiller’s best ideas. I say that Bogle and Shiller go together like chocolate and peanut butter. The thing that I say that some view as anti-Bogle is that Bogle made the biggest mistake in the history of personal finance when he said that it is possible to “Stay the Course” without being willing to change your stock allocation in response to big valuation shifts. But I don’t see it as being such a big deal that Bogle made a mistake. We obviously all make mistakes and Bogle’s ideas have led to many breakthroughs (including Valuation-Informed Indexing — there clearly would not be any VII today without the insights contributed by Bogle).

It may be that some of the anger felt by some of the Bogleheads is BECAUSE my ideas are so influenced by Bogle’s. The angry ones could dismiss my ideas easily if they differed in many ways from Bogle’s. Because they are so closely related,
it is hard for them to dismiss them. Yet the strategy recommendations are very different. In January 2000, a Valuation-Informed Indexer would probably have been going with a stock allocation of about 10 percent. A Buy-and-Holder would
probably have been going with 70 percent. That’s a big difference! My only difference with Bogle is over the valuations question, but valuations are so important that we often end up in very different places.

As you note, it’s not that Bogle rejects the idea that valuations affect long-term returns. I learned this from him! It’s that Bogle does not IMPLEMENT the insight. He SAYS that valuations matter. But his allocation recommendations do not take valuations into account. That’s the entire deal. That’s the only real question in dispute in the eight-year-long debate.

Bogle said in an interview that he thinks VII can work:

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

But when I sent him an e-mail asking for his help in dealing with the abusive posting, he did not respond:

http://arichlife.passionsaving.com/2009/07/30/my-hope-is-to-persuade-you-to-steer-the-indexing-revolution-to-a-more-promising-path/

Please have a great week away from all this and perhaps we will be able to talk over some ideas for further research when you get back. There are all sorts of possibilities. I can assure you that I had zero idea what I was getting into when I put up that first post back on the morning of May 13, 2002. This is a deep well!

One last point. Over the years I have had a number of people ask me about international SWRs. It sounds like your recent paper will go a long way to answering their questions. I will definitely be checking it out and linking to it in future days.

Rob

“We ‘Know’ All Sorts of Things About Investing Today That We Do Not Want to Acknowledge That We “Know. My Aim Is to Harvest This Unappreciated Knowledge.”

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Yesterday’s blog entry described an e-mail that I received on December 16, 2010, from academic researcher Wade Pfau. Set forth below are the words of my response.

Wade:

Thanks for your response.

All is forgiven from my end. All of the points you make in your response make sense to me. There is no question that this is explosive stuff and it is hard at times to say things perfectly. I of course struggle with that same issue. So long as there is good intent, things work their way to a good place. I can assure you that there is good intent on my end. I am reassured by the words of your response that there is good intent on your end.
Differences on fine points are of course not a problem. Those sorts of differences are to be expected and are healthy.

There has been HUGE interest at that board in SWRs in the past. I believe that the reason why you did not see a response is that people there feel shame over how the board has handled this issue. Part of it is how they interacted with me and part of it is how they misled people re the issue (it is a reality that people were misled — the best interpretation that can be put on it is that the people putting forward the misleading stuff were suffering from cognitive dissonance).

The personality clash is with SOME Bogleheads, not all Bogleheads. There are some great people over there who would love to have me participate in the discussions held there. They are (understandably) afraid to speak up. When a segment of a board community fears stating its honest views, the board had lost its intellectual integrity; people are not hearing both sides. It doesn’t make me happy to say this. But it needs to be said.

I am grateful for you spelling out the cause of your concern by saying: “The thing that troubled me was how sure you were about your predictions.” I believe that there is a misunderstanding here. I am NOT dogmatic about the particular predictions. I do not believe that dogmatism re that aspect of the question is justified. I love it when someone like yourself puts forward a different reasonable take. That gets people thinking. We need more debate, and dogmatism will not get us that.

My guess is that the thing that I was being dogmatic about in the comments you have in mind was the idea that SOME adjustment must be made for valuations. I do see it as being irresponsible to make no adjustment for valuations whatsoever given the consequences that follow for retirees who place their confidence in SWR studies that get the numbers wrong. My view is that there is an INSANE level of dogmatism coming from some of the defenders of the Old School studies. If they could just acknowledge that there is more than one reasonable point of view, we could all be friends.

Anyway, I very much do NOT believe that dogmatism is justified re these matters. It does indeed sting for me to hear myself described as being dogmatic here because I have invested so much in the way of blood, sweat and tears into efforts to bring the dogmatism to an end and to get things pointed in a more positive direction.

There’s an awful lot of material at those links. I certainly don’t expect you to look at all of it. You probably would prefer to focus on materials that deal with substantive matters (most of those materials focus on the process questions). I will get some links on substantive matters to you within the next few days.

Still, you might want to spend a little bit of time looking at the links that focus on the process questions. I have spent an awful lot of time on the SWR matter and on related matters and I have come to believe that the full reality is that there ultimately is a great deal of overlap between the substance issues and the process issues. I am going to put forward one illustration of what I mean by this just to give you a sense of what I am getting at.

You mentioned that you were not aware of the SWR controversy until September of this year. That should not have been the case! Bill Bernstein does rough calculations in his book “The Four Pillars of Investing” showing that the SWR at the top of the bubble was somewhere near 2 percent. Unfortunately, even most people who have read the book are not aware of this because he wrote it up in such a way as to downplay the finding. And of course the finding was not front-page news in the major papers, as I very much believe it should have been.

There are all sorts of issues like this. We “know” all sorts of things about investing today that we do not want to acknowledge that we “know.” My aim is to harvest this unappreciated knowledge. I do not by any stretch of the imagination believe that I have all the answers. But I do believe strongly that we need to launch a debate. I had a reputation prior to my involvement in the SWR debate of being a “teddy bear” poster. I am likely one of the least confrontational people you know. My problem re this matter is that there are a good number who object violently even to the idea of having  a discussion. And discussion boards at which critically important issues may not be discussed rarely achieve their full potential.

I regret that you have had to sort through all this drama. But I will direct a phrase to you that you have used in reference to me. There is something in you that saw an issue of some importance when you happened across the thread on SWRs. YOU are really on to something in seeing the significance there (many smart people have failed to see it). I hope that perhaps I will be able to point you to some things that perhaps will spark further fruitful investigations.

No dogmatism. That’s out! The aim here is exploration of potentially exciting new realities. It’s been my goal since the first day to bring out the positive in all this (which in my assessment is so far-reaching that it is scary) and to leave the boring, time-wasting stuff behind. That’s what I’ll be trying to pull off in future communications.

Thanks again for responding to a challenging e-mail in a warm and honest and frank and encouraging way. That gives me some hope (combined with a few other recent developments) that this saga may be taking a bit of a turn in a life-affirming direction.

Rob

Valuation-Informed Indexing #54 — Data Combined With a Sound Theory Makes a Powerful Case

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I’ve posted Entry #54 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Data Combined With a Sound Theory Makes a Powerful Case.

Juicy Excerpt: As the poster using the screen-name “Fred Flintstone” notes: “The paper refutes a central tenet of the Boglehead investing philosophy.”

That it does.

But Greyfox brings up a point that has only rarely been examined in much depth.

He says: “Without some sound theoretical basis, there is really no way to know that some superior results of a strategy aren’t just random results that won’t repeat in the future.”

I strongly agree.

The fact that the entire historical record shows both that Buy-and-Hold can never work well for for the long-term investor and that Valuation-Informed Indexing will always offer higher risk-adjusted returns is powerful evidence in support of my favorite investing strategy. But Grayfox is right. Even 140 years of data is not enough. Without a theory that makes sense of that data, making changes in your stock allocation pursuant to the consistent message of the data is a dangerous business.

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.