PassionSaving.com Home Page : The Financial Freedom Blog : April 2008
A community member named “Squash500” speaks for many in a post he makes to the thread at the Financial WebRing Forum discussing its recently adopted ban on honest posting on investing topics. He says: “I agree with the banning of Hocus. What I don’t understand is how Hocus can correspond in such a sweet and polite way — yet he irritates me to no end! What does Hocus get out of all this nonsense? Is he trying to sell us his book for $24.95?” In a follow-up post, he adds the observation that: “Hocus was banned because he was a polite and radical PITA [that stands for pain-in-the-behind].”
Squash500 nails it.
I have indeed endeavored to be sweet and polite in my postings on the various boards. All community members share with me what they have learned without charging me one thin dime as compensation for services rendered and edification received They deserve sweet and polite, or at least a sincere effort in that direction. So that’s me.
Irritating? A radical PITA? Yep. That’s me too.
Bull markets are a lie. The U.S. economy has been generating sufficient productivity to finance a 6.5 percent annual real return for stock investors for a long, long time now. They don’t call it a bull market when the return is 6.5 percent real. That’s just a normal market. To earn the designation “bull,’ the return has to be a good bit more than that. Another way of putting it is that, to earn the designation “bull,” the return has to be a lie. That’s so by definition.
The rational investor understands that, when he or she buys into something referred to as a “Bull Market,’ he is participating in a grand act of deception. Whenever you hear the phrase “Bull Market,” it would be a good idea to substitute in your mind the phrase “Lie Market.” Hearing it that way makes it less likely that you will be one of the ones who gets ruined in the aftermath.
I think of the people who post on the boards that I post on as my friends. That’s why I am sweet and polite to them. That’s also why I let them know that Bull Markets are Lie Markets. If you saw your friend getting into his car at a time when he was nutso drunk and you took the keys from him and hid them, there’s a good chance that he would call you a radical PITA. Too bad, you know? It comes with the job of being a friend.
Become friends with me and you’re going to have a hard time finding the keys when you attempt to drive home drunk from my house. Become friends with me and you’re going to hear an earful about what the historical data says about the chances of you obtaining a decent long-term return on your money for savings invested in stocks at times when prices are at the levels they have visited in recent years.
I can’t take your investing keys away from you. It’s your call where you put your money. But I can respond to questions and comments put forward on discussion boards that encourage you to make the sorts of mistakes that have in the past always caused middle-class investors to suffer wipeouts. If someone tells you what the safe withdrawal rate would be in some imaginary world where valuations have no effect on long-term returns, I’ll do what I can to get the word to you that that world ain’t the world you are going to be able retire in. If someone plays some nonsense gibberish word game to entice you into leaving your stock allocation unadjusted at a time when prices have traveled to the la-la land levels where they reside today, I’ll do what I can to let you know that this is a strategy that has not once yet worked in the real world.
I’m a PITA to those who tell tall tales about how investing works at times of runaway price levels and to those who take comfort in the tall tales too. No apologies.
Do I know everything? Nope.
But then neither do the ones who are so afraid of what you will learn if honest posting is permitted that they spend years of their life energy running from board to board making sure that no thread in which people engage in reasoned and friendly sharing of investing ideas is permitted to remain in place long. I oppose those guys (and witches). I like to think that my voice is the strongest voice in the Retire Early Community calling for removal of the thugs who have done so much damage to so many of our boards in recent years. I put a post to the Motley Fool board urging Greaney’s removal on November 23, 2002. I think it would be fair to say that I’ve done my part and then a whole big bunch more on top of that and then a whole big bunch more on top of that too.
The ones who encourage you in your fantasies that this might be the first time in which all the rules that have governed the markets since the first day are stood on their heads are not your true friends, Squash500. That’s my take.
Sometimes what they say in advertising slogans really is so. It takes a tough man to make a tender chicken. Think of me as the Frank Perdue of InvestoWorld.
Think it over. It’s your money, my new friend. More on This Topic
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April 2, 2008 12:22 – It’s Personal
There’s a revealing comment in the “explanation” sent to me by ModeratorQ for the ban on honest posting on investment topics recently adopted at the Financial WebRing Forum. He says: “I’m not blind to what you are doing or to the response that you are generating from long-time posters here who have made extremely positive contributions.”
What he is saying here is that it is all personal.
He’s not saying that he has personal negative feelings against me. The reference to me is exceedingly vague — he says that he is not blind to what I am doing but gives no indication that he views what I am doing as being in any way, shape or form harmful to the forum. The meat of that sentence is the reference to “long-time posters here who have made extremely positive contributions.” ModeratorQ likes the three abusive posters — Norbert Schenkler, DanielCarrera, and Scomac. The ban was imposed in deference to these three individuals (and their “defenders”). The motivation for the ban is personal in nature; its an expression of support for three abusive posters who don’t like being exposed as such on “their” board.
Crazy, huh? Why the heck would a board administrator act in support of abusive posters? Isn’t it the job of a board administrator to take action against abusive posting? When I sent my e-mail to ModeratorQ, surely he understood that my request that he “take action” against the abusive posting was not a request that he ban me!
He knew that I wasn’t asking that he ban me. He knew that I was asking that he suspend or ban Dan, who had with obvious and deliberate intent posted in contempt of ModeratorQ’s repeated warnings that he not bring up what had happened at other forums at earlier stages of The Great Safe Withdrawal Rate Debate. Yet the reality is that he did ban me and he did not ban Dan.
He tells us why in the words quoted above. Dan is one of “the long-time posters here who have made extremely positive contributions.” One of the most popular posters at the board was engaging in obvious violations of the rules of the board. What to do? What to do?
ModeratorQ is obviously not the first board administrator who has had to struggle with this dilemma. David Forrest at Motley Fool had to face it when John Greaney became unhinged and threatened to kill anyone who posted honestly on the safe withdrawal rate (SWR) topic. Morningstar Casey had to face it when Mel Lindauer elected to have his Goon Squad burn The Old Vanguard Diehards Board to the ground rather than permit honest posting on SWRs and other valuation-related investing topics. Andy Rabinowitz faced it when John Walter Russell’s posts to the Early Retirement Forum were so well received that BigMoneyJim and CuteFuzzyBunny and Nords made it clear that the board would be held hostage until a ban on honest posting on the SWR topic (and on other, related topics) was put in place.
The rules of what works in investing change as we shift from a bull to a bear. There is one set of rules that tells us what works at times of low and moderate valuations. There is a very different set of rules that tells us what works when prices reach the la-la land levels that have applied in recent years. The thugs who have destroyed so many of our boards are people who came to positions of “leadership” in times when one set of rules worked and who have continued insisting on the merit of their failed ideas after we entered an entirely different era.
Do you keep posters around who achieved popularity in an earlier time and have since become an obnoxious presence? Or do you give them the boot, angering their supporters? Another way of putting the question is — Do you honor your obligations to protect the integrity of the community discussions or do you pretend that you can’t see anything wrong with the use of deception, intimidation and word games to block discussions that bring to light the errors of popular contributors?
What if you yourself are one of the ones who has been putting forward poor investing advice for years now? How much would you be willing to wager that ModeratorQ believes in the Efficient Market Theory? I don’t know for sure. But I know for sure that I wouldn’t want to bet money against the possibility.
Huge bull markets become huge bear markets. That’s the way it has been playing out in the U.S. market for 138 years now. It’s also the way it has played out in every market that has ever existed anywhere on Planet Earth since the day the first market was set up for business. I have a funny hunch that it might play out that way this time too.
But that wasn’t the winning thing to say during the time when we were collectively electing to send stock prices up, up, up, was it? It may be that there were people posting honestly in those days, or at least making an effort to do so. Those people weren’t made to feel welcome. They were shown the door. They’re long gone now. The ones who rose to the top were the most stubbornly and mindlessly and viciously pro-bull posters.
The worst rise to the top in a wild bull. It’s no accident that we today see John Greaney possessing influence in one community and Mel Lindauer possessing influence in another and Norbert Schenkler possessing influence in another. Cartoonish pro-stock views were what sold in an earlier day; it was the most reckless of investing viewpoints that had “The Juice” back in the Summer of 1999. We are paying a financial price today for our too easy acceptance of the conventional wisdom back then.
This is what it feels like to experience change take place before you in real time. Change is what we are seeking when we ask that our boards permit honest posting. We’re not just seeking change re what topics may be discussed. We are seeking change re what community members will obtain Big Shot status. That’s why there is such heated resistance to the idea.
I’ts personal.
It would be nice to think that these sorts of things do not matter. It would be nice to think that politics does not enter into the determination of what can be said on discussion boards dealing with investing. It would be nice to think it, it would be a lie to say it. Politics affects every human endeavor. Investing is no exception.
You cannot trust most of what you read about how to invest effectively at a time when the P/E10 level is 24. No way, no how. What you read in investing forums and in newspapers and in magazines is all influenced by politics. The political reality is that there are lots of people who got a lot of things terribly wrong during the bull years and who have caused huge financial losses for millions of middle-class investors who placed their confidence in them. They are not in much of a mood today to say those wonderfully healing words “I” and “Was” and “Wrong.” They are in a cover-up mode. They are in a stonewall mood. They are in an abusive posting mood.
You are going to have to work up the courage to force the issue.
Or face the financial consequences of failing to do so.
You see, it’s personal. Not just for the Goons. Not just for the site administrators. Not just for me. Not just for the other Normals. For you too. It’s personal for all of us. That’s one of the many things that the Efficient Market Theory gets wrong. Politics isn’t always efficient but politics sure as shooting plays a role in the development of our investing strategies down here in the Valley of Tears.
The previously scheduled debates have been canceled at the Financial WebRing Forum. Three candidates who were big winners in the early primaries but who have been down in the polls a bit of late wanted it that way. The Big Shots who own the microphones clicked the “Off” switch. The decision is final.
Or is it? More on This Topic
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April 3, 2008 12:38 – Why I Quote Song Lyrics in My Posts…
… and why it drives the Lindaurheads quite bananas.
The words below are from G.K. Chesterton’s Orthodoxy. There is talk of a major publisher putting out an annotated version later this year under the title The Case Against the Efficient Market Theory.The new version will include tables and all that junk, according to industry rumor, but it will not be peer-reviewed. They searched far and wide, but they couldn’t find any peers to Chesterton!
Anyway, here’s what this Chesterton individual has to say on our favorite topic:
If you argue with a madman, it is extremely probable that you will get the worst of it; for in many ways his mind moves all the quicker for not being delayed by the things that go with good judgment. He is not hampered by a sense of humor or by charity, or by the dumb certainties of experience. He is the more logical for losing sane affections. Indeed, the common phrase for insanity is in this respect a misleading one. The madman is not the man who has lost his reason. The madman is the man who has lost everything except his reason.
The madman’s explanation of a thing is always complete, and often in a purely rational sense, satisfactory. Or, to speak more strictly, the insane explanation, if not conclusive, is at least unanswerable…
Perhaps the nearest we can get to expressing it is to say this: that his mind moves in a perfect but narrow circle. A small circle is quite as infinite as a large circle; but, though it is quite as infinite, it is not so large. In the same way the insane explanation is quite as complete as the sane one, but it is not the world.
The lunatic’s theory explains a large number of things, but it does not explain them in a large way. I mean that if you or I were dealing with a mind that was growing morbid, we should be chiefly concerned not so much to give it arguments as to give it air, to convince it that there was something cleaner and cooler outside the suffocation of a single argument.
Curing a madman is not arguing with a philosopher; it is casting out a devil. And however quietly doctors and psychologists may go to work in the matter, their attitude is profoundly intolerant. Their attitude is really this: that the man must stop thinking, if he is to go on living. Their counsel is one of intellectual amputation. If thy head offend thee, cut it off; for it is better, not merely to enter the Kingdom of Heaven as a child, but to enter it as an imbecile, rather than with your whole intellect to be cast into hell
Such is the madman of experience; he is commonly a reasoner, frequently a successful reasoner. Doubtless he could be vanquished in mere reason, and the case against him put logically. But it can be put much more precisely in more general and even aesthetic terms. He is in the clean and well-lit prison of one idea: he is sharpened to one painful point. He is without healthy hesitation and healthy complexity….
The sane man knows that he has a touch of the beast, a touch of the devil, a touch of the saint, a touch of the citizen. Nay, the really sane man knows that he has a touch of the madman…. Madmen never have doubts. More on This Topic
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April 4, 2008 12:05 – Financial WebRing Forum Entertains (Somewhat) Honest Discussion of Valuation-Informed Indexing
The Financial Webring Forum recently entertained a (somewhat) honest discussion of Valuation-Informed Indexing. The walls are (slowly) breaking down!
Here are some snippets of observations explored in more depth at the thread linked to above:
* Here’s a graph of 30 year annualized returns. B&H is black, VII is magenta. VII is pretty clearly superior everywhere, although there are a few occasions ending in the last half of the 90s, i.e. starting in the last half of the 60s, where B&H has a small advantage. Recent differences appear to be quite minor, although I would point out that an extra 1/2% a year over 30 years is not chicken feed.
* In 1996, you could not make an argument that the historical data ever showed a period where B&H was better. Timing was sometimes no better but it was never worse. But then the late 1990s happened and it all went to hell. B&H turned out to be a huge winner in the late 1990s. Tie it together with widespread acceptance of modern portfolio theory and efficient markets – and no looking too far back because really old history is probably less relevant – and B&H is obviously the way to go. The 2000-2002 bear market might make you question that, but maybe not. We have a few more years under our belt now. Is Shiller a hero or a fool? Is buy-and-hold appropriate because the old days aren’t coming back or are we fooling ourselves with recency bias?
* The B+H outperformance seems to be an “anomaly” to the extent that a massive bubble is an anomaly in market behavior.
* The B+H style is suited for the investor who lacks the time, talent or interest to watch market movements or to do the work required for VII. It has validity based on history. It is meant to deliver a sleep factor of 8 to 9/10 for this type of investor. VII is for the person who likes the work, can do the work, and takes the time for the work. NOT doing the work would be stressful. And that means this investor isn’t suited to B+H. VII also has validity based on history. Hence for this investor, the sleep factor is also 8 to 9/10.
* Pretty wimpy example of market timing! Real market timers are either 100% long or 100% cash. Nothing in between. Or, even better, 100% long or 100% short!
* Thanks, fascinating.
* VII is built at least partly on some very old wisdom from Ben Graham, namely that it’s unwise to go to extremes under any circumstances. IIRC Graham suggests varying equity allocations in the 25-75% range.
* I’m surprised by the limited number and muted nature of responses to this posting. Firstly, it appears stimulated by boredom: “Things have gotten altogether too stale. You can only talk so long about thrift and RRSPs and taxes and gold and diversification and the venality of politicians and whether blonde is he or she and … ” Secondly, through the ultimate sin of retrospective data mining, Norbert is casting doubt and dismay amongst the faithful, at a (market) time when most are already sufficiently stressed to start making errors.
* My concern with B&H is that one’s equities could be in a severe dip at the very moment when you need to cash some in to sustain a retirement lifestyle. Has this situation been discussed previously?
* Actually, the way you specify the model, it seems plausible. I’m presuming you’re using indexes to achieve stock exposure. What happens if instead it’s a stock basket (say 30 stocks)? The question is whether all stocks have to be within the P/E10 parameter.
WARNING! Discussions of the realities of stock investing have been found to be exceedingly dangerous to newbies at the Motley Fool site, at the Early Retirement Forum and at Morningstar.com. Do NOT read about Valuation-Informed Indexing if you have at any time had thoughts that most investing experts might not already know everything there is to know about the subject. Learning what the historical data says about the effect of valuations on long-term returns may render you unfit for Passive Investing and other strategies aimed at taking money out of your pocket and putting it into the pockets of the experts who have better ideas as to what you should do with it than you are able to come up with through use of your common sense. You have been WARNED. More on This Topic
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April 7, 2008 10:50 – Can Passive Investing Beat Valuation-Informed Indexing?
A new community member named “Curious” asks a thought-provoking question in the comments section for Friday’s blog entry (“Financial WebRing Forum Entertains [Somewhat] Honest Discussion of Valuation-Informed Indexing”). Here’s the question:
“Let’s suppose that the market is made up only of buy-and-hold investors and valuation-informed investors. Do the buy-and-hold investors (who do not trade) lose money to the valuation-informed investors (who trade)?”
To read my response or to offer thoughts of your own, please go to the blog entry for April 4 and then scroll down to the section in blue entitled “Comments Posted” and click there.
Juicy Excerpt: What would happen if everyone tried to sell their shares when the market was valued at a P/E10 level of 44? I believe that the sales would cause prices to crash so that, by the time the last person selling received compensation for his shares, the total payout would be the amount that would have been paid out had the P/E10 value been 14 or 15. Early sellers would of course obtain more than fair value for their shares. But late sellers would obtain less than fair value. The overall payout would be fair value, an amount roughly one-third of what was suggested by the newspaper prices at the time when the market was valued at a P/E10 level of 44. More on This Topic
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April 8, 2008 09:30 – Hocomania Never Sleeps
Every marriage has its moments. This one couple had tried everything. They tried talking it over and they tried hiring a babysitter and rediscovering the romance and all that other junk and finally came up with something that really seemed to work for them. The thing they came up with was, each time one spouse was annoyed by something the other spouse said or did, he or she would pick up a frying pan and hit the offending spouse over the head with it. That did the trick.
It worked so well for them that friends and neighbors followed their lead and found that the Frying Pan Theory for achieving marital bliss worked for them too (they lived in a strange neighborhood). Soon people everywhere were hitting their spouses over the head with a frying pan with great regularity. They were content. They were happy. They were fulfilled.
There are always troublemakers. There was a group that called themselves the No Fries who claimed that the Frying Pan People were nutso. Some of them really put their necks on the line. Some of them proclaimed the Frying Pan gibberish “dangerous.”
Something had to be done. The Frying Pan People had dollar bills in their eyes. If they could only persuade everyone to adopt Frying Pan Theory as their approach to marital bliss and get those Normals to shut up, all would be well. They hired some people to do some Studies. They needed to pass Peer Review, of course, so they asked some of the other Frying Pan People for recommendations. The Frying Pan Professors said, yes, it appeared to them that the Frying Pan Theory checked out. Frying Pan People got tenure. No Fries did not.
Time passed and the No Fries began to have doubts. So many people seemed to think that frying pans were the way to go. And they all looked so happy! Plus, there were those Studies. Were the No Fries missing out on something good?
A few No Fries tried hitting their spouses over their heads with frying pans. The spouses complained that they didn’t like it, it didn’t make them feel loving and warm and squishy inside. Something was wrong. They did the sensible thing and sent a letter in to one of the big magazines covering developments in the field and asked what was up. The magazine person explained that you have to really believe in Frying Pan Logic for this thing to work. Those with doubts don’t experience the magic. The very fact that the whiners were asking these sorts of questions showed why Frying Pan Logic wasn’t working for them.
Some of the No Fries began to enjoy getting hit by frying pans at this point. Or at least, if they didn’t, they were no longer willing to say so. It was one thing to get hit by a frying pan every now and again. It was something else to be a pariah in the neighborhood. It you didn’t really like frying pans, the thing to do was to at least pretend you did. Maybe you would get to like them over time.
A few of the more stubborn No Fries weren’t able to kid themselves that it felt good. “It hurts,” they would complain, “really, it does.” They were tolerated so long as they kept quiet about their strange ideas. If they mentioned now and again that they thought the frying pan thing was a sorta not great idea, no biggie. If they kept at it — well, you know.
More time passed and things got to a state where everyone had these ugly bumps all over their heads. The Fries didn’t want to admit to the No Fries that they had been right all along, but signs occasionally slipped out that they didn’t find it a big bunch of fun getting another pounding on top of the bumps already in place. “Yowsa!” they would cry out. Then, when someone asked why they had cried out “Yowsa!” they would say that there was no particular reason, it wasn’t like they were having doubts about Frying Pan Logic or anything like that. They meant it as a celebration of Frying Pan Logic. They meant “Yowsa!” in a good way. Yeah, that was it.
Eventually, people got bored not only with being hit by frying pans but with hitting their spouses with them too. It just wasn’t the thing to do anymore. The Study People got about the business of writing new sorts of studies proving new sorts of things.
People still got married. People still moved into houses together and had babies and all that sort of thing. Instead of hitting their spouses over the head with a frying pan when trouble arose, they fell back into the habit of yelling and crying and then seeing that look and then getting hot. That seemed to work out okay, more or less.
No one ever thought to write any Peer-Reviewed Studies about it, however. It seemed too obvious a thing to write a study about.
The couple who started the frying pan craze never got divorced. They have five kids today, three girls, two boys. They say that they don’t know what they were thinking. There was a lot going on at the time and this crazy idea somehow just popped into their heads. They gave it up long before most of their followers. She says it was his idea and he says it was her idea.
The kids say that their strong hunch is that they’re both right. More on This Topic
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April 9, 2008 12:12 – Technical Analysis for Non-Dummies
I’ve added an article to the “Investing for Humans” section of the site entitled Technical Analysis for Non-Dummies.
Juicy Excerpt: I know little about technical analysis. I don’t practice it. I don’t recommend it. But hey! Where would I be today if I let little things like that stop me from spouting off my opinions on an investing topic?
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April 10, 2008 15:55 – Warning: I Talk to Goons
I’ve added an article to the “Banned at Motley Fool!” section of the site entitled Warning: I Talk to Goons.
Juicy Excerpt: A good number of the Goons have posted constructively on other topics or at other times. Some even argued in support of the idea of permitting honest posting on safe withdrawal rates in the days before their turn to The Dark Side. I hate goonishness more than anyone else in the community. I don’t think it follows that I need to hate the particular individuals who post as Goons as people.
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April 11, 2008 12:18 – “This is What Investing Should Be — Calculated, Deliberate, Confident, Informed and Simple”
I’ve added Aarons story to the Middle-Class Millionaires section of the site.
Juicy Excerpt: “You and Mr. Russell are on to the most valuable ideas about spending and investing I’ve ever encountered. Saving 30% can be easier than saving 10%? That is absolutely brilliant, and I know it’s true because I’ve been there. One is a quest, and the other is a drain. Totally different energy.
“I am not willing to save 30% anymore, but I do have 15 years of accumulated savings that I am dead-set against losing and will count on for financial independence some day. I’m waiting for another 1982 opportunity, but don’t know when or if it will ever come.
“Then I saw the PE10-weighted TIPS/S&P 500 portfolio and had an ah-ha moment. This is what investing should be — calculated, deliberate, confident, informed and simple. And based on mathematics and reason. We should know why our investments will work, and feel good about being able to invest. Faith should not be a factor, and sacrifice should not be the attitude.
“I’ve got a lot to learn, Rob. Thanks again for putting all your ideas out there. I really can’t express what I’m going through right now. It’s a turning point for sure.”
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April 14, 2008 13:04 – “It Is the Rigidity of Passive Investing that Causes All the Sickness that Surrounds It”
A community member named “New Investor” asks a question in the comments section for Friday’s blog entry (“This Is What Investing Should Be — Calculated, Deliberate, Confident, Informed and Simple”) that in my view reveals the sickness at the core of the Passive Investing approach. He argues that, in the event that Valuation-Informed Indexing is the way to go, “clearly we need an ironclad strategy, in the form of a strict rules-based approach.”
I strongly disagree.
Juicy Excerpt: Why the intense resistance to considering what works? The resistance is the product of fear, New Investor. Investing is taking on risk. Taking on risk causes fear. Our search for relief from the fear we experience investing causes us to look for formulas that possess some magical power to always be right, to always work and to work without the need for us to exercise judgment and to take the chance of being wrong. Any investing approach that pretends to be responsive to this sick desire in time only magnifies our fears. There are no magic formulas. Your demand that I provide you with one is rooted in the same emotional weakness that caused you to fall for the Passive Investing mindset in the first place. I am encouraging you to try to overcome your fears, not to submit to them a second time, this time in the name of timing rather than in the name of Passive Investing.
Please take a step back and consider for a moment what it is about Passive Investing that causes such intensely self-destructive reactions among the investors who follow it. It is the rigidity of Passive Investing that causes all the sickness that surrounds it. The error in Passive Investing is that it insists that one stock allocation apply at all sorts of varying price levels. What you are asking for here is just a variation on this same doomed and dismal theme. You are saying that the allocation may change, but that it must change in formulaic ways based on some rigid set of pre-determined rules. Why? Why must investing be turned into a sick, neurotic game? Why cannot reasonable and emotionally healthy humans consider investing in reasonable and emotionally healthy ways? Did someone pass a law back about the time that Eugene Fama revealed to an awed universe the Efficient Market Theory?
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Just about everything you have read about investing over the past 30 years was influenced in important ways by the Efficient Market Theory. The Efficient Market Theory is a joke — a dumb joke, a cruel joke, a very unfunny joke, but a joke all the same. We are watching in slow motion and in real time the greatest loss of middle-class wealth in the history of the United States play out before our eyes as a result of the lies told to us by advocates of this dumb, cruel, unfunny joke.
We don’t need intellectual arguments. We had all the intellectual arguments we needed to reveal the Efficient Market Theory as a joke on the day it was put forward. There never was even a sliver of intellectual integrity to this “idea.” So that’s not an issue.
What’s holding us back? Why haven’t the Old School safe withdrawal rate studies been corrected? Why haven’t middle-class investors been warned to bring their stock allocations down to levels that are reasonable for these prices levels? Why haven’t we gotten about the business of replacing the Sick Joke Approach to Investing Analysis with something more substantial and more realistic and more practical and more balanced and more reasonable and more life-affirming and more human?
Pride.
Or shame, if you want to look at it from that direction.
The people who pretended to believe in the theory for a time are too embarrassed today to acnknowledge the damage they have caused by putting forward such dangerous investing advice. They have built up in their own minds and in the minds of their followers an image of themselves as infallible and they don’t like the idea of seeing those perceptions go “pop!” even a tiny little bit.
They must eventually do so, of course. Theories that don’t make sense don’t stand the test of time. The Efficient Market Theory is today in the process of being tested for the first time. It is failing the test with flying colors. The Empire of Nonsense is crumbling. So the Big Shot Experts are eventually going to have to change their tune, whether they like the idea or not.
My thought is that it is better for them to get this over with sooner rather than later. I think it would be fair to say that there are two or three who have expressed displeasure with the veiled hints and vague suggestions that I have put forward in this regard. I’ll keep on doing what I do. I wouldn’t mind a bit more help.
The reason why I think it is better once you know you got something wrong to just come out and admit it is that the longer the con continues, the harder it becomes for those protecting the con from scrutiny to avoid looking bad for doing so. Here are some words from John Mauldin:
“This weekend Rob Arnott told the audience at my conference that he recently spoke to approximately 200 academics in the area of finance. He asked them how many of them believed in the Efficient Market Hypothesis that Woody wrote so cogently and negatively about above. Not one of the academics raised his hand. Then Rob asked how many of them use EMT in their research and assumes it to be true, and nearly every hand was raised.”
Not good. More on This Topic
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April 16, 2008 12:45 – Does Mel Lindauer Run Vanguard?
I’ve added an article to the “Banned at Motley Fool!” section of the site entitled Does Mel Lindauer Run Vanguard?
Juicy Excerpt: Does Mel run Vanguard? Does Mel run this board? Is Mel unhappy? This board is more like a police state than a place to share ideas.
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April 17, 2008 15:44 – Never Go to a Nerd for Investing Advice
Bernstein is a nerd with a creative mind.
Bogle is a nerd with courage.
Munger ain’t no nerd. He’s the opposite.
Buffett isn’t a nerd either. He might have some friends who are nerds. That’s the worst you can say about him.
Asness isn’t a nerd. Too funny.
Orman isn’t a nerd. Her eyes are too big.
Arnott isn’t a nerd. Arnott is a stud. Arnott actually pointed out that the nerds are deep down inside afraid to look at what the numbers say. This Arnott fellow is the real deal.
Russell isn’t a nerd. He’s too kind. And too generous.
Easterling likes numbers an awful lot. I can’t blame you for being suspicious. But he’s smart and he’s a straight-shooter. What do you suppose his game is?
Shiller is Superman wearing a nerd disguise. How did the guards happen to let that one past the gate?
Mauldin talks about baseball a lot. That makes me wonder that he might be a nerd trying to cover it up. And he writes such long posts; that’s always a bad sign. Still, If he’s a nerd, he does the nerds proud. There are exceptions to every rule.
We tackled the Lindauer matter the other day. He’s off the hook for a week or so.
Kiyosaki is an anti-nerd. Kiyosaki would benefit from taking nerd pills. It’s not often I run into one who I wish could be more nerdy.
Burns is a nerd who tries hard to overcome it. Let’s give credit where credit is due.
Bennett ain’t no nerd. He’s an idiot, sure. That’s different. More on This Topic
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April 18, 2008 15:36 – “I Woke at 4:00 am and Stared at the Wall for 20 Minutes”
I’ve added Tasha’s story to the “Middle-Class Millionaires” section of the site.
Juicy Excerpt: I woke at 4:00 am and stared at the wall for 20 minutes before turning on my laptop to surf around looking for info on becoming debt-free and financially independent. I found you through a series of Google searches on financial independence. For my third search, I entered “what does financial independence mean?” At the bottom of the third Google page, I clicked on “8 Paths to Financial Independence,” which brought me to your well-thought-out, respectfully written piece at PassionSaving.com.
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April 21, 2008 04:23 – Passive Investing — The Theory and the Practice
For an in-depth examinatiion of how Passive Investing works in theory, please click here.
For an in-depth examination of how Passive Investing works in practice, please click here.
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April 22, 2008 09:22 – The Broken Homes that Jack Caused
Taylor Larimore (co-author of “The Bogleheads’ Guide to Investing”) has a retirement home that he refers to as “The House That Jack Built.” The idea is that he earned such oversized returns during the wild bull that he was able to afford a home that he would not have been able to afford had he needed to rely solely on money he earned from the work he did. He attributes those oversized returns to Bogle and his advocacy of Passive Investing.
Where did the money come from? Taylor didn’t earn it from engaging in productive work. Bogle didn’t take it out of his pocket and put it into Taylor’s. Whose pocket did it come from?
It came from your pocket. And from mine. And from the pockets of all the other middle-class investors of today (including Taylor’s, to be sure).
Whenever you hear about a money-generating scheme that sounds a bit too good to be true, the thing to do is to to focus in on what’s going on step by step until you are clear where the money is coming from and where the money is going to. When you get clear on that, you know whether the approach being described is a Get Rich Quick scheme or not and who benefits from it. Follow that practice to examine Passive Investing and you learn that Passive Investing is a Get Rich Quick scheme. There’s no substance to the juicy returns bragged about by followers of this approach. Passive Investors get rich the new fashioned way — they borrow to the hilt!
Where did the money for Taylor’s retirement home come from? It came from the investors of today. Taylor (and all the stock investors of the late 1990s) borrowed that money from the stock investors of subsequent years. No, we didn’t sign any pieces of paper. They didn’t see a need to ask our permission. We all know Taylor is a fine fellow. We all wanted to help him out. We do what we can when opportunities present themselves, do we not?
There’s a reason why you often hear me referring to the historical stock-return data in the investing articles at this site. It’s because the historical data, being objective, tells truths that us subjective humans are often more than a little reluctant to give voice to. Taylor’s not going to tell you who really paid for his retirement home. Neither is Bogle. The historical data will, however.
The historical data will tell you that the U.S. economy has been generating enough productivity to support a 6.5 percent annualized real return for stock investors for a long time now. It will also tell you where the money comes from when the return goes far above 6.5 percent, as it did in the late 1990s. It comes from future returns. That’s been the case for the first 137 years of our stock market’s history. Presuming that the rule that one plus one equals two continues to hold, it will continue being the case for the next 137 years too.
Passive Investing is a Get Rich Quick scheme because it encourages people to believe that the excess returns they obtain during wild bulls count as real earnings, not borrowed funds. If we understood that those excess returns needed to be paid back, we wouldn’t be keeping our stock returns stable at times when the amounts borrowed grew too large. We wouldn’t invest passively, but actively, rationally. When the debt that we were buying into when we purchased stocks grew too large, we would moderate our participation in the stock market until it made sense again for us to return to our old levels of participation.
Taylor really did bring in the money to pay for the retirement home by following Bogle’s Passive Investing strategies. So what’s wrong with Passive Investing? Isn’t it just great that it lets us have retirement homes without having to do the work needed to pay for them?
It doesn’t do that, of course. People are paying for Taylor’s retirement home. That’s why we have had 10 years of poor stock returns and in all likelihood will have more years of poor returns coming up ahead in the not too distant future. There will be people not able to afford additions to their houses because of the debt we incurred back in the day when we all were pitching in to help Taylor afford his retirement dream. There will be people seeing strains in their marriages when the money troubles get too intense. There will be kids who won’t be able to go to college, old people who won’t be able to get the best medical services.
It’s not all about Taylor, you know? That’s my point.
There are people who are going to think that that comment is unfair. I don’t think it is. It of course would be unfair if I were suggesting that it is only Taylor Larimore who ripped off the investors of today by putting too much in his own pocket back in the 1990s. I of course do not mean that. Taylor was one of millions. And I of course acknowledge that the Taylor of today is one of those being ripped off. All of those who participated in the bull imposed a heavy burden on all of those who came after; to some extent the two groups are comprised of the same people and to some extent they are not. My point is that Bogle and Taylor and all the rest of us should appreciate where the money to build Taylor’s retirement home came from. It came from real flesh-and-blood people who had to contribute blood, sweat and tears to earn it. I see it as bad taste for someone like Taylor to gloat over how he got his by happening to be at the right place at the right time.
Should he give the money back? Obviously not. That’s dumb. What I think is that he should acknowledge that he knows that the money to build the retirement home didn’t come from nowhere and that it didn’t come from Jack Bogle and to the extent that it can be said that it came from Passive Investing, it also needs to be said that it came at a great price to millions of investors who should not have been required to bear the burden of financing Taylor Larimore’s retirement. It came from people who worked for a living and who put something aside for retirement hoping to see it grow and who haven’t seen it grow much in recent years because Taylor and millions of others took out too much for themselves back in the late 1990s.
When we agree to talk honestly about investing, we’re halfway there to understanding how this stock investing game works in the real world. More on This Topic
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April 23, 2008 07:32 – Indexing Without the Emotional Baggage
I’ve added an article to the “Valuation-Informed Indexing”section of the site entitled Indexing Without the Emotional Baggage.
Juicy Excerpt: The very thing that made indexing the most appealing approach imaginable for 18 years has made it the worst approach imaginable for the past eight years and into the foreseeable future. Indexing gave investors not too interested in learning how stock investing works a free ride for 18 years. Now it is crushing them. This cannot continue. To survive (and indexing must survive), indexing needs to be reformed. We need a new and more reasoned approach to buying into the market return.
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April 24, 2008 10:08 – Rational Investing vs. Passive Investing
I’ve added an article to the “Valuation-Informed Indexing” section of the site entitled Rational Investing vs. Passive Investing.
Juicy Excerpt: To embrace Passive Investing is to set aside your capacity to engage in human reason. Don’t go there! Your need to justify to yourself your decision to reject your own capacity to reason will cause you also to reject the product of the reasoning power of millions of other investors traveling different paths to solve the same mysteries. Passive Investing is a lose/lose/lose proposition.
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April 25, 2008 10:23 – Buzz Updates
Aaron Friday writes in his blog entry for February 8, 2008, that: “I stumbled across Rob Bennett’s website in one of my hazy and tired, nightly quests for truth on the internet. This man has a lot to say about saving, spending and investing, and all of it is worth reading. His ideas about using, saving and investing money are what kettlebells are to physical training. They’re functional, they’re powerful, and they’re simple. They will inspire you to learn what makes investing work and what makes financial freedom possible. Just be open-minded and get ready to read, a lot. We’ve exchanged a few emails, and he hasn’t even suggested that I buy his book, which I will. Smart, insightful man. Good guy. Go there and read it all. Your personal wealth is a tool. Use it masterfully, confidently and with a purpose.” I am grateful to Aaron for those extremely kind words.
CareerChanger at Squidoo.com lists as one of her Practical Career Change Resources the article at the “Retire Different!” section of the site entitled “Six Unconventional Mid-Life Career Change Tips.”
FrontierMidWife is using PassionSaving.com to “make some plans for my future lifestyle.” She explains that: “I listened to a podcast about this guy who coined this term, passion saving. It’s all about saving in order that you can pursue your passions now, or soon, NOT saving for retirement. She adds that, “It actually is a lot like the Your Money or Your Life idea,” which is so (that book was the single biggest influence on my thinking in the saving area).
InvestorBlogger links to the article “Financial Pornography Is Not Sexy,” in the “The Self-Directed Life” section of the site.
I post a Letter to the Editor at the Early-Retirement-Planning-Insights.com site entitled Valuations Before the Great SWR Debate. I say: “The Great Safe Withdrawal Rate Debate is the product of three recent developments. One, we have more access today to statistical data on the long-term performance of stocks than we have had in the final years of any earlier out-of-control bull market. Two, middle-class participation in the stock market is greater today than it was in earlier out-of-control markets (because we now provide for our own retirements, and such). Three, the internet discussion-board communications medium permits sustained questioning of arguments and methodologies to an extent that earlier communications mediums did not.” More on This Topic
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April 28, 2008 05:11 – “I Now Live on SS and in HUD-Subsisized Housing…But My Time’s My Own”
I’ve added Mary’s story to the “Middle-Class Millionaires” section of the site.
Juicy Excerpt: I forthwith dropped out of the commercial world. Walked out of my “job.” I moved back to New England and lived with various friends for five years, and now I live on SS and in HUD-subsidized housing. Medicaid for healthcare (the best healthcare I’ve ever had!) But my time’s my own.
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April 29, 2008 11:52 – “You Have Not Addressed the Actual Problems Investors Face”
Today’s blog space is filled by the text of an e-mail sent to me last week by Alex Sutherland (Alex has kindly given me permission to set forth the text of his e-mail here):
I just read your commentary on Stocks for the Long Run [the reference is to an article that appears at the “The Book I Read” section of the site] and you bring up some very interesting points.
Unfortunately what I understand as your two main points are intermingled in a way such that I have some difficulty unraveling.
My understanding of your two main arguments is that:
1. You do not believe that buy and hold investors exist because you believe that emotional investors will sell their stocks after major losses.
“Do you know anyone who would not sell stocks after experiencing a 68 percent price drop? Neither do I. My strong hunch is that neither does Siegel.”
2. You believe that long run performance is predictable based on Valuation-Based Indexing.
For the sake of argument assume that I’m very used to risk and taking big losses (maybe a professional poker player, for example, who has no qualms flipping a coin for a month’s salary) and completely capable of buying and holding my stocks even if they lose 90% of their value or 68% or whatever over the next few years. Also suppose that I’m 23 so investing with a 30-40 year horizon is perfectly plausible.
Given these assumptions to really argue that I shouldn’t put all my money in stocks regardless of valuations, it is not sufficient to simply show that buying at a low valuation is more profitable than buying at a high valuation. You then need to show that this more complex strategy will do better 40 years from now than buying and holding stocks for 40 years.
My problem with your argument is that I cannot time the market in the long term without choosing a time to buy which under your approach involves waiting until valuations are low. This could be a very long time or a very short time.
My understanding of what you’ve demonstrated suggests that you have not addressed the actual problem investors face.
As an investor today my options are very simple. I can wait for lower valuations or I can buy stocks. Do you have a solid estimate of the distribution of the time it would take from today for the S&P’s P/E ratio to drop below a given value? Without such an estimate how can you really compare you ideas to buying and holding stocks?
I’m interested to hear your ideas.
Tomorrow’s blog entry will set forth the text of my response to Alex. More on This Topic
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April 30, 2008 04:15 – “Choosing Passive Investing Is Like Choosing to Take on Hundreds of Thousands in Student Debt”
Yesterday’s blog space was filled by the text of an e-mail sent to me last week by Alex Sutherland. Set forth below is the text of my response to Alex:
Thanks for writing. Yours was a thoughtful note that I much enjoyed reading.
The points you raise are intelligent ones. I obviously come down strongly in favor of long-term timing. I’d like to hear more people aim to present a reasoned case against the idea, as you have. I doubt at this point that those arguments are going to entirely persuade me. I do think they will persuade others, however. And I am sure that considering the ideas will cause people to think over some important questions in a new light. Finally, it could be that you are right and that I am wrong. I can’t see it today, but I obviously am not God. The only way I am ever going to get there is to have people like you make an effort to raise these points. So I am grateful for that and I encourage you to consider offering comments to the blog if ever time permits.
I do not agree that Valuation-Informed Indexing is more complex than Passive Investing. You certainly are not the only person who thinks this; most people do. My view is that it is less complex because it is a more natural way to invest. Passive Investing is an unnatural act. When we buy any other sort of asset, we look at prices; it is only re stocks that this basic step of the buying transaction is thrown out the window. Doing that goes against something fundamental in human nature and we feel compelled to work up all sorts of rationalizations to justify what we have done. I believe that the simpler approach is just to do what makes sense — to pay attention to prices. There’s nothing hard about it except that it goes against conventional thinking for the length of time that we remain at sky-high price levels.
Your analysis of what I need to show to make the case for Valuation-Informed Indexing (VII) sounds essentially right to me. My only hesitation in endorsing it is that you might be exaggerating the extent to which things must be known to precision to make VIII work. It certainly is so that you must compare the return you would receive from Passive Investing with the return you would obtain from VII — the argument has to be that there is a relative benefit. And you need to know that prices are going to come down at some point in the future; if prices never came down, VII would never pay off. However, you don’t need to know precisely when this is going to happen. You need to know that the probabilities are on your side. If the probabilities are on your side with VII, you should practice VIII.
The purpose of the Scenario Surfer (see the tab at the left side of each page at the site) is to help people form assessments of the rough probabilities (working on an assumption that stocks are likely to perform in the future at least somewhat as they always have in the past). My experience is that VII beats Passive Investing/Rebalancing in about 9 out of 10 tests. My view is that this means that VII is offering the best deal even in those cases in which VII does not come out ahead by the numbers. In that rare case in which rebalancing beats long-term timing, what is happening is that the investor is getting a lucky draw of the cards; he ends up ahead but at the cost of taking on great risk. I think it is fair to say that VII always offers a better long-term return at lower long-term risk (if properly implemented, of course).
You might want to look at the article “Market Timing — What Works and What Doesn’t” in the VII section of the site to get more background on how one uses rough assessments of the probabilities of various outcomes to make decisions as to how much to change one’s stock allocation in response to price changes.
Since your focus is on young investors, you need to pay particular attention to the compounding issue. Say that an investor is in his 20s and has $10,000 invested. Say that he experiences a 50 percent loss, a loss of $5,000. That’s a devastating loss to an investor in his 20s. If you calculate the compounded value of that loss to this investor by the time he is 65, you will see that it is huge. No one should be glib about such a devastating loss. I think that the conventional advice does a great disservice to young people in the way it makes light of the losses they are likely to suffer as a result of following the Passive Investing approach. Young people need to protect their money too. Losses are never a good thing for an investment plan.
In answer to your direct question, I do not have “a solid estimate of the distribution of the time it would take from today for the S&P’s P/E ratio to drop below a given value.” I believe that you may be guilty of a certain amount of black-and-white thinking here. You don’t need to know these things with much precision at all to be confident that VII will pay off in the long run.
The key is understanding that you do not need to place all-or-nothing bets. You don’t need to go to a zero stock allocation with the expectation that stocks will go to a valuation level of X within Y number of years and that you will then go to a 100 percent stock allocation. That’s extremist thinking. You need to think in terms of relative long-term value propositions. If you have determined that an 80 percent stock allocation makes sense for you if stocks are at reasonable prices, then an 80 percent stock allocation cannot also make sense for you if stocks are priced as they are today. Some sort of adjustment is logically mandated. If you are not able to say with much precision when valuations will change, that should influence the size of the adjustment you make, but it does not justify making a zero adjustment (unless you believe that high valuations have a zero effect on the long-term value proposition).
You are right to suggest that someone who really can hold through thick and thin will end up in the end obtaining a decent deal from stocks (it could take 25 or 30 years for this to be so). But have you stopped to consider how much better that person would make out by lowering his stock allocation at times of high prices, thereby protecting his capital until prices dropped, and then investing a far larger sum in stocks at a time when prices are reasonable and the long-term returns truly outstanding?
If you incur a huge loss sometime early in your investing career, you are going to take on a “debt” that it is going to take you decades to pay off. If you protect most of your money until the long-term value proposition improves, you are at a later date going to feel like you are the only one of your peers able to swim without a huge weight tied to his legs. To my mind, choosing Passive Investing is like choosing to take on hundreds of thousands in student debt. It is something that lots of people do and it’s something that lots of people will manage to overcome. It’s an unfortunate reality, however. It’s a choice that will be having negative ramifications for millions of young people for decades to come. It’s never a good idea to choose the weaker long-term value proposition, in my assessment.
Again, thanks for writing and do come back with more questions or comments if you feel so inclined.
Tomorrow’s blog entry will set forth the text of Alex’s reply to my response. More on This Topic
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