A Rich Life

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

“Wade Pfau Over and Over and Over Makes Clear That He Views Me as the Teacher and Himself as the Student in the 16 Months of E-Mail Correspondence in Which We Developed Together Our Breakthrough Research Showing Millions of Middle-Class Investors How to Reduce the Risk of Stock Investing by 70 Percent”

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Set forth below is the text of a comment that I recently put to this site’s blog:

At about nine minutes into this video you made, Rob, you claim credit for “at least 50% of the work that Wade Pfau put into his published research.” Do you suppose he agreed with your assessment?”

Do you suppose he agrees with your assessment?

Nothing could be more clear, Banned.

Here is the article at which I provide links to the blog entries reporting on the 16 months of e-mail correspondence in which we developed together our breakthrough research showing millions of middle-class investors how to reduce the risk of stock investing by 70 percent:

http://arichlife.passionsaving.com/the-buy-and-hold-crisis/corruption-in-the-investing-advice-field-the-wade-pfau-story/

Wade over and over and over makes clear that he views me as the teacher and himself as the student.

I obviously do not intend any dig at Wade with those words. Wade made a huge contribution and I have said publicly that his contribution merits a Nobel prize in Economics. I just happened to be placed in circumstances that permitted me to gain a jump of several years over him and that of course came through in the work we did together.

When Wade felt safe posting honestly, he had no problem saying such things. It was only after you Goons (with the implicit support of my good friend Jack Bogle) made clear that you would destroy his career if he continued to post honestly that Wade ever came forward with any comments 100 percent the opposite of the viewpoints he expressed over and over and over again during the 16 months in which he believed that there would be no penalties imposed on him for the “crime” of saying what he truly believed about safe withdrawal rates and many other critically important investment-related topics.

Rob

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

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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 is the text of an e-mail he sent as a follow-up to the e-mail described in the earlier blog entry:

Rob,

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

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

“Wade Pfau Has a Ph.D. in Economics from Princeton. Wade Spent Months Trying to Find a Study Showing That Long-Term Timing Is Not Required. He Never Found One. He Was Amazed. He Kept Thinking that He Had Done Something Wrong. But He Looked and He Looked and He Looked and He Never Found Such a Study.”

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

I am grateful to you for putting forward something that deals with substantive issues, Banned. We work out our differences by dealing with substantive issues.

There is a contradiction in the words used to introduce the table set forth at the link. First, it says: “By owning the entire market (all of the asset classes), susceptibility to changes in market variations is minimized.” Then it says: “Large variations over a short period of time, but tends to be stable when viewed over the long term.”

The first statement cannot possibly be true if the second statement is true (and the second statement IS true). These are not my words. These are the words of the Bogleheads, the primary advocates of Buy-and-Hold. And these words show why Buy-and-Hold can never work for even a single long-term investor.

The second statement is a wonderful summation of the 140 years of U.S. stock market history available to us. Year to year variations in returns are indeed INSANE. And long-term variations are indeed minimal. We are in complete agreement re this statement.

Where we differ is re its MEANING. You take this statement as signifying support for a Buy-and-Hold strategy. I take it as a warning NOT to follow a Buy-and-Hold strategy.

If returns are stable over the long term and if that stable return is a good one (it is), you want to be heavily invested in stocks as a rule. We agree re that point.

If returns are wildly variable in the short term, you want to be heavily invested in stocks during the short-term periods when returns are very, very good but you do NOT want to be heavily invested in stocks when returns are very, very bad. You want to avoid taking the huge hit that comes from being invested in stocks during price crashes. Avoiding crashes will increase your return DRAMATICALLY while also diminishing your risk DRAMATICALLY. The lifetime benefit is counter-intutively high. You would need to work the numbers to see how huge a difference this makes.

That’s Valuation-Informed Indexing, Banned. The only difference between Buy-and-Hold and VII is that with VII you lower your stock allocation at times of price crashes (those times when the short-term variation works against you) and increase it at times of huge price jumps (those times when the short-term variation works to your benefit). That’s the entire deal.

Now –

Buy-and-Holders would have to be insane not to want to take advantage of return predictability if it existed. They obviously do not believe that these times of short-term variability (in both directions) can be predicted. I obviously do. That’s the only issue in dispute.

This is where I say the Buy-and-Holders have never put forward a single sliver of evidence supporting their position. This was Wade Pfau’s most important finding. This is why Wade says that the research that he and I did together belongs in the Journal of Finance, the most important journal in the field.

Wade has a Ph.D. in Economics from Princeton. He makes a living doing investment research. If there is anyone alive who is able to determine whether there is a study showing that long-term timing is not required, Wade is that person. Wade spent months trying to find such a study. He never found one. He was amazed. He kept thinking that he had done something wrong. He must have missed it! But he looked and he looked and he looked and he never found any such study.

He wanted to be sure. So he went to the Bogleheads Forum to see if anyone there knew of one. No one did. Not John Bogle. Not Bill Bernstein. Not Larry Swedrow. Not Rick Ferri. Not Taylor Larimore. None of these people have ever seen a single study supporting the core principle upon which the Buy-and-Hold strategy is built.

If these people never heard of a study, there is no study, Banned. There is zero reason for any rational person to believe that long-term timing (paying attention to price) is not absolutely required for anyone hoping to have a realistic chance of long-term investing success.

Now — to the first statement that appears before the presentation of the table!

The first statement says: “”By owning the entire market (all of the asset classes), susceptibility to changes in market variations is minimized.”

No! This is false!

The research that Wade and I did shows that the far bigger factor is the valuation level that applies when the asset is purchased. Just paying attention to valuations alone takes 70 percent of the risk out of stock investing. Owning a large number of asset classes does virtually nothing to minimize risk compared to the simple act of taking valuations into consideration when setting your stock allocation. Buy-and-Holders do not minimize risk by going with a pure Get Rich Quick approach. They MAXIMIZE it! Just as common sense tells us must be so!

There never can be any justification for failing to take price into account when buying something, Banned. It cannot be. It is a logical impossibility.

If you want to say that Buy-and-Holders sincerely believe that it is not necessary to take price into account, I can go along with that statement. But I cannot go along with a statement that there is research supporting such a statement. Wade checked this very, very, very carefully. There is no such research. There never will be any. The idea that it is not necessary to take price into account when buying stocks is dangerous and false and wrong and absurd.

Buy-and-Hold was a mistake.

It was a mistake made by good and smart people who were trying to help us. But it was a mistake all the same.

That mistake caused our economic crisis. That mistake needs to be fixed.

I wish you all good things.

Rob

“It Is Natural That Powerful People Will Do What They Can to Protect Their Interest. It Is the Norm in the Academic World and In the Broader World. I Am Grateful That You Write About It.”

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I have been sending e-mails to various people letting them know of how the Buy-and-Hold Mafia silenced Academic Researcher Wade Pfau after he published research showing the superiority of Valuation-Informed Indexing strategies over Buy-and-Hold strategies. Set forth below are reports on five of the responses I received.

1) Alessandro Acquisti, Associate Professor at Carnegie Mellon University, said: “Thanks for the link.”

2) Jay Desai, Assistant Professor at Shri Chimanbhai Patel Institute of Management and Research, said: “I have gone through your article. I also believe that no market in the world is efficient as explained by the Fama-French Model.”

3) Jing Chen,an Assistant Professor at the University of Northern British Columbia who has done important research that attempts to integrate physics, biology, economics, information science and other fields and to provide an entirely new foundation for economic theory, said: “Thanks for your message and your article.  It is natural that powerful people will do what they can to protect their interest. It is the norm in the academic world and in the broader world. I am grateful that you write about it.”

4) Joe Fuller, a co-founder of Monitor Group, a multinational consulting firm, said: “I’m afraid this literature is not anything I’m remotely expert in, so I’m afraid I’m not comfortable taking a position.”

5) Steve Jewson, a Vice President for Model Development at Risk Management Systems, said: “I like it. It makes sense to me.”

“I Put Up a Post Reporting on the Errors in the Old School Safe Withdrawal Rate Studies Many Years Before Any of the ‘Experts’ in This Field Had Discovered Them”

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Set forth below is the text of a comment that I put to an article that my friend Academic Researcher Wade Pfau posted to the Market Watch site:

I am the person who discovered the errors in John Greaney’s safe withdrawal rate study. I put up a post reporting on them at a Motley Fool board that we posted at together on the morning of May 13, 2002, many years before any of the experts in this field were saying that it is not possible to calculate the safe withdrawal rate accurately without taking into account the valuation level that applies on the day the retirement begins.

A fantastic discussion followed in which hundreds of us learned some amazing things about how stock investing works. Unfortunately, John and some others did not want the learning experience to continue and engaged in abusive posting tactics to destroy the board. The comments of hundreds of our fellow community members who wanted this learning experience to continue are detailed in this article:

http://www.passionsaving.com/investing-discussion-boards.html

Wade is familier with this history. I have discussed different aspects of it with him in great depth on numerous occasions.

Stock investing is an intensely emotional endeavor. It is not possible to make sense of any element of the stock investing project without taking the effect of investor emotions on stock prices into account. The P/E10 metric has been shown in research to be the best tool for doing this. There was a time when we didn’t know this but that was 30 years ago. Shiller showed in research published in 1981 that valuations (emotions) must always be considered.

We will not get the SWR (or retirement planning in general) right until we work up the courage to acknowledge that investing is not strictly a numbers game. This is a numbers plus emotions game. P/E10 is the metric that permits us to take valuations into account. It is my strongly held belief that valuation-informed retirement planning strategies are the future.

Rob

“How Could Someone Who Holds a Ph.D. in Economics from Princeton Come to Believe That There are Zero Peer-Reviewed Studies Showing that Long-Term Timing Is Not Required for Long-Term Investing Success?”

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Reality bites, don’t it hocus!?
 
Reality bites in both directions, Yip.

Wade said those things. You have quoted him accurately.

He also advanced the 45 quotes that I reported on in the article linked to above.

He still believes those 45 things. Even if he didn’t,  the fact that he once believed those 45 things would be news with major public policy significance. He held a Ph.D. in Economics from Princeton when he said those things. He is in a position to know the truth of these matters. And yet he believed that there has never been a single study showing that long-term timing doesn’t work or isn’t required for long-term success. A Ph.D. in Economics from Princeton researched this question and that is what he discovered. Even if he changed his mind at a later date (he hasn’t), that would be big news. It would raise the question — How could this be? How could someone who holds a Ph.D. in Economics from Princeton come to believe that there are zero peer-reviewed studies on the record showing that long-term timing does not work or is not required for long-term success?

We all need to know the answer to that one, Yip. Buy-and-Holders and Valuation-Informed Indexers alike. And we will not ever come to know the answer until we give ourselves permission to discuss the question. It is through discussion that we learn. So we MUST permit (and encourage!) civil and reasoned discussion of these matters. There is no other path from the horrible place where we all are today to the wonderful place where deep down in our hearts each and every one of us wants to be tomorrow.

If I win, we all win.

If you win, we all lose.

It doesn’t take me too long to figure out who to root for re this one, my old friend.

Rob

This game can be played the other way around.I promote myself as the most severe critic of Buy-and-Hold alive on Planet Earth today.Yet on the morning of May 13, 2002, if you had asked me what investing strategy I follow, I would have said “Buy-and-Hold” and I would have said it proudly.What gives? Am I the genius who discovered the horrible flaw in the Buy-and-Hold strategy? Or am I the dunderhead who at a time in his life when he held a Masters in Tax Law from George Washington University and had rose to the level of Director at the Ernst & Young consulting firm and who had written the #1 best-selling report in the history of the Soapbox.com site and who had transformed himself into a sufficiently effective saver to be able to start from zero and yet in 10 years save what he needed for his family of four to live off his savings for many, many years to come still believed in this oh-so-horrible and oh-so-obviously-flawed Buy-and-Hold strategy?
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I am that genius, Yip. And I am that dunderhead. I possess two, two, two characteristics of the Human in one! We are all human. We all have the potential of genius within us. And we all have the potential of dunderheadedness within us.

John Bogle is one of the darn humans. So is Robert Shiller. So is Wade Pfau. So is Bill Bernsteinzz. So is John Greaney. So is Rob Bennett. So is Rob Arnott. So is Albert Sanchez Graells. So is Scott Burnszzz. So is Mel Linduaer. So is Microlepsis. So is John D. Craig. So is Ed Easterling. So is Larry Swedroe. So is J.D. Roth. So is Mike Piper. And on and on and on and on and on.

We are stuck together on this planet, Yip. We all possess access to some pieces of the puzzle and have been denied access to other pieces of the puzzle. We have a system in this country that permits us to share with each other the pieces that we each hold in our hands so that the collective entity we call “the United States of America” can come to possess as many of the pieces as possible and we can all thrive together. We need to play it that way in the investing area just as we do in all the other areas. Our decision to play it very, very differently in the investing area is in the process of killing us.

We need to figure out why Wade Pfau believed the things he did when he was being a dunderhead (regardless of whether you think it is Wade 1.0 who is the dunderhead or Wade 2.0 who is the dunderhead). And we need to figure out why Rob Bennett believed the things he believed when he was being a dunderhead (regardless of whether you think it was the pre-May 13, 2002, version of Rob who was the dunderhead or the post-May 13, 2002, version of Rob who is the dunderhead). And we need to figure out whether Old Saint Jack is being a dunderhead when he says things in his speeches that support what Rob believes or when he says things in his speeches that support what Mel believes.

We’re all dunderheads here, Yip. Each and every one of us.

And we are all geniuses too. So we are all entitled to the respect and affection and gratitude of all the other dunderheads when we venture to put forward our genius posts on the discussion boards and blogs that we have built together for that purpose.

I am telling you the way it is going to be, my old friend. I am not asking, I am telling. There is a difference. Please try very hard to understand. It is critical that you understand that I am telling and not asking so that you will know how to proceed after reading these words.

My best wishes to you and yours.

Rob

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

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

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

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

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

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

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

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

Rob:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Rob

Rich Toscano at Pacific Capital Associates: “It’s Great to See a Finance Journalist Who Understands that Valuations Matter. It Seems That Efficient Market Zealotry Is Rampant in the Journalism Community. So You Are Doing a Great Service.”

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I have been sending e-mails to various people to let them know of my article on the silencing of Academic Researcher Wade Pfau. Set forth below are descriptions of some of the responses I have received.

1) William Cohan said: “Thank you, Rob. Will take a look.”

2) Rich Toscano at Pacific Capital Associates in San Diego, said: “Haha… that’s a funny coincidence… real estate is just a side interest for me; my “day job” is investing and I am also a big fan of Shiller’s CAPE.  (The coincidence is that there’s not very many of us!)  I’ve written articles on it somewhat regularly; here is the last (admittedly out of date) one: http://pcasd.com/us_stocks_overpriced_once_again . I think it’s time for another!  In fact I was planning on writing an article soon to address some of the critcisms of the CAPE (it’s nice that enough people are finally paying attention to it that it is getting critics).  Some criticisms are good but predictably most come from stock touts simply misunderstanding it. Anyway, it is GREAT to see a finance journalist who understands that valuations matter!  It seems that efficent market zealotry is rampant in the journalism community (even after everything that happened last decade).  So you are doing a great service.  I just love your valuation-based return calculator.  I’ll look forward to checking out your site and blog in more detail.”

3) Edwin Hamilton said: “This is compelling but so far I have only been able to ‘talk to myself.’ Serial herd behavior by the American people — need to expose this deception!”

I traded a number of e-mails with Edwin re my efforts to get the word out. At one point, he suggested checking into whether Lindsey Lohan would be willing to co-blog on the issue. I wrote back: “I tried hooking up with Lindsey. It turns out that she’s a confirmed Buy-and-Holder. Go figure!”

4) David Clay Johnson, an investigative journalist, said: “Thanks. I will take a look at this after I finish my next book.”

5) J.D. Roth, the personal finance blogger who started the Get Rich Slowly blog, wrote (in an e-mail dated January 21, 2011, that I failed to report on at the time): “I keep thinking about ways I can write about this subject so that it makes sense. That is, I *do* agree that when the market is high, it makes less sense to blindly invest than when the market is low. But how does one determine what is high and what is low? (I know you have a formula that you like — PE10? — but that’s something experts could argue about for years, right?) I tend to think that’s where re-balancing comes in. If, in a theoretically neutral market, you’re targeting an asset allocation of, say, 50-50, and then stocks grow so that your allocation is 70-30, rebalancing should, in theory, act somewhat like value-informed investing, right? Anyhow, it’s something I’m thinking about, and not just theoretically. It has practical applications to my own portfolio! 🙂

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.