Stock Panic Up Close and Personal

I want to quit now.
But I just can’t split now.
–The Miracles, “You’ve Really Got a Hold on Me.”

We have seen stock panic playing out in real time in comments made on investing discussion boards in recent years. This article explores the behavioral finance implications of comments set forth in the Investing Discussion Boards Ban Honest Posting on Valuations! article.

Stock Panic Comment #1 — “Never in the history of the Diehards forum has one poster, always making civil and well thought-out posts, managed to irritate so many without anyone being able to articulate a good reason as to why.” (Comment #1 in the earlier article)

Mephistopheles presents us with a puzzle to solve with the words quoted above. My take is — it’s because we are talking about numbers.

The bull of the 1990s was built on numbers. Middle-class investors know to be afraid of stocks when prices get too high. They understand that something that sounds too good to be true probably is not true. Middle-class investors are impressed by numbers-based arguments, however. Numbers arguments have a special status in our society. Many do not pay attention to word-based arguments. They respond: “Show Me the Numbers!”

The Great Safe Withdrawal Rate Debate is a debate about numbers. We have taken all the numbers-based arguments that were used to argue that stocks are always best for the long run and flipped them. When you ignore valuations in your calculations, stocks always look best. When you factor in valuations, stocks do not look like a good long-term choice at times of high valuations.

Oops!

Most investing “experts” are Numbers Guys. They are the sorts of people who like things hard and concrete and real. They made a huge mistake in failing to see the error of the way in which the numbers were being reported in the 1990s. This mistake was carried over in thousands of articles, thousands of books, thousands of speeches. Admitting the mistake is a big emotional hurdle for them. They very much do not want to admit the mistake.

Numbers-based arguments give them no choice. If the new numbers are right, the old numbers are wrong. It’s that simple. Numbers are stubborn, uncompromising things.

It’s that simple and that complicated. The “experts” got the numbers wrong. It’s easy to demonstrate this; all you have to do is to look at the historical stock-return data using an analytically valid methodology. The hard part is finding a way by which the “experts” can save face while acknowledging their grand blunder.

It’s not the people presenting the new numbers who are making the “experts” feel bad. It is the “experts” themselves who torture themselves with their personal knowledge of how much financial damage they have done to those who have paid heed to their faulty advice.

If this were a small mistake, those who made the mistake would feel comfortable acknowledging it. If this were a difference of opinion, they could permit the airing of alternate viewpoints. This is a case where people widely recognized as “experts” got important numbers not just wrong but wildly wrong. To acknowledge the numbers errors, they need to be able to acknowledge that they are not quite the “experts” that they are widely perceived to be. That requires a level of grace that some of them unfortunately do not yet possess.

It would be a good thing not only for us but for them too for them to accept the realities. It would take pressure off of them. There is room in InvestoWorld for more than one type of expert. There is room in InvestoWorld for experts who sometimes make mistakes. Still, it is emotionally hard for the “experts” of today to say out loud that they got a good number of pretty darn important points terribly, terribly wrong.

The controversy is not an intellectual one. There are no intelligent arguments for reporting numerical calculations wrong. The controversy is an emotional one — the all-too-human reluctance to saying the words “I” and “Was” and “Wrong.”

The first step to getting to a better place is accepting that investing itself is primarily an emotional endeavor and only secondarily a rational endeavor. So long as we discuss these matters using the language of reason, we cannot get to first base. The problems are emotional in nature. Emotions do not respond to rational argument.

Trying to “make sense” of the “arguments” put forward in defense of the Old School studies is a futile endeavor. The studies do not serve any rational purpose. The Old School safe withdrawal rate studies are exercises in rationalization. Their purpose is not to discover realities, it is to supply surface-plausible justifications for taking actions decided on before the studies came into existence.

One side is putting forward reasoned arguments. The other side is giving vent to emotional pain. The two sides are speaking different languages. The New School advocates are seeking insights as to how best to invest for the long run. The Old School defenders are seeking to alleviate the emotional pain they feel when confronted with the realities of the message of the historical stock-return data.

Stock Panic Comment #2 — “It looks like a bunch of new people logged in for the express purpose of antagonizing one guy…. C’mon Morningstar. Remove those users.” (Comment #2 in the earlier article)

I was shocked when Greaney first began posting abusively. I was shocked again when a good number posted in defense of him. I was shocked yet again when Motley Fool failed to take action after the problem was brought to its attention. And I was shocked still yet again when Morningstar too failed to take action after the problem was brought to its attention.

Both Motley Fool and Morningstar have rules published at their sites that protect us from abusive posters. Why have they not been enforced?

Financial considerations probably play a role. When stocks are at the price levels at which they reside today, realistic examinations of the effect that valuations have always had on long-term returns are not popular. There is no question whatsoever but that there are posters who would have left both the Motley Fool board and the Morningstar board in the event that the posting rules that apply at those boards had been enforced in a reasonable manner. If these two corporate entities had honored their promises to the people who built their boards, they would have experienced some short-term financial pain for doing so.

It’s hard for me to accept that that’s the entire explanation, however. Both the Motley Fool board and the Vanguard Diehards board were in time destroyed by the abusive posters. There were large numbers at both boards who expressed a desire that honest and informed posting on the valuations topic be permitted. My strong sense is that both of these corporate entities acted against their long-term financial interests in failing to enforce their posting rules.

Why? Because their site administrators are flawed humans.

My guess is that the site administrators have money invested in stocks. My guess is that the site administrators are experiencing the same fears about their long-term financial security that many other middle-class investors are feeling today. The defenders of the Old School studies have never been able to find any effective “argument” for their case other than to deluge boards at which it is questioned with brutally abusive posting. A site administrator who enforces the published rules of his site causes the defense of the Old School studies to fail.

It is not “rational” to permit abusive posting to destroy a discussion board when the published posting rules protect those seeking to build the board through constructive posting. But it does not generate an immediate good emotional feeling to see a theory in which one is emotionally invested shown to be wrong.

Dallas Morning News Columnist Scott Burns has argued that the stakes in our discussions are small. I do not agree with Scott on this point. I think that the actions we have seen site administrators for large corporate sites take shows that the stakes are high indeed. I think that Scott was right at an earlier time when he said that the reason why we have not yet seen much discussion of the New School findings in the general media is that: “It is information most people don’t want to hear.”

Stock Panic Comment #3 — “That is the way the heavy fist works. You make a few examples and everyone falls into line.” (Comment #3 in the earlier article)

The typical middle-class investor does not check out the methodology of every study cited to him. He employs shortcuts. He assumes that the people endorsing the studies checked them out before endorsing them.

This is reasonable behavior. It is also dangerous behavior when employed in the investing area.

The words quoted above explain why. We learn through a process of interaction and questioning. There is no one person in the world who knows everything. So, in most areas, certain people put ideas forward and then those ideas are evaluated by others and new insights are developed from the discussions and so on and so forth.

This is not how it works in the investing area, at least not in the handling of the most fundamental and most important questions. The question of whether the market is efficient or not is a question that has been taken off the table. The claim that the market is efficient cannot be defended with logic. Yet it possesses a strong emotional appeal for so long as prices remain as high as they are today. Therefore, questioning of the claim has been widely prohibited.

I know it sounds like I am kidding, but I am not. I never would have believed this myself back in the days before May 13, 2002. But I have no choice but to believe what I have seen with my own eyes. What I have seen is that the words quoted above describe not just what happens on discussion boards, but what happens in InvestoWorld in general. Dubious assumptions are not subjected to healthy debate.

I’ll give one striking example of how the let’s-put-our-fingers-in-our-ears-before-we-become-aware-of-the-realities phenomenon evidences itself. William Bernstein (author of The Four Pillars of Investing) put a post to the Vanguard Diehards board saying that he did not believe in the macro version of the Efficient Market Theory. That theory is a core belief among the “leaders” of that board, so Bernstein’s comment should have set off a firestorm. Do you know what happened? Nothing. There was no response to Bernstein’s post.

There was no direct censorship practiced. I checked. I put up a thread myself a day or two later making note of the Bernstein comment to prove to myself that anyone who cared to was able to post observations on it. People had the ability to respond. People elected not to respond.

Why? I cannot see into other posters’ hearts and heads. I can tell you what I believe. I believe that most middle-class investors are intimidated by phrases like “Efficient Market Theory.” They do not understand clearly what it means, and they are concerned that if they ask basic questions people will think they are stupid. These concerns are not entirely unjustified. I have seen cases in which people asked such questions and were indeed characterized as stupid for having done so. Heck, I have been called names myself thousands of times!

People are not dumb. People are smart. They are smart enough to pick up on hints as to what questions may be asked and what questions may not be asked. Once they figure out which questions may not be asked, they stop asking.

Not good. This must stop. The investing game is not a game played with Monopoly money.

You know what’s dumb? It is these “theories” that cannot be defended in any rational way that are dumb. The Efficient Market Theory is dumb, as dumb as a bag of bricks.

The middle-class investors who do not question it are not dumb, but they do need to become braver about asking basic questions. And the “experts” who make us feel uncomfortable about asking basic questions need to expand the scope of their expertise until they reach a point at which they feel comfortable encouraging questioning of their claims. True experts are confident enough in their beliefs that they don’t need to rely on “the heavy fist.”

Stock Panic Comment #4 — “The majority opinion rarely needs protections from a constitution, laws or rules. It is the minority opinion that needs to be protected.” (Comment #4 in the earlier article)

This is especially so in the area of stock investing. The emotional pull is to buy stocks when they are popular (which is the worst time to buy stocks, according to the historical data) and to sell stocks when stocks are not popular (which is the best time to buy stocks, according to the historical data). A long-term stock investor always wants to hear the contrarian viewpoint because he needs to hear it to arrive at an emotionally balanced take.

One of the things I like about The New School of Safe Withdrawal Rate Analysis is that it forces you to take into consideration both the majority and the minority opinion. Each price jump is a positive in that it adds to your accumulated wealth and each price jump is a negative in that it lowers the safe withdrawal rate. That’s a realistic and balanced way of looking at things.

One of the biggest problems with the conventional way of looking at investing questions is the phony dichotomy between Bulls and Bears. I’m a Democrat and I cannot talk to you because you are a Republican! I’m a Red Sox fan and I cannot have you in my house because you are a White Sox fan! I’m a Bull and I cannot be friends with you because you are a Bear! Yucko!

I am an aspiring early retiree. I would like to achieve financial freedom as early in life as possible. I learn from Bears. I learn from Bulls. I learn from proponents of the majority viewpoint. I learn from proponents of the minority viewpoint. I learn from Humans. That’s what it comes down to.

It’s an extremely controversial viewpoint in InvestoWorld. I think it is fair to say that that’s a problem that all of us who visit InvestoWorld from time to time need to do all that we can to fix.

Stock Panic Comment #5 — “There is a warmth and consolation to be found in the midst of everyone being wrong together.” (Comment #6 in the earlier article)

People are uneasy about investing. First of all, we are not terribly well informed. Those of us who want to retire someday are forced to invest whether we like the idea or not. We have limited time to devote to studying this junk. Most of the books contain lots of big words and mysterious-sounding phrases and lots of tables with lots of scary numbers planted inside them. And the key issue explored in these books is — Risk. That’s just great, you know? We are already worried about our retirements because we have not saved enough and now we are being told to take Risks with the little bits of wealth we have managed to accumulate over the years.

People do indeed need to be reassured about their investing decisions. And it is indeed true that we turn to other humans for reassurance, as the words quoted above suggest. We’ve been doing that since our caveman days.

How do we develop a greater capacity for independent thinking, which is an essential for those who hope to walk the buy-and-hold walk as well as to talk the buy-and-hold talk? We need to come to possess a firm grasp of the basics of how investing works. That’s all it really takes. It is not hard to come to an understanding of the fundamentals. It’s essential that this be done. I recommend that those who do not possess a firm understanding of the basics refrain from investing in stocks until they have come to do so.

We need experts who will shoot straight with us. Bogle’s stuff gets us about halfway there. We need to push the Indexing Revolution to the next stage in its development. The conventional approach to indexing works well in bull markets. We need an enhanced version that works in both bull and bear markets. I have put forward the Valuation-Informed Indexing approach as my suggestion for a constructive Next Step.

Stock Panic Comment #6 — “It’s not what you are saying that seems disruptive, but rather all the dialog that inevitably takes place afterwards.” (Comment #9 in the earlier article)

This comment (by Bill Sholar, former owner of the Early Retirement Forum and author of the FIRECalc retirement calculator) sums things up well. I am not able to recall a single case in which an advocate of one of the New School studies put up an abusive post. But it is certainly true that realistic posting on the safe withdrawal rate topic left a whole big bunch of abusive posting “in its wake.”

You figure it out.

I challenge you to come up with an explanation that does not require heavy reliance on the word “emotion.”

The Efficient Market Theory posits that stock investors are 100 percent rational. It’s a lie. Our investing discussions of the past five years prove this beyond any reasonable doubt.

The dominant model of how investing works has been proven a failure. It needs to be replaced by something more realistic. I have suggested the Investing for Humans model, a model that posits that investing is primarily an emotional endeavor and only secondarily a rational endeavor. Where you start from determines where you end up. Those who follow that model will be looking for reassurance from time to time too. The difference is that they will be seeking reassurance re something that makes sense and they will therefore not feel nearly the same level of defensiveness; the reassurance given will be restoring confidence in an emotionally healthy and balanced approach.

Stock Panic Comment #7 — “Some on this board feel threatened by the arrival of hocus and his ideas. They feel a threat to their perceived elite status here.” (Comment #10 in the earlier article)

It is not just the authors of Old School SWR studies who feel threatened by new ideas. Financial columnists who have spent years touting the Efficient Market Theory feel threatened. Advocates of the conventional approach to indexing feel threatened. Authors of books that are rooted in an acceptance of the popular investing ideas of today feel threatened.

In a world in which investing were entirely a rational endeavor this would not be so. All that anyone would care about in such a world would be making money and all would welcome new ideas that checked out. We do not live in such a world.

Humans are not rational. We possess the ability to reason, but we are not robots. I see that as a good thing. I would rather be a human than a robot. In any event, it is clear to me that any investing model that presumes complete rationality on the part of investors will fail. The assumption just does not stand up to scrutiny.

I have an idea as to why the Efficient Market Theory became popular in the first place. It is a comforting illusion (for a time!) to believe that markets are rational and efficient. Things would be so much easier to understand in a world in which all that yucky emotional stuff did not play a role in the decision-making process.

The problem with illusions is that they always go “pop!” It always hurts when they go “pop!” Illusions are comforting in the short-term. They produce pain in the long-term.

All stocks are held by humans. All humans are emotional. We cause ourselves a lot of pain by failing to face up to this obvious and critically important reality.

Here’s Dylan:

<blockquote>Idiot wind, blowing through the dust upon our shelves.
We’re idiots, babe, it’s a wonder we can even feed ourselves.</blockquote>

It shouldn’t have been left to me, some guy who posts stuff on the internet, to let the Big Shot “Experts” know that stocks are held by humans and that humans are emotional. But that’s the way it happened to play out because — we’re idiots, babe.

Stock Panic Comment #8 — I’m sure that 90+% of posters here would like to see an end to the disruptive posts about hocus. (Comment #11 in the earlier article)

I agree with the point being made here. I have doubts as to whether the percentage is as high as 90 percent. My guess is that about 80 percent of the population of most investing boards would prefer that the published rules be administered in a reasonable manner. In the world outside Planet Internet, Normals may well comprise as much as 90 percent of the population.

The Goons are 20 times more intense than the Normals, however. Most Normals have only a passing interest in learning how long-term investing really works. The Goons see their entire world view being at risk when questions are raised about the beliefs they formed during the wild bull.

This is an encouraging thought. It means that most peoples’ views are not set in stone. The sad side of the story is that it means that large numbers of middle-class investors are likely going to lose large portions of their wealth through little fault of their own. A few ruthless Goons ruin it for a far larger number of non-intense Normals.

Stock Panic Comment #9 — “Some of the disruption is in the form of a Baptist running occasionally into Methodist services, and claiming that some of their beliefs are heresy.” (Comment #12 in the earlier article)

The comparison of investing beliefs to religious dogma is telling.

Stock Panic Comment #10 — “Life is short. Too short for Motley Fool or Mr. Greaney’s incompetence/ethics shortage/whatever ailment interferes with his ability to communicate facts in a straightforward manner.” (Comment #15 in the earlier article)

It frustrates me that people are constantly personalizing these discussions. We should not be talking about Greaney or Sholar or Bennett or Russell. We should be talking about what the historical stock-return data tells us about safe withdrawal rates and the effect of valuations on long-term returns in general.

Why do people do this? I believe it is because the personal stuff is safer ground. The investing realities are scary stuff for people who have constructed retirements by making reference to the Old School SWR studies and for people who have developed their investing strategies by making reference to analyses influenced by the Efficient Market Theory.

Stock Panic Comment #11 — “A rifle is not well suited for close quarters work….” (Comment # 23 in the earlier article)

These words appear at the Motley Fool board to this day. Motley Fool is an investing site.

Stock Panic Comment #12 — “This board has degenerated into something that I can no longer be proud to be involved with.” (Comment #24 at the earlier article)

I sometimes feel this way about InvestoWorld. Do I really want to be involved in something so dirty and so smelly and so ugly and so mean-spirited?

I do. The other side of the story is that I have met hundreds and hundreds of wonderful people during the course of our investing discussions, people who need to know the realities to be able to generate returns that will be used to do wonderful things like send their kids to school and take care of health problems and finance well-deserved getaways.

Investing discussions have become ugly because the Efficient Market Theory denies the human element of the investing equation. Write humanity out of the script and you come up with a movie that is artificial and forced and phony and flat. When investing discussions are uplifting, it’s because of the human element of the story. When investing discussions are ugly, it’s because the human element of the story is being denied.

Stock Panic Comment #13 — “Rob, for a long time, I wondered if you were really a psychologist studying group dynamics.” (Comment #37 in the earlier article)

There is a sense in which this is indeed what I am doing. I founded the Financial Freedom Community because I wanted to create resources by which we all could learn more about how saving and investing really work. Group dynamics is a big part of the investing project. It is largely ignored in the conventional literature. We need to understand better how investors place themselves in groups and then ignore all information bits generated by those not within the approved groups.

I don’t believe that Groupthink is all bad. There’s a reason why we separate into groups. The Vanguard Diehards are interested in learning about and following Bogle’s indexing ideas. They quite properly exclude from their consideration day-trading strategies. Consideration of day-trading strategies would be an inappropriate distraction from the pursuit of their legitimate goals.

Excessive dogmatism is dangerous, however. The “leaders” of the Vanguard Diehards community (my sense is that many members of the community do not support some of the actions of their “leaders”) ruled out all informed discussion of the effect of valuations on long-term returns. John Bogle is one of the leaders in the field of exploration of this topic! It is going too far to rule out consideration of the ideas of the guy who founded the movement to which you belong!

The problem is that Bogle contradicts himself in his writings on the valuations question. He makes outstanding points; it is from Bogle that I first learned how long-term investing really works. But he undermines his explanations with his use of wrong-headed catch phrases like his admonition to “Stay the Course!” Many of his followers interpret that phrase as an admonition not to change their stock allocations in response even to dramatic changes in valuations, a strategy that runs counter to much of what Bogle says about the effect of valuations on long-term returns.

The biggest problem with today’s investing advice is the extreme dogmatism that is employed to block questioning of it. Today’s “experts” are defensive in the extreme. We need more humility. We need experts who do not see a need to portray themselves as knowing everything. We need an openness to new ideas and to alternative points of view. We need less stuffiness and more of a sense of humor. We need fewer tables of numbers and more quoting of song lyrics.

Bogle gets us about halfway there. At the end of one of his books, he makes the point that he too can get things wrong. That’s perfect! Humility really is part of Bogle’s approach and it is when he is humble that Bogle is most effective and most profound. I think it is fair to say, however, that Bogle loses his way at times. If this were not so, the Vanguard Diehards board would never have become what it became in its most abusive and ugly days.

Bogle is responsible for that. Not entirely, of course. He does not control what his followers say or do. But he played a role by being too dogmatic in some of his own statements and by failing to speak up when his most dogmatic followers put forward cartoon versions of his ideas.

I am very much a Boglehead. I am also a Russellhead and a Shillerhead and a Buffetthead and an Arnotthead, of course. I take Bogle at his word when he says that he makes mistakes. That’s the Bogle I love. That’s the Bogle that offers us investing advice that points us to the future of indexing and helps us to overcome the mistakes of indexing’s past.

Stock Panic Comment #14 — “Intercst had a secret to retiring early he didn’t reveal. He freaking invested during the heights of the bull market.” (Comment #41 in the earlier article)

How stocks perform in bull markets is completely different from how stocks perform in bear markets. It could be reasonably argued that we are talking about two different asset classes.

This throws people. It is human nature to look to people who have been successful doing something to learn how to do it yourself. But, with stock investing, those who follow highly irresponsible strategies can achieve good results for long periods of time. The worst rise to the top in extreme bull markets.

This reality places a burden on the “experts” to do all they can to counter the weaknesses of human nature. We know that people get carried away in bull markets. So we should warn them of the dangers of doing so. Too many experts act like politicians or salesmen, telling people what they want to hear instead of what they need to hear. The experts who earn my greatest respect are the ones who tell it straight even when it’s not easy to do so.

Stock Panic Comment #15 — “I credit hocus for casting well-deserved doubt on intercst’s work. Invaluable and worth being repeated ad libitum. Ironically, I have similar doubts regarding hocus’ proposed strategy.” (Comment #43 in the earlier article)

I object above to the personalization of the debate. Then I offer a comment suggesting that Greaney’s approach to early retirement is irresponsible. What gives?

I am not making a personal comment when I criticize Greaney’s investing ideas.

It is common in other fields for people to offer criticisms of ideas. Baseball reporters often question whether a manager did the right thing or not in calling for a steal. Politicians often question whether a tax incentive is likely to achieve its goals or not. In the investing field, I have seen a great deal of defensiveness among advocates of the Old School SWR studies and among advocates of the Efficient Market Theory. They don’t like to be questioned and they try to suggest that questioning of their investing views constitutes a personal attack. No sale.

There are two things responsible for this defensiveness, in my view. One, the Efficient Market Theory is full of holes; it cries out for criticism. Two, lots of Efficient Market Theory advocates got rich during the wild bull; success breeds arrogance. Our unfortunate situation is that we have a lot of people whose financial success was due to a lucky turn of the cards trying to portray it as having been due to them having had the intelligence to buy into the Efficient Market Theory.

The great risk of stock investing is that short-term results often argue for strategies directly counter to those that make long-term sense. To see through the short-term noise, you need to possess a sure grasp of the fundamentals of how long-term stock investing really works. You cannot trust anything that came out during the wild bull to tell you the straight story — not books, not articles, not success stories.

What can you trust? I recommend studying the historical stock-return data. It goes back long enough to show how stocks work in both kinds of markets. It is the only way I know of to get outside of the echo chamber that argues during a wild bull that stocks are always best and during a wild bear that no middle-class person should ever invest in stocks. Both of these extremes are emotionally unhealthy. It is the job of the “expert” to become sufficiently informed of the message of the historical record to see beyond the popular enthusiasms of both wild bulls and wild bears.

The words quoted above are indicative of a healthy attitude toward investing issues. You should be skeptical of all claims you hear, including those put forward at this site. I’m one of those darn humans too. I make mistakes too.

Stock Panic Comment #16 — “Hocus is the only person I know (if only via message board) who has completely opted out of participation in the stock market bubble.” (Comment #45 in the earlier article)

I was the typical middle-class investor in the years before I began putting together my Retire Early plan. What put me on the road I am on today is that I was planning to hand in a resignation from a high-paying corporate job and I had a wife and kids depending on me not making big mistakes in doing so. I had to check things out for myself. I report on my findings in the articles posted to this site.

Do I know more than most of the big-name experts? On some aspects of the investing question, I believe that I do (I possess a different skill set than they do, permitting me to see things that they do not see). On some aspects of the investing question, I am certain that I do not.

If there is anyone out there relying solely on what I say to put together their investing strategies, please stop! I don’t understand this stuff well enough to take on that sort of responsibility. That said, I believe that it would be a good thing if all middle-class investors heard my message. I believe that I have identified (with the help of hundreds of Retire Early Community members, especially John Walter Russell) big flaws in the conventional advice that those seeking early financial freedom need to take into consideration.

Dallas Morning News Columnist Scott Burns says that I go about making my case in “a manner that is catastrophically unproductive by adding missionary zeal that inflates your importance and demeans others.” He adds that: “The whole idea that there is a new school of Safe Withdrawal Rates reeks of personal aggrandizement.” I don’t see it. But I have a great deal of respect for Scott’s work and I think you should know that a well-regarded personal finance columnist says this of me.

Stock Panic Comment #17 — “That’s why I call it hateful…. It’s predatory. Whom does it benefit? Do you feel more powerful in your derision of hocus?” (Comment #47 in the earlier article)

I call this article “Stock Panic Up Close and Personal.” Some would say that’s not appropriate. Some would say that we have not yet seen a stock panic. I disagree.

I don’t think of a stock panic as something that happens all in a flash, on the day when prices plunge. I think of a stock panic as a long-term development, one that begins when people first realize at some deep level of consciousness that prices have gone up by too much for too long to be sustainable and one that ends when people reach a point of such despair over their effort to ignore that knowledge that they say out loud what they have long known to be so deep inside. The source of the panic is the battle between our two selves, our smart and loving selves and our ignorant and hateful selves. I define a wild bull as an unfortunate series of events that causes our ignorant and hateful selves to assume dominance over our investing views for a stretch of time.

The panic began in the mid-1990s. The panic caused the blow-off price jolts of the late 1990s. Few think of those price jolts as evidence of a ”panic.” I say they were. Those price jolts were reckless and irrational and self-destructive and hurtful of ourselves and others. They were part of a buying panic. People were afraid of “missing out.” Those sorts of fears become translated over time into other sorts of fears, fears of losing everything. All irrational investing decisions are bad news for the long-term stock investor, in my view.

I see panic in thousands of the posts that have been put forward during The Great Debate. The panic has not yet been resolved. We have not yet seen The Big Price Drop. The panic is ongoing. It is extremely high prices that cause a panic. It is the drop in those prices that resolves the panic.

Panic is an ugly emotion. It connects to all other sorts of ugly emotions. The “experts” are not writing about this. Why?

You would not see the sort of behavior that is discussed in the earlier article if stock investors were confident in the stock allocations they are holding today. You would not see the nastiness, the hate, the fury. Where does all this negative emotion come from? What is its source?

People should be writing about this. People should be talking about this. Ignoring it does not make it go away. Ignoring it makes it worse.

Most of the experts of today do not see it as being part of their job to address these sorts of issues. I see this as a failing on their part. I see the emotional side of the stock investing story as an important part of the story.

What have our discussions been about? Valuations, right? Yes and no. Our discussions have been about investor emotions. It’s a different way of saying the same thing. Changes in investor emotions are what cause changes in valuations.

When the Efficient Market Theory says that valuations do not matter, it is saying that emotions do not matter. That’s saying that humans do not matter. It is because all stocks are held by humans and because all humans are emotional creatures as well as reasoning creatures that emotions are such an important part of this story.

The Efficient Market Theory denies our humanity. What we see in the sorts of posts summarized in the earlier article is our humanity trying to reassert itself. What we see in the abusive posts is the Efficient Market Theory being employed to smack it back down again.

I want to make stock investing safe for humans again.

Stock Panic Comment #18 — “I am sure that everything will work out and the result will be much better than either of us can imagine.” (Comment #49 in the earlier article)

Our community has been put through a lot. Has it been worth it? It depends on what we make of it. My hope is that we will turn this into a great learning experience.

The problem has been the intensity factor. The Goons are 20 times more intense than the Normals. We need the Normals to speak up more. We need the Normals to get over their feeling that the “experts” must know so much more than they do.

Experts make mistakes. Most are well-intentioned. But all are human. All are capable of making mistakes.

When you ask questions about things that concern you, you help not only yourself, but also the expert to whom you direct the question and the entire community of investors that stands to benefit from the learning experience initiated. It is clear to me that many middle-class investors feel doubts about today’s conventional wisdom on stock investing. I encourage them to give voice to those fears.

Strong ideas can withstand questioning. Ideas that cannot withstand questioning do not deserve to remain standing.

Stock Panic Comment #19 — “When we lost a few posters because I reinstated hocus I learned quite a lot. I learned that it feels good to do the right thing. I learned who my friends truly were. And I learned a lot about running this web site.” (Comment #52 in the earlier article)

Do you see the emotion in this post? El Supremo does not share my investing views. But he felt better about himself when he did the right thing than he did when he did the wrong thing.

Multiply that by 10 million and you will begin to get some idea of why extreme bull markets are not a good thing for long-term stock investors. When prices reach the sorts of levels where they reside today, it becomes all but impossible for just about anyone to tell the truth about investing.

Say that you are close to retirement and that you have a stock portfolio valued at $1 million. Reduce that for the Big Price Drop that the historical data tells us to expect, and you have a portfolio valued at $600,000.

A columnist writes an article telling you that. Does this make you like him? Or does it make you want to boycott his column or his entire newspaper or the companies that advertise at his newspaper? Do you see the problem? Scott Burns said that the reason why we have not seen many articles about our New School SWR findings is that: “It is information most do not want to hear.”

Bull markets turn us all into liars.

We need to find our way back to a place where we can tell the truth about stock investing. We need to, like El Supremo, discover what it takes to feel good about ourselves once again.

Stock Panic Comment #20 — “Why not just let it go? Why not just put all this behind you and forget about hocus and this tool thing and all this other stuff? Why not go back to the way we were? ” (Comment #54 in the earlier article)

It must be difficult for someone who did not live through the Campaign of Terror to make sense of it. I’ve had a front-row seat since the first day and it is more than a little difficult for me to believe some of what has gone on.

Again, multiply by 10 million to gain a sense of what it means for a nation of investors to work their way back down to reasonable prices after participating in the most out-of-control bull in our nation’s history. It ain’t easy.

I knew that valuations were an important factor back on the morning of May 13, 2002. I learned that from reading Bogle’s book back in the mid-1990s, when I was putting together my Retire Early plan. But I didn’t know all this other stuff. I was naive.

It makes sense in a strange sort of way, once you force yourself to make sense out of it. Stocks are an unusual asset class in that the buyers of the asset collectively determine the selling price. Think of beanie babies. Beanie babies were selling for crazy prices for a time, right? How come? Because people came to not care what they were worth but only about what they could get for them when they sold them to the next buyer. The market for beanie babies was highly inefficient. The price of beanie babies became disassociated from their fair value. The same thing happened with stocks.

This sort of situation encourages deception. People are scared about whether they are going to have enough to retire. They see prices shooting up and that provides some emotional relief. They wonder whether what goes up can also come down. They banish that discouraging thought from their heads. And then some idiot on a discussion board reminds them of the realities. Things go berserko.

Denial is not the answer. Learning how stocks really work is the answer. That’s how we develop the confidence in our long-term strategies needed for us not to feel so emotionally vulnerable. One thing that I have discovered is that, each time you acknowledge a truth, it opens the path to the learning of many more truths.

The realities of stock investing are not depressing. They are exciting. Our story is a positive one. We do need to let go of the discredited “theories” of the past. I think that a good number of people have an exaggerated idea of the pain that is involved in doing so. Doing one right thing leads to doing another right thing and then another and then another. It gets easier.

Stock Panic Comment #21 — “Anonymity on these boards allows small-minded cowards to take shots at their betters; and where else can that happen? ” (Comment #60 in the earlier article)

Envy has played a big role in our investing discussions. The crazy thing is that much of the envy has been evidenced by people who enjoyed huge gains during the wild bull.

There are studies that have been done that show that people can be happy with small amounts of money so long as they feel that they are doing well compared to the group to which they compare themselves. And people can be unhappy with large amounts if they feel that they do not measure up in the eyes of their peers.

Out-of-control bulls cause some people to feel that they are not keeping up and others to feel that they must find a way to convince themselves and others that their outsized gains are attributable to more than just dumb luck. We are not rational actors seeking to maximize our long-term investing returns. We are in part that. We are also humans with all of the positive and negative emotions that go with being such.

It is impossible to invest successfully without devoting some attention to these questions. They are tricky. It sometimes makes us feel yucky to go down deep, where things are tangled and dark. That stuff influences us, though. We need to look at it if we are to achieve our financial freedom goals.

Stock Panic Comment #22 — “Not to say Hocus (Rob) is a pearl, but maybe he does get some people to come up with pearls for their replies. ” (Comment #62 in the earlier article)

Scott Burns says that our safe withdrawal rate findings are no biggie, that they are sort of snoresville. Why then did our discussions generate hundreds of thousands of posts at 10 different boards in discussions that have now continued for over five years?

People post about what they care about. People care intensely about the effect of valuations on long-term returns. Most people don’t understand all the issues. But lots of people clearly see that there is something seriously wrong with the conventional take on this question. People are trying to put together the pieces of the puzzle.

In any other field, people would be pointing to the reaction we have seen to my SWR posts and saying “this is a huge story!” Because we are talking about investing and the failure of the Efficient Market Theory, the official reaction is that this is snoresville.

Still, people cannot help but post about it, can they? This topic is still generating dozens of posts on a daily basis in November 2007 (when this article was posted), more than five years after the posting of the first thread-starter.

SWRs matter.

Valuations matter.

Investor emotions matter.

Humans matter.

This isn’t like that time when I bought the Leo Sayer album. I’m sure about this one.

Stock Panic Comment #23 — “At this point it doesn’t even look like Hocus is running an underhanded smear campaign against Mel, Taylor and other so-called “big shots”, right? It looks like the debunkers are to blame for the ruckus and subsequent polarization of the board into two camps. Like I said, skillful.” (Comment #64 in the earlier article)

My great “crime” was that I was the first person to report accurately what the historical data says about safe withdrawal rates. At a later time, I expanded on the insights that we developed in the SWR area to show the effect of valuations on long-term stock returns in general.

Tons and tons and tons and tons of abusive posts were dropped on us to block the discussions that hundreds of us expressed an interest in holding. In response to that, I said that the published rules of the various boards should be enforced to bring the abusive posting to an end.

There are people who deny that investing is primarily an emotional endeavor.

Stock Panic Comment #24 — “The Diehard mentality has done more to discourage investing dialogue and an open exchange of ideas than any other philosophy I know of.” (Comment #67 in the earlier article)

John Bogle is fifth on my list of favorite investing analysts. I see the Indexing Revolution as a big step forward for middle-class investors. I recommend a form of indexing (Valuation-Informed Indexing) in the articles posted at this site.

All that said, I agree with the words quoted above. Bogle has done some great things. Bogle has messed up in some big ways. Both things are so.

If Bogle is as smart as I like to think he is, he will take note of the fact that so many have put forward comments along the lines of the one above. There is something seriously wrong with an investing approach that causes as much hostility and defensiveness and hate as is caused by the conventional indexing approach.

I come not to bury indexing but to save it. The conventional approach has failed us. Let’s get to work building something better!

Is anyone able to identify any possible downside?

Stock Panic Comment #25 — “A few years ago when Motley Fool boards were free, I followed those discussions. I actually was on the side of Greaney regarding the 4% safe withdrawal rate based on historical. I actually think I now lean towards Rob’s view, that you have to consider the starting point…. While intercst was busy making fun of Rob, he kept putting out information that may prove extremely painful for those who took his safe withdrawal rate as gospel.” (Comment #68 in the earlier article)

Lots of smart people have been taken in by the Old School studies. Most readers of the Old School studies do not spend hours reading all the fine print. The Old School findings appear at first impression to be plausible. This is what makes them so dangerous.

When the Motley Fool board was in its glory days, there were hundreds of threads posted in which aspiring early retirees made clear that they were making use of the Old School studies in their retirement planning. All of the people who are saying today that SWRs are of no consequence were saying then that they were of great consequence. What changed? The only thing that changed is that we learned that the Old School numbers are wildly off the mark.

There are investors who very much want to know what the safe withdrawal rate is so long as the number is overstated by a percentage point or two but who very much do not want to know what it is if the number is reported accurately. And there are people who to this day maintain that stock investing is primarily a rational endeavor.

Imagine that we were talking about a trampoline manufacturer who used an invalid study to support a claim that its trampoline is safe for kids who weigh more than 50 pounds when in reality testing shows that kids of that weight who use the trampoline have only a 30 percent chance of escaping serious injury. Would there be people devoting years of their lives to seeing to it that none of the parents involved were able to hear the accurate information?

It’s an insane question. We all know that it is important to state safety claims accurately when we are talking about trampoline manufacturers. Why is it that so many follow a very different set of rules when we are talking about claims made about the safety of our retirement portfolios?

Real live people use these studies to plan real live retirements that take place in the real live world. Do we not owe it to these people to permit them to hear honest reports as to what the historical data says?

Again, it’s an insane question. Incredibly enough, however, the answer we have gotten back from the owners of the Motley Fool board, the Morningstar board and the Early Retirement Forum is “No, it is absolutely essential that we block honest posting, to permit honest posting on SWRs is too disruptive.” Perhaps some require some “disruption” to get their heads on straight.

I, Rob Bennett, have been charged with the high crime of reporting accurately what the historical data says about safe withdrawal rates. I hereby plead an enthusiastic “Guilty as Charged!”

Yowsa!

Stock Panic Comment #26 — “Nevermind that there are also experts that take contrary positions, and that point out ambiguities and complexities in the evidence.” (Comment #69 in the earlier article)

Pseudo-science rules in the investing field. It’s not what you don’t know that is likely to hurt you. It’s what you may be fooled into thinking that you know that you do not that is most likely to hurt you the most.

My most important piece of advice for middle-class investors is to develop a firm grasp of the fundamentals of how stocks work before putting even a dollar into this high-potential/high-risk asset class. It doesn’t take that long to learn the basics. Once you do, you won’t fall for all sorts of nonsense dressed up as science.

There will still be lots of things that you will not know if you follow this advice. That’s okay. The important thing is that your spidey sense will alert you when someone is engaging in some funny business aimed at selling you something.

You don’t need to know everything. You need to know enough to be wary of the most obvious sorts of trickery. Many of the tricks used on us are not so terribly sophisticated. We fall for them because they are repeated so often by so many different people (many of whom do not know that they are putting forward trickery because they are merely repeating thoughtlessly junk ideas that they picked up from others) that we presume that there must be something to the claims being put forward.

Never assume that just because it is a Big Shot expert saying something that there must be something to it. I have learned to my dismay that this is too often not the case.

Stock Panic Comment #27 — “The very idea that Jack Bogle’s ‘safety’ (or anyone else’s) would be an issue puzzles me, and the notion that the invited speakers need to be ‘protected’ from disagreement really is astonishing.” (Comment #72 in the earlier article)

Discussion boards are an important communications medium of the future. They will not realize their potential until site owners take seriously their responsibilities to administer the published rules of the boards in reasonable ways.

When big-name “experts” participate at a board, they provide that board a measure of credibility that it would not otherwise possess. My rule is that I will not participate at any board community that bans honest posting on the topic of the board. That’s a pretty darn minimal standard, is it not? I find it shocking that there are “experts” with far bigger names than mine who appear to be unconcerned with the abusive posting practices being engaged in at boards at which they participate.

No expert is able to be aware of every post posted to a board. I do not advocate some severe standard that requires this. The abusive posting at the Vanguard Diehards board became so intense that the board imploded; that board today generates only a small fraction of the posting it obtained at an earlier time in its history. There are a number of big-name experts who posted at that board or participated in the community in other ways during the time that the abusive posting was going on and who took no public acts to stop it. I find this strange and dangerous and irresponsible.

If board leaders are not following the published rules of the site at which the board operates, that is shameful behavior. If a board has become a shameful enterprise, big-name experts should not be permitting their good reputations to be used to promote it.

Is there anything that in any way, shape, or form would in ordinary circumstances be controversial about what I am saying here? Is what I am saying here not something that would pass as simple common sense in any area of endeavor other than stock investing?

Stock Panic Comment #28 — “If you want to understand the dynamics of what happened here, you need a model for understanding. I suggest you use a ‘cult’ as a model.” (Comment #74 in the earlier article)

Yes and no.

The group that opposes discussion of the realities of long-term stock investing is indeed cult-like in its blind adherence to stale and mindless dogmas. They practice thought control of “newbies” by striking out at those who offer reasoned takes on the topics addressed.

I am a bit uneasy with the “cult” explanation, however. My concern is — how far do we take it? It is not at any one discussion board that we saw this behavior; we saw it at a good number of different places. And the phenomenon is not limited to discussion boards. We see word games in the writings of some of the leading authorities in the field, people like John Bogle and William Bernstein and Scott Burns and Jonathan Clements. Are these people part of a cult? It seems to me more than a little bit of a stretch to argue this.

I place the blame on the model we use to understand investing — the Efficient Market Theory. This theory is wrong, terribly wrong. That’s my opinion, of course — you are free to reject it or accept it. Presuming that I am right in saying that the theory is wrong, I think that tells us what we need to know to explain the strange behavior without needing to say that the majority of middle-class investors belongs to a cult.

Most middle-class investors do not know what the Efficient Market Theory is. What they know is what it teaches — timing does not work, no one is capable of picking individual stocks effectively, stocks are always best for the long run, these sorts of things. It is hard for them to see these things as wrong without going to the root and seeing what is wrong with the Efficient Market Theory. Most don’t have that great an interest, largely because they just don’t have the time to be sorting though the good and bad points of a theory. They assume that the experts know what they are talking about.

Is it cult-like to put your faith in experts? It is a bit, but not really. Investing is not a religion for most people; it is a small part of their lives and they don’t want to spend a great deal of time on it. It seems safe to trust the experts, so most Normals do.

The real problem in my mind is that the experts have let us down. The experts bought too heavily into a bad theory and things got out of control.

The conversations are indeed cult-like. I grant that. The real problem is that people do not have the background needed to think their way through the conflicts in the arguments put forward in support of the theory. We need to become educated on the fundamentals. Those who know where stock returns come from are informed enough to see the flaws in the Efficient Market Theory. Experts should know this, but the reality is that most don’t. The Efficient Market Theory determines how our experts think and they are not able to see how wrong the theory is until they develop a new way of thinking about what is involved in the investing project.

Stock Panic Comment #29 — “I began reading this Morningstar forum about 6-8 months ago and quickly learned that valuation matters…and yes from Rob…but I read others to validate my “new” thoughts on the matter.” (Comment #76 in the earlier article)

This is what it is about — learning and teaching. In heaven, all who post on investing discussion boards will be participating in either a learning experience or a teaching experience or both. It’s not that way here on Planet Earth.

The Efficient Market Theory assumes that it is. The Efficient Market Theory assumes that we are something that we are not. It assumes that we are robots who are aware of every information bit about stocks that exists and that we are Mr. Spocks who process those information bits without being influenced by any emotions we feel about the topics they address. This is not so. This is a falsehood. This is a lie.

People show emotion on investing discussion boards every hour of every day of every week. Every show of emotion illustrates why the Efficient Market Theory is a bad model for understanding how stocks work. Why do the “experts” not write about this?

There are ways of testing theories. A great way to test the Efficient Market Theory is to go to investing discussion boards and see how real live humans form their investing strategies in the real live world. I have been doing this for a long time. My report to you is that the way the Efficient Market Theory says people do it and the way people do it in the real world are very different things.

Reason does indeed play a role in the investment decision-making process, to be sure. The poster quoted in the words above behaved in a reasonable way. He heard some new ideas that seemed to make sense, he checked them out to make sure, he acted on what he learned. That’s good. But I doubt that that poster always acts in a purely rational or efficient way. And I know for certain that lots of others do not. So the market can never be entirely rational or entirely efficient. The dominant investing model of today is built on sand.

Stock Panic Comment #30 — “If Rob ignored them, they accused him of evading their questions. When Rob responded to their questions, they accused him of being long winded. When they attacked, Rob responded too gently, IMO. So, they accuse him of being ‘passive aggressive’. There was no way for Rob to come out even.” (Comment #77 in the earlier article)

I cannot count how many times I have seen posts suggesting that I was “mean” to John Greaney by pointing out that he got an important number wrong in his study on safe withdrawal rates. I don’t see it that way. One of my biggest worries is that I will get a number wrong in an article that I write about personal finance and that I will cause someone great pain by doing so. When someone points out to me that I got a number wrong in one of my articles (John Walter Russell has done this on more than one occasion), I consider that person one of my best friends. I worked with John Greaney for a long time. I consider him a friend. I pointed out the analytical error he made in his study in a spirit of friendship.

I think it would be fair to say that he does not see it that way. I think it would be fair to say that he took my correction of his study personally. That’s highly unfortunate. It’s also highly human, right? We’re all humans. Each and every investor is first of all a human. We must never forget this critically important reality.

The Stock-Return Predictor tells us that the most likely real annualized return for the next 10 years is 0.7 percent (this article was posted in November 2007). How would purely rational investors respond to that information bit? If they were highly invested in stocks, they would lower their stock allocations. We have seen that in the real world many have not reacted that way. They have reacted instead with — denial.

Again, this is both unfortunate and human.

It’s also important.

There is no room in the Efficient Market Theory for recognition that humans go into denial when confronted with realties that do not please them. None of the thousands of pretty little studies with all of their pretty little tables of numbers that have been produced by advocates of this theory account for this reality in their research. Guess what that means? It means that their research is flawed. It means that they too got the numbers wrong.

Valuations matter. I say that all the time. Another way of saying it is to say that emotions matter. It is swings in emotion that cause swings in valuation. The reason why stocks are so absurdly overpriced today is that stocks provided such absurdly high returns in the late 1990s. That caused lots of people to come to believe things about stocks that cannot possibly be so. People have been learning over the course of the past eight years (a time-period in which super-safe asset classes have provided higher returns than stocks) that stocks are not what the “experts” have made them out to be. Many of us responded to this news in much the same manner as Greaney responded to his discovery that he got the number wrong in his study — with denial.

John Bogle is not a psychologist. He has no training in how to recognize or treat denial. William Bernstein is not a novelist. He isn’t able to recognize denial in all of the little ways in which it evidences itself in the daily playing out of the grand investing story. Scott Burns is not a detective. He doesn’t follow the clues provided by expressions of denial to solve the puzzles of investing.

The investing “experts” are not trained in much of what they need to be trained in to do their jobs. They know about numbers. They know about the theories cooked up in the ivory towers. They know about the way it is supposed to work. They don’t know about the way it which it actually does work in the real world.

Visit an investing discussion board for a few hours and you will have a front-row seat to a drama showing you how it actually does work. Report the realities, and you will prompt a reaction. It will not be an entirely rational reaction. You will hear the Efficient Market Theory cited many times. You will rarely see its core assumption of rational investor behavior evidence itself.

Humans like to fool themselves. People who are experts in fields other than investing have known this for a long, long, time. We need to get about the business of spreading the word to the investing “experts” before more of the accumulated wealth of middle-class America goes down the drain.

Stock Panic Comment #31 — “If the only posters they want on that board are those that will be yes men, repeat the tired old mantras and bow down and kiss the feet of Bogle and the moderators, do you really want to waste your time with such close-mindedness? ” (Comment #79 in the earlier article)

You are looking to buy a new car. Do you look into only the good points of the model you have in mind, or do you look into both the good and bad points? You look into both.

You’ve bought the car. Now what? Now you focus on the good points and ignore the bad points. You’ve already made your decision. The idea now is not to learn which car is best. The idea now is to avoid buyer’s remorse.

Some people come to discussion boards seeking to learn how to invest effectively. Some people come to discussion boards seeking confirmation of decisions they have made. The two goals are opposites. One is a learning motive, which requires exposure to new ideas. The other is a reassurance-craving motive, which requires unconditional support.

When should we stop learning how to invest? Some would say “never.” But doesn’t that conflict with the buy-and-hold concept? Learning brings on change. Change does not fit well with a pure buy-and-hold strategy.

My view is that we need to combine a certain measure of close-mindedness with a certain measure of open-mindedness. If you revisit every investing question every day, you will not follow any one strategy long enough to find out if it works. But if you become dogmatic, you are doomed. No one knows everything. Buy into the idea that some investing guru knows everything and you place yourself on a path leading to dogmatism and doom.

It makes sense to be resistant to certain new ideas because acceptance of them would require a revisiting of your fundamental beliefs about what works. It does not make sense to close your mind entirely to any new idea. I don’t believe that short-term timing works. But I make an effort to avoid dogmatism on this point. I don’t know everything about how to invest and I never will.

How would you react if someone told you that your spouse was an alcoholic? Your reaction would probably be a strongly negative one; you wouldn’t want to hear it. That’s how many people react to hearing that their investing strategies are not likely to pay off. It’s a healthy reaction to a point. If six different people tell you that your spouse is an alcoholic, you need to get out of denial mode and do something to address the problem. When it’s been eight years since stocks have performed in the way they are supposed to (according to ideas you bought into long ago), it’s time to return to the basics and figure out what is really going on.

It’s important to understand that there’s a reason why we are resistant to new ideas. It’s not because we are stubborn or dumb or bad. It’s because it’s not always good to be open to new ideas. But it is a mistake to make resistance to new ideas your sole driver. There are exceptions to every rule. There are times when new ideas should be resisted and there are times when new ideas should be welcomed.

Stock Panic Comment #32 — “Vanguard monitors this forum on a regular basis at a very high level, so the “higher-ups” do, indeed, know exactly what’s going on here.” (Comment #80 in the earlier article)

I find this comment disturbing. If there are people in positions of responsibility who are aware of what is going on, they should be taking steps to help the members of the board community.

Some people see stock investing to be a “knowing” project. I see it as a “caring” project. Being strong in the knowing department can help you become effective in the caring department. Being strong in the caring department comes first and is most important. There are many investing “experts” around today who know too much and who care too little.

Stock Panic Comment #33 — “Wouldn’t that be a crackup if what Rob is doing actually worked? I think people would be really mad.” (Comment #81 in the earlier article)

People would be really mad to discover that an investing strategy that was shared with them and that they rejected worked. If that comment doesn’t persuade you that investing is primarily an emotional endeavor, I think you might as well stop reading articles posted to this site because I am not going to be able to do it for you here.

Envy is an emotion. There is no room for envy in the Efficient Market Theory. The Efficient Market Theory does not tell the complete story.

Stock Panic Comment #34 — “I have seen many rip Rob, but truthfully I don’t understand what the counter argument is. Is there a counter-argument?” (Comment #82 in the earlier article)

This guy speaks for many. Abusive posters dominate discussions of how valuations affect long-term returns. The majority of posters possesses a desire to learn. But the majority is intimidated by the knowledge that the abusive posters pretend to possess.

The abusive posters do not know nearly what they pretend to know. But the “experts” have not educated the rest of us to the extent we need to be educated to point out the holes in their arguments. I’ve been there. I was a typical investor who presumed that the experts were shooting straight with me in the days before I began putting together my plan for early retirement in the mid-1990s. I’ve been shocked by what I’ve learned in the time since.

You need to know the basics. Stocks are an asset. Price matters when purchasing an asset. That must be so. There can never be a counter to that claim because that claim must be so.

Goon posters will aim to intimidate you into backing down on what you know must be so by citing “experts” and “studies” and “theories” that seem to suggest that price does not matter when buying stocks. No! You must hold fast to common sense. Common sense trumps all in my book. A theory or a study or an expert that defies common sense should always be suspect.

Common sense will take you a long, long way in investing. It’s a good idea to fortify your common sense with some reading and with some knowledge of what the historical stock-return data says. But you can’t go too far wrong returning to common sense often. Go over the basics in your mind again and again. You need to possess confidence in your understanding of the basics. That’s what will get you through challenges to your buy-and-hold convictions.

Stock Panic Comment #35 — “Go back 100 years in finance and many other disciplines, and examine the academic studies of that era. You will see that they are often riddled with assumptions, theories, and analysis that are now considered to be wrong or even ridiculous. And 100 years from now people will likely view the studies upon which we rely in the same light. Moreover, even today, for every academic study that argues for one proposition, there will typically be another study that argues the opposite. The primary way people on this forum can maintain that academic studies support their views, to the exclusion of others, is by simply ignoring contrary studies and/or the ambiguities and limitations of current studies.” (Comment #83 in the earlier article)

Dogmatism is evidenced in its strongest form when the support for the idea being advanced dogmatically is weakest. Dogmatism arises from a lack of confidence. It betrays a weak hand.

Why is there so much dogmatism in discussions of investing? It’s a highly uncertain business of great import. It scares people to acknowledge how little confidence they feel in their investing strategies. By shouting, people try to persuade themselves that they feel sure of what they are saying.

The risks are especially great for those planning retirements. That’s why there is virtually zero tolerance for accurate reports of what the historical stock-return data says about the safety of retirements planned pursuant to the Old School safe withdrawal rate studies.

Every time you see an abusive post on an investing discussion board, there should be a voice in your head saying “deduct points, this speaker lacks confidence in the case he is putting forward.”

The Efficient Market Theory is the quintessence of dogmatism. It is a theory that defies common sense and that defies the historical data. It is properly described not as a theory, but as an assumption. How do we know that the market price is right? We assume it. How do we know that long-term timing does not work? We assume it. How do we know that stocks are always best? We assume it. How do we know that taking risk is always rewarded? We assume it.

There are studies put forward that purport to prove these things. But those studies are generally not set up in the ways in which they would be set up if the driving force behind them were a quest for truth. The authors of these studies are often guilty of doing what the author of the words quoted above finds discussion-board posters guilty of; they ignore the positions of those who question their findings. The analytical errors are probably not intentional in most cases. That doesn’t change the reality that the studies do not prove what they claim to prove.

I believe what I believe. I often state my views strongly. I pray that you never take anything I say on faith. I am a human and I make mistakes. I probably am wrong about some of the things I say about investing.

Those words are hard to write. I know from what I have seen that I need to learn how to write them frequently if I am to offer something different and better than what most of today’s “experts” offer. I hope that others will learn to write these sorts of words and to mean what they write and to keep these sorts of words in mind when offering investing advice.

It’s not what we don’t know that most hurts us. It’s what we think we know for certain that just isn’t so.

Stock Panic Comment #36 — “I’ll venture a regular guy opinion. I will say that Rob’s explanation does make sense. However, no one can predict the future. Just when someone uses history to try to backtest, create a model, and then predict the future, the factors change or new factors emerge, thus making the model useless for predicting the future. (Comment #84 in the earlier article)

This guy is expressing a healthy open-mindedness combined with a healthy skepticism.

Stock Panic Comment #37 — “What Rob said sounds reasonable enough, so I wouldn’t be able to judge his advice without additional input. I must rely on the fact that I don’t hear the authors I trust saying the same thing. The authors I trust seem to agree that returns may be lower in the years to come, but none of them suggest that we should drastically reduce our stock allocations in light of this information…. I don’t have time to join the search for ‘the Grail of Investing.’ Besides, I have other priorities in life. So, I have to rely on the judgment of people who make the most sense.” (Comment #85 in the earlier article)

This is a good expression of the viewpoint held by many Normals.

Stock Panic Comment #38 — “If all he thought was that the market is a bit overvalued and we are probably in for a period of below average returns there would be no controversy. His views go way beyond that. He claims that the entire industry is wrong and he, as founder of the New School [of safe-withdrawal-rate analysis], has the “correct” answers.” (Comment #86 in the earlier article)

The history is that I started out with an exceedingly modest tone. The famous post put up on the morning of May 13, 2002, asked a question. I wasn’t brave enough to say that I thought that the Old School SWR studies get the number wrong (although I did believe this to be so). I put it in the form of a question so as to come across as nonassertive and non-offensive and non-threatening.

I have become more bold over time. That is because of what I have seen. What I have seen amazes me. The Old School studies give people demonstrably false retirement advice. We discovered this over five years ago. A good number of people who claim some level of investing expertise (including several big names) do not seem to care enough to do much to get the word out to people before they suffer one of the most painful life setbacks imaginable. The system is broken, friends and neighbors. That’s what I have learned.

I don’t claim to know all there is to know about investing. There are all sorts of things I do not know. I know with 100 percent certainty that it is wrong to give people demonstrably false information on what the historical data says about safe withdrawal rates, knowing that they are going to use this information to put together retirement plans. How much of a genius do you need to be to grasp that much?

I became radicalized. The word “radical” means “to the root.” The investing advice field is intellectually corrupt to the root. Most of the people in it are good people. But they are trying to adhere to a model for understanding how stock investing works that just does not make sense. We need to pull up the Efficient Market Theory by the roots and start over with something else. I couldn’t have told you what the Efficient Market Theory was on the morning of May 13, 2002. Today I say that we need to pull it up by the roots. That’s because of what I have seen and what I have learned during The Great Debate.

The sorts of things that I have seen take place could not have taken place unless the entire field was corrupt. Again, I am not saying that the people are corrupt. I am saying that the investing field today is intellectually corrupt. It is impossible to give realistic advice that fits with the Efficient Market Theory. I’ve seen a number of big-name experts try to do it and end up twisting themselves up in nonsense gibberish logic pretzels. I’ve been making my living by stringing words together for a long. long time and the goal of a writer is to say things as plain and clear and simple and true as possible. Most of today’s investing guides are polluted with convoluted word games. This is not because the people writing them are lacking in intelligence. It is because there is no way to combine what the Efficient Market Theory mandates and what observation of the real world mandates in a single narrative possessing a reasonably strong logic chain.

We need to get the word out about the errors in the Old School safe withdrawal rate studies. I’ll tell you why I believe we have not yet been successful in this pursuit. It’s because fixing the Old School studies raises questions that experts in this field do not know how to answer. The obvious question is — How did so many smart people get taken in by what these la-la land studies say? They were taken in because they placed some measure of confidence in the la-la land Efficient Market Theory and buying into the premises of that theory makes it impossible to think clearly about how long-term investing really works.

Please take a look at the Stock-Return Predictor (see the tab at left). The Predictor tells us that, if stocks perform in the future as they always have in the past, the most likely annualized real return for the next 10 years is 0.7 percent. Did you know that? Are you shocked to learn that?

You shouldn’t be shocked by learning something of such basic importance. In a system that worked, this would be widely shared information. Everyone with any money in stocks would know this. Why doesn’t everyone know it?

It’s because the Efficient Market Theory says that this situation is impossible. The theory says that all available information is incorporated into the market price. The fact that returns for the next 10 years are likely to be less than what can be obtained by investing in far safer asset classes is an important piece of information. That should be factored into the market price, according to the theory. But if that were factored in, the price could not be as high as it is today. Knowledge that the long-term return is likely to be low should cause the price to drop (bringing the likely return up to more reasonable levels).

Some advocates of the Efficient Market Theory deny this, but what the theory really says is that investors are rational; prices cannot be efficient if investors are not rational. Investors are not rational. I know this. I’ve spoken with thousands of them. They’ve called me names. They’ve banned me from their discussion boards. They’ve made fun of some of my favorite song lyrics. They made fun of the Frank Sinatra song All the Way. How crazy can you get? I mean, come on!

Here’s a snippet:

When somebody loves you, it’s no good unless she love you
All the way.
Through the good and lean years and through all the in-between years,
Come what may.
Who knows where the road may lead us?
Only a fool would say

Please take note of the part where he observes that “only a fool would say” where the road will lead us. I think it is fair to describe this as a none-too-veiled criticism of the Old School studies. Listen to Frankie Boy! He knows whereof he speaks. And what he is saying about long-term asset allocation strategies is entirely consistent with what many of the other big-name “experts” (people like Marshall Crenshaw and Miles Davis and The Who — but not Leo Sayer!) say on the topic. Is it really possible that all of the best-respected names in the field got it wrong?

We need to face facts, people. We humans are more than a little bit bonkericious. We buy Barry Manilow records — don’t deny it, somebody has to be buying them or they wouldn’t offer them for sale in record stores everywhere. We need a model for understanding how investing works that takes into account this obvious reality. The Efficient Market Theory has to go.

What was the question again?

Stock Panic Comment #39 — “What truly impresses me is the consistency that hocus points us to something of value. “ (Comment #87 in the earlier article)

These words were put forward by John Walter Russell. Please note the way in which he phrases what he says. He doesn’t say that I am especially smart or especially knowledgeable. He says that I am able to point discussions in directions which often end up being fruitful.

That’s what I see as my talent. There are some who believe that to be an investing “expert” you need to know it all. I do not know it all, so, if that’s your standard, I fail the test. However, I have seen my pointing lead us to some pretty darn wonderful stuff over the years, so my intent is just to continue doing what I do to the best of my ability.

My biggest worry today is that we do not have enough people contributing on the constructive side in our investing discussions. I know that the stuff that we have been coming up with is of great value. But we need checks on it. We need people looking for flaws (with good intent, of course) and we need people adding different perspectives. That’s the advantage of developing our ideas in a community. One of the reasons why I founded the Retire Early Community in the first place was to make this sort of healthy interaction possible.

Get to work!

In all seriousness, please do understand that we need the help that you can provide and that we all are grateful for any contributions you are able to make.

As for me, I’ll just keep pointing.

Stock Panic Comment #40 — “Jim Rogers stated that new ideas tend to be first ignored, then people grow actively hostile, and only later does acceptance come.” (Comment #90 in the earlier article)

I probably laughed once when I was young at something Lyndon Johnson said in a speech and now God is paying me back for it. Do you remember how he used to always be seeing “light at the end of the tunnel” re the Vietnam quagmire? I’m always seeing the beginning of the acceptance stage re this SWR matter.

Stock Panic Comment #41 — “Maybe this can be summed up by one question: Why would anyone subject themselves to this much abuse? They’d either have to be a troll or the most saintly person on earth trying to save all of our souls. ” (Comment #93 in the earlier article)

Or maybe they really like exploring early retirement junk.

Stock Panic Comment #42 — “I have never seen hocus show incivility. No matter what. Truly amazing. Either he is really the output of an artificial intelligence program, or the man’s on the way to becoming a saint! ” (Comment #95 in the earlier article)

Here’s Dylan:

I got the pork chop.
She got the pie.
She ain’t no angel
And neither am I.

I am grateful for the kind words all the same.

Stock Panic Comment #43 — “Rob and Cleo are the most trustworthy. These posters always get to the heart of a matter and offer sound, intuitive, original, creative and helpful advice. The good Lord should clone them for the benefit of mankind. Engineers, on the other hand, and here I include “engineer types” (we all know who they are) are typically quantitative and not qualitative. Whatever brain transmitters gave them their high level of mathematical, measuring and similar skills apparently resulted in a lowering of emotional, feeling and human relations skills. ” (Comment #96 in the earlier article)

We need engineer types in the investing advice biz. We also need non-engineer types.

Stock Panic Comment #44 — “Post on, Hocus! ” (Comment #101 in the earlier article)

Will do!

I’ll pick up my guitar and play,
Just like yesterday.
Then I’ll get down on my knees and pray
We won’t get fooled again.
— The Who, “Won’t Get Fooled Again