A Rich Life

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

Financial Highway #13 — How Our Ideas on Investing Got on the Wrong Track

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I’ve posted my 13th entry in my series of articles on Valuation-Informed Indexing for the Financial Highway site. It’s called How Our Ideas on Investing Got on the Wrong Track.

Juicy Excerpt: The full reality is that our understanding of all areas of life endeavor is achieved in building-block style. We learned a great deal when the Buy-and-Holders showed us that short-term timing doesn’t work. Shiller would probably never have achieved his advances had the Buy-and-Holders not laid the foundation for them with their own breakthroughs.

The Buy-and-Holders think that acknowledging their mistake will cause them to lose “credit” for explaining how stock investing works. I don’t think that’s right. I think that that acknowledgement of the mistake will permit us to take the genuine insights of the Buy-and-Holders to places we have never been able to take them before. I believe that we will someday look back at the day when the Buy-and-Holders acknowledge their error as one of the most important and exciting days in the history of the core Buy-and-Hold project — to learn the truth about how stock investing works.

VII #109 — The Stock Market Is the Only Market in Which Buyers Cheer Rising Prices

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I’ve posted Entry #109 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Stock Market Is the Only Market in Which Buyers Cheer Rising Prices.

Juicy Excerpt: Say that you were going to buy a used car. And say that you were not willing to spend any time negotiating. You were going to walk onto the lot and pay the price asked for the model you sought. Would you be raped?

You would not be raped. You would overpay. The dealer sets the asking price by assuming that negotiations will follow. So those who can’t be bothered pay more. That’s fair, isn’t it? Negotiating with car dealers is a pain. Those of us who negotiate deserve a price break over those who don’t.

But the overpayment would only be a few thousand dollars. Dealers don’t dare to set asking prices more than a few thousand over what they expect to be the selling price because to do so would drive away potential customers. An asking price that is $10,000 above the expected selling price sends a signal to possible buyers that this dealer is not to be trusted.

It doesn’t work that way with stocks.

Beyond Buy-and-Hold #87 — Bull Markets Transfer Wealth from One Group of Investors to Another

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I’ve posted Entry #87 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s titled Bull Markets Transfer Wealth from One Group of Investors to Another.

Juicy Excerpt: Bull markets do not generate wealth. Bull markets transfer wealth from one group of investors to another. If there were no bull markets, there would be no bear markets. Stocks would at all times offer a return in the neighborhood of the stock return justified by the annual productivity growth of the overall economy — something in the neighborhood of 6.5 percent real. But bull markets transfer huge sums of wealth from one generation of investors to another. To the great detriment of the overall economy.

Rob Bennett’s Responses to Academic Researcher Wade Pfau: #17 — How Valuation-Informed Indexing Will Reach Its Tipping Point

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Wade says that I “desperately” want to hear researchers and other experts in this field say that the Old School safe-withdrawal-rate studies need to be corrected. The suggestion is that I place too much importance on this matter. Others have said similar things. My ten-year effort to get the errors in the retirement studies corrected has been referred to as my “obsession.” I have been told that I am on a “crusade.” It has been said that my passion re this matter causes me to suffer “death by verbosity.”

I don’t buy it.

When I gain the right to post honestly on the internet re SWRs and many other critically important investment-related topics, it won’t be only Rob Bennett who gains that right. Robert Shiller (the author of Irrational Exuberance) will gain that right. Vanguard Founder John Bogle will gain that right. William Bernstein (author of The Four Pillars of Investing) will gain that right. And on and on and on.

When I gain the right to post honestly, we ALL gain the right to post honestly. There’s huge leverage in that. We have denied ourselves the right to speak openly and plainly and honestly and realistically about how stock investing works for 30 years now. Behind the scenes, we have achieved huge advances in our understanding of the realities during those three decades. When we give ourselves permission to talk about what we have learned (and thus for the first time to fully understand it — we humans take in knowledge by talking it over), we will shoot ahead at an amazing pace. Can you imagine where we would be today in the electronics field if a law had been passed in 1981 saying that advances in that field had to cease because it would hurt the feelings of the people who didn’t know everything there was to know about electronics in 1974 for us to continue to move ahead? There’s huge leverage to be had by permitting thousands of smart and good people to use their brains again and help us all learn how stock investing really works even when telling that story means pointing out that there was a time decades ago when we didn’t know it all perfectly.

The Buy-and-Holders did something potentially wonderful back in the early 1970s. They developed an investing strategy rooted not in vague and subjective impressions and opinions but in the hard stuff, academic research based on an examination of the historical return data. It’s that breakthrough that has permitted us to make so much progress. There would be no Valuation-Informed Indexing today had it not been for work the Buy-and-Holders did in earlier times arguing that we should research investing questions rather than just offer off-the-cuff subjective opinions about them. What we didn’t see in the early 1970s was how the power of research could be used to hold us back rather than to push us forward. It is the claim that Buy-and-Hold is rooted in research that has made it so influential a strategy. But, because the Buy-and-Holders got it wrong, all that influence has been used to steer investors in the wrong direction. The road out of this economic crisis is to permit the researchers to report honestly and accurately what they learn when they study the data. It’s not putting numbers into tables that is the purpose of investment research. It’s discovering truths about investing that is the purpose. To discover truths, we need to become able to acknowledge errors when we make them.

That’s why this is such a big deal. That’s why I am “desperate” to see the Old School SWR studies corrected. Causing millions of people to suffer failed retirements is a big deal. The Buy-and-Holders want to avoid acknowledging the errors they made in the studies in the worst way. The Old Boys Club has sent down the word — you spill the beans re this one and you’ll never be able to get work in this field again. But what happens if the economic crisis grows so terrible that even people in the investing field begin to feel the need to take action to bring it to an end? I believe that we will then see forward movement. And it won’t be a little bit of forward movement. Valuation-Informed Indexing is close to its Tipping Point as a breakthrough idea. Once we get a few of the big names in this field developing the courage to stand up to the Goons, we will see an avalanche of investing insights. We will as a society experience the benefits of 30 years of insights over the course of about six months of time. It will be something else!

We need to get to that Tipping Point. There’s nothing intellectually we need to do. We have the data that shows that Valuation-Informed Indexing is superior. We have the research that shows that Valuation-Informed Indexing is superior. We have the expert statements showing that Valuation-Informed Indexing is superior. What we need is a means to spread the word to the millions of middle-class investors crying out for a more sensible and effective way to invest. There’s a sense in which we even have that. The internet is a powerful communications medium. We could spread the word quickly if those who knew what works were not afraid of what will be done to their careers if they dare to speak up. And we even have rules in place at all our boards and blogs protecting those people from the brutal tactics of the Buy-and-Hold Goons. We are on the 99-yard line. All we really need today is effective enforcement of the rules that in theory already are in place at the web sites where we need to be spreading the word.

Set forth below are 10 examples of experts who would love to be able to tell the truth about stock investing, if only as a society we were willing to do what we need to do to make them feel safe doing so.

1) I learned about the errors in the Old School safe-withdrawal-rate studies by reading John Bogle’s book. Bogle explained that Reversion to the Mean is an “Iron Law” of stock investing. If high prices always lead to low prices, the safe withdrawal rate obviously cannot be the same when prices are high as it is when prices are low. Bogle would love to feel free to tell the truth about stock investing, as revealed by the last 30 years of academic research. We should let him.

2) Years before all of the major publications in this field acknowledged the errors in the Old School studies, one of the Goons asked William Bernstein whether he agreed with my claim that the Old School studies employed an invalid methodology. Bernstein said that “of course” the methodology used was valid but that anyone who was giving thought to making use of one of the Old School studies to plan a retirement would be well-advised to “FuhGedDaBouDit!” The second part of his statement is obviously just a down-to-earth way of saying that the methodology used in the studies was analytically invalid (if a valid methodology had been used, the numbers generated by the studies would not have been so wildly off the mark). Bernstein would love to feel free to tell the truth about stock investing, as revealed by the last 30 years of academic research. We should let him.

3) Yale Economics Professor Robert Shiller described the theory behind the Valuation-Informed Indexing concept in his bestselling book Irrational Exuberance. But Shiller held back from including even one paragraph in the book telling investors how they should invest now that we know that Buy-and-Hold strategies can never work in the long run. Shiller told us why in an interview in which he said that he has never dared to go public with all he knows about how stock investing works because he would be smeared as “unprofessional” if he did so (I have a funny hunch that I might know what investing strategy it would be that would inspire its followers to do something like that). I wouldn’t be at all surprised to learn that Shiller has already written Irrational Exuberance II, the book that describes what it is that investors need to do now that they know how dangerous it is not to practice long-term timing. Shiller would love to feel free to tell the truth about stock investing, as revealed by the last 30 years of academic research. We should let him.

4) Philip Taylor is a blogger who organizes the annual Financial Blogger Conferences. I submitted an article on Valuation-Informed Indexing for inclusion in the conference magazine. Phil rejected the article not because he does not see merit in the investing strategy but solely because he knows that bloggers don’t today know enough about the dangers of Buy-and-Hold and the benefits of Valuation-Informed Indexing to appreciate how much they would be helping their readers to lead the transition to the new strategy. He told me: “I assure you, my rejection of your article has nothing to do with my opinion on your particular strategy. I don’t need convincing of anything. Your way is perfect as far as I am concerned. Go preach it to the nations. #FinCon12, though, is not the right pulpit for this topic. The bloggers just don’t care. They have shown time and time again in the surveys that these types of topics are not of interest. Please respect that I know my audience.” Phil is right in what he says about out fellow bloggers. I have experienced this indifference to the new strategy on hundreds of occasions. But what if Bogle and all the others came out with public statements saying that Buy-and-Hold is the past and Valuation-Informed Indexing is the future? Would financial bloggers not be thrilled to lead the effort to get accurate and honest and realistic information about how to invest in stocks out to their readers? The question answers itself. Taylor and all other financial bloggers would love to feel free to tell the truth about stock investing. We should let him.

5) Mike Piper is the author of the Oblivious Investor blog. I had a long talk with him at last year’s Financial Bloggers Conference about the ban on honest posting in place today at his site and in place today at a good number of other sites. Mike told me that “there is nothing I would like more” than to see a lifting of the ban. But Mike has a problem. He permitted honest posting at his site for a time and my daily comments pointing out the dangers of Buy-and-Hold enraged his readers, most of whom follow the Buy-and-Hold strategy. If Mike were to permit honest posting, would he be able to retain his readership? If Bogle and all the others spoke out, he sure could. If Mike were giving honest and accurate and research-supported investing advice, his readership would skyrocket and all those Buy-and-Hold readers who are upset today to read the truth about stock investing would be thrilled to do so. But Mike needs our help. He needs Bogle and lots of others to give him “cover.” Mike would love to feel free to tell the truth about stock investing. We should let him.

6) Financial Planner Michael Kitces wrote at his blog that: “There are time-periods where stocks are a terrible addition to that portfolio. Yet inexplicably, we as planners STILL tend to suggest that it is ‘risky’ to not own stocks when in reality the only material risk is to our business and ability to keep clients, NOT to the clients’ goal.” I think it would be fair to say that Michael very much looks forward to the day when he can tell his clients the truth about stock investing. He has told me in e-mail correspondence that he knows of numerous financial planners who were in the days following the 2008 crash discussing the possibility of starting to let their clients in on some of the stuff that all those who work in this field today know about but dare not give voice to in public comments. Michael would love to feel free to tell the truth about stock investing. We should let him.

7) New York Times Financial Blogger Carl Richards has said of my work: “I have read everything I can about Valuation-Informed Indexing. What you are doing has huge value.” But Carl too banned me from his site. Again the reason was the burning rage that my reports on what the academic research says about stock investing caused in many of his readers, people who were trying to maintain a belief in Buy-and-Hold principles three decades after the research showed that there is precisely zero chance that Buy-and-Hold can ever work in the long term. Carl would love to feel free to tell the truth about stock investing. We should let him.

8) In the wake of the onset of the economic crisis, a federal commission was formed to identify its cause. The effort bore no good fruit. Democrats on the commission blamed the policies of Republicans. Republicans on the commission blamed the policies of Democrats. No one paid any attention to what the commission said because we all hear Democrats yelling at Republicans and Republicans yelling at Democrats on a daily basis. I have a funny hunch that the members of the commission would have loved to have felt free to identify the obvious true cause of the crisis. Stocks were overpriced by $12 trillion in 2000. Even John Bogle, the King of Buy-and-Hold, acknowledges that stock prices always return to fair-value levels after the passage of 10 years or so. Bogle calls this an “Iron Law” of stock investing. So everyone paying attention knew in 2000 that roughly $12 trillion of consumer buying power would be disappearing from our economy by sometime near the end of the first decade of the 21st Century. There’s your economic crisis! The members of the economic crisis commission would love to feel free to tell the truth about stock investing. We should let them.

9) Rajiv Sethie, a Professor of Economics at Columbia University, said of my work: “Rob Bennett makes the claim that market timing based on aggregate PE ratios can be a far more effective strategy. I can see how it could be true.” Rajiv would love to do the research proving it to be so and to win the Nobel prize that would follow from doing so. If he weren’t aware of what was done to Wade Pfau when he did this and what has happened to numerous others in this field who have dared to speak honestly about what the last 30 years of academic research shows us, Rahiv would have done that research a long time ago. If he hadn’t, hundreds of other fine academic researchers would have jumped at the chance to win that Nobel prize. Rajiv and hundreds of other fine academic researchers would love to feel free to tell the truth about stock investing We should let them.

10) The first two words in the February 2005 e-mail sent to me by Dallas Morning News Columnist Scott Burns in response to my e-mail pointing out the errors in the Old School SWR studies were: “You’re right!” Scott asked me in that e-mail for my telephone number so that he could interview me in preparation for an article letting his readers know of the dangers of following the Old School studies. He thought better of it. Scott later wrote an article pointing out that “some people” believe that the Old School studies are analytically invalid. But he was careful not to let his readers know of his personal viewpoint that these criticism are on the mark. And he was careful not to mention the name of the person who pointed out the errors in the studies to him. And he was careful not to include a link to my Retirement Risk Evaluator calculator (which reports the SWR numbers accurately) in his article. And he was careful to put forward numerous defamatory comments about me to keep himself in the favor of the Lindauerheads and the Greaney Goons. Scott would love to feel free to tell the truth about stock investing. We should let him.

We all want to feel free to tell the truth about stock investing. Why wouldn’t we? We all benefit from knowing how stock investing works. And we can only understand things that we feel free to discuss. Permitting honest posting on safe withdrawal rates and many other critically important investment-related topics is a win/win/win/win/win.

So why don’t we do it?

We don’t like to have death threats directed at us. We don’t like to have tens of thousands of acts of defamation directed at us. We don’t like to be banned from the internet sites we frequent. We don’t like to have internet Goons sending defamatory e-mails to our employers in efforts to get us fired from our jobs.

Once even a small number of influential people speak out in opposition to the Campaign of Terror, it’s all over. Buy-and-Hold is no more at that point. Valuation-Informed Indexing is the new dominant model at that point.

The Tipping Point is one price crash away. It is the next price crash that will change things in a way that will permit us to to begin work on bringing about the greatest period of economic growth ever seen in U.S. history. There is a reason why it’s darkest before the dawn. It often takes a whole big bunch of darkness to help the humans work up the courage to do what deep in their hearts they knew for many years very much needed to be done.

“Had Shiller Published His Research 20 Years Earlier, There Never Would Have Been Any Buy-and-Hold”

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Set forth below are some words that I posted to the discussion thread for the blog entry titled Wade Pfau: “This Paper…Suggests that the Traditional Approach to Retirement Planning Is Counterproductive and Possibly Damaging.” The words put forward by Wade to which I was responding are in italics.

My null hypothesis is that valuations-based investing is not useful, and now I’m seeking to determine if I can find sufficient evidence to reject this null hypothesis with sufficient confidence.

You are putting your finger on the entire reason for the “controversy” with these words, Wade.

How the heck did Buy-and-Hold (the alternative to Valuation-Informed Indexing) ever become your null hypotheses? There has never been a sliver of data supporting Buy-and-Hold. And the idea that price matters with everything but stocks defies common sense.

Buy-and-Hold was a MISTAKE, Wade. There was never any data supporting it. There was never any logic supporting it. It was just a mistake. Had Shiller published his research 20 years earlier, there never would have been any Buy-and-Hold.

People did some research showing that short-term timing doesn’t work and JUMPED TO THE CONCLUSION that long-term timing doesn’t work either. They just failed to distinguish between the two. There has never been any indication that long-term timing might not work. The idea is revealed as silly, if you think about it for a few moments.

All of the research shows that short-term timing never works and that long-term timing always works. It is more true to say “Timing Always Works” than it is to say “Timing Never Works.” (The better thing to do is to distinguish between the two.)

For Buy-and-Hold to become the null hypothesis, someone should have had to present either a logical argument or some historical data in support of it. No one has ever done so.

The null hypothesis should be that price matters when buying stocks, just as it does when buying anything else. It is the Buy-and-Holders making the fantastic claim. They should be required to present something in support of their fantastic claim before declaring it the null hypothesis.

Rob

What If Everything You Thought You Knew About Stock Investing Turned Out to Be Wrong?

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I’ve posted Entry #30 for my weekly Investing: The New Rules column at the Death by 1,000 Papercuts site. It’s called What If Everything You Thought You Knew About Stock Investing Turned Out to Be Wrong?

Juicy Excerpt: No one else is saying that. No one else is saying anything even close to that. So this is a big deal. If that claim holds up, this is the biggest advance in our understanding of how stock investing works in history, no? I am saying here that price drops are a good thing and that price increases are a bad thing. I am turning the conventional understanding of how stock investing works on its head.

VII#13 — Volatility Is Optional

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I’ve posted Entry #13 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Volatility Is Optional.

Juicy Excerpt: There was a time when there were no cars or phones or electricity or computers. It was because we learned stuff that we were able to bring these life-changing inventions into being. Could it be that we are in the process of learning things about investing that will someday permit us to look at price volatility as a thing of the past? That’s what I think.

VII #12: Stock Crashes Are Impossible — It’s a Good Thing Too Given How Often They Turn Up!

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I’ve posted Entry #12 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stock Crashes Are Impossible — It’s a Good Thing Too Given How Often They Turn Up!

Juicy Excerpt: Famed Asset Allocation Strategist Paul McCartney explored how emotion swings can evidence themselves in stock price changes in his song “Yesterday.” He explained that: “Why she had to go, I don’t know, she wouldn’t say. I said something wrong…”

McCartney gets it. The young lady in question probably could not herself give a fully logical reason why she one day “had to go.” It’s not something that hit her all at once. She no doubt had been mulling the matter over for some time. But she knew that leaving was a big step. So she pushed those thoughts out of her mind as long as she could. Eventually, though, things reached a point where she could push them out of her mind no longer. At that point she “suddenly” changed her mind.

“It’s Not Any More Possible to Out-Guess a Lunatic Than It Is to Out-Guess a Genius”

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Recent blog entries have reported on correspondence between a community member named “Larry” and me. Set forth below is the text of an e-mail that I sent to Larry on November 12, 2009.

Larry:

I’m certainly going to look closely at your chart. I’m excited about it.

Just to be clear, we are in complete agreement re the negative reaction that is generated by making claims that timing is a good thing. There are many smart and well-intentioned people who respond as you did. And the reason why they respond that way is rooted in something positive.

Most middle-class people are looking for a way to invest that avoids all the nonsense. The word “timing” is evocative of the nonsense (jumping in and out of stocks each time a new development hits the news). People are looking for something real and the word “timing” evokes all that is phony about investing advice and so they respond negatively to it. That’s a good thing so far as it goes because it suggests that people are open to hearing good ideas that make sense and that work in the long run.

I am today convinced that all of the trouble we have seen has its roots in one grand mistake made by the academics back in the 1960. They saw that short-term timing didn’t work and they felt the need to develop a theory to explain that reality. To understand what happened, you have to put yourself in their shoes and realize how counter-intuitive a reality it was.

Through all of history, people had been trying to employ their intelligence to figure out when to buy stocks and when not to do so. It wouldn’t be overstating things too much to say that the entire investing project was viewed as how best to go about timing the market. And now they had research that showed that timing didn’t work! It was a startling finding and one that simply had to be explained.

There are two possible explanations. One is that the market does such a good job of setting prices that it is impossible for anyone, no matter how smart, to do better. The second is that the market does such a poor job of setting prices in the short term that knowledge is no help in figuring out where prices are going in the short term.

It’s not any more possible to out-guess a lunatic than it is to out-guess a genius. For different reasons. The reason why you cannot out-guess a genius is that he is smarter more than you. The reason why you cannot outguess a lunatic is that his choices defy logic and thus his moves cannot be effectively predicted through the use of logic.

The academics GUESSED that the first explanation was the one that applied. The idea that the market is good at setting prices is the Efficient Market Theory. All of today’s conventional investing wisdom follows from this incorrect guess.

What the data shows is that the reason why short-term timing does not work is that the market is so POOR at setting short-term prices. In the short-term, any connection between the market price and true value is pure coincidence. The market is bonkers in the short term. The price can go to three times fair value or to one-half fair value. The market is the OPPOSITE of efficient in the short-term.

Of course the market IS efficient in the long-term. In five years, a little bit. In 10 years, a good bit. In 20 years, almost entirely. There IS an efficient market. But the market is only GRADUALLY efficient, NOT immediately efficient.

That one error caused all of the strategic recommendations that followed from use of the dominant model to be 100 percent the opposite of what works. If the market does a good job of setting prices, you want to put your trust in the market. If the market is nutso re setting price, you want to come to an independent assessment of fair value (through use of a P/E10 adjustment).

That’s it. That’s the entire problem. The academics took a wrong turn early on and they have never since been willing to retrace their steps. So we keep walking into more and more dangerous territory.

My goal is to get that mistake acknowledged and corrected. Once that is done, there is no problem whatsoever. There will be thousands of people generating good research and good analysis and so on. Things will just naturally get better and better and better.

The hurdle is getting that mistake acknowledged. I think people are afraid to admit the mistake because it is the cornerstone of 30 years of work and they fear tearing everything down at this point. But I see no practical alternative means to getting to a good place. Everything that followed from that big mistake (and that’s just about everything that we “know” about investing today) is wrong. We learn by acknowledging mistakes.

I don’t believe that there is a way around acknowledging the mistake.

The reason why I advocate timing is that I want to steer people toward dealing with this aspect of things. I want to develop a consensus that the old model is broken and that an entirely new model is needed. There is only one difference between the two models. The old model says that timing is impossible and the new model says that timing is required. That one change makes an awfully big difference in the ultimate treatment of hundreds of strategic questions (including asset allocation, to be sure).

We are in complete agreement that this is an asset allocation question. I am saying that it is a lot bigger than that.

It is not just our understanding of how to set our allocations that is wrong. Our entire model for understanding how the market works is wrong. The market is the OPPOSITE of efficient. Think what that means.

I’ll give one example of what I am getting at. Bogle says to tune out the short-term noise. Few of Bogle’s followers really manage to do that. You know why? Because Bogle is saying that the market is setting prices properly. That means that the market’s reaction to events really is of significance and can hardly be ignored by those with money in the market.

I am saying the opposite. I am saying that the market price is pure nonsense in the short term; it is meaningless, insignificant. If people came to believe that, it seems to me that people really could come to tune out the short-term noise in a real and practical way.

Do you see the difference?

It is either true that the market is smarter than the smartest investor alive or that the market is dumber than a bag of rocks. It’s got to be one or the other for short-term timing not to work. It makes a huge difference which of these two things is true. The entire historical record says that the market is dumber than a bag of rocks in the short term and BECOMES smart only after the passage of about 10 years.

I don’t care about the semantics. But I am looking to do more than give people tools for setting their stock allocations. I want people to come to understand how the market works. Once we come to agreement on that, there is no limit to where we can take all this. We have to get it right, of course. What I can say after seven years is that thousands of smart people have tried to find holes in the Rational take and not one has yet been able to come up with any reasoned arguments. I think that’s significant and I want to take this to a bigger stage to see if having more know about it would cause anyone to come up with anything.

If no one is ever able to come up with anything, I think it makes sense to accept what the data says is so as being so: The market is the OPPOSITE of efficient in the short term and always in the process of BECOMING efficient (a process that reaches meaningful fruition at about 10 years).

Rob

VII #4 — The Stock Market Functions Unlike Any Other Market

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I’ve posted Entry #4 in my Valuation-Informed Indexing column at the Value Walk site. It’s called The Stock Market Functions Unlike Any Other Market.

Juicy Excerpt: Fama was onto something huge when he developed the Efficient Market Theory. The theory is almost valid. He just tragically left out a link in the logic chain. The stock market functions unlike any other market. You cannot use the nominal market price as something real because it is not the product of a negotiation process for all the shares outstanding at a given time. You also need to consider the playing-around factor, the extent to which investors of the day have elected to make themselves feel good (or bad) about their financial circumstances by assigning a temporary price to stocks higher (or lower) than the one that would apply if the number were determined by making reference to real financial transactions.

Fama made a mistake and then Malkiel copied his mistake and then Bogle copied the mistakes of Malkiel and Fama. We are today as a result in a big mess. The idea of rationalizing the investing project was a wonderful one. But when you get a foundational point wrong,the analytical errors must be corrected or else all of the strategic recommendations developed from following the implications of the invalid foundational point will be in error.