A Rich Life

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

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

Wade Pfau: “I Was Trying to Pay Tribute to Your Accomplishments in What I Knew Would Be a Hostile Environment”

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Yesterday’s blog entry contained the text of an e-mail that I sent to academic researcher Wade Pfau on Dec. 16, 2010.

Wade sent me an e-mail in response saying that: “I’m sorry for offending you. I’ve removed that post from Bogleheads. I will think about adding a new post to start over later and to express your accomplishments differently.”

Wade told me that he did not view his post as defamatory. He said that he had read enough material at the Bogleheads board to know that I was not well liked “by them” and noted that I had been referred to at the board as a person who could not be named. He added that he tried to be respectful to me in his post. He argued that most of his comments about me were positive and explained that “I was just trying to give you credit for your contributions in the context of knowing that this will not be well received at Bogleheads.”

Wade maintained that the negatives he used in reference to me “I don’t think are so negative” because “I think you were really on to something.” However, he added that “the thing that troubled me was how sure you were about your predictions, and how you asserted the correctness of those predictions in the face of criticism.”

At that point, the e-mail turned to a specific point. John Walter Russell’s research showed that, at the top of the bull market, the safe withdrawal rate for a retirement portfolio with an 80 percent stock allocation was 1.6 percent real. Wade observed that: “That 1.6 is not a point estimate from the regression, but the lower bound of a confidence interval that has to be defined in a fuzzy way because correct confidence intervals cannot be estimated due to the overlapping observations problem.  That means there has to be some doubt about the correct number. ”

Wade concluded his e-mail by apologizing for offending me but suggested that I had overreacted. Overall, “I was trying to pay tribute to your accomplishments in what I knew would be a hostile environment.”

Finally, the e-mail states that “I think we are basically on the same side.” Wade said that he had not looked at the links set forth in my e-mail to him but that he hoped to do so soon.

Rob

“It’s Not a Mistake When John Bogle Fails to Do Anything About the Lindauer Matter After I Have Sent Him Three E-Mails Asking for His Help”

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Set forth below is the text of a comment that I recently put to the Goon Central board in response to a question from Drip Guy.

Before you came to enlighten the World, everyone who mentioned SWRs before you was lying?

Was everyone who believed years ago that the earth was the center of the universe lying, Drip Guy?

Humans don’t know everything. We learn over time. I was certainly the first person who reported the SWR accurately.

Now — was Greaney lying when he said that I was on medications and that I stalked women?

Obviously.

So he made a mistake and then lied to cover up the mistake.

How about Scott Burnszzz and the other “experts” who made clear that they are aware of the research showing that valuationszzz affect long-term returns and yet have done little or nothing to get the Old School studies corrected?

Are they lying? I think it would be fair to say that they are not behaving with a high degree of integrity. How would you feel if you were one of the millions of middle-class investors who will be suffering a failed retirement because of their failure to speak up?

Our economic crisis started with a mistake, the idea that the market is efficient. But it’s not a mistake when John Bogle fails to do anything about the Lindauer matter after I have sent him three e-mails asking for his help. If Bogle were a used car salesman, I think it is clear that he would not permit the sorts of people who have put up posts in “defense” of Lindauer to post at a board with his name in the title. Why does he do it as an investment expert in which millions of middle-class people have placed their trust? Should the ethical standards that apply in The Stock-Selling Industry be that much below those that apply in the used car business?

I say “no.”

I find no fault with those who developed mistaken ideas about how stock investing works in the days before all of the research was available to us. I view that as just one of those things.

But, yes, I absolutely think that people should correct their mistakes when they learn of them.

If you want to say that the errors in the Old School studies were just mistakes in early 2002, I have no problem with that. That’s what I think too.

But I put forward the post that kicked off The Great Debate nearly ten years ago. Are we to believe that it’s all just an innocent mistake to this day?

We are going to need to rebuild the economy that was destroyed through the relentless promotion of Get Rick Quick strategies for 30 years after the research was published showing that Get Rick Quick never works. I am going to do my part to defend those whom I view as pioneers in the field. I certainly include people like Bogle and Burns in that group. But I am not going to lie in their defense. I am going to spin things in their favor to the greatest extent possible. But I am not going to say that Burns wrote a series of articles demanding that the Old School studies all be corrected as soon as he received my e-mail or that Bogle demanded the removal of all posters who had posted in “defense” of Lindauer or Greaney as soon as he became aware of what the Sewer Rats were doing to the Vanguard Diehards board.

What I conclude about these matters is not going to count for all that much in the grand scheme of things, Drip Guy. It’s what millions of middle-class investors whose lives are in the process of being destroyed in this economic crisis conclude that matters.

I will be in there pitching, putting things in the most positive light possible for the Buy-and-Holders. But there are limits to my powers of persuasion, Drip Guy. I think it would be fair to say that the Buy-and-Hold dogmatics are not exactly making my job an easy one.

If you cared about your long-term self-interest one-tenth as much as I care about your long-term self-interest, I think it would be fair to say that these matters would have been put to rest in the Spring of 2002.

I will continue to extend the hand of kindness to you and to all others who have gotten caught up in all the ugliness visited on us by the Internet Sewer Rats who have elected of their own volition to put up posts in “defense” of Lindauer and Greaney. But I won’t post dishonestly on SWRs. If you think I will, you’re living in a dream world. It would be cruel of me to suggest to you that any fantasies you are counting on in this regard have even the tiniest chance of ever coming true.

Be well, my old friend.

Rob

“If Bogle Made Clear That He Will Support Those Who Post Their Honest Views Regardless of Any Intimidation Tactics Employed by This Other Individual, That Would Do the Trick”

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Set forth below are some words that I posted to the My Personal Finance Journey site in response to Jacob’s observation that “it’s important to think about next steps for Valuation-Informed Indexing”:

We need to get lots more people discussing VII, Jacob. There’s never going to be 100 percent agreement on any particular points and we should never wish that there would be. We learn from talking things over. So we just need to do all that we can to get as many discussions started as we can.

You did a super job with this post. The fellow who writes the “Money & Such” blog wrote several super posts about it. Frank at “Bad Money Advice” wrote a fine post about it a little ways back. Pop Economics had a good post on it. We need more of this sort of thing throughout the Personal Finance Blogosphere — people writing comments both pro and con so that their readers can hear both sides and think things through for themselves.

Getting the Bogleheads Forum opened up to discussions of it would be huge. I don’t know how much of the history you know but there were hundreds of people participating in the discussions that we had there for nearly two years. Those people are smart and know the issues well. So we could achieve big advances there.

I would like to get more feedback from John Bogle. Bogle said in an interview that he thinks Valuation-Informed Indexing can work. But his words fell a bit short of an endorsement, in my assessment. I would like a clearer and more in-depth discussion of what he sees as both the pros and cons. I have written him three e-mails but have not received a response. I suggested at one time that I make a presentation at one of the annual Bogleheads meetings and that we have Bogle respond to the points I make, either endorsing them or challenging them or looking at things from his own perspective or whatever.

That would be the best way to proceed, in my view. Bogle obviously has huge influence on many posters at Bogleheads. If he were to signal that he favors further discussions, that would encourage lots of people who post there and who have good ideas to speak up. The problem we have now is there there is one individual who posts there who is viewed as a “leader” and who intimidates those who post in support of VII. If Bogle made clear that he will support those who post their honest views regardless of any intimidation tactics employed by this other individual, that would do the trick. Many, many people are willing and happy to help out. But there are limits to how much people are willing to put themselves through to do so.

I would like to see the leaders in the Personal Finance Blogosphere speak out as well. Again, both supportive and critical comments are helpful. The message that needs to be sent is — There is nothing wrong with talking about these ideas, there will be no punishments of those who talk about these ideas or harassment of those who post supportive comments. Once people begin to get that message, things will just naturally move over time to a better and better place.

The other thing that people interested in the VII concept can do is to read my three weekly columns, where I expand on the ideas each week. I address the technical issues most frequently in the “Valuation-Informed Indexing” column at the www.ValueWalk.com site. There’s lots of exciting stuff that comes up in those columns (I don’t think that should be taken as bragging as I obviously don’t claim that I developed the VII concept by myself — there were hundreds of fine people, including many passionate supporters of Buy-and-Hold, who helped out in very important ways).

If there is anyone reading these words who can think of anything else I can do, I hope they will contact me. Getting the word out on this has become my Life Project. So I obviously want to do anything and everything I can do. I am of course extremely grateful for all the help you have offered, Jacob. Your efforts have been heroic. I believe that they will be widely seen in days to come as having helped out many, many people in highly significant ways.

Rob

Wade Pfau: “The Market Timer Enjoys a Far Less Risky Strategy”

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It’s not only that Valuation-Informed Indexers have obtained far higher returns that Buy-and-Holders over the entire 140 years of historical data available to us today. Perhaps even more important is that they have done so while taking on dramatically less risk.

Wade Pfau, Associate Professor of Economics at the National Graduate Institute for Policy Studies in Tokyo, Japan (Wade is the fellow who recently posted preliminary research showing that Valuation-Informed Indexing provides better long-term returns than Buy-and-Hold in 102 of the 110 rolling 30-year time-periods in the historical record), advanced a post to the Bogleheads Forum this morning pointing out that the entire historical record shows that long-term market timers (Valuation-Informed Indexers) take on far less risk than Buy-and-Holders.

Set forth below are the words of Wade’s post:

Mel, thank you for the comment. If you think I am trying to be sneaky, I think you are missing something important.In the Fisher and Statman framework, the market timer would have finally returned to 100% stocks in 2009 so that they would have had the same returns that year and would still be together at the end of 2009.

For 2010, I don’t have the market returns data yet, but the PE10 decision rule would have sent the market timer back to Treasury bills. I know stocks outperformed Treasury bills in 2010, and this would hurt the market timer.

Anyway, I just thought that figure was interesting. I know it is not the full story. I hope to have the full story for you in another couple of weeks.

But DP is right that the market timer enjoys a far less risky strategy. I can’t understand why Fisher and Statman glossed over this rather essential detail. They comment that the Sharpe ratio for the market timer is biased upwards because it is comparable to someone with a 50/50 asset allocation rather than a 100/0 allocation. But that suggests to me that we should compare the market timer to a 50/50 allocation instead of a 100/0 allocation. But even without adjusting for risk, the market timer produces more or less the same returns over the whole historical period. That segment of the horserace I showed you began in 1871, not 1995.

And it took the unprecendented 1990s boom for the buy-and-hold guy to catch back up to the market timer. For most of history, the market timer was ahead. Relying on a 100% stocks strategy throughout the 1990s boom doesn’t sound very low-risk to me.

Financial Samurai “Can’t Understand the Rift” Behind Lindauer/Greaney Smear Campaign

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The Lindauer/Greaney Goons took their Smear Campaign to a thread put up last week at the Financial Samurai blog entitled “The Dark Side of Early Retirement.”

I objected with these words (Post #47):

“Of course I have never spammed your site or any other site one time in my entire life, Sam.

“My “reputation” is the result of the fact that I am the person who discovered the analytical errors in the Old School safe withdrawal rate studies back in May 2002. The former owner of the Early Retirement Forum (Bill Sholar) was a friend of mine in our Motley Fool days. He developed the FIRECalc retirement-planning calculator, which gets all the numbers wrong (it doesn’t include a valuations adjustment and that is the single most important factor that determines retirement success or failure). When I posted the accurate numbers at his site, Bill went nuts. Hundreds of other people expressed interest in being able to have honest discussions. Bill nixed that.

“Do you now understand why there is such a deep hatred of me among some of the people who congregate there? How would you feel if you not only had gotten the numbers wrong in a retirement study but had thereby caused lots of your friends to suffer failed retirements and had also banned honest posting on the topic at a retirement board? You would feel pretty darn bad about yourself. That’s how those people feel about themselves.

“You could be helping them out by writing about this matter. We need to get this all in the open so that people can return to sanity. I encourage you and all other personal finance bloggers to do so. Lots of people have been hurt, lots of boards and blogs have been destroyed or seriously damaged and those of us who care about the future of these communities should be doing what we can to help out.

“You’re a brave fellow, Sam. You’re perfect for this!”

Financial Samurai said in response: “Rob, I don’t fully understand the rift, hence I’m not the best one to help you debate. Good luck in fighting for what you believe in!