A Rich Life

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

“The Valuation-Informed Indexer Is Indifferent to Whether Prices Go Up or Down. Investors Who Are Indifferent to the Direction of Short-Term Price Changes Are Investors Who Truly Are Able to Focus on the Long Term.”

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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 are the texts of two e-mails that I sent to Robert as follow-ups to the one described in the earlier blog entry:

Robert:

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A question I am often asked is: “How does a Valuation-Informed Indexer decide on
an asset allocation. I tried to answer that in RobCast #137, “Nine VII Portfolio Allocation Strategies”:
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Rob
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Robert:

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I agree entirely that the short-term direction of the economy is unknown. My thought is that this does not matter for investors who are investing for the long term. People need to adopt the goal of maximizing the size of their portfolios over the course of a lifetime. VII does that. VII DOES cause poor results in the short term (Buy-and-Hold beat BII handily from 1996 through 2000). This is the price you have to pay to get higher long-term returns. The short-term really is not predictable but the long-term always is. Fortunately, it is the long term that matters.

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Re when to make changes. The VII principle is that the P/E10 level tell us the amount of riskiness inherent in stocks at any given time. Prices reached insanely dangerous levels in 1996. The investor would have done well to lower his stock allocation at any time from 1996 through today (with the exception of a few months in early 2009) because doing so would have lowered his risk. We don’t try to guess when turnarounds will come. We make the changes when the P/E10 level tells us they are needed to get our risk profiles right and then we wait patiently for the market to once again perform in the long term as it always has in the past.

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The Investor’s Scenario Surfer is a calculator that lets the investor work through as many 30-year returns sequences as he likes and to test how the strategy performs:

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http://www.passionsaving.com/portfolio-allocation.html 

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I’ve run the calculator hundreds of times. I beat Buy-and-Hold in 90 percent of the cases. There have been cases where I have ended up with a portfolio of twice the size of the Buy-and-Hold portfolio. If you have trouble figuring out how the calculator works (it is not terribly intuitive, I am afraid), please just let me know and I will go through the steps with you.

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Re the point that paying attention to valuations makes sense. It does. But the Efficient Market Theory has been the dominant intellectual framework for a long time. If the market were efficient, it really would not make sense ever to change your allocation. Buy-and-Hold really does follow from from a belief in the EMT. The mistake was the EMT and the reasons why that mistake was made have never been explored in depth.

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I believe that the market WILL become efficient in days to come. The reason why the market is not efficient today is that our understanding of how stock investing works is so limited. For the market to be efficient, investors need to make choices that serve their self-interest. We today CANNOT make choices that serve our self interest because we just don’t yet know enough to do so. As more knowledge floods in, we will all make better choice and the market really will become efficient.

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When that happens, there will no longer be bull markets or bear markets, both of which are emotional phenomena. It is the Get Rich Quick impulse within all of us that causes bull markets and it is bull markets that cause bear markets. The key is getting the “experts” to acknowledge that valuations/emotions are proper subjects of study in this field. Once we study this stuff, we will learn how to avoid the obvious pitfalls. Right now, we are afraid to study the realities because we sense that discussion of the realities will bring on another crash.

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Re uncertainty/risk. The Valuation-Informed Indexer just doesn’t worry about the explanations of higher P/E10 values that are put forward during bull markets. The core idea is that it is unlikely that the long-term rate of return in an advanced economy wil change all that much. For 140 years, our economy has been sufficiently productive to support a long-term return of 6.5 percent real. We of course accept that this number might change to 6 percent or 7 percent in coming days. But it would take extraordinary developments for it to change too much more than that.

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The key to not getting caught up in the justifications for higher P/E10 levels is to do the math. Stocks were priced at three times fair value in 2000. How could U.S. productivity change that much? People just were not doing the math. I think it was a huge advance when the Buy-and-Holders rooted their strategy in DATA. That’s how we protect ourselves from the emotional subjectivism that makes stock investing risky. Unfortunately, the Buy-and-Holders failed to include the most important number of all (the P/E10 level) in their calculations and thus got all the numbers wrong. A numbers-based system that gets all the numbers wrong is the worst system of all!

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When you incorporate P/E10 into the calculations, you get an emotionally balanced approach. The Valuation-Informed Indexer is indifferent to whether prices go up or down. Each upward movement causes his portfolio value to rise but causes his expectation of long-term returns to fall. And each downward movement causes his portfolio value to fall but his expectation of long-term returns to rise. Investors who are indifferent to the direction of short-term price changes are investors who truly are able to focus on the long term.

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Or at least so says I!

“Lots of People WANT to Tell the Truth About Stock Investing. Wade Does. Bogle Does. Bernstein Does. Lots of My Blogger Friends Do. But Everyone Is Afraid to Be the One to Pin the Bell to the Cat. Whoever Speaks Up Is Destroyed. They Have All Seen What Has Been Done to Me for 10 Years Running Now.”

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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 response I sent to the e-mail by Robert described in the earlier blog entry:

Robert:

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I know that you took back some of the words below after you took a look at the “People Are Talking” section of the site. That was kind. But I want to respond to the point you made in the e-mail below because it is an important one and one that is directed to me by lots of good people who are sincerely trying to help me out,
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Yes, it is 100 percent true that in ordinary circumstances it works better to use a moderate tone. The types of people who I am trying to reach are indeed turned off by the sensationalist/scandalist tone. I hear this a lot. I believe that there are particular circumstances that apply in this case that require me to report things as they have happened, even when those realities cannot be expressed through a tone that is not sensationalist/scandalist.
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Buy-and-Hold is a research-based strategy. Millions of people believe in it. There is now 30 years of research showing that Buy-and-Hold can never work for a single long-term investor.
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That’s the reality. Shiller showed that valuations affect long-term returns. So the risk/reward profile for stocks CHANGES with changes in valuation levels. Even the Buy-and-Holders acknowledge that the investor’s choice of a stock allocation is the most important choice he makes. Yet they urge investors to follow practices that insure that they will rarely be going with the stock allocation that is right for them. How could this be?
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How does an alcoholic react when a friend tells him that he has a problem?
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He reacts with defensiveness, right? He says that he has no problem, that he can quit any day.
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Does that means that he really has no problem, that he really can quit any day?
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It does not. The alcoholic knows on one level of consciousness that he has a problem. He knows this better than anyone else knows it. But he is desperate to suppress this knowledge. He cannot cope with it emotionally. So he lives in denial of it. Those who remind him of the important truth he is trying desperately to suppress incur his wrath. He is not angry at them because he suspects they are wrong. He is angry with them because he knows with certainty that they are right and he cannot bear to have this truth spoken out loud.
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So it is with the Buy-and-Holders. They know on one level of consciousness that it is foolish to stick with a single stock allocation at all times. They know that they have set their retirements back many years by following foolish investing strategies. They know they have hurt their friends by recommending that they follow the same strategies. They know that collectively the Buy-and-Holders caused the economic crisis by failing to sell stocks when prices began rising to insanely dangerous levels. They know all these things and they are desperate not to have to cope with all these realities. So they respond with hate and anger and contempt when they hear someone mention the realities. The anger becomes even greater when the person mentioning the hated realities explains that there is 30 years of peer-reviewed academic research showing that Buy-and-Hold can never work for a single long-term investor.
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It’s not just the ordinary investors who are suffering emotional pain. The “experts” are too. The experts possess great knowledge of all the things about stock investing that can be understood intellectually. But they possess very limited knowledge of the emotional side of stock investing because this side of the story is ignored under the Buy-and-Hold Model. So the experts too become defensive when the realities of stock investing are mentioned. In many cases they become MORE defensive. They have more to lose if the realities become widely known. They have built their reputations during the Buy-and-Hold Era. If Buy-and-Hiold is dangerous, their investing advice was dangerous for all those years. If word gets out about what the research really shows, they will lose status and perhaps even be subject to lawsuits (Shiller’s research is public knowledge).
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The is the source of our economic troubles today. We are in a transition period from Buy-and-Hold to Valuation-Informed Indexing. I want to spread the word about what works. But the Buy-and-Hold Mafia very, very much does not want me to succeed.
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They cannot stop me by pointing to research. There is no research that supports Buy-and-Hold. Wade checked this. He searched the literature trying to find a single study suggesting that long-term timing (the exercise of price discipline) might not be required for long-term investing success. He was not able to find a single study. He went to the Bogleheads Forum and asked if anyone there had ever heard of a study. Bogle and Bernstein and Swedroe all post there. No one at the board knew of a single study. The core claim of Buy-and-Hold (that market timing is not required) is supported by exactly nothing. There is indeed research showing that short-term timing does not work. But there is none showing that long-term timing (the exercise of price discipline) is not required. If short-term timing does not work and long-term timing is required, it is a false claim to say that timing is not required. One form of timing always works and is always required.
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We were intellectually ready to move on to Valuation-Informed Indexing in 1981. People didn’t immediately comprehend the implications of Shiller’s revolutionary findings. So the transition got held up. We had a huge bull market and there was little interest in learning about a new model for understanding how stock investing works until the crash in 2008. Now there is interest. But the Buy-and-Holders have been engaging in highly abusive tactics to cover up the errors in the Old School safe withdrawal rate studies for 10 years now. I put a post to a Motley Fool board pointing out the errors in these studies on the morning of May 13, 2002. The Buy-and-Holders at the time denied that there were errors and demanded that I be banned from every significant discussion board and blog at which I tried to tell the story. There is now a universal recognition in the field that the Old School studies get the numbers wildly wrong. This has been reported in every leading periodical in the field.
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But the studies still have not been corrected! If the studies were corrected, there would be a discussion of WHY the errors were made and that would be the end of the Buy-and-Hold Model. So for now we are in this strange twilight zone. It was when Wade sent an e-mail to the authors of the Trinity study (one of the Old School SWR studies) suggesting a correction of the errors in it that the Buy-and-Hold Goons threatened to get him fired from his job. Bogle did not speak up. Bernstein did not speak up. Swedroe did not speak up. Wade has seen the Goons destroy people’s careers. He has financial responsibility for two small children. So he buckled. He wasn’t happy about it. He felt that he had no practical choice.
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That’s where things stand today. Lots of people WANT to tell the truth about stock investing. Wade does. Bogle does. Bernstein does. Lots of my blogger friends do. But everyone is afraid to be the one to pin the bell to the cat. Whoever speaks up is destroyed. They have all seen what has been done to me for 10 years running now.
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Or problem is not an intellectual one. it is a POLITICAL one.
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I have tried to interest political bloggers in the story. But political bloggers defer to the “experts” in the field. They of course do not appreciate the level of corruption that applies today in this field. They have no way of knowing. And they do not have confidence in their own knowledge of how investing works. So the political bloggers too keep their mouths shut.
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I have great respect and affection for the Buy-and-Holders. I view them as pioneers and heroes. I want to work with them constructively. I appreciate that they are suffering from cognitive dissonance, which is a very real phenomenon written up extensively in the psychological literature. But the Buy-and-Holders feel so threatened by reports of what the last 30 years of research really says that they cannot bear to hear me make those reports. And the new internet communications medium has made it easy for someone like me to file such reports and to have them heard by the people who need to hear them. So the Buy-and-Hold Mafia has felt it necessary to engage in insanely abusive and even criminal behavior. THIS IS THE STORY. If I don’t tell this aspect of the story, I am not doing my job as a journalist. I try as hard as I can to place the Buy-and-Holders in the best possible light. But there are things that I need to say to tell the story in a way that makes sense. It just wouldn’t make sense to say that there are all these amazing things that we now know about stocks but that I am the only one that knows them.
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I am not the only one that knows them. Shiller knows. Shiller has said that he has never dared to tell us all he knows because he knows that he would be branded “unprofessional” if he were to do so. Lots of others SUSPECT that there are flaws in the Buy-and-Hold Model. But they have never explored these doubts with any great care because the subject rarely comes up. The subject rarely comes up because the Buy-and-Hold Mafia has made the price that is paid by those who bring it up so high. We all learn from talking things through. So long as the discussions are not held, we all remain in ignorance of all sorts of important investing truths.
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We live in the best time to be a stock investor in the history of Planet Earth. But we cannot benefit from what we “know” because we cannot discuss what we know and thus we cannot share what we know. And the economic crisis caused by the promotion of Buy-and-Hold strategies threatens to put us in the Second Great Depression (stock prices will fall another 65 percent in the not-too-distant future if Shiller is right).
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It’s a mess!
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I always try to speak as charitably as I possibly can about the Buy-and-Hiolders without engaging in outright dishonesty or failing to tell the story that very much needs to be told. My motto is: Be as charitable as possible without crossing the line and becoming dishonest while also being as charitable as possible without crossing the line and becoming dishonest.
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Anyway, that’s where I am coming from. I wish that the story I tell were not so “out there.” But the good in it is 10 times more good than the bad in it is bad. It is the advance in our understanding of how stock investing works that people will be talking about 100 years from now. I hope that all these words make at least a tiny bit of sense to you.
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Rob

“Where I Do Not Agree With You Is Re Your Suggestion That, Because I Cannot Prevail Alone and Because I Cannot Prevail Today, I Should Give Up. Somebody Has to Do This. If No One Does This Job, We All Go Down Together. There Is Going to Come a Day When “Your Side” Is Going to Want to Take This to a Good Place.

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

You are not the center of the universe.

Yes and no, Dab.

I cannot pull this off on my own. In that sense it is true that I am not the center of the universe. I could send e-mails to 10 million people and I could write 10 million articles and I could record 10 million podcasts and it won’t matter if I do not persuade at least a small number of my fellow humans to join hands with me and work together on this important project. You got that one right.

The other side of the story is that nothing great was ever accomplished without a single human mind dedicating itself to achievement of that goal. That’s how it happens. That’s the only way it ever can happen. If I am going to prevail, it is going to be because LOTS of people support my efforts. The way Yip likes to put it is that I am going to need to see comments appearing at my blog. He’s right about that in one sense. When I prevail, those comments will be there. If we never see the comments, I never will prevail. So he is making reference to something of great import.

Where I do not agree with you is re your suggestion that, because I cannot prevail alone and because I do not have comments at my blog today, I should give up. Somebody has to do this, Dab. If no one does this job, we all go down together. That is a terrible outcome for every single one of us. So that possibility must be rejected as the first order of business. It may well be that it will be hard for me to pull this off given the lack of comments and the intensity of the people standing in my way and all that sort of thing. It HAS been hard. It has been very, very, very hard. I give you all that. What I say is that I must continue pressing on no matter how hard it has been or how hard it is today or how hard it will become tomorrow.

There is no option here other than success, Dab. There is no Plan B because there can be no Plan B. Letting our society fall into the Second Great Depression is not an acceptable outcome. That’s out. So I soldier on NO MATTER HOW DISCOURAGING THINGS APPEAR AT TIMES. I don’t like it. I am trying the best I can to cope with the realities of a world that I did not create. It crushed my heart when I was banned from Motley Fool. That was May 2003. I allowed myself a little cry into my pillow. Then I pulled myself away from the pillow, brushed myself off, put bandages on my wounds and went out looking for the site of the next battle. Giving up is not an option. The stakes are too high.

We both know that there are not lots of people willing to say publicly “Rob Bennett is 100 percent right in everything he says about stock investing.” Depending on how you use the words, you wouldn’t be entirely off base to say that there is NO ONE willing to say those precise words. My brother Steven, whom I love and who loves me, said in response to me telling him the Rob Arnott story, that the difference between Arnott and Bogle and his brother is that “they have a life and you don’t.” So there you have it — My own brother is a Goon!” I can cry warm tears into my pillow one more time if that gives me some temporary relief, Dab. But the bottom line here is that, when I tire of the crying game, I am going to need to work up the energy to send some more e-mails. Because there ain’t too many other choices open to me.

That’s where things stand on the morning of January 6, 2013.

Most of what I report above is bleak stuff. Full truth be told, though, I don’t think I am being a Pollyanna when I say that the realities are not all bleak. Yes, I am hurting. Yes, I lack a life according to my brother Steven’s definition of the term (I am probably too close to the situation to speak objectively as to whether he is right or not — I do not have the option of giving up so I cannot in fairness to myself entertain consideration of the question of whether I today have a life or not). But, yes, there have been huge changes in a positive direction since the morning of May 13, 2002. You know what they have been as well as I do, so I don’t need to recount them here. Those things are real too, as real as the board bannings and the insults and the lack of book sales and all the rest. Both sides have their little “victories” they can point to. So there! Anyway, it’s not all bleak. If I can acknowledge how much it hurts to have my head slammed against a wall 20 times a day 365 days a year for 10 years running, I can also in fairness acknowledge that those on “your side” have had their heads slammed against a wall one or two or three times over the course of the past 10 years. It doesn’t make us even. But it makes us — well, something. 

What it has to make us to bring this all to a successful conclusion is — Equally in desire of a successful conclusion.

That’s where this is headed. There is going to come a day when “your side” is going to want to take this to a good place. Not because I have so many people contributing at my blog. Because I cannot get that without the cooperation and aid and encouragement of many people on “your side.” You’ll have to decide for your own reasons to give me that cooperation and aid and encouragement. When you do (I am not permitted to entertain the possibility that this will never happen, for reasons outlined above), I will get comments, plenty of them. Then there will be peace, a wonderful and exciting and rewarding and enriching peace.

You might be inclined to think this will never happen. Why would the side that has done such a great job of smashing my head into a wall 20 times a day for 10 years now ever want to start doing things that would help and encourage me? There’a a good reason, Dab. It’s because the work that I do helps “your side” as much as it helps “my side.” The secret, hidden truth here is that there is only one side. We all want the same things. John Bogle is a hero to the middle-class. He is the second most important investment analyst in history (in my personal assessment — I won’t argue too strenuously with someone who puts him first). Bogle’s work becomes 20 times more important when he snaps the piece that has been missing until today into place. So Bogle wins when Bogle starts helping and encouraging Rob Bennett’s efforts to do just that. And of course everyone associated with Bogle’s ideas also wins. Big time.

So I am going to win!

I am sorry if that breaks your heart, Dab. But that is the way it is. For Bogle to win and for Dab to win, Rob Bennett has to win. God elected to place us on this planet together and He expects us to figure out a way to make this all work no matter how much we get on each other’s nerves from time to time.

I win on the last page. So does Bogle. So does Dab.

There is no other way this can turn out. I know because I sneaked a peek at the last page before I put up that fateful first post.

Friend! Comrade!

Rob

“Since There Is Only One Person Taking in the Idea When I Send an E-Mail Describing Valuation-Informed Indexing, There Is None of the Negative Group Dynamics That Has Poisoned Discussions So Many Times in the Past”

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I’ve been sending e-mails to various people letting them know about my article on the tactics used by Buy-and-Holders to intimidate Academic Researcher Wade Pfau into not publishing further research showing the superiority of Valuation-Informed Indexing investing strategies over Buy-and-Hold investing strategies. I recently received a response from Brad Borden, a law professor at Brooklyn Law School, saying: “This is interesting. I’m curious, however, to know why you chose to contact me.” My response is set forth below:

Brad:

Thanks for your response.
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There is no particular reason why I contacted you in particular.
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The entire story is very strange. I have been working on this for 10 years. I have had mixed reactions to the work I have done.
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Those who “get it” (a small number in percentage terms) view this as the most important advance ever achieved in the investing field. There are numerous smart and good people who see the implications as being very positive and very far- reaching. Those reactions naturally make it impossible for me to give this up. I want this work to be recognized and to help people live better lives.
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Those who do NOT get it (a high percentage of the population, perhaps 90 percent, and a group that also includes many very smart and very good people) see only limited value here or (in not a small number of  cases) react with hostility.
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The high percentage of indifferent and (especially) hostile reactions has made it impossible for me to spread the word effectively. For example, I built a very large Retire Early discussion-board community at the Motley Fool site. The board was destroyed by arguments over the merits of these ideas. A small group thought these ideas generated the best discussions ever held at the board. A large group preferred to see the entire board destroyed rather than to permit the discussions to continue.
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The short version of all this is — These ideas generate intensely emotional reactions. To spread the ideas, I need to find a way to work around this problem.
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My current effort is to contact all sorts of people by e-mail and to answer any questions they have and to try to gain support that way. Since it is only one person taking in  the idea, there is none of the negative group dynamics that has poisoned discussions so many times in the past. If the people who I win over are as intense in their enthusiasm as some of those I have won over in the past, even a small number of supporters might make a huge difference.
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I am not focusing on one type of person because I have not found any one type of person that is particularly open to hearing about the ideas. Some investing experts love this stuff and some hate it. Some journalists love this stuff and some hate it. Some economists love this stuff and some hate it.
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I fully understand that my explanation sounds odd. This entire matter is very odd. I have never seen anything remotely like it. If the ideas are sound (there is a mountain of evidence that they are, at least in my assessment), it is imperative that I spread the word before more damage is done to our economy through the promotion of the discredited conventional investing ideas. But the normal ways of building support for personal finance ideas (getting experts on board, writing articles, going to blogs, etc.) just do not work for this particular concept. I am trying something different just to see whether the effort bears good fruit or not.
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You don’t possess any particular characteristics that make you a good person to contact other than that you obviously possess a strong intellect and are involved in at least a tangential way with some matters that relate in some way to public policy. If you end up feeling that you learned something, I will of course be 100 percent happy. If you  prefer that I not contact you again, I am of course okay with that. If you ask questions, I will do what I can to respond effectively. If somewhere down the line you become a supporter, I will be thrilled about anything you can do to move the ball forward. I of course understand that that’s an extreme long-shot. My belief is that I only need a  small number of those extreme long-shot bets to come through to make a big positive difference. And I think that in time I will see a small number of these “bets” come through for me.
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Sorry for the long explanation. I feel that you merit as clear an answer as I am able to provide. Please don’t feel any obligation at all to do anything further. The vast majority of those I contact do not respond in any way. You have already made me feel good by saying “this is interesting.” If by any chance you feel a desire to explore any aspect of this in greater depth, certainly feel free to shoot me back a follow-up e-mail with more questions or concerns or reactions or whatever.
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And thanks for giving me an opportunity to work that all out on paper!
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Rob

Business Week Columnist Vivek Wadhwa Tweets a Link to My Article on the Silencing of Academic Researcher Wade Pfau

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Business Week Columnist Vivek Wadhwa has tweeted a link to my article on the silencing of Academic Researcher Wade Pfau.

Wadhwa has appointments at Duke, Stanford, Emory and Singularity University and writes columns for the Washington Post as well as for Business Week. I think it would be fair to say after this tweet that he is also a Hero to the Middle-Class Investor and an all-around good guy. His web site is here. His bio is here.

Vivek’s tweet reads: “Received worrisome e-mail from Rob Bennett. Warns of risk with Buy-and-Hold Investing. [Link to Wade Pfau Article] — I have no clue.” I sent a response tweet that reads: “Thanks for kindness of link to Wade Pfau article. We all should work together to get word out & bring to wonderful conclusion.”

Vivek has 31,787 followers. These are genuine followers (he follows only 195). Many of his followers are top-notch people. Looking at just the first few names, I saw Vanessa O’Connell of the Wall Street Journal, Christine Lagorio, an Executive Editor at Inc.com, and Charles Cooper, Executive News Editor at CNET.

Vivek learned of the Wade Pfau article as the result of my recent e-mail to him. He responded last night, saying that he felt that the content of the article was “outside of my field of knowledge” but that he was “glad to tweet a question asking if you are right” and thereby to “let others make up their minds.” He asked me what link I would like him to include in the tweet.

I responded this morning. I suggested that he link to the article re the silencing of Pfau by the Buy-and-Holders (A number of Buy-and-Holders threatened to send defamatory e-mails to Wade’s employer in an effort to get him fired from his job for the “crime” of having published research showing the dangers of Buy-and-Hold investing strategies and several big names in the field [including Vanguard Founder John Bogle] failed to take action against those advancing the threats, thereby implicitly encouraging them [I have sent Bogle four e-mails asking for his help with the matter]).

Vivek sent me an e-mail after posting the tweet that stated: “I tweeted a balanced message.” I responded with an e-mail saying: “Thanks a million. That’s perfect. Balance is good!” He wrote back: “Sure.”

The intimidation campaign against Wade came about as a result of a 10-year effort (successful so far!) to cover up the errors in the Old School safe withdrawal rate studies. I reported on the errors in a May 13, 2002, discussion-board post at the Motley Fool site. The author of one of the discredited studies responded by threatening to kill my wife and children if I continued to post honestly on the subject. I continued posting honestly and was banned from the site despite posts by hundreds of my fellow community members saying that the discussion of the how valuations affect retirement planning was the most exciting discussion ever held at that board. In the ten years since, the Goon posters have followed me to hundreds of web sites at which I have posted comments or guest blog entries, always posting abusively and only in extremely rare cases being disciplined in any way for doing so (in contrast, I have been banned from 15 sites at the demand of enraged Buy-and-Holders). Wade learned of my work as a result of my thousands of posts to the Bogleheads forum (before I was banned at that site) and said that he would like to work with me to develop research showing once and for all whether the historical return data supports the Valuation-Informed Indexing strategy (my suggested replacement for the Buy-and-Hold strategy) or not. We worked together for 16 months, exchanging hundreds of e-mails. Wade found that everything I had said checked out and expressed amazement that no earlier researcher had reported on these matters (all of my ideas follow logically from research published by Robert Shiller over 30 years ago). He concluded that Valuation-Informed Indexing has for the entire 140 years of historical data available to us provided investors with far higher returns than Buy-and-Hold while exposing them only to greatly reduced risks. “Yes, Virginia, Valuation-Informed Indexing works!” he said.

The The Big Picture Blog recently posted a lengthy article (“Buy-and-Hold Is Dead — And Never Worked in the First Place”) telling the story of my ten years of work developing the Valuation-Informed Indexing concept with the help of the hundreds of my fellow community members who dared to “cross” the Buy-and-Holders by engaging in original research or discussing the implications of research already published (the VII concept is rooted in the 1981 finding of Yale University Economics Professor Robert Shiller that valuations affect long-term returns — Shiller has said in published interviews that he has never dared to tell us all that he knows about stock investing because he fears that he would be branded “unprofessional” if he were to do so). Site Owner Barry Ritholtz separately linked to an article of mine titled Why Buy-and-Holder Investing Can Never Work.

 

The Big Picture Blog Reports on Wade Pfau’s Research Showing the Superiority of Valuation-Informed Indexing Over Buy-and-Hold

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The Big Picture blog early this morning posted an article reporting on Academic Researcher Wade Pfau’s research showing the superiority of Valuation-Informed Indexing over Buy-and-Hold. The report is titled: Buy-and-Hold is Dead (and Never Worked in the First Place).

Juicy Excerpt: Attorney, tax expert and financial writer Rob Bennett told us…”The thing that I have done that no one before me has done is to explain the practical IMPLICATIONS of Shiller’s findings. Even Shiller has never done this…. Shiller and many others have been keeping their mouths shut about the practical implications of his theory for three decades now.” Bennett’s website provides endorsements for his stock timing theories and argues that the prevailing Buy-and-Hold dogma helped to cause the financial crisis.

After seeing the report, I sent the following words to Wade:

Wade:

I hope things have been going well with you. I think of you often. I miss talking things over with you!

I am of course continuing my work to spread the word re your breakthrough research on Valuation-Informed Indexing and on the true cause of the economic crisis. An article was posted early this morning at The Big Picture blog that reports on the essential points:

http://www.ritholtz.com/blog/2012/11/is-there-a-better-way-to-allocate-stocks-thasn-buy-hold/

I’d be grateful to know your thoughts. My thought is — You need to get to work finding a journal for the follow-up research on VII that you told me about! I noted in my first comment on the discussion thread for the article (the comment has not yet appeared at the site) that you would be thrilled to get back to work on that paper if you were given some encouragement. Please consider these words of mine as encouragement that you direct some energies to this important project! Soon! Today! Yesterday!

I also wanted to share with you the words that I sent to the author of the article when he showed me a draft version yesterday night. Thoughts of your good work (and the good work of John Walter Russell and John Bogle and Robert Shiller and so many others) came flooding into my brain when I read the words of the article. Here is the text of my e-mail:

George:

If you have followed Bob Dylan’s career, you know that he has always been a smart-aleck in his dealings with the press. He gave a clue why in some words he put forward after he wrote the first volume of his autobiography and read the reviews of it. He said that those reviews brought him to tears. Most of the people who reviewed his records were not musicians and thus were not able to appreciate the struggles he was overcoming in producing the records. Many of the people who reviewed his autobiography had written books of their own and thus “got” what he was trying to do. The reviews of his autobiography were the first reviews that he fully respected.

That’s the feeling I experience reading your words. What’s different about your write-up is that it shows that you appreciate the scope and significance of the project. That’s the thing that very few others get. It almost brings me to tears to see that after ten years of work someone is seeing how big a deal this is and helping me get the word out to the millions of people who need to hear the message.

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I am extremely grateful. Please let me know if there is ever anything i can do to help you or your readers in return. I have worked for this sort of write-up for a long time. I am humbled to see the draft. I will work hard to merit the trust you have placed in me by giving these ideas the serious consideration that I have long believed they merit.
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I believe that you are moving the ball forward in a significant way. You focused on the right things. The people who have tried to hold me back are good people who want to do good work. You didn’t focus on the negatives, you focused on the positives. I believe that that is the approach that people need to take to help those people see that we are all on the same side re these matters. An advance in our understanding of how stock investing works helps us all live richer lives.
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When your article appears, I will forward a link to it to Wade. I have hopes that reading your words will melt his heart. It may take some additional time but somewhere down the road a piece I believe that either your words or words that follow from your decision to release your words will melt John Bogle’s heart.
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You have filled my heart with good cheer on this special Sunday night.
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Thank you.
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Rob

You of course have also done very important work, my old friend. Please take a bow!

I will ask my boys to say a prayer for you. My understanding is that God listens with special care to the prayers of children.

And, as John Walter Russell used to regularly advise us all — Have fun!

Rob

Addendum:  The article now appears at the ZeroHedge.com site and at the WashingtonsBlog.com site.  The Financial Times links to the article at its “Alphaville/Further Reading” section, referring to Valuation-Informed Indexing as “An Alternative to Buy-and-Hold.”

“The Answer Is for People to Accept That There Are Two Models and Not Be So Defensive. We All Need to Acknowledge That the Other Guy Is a Friend and Someone Who Is Trying to Help.”

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Set forth below is the text of a comment that I recently put to the Investor Junkie blog:

 can say from what I’ve seen people often claim you are let me put it in a nice way.. abrasive. While I have no issue with your viewpoint, I think many object to the methodology of how you do it.

Thanks for sharing your thoughts, Larry. There are lots of people who say that. Even people who support me say that. I’ll try to explain what I think is really going on.

I believe in 90 percent of what the Buy-and-Holders believe. There is only one point of disagreement. I say that valuations have to be taken into consideration in all calculations. They say that they should never be considered. If valuations were a small factor, this would not be a big deal. But the valuations effect is so big that whether you take them into consideration or not makes a HUGE difference.

I am 100 percent polite and warm and kind in my interactions with Buy-and-Holders. Always. No exceptions. The thing that is “abrasive” is that I say “Well, you got the numbers wildly wrong in that retirement study and the error is going to cause millions of people to suffer failed retirements.” It hurts people’s feelings for me to say that. But, if it is true that valuations matter, what I am saying is so. There’s no soft way of making the point. If you believe that valuations matter, you are either “abrasive” or dishonest. There are no other options.

I think the answer is for people to accept that there are two models and not be so defensive. We all need to acknowledge that the other guy is a friend and someone why is trying his best to help. I accept that there are lots of good and smart people who really believe in Buy-and-Hold. They have a right to believe what they believe. But if I were to say that I believe in Buy-and-Hold, it would be dishonest. There never should have been even a tiny bit of pressure applied to me to persuade me to post dishonestly. My right (and the right of all Valuation-Informed Indexers) to post honestly should be respected.

The Buy-and-Holders were the top dogs for a number of years. They are not accustomed to being challenged. They have to accept that those days are over. People learn new things over time and we move on to new and better ideas.

I say all the time how much I like and respect the Buy-and-Holders. It’s a rare event when one of them says that about me or about any of the Valuation-Informed Indexers. I have had Buy-and-Holders threaten to kill my wife and children. Never have I made any such threats in return. So who is truly the “abrasive” one?

People need to hear both sides to be able to make informed decisions of their own. As of today, the Valuation-Informed Indexers need to stand up for themselves to even be able to speak (as evidenced by the 15 bans!). I am 100 percent happy always to praise the Buy-and-Holders for their many legitimate insights and I always am sure to do so. I am NOT willing to say that I agree with them. I shouldn’t be pressured to do so. And my unwillingness to do so should not be perceived as “abrasive.” My view is that it is the abusive tactics of the Buy-and-Hold dogmatics that are truly “abrasive.”

Rob

The Buy-and-Hold Myth and Seven Other Guest Blog Entries

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Set forth below are links to seven Guest Blog Entries I wrote about the Valuation-Informed Indexing investing strategy:

1) The Buy-and-Hold Myth at Married with Debt;

2) What Kind of Investor Are You?, at Don’t Quit Your Day Job;

3) The Efficient Market Hypothesis Is Flawed, at Don’t Quit Your Day Job;

4) If Buy-and-Hold Doesn’t Work, Then What?, at Don’t Quit Your Day Job;

5) Are Stock Gains and Losses Real? at Consumerism Commentary;

6) Are Safe Withdrawal Rates Really Safe?, at Financial Mentor (A great survey of the first ten years of New School SWR research);

7) Is 2 Percent the New Safe Withdrawal Rate?, (at My Money Design (Another nice overview of the growing popularity [I told you to beware of the Wave, Goons!] of my New School SWR concept); and

8) Investors Who Ignore Valuations Are Like Overeaters Who Ignore the Risk of Heart Disease, at My Personal Finance Journey.

ITNR #112 — Professor Abandons Breakthrough Research Following Threats by Buy-and-Holders

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I’ve posted Entry #112 to my weekly Investing: The New Rules column at the Death by 1,000 Papercuts site. It’s titled Professor Abandons Breakthrough Research Following Threats by Buy-and-Holders.

Juicy Excerpt: Wade found that everything that John and I had discovered together checked out. Valuation-Informed Indexing is far superior to Buy-and-Hold, according to the 140 years of return data available to us today. Wade’s research (now published in peer-reviewed journals) showed that Valuation-Informed Indexing provided higher returns than Buy-and-Hold at reduced risk for 102 of the 110 rolling 30-year time periods now in the historical record.

Forget for a moment that you are a normal human being. Assume that you are a Buy-and-Hold Goon desperate to keep people from learning the realities of stock investing. What would you do at this point?

Coda — What Am I Going to Do Now That My Reporting on the Wade Pfau Saga Is Complete?

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I’m going to Disney World!

Well, not quite. I’m saving that for the day the Ban on Honest Posting comes to an end. But I’m doing something close. I’m going to Ocean City, New Jersey. We take off in a few minutes. I will not be approving comments to the blog during the time I am gone (sand and computers don’t mix, according to Old Farmer Hocus). But fear not, Goon friends! If you file your stupid comments — er, I mean your well-informed and helpful and much-appreciated comments — now, I will read them when I get back and get them quickly posted or (more likely) sent to the Trash Bin along with most of your smelly, yucky, anti-human comments– er, I mean well-informed and helpful and much-appreciated comments.

I will return to the computer on Friday, August 17, 2012, presuming that one of the Greaney Goons doesn’t shoot me down in cold blood while I am playing a round of miniature golf with my boys on the boardwalk.

I earned this one!

I’ve posted an article to the “The Buy-and-Hold Crisis” section of the site titled Academic Researcher Silenced by Threats to Get Him Fired From His Job After Showing Dangers of Buy-and-Hold Investing Strategies — Teaser Version. The purpose of the teaser version is to give me something to send to political bloggers who might not immediately see the political implications of the story and might be enticed by some of the hottest Wade Pfau comments into reading the version that provides more background and context and detail.

My best wishes to all my internet friends, both the Valuation-Informed Indexers and the Buy-and-Holders.

Stay the Course!