A Rich Life

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

Should You Resist Hunches Or Yield to Them?

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Neither.

You should explore them. You should try to figure out where they are coming from, what they mean.

Hunches are not the product of logic. In that sense they are irrational.

But some hunches represent a sort of super-logic. There are circumstances in which a hunch can permit you to jump over the limits of pseudo-logic to something better and more financially rewarding, a healthy, emotionally balanced logic.

At the root of the paradox is the human capacity for self-deception. Logic alone can never get us to where we want to go for so long as we are so prone to tell lies to ourselves. Lie-inspired logic can take you over a cliff by insisting that you continuine to move in a straight line no matter what your eyes tells you about the dangers just up ahead. There are cases in which a hunch can serve as a veto over the mad logic that if not questioned could ruin you.

Say that you’ve bought into the Passive Investing idea. It’s worked well for a good number of years. The logic says that you must never change your stock allocation no matter how wrong it comes to feel not to do so. Yet a hunch tells you that the Passive Investing idea was yesterday’s hot investing strategy, that the smart money is moving to a new understanding of what it means to “Stay the Course.”

Listen to that hunch!

In all seriousness, that’s a good hunch. That’s just common sense. The idea that you should stick with a stock allocation chosen at a time of reasonable prices when prices have gone to la-la land is obviously the product of a wild bull-market psychology. When the bull market goes bye-bye, so should the bull-market “logic.”

The problem is that you’ve adopted an irrational idea as the core principle of your investing mindset. You’ve left no means for common sense to persuade you through ordinary channels. So it takes a different route. In this case, common sense appears to you in the form of a hunch. It dresses up in irrational clothing to bring a rational message to a guy or gal who tried to abandon rationality for good but who is a bit too smart to stick with the program once the emotional pull toward doing so has disappeared. That hunch is the better part of you, the smart side of you. Let that good-looking fellow in the door! Give that clever gal a hand with her coat!

Not all hunches are like that, unfortunately. Hunches have a bad reputation in the investing realm because hunches cause a lot of trouble in the investing realm. You don’t want to let just any good-looking fellow in the door. You don’t want to be jumping up to help just any clever gal with her coat. You need to be discriminating.

You lower your stock allocation to bring it to where it should be at a time of sky-high prices. And prices really do come down. You feel like a genius. You feel like so much of a genius for anticipating the price drop that you begin to feel uncomfortable with even the small stock allocation you are now going with. The newspapers are now saying that stocks are for losers. They sure changed their tune! Maybe you should sell it all? Selling worked for you before. There must be a reason why the newspapers, which have in your experience always been biased in favor of stocks, are now urging you to dump them.

No, no, no. no, no.

In this case the hunch represents not common sense, but common fear. The newspapers are consistent enough. They are consistently emotional, consistently irrational. They reflect our own irrationality back at us. We should pay about as much attention to the newspapers when they are pushing us to get out of stocks for emotional reasons as we do when they are pushing us to stay overinvested in stocks for irrational reasons.

This is a hunch that comes from a bad place. This is a hunch that I would try hard not to listen to.

Some hunches are good. Some hunches are bad. How the heck are we supposed to know the difference?

Lift your hunch up in your hands and examine it. Study it. Check its history — where did it come from? Hold it up next to your other investing beliefs. Does it fit in? If it doesn’t fit in, is it because your other investing beliefs don’t get out enough, that you have become too insular, too dogmatic?

There is no one rule on investing hunches. Hunches can be of great positive value or of great negative value. I can say that you do not want to ignore hunches. Even the ones that you do not want to listen to can make you aware of weaknesses in your understanding of how stock investing works (if you were confident in your beliefs, bad hunches would not trouble you). So don’t be dismissive of hunches. Try to gain a sense of why you are experiencing them.

The person who says that he or she never experiences a hunch is like the person who says that he or she never gets annoyed with his or her spouse. I mean, come on. Hunches are a sign that you do not know it all. And you don’t. So it is not necessarily a bad thing to see this sign of the obvious reality appearing before you.

Don’t kick your hunches out as if they were unworthy, irrational things. And don’t embrace them casually. The appearance of a hunch is a sign that you have not thought things through carefully enough. It’s better to have a hunch getting you back to work than to experience a poor investment result.

Don’t automatically resist hunches and don’t automatically yield to hunches. View them as an reminder of the need to continue looking at things from different angles, to continue learning. Hunches are frightening only to the overly dogmatic.

Today’s Passion: I have a funny feeling that we will talk more about hunches as we continue boldly into The Future of Behavioral Finance.

“I Have Much More Confidence in My Ability
to Understand What Is Happening”

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I’ve added Elizabeth’s story to the Middle-Class Millionaires section of the site.

Juicy Excerpt: I woke up around DJI 13200, realized I had a lot to learn and had better learn it fast, and found this site. I now have cash sitting in MMFs that has not disappeared out of my retirement funds. I also have much more confidence in my ability to understand what is happening and to respond appropriately as the situation evolves…. I thank you for your public service and, in another dimension, for the personal courage it took to make it happen.

Today’s Passion: We do not learn solely by examining logic chains. We need to hear stories of people like us doing the sorts of things we are thinking perhaps we should be doing to gain the confidence to act on what the logic chains tell us; hearing the words that give us the courage to act on the information bits supplied by the logic chains is a form of learning of its own. You will find many stories of ordinary investors like you coming to terms with the realities of stock investing at times when prices are where they are today at the Letters to the Editor section of John’s site.

Please Do Not Feel That You Must Read This Blog Entry

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Intimidation undermines science.

Intimidation interferes with the reasoning process.

Intimidation causes confusion.

Intimidation turns friend against friend.

Intimidation biases research.

Intimidation can trump logic for a time.

Intimidation causes worry about the long term because intimidation cannot trump logic indefinitely.

The use of intimidation reveals the weakness of an argument.

Intimidation is bad manners.

The desire to make use of intimidation comes from a dark place in the human psyche.

Intimidation has a bad track record.

Everyone notices intimidation.

Many of us ignore intimidation in the hope that it will go away by itself without our needing to get involved.

Intimidation serves no constructive purpose.

Participating in intimidation or tolerating intimation causes us to feel shame.

Intimidation is often the product of defensiveness.

Intimidation is a form of power favored by those who do not possess access to more legitimate forms of power.

We all have lots of experience with intimidation, both using it and having it used on us.

Intimidation feeds on itself — one act of intimidation brings on other acts of intimidation to block discovery of the first.

I cannot recall ever hearing anyone argue that intimidation is a good thing.

Intimidation hurts both those to whom it is directed and those doing the directing.

Intimidation is both non-feeling and non-thinking.

Intimidation is a common rhetorical device.

Many people have done things to limit intimidation or to put an end to it, but it always reappears.

Intimidation has no place in discussions of what the historical stock-return data says about the effect of valuations on long-term returns.

Or maybe it does. Maybe we just do not yet fully understand what influences stock prices. Maybe emotions play a big role and wherever emotions come into play intimidation sooner or late comes into play too.

Intimidation is the use of fear by fearful people.

Most of us do not like talking about or thinking about intimidation, especially in the discussion of investing strategies.

Today’s Passion: The Terrible Truth About Cute Fuzzy Bunny is that he’s not even a little bit cute, he’s not particularly fuzzy, and serious people have raised questions as to whether he is even a true bunny!

The Author of the Bogleheads Wiki
Statement on SWRs Speaks Out

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A fellow going by the name “SWR Lover” has posted a comment to Tuesday’s blog entry on the Bogleheads wiki statement on safe withdrawal rates (SWRs), saying that he is the author. We of course do not know this for certain to be so. I find it believable. The group that controls what goes into the Bogleheads wiki has strong connections with John Greaney and with the abusive posters who congregate at Goon Central to organize their work destroying Retire Early boards and Indexing boards. One of the regulars there is “Drip Guy,” and the wording of SWR Lover’s post suggests that he could well be “Drip Guy” under another name. Certainly the reasoning employed by SWR Lover is the reasoning that I witnessed often being put forward by Mel Lindauer (co-author of The Bogleheads Guide to Investing) and his “defenders” during his campaign to block honest posting on SWRs at the Vanguard Diehards board. If SWR Lover is not in fact the author of the flawed wiki statement, he is certainly guilty of possessing the same mindset as the author of those hard-headed and hard-hearted words.

First, a word on why you should read what follows. The Old School SWR findings have over the years been cited in tens of thousands if not hundreds of thousands of newspaper articles on retirement planning. It is rare to hear retirement advice today that was not influenced in some way by these studies. That means that you have been influenced by them. We all take in what we hear thousands of times and all of us have been influenced in some way by these claims. If the Old School SWR studies got the numbers wrong (and they did), we are all at risk of suffering busted retirements somewhere along the line as a result. And the false reasoning that led to the errors in the Old School studies led to errors in the investing advice you have heard and accepted as true in many other areas. SWRs matter. It is critical that they be reported accurately. That’s why I often spend time analyzing carefully statements of the sort we saw put forward by SWR Lover last night. His errors are our errors. When we come to understand why SWR Lover has gotten it all wrong, we come to learn where the rest of us have gotten it all wrong too.

Here is what SWR Lover said in his comment to the earlier blog entry:

“Rob,

“I personally wrote the initial article for the Wiki section on SWR. I also purposely included the statement you see there now:

“Original Author, in Wiki: “…one should always be sure to be clear whether the use is in reference to past or projected SWRs, so that unnecessary argument can be prevented.”

“I did that to illustrate there is no need to misunderstand history versus future. Most folks handle that concept quite nicely and naturally without needing to see such a clause, but I thought it added a nice closed loop to that potential argument(!). It certainly does not mean what you ascribe to it:

“RB on his blog: “This statement implicitly (but not explicitly, to be sure) acknowledges that [“old school studies”.. are not [correct].”

“It does not mean that in any way, shape or form. I know what it means, because I wrote it. My intent was to make sure the record is plain as can be, and I think it actually is. (Well, perhaps except for one person. We do what we can, but sometimes there are limits…).”

These are word games. People use SWR studies to plan their retirements. It is important that people planning retirements have access to correct numbers. Otherwise, they are likely to suffer busted retirements. The historical stock-return data shows that the biggest factor affecting the safety of a retirement is the valuation level for stocks that applies on the day the retirement begins. The Old School studies contain no adjustment for this factor. Thus, the Old School studies get the numbers wrong. At times when valuations are extremely high (as they have been for a good time now), they get the numbers wildly wrong. Those are the realities.

The key phrase in SWR Lover’s comment is: “Most folks handle that concept quite nicely and naturally without needing to see such a clause.” There is a sense in which that statement is 100 percent false and there is a sense in which that statement is largely true.

The “concept” he is referring to is the word game. Do most folks view the Old School studies as trickery? Do they know right off the bat that they are exercises in word gaming? Do they get it that we have about as much chance of learning the SWR by using the methodology employed in the Old School studies as we have of getting the SWR right by picking numbers out of a hat?

They do not. There were hundreds of SWR threads that appeared at the Motley Fool board in the days before I first reported what I knew about SWRs (that was on the morning of May 13, 2002). In none of those threads did anyone ever say that he knew that the Old School methodology was just a sick joke and that the numbers were wildly off and that these numbers were in no circumstances to be used to plan a retirement taking place on Planet Earth (William Bernstein has said that anyone giving thought to using one of the Old School studies to plan a retirement would be well-advised to “FuhGedDaBouDit!”). Every member of that discussion-board community thought that the Old School studies were legitimate (even I thought at the time that the studies were the product of honest effort). Those threads remain available today. What I am saying here can be checked. People have planned retirements by making reference to the Old School studies.

There is a sense, though, in which what SWR Lover is saying here really is so. People thought at one time that the methodology used in the Old School studies was analytically valid. Now they know that it is not. But a good number of the people who have learned as a result of our discussions that the Old School studies get the numbers wildly wrong still use the Old School studies to plan their retirements! This also can be verified by looking at the Post Archives of The Great Safe Withdrawal Rate Debate. This also can be checked.

So we have learned two important things. One, we have learned that our thinking on what it takes to plan a retirement effectively is hopelessly confused. We got it all wrong, and we need to go back to the beginning and start again (that’s what The Retirement Risk Evaluator, the world’s first New School SWR calculator, is all about). Two, we have learned that discovering that a methodology gets the numbers wrong does not necessarily hit investors where they live. It might be that people want accurate numbers when analyzing things in other fields (that certainly has always been my experience!). When it comes to investing, though, an entirely different set of rules applies. In the investing field, people love to be deceived. In the investing field, people applaud inaccuracies. In the investing field, people react with shock and anger and hostility to the idea that a false number might be corrected. Stock investing generally does not work according to the rules of reason.

The latter finding is the more important one, in my assessment. It is of critical importance that the Old School studies be corrected, to be sure. But it is of even greater importance that we come to a deeper understanding of why it is that people want to be deceived in the investing advice they read. That’s more important because doing the work it takes to get the numbers right is a waste of time if people are not responsive to what we come up with.

I say above that in earlier days I believed that the Old School studies were the product of honest effort, suggesting that I do not believe that to be the case today. Am I saying that I think that all the authors and promoters of the Old School studies are engaged in fraud? Yes and no. It is fraud to advise people to use numbers you know to be wrong to plan their retirements (and the errors in these studies are so basic that it is more than a little hard to imagine that I am the first person who has noticed them). But it is a very strange and special kind of fraud we are dealing with. Many of the people advocating that others use the Old School studies to plan their retirements are using them themselves to plan their own retirements. This too can be verified by making reference to the Post Archives of our discussions. So this is an act of fraud in which the person engaging in the fraud is himself a victim of the fraud. Holy moly!

Self-deception is the primary problem here. The deception of others is of course a big problem too. But, if we want to help the people whose retirements are at risk, we need to be practical in our approach. And the practical reality is that we need to deal with the self-deception matter to get to first base. When the people telling lies about SWRs (word games are essentially lies, are they not?) realize that they are destroying themselves by using bad numbers to plan their own retirements, they will stop urging others to use bad numbers to plan their retirements. Does that not make sense?

I of course believe that we should continue to do what we can to get the word out about the false SWR claims advanced in the Old School studies. There are hundreds of community members who have responded with great enthusiasm to our findings, showing that the level of self-deception practiced by stock investors varies greatly; some are capable of seeing that it is a bad idea to use wildly wrong numbers when deciding when to hand in a resignation to an employer. Many others are not capable of seeing this, however. Those many others include (not entirely, but to some extent) big names like John Bogle, William Bernstein and Scott Burns. So our most urgent task today is to come to a better understanding of why even powerful minds feel such a strong draw to self-deception when forming ideas about how to invest. That’s a big story in its own right, bigger than the story about the Old School studies getting the numbers wrong, in my estimation.

I referred to SWR Lover’s comments as “repulsive” in my response in the comments section for the earlier blog entry. The reason why I find the word games repulsive is that word games feed right into this self-deception disease that we all seem to suffer from in the area of investing. We very, very, very much want to believe that things that cannot possibly be so about stock investing really are so. I see it as the most important work project of my lifetime to come to a full understanding of why it is that stock investors destroy themselves in this way over and over again (this is the fourth time in history in which valuations have risen to what they are today — the first three trips ended in bone-crushing losses to all who invested heavily in stocks despite what their common sense told them about the risks of doing so at these sorts of price levels). Those who are engaging in word games are doing the opposite of what I am seeking to do. I am trying to make things more clear to people, they are trying to make things less clear. It is in this sense that I view the use of word games in this area as “repulsive.”

I do not view SWR Guy repulsive as a person. I am grateful that he let us know a little bit of what was going on in his mind when he wrote the gibberish that now serves as the Bogleheads wiki statement on SWRs. I contest the ideas put forward by SWR Guy to the strongest extent imaginable. He and I are coming at this from entirely different places. I hope that our personal interactions can be warm ones and civil ones and friendly ones and helpful ones. That’s because I want them to be learning ones. SWR Lover is not just destroying others with his word games. He is destroying himself at the same time. I think if benefits all aspiring early retirees for us to learn what it is that makes it seem in his eyes that that is an appealing thing to do.

Today’s Passion: I argue in an article entitled Does John Greaney Believe His Own Safe Withdrawal Rate Claims? that, if John’s best friend asked him about SWRs, John would probably say the same sorts of things that he says in his study and on our boards.

I Hope You Suffer

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Sometimes I say things in the heat of the moment just to have something to say and, then later, when I read the words back, they make sense! It sometimes really does happen that way. It makes me wonder if there really is a God or something.

Some Goon was sticking his elbows out at me in comments he put to a recent blog entry and I went into my usual riff about how all you need is love and love is the answer and what the world needs now is love, sweet love, blah, blah, blah, blee, blee. blee. Then, for reasons unknown to us mere mortals, the Holy Spirit elected to inspire me to talk about the connection between love and suffering. That balanced the gooey, sticky sweet part and made the riff sound more balanced and real and right.

It’s all about love. It’s all about suffering. Both things are so.

Suffering leads to love. Love leads to suffering.

Hey! I didn’t make the rules. I just report on these unfortunate investing realities as I happen to discover them.

If you keep your heart open to love, you are going to suffer. Anyone who tells you different is not your true friend. Like Otis, I’m a love man. But Otis also wrote “Mr. Pitiful.” Otis knows the score and Otis tells the truth. You need to listen to more than one song if you hope to get anywhere in this world.

I noted in that blog entry that the boards are gradually opening up to the idea of permitting honest posting. My dream! So I should be happy, right?

Well, yeah. Except that this opening up process is the result of lots of people losing a large percentage of their life savings. Which means that financial freedom dreams are being crushed. I am in the business of helping people make their financial freedom dreams come true. So I think it would be fair to say that this little detail is a discouraging note in an otherwise happy song.

Sorry about that.

It’s the way life goes on down here in the Valley of Tears. You get to love through suffering. There is no other way.

When I gave the title “Passion Saving” to my first book, I looked up the word “passion” in the dictionary. One of the definitions was “long suffering.” I thought that was funny. I suppose that the reference is to the passion of Jesus. But then why do they call the crucifixion the “passion” anyway? What’s up with that?

All passion comes from suffering. Romeo and Juliet felt a deep passion because their love was denied. If Juliet’s father had said “that Romeo fellow seems like a nice enough boy, perhaps we can find a place for him in the family business,” she would not have felt things so strongly. Love denied grows. A passionate moment is a moment when something that has long been denied to you is given to you.

We’re suffering now because of the lies we told in the 1990s. I wish that everyone would stop with all the nonsense rationalizations and just say things as we all on a deep level know they are. All the blah-blah has its place. But the first thing that is needed is for us to acknowledge that it is our own lies that caused the problem. We need to grow up. We need to stop making up stories that pull our attention away from The Real Story.

The pain is God’s way of forcing us to do that. He doesn’t set things up this way because He wants to crush us. Bear markets are not God’s vengeance. They are God’s way of showing His love for us. He is saying that He expects better of us, that he knows that we are capable of better.

We are a better people than we pretended to be in the late 1990s. We all should be wishing for a bear market so that we can regain the good qualities that we abandoned during that most unfortunate time. We are capable of honesty. We are capable of compassion. We are capable of intelligence. We are capable of courage.

It is by suffering that we regain the good traits that we temporarily set aside. It is by suffering that we learn again how to love.

And you thought that losing the money you hoped to retire on was a bad thing!

Today’s Passion: The article entitled Learning From Your Mistakes — I Never Should Have Bought That Leo Sayer Album explores the suffering involved in trying to find common ground with a girl who likes disco.

We’re Not Feeling as Fearful As We Think We Are

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Many investors acknowledge that we all were feeling greedy back in the 1990s. But now that stocks have performed poorly for over eight years, those days are behind us. The problem today is that, if things keep going like they have been going lately, it is our feelings of fear that will be getting out of control.

Right?

Not right.

Today’s P/E10 value is 25. We are now at one of the highest valuation levels experienced in the history of the U.S. market. Stocks have never given a strong long-term performance starting from these valuation levels. We are not today living in times of extreme fear or even moderate fear. We are today living in times of extreme greed.

It doesn’t feel that way because things were so out of control in the late 1990s that even eight years of poor performance have not been enough to get us back to reasonable price levels. The P/E10 level in the month before The Great Crash of 1929 was 33. We were at 44 in January 2000. Today we are at 25. Yes, we are moving in the right direction. No, we are not even close to where we need to be for stocks to begin offering a strong long-term value proposition once again.

This came up in the interview that Fortune recently did with Warren Buffett.

Here’s what the interviewer said:

“By your rule, now seems like a good time to be greedy. People are pretty fearful.”

Here’s what Buffet said:

“You’re right. They are going in that direction. That’s why stocks are cheaper. Stocks are a better buy today than they were a year ago. Or three years ago.”

There’s not one word in Buffett’s response that is incorrect. Stocks are a better buy than they were a year ago or three years ago. Stock prices are moving in the right direction.

But the interviewer is wrong to say that “now seems like a good time to be greedy” and “people are pretty fearful.”

If people were truly fearful, they would lower their stock allocations. There would be massive sales of stock. That would bring prices lower. It is not right to say that people are fearful at a time when stock prices are at one of the highest price levels in history.

There’s a bit of fear mixed in with the greed today, that’s all; the greed is no longer a pure greed. We are in the process of moving from a greed-based market to a fear-based market. We’ve got a long way to go. We have so far traveled perhaps halfway to completion of the journey.

I wish that Buffett had corrected the misimpression voiced by the interviewer. I wish that he had said: “No, that’s not right, prices are scary today, those who have not yet lowered their stock allocations need to do so immediately.” The sooner that message gets out, the better.

The interviewer’s comments are not fearful comments. They are greedy comments. It is greedy to expect strong long-term stock returns starting from these price levels. When we are truly feeling fearful, interviewers won’t be making comments like that. When we are truly feeling fearful, interviewers will be mocking anyone who says that stocks can ever offer a strong long-term value proposition. That’s when the long-term value proposition will be the strongest it can be.

Don’t be fooled by false fearfulness.

Become truly fearful.

Make greed fun again.

Today’s Passion: The article entitled Woody Allan’s Take on the Efficient Market Theory argues that we lie to ourselves about how stock investing works because — well, we need the eggs!

Hate Is Not a Sound Long-Term Investing Strategy

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I’ve seen loyalty. I’ve seen deception. I’ve seen friendship. I’ve seen intimidation. I’ve seen responsibility. I’ve seen willful ignorance. I’ve seen generosity. I’ve seen arrogance. I’ve seen courage. I’ve seen cowardice.

And that’s just on internet discussion boards dealing with the topic of stock investing!

It’s humans who buy stocks. That rarely noted fact explains why the conventional advice re how to invest for the long term does not work. The conventional advice is rooted in an assumption that investing is primarily a rational endeavor. Humans are emotional. Since it is humans who buy and sell stocks, it is not possible for investing ever to become primarily a rational endeavor, no matter how much some ivory-tower eggheads might long for it to be so.

There are important things to study and there are easy things to study. Emotions are hard. Many stock analysts have elected to study only those aspects of the stock-investing project that are easy to study. We possess little understanding today of how our emotions save us or ruin us. We need to learn more.

Discussion boards are the perfect communications medium for studying the human side of the investing project. Many of the people who post to boards are human. Not all, to be sure. Humans are making new inroads at discussion boards all the time, however. I have heard reports that at some of the better administered boards, humans now comprise a majority.

You’ve heard that fear and greed are the two most important investing emotions. Greed prevails in bull markets, fear prevails in bear markets. What emotion do you get when a major bull is preparing itself for its journey to Bull Heaven and a major bear is still just learning how to walk and say “goo-goo-ga–ga”? What emotion pops up when greed is in the early stages of the process of being transformed into fear?

Anger.

In the worst cases, hate.

What do today’s stock investors have to feel angry or hateful about? Plenty. Today’s P/E10 value is a bit under 28. The fair-value P/E10 is 14. If stock prices were to return to reasonable levels (it’s been known to happen), those going with high stock allocations today would see their financial freedom dreams go “poof!”. You would cry too if it happened to you.

The anger today is not directed at a price drop. Wer’e not there yet. The anger today is directed at explanations of why the economic realities require a price drop or to mentions of the historical stock-return data, which shows that big price drops have always been the result when we have found ourselves in similar circumstances at earlier times in history.

The point of today’s anger is to scare away reality. You can’t scare away reality. But it’s just the sort of thing that those darned humans would want to take a stab at all the same!

I hope that not everyone is feeling angry or hateful. If everyone is feeling angry or hateful, there is no one left to read this blog, which is guaranteed to be at all times 100 percent anger-free.

My strong sense is that most of today’s investors are experiencing mostly healthy emotions and would like to gain a better sense of how stock investing really works before it is too late for the new information to help them avoid the pain of the big price drop. Those investors are unsure of their footing, however, while the investors feeling anger and hate are intense in their conviction that discussion of the realities must be forbidden. So the investor emotions that matter today are the emotions of anger and hate. It is those who feel anger and hate who control the agenda, not just in the Financial Freedom Community but in the Big Bad Outside World too.

Hate is not a sound long-term investing strategy. Don’t let those feeling the most negative emotions block you from learning what you need to learn to become a successful long-term stock investor. Respond to anger with humor. Confront hate with compassion and concern (both for those who feel the anger and hate and for those at whom the anger and hate is directed).

Please try not to be too discouraged. I’ve sneaked a quick look at the last page of our little drama. Love conquers all in the end.

No, honestly!

Unmentionables

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Scott Burns puts forward tantalizing hints but doesn’t dare to tell the full story.

William Bernstein took a chance by stating it pretty darn clearly one time and is not inclined to take a bigger one by stating it pretty darn clearly a second time.

John Bogle says enough to permit those who want to know the realities figure them out for themselves, but holds back enough to permit those who do not to remain in the temporary comfort of the darkness.

Jonathan Clements knows enough to see that there is a big story out there, but elects to spend his time pursuing less controversial topics.

I mentioned in yesterday’s blog entry that: “We don’t want it shoved in our faces just how bad things have gotten, just how irresponsible we have been in bidding up stock prices to such absurd levels in recent years.”

It’s a big story that as of yet has not been widely reported. I don’t mean the fact that stocks are overvalued. That’s been written about some. I mean how upset it makes people to think about it, and how much anger some experience when they hear it discussed in a clear and direct and understandable and undeniable way.

The conventional thinking on stocks is that stock investing is primarily a rational endeavor. I challenge anyone to devote 15 minutes to reading the transcript of The Great Safe Withdrawal Rate Debate and to continue to maintain afterwards that stock investing is primarily a rational endeavor. The debate transcript shows that stock investing is primarily an emotional endeavor. I mean, come on.

What are we going to do about it?

I propose that we learn more about it.

Learning that stock investing is primarily an emotional endeavor changes everything. It compels a different starting point for the analysis of every possible investing question. Change all of the starting points, and you change all of the end points.

It would not be overstating things all that much to say that everything we thought we knew five years ago about investing has turned out to be at least a little bit wrong. We’ve got some challenging work ahead of us. Some exciting opportunities to make the world a better place now appear before us too.

Burns, Bernstein, Bogle and Clements are four of the best. Each of them has played a role in the development of the insights we have generated during The Great Safe Withdrawal Rate Debate. Thanks, guys!

Each of them has pulled back from exploring in depth those insights on his own. Way to drop the ball, guys!

I have hopes that we are not going to drop the ball. I have hopes that we are going to hold onto the ball for a run all the way into the end zone.

If it were easy to tell the full truth about stock investing, Burns, Bernstein. Bogle and Clements would have already done it. It’s not easy. We’re going to do it anyway. That’s why we set up this community in the first place, is it not? That’s the job we have taken on, is it not?

The first step is to figure out why Burns, Bernstein, Bogle and Clements have shied away from the task. What are they afraid is going to happen if they tell it straight, with no chaser?

My sense is that they are afraid that telling the stock investing story straight and full and true would make make their readers angry at them. It’s one thing to talk about how stocks work. It’s a very different thing to talk about how people work, especially when part of the story that needs to be told relates to how people sometimes mess up.

People got us to the P/E10 level that we are at today. Isn’t it just like those darn humans to do something like that? Look into a problem deeply enough, and it always seems to turn out that it’s the humans who are at the center of the mess-up!

The humans messed up in a big way. That’s the big Unmentionable in the field of investing analysis today. The human factors are the Unmentionables because it’s humans who buy the newspapers and attend the speeches and subscribe to the newsletters and all that sort of thing.

We all want our fellow humans to like us, and, if we start telling them that they messed up, they might not. So many of the best investing analysts have elected not to say too much about it and to be less than clear and direct in what little they do say.

We need to be charitable. We need to be balanced. We need to be diplomatic. We need to tell the story, though. We need to mention the Unmentionables. It’s an important part of the investing story. The story as a whole does not make sense unless this aspect of it is addressed in some depth.

You might want to click on your seat-belt. It promises to be a rocky ride. We’re going to be doing some truth-telling around this place in the days and weeks and months and years to come.

Our mission, if we elect to accept it (and we have so elected) is — To tell the part of the stock investing story that Burns and Bernstein and Bogle and Clements have never quite possessed the courage to tell.

Wish me — I mean us! — luck!

The Rumors About Stocks Are True

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My wife and I were driving down the road the other day and we passed a Ruby Tuesday restaurant. “What was that song supposed to be about, anyway?” she asked. I said that it was about a hippie-chick who was so unwilling to become tied down by social norms that she refused to answer to any one name.

This got me to thinking about stocks.

Stocks are like hippies in that they are always changing their look. In the last three years of the 1990s, the DOW went up by about 30 percent a year. There are other times when stocks go down by just as much. One day you determine that your net worth is such-and-such, and the next day those old calculations are out the window. This is a fickle investment class.

Stocks are never boring. That’s the appeal. But fashions change. Who wants to be caught wearing bell-bottom stocks when straight-leg Treasury Inflation-Protected Securities (TIPS) again become the in thing?

What is the one bit of investing advice that most of the experts seem to agree on? Buy-and-hold, right?

What’s buy-and-hold all about? It’s about making a commitment. The experts are essentially telling us to marry our stocks.

The trouble is — the Ruby Tuesdays of the world don’t generally make the best life partners. We all long to be wild and free. But someone has to bring the car in to get the muffler replaced and she needs to do it at the particular time that the guy who offered to do the job set as the appointment time. I like hippies. But I have come to believe that they got carried away with the freedom thing. What’s the big deal about having a regular name like everybody else anyway?

Stocks are too flighty for my taste. I’m not against change. I’m against too much change. I like consistency too. I look for a nice mix of the two in my investment portfolio.

So here’s what I do. I’ve talked to some people who know about statistics and other jizz-jazz like that and they tell me that stocks have for a long time been generating an annualized real return of 6.8 percent. There are periods of time in which they generate far larger returns (if you are older than my six-year old, you can probably remember those days), and there are periods of time when they generate far smaller returns. In the long run, though, that 6.8 percent number is the number that matters.

My view is that investors should not even count returns greater than that when determining their net worth. Why count on something that isn’t going to be around for long? It’s only going to break your heart in the end to do so. The 6.8 percent return is the real thing. The rest is fluff. Forget her, I mean it.

At times of high valuation, you can’t even count on the 6.8 percent, unless you are willing to wait a long time (at least 30 years). So, at times like today, I move some of my money to more straight-laced asset classes, things like TIPS and IBonds. Stuff that might not come off as being quite as flashy as stocks. But stuff that you can count on to be there for you in times of need. You can see yourself getting old with TIPS and IBonds, and with stocks purchased at normal valuations levels too, can’t you? Today’s stocks are too fast to last.

Stocks are fun. I don’t say different. Sometimes it’s not fun you are looking for. Sometimes you want to have a serious conversation. TIPS and IBonds are serious-conversation sorts of asset classes. I concede that TIPS and IBonds are not glamourous. I think they’re cute as a button, though. As the sage Bruce Springstein once observed: “You’re no beauty but, hey, you’re allright, and that’s allright with me.” He’s a well-recognized authority on the effect of Cool Girls on Asset Allocation Strategies, so I figure he’s probably giving us the straight story.

The thing that always pulls me back to stocks is the 6.8 percent return. You’ll never get a return that attractive from TIPS or IBonds. It’s important to remember, though, that stocks can be counted on to provide a 6.8 percent return in a reasonable amount of time only when purchased at reasonable prices. At those sorts of prices, I love stocks enough to want to marry them.

When prices are at the sorts of levels that they are at today, I get nervous walking anywhere in the vicinity of a church while holding hands with stocks. Make a promise to have and to hold stocks, I mean to buy and to hold stocks, at a time when the P/E10 value is 26, one of the highest on record? Not this boy. Stocks today come with too much baggage. Stocks today are high-maintenance. Stocks today come with secrets from their past that they don’t want you to find out about. I’m not sure I even want to be seen alone with stocks nowadays. We’re old friends and that’s all, okay?

At times like today, I see an inner flame in the sorts of asset classes that some others might dismiss as “mousey.” It’s TIPS that are unforgettable at today’s prices. It’s IBonds that are always on my mind these days. Remember that Eagles song about the guy who found it a peaceful easy feeling to be falling in love because he was beginning the adventure with both feet firmly planted on the ground? Thats TIPS. That’s IBonds.

I don’t say that stocks never tempt me. My view is that stocks need to calm down a bit before they will be marriage material again. They’re still the talk of the town, but much of the talk nowadays comes in the form of ugly rumors. The thing is, they drive too fast and someone is going to end up hurt. Stocks need to learn to walk the line before I am going to bring them home with me to meet mom and dad.

Does Anybody Really Know What Time It Is?

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What do you know? How do you know it?

You need to know certain things to get from the place where you are when you pull yourself out of your bed in the morning to the place where you are will be when you throw yourself back into it at night. For example, you need to know about gravity. If not for gravity, you would need to dress differently. You might need to wear heavy boots to keep from floating off into space. Gravity matters. Since you know that gravity exists, you keep this reality in mind as you make all of the various life decisions put before you during the course of another day spent journeying through this Valley of Tears.

You do know that gravity exists, right?

No. The truth is, you really don’t.

Have you ever explored the gravity question in depth? Have you ever checked out the claims that teachers and friends and experts have made about gravity? You haven’t. You have taken them on faith.

That’s what humans do. There are thousands of things we need to do to keep body and soul joined. We couldn’t possibly check out each and every little detail of each and every little claim that we elect to take on faith for the purpose of freeing up some time to devote to the things in our lives that we care about most.

I think you made the right choice re the gravity thing. I personally am confident that there really is such a force and that it really does work at least largely as lots of people tell us it does. The conventional understanding of how gravity works is cool.

The conventional understanding of how stocks work is not cool.

Taking things on faith makes sense. It save us an awful lot of time to just assume that, when lots of people say the same thing, they must all be right or at least close enough to being right that we don’t need to worry about it much. There are times, though, when taking things on faith can get you in a whole bunch of trouble. One of those times is when you are deciding how to invest your money.

Here are some words from a community member named “Janey”:

“What Rob said sounds reasonable enough, so I wouldn’t be able to judge his advice without additional input. I must rely on the fact that I don’t hear the authors I trust saying the same thing. The authors I trust seem to agree that returns may be lower in the years to come, but none of them suggest that we should drastically reduce our stock allocations in light of this information….I don’t have time to join the search for ‘the Grail of Investing.’ Besides, I have other priorities in life. So, I have to rely on the judgment of people who make the most sense.”

Janey is telling it straight. She is acknowledging that she is not able to identify any reasons why the Valuation-Informed Indexing approach to investing is not superior to the conventional indexing approach. It sounds fishy to her, though. There are lots of smart and well-informed and well-respected people who say things that are at odds with what I say. So she can’t help but conclude that there is probably something wrong with what I am saying. Given the practical reality that she cannot afford to spend years of her life researching my claims and the counters to my claims advanced by my critics, she has decided to place her confidence in what a lot of smart and well-informed and well-respected people have told her.

Janey believes in gravity. Is that so wrong?

I think it makes a lot of sense. I think Janey is a smart cookie and a nice person too (I am going by what I have read in a few posts she has put forward at the Vanguard Diehards board). I think she is making a mistake to place her confidence in the smart and well-informed and well-respected people in whom she has elected to place her confidence. But I understand why she has done so and I am grateful to her for sharing with us a look into the thought-process by which she made a decision to do so.

Janey makes investing decisions in the way that most smart and nice people make investment decisions. We humans are not computers with legs. We are social animals. We often decide what we think by asking others what they think.

The dominant investing paradigm assumes that we are computers with legs. The dominant investing paradigm says that the stock market is efficient because prices are set by millions of investors acting rationally in their self-interest.

In reality, prices are set by people. People make their investing decisions not rationally (reason comes into it, of course, but reason is not the dominant influence on our investing choices), but by talking with other people. Each time that another human becomes convinced that stocks are “good,” two things happen: (1) stocks become a little less “good” (because that human’s purchases cause the price of stocks to go up and the long-term return obtained by those who purchase stocks in future days to go down); and (2) those who retain doubts about how good stocks are become less sure of themselves as the result of hearing from yet one more fellow human how good they are. In time, just about all the humans that can be reached by telephone or e-mail or radio broadcasts own stocks and prices have been driven so high that we are in one of those rare time-periods when stocks are not so “good.”

Janey has been misled by the smart and well-informed and well-respected people in whom she has placed her trust. Not because they are bad or dumb or uncaring people (athough human failings do indeed play a role in making transparently silly ideas popular for a time). Because they are just as human as Janey is. Being smart and well-informed and well-respected doesnt make you any better at understanding how stocks work than all of your fellow humans who are a bit less smart and a bit less well-informed and a bit less well-respected than you. Janey would be better off listening to her common sense than listening to the people she has come to view as investing experts.

You cannot learn about stocks in the way that you learn about gravity. Why? Because the very fact that so many people have come to like stocks so much is what makes them unappealing. It is because so few question the value proposition of stocks today that stocks have today become such a dubious investment choice for the middle-class investor.