A Rich Life

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

Valuation-Informed Indexing #148: Why It’s a (Not Entirely) Good Thing That Robert Shiller and Jeremy Siegel Are Personal Friends

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I’ve posted Entry #148 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Why It’s a (Not Entirely) Good Thing That Robert Shiller and Jeremy Siegel Are Personal Friends.

Juicy Excerpt: It’s wonderful that he is warm with Siegel and with lots of others in the field who hold very different viewpoints. But we need Shiller making the case for a new approach to stock investing as strongly as he can possibly make it. I have seem him on numerous occasions fail to do that. One doesn’t gain the sense listening to Shiller that Siegel’s investing advice is nearly as dangerous as one concludes it to be when one follows the logic chain set forth in Shiller’s book where it leads one.

Valuation-Informed Indexing #123 — Shiller’s Chilling Words About the Limits to Tolerated Discussion of the Investing Realities

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I’ve posted Entry #123 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Shiller’s Chilling Words About the Limits to Tolerated Discussion of the Investing Realities.

Juicy Excerpt: Shiller says early in his lecture that he was a “total outcast” when he first began exploring his new investing model. He notes that: “I had tenure, so I could do it.” But, still, “you don’t want to do anything that is too out of fashion.” Fortunately, “we have a system that allows it to happen and I’s very glad to have that.”

The statement is chilling when you consider the impulse behind it.

Valuation-Informed Indexing #116 — Shiller Does Not Fully Appreciate the Most Far-Reaching Implications of His Own Investing Theory

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I’ve posted Entry #116 to my weekly Valuation-Informed Indexing column at the Value Walk site. it’s called Shiller Does No Fully Appreciate the Most Far-Reaching Implications of His Own Investing Theory.

Juicy Excerpt: I approach this question from a very different starting point. I think it would be fair to say that Shiller is looking at the various economic indicators and making an effort to sort through them and come to some reasonable conclusions. All of his comments sound perfectly reasonable and perfectly conventional. This is what alarms me.

Shiller’s views on how stock investing works are NOT conventional; they are “revolutionary,” according to the subtitle of his book. And, full truth be told, Shiller’s views on how stock investing works are not entirely reasonable either. They are counter-intuitive. They are in many respects UNreasonable. This is why they are so exciting and potentially powerful, in my assessment.

Financial Highway #13 — How Our Ideas on Investing Got on the Wrong Track

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I’ve posted my 13th entry in my series of articles on Valuation-Informed Indexing for the Financial Highway site. It’s called How Our Ideas on Investing Got on the Wrong Track.

Juicy Excerpt: The full reality is that our understanding of all areas of life endeavor is achieved in building-block style. We learned a great deal when the Buy-and-Holders showed us that short-term timing doesn’t work. Shiller would probably never have achieved his advances had the Buy-and-Holders not laid the foundation for them with their own breakthroughs.

The Buy-and-Holders think that acknowledging their mistake will cause them to lose “credit” for explaining how stock investing works. I don’t think that’s right. I think that that acknowledgement of the mistake will permit us to take the genuine insights of the Buy-and-Holders to places we have never been able to take them before. I believe that we will someday look back at the day when the Buy-and-Holders acknowledge their error as one of the most important and exciting days in the history of the core Buy-and-Hold project — to learn the truth about how stock investing works.

VII #108 — Robert Shiller Does Not Always Give the Best Investing Advice

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I’ve posted Entry #108 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Robert Shiller Does Not Always Give the Best Investing Advice.

Juicy Excerpt: Shiller’s advice on the practicalities of stock investing often leaves something to be desired. He offers better advice than most Buy-and-Holders. Unfortunately, that’s not saying much. I have been following Shiller’s comments on the how-to questions of stock investing for several years now and, while there are almost always valuable insights contained in them, I cannot recommend that investors follow his advice without exercising a good deal of caution in doing so.

VII #107 — Shiller Shows Too Much Respect for the Efficient Market Hypothesis

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I’ve posted Entry #107 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Shiller Shows Too Much Respect for the Efficient Market Hypothesis.

Juicy Excerpt: The Efficient Market Hypothesis is a silly idea. The idea that the market sets prices properly has caused more human misery than any other idea ever advanced in the history of personal finance. As Shiller’s words above note, the theory has been statistically rejected many times. A theory that has been statistically rejected many times is NOT a serious theory. It is a foolish, dangerous, wrong-headed theory. Why does Shiller conclude otherwise? He says that the word done in support of the Efficient Market Hypothesis is “of the highest quality.” What does that mean? My sense is that Shiller and I have very different ideas of what the phrase “of the highest quality” signifies.

VII #104 — How Shiller’s Ideas Will Reach the Tipping Point

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I’ve posted Entry #104 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called How Shiller’s Ideas Will Reach the Tipping Point.

Juicy Excerpt: I’ve been saying for several years that the big day is going to be when John Bogle walks to the front of an auditorium and gives a speech containing the words “I” and “Was” and “Wrong.” That would be written up on the front page of the New York Times. Once it is written up on the front page of the New York Times, lots of people who are today afraid to speak up will find enough courage to do so. Momentum will accumulate quickly.

I had hopes when Brett Arends wrote in the Wall Street Journal about The Market Timing Myth, saying “it’s hooey” and “they’re leaving out more than half the story.” That one should have gone viral. But humans are social animals. Everyone would have written about it if they were sure that everyone else would be writing about it. Since they weren’t sure, it didn’t happen. When Bogle gives his “I Was Wrong” speech, everyone will be sure and there will be no holding back the wave.

VII #100 — Shiller Has Not Yet Given Clear Advice on How to Implement His Investing Insights

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I’ve posted Entry #100 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Shiller Has Not Get Given Clear Advice on How to Implement His Investing Insights.

Juicy Excerpt:  I have devoted 10 years of my life to the project of writing articles and developing calculators and recording podcasts and producing column entries that explore Shiller’s model. That shouldn’t be possible. In a sensible world, there would have been hundreds of Shiller-centric sites in place when I came on the scene in 2002. There weren’t any then and there aren’t any now. If anyone reading these words knows of a good site devoted solely to exploring the implications of the Shiller model (other than my own, of course), I would be grateful if you would let me know about it.

Academic Researcher Wade Pfau, On Learning That His Breakthrough Research Showing That Long-Term Timing Always Works Would Be Published in Only a ‘Decent’ Journal: “There Is a Saying That Any Article Worth Reading Has To Be Rejected By a Journal At Least Once. And Quite a Few Articles That Led to Nobel Prizes in Economics Were First Rejected By a Journal.”

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Yesterday’s blog entry reported on an e-mail that I sent to Academic Researcher Wade Blog on December 2, 2011. Wade responded the same day,

He said: “I agree with you that Bengen’s message was rather muddled.Though he usually expressed confidence in 4.5%, in one answer he seemed really unsure.  Also, he is out of stocks now, which violates the whole point of his research that 4% or whatever is supposed to be safe with a fixed asset allocation. It’s interesting.”

Regarding his breakthrough research showing that long-term timing always works, he said: ” I was discouraged when I first received the “desk reject” by the editors of the same journal that published the Fisher and Statman paper. I realized that I didn’t have a chance with one of the top journals. Applied Financial Economics is fine.  While it doesn’t have the same reputation as a top journal, it is a respected and credible peer-reviewed international journal in finance.  Maybe it is in the top 20-30 of finance journals.  So it’s not too low. ”

As a joke, Wade noted that: “If you are right about my paper, then maybe I could propel the journal upward :)”

He followed up with a tantalizing observation: “Well, there is a saying that any article worth reading has to be rejected by a journal at least once. And quite a few articles that led to Nobel Prizes in economics were first rejected by a journal.  Not that this is Nobel Prize stuff.  Probably, at least, Shiller is going to win a Nobel Prize in one of these upcoming years.”

The e-mail ended with some reflective comments: “As I was finishing up revising my article, I looked again at 2 pages of handwritten notes I made last December in the middle of the night when I was wide awake with jetlag after flying to Iowa for Christmas. I hadn’t looked at those since maybe February, and its a nice memory about how the whole research plan came out all at once.  But then there were twists, such as safe savings rates, which came out of this rather serendipitiously.  The last year has been a wild ride with this stuff. Hopefully 2012 will provide more positive developments.”

“Shiller Discovered That the Earth Is Round Instead of Flat and All the Old Maps Need To Be Redone. There Is an Intense Reluctance Among Many to Discuss These Matters Openly and Plainly and Clearly. It Is Widely Viewed As “Rude” to Do So.”

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Yesterday’s blog entry reported on an e-mail sent to me by academic researcher Wade Pfau on February 24, 2011. My response is set forth below:

Wade:

I’m responding before seeing the Bogleheads thread and the Drip Guyexchange. I want first to respond to the question “Why haven’t academics already published research about this?”

I have identified two reasons:

1) The Social Taboo against pointing out flaws in Buy-and-Hold.

We all live in communities. There are thousands of books and studies and calculators that were developed pursuant to the Buy-and-Hold Model, which is rooted in the Efficient Market Theory. Shiller’s research (showing that valuations affect long-term returns) discredits all that. The point is fundamental. If the market is really not efficient (if valuations really affect long-term returns), everything developed in the Buy-and-Hold Era is wrong in very significant ways. Shiller discovered that the earth is round instead of flat and all the old maps need to be redone. There is an intense reluctance among many to discuss these matters openly and plainly and clearly. It is widely viewed as “rude” to do so because so many will need to acknowledge having made mistakes when word gets out. We all are aware of these social pressures and make an effort to be responsive to them (even me! — the reason I am less responsive than most today is that I have seen through personal experience that tolerance for a  lack of clarity can keep things going around in circles endlessly).

2) Cognitive Dissonance

It should not be concluded that because there are many who have a vested interest in blocking knowledge of how stock investing works that these many people are corrupt. Humans have an immense ability to rationalize — “a man hears what he wants to hear and disregards the rest,” according to famed asset allocation strategist Paul Simon. People don’t think about things they don’t want to know. Until the crash, most wanted to believe that Buy-and-Hold worked. So they avoided thinking about all the reasons why it cannot work. People can only come to learn about this stuff gradually over a long period of time by asking lots of questions and slowly taking in new ways of thinking about stock investing. Unfortunately, the Social Taboo has made this impossible for many years. The level of hostility that has been generated by challenges to Buy-and-Hold has made it difficult for those trying to understand both sides to make sense of things.

There are lots of signs that things are starting to change. Let’s hope that they change fast enough for us to be able to get the word out before a failure to address these matters puts us all in the Second Great Depression. I’m optimistic (perhaps willfully so).

Rob