PassionSaving.com Home Page : The Financial Freedom Blog : January 2008
January 7, 2008 09:27 – Portfolio Allocation by Intimidation
Drip Guy put up a post at the Goon Board last night threatening to sue me for reporting the safe withdrawal rate accurately. This is not the first time this has happened; it is standard Goon practice to up the ante on intimidation campaigns when earlier efforts do not yield the desired results.
I bring it up today because I want to draw your attention to the broader implications. What does it mean for the investing strategies that you are following today that Drip Guy has threatened to sue Rob Bennett because Rob Bennett has dared to “cross” John Greaney by reporting accurately what the historical data says about safe withdrawal rates?
It turns out that it means quite a lot. If you have put your trust in the conventional investing wisdom of today (a day in which stock prices are at one of the highest levels ever reached in the history of the U.S. market), the fact that there’s a fellow living somewhere on our magnificent planet who feels such seething rage about what the historical data says re safe withdrawal rates that he would threaten lawsuits against those posting accurately about them means that you are in danger of suffering severe life setbacks in days to come.
What? The fact that some nutcase on the internet goes off his rocker means that you will suffer financial losses? How so?
Here’s how so.
Drip Guy is not the only nut case amongst us. There are others. In fact, I think it can be fairly said that we are all nutcases to some extent. We’re human. Humans do crazy things from time to time. Perhaps you’ve noticed.
No, we don’t all take it as far as Drip Guy or Mel Lindauer or John Greaney. We’re capable of taking it pretty darn far all the same.
If you are not willing to acknowledge that you could ever take it as far as Drip Guy or Mel Lindauer or John Greaney, how about acknowledging that you could take it as far as John Bogle or William Bernstein or Jonathan Clements or Scott Burns? Those are reasonable people, right? Those are smart people, right? Those are people of integrity, right? Those are not internet nut cases, right?
We make a mistake when we dismiss the Campaign of Terror as being solely a product of ill-policed internet discussion boards. It is indeed that. But it is also a lot more than that. It is also a product of ill-policed bull markets.
I’ll explain.
Robert Shiller has compared bull markets to Ponzi schemes. A Ponzi scheme is an act of fraud in which the people who get in early make gobs of money by persuading people who end up losing lots of money to buy into the investment they are selling by pointing to the huge gains made by those who got in early. After the thing collapses, people always describe those who fell for the fraudulent claims as having been taken in by their own greed. That’s a truth, but only a partial truth. It’s not only greed that causes us to fall for Ponzi schemes. It’s also the evidence put before our eyes during the time when the Ponzi scheme is paying off. The people who make gobs of money really do look smart sitting there with smiles on their faces and big bags of money all about them. Making money is the point of investing. Seeing people sitting among big money bags is compelling evidence to a lot of people trying to figure out what investing “expert” they should listen to.
The stock market during a bull market acts according to the same principle. Stocks are shares of ownership in corporate enterprises. The U.S. stock market has been paying a long-term real return of about 6.5 percent real for a long, long time. When we see returns of 20 percent and 25 percent and 30 percent, we have good cause to be skeptical, just as the people being enticed into Ponzi schemes after the point at which they can pay a positive return have good reason to be skeptical of the get-rich-claims used to entice them. We also have good reason to fall for the enticements. The people who get in early in wild bull markets really do make gobs of money. In the minds of a good number of generally smart and reasonable people, this makes them “experts.” The way it is.
The worst rise to the top in a wild bull market. The more irresponsible your investing strategy, the better it does when prices are going to la-la land for no rational reason. The more irresponsible your investing strategy, the more “expertise” you can claim.
The more irresponsible your investing strategy, the more inflated your ego will become by the results you obtained during the Ponzi scheme years. The more irresponsible your investing strategy, the more defensive you will become when the strategies that worked so well during the Ponzi scheme years begin working not well at all.
You will be tempted to ignore findings and arguments and claims contrary to the views you came to have confidence in during the Ponzi scheme years. You will be tempted to trivialize, to rationalize, to obfuscate. When pressed, you might experience flashes of anger. Who are these people questioning your expertise? Where are their gobs of money? How dare they?
Scott Burns has written three columns about the New School of safe-withdrawal-rate analysis. That’s good. He has continued to cite the findings of the Old School studies after having done so. That’s not so good.
William Bernstein has said that a 4 percent withdrawal rate is at today’s valuation levelsis ” risky.” That’s good. When questioned in a hostile environment about his SWR findings (this happened at The Old Vanguard Diehards Board, which was subsequently burned to the ground by the Lindauer Goons), he said that he had “no idea” what the safe withdrawal rate is at today’s valuations. That’s not so good.
Jonathan Clements has acknowledged that the Old School findings are “not the last word in safe withdrawal rates.” That’s good. He has failed to follow up on suggestions that he explore just how far off the mark the Old School findings are and then write an article sharing with his readers what he learns. That’s not so good.
John Bogle has explained the realities of where stock returns come from better than anyone I know; it was his book that helped me first understand why the Old School studies are analytically invalid. He watched the Campaign of Terror waged against The Old Vanguard Diehards board for close to two years by the Lindauer Goons without raising a peep of protest to Morningstar, the site that hosted the board. That’s not so good.
Here’s Shiller: “Behavioral finance corrects a major error in most traditional finance — the neglect of the human.”
Do you see?
You cannot tell the story of stock investing in an accurate and complete way without taking the human factor into account. Humans fall for Ponzi schemes. This has been going on since Adam and Eve fell for the one about the apple and the peer-reviewed studies showing that taking just one bite could not possibly do any harm. It has happened in every case in the history of the U.S. stock market in which the P/E10 value has gone above 20. The average price drop we saw on the three earlier occasions in which we reached such price levels is 67 percent. Wild bull markets are not kind to people who ignore the message of the historical data and fall for the claim that this particular Ponzi scheme is sure to end differently than all of those that came before it.
Do the experts possess a desire to warn us of the dangers of investing our retirement money in Ponzi schemes? I can point to a good bit of evidence showing that they do. Bernstein reported the safe withdrawal rate accurately in his book; he didn’t need to do that, did he? Bogle has on numerous occasions reported accurately where stock returns come from; he didn’t need to do that, did he? Scott Burns has reported three times on the New School findings; he didn’t need to do that, did he? Clements wrote a column reporting on Bernstein’s findings that valuations affect safe withdrawal rates; he didn’t need to do that, did he?
Most humans have something inside them that drives them to want to be honest. It’s the way God constructed us. Overly cynical arguments about Ponzi schemes and about much else generally leave me cold. Exaggerations are a bore; they lead to dead ends.
Most humans also have something inside them that drives them to acts of self-preservation. During this most recent Ponzi scheme (stocks reached valuation levels far higher than those we saw in 1929 at the top of the recent out-of-control Ponzi scheme), we have seen death threats made against those who reported accurately on safe withdrawal rates. We have seen board bannings of those who reported accurately on Bogle’s views on the effect of valuations on long-term returns. We have seen lawsuits threatened against those who have asked that their fellow Retire Early Community members be permitted to discuss investing topics in peace once again.
Scott Burns has been intimidated. William Bernstein has been intimidated. Jonathan Clements has been intimidated. John Bogle has been intimidated. Heck, I have seen signs that Robert Shiller has been intimidated in small ways. I know darn well that I was intimidated. I learned that the Old School safe-withdrawal-rate studies were analytically invalid back in 1996 but I did not put forward the post kicking off The Great Safe Withdrawal Rate until the morning of May 13, 2002. Intimidation is omnipresent during a wildly out-of-control Ponzi scheme.
It’s not just Drip Guy.
That’s the point. It’s Drip Guy and thousands and thousands and thousands of others. Only a tiny number are as abusive as Drip Guy. But almost all are intimidated by the Drip Guys of the world. Only a tiny number are willing to tell the story straight and true, and those few almost always bend over backwards to enfeeble their own arguments so that they don’t shock the Drip Guys of the world enough to bring on their sustained wrath. Jonathan Clements doesn’t want to be sued and Jonathan Clements doesn’t even want to be threatened that he will be sued. Neither does Scott Burns or William Bernstein or John Bogle. Neither do millions of other humans.
Fail to consider the implications of that reality when setting your stock allocation, and you are all but certain to get it wrong. Intimidation isn’t a good reason for going with a high stock allocation at times of extremely high stock prices.
Ignore Drip Guy. He has little of consequence to tell you. Look to the reaction we see to the appearance of Drip Guy types at our boards. When you see Scott Burns go into hiding at the appearance of a Drip Guy type, make a mental note to yourself to factor in the amount of distortion this suggests is present in everything that Scott Burns says until the intimidation campaigns and deception campaigns and smear campaigns come to an end. For so long as prices remain at one of the highest levels ever seen in the history of the U.S. market, the Drip Guys of the world hold the field. For so long as the Drip Guys of the world hold the field, the Scott Burnses and the William Bernsteins and the Jonathan Clementses and the John Bogles of the world cannot be trusted to tell the complete and plain and unvarnished truth about how stock investing works. It’s a sad enough reality, but it’s not a reality that someone seeking to attain financial freedom early in life can afford to ignore.
For now, all investing advice you hear is investing advice delivered by an expert with a gun to his head. Scott Burns told us that the reason why we have not seen more big-name media reports of our safe withdrawal rate findings is that: “It is information most people don’t want to hear.” Free speech is the first casualty of wars and out-of-control Ponzi schemes.
When will we get back our freedom to speak openly and clearly and honestly and compassionately? When will we get back our feeling of concern that our fellow community members not suffer busted retirements? When will we get back our self-respect? When prices fall. When the Ponzi scheme is exposed and going with a large stock allocation becomes a decent and good and respectable and profitable form of investing once again.
It will happen. Humans have on prior occasions survived worse than anything that the Drip Guys of the world can dish out, and I am confident that we will make it safely (but a good bit poorer, to be sure) to the other side this time too.
Let up pray! More on This Topic
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January 8, 2008 11:06 – “Here Was Someone Who…Was Not Afraid to Call the Corporate Culture B.S.”
I’ve added Tmeri’s story to the “Middle-Class Millionaires” section of the site.
Juicy Excerpt: To attain early retirement, you need to desire early retirement. To desire early retirement, you need to know that early retirement is possible for you. To know that early retirement is possible for you, you need to hear how lots of different people have done it and how they have gone about doing it and what obstacles they encountered and how they overcame them. You don’t learn about this stuff by reading a single article or a single book. You learn about it over time as your mind gradually becomes open to a greater and greater number of new ideas, each one building upon some earlier one. It’s a process that can only be pursued in a totally effective way in a community of people pursuing similar life goals.
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January 9, 2008 05:50 – My E-Mail to the St. Petersburg Times re the Lindauerheads
Helen Huntley, the personal finance editor of the St. Petersburg Times, wrote a blog entry on January 7 entitled Jack Bogle Weighs in with the Bogleheads. Set forth below is the text of an e-mail that I sent to Helen in response to her blog entry.
If I hear from Helen, I will report on her response at this blog. I will quote her response in the event that she gives me permission to do so.
Helen:
I am Rob Bennett, owner of the PassionSaving.com site and author of the Financial Freedom Blog. I am posting the text of this e-mail at my blog as there are many people in the Financial Freedom Community who are concerned about the matter being discussed.
I was glad to see you write about Jack Bogle’s appearance at the Bogleheads board. I have written many thousands of posts at internet discussion boards and learned much from the experience. I see the discussion board as an important communications medium of the future.
There’s a big problem with this medium, however, and I think it needs to be noted in connection with the Bogleheads board. This board was created by a group of highly abusive posters who destroyed the Vanguard Diehards board because it permitted honest posting on Bogle’s views on the effect of valuations on long-term returns (some of Bogle’s views are highly controversial at times of high stock prices).
There are many fine posts appearing at the new board everyday, but a prohibition on honest posting on valuations remains in effect there today. I think it would be fair to characterize a board that prohibits honest posting on so important a question as a corrupt enterprise. It is my strongly held view that Bogle should insist that the ban on honest posting on valuations be lifted and that he should not offer further endorsements of the board until it does.
A large number of posters at the Vanguard Diehards board favored the idea of permitting honest posting on the effect of valuations. I have an article at my web site that provides snippets from a good number of their comments:
Investing Discussion Boards Ban Honest Posting on Valuations!
If you have an interest in writing an article on this matter, I would be happy to provide any background information needed to do so and to answer any questions about it that you might have.
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January 10, 2008 11:08 – The Shame (and Pride!) of Expecting an Inheritance
I’ve added an article to the “Retire Different!” section of the site entitled The Shame (and Pride!) of Expecting an Inheritance.
Juicy Excerpt: One of my father’s unrealized dreams was to start his own hardware business. To the extent that his inheritance permits me to get my writing business off the ground, I am letting him live his dream through me. One of my mother’s unrealized dreams was to have an education (she was forced by her family’s difficult financial circumstances to quit school after completing eighth grade). To the extent that her inheritance permits me to put my schooling to good use, I am letting her live her dream through me.
Programming Note: The blog will not be updated on Friday (I will be away from the computer). Please visit us again on Monday, January 14, for more exciting reports on safe withdrawal rates, fun units, early retirements and such like. Same bat time, same bat channel.
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January 14, 2008 12:42 – My Advice to Bogle on Dealing with the Lindauerheads
Vanguard Founder John Bogle has recently put posts to both the Lindauerheads board and The New Vanguard Diehards Board suggesting (but not stating with clarity) that he is losing patience with the abusive posting tactics that were employed by defenders of Mel Lindauer (co-author of The Bogleheads’ Guide to Investing) to destroy The Old Vanguard Diehards Board and that have been recently used to intimidate the group trying to build The New Vanguard Diehards Board and to open that board to honest posting on the effect of valuations on long-term returns. Whew! That was a long sentence.
Good for him. It would not be entirely unfair to describe this initiative as a case of too little too late. But Bogle does indeed possess the “juice” to rein in the Lindauerheads and every little effort on behalf of the thousands of constructive posters who built the old board helps. I applaud Bogle for taking the steps he has taken and encourage him to move a lot farther and at a far greater speed.
In his comments at The New Vanguard Diehards Board, Bogle asked a question that I sense is on the minds of many. “Why can’t we all just get along?” he wondered. This blog entry aims to respond to that question by offering 10 tips for helping Bogle deal more effectively with the Lindauerheads in the future than he has in the past.
Tip #1 — Forget About the Idea that Bogleheads and Lindauerheads Can Co-Exist in Peace. Why can’t the Bogleheads get along with the Lindauerheads? Because the Lindauerheads hate us.
It’s that simple, that human, that emotional.
Many of us think of investing as primarily a rational endeavor. I have certainly been guilty of this in the past; Bogle is certainly guilty of this in the present. Imagine investing as primarily a rational endeavor and it is not possible to make sense of the behavior exhibited by the Lindaurheads toward the Bogleheads. Learning together is what it is all about, no? Learning together is how we all make money and achieve financial freedom, no?
That’s a rational truth. The emotional truth is that the Lindauerheads hate the Bogleheads. They hate it that the Bogleheads are rational. They hate it that the Bogleheads are balanced. They hate it that the Bogleheads are open to learning. They hate it that they see in us the virtues that they know somewhere deep inside that they lack.
Talking nicey nice will not change this. Trying to negotiate compromises will not change this. Letting the Lindauerheads have their way on a host of issues while bowing down and requesting that little bits of honest posting on the valuations question be permitted will not change this. The Lindauerheads are not interested in nicey nice talk or in compromises or in honest posting on valuations.
You cannot get to first base pursuing these types of approaches. The Lindauerheads are not motivated to negotiate in good faith. The Bogleheads cannot negotiate with themselves. Bogleheads and Lindauerheads will never be able to co-exist in peace until the Lindauerheads become motivated to work out compromises. Getting them motivated is the very first step.
That means kicking them off the boards we built for purposes other than the purposes they pursue. You dig?
What the Bogleheads need to hear from Bogle is not that he will be the 1,000th Boglehead who will try to work something out with the Lindauerheads. That sort of effort will not produce a payoff. Bogle’s suggestion that that is the path he is walking down today encourages the Lindauerheads in their current course of action. It’s a loser strategy.
Don’t ask why we cannot all get along, Jack. Ask what can be done about those who have made it only too clear that they possess no desire to get along.
When you (and others with influence, to be sure) stop playing the Lindauerheads’ game, good things start to happen. The first step to getting from where we are now to where we want to be tomorrow is for you to stop demonstrating weakness by wondering aloud why we cannot all get along and to get about the business of taking the perfectly reasonable steps you must take if the idea of us getting along is to become a reality not in your wishes, hopes and dreams, but here on good old Planet Internet.
I’m speaking from experience. I think it would be fair to say that I speak with the voice of authority re this one.
Tip #2 — Encourage the Humans. Bogle offered some comments in his post at the Lindauerheads board that were so precisely on the mark that I feel obliged to highlight them here. He applauded Petrocelli (one of the posters seeking to rebuild the Vanguard Diehards board) for his winning sense of humor. Yes, yes, a thousand times yes! This is the sort of message that the Lindauerheads and the Bogleheads both very much need to hear.
We will never persuade robots; we can reasonably hope to persuade humans. It is the humanity of the Lindauerheads that is their greatest weakness (it is really their greatest strength, but they of course do not see it that way today). Petrocelli’s humor is a powerful weapon for the forces of good. It is through the use of humor that Petro shows that he knows 50 times more about life and investing than the puffed-up Lindauerheads with their studies and statistics and dogmas and trite maxims.
Encourage the humans. Let the sun shine in! This is the right path. I’m sure of it.
Tip #3 — Show Your Own Humanity. Even more devastating to the Lindauerhead mentality than seeing Bogle encourage the humanity of others is seeing Bogle demonstrate an awareness that he himself is one of the humans. Bogle objected to the practice of the Lindauerheads referring to him as “Saint Jack,” noting that his wife is only too aware of just how human he really is. This was perfect. I could not have written more effective words than the ones put forward by Bogle on this point.
The message that was being delivered with these words was: “My sympathies are with the humans, not with the know-it-alls.” We all very much needed to hear those words. We cannot hear that sort of thing often enough. Hearing those words at this stage in the proceedings was like seeing manna come down from the sky during our long trek through the hot, sandy desert. Community applause!
Tip #4 — Admit Your Mistakes. Bogle took an important step forward by acknowledging that he ain’t no saint. It is the logical follow-up that really gets the job done. Bogle needs to acknowledge that he has made mistakes in his development of the investing advice that he has put forward in the past. At a minimum he needs to affirm that it is possible that he has made mistakes (he has said this on earlier occasions, but I think it would be fair to say that the Lindauerheads have a tendency to “forget” Bogle’s teachings on this point, which are probably his most important teachings of all).
Bogle’s admitting than he has been wrong or that it is at least possible that he has been wrong changes everything. That step leaves the Lindauerheads defenseless. It pops the balloon.
Tip #5 — Identify Your Priorities. Bogle’s dilemma is that some of his ideas are in contradiction with others of his ideas. You can’t on the one hand say that you believe in common-sense investing and then tolerate the dogmatism that is characteristic of the Lindauerheads and not expect to see the contradiction reveal itself over time. You can’t on the one hand say that reversion to the mean is a reality and then suggest that it is okay for investors not to adjust their stock allocations when prices get to the sorts of levels that apply today and not expect to see the contradiction reveal itself over time.
Bogle needs to decide which set of his ideas are the ones he really believes. Then he needs to state those ideas in clear and plain and understandable terms. He owes that both to the Bogleheads and to the Lindauerheads. Truth be told, he owes it most of all to himself.
Tip #6 — Reject Your Natural Desire for Certainty. The Lindauerheads didn’t inherit their inclination toward dogmatism from anyone strange. Bogle ain’t no Lindauerhead. He is often guilty of dogmatism, however. Dogmatism is the product of vulnerability. Humans are vulnerable creatures. Investing is inherently a vulnerable act. It means giving your money up and hoping that it will still be there at a later date when you need it to pay the electric bill and the hospital bill and the gifts-for-the-grandkids bill. We can struggle to overcome dogmatism. We can never entirely succeed in this struggle.
Overcoming dogmatism is not an act of the intellect. There are many things that Bogle knows that I do not know. His superior knowledge does not translate into a capacity to avoid the dogmatism that has historically been the single biggest factor causing stock investors to suffer bone-crushing losses once prices got to today’s levels, a factor far bigger than the lack of intellectual skill or experience that holds people like me back. Bogle’s intellectual talents if anything make it harder for him to avoid the lure of dogmatism.
Endorsing Valuation-Informed Indexing would be a help. Valuation-Informed Indexing is inherently a less dogmatic approach than the conventional indexing approach. That doesn’t mean that vulnerable humans will not figure out ways to incorporate elements of dogmatism into the new approach. Doing battle with the lure of investing dogmatism is a quest that never comes to an end. It is a battle re which the Big Shots of the world (and Bogle is the biggest of shots walking about in the year 2008) begin at a big disadvantage.
Tip #7 — Brush Up on Your Reading and Incorporate What You Learn Into Your Thinking. I was shocked and dismayed and appalled when I read reports of the annual meeting of the Vanguard Diehards at which Bogle argued that stocks are not terribly overvalued today by looking at the P/E1 indicator. I learned why P/E1 is not a good valuation indicator a number of years ago. It is common to see accounts in the media refer to P/E1, but I don’t know of anyone who I consider well-informed who is not aware of the grave flaws of the P/E1 tool. Shiller knows. Russell knows. Easterling knows. Bogle should know.
Is Bogle’s lack of understanding of how valuations are measured a failing of intellect or a failing of emotion? On the surface, it appears to be a failing of intellect. He just needs to catch up on his reading, right?
I don’t believe that that’s entirely it. I believe that it is the inclination to dogmatism discussed above that is the cause of Bogle not seeing the need to keep up with developments in the valuations area (or the need to incorporate those he does hear about into his own thinking). There was a day when he was the king in this field. Findings of recent years appear to a large extent to have passed him by. He needs to deal with the emotional failings first. Getting over the emotional hurdles will reignite his interest in learning how investing really works.
John Walter Russell has a catch phrase that he uses at the end of his posts — “Have fun!” My guess is that that is advice that Bogle needs to take to heart. When you start thinking that maybe you really do know it all (and I think it would be fair to say that Bogle has been remiss in not shooting down the “Saint Jack’ comments frequently enough in recent years), there’s not much chance for enjoying a learning experience. Rule out the possibility of enjoying a learning experience, and you rule out the possibility of having fun.
Get back to where you once belonged, Jack!
Tip #8 — Stop! In the Name of Love. JohnDCraig put a post to The Old Vanguard Diehards Board in which he argued that 90 percent of that board community were Bogleheads and only 10 percent or less were Lindauerheads. I don’t have quite so optimistic a take. It seems possible to me that 20 percent of the community either participated in or supported the deception posts, the intimidation posts, the word game posts, the Smear Campaign posts. Still, that left 20 percent who were driven by love (a desire to learn is a love-rooted desire), not hate.
Bogle needs to spend some time thinking about those people, about their desire to learn, about their quests for financial freedom, about the trust they have placed in him. When a ban is imposed on honest posting on safe withdrawal rates, that doesn’t mean that the Goons score points in some debate-club discussion. It means that lives are destroyed. Lives of people who placed their confidence in Bogle. Lives of people who took the promises of Morningstar to protect them from the Lindauerheads to heart. Those people deserve better than what they are getting from Morningstar and Bogle today. A lot better.
I once opened a fortune cookie that advised me that: “The best thoughts come from the heart.” I have often found this to be so.
Tip #9 — Reject Hate Without Apology. If Bogleheads comprise 80 percent or more of the two boards, how is it that the haters have managed to put in place bans of honest posting on safe withdrawal rates and on Bogle’s views on valuations? Love has the numbers because most humans are more oriented to love than to hate (if this were not so, we would have blown ourselves up a long time ago). When prices are where they are today, however, hate has the intensity. The haters are 50 times more intense than those who have expressed a desire that honest posting be permitted (that’s everyone who has not expressly signed up with the Goons, really, when you consider that we all had to click “I agree” to the Morningstar rules before being permitted to post at either of the Vanguard Diehards boards).
Those who favor honest posting possess the power needed to have their way. What they lack is the confidence that honest posting and civil discussion really matter. Bogle’s own recent words tell the tale. He has put forward words suggesting that he wants us all to get along but at the same time he has done nothing of practical value to rein in the Lindauerheads. Word games don’t pay the electric bill when it’s cold outside, you know?
Vague admonitions to try to get along will not do the trick. Bogle needs to overcome his fear of what the Lindauerheads will say about him in the event that he comes down strongly in favor of reasonable enforcement of the rules that govern posting at the two boards. Where is this courage to come from? It has to come from the love that he feels for the many community members who have expressed their admiration for him and who have also expressed a desire that honest posting on valuations be permitted at the two boards.
Bogle owes those people something. Those are the people who built our boards. He has to stop apologizing for the feelings he has for those people and start taking practical steps on their behalf. We cannot get along because some of us are motivated primarily by love and some of us are motivated primarily by hate. The purpose of the posting rules is to keep those motivated primarily by hate from poisoning our discussions. Those motivated primarily by love need Bogle’s help in seeing that the rules are enforced and in seeing that those motivated primarily by hate are removed from the scene before doing more damage.
Tip #10 — Take It Personal. The Lindauerheads claim that they too are Bogleheads. For obvious reasons. The reality is that they are nothing without Bogle’s endorsement. Who even knew who Mel Lindauer was in the days before Bogle graced The Old Vanguard Diehards board community with his presence? When the Lindauerheads turned ugly, Bogle should have withdrawn his support. End of sentence, end of paragraph, end of section, end of chapter, end of story.
I know whereof I speak on this question. I feel a deep love to this day for the Motley Fool Retire Early Board (now defunct). There were thousands of people who contributed constructively to that board, making it the most important resource for learning what it takes to achieve early retirement that existed on Planet Earth. When the Goons took over the board, I knew that I had to ask Motley Fool to help out and, when that failed to bring effective action, to work with my fellow community members to make the board again a place where people of intelligence and integrity would feel comfortable congregating.
Did I pay a price for speaking truth to power? I did.
Did I learn things that I never could have learned had I allowed the board to go down without a fight? I did.
Will Bogle be smeared like the rest of us if he speaks up? He will be.
Will Bogle learn wonderful things now beyond his imagination if he takes the side of the angels on this one? He will.
Bogle has the power to win us back our boards. He has the “juice” needed to take out the Goons. Lindauer is nothing without Bogle in his corner.
I hope that Bogle takes the necessary steps by the close of business today.
I whispered: “Sometimes love is only sleeping.”
–The Monkees, “Love Is Only Sleeping” More on This Topic
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January 15, 2008 14:11 – Seth Godin on The New School
Seth Godin has written a blog entry entitled Encyclopedia Salesmen Hate Wikipedia.
He’s right, of course.
The punch line is the killer: “Apparently, technology doesn’t care who you hate.”
How many times have I said something very much like that in connection with the historical stock-return data and the “defenders” of the Old School studies? The historical data is like a mountain or an ocean. Those seeking to defend the Old School studies can put forward their deceptions and their threats and their word games from early in the morning until late at night, and the historical data just does not care.
There is nothing that they can do to get it to care. The historical data is, and that’s all. It says what it says. You cannot change that by threatening it or by deceiving it or by playing word games with it.
You can change what the humans say. Threats influence humans. Deceptions influence humans. Word games influence humans.
They don’t influence the data, though. The data itself is solid, objective. That’s why what the data says matters.
The data tells us what we need to know to see through the fog that envelops all investing discussions when stock prices get to the sorts of levels that prevail today. That’s the benefit. That’s the value proposition.
Will the New School sweep the world as Wikipedia has swept the world? I think it will. Roughly accurate beats wildly inaccurate every time. There is no reasonable case to be made for the Old School methodology.
So what’s holding us up?
Our case is too strong. Our value proposition is too great.
That’s a counterintuitive explanation. But I think it really is so. If the New School improvements were minor improvements, we could make small and steady gains, taking over the world in gradual steps. The problem we face is that the value of accurate retirement studies is so great compared with the value of inaccurate retirement studies that those with something invested in the Old School methodology cannot bring themselves to acknowledge the need for the change.
Small improvements might be acceptable. Big improvements require saying those words “I” and “Was” and “Wrong.” That’s a sticking point for a good number working in this field.
It’s what the data says that matters in the end, though. The data is New School. That’s our edge.
The “defenders” of the Old School studies show that they know this each time they reveal their hate for the New School. Hate is the emotion of losers.
We won!
It’s not me saying that. It’s the encyclopedia salesmen saying that with their behavior. More on This Topic
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January 16, 2008 14:36 – The Failure of Buy-and-Hold
A recent thread at the Lindauerheads board entitled Does the Market Worry Anyone? shows why the old approach to buy-and-hold has failed us.
A poster named “JemHunter” notes that “stock prices are no higher today than they were eight years ago” and that the conventional advice assures us that stocks always provide a good return over the long term. What gives?
The people touting stocks at times of sky-high prices rarely define how long it takes to reach the long term. Middle-class investors usually presume that they are talking about a time-period of 10 years or so. The reality is that, when prices get to the levels we saw at the end of the 1990s, it can take over 20 years for stock investors to see any positive return at all. To see returns that beat those available from the super-safe asset classes can take 25 years.
A poster named “Zingi” says that he missed the huge bull market and is excited about the recent price drop because it will permit him “to play catch up.” Are things looking up for Zingi?
I think it would be fair to say that Zingi has been misinformed as to the realities of long-term stock investing. We are now at one of the highest price levels ever seen in the history of the U.S. market. The average price drop we saw in the three earlier times when we got to these prices levels was a price drop of 67 percent (counting dividends, the likely real portfolio loss is 40 percent). We are not today anywhere remotely close to the price levels where it would be possible to play catch up.
A poster named “Soaker” argues that “the S&P 500 is more or less on its long-term trend line right now, after having gone well above the trend in the 1995-2000 period.” True? Or False?
It’s true that valuations are down markedly from where they were in early 2000. The P/E10 level was then 44 and it’s now in the mid-20s. Things are beginning to look up — a bit.
The other side of the story is that any P/E10 value above 20 puts us in the red-alert danger zone. We have a huge price drop ahead of us before stocks will again offer a strong long-term value proposition. We are indeed back to where we were in the mid-1990s. It’s important to remember, though, that stocks were already dangerously overvalued in the mid-1990s (the huge bull began in 1982 and ended in late 1999).
A poster named “EyeDee” tells us that “I read Bogle in the mid-1990s, so we purchased most of our stocks in the very late 1990s and mostly bought the SP500 and TSM, since at that time he said foreign was not needed.”
This comment points to one of the big flaws in the investing approach known as “passive investing.” Advocates of passive investing like the numbers to look good, so they often change the mix of investments that they advocate. When the S&P is going gangbusters, they advocate putting all of your stock money in the S&P. When the S&P is doing poorly, they advocate asset classes doing better than the S&P. The trouble is, they never say in advance what asset classes are the right ones to invest “passively” in. Many of Bogle’s followers advocate a highly active approach to passive investing.
EyeDee also comments that: “When I see the SP500 basically flat for the last eight years, I worry a lot and wonder if large U.S. stocks will ever recover.”
This is the one that pains me the most. The S&P is going to recover. People are going to make a lot of money by investing in the S&P in days to come. It’s not going to be people like EyeDee making that money, however.
The people who will be making money will be people who bought their S&P shares when they were selling at reasonable prices. In order for those people to earn big returns on their stock portfolios, they need to have people like EyeDee become convinced that prices don’t matter and that the S&P is a good buy even at today’s prices; those seeking to buy when prices are good and to sell when they are bad rely on the mistakes of those who buy when prices are bad (like today) and sell when prices are good (those who are going with high stock allocations today are likely going to suffer such bone-crushing losses that they will have no choice but to sell after the huge price drop).
Now do you begin to understand why most of the big-name stock experts don’t like it when people like me ask questions about what the historical stock-return data says about the effect of valuations on long-term returns? Buy-and-hold works. But it works only for those who are price-conscious. There is a highly technical term used in the literature to refer to those who place their trust in experts who assure them that stocks are a good buy even when sold at la-la land prices. These people are referred to warmly as “customers.” Or sometimes even more affectionately as “suckers.” (No offense to EyeDee intended — my intent is to foster consumer awareness in the investing realm.)
The purpose of Valuation-Informed Indexing is to make buy-and-hold a realistic investing strategy for middle-class investors like EyeDee. Not everybody who wears a nice suit and a nice smile is your best friend, EyeDee.
EyeDee also says: “When I see charts of returns for those eight years or even for the last 10, 15, 20 years, I do not understand why some people say stocks are expensive or have high valuations.”
The fair value P/E10 value is 14. Today’s P/E10 value is 26. Stocks are today priced at nearly double their fair value. People have a hard time grasping how high prices are today given how long it has been since stocks provided a return competitive with the returns provided by the super-safe asset classes. To understand, you need to look at how long the great bull continued and how out-of-control prices got during those days. We have never in the history of the U.S. market seen anything like it. That means that the return trip to normal price levels also needs to be something the like of which we have never seen before.
I think it would be fair to say that true experts would have spoken out in strong terms back when prices were first getting out of control. My sense is that many feel that it is far too late for them to come forward now. Personally, though, I wish they would. What’s done is done. We can only change the future.
“SchoolyD” says: “I think many of us would find it easier to maintain peace of mind during market downturns if, instead of having to rely only on statistical principles (e.g., reversion to the mean) and atheoretical extrapolations from past market behavior we understood why over the long haul equities can be expected to return 8-10% per year on average.”
The historical long-term real return has been about 6.5 percent real. That was the amount generated during the American Century. If anything, we should expect a lower return in the years ahead. Given that 6.5 percent real is the average return, you obviously cannot realistically expect anything close to 6.5 percent starting from today’s valuations (unless you are willing to wait over 30 years to see it). The historical data puts the most likely 10-year annualized return today at 1.3 percent real. The odds of it being a good bit lower are just as good as the odds of it being a good bit higher.
Middle-class investors need to understand where stock returns come from. If you understand where stock returns come from, you will not be taken in by all the mumbo jumbo that the experts use to sell stocks at times when a rational case for investing heavily in stocks is just not there.
Stock returns come from the earnings of the underlying companies. That means that there is a limit on how high returns can go. When we have many years in which returns are far higher than what the economic realities permit, the extra returns comes from the returns that otherwise would have been earned by future investors. Remember when everyone was jumping up and down about the absurd returns being earned in the 1990s? The returns you earn from stocks today have been diminished so that we can collectively pay back the debt incurred when returns of 20 percent and greater were paid to stock investors of the late 1990s. Out-of-control bull markets sure are a laugh, eh?
If you don’t care, you don’t care. It is my strongly held view that you should care.
Too many people are not even willing to tell you the realities because they are worried that you will get mad at them if they do. I don’t want you to get mad at me. But I see it as my job to tell you the realities regardless. So I just did. (To the best of my ability — please let me know if you see holes in any of my claims). More on This Topic
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January 17, 2008 14:40 – Investing Experts ISO Common Sense
I recently wrote a Letter to the Editor posted to the www.Early-Retirement-Planning-Insights.com site setting forth my thoughts on the inadequacies of many of today’s big-name investing experts.
Juicy Excerpt: My sense is that the experts are to some extent telling people what they want to hear (I find this shameful behavior) and to some extent really are taken in by the traps themselves. My sense is that they allow themselves to be fooled on a few core points and then they genuinely lose the capacity to reason things through carefully on more subtle points. More on This Topic
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January 18, 2008 14:18 – Poof!
There’s a question that comes up on investing discussion boards whenever there’s a significant drop in the price of stocks. People ask: “Where did all the money go?”
Call on me, teacher! I know this one, I know this one!
It goes “poof!.” It goes back to the same place that it came from — nowhere.
This message has been presented to you as a public service announcement. We now return you to your regular programming.
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January 22, 2008 09:16 – Stock Slaves
I don’t care about astronomy.
I don’t care about economy.
But it sure does bother me to see my loved ones turning into puppets.–Dylan, “Slow Train Coming”
Slavery was outlawed in the states some time back. It was in all the papers.
The evil in man’s heart that permitted slavery to exist remains with us, I’m afraid to say. You can’t pass a law turning men into angels.
There were a lot of things going through my head in the days leading up to my posting of that fateful May 13, 2002, post. I’m like everybody else. I didn’t want people yelling at me and smearing me. I didn’t want to see any harm done to our boards. I wasn’t 100 percent sure that I was right. I was reasonably sure — I would say 90 percent. I wasn’t 99.99 percent sure until I had had a chance to talk things over with my mates.
The smear campaigns were getting worse, though. It was becoming more and more clear to me that something had to be done. If I was not willing to pull together the courage needed to step forward, could I reasonably expect others to do so?
One of the things that got me over the line was a post by some fellow whose screen-name I can no longer recall. He was heavily invested in stocks and something in the part of the human brain that is controlled by common sense had him worried. He put up a post saying that he was cutting back. He was smeared every which way from here to New York. He was a dummy, a loser, not the sort of individual fit to even dream about early retirement. You know the routine.
One of the tricks that writers use is that they try to form a picture in their mind of the person they are writing to. When you do that, the writing comes out more conversational, less stuffy, more natural-sounding. This guy was the sort of person I pictured in my mind when I composed my posts. My reader, my fellow community member, my friend, was being vilified for the terrible crime of trying to help us all out by sharing his sincere thoughts. I was witnessing this ugliness and saying nothing. Yowsa! I began to have doubts as to whether I was really the person I liked to tell myself I was.
The beer don’t taste the way it ought to taste somehow.
I don’t know.— Randy Newman, “Christmas in Capetown”
That told me that something was terribly, terribly wrong re the direction in which our boards were headed. I had little idea at the time as to the true nature and the true scope of the problem. But I knew enough to worry that I was not going to be able to hold the reins on that May 13, 2002, rip-snorter too much longer.
That guy should feel welcome to post at our boards. His voice is a voice we need to hear.
Not just him, of course. All of the many thousands like him should be able to post without fear at our boards.
And honestly. They should be not only permitted but encouraged to post their sincere views. When posters lie for the purpose of appeasing Big-Shot Goons, we all lose. How can we have confidence in what we see on our boards once we know that a good number of the posts are being put up as the price of admission to communities controlled by hateful and spiteful and narrow-minded tyrants?
I learn more from guys like him than I do from Big Shots, you know? Big Shots have their place. But the types of people who become Big Shots on discussion boards often just post reiterations of stuff I have seen put forward in magazines and books by people far smarter and more experienced than the Big Shots. I prefer to read that sort of thing in its original language; my experience is that the Big Shot translations often leave a great deal to be desired. It’s the Normals that tip me off to things that I cannot learn elsewhere. The Normals show me how the stuff that the big-name experts put forward in the magazines and books works out in the real world. The Normals add a dimension to my understanding of how stock investing works that the Big Shots simply cannot provide me.
So I stuck up for the guy. I dropped the nuclear bomb. I posted honestly on the safe withdrawal rate topic. Imagine! How “catastrophically unproductive” of me! The world of Retire Early boards will never be the same. I did that!
When we allow people to post honestly, we learn things from boards that we cannot learn anywhere else. That’s exciting as all get-out. When we ban honest posting, we degrade our own community members. No one should have to post dishonestly as the price of gaining admission to a discussion board. No way, no how. That one should not be controversial. I mean, come on, people!
But Bogle permits it, doesn’t he? Vicious smear campaigns are used to maintain “order” at both The New Vanguard Diehards Board and the Lindauerheads board and the best that Bogle can come up with to say in objection is: “Why cant we all just get along?” Uh, hello, Jack? We can’t get along because some of us are not following the rules they agreed to follow when we granted them posting privileges and those are the ones that you are joking around with up on the stages of those annual get-together things you go to. “Wasn’t that a tasty chicken dish, Mel?” Yuck, yuck, yuck.
To suffer a busted retirement is a serious life setback. I don’t get the joke, Saint Jack. Sue me.
It’s not just Bogle, of course. Motley Fool banned honest posting on safe withdrawal rates. The Early Retirement Forum banned honest posting on safe withdrawal rates. Morningstar banned honest posting on safe withdrawal rates. This isn’t just a Bogle matter. Bogle is part of it. It’s a lot bigger than him, though. He is a contributing factor to a very big problem.
The idea that the first rule of becoming an investing expert is taking a vow to never, never, never, not under any circumstances admit to having gotten something wrong applies in all sorts of places you would not intuitively expect to see it apply. It’s a bad scene.
Looks like we’re in for nasty weather.
–Creedence Clearwater Revival, “Bad Moon Rising”
I see it as a form of slavery. It’s degrading to have to lie, especially about a matter that is likely to cause hundreds of thousands of your fellow community members to suffer busted retirements. It’s sick. It’s not just a dollar loss that we are talking about here. This is a loss of personal integrity. To have to forfeit your personal integrity to please some discussion-board goons is a kind of slavery in my eyes. The self-degradation being agreed to goes that deep.
I never engaged in deliberate deception on safe withdrawal rates or on any other matter. I did keep my mouth shut for a time. I didn’t cross the line, though, and tell a lie knowing that it was a lie. I felt slightly degraded for having to hold back on what I knew, but I never went the distance that hundreds of my fellow community members have felt themselves forced to go to avoid a whipping since my posting of The Post Heard ‘Round the World.
I don’t think that any of you should degrade yourselves. I don’t think it is good for the people who are tricked. I don’t think it’s good for you either. I don’t even think it is good for the goons. I believe that any healing process that is going to help the goons is going to come only after the Campaign of Terror is brought to a full and complete stop.
I think that the ways in which discussion boards are run today turns us into slaves. When you say things that you don’t believe to avoid a whipping, you are more a puppet than a person. I think that the owners of Motley Fool should be ashamed of themselves. I think that the owners of Morningstar should be ashamed of themselves. I think that the experts who have posted at the Lindauerheads board and have not spoken up should be ashamed of themselves. Is the money really that good? Come on.
I don’t like to see people losing money as the result of demonstrably false investing claims. It sickens me. But I think of myself as a human-behavior expert as much as I think of myself as a personal finance expert. The human degradation thing sickens me more. It tells me that those of us working in the investing advice biz are dealing with a very twisted system indeed.
Let’s change it! Let’s take a sad song and make it better! Let’s boogie ourselves into a better place, fellow slaves!
She was a backwoods girl, but she surely was realistic.
She said: “Boy, without a doubt,
You need to quit your messing and straighten out.
You could die down here and become nothing more than just another accident statistic.”— Dylan, “Slow Train Coming” More on This Topic
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January 23, 2008 10:48 – Bogle Laughed
Bogle appeared on one of those idiotic television shows yesterday where they ask experts what their analysis is of what happened in the last eleven seconds and what it all means for what might happen in the next seven seconds.
He laughed.
He was making a point. He was telling us that focusing on the last eleven seconds and on the next seven seconds is not the way to go. Bless him for that.
But don’t stop there. Bogle needs both a blessing for the wonderful work he has done and a kick in the pants for his failure to get down to the business of addressing his own failings.
The idiots on the television show didn’t aspire to become idiots when they were little boys and girls. They aspired to better things. Pressures came along to steer things in an unanticipated direction. The eleven-seconds stuff sells. The seven-seconds stuff even more so. We all have mortgages, right? It doesn’t really hurt anyone to tell it the way it isn’t, does it? We’re all grown-ups. We can change the channel if we don’t like the broadcast, right?
We can change the channel. The other way to look at it is that they could change the nature of the broadcast. They could make it less idiotic and then we wouldn’t have to change the channel. There’s no law of the universe that says that we must always rationalize bad behavior and never reach inside to come out with something better and stronger and finer and truer to what we really want to be.
But, yes, we can change the channel. It’s a true enough observation. Whatever.
They probably laugh at Bogle too, you know? From their standpoint, he is the idiot. Who’s to say who’s right?
I’ll say.
Bogle is right. They are idiots. The eleven-second stuff and the seven-second stuff is nowheresville. God bless Bogle.
Except….
He gets a lot of important stuff wrong too.
He’s right to laugh because they really are idiots and we really need to know that. A laugh conveys the idea effectively. I applaud Bogle’s laugh.
I worry about it too.
Bogle knows more than the idiots. He doesn’t know more than the investing experts of the future who will look back at Bogle’s ideas and laugh at what an idiot he was. His laugh says that he’s above all that, that he’s got it figured out, that he’s cool. Famous last thoughts. I bet the idiots think they’re cool too. Their faces appear on the television screen every day.
Bogle should be applauded for laughing and Bogle should be condemned for laughing. Both things are so.
If the idea is to have a little fun, fine. Laughter can be a healthy outlet for frustration. Maybe he cannot stand the idea of being asked the same idiotic question one more time. I’d rather see him put forward a gentle laugh than an acerbic or sarcastic or mean-spirited comment. I see where he’s coming from.
A laugh can also be a sign of arrogance. The genius of Bogle’s approach lies in its humility. T-Bone Burnett informed us that: “As soon as you know you’re being humble, you’re no longer being humble.” The title of that song was “Trap Door.” Bogle risks a fall through the trap door when he laughs. He risks becoming too full of himself and ruining his own parade.
I laugh at the Goons. They are so absurdly over the top with their claims and their behavior that I think it’s the proper thing to do. There’s risk there, however. I was born with whatever poison it is that turns someone into a Goon working within me. It might be said that, as soon as you call someone else a Goon, you risk becoming a Goon thyself. That’s so.
I laugh at the Efficient Market Theory. I call it the Efficient Market Disease. Har-de-har-har.
I could become like the television idiots if I laugh too long and too hard and too often. So could Bogle. So could you.
It’s funny. And it’s not. More on This Topic
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January 24, 2008 08:01 – Hate Story
What do you see about you? I see confusion. I see fear. I see anger. I see remorse. I see anguish. I see hate.
Hate is evidence of pain. Is that not so? Healthy and strong and confident people do not hate, do they? Hate is a sign of weakness. Hate is a sign of despair. Hate is a sign of pain.
When investing experts see that the people trying to implement their theories in the real world are feeling a great deal of pain, they should revise the theories. My sincere take.
Here is a statement about Bogle’s investing ideas taken from the article at the “Banned at Motley Fool!” section of the site entitled “Investing Discussion Boards Ban Honest Posting on Valuations!”:
The Diehard mentality has done more to discourage investing dialogue and an open exchange of ideas than any other philosophy I know of.
Yowsa! That doesn’t sound good. That was put forward by a poster named ” Werman.” There are lots of other observations like it in the article, and of course thousands more like it have appeared over the years at the boards at which Bogle’s investing ideas are discussed.
Do you think there might be some serious flaws with those ideas?
Me too.
I’ve made my living as a reporter for many years. I used to work on Capitol Hill. I’ve seen people discuss wars, abortion, gun control, taxes, all sorts of things that you would intuitively expect would generate divisiveness. You know what? Never in any of those discussions have I seen a fraction of the hate evidence itself that I have seen evidence itself during my participation at investing discussion boards in recent years.
Whatever could I have said to cause this overflowing of hate?
I reported accurately what the historical data says re safe withdrawal rates.
I say again — Yowsa!
Something is rotten in the state of Vanguard.
I don’t mean to pick on Bogle. I focus on him not because he is one of the worst out there, but because he is one of the best. It wouldn’t shock me so much if some fly-by-night con man was inspiring all this hate. Bogle is not some fly-by-night con man. Bogle is a hero to the middle-class. Bogle is the real thing. When his ideas inspire hate, that’s news.
Bogle is like a tragic hero in a Shakespeare play. Lear wasn’t an idiot. He was a great leader. That’s what made his fall so hard to take. It is the story of how low the great can be brought low by one tragic flaw that supplies the drama in a tragedy. It is because Bogle’s ideas promise so much that their failure to deliver in the real world causes such angst.
There are four reasons for the hate:
1) Investing affects more people in a personal way than war or abortion or a political campaign. We all need to finance our retirements. It is a universal. When ideas that we have been told about how to finance our retirements are shown not to work, all take a hit;
2) Investing is perceived as being sufficiently complicated that many of us feel that we need to take the word of experts rather than research things on our own. That puts us in a position of vulnerability. The vulnerable are obviously more sensitive than the secure;
3) The flaws in the conventional investing ideas (conventional for the length of extreme bull markets only, to be sure!) are obvious. You don’t need an I.Q. of 140 to figure out that the prices at which stocks are sold affect the long-term return provided by them. Middle-class investors who place their confidence in the experts are put in the difficult position of “believing” in things that defy common sense. They are forever forcing down their feelings of concern, forcing themselves to ignore things they really do at some level of consciousness “know.” Do that for long enough and there will come a time when you will explode;
4) Stock prices are set primarily by emotion (in the short term). That means that each investor’s hopes that this will be the first time in history in which an out-of-control bull will not be followed by an out-of-control bear depend on what every other investor says and feels and does. Telling the truth about valuations in an environment like that is like tossing a match into a dry stack of hay.
Many of the experts have determined that it is better to keep quiet, not to stir things up. Many have concluded that it is better that they not look at the realities too closely themselves lest they be tempted to say the wrong thing at the wrong time. I have a different take on things.
I see the hate as the natural and inevitable consequence of the tall tales that were told during the out-of-control bull. Had our experts been straight-talkers then, we wouldn’t be in the mess that we are in today. Fearing to discuss the realities does not make them go away. We learn to cope with the realities by addressing them squarely. Learning is a function of love. It’s not a more powerful ignorance that overcomes hate. It is love that overcomes hate.
Most of today’s investing experts don’t even address the problem of hate. They talk about numbers, tables, charts, blah-blah-blah, blee-blee-blee. You cannot get from there to where we all need to go. Hate can be overcome. It cannot be overcome by ignoring it. Ignoring it causes it to grow.
Hate is a strong force in InvestoWorld today. It will not always be a strong force. Remember what noted portfolio strategist Jimi Hendrix so sagely observed during a particularly ugly moment of an earlier bear market:
I’m a coming to get you! More on This Topic
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January 25, 2008 12:33 – Newspaper Prices
There are one million shares of Company ABC outstanding. The stock sells for a price of $50 on the morning of January 25. Late in the day, some fellow gets enthusiastic about the company’s prospects and offers $51 to buy a share. The offer is accepted.
How much has the total value of the outstanding shares of Company ABC increased?
My understanding is that total value as reported in the newspapers increases by $1 million. A single share in this company used to be reported as being valued at $50. It is now reported as being valued at $51. That’s an increase of $1. Multiply the $1 by the number of outstanding shares, and you get $1 million.
Is that right?
I possess little confidence in my ability to work numbers. So it could be that I am off base here. I am putting forward my understanding as to how the newspaper prices for the stocks we buy are determined. I think that the point being made here is important to our efforts to come to a better understanding as to how long-term stock investing really works. So, if you are better skilled at working numbers than I am and can identify flaws in what I am saying here, I would be grateful if you would let me know either by posting comments to the blog or by sending me an e-mail (please see the “Contact Rob” tab to the left).
Let’s say that I am right in how I describe things. It’s a problem, no?
It enters the head of one fellow that ABC Company is really worth $51 and not $50 and that one guy’s belief causes a $1 million increase in the reported value of the outstanding shares of ABC Company. Make sense? No, not make sense. Not to this boy.
Middle-class workers use those newspaper numbers to plan their retirements. It’s kinda sorta important that they be reasonably accurate. It’s silly to think that the value of the outstanding shares of ABC Company increased by $1 million because it entered one fellow’s head that up until January 25 he was being a bit under-enthusiastic about the company’s prospects. That same fellow could change his mind on the next day and send the combined value of outstanding shares of ABC Company downward by $1 million, could he not?
That surely wouldn’t be any fun for the people counting on shares of ABC Company to finance their retirements. Do we like the idea of having our retirement hopes soar or fail because of a whim that enters some one individual’s head, or even the heads of a small group of individuals? I sure don’t like the idea of my retirement plans being grounded in such sandy soil.
It seems to me that thinking about things this way helps us answer that disturbing question we hear so often when prices are falling rapidly — Where did all the money go? I put forward a response to that question in last Friday’s blog entry. I said that the money goes “Poof!”, that it goes back to where it came from in the first place — nowhere. Easy come, easy go, you know? This blog entry is really just a more extended take on the same question. I am here trying to explain in a bit more depth how it is possible when stock prices are what they are today for a large portion of your retirement money to over the course of a few months go “Poof!”.
I don’t have confidence in the Newspaper Prices. I don’t think you should either.
I think we deserve better. A lot better.
I say that honesty matters. Yes, even in discussions of investing. Yes, even in discussions held on the internet. Yes, even in reports of what the historical data says re safe withdrawal rates. Yes, even in the reporting of prices that determine the value of our retirement portfolios.
Please do let me know if you see anything wrong in the calculation discussed above. It is my intention to use this one to help a large number of middle-class workers come to a better understanding of how to invest effectively for the long run. I very much want to get this one right. More on This Topic
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January 28, 2008 10:10 – IndexUniverse.com on “Guys Named Rob”
Jim Wiandt, the publisher of IndexUniverse.com, today posted a blog entry entitled Guys Named Rob and Hougan’s Folly. I’ve allowed myself to feel a flicker of hope that this development offers us a way of being able soon to bring the Campaign of Terror to an end and to begin enjoying the fireworks (the good kind!) that follow from bringing our breakthrough investing insights of the past six years to a much larger group of indexers.
Juicy Excerpt: “What is it with guys named Rob? Longtime index agitator Rob Arnott has now been joined on these pages by a Vanguard Diehard agitator named Rob Bennett….”
I don’t like being referred to as an “agitator” one tiny bit. But when the unfair adjective comes as part of a sentence applying the same adjective to Rob Arnott, I can take it as being all a part of the wonderful game. Arnott is a stud, one of the true straight-talkers in a field dominated by mush-mouths. It’s not that Arnott and I give them hell, it’s that we tell it like it is and some of them feel as if we are giving them hell.
A community member put up a thread re this development on the Lindauerheads board. It was quickly deleted by Goons in High Places. I wonder why.
When you so fear talking about something, it’s a sign that you need to talk about that something real bad.
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January 29, 2008 11:27 – The Lighter Side of The Great Debate
BigMoneyJim used to be one of my biggest fans. Then I put forward The Post Heard ‘Round the World. That one caused him to run away from home and join the goon circus. Oh, well.
Jim started a smear site some time back that I think can fairly be described as being in general a big pile of smelly garbage. Still, a confirmed optimist finds life-enhancing stuff in the strangest of places. Jim has a section of the site at which he reports on quotes that I have put forward during The Great Safe Withdrawal Rate Debate, adding his own whimsical titles to the quotes. I think it is a good idea to try to focus from time to time on the lighter side of just about any bad situation, and this section of Jim’s site brings a smile to my face even on my third or fourth read of some of the items.
Here are a few samples:
What Happens If the Writing Income Doesn’t Come In?: “My wife divorces me, takes the kids, I turn to alcohol, and then a life of crime, I get arrested, sent to jail, lose my faith, and shoot myself to end the pain. That’s the plan, anyway.”
Unfortunate!: “My hope is that this site will serve as a Learning Together resource rather than as a place for Rob to stand up on a box and shout his opinions at unfortunate passers by.”
Inevitability: “That depends. What’s the latest count on how many sites have been formed dedicated to the task of trying to slow me down?”
Perception of Reality: “Things seem to be swinging in my direction for a few weeks straight now.”
Accomplishment: “Getting a good number of Diehards to put me on ‘ignore’ is one of my biggest breakthrough accomplishments thus far in the discussions!”
Untitled: “I write for humans. To write for humans, you need to understand humans. To understand humans, you need to be a human.”
On [the Launching of] Hocoreseachers Labs: “My sense is that there is a large segment of the community that has been getting fed up with the decline in abusive posting we have all noted with alarm in recent months. I believe that there are a good number of posters who have in the past few days reached the point where they were about to insist that something be done and pronto. They will no doubt view your news as the answer to their prayers.”
On Hocus Bingo: “I really need to get around to sending a note to the good people at the Guiness Book of World Records. I don’t know precisely where “the Top” is in internet discussion-board debates. But, wherever the Top is, this thing has found its way over it.” More on This Topic
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January 30, 2008 10:57 – “It’s Not Like You Are Proposing Some Wild New Idea”
Jim Wiandt, publisher of IndexInvestor.com, on Monday afternoon extended to me an invitation to submit an article on Valuation-Informed Indexing for publication at the site. He said that: “if it’s good, and if it’s pertinent, we’ll run it.”
I submitted an article yesterday afternoon. It’s entitled “A New Approach to ‘Staying the Course.’ ” It argues that an investor seeking to Stay the Course in a meaningful way needs to lower his stock allocation at times of high prices to maintain the same risk level, rejecting Bogle’s advice to stick to a single stock allocation while prices go through dramatic changes. These are the same points that I make in the “John Bogles Big Mistake” article (please see the “Heroes and Villains” section of the site).
I chose to go this route with my first submission to IndexUniverse.com in part because it was my “Bogle’s Big Mistake” post at The Old Vanguard Diehards Board that caused the Lindaurheads finally to abandon Morningstar.com and set up a new board where they would be free of those pesky Morningstar posting rules. I believe that the point being made is an important one for indexers to hear, and I have heard a good reaction to it from a good number of community members. The fact that so many see value in allowing the point to be expressed illustrates the damage done by the ban on honest posting. Moreover, I thought that focusing on this point was a good way to introduce the Valuation-Informed Indexing concept to Jim as it is a pure substance point (Jim has expressed a desire to avoid getting “in the middle of a personal feud”).
Jim sent me an e-mail last night. His first words of reaction were: “This is what all the fuss is about?” He went on to observe that, while he does not agree with my argument (I think it would be fair to say that there are more than one or two others who have expressed some reservations, eh?), “it’s not like you are proposing some wild new idea.”
Precisely so.
The idea that valuations affect long-term returns has been around since the first stock market opened for business. It will be around until the end of time, just as will the crazy (from my point of view) idea that market prices are in some mystical sense efficient, or true, or accurate, or right. Believing that the tension between these two positions could ever be resolved is like believing that the tension we all feel between our desire to eat more chocolate-chip cookies and our desire to get in better shape is ever going to be resolved. Coming to terms with the tension between these two ideas is coming to understand what investing is all about. Both points of view are fundamental points of view. Where you stand on the fundamentals affects where you stand on every other question you need to resolve in deciding what to do with your money.
Going by Jim’s words alone, I think I would be justified in expecting soon to see my article appear at IndexUniverse.com, and in expecting to see additional articles exploring other aspects of the Valuation-Informed Indexing approach in the days and weeks and months and years to come. Perhaps it will work out that way. I certainly hope so. I have my worries, however.
My worries stem from a decision made yesterday by Matthew Hougan, the fellow in charge of editorial matters, to delete the many posts (by me and others) pointing out deficiencies in a column pointing out the good that is done at the Lindauerheads board while failing to note the great harm that came from the destruction of The Old Vanguard Diehards Board and that is still being done today by the ban on honest posting on safe withdrawal rates and on the effect of valuations on long-term returns. I sent Matt an e-mail warning him that the Goons have a long history of watching for weakness and jumping on it when they see it. I believe that his decision to delete those posts sends the worst possible sign.
Both Jim and Matt have expressed an intent to avoid the ugly stuff that I refer to as “the Campaign of Terror” while encouraging the expression of the healthy differences of opinion that indexers need to hear to be able to make sound strategic decisions. The way in which Jim put it in an e-mail sent this morning is that: “The personal stuff is a waste of time, so that’s the kind of thing we’ll nip in the bud to ensure that the discussion is, sure, lively, but also civil and substantive.”
Those are good words. Jim is a Normal. Matt is a Normal. The vast majority of indexers and aspiring early retirees would like to see honest differences of opinions voiced on all of our sites and all of our boards. Nothing could be more clear. So why do I remain concerned? Everything is all set, no?
Perhaps. But something deep inside tells me not to break out the champagne just yet. The Goons have been around a long time. The Goons have survived cliffhanger situations on numerous earlier occasions.
There are rules at the Motley Fool site that permit the expression of honest differences of opinion. There are rules at the Early Retirement Forum that permit the expression of honest differences of opinion. There are rules at Morningstar that permit the expression of honest differences of opinion. If a widespread desire that the expression of honest differences of opinion be permitted were all that we needed to make it so in the real world, the first poster who resorted to Goon tactics at Motley Fool would have been suspended for a week, all the others tempted to go in that direction would have picked up on the point, and there never would have been a Campaign of Terror, just wonderful Learning Experiences all the way around.
Could it happen this time? Sure, it could. But the Normals need to show some firmness of purpose. Rules of civility don’t exist to protect majorities. Majorities can take care of themselves. Rules of civility exist to protect minorities. The idea that indexers should change their stock allocations in response to changes in price levels is very much a minority opinion today and will remain a minority opinion for so long as prices remain at today’s level. Rules that are not enforced are empty words. We need responsible people who care about the integrity of our discussions to speak up louder and to insist (not ask!) that those who resort to the ugliness we have seen put forward by the Goons be shown the door.
We all are embarrassed by the Goons. We are all ashamed to be associated (even just by having our screen-names appear on the same boards) with the tactics employed by the Goons. That’s all to the good. We need to back up our embarrassment and our shame with effective action to rein in the Goons. It’s effective action backing up the nice-sounding words that has been the missing ingredient in our efforts to keep our boards clean for far too long a time now.
Adopting a Zero Tolerance policy toward Goon tactics is a win/win/win. It allows us to win back our integrity the same way we lost it, little by little, bit by bit. It enriches our discussions, helping us all learn what we need to learn to achieve long-term investing success. And it helps the Goons learn the facts of life; when Goon tactics are repulsed, the individuals employing them are forced to go back to the drawing board and come up with more civil and reasonable means of making their case. That’s a winna!
Help a Goon! Come out strongly in favor of a full and complete stop to the Campaign of Terror by the close of business today. Pray for a rain of grace to come pouring down upon all our poor, misguided heads and hearts. Or, as noted index-fund strategist Paul McCartney once so effectively urged, let’s all get down to the important business of getting back to where we once belonged. Let’s Retire Early! More on This Topic
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January 31, 2008 12:46 – A Strange Babyland
Last Friday’s blog entry (“Newspaper Prices”) explored how one of our fellow middle-class workers can by spending $1 increase overall middle-class wealth by $1 million. He offers to pay $51 for a share of Company ABC, valued at the time at $50, and thereby increases the value that the newspapers report for all one million outstanding shares of this stock. Neat trick, huh?
Yes, it’s a neat trick. So neat that word inevitably gets out. You know how those humans are.
Before you know it, there are 3 happy stout fellows in Iowa spending $1 to increase middle-class wealth by $1 million, and 6 nice middle-aged ladies in New Jersey doing the same, and 74 wise elderly gentlemen in Chicago doing the same and 42 Extremely Cool Girls in Colorodo doing the same and so on and so on and so on. We all work hard for the money, right? What would you expect us to do when we find out how easy it is to turn $1 into $1 million, say that we need to wash our collective hair that night?
The colloquial term used to describe the decisions of millions of otherwise reasonable people to say “insto presto!” and thereby change $1 into $1 million is “bull market.” When those of us in the investing advice biz are attending one of those super-secret, behind-closed-doors, absolutely-no-admittance-without-invitation pow-wows reserved for those in the investing advice biz only, we often use a more technical term of art. We call it “telling a whopper.” Same difference.
We tell whoppers. It’s one of the things we humans do, there’s probably a genetic explanation. We have the power to make the price of the stocks we own just about anything we want to make it, and we use it. We’re like those poor rats that scientists are forever conducting experiments on. At first, they are shy about taking whatever action it is that they need to take to get the food pellet. Eventually, they get it, however. And so do we. We push the food-pellet bar gently at first; bulls climb a wall of worry, they say. Once we see how well it works, though, we push the thing harder and faster and harder and faster. Like teenage boys playing a video game, we push until our fingers are sore from pushing.
We’re all going to be rich!
You have doubts? You worry that there might be some sort of payback down the road a piece?
I suppose you might be right. Oh, well. It was a fine idea at the time, now it’s a brilliant mistake.
Take a look at The Stock-Return Predictor (tab at left). We pushed the food-pellet bar so hard and so many times back in the 1990s that we jolted the P/E10 number up to 44. Please enter that number into the calculator and see what 10-year return comes up. The most likely annualized 10-year real return for those buying stocks at the top of the dear departed bull was a negative 1.09 percent. Treasury Inflation-Protected Securities (TIPS) were at the time paying a real return in the neighborhood of 4 percent.
No fair! Stock investors take on far more risk than TIPS investors. They should be compensated. Stock returns should always be higher than TIPS returns, never lower. We wuz robbed!
It’s true. We really wuz robbed. The sad, pathetic part is that we wuz robbed by ourselves. We have the power to vote ourselves raises by pushing the food-pellet bar but we have to borrow from our future returns to finance them. Push that darn food-pellet bar too many times and you end up with stocks paying the sorts of returns that they have paid for the past eight years.
Bummer, man.
Can we get our old stocks back? We can. All it takes is a decision by a lot of us to push the food-pellet bar many, many times in the opposite direction. The fair-value P/E10 number is 14. We are now at 24. We still have a long ways to go before stocks will be able to pay an appealing long-term return again. But a P/E10 of 24 is a whole big bunch better than a P/E10 of 44. Slowly but surely, we are getting from the dizzy place we got to by pushing that darn food-pellet bar too many times to the groovy place we need to be in to be able to obtain the long-term returns from stocks needed to finance decent middle-class retirements.
I am not a fan of the idea of pushing the food-pellet bar too forcefully and too often. It sounds like fun. Eating chocolate brownies six times per day sounds like fun. Sometimes the kid in us needs a responsible adult to point out the downside of having too much fun all at once. It sure would be nice if there were some responsible adults among the big-name investing advisors (you can’t count Robert Shiller, as we have been infomed that he’s one of those weirdo bears and thus may safely be ignored).
Here are some words from the song “Glad to Be Unhappy.”
Like in a strange babyland
With no mammy and no pappy,
We’re so unhappy.Faces are growing long in InvestoWorld lately. I have some discouraging news and some encouraging news to report.
The discouraging news is that all that your common sense tells you is so. We don’t get to keep the phony returns. The Summer of 1999 is over and it’s not coming back anytime real soon. It was a mistake. The sooner we face up to that, the better.
The encouraging news is that all that your common sense tells you is so. It really is possible to make sense of stock investing. It’s not nearly as complicated as the “experts” make it out to be. Buy when prices are fair, and your long-term return will be very good indeed. Say “Yes!” to every telemarketing call and you’ll spend your entire life running hard just to stay in place. It makes sense for those who want it to make sense.
Programming Note: I am putting the blog on hiatus for the month of February so that I can spend some concentrated time on my second book, Investing for Humans: How to Get What Works on Paper to Work in Real Life. I’ll be back (God willing) on the morning of Monday, March 3. Take care! More on This Topic
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December 2007 << >> March 2008