A Rich Life

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

Robert Savickas, GWU Associate Finance Professor: “All the Things You Say About Buy-and-Hold and About the Importance of the Valuation Levels for Choosing Your Portfolio Entry Points Is Very Intuitive, Was Always on My Mind, and I Am Surprised That Anyone In Their Right Mind Would Argue With It. This Should Not Generate Controversy and I Am Surprised That It Does. You Don’t Need Any Financial Education to Intuitively Understand These Things.”

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

Friday’s blog entry reported on my correspondence with Robert Savickas, Associate Finance Professor at George Washington University Business School. Set forth below is the text of an e-mail that I sent to Robert as a follow-up to the e-mail of mine described in the earlier blog entry:

Robert:

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Thanks again for your interest. You have brought a nice measure of cheer to my Tuesday evening. I have 10 years of my life invested in this concept.
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The best overview is here:
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Rob
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Robert responded with the following words:
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Hi Rob,

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All the things you say about buy-and-hold and about the importance of the valuation levels for choosing your portfolio entry points is very intuitive, was always on my mind, and I am surprised that anyone in their right mind would argue with it.  It did not make sense to enter a buy-and-hold in 1999 or 2000.  It was clear that we were on the unsustainable top.  A normal person would wait for things to come down first before buying for the long term.  this should not generate controversy and I am surprised that it does.  You don’t need any financial education to intuitively understand these things.
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All of your email makes sense and I have been aware of, basically all of these things, due to my watching and trying to play the markets over the past dozen of years.
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There is only two things that I have some disagreement with.  The first is the interpretation of P/E ratios.  Each time they reach high levels, a whole lot of people come up with rationalizations why this time it is different, the high levels are justified and the valuations will continue to grow.  Those tales often sound reasonable enough (they are designed to sound that way) and thus introduce uncertainty about the interpretation of the valuation ratios.  With uncertainty comes risk.
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We all know about the risks of investing in single stocks, especially for the long-term.  Single stocks are a good vehicle for short-term trading, but not for long-term holding.  We all know about indexing, diversification, etc.  We all know that index portfolios trach economy.  My second disagreement is in regards to your statement that economy is highly predictable.  It is true that business cycle imparts some clear patterns on the economic growth and financial markets.  We have many economic indicators that help us gauge the health of the economy.  All that we have.  With the help of all these things, we can predict recessions, troughs, recoveries, booms, etc.  BUT: there is one major source of uncertainty and risk in all of this: the timing.  For example, it was as clear as day that the economy was overheated in 1997 and a bust is impending.  However, it took three more years for this predictable scenario to actually unfold.  If you, as an investor, bet against the overheated economy in 1997, you would be burned out of the market and out of your money before your prophesy comes true; by that time you would have no money left to take advantage of it. John Maynard Keynes has a quote on that, something like that the markets can remain overpriced longer than you can keep money in your wallet.  Same with the real-estate bubble. It was a clear bubble back in 2004, but we had to wait a whole two years till it finally burst.  In the end of 2005, credit spreads were razor-thin, indicating that people have no respect for credit risk: a surely unsustainable state of affairs.  But the credit bubble finally started blowing in 2008.
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About the timing risk in economic forecasts, I speak from personal experience: I payed with investing in economy-wide, index, and sector ETFs, all with the purpose of taking advantage of the apparent predictability of the economic cycle.  I was darned right! But often at the darned wrong time, usually too soon.  The problem in the real time is that you don’t know how long yet to wait till your anticipated scenario will finally start unfolding.  You are afraid to miss the point, so you usually end up jumping the gun…  So, I don’t know if all risk can be eliminated.
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Robert

“People Are Social Animals. They Need to Hear Others Endorse an Idea to Have Confidence in It. It Would Make a Huge Difference If There Were a Place Where People Could Go to Find Out That Lots of Knowledgeable Folks Believe in These Ideas. There Is Huge Power in Community.”

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I have been sending numerous e-mails to 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 Joachim Klement, Chief Investment Officer at Wellerchoff & Partners, Inc. Set forth below is the text of the e-mail that I sent to Joachim in response to the e-mail from him described in the earlier blog entry:

Joachim:

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I love your comment re “The Structure of Scientific Revolutions.” I have not read the book but I have heard descriptions of the premise and I believe that the concept explored in the book precisely describes what is going on in investing today. I had a fellow at a discussion board tell me that he liked my ideas but that I went “too far.” The problem we have is that people cannot imagine people as smart as the experts in this field being wildly wrong and, if valuations matter, they are a very big factor. Since there is no way to turn this into a small thing, it is ignored altogether (outside of lip service). We need a paradigm shift and the humans accept paradigm shifts only with great reluctance.

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The encouraging side of the story is that, once a paradigm shift is achieved, lots of change is accepted quickly. I believe that we have another price crash coming (every secular bear in history has brought us to a P/E10 value of 7 or 8 and that is 65 percent down from where we are today) and that the next crash will bring about the paradigm shift. I do all of my work on the internet. So I have had a front-row seat to shifts in investor attitudes over the past 10 years. I was blacklisted at every investing blog of any consequence prior to the 2008 crash. That’s not so today. Lots of people are still skeptical of my ideas. But the level of hostility is much less. There has been a definite change in the water temperature.

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I very much agree with your “we need to keep on arguing” statement as well. I agree with you that it makes sense to target Mauldin and Zweig. I have not been able to get an e-mail address for Maudin (I have had some correspondence with Ed Easterling, who worked with Mauldin on one of his books). I have contacted Zweig but not heard back from him. My guess (this is pure speculation) is that Zweig does not want to be too far ahead of the trend (I say this because he has said things that suggest to me that he knows or at least suspects more than he is saying in public). An even more promising target in my view is Brett Arends at the Wall Street Journal. He has said things VERY plainly. He did not respond to an e-mail I sent. Again, my guess is that he is holding back for the time being. He didn’t hold back in one article that I saw. But the article deserved to go viral and did not generate any reaction. So my guess is that he may have concluded that the time is not ripe for sticking his neck out too much. Another guy who is super is Michael Kitces, a Maryland financial planner. Michael writes a blog where he offers some pretty darn frank assessments. He’s also a very warm fellow.

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The thing that I believe is most desperately needed is an internet discussion board where those who believe in Shiller’s ideas meet each day. It amazed me when I looked around for such a place and was not able to find one. There is a board for every topic on the internet. Yet there is nothing that I know of for Shiller’s investing ideas, even though the guy has written a best-selling book. This is a BIG probem. As my comments above suggest, people worry about being too far ahead of the crowd re this topic. People are social animals. They need to hear others endorse an idea to have confidence in it. I have had people tell me that everything I say about investing makes perfect sense but that they cannot buy in until they hear the “experts” endorse the ideas. It would make a huge difference if there were a place where people could go to find out that lots of knowledgeable folks believe in these ideas and where the people spreading the word about the ideas could trade stories and talk about trends and all this sort of thing. All of the people who do this do it on a one-by-one basis and that makes the job 10 times harder. There is a huge power in community.

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I want to get such a place off the ground. It’s hard to be the first, though. If such a place existed, you could recruit members for a second such place just by going to the first place. But it is difficult to get the ball rolling the first time. I don’t know of any good mailing lists for those who believe that P/E10 matters. There obviously are people who tell clients about it but I do not know of a professional group for those who follow this approach to investing analysis. It drives me crazy! I am mostly just venting here. I don’t at all expect you to solve the problem and I am grateful for the suggestions you have made. But please keep me in mind if at any time now or in the future you hear of things that might help me get such a project off the ground. I think the need is great.

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I am NOT trying to form a bear board. There of course is ITulip and Zero Hedge and things like that. I do not view Shiller as a bear. I view him as someone who has a better understanding of how stock investing works and who used research to inform his investing views. Research is objective (or should be), so I don’t feel that terms like “bull” or “bear should apply.

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Thanks much for sending some great thoughts my way and for giving me an opportunity to form some of my own and to bounce them off of someone knowledgeable about the issues.

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Take care, man.

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Rob

Joachim Klement, CIO at Wellershoff & Partners: “I Can Confirm Wade Pfau’s Experience. Whenever I Send My Papers to the Financial Analysts Journal or Similar Traditional Journals, I Get Rejected.”

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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 Joachim Klement, Chief Investment Officer at Wellershoff & Partners, Inc. Set forth below is the text of the e-mail that Joachim sent me in response to my e-mail to him reported on in the earlier blog entry:

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Hi Rob
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Well, I am in the expert panel of Expert Investor Europe and just recently talked about these things in an interview that will be published soon. Also my paper on the Shiller-PE is under review at the Journal for Portfolio Management.
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But I can also confirm Wade Pfau’s experience. Whenever I send my papers to the Financial Analyst’s Journal or similar traditional Journals, I get rejected…
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Best regards
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Joachim
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I wrote back:
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It’s a weird coincidence that you mentioned Financial Analysts Journal. I don’t follow the journals so it is possible that I am confused. But I believe that Rob Arnott was the editor of that journal a few years back. Is that right? 

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Rob and I had a discussion about this stuff just yesterday. He said that he has not been able to get a journal to publish an article he wrote with Harry Markowitz which shows that a modest amount of error in stock prices would fully explain the Fama-French size and value effects. He wrote: “Journals turning down a Nobel Laureate? Yep, it happens.”

 

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No matter how many times i hear about or see something like this, it amazes me. I am NOT an investing expert. I am a journalist. So I tend to focus on the public policy implications, which are HUGE. If overvaluation is a real thing, then it was the promotion of Buy-and-Hold that caused the economic crisis. All that you need to do to show that is to calculate the amount of overvaluation experienced in the U.S. market in 2000. It was $12 trillion. If that $12 trillion was all phony gains fated to disappear over the course of the next 10 years or so, then $12 trillion of spending power was fated to disappear from the hands of the U.S. consumer. There’s your economic crisis!

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I am sorry to vent. I just see this as being so big that I cannot get over it. I understand that people have different points of view. That’s normal and healthy. But as someone outside the field I feel that people inside the field have become immune to appreciation of the significance of this. People have come to accept that it takes time for new ideas to catch fire in the academic community and are just sitting back waiting for things to happen. They are not grasping how big this is.

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Shiller’s ideas turn the fundamentals of our understanding of how stock investing works on their head. So we just need to figure out for sure whether he is right or not. I don’t blame people for proceeding slowly. That makes all the sense in the world. You don’t want to rush to adoption of a new understanding of the fundamentals. But we cannot advance our understanding without full and frank discussions in which lots and lots of smart people participate, including not just academics but also policymakers and journalists and all sorts of other stakeholders. We ALL have an interest in having the stock market function properly and in not seeing overvaluation corrected through crashes and the economic crises that follow from them.

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I apologize for directing so many words at you. I am to a large extent thinking out loud. My conversation with Arnott yesterday sort of blew my mind. He takes it in stride. He says that I am right on all the substance questions. He doesn’t see what is happening on the process side as being so shocking. I sure do! A Nobel Laureate cannot get work addressing an issue of fundamental importance published in a top-rate journal — Yikes! I don’t think that the average investor has any idea whatsoever that this sort of thing goes on. I say that because I think of myself as an average investor. I am 100 percent shocked by this stuff.

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Is there any place you know of where people explore the process issues? I feel that this side of things just falls between the cracks. The substance side gets addressed in the journals (or in some cases does not). The process side? I see that as something that we should be hearing about in the New York Times or the Wall Street Journal or in a best-selling book. But it has not yet happened. Politicians spend tons of energy discussing the Federal budget deficit and the economic crisis. We need to have them directing their energies to dealing with the true CAUSE of the crisis if this in fact is the true cause. How do we get them doing that when the journals won’t even publish super-important articles?

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I don’t expect you to have answers to these questions. I am grateful to you just for your willingness to engage in a little back and forth. I am just venting because to my eyes this is so crazy. If you have any thoughts as to how I could get a national debate launched on the process side of this matter (it’s the process side that I most care about as a journalist), I sure would be grateful if you would pass them along. Is there anyone that you can suggest that I might talk to about doing something on the process side?

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If not, I 100 percent understand. I of course get it that none of this is your doing. I just feel that we have a matter of huge public policy significance that is falling between the cracks (most journalists feel that investing is too complicated for them to understand and thus elect to let the experts take care of it) and that I need to figure out how to get the process side of this on the national agenda.

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Rob

“I Don’t Understand Why You Say That Those Who Used P/E10 to Predict Long-Term Returns Would At One Time Have Been ‘Off.’ Wade Checked the Entire 140 Years of Stock Market History Available to Us and Never Found a Time When They Were ‘Off’.”

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

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

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I understand that you believe that stock returns are to some extent predictable. I would be grateful if you could describe the THEORY of how stock prices are set that justifies this belief.
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Buy-and-Hold is rooted in a belief in the Efficient Market Theory. If the Efficient Market Theory were valid, Buy-and-Hold would indeed be the ideal strategy. It does indeed follow from the theory. If stock prices changes are determined by economic and political developments that cannot be identified in advance, risk is a constant and the best choice for the investor is always to remain at the same stock allocation. I do not share the Buy-and-Holder’s belief in the Efficient Market Theory. But I do acknowledge that the strategy follows logically from a belief in the model.
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Valuation-Informed Indexing is rooted in a belief that investors carry within them both a belief that Get Rich Quick can work in the short run and that only common sense can work in the long run. So investors believe that stock prices can go wildly off the mark for periods of time of up to 10 years but that prices always return to fair value over time as investors become alarmed that a widespread reversion to a common-sense belief in how markets work is going to cause a crash and an economic crisis. We have a different foundational belief from the Buy-and-Holders and so we follow a different asset allocation strategy.
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Is there a theory that supports the idea that stock prices are to some extent predictable both in the short-term and in the long-run? If the market were efficient, this would not be so because prices would follow a random-walk pattern. I don’t think it follows from the theory I believe in either because I don’t see why investors would permit prices to get so out of hand if they thought they were predictable in the short term. If investors believed this, wouldn’t they exploit their knowledge of where prices were headed? If the thing that made prices predictable was valuations, wouldn’t the exploitation of the inefficiency cause the mispricing to disappear? Perhaps you believe that it is something other than valuations that makes price changes somewhat predictable both in the short-term and in the long-term.
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The significance of Shiller’s 1981 paper is that it discredited the Efficient Market Theory. Once we knew that the model that supports the Buy-and-Hold strategy was invalid, we knew that the strategy was dangerous. Everyone agrees that price matters in purchases of every possible good or service except for stocks. The only reason why some thought at one time that Buy-and-Hold might work is that they bought in to the Efficient Market Theory. So the big step was the publication of that 1981 research. That was what set us on the right track (or at least what could have done so).
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Shiller certainly did expand on his foundational insight in subsequent work. And of course many others have confirmed his findings and expanded on them. I point to the 1981 research because it removed the foundation belief that caused people for a time to accept that Buy-and-Hold (an exceedingly counter-intutive idea) might make sense.
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I of course don’t believe that everyone “got it” as soon as Shiller published his 1981 research. Few “got it.” In fact, it is still a small number that entirely gets it today. The research is out there, though. There is nothing today that stops us all from getting it other than the Social Taboo that restricts us from talking openly and frankly and expansively about Shiller’s findings. The Social Taboo is the cause of all our troubles in this field, in my assessment. The Social Taboo was formed in 1981 and then grew in strength in subsequent years as the mountain of evidence supporting Shiller’s findings grew taller and taller.
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I don’t see how an investor can know in advance his real return on CDs or corporate bonds. The inflation rate affects the real return. How can you know the inflation rate in advance? If you don’t know your real return, you are taking on risk, more risk than was being taken on by investors who bought stocks at a time when their worst-case scenario return was solid.
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I don’t agree that investors switched to CDs because they thought they knew what real return they would obtain from them. I believe they switched for emotional reasons. They were afraid of stocks. Investors had permitted stock prices to rise to insanely dangerous levels and the price crash that inevitably followed scared them. We are living through a similar set of circumstances today. Buy-and-Hold is the most emotional strategy imaginable. It teaches investors that it is okay to ignore price, which makes investors uneasy because they do not follow this “strategy” in their purchases of any other good or service. The huge losses that inevitably follow confirm their misgivings and they swear off the asset class just at the time when it becomes priced to deliver amazing long-term returns. Those who fall for the Buy-and-Hold marketing mumbo jumbo get hurt on both ends: They buy stocks when they offer a horrible long-term value proposition and then they sell them when they offer a fantastic long-term value proposition. We should be discouraging investor emotion, not exploiting it to the fullest extent. Get RIch Quick strategies provide short-term profits for the industry but the huge losses they cause for the investors who follow them cause so much economic damage that even the industry would be better off if we permitted the experts in this field to give more emotionally balanced advice, in my belief.
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I don’t understand why you say that those who used P/E10 to predict long-term returns would at one time have been “off.” Wade checked the entire 140 years of stock market history available to us and never found a time when things were “off.” The model always works as it is supposed to. I haven’t looked at what would have happened if you looked only at 20 years but it certainly makes sense that those numbers would indeed be off. Looking at 20 years wouldn’t tell you anything of any value. That’s not even close to being a long-enough time-period to help you understand how stock investing works. Bull markets can last 20 years. So the 20-year time period you were looking at might have been an intensely emotional time.
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You might be trying to use the P/E10 values to make precise return predictions. They do not do that. P/E10 tells you how risky stocks are at a given time. So you can use it to identify a range of possible returns and to assign rough probabilities to different points along the spectrum of possibilities. But please remember that in the short term it is emotion that dominates and that emotion cannot be precisely predicted with the tools we have available to us today. Even a time-period 10 years or 20 years out is in part affected by the short-term factors that apply to it. So a precise prediction is not possible.
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Rob

“We Were at 3x in 2000. We Will Be at 0.5x When This Is Over. That’s a Loss for Every Stock Investor of Five-Sixths of His Accumulated Wealth of a Lifetime.”

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I have been contacting numerous people to let them know about my article 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 my response to the e-mail detailed in the earlier blog entry:

Valeriy:

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I get what you are saying here and I agree with most (but not quite all) of it.
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I 100 percent agree that excessive P/E10 values over-correct. That is a hugely important point and one that even many who believe in P/E10 do not get.
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The important question (in my mind) is — Why?
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I believe that P/E10 is reporting to us the state of investor emotions. In 2000, we were insanely in love with stocks. So the nominal price at the time was at three times the true and lasting value (let’s call it 3x). The REASON why prices always over-correct is that the drop from 3x to x is emotionally devastating. The drop from 3x to x causes a loss of $12 trillion of buying power in our economy. That loss causes tens of thousands of businesses to fold and puts millions of employees out of work. The economic destruction causes us all to lose hope for the future. Our despair causes us to lose hope that stock prices will ever recover. So the P/E10 value falls not to fair-value (15) but to one-half of fair value (7 or 8). There has never been an exception to this rule. Every secular bull market has produced a secular bear market that put us at 7 or 8.
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Please consider what this means in the current context. We were at 3x in 2000. We will be at 0.5x when this is over. That’s a loss for every stock investor of five-sixths of his accumulated wealth of a lifetime (assuming a 100 percent stock allocation — you need to lower the loss to reflect the percentage of a portfolio not in stocks in 2000). This is why it is so imperative that we get word out re all this. To get to a P/E10 of 7 would take another 65 percent price drop over the next few years. That would put us in the Second Great Depression.
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But this is 100 percent optional Great Depression! A P/E10 of 7 is as insane as a P/E10 of 44. If we tell people how stock investing works, we will never see such extreme P/E10 values again. Once we get the word out, stock prices become self-regulating. If people understand that they MUST change their stock allocations in response to big price swings, each swing upward will bring on sales and those sales will pull prices back to fair-value levels again. There can never be another bull market or another bear market once we permit open discussion of Shiller’s findings. We want people to invest in a rational way. But people cannot be rational without easy access to good information and the idea that is constantly pushed that timing is in some way a bad thing causes those who understand how important long-term timing is to keep their mouths shut about it. So investors do not today have access to the information they need to make intelligent choices.
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Stock prices cannot be precisely predicted at ANY P/E10 level. That is because prices are determined by emotion in the short term (up to ten years) and by economic realities in the long-term (over 10 years). The price that applies at any given time is a combination of short-term and long-term effects. Long-term prices are to a large extent predictable but not fully so because prices are always at least to some extent influenced by the investor emotion that applies at the moment and this is never predictable at all (emotion is irrational and thus cannot be predicted). Some people say that the r-sqaured for P/E10 does not show a large enough correlation. It shows the precise amount of correlation that we should expect if the Shiller model is accurate! We should not expect a perfect correlation because Shiller says that emotion affects prices in the short term and so the short-term aspect of any price should never be predictable. The market behaves exactly as we would expect it to behave in a world in which Shiller’s understanding of how the market works is the right one.
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The right way to think about this (in my view!) is that P/E10 tells you the extent of risk in the market. It never identifies the precise return that will apply in 10 years. It always identifies the range of possible returns (the range is 6 points in either direction — when prices are at fair-value levels, the range is from an annualized 10-year return of 0 on the down side to an annualized return of 12 percent real on the up side) and assigns rough probabilities to an actual outcome falling at any point on the range of possibilities (the most likely 10-year outcome starting from a time of fair-value prices is an annualized return of 6 percent real).
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People have a hard time relating to this because we are all accustomed to focusing on the short-term, what will happen in the next year or so. The Buy-and-Holders showed that that is a waste of time (I believe they are right that short-term timing never works and I believe that this was a major advance). What the Buy-and-Holders missed is that long-term outcomes are nothing at all like short-term outcomes. Long-term outcomes are HIGHLY predictable. Buy-and-Holders advise against all forms of timing because they believe that risk is stable and thus the best bet is to maintain a constant allocation. Valuation-Informed Indexers believe that risk is variable and that the key strategy imperative is to keep one’s personal risk profile constant and this REQUIRES long-term timing. If long-term timing works, staying at the same allocation at all times is an insanely risky choice. It is ALWAYS going to produce a wipeout sooner or later. And, indeed, in the historical record we see just this. Those who remain at a high stock allocation ALWAYS experience at least one wipeout at some point in their investing lifetimes (which delays their retirements by years or in some cases by decades).
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A fair-value P/E10 on the way up is a very different thing than a fair-value P/E10 on the way down. It’s not the number alone that matters. You need to take into consideration what CAUSES the fair-value P/E10 number. A fair-value P/E10 on the way up is caused by POSITIVE investor emotions — people are getting over the panic they felt during the preceding crash and slowly gaining confidence in the stock market again. A fair-value P/E10 on the way down is caused by NEGATIVE investor emotions — people are terror-struck at the prospect of losing all their money but not able yet to fully process the damage they did to their portfolios by following Buy-and-Hold strategies during a bull market.
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One of Shiller’s most important lessons is that stock investing is NOT purely a numbers exercise. We can use numbers to generate insights. But the numbers must always be considered in light of the reality that investing is done by humans, who are emotional creatures. Strictly numbers-based analyses leave out an important part of the equation. This is why much of the research in this field has gotten off track (n my view!).
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Thanks again for the stimulating back-and-forth and for caring enough to at least take a look at some of my thoughts re these matters.
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Rob

“Rob Arnott Is 100 Percent Correct to Fault Stridency. But Failing to Speak Up About Criminal Acts Is Not Charity, It Is Cowardice.”

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Set forth below is the text of a comment that I recently put to the Goon Central board:

There’s just nothing of value to be learned in a circular argument You are pointing at any important truth with these words. It IS a circular argument.

If the market is efficient, everything you say is so.

If valuations affect long-term returns, everything I say is so.

The pre-1981 research supports the idea that the market is efficient. The post-1981 research supports the idea that valuations affect long-term returns. Where someone stands on all these questions depends on whether he is aware of the post-1981 research and has thought about it enough and explored its implications enough to know what it signifies.

Some of us have. Some of us haven’t. It’s hard for us to communicate with “the other side” because we start from entirely different premises. As a society, we are in a transition period. The majority still believes that the pre-1981 research is at least generally on the mark. And the minority believes otherwise but generally keeps its mouth shut.

THAT IS THE PROBLEM.

The minority keeps its mouth shut because of the social pressures imposed when any of us speak up about the implications of the post-1981 research. What makes me different is that I keep my mouth shut less than anyone else. That wasn’t always so. I kept my mouth shut entirely prior to May 13, 2002. And I kept my mouth shut about lots of things in 2003 and 2004 and 2005 and 2006 and 2007 and 2008 and 2009 and 2010 and 2011 and 2012. But it is true that I keep my mouth shut about less and less all the time. Why? Because I have learned from personal experience that keeping one’s mouth shut does not solve the problem.

Valuation-Informed Indexing is superior to Buy-and-Hold. In every possible way. There is zero chance that even a single human being would prefer Buy-and-Hold once he came to understand Valuation-Informed Indexing. This is the biggest advance in our understanding of how investing works in the history of investing analysis. It is bigger than all the other advances combined. We will be living in Investor Heaven after we achieve this advance. There is not one of us on either “side” that does not want to live in Investor Heaven.

But there is always much resistance to a change when the change is so big and profound. All the textbooks need to be rewritten. People who are big shots today will not be big shots tomorrow. InvestoWorld is in the process of being transformed from top to bottom.

It is a good thing. It is a very, very, very good thing. Valuation-Informed Indexing is the culmination of Jack Bogle’s boyhood dream, and this fellow dreamed big. Now we are here.

The only thing holding us back is — We need to acknowledge what we have done. We have to stop being ashamed that we have learned how to reduce stock investing risk by 70 percent and start celebrating this wonderful reality.

We are a society in a state of transition. We need to get from Point A, a horrible, dark, smelling, scary place, to Point B, the place where each and every one of us deep in his or her heart wants to be tomorrow.

But how?

Rob Arnott tells me that the answer is for me to be less strident, to pull it back a few notches. to stay true to my message but to say if differently.

No!

He’s wrong. He’s a great man. I respect him. I am honored that he tells me that my investing ideas are the right ones. I believe that he offers this advice to me in good faith. But I will not follow that advice. He is wrong.

How do I know? I know because of what I have seen with my own eyes.

The Buy-and-Holders are hurting. They are hurting in a terrible way. Those of us who understand why they are hurting have an obligation as people who respect our Buy-and-Hold friends and who care about our Buy-and-Hold friends to hold out the hand of kindness and help these people out. Rob thinks that is what he is doing. BUT HIS APPROACH IS NOT GETTING THE JOB DONE.

The hurting continues. This is not acceptable. This must change.

Now —

The Buy-and-Holders really do not believe in Valuation-Informed Indexing. They have every right not to believe. And they have every right to present every argument they can muster in criticism of Valuation-Informed Indexing. And we are obliged to show them the respect and gratitude they have commanded with their very important and well-intentioned efforts. All that is so. All that should go without saying.

But not death threats. Not board bannings. Not tens of thousands of acts of defamation. Not threats to get academic researchers fired from their jobs.

We don’t tolerate that stuff. Not if we care about our Buy-and-Hold friends. We don’t rationalize failing to speak out when we know that failing to speak out may lead to prison sentences for our Buy-and-Hold friends. No way, no how. That cannot be.

Rob Arnott is wrong on the process question and I am right. The way to play this is to bring the Campaign of Terror to an end and THEN to adopt the least strident position possible. Rob is 100 percent correct to fault stridency. But failing to speak up about criminal acts is not charity, it is cowardice. Rob is not speaking up not because he is holding back in charity but because he is AFRAID to speak up. He’s probably not aware that that is what is going on. But it is my sincere belief that that is indeed the case. My good friend Rob Arnott is hurting my Buy-and-Hold friends by failing to speak up, not helping them.

I will continue to speak up.

I will talk about all the wonderful things that the Buy-and-Holders have taught us all. Always. That will never change. That part is already written in the books.

But I won’t be a party to actions that in the long time are going to put my Buy-and-Hold friends behind prison bars. Not this boy.

There are two things that need to happen for this circular argument to become a productive one. The people who understand the research need to work up the courage to stand up to the Buy-and-Holders and demand (NOT ASK!) that they honor our social norms re how reasonable people engage in discourse. And the Buy-and-Holders need to lose the attitude, they need to accept that, as strongly as they believe what they believe, there is always that small chance that they are wrong and they thus need to let the other guy have his say.

My best wishes to you and yours, Yip.

We are not enemies. We are friends. We are all on the same side. We are all in the same boat. If this country goes down, I go down with it. So I am rooting for you. Your success re this matter is my success too.

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.”

 

Law Professor Brad Borden: “This [My Article on The Silencing of Academic Researcher Wade Pfau by the Buy-and-Hold Mafia] Is Interesting. I’m Curious, However, to Know Why You Chose to Contact Me.”

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I have been sending e-mails to numerous people telling them about my article on The Silencing of Academic Researcher Wade Pfau by the Buy-and-Hold Mafia. Set forth below is the text of a response that I received from Law Professor Brad Borden, followed by my reply to Brad:

Hi, Rob:

This is interesting. I’m curious, however, to know why you chose to contact me.

Thanks,

Brad

 

Brad:

Thanks for your response.

There is no particular reason why I contacted you in particular.

The entire story is very strange. I have been working on this for 10 years. I have had mixed reactions to the work I have done.

Those who “get it” (a small number in percentage terms) view this as the most important advance ever achieved in the investing field. There are numerous smart and good people who see the implications as being very positive and very far-reaching. Those reactions naturally make it impossible for me to give this up. I want this work to be recognized and to help people live better lives.

Those who do NOT get it (a high percentage of the population, perhaps 90 percent, and a group that also includes many very smart and very good people) see only limited value here or (in not a small number of  cases) react with hostility.

The high percentage of indifferent and (especially) hostile reactions has made it impossible for me to spread the word effectively. For example, I built a very large Retire Early discussion-board community at the Motley Fool site. The board was destroyed by arguments over the merits of these ideas. A small group thought these ideas generated the best discussions ever held at the board. A large group preferred to see the entire board destroyed rather than to permit the discussions to continue.

The short version of all this is — These ideas generate intensely emotional reactions. To spread the ideas, I need to find a way to work around this problem.

My current effort is to contact all sorts of people by e-mail and to answer any questions they have and to try to gain support that way. Since it is only one person taking in  the  idea, there is none of the negative group dynamic that has poisoned discussions so many times in the past. If the people who I win over are as intense in their enthusiasm as some of those I have won over in the past, even a small number of supporters might make a huge difference.

I am not focusing on one type of person because I have not found any one type of person that is particularly open to hearing about the ideas. Some investing experts love this stuff and some hate it. Some journalists love this stuff and some hate it. Some economists love this stuff and some hate it.

I fully understand that my explanation sounds odd. This entire matter is very odd. I have never seen anything remotely like it. If the ideas are sound (there is a mountain of evidence that they are, at least in my assessment), it is imperative that I spread the word before more damage is done to our economy through the promotion of the discredited conventional investing ideas. But the normal ways of building support for personal finance ideas (getting experts on board, writing articles, going to blogs, etc.) just do not work for this particular concept. I am trying something different just to see whether the effort bears good fruit or not.

You don’t possess any particular characteristics that make you a good person to contact other than that you obviously possess a strong intellect and are involved in at least a tangential way with some matters that relate in some way to public policy. If you end up feeling that you learned something, I will of course be 100 percent happy. If you  prefer that I not contact you again, I am of course okay with that. If you ask questions, I will do what I can to respond effectively. If somewhere down the line you become a supporter, I will be thrilled about anything you can do to move the ball forward. I of course understand that that’s an extreme long-shot. My belief is that I only need a  small number of those extreme long-shot bets to come through to make a big positive difference. And I think that in time I will see a small number of these “bets” come through for me.

Sorry for the long explanation. I feel that you merit as clear an answer as I am able to provide. Please don’t feel any obligation at all to do anything further. The vast majority of those I contact do not respond in any way. You have already made me feel good by saying “this is interesting.” If by any chance you feel a desire to explore any aspect of this in greater depth, certainly feel free to shoot me back a follow-up e-mail with more questions or concerns or reactions or whatever.

And thanks for giving me an opportunity to work that all out on paper!

Rob

Valuation-Informed Indexing #131 — Why My Claims About Buy-and-Hold Sound “Strident”

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I’ve posted Entry #131 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s titled Why My Claims About Buy-and-Hold Sound Strident.

Juicy Excerpt: Experts and researchers and article writers are like everybody else, they want to be liked. Investors want to believe that the phony pumped-up prices we see in bull markets are real because they are counting on those phony pumped-up prices to finance their retirements. So the experts and researchers and article writers learn to keep their mouths shut. They do more than that. To be able to live with themselves, they need to persuade themselves that failing to tell people about the need to engage in long-term timing is not such a bad thing. To be able to persuade themselves of that, they need to close their minds as well as their mouths.

But no one is ever able to really put the thought that price matters out of his or her head. All of the experts and researchers and article writers who are trying to ignore this basic reality face a struggle doing so. So do all the investors listening to the experts and researchers and article writers.

What happens when some fellow comes forward with the numbers?

He hurts people’s feelings. He forces people to hear things they don’t want to hear. He causes people to experience feelings of anger and fear and shame. He delivers a message that comes to be perceived as strident.

Rich Toscano at Pacific Capital Associates: “It’s Great to See a Finance Journalist Who Understands that Valuations Matter. It Seems That Efficient Market Zealotry Is Rampant in the Journalism Community. So You Are Doing a Great Service.”

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I have been sending e-mails to various people to let them know of my article on the silencing of Academic Researcher Wade Pfau. Set forth below are descriptions of some of the responses I have received.

1) William Cohan said: “Thank you, Rob. Will take a look.”

2) Rich Toscano at Pacific Capital Associates in San Diego, said: “Haha… that’s a funny coincidence… real estate is just a side interest for me; my “day job” is investing and I am also a big fan of Shiller’s CAPE.  (The coincidence is that there’s not very many of us!)  I’ve written articles on it somewhat regularly; here is the last (admittedly out of date) one: http://pcasd.com/us_stocks_overpriced_once_again . I think it’s time for another!  In fact I was planning on writing an article soon to address some of the critcisms of the CAPE (it’s nice that enough people are finally paying attention to it that it is getting critics).  Some criticisms are good but predictably most come from stock touts simply misunderstanding it. Anyway, it is GREAT to see a finance journalist who understands that valuations matter!  It seems that efficent market zealotry is rampant in the journalism community (even after everything that happened last decade).  So you are doing a great service.  I just love your valuation-based return calculator.  I’ll look forward to checking out your site and blog in more detail.”

3) Edwin Hamilton said: “This is compelling but so far I have only been able to ‘talk to myself.’ Serial herd behavior by the American people — need to expose this deception!”

I traded a number of e-mails with Edwin re my efforts to get the word out. At one point, he suggested checking into whether Lindsey Lohan would be willing to co-blog on the issue. I wrote back: “I tried hooking up with Lindsey. It turns out that she’s a confirmed Buy-and-Holder. Go figure!”

4) David Clay Johnson, an investigative journalist, said: “Thanks. I will take a look at this after I finish my next book.”

5) J.D. Roth, the personal finance blogger who started the Get Rich Slowly blog, wrote (in an e-mail dated January 21, 2011, that I failed to report on at the time): “I keep thinking about ways I can write about this subject so that it makes sense. That is, I *do* agree that when the market is high, it makes less sense to blindly invest than when the market is low. But how does one determine what is high and what is low? (I know you have a formula that you like — PE10? — but that’s something experts could argue about for years, right?) I tend to think that’s where re-balancing comes in. If, in a theoretically neutral market, you’re targeting an asset allocation of, say, 50-50, and then stocks grow so that your allocation is 70-30, rebalancing should, in theory, act somewhat like value-informed investing, right? Anyhow, it’s something I’m thinking about, and not just theoretically. It has practical applications to my own portfolio! 🙂