A Rich Life

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

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

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

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

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

What happens when some fellow comes forward with the numbers?

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

Valuation-Informed Indexing #125 — Rob Arnott Says My Investing Ideas Are “Sound” But That I Am Too “Strident”

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I’ve posted Entry #125 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Rob Arnott Says My Investing Ideas Are “Sound” But That I Am Too “Strident.”

Juicy Excerpt: I recently engaged in e-mail correspondence with Former Financial Analysts Journal Editor Rob Arnott concerning the Valuation-Informed Indexing investing strategy (Valuation-Informed Indexers believe that investors MUST change their stock allocations in response to big valuations shifts to have any realistic hope of long-term investing success because this is the only means by which an investor can keep his risk profile roughly stable over time). Rob was kind enough to give me a big thumbs-up on the content side (“your ideas are sound”) and frank enough to give me a big thumbs down on the process side (“your stridency is unhelpful to your cause”).

But I am NOT strident! How dare he?

Actually, it’s probably better that he dares. I was talking to my brother Steven about holiday plans and I happened to tell him the story of Arnott’s e-mails. My brother shared Rob’s views re the stridency thing! I’m surrounded! My own flesh and blood is part of the conspiracy!

“People Make the Point Made by Rob Arnott About My “Stridency” All the Time. The Majority of People Who Hear My Case Do NOT LIke the Way I Present It.”

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One of the Goons recently characterized Rob Arnott’s observation (directed at me) that “your stridency is unhelpful to your cause,” as “the understatment of the year.” He asked: “From how many sources have you heard some variation of this advice and have chosen to ignore it?” My response, initially set forth in the comments section of a blog entry from last week, is set forth below (my aim in posting the words as a separate blog entry is to highlight them so that they reach the attention of readers who do not review the comments section of the blog entries):

I’m not able to estimate the number, Trebor. It is a big number.

I’ll give you an example that I think makes the case in compelling fashion. John Walter Russell devoted eight years of his life to researching Valuation-Informed Indexing without receiving a dime of compensation in return. John was a personal friend and he thought this stuff was very important. He obviously possessed zero bias against me. Yet I recall a thread at the FIRE board at which he commented (this is a paraphrase): “The Goons like to hold up a red flag to Rob because they know he will never fail to charge.”

John was saying something along the same lines as Rob Arnott, no? John was my partner in the development of the calculators at this site. He was never once banned from a site and I was banned at 15 different places. That’s what Rob was getting at.

I’ll give one more example. Before I was banned from the Early Retirement Forum, there was a community debate on whether I should be banned or not. There was one fellow there who generally agreed with my thinking on investing issues and he made a case that I should not be banned. A post by me responding to a comment made by someone else followed his and, after he read it, he said something to the effect of: “I take it back.”

I get this reaction over and over and over again. Even the Goons say all the time “it’s not what you say, it’s how you say it.” There was a fellow who used to post a lot of comments here — Arty. Arty loved my stuff. But, when I posted the articles about the Wade Pfau matter, Arty said that he was leaving and would not be back. And indeed he has not been back.

I do not agree with what Rob Arnott said. But I acknowledge that there are many people, including a good number of people who see value in my work in this area, who share his view of the matter. People make the general point made by Rob all the time. The majority of people who hear my case do NOT like the way I present it. This has been established beyond any reasonable doubt at this point, in my assessment.

Thanks for taking time out of your day to post this helpful question.

Rob

Former Financial Analysts Journal Editor Rob Arnott to Rob Bennett: “I’m Too Embroiled in My Own Controversies to Magnify Them Further With Collaboration. Your Ideas [About Valuation-Informed Indexing] Are Sound.”

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My last two blog entries reported on e-mail correspondence between Former Financial Analysts Journal Editor Rob Arnott and I in which we discussed the brutal (my word) intimidation tactics that have been employed by Buy-and-Holders in recent years to block the publication of academic research revealing the deficiencies of the “status quo” (Arnott’s phrase) thinking on how the stock market works. He reported that he has had difficulty finding journals to publish his more controversial work and that articles of his that challenged the conventional thinking of today have generated hate mail. In fact, he has not yet been able to find a journal to publish an article on an important topic that he co-authored with Nobel Laureate Harry Markowitz! (I checked his e-mail three times when writing these words to be sure that I did not just imagine this part while experiencing a fever.) I expressed my shock at this report and noted that I believe that the reason why I feel a greater sense of urgency re solving the problem is that  my perspective is that of a journalist rather than that of an investing expert and I thus tend to focus on the public policy implications of the 30-year cover-up of Yale Economics Professor Robert Shiller’s “revolutionary” (Shiller’s word) findings showing how stock investing really works (not at all how the Buy-and-Holders have been for many years now telling millions of middle-class investors it works).

Late in the afternoon of December 6, 2012, Arnott replied to my e-mail of that morning. He wrote: “I am very pleased that you were not offended at my frank advice.  I’m too embroiled in my own controversies to magnify them further with collaboration.  Your ideas are sound.  Your stridency is unhelpful to your cause.  Anyway, all the best.”

I immediately sent back the following words: “I understand. I hope that I am not guilty of stridency. You are certainly not the only person who has said that I am. So I am going to need to work harder to examine my own behavior. I wish you all the best as well.”

I then sent an e-mail to Vanguard Founder John Bogle, Four Pillars of Investing Author William Bernstein, and Academic Researcher Wade Pfau saying: “Since the three of you were copied on the e-mail that I sent to Rob Arnott this morning, I wanted you to see the resolution of our conversation as set forth in his e-mail to me this afternoon and then my response to him. And I of course wish the three of you all the best that this life has to offer as well. Please take good care.”

The following afternoon I received a final e-mail from Rob Arnott containing the following warm message: “Have a wonderful holiday season!”

Rob Bennett to Former Financial Analysts Journal Editor Rob Arnott: “The Illustrations You Offer of the Problem of Buy-and-Hold Dogmatism Are Shocking. I Know From My Discussions With Financial Planners and Bloggers That Many Others Have Had Similar Experiences. This Must Stop. I Feel More of a Sense of Urgency re This Matter. My Focus Is On the Public Policy Implications. We Are Living Through A Public Tragedy of Epic Proportions.”

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Yesterday’s blog entry reported on an e-mail that I received from Former Financial Analysts Journal Editor Rob Arnott describing the hostility that his research has generated among “guardians of the status quo” in the investing field. Commenting on my report of how Buy-and-Hold Goons threatened to get Academic Researcher Wade Pfau fired from his job after he published research showing the superiority of Valuation-Informed Indexing strategies over Buy-and-Hold strategies, he said that he has on occasion experienced difficulty in getting his work published (in fact, he has not yet been able to find a journal to publish an article co-authored by Nobel Laureate Harry Markowitz!) and that journals that have published his work have received “hate mail” after doing so. Rob castigated me in his e-mail for embracing “a victim mind-set” and for characterizing those who threatened to send defamatory e-mails to Wade’s employer  as “Goons.” He copied Vanguard Founder John Bogle and The Four Pillars of Investing Author William Bernstein, whom he described as personal friends and whom I noted had failed to speak up on Wade’s behalf when he was under attack, on his response to me. Set forth below is the reply that I sent early on the morning of December 6, 2012 (I also copied Bogle and Bernstein, as well as Wade Pfau):

Rob:

Thanks much for your response. I have been a huge admirer of your work for years. So it was a thrill to receive it. Your frank and balanced and helpful words have added a nice bit of good cheer to my Thursday morning.

I understand that all you know of my work is the one article that I linked to in the e-mail. It pains me to think that the words of that article may have planted the idea in your head that my respect and affection for John Bogle might be any less than your own. In my ranking of the most important investing analysts of all time, Bogle ranks second only to Robert Shiller. I love the man. I admire his accomplishments. I don’t want there ever to be any doubt in anyone’s mind re that aspect of the question. I also of course feel a good bit of respect for the others mentioned in your e-mail, and, in full truth, for all of the Buy-and-Hold pioneers. All of the work that I have done is built on the Buy-and-Hold Model. There would be no Valuation-Informed Indexing today had a number of smart and good people not rolled up their sleeves and did the work needed to generate the many powerful insights that have helped millions to come to a better understanding of how stock investing works.

The illustrations you offer of the problem of Buy-and-Hold dogmatism are shocking. I know from my discussions with financial planners and bloggers that many others have had similar experiences. This must stop.

You say that “that’s life” and that “life isn’t always fair.” That’s so. But our job is to spend every waking hour pushing in the direction of fairness, no? That’s the struggle. That’s what the work that we all do is all about. We will never succeed entirely. But we always keep pushing in that direction. That’s how Bogle achieved what he achieved, is it not? Bogle met resistance in his early days. He soldiered on. The spirit that he possesses that caused him to fight is the cause of much of my admiration of the man. If I were to give up in the face of frustrations, I wouldn’t in the end be much of a friend to our mutual friend John Bogle, in my own assessment. So I always fight on with the aim of bringing things to a better place over time.

I of course agree that Bogle (and all others) must be true to his own beliefs. If he didn’t criticize the aspects of my work that he does not find convincing with as much gusto as I criticize the aspects of his work that I do not find convincing, I couldn’t feel the respect for him that I want him to feel for me. A friend criticizes perceived deficiencies in a friend’s work not out of any animus but out of a desire to help the friend become his better self. That’s the spirit in which I have found fault with one aspect of Bogle’s teachings (the idea that long-term timing is not required for investors seeking to Stay the Course in a meaningful way) and that’s the spirit in which I hope in days to come he will be finding fault with whatever aspects of my teachings he finds unpersuasive.

My sense is that there is only one point re which you and i have a different take of some consequence. We are both seeking to push the general understanding of how stock investing works in the same direction. But I think it would be fair to say that I feel more of a sense of urgency re this matter. My guess is that the reason for this lies in our different backgrounds. I am NOT an investing expert and I do not pretend to be one. I am a journalist. My focus is on the public policy implications of the dogmatism. I would be grateful if you would take a look at two articles that I have written that argue that the heavy promotion of Buy-and-Hold strategies was the primary cause of the economic crisis: (1) The True Cause of the Current Financial Crisis; and (2) The Bull Market Caused the Economic Crisis.

Say that there is some truth to what I argue in these articles. We are living through a public tragedy of epic proportions. One the one hand, Wade’s research tells us what we need to know to reduce the risk of stock investing by nearly 70 percent (he shows that the maximum portfolio drawdown percentage is 60 percent for Buy-and-Holders and only 20 percent for Valuation-Informed Indexers). On the other, we are on our way to the Second Great Depression because we have as a society elected to impose a Social Taboo to block the frank discussion of these matters. We all want the same things. There is not one person alive, Buy-and-Holder or Valuation-Informed Indexer, who wants to see us fall into the Second Great Depression or who doesn’t want to know how to invest effectively. How did we ever get ourselves into such a crazy fix? It’s all a quirk of history. Had Shiller published his research showing that valuations affect long-term returns in 1971 rather than in 1981,the name of the book would have been “A Valuation-Informed Walk Down Wall Street” and we would today be living in the greatest period of economic growth in U.S. history. How do we get from this awful place where we are today to the wonderful place where we all deep in our hearts want to be tomorrow?

We don’t get there by calling each other “Goons” — I think that much is fair to say!

I don’t want to call anyone names, Rob. It’s the last thing I want to do. If you read my interactions with the Goons carefully (I post daily at the Goon Central site), you will see that I call those who attack me so relentlessly and in such brutally personal terms “friend” more often than I call them “Goon.” The Goons are my friends, Rob! These are people I know from the days when we worked together to build the Motley Fool’s Retire Early Board into the most successful board in that site’s history.

Why do I EVER call them “Goons? I am trying to draw attention to a problem. The death threats really did happen. The tens of thousands of acts of defamation really did happen. The board bannings really did happen. The threats to get Wade fired from his job really did happen. These people are in emotional pain. If you have any doubts whatsoever about this, please take a look at the article I wrote detailing the efforts of hundreds of non-Goons to keep the Retire Early and Indexing boards and blogs open to civil and reasoned and honest discussion of all investing issues. 

We shouldn’t be ignoring this emotional pain. We should be trying to help our friends overcome their pain. THAT”S PART OF THE JOB OF AN INVESTING ADVISOR.

Many of the experts in the field don’t see it that way today. They feel that investing analysis is a numbers exercise, that there’s no place in this field for the discussion of human emotions. This is the core mistake that caused all the trouble, in my assessment. When we see people engage in the sorts of behavior that I am referring to here (and which you have obviously experienced as well in somewhat different form because your work is not as internet-based as mine), we need to try to figure out what is going on and to address the problem. I don’t want to ever have to use the word “Goon” again. I won’t ever need to if people like Jack Bogle and Bill Bernstein and Wade Pfau make clear that they expect the published rules of all of the boards and blogs to be followed. When they fail to do this, they send a signal that in this one area the normal rules of social intercourse that keep us all human do not apply. WE NEED TO STOP SENDING THAT SIGNAL. When we start sending the right signals, good things will start happening. Lots of people want to learn but are afraid to speak up. As more and more people come to feel safe in speaking up, the entire social dynamic will change. We will reach a tipping point and things will begin getting better and better and better each day rather than worse and worse and worse. New ideas cannot grow until we create an environment in which sincere and polite and respectful questioning is permitted. And even encouraged!

That’s where I am coming from, in any event. I detect a suggestion in your e-mail that you would be willing to help in an effort to pull things in a positive direction if I would be willing to engage in private discussions. Of course! Why the heck not? I want to know about any ideas that you or Jack or Bill or Wade (I added him on the Cc for my reply) have for the five of us working together to transform these discussions into something viewed as a 100 percent positive for every single person involved in them. Let’s make that happen! Please be assured that I will do anything that I view as even remotely reasonable that you or Jack or Bill or Wade suggest. Please just shoot me back an e-mail with any suggestions or questions or concerns or thoughts or proposals.

Thanks again for getting the ball rolling on this, my plain-speaking friend.

Rob

Former Financial Analysts Journal Editor Rob Arnott to Rob Bennett: “I’ve Had Similar Experiences to Those You Describe. My Work Has Often Triggered Overt Hostility from the Guardians of the Status Quo. I’ve Also Had Difficulties Getting Some of My More Controversial Ideas Published. And the Journals That Published Some of My More Controversial Papers Did Get Hate Mail.”

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I’ve been sending e-mails to various people letting them know about my article on The Silencing of Academic Researcher Wade Pfau, who showed the superiority of Valuation-Informed Indexing strategies over Buy-and-Hold strategies. Set forth below is the text of an e-mail response that I received on the night of December 5, 2012, from Former FInancial Analysts Journal Editor Rob Arnott. I will provide the text of my response to Rob in tomorrow’s blog entry. Thursday’s blog entry will report on a few brief e-mails that Rob and I exchanged with each other in wrapping up the conversation.

Rob Anott wrote:

I’m copying Jack and Bill [the reference is to Jack Bogle and Bill Bernstein] , who you mention in your article.

I’ve had similar experiences to those you describe; so, I can empathize with you for your travails.  HOWEVER, we part company on how to deal with this challenge.  I roll with it and move on.  You seem to be “stuck” in a victim mind-set.  Characterizing one’s adversaries as Goons is also unhelpful to your cause.

Jack Bogle is a dear friend; he attacks some of my ideas with relish, and it doesn’t bother me.  He’s entitled to a different view, and he’s never personalized his attacks.  Bill Bernstein and I have co-authored one journal article, while agreeing to disagree on a couple of other issues.  I remain good friends with both, with ample mutual respect.  I know Rick, Scott and Larry less well, but I know that we agree on some things and not others.

As you can probably imagine, my work has often triggered overt hostility from the guardians of the status quo.  And, as one of the “godfathers” of Tactical Asset Allocation and of the Fundamental Index® concept, which are kissing-cousins to your work on Valuation-Informed Indexing, it’s clear that you and I both think the markets are inefficient in much the same way.

I’ve also had difficulties getting some of my more controversial ideas published.  For instance, I’m having a dickens of a time getting any journal to publish my work with Harry Markowitz, Jason Hsu and Jun Liu, which shows that a modest amount of error in stock prices would create – and fully explain – the Fama-French size and value effects.  Journals turning down a Nobel Laureate?  Yep, it happens.  And the journals that published some of my more controversial papers did get “hate mail” for doing so.

I also know of two young professors who wanted to do research on Fundamental Index® and reported to me that their colleagues advised them that this line of research could derail their career prospects.  Outrageous?  Not necessarily:  in the early days of Fundamental Index®, people weren’t yet sure whether this was the investing equivalent of “cold fusion”!

These are the same kinds of problems that you describe.  That’s life.  Life isn’t always “fair,” nor is our own perception of “fair” necessarily correct.

In summary, I will not be available to help you protest the injustice of it all.  Feel free to add me to the list of those who declined to help, alongside Jack, et al, as long as you’re also prepared to provide your readers access to this email.

I would strongly encourage you to *not* abandon your ideas, but to find other ways to make your case, and to give up on the name-calling with those who disagree with you.  Best wishes on pursuing a constructive path, exploring new ideas and accepting criticism from others with civility and perhaps even relish.

Podcast #8 — The Coming Revolution in Investing Advice

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I’ve added Podcast #8 to the “RobCasts” section of the site. This one is called The Coming Revolution in Investing Advice.

In this one I tell the story about the investing researchers who did not raise their hands when asked at a conference if they believed in the Efficient Market Theory but then did raise their hands when asked if they would be using the Efficient Market Theory in the research they would be doing when they got back to their offices on Monday morning. Yowsa!