A Rich Life

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

Economics Professor Valeriy Zakamulin: “If the Current P/E10 Ratio Is Near the Long-Run Mean, the Shiller Model Cannot Predict Anything.”

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I have been sending e-mails to numerous people letting them know about my article reporting on The Silencing of Academic Researcher Wade Pfau by the Buy-and-Hold Mafia. 

Yesterday’s blog entry reported on my correspondence with Economics Professor Valeriy Zakamulin. Set forth below is the text of his next e-mail to me:
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Hi Rob,

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I looked at your blog, you advocate the Shiller’s PE10 model. It can indeed predict returns to some extent, and this model is very popular among practitioners.

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Yet the majority of people do not understand correctly the implications of this model.

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The correct implication that everyone understands: if the current PE10 ratio is way too far from its long-run mean, then there is something extremely wrong with the valuation. In this case the model predicts that sooner or later there will be a big correction.

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The incorrect implication: the majority of people believe that the Shiller’s model implies that if the current PE10 ratio is near the long-run mean, then the market valuation is correct and one should expect the returns equal to the long-run mean returns. The problem is that people do not really understand the nature of mean reversion. The mean reversion is not just returning back to the mean. What the Shiller’s model really implies is that “an excess in one direction will lead to an excess in the opposite direction”. So if the market was highly overvalued in 2000, then the PE10 ratio should first decrease to the mean, then move further down so that the market will be undervalued. Every secular bull market starts at a PE10 value which is way below the long-run mean.

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You need to understand the following: IF THE CURRENT VALUE OF PE10 RATIO IS NEAR THE LONG-RUN MEAN, THE SHILLER’S MODEL CANNOT PREDICT ANYTHING!

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To understand, just look at the chart of PE10

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http://en.wikipedia.org/wiki/File:S_and_P_500_pe_ratio_to_mid2012.png

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For example, at about 1970 and 1990 the PE10 ratio was at the long-run mean. Did it mean that the 10-year return would be “average”? On the contrary, during 1970s the stock market return was way below average whereas during 1990s the return was way above average.

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Valeriy

Economics Professor Valeriy Zakamulin: “I Can Understand Why Robert Shiller Cannot Tell People About All His Ideas on How Stock Investing Works. He Must Act Very Professionally. He Can Only Tell Those That Are Supported by Scientific Research.”

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I’ve been sending e-mails to numerous people letting them know about my article reporting on The Silencing of Academic Researcher Wade Pfau by the Buy-and-Hold Mafia.

Yesterday’s blog entry reported on my correspondence with Economics Professor Valeriy Zakamulin. Set forth below is the text of the e-mail that Valeriy sent me in response to the e-mail detailed in the earlier report:

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Dear Rob,

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I apologize for not being able to respond to all points in your mail, I just do not have so much time.

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When it comes to the paper of Arnott, co-authored by Nobel Laureate H. Markowitz, I am familiar with the paper. First, if a Nobel Laureate co-authors a paper, this does not automatically means that this paper is an excellent paper (if you are interested in the flaws of other Nobel Laureates, read about the collapse of the Long Term Capital Management http://en.wikipedia.org/wiki/Long-Term_Capital_Management). This paper does have some weaknesses. For example, the size effect is mainly due to the January effect, the value effect is also partly due to the January effect. This paper, which supposedly explains both the size and value effects, cannot account for the January effect.

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I can understand why Robert Shiller cannot tell people about all his ideas on how stock investing works. Being a recognized Yale Professor, he must act very professionally, he can only tell those that are supported by scientific research.

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It seems to me that you do not really understand how the market timing strategy works and a possible total collapse of the stock market. From the long-term perspective, the period of 1990s was a period of a great stock market bubble according to the PE10 model. But was it rational to withdraw money from stocks in 1990 and put them into bonds? Not at all, if you used Shiller’s model you would miss the great return over 1990s. Market timing strategy implied selling the stocks in about 2001 and place money in bonds. But what if all investor pursued this strategy? I am sure that all the stock prices would dropped to zero. You disagree with the assumption that investors are rational, but at the same time you actually believe that investors are rational and the mass sale of stocks ends when the PE10 ratio approaches its long-term average. This will never happen if the investors are irrational. As a proof of my point, read about the stock market crash of 1987 (see for examplehttp://hnn.us/articles/895.html). One of the main causes was the popularity of the portfolio insurance strategy which requires selling stocks when prices drops. When everyone implements this quite sensible strategy, then the stock market crashes.

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I am not familiar with the papers by W. Pfau, if they were critisized, maybe the critique was well grounded?

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I believe that if people knew about PE10 model in 1970, then the period afterwards would be a period of only good economic times. Here you are wrong. The stock market is only a barometer of the state of economy. I believe that for a capitalism economy it is natural to have periodic boom-bust cycles.

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Valeriy

“The Problem We Have Is a Circular One. The Experts Say That Buy-and-Hold Can Work Because This Is What People Want to Hear. And the People Want to Hear It Because in an Earlier Time They Were Persuaded by the Experts that Buy-and-Hold Could Work and Now Their Retirements Are Riding On It.”

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I’ve been sending e-mails to numerous people letting them know about my article reporting on The Silencing of Academic Researcher Wade Pfau by the Buy-and-Hold Mafia.

Yesterday’s blog entry reported on my e-mail correspondence with Economics Professor Valeriy Zakamulin. Set forth below is my response to the e-mail detailed in yesterday’s report:
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Valeriy:

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You are making great points and asking important questions. Thanks for being willing to get down to the nitty gritty of all this.
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What I believe in might be termed a “Conspiracy of Ignorance.” I believe that the humans gradually acquire knowledge over the years. We start out not knowing and then over time we come to know. I don’t think that people are meeting in a dark room and crafting plans to trick everybody. I believe that people misunderstand how stock investing works and pass along their misunderstandings when they share what they think they know with others.
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I believe that the Efficient Market Hypothesis was an advance over what we had before. It was a tool that helped us advance. But I also believe that belief in it has become dogmatic and the dogmas are holding us back.
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I understand the point you make about the default belief (the “presumption of innocence”). Ideally, there would be no default belief. We would just tell people what we know for sure and let people make decisions based on that. The trouble is, it is the most fundamental question of all (how markets work) that causes the most uncertainty. Buy-and-Holders believe that the market is efficient. If that’s so, stock investing risk is stable and staying at the same stock allocation at all times is the ideal strategy. But what if this is not so, what if valuations affect long-term returns? If that is so, then risk is variable and Buy-and-Hold is the most dangerous strategy imaginable (if millions of investors elect to remain at the same stock allocation when they should be lowering their stock allocations to keep their risk profiles constant, the collective losses will be in the many trillions of dollars and will cause an economic crisis and in time a Second Great Depression).
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So which is it? As a society, we do not know. My belief is that valuations affect long-term returns, that the market is NOT efficient. But there are millions of good and smart people who believe just the opposite, who believe that Buy-and-Hold is a 100 percent sensible and responsible strategy. So, in the practical realm what do we do? We cannot tell people to hold off on investing for retirement until we all agree on which approach is best. Given that we do not all agree what is best, what should we tell investors to do?
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It seems to me that the presumption should be that valuations affect long-term returns. All that long-term timing is is paying attention to price. There is no other good or service that we can buy for which price does not matter. Why presume that stocks are the one exception? Plus, we have the fact that for the 140 years of historical data available to us, price always HAS mattered; the data confirms what common sense tells us must be so. In contrast, Buy-and-Hold has never worked in the long-term. Those who stay at the same stock allocation always face a wipeout sooner or later; prices gradually rise higher and higher and higher (because so few are paying attention to price!) and eventually the market crashes and we all lose (even those not invested in stocks suffer in the economic crisis brought on by the huge loss of collective wealth experienced in a stock crash).
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I believe that the Efficient Market Hypothesis was a powerful insight containing one huge flaw that is now in the process of killing us. The hypothesis ASSUMES investor rationality. Shiller’s research shows that investors are NOT rational. What fools people is that the irrationality of investors does not do us much harm in the short-term. From 1982 through 1996, stocks were priced to provide a strong long-term value proposition. Buy-and-Holders were going with high stock allocations for different reasons than Valuation-Informed Indexers but the practical effect (good returns) was the same for both groups of investors. It was only with the 2008 crash that Buy-and-Holders were able to see in a concrete sense the danger of staying with the same stock allocation at all times (and of course the next crash — Shiller’s work suggests that prices will drop another 65 percent over the next few years — will bring the point home in a truly terrifying way).
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The Buy-and-Hold Model (rooted in a belief in the Efficient Market Hypothesis) permits researchers to study all aspects of the investing experience that can be examined through the use of logic. But the the most important thing we need to study is RISK and the risk of stock investing is rooted in the human inclination to let emotion influence one’s allocation choices. We need to give ourselves permission to discuss RISK in a frank way and that requires that we talk about things not acknowledged by the Efficient Market Hypothesis. The P/E10 metric is a tool that lets us reduce investor emotion (risk) to a number. Stocks were priced at three times fair value in 2000, according to the P/E10 metric. This means that the investor who thought that he had a portfolio value of $600,000 in reality had a portfolio value of $200,000. Big difference! That investor’s illusions caused him to make all sorts of bad financial planning decisions. Those illusions caused him to ruin his life. But the researchers in this field never talk about that aspect of the question! They talk about numbers. To understand investing, they need to talk about human emotions. It is the human desire for self-deception that is the driving force behind all bull markets and it is bull markets that make stock investing risky (there has never been a price crash of long-term significance starting from a time when stocks were selling at low or moderate prices).
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The problem we have is a circular one. The experts say that Buy-and-Hold can work because this is what people want to hear. And the people want to hear it because in an earlier time they were persuaded by the experts that Buy-and-Hold could work and now their retirements are riding on it. How do we break the circle? The researchers should be warning people of the dangers of Buy-and-Hold in a world in which the Efficient Market Hypothesis has been discredited (if Shiller is right, the Efficient Market Hypothesis is wrong). Most are not doing this. When researchers fail to point out the dangers, people assume that the advice they are hearing from the experts must be more or less okay. In reality, it is as dangerous as all get-out. The researchers are not paying attention to how their research is being used — it is being used to prop up long-discredited (even if once promising) ideas.
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Here is a blog post in which I report on an e-mail I received from Rob Arnott:
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I find it a scandal that researchers were intimidated into not doing research they believed was important. How can we advance knowledge if we are afraid to look at the most important questions? Who is it that is sending the hate mail to these journals? Scientists? Is the sending of hate mail part of the scientific process?
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These sorts of things don’t happen only to Rob Arnott. When I was working with Wade Pfau, he was like a kid in a candy store, discovering new insights on a daily basis and getting more and more excited about where he could go with them. Now he feels that he dare not explore any of those insights. Please look at the quotes at the bottom of this article (the longer version of the article I linked to in my first e-mail to you)
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and see what Wade said about the work he was doing at the time. He was AMAZED that no other researchers had engaged in these sorts of explorations. He couldn’t make sense of it. Now he knows. Other researchers don’t look at these questions because it is a career-limiting move to do so.
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Even Robert Shiller has experienced intimdation. Shiller has said in interviews that he has never told us all that he knows about how stock investing works because he knows that he would be branded “unprofessional” if he were to do so. Huh? An economics professor at Yale doesn’t feel comfortable sharing what he knows about a critically important subject that he has studied for decades? How could that possibly be a good thing? How could such intimidation tactics be part of a valid scientific endeavor? Intimidation tactics are not science. Intimidation tactics are the antithesis of science.
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I believe that this article
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is one of the most important “studies” even done in this field. Most people in this field won’t even refer to it as a “study” because it does not contain numbers and charts and tables. I say it is important because it tells the true story of the EMOTIONS of the Buy-and-Holders. That’s what we need to know about to advance our knowledge. That’s the missing piece. The market really does want to be efficient. Fama was close to getting it right. What he missed is that investors can behave rationally only if they have access to all the information they need to make good decisions. And, once we get into a bull market, as a society we formulate a SOCIAL TABOO that blocks us from engaging in discussion of the problems of overvaluation. We “know” that the inflated prices are real at the same time that we also “know” on another level of consciousness that they are not. The conflict between the two things we “know” drives us crazy and we evidence our craziness in the sorts of comments you see recorded in that article.
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I hope that I am making at least a little bit of sense, Valeriy. I am grateful to you for giving me an opportunity to at least take a stab at making sense to a kind and intelligent person who is well-informed about these issues.
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I do believe in a sort of conspiracy. But it is not the sort of conspiracy in which bad people meet in a smoke-filled room to craft plans by which to screw people over. It is a Conspiracy of Ignorance in which millions of people who deep in their hearts very much want to move on to a better place hold back from doing so because they are afraid of what they will find on the other side of The Big Black Mountain. I have been to the other side and I am here to report back that there are wonderful things to be found on the other side. My problem is that it is hard to convince people who have never seen these things how much we are able to advance our understanding of how stock investing works today. We now know how to make stock investing a virtually risk-free endeavor. Wade’s research shows that the Maximum Portfolio Drawdown Percentage drops all the way down from 60 percent to 20 percent (with no loss of return!) for those investors open to taking valuations into consideration when setting their stock allocations. We are on the verge of experiencing the greatest advance in our understanding of how stock investing works ever experienced in history.
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All we need is for people to calm down and let in all the good stuff. But people are afraid of the new. I can comfort them and reassure them and inspire them if I can talk to them. But the Buy-and-Hold dogmatics go crazy with fear whenever and wherever I try. And they use the studies of the academic researchers to justify their use of their intimidation tactics. So I need to report to the people affected by this (that’s every last one of us!) how the academic research is being used. It is being used today not to advance knowledge but to hold it back from advancing! I need to say that not because I do not like the researchers (I like them very much) but because it is so and because the intimidation tactics have brought on an economic crisis and because we must address this problem if our free market economic system is to survive.
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That’s where I am coming from, in any event. I hope that my venting has made at least a tiny bit of sense. Please do not think that in any way, shape or form I am aiming to criticize you personally. We are all (including me!) little parts in a big Machine. My job is to get that big Machine back on the right track so that all our work becomes productive and positive and meaningful and life-affirming and fun again. It’s a very hard job but it very much needs to be done and through a strange twist of events it seems that I was elected to take this one on.
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Please let me know of any thoughts that these words inspire. If I am off-base, I very much need to know how.
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Rob
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ADDENDUM A:
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On reading these words back, I see that I did not address your final point, that a move to money markets would cause a collapse. It’s true that a move out of stocks would cause prices to fall to fair-value levels and that that would be a significant drop from where we are today. The good news is that, once we let people learn how stock investing really works, we will never again see a drop below fair-value levels. In a rational world in which knowledge can be shared freely, stock prices are self-adjusting. High prices cause the value proposition of stocks to fall, which causes people to want to lower their stock allocations, which causes prices to return to fair-value levels. There never again will be bull markets or bear markets once we open the internet to honest posting on the implications of Shiller’s findings.
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The emotional approach (Buy-and-Hold), however, eventually causes prices to fall to levels far BELOW fair-value levels. Every secular bull in history has eventually brought us to a P/E10 level of 7 or 8, a 65 percent price drop from where we are today. Insane emotionalism in one direction always brings on insane emotionalism in the other direction. What we want is emotional (and market) stability and that can only be brought on by addressing the emotional conflict that I referred to up above. People will feel at ease about stock investing when they understand how it works and people will understand how it works when we produce lots of research showing that buying stocks is just like buying any other good or service, the price you pay ALWAYS, ALWAYS, ALWAYS matters. It is emotion that causes risk. And it is the belief that it is possible to invest in stocks successfully without taking price into consideration that causes emotion (no human is capable of having confidence in a strategy that ignores price because it defies common sense to believe that price might not matter).
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We WILL see a price drop if we open the internet to honest posting but it will be limited. The huge price drop we will see if we continue the cover-up will bring on the Second Great Depression. We can recover from a relatively small price drop and our new knowledge of how to make stocks a virtually risk-free investing class will then bring on an economic boom as millions of middle-class people learn for the first time how to finance their retirements in a truly smart, simple and safe way.
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ADDENDUM B:
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What I am suggesting re the “How Science Works” question is that the default belief be that price DOES matter, that long-term timing IS required. Price matters with every other good or service offered for sale. Why ASSUME that it works the other way around with stocks? If that were the assumption, people could still publish research trying to show that Buy-and-Hold works, but the default belief would be the opposite of what it is today. If people concluded that there was good evidence in both directions, they would go with a belief that the case for Buy-and-Hold (or the case for market efficiency) had not yet been made and that thus it was not appropriate to suggest that such a strategy could work. The root of all our troubles is this crazy assumption. There has never been a single study showing that long-term timing doesn’t work and common sense tells us that it MUST work. Why assume the opposite of what both common sense and the entire record of historical data tell us and then become dogmatically opposed to challenges to the crazy assumption?
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To make sense of this, I think we need to go back to the days when the Efficient Market Hypothesis was developed and examine why the mistake was made. My sense is that the problem is that index funds were not available at the time (Bogle formed Vanguard in 1976). Long-term timing only works with indexes. Since indexes were not available when the work was being done to see whether timing works or not, the researchers tested only short-term timing. When they learned that short-term timing doesn’t work, they jumped to a hasty conclusion that both forms of timing do not work (because in a practical sense there really was only one form at that time). It is my belief that, had Shiller published his “revolutionary” (his word) findings in 1971 rather than 1981, the name of the 1974 book would have been “A Valuation-Informed Walk Down Wall Street” and we today would be living in the greatest period of economic growth in our history instead of in the early years of the Second Great Depression. You see concern expressed about the national budget deficit all the time. But if you compare the numbers, the Buy-and-Hold problem is the far more serious one (the market was overpriced by $12 trillion in 2000 and even Bogle acknowledges that prices always return to fair-value levels with the passage of about 10 years of time — it is obviously not possible for any economy that loses $12 trillion of buying power in 10 years to avoid collapse).
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ADDENDUM C:
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My bottom line is that we all need to work together to launch a national debate on these questions. I obviously do not know it all. I obviously am one of the flawed humans. So anyone who goes solely by what I say is a darned fool. But what if there were thousands of people coming from all sorts of different perspectives and from all sorts of sets of life experiences addressing these questions with clear and frank and honest words? I think that would turn all this negative energy into positive energy. Say that Buy-and-Hold prevailed. That would be wonderful! By permitting the debate, the Buy-and-Holders would end up for the first time feeling a true confidence in their ideas. We should all want to see that happen if the reality is that Buy-and-Hold works.
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I don’t believe that it is even possible for people to know something that they do not feel free to talk about. We learn through discussion. So we MUST talk openly about these matters. It is this assumption that the market is efficient despite the 30 years of academic research showing otherwise that keeps people from talking openly. So I believe that that assumption must be challenged. I believe that we should give Fama full credit for his contribution, which was huge. But I also believe that Fama himself wants his ideas to bear good fruit and so on some level of consciousness Fama himself (and all those who follow his ideas) wants learning to advance. If Fama and Bogle and all the others on “that side” of things wants learning to advance, we ALL want learning to advance. So let’s do it! Let’s get about the business of learning together what really works! We should put an end to The Debate About Having a Debate and proceed to the actual debate that matters, the debate about how stock investing works in the real world.
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Rob

Economics Professor Valeriy Zakamulin: “I Would Not Agree That All Academic Professors Deny the Existence of Predictability. If A Paper That Supports Predictability Is Not Accepted, This Usually Does Not Mean That an Editor or a Reviewer Disbelieves In It. Most Often There Are Some Serious Flaws in Research Design.”

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I’ve been sending e-mails to numerous people, letting them know about my article reporting on The Silencing of Academic Researcher Wade Pfau by the Buy-and-Hold Mafia.

Valeriy Zakamulin, a professor in the Department of Economics and Business Administration at the University of Agder, wrote:

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“I agree that the topic of stock return predictability is indeed controversial. Yet I would not agree that all academic professors deny the existence of predictability. If a paper that supports return predictability is not accepted, this usually does not mean that an editor or a reviewer disbelieves in it. Most often there are some serious flaws in research design. Typical flaws are data-mining bias, look-ahead bias, econometric pitfalls, etc. There have been published many papers in top academic journals that find in-sample predictability.”

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Personally I believe in stock return predictability, see my paper

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http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1857794

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I replied:
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Valeriy:

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Thanks a million for that extremely helpful response.

One, I appreciate the context you provided re why some research in this area may have been rejected. There are some who adopt views re this matter that I view as excessively cynical. It cheers me to hear someone who is more knowledgeable than me about the technical aspects of the question who is able to offer a more charitable and encouraging and positive take.

Two, I did not know about your research and I am so happy that now I do! I have downloaded the paper and will give it a careful read over the next week or so (I am at the moment trying to complete a few projects I need to put behind me before taking a few days off for the holidays).

I am not an investing expert. I do not have the technical background you possess. I am a journalist. I do think I possess a strong grasp of the political aspects of the question (as noted above, I tend to be inclined to a more optimistic take than some of the others who share my concern that we need to move forward more quickly than we have been re challenges to the conventional thinking). I also have done a lot of work exploring the how-to-invest implications of Shiller’s findings and the research that followed from it. Please feel free to shoot me an e-mail if you ever have an interest in talking over any questions re which you believe that I might be able to offer any help.

I’ll ask you one question that I think is key to making sense of all this. Please don’t feel that I am demanding or even expecting an answer for you. I am just throwing this question out there in the event that it might be helpful to do so.

You say that there are many papers in top journals showing in-sample predictability. Do you know of any that show the opposite — that long-term market timing does NOT work? My sense is that the source of all the confusion is that those who believe in the Efficient Market Theory ASSUMED that long-term timing does not work without ever showing this to be so and that the problem ever since has been that people don’t want to reject this assumption because so many books and articles and calculators were built on this foundational belief.

The idea that timing doesn’t work became the default position, so the burden was placed on those who believe in predictability to prove their case while it really should be the other way around — we should be assuming that long-term timing always works (since long-term timing is paying attention to price and price discipline is what makes markets work) and challenging those who do not believe that long-term timing is required to present evidence in support of their case.

IS there any evidence that supports the claim that long-term timing is not required? Wade Pfau spent a good bit of time trying to find something re this point and came up empty-handed. He even went to the Bogleheads Forum and asked if anyone there knew of any studies showing that long-term timing does not work or is not required for long-term success. No one there knew of any work that had been done on this particular point.

Thanks so much for doing the work you do, which I believe (I am biased — but still…) is the most important research work (in any field!) being done today. I wish you the best of luck in all your future endeavors.

Rob

25-Year CPA Lyn Graham: “One Direction for a Person Working With Such Perceived Threats Is to Work Under the Visible Level. The Other Is to Be Very Visible and Make It Difficult for the Threats to Be Carried Out Without Notice.”

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I’ve been sending e-mails to numerous people, letting them know about my article reporting on The Silencing of Academic Researcher Wade Pfau by the Buy-and-Hold Mafia.

Yesterday’s blog entry reported on my correspondence with 25-Year CPA Lyn Graham. Set forth below is Lyn’s response:

The forthcoming market crash is foretold and purposeful, and no investment strategy I have heard or can think of is the solution. It is a sad state of affairs. Reagan warned we are only a generation away from losing our freedoms. I never took that as a prophesy but ….
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Economic success breeds freedom, and economic success is being destroyed, purposefully.
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One direction for a person working with such perceived threats is to work under the visible level. The other is to be very visible and make it difficult for the threats to be carried out without notice.
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I am not sure I have much to add. Good luck.
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I replied:
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Lyn:

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I’ve definitely chosen the “Be Very Visible” path!
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I want to end the conversation on an optimistic note. Shiller’s ideas represent a very big advance. I truly think I speak as an expert on this question because no one else has spent as much time exploring the implications of his ideas. Think where we would be had we failed to achieve any advances in electronics and computer and software technology for the past 32 years. We’ve given up a lot by closing off advances in our understanding of how stock investing works. The good news is that, when those paths open to us, we are going to see huge increases in our economy’s ability to generate wealth for us all in a very short amount of time.
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I am not saying that everything is roses. But I think that sometimes it is darkest before the dawn and I don’t think that is pure coincidence. I think it may sometimes take a spell of darkness to help the humans appreciate why it is important always to be moving ahead. I can see things getting much worse than they are today and then suddenly turning very positive indeed.
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Even if I am wrong, it’s probably better to be optimistic than not to be as it is difficult to work up the energy to work hard for good solutions once one becomes overly pessimistic. If it were just me, perhaps I would become discouraged. I have two young boys. So I feel that I have no choice but to maintain hope for the future even when my eyes see things that otherwise might push me in the other direction.
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Rob

“Jack Bogle Owes Every Investor Who Has Followed a Buy-and-Hold Strategy an Explanation of Why He Did Not Correct the Errors He Made Promptly Following Shiller’s Publication of Research Showing Them to Be Errors”

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Set forth below are the texts of six comments that I recently put to a discussion thread at this blog:

There is no conspiracy.

Former Financial Analysts Journal Editor Rob Arnott copied Jack Bogle on his e-mail to me saying that my investing ideas are “sound” and sharing with me his own experiences with intimidation being employed to stop academic researchers from doing the research that we all need to see to learn how stock investing really works. Jack did not respond.

I don’t think “conspiracy” is precisely the correct word to describe what is going on here. But there is certainly some sort of funny business going on when Jack Bogle does not offer a public response to an e-mail of that nature. No?

Please explain Bogle’s failure to respond to Rob Arnott’s e-mail from your perspective that there is no “conspiracy” going on re these matters.

Rob

 

You are delusional.

You were one of the ones saying that on the morning of May 13, 2002, when I put up my famous post pointing out the errors in the Old School safe withdrawal rate studies.

In the past year or two, every major publication in this field has acknowledged that I was right.

Is it Rob Bennett who is delusional? Or is it the “experts” who continue to try to “defend” Buy-and-Hold in the face of 32 years of peer-reviewed academic research showing that there is precisely zero chance that this strategy can ever work for a single long-term investor?

Rob

 

You have been banned from a large number of boards.

And I have seen a good percentage of the site administrators who banned me write me notes APOLOGIZING for the bans and telling me that they see great value in my work.

Odd?

Rob

 

As to not getting responses, no one owes you anything.

Jack Bogle owes every investor who has followed a Buy-and-Hold strategy (and they number in the millions) an explanation of why he did not correct the errors he made in development of the strategy promptly following Shiller’s publication of the research showing them to be errors, Sparky.

With great influence comes great responsibility.

Rob

 

Name any crackpot idea and you usually find that 2 or 3% of the population will support that position. That is really not a great percentage.

No one employs death threats and board bannings and tens of thousands of acts of defamation and threats to get academic researchers fired from their jobs to “defend” their ideas from the challenges raised by crackpots, Sparky. Your own behavior tells the tale here.

Rob

 

you seem to be viewed as a nuisance.

I am viewed as a nuisance and a lot worse by people who are still turning a buck through the promotion of Buy-and-Hold strategies 32 years after the peer-reviewed academic research showed that there is precisely zero chance that such a strategy could ever work for even a single long-term investor. That much is certainly fair to say, Sparky.

Rob

25-Year CPA Lyn Graham: “This Sort of Intimidation Is Not Acceptable. The Cigarette and Pharmaceutical Industries Found Research Supporting Their Products by Funding It. But That Was Big Money Supporting Outcomes, Not Dissuading Others.”

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I’ve been contacting numerous people to let them know about my article reporting on The Silencing of Academic Research Wade Pfau by the Buy-and-Hold Mafia. 

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Lyn Graham, a certified public accountant with more than 25 years of public accounting experience in audit practice and in national policy development groups, wrote:

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Investment theory is not my area of academic research, but of course this sort of intimidation is not acceptable.
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The cigarette and pharmaceutical industries (found) find research supporting their products by funding it. This is another form of intimidation since funding is rewarded by the schools and is directly financially beneficial to the researcher. It has even occurred in such disciplines as accounting. But this is big money supporting outcomes, not dissuading others.
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As Harry Markopolos (the Madoff exposer) learned, there is always resistance to counter-conventional wisdom research. I have found that in my own research. Editors and reviewers of academic works also create this without bribes or threats. The one environment one might expect to be open to new direcions is remarkably prejudiced and closed-minded. Far better in their minds to support a simple extension of an oft-published strain of research than to “take a chance” on a new direction.
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I do have some knowledge of academic matters.
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Once tenure has been granted (important to be able to freely seek contrary knowledge) “they” can complain to the school all they want, but the researcher is protected by the school. If the researcher is not tenured, then the conventional advice is to get tenured, then branch out. Whether tenured or not the researcher needs to report this matter to the school to “paper the trail” if something happens.
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If the researcher feels physically threatened, he needs to make this a police matter and report this. It might be across states boundaries which might then evoke a Federal Agency response. Legal counsel (I would suggest speaking to the school counsel first) may be necessary to build a case for  future litigation or a restraining order. This is not a matter for a person or a blog to take on alone and may further endanger the individual if there is a real threat.
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Editors and reviewers are another issue. Top Journals are tough to break into and can be resistant to controversy. The blessing in Finance is that there are so many “top tier” journal  outlets that a well researched and documented article is likely to be accepted at one of them. There may be one in that pack that is open to taking a chance, but I am not in a position to advise which ones. There are some ways to identify likely targets such as the nature of articles published and their willingness to take an “outlier.” It can take 5-7 years in many disciplines to walk a study through to publication. Not even a conspiracy at work – just anal retentiveness.
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A book is also an outlet that has fewer constraints (although few academic points for the untenured at research institutions). See This Time is Different by Reinart and Rogoff. I publish with Wiley.
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Gangster mentality has returned to our culture.
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Hope this helps. I am retired and not interested in joining a cause, but would be pleased to speak to or correspond with the individual directly if I might be of some help.

“People Do Not Post Comments Here. And People Do Not Link to Me. They Are Afraid to Do So. I Had Tons of Support Before Greaney Threatened to Kill Family Members of Any Poster Who Expressed Support for Me.”

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

I have 140 wildly supportive comments posted (with links!) at the “People Are Talking” section of the site, Sparky. There is no other blogger on the face of Planet Internet who has even a fraction of the number of wildly enthusiastic endorsements that I have won for myself.

Tell me one other blogger who has his name in the Acknowledgments section of peer-reviewed academic research (saying that he was the person whose views on investing inspired the research). And we’re not talking about any old research paper here. We are talking about research that a Ph.D. graduate from Princeton says belongs in the Journal of Finance, the top journal in the field.

Are you joking?

You are right that people do not post comments here. And people do not link to me. And people do not write articles about me.

They are afraid to do so.

I had tons of support before Greaney threatened to kill family members of any poster who expressed support for me. Do you think that might have something to do with the lack of comments here?

And it’s not just the death threats. The death threats were advanced by social misfits who in ordinary circumstances no one would pay attention to for two seconds. The bigger problem is the failure of people like Jack Bogle and Bill Bernstein and Larry Swedroe and Scott Burns to speak up and demand that something be done about those death threats and all the other intimidation tactics that you Goons have employed.

When Bogle speaks up, it is over, Sparky.

From that day forward, I will have not just hundreds of comments at this blog every day, I will have thousands.

That’s why I built the Retire Early board at Motley Fool into the most successful board in that site’s history in the first place. I want thousands of comments every day. And I want a thriving community of people helping those thousands of people to save and invest more effectively.

When your prison term is announced, that news is going to go viral. And then it will be over. The ugly part, I mean. The wonderful, life-enhancing exploration of the realities of saving and investing will continue for years and years and years.

Do I like it that my success depends on you being sent to prison?

I do not like it one tiny bit.

That’s why I have spoken out against the intimidation tactics going back to the first day.

I don’t control everything that happens in this crazy, mixed-up world of ours, do I, Sparky?

If it were up to me, there would be thousands of comments here every day and you would not be on your way to prison. It’s not up to just me. So I have been forced to watch it play out this other way instead.

I wish you all the best, my long-time abusive posting friend.

Rob

“I Have Engaged in Hard Self-Evaluation Every Day for 10 Years Running Now. I Have Come to the Conclusion That It Is Possible That I Am Wrong.”

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Set forth below is the text of a comment that I recent put to a discussion thread at this blog: 

I agree in full with the first two points you make here and in part with the third, Sparky.

I am 100 percent confident that many of the recipients of my e-mails find the e-mail campaign an odd way of spreading the word. How can I be so sure? I find it an odd way of proceeding MYSELF. If the person sending the e-mails finds it an odd way of proceeding, how could at least a significant percentage of those receiving them not feel the same?

And I certainly agree that the vast majority of people do not share my views on investing. If they did, stocks couldn’t possibly be priced as they are today. So that one also is settled.

Your third point is that I should do some hard self-evaluation and consider the possibility that I am wrong.

I agree 100 percent with those words as stated. I have engaged in hard self-evaluation every day for 10 years running now. So I obviously agree with you that this is needed. And I have come to the conclusion that it is possible that I am wrong. I’ve been wrong before. I thought I was right on those occasions. If it happened those times, why would it not be possible that it is happening again?

The part re which I disagree is unspoken but implicit in your words.

Your implicit suggestion is that I should stop sending the e-mails.

No.

That would be a terrible, terrible, terrible choice for me to make.

This is where YOU need to consider the possibility that it is YOU who are wrong.

If you are wrong, we have available to us today a means of reducing the risk of stock investing by 70 percent and we are not making use of it.

If you are wrong, we have caused an economic crisis because some Big Shots in this field were not able to work up the courage to acknowledge that what the academic research appeared to show 30 years ago no longer applies (something that all “experts” in this field should know as a result of their obligation to keep up with the new research as it appears).

If you are wrong, we have destroyed many fine discussion boards and blogs for no good reason whatsoever.

If you are wrong, many of our friends will be serving long prison terms following the next price crash. Huh? That makes sense? It’s not a close call, Sparky. That makes zero sense.

I could be wrong. You could be wrong. So it goes in this crazy, mixed-up world of ours.

Fortunately for us, we have as a society figured out a way to deal with this dilemma. We permit both sides to have their say. Then all the people interested in the subject listen in and decide for themselves. That way, as the case for an idea weakens, it is replaced by another, ultimately stronger idea.

That’s how we have to play it. I am not wrong re that one. That one is backed by all our cultural norms and indeed by our entire legal system and by thousands of years of human civilization. It’s not even remotely possible that I am wrong re that one.

Say that I really am wrong and that Buy-and-Hold is the ideal investing strategy. If that is so, Buy-and-Hold will survive any challenges that I or anyone else can present. The Buy-and-Hold idea will be stronger after it is vindicated than it is today. If Buy-and-Hold is the ideal strategy, that’s what you and I both want to see happen, no?

So let’s get to work, Sparky!

Let’s get that Ban on Honest Posting lifted at every discussion board and blog on the internet and let’s see Buy-and-Hold (or Valuation-Informed Indexing!) vindicated in the national debate that follows.

I look forward to working together with you and all of my other Buy-and-Hold friends to put all the ugliness behind us and to transform these discussions into helpful and fruitful and warm and friendly ones from this point forward.

Please let me know at what time today I should begin posting again to the Bogleheads Forum. I believe that it would be helpful if you would ask Mel to put up a “Welcome Back, Rob!” thread. That would set the right tone for where we all want to take this in coming days.

Thanks for hanging in there, my old friend!

Rob

Professor Jacob Goldenberg: “Threats Like This (If Indeed It Happened) Are Unjustified”

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I’ve been sending e-mails to numerous people to let them know about my article reporting on The Silencing of Academic Researcher Wade Pfau by the Buy-and-Hold Mafia. Set forth below are reports on five brief responses.

1) Bertrand Candelon, a Professor in International Monetary Economics at Maastrich University, wrote: “Hi, Rob: Thanks for sending me your paper. I will read it and let you know.”

2) Stephen Diamond, an Associate Professor of Law at Santa Clara University, wrote: “I will take a look and let you know my thoughts.”

3) Aoife Nolan, a Professor of International Human Rights Law at the University of Nottingham, wrote: “Thanks for your e-mail. I’m afraid it’s not really my area but thank for you sending the article on.”

4) Jacob Goldenberg, a Professor at the School of Business Administration at Hebrew University of Jerusalem, wrote: “I looked at the article. Although it sounds interesting, I am totally ignorant in this field. Personally, I think that in general threats like this (if indeed it happened) are unjustified. But since this is totally outside my field I think I am not the right person to give any advice.”

I replied: I understand. Thanks for taking a look. I am not seeking any particular response or advice from you. You are of course right that the intimidation tactics are unjustified. It’s a human esponse, however. The Buy-and-Holders are smart and good people. They have made huge positive contributions. Now we need to figure out how to get things to a place where they can enjoy the satisfaction that they should be feeling that we have in recent years been able to take their insights to an even better place. I don’t have all the answers. I am still trying to figure things out myself to some extent. The reactions I get from people give me little clues as to what the concerns are, etc. I believe that in time that will help me develop more effective ways to proceed.”

5) Softiane Aboura, a Finance Professor in Paris, wrote: “I did not read everything but it seems interesting. Generally industry wants to maximize its transaction costs whatever is the strategy.”