A Rich Life

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

Rob Bennett to Academic Researcher Wade Pfau: “I Strongly Believe That There Are Things You Must Do and Things You Must Not Do to Protect Your Reputation As An Ethical Person. I Believe Today That There Is Serious Reason to Question Whether You Have Managed to Stay on the Right Side of the Line…. Are You Insane, Man? Please Think!”

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Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on January 1, 2012. My next e-mail to Wade was dated April 5, 2012, and was titled “Concerns Re You Going to the Dark Side.” The text is set forth below.

Wade:

I hope things are going well with you.

This e-mail will not be a pleasant one to write (or to read). I don’t think I have any choice but to write it, given recent developments.

Before I start, I want to state the obvious preface. I have great feelings of respect and affection for you personally and I admire your research work probably more than anyone else alive on Planet Earth today. In ordinary circumstances, that would be the basis for a wonderful relationship. As you know, there have been things that stood in the way of that since our first communications. Those obstacles have always saddened me. My strong sense is that the problem side of the relationship has grown much worse since your postings at my blog re whether Bill Bengen should correct the errors in his SWR study. The purpose of this e-mail is to (1) attempt to confirm whether that is indeed the case or not; and (2) get some things off my chest that I need to get off my chest to fell that I have always dealt with you in good faith.

You are of course aware that there has been an organized effort on the internet to destroy my reputation which has been led by Mel Lindauer and John Greaney  and which has made it impossible for me to earn a living for 10 years now. I believe you know that I plan to bring lawsuits against the sites that have permitted the Lindauerheads and the Greaney Goons to engage in defamation and death threats and other tactics to block numerous board and blog communities from learning what they need to learn what the last 30 years of academic research says about safe withdrawal rates and other important investment-relarted topics.

I believe that we all have a responsibility as part of the ethical demands of our respective professions to speak up when we see this sort of behavior. I have of course spoken up. You have spoken up on a few occasions in small ways but generally have kept quiet re this aspect of things. It’s not easy to say where precisely the line should be drawn re speaking up or not speaking up. My problems are of course not your problems and I of course do not expect you to feel as  great a concern re this aspect of the question as I feel since I am directly involved. That said, I strongly believe that there are things you must do and things you must not do to protect your reputation as an ethical person. I believe today that there is serious reason to question whether you have managed to remain on the right side of the line.

I was questioned the other day by one of the Goons as to whether we were still in e-mail communication. My answer was that I presumed we were. I don’t recall us having a back-and-forth discussion since the day you posted on the Bengen blog post. My recollection is that I sent you a copy of an e-mail that I sent to a visitor at my site because he referenced you in the e-mail and I wanted you to see both his words and my words. I did not receive a response to you re that e-mail but I did not see that as being a big deal.

Today, I was communicating with another financial blogger and wanted to send him a link to the blog post in which you explored Valuation-Informed Indexing and found that it beat Buy-and-Hold in 102 of 110 of the rolling 30-year time-periods in the historical record. As you obviously know, this post of yours was a big help to me in trying to overcome the Campaign of Terror against me and the many board communities in which numerous community members have expressed a desire that honest posting on SWRs and other valuation-related topics be permitted. The goal of the Internet Sewer Rats has been to persuade my potential readers and customers that I have not done important work and your mention of my name in a post that shows that I was right all along made it impossible for them to continue to maintain that position.

You have removed my name from the post. Why?

You of course have a right to re-write posts. In this case, however, the action is an exceedingly odd one. You have been attacked by Lindauer yourself. You have acknowledged in posts that Drip Guy has sent you e-mails and you have changed positions you have taken in discussions at the Bogleheads board as a response to his threats. When you contacted the Trinity authors about correcting the errors in their SWR study, the Greaney Goons put up posts threatening to get
you fired from your job if you followed through and you then retreated from your position after letting me know that you were indeed concerned that you might lose your job as a result of their actions. We of course both know that the Sewer Rats have employed similar tactics in numerous other cases.

I believe you are making a huge mistake, Wade.

Please don’t hear that as a threat. I hope you will hear it as a friend speaking to a friend. I said similar words to Greaney 10 years ago and he is where he is today because he ignored those words (Greaney was my personal friend in earlier times). I said similar words to Lindauer. It breaks my heart to see another one of my friends take this horrible path. Are you insane, man? Please think!

I am a journalist, Wade. My job is to tell this story in as honest and as complete and balanced way possible. I take the responsibilities of my profession seriously and I will honor them. I WILL let personal friendships influence me (I have done
this with Greaney on many occasions). I think it would be inhuman of me not to do so. But I WILL also honor my responsibilities to my readers.

There are millions of middle-class people who have been done great harm by this economic crisis. They need to know the story here. The hardest question for them to understand is — Given that the academic research has shown for 30 years that Buy-and-Hold can never work for any long-term investor, why are there still people today advocating it? I need to tell BOTH sides of that story. That’s my job.

My strong hunch is that you would prefer to stick to the research and keep away from all this ugly junk. Guess what? Every single one of us feels the same way. The full reality here is that the reason your research has not received the attention it merits (I understand that you have received a great deal of attention and that that attention is fully deserved) is because people cannot come to terms with the ugly, emotional side of all this. If our free market economy is to survive for much longer into the future, we all need to work up the courage to deal with that side of things. We need to do so with love, to be sure. But we need to do so with honestly as well. There is no other way.

If I hear a response from you that indicates that you want to deal with the issues at stake here in a responsible way, I will do whatever I can to put in place a process that will work to help every single person involved come out of this looking as good as it is today possible for them to look. That’s the love part of the formula.

The honesty part of the formula is that, if I do not hear from you, I need to report on what you have done in this case and in your other interactions with the Goons on the Bogleheads Forum and elsewhere. I hate being put in these circumstances as I know you hate being put in these circumstances. The bottom line here is that these are the circumstances into which we were born and we both need to work up the courage to make the best of them.

Please always know that, if you see something that I have written and you feel that I have not told things in a precisely fair way, I will be thrilled to give you space in the article or blog post to tell your version of events in your own words. My preference is that it be done in that way.

Please also know that I will of course always respect the work you have done. I very much still believe that you are someday going to win that Nobel Prize and that we are going to see your name on the front page of the New York Times. It will be a great day for all of us when that happens.

Please also know that I will do everything I can to slant things as much as I can in your favor without failing to honor my obligation to my readers to provide them with the detail they need to hear to  make sense out of the amazing circumstances that apply in InvestoWorld today.

Please also know that I will always think of you as a friend and will always wish the best for you and will always be\ honored to be associated with you in any way (even if this crazy mixed-up world of ours puts me in circumstances in which I need to name you in lawsuits at other times!).

I will close by letting you know of three things that I have in mind at the moment (the purpose of this e-mail is to assure myself that I have done every last thing that I can do to avoid going ahead with these steps):

1) I am going to start a thread at the Goon Central board letting them know that I have sent you this e-mail (without posting the text).  Drip Guy asked me about you directly yesterday, which suggests to me that he feels you have been compromised. I argued yesterday that this was not the case. I don’t want the Goons thinking that I play games re this sort of thing and I have been careful always to respond honestly to their questions. So I think I need to let them know that my sense of where things stand has changed as a result of what I learned today;

2) I expect to post the text of this e-mail at my blog within another week or two. This is obviously an important development in the saga. If you have indeed gone to the Dark Side, that is a major win for the Goons, who have been feeling greatly weakened in recent months aside from this development; and

3) I am in the process of writing a long article that will detail 101 incidents of this nature (you are not the only one who is afraid of what the Goons will do to your reputation if you state your honest beliefs about investing in clear terms!). You are certainly not the focus of the piece. But my expectation is that you will be mentioned in five or so of the incidents. I just want you to know that that is in the works as I feel that each time we go a step down the dark path, it makes it harder to move to the better path for all concerned. How I wish that others could see this point as clearly as I do!

The Goons are not going to win, Wade. They CANNOT win. If we don’t help people learn what they need to learn about stock investing, the numbers show that the whole thing is going to go down (please ask if you have questions about this
aspect of things). There was a big change in people’s attitudes after the 2008 price crash. I’ve been doing this for 10 years and I can tell you that nothing had as much impact as that. The next crash is going to hurt worse (because it follows on
so many down years) and is going to cause a much bigger change in public opinion. You want to be positioned on the right side of things when that happens. We are going to need to act quickly then and we need you working with us!

If you have particular concerns or questions, please let me know of them and we can do out best to resolve them when they can be resolved with relative ease.

I cannot post dishonestly on safe withdrawal rates. It is insane that I was ever asked to do this and it is insane that there is even one responsible person who ever thought that it might be possible that I would go along with such a demand. Just
about anything else is negotiable because, once we achieve the right to post honestly on that topic, a lot of the ugly feelings of shame will dissipate. I cannot give an inch on that one. For reasons that should be obvious to all reasonable people.

Sorry for the long e-mail. I hope it leads to good things!

I wish you the best in all your future endeavors, my good (non-Goon, please?) friend!

Rob

Rob Bennett to Academic Researcher Wade Pfau: “The Red Line Follows Pretty Much the Same Path as the Blue, But With Lower Tops and Higher Bottoms. That’s the Truer Picture Since the Blue Line in Time Always ‘Catches Up’ to the Red Line.”

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Yesterday’s blog entry reported on an e-mail sent to me by Academic Researcher Wade Pfau on December 3, 2011. I responded the same day I said: “That sounds super.”

My next e-mail from Wade arrived the following day. Wade reported that his article on Valuation-Informed Indexing had officially been accepted at Applied Financial Economics and would be appearing in print within 18 months. I responded the next morning, offering Wade my congratulations.

I next heard from Wade on December 10, 2011. He reported that: ” I ended up writing a new paper on valuations after all.”  He attached a copy to the e-mail and  said that he would provide a link in a few days and that he had submitted the paper to the Journal of Financial Planning.

He also said: ” I just made a blog post about something you suggested to me months ago.  It also came up independently as well at a seminar I gave at Texas Tech University in October. Any thoughts about the result?

http://wpfau.blogspot.com/2011/12/valuations-adjusted-wealth.html

 

Wealth Accumulation Graphic

 

Wade:

I looked first at the blog post. I will comment on the paper later.

I am very interested in the concept you are exploring. I don’t entirely understand what you did. So anything I say must be viewed as being the product of an exceedingly tentative observation.

My impression is that the red line really is a good bit more stable than the blue line. It is not flat. But it is a good bit flatTER.

From 1900 through 1970, the red line follows pretty much the same path as the blue, but with lower tops and higher bottoms. It could be argued that that’s the truer picture since the blue line in time always “catches up” to the red line. If you were using the red line to inform your decisions as to how much wealth you possess, you would be using a better guide because you would avoid temporarily extreme assessments in both directions. That’s a good thing, no?

There’s a big drop in 1970 that makes the red line seem not at all flat for a time. However, in comparison to the blue line, it is flat even then. The drop for the blue line is even steeper. This was the stagflation of the 1970s, which was caused by the bull market of the 1960s. What is happening in a bull market is that we are borrowing money from future investors. What is happening in a bear market is that we are paying back the debt we incurred. I (tentatively) think you could say that
the bull/bear cycle causes real economic damage. So there was more wealth accumulation in the 1960s than there was in the 1970s. But the market numbers exaggerated this reality. The red line shows a drop in wealth accumulation but a less dramatic and more realistic picture than the blue line.

Assuming that the blue line is going to come down and touch the red line (and probably then drop well below it) in coming days, the red line will again prove to be more flat in the post-1990 period.

There’s a very important policy prescription that follows from this (presuming that I am on the right track re what I am seeing). When the blue line next drops below the red line, consumers/investors are going to become convinced that they have far less in the way of wealth than they really do possess (according to the more accurate red line). This is going to cause a greater contraction of consumer spending, which in turn is going to cause a worsening of the economic crisis. If consumers/investors were  made aware that it is the red line that matters for the long run, they would find the blue line numbers less frightening and would be less inclined to reduce their spending even more. That is, persuading millions of middle-class investors that the red line is the accurate wealth assessment line would constitute an EFFECTIVE spending stimulus, something we may very much need in days ahead as the blue line continues to work its way downward.

Please note that the blue line ended up a good bit lower than the red line at the end of the last bull/bear cycle (1982), as it did in 1920 and 1950 (my rough approximations of the ends of the two earlier cycles). If this pattern repeats, we are going to see a blue line (what people believe is their wealth) a good bit below today’s red line. That is going to frighten lots of people.

The question is — Which is the real number? Will people’s fears be genuine or inappropriate? My contention is that the fears will be exaggerated and that the last thing we should be doing in an economic crisis is reporting numbers that cause
people’s fears to be heightened beyond what is justified by the bad-enough realities (the red line).

My overall sense is that bull markets move wealth from one time-period to another. They increase wealth in a current time-period by borrowing from the future. But the net effect is not a neutral one. The shocks delivered to the economy by this
artificial shifting of wealth destroys wealth (because of the inefficiencies connected with having tens of thousands of businesses fail and millions of unemployed workers). So we are all poorer as a result of bull markets. The red line gives investors a better sense of where they stand than does the blue line. If we persuaded investors to pay more attention to the red line, we would diminish the economic shock delivered by the bull market and thereby limit the diminishment of wealth suffered because of it.

I would love to hear about any feedback on the chart provided by others.

Rob

Rob Bennett to Academic Researcher Wade Pfau: “My Understanding of the Theory [Behind Valuation-Informed Indexing] Has Helped Me Avoid Pitfalls That Lots of Others Have Fallen Into”

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Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on August 12, 2011. He sent a response the same day.

Wade congratulated me for obtaining a monthly column at the Financial Highway site. He said that his university subscribed to a service that provided links to media sources using the university name and that my article was picked up by the service. “So everyone here got to see a link to your article in email and our alumni director made a link to it in the alumni group on Facebook.”

He also said that he had received positive comments from a journal on his Fisher and Statman research. He said that things were looking good re future publication. He said: “I might include about the rolling 30-year periods in it rather than keeping it for a separate article.  I’ve been getting so busy and there is not enough time to write all the papers I want to write these days.”

My response, sent later the same day, appears below.

Wade:

It always brings a measure of cheer to my day to receive an e-mail from you. Intelligent discussion of investing is like sunshine to me!

That’s a great story about your university and the e-mail links. The internet works in mysterious ways! It’s so new and different a communications medium that people have not figured it out yet.

One of my dreams is to get one of my calculators picked up at the LifeHacker site. It is a a HUGE site and the calculators are perfect  for it because the site is looking to share knowledge of practical tools. So what happens a week or so ago? LifeHacker picks up one of my saving articles! It brought in lots of traffic and I am of course grateful. But it is strange for things to happen that way. My investing work is 20 times more important than my saving work and my saving work is 20 times more popular. I actually think of my investing work as Anti-Marketing. My saving articles pull people into my site and my investing articles drive them right back out again!

I like the idea of adding the rolling 30-material into the Fisher article. You have two A+ articles there. But you are better off with one A+++ article. The engineer for the Beatles said that his greatest career regret was that he let them release Strawberry Fields Forever/Penny Lane as a single rather than saving it for inclusion on Sgt. Peppers. Sgt. Peppers got plenty of attention on its own. But it would have been even bigger with inclusion of those two songs (and the dropping of two inferior songs). One A+++ article can have more impact than a lifetime of solid B+ material. So don’t make any mess-ups in that article! (That’s a joke.)

There’s a point made in one of the Bogleheads threads in which you  participated that I think might be worthy of some of your consideration. It was one of the critics who put it forward but it was a strong point. He asked: “What is the THEORY that explains why P/E10 would be able to predict returns?” My strong sense is that people don’t spend  enough time thinking that over. I believe that I understand the theory (it is of course possible that I am wrong). My sense is that my understanding of the theory has helped me avoid pitfalls that lots of others have fallen into.

Anyway, you must get that article on the front page of the New York Times before our economic and political system falls! That’s sort of a joke too, but perhaps only 50 percent so. We really do live in times that are both exceedingly scary and exceedingly promising (but perhaps all times seem that way to the poor humans living through them without knowledge of how things turn out on the last page of the story).

Please take care.

Rob

Academic Researcher Wade Pfau: “I Do Not Wish to Antagonize the ‘Goons’ Too Much… I Do Not Want Them Working Behind the Scenes To Derail Me…I Did Warn the Editor of the Journal of Financial Planning That They May Receive Some Hate Mail After I Mentioned Your Name in the Safe Savings Rate Paper””

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Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Pfau on May 2, 2011. On May 16, 2011, Wade put a post to his blog endorsing the idea of permitting honest posting on safe withdrawal rates. He stated: ““Retirees now frequently base their retirement decisions on the portfolio success rates found in research such as the Trinity study. Studies such as those are fine for what they accomplish: they show how successful different withdrawal rate strategies were in the historical data. But it must be clear that this is not the information that current and prospective retirees need for making their withdrawal rate decisions.” I posted a comment to Wade’ blog expressing the view that: “This is the most important paragraph ever written about retirement planning, Wade.” I sent an e-mail to Wade that day. The text follows.

Wade:

Congratulations and thanks on your amazing SWR post!

I have gone into a bit more detail re my reaction in a comment that I just put to your blog

I would like to write this up at my blog tomorrow. Please let me know if you would prefer that I hold off or if there are any comments from your end (in addition to those that I can pull from your blog entry)
that you would like me to include in the write-up.

What a long, strange trip it’s been!

Rob

Wade responded later the same day. He thanked me but said: ” I don’t think I really said anything particularly new though.  It is the kind of thing you’ve been saying for years.”

Re the issue of whether the time was ripe for me to write about his study, he said: Sure, it is okay to discuss the blog, paper, etc. in your blog now. But, perhaps, you do not need to emphasize my name so much, or even at all.  It is okay to just refer to it as “a new academic study” etc. I do not wish to antagonize the “goons” too much, as I would like to reach a wider audience than them anyway, and I don’t want them working behind the scenes to derail me.”

He added that: “I did warn the editor of the Journal of Financial Planning that they may receive some “hate mail” after I mentioned your name in the safe savings rate paper. Maybe it didn’t happen after all, but it won’t be a big problem even
if it does happen now.”

Finally, he reported that Dan Moisand had just been elected to join the advisory panel of the Journal of Financial Planning. He noted that Dan had expressed an interest in writing a column for his “Financial Advisor” column on safe withdrawal rates and valuations.

Academic Researcher Wade Pfau to Rob Bennett: “You Really Shouldn’t Have Posted My Private E-Mails. This Is So Unethical.”

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I have for several weeks been reporting at my blog on my 16-month e-mail correspondence with Academic Researcher Wade Pau. The most recent blog entry (posted this morning) was titled: Academic Researcher Wade Pfau (In Response to a Threat by the Greaney Goons to Get Him Fired From His Job for Posting Honestly on Safe Withdrawal Rates): “I Think I Should Stay Publicly Quiet for Awhile As I Really Don’t Want Anyone Sending Messages About Any Topics to Officials at My University.” Wade posted his reaction to the blog entry as a comment to it. His words are set forth below:

Rob,

After months of trying to prop yourself up at my expense, and showing such utter lack of personal integrity in posting the contents of my private emails when I explicitly asked you not to, you’ve finally gotten to your big payoff: the “proof that I’ve been threatened into silence.”

Let’s back up:

-As this whole email history reminds, I was always somewhat confused about your position. I now realize you believe that market valuations can be used to better identify a “safe withdrawal rate.” But I don’t think so. The U.S. experience has been rather unique, and the relationship between past market valuations and withdrawal rates in the U.S. is not necessarily indicative about future withdrawal rates. There is even less historical data to link valuations to safe withdrawal rates than there this is to simply look at what withdrawal rates worked in the past.

-The Trinity study came about as an offshoot of research by financial planners. But financial economists had long known there is no such thing as a safe withdrawal rate from a portfolio of volatile assets, well before the Trinity study was ever written. This means that you didn’t discover anything that wasn’t known before. It is dishonest for you to pull out all these 1.5 year old quotes from me and ignore what I’ve learned and said since then.

-Your blog post today refers to a heated exchange that DRiP Guy and I had at Bogleheads in April 2011. And do you recall what the outcome of that exchange was? That is when I realized that he was right about this whole matter. And so I did not write to the Trinity authors to ask for a correction, I wrote to apologize to them for being too publicly critical of their study, but to also point out some reasons why the limited U.S. historical data may not really be sufficient to have a clear idea about the safe withdrawal rate. I told you that before.

-I’ve said the Trinity study is not helpful for new retirees. You’ve said that this doesn’t go far enough because the study needs to be corrected. But what you really mean is: you want to become rich and famous and you think this will happen if there is a formal process to republish old studies acknowledging you for “discovering” an “error” in them and providing your proposed “correction.” Since you are wrong about the “error” and the “discovery” and the “correction,” I’m not sure how successful you are going to be with this plan.

-Now about this job threat business. You’ve accused DRiP Guy of calling my employer and all sorts of other oddities, but why don’t you just provide a link so that people can judge the accusation for themselves:

http://boards.fool.com/hocus-gets-college-prof-to-question-swr-studies-29265775.aspx?sort=whole

This was still a period of uncertainty about what would happen in Japan after the Great Kanto earthquake the month before, and a new president had also just been installed at my university indicating a shift in power away from the group that had hired me. So you have here what looks like your big triumph… proof I’ve been silenced. However, I quickly recovered from my initial concern and realized that the whole thing was ridiculous. Anyway, there is no threat there. intercst knows how to push your buttons. That’s all. I wouldn’t lose my job even if people did complain about me, and as far as I know, no one ever did email or call my employer. My research has not been impacted by any alleged threats, and it is really insulting and disgusting all of the times you’ve suggested otherwise. And I was still peeved that you misrepresented why I emailed the Trinity authors, which is what caused the whole issue in the first place.

-You owe Mr. Bengen an apology, because it does look like the 2000 retirees are going to be okay after all with 4%. We are getting far enough along in their retirements to see this. While that doesn’t mean that 4% was safe ex ante, it does mean that he did not cause millions of failed retirements, as you’ve explicitly suggested before.

-Finally, you shouldn’t have posted my private emails. That is so unethical. And it really doesn’t help to build you up. Posting my outdated private emails will only give second thoughts to anyone in the future who might have been willing to give you the benefit of the doubt.

I’m not going to get into a back and forth with you about this. I already know your response. You will be outraged. You will suggest that I’ve turned my back on average Americans and sold out to Wall Street. You will remind us all that you’ve been a victim of death threats. You will say that we could have discussions about all of these diverse viewpoints if only some internet discussion boards would be opened to honest posting. You will say that you discovered errors in the 4% rule and that those with a vested interest in preserving 4% have terrorized you for trying to get past studies corrected. As such, you will ignore everything I wrote above. You will just spin my comment as proof that I’m really afraid to speak truthfully. You will do this all in a very long series of comments which may approach 10,000 words in total. But it’s all so tiring and implausible. Please don’t spend your day doing this. Go play with your kids. It’s time to move on.

Rob Bennett to Academic Researcher Wade Pfau: “You Have Shown That There Are Circumstances in Which Returns Are Higher in Treasury Bills Than They Are in Stocks. That is INSANE. That Cannot Be. It IS. But It CANNOT Be. Both Things Are So.”

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Yesterday’s blog entry reported on an e-mail sent to me by Academic Researcher Wade Pfau on March 10, 2011. I sent my response later the same day. The text appears below.

Wade:

Thanks for letting me know that you came through the earthquake okay. I of course feel for and will pray for all the people affected.

The question is: WHY isn’t Buy-and-Hold mean-variance efficient?

The logic of Buy-and-Hold is rock-solid. It SHOULD work. Think about what you have shown. You have shown that there are circumstances in which returns are higher in Treasury bills than they are in stocks. That is INSANE. That cannot be. It IS. But it CANNOT be. Both things are so.

Say that your paper were published. And say that all of the web sites and books and magazines reported on this. Would this not change investor behavior? All investors want to achieve good results. No one is going to elect to remain in stocks when Treasury bills are offering a better return once they know that this is so.

That means that there are not going to be any more bull markets after your research (and lots more research like it that will follow in its wake) is published. And no more bull markets means no more bear markets. Volatility is OPTIONAL. If we let people know how stock investing works, stock price volatility comes to an end.

This is of course wonderful news. Our problem is that it is TOO wonderful. Things that are too wonderful upset the applecart in a big way. You are causing trouble for everyone who has ever advocated Buy-and-Hold. And that includes a lot of your peers!

What has happened historically is that in the 1960s for the first time the analysis of how stock investing works became an academic pursuit. This changed things in a fundamental way. Until then it has just been people taking guesses and people trying to sell junk. Starting in the 1960s it became possible to achieve real and lasting advances in our understanding of the realities.

Buy-and-Hold was popularized by the publication of “A Random Walk Down Wall Street” in 1974. From 1974 to 2011 is 37 years. That seems like a lot to us. But in the grand scheme of things that’s the wink of an eye. All that has happened in the grand scheme of things is that some perfectly smart people happened to make a mistake and they have gained so much fame and wealth as a result of that mistake that they have become emotionally reluctant to acknowledge it. The history train is moving in our direction and it cannot be stopped. Buy-and-Hold will die by the same power by which it came to life — analysis of the historical return data.

This is an either-or, Wade. There is no middle ground. You either believe that the market is efficient (that all factors affecting price are considered at all times) or you believe that valuations affect long-term returns. If you believe that valuations affect long-term returns, you believe that there is at least one important factor not being taken into consideration when prices are set — Valuations. If valuations are being considered, both overvaluation and undervaluation are logical impossibilities. The people who buy stocks refuse to pay insanely high prices for anything else they buy. If they begin to refuse to do this when buying stocks, we can never again see another bull market (each price
increase would bring on sales and the sales would lower prices).

It might help to put this in an economic context. What your findings are really challenging is Adam Smith economics (at least as it has been formulated in the past). Adam Smith economics ASSUMES rationality on the part of economic players. Adam Smith economics is Rational Man economics. You are saying that investors are irrational. You are saying that millions of investors elected to buy stocks at a time when the most likely annualized 10-year return was a negative 1 percent real and when an investment class with a government guaranty attached (TIPS) was offering a return of 4 percent real. It is not possible to believe both that investors are capable of doing such a thing and that investors always make rational choices. Humans are capable of huge amounts of irrationality. Adam Smith economics is not a complete explanation of how the world works.

Everyone has known that Adam Smith economics is not a complete explanation for many, many years. But people have accepted the model on the grounds that it is the best we can do and that it is better than nothing. But Fama took a fateful step when he applied Adam Smith economics to the study of stock investing. With stock investing, it is possible to quantify the extent to which the reality deviates from the theory. P/E10 does this. P/E10 tells us the extent to which humans deviate from rationality. It reduces investor emotion TO A NUMBER.

You’ve brought up the question of whether there is anything new here or not. The idea that valuations affect returns is not new. It is the QUANTIFICATION of this that is new. Our practice in the past has been to overlook the problem of investor irrationality because we don’t feel comfortable dealing with it. Once we quantify it and see that investor irrationality has been the primary cause of each of the four economic crises we have seen since 1900, we are not able to rationalize anymore. That nonsense came to an end (intellectually, not practically) when we came up with this idea of subjecting stock investing to formal, scientific analysis. We have put one of out favorite rationalizations to death.

Learning is good. This is all good. There is zero downside to having humankind rise to a new level of understanding of how stock investing works that permits us to put an end to bull markets and bear markets and economic crises. But that
doesn’t mean that everybody is going to greet the change with open arms. People were suspicious about the harnessing of electricity. People were suspicious about the idea of flying in airplanes. People were suspicious about the personal computer. There is a lot of resistance to the idea of reporting the numbers used in stock analysis accurately. But accurate reporting of the numbers will come (unless as a society we give up on science altogether — I view that as an exceedingly far-fetched possibility).

So there are going to be fights. But we know in advance which side is going to win in the end. The battle is not primarily an intellectual battle. All of the evidence is on one side, so there is nothing intellectually to fight about. The battle is a POLITICAL battle. I can tell you as someone who has been doing this for nine years that the only thing that has ever helped was the stock crash and the economic crisis. There has been a HUGE softening of resistance over the past two years. The next crash is going to bring ANOTHER huge softening. And then we are off to the races.

The risk here is that the next crash may also put is into the Second Great Depression. All predictions about the future are out at that point.

But if we are heading into a Game Over situation, nothing much matters anyway. So I don’t view that as a real downside in a practical sense. If we are able to avoid the Second Great Depression, we are headed to the biggest advance in our understanding of how stock investing works ever experienced and I believe that that advance will translate into an era of huge economic growth.

I apologize for putting forward so many words. But I want to offer you an explanation of this rejection and this is the only sane explanation that I am able to offer. People don’t want to accept that this is an either-or. People want to be able to say that both Fama and Shiller are right. It’s okay to say that they are both smart and good people and that they are both pioneers and all that sort of thing. It is not okay to say that they are both right. If Fama is right, Shiller is wrong. If Shiller is right, Fama is wrong.

If Shiller is right, Buy-and-Hold is not a generally good but slightly flawed strategy. If Shiller is right, Buy-and-Hold is the purest and most dangerous Get Rich Quick strategy ever concocted by the human mind (not by intent — but still).

I really think that the logic chain that I am putting forward here holds, Wade. You are going to be rejected lots of times because of the exceedingly strange nature of the controversy you are addressing. But your work will ultimately be accepted. And when it is accepted, it will not be accepted as a nice step forward. It will be accepted as the most important piece of investment research yet published or it will not be accepted at all (there are many who do not permit themselves to acknowledge even to themselves the reasons for their rejection of the research but on some level of consciousness they appreciate the implications of your findings and cannot permit them to be publicized until they have come emotionally to terms with them).

The good news is that we are one stock crash away from Buy-and-Hold tumbling to the ground. Everyone alive wants to know how to invest effectively, Once Buy-and-Hold tumbles to the ground, there is nothing anymore to stop us all from mining hundreds and hundreds of very powerful and enriching insights into how stock investing really works.

It is not written in stone that economics must always be known as the Dismal Science. It’s been the Dismal Science for many years because for many years we have not known many important things about how economics works. As we move from ignorance to knowledge, economics becomes less and less dismal. It’s all up to us — the humans!

Rob

Rob Bennett to Academic Researcher Wade Pfau: “Is It Not So That Your Results Challenge Fundamental Principles of Modern Portfolio Theory? You Show That an Investor Does Not Need to Take on Added Risk to Justify a Realistic Expectation of Added Return.”

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Yesterday’s blog entry reported on an e-mail sent to me by Academic Researcher Wade Pfau on March 10, 2011. My response, sent later the same day, is set forth below.

Wade:

The Fisher/Statman paper is stunning.

My personal view is that this may be the most important piece of investment research ever published. I don’t care that that sounds wildly overstated. My experience with these matters tells me this is so.

Is it not so that your results challenge fundamental principles of Modern Portfolio Theory? You show that an investor does not need to take on added risk to justify a realistic expectation of added return. It is possible to both increase return AND lower risk with the same act — moving to a valuation-informed strategy for setting one’s stock allocation. An entire book could be written exploring the many far-reaching theoretical and practical  implications of this finding. Even Shiller has not yet stated things in quite as compelling a manner as you state them in this paper, in my assessment.

You have an amazing work ethic. If I had produced one paper with the significance of the several you have churned out in recent days, I would need to take six months to come to terms with what I had done before feeling grounded enough to move forward again. You have been generating breakthrough research at a breakneck pace. I salute you!

The single thing that most excites me about the paper is the comparison of greatest portfolio value drops. In my eyes this is the best measure of risk. Small amounts of volatility can be endured. And volatility that is endured doesn’t matter in the long run. But crushing price drops cause investor bailouts. And none of the long-term returns that apply theoretically apply in the real world for investors who bail out. A price drop of over 60 percent is certainly going to cause a bailout in most cases. A price drop of 20 percent or so is a significant hit but in most cases would not cause a bailout. So I see this difference between the two approaches as being huge.

That’s very interesting about Japan. I have gotten a good number of questions about foreign markets myself over the years. I have zero knowledge about foreign markets. So I just say that I don’t know. It will be good to see some research on the question (although I will need to be much more cautious in my assessments of this kind of research because my knowledge base is so limited).

The Retirement Risk Evaluator was posted to my site in April 2007. John Walter Russell and I were co-developers (or co-authors if you prefer). John was a retired government systems engineer. He did all the research that appears today at the www.Early-Retirement-Planning-Insights.com site. He owned the site until his death in October 2009, at which point it passed to me. I have not added or deleted any material. I keep the site up so that people can see the research.

I am grateful for your acknowledgment in your paper of whatever help I have been able to offer you. I am pleased that you also acknowledged a good number of community members who participate at the Bogleheads board. That is appropriate and kind and helpful. There have been a few statements you have made there regarding me that I did not think were proper. But I of course understand that the “controversy” aspect of all this is an exceedingly delicate matter. You have done as good a job of walking the difficult line as anyone else and in some cases (as in your citing of both me and several Bogleheads Forum participants) I think you have pushed things a bit in the direction in which they need to go for a healing process to begin. That will end up being very important work if it ends up bearing good fruit. So your efforts in that direction are much appreciated.

I’m sorry to hear about the rejection and glad to hear about the acceptance at the Journal of Financial Planning. I’m always wondering what is going on in people’s heads when they make these decisions.  I puzzle over that one EVERY DAY.

I have three new things going on.

One is that I have just begun posting at www.Quora.com. It’s a question- and-answer site of considerable potential. It has attracted a more intelligent group of participants than earlier Q&A sites. I had big hopes for the Google Knol site a year ago because that site took a more intelligent approach to things and I hoped to be able to avoid the harassment and abusiveness that has held us back at so many lowest-common-denominator sites. Google has abandoned Knol (without shutting it down). So I have given up on that. But I am hopeful that Quora may over time come to permit these ideas to get a wider hearing. I’ll have to see what the reaction is when I post more.

Two, I am working with two marketing people to develop some products (CD sets and this sort of thing) getting these ideas out to people. The thought there is that I might be able to offer personal finance bloggers a cut of the profits for helping to sell the products to their readers. One big edge that Buy-and-Hold has going for it is that people make money from it. If I can find a way to make VII a money maker, I think I may be able to open some minds (I don’t mean that cynically, I am making a serious point here — people will listen more carefully to a new idea if they see profit potential in it).

Three, I have made a request to speak at a personal finance bloggers convention that has been scheduled for the weekend of October 1 in Chicago. Some of the big players will be there. Getting just one or two of the big players on my side would help deal with the blacklisting and bans that apply at many blogs today. I have seen a far more positive reaction among bloggers in the past six months than I had ever seen at earlier times. There are today several places where I can put up honest and uncompromised Guest Blog Entries. The next step is to get one of the heavy hitters to himself either endorse the ideas or say that there is enough merit in them that people should be talking about them.

Rob

“I Definitely Need to Cite [You] as the Founder of Valuation-Informed Indexing…. Shiller Pointed Out the Predictive Power of P/E10 But Never Discussed How to Incorporate It Into Asset Allocation.”

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Yesterday’s blog reported on an e-mail that I sent to academic research Wade Pfau on January 16, 2011. Wade responded later the same day. He endorsed John Walter Russell’s characterization of a paper purporting to show that long-term timing does not work as testing “idiot switching.” He said: ” ‘Idiot switching.’  That is great, and describes exactly what the Fisher and Statman paper does.  You and John have a great knack for coining new terms.  I think VII is a much better term than any alternatives I’ve come across.” He added that he did not think it would be appropriate to use the term “idiot switching” in an academic paper.

Wade also reported that “as always, I will be reading all your links.” He said: “I definitely need to cite some of your work as the founder of VII, as I have not found anyone else who can lay claim to that.  Shiller pointed out the predictive power of PE10 but never discussed how to incorporate it into asset allocation, as far as I know.”

 

Wade Pfau: “I Hope We Can Stay in Touch. I Would Like to Do a Valuation-Informed Indexing Study, But It Will Probably Take a Few Months Before It Gets Finished.”

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Yesterday’s blog entry reported on an e-mail that academic research Wade Pfau sent me on December 16, 2010. I sent my response on December 24, 2010. The text is set forth below.

Wade:

I have a few minutes today to write up some responses to this e-mail, which I didn’t get to write up when I first received it. I hope you are enjoying your holiday and I of course understand that you may not be able to look at this for some time.

You asked about citations. I thought your linking to the Google Knol was a good choice. That provides an overview of the New School SWR approach with links to additional materials for those who want to explore deeper. There’s one big problem with linking to the Knol, however. My sense is that Google may pull the plug on the Knol site at just about any time. So it may be that the link will not work for long. My second choice would be to link to the calculator page as
that contains both the essential tool and links (when you scroll down the page) to more materials.

http://www.passionsaving.com/retirement-calculator.html

You asked about the timing of John’s essential findings. I’ll provide some links to the SWR Research Group, a forum that I founded in July 2003. John did much of his research there and others commented on it in real time (the comments often led to further research). Unfortunately, abusive posters insisted that the board (and the entire site at which it was housed) be shut down. After it was shut down, one of the abusive posters  put the board back up (without acquiring rights to the material) and added some abusive introductory material. It does not appear to me that the posts themselves were doctored. I understand that you may not want to cite to a source with abusive material in it.
But these links will at least address the timing question you had. And there is a lot of material at this board that you may want to at least know about. When it comes to providing a link, you might link instead to the www.Early-Retirement-Planning-Insights.com site. John reposted much of the material first produced for the SWR Research Group board at his own site (which passed to me on his death).

Here’s a thread that John posted on July 24, 2003 called “Safe Withdrawal Rate vs. P/E10 Data.” He would have described this as the date at which he felt confident enough that a valuation adjustment is needed in SWR research to have characterized research not containing a valuation adjustment as “analytically invalid.” I had been using that term for some time at this point.

http://s162532268.onlinehome.us/Sewer/viewtopic.php?t=1169

Here’s a thread that John posted in March 2005 called “Our Standard Analysis Procedures.” This describes his methodology.

http://s162532268.onlinehome.us/Sewer/viewtopic.php?t=1042

You asked for recommendations re what to read re the work that John and I did together. I would suggest starting with the material at the Foundations section of his web site:

http://www.early-retirement-planning-insights.com/foundations.html

I hope this material helps a bit. Please let me know if you have questions about any of it.

Rob

Wade responded later the same day. He said: “I hope we can stay in touch.  I would like to do a VII study, but it will probably take a few months before it gets finished.”

Wade Pfau: “I Was a Little Nervous About Contacting You, In Case You Thought I Was Trying to Steal Your Thunder”

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Yesterday’s blog entry reported on an e-mail that I sent to academic researcher Wade Pfau on December 21, 2010. Wade was visiting family for the holidays at that time. So that series of e-mails came to an end. The topics discussed in it were picked up in subsequent e-mail discussions.

One separate discussion grew out of some matters brought up in the discussion thread referred to above. The focus of this discussion was a research paper that Wade prepared on safe withdrawal rates. Set forth below is the text of an e-mail that I sent to Wade on December 16, 2010, relating to his safe withdrawal rate research.

Wade:

That’s super! Thanks so much for letting me know.
I skimmed the paper before writing to you. I will read it more carefully perhaps tomorrow (I have a few deadlines facing me today). I’m excited to see this. I am so glad that you let me know about it.
I am going to post your comment as today’s post to my “A Rich Life” blog. I’d love to see more people doing this sort of thing.
I’d be grateful if you would let me know when the article is published. It’s of course my belief that this is important stuff and we need to see lots more good and smart people advancing the ball in the way in which you have with this work.
Rob
Wade responded the same day. He said: “I was a little nervous about contacting you, in case you thought I was trying to steal your thunder.  I did try to properly cite your contributions.  I’m glad to see your positive response.”
Wade asked how he should cite the work John and I did together during the time we were developing The Retirement Risk Evaluator, in particular a post by John in which he described his approach on confidence limits. He observed that: “You’ve written so much that I’m afraid I’ve only read a small sample of it all” and urged me to identify some of my writings that would be of particular benefit to him.
He provided me links to two research articles he had written on safe withdrawal rates.