A Rich Life

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

Rob Bennett to Academic Researcher Wade Pfau on Hearing of His Fears that the Greaney Goons Will Carry Through on Their Threats to Get Him Fired From His Job: “Please Don’t Delude Yourself Into Thinking That There Is Anything More Than a Zero Chance That ‘This Stuff Will Blow Over Soon’….This Has Been Going on for Nine Years.”

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Yesterday’s blog entry reported on an e-mail sent to me by Academic Researcher Wade Pfau on May 1, 2011, in which he described his fears of getting fired because of the threats made by the Greaney Goons to contact his employer with defamatory comments as their way of “punishing” Wade for having posted his honest views on the need for the Old School safe withdrawal rate studies to be corrected now that there is a consensus in the field that they get the numbers that millions of middle-class people have used to plan their retirements wildly wrong. I sent my response later the same day. The text is set forth below.

Wade:

Thanks for your kind (and troubling) note.

I will of course honor your wishes re the matters you refer to below.

The concern you are expressing is so insane that I am tempted not to take it seriously. The other side of the story, of course, is that I have had similar things done to me on scores of occasions and I have seen similar  things done to many others. So the full reality is that the concern you evidence is only in an objective sense insane and in the context in which it is being raised here entirely real.

Please don’t delude yourself into thinking that there is  anything more than a zero chance that “this stuff will blow over soon and those guys will forget about it and move on to the next thing.” This has been going on for nine years.

It would have been far, far easier to let it go when it all could have been easily characterized as a well-intentioned mistake. We now have s situation where hundreds of reputations are at jeopardy and where tens of thousands of lawsuits are likely to be filed once middle-class investors hear the story. I obviously wish that I could wave a magic wand and take us back to the morning of May 13, 2002. But none of us possess that power. All responsible people caught up in this (I think
it is fair to say that that includes all responsible people living in free-market economies today) need to accept the cards we have  been dealt and take whatever steps we can to bring things to a good and positive and life-affirming resolution for every single person (including those on “the other side”) as possible.

I believe that our hope lies in the fact that everyone deep down inside wants the same thing. There are of course some who  tell themselves that they do not want a resolution. But deep down  inside they do. They have painted themselves into a corner and are not capable of letting in the full horror of what they have done. We have to extend the hand of kindness while also insisting on the right to do honest and positive work and not to degrade ourselves or participate in the degradation of others. We need to combine love and honesty in the proper proportions.

I’ll always do anything I can to take things to a positive place. I don’t know if you believe in God or not, but, if you do, this is  a time to call on that belief for comfort that a positive resolution of this matter really is possible. I (somewhat stubbornly) believe that it is. John Walter Russell used to tell me “I’ve put it in God’s hands and i know it will eventually work out better than anyone can today imagine.” John had a stronger faith than I did. But I have just enough to see that there might be something to what he said.

I am horrified to think that I have even in the most indirect way caused you to feel anxiety over how things might proceed. I apologize for that. I hope that you possess at least some understanding of the huge importance of the research you have already done (to say nothing of what you are obviously capable of doing in the future). My dream is that there will be a day when the pain you have been put through here pays huge dividends (I of course dream that the same will someday be true for me and my family).

Please keep your chin up and stay optimistic. The potential good here is 500 times bigger than the small-minded stuff. There’s got to be a way to make the good stuff happen and make the ugly stuff go away. We will find it together (I don’t mean just you and me but the entire community of investors and people living in free-market economies in general).

Please let me know if there are any promising avenues that you discover or any questions or concerns that you would like to direct to me. If you ever think I am walking an ill-chosen path, I would be grateful if you would let me know. I obviously don’t always get it all right. I need to count on my friends to steer me back to a better path when I take wrong steps.

Please take care.

Rob

Academic Researcher Wade Pfau (In Response to a Threat by the Greaney Goons to Get Him Fired From His Job for Posting Honestly on Safe Withdrawal Rates): “I Think I Should Stay Publicly Quiet for Awhile As I Really Don’t Want Anyone Sending Messages About Any Topics to Officials at My University”

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Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on April 5. 2011. I sent Wade an e-mail on April 18, 2011, reporting that The Returns Sequence Reality Checker had been released.

Wade said that the calculator looked great. He asked: “Have you been following the Trinity study thread at Bogleheads? DRiP Guy had a bit of a temper tantrum over the weekend” I responded that: “Things move forward at an exceedingly slow pace. But I did detect forward motion” in that thread.

Wade was during this time-period posting occasionally at my blog.  A number of articles were published in this time-period acknowledging ten years later that I was right in my May 13, 2002, post, that the Old School safe withdrawal rate studies really do get all the numbers wildly wrong because they do not include an adjustment for the valuation level that applies on the day the retirement begins. I wrote in a blog entry that the Old School studies should be corrected.  I explained that financial planners had been using the infamous “4 Percent Rule” for years and that millions of middle-class investors will be experiencing failed retirements in days to come and that we should all do everything possible to get the word out and help as many people as we can. Wade at first expressed reluctance to acknowledge the obvious merit of this idea. But, after some discussion, he agreed that the Old School studies should be corrected. He said that he would write an e-mail to the authors of the Trinity Study seeking a correction.

The Greaney Goons responded by putting forward posts at a thread at the Goon Central board threatening to get Wade fired from his job by sending defamatory comments to his employer. Wade sent me the following e-mail on May 1, 2011:

Hi Rob,

Thanks for the comments on my blog, and also your new article about the Fisher and Statman study is very nice.

I think I should stay publicly quiet for a while, as I really don’t want anyone sending messages about any topics to officials at my university.  They will not care about who is right or wrong, especially as they will not care about US retirement planning issues anyway, but they just don’t like any topic of controversy or problems. Hopefully this stuff will blow over soon and those guys will forget about it and move on to the next thing before any further escalation occurs.

But would you mind, at least for the next week or so, to not mention my name anymore on your blog, and to also completely ignore the “Wade Pfau Contacts Trinity Authors” thread at the Hocomania site.  I hope that thread can quickly move down the list into the archives.  At the same time, please do not delete it either, as that would surely be noticed by someone.

By the way, please do not mention this publicly, but just to let you know, I haven’t heard back from any of the Trinity authors yet.

Best wishes, Wade

Academic Researcher Wade Pfau: “Valuation-Informed Indexing Always Provides More Returns for Often Less Risk”

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Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on March 1, 2011. He sent his response later that day.

Wade said that he shared my view that using 30-year rolling time-periods to make the case for Valuation-Informed Indexing was “compelling” and that “I’m definitely going to be using tables like the one I showed at Bogleheads with all the risk measures.” He explained that: “My idea is to show many different tables with results over the whole period for returns and risks.  Valuation-Informed Indexing always provides more returns for often less risk.” Wade’s e-mail continued: “I also want to read more about the “information ratio” measure, as I think it may be the most important of all the measures in that table. But I need to better explain its full power.”

He stated: ” I will pick some of the cases where VII did least well and show the 30-year rolling periods for those.  This is to help avoid data mining.  But the fact will remain that no matter what I try, VII will still perform better in 85-95% of cases for 30 years, and the times that it does worse are those in which buy and hold was doing its best in history (which is always right around the peak of the bubble in 2000), and so VII is not more risky.  I have a new figure for showing this as well. And a nice figure showing the outperformance percentages across rolling periods of lengths between 1 and 40 years.  I think it is all quite persuasive.”

“Just Don’t Forget to Consider Taxes Next Time, You Big Dummy!”

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Yesterday’s blog entry reported on an e-mail that Academic Researcher Wade Pfau sent me on February 28, 2011. My two responses, sent on March 1, 2011, are set forth below.

Wade:

That’s stunning.

I’ve said it before and I’ll say it again, my man. It’s the front page of the New York Times or bust for this important research.

You can say “it will never happen” just because it has never happened before. But I can assure you that on the morning of May 13, 2002, not one person (including me) who read my post asking questions about the safe withdrawal research of the time anticipated it leading (through an indirect and highly circuitous process) to a post of this nature nine years later.

But all of these issues are connected. You pull one thread and a lot of things begin unravelling. You are pulling at a lot of threads. I am confident that we are going to see enough unravelling to see this on the front page of the New York Times after some time passes and the speed of the unravelling continues to accelerate.

All big stories start with something small. It took years of investigations for the Watergate story to generate a “Nixon Resigns” headline. People make things happen by sticking their necks out and asking questions. The World Famous Portfolio Allocation Strategist Bruce Springsteen once observed: “From Small Things, Mama, Big Things One Day Come.”

I disagree with you about the “Dismal Science” comment. Economics has been a Dismal Science in the past because it has largely ignored the human aspect of the question. What we are learning is how terrible a mistake that is.

Buy-and-Hold is just Adam Smith economics (“the market is always right”) applied to investing. What we are seeing with today’s economic crisis is what follows when an excessively rationalistic economic theory is applied in the practical world. What follows is widespread human misery. When a new economics is developed that includes consideration of the human element, economists will be leading us to a new era of greater economic growth than we have ever seen before.  No one will be calling them practitioners of a Dismal Science then.

Anyway, that was the single best post I have ever seen. And not by a little bit either. People will be thinking through the implications of that one for a long time.

Just don’t forget to consider taxes next time, you big dummy!

Rob

 

Wade:

Your point about it being unfair to compare 100 percent stocks with 100/0 stocks (that the proper comparison is 100/0 with 50 percent stocks) is very important. I came to see the importance of this when doing runs with the Scenario Surfer and have struggled with finding a good way to get the point across. You did an amazing job with your use of the Sharpe ratio and the other statistical tools you cited.

The problem that I ran into with the Surfer is that I had two different goals: (1) to learn how to invest effectively; and (2) to demonstrate the benefits of long-term timing. When it comes to investing effectively, I would be disinclined to ever go with a stock allocation higher than 80 percent. The individual investor just cannot afford to have all his eggs in one basket. When it comes to showing that long-term timing works, it would be best to at times of very low prices to go with a
stock allocation of 100 percent or even SOMETHING WELL IN EXCESS OF THAT.

I am confident that, if you run tests on allocations of over 100 percent at times of low valuations, your showing that long-term timing works will be even stronger. My guess is that the optimal (according to the numbers) stock allocation is well in excess of 100 percent stocks at times of low valuations and is probably at least somewhat in excess of 100 percent stocks even at times of moderate valuations.

The reason why this is so is that long-term timers are not guessing. Valuations MUST revert to the mean or the market would collapse. So this is a sure thing (the amount of time that will pass before reversion to the mean takes place is of course NOT a sure thing). Since stocks pay such high returns at low valuations, an allocation in excess of 100 percent is locking in a big differential.

People have a hard time accepting this because it is irrational. There should not be such a big differential. What they are missing is that all overvaluation is irrational. There should not be any differential at all. But there is! And there always will be until the day arrives when we can all talk plainly about this topic and thereby as a society come to terms with it.

I don’t want to add to your projects list. You are making fantastic choices on your own. But someday in the future I would love to see a calculation of the optimal stock allocation at different price levels, with allocations of over 100 percent stocks among those considered as possibilities. That analysis is going to show a HUGE differential for VII. One of the reasons why the case has never been made strongly enough is that most of us shy away from even testing allocations in excess of 100 percent.

If I were creating the Surfer today, I would let people test allocations above 100 percent. I wouldn’t suggest anyone adopt such an allocation. But I think looking at what they have produced throughout history tells us something important about how stock investing really works. I see great theoretical value in showing this.

Rob

Academic Researcher Wade Pfau in Response to Mel Lindauer’s Claim That His Research Engages in Data-Mining: “I Take the Issue of Data-Mining Very Seriously, and, With All Due Respect, Any Data-Mining That I Am Doing Is In Favor of Buy-and-Hold, Not In Favor of Market Timing”

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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. Set forth below is the text of another e-mail that I sent to Wade on the same day.

Wade:

Please save this for after you catch up on your sleep!

You’re right about the regret bias.

But it won’t be a problem once we are able to get the word out re the need for long-term timing. Say that Money magazine and all the experts and all the web sites all begin pushing that message. There will never again be another bull market. So there will never again be a need to lower one’s stock allocation too much. So there will never again be regret bias.

All of this is circular. People cannot learn about VII because of the Ban on Honest Posting. The Ban is needed to protect Buy-and-Hold. If we give up on the effort to protect Buy-and-Hold, we learn things that it was not possible to
learn in the days before indexing. Once we learn these things, we are never going to forget them. There are going to be books and magazines and calculators and web sites to constantly remind us.

Overvaluation is not a natural phenomenon. It is the product of our ignorance of how stock investing works. We are becoming less ignorant because of decades of academic research (including the research done by the Buy-and-Holders, to be sure — the finding that short-term timing does not work was a HUGE advance).

When the car was invented, one of the complaints was that there were not enough roads to ride it on. Once we all had cars, we solved that problem! When the internet was invented, people said “well, there’s not much there to look at really.” Once we all had computers, we solved that problem.

Once we all know how to invest effectively, no one is going to want to go back to experiencing insane bull markets followed by insane bear markets. For what purpose would anyone want to do that? Those days are over. It’s just a question of getting the word out at this point.

Future discussions will not be over whether to engage in market timing or not but over how best to engage in market timing. There are lots of fruitful discussions that can be held re that question. That’s a very different sort of discussion from the one we have been having for nine years. When we are all directing our energies in a constructive direction, the pace of progress is going to speed up considerably.

The question of whether people need to engage in market timing or not (whether people need to take price into consideration when buying stocks or not) is a time waster. The future of investing analysis will be aimed at answering a far more intelligent question — HOW should people engage in market timing?

As we move to the next stage, the investor regret matter becomes less of a factor. It’s helpful to keep in mind that we have just lived through the most out-of-control bull in U.S. history. Why was this one so bad? Investors have always been drawn to Get Rich Quick thinking (the idea that this might be the first time in history when the price paid for stocks turns out not to matter). But this time those drawn to Get Rich Quick could cite ACADEMIC STUDIES purporting to back up their Get Rich Quick inclinations. That’s why I say that Buy-and-Hold is the purest and most dangerous Get Rich Quick scheme ever concocted by the human mind (not intentionally so — but still).

Once we bury Buy-and-Hold 30 feet in the ground where it can do no further harm to humans and other living things, it is all downhill sledding. The investor regret matter was indeed a problem for those who attempted to invest rationally during the Buy-and-Hold Era. But it never needs to be an issue again once the dangers of Buy-and-Hold become widespread public knowledge.

Rob

Wade responded later the same day. He said: “I think you will find my new follow-up post even better than the first one”:

http://www.bogleheads.org/forum/viewtopic.php?p=974752#974752

In the material that appears at the link, Mel Lindauer, the co-author of the book The Bogleheads Guide to Investing, attacked Wade’s research for various perceived deficiencies. Wade responded: “Mel, thank you for the comment. If you think I am trying to be sneaky, I think you are missing something important.” When Mel escalated his attacks by observing “sure looks like data-mining to me,”  Wade stated: “I take the issue of data mining very seriously, and with all due respect, any data mining that I am doing is in favor of buy-and-hold, not in favor of market timing. ”

Mel in a subsequent comment said: ” I’m just trying to get to the bottom of all the issues, before you attempt to publish what may be found to be inferior or incomplete work by your peer reviewers. You appear to honestly want to pick our brains, so I’m giving you the feedback you asked for. These are issues that will be raised later, so you need to face them now. However, it appears you’re getting just a little bit testy because I’m raising issues that you may not have considered and which could certainly change the results. Better to get the issues raised here and resolved instead of having your paper rejected because of these very basic issues which you haven’t addressed.

Wade responded: “I’ll try not to get testy. When we stop comparing apples and oranges, and instead compare two scenarios which offer broadly similar risks to investors: (1) the worst performing market timing scenario produced $94,866 ; (2) a 50/50 asset allocation produced $13,426; (3) the 50/50 asset allocation is also going to have to pay some capital gains taxes when it rebalances annually, but the market timer will surely have to pay more taxes over time. But do you honestly believe that the extra taxes paid by the market timer will wipe out the entire surplus gains it had provided at a broadly similar level of risk? ”

Mel responded by pretending that he believed that Wade had changed the scenarios he was describing. He said: “The figures in your original chart were 100%/0 and now you’re talking about the returns for a 50/50 portfolio?”
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Wade said: Please refer to my post above that includes a table and a figure. I talk about both cases there. I’m not switching anything. Would you agree that it is not appropriate to compare the returns of different strategies that result from taking very different levels of risk, and that we should compare risk-adjusted returns? In that case, it is 50/50.  Am I the only one who thinks that it isn’t quite right to be comparing a strategy that is 100% stocks against a strategy that is on average only 50% stocks? Fisher and Statman do this, but one of the points I am trying to make is that this isn’t a fair comparison. Am I wrong?”
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Mel said: It’s a very personal thing. Each investor determines the amount of risk they’re willing to take, and many are willing to take on more risk than others for the expected higher returns. Some investors choose 100% equity, some might be 80/20, some 60/40 etc. So you can’t say that all investors should or do wish to assume the same level of risk.
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Wade stated: I’m definitely not saying that all investors should take on the same risk. Of course not.  What I am saying, or asking, is that if you wish to compare two different investment strategies to see which can be expected to provide the highest returns, shouldn’t you make some kind of adjustment for risk? If you ignore risk, then whatever provides the highest expected return over time will tend to win. Is it okay to ignore risk for the comparisons? Or should you only try to compare strategies which offer the same risks? Then, from there, you can move on and make further adjustments to the strategy to calibrate the level of risk you are willing to incur as an individual investor.  To give some context. I am currently 70/30. But I am seriously considering changing to 50% stocks/70% stocks/90% stocks depending on the level of PE10. I won’t do this until at least the summer, because I need to start studying for the CFA Level 3 exam soon, and I can see that it will teach lots of important tools for making these comparisons, and give me more time to think about this rather serious and important decision. I still have 35 or 40 years before I would seriously consider retiring.”
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Mel said: “I’m simply raising issues that others are certain to raise. And ignoring the cost of taxes in the market-timing strategy is a major flaw IMO. ” Do you have clearly-defined and executable buy and sell points where all of the information needed to follow the market-timing system is publicly available to all investors?  Finally, have you considered what the market impact would be if a very large number of investors followed the system and executed their market timing buys and sells on the same day? (I’d guess that there would only be one right buy and sell date for the data to be valid).  PS – Congrats on getting past the first two CFA tests. You’re almost there!”
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Wade responded: “Thank you for these comments. I think we can wrap up our discussion, thank you very much.  Taxes do remain an area I haven’t explored, but would like to. But it will require a lot of work so I cannot do it until after the exam.  About the decision rules with publicly available information, that should not be a problem. After the market closes at the end of the year, people should be able to get an update on PE10 immediately and change their asset allocation for the following year when necessary.  About the potential market impacts of many people adopting this strategy, I don’t have any clear answer. Some may think it will eliminate booms and busts from the market, but as a “dismal scientist” (a nickname for economists) I can’t accept that. There are always unintended consequences to new policies. Bubbles would just form elsewhere. This is an important question though. Under my assumptions, people make their moves on January 1st of each year, but I suppose in reality things wouldn’t work out quite that precisely. But at the end of the day, as well, it will probably be hard to convince a lot of people to overcome the psychological roadblocks of this contrarian investment strategy, so that the market impacts may not be so large.  After all, as you kindly pointed out much earlier, all of this has been around at least since the time of Graham and Dodd.  Thank you again for all your comments and time today.”
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There were no further posts to the thread for twelve days, at which point Wade advanced a post reporting on how the earthquake in Japan affected him and his family. Mel offered his good wishes.

Academic Researcher Wade Pfau: “Though I Was Only Trying to Do an Old-School Safe Withdrawal Rate Study, All That I Ended Up Doing Was Showing in a Different Way What You Had Been Saying All Along — The SWR Changes With Valuations”

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Yesterday’s blog entry reported on an e-mail sent to me by academic researcher Wade Pfau on February 22, 2011. On February 15, 2011, I received an e-mail from Wade on a different topic, his research on safe savings rates.

He said: “You and DRiP Guy realized immediately about my new paper what it took me a few days to come to grips with: though I was only trying to do an old-school SWR study, all that I ended up doing was showing in a different way what you had been saying all along: the SWR changes with valuations.  I guess I’m cursed by valuations now 🙂 I hope my paper can help that idea get acceptance, since I don’t really mention valuations in it, but once people get warmed up to the idea, they will realize, as I did, that valuations are the driving factor.  But perhaps it is better for people to realize that for themselves, rather than to point it out to them directly.”

I sent my response the following day. Here is the text:

Wade:

We are ALL cursed by valuations!

My true belief is that we are all BLESSED what we have learned about valuations. Unfortunately, for the moment it FEELS like a curse.

It’s possible that coming at the valuations question from an indirect angle might help you slip through the radar. I wouldn’t bet big money on it. But there’s certainly no harm in trying something new. And in any event I think that looking at things in this way highlights some new points. So I very much see this as being a highly positive thing.

I agree to a point with your statement that “the biggest risk of VII is that a prolonged boom leaves you sitting on the sidelines too long.” It doesn’t do this if it is followed in a reasonable way. But if someone overacts, this is indeed a serious risk. The answer here is not to avoid discussing the strategy. The answer is to discuss it with enough care so that people come to understand how it works.

There are two competing realities. One reality is that stocks are generally the best asset class. Anytime you lower your stock allocation, you are going against that reality. So it would be fair to say that you better have a good reason for going against that reality.

The other reality is that the riskiness of stocks increases with increases in valuations. This is ALSO an important reality. It’s not the only reality but it is not a reality that may safely be ignored.

The trick is to keep BOTH realities in mind when making stock allocation choices. It cannot be done right any other way. It is unbalanced to consider either of the realities in isolation.

I think this can be compared to raising kids. We all know parents who set zero boundaries and whose kids suffer as a result. And we all know parents who come down too hard and whose kids suffer as a result. We just have to accept that it is possible to come down too hard and that it is possible to come down not hard enough and to try to avoid the extremes.

So it is with considering valuations when setting one’s stock allocation. It is possible to give valuations too much consideration and it is possible to give valuations too little consideration.

What people are missing is how EXTREME Buy-and-Hold is. Buy-and-Hold takes the most extreme position possible (don’t adjust for valuations at all!) and puts it forward as the norm. Nothing could be more irresponsible, in my view. We should all be giving people all the help we can supply re balancing the competing considerations. No one should be arguing the merit of one side of the story being the only one that can be heard.

Rob

“Shouldn’t We Have a Peer Review Process to Help Us Get Bad Studies Corrected After Errors Are Discovered In Them?”

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Set forth below is the text of a comment that I put to the Value Walk site as part of the discussion thread for a post titled Investing Experts Need to Distinguish Opinion from Truth.

That’s basic CFA requirement — analysts must distinguish between facts and opinions in their reports.

Thanks, Paddy. That makes sense.I’ll give you an example of a place in which this entirely sensible rule does not seem to me to apply in the investing context.

When academics publish studies in journals, they are required to submit them for Peer Review. The idea is to insure that the work done is quality work. A good thing.

I am the person who discovered the analytical errors in the Old School safe withdrawal rate studies. This was back in May 2002. At the time, there were lots of people who questioned whether what I said was so. But numerous big-name experts have since looked at it and concluded that I indeed was right: It’s not possible to calculate the safe withdrawal rate that applies for a retirement without taking into consideration the valuation level that applies on the day the retirement begins. So all the old studies (which millions of people have used to plan their retirements) got all the numbers wildly wrong.

I think we should be correcting those studies. The studies are still available on the internet. So new people are pulling them up every day and being taken in by the demonstrably false claims contained in them. I also think we should be trying to assess why the errors were made in the first place. My experience is that the great thing about making mistakes is that you can learn from mistakes. Why did so many smart people get retirement planning so wrong? I think we could all learn a lot by exploring that question.

There are now perhaps a dozen big-name publications (The Economist, Business Week. The Journal of FInancial Planning, etc.) that have reported on the errors. But not one of the studies has yet been corrected!

Huh?

If we are going to have a Peer Review process to protect us from bad studies getting published in the first place, shouldn’t we have a Peer Review process to help us get bad studies corrected after errors are discovered in them?

Apparently, we don’t have such a thing.

It seems to me that you must be right, that there is language stating that people in this field should be distinguishing fact from opinion. My strong sense, though, is that many today are interpreting these rules very loosely. It is my sense that there is a lot of stuff being said in this field that is being put forward as fact but that in reality is nothing more than opinion.

InvestoWorld is in a strange place in the Year 2012, in my assessment. Things are sort-of upside-down.

Rob

VII #28 — Wade Pfau’s Research Understates the Superiority of Valuation-Informed Indexing Over Buy-and-Hold

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I’ve posted Entry #28 for my weekly Valuation-Informed Indexing column at the Value Walk site. It explains why Wade Pfau’s research understates the superiority of Valuation-Informed Indexing over Buy-and-Hold.

Juicy Excerpt: We have seen three secular bull market in the historical record. The average price drop that followed (from the high point to the low point) was  68 percent. The average 20-year return following the bull top was 0.7 percent (including dividends). It is exceedingly unlikely that more than a tiny percentage of Buy-and-Holders stuck with their high stock allocations through so many years of financial pain and yet any investors who sold obtained worse results than the results than caused Buy-and-Hold to come up short in 102 of 110 of the 30-year periods in the historical record.

Valuation-Informed Indexers do not experience the same difficulty sticking to their planned stock allocations because Valuation-Informed Indexers go with far lower stock allocations at times when stocks are priced to crash (times of high valuations). So failing to consider the reality that most Buy-and-Holders are forced to sell when prices crash slants things in favor of Buy-and-Hold.

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