PassionSaving.com Home Page : The Financial Freedom Blog : May 2008
May 1, 2008 05:15 – “I Actually Think I Am Somewhat Convinced”
Tuesday’s blog space was filled by the text of an e-mail sent to me last week by Alex Sutherland. Wednesday’s blog space was filled by the text of my response to Alex. Today’s blog space is filled with the text of Alex’s reply to my response, followed by my commentary on the entire exchange:
“Thanks for your thoughtful and quick response. I just finished reading it and will reread it once I have some time to think things through more carefully. I actually think I am somewhat convinced. I’ll think about things more and possibly respond.
“Thanks for sharing your thoughts.”
Wow.
That was like — what do you call it? — a reasoned and civil discussion of investing topics.
Is that permitted when prices are at the levels that apply today? Is someone going to turn us in to the authorities?
Alex may ultimately decide that I am full of beans. Or he may not.
Does it matter so much? I say “no.”
What matters is that we both engaged in a conversation permitting us to learn about the subject matter. It’s a human thing!
John Bogle showed that he fails to see the value of this sort of thing when he gave the Lindauerheads permission to use his name to promote their board (which prohibits honest posting on Bogle’s views on the effects of valuations on long-term returns).
Morningstar showed that it fails to see the value of this sort of thing when it banned honest posting on valuations at the Vanguard Diehards board.
Motley Fool showed that it fails to see the value of this sort of thing when it banned honest posting on safe withdrawal rates (SWRs) at the discussion boards at its web site.
The Early Retirement Forum showed that it fails to see the value of this sort of thing when it banned honest posting on SWRs.
Scott Burns showed that he fails to see the value of this sort of thing when he declared that my attempts to get the Old School SWR studies corrected evidence a desire for “personal aggrandizement” and that my efforts to open up the possibility of honest posting on the SWR topic are “catastrophically unproductive.”
Bill Bernstein showed that he fails to see the value of this sort of thing when he failed to speak up against the Campaign of Terror used to destroy the Vanguard Diehards board. Larry Swedroe did the same. Rich Ferri did the same.
People who become so dogmatic in their investing views that they cannot discuss them in reasoned and civil tones are dangerous. People who are that intense are not capable of fairness or accuracy or balance.
There is something intrinsic to Passive Investing that brings on this type of behavior. The delusions encouraged by Passive Investing advocates were responsible for the out-of-control bull. The dogmatism of Passive Investing advocates has been responsible for the failure of millions of middle-class investors to learn what they need to learn to protect themselves from the aftermath of that most terrible of bull markets.
Who’s smarter about investing? Alex Sutherland? Or Bogle and Bernstein and Burns and all the others mentioned above?
Alex understands that he doesn’t already know it all. That opens him to learning experiences.
Alex is smarter. If we must call someone an “expert,” Alex is the one who comes closest to fitting the bill.
These others may have bigger I.Q.’s. That’s possible. They also have bigger egos dampening the power of their natural intelligence. They also have a greater emotional investment in the investing advice that became wildly popular during the most out-of-control bull market in U.S. history and that has been discredited in the years since it came to an end.
I place more confidence today in what I hear from Alex (and others like him) than in what I hear from Bogle or Bernstein or Burns or any of the others noted above. How about you? More on This Topic
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May 2, 2008 07:10 – Buzz Updates
The University of Toronto lists the article “Stock Valuation Made Easy” (at the “Investing for Humans” section of the site) as “Recommended Reading.”
The University of Toronto refers its students to PassionSaving.com for background on Fundamental Analysis of stocks.
Johnny2000 gives us a push at LinkFilter.net.
The author of Texas Money Talk lists Passion Saving as one of his “Daily Reads.”
I post a Letter to the Editor at the early-retirement-planning-insights.com site entitled When P/E10 Equals 8. I say: “Drawing down from a portfolio with a high stock allocation is inherently a dangerous business. Most retirees of today have no idea what sort of risks they are taking on when that make that shift from the accumulation stage to the distribution stage.” More on This Topic
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May 5, 2008 06:11 – The Movie of Your Life
You want to manage your money more effectively?
Figure out why it is that you want this thing. That’s my tip. That’s what works.
I want to be rich. I don’t want to have to worry about money. I want to retire early.
Yeah, yeah. So does everybody else. Those are secondary reasons. To save effectively, you need to dig deeper. You need to uncover the primary reason, the reason that applies only for you.
You want to be rich why? To do what with your life?
You want to worry less about money so that you can worry more about what? Even Bill Gates worries about something. Having more money wont relieve you of worry, it will just shift you to a more fulfilling form of worry. What is your idea of a highly fulfilling form of worry? Where is it that you want your saving efforts to take you?
You want to retire early to do what? Early means that there are lots of years to come after the job is done. What is it you are going to be doing with those years? Figure that one out and you won’t need to ask me for saving tips; you’ll be coming up with your own in the shower and when taking a bike ride and when waiting for a bus. Saving is not difficult for those who possess a clear idea of the purpose being served.
I came across a painfully beautiful and painfully honest video that I think might help you struggle with the key saving question — the purpose question (please scroll to the bottom of the page that the link takes you to and click on the section marked “Movie”). The purpose of the video is to promote the Catholic religion. That’s not the only purpose being served by it, however. What it really promotes is living a thoughtful life. The video is telling us that we need to start with the end-point and work backwards if we want to make good decisions today. It’s only about two minutes long, but those are a powerful two minutes.
The video tells us that the words we want to hear when the movie of our lives is played back are: “Well done, good and faithful servant.” Can effective use of dollar bills increase the odds that you will someday in the not so terribly distant future hear those soothing and encouraging and cheering and healing words? It is my hope and tentative belief that the answer to that one is “yes.” More on This Topic
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May 6, 2008 15:25 – Obtaining “Permission” to Ignore Valuations
John Walter Russell recently added an article to his web site entitled Diversification.
Juicy Excerpt: If you like owning lots of companies, fine. By all means, do so. You have my blessings. Just don’t tell me that you are diversifying risk. Risk is tied tightly to valuations.
This morning I wrote a Letter to the Editor entitled Obtaining Permission to Ignore Valuations offering my views on John’s article.
Juicy Excerpt: This suggests a reason why there is so much confusion over indexing and Passive Investing. People talk of the two concepts as if they are the same thing. I don’t see any necessary connection at all. Indexing is a way of achieving large amounts of diversification at low cost. Passive Investing is a “strategy” for putting your head in the sand re the effect of valuations. Why are these two concepts perceived as being related? I’m beginning to think that people are counting on the illusory safety of indexing to make them feel better about the unacknowledged risk they take on by going with Passive Investing. More on This Topic
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May 7, 2008 13:39 – The Beer Don’t Taste the Way It Ought to Taste Somehow
They all talk about fear and greed. How many mention shame as one of the emotions felt during times of out-of-control stock prices?
The Early Retirement Forum banned honest posting on safe withdrawal rates (SWRs) some years back. Bill Sholar was the founder of the forum. Bill developed the FIRECalc retirement calculator and didn’t want to correct the errors in it when they were brought to his attention. Hundreds of community members showed great interest in having honest discussions of the realities of SWRs. So Bill felt that he had “no choice” but to ban honest posting on this important Retire Early topic.
That settled things, eh?
Apparently not.
Going by the posts put forward by Cute Fuzzy Bunny (one of the Goon posters who posted in “defense” of Sholar’s decision to leave the calculator uncorrected) in this recent thread, I think it would be fair to say that the answer is “no, the ban on honest posting did not settle things.”
Surprise! Surprise!
It turns out that those same humans who cannot bear to hear what the historical data says about the effect of valuations on long-term returns during a time when stock prices are at extreme highs also cannot bear to think of themselves as the types of people who ban honest posting during a time when stock prices are working their way back to reasonable levels and millions of people are suffering the financial consequences that inevitably follow from the earlier deceptions.
We’re complicated beings.
We’re not entirely honest. That’s why stock prices from time to time will reach the sorts of levels that apply today. We’re not entirely dishonest either. That’s why, every time in history in which prices have reached the sorts of levels that apply today, we have seen a price crash in the days that followed. We’re too fearful to be entirely honest and we’re too loving to be entirely dishonest. Both things are so.
The newspapers talk as if all we need to do to get stocks back to performing as they are “supposed” to is to figure out how to fix the sub-prime mortgage problem. Its not as simple as that. Or perhaps its more simple than that. In any event, it’s not an economic problem that needs to be fixed.
The problem that needs to be fixed is an emotional problem, a human problem, a valuations problem. We don’t fix the real problem by talking about other problems brought up to take our attention away from the real problem. We fix the real problem by talking about the real problem and then taking the obvious steps needed to address it.
We told a lot of lies back in 1990s. We ruined a lot of lives with those lies. We feel a lot of shame over the role we played in ruining those lives.
That’s what needs to change. We need to figure out what we need to do to get over our shame, to get back to the place where we can talk about stock investing honestly again, where we can acknowledge that of course valuations affect long-term returns, that of course we should correct any errors we discover in studies and calculators that people use to plan their retirements, that this obvious truth should not be in any way, shape or form “controversial.”
When we get to that magic place, you’ll know it. The P/E10 value will be a lot lower. The Big Shots will speak with a good bit more kindness and warmth and humor and humility. Large numbers of ordinary people will feel comfortable participating at our boards again, sharing their sincere thoughts and beliefs and concerns and reactions.
Sound good?
My guess is that the one part that doesn’t sound so good to a lot of people is the part about the P/E10 value being a lot lower. That’s a necessary part of the picture. It’s honesty in the pricing of stocks that permits all the other sorts of honesty. It’s honesty in the pricing of stocks that frees us to act like humans again.
Internationally Renowned Asset Allocation Strategist Randy Newman nailed it:
The beer don’t taste the way it ought to taste somehow.
I don’t know. More on This Topic
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May 8, 2008 08:14 – All Good News Is Bad News
Many of today’s investors are looking for encouraging news re the economy. If you accept the premise of the Valuation-Informed Indexing approach (that valuations affect long-term returns), then all good news on the economic front is actually bad news.
It is not economic problems that are causing the price drop. So an improvement in the economy cannot halt it, except temporarily. Valuation-Informed Investors see that it is runaway investor emotions that cause runaway stock prices and the big price drops that inevitably follow from them. Once prices gets so high that the economic realities cannot support strong long-term price gains, investors become increasingly frustrated that stocks are not performing as they are “supposed” to. The frustration leads to sales of stocks, which lead to price drops, which in enough time lead to reasonable price levels.
Good economic news cannot change this dynamic. It can influence the timing of the return to reasonable price levels. But it cannot transform a poor long-term value proposition into a good one.
Good economic news can ultimately cause a worsening of the price decline. Good economic news encourages investors who have excessively optimistic views about stocks at today’s price levels. Those hopes are obviously going to be dashed with the passage of time. The temporary encouragement brings on a deeper long-term disappointment. What is today viewed as good news, when it produces little in the way of a lasting improvement in returns, will cause negative emotional reactions.
The moral?
Tune out the news.
Focus on the message of the historical stock-return data. That’s where the valuable insights re the long-term performance of stocks truly reside. The historical data provides actionable information. The news is noise. More on This Topic
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May 9, 2008 14:55 – Buzz Updates
The FIRE Finance blog includes “The Financial Freedom Blog” in its list of “The Top 100 Personal Finance Blogs” (#94 in the “Compete Rankings” list).
Bob’s Financial Web Site presents tables showing the strong correlation between P/E10 values and Year 20 returns.
Bob’s Financial Web Site presents lots of tables on SWRs and P/E10 and such.
Cute Fuzzy Bunny reminds us in a post to the Early Retirement Forum that we had better not report accurately what the historical stock-return data says about safe withdrawal rates if we know what’s good for us.
I post a Letter to the Editor to the www.Early-Retirement-Planning-Insights.com site entitled “Obtaining ‘Permission’ to Ignore Valuations.’ I say: “I’m beginning to think that people are counting on the illusory safety of indexing to make them feel better about the unacknowledged risk they take on by going with Passive Investing.”
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May 12, 2008 08:30 – Bogle Needs to Read Bogle
There was an edifying exchange of five points of view aired in the Comments Section for the blog entry for April 22 (“The Broken Homes That Jack Caused”).
The blog entry argued that the oversized gains enjoyed by investors of the late 1990s were borrowed from investors of the future, which of course means us, the investors of today. A community member named “Dunter” expressed skepticism, asserting in a post filled with more than a healthy amount of attitude that, in the normal market, wealth does not come from other investors. I told a few jokes about cutting class on Friday mornings and such. John Walter Russell quite properly corrected Dunter’s mistaken impression, stating that: “It most certainly does. John Bogle calls this the Speculative Return.”
The five points of view being given voice in that brief exchange are the five points of view we have been hearing from Day One of our investing discussions, over and over and over again.
Dunter supplied the voice of The Goon. Ill-informed. Arrogant. Overbearing. Obnoxious. If you have been paying even a tiny bit of attention for the past six years, you know the type all too well.
Russell supplied the voice of The True Expert. Russell’s standard practice is just to tell people what they need to know to invest successfully, to answer their questions, to knock himself out doing so. How did this fellow ever get past the guards?
Bogle supplied the voice of The Crowd-Pleasing Expert. Bogle of course says all of the things that Russell says that he says. But he usually throws in some confusing gibberish too, just enough to permit those absolutely determined not to come to a clear understanding of the subject matter to remain in a fog. While it is of course true that Bogle has for years and years and years been talking about the speculative return, it is also true that Bogle has been for years and years and years playing the sorts of word games that need to be played for Goons like Dunter to be able to insist that their arrogant, overbearing, obnoxious views are viewed as The Only Possible Rational Ones by the big-name experts. Dunter views Bogle as a hero every bit as much as Russell does and arguably with roughly equal justification.
Bennett supplied the voice of The Joker. I admire Russell for his bottomless reserves of patience and kindness. I don’t exhibit quite bottomless reserves of these virtues myself, however. I somehow got the idea in my head that speaking directly and plainly and bluntly on investing topics is a virtue too. That’s the one that I put at the top of the list. When I hear the sort of nonsense being put forward by a Goon poster as was being put forward by Dunter (it would have been very different if I had seen genuine confusion being evidenced by a Normal), I tell jokes as a way of signaling my disdain for the dangerous and destructive game playing.
You supplied the voice of The Normal. You don’t recall putting up a post in response to that blog entry? That sounds right. You rarely do, do you? You usually sit and listen, taking it all in, saying little. That’s the way of the Normal, for good or for ill.
Russell is gold. He’s the gift of a good God to the Retire Early Community, in my assessment.
Bennett is tolerable. His posts are too long. Some of his jokes are not as funny as he thinks they are. His song lyrics are dated. He gets on people’s nerves at times. But he makes a reasonable point now and again despite himself. He gets at least a passing grade.
Dunter is a big pain in the community backside. Steps should be taken.
Bogle is the gift of a good God when he talks sense and a big pain in the community backside when he flatters the Goons with his jibber-jabber routine. Time will tell which side of him will ultimately come to be viewed as the dominant one.
You, dear Normal, are the tiebreaker. If you had not spoken out on so many occasions in support of the idea of us permitting honest posting on investing topics, we wouldn’t be where we are today. If you hadn’t failed to deliver the hard stuff when it very, very much needed to be delivered, we would be somewhere even better.
You need to stop being intimidated by the Dunters of the world, Normal. When people come off sounding really, really dumb, there’s often a good reason. The reason is often the most obvious one you can imagine.
I cannot tell you precisely why Bogle plays up to the Goons when it is so obvious that he knows better himself. All I can reveal is that he loses points with me for playing that game. That’s the reason why I mark him down as a Crowd-Pleasing Expert rather than as a True Expert. Russell’s investing advice is a big heap more sensible and more credible and better informed than Bogle’s. That’s certainly my take, in any event.
When we are talking about whether there is a speculative return or not, we are talking about a fundamental point. If what Bogle has been saying for years on this topic has left a good number confused about it (the Goons are not a majority, but their number is not a tiny one), he needs to examine his methods of persuasion; he’s doing something terribly wrong.
We shouldn’t be talking about so basic a question at such a late date. We all should know. Not just Russell. Dunter should know. You should know. We all should know.
Bogle should know!
I sometimes think that the key to resolving all this is for Bogle to sit down in a quiet place and read some Bogle!
And carefully this time, as if he believed that what he said about how to invest successfully for the long-term mattered.
He loves us Normals, he loves us not. He loves us Normals, he loves us not…. More on This Topic
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May 13, 2008 05:29 – Year Seven
At 10:40 am, we enter Year Seven of The Great Safe Withdrawal Rate Debate.
Here’s the thread that kicked it all off.
Please be prepared for one of those tricky Alfred Hitchcock-type endings. Don’t believe anything I say in that last post! Someone must have slipped Goon pills into my coffee!
Juicy Excerpt #1 (Greaney words): If I was smart enough to be able to tell when stock prices were high or low, I would adjust my initial withdrawal rate accordingly. For example, the 100% safe withdrawal rate for a 77% stock/23% fixed income portfolio and a 20-year pay out period is 4.56% (The years 1929-1949). If I was bright enough to foretell the 20-year bull market in 1980, I could have raised my 20-year safe withdrawal rate to 16.00%. Unfortunately, I don’t count myself among the select group of individuals who possess this unusual talent.
Juicy Excerpt #2 (Russell words): There really is logic to hocus’s concern about valuations during the last few years before retirement. The stock market’s statistics are poorly described and there are extended periods of overvaluation and undervaluation. That is the reason that we like to use historical data. It reduces (but does not eliminate) one’s assumptions about the market’s behavior…. Maybe hocus is leading us toward something even better.
There are great difficulties in defining what constitutes overvaluation and undervaluation. Otherwise, everybody would be timing the market successfully over long periods of time. But I do think that we can identify the kind of biggies that hocus is talking about. And I do think that it is worth knowing how much they affect the safe withdrawal rates. Grouping the data into three sets is about right. It may turn out that there are two sets of outliers…extremely overvalued and extremely undervalued…that can be clearly identified.
Juicy Excerpt #3 (Bennett words): The results you obtain from the analysis are influenced by the factors you take into consideration in setting up the study. If you leave out important factors, you will not get the most accurate results possible, but something less than that. My contention is that the existing Safe Withdrawal Rate studies ignore one piece of data that would tend to result in lower safe withdrawal rates–the effect of purchase price.
Thus, the studies do not do what they purport to do, reveal to investors their “safe” withdrawal rate. The number they provide is something else–the safe withdrawal rate that would apply if we lived in a world where purchase prices didn’t affect safe withdrawal rates. In my view, we need to adjust the results obtained from the existing studies to provide guidance more useful for the world in which we actually do live.
Juicy Excerpt #4 (Normal words): The whole 4% debate isn’t hard science. It is just an attempt to come up with a reasonable number for people to live on. 1% is unattainable for most people ‘cept intercst. 10% is stupid. What is reasonably safe? Despite my own dislike for stats like “94.6% safe”, I do accept that “around 4%” works for a pile of assets like 75/25. [I myself willingly accept a lower terminal value in exchange for a higher withdrawal number (still under 5%) by including more asset classes in my plan – particularly REITs and investment properties.]
Juicy Excerpt #5: (more Normal words): I think you’re starting to question the premise of buying at market regardless of valuation. But you don’t want to slip into “the dark side” of market timing. I’m not sure you can have it both ways. I think in order to value the market one does have to embrace “timing” and come to terms with it.
Juicy Excerpt #6 (more Normal words): I wonder if what we are seeking is really beyond our grasp.
Juicy Excerpt #7 (more Greaney words): If you want to hold 100% TIPS instead of the mix of stock and fixed income that have been optimal over the past 130 years, that’s fine. But you should realize that worst 30-year period for stocks had an inflation adjusted yield of 3.35%. TIPS are trading at or below that level. My view is that only those with unusually keen market forecasting/timing abilities would want to make that bet, but we all ” put our money where our mouth is” when it come to our retirement investments…. We won’t know if the 3.4% I-bond yield beats stocks until the end of the 30-year period. A 3.4% inflation-adjusted yield has only beat the S&P500 in 1 or 2 out of the 100 30-year periods from 1871-2000, so you need very specialized forecasting abilities to identify when to use a strategy that only works 1% or 2% of the time. I confess that I have not been blessed with this remarkable insight. Perhaps hocus has.
Juicy Excerpt #8 (more Normal words): I believe there is no question that there is a relationship between future market performance and the overall valuation of the market, over the long term. Certainly overall market lows within bear markets eventually give way to market highs within overall bull markets. And vice versa. The problem is that no one knows how low the low point is, or how high the high point is, so timing the market is not possible to do with accuracy.
Juicy Excerpt #9 (more Normal words): If you reduce your stock exposure to 50% and invest the other 50% of your assets in 5-year treasury notes or ginnie mae funds,you would expect to earn 84% of what 100% S&P portfolio would earn, 84% of 4%s afe withdraw is 3.36%.
Juicy Excerpt #10 (more Russell words): I do think that hocus is on to something…. New failures are still clustered around the same bad starting years…. What we find is that 1899 through 1916 were problem years. The depression years of 1929, 1930 and 1937 were another cluster of bad years to start retirement. The third cluster of bad years were from 1960 through 1973.
Juicy Excerpt #11 (More Bennett words): The key variable in making something “worst case,” in my understanding, is how likely is it that you are going to have a big loss in one of your early retirement years. The worst case of all is that you retire in a year like 1929, or 1966, or 1969. If that happens, your portfolio is depleted by so much right out of the gate that you are never able to make it up. Doesn’t it matter to someone planning to retire in 2003 whether 2003 is going to turn out to be a year like 1966 or not? It seems to me that the study is presuming that years like 1966 and 1929 just sort of pop up every now and again, no one can really tell when. That’s not what I see when I look at the data. More on This Topic
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May 14, 2008 12:47 – Buffett Treats Us Like Babies
Here are some words that Warren Buffett put forward in a recent interview in Fortune magazine:
“I always say you should get greedy when others are fearful and fearful when others are greedy. But that’s too much to expect. Of course, you shouldn’t get greedy when others get greedy and fearful when others get fearful. At a minimum, try to stay away from that.”
Valuation-Informed Indexing is all about following what Buffett genuinely thinks is best — getting greedy when others are fearful and getting fearful when others are greedy. Passive Investing (grrr…) is all about following what Buffett presents in the words above as the approach that makes sense if you don’t believe that humans are capable of what works best — sticking to a single allocation regardless of how greedy or fearful the market price shows most other investors have become.
Buffett sells us short. Based on what I’ve heard from tens of thousands of middle-class investors participating on discussion boards over the past six years, I have concluded that he is wrong.
He’s wrong about two things.
One, he’s wrong to think that we are not capable of learning how to get greedy when others are fearful and fearful when others are greedy. It certainly is so that most of us are not capable of doing this today. But many of us have shown a willingness to learn the realities of long-term stock investing. The big hang-up is that people like Buffett have concluded that we are not capable of doing the right thing and that thus there is no purpose served in even urging us to do so!
The biggest problem for most is that they cannot integrate what their common sense is telling them (to become greedy when others are fearful, etc.) with what the Big Shot Experts are telling them (that Passive Investing is an acceptable or even a good strategy). Buffett makes the problem worse when he says the sort of thing he says in the words above. I would be grateful if he (and all of the many others saying the same thing) would kindly knock it off.
Two, he’s wrong to think that Passive Investing is going to end up being good enough. It has been good enough in recent years because we have not experienced the worst that a bear market can dish out in recent years. Most investors have no idea what is likely going to hit them in days to come because they have been listening to people saying things along the lines of what Buffett says here and have come to believe as a result that Passive Investing makes sense, that Passive Investing can work in the real world. Passive Investing cannot work. People like Buffett should stop patronizing us and start telling us the story of what works in stock investing straight, with no chaser.
There are some investors who truly are not capable of reining in their emotions to the extent necessary to lower their stock allocations when prices get too high and to increase them when prices get too low. For that group of investors, an argument can be made that Passive Investing is dangerous but acceptable. So long as it is presented in that light (an accurate light), I have no problem with it.
It is irresponsible, though, to suggest that Passive Investing can ever be more than a poor choice viewed as minimally acceptable for those investors who just are not capable of implementing the better-informed approach (to lower one’s stock allocation when prices are high and to increase it when prices are low). Yes, I am saying that Warren Buffett is being irresponsible in the advice he offers on this one point. To be sure, I was surprised to see him say what he said in the Fortune interview; Buffett has a very good track record of offering straight talk when it is needed.
The problem with suggesting to investors that Passive Investing is acceptable is that our most negative emotions cause us to want to believe that Passive Investing is more than merely acceptable, that it is actually preferred, that it is actually rational, that is it actually effective. Investors who hear the sorts of words that Buffett puts forward above come to build their financial plans around the Passive Investing concept. Once they do, they develop a great emotional resistance to hearing of the far more effective alternatives or even to permitting others to hear of the far more effective alternatives. Bad money drives out good, and ineffective investing strategies drive out effective ones.
Valuation-informed strategies are what work. But Passive Investing has been pushed so hard in recent years that it has become taboo to state this reality aloud. The Old School safe-withdrawal-rate studies are rooted in acceptance of the Passive Investing model. It is because of the fairy tale that Buffett (and lots of others, to be sure) puts forward that it has become all but impossible to talk honestly about the risks that these gravely flawed studies pose to millions of today’s retirees. Passive Investing has done us great harm in recent years. We need to work to overcome the taboo on warning people about its dangers.
Buffett is holding back from offering the advice that he obviously knows really is best because he does not think we are emotionally mature enough to take it. There is a sense in which he is right. A good number of us are not emotionally mature enough in the investing area to accept realistic long-term investing advice today. But the failure of people like Buffett to talk to us straight is a big cause of the problem. The only way this vicious circle can be brought to an end is for people like Buffett to work up the courage to just tell it like it is, consequences be darned.
The experts should not be encouraging us in our vain fantasies about Passive Investing. They should be telling us what they know, telling us what the historical stock-return data shows has always been so. We can develop the emotional maturity to invest far more effectively than we do today. The first step is hearing from people like Warren Buffett what we are doing wrong and what we need to change to get to a better place than where we stand today.
Middle-class investors have been given the responsibility of providing for their own retirements in recent decades. If we are adult enough to be expected to finance our own retirements, we are adult enough to handle the truth about how long-term stock investing works. Middle-class investors need to grow up. To do so, we need people like Warren Buffett to stop chucking our chins and cooing “goo-goo, ga-ga” at us.
No more strained peaches for breakfast for us, Warren. The next time some big magazine offers you an opportunity to help middle-class investors figure out how they got on the wrong track, please tell it like it is. We’re big boys and girls. We can take it, our (usually) straight-shooting friend! More on This Topic
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May 15, 2008 07:08 – A New Approach to “Staying the Course”
I wrote a guest blog entry that appeared at the Clever Dude blog yesterday entitled “A New Approach to Staying the Course.”
Juicy Excerpt: If you, like me, believe that it is possible for prices to be too high, then you should not be sticking with the same stock allocation in your effort to Stay the Course. For investors like us, changes in prices are causing the course to always be in motion. Risks are greater at times of high prices and long-term returns are lower.
If a 60-percent stock allocation was just right when you elected it during a time of moderate prices, it cannot possibly be just right today, a time of super-high prices (my valuation tool is P/E10, the price of an index over the average of the past 10 years of earnings). For an investor like you to Stay the Course, you need to lower your allocation when prices get to where they stand today, perhaps to 30 percent. Only when prices return again to moderate levels will a 60 percent allocation again be just right for you. More on This Topic
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May 16, 2008 15:22 – Buzz Updates
1) The Kirk Report describes The Retirement Risk Evaluator as “a different retirement calculator.”
2) The And Freedom Tastes Like Reality blog says: “I’ve looked at the Passion Saving return predictor, and as of this post, the S&P 500 index is over 1500, so the Price/Earnings ratio is over 30. Unless I’m in a retirement plan with an employer match, my investment dollars will not go far in an equities market.”
3) The Generational Dynamics site notes the recent New York Times article that uses the P/E10 tool to form a reasonable assessment of long-term stock returns. It says: “This is an extraordinary and historic event in economic journalism.”
4) The 2Merrill blog links to the article on “Pros and Cons of Invdexing” in the first sentence of its description of John Bogle’s revolution in investing.
5) I post a Letter to the Editor at the Early-Retirement-Planning-Insights.com site entitled Is the Stock Market a Closed System? I say: “We are saying that there is more integrity to the portfolio numbers when stocks are at fair value than there is when stocks are wildly overvalued. I really think it is fair to say that that is the bottom-line point we are making. We are saying that at times of overvaluation investors need to mentally adjust down those numbers to have them reflect reality or else they are fooling themselves.”
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May 19, 2008 08:51 – This Blog Will Be Terminated With Extreme Prejudice
I will post the last entry for the Financial Freedom Blog on Friday, May 30.
Then this blog with its clunky software will be no more.
I will post the second entry for the A Rich Life blog on Monday, June 2.
The new blog will employ the groovy WordPress software. We’re moving on up!
You are not just a reader to me. You are a friend. Don’t dump me!
I ask that you kindly bookmark the web page for the new blog (today’s real blog entry, the first posted to the new blog, appears there and is entitled “We’re Not as Fearful As We Think We Are.”]
If you are one of those clever people who knows about RSS feeds, please subscribe to the feed available at the page linked to above.
If you do not either bookmark the new page or subscribe to the feed, you may forget about me. And I will miss you. Terribly.
Please do not put off doing this. You are a human and you will forget. Do it now while you are thinking about it. Do it!
Blogs come and blogs go. The quest for financial freedom continues at new places. Come join us at the new place and —
Let’s disrupt!
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May 20, 2008 11:53 – Taking Our Newfangled Concept of “Retirement” to the Streets
The Get Rich Slowly blog reported sometime back on the Liz Pulliam Weston articles that featured me and several other middle-class workers who opted for a newfangled approach to retirement. Both the blog entry and the comments filed in response to it are worth checking out.
Here are a few excerpts:
J.D.: For most of these couples, early retirement means partial retirement. Instead of leaving the workplace completely, they downshifted into jobs that are more meaningful, but for which they earn less. This supplemental income also means they don’t have to draw heavily on their retirement savings.
Brad: It would be great if there were a universally accepted term for this form of early retirement. I don’t like downshifting as many early retirees don’t really work any less hard than they used to, they just have the luxury of doing work they love to do, with less focus on having to maintain a certain pay level. [Note by Rob: I refer to this approach as “Retiring in Stages” — I am retired only from the need to do work that I do not love.]
Patrick: I think most people who retire at a young age will need something to do to keep them occupied. The difference is the couples in the article can choose what they want to do vs. working for the largest paycheck.
TosaJen: DH and I are trying to set up our lives so that we could live off our investment income (financial independence or FI from Your Money or Your Life). Then, instead of working so that soul-sucking corporations can make more money for shareholders, we can perform work that we think is important.
Me: Even Rob Bennett from passionsaving.com admitted he didn’t factor in the cost of healthcare very well.
Katie: I’m intrigued that for so many people retirement means working for yourself. I just don’t see that as retirement. It’s something, but not retirement.
Canadian Dream: I’ve always like the term FIRE (financial independence and/or early retirement) to cover it all. [Note: I believe that Wanderer is the person who coined the FIRE term while he was posting at Motley Fool, the first Retire Early board.]
Minimum Wage: I don’t see anything remarkable in these stories. I’m willing to bet a year’s income that I live more frugally than they do, and that if I had their income, I’d be wealthier than they. Let’s see some stories of REAL frugality. [Note: It certainly is so that there are a lot of people who live more frugally than I do.]
Icup: I really like how these people are stretching the definition of retirement. Very creative.
Mariette: I agree with everyone that you have to have some purpose in your life after you retire, at whatever age that is; whether that’s working part time doing something you love, volunteering, exploring hobbies, whatever.
Peter: The key we should take from this is to start taking steps towards your retirement and put yourself in the path of luck. [Note: I love the idea of putting yourself in the path of luck — that is how things happen in the real world.]
Millionaire Mommy Next Door: We’ve struggled with the word “retirement”, too, and would love to find another word.
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May 21, 2008 09:54 – “Securities Markets Appear to Be At Least Partially Predictable After All”
I strongly recommend that you read a recent article by Joseph Picerno entitled Back to the Future — Again: The Financial Literature Now Favors Active Asset Allocation, But It’s Still Risky.
Juicy Excerpt #1: The conviction is supported by a growing body of academic research that has been piling up empirical evidence on the side of dynamic strategies. A crucial finding: Securities markets appear to be at least partially predictable after all.
Juicy Excerpt #2: The intellectual evolution that now favors active asset allocation conflicts with the random walk theory (RWT), a particular version of the efficient market hypothesis (EMH).
Juicy Ecerpt #3: The message is periodically repeated, often to deaf ears.
Juicy Excerpt #4: The academic bibliography is now flush with 20-plus years of empirical studies showing that fundamental data (dividend yields, interest rates, etc.) offers a richer source for predicting returns than what was thought possible via the early conceptions of EMH that focused on price alone. For example, one line of research shows that returns are mean reverting in the medium to longer term, which implies predictability, and so asset allocation weights should change. Such notions clash with the random walk account of EMH.
Juicy Excerpt #6: “The level of predictability [in equity returns] tends to be 25 percent, 35 percent,” says Reichenstein. That suggests that asset allocation strategies should be only partially dynamic, such as allowing for shifts in equity weights within a modest range without betting the farm on predictions.
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May 22, 2008 16:37 – “The Truth Has a Way of Emerging Eventually”
There’s a second article recently authored by Joseph Picerno that I strongly recommend that you read. This one is entitled Rethinking Modern Portfolio Theory.
Juicy Excerpt #1: Perhaps the biggest shocker of all is the idea that the value strategies of Ben Graham and his disciples are in general agreement with modern portfolio theory (MPT).
Juicy Excerpt #2: While the academic interpretation of MPT has changed, the popular perception remains stuck in the 1960s and 1970s.
Juicy Excerpt #3: Recognized or not, there’s been a slow but steady accumulation of empirical research since the 1980s that’s altered financial economists’ view of capital markets.
Juicy Excerpt #4: If two formerly competing notions of money management–each commanding huge amounts of money under management–are now in basic agreement, it probably reflects a fundamental truth about how the capital markets function and how investors should build and manage portfolios.
Juicy Excerpt #5: This is the definition of investing, Graham preached, and anything else is speculation.
Juicy Excerpt #6: The early readings of MPT conveniently overlooked such observations. But the truth has a way of emerging eventually. Indeed, a new generation of researchers took a fresh look at the random walk in the 1980s and 1990s and the accumulating tide of studies began to turn the academic tide.
Juicy Excerpt #7: Although academics are latecomers to the party, the fact that they’ve arrived only adds more credibility to what Graham taught: valuation matters.
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May 23, 2008 15:15 – The Buy-and-Hold Reality Checker Is Coming!
John Walter Russell (owner of the www.Early-Retirement-Planning-Insights.com site) and I are working on our fourth investing calculator, The Buy-and-Hold Reality Checker.
Our first calculator is The Stock-Return Predictor (see tab at left). This calculator employs a regression analysis of the historical stock-return data to reveal the most likely 10-year annualized real return from a purchase of the S&P 500 index made at any of the various valuation levels. It shows the big effect that the starting-point valuation level has on a stock investor’s long-term return.
Our second calculator is The Retirement Risk Evaluator (see tab at left). This is the first retirement calculator to show the effect of the valuation level that applies on the start-date of a retirement on the odds of that retirement going bust within 30 years. The Risk Evaluator shows that most retirement calculators report numbers that are wildly off the mark for retirements beginning when stock valuations are as high as they are today.
Our third calculator is The Investor’s Scenario Surfer (see tab at left). This is my personal favorite. The Surfer uses a random-number generator to simulate realistic 30-year returns sequences, allowing the user to test various allocation strategies and see what approaches are most likely to work in the real world. The calculator shows that long-term timing (changing one’s stock allocation in response to dramatic price changes with an understanding that this approach may not produce benefits for as long as 10 years) consistently beats rebalancing (sticking with the same stock allocation despite wild price changes).
The Buy-and-Hold Reality Checker will rely on the results of thousands of runs of the Scenario Surfer to provide data-based insights on scores of strategic options. Are there some circumstances in which rebalancing stands a good chance of performing almost as well or perhaps even better than long-term timing? How long are Valuation-Informed Indexers likely to have to wait in various circumstances to see positive results? To what extent is the compounding returns phenomenon responsible for the long-term edge enjoyed by Valuation-Informed Indexers? To what extent does holding for the long term mitigate the risk of stock investing? These are the sorts of questions that will be answered by the calculator now in development.
We expect to make the Reality Checker available at the two web sites sometime this Summer.
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May 27, 2008 09:13 – Humans Stink
John Bogle is corrupt.
Scott Burns is corrupt.
William Bernstein is corrupt.
Jonathan Clements is corrupt.
Bill Sholar is corrupt.
Mel Lindauer is corrupt.
John Greaney is corrupt.
Motley Fool is corrupt.
Morningstar is corrupt.
The Early Retirement Forum is corrupt.
Robert Shiller is corrupt.
John Walter Russell is corrupt.
Rob Bennett is corrupt.
Humans stink.
Yet I want to wrap my arms around them and hold them for a million years.
Whatchagondo?
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May 28, 2008 08:56 – Greaney Reports on Social Security Benefits “Loophole”
John Greaney, owner of the www.RetireEarlyHomePage.com site, reports on a loophole in the Social Security rules that could pay off big-time for some retirees in an article entitled Where Can a 70-Year-Old Buy the Least Expensive Life Annuity?
Juicy Excerpt: A little-known Social Security provision effectively allows you to “purchase” a life annuity from the Social Security administration at a substantial discount to what a commercial insurer would charge for the same monthly benefit. Delaying taking Social Security benefits until age 70 gives a retiree a monthly check as much as 77% larger than a retiree who started taking benefits at age 62. But you don’t have to delay taking benefits until age 70 to take advantage of this. The Social Security Administration allows you to “withdraw your application” for benefits, reapply at a later date, and get the same larger monthly check as someone who delayed taking Social Security until that age. Of course, you’ll have to pay back all the Social Security benefits you’ve received to date, but you won’t have to pay back interest on the money and you’ll be eligible for either a tax deduction or tax credit on the income taxes you paid on the Social Security benefits collected to date. If you save and invest the Social Security benefits you collect from age 62 to age 69 and then reapply at age 70 for the larger monthly benefit, you’ll likely have tens of thousands of dollars in after-tax earnings beyond the amount that you repay to the Social Security Administration.
There’s been some discussion of the strategy at the discussion board associated with Greaney’s site.
Juicy Excerpt: Social Security’s attitude is that this is a legitimate option for people to consider and, if it makes them better off financially, they should use it.
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May 29, 2008 13:11 – I’m Superman!
You want to be famous?
That’s easy. I can tell you the secret.
Go to a discussion board and post honestly about how valuations affect long-term stock returns. Everyone will know your name in no time.
I didn’t say you would be popular! I said you would be famous. There’s a difference.
They were talking about me again on the Bogleheads board yesterday. They didn’t mention my name. But they were talking about me all the same. In certain circles, I’m like Hillary or Prince or Cher. Except with me they don’t even need to say one name for all to know who they’re talking about. They say something like “remember how this board got started?” and everyone either knows or knows enough to keep his or her mouth shut about what he or she doesn’t know.
There’s a fellow named Apprentice_941 who put up a post saying: “I’ve belonged to more than two dozen forums ranging from topics like Photography to Investing to Firearms over the last 10 years. I’ve noticed that the Bogleheads Forum administration censorship – and the threat of censorship calls by other forum members – is the greatest I have ever encountered.”
There were various jizz-jazz responses supplied. But the juicy stuff was stated only in code.
One guy said: “You clearly were not around for the genesis of this forum.” Another offered: “I was around on the M* site and watched as it was taken over by a couple of posters who just wanted to stir up trouble.” Yet another came forward with: “Just try to understand how the forum came into being and maybe things will look different to you.”
It’s all Farmer Hocus’ fault! We have no choice but to censor you. That mean old Rob Bennett posted honestly on safe withdrawal rates for two years– You would practice heavy censorship too if you had lived through that!
I plead guilty. I’m the troublemaker, the one responsible for “how the forum came into being,” the poster whose posts served as “the genesis for this forum.” I knew that posting honestly on safe withdrawal rates would “disrupt” (honest posting had caused “disruption” on other forums I posted to before the Vanguard one) and I went ahead and did it anyway. “Disrupting” the promotion of demonstrably false retirement claims is a good thing, in my view.
Still, I’m just some guy who posts stuff on the internet. Why is it that so many Passive Investing enthusiasts as so afraid of me? How is it that I came to possess such amazing powers?
I posted faster than a speeding bullet. The resistance to accurate posting on safe withdrawal rates is more powerful than a locomotive. I caused a huge discussion board community to come into existence in a single bound. I’m Superman!
All that I did was to post at the Vanguard Diehards board about the same sorts of things that I write about here on a daily basis. You’ve read my stuff. I really am more of the mild-mannered reporter type, am I not? Superman, bah! I’m Clark Kent.
The truth is that I am both.
Rob Bennett is Clark Kent. He writes. About personal finance. Blah, blah, blah, blee, blee, blee.
It’s the historical stock-return data that transforms me into Superman. With the historical data behind me, I’m made of steel. Ban me or correct your safe withdrawal rate studies — I leave you no other options!
The historical data is kryptonite for the Passive Investing enthusiasts. An investing model that gets the numbers people use to plan their retirements wildly wrong is an investing model headed for the trashbin of history.
People want to believe in fairy tales for the length of an out-of-control bull. So they do. But it’s sorta, kinda hard to maintain the belief when there’s some reporter type pointing out that there has never in the history of the U.S. market been a time when the fairy-tale approach did not eventually bring ruin for the investors following it. Saying that causes a good number of Passive Investing enthusiasts to suffer tummy pains.
It never was my intent to cause anyone to experience tummy pains. But Clark Kent is a reporter. Of course he tells. That’s what reporters do. And what usually follows turns him into a discussion-board Superman whether he likes the idea or not.
Where’s Lois Lane? After all the nasty stuff I’ve heard said about me, I need a hug.
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May 30, 2008 12:17 – “From Shattered Dreams of Early Retirement… to Reassurance from Quantitiative Research”
I’ve added Patricia’s story to the Middle-Class Millionaires section of the site.
Juicy Excerpt: The positive aspect is that the intelligence behind your retirement analysis, plus that of those who have applied Monte Carlo simulation, plus W Bernstein, plus the Trinity studies, etc.,empowers me to really understand the potential scenarios. They give reassurance that the plans that I may be making are supported by analysis, research and evidence so I may know what I’d be getting into. To be perfectly honest, I’ve been quite fed up with retirement books that oversimplify matters.
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May 31, 2008 17:44 – We’ve Moved — Please Join Us at the New Place!
Please bookmark the A Rich Life blog or subscribe to its RSS feed. Starting June 2, that’s where all the aspiring early retirees are hanging out. We need you there to make it a fun party!
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