Set forth below are the texts of three related comments that I recently put to the Goon Central board:
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Such silly, impotent threats are all you have left in your empty life.
Time will tell the tale, GW. That’s the drama of the thing. Rob
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Valuation-Informed Indexing #142 — Bad Retirement Studies Are Like Dirty Restrooms: They Are a Sign of More Bad Stuff That You Cannot See
I’ve posted Entry #142 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Bad Retirement Studies Are Like Dirty Restrooms — They Are a Sign of More Bad Stuff That You Cannot See.
Juicy Excerpt: Most of the experts use the claim that their strategies are backed by research as a marketing gimmick. it sounds good to say that advice is rooted in research. It makes investors feel comfortable to hear those kinds of promises. But honoring the promises would tie the hands of the experts. When you take research seriously, there are things you cannot say that from a marketing standpoint you might very much want to say. The 10-year delay in correction of the retirement studies shows us that, when there is a conflict between marketing imperatives and the need to be true to the research, most investing professionals put marketing concerns first, second, third and fourth.
The reality is that today’s experts are not taking valuations into consideration in ANY of their calculations. It’s not just the safe withdrawal rate studies that present a problem. The only reason why the problem became visible in the retirement area is that the retirement studies require identification of a worst-case scenario, a single point on the spectrum of possible return scenarios. When you have one number to look at, it is possible to say whether the number is accurate or not.
Once we saw that the retirement numbers were not accurate, we should have reacted not by minimizing the problem but by wondering whether it might be indicative of a much deeper and broader problem than the one that had became obvious. I suspect that the reason why we have feigned unconcern for some time is that on some level of consciousness we suspect how deep the problem goes and we are worried about what it will mean to come to terms with it.
Economics Professor Valeriy Zakamulin: “I Do Believe That Stock Returns Are to Some Extent Predictable, Both in the Short- and Long-Term. But I Do Not Accept that Stock Returns Are Highly Predictable. My Model Predicted Better Than the Shiller P/E10 Model Post-1960.”
I have been letting lots of people 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 Economics Professor Valeriy Zakamulin. Set forth below is the text of Valeriy’s response to the e-mail of mine detailed in the earlier blog entry:
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Rob:
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First of all, you forget that I do believe that the stock returns are to some extent predictable, both in the short- and long-term. But I do not accept that the stock returns are highly predictable. Just read my paper about the secular mean reversion and long-run predictability of stock returns. In this paper I actually show that my model predicted better than the Shiller’s PE10 model post-1960.
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Second, when it comes to the fixed interest rate securities like CDs and bonds, you need to understand that for an investor who holds them till maturity the return is positive and known in advance. Hence, in this case CDs and bonds are completely risk-free. If you bought a CD or a bond in 1980-82, this security would provided you 12-15% annual fixed return till maturity. That is why many investors switched to fixed income securities at that time.
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Third, Shiller in 1981 wrote a paper about excessive stock volatility (compared to some particular rational model). As far as I know he wrote a paper (co-authored by Campbell?) about his model that uses PE ratio only in 1998. In this paper they warned about a huge overvaluation in the stock market.
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Finally my comment on the following: I would not be inclined to set my bond allocation by “the current secular trend in the bond market.” I would compare the long-term value proposition available from bonds with the long-term value proposition available from other asset classes and go with the asset class offering the better deal. My view is that all investors should be seeking the asset classes that offer the best returns at the lowest risk.
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I believe this is a huge mistake if we agree that the stock and bond returns are predictable. If you believed that stocks would provide you with 6.5% annual average return (computed using 140 years of data) and use this estimate to invest in 2000 for about 10 years, you would be way off your expectations. If, on the other hand, in 2000 you used last 20 years to compute the average stock return and supposed that during the next 10 years the stocks provided the same average return, again you would be way off your expectations. The same examples can be constructed for the bond investing. A more wiser approach to stock and bond investing is to take into account the model that use the predictability of stock and bond returns.
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Valeri
Economics Professor Valeriy Zakamulin: “In 1982 the Yield on 10-Year Government Bonds Approached 15% Annual. This Was Much More Than One Could Get From Risky Stocks, the Prices of Which Has Been Decreasing From About 1966. No Wonder the P/E10 Dropped to About 7 at That Time.”
I’ve been letting lots of people 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 Economics Professor Valeriy Zakamulin. Set forth below is the text of the e-mail sent by Valeriy in response to the e-mail of mine detailed in the earlier blog entry:
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Rob:
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My comment on the following:
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“Which would you say were riskier in the early 1980s, stocks or CDs? I would say that CDs were far riskier. Inflation could have wiped out your returns. Stocks are virtually risk-free when they are selling at the prices that applied at that time. The likelihood was that valuations would rise dramatically over the next 10 years and the investor would obtain a return of something in the neighborhood of 15 percent real per year. In a worst case scenario, valuations would remain at insanely low levels and the return would be “only” 6.5 percent real. The only risk that I can see is the risk that the economy could have collapsed. But, if that happened, CDs would not pay off either. So the risk of stocks was certainly less than the risk of CDs at that time.”
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First of all, we know about this only a-posteriori.
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Second, about year 1980, you probably forget that at that time the short and long interest rates were sky-rocketing. You could get about 10% annual completely risk-free return from CDs. In 1982 the yield on 10-year government bonds approached 15% annual. This was much more than one could get from risky stocks, the prices of which had been decreasing from about 1966. No wonder that the PE10 dropped to about 7 at that time: investors sold stocks and bought bonds instead. And note that it was completely rational!
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Third, when you talk about stock risk, you’d better mention that you are talking about long-run risk, not short-run. If you bought stocks in 1980 and held them till 1982, you would lose. Of course, if you bought stocks and held them for about 10-20 years, you would greatly multiply your initial investment.
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I see that you focus mainly on stocks and forget about secular trends in bonds. Bonds, as stocks, also have secular bull and bear markets, and stock returns depend on whether it is a secular bull or a secular bear market in bonds. How much to allocate to bonds also depends on the current secular trend in the bond market.
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Valeri
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I replied:
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Valeri:
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On point after point, the same basic dynamic applies. If you ASSUME investor rationality, Buy-and-Hold and all the conventional investing wisdom makes perfect sense. If you ASSUME that investor emotions are the dominant influence on stock prices, Buy-and-Hold is the most dangerous strategy ever concocted by the human mind. It is the fundamental assumption that determines where your logic leads. Experts in this field spend all of their time debating the end points of their analyses. They need to examine the fundamentals. That’s where the action is (in my view!).
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Did you ever look at how the people posting at liberal web sites respond to political developments in contrast to how people posting at conservative web sites respond to them? You would think these two groups of people were living in different worlds or seeing different fact patterns play out. They view the world from fundamentally different perspectives. Both sets of people are entirely sincere. It is the starting-point world view that determines what they see when they look at the world. So it is with Buy-and-Holders and Valuation-Informed Indexers.
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You say “we know about this only a-posteriori.” That’s a Buy-and-Hold mindset speaking, Valeri (I mean no offense, please understand that I have the greatest respect in the world for all of my many Buy-and-Hold friends). You find it hard to accept that long-term stock returns are highly predictable and that investors could be so irrational as not to take advantage of this reality. So, when stocks perform in highly predictable ways, you look for reasons why investors did not act as they “should” have. The reason is that investors are not rational! They want to be. They could be a lot more rational than they are today. But to become more rational, they need more experts encouraging them to learn about what the last 30 years of academic research shows and to take advantage of tools that help them make practical use of this research and all this sort of thing. Investors cannot learn about these findings in the absence of hearing about them. We need to tell people about them and we need to encourage people to talk the findings over. Then investors will gradually become more capable of rational choices, to everyone’s benefit.
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All of the key things we “know” today about how stock investing works, we “knew” in the early 1980s. We now have 140 years of historical data available to us . In 1982, we had only 110 years of historical data available to us. But the message was precisely the same. Shiller didn’t publish his research showing that valuations affect long-term returns in 2011. He published it in 1981. The research and the data said the same thing then that it says now. It said that long-term timing is absolutely required, that any investor who fails to engage in long-term timing has zero chance of seeing his investing strategy work out well in the long term. Why? Because practicing long-term timing is nothing more or less than exercising price discipline and no market participant can do well without exercising price discipline. That’s Lesson #1. Nor can any market work if the majority of participants in it fail to exercise price discipline. Price discipline is the thing that makes markets work. Take price discipline out of the equation and you have a dysfunctional market and the price crashes and the economic crises that follow from that.
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I very much disagree that 10 percent returns were available risk-free from CDs in the early 1980s. Do you know of any peer-reviewed academic research that tells us how to predict long-term CD returns? I do not. So you are always taking on inflation risk when investing in CDs. This is not so with stocks. The U.S. economy has for 140 years been sufficiently productive to support returns of 6.5 percent PLUS inflation and, at times of insanely low prices, the return naturally goes up to 15 percent real. It is not possible to obtain similar returns from CDs on a risk-free basis. Stocks offered a far better long-term value proposition than CDs in the early 1980s, according to the academic research (in my assessment!).
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You say “no wonder that the P/E10 dropped to about 7 at that time,” suggesting that the reason was the price drops we were seeing from 1965 forward. You are ignoring the effect of the relentless promotion of Buy-and-Hold strategies by the “experts” in this field! Say that Shiller has published his research in 1971 instead of 1981 and that we all had been promoting Valuation-Informed Indexing all along. In that case, investors would have responded to the lower stock prices in the same way they respond to lower prices for any other good or service they buy in this consumer wonderland of ours. They would have gotten excited about the lower prices and increased their darned stock allocations! That would have brought those insanely low stock prices back up to reasonable levels in no time flat. It is the relentless promotion of Get Rich Quick/Buy-and-Hold strategies that causes insane price levels like that (and all the human misery that goes with the unemployment rates we see at times when we permit the heavy promotion of such doomed strategies). Had we all been telling people all along what we learned from Shiller’s research, none of this would have posed any problem whatsoever.
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I of course disagree that it was “completely rational” for millions of investors to sell their stocks at a time when the most likely 10-year annualized return was 15 percent real. I see it just the other way around. I see it as rational for investors to increases their stock allocations when the long-term value proposition is outstanding and to decrease them when the long-term value proposition for stocks is worse than it is for no-risk asset classes.
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You are 100 percent correct that I am talking about long-term strategies, not short-term strategies. Shiller’s research confirms the Buy-and-Hold finding that short-term timing never works. I view that insight as the second most powerful investing insight in history. None of what I am talking about works in the short term. In fact, in the short term, Valuation-Informed Indexing is often a total disaster (look at what happened from 1996 through 1999 for a recent, real-life illustration of the point). This stuff does not work in the short term. That point cannot be emphasized enough. I believe that much of the confusion re these points is that investors have a natural but unfortunate inclination to focus on the short term and there is so much money to be made in this field by appealing to this unfortunate inclination that most “experts” in the field feel pressured to rationalize the promotion of strategies that are precisely the opposite of the strategies they would recommend if they used the last 30 years of peer-reviewed academic research as their guide.
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You say that an investor who bought stocks in 1982 and then held for 10 to 20 years would do very well. This is so. But is it because the investor followed a Buy-and-Hold strategy or is it because stocks were priced to deliver outstanding long-term returns in 1982? I say that it is the latter. Buy-and-Hold can APPEAR to work for a time. But it only works when stocks are priced to deliver a strong long-term value proposition. Buy-and-Holders don’t sell when the long-term value proposition turns bad. So they eventually give up most of the gains they enjoyed in earlier years. It is because Valuation-Informed Indexers don’t do this that they are able to retire so many years earlier. The Valuation-Informed Indexers go with the same high stock allocations as the Buy-and-Holders during the years when stocks offer a strong long-term value proposition. But they lower their stock allocations when the long-term value proposition for stocks is no longer there. So they never experience the portfolio wipeouts that are eventually experienced by EVERY Buy-and-Holder (there has never yet been an investor who followed a Buy-and-Hold strategy for an investing lifetime and did not see most of the accumulated gains of a lifetime wiped out at one point — this has never once happened to any Valuation-Informed Indexer). The only difference between the two strategies is that the Valuation-Informed Indexers retain a far higher percentage of their gains and thus feel a far greater emotional peace about the investing experience than the Buy-and-Holders, who pretend for a time that their bull market gains are real and then suffer great emotional angst as the phony gains disappear into thin air in the secular bear brought on by the relentless promotion of Buy-and-Hold strategies.
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Finally, I would not be inclined to set my bond allocation by “the current secular trend in the bond market.” I would compare the long-term value proposition available from bonds with the long-term value proposition available from other asset classes and go with the asset class offering the better deal. My view is that all investors should be seeking the asset classes that offer the best returns at the lowest risk. If all investors did this, the investing markets would work as well as other markets, in which market participants do precisely this. It is this idea that investors should follow entirely different sets of rules that cause all the trouble. Investors need to be informed about what works to be able to invest effectively and investors need to invest effectively for our markets to stabilize and remain healthy.
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It all makes sense — But only from the perspective of someone who has rejected the conventional idea that investors can invest rationally without taking price into consideration when making purchase decisions. If you ASSUME that rationality is possible without price discipline, you will end up in a very different place. My question to you is — Is that because the other place is the right place or is it because your starting-point ASSUMPTION could never permit you to arrive at any other destination?
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Please do not take any of this personally. I like you and I respect you just as I like and respect all of my many Buy-and-Hold friends. I interpret your questioning as a sincere desire to figure out where I am coming from and so I am trying my best to be as frank as possible while also being as polite and warm and respectful as is obviously appropriate. I hope you will hear these words in the spirit in which I am sending them your way, my new friend.
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Rob
Economics Professor Valeriy Zakamulin: “If the Bubble Occurs, It Is Rational to Participate In It”
I’ve been e-mailing lots of 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 Economics Professor Valeriy Zakamulin. Set forth below is the text of an e-mail sent by Valeriy in response to the e-mail of mine detailed in the earlier blog entry:
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Rob:
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First of all I would like to comment the following:
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The right way to think about this (in my view!) is that P/E10 tells you the extent of risk in the market. It never identifies the precise return that will apply in 10 years. It always identifies the range of possible returns (the range is 6 points in either direction — when prices are at fair-value levels, the range is from an annualized 10-year return of 0 on the down side to an annualized return of 12 percent real on the up side) and assigns rough probabilities to an actual outcome falling at any point on the range of possibilities (the most likely 10-year outcome starting from a time of fair-value prices is an annualized return of 6 percent real).
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What I am telling in this context is that if the PE10 ratio is way too high or way too low, then the precision of your forecast (the range of possible outcomes as measured for example by plus minus one standard deviation) is rather good. If the PE10 ratio is close to its long-run mean, then the range of possible outcomes is too wide to be useful for forecasting.
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My comment on the following: If we tell people how stock investing works, we will never see such extreme P/E10 values again. Once we get the word out, stock prices become self-regulating. If people understand that they MUST change their stock allocations in response to big price swings, each swing upward will bring on sales and those sales will pull prices back to fair-value levels again. There can never be another bull market or another bear market once we permit open discussion of Shiller’s findings.
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First of all, it seems to me that we agree that people are not fully rational. Second, it will not be correct to say that it is rational that the PE10 ratio should always be about 15. In a rational expectation model the value of PE (hence PE10) depends on some, sometimes unobservable, parameters. For example, the investor’s risk aversion, the derivative of which is the market price of risk. Third, I do believe that the Shiller’s work did its job, now many people understand that it is not rational to have a PE10 value of 44. Forth, despite this, even in a rational expectation framework if the bubble occurs, it is rational to participate in it. As an example, image that you are in 1993 and you see a bubble in the stock market, yet the economic outlook is very bright, the investors’ optimism is high, and it looks like the bull market will continue for a long time. Will you get out of the stocks and miss the bull market till 2001? I doubt.
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Valeriy
Economics Professor Valeriy Zakamulin: “If the Current P/E10 Ratio Is Near the Long-Run Mean, the Shiller Model Cannot Predict Anything.”
I have been sending e-mails to 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 Economics Professor Valeriy Zakamulin. Set forth below is the text of his next e-mail to me:
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Hi Rob,
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I looked at your blog, you advocate the Shiller’s PE10 model. It can indeed predict returns to some extent, and this model is very popular among practitioners.
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Yet the majority of people do not understand correctly the implications of this model.
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The correct implication that everyone understands: if the current PE10 ratio is way too far from its long-run mean, then there is something extremely wrong with the valuation. In this case the model predicts that sooner or later there will be a big correction.
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The incorrect implication: the majority of people believe that the Shiller’s model implies that if the current PE10 ratio is near the long-run mean, then the market valuation is correct and one should expect the returns equal to the long-run mean returns. The problem is that people do not really understand the nature of mean reversion. The mean reversion is not just returning back to the mean. What the Shiller’s model really implies is that “an excess in one direction will lead to an excess in the opposite direction”. So if the market was highly overvalued in 2000, then the PE10 ratio should first decrease to the mean, then move further down so that the market will be undervalued. Every secular bull market starts at a PE10 value which is way below the long-run mean.
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You need to understand the following: IF THE CURRENT VALUE OF PE10 RATIO IS NEAR THE LONG-RUN MEAN, THE SHILLER’S MODEL CANNOT PREDICT ANYTHING!
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To understand, just look at the chart of PE10
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http://en.wikipedia.org/wiki/File:S_and_P_500_pe_ratio_to_mid2012.png
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For example, at about 1970 and 1990 the PE10 ratio was at the long-run mean. Did it mean that the 10-year return would be “average”? On the contrary, during 1970s the stock market return was way below average whereas during 1990s the return was way above average.
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Valeriy
Economics Professor Valeriy Zakamulin: “I Can Understand Why Robert Shiller Cannot Tell People About All His Ideas on How Stock Investing Works. He Must Act Very Professionally. He Can Only Tell Those That Are Supported by Scientific Research.”
I’ve been sending e-mails to 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 Economics Professor Valeriy Zakamulin. Set forth below is the text of the e-mail that Valeriy sent me in response to the e-mail detailed in the earlier report:
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Dear Rob,
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I apologize for not being able to respond to all points in your mail, I just do not have so much time.
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When it comes to the paper of Arnott, co-authored by Nobel Laureate H. Markowitz, I am familiar with the paper. First, if a Nobel Laureate co-authors a paper, this does not automatically means that this paper is an excellent paper (if you are interested in the flaws of other Nobel Laureates, read about the collapse of the Long Term Capital Management http://en.wikipedia.org/wiki/Long-Term_Capital_Management). This paper does have some weaknesses. For example, the size effect is mainly due to the January effect, the value effect is also partly due to the January effect. This paper, which supposedly explains both the size and value effects, cannot account for the January effect.
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I can understand why Robert Shiller cannot tell people about all his ideas on how stock investing works. Being a recognized Yale Professor, he must act very professionally, he can only tell those that are supported by scientific research.
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It seems to me that you do not really understand how the market timing strategy works and a possible total collapse of the stock market. From the long-term perspective, the period of 1990s was a period of a great stock market bubble according to the PE10 model. But was it rational to withdraw money from stocks in 1990 and put them into bonds? Not at all, if you used Shiller’s model you would miss the great return over 1990s. Market timing strategy implied selling the stocks in about 2001 and place money in bonds. But what if all investor pursued this strategy? I am sure that all the stock prices would dropped to zero. You disagree with the assumption that investors are rational, but at the same time you actually believe that investors are rational and the mass sale of stocks ends when the PE10 ratio approaches its long-term average. This will never happen if the investors are irrational. As a proof of my point, read about the stock market crash of 1987 (see for examplehttp://hnn.us/articles/895.html). One of the main causes was the popularity of the portfolio insurance strategy which requires selling stocks when prices drops. When everyone implements this quite sensible strategy, then the stock market crashes.
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I am not familiar with the papers by W. Pfau, if they were critisized, maybe the critique was well grounded?
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I believe that if people knew about PE10 model in 1970, then the period afterwards would be a period of only good economic times. Here you are wrong. The stock market is only a barometer of the state of economy. I believe that for a capitalism economy it is natural to have periodic boom-bust cycles.
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Valeriy
Economics Professor Valeriy Zakamulin: “I Would Not Agree That All Academic Professors Deny the Existence of Predictability. If A Paper That Supports Predictability Is Not Accepted, This Usually Does Not Mean That an Editor or a Reviewer Disbelieves In It. Most Often There Are Some Serious Flaws in Research Design.”
I’ve been sending e-mails to numerous people, letting them know about my article reporting on The Silencing of Academic Researcher Wade Pfau by the Buy-and-Hold Mafia.
Valeriy Zakamulin, a professor in the Department of Economics and Business Administration at the University of Agder, wrote:
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“I agree that the topic of stock return predictability is indeed controversial. Yet I would not agree that all academic professors deny the existence of predictability. If a paper that supports return predictability is not accepted, this usually does not mean that an editor or a reviewer disbelieves in it. Most often there are some serious flaws in research design. Typical flaws are data-mining bias, look-ahead bias, econometric pitfalls, etc. There have been published many papers in top academic journals that find in-sample predictability.”
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Personally I believe in stock return predictability, see my paper
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http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1857794
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I replied:
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Valeriy:
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Thanks a million for that extremely helpful response.
One, I appreciate the context you provided re why some research in this area may have been rejected. There are some who adopt views re this matter that I view as excessively cynical. It cheers me to hear someone who is more knowledgeable than me about the technical aspects of the question who is able to offer a more charitable and encouraging and positive take.
Two, I did not know about your research and I am so happy that now I do! I have downloaded the paper and will give it a careful read over the next week or so (I am at the moment trying to complete a few projects I need to put behind me before taking a few days off for the holidays).
I am not an investing expert. I do not have the technical background you possess. I am a journalist. I do think I possess a strong grasp of the political aspects of the question (as noted above, I tend to be inclined to a more optimistic take than some of the others who share my concern that we need to move forward more quickly than we have been re challenges to the conventional thinking). I also have done a lot of work exploring the how-to-invest implications of Shiller’s findings and the research that followed from it. Please feel free to shoot me an e-mail if you ever have an interest in talking over any questions re which you believe that I might be able to offer any help.
I’ll ask you one question that I think is key to making sense of all this. Please don’t feel that I am demanding or even expecting an answer for you. I am just throwing this question out there in the event that it might be helpful to do so.
You say that there are many papers in top journals showing in-sample predictability. Do you know of any that show the opposite — that long-term market timing does NOT work? My sense is that the source of all the confusion is that those who believe in the Efficient Market Theory ASSUMED that long-term timing does not work without ever showing this to be so and that the problem ever since has been that people don’t want to reject this assumption because so many books and articles and calculators were built on this foundational belief.
The idea that timing doesn’t work became the default position, so the burden was placed on those who believe in predictability to prove their case while it really should be the other way around — we should be assuming that long-term timing always works (since long-term timing is paying attention to price and price discipline is what makes markets work) and challenging those who do not believe that long-term timing is required to present evidence in support of their case.
IS there any evidence that supports the claim that long-term timing is not required? Wade Pfau spent a good bit of time trying to find something re this point and came up empty-handed. He even went to the Bogleheads Forum and asked if anyone there knew of any studies showing that long-term timing does not work or is not required for long-term success. No one there knew of any work that had been done on this particular point.
Thanks so much for doing the work you do, which I believe (I am biased — but still…) is the most important research work (in any field!) being done today. I wish you the best of luck in all your future endeavors.
Rob
25-Year CPA Lyn Graham: “One Direction for a Person Working With Such Perceived Threats Is to Work Under the Visible Level. The Other Is to Be Very Visible and Make It Difficult for the Threats to Be Carried Out Without Notice.”
I’ve been sending e-mails to 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 25-Year CPA Lyn Graham. Set forth below is Lyn’s response:
The forthcoming market crash is foretold and purposeful, and no investment strategy I have heard or can think of is the solution. It is a sad state of affairs. Reagan warned we are only a generation away from losing our freedoms. I never took that as a prophesy but ….
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Economic success breeds freedom, and economic success is being destroyed, purposefully.
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One direction for a person working with such perceived threats is to work under the visible level. The other is to be very visible and make it difficult for the threats to be carried out without notice.
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I am not sure I have much to add. Good luck.
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I replied:
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Lyn:
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I’ve definitely chosen the “Be Very Visible” path!
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I want to end the conversation on an optimistic note. Shiller’s ideas represent a very big advance. I truly think I speak as an expert on this question because no one else has spent as much time exploring the implications of his ideas. Think where we would be had we failed to achieve any advances in electronics and computer and software technology for the past 32 years. We’ve given up a lot by closing off advances in our understanding of how stock investing works. The good news is that, when those paths open to us, we are going to see huge increases in our economy’s ability to generate wealth for us all in a very short amount of time.
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I am not saying that everything is roses. But I think that sometimes it is darkest before the dawn and I don’t think that is pure coincidence. I think it may sometimes take a spell of darkness to help the humans appreciate why it is important always to be moving ahead. I can see things getting much worse than they are today and then suddenly turning very positive indeed.
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Even if I am wrong, it’s probably better to be optimistic than not to be as it is difficult to work up the energy to work hard for good solutions once one becomes overly pessimistic. If it were just me, perhaps I would become discouraged. I have two young boys. So I feel that I have no choice but to maintain hope for the future even when my eyes see things that otherwise might push me in the other direction.
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Rob
“As Word Gets Out About This and People See That Those of Us Who Talk Openly About It Are Not Being Destroyed, More and More People Will Feel Safe Coming Forward”
I’ve been sending e-mails to numerous people letting them know about my article reporting on The Silencing of Academic Researcher Wade Pfau by the Buy-and-Hold Mafia.
Monday’s blog entry reported on a response by 25-Year CPA Lyn Graham. Graham wrote: This sort of intimidation is not acceptable. The cigarette and pharmaceutical industries found research supporting their products by funding it. But this is big money supporting outcomes, not dissuading others.”
My response is set forth below:
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Lyn:
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Those are super comments. Your response has brought a nice measure of cheer to my Saturday morning.
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There was a fellow who reported on the Madoff fraud to the SEC several years before it was widely exposed. He had no inside information. He just did some mathematical calculations and was able to prove that the fund could not possibly be legitimate. The SEC ignored him.
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That’s my situation re this much bigger matter. The Buy-and-Hold idea has been under intellectual challenge for over 30 years. Shiller published the research that discredited it in 1981. But, as you say, there is always opposition to counter-conventional-wisdom thinking. Shiller’s findings are truly revolutionary. They change everything we once thought we knew about stock investing. They change things in a very positive way. Still, they upset the applecart. So they have been resisted with great strength.
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As you observe, that’s unfortunate but also a bit of an historical norm. The element that adds a nasty edge to this story is the rise of the internet as a powerful new communications medium. I am not an investing expert. I am a journalist. I built a hugely successful discussion board on early retirement back in early 2000. Since I had used Shiller’s ideas in putting together my own plan for early retirement, I shared what I knew with my fellow community members. I received a very positive response from a large number of people (but a minority of the board population). But another group felt intensely threatened by what I said. There is a mountain of intellectual support for Shiller’s ideas but there was a bigger mountain of popularity for the conventional ideas in May 2002, when I advanced the post that set off the explosion. The defensive group had both me and discussion of the topic I raised banned.
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They didn’t stop there. They saw me as a threat. So they made it a policy to follow me everywhere I went on the internet and to post abusively at all these other places until the site owner agreed to ban me. Since they are an organized group willing to engage in exceedingly abusive tactics if necessary, most ordinary people are afraid of them. So the ordinary people always eventually back down, word that the goons have prevailed once again spreads around the internet, and it becomes easier for them to prevail at the next place.
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Please understand that these people really do “believe” in the ideas they are pushing. I put the word “believe” in quote marks because they obviously do not have enough confidence in them to engage in civil discussion of them. But they “believe” in the sense that they follow the ideas themselves. This is also so of the experts in the field who promote the ideas. The experts are of course aware of the 30 years of academic research discrediting the conventional ideas. But they suffer from cognitive dissonance. They cannot bear to accept that they have been giving bad advice for so many years. They biggest scandal here is that the experts (some of the biggest names in the field) tolerate the insanely abusive practices (including death threats and threats to get researchers fired from their jobs) of the internet goons.
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The only explanation I can offer is that the experts just do not see any practical alternative. The situation is akin to what happened with Joe Paterno, the football coach at Penn State where a child molester was being protected for many years. People knew that bad stuff was going on. One woman was fired from the university because she investigated it. But people also loved Paterno and convinced themselves that things just couldn’t be as they appeared. It was a similar story with Lance Armstrong, the bicycle racer who recently lost all his medals because he was using performance enhancing drugs. Armstrong sued people who told the truth about him and got away with it for years because, even though just about everyone knew he was taking drugs, people understood that it was dangerous to give public voice to what everyone knew.
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The particular thing that added so much fuel to the investing controversy is the openness of the internet. Researchers in the field of course know about the challenges to Buy-and-Hold (the academic construct that is under challenge is called “The Efficient Market Theory”). They also know to keep their mouths shut. I am just some guy who figured out how to get stuff posted on the internet. So I didn’t know that. I posted about Shiller’s findings not knowing that I was doing anything “wrong” and hundreds of my fellow community members offered effusive praise for my work not knowing that I was doing anything wrong. One of these people spent eight years of his life helping me develop calculators that help people put Shiller’s ideas to practical use in ways that were not possible before we developed these tools. My friend (John Walter Russell) and I changed the history of investing. I think it is fair for me to say that given the words of praise I have won from many of the biggest names in the field that are posted at the “People Are Talking” section of my blog.
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But even the people who offered this praise don’t let me post at their sites! They know that they will be destroyed if they do. Also, they will lose readers. Most people still believe in Buy-and-Hold and will continue to believe until there is a public discussion of the flaws. But, if all the site owners concern themselves with is the popularity of their sites, we won’t see that discussion until the idea becomes less popular. Which means we won’t hear the discussion of why Buy-and-Hold cannot work until we see another price crash, at which point the losses will already have been realized.
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The truly frightening part of this is that Shiller’s model posits that it is these stock crashes that cause economic crises. When prices crash, millions of people lose wealth. So they spend less. And the economy contracts. Another big contraction could put us in the Second Great Depression. This is an important story.
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Wade Pfau came into this by reading my posts at a discussion board. He was excited by the research possibilities. So he contacted me and we worked together for 16 months. He did get his work published at a journal he describes as of acceptable but not stellar quality. He understands how important the research is and was disappointed that it was not published in a top-line journal. He was worried about the threats to get him fired from his job. I know because he told me so. But that is not all he was worried about. He was also concerned that there were a lot of people who did not like hearing what he was saying in his research. Accepting Shiller’s ideas requires people to accept that their portfolios are not worth what they today believe them to be worth. That’s hard medicine for people already worried about their retirements. I believe that Wade was also concerned that the big names in the field were not sticking up for him when he came under attack. He felt isolated. I think that’s how most people who learn about these matters feel.
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My aim is to get a discussion launched. The bad in this attracts attention because of its sensational nature. I DO NOT WRITE ABOUT IT FOR THAT REASON. I write about the bad stuff because there is no way for people to make sense of the story without knowing about that stuff. The good in this story is ten times more good than the bad stuff is bad. Shiller showed us how to reduce the risk of stock investing by 70 percent. I want people to learn about that. When people learn about that, we will become a wealthier people (capital will be better allocated than it is today) and we will recover from our economic crisis. These advances help everyone!. It’s all good stuff. We just have to get over this wall of defensiveness and fear of the new. As a journalist, it is hard for me to accept that there is not some way for me to help us pull that off, especially given that everything i say is documented on the internet (with time stamps and all this sort of thing).
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The people who promoted Buy-and-Hold are good and smart people. But they are today frightened and defensive people. The internet scares them because they have been covering this stuff up for years and this open medium threatens to expose them and it’s not too hard to imagine exposure leading to hundreds of billions of dollars in lawsuits. It’s a big mess! But fixing the mess promises to help us advance as a society in a very important way. The intimidation tactics are part of the story because they explain why people are learning about this from me, someone who did not go to investing school or manage a fund. The people who went to investing school and who manage funds don’t feel free to talk openly about this. So the only way it could come out is through someone like me. I feel that I need to tell about the intimidation tactics to help people make sense of things. I wish that they would not be the focus because discussion of them scares lots of people away. But I cannot see a way to tell the story without telling that side of things.
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Whew!
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I am grateful for your kind offer to contact Wade. I don’t think it would help. I agree that he should contact the police (I have done this) but he very much does not want to go down that road today. He wants to be accepted by all his peers and most of his peers today are people who do not want to see Buy-and-Hold challenged in an effective way. I of course understand that you are not in a position to join a cause. I didn’t as a matter of intent elect to join this one myself! I was sort of pushed into it. The only thing I would ask is that, if there is anyone you know of who you think might benefit from knowing about this, that you spread the word. For example, the best thing would be if a reporter from a big-name publication wrote up this entire story. We have a saying in the journalism field that exposure is a disinfectant. As word gets out about this and people see that those of us who talk openly about it are not being destroyed, more and more people will feel safe coming forward. Once we build the “cause” (a working economy!) to a certain size, things will reach a tipping point and things will just naturally grow and grow on their own. We already have enough people with an interest in the issue for these things to happen. We just need to help them to feel safe enough to give voice to their questions and thoughts and concerns.
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Thanks for listening. You are a kind and intelligent and fair-minded person. You have made a difference. I wish you all good things.
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Please write back if any of this does not make sense and you would like to understand better. But please know that I fully understand if you conclude that you have done all that you are able to do. If that’s the case, please just keep me in your thoughts. I am an optimist. I believe that things have been turning in the right direction in recent years. We just need to see one more devastating stock crash! (That’s a joke, kinda, sorta.)
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Rob
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