A Rich Life

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

Robert Savickas, GWU Associate Finance Professor: “This [Valuation-Informed Indexing] Sounds Like a Real Thing. If It Is and I Can Thoroughly Understand It, Then It Will End Up in My Classrooms and in My Students’ Minds (Of Course, With References to You and Wade).”

by

I have been contacting numerous people, letting them know about my article reporting on The Silencing of Academic Researcher Wade Pfau by The Buy-and-Hold Mafia.

Yesterday’s blog entry reported on my correspondence with Robert Savickas, Associate Finance Professor at George Washington University Business School. Set forth below is the text of an e-mail he sent as a follow-up to the e-mail described in the earlier blog entry:

Rob,

>

Where can I get a synopsis of how this Valuation-Informed Indexing works?  I am interested in the bare-bones look at the main principles that make it superior to buy-and-hold.  I can fill out the details later.  This sounds like a real thing.  If it is and I can thoroughly understand it, then it will end up in my classrooms and in my students’ minds (of course, with references to you and Wade).  I may also give it a try myself.
>
I am still waiting to get a link or a copy of Wade’s paper.
>
Thanks,
>
Robert
>
I wrote back:
>
Robert:

 >
Thanks much for your interest. Here is Wade’s paper:
 >
 >
I think you state things very well with your “on average” comments.
 >
Here is The Stock-Return Predictor, a calculator that I created with John Walter Russell that runs a regression analysis of the historical return data dating back to 1870 to identify the most likely 10-year annualized return starting from any possible valuation level (using the P/E10 valuation metric):
 >
 >
The most likely 10-year annualized return in 1982 (when the P/E10 level was 8) was 15 percent real. In 2000 (when the P/E10 level was 44), the number was a negative 1 percent real. So valuations make a HUGE difference. There is no one stock allocation that makes sense both when the most likely long-term return is 15 percent real and when the most likely long-term return is a negative 1 percent real.
 >
By agreeing to go with a Buy-and-Hold strategy, an investor insures that he will be going with a significantly wrong stock allocation two-thirds of the time. If the allocation he chooses makes sense for a time of low valuations, he is going with the wrong allocation at times of moderate and high valuations. if the allocation he chooses makes sense for a time of high valuations, he is going with the wrong stock allocation at times of low and moderate valuations. if the allocation he chooses makes sense for a time of moderate valuations, he is going with the wrong allocations at times of low and high valuations. If valuations affect long-term returns (as Shiller showed in 1981 — his findings have been confirmed many times in the years since), it is logically impossible that there could be any one stock allocation that would be right for any investor at all valuation levels. The risk/reward ratio of stock investing VARIES with changes in valuation levels. So there can never be one allocation that works at all valuation levels. To keep his risk profile constant, the investor MUST be willing to make changes in his stock allocation in response to big shifts in valuation levels.
 >
That said, it is indeed so that Buy-and-Hold works on average. The calculator shows this. Look at the 60-year numbers you get when “44” is entered into the P/E10 box (we had a P/E10 of 44 in 2000, that’s the highest P/E10 level ever experienced in U.S. history by far). At 60 years out, even starting from the worst time to buy stocks in U.S. history, the most likely annualized real return is 6.2 percent real. Not at all bad!
 >
But think what the investor has to live through to obtain that return!
 >
In 2000, we were at three times fair value. So a portfolio with a real value of $300,000 was temporarily priced at $900,000. Every bear market in U.S. history has brought us to a P/E10 level of 7 or 8. So we are today in the process of working our way down from portfolio values of 3x to portfolio values of 0.5x. The portfolio priced at $900,000 in 2000 will be priced (after inflation adjustments) at $150,000 after the next crash. How many Buy-and-Holders will stick with their high stock allocations while the value of their accumulated life savings go from $900,000 to $150,000? I think it would be fair to say that the answer is a number closely approaching zero. In fact, logic tells us this must be so. Just about everyone has to sell for the P/E10 value to drop to one-half of fair value. Many investors believe in Buy-and-Hold. Most of these investors would have to lose confidence in their strategy for prices ever to drop to such shockingly low values.
 >
But-and-Hold works in theory and Buy-and-Hold works on average. But Buy-and-Hold does not work in the real world for ordinary middle-class investors. Some great strategy!
 >
The risk question is a very big deal. I of course understand that this is my most outlandish claim. I continue to put it forward because I sincerely believe that it is a logical implication of Shiller’s “revolutionary” (his word) findings.
 >
There is always going to be risk for people who pick individual stocks. I of course have no problem with people choosing to do that. But I believe that indexing changes the world of stock investing. The reason why these ideas have not yet caught on is that indexing is new and people are trying to use the same approach to analysis that they used to look at individual stocks to look at indexes. My view is that indexes are an entirely new animal.
 >
The risk in picking an individual stock is that you will pick a loser. YOU CANNOT PICK A LOSER WHEN GOING WITH A BROAD INDEX. The index just reflects the performance of the U.S. economy as a whole. The performance of the U.S. economy has been highly predictable for 140 years now. The index return has for times gone above 6.5 percent real and for times gone below 6.5 percent real but it always returns to that number in not too long a time. It is of course possible that the number will not be precisely that on a going-forward basis. But I think it is more than reasonable to use that as a default presumption. The return on a broad index is highly likely to be something in that general neighborhood.
 >
The only risk that remains for the indexer is the risk that comes from following a Buy-and-Hold strategy. If you see a loss of 5/6ths of your lifetime savings, you are going to sell and lose everything. But Wade’s research shows that your maximum portfolio drawdown if you follow a Valuation-Informed Indexing strategy is 20 percent. That’s not going to cause a reasonably informed stock investor to sell. So where’s the risk?
 >
Now take this idea one step further. What if all the experts pushed this approach instead of Buy-and-Hold? We all consider price when buying cars and bananas and sweaters. What if we followed the same practice when buying stocks? There could never be another bull market! When prices got too far above fair-value levels, there would be enough selling to pull them back down to fair-value levels. Prices would always self-regulate in a VII world. This means that stock prices would increase by roughly  6.5 percent real each and every year. There would not be any more wild upward or downward swings.
 >
Is this idea really so far-fetched?
 >
What’s really going on is that the investor is giving up use of his money for a time so that the companies in which he is invested can put it to their own uses. Investors are being paid not for taking on risk, as is commonly believed, but as “rent” for the use of their money. There is no reason why stock prices should not go up by a steady 6.5 percent real each year. My view is that that is a more accurate reflection of the reality than the crazy price changes we see today, where the market value sometimes goes up by 30 percent in a year and at other times goes down by 30 percent in a year.
 >
Anyway, that’s the idea.
 >
It’s not my intent to come across as a know-it-all. I do NOT believe I know it all. I just happen to believe that Shiller discovered something very important and as a journalist it shocks me and appalls me that more people are not exploring the implications of his findings. My aim is to launch a national debate of these questions. I don’t care so much whether I am proven right or not. What I want is for me either to be proven right or to be proven wrong as part of a civil and reasoned DISCUSSION of the ideas. The ideas themselves are all rooted in Shiller’s findings, applied to a Buy-and-Hold base. My contribution has been to tease out scores of implications of these ideas, with the help of hundreds of my fellow community members, including researchers like John Walter Russell, Rob Arnott and Wade Pfau.
 >
Rob

“Re the Issue of Being Labeled a Nut, I’m Afraid that It’s a Bit Late to Help Me Out re That One!”

by

I have been contacting numerous people to let them know about my article reporting on The Silencing of Academic Researcher Wade Pfau by The Buy-and-Hold Mafia.

Yesterday’s blog entry reported on my correspondence with Robert Savickas, Associate Finance Professor at George Washington University Business School. Set forth below is the text of the e-mail that I sent to Robert in response to the e-mail of his that is described in the earlier blog entry:

Robert:

I believe that we are on the verge of discovering powerful insights re the nature of investing risk.
>
Take a look at Wade’s paper if you get a chance. He has a graphic (I believe it is on page 8) where he compares the Maximum Portfolio Drawdown for a Buy-and-Hold portfolio with the MPD for a Valuation-Informed Indexing portfolio. The difference is 60 percent vs. 20 percent. That’s a good measure of risk, is it not? Losses don’t really matter unless you sell and thereby lock them in. So the thing you want to avoid is big portfolio losses. You reduce the potential drawdown by close to 70 percent by being willing to take price into consideration when setting your stock allocation. Showing investors how to reduce stock risk by 70 percent is huge. I think it would be fair to say that this is the biggest breakthrough yet achieved in the history of investing analysis.
>
Risk is essentially optional for stock investors today. It is following Buy-and-Hold strategies that creates risk. Once we all get about the business of warning investors of the dangers of Buy-and-Hold, we can pretty much say goodbye to the problem of stock investing risk.
>
Re the issue of being labeled as a nut, I’m afraid that it’s a bit late to help me out re that one! I’ve been banned at 15 different discussion boards and blogs. Here’s a web site whose entire purpose is to ridicule me:
>
>
The other side of the story is that lots of good and smart people have said exceedingly kind things at my work. There are 120 endorsements at the “People Are Talking” section of my site, which runs down the left-hand side of the home page of my blog:
>
>
And I have had hundreds of ordinary middle-class people thank me for being the first person ever to explain how stock investing works in a way that makes sense to them. That counts for something.
>
I would of course be happy if the Goons would stop attacking me. But the thing that drives me is doing right by my readers. So I don’t feel comfortable signing on to ideas that I know don’t hold water. I have hopes that we are going to see hearts melt following the next crash. I believe at that time that I will be working side-by-side with all of my many Buy-and-Hold friends (most of the people who post at that hate board were friends of mine in an earlier day) to rebuild our broken economy.
>
Someone has to stick his neck out for human knowledge to advance over time. No? It amazes me that Shiller published his research 30 years ago and so few in this field have picked up on the many exciting implications. I love the humans dearly (the title of the book I am writing is “Investing for Humans: How to Get What Works on Paper to Work in Real Life”) but they can be a trial from time to time. Come to think of it, trying to help the humans learn what it takes to invest effectively for the long run is not all that different from being married!
>
Rob

“If You Had Been Banned on One or Two Boards, One Could Say That Maybe There Was the Possibility That Someone Overreacted in Banning You. However, When You See That It Is Consistent Behavior from You Followed by the Consistent Reaction of Those That Read the Boards and Administer the Boards, It Is Clear that the Problem Is You.”

by

Set forth below is the text of a comment that I recently posted to a blog entry at this site:

Rob,

From what I have read and have also seen in MANY examples, you were banned due to your continued abrasive attitude as well as your refusal to answer direct questions as well as provide proof to back up your claims (such as threats). If you had been banned on one of two boards, one could say that maybe there was the possibility that someone overreacted in banning you. However, when you see that it is consistent behavior from you followed by the consistent reaction of those that read the boards and administer the boards, it is clear to see that the problem is you.

I gave you an example of a similar issue the other day. As I mentioned, I was looking at old postings on the FMF board. I am sure you will agree that this particular board is mostly devoid of confrontation and friction. However, we saw what happened when the comments section (heavily dominated by you) surpassed 100 comments in very quick order and FMF had to shut down the comments. This is not an exception. It seems to be a pattern for you.

You seem to have a campaign every time you post and try to drive over people like a Mack Truck.

I am grateful to you for asking a real and important question here, Pink. You are giving voice in this particular comment to a feeling that is shared by many smart and good people.

To understand what is going on, you must understand the context in which these discussions have been taking place.

Buy-and-Hold was the first effort at a research-based strategy for ordinary people. People LOVE the idea of rooting their investing strategies in peer-reviewed academic research. Buy-and-Hold provided millions of people with AMAZING results for DECADES. People LOVE Buy-and-Hold. They view the Buy-and-Hold pioneers as HEROES.

I say that Buy-and-Hold is dangerous. I say that it is irresponsible. I say that it is a Get Rich Quick scheme. I say that it caused the economic crisis. That’s strong stuff. That strikes the many good and smart people who view Buy-and-Hold in a very positive light as SHOCKING.

People have never heard anyone say the things I am saying before. My words come as a shock. That’s why my posts generate so many questions and comments. It’s not anything I do that causes this. It is the nature of the discussion that causes this. I am questioning fundamental beliefs. That is unsettling on a deep level. People respond in all kinds of unusual ways when their fundamental beliefs are questioned.

The Buy-and-Hold Mafia has handled this by shutting down debate at every board and blog. THAT IS A TERRIBLE MISTAKE.

We need to do just the opposite. We need to ENCOURAGE debate. We need to have a NATIONAL debate. We need these discussions to go viral. We need to get tens of thousands of people, experts and ordinary investors both, involved.

Why?

Because that is how we Normalize the discussions.

We are never all going to agree. It wouldn’t be healthy if we did.

But you are right that we cannot have 200 questions directed to Rob each time he says “hello, how about them Orioles?” We need people to come to accept that there is more than one legitimate viewpoint on all these questions. To do that, we must educate people as to the basics. We do that through discussion. Rather than shutting down discussions, we need to encourage discussions.

Once we do that, the phenomenon that you refer to will fade away in a natural way. You won’t have to force it to happen. It will happen because people will come to know the answers to their many questions. Whether they change their minds about what works in investing or not, they will settle down. Valuation-Informed Indexing will over time become one more thing to take into consideration when deciding on an investing strategy.

I have put forward the new ideas. I don’t apologize for that. The new ideas are very much worthy of the consideration of every investor alive.

I have not caused the circus atmosphere. We have seen a circus atmosphere because debate on these questions has been held back for so long that, when people have an opportunity to ask some questions, their enthusiasm flows over the top of the cup.

Yes, we need to settle things down a good bit.

But not by further suppression.

We need to settle things down by handling discussions of investing strategy in the same way that we handle discussions of every other subject under the sun. We need to accept that there is more than One Right Way to Invest and show respect and affection and gratitude to those who hold viewpoints other than our own that they seek to share with us on discussion boards and blogs.

Rob

Valuation-Informed Indexing #145 — The Financial Crisis and the Systematic Failure of Academic Economics

by

I have posted Entry #145 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Financial Crisis and the Systematic Failure of Academic Economics.

Juicy Excerpt: All stock investors should read an amazing paper produced by the University of Copenhagen Economics Department. It is titled The Financial Crisis and the Systematic Failure of Academic Economics. This is the real story, the news that unfortunately does not often enough end up in the newspaper.

I’ll set forth a few snippets that you can use to determine whether reading the full paper is worth your time:

A Summing-Up: “The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold. In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s focus on models that, by design, disregard key elements driving outcomes in real-world markets. The economics profession has failed in communicating the limitations, weaknesses, and even dangers of its preferred models to the public. This state of affairs makes clear the need for a major reorientation of focus in the research economists undertake, as well as for the establishment of an ethical code that would ask economists to understand and communicate the limitations and potential misuses of their models.”

“I Am Indeed Slow to Act. Some Interpret That As a Lack of Courage. My Take Is That It Is Better Understood As a Situational Kind of Courage. I Need to Be Very Sure Before I Become Unbending.”

by

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

He’s all talk and no action.   He never does anything.

I am slow to act, GW. For good or for ill. If I were asked to give one word to describe my personality, it would be “methodical.” I like to be sure.

That’s why I was the first one to go public about the errors in the studies. I had noticed them years before. My guess is that lots of other people noticed them. I didn’t shoot my mouth off. But I didn’t stop thinking about them either. I thought and thought and thought. And when I felt that I knew enough to venture forward and say something, I ventured forward and said something.

It was the same with everything else.

It was the same with contacting Bogle. It was the same with sending the e-mails. It was the same with saying that Buy-and-Hold caused the economic crisis. It was the same with saying that the new research shows us that stocks are less risky than bonds and that we can reduce stock risk by 70 percent. It was the same with using the phrase “financial fraud” (I used that phrase in correspondence with an e-mail respondent the other day, the first time I recall using it somewhere other than here — I test things out here and then work up the courage to follow-up elsewhere). It was the same with making note of the prison sentences.

There are some lines that I will never cross. No matter how bad things get.

I am the leader re this matter. But FoolMeOnce  once made the point that being a leader doesn’t amount to much if you don’t have followers. FoolMeOnce wanted to be with me. But he was afraid because there were not lots of others publicly declaring that they wanted to be with me. Lots of people are like that.

If that never changes, my efforts will never succeed. This is not a one-man job.

You’ve got me re that one.

I think it will change. But I am not God. I’ve been wrong about lots of things. It could be that I am wrong about this.

However, if there comes a day when people show a willingness to follow, I will lead. I’ll be scared. I was scared when I put forward the May 13, 2002, post. I forced myself to push the “send” button. I’ll force myself to lead this effort where it needs to go for millions of people to feel safe saying what they truly believe about stock investing on EVERY board and blog on the internet. That’s the job. I will see it through to completion presuming that I someday have the number of followers required for this to be a viable proposition.

I don’t think of myself as being a person of great courage. If I had been a person of great courage, the May 13, 2002, post would have gone up in May of 2000.

But I am something. I follow through. When I commit myself to something, after pondering and pondering and pondering whether it is the right choice or not, I stock to that path in the face of relentless opposition. There have been one or two other turning points in my life in which similar events played out. I handled things in the same way. With love for the other side. With a great desire for compromise. But with a steel resolve not to betray the core mission, which I elected only after a great deal of pondering as to what was the right way to proceed.

It’s not my purpose here to brag. I am not saying how great I am or how strong I am. I am not predicting ultimate victory. Perhaps I will end up in the electric chair, like Greaney once predicted.

What I am saying is that, if I fail, it will not be because I did not follow through. I am slow to act. But I evidence determination in the actions I take. There’s something in the nature of the methodical person that makes him slow to act in cases in which he is not sure (which is most cases) and determined in cases in which he is sure (the small number of cases to which he has devoted so much thought that even his methodical soul is clear re what must be done).

I believe — based on my life story — that the methodical person is the most determined person once he has convinced himself that an action absolutely must be taken. People don’t see it that way because the methodical person so rarely sticks his neck out. But it is not really a lack of courage that causes the methodical person to generally refrain from sticking his neck out. It is a lack of certainty. The methodical person sees both sides of the story. So he is generally content to let the other guy — who seems so much more sure of himself — call the play. In those few cases in which the methodical person has directed enough mental energies to a matter to feel comfortable sticking his neck out, he is so sure that he cannot live with himself if he does not evidence follow-through.

That’s where I think things stand, in any event.

There are lines that I will never cross because I could never feel comfortable crossing them. I will never say “I know for certain that Valuation-Informed Indexing works” because I don’t believe it is possible for one person to be that sure of anything. No one person knows it all. I could be missing an important piece of the puzzle. I can believe that VII works. I cannot by myself know for certain.

It’s not just me on the issue of whether honestzzz posting should be permitted. That one is backed by our entire society, our entire culture, our entire history, our entire legal system. That’s why I feel so sure re that one. Re that one I am positive.

If I obtain a sufficient number of followers to achieve my goals, I will have what it takes to follow through. I know this from life experience. I won’t flinch. I won’t go sentimental. I won’t offer deference to my “betters.” I’m tough as nails when the circumstances are such that a person with my personality feels driven to be as tough as nails.

If I don’t obtain a sufficient number of followers, this will not happen. I will never feel that it is right to force it. I don’t believe that that can ever be the right thing to do and I will never be able to persuade myself that it is the right thing to do, no matter the circumstances. If things reach a point where our entire economic system is about to collapse and I still do not have a sufficient number of followers, so be it, that’s what was meant to happen. I don’t judge myself according to whether I achieve success in the eyes of the world (perhaps you have noticed!). I judge myself according to whether I have lived up to my internal standards. My internal standards compel me to send the e-mails. My internal standards forbid me from crossing lines that I believe should never be crossed. So there are many “options” that some others might consider that are not even remotely possible options in my mind.

Anyway, that’s where things stand from my perspective.

I am determined. And I am optimistic. But I am not certain. There are ways that things could play out that you guys would “win.” That sort of win would be a horrible loss for all of us, in my assessment. But I do not say that there is zero chance that we will all have to endure what comes with a win for you guys (and witches).

I am not entirely lacking in courage, though. I am indeed slow to act. Some interpret that as a lack of courage. My take is that it is better understood as a situational kind of courage. I need to be very sure before I become unbending.

“I Know More About What Works in Stock Investing Than Most Experts in This Field Because I Abandoned Buy-and-Hold in August 2002, When Greaney Advanced His First Death Threat and Hundreds of Buy-and-Holders Cheered Him On.”

by

Set forth below is the text of a comment that I recently put to a discussion thread at this blog:

Did you come across as the expert you purported to be?

I’ll answer this one separately.

I don’t think that there can be such a thing as an investment “expert” today, Banned. We only started doing academic research on investing questions in a systematic way in the 1960s. So we are talking about a field with a history of about 50 years. We are still in the Pioneer days, when we are going to make lots of mistakes and track back and re-start and all that sort of thing. So I think it is dangerous for people to be taking too seriously the idea that they have developed some form of permanent “expertise.”

So I don’t really think of myself or anyone else as an expert. I don’t object if someone refers to me as an “expert” in an introduction because this is common practice in this field. If the question comes up in the discussion, I make the point I made in the paragraph above, that it would be best if investors appreciated that there is no such thing as an true investment expert in today’s world, the science is too young.

I am very proud of my accomplishments. I potentially saved millions of middle-class retirements by discovering the errors in the Old School SWR studies back in 2002. The discussions that followed from that discovery (“The Great Safe Withdrawal Rate Debate”) led us to all sorts of exciting places. I think it would be fair to describe Valuation-Informed Indexing as the first true research-based investing strategy (it obviously owes a great deal to the Buy-and-Hold pioneers). Nothing could be more exciting than the discovery I made with my friend Academic Researcher Wade Pfau that it is today possible for us to reduce the risk of stock investing by 70 percent by warning investors of the dangers of Buy-and-Hold strategies (dangers that we did not know about until Shiller published his revolutionary research in 1981).

Do I know more about what works in stock investing than any of the “experts” who advocate Buy-and-Hold strategies? I think that is certainly fair to say that that is so in a practical real-world sense. They know more about what is written in the textbooks. I know more about what works in the flesh-and-blood world. But not because I am smarter than my Buy-and-Hold friends! I know more because I abandoned Buy-and-Hold back in August 2002 (when Greaney advanced his first death threat and hundreds of Buy-and-Holders who saw him do it cheered him on). That told me that Buy-and-Hold causes those who follow it to become excessively emotional. So I have learned all sorts of amazing things about how stock investing works over the past 11 years that the Buy-and-Holders have closed themselves off from learning by virtue of their unwillingness to acknowledge the 30 years of peer-reviewed academic research showing that there is zero chance that a Buy-and-Hold strategy can ever work for a single long-term investor.

Do I want my Buy-and-Hold friends to join me in this amazing learning adventure? I do. Very, very, much. There’s nothing that would make me happier than to be working beside great and smart and good people like Jack Bogle and Bill Bernstein and Larry Swedroe and Scott Burns. Tell me what magic words I need to say to them to get them to drop the pose that they knew it all going back to the day they were born on Planet Earth, and I will say those magic words, Banned.

I am not working with these people today not because I am too good for them. I am not working with these people today because their puffed-up egos don’t permit them as of today to acknowledge that they got on the wrong track during the insane bull market and that we all become better informed about how stock investing works when we all work TOGETHER for the purpose of helping the people who look to us to provide effective guidance.

I love these guys, Banned.

Do they love me? That’s the question you should be asking.

Are they even able to swallow their pride enough to acknowledge that there’s a lot that they can learn from me? (I have certainly acknowledged on many occasions that I have learned a lot from them).

That’s where things stand today, Banned. There’s no issue on my end. The problem is with the Buy-and-Holders. The hand of kindness is extended to them. Can they work up the courage and grace to reach out and accept it before their investing advice brings on another stock crash and puts us in the Second Great Depression?

No, I am not an expert in the conventional meaning of that word. And, no, my good friend Jack Bogle is not one either. So Jack and I should be comparing notes, learning what we can from each other so that we can do a better job for the people who look to us to learn how to finance their retirement plans.

That’s my take re this important question, in any event.

My warmest wishes to you and yours, Banned.

Rob

Realty Mogul Site Interviews Rob Bennett

by

The Realty Mogul site recently interviewed me re Valuation-Informed Indexing and how it applies to real estate investing. The article is here.

Juicy Excerpt: “Going along with conventional advice, I believe people should only invest in things they understand well. Real estate can be very appealing, but I recommend people chose the asset class they are going to focus on and study that to death as opposed to spreading yourself out thin and having a little bit of everything. I have not studied real estate, so I don’t invest in it as a result. If you study it, real estate can make an excellent asset class.”

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

by

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.

“Bogle Associates with People Who Make Death Threats and Fails to Speak Up About It. That’s What Gives the Goons the Power They Possess Today.”

by

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

do you really think any reputable university would pay any heed to anything anonymous individuals we’re saying about one of their employees? 

Wade didn’t say that he thought that the officials at his University would necessarily believe everything that you Goons said. He said that he was concerned that his career would be done harm all the same because they just wouldn’t like the controversy and they wouldn’t like having to deal with the crazy situation. Since it was his work creating the problem, he would be punished.

Yes, I find that believable. I once compared Greaney’s behavior threatening a woman at Motley Fool to the behavior of a rapist. The others at the board wanted to help their friend but they didn’t want to report Greaney. Why? It was for the same reason that many women don’t want to report rapes. There are intense social pressures not to do so. Rape is such a horrible crime that all in society affected by it are ashamed about what happened. So we look to blame the victim — she must have done something to bring this on. Wade was afraid that he would be blamed for having brought on the smear campaigns against him. There are Buy-and-Holders (and perhaps even some Valuation-Informed Indexers) who would have said: “Wade must have done something.” I don’t think Wade is entirely wrong about that.

It was not solely the threats made by the Goons that caused Wade to flip. Six other factors are: (1) the lack of a positive reaction to his research by the majority of posters at Bogleheads; (2) the charges by Mel Linduaer that he had engaged in unethical research practices and the failure of other community members to stand up to Mel; (3) the feelings of envy that Wade knew he would inspire in his peers if he were put up for a Nobel prize at his age; (4) the failure of Bogle to speak up about Mel’s attacks and about the threats made by the Greaney Goons; (5) Wade’s experiences seeing what had happened to other Valuation-Informed Indexers, including myself, and the intense, burning hate that had been directed at them by Buy-and-Holders; and (6) Wade’s lack of understanding of many aspects of the Valuation-Informed Indexing model.

It was the combined effect of all these factors that caused the flip. The threats were the trigger and the threats tell the most compelling story. It is amazing to hear that such threats were made in public and that Wade did not call the police when they were made. It is a compelling part of the story and the threat element of the story suggests the other elements because Wade’s failure to call the police informs the listener that something exceedingly odd is going on.

You ask whether what the Goons did could have mattered. He flipped, didn’t he? And Shiller to this day holds back on telling us all he knows about stock investing, doesn’t he? And the bans at the 15 boards and blogs remain in place to this day, don’t they? And Mel Lindauer and John Greaney retain posting rights to this day, don’t they? And the economic crisis continues to this day, doesn’t it? And there are still people to this day who recommend Buy-and-Hold strategies, are there not? And the Old School safe withdrawal rate studies remain uncorrected, do they not? And Wade now buries the valuation question in the research he publishes so that it will not attract too much attention or controversy, does he not?

Yes, what the Goons do matters.

Not because of the inherent power of the Goons. The Goons have little inherent power. If Bogle spoke up about Lindauer when I sent my first e-mail to him, there obviously would never have been any threats made against Wade. But Bogle didn’t speak up, did he? That’s the story here.

When Bogle speaks up, it is over. For so long as Bogle fails to speak up, his silence is interpreted by millions of people as an implicit endorsement of the Goon behavior. People trust Bogle and the other experts in this field. They need to see Bogle and the other experts take action to feel confident that what their common sense tells them is so really is so. They need to see Bogle take action against the Goons to understand and accept that the rules of social intercourse that apply in every other area of human endeavor apply in the investing realm as well.

Bogle doesn’t make death threats himself. But Bogle associates with people who make death threats and fails to speak up about it. That’s the problem. That’s what needs to change. That’s what gives the Goons the power they possess today. When Bogle speaks up, all the rest of us will feel comfortable speaking up. When Bogle speaks up, the fever will break and we will all make it together to the other side of The Big Black Mountain and a thing that has brought us a lot of bad over the course of 10 years will begin very quickly bringing us a lot of good and will continue doing so for a long, long time.

Bogle needs to call out Mel Linduaer and John Greaney in the way that I have called out Mel Linduaer and John Greaney. It doesn’t matter much what Bogle says about Valuation-Informed Indexing. He needs to behave re the Lindauer/Greaney matter in the manner in which Arnott said he has always behaved in the presence of Arnott. He can disagree on substance. He must act like a gentleman on process questions. He must come out strongly in opposition to death threats and defamation and board bannings and threats to get academic researchers fired from their jobs. When he does that, the substance questions will take care of themselves.

We can handle the substance questions so long as normal process rules apply. We cannot handle Jack Bogle attending functions with people who have put up posts in “defense” of Mel Linduaer and John Greaney and saying nothing about their behavior. That failure to speak up sends a signal that imprisons us all. It is so far outside of our social norms that we cannot process it. People fear what a John Bogle, with all his connections and influence and money, can do to them if they “cross” him. People need to know in no uncertain terms that Bogle is on the side of those who want the sorts of individuals who have put up posts in “defense” of Lindauer and Greaney serving prison terms rather than posting on our boards. Only Jack himself can change the public perception that has grown over the past 10 years that he is ethically compromised re this matter because of his own feelings of personal pride over having developed the Buy-and-Hold concept.

Yes, the Goons matter. They shouldn’t, that’s certainly fair to say. But today they do. Because people who do matter have failed to disassociate themselves from the Goons in the matter in which they would if we were talking about any subject other than the errors that were made in the development of the Buy-and-Hold concept (because all the research needed to get it 100 percent right was not available at the time the concept was initially formulated).

Rob

“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.”

by

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