A Rich Life

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

Academic Researcher Silenced by Threats to Get Him Fired From His Job After Showing Dangers of Buy-and-Hold Investing Strategies

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I’ve posted an article to the “The Buy-and-Hold Crisis” section of the site titled Academic Researcher Silenced by Threats to Get Him Fired From His Job After Showing Dangers of Buy-and-Hold Investing Strategies.

Juicy Excerpt: The question this article addresses itself to is — How do they pull it off?

It’s not hard to understand why financial planners would want to encourage their clients to invest heavily in stocks — most of the money made in this field is made through the selling of stocks and all industries want their customers to believe that the product they are selling is a good buy at any possible price. But how has Wall Street managed to convince millions of middle-class people to throw away large portions of their retirement money through a misguided belief in this obvious fiction?

Buy-and-Hold advocates argue that the academic research on stock investing supports their claims that market timing doesn’t work or isn’t required for long-term success. Academic researchers are independent actors. How have the researchers been persuaded to keep quiet about what the entire historical record so clearly shows to be the case, that long-term market timing (changing your stock allocation in response to big swings in valuations with the understanding that you may not see benefits for doing so for as long as 10 years) always provides investors with much higher long-term returns at greatly reduced risk?

It’s done through the application of brutal intimidation tactics aimed at those who stray from support for the company line. Other researchers with thoughts of telling the truth about stock investing see what has happened to their peers, learn the lesson that the industry needs them to learn for their Buy-and-Hold marketing slogans to remain effective, and self-censor their research.

Rob Bennett’s Responses to Academic Researcher Wade Pfau: #18 — The Problem Is That Not One Buy-and-Holder Today Has Confidence in Buy-and-Hold

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I would be embarrassed.

If someone on “my side” put forward a death threat, I would cringe. If someone on “my side” engaged in defamation, I would disassociate myself from the comments. If someone on “my side” sought unjustified board bannings, I would object if the site administrator went along. If someone on “my side” threatened to get an academic researcher fired from his job, I would rush to put up comments saying that I want to know what that academic researcher really believes, that silencing the researchers makes it impossible for any of us to trust what any of the researchers say from that point forward.

It’s a good idea to learn how to reduce your message to a few words, to figure out how you would make your pitch if you were trying to convince someone during the 30 seconds you would share in an elevator. So I am going to keep this one short.

Wade Pfau published research showing that Valuation-Informed Indexing has provided far greater returns than Buy-and-Hold at greatly reduced risk for the entire 140 years now in the historical record. The research of this Ph.D. from Princeton is the most important research ever published in this field. We all should be thanking him. We all should be exploring his ideas. We all should be making the shift to Valuation-Informed Indexing and encouraging our friends and neighbors and-co-workers to do the same.

John Bogle isn’t doing that. Bill Bernstein isn’t doing that. Scott Burns isn’t doing that. Jonathan Clements isn’t doing that. Larry Swedroe isn’t doing that.

They don’t believe.

It’s that simple.

If they believed, they would react differently to the news of the silencing of a great researcher. There are two legitimate responses here. One is to make the switch from Buy-and-Hold to Valuation-Informed Indexing. One is to make the case for why Buy-and-Hold remains a legitimate strategy despite the publication of the powerful new research findings.

Threatening to get the researcher fired from his job is not a legitimate response. Creating a “hostile atmosphere” (Wade’s term) for the researcher is not a legitimate response. Ignoring the research is not a legitimate response. Ignoring the story of the silencing of the researcher is not a legitimate response.

The Buy-and-Holders do not have confidence in their strategy. That’s 11 words. That’s the story here.

They follow it. There is a mountain of evidence showing that they follow it. They are not lying about that part.

But they don’t believe in it. Not deep in their hearts.

The only question that remains is when they will work up the courage to say that publicly and thereby let the effort to learn what does work to proceed.

I hope that happens soon. I have a funny hunch that deep in their hearts every last one of the Buy-and-Holders hopes the same thing. I promise to continue doing my part to bring them to a point where they feel able to say The Three Magic words and thereby to see their long-deferred dream of promoting a smart, simple, safe and truly research-backed strategy for millions of middle-class investors come true.

Hate is not a sound long-term investing strategy. Love is the answer. I know that much for sure.

Rob Bennett’s Responses to Academic Researcher Wade Pfau: #15 — No Apologies?

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Where are the apologies?

I’ve generated hundreds of important investing insights in my podcasts and weekly columns and articles and discussion-board comments of the past 10 years. The Buy-and-Hold Machine is not happy to see me telling people about those insights and yet has not been able to find any flaws in the academic research that supports them. Let’s say that the insights are all baloney. Let’s say they are all wrongheaded. All but one. The first one cannot be wrongheaded because even The Buy-and-Hold Machine now (tens years later) agrees that that one is on point. The Old School safe-withdrawal-rate studies got the numbers that millions of middle-class people used to plan their retirements wildly wrong. There’s no argument anymore than I am off base re that one. We have achieved a consensus at least re that one.

So where are the apologies?

I am owed an apology re that one even if every other insight I have generated is baloney, no? It was no small insight. One of the primary reasons why people invest in stocks is to finance their retirements. The Old School studies didn’t get the retirement numbers a little wrong, they got them wildly wrong. A failed retirement is a serious life setback. I helped everyone out — or at least I tried to help everyone out — when I dared (it took courage) to step forward and tell the truth about safe withdrawal rates. I helped — or tried to help — the retirees who would have suffered failed retirements if I didn’t work up the courage to take on The Machine (the retirees may suffer failed retirements all the same because of the ten-year cover-up but I also spoke out in the strongest possible terms against the cover-up). And I helped the “experts” in this field who were leading the cover-up. They have incurred hundreds of billions of dollars in potential legal liabilities. I did all I could to help them avoid those liabilities. No?

So where are the apologies?

Where are the expressions of gratitude? John Bogle has not sent me an e-mail saying “Thanks, man!” Huh? What’s the problem here?

Where are the offers to help me spread my ideas far and wide?

Where are the links to my web site?

Where are the articles demanding that the Goons drop their Campaign of Terror against our board and blog communities, including a number of communities that I built pretty much with my bare hands?

Is there a problem?

There is a problem.

We are ashamed.

All of us.

We need to get over it.

Do you know why the Buy-and-Holders act like they know it all? A number of people who agree with my general take have said that it is because there is money in it. What industry wouldn’t want people to believe that the product it offers for sale is worth buying at any price imaginable? That’s what Buy-and-Hold says, is it not? When the stock-selling experts tell us not to time the market, what they are really saying is not to take price into consideration when buying stocks. Just buy stocks! Lots of them! Price be darned! As Church Lady might observe, “How convenient!”

I certainly agree that money-making comes into play here. I do NOT believe that this is the primary problem, however. I think that some of my friends may at times fall into the trap of being a little too cynical.

Say that we were to open up every internet board and blog to the discussion of Valuation-Informed Indexing. Say that the idea spread like wildfire. Say that one year from now 90 percent of investors were Valuation-Informed Indexers. Would the profits of The Stock-Selling Industry go up or down?

They would go up. Investors who understand how stock investing works have confidence in their financial futures. People who have confidence in their financial futures buy stuff. If most investors became Valuation-Informed Indexers, the fears that keeping consumers from spending and extending and worsening our economic crisis would be overcome. We would see an economic boom. And investors who understand how stock investing works buy more stocks than investors who are intimidated by the subject. Valuation-Informed Indexing is common-sense investing. If the experts got behind the idea, more people than ever before would buy stocks. The transition from Buy-and-Hold to Valuation-Informed Indexing would be a boon for millions of middle-class investors and for the industry that advises them both.

So this is not really a money thing. Those who participated in the ten-year cover-up of the errors in the Old School SWR studies are worried about lawsuits. To that extent it’s a money thing. But the opposition to honest posting came long before lawsuits were a big concern. The core problem here is something different. If we are going to overcome this mysterious force that is holding us back from an economic boom and that is threatening to pull us into the Second Great Depression, we need to develop a true understanding of what it is.

What is really at the core of all this craziness?

On the surface, it appears to be arrogance. The Buy-and-Holders don’t admit mistakes. They don’t ever, ever, ever, ever, ever admit mistakes.

But what’s behind the arrogance? Why are they like this?

Say that you were a doctor and that you thought that cutting someone open might help them with their problem but you were not sure. What would you do? A lot of us would not be able to cut unless we were sure. So we would try to convince ourselves that we were sure. Then, if there were a bad result and someone questioned our decision, we would become angry and defensive. The person questioning the choice is giving voice to our own doubts. So their words really hurt. And it becomes important to us to silence that voice.

That’s why the Buy-and-Holders hate me. It’s not that I am saying something they don’t think makes sense. If they thought that what I said doesn’t make sense, it wouldn’t bother them. They would laugh it off. They wonder themselves if what I am saying is right and, when I give voice to their doubts, it makes them go crazy. The want me to shut up. And I won’t. Not because I want to hurt them. Because I believe that they are on the wrong track and that deep in their hearts they want to be on the right track. So I am doing for them what they would want me to do for them if they were able to think straight about these issues.

Why can’t the doctor acknowledge that he really doesn’t know if cutting is a good idea or not? Because cutting is a big deal. No one wants to be cut for no good reason. You can’t just go ahead and cut unless you are sure. Unfortunately, the humans are born ignorant. We don’t it all. Sometimes we are guessing. That’s sometimes so even when we are making decisions as important as whether to cut another human body or not.

If a perfect world, the investing experts could continue doing studies until they learned everything there is to know and only then offer any advice to investors. We don’t live in an ideal world. In the world in which we live in people need investing advice TODAY. We don’t have perfect information today. So we might mess up. But we cannot take a pass. We have to recommend something.

The Buy-and-Holders did the best they could given the limited extent of their knowledge when they designed the Buy-and-Hold Model. But, since the matter they were advising people on (what to do with their retirement money) was so important, they acted like they were a lot more confident than they were. And, because they cannot stand the thought of having caused the great human misery they caused if they really are wrong (as they now suspect), they become highly defensive when challenged. They cannot admit they were wrong. They feel that their lives will have been wasted if they admit that.

I don’t say that the investing experts did nothing wrong. What I say is that we all did wrong too. We should have made clear to them that we don’t expect them to have all the answers. We never should have started calling John Bogle “Saint Jack.” That put him in a terrible spot. That made it that much harder for him to acknowledge his mistakes. He feels that he needs to live up to the exalted view we have of him. We would have been better friends if we had made it a practice to ask hard questions of him, to always challenge him to learn more and to sharper his ideas over time.

So it is not only John Bogle who today is feeling shame. All the people who followed John Bogle’s ideas are feeling shame too. That’s most of us.

The shame makes us defensive and our defensiveness causes the problem to grow worse and the problem growing worse makes us feel more shame. We’re caught in a trap of self-recrimination.

I believe that the next price crash will help. The next crash will scare us more than did the first one. People who become very scared give up their pride in desperation. If we give up our pride, we will open our minds to accepting ideas that show that we got things wrong in earlier times. That sort of thing doesn’t seem like such a big deal when things reach a point where your way of life is at risk.

We need to hurt. We need to suffer. It’s the only way past the defensiveness and the anger and the shame that keeps us in ignorance today.

We all want the same things. I did not develop the Valuation-Informed Indexing concept by myself. Hundreds of people helped me. Including lots of Buy-and-Holders. Including John Bogle.

I wish that John Bogle and my other Buy-and-Hold friends could see that and that it could help them feel less ashamed of the mistakes they have made. If they felt less shame, they would find it easy to thank me. And I would find it easy to shake their hands and say “don’t worry about it” and begin working together with my Buy-and-Hold friends to rebuild our broken economy.

Ed Rager, Mel Lindauer and Taylor Larimore to Rob Bennett: “You’ve Constantly Misquoted, Distorted, and Disrespected Jack Bogle and Bill Bernstein. Your latest Post “Jack Bogle’s Big Mistake” Was, in Our Opinion, the Final Straw. Jack and Bill Both Join Us at Our Private Events Because They Enjoy Meeting with Friendly, Like-Minded Diehards in a Relaxed and Secure Atmosphere….You Will Not Be Allowed to Attend.”

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While I was looking through my old e-mails to recover the ones that I sent to the Morningstar site administrators and reported on in the last few blog entries, I came across the e-mails that I sent to sign up to attend the Vanguard Diehards Conference with John Bogle in 2007. I had intended to ask Bogle questions about the cover-up of the errors in the Old School safe-withdrawal-rate studies, which I had reported on at a Motley Fool discussion board on May 13, 2002, and which have not been publicly acknowledged by the “experts” in the investing advice field until recent months. I thought that these e-mails too were worth reporting on. I did not receive a response to the question I posed in the last e-mail.

Set forth below are the texts of three e-mails: (1) the e-mail that I sent to Ed Rager on February 17, 2007; (2) the response that I received from Ed on February 18, 2007; and (3) the reply that I sent on Feburary 19, 2007.

Ed:

This is Rob Bennett (“hocus” on the boards). I’d like to make my reservation to attend Diehards VI.

I live in the area. So I do not need a hotel reservation.

My personal information is:

[….]

Please let me know what I need to do to transfer the registration fee of
$189.

Thanks for all the work you did putting this together.

Rob

Hi Rob:
Our Diehards get-togethers are private social meetings of friends and like-minded souls who love, admire, and respect Jack Bogle and his teachings.  You’ve constantly misquoted, distorted, and disrespected Jack Bogle and Bill Bernstein.  Your latest post “Jack Bogle’s Big Mistake” was, in our opinion, the final straw.  Jack and Bill both join us at our private events because they enjoy meeting with friendly, like-minded Diehards in a relaxed and secure atmosphere.  We want them to continue to enjoy and attend our private social events.  Therefore, we regret to inform you that you will not be allowed to attend.
Ed, Taylor and Mel
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Ed, Taylor and Mel:Boo, baby!These statements are of course absurd.Have you notified Jack Bogle of what you have done?

If you have notified him, would you please let me know his reaction?

Rob

Rob Bennett to Academic Researcher Wade Pfau: “If I Can Think of Things That I Can Do To Soften the Blow to the Goons…I Will Do That… If It Is Any Comfort, I Think It Would Be Fair to Say That the Goons Are Losing Power and Influence BY THE DAY.”

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Yesterday’s blog entry reported on an e-mail sent to me by Academic Researcher Wade Pfau on May 16, 2011. I sent a response the following day.

Wade:

It’s a revolutionary statement. You are telling the truth about safe withdrawal rates. Every advance that we have achieved over the past nine years started with my decision to tell the truth re SWRs in my May 13, 2002 post. It may be that you cannot see today where this is going to lead you in time. As  someone who has already made a good bit of the journey, I can tell you that it is going to take you to some amazing places.

Yes, of course I have been saying this for nine years now. But who am I? I am some guy whose claim to expertise in this field is that I figured out how to get posts to appear at internet discussion boards. My words have power to those who see them. Not too many see them. You are positioned to be able to publish peer-reviewed research. You have the potential to have far more influence.

I of course have no more desire to antagonize the Goons than you do. But the reality obviously is that they ARE antagonized by honest posting on these matters. So that aspect of this is a problem.

My intent was very much to focus on your name (and on Bogle’s name) since it is the fact that you are saying these things (and that, as you note, Bogle has offered important support for the core ideas) that is the news here. I am going to have to give some thought as to whether there is a  “soft” way to report this. It won’t work to say only that there is a “new academic study.” I need to give a link to the study for the story to make any sense at all. And, if I give a link, the Goons will be upset with you.

My guess is that I am going to play it the way I planned. My plan was to include your name (and Bogle’s name) in the headline but to offer only limited commentary. I would quote the key paragraph of your blog post (the one I quoted in my comment at your blog) and I would quote from my comment and perhaps from my e-mail to you from yesterday (I presume that you would prefer that I not quote from your e-mail below and I have no problem with that, so I will leave that out of it) and generally leave it at that. If I can think of other things that I can do to soften the blow to the Goons while still making the essential point that there are today people of influence in this field making public statements about the analytical errors contained in the Old School SWR studies, I will do that. But my guess is that I am not going to be able to tell the story that needs to be told without saying at least that much.

If it is any comfort, I think it would be fair to say that the Goons are losing power and influence BY THE DAY. There was a time when I was blacklisted at every major personal finance blog. Today I am having the experience of bloggers COMING TO ME and asking me to write guest blogs. This is a big change. People are having increasingly serious doubts about the Buy-and-Hold mumbo jumbo. About the only thing people are not willing to go along with today are direct and clear statements about the Ban on Honest posting. I believe that a big part of the concern there are the lawsuits that we are likely to see in days to come. But the wall is eroding. I believe that there will come a day in the not-too-distant future when you will be able to do your work in peace and not need to worry about the sorts of Internet Sewer Rats who have put up posts in “defense” of Lindauer and Greaney putting forward threats to destroy your career and all this sort of thing.

Please continue thinking through the implications of where your research leads. It takes time for it all to sink in. My sense is that you understand that your work is of great significance but that you do not today come close to appreciating just how revolutionary it truly is. That is going to come with time. You have caught a very large tiger by the tale, my good friend. I’m sure of it!

Do not hesitate to let me know if I say anything in the blog post or in the comments that follow that concerns you. I don’t think that is going to happen. But in the event that it does, I obviously want to do everything I can possibly do to keep things on a positive and constructive and life-affirming track.

Please take care.

Rob

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

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Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on February 25, 2011. Set forth below is the text of another e-mail that I sent to Wade on the same day.

Wade:

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

You’re right about the regret bias.

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

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

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

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

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

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

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

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

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

Rob

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

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

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

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

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

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

Academic Researcher Wade Pfau: “This Is a Real and Unavoidable Concern. Someone Has to Be Strongly Committed to the [Valuation-Informed Indexing] Strategy to Not Deviate at the Worst Possible Time.”

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Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on February 25, 2011. He sent his response later the same day.

Wade thanked me for my messages, saying that our correspondence “gives me a lot to think about.”

He offered an observation regarding one potential pitfall for those following a Valuation-Informed Indexing strategy. He said: “The worse thing would be if he abandoned the valuations strategy in 1999 to join his friends with 100% stocks.  I
think this is a real and unavoidable concern.  Someone really has to be strongly committed to the strategy to not deviate at the worst possible time.  But I think people can do it if they get a firm understanding about the historical data.”

I sent an e-mail to Wade on that day offering further comments on his exchanges with Drip Guy and other Goon posters. The text is set forth below.

Wade:

You’ll never find consistency in the statements of Drip Guy and the other Goons. Their primary aim is to block fruitful discussions and they will say whatever needs to be said to achieve that aim.

I was FORCED to put up the post of May 13, 2002, that kicked off The Great Safe Withdrawal Rate Debate. Greaney founded the Motley Fool’s Retire Early board. I built the board into the most successful board at the site (posting only about saving). I had to take time off to write my book and a fellow named “Wanderer” became the best poster. Wanderer committed the “crime” of saying that he thought investing in real estate (instead of stocks) could make sense at times. Greaney signaled to his Goons that he wanted Wanderer gone and the deed was done. Greaney’s SWR study was the tool used (if the SWR can never drop below 4 percent, the long-term return for stocks is implicitly always 6.5 percent real and stocks thus can never be beat on a risk-adjusted basis (no need to study anything to invest in a stock index) by other asset classes. If I did not do something at that point, the board could never again serve as a useful place to learn about planning for an early retirement.

By pure coincidence, John Walter Russell had retired the week I put up the first post and was looking for something constructive to do. He did the first New School research on the sixth day of the discussions (May 18, 2002) and found that the sensitivity numbers for the Old School SWR studies were poor. Lots of community members got very excited about learning more.

From that point forward the battle has been over whether honest discussion should be permitted or not. Mel Lindauer (co-author of “The Bogleheads Guide to Investing”) and others knew who I was when I put my first post to the Vanguard Diehards board in July 2005. So my first post was met with abusive posting. Lindauer and others demanded that Morningstar ban me because I was not willing to post dishonestly but Morningstar was not willing to go along given that I had never violated any posting rules. When I announced an intention to appear at one of the annual meetings (where I would be able to direct questions to Bogle), the Lindauer group formed the new Bogleheads board off the premises of Morningstar.com and encouraged people to switch boards. Now the Lindauer/Drip Guy group does not need to get an independent site administrator to impose board bannings and they can maintain the ban without anyone being able to ask embarrassing questions.

You’ll never get anywhere with Drip Guy. I don’t mean to say that he does not follow Buy-and-Hold principles in his own investing. I believe he does. I asked Greaney how much he lost in the crash and he said “well in excess of $1 million.” That persuades me that they personally follow what they preach. But they have zero willingness to entertain the possibility that they have made mistakes. That by itself is not a problem (except for them). The problem is that they also have zero willingness to permit the hundreds of community members there who would like to be able to discuss both sides in civil and reasoned discussions to do so. I see that as a BIG problem in scores of different ways.
There are smart people in the community who say helpful things. But once honest posting is banned the thing becomes a corrupt enterprise.

It might be that Drip Guy and the others would play it a different way if they had a chance to do it over. But they now have to deal not only with having been wrong on SWRs but also with having destroyed numerous boards and blogs in their efforts to block community desires that honest posting be permitted. Drip Guy doesn’t feel even a tiny bit inclined to own up to that, according to every sign I have seen from him. So he often talks incoherent babble. He doesn’t see himself
as having any other choice at this point.

Sorry for the long answer. But I see no other way to help you make sense of the Drip Guy matter and of the fact that a good number of smart community members fail to speak up about it when it becomes an obvious issue.
They know that Drip Guy is in the Lindauer camp. That’s what matters as a practical reality, not whether what he says makes sense or not. And Bogle appears with Lindauer at the annual meetings. Community members there have noted that Bogle allows photos to be taken of him and Lindauer standing next to each other. That sends a signal to people as to what can and cannot be said at the forum.

That’s what needs to change. The entire Campaign of Terror against our board and blog communities comes crumbling down on the day that Bogle appears in a public forum and says the magic words “I” and “Was” and “Wrong” or the somewhat- less-helpful-but-still-magic words “I’m” and “Not” and “Sure.” When those words are said, all of the negative energy converts to positive energy and from that point forward everyone is working together to learn how stock investing works in the real world instead of pursuing counter-productive political agendas. No one gets left behind then. Learning how stock investing works (for the first time — the study of stock investing was
never a systematic academic enterprise before the research was done on the efficient market theory) is a win/win/win/win/win with no possible downside for anyone.

Rob

“I Was Thinking About Taking Taylor [Larimore] to Task for This [Mischaracterizing Bogle’s Position]…. Other People Have Already Pointed It Out to Him and He Doesn’t Seem to Care.”

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Yesterday’s blog entry reported on an e-mail that I sent to academic researcher Wade Pfau on January 20, 2011. Wade responded the next day.

He said: “If you do have any suggestions about how I explained why long-term market timing works, but not short-term market timing, I would love to hear it.” He added, though, that he did not want me to have to retype points I had already made in materials at my web site. He explained that: “I think this is something you’ve addressed in your various articles, and I will read everything before finalizing my paper.”

Re Larimore’s mischaracterization of Bogle’s position, Wade said: “I was thinking about taking Taylor to task for this, but in the end I’ve decided not to. That guy is over 80 years old and he seems to be a bit of a follower. I don’t really feel a need to argue with him at this point. Especially since other people have already pointed it out to him and he doesn’t seem to care.”

Wade told me that he had “big news.” He had posted preliminary results of his research:

http://www.bogleheads.org/forum/viewtopic.php?t=67093

He noted that “Richard disappeared after I took him to task about being full of it with regards to ‘standard statistics.’ ” He explained that: “I think on those message boards that all those guys repeat that mantra so much that they do not think it is standard statistics, when in fact the issue of rolling periods is a rather advanced topic well beyond the reaches of Statistics 101, and their assumptions are not necessarily right.”

Wade Pfau: Bogle in Many Cases Has Said Things “Not All That Different From What You Said”

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Yesterday’s blog entry set forth the text of a an e-mail that I sent to academic researcher Wade Pfau on December 16, 2010. Wade responded the next day.

Wade said in his December 17 e-mail that: “In thinking about it further, I owe you further apology as my comment was based on a misunderstanding about your past claims.” He explained that: ” I understood that you meant this as the safe
withdrawal rate, but somehow I still confused myself into thinking that this number represented your prediction for the actual withdrawal rate.  If it was a prediction, then naturally you would need to indicate the uncertainty surround it.  But it is not a prediction.  It is just a lower bound that should be safe. So you don’t have to be so worried about its precise value. ” He speculated that the person who had suggested in an earlier thread at the Vanguard Diehards board that I had been dogmatic in my posting “made a similar mistake” and that this mistake “confused my ability to understand your response.”

He added that “actually I am a neophyte to the whole withdrawal rate debate.  I didn’t even know about Bengen or the Trinity study until July” but “now I am quite interested in this topic.”

Wade expressed confusion over “why some Bogleheads are so threatened by using valuations.” He noted that John Bogle has in many cases said things “not all that different from what you said.”

He concluded the e-mail with a kind compliment. He said: “I should also just say that you are a very good writer….Your writing really commands attention.”

The text of my response is set forth below:

Wade:

That all sounds good.

Please enjoy your week away. I expect to send you an e-mail next week that will provide a link re your question about the timing of John’s work and perhaps address a few other substantive points. But I of course understand that you will not see it until the following week.

Bernstein’s discussion of SWRs is on Page 234, if I recall correctly. I have cited it so many times over the years that I have the page number memorized. The claim that I often make is that the Old School SWR studies are “analytically invalid” and I often cite Bernstein’s words in support of this claim. One of my fellow community members who does not like me using that phrase sent Bernstein an e-mail asking him if he agrees that the Old School studies are “analytically invalid.” Bernstein said that “of course” they are analytically valid. But he followed that up by saying that anyone giving thought to using one of them to plan a retirement would be well-advised to “FuhGedDaBouDit!” That’s the point that I mean to convey with the claim that they are “analytically invalid”! The purpose of the studies is to help people plan retirements. They are not designed in such a way as to be able to do that effectively. So in my eyes they are analytically invalid. They do not the job that they were set up to do.

It may make you feel better to know that John Walter Russell also made the mistake of confusing the number that is at the lower bound of the confidence interval (the SWR) with the number most likely to turn up. John and I exchanged about 10 e-mails on this point a long time ago. I agree with you that there’s a good chance that the other poster in the thread you read was making a similar mistake. This is not intellectually difficult stuff (at least not the parts that I understand — I have no background with the statistical tools). But there is an undercurrent here that is EXTREMELY counter-intuitive. I have seen it throw many smart and good people off track. I of course would like to be able to figure out how to communicate the points in a way that avoids the confusion that enters into just about every discussion of these matters. I have picked up some clues as to how to do that over time. But it is the hardest job that I have ever tackled in my life. The way to spin this in a positive way is to observe that, if the confusion is today very deep, the prospect of making a giant leap forward in our understanding of how stock investing works once we overcome the confusion is also great.

Your words about John Bogle are 100 percent right on! It was by reading Bogle’s “Common Sense on Mutual Funds” in the mid-1990s that I got on the track that I am now on. I am the biggest Boglehead in the world. The investing strategy that I recommend is called Valuation-Informed Indexing. It is a mix of Bogle’s best ideas and Shiller’s best ideas. I say that Bogle and Shiller go together like chocolate and peanut butter. The thing that I say that some view as anti-Bogle is that Bogle made the biggest mistake in the history of personal finance when he said that it is possible to “Stay the Course” without being willing to change your stock allocation in response to big valuation shifts. But I don’t see it as being such a big deal that Bogle made a mistake. We obviously all make mistakes and Bogle’s ideas have led to many breakthroughs (including Valuation-Informed Indexing — there clearly would not be any VII today without the insights contributed by Bogle).

It may be that some of the anger felt by some of the Bogleheads is BECAUSE my ideas are so influenced by Bogle’s. The angry ones could dismiss my ideas easily if they differed in many ways from Bogle’s. Because they are so closely related,
it is hard for them to dismiss them. Yet the strategy recommendations are very different. In January 2000, a Valuation-Informed Indexer would probably have been going with a stock allocation of about 10 percent. A Buy-and-Holder would
probably have been going with 70 percent. That’s a big difference! My only difference with Bogle is over the valuations question, but valuations are so important that we often end up in very different places.

As you note, it’s not that Bogle rejects the idea that valuations affect long-term returns. I learned this from him! It’s that Bogle does not IMPLEMENT the insight. He SAYS that valuations matter. But his allocation recommendations do not take valuations into account. That’s the entire deal. That’s the only real question in dispute in the eight-year-long debate.

Bogle said in an interview that he thinks VII can work:

http://arichlife.passionsaving.com/2009/07/28/bogle-says-valuation-informed-indexing-can-work/

But when I sent him an e-mail asking for his help in dealing with the abusive posting, he did not respond:

http://arichlife.passionsaving.com/2009/07/30/my-hope-is-to-persuade-you-to-steer-the-indexing-revolution-to-a-more-promising-path/

Please have a great week away from all this and perhaps we will be able to talk over some ideas for further research when you get back. There are all sorts of possibilities. I can assure you that I had zero idea what I was getting into when I put up that first post back on the morning of May 13, 2002. This is a deep well!

One last point. Over the years I have had a number of people ask me about international SWRs. It sounds like your recent paper will go a long way to answering their questions. I will definitely be checking it out and linking to it in future days.

Rob

“The Terms “Buy-and-Hold” and “Get Rich Quick” Are Synonymous. Virtually All of the Risk of Stock Investing Comes from the Human Inclination to Be Drawn to a Buy-and-Hold/Get-Rich Quick Strategy”

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

Do these concepts look the same to you, idiot?

Yes, Drip Guy. The terms “Buy-and-Hold” and “Get Rich Quick” are synonymous. Virtually all of the risk of stock investing comes from the human inclination to be drawn to a Buy-and-Hold/Get Rich Quick strategy.

I will make an effort to explain why this is so. If you make an effort to listen, I am confident you will get it. If you permit your rage at discovering that there was a time when you did not know everything there is to know about stocks overcome your reason, you obviously will fail to get it yet one more time. I can put forward the explanation. It is necessary for you to put a tiny bit of effort into this too for the back-and-forth to bear good fruit.

Here is your definition of “Buy-and-Hold:

used to describe the activity of investing in something and then keeping it for a period of time

That’s a good definition.

Now —

What’s wrong with the idea of investing in something and then keeping it for a period of time?

What’s wrong is that this definition says nothing about whether the thing invested in offers a strong long-term value proposition or not!

Warren Buffett holds his investments for a long time. But he sure as shootin’ ain’t no Buy-and-Holder in the way that it is practiced by Lindauer and Greaney and Bogle. Buffett buys things worth buying and holds them. Lindauer and Greaney and Bogle buy stocks when they are garbage and then refuse to consider selling no matter how much holding on to garbage depletes their portfolios.

Huh?

I am not overstating things when I say that stocks were garbage in January 2000, Drip Guy.

The most likely annualized long-term return was a negative 1 percent real. TIPS were at the time offering a positive 4 percent real. That’s a return differential of 5 percentage points per year. For 10 years running. That adds up to a total loss of 50 percent of the initial portfolio size.

You are telling me that this is an acceptable investment strategy? If you truly believe that, you are insane.

This is suicide investing.

There are ten different aspects of the Buy-and-Hold package that are pure gold. As you know, I praise these aspects of the Buy-and-Hold package to the sky all the time.

But the Get RIch Quick aspect is so devastatingly bad that it overpowers all that could be good about Buy-and-Hold.

There is not one person on Planet Earth who benefits from the continuance of this 10-year-long cover-up, Drip Guy. Certainly not any Buy-and-Holders.

The Buy-and-Holders should be dancing in the streets today. They are the ones who came up with the idea of rooting one’s strategies in the academic research. The research has now taught us how to reduce the risk of stock investing by 80 percent while delivering long-term returns far higher than most people ever thought possible. We should today be in the Golden Age of Stock Investing and celebrating the Buy-and-Holders for being the ones to have brought it to us.

Where are we instead? We are living through the worst economic crisis in U.S. history, one caused by Wall Street’s relentless promotion of an investing strategy that was originally intended to be research-backed but which became the opposite of that when research was published showing that the Buy-and-Holders got one thing horribly, horribly wrong and the Buy-and-Holders reacted not by fixing the mistake but by adopting a policy of engaging in defamation and death threats and board bannings and smear campaigns to block any of the millions of middle-class people whose lives are in the process of being ruined by this pure Get Rich Quick garbage from learning what they need to know to salvage what is left of their retirement hopes.

That’s brilliant work, Drip Guy. Congratulations! You’ve turned John Bogle into Bernie Madoff! You’re a true Boglehead through and though!

Heaven help us all.

Rob