A Rich Life

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

ITNR #69 — Pride Comes Before a Stock Crash

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I’ve posted Entry #69 to my weekly Investing: The New Rules column at the Death by 1,000 Papercuts site. It’s called Pride Comes Before a Stock Crash.

Juicy Excerpt: A group of my critics put together a web site for the purpose of ridiculing me. I don’t approve. But I do listen in to what they say. You’re more likely to learn about the weaknesses of your ideas bylistening to your critics than you are by listening to people who think you are the tops.

One time these fellows asked a hard question.

They noted that I say that Valuation-Informed Indexing provides far higher returns than Buy-and-Hold. At greatly reduced risk. And that it is backed by 30 years of academic research, based on 140 years of stock market history. And that it is a less stressful way to invest. And that it lets those who follow it retire five to 10 years sooner than otherwise would be possible.

If all that is so, Rob, why aren’t there millions of people beating a path to your door?

“I Am a Threat Only to the Buy-and-Holders”

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Set forth below is the text of a comment I put to a thread on Valuation-Informed Indexing at the My Personal Finance Journey site:

Bogleheads.org is just one of many personal finance discussion boards and blogs which have “uninvited” Mr. Bennett.

That’s so.

But why?

I am the person who discovered the analytical errors in the Old School safe withdrawal rate studies.

So the first post that I put to the Vanguard Diehards board was met with a hostile response. And then there were abusive posters who followed me to every thread in which I posted. Why? Is it a bad thing to let people know about errors that were made in retirement studies? It seems to me that it is a very, very good thing.

There’s no one today who says that the Old School studies are valid. Bernstein has said those studies get the numbers wrong. Scott Burns has said this. Wade Pfau has said this. The Economist Magazine has said this. Michael Kitces has said this.

Shouldn’t the fact that I am the person who discovered the errors in these studies be cause for the Bogleheads to send me a special invitation to their discussions? Why this strange reaction?

It’s because a finding that the Old School SWR studies got the numbers wrong raises doubts about the entire Buy-and-Hold project. The way that the site administrator there put it is that I am a “threat” to the board community there. The reality is that I am not a threat to the entire community. I am a threat only to the Buy-and-Holders. There were hundreds of community members there who loved my stuff and who told me so on numerous occasions.

If you were confident in your investment strategies, you would not feel threatened by posters who post views consistent with Shiller’s research, Carlyle. You make an effort to sound confident. But it’s bravado you evidence, not true confidence.

I say these things not to hurt your feelings or the feelings of any other Buy-and-Holder. I say them because we need to come to terms with these realities before we drive our entire economic system over a cliff.

It reflects poorly on the Bogleheads that they have banned honest posting at their site. It goes against our society’s deeply held social norms. We are going to need to work together to change this. We cannot even begin learning the realities of stock investing until we reach a point at which we all agree that all sides should have a chance to speak.

Rob

“Take Buy-and-Hold Out of the Picture and Stock Market Prices Are Self-Regulating”

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Set forth below is the text of a comment that I put yesterday to a thread on Valuation-Informed Indexing at the My Personal Finance Journey site. The blog entry was posted some time ago. I only discovered the most recent posts by Carlyle (to which my post responded) yesterday.

I would say is that the notion that Buy-and-Hold had anything to do with the economic downturn is beyond ridiculous.

You speak for many with these words, Carlyle. I wish that one of those who feel this way would try to articulate why he feels this way. That would give us something to work with.

Stocks were overpriced by $12 trillion in January 2000. That’s a matter of public record. Bogle says that stock prices always return to fair value. He says that is an “Iron Law” of stock investing. So we knew in 2000 that the U.S. economy was going to lose $12 trillion in spending power over the next 10 years or so. Are you able to imagine any way that losing $12 trillion in spending power would not bring on an economic crisis?

The reason why I say that Buy-and-Hold caused the crisis is that it was Buy-and-Hold that caused the $12 trillion in overpricing. If investors knew that they needed to lower their stock allocations when prices got too high, there could never again be another out-of-control bull market. People would sell stocks and prices would go down when prices got out of hand. Take Buy-and-Hold out of the picture and stock market prices are self-regulating. It’s Buy-and-Hold that tells people they do not need to sell. Do you see that?

I believe you when you say that you find the idea ridiculous. But I think we could all advance the discussion if you could articulate why you believe this. Is there some reason why you think that the promotion of Buy-and-Hold strategies could not cause an economic crisis?

My personal belief is that it may be that the reason is that you are emotionally attached to Buy-and-Hold. I don’t say that to hurt your feelings. I say it because it is my sincere belief that that is what is driving your belief.

Thanks for the back and forth in any event.

Rob

Programming Note: The Bennett family vacation has been postponed due to uncooperative weather. Grrr…. Those horrible , no-account Buy-and-Holders are no doubt the cause of this somehow!

Beyond Buy-and-Hold #50 — Buy-and-Hold Is Either the Best Strategy of All Time or the Worst

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I’ve posted Entry #50 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called Buy-and-Hold Is Either the Best Strategy of All Time or the Worst.

Juicy Excerpt:  It’s not possible to reach a compromise on points re which both camps are in agreement. Thus, we need to turn to points re which the Buy-and-Holders and the Valuation-Informed Indexers are in disagreement to have any hope of developing a middle-ground position. Unfortunately, there’s only one point of disagreement. And the point of disagreement is a light-switch sort of point; it’s a yes or no matter and it is hard to see how any compromise middle-ground position could be developed.

The one point that divides the two camps is that Valuation-Informed Indexers say that valuations matter and Buy-and-Holders say that they do not. The historical data shows that, if valuations matter, they matter a lot. The valuations factor is roughly 70 percent of the game, according to the data. Those who understand valuations nearly always do well. Those who do not understand valuations nearly always do poorly.

“Your Outlandish Statements Create a Giant Chasm That Regular People View As Just Another Infomercial, Over-the-Top Claim”

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Spokane Al speaks for many in a comment he put to my Beyond Buy-and-Hold column the other day. Here are his words:

“For me at least when you say stuff like “. . . is the most dangerous Get Rich Quick scheme ever concocted by the human mind” I lose interest. I am willing to read and consider when one conducts reasonable discussions on a subject. I think that your outlandish statements create a giant chasm that regular people view as just another infomercial, over the top claim. They serve more to inflame rather than convince.

“And I know that turns me off because I know that as a buy and holder, contrary to many of your statements, my returns have been competitive over the past 10, 15 and 20 years. Oftentimes, I do not see your data as backing up your arguments.

“At least that is my opinion.”

I wrote one of those lengthy responses for which I have become famous (infamous?).

Juicy Excerpt:  I am 100 percent convinced that what you are describing here is a real phenomenon. Most people see my claims as extreme and tune me out when they see me say something extreme. It’s a big problem for me.

 

Arbor Investment Planner Article #2 – Asset Allocation Advisors Cause Finance Crisis

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I’ve posted my second Guest Blog Entry at the Arbor Investment Planner blog. It’s called Asset Allocation Advisors Cause Financial Crisis.

Juicy Excerpt: There is no study supporting Buy-and-Hold. The idea that academic research supports this approach is a myth. People really do believe in it; both experts and ordinary investors. But they don’t believe in it because of a study they have read. They believe in it because experts endorse it and because it is rarely challenged.

We have created a Catch-22 situation. Buy-and-Hold cannot be questioned because “everyone” knows it works. But everyone knows it works only because they have never heard it effectively questioned. What if “everyone” just happens to be wrong?

VII #49 — Paradigm Busting

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I’ve posted Entry #49 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Paradigm Busting.

Juicy Excerpt:  Valuation-Informed Indexing would be more popular if investors didn’t feel that they need to choose either VII or Buy-and-Hold. People would feel more comfortable taking a compromise choice somewhere between the two extremes. Unfortunately, no compromise is intellectually viable.

If the market is efficient, the Buy-and-Holders are right and the Valuation-Informed Indexers are wrong. If valuations affect long-term returns, the Valuation-Informed Indexers are right and the Buy-and-Holders are wrong.

I dislike dogmatism. But when it comes to numbers, it’s hard to get around the reality that there are right and wrong answers. Valuation-Informed Indexing is a paradigm-buster or it is a waste of time. Either it supplants Buy-and-Hold entirely or there is nothing to it.

VII #47: Buy-and-Hold Is Dead! Long Live Buy-and-Hold!

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I’ve posted Entry #47 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Buy-and-Hold Is Dead! Long Live Buy-and-Hold!

Juicy Excerpt: I can testify on Scott’s behalf re that one. I’ve been reporting on the accurate numbers at discussion boards and blogs for nine years now and my experience is that the accurate numbers are information that lots of people very, very, very, very, very, very, very much do not want to hear.

We hate knowing the realities of stock investing. Hate it, hate it, hate it, hate it, hate it. That’s the premise of the VII model. Investors are emotional. The purpose of investment research is to rein in investor emotions. It is essential to incorporate valuation adjustments into all calculations. It is critical to report the numbers people use to develop their investing strategies accurately.

“We Need to Acknowledge That We Did Not Know Everything There Is to Know About Stock Investing on the Day Buy-and-Hold Was Developed”

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Set forth below are the words that I posted in response to a comment put forward at my Beyond Buy-and-Hold column at the Our of Your Rut site. The column was titled The Three Faces of Wall Street. The comment was put forward by a fellow named “Spokane Al.” Al asked me to explain what I mean when I refer to “Buy-and-Hold.” He said that he rebalances his portfolio regularly and asked: “Does this make me one of the evil buy and holders and a reason for all the historical errors that you continually point out?”

You’re asking a super question, Al. Actually, your question is so important that I am going to put it on a list I keep of future column topics.

Yes, you are evil through and through!

I’m joking, of course. I don’t think you are evil. I do think that Buy-and-Hold is a MISTAKE and that you are doing yourself a lot of harm by following the investing strategy that you follow. Collectively, all the Buy-and-Holders are doing so much damage to our economic and political systems that it can hardly be measured. It is the widespread promotion of Buy-and-Hold that is the primary cause of the economic crisis that has caused so much suffering.

In all fields of life endeavor, there are advances over time in our understanding of how things work Take physics. There was a time when most people thought that the sun revolved round the earth. One day, we learned that it is the earth that revolves around the sun. Learning that helped us make all sorts of further advances. Can you imagine where we would be if we had failed to acknowledge the mistake when it came to our attention? That’s where we are today in the stock investing realm.

The two most important discoveries in the history of stock investing both were uncovered over the past 50 years. They are: (1) that short-term market timing never works; and (2) that long-term market timing always works and is required for long-term success. Buy-and-Hold is today’s dominant model for understanding how stock investing works. It is rooted in that first discovery. That first discovery was a big advance and the Buy-and-Holders should properly be applauded for coming up with it.

Our troubles came about because at the time the Buy-and-Holders made the first discovery they didn’t know there was going to be a second discovery. They saw research showing that short-term timing never works and they jumped to the conclusion that timing in general doesn’t work or isn’t required. That’s not even a tiny bit true. In later years, we discovered (from academic research) that long-term timing ALWAYS works. But the Buy-and-Holders had already come out with claims that timing doesn’t work. So they have refused to acknowledge the importance of this second huge insight. They continue to this day to tell people that there is no need to time the market or even that timing is a bad idea.

This is why we have an economic crisis. When stocks become overvalued, they offer poor returns. The natural and obvious thing to do when stocks offer poor returns is to lower your stock allocation. You acknowledge above that this is not what you do. You rebalance, which means to stay at the SAME stock allocation. Millions of your fellow investors follow the same practice. They stayed at the same stock allocation instead of selling as stock prices went up, up, up.

The result is that the market came to be overvalued by $12 trillion in 2000. That money did not fall out of the sky. It needs to be repaid. We now are in the process of paying that $12 trillion back. It’s going to take a long time. Thousands of businesses have failed. Millions of people are unemployed. All of this is 100 percent unnecessary. There never would have been any $12 trillion debt to pay back had we all just sensibly lowered our stock allocations when prices got so high.

All that we need to do to bring the insanity to an end is to acknowledge as a society that we did not know everything there is to know about stock investing on the day the Buy-and-Hold Model was developed. Buy-and-Hold was a wonderful advance. You see me thank the Buy-and-Holders for their advances at this column all the time. But Buy-and-Hold was not the last word in stock investing advice. We have learned new things in the years since “A Random Walk Down Wall Street” was published and we need to begin including those new insights in all of our discussions of stock investing.

I consider all Buy-and-Holders my friends, Al. I consider them friends because they taught me important things about investing. Unfortunately, I cannot say that the feeling is entirely mutual. There are a good number of Buy-and-Holders who don’t like me too much. I wish I could change their minds. But my sense is that the only thing that would change their minds is if I endorsed Buy-and-Hold. And the academic research of the past 30 years shows that Buy-and-Hold is the purest and most dangerous Get Rich Quick scheme ever developed by the mind of mortal man. I don’t say that it was designed to be this — but still.

I believe strongly that you made a mistake by staying at the same stock allocation when prices went to insanely dangerous levels, Al. I can point you to research showing this to be so. Those who are willing to change their allocations in response to big price swings are able to obtain far higher returns at far less risk and to retire a good number of years sooner. It’s a wonderful thing that we are able to do that today and I of course want to share that exciting news with all of the millions of people who would love to know about about a far better way to invest their retirement money.

You are of course entitled to think differently. I am not God. I could be wrong. But it hurts me a bit when you suggest that I think you are “evil.” I just think you made a mistake. The way I would put it is that the Buy-and-Hold/Get RIch Quick IDEA is evil because it does so much harm to so many humans. But the people who follow it are just making the same goofy mistakes that all the humans (including Rob Bennett, to be sure!) have been making about all sorts of subjects since the beginning of time. I wish the Buy-and-Holders could lighten up!

We are flawed creatures. We make mistakes. This happens in the investing area just as in every other area of human endeavor. If the Buy-and-Holders could let that in, I think we could all enjoy some exciting and enriching and fun times together in coming days learning a hundred things about stock investing that no group of people who came before us was ever able to learn. The opportunities available to stock investors today are just out of this world. But we need to take the defensiveness thing down a notch or two to be able to take advantage of them.

I think Buy-and-Hold was a mistake. It wouldn’t be honest of me to say any different. But I feel respect and affection for all Buy-and-Holders for all they have taught me and millions of others. I believe that there is going to come a day when we are all going to move together to a far better place. When we do, I believe that the Buy-and-Holders will properly be getting the credit for having built the foundation that over time ended up getting us to that wonderful place. And good for them!

The short answer to your question is: A Buy-and-Holder is someone who does not take into consideration the price at which stocks are selling when setting his stock allocation. A Valuation-Informed Indexer CHANGES his stock allocation in response to dramatic price swings. It’s not necessary to make more than one allocation change every 10 years or so on average. But it is IMPERATIVE that that change be made. If you fail to make that change, you thereby permit your risk profile to get totally out of whack. We all should have been lowering our stock allocations in the late 1990s and it is a national tragedy that most of the “experts” in this field failed in their responsibility to insist that we all do this. Now all that is left to us is to work together to repair the damage we have collectively brought about by failing to call them out on their failure to do their jobs.

Rob

Beyond Buy-and-Hold #30 — What’s So Bad About Buy-and-Hold?

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I’ve posted Entry #30 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called What’s So Bad About Buy-and-Hold?

Juicy Excerpt: Picking indexes doesn’t free you of the need to identify strong value propositions and to refuse to put money on the table until you find one. What make the “hold” part of Buy-and-Hold work is that it takes time for strong value propositions to pay off. Guess what happens in the long term to poor value propositions? They reveal themselves as poor value propositions, just as surely as strong value propositions reveal themselves over time as strong value propositions.

Fail to limit your investing to strong value propositions and you take the magic of long-term investing and turn it against you. There’s a chance that a poor value proposition will pay off in the short-term. There’s almost no chance that it will pay off in the long term. Invest your money in a poor value proposition as a Buy-and-Holder and you lock in a loss by sticking with that choice for the long term.