Taylor Larimore and the Monster Mistake, Fright Scene #1 — In the Lair of the Gentleman Goon
Taylor Larimore is one of the co-authors of the book The Bogleheads’ Guide to Investing. He posts daily at the Vanguard Diehards discussion board at Morningstar.com.
The Vanguard Diehards board is a high-potential board. Lots of smart people post there. The Vanguard Diehards board is a goon board. Lots of goons post there. The Vanguard Diehards board is a goonishly wonderful board or a wonderfully goonish board, depending on your point of view.
Taylor Larimore is the board’s signature poster. He does indeed engage in a good bit of goonishness. Mention the merits of long-term timing and Taylor Larimore will put up a post with 20 quotations from experts dismissing the idea of short-term timing. He often refers to posters who put forward questions about valuations to which he is not able to respond effectively as “trolls.” He says nothing about the ruthlessly abusive posting of another co-author of his book, Mel Lindauer.
Taylor Larimore ain’t no Mel Lindauer, however. Taylor Larimore is a nice goon, a gentleman goon. I get the sense that Taylor Larimore would be happy if goon tactics were not needed to block honest and informed discussions of the effect of valuations on long-term returns. Lindauer (and a good number of others, to be sure) respond to the call of The Great Goon in the Sky with relish. Not Taylor Larimore. He does what needs to be done, or he at least sanctions others doing what needs to be done, but he does so without any show of enthusiasm. Good for him (kinda, sorta).
Taylor Larimore and the Monster Mistake, Fright Scene #2 — The Magic Words That Must Be Spoken to Break the Witch’s Spell
Taylor Larimore did something the other day (this article was posted in June 2007) that made my eyes pop out in shock and amazement. Since the early days of The Great Safe Withdrawal Rate Debate, we have been plagued by goon posters who want to defend the conventional investing model of today but who are too aware of the pitfalls of trying to do so in reasoned debate to be willing to engage in straight-talk discussions. Hostility comes through loud and clear, but we miss out on the learning experience that often follows from honest expressions of discontent. Word games are a dishonest means of communicating displeasure. Taylor Larimore went beyond word games on an important investing question the other day.
A poster noted that even experts inclined to defend the conventional model acknowledge that valuations are too high today to justify realistic expectations of solid stock returns on a going-forward basis. For example, William Bernstein (author of The Four Pillars of Investing) puts the long-term return of stocks at 3.5 percent real, a number not sufficiently higher than the return that can be obtained from purchasing Treasury Inflation-Protected Securities (TIPS) to justify the far greater risk involved in owning stocks.
Larimore said: “Short-term (10 years or less), it doesn’t matter. Long-term, I believe stocks will continue to grow — as they have for 200 years.”
That statement shows Taylor Larimore to be less than well-informed about today’s investing realities. It’s not a word game response, however. It’s an honest uninformed statement. That’s a lot better than the alternative. That’s a whole big bunch better than the word games we have come to expect from defenders of the conventional model who do not possess the personality or character deficiencies necessary to descend into the ranks of the card-carrying Goons.
By talking straight, Taylor Larimore gave us something to work with. He offered the hand of kindness to those of us seeking an understanding of how long-term investing really works that is both honest and informed.
Taylor Larimore and the Monster Mistake, Fright Scene #3 — The Long and Winding Road Through the Dark and Lonely Forest
What Taylor Larimore said gets to the heart of both what’s right about today’s dominant investing model and what’s wrong with it too. How stocks perform over the next 10 years “doesn’t matter,” says Taylor Larimore. That’s a bit strongly stated for my tastes. But what Larimore is saying here is a lot more true than it is false. He is putting his finger on the legitimate breakthrough of the now dominant model.
Investors used to worry about the short-term. What distinguished a bull from a bear was that a bull expected stocks to do well over the next 10 years and a bear expected stocks to do poorly over the next 10 years. Today’s smart investor (the one at least smart enough to buy into the “Stocks for the Long Run” model, a gravely flawed model that is a step above what came before it) doesn’t care whether stocks are going to do well or poorly over the next 10 years. Most of today’s investors are (or at least profess to be) long-term investors. Their focus is on what will happen over time-periods of longer than 10 years.
Larimore did something very important in the words quoted above. He defined for us what he means when he uses the phrase “investing for the long-term.” Most defenders of the “Stocks for the Long Run” model fail to do this. They advise investing for the long term, but don’t say what that means. Is three years the long term? Five years? Ten Years? Fifteen years? What? Larimore suggests in the words quoted above that the 10-year mark is where the short-term ends and where the long-term begins.
That’s just what we need to know to be able to point to some figures that will scare most of today’s middle-class investors right out of their pants.
Taylor Larimore and the Monster Mistake, Fright Scene #4 — Those Horrible Dreams of Walking Around in Public with No Clothes On
Most of today’s investors have never stopped to consider how long the “long term” really is. Most are not going to be able to wait 10 years to see good returns from their stock investments. You can tell that by reading the posts put to the Vanguard Diehards board. Many indexers are expecting to see good returns from stocks in five years or less. The odds are not good.
By setting forward a definition of the long-term that requires that investors wait 10 years to see their trust in today’s conventional advice pay off, Taylor Larimore is suggesting an exceedingly generous means of assessing the value of that advice. It’s probably only one in five of today’s investors who will be able to wait 10 years for stocks purchased at today’s prices to provide a satisfactory return. Under the Larimore rule, that would be good enough.
The historical stock-return data tells us that in all likelihood 10 years is not going to be nearly enough. Stocks are not priced today to provide a good return in 10 years. Stocks are not priced today to provide a good return in 15 years. Stocks are not priced today to provide a good return in 20 years.
How about in 25 years? That’s a definition of the much anticipated “long run” that makes sense, according to the historical data. Those who purchase stocks today will by the year 2032 have received a strong enough annualized real return to justify their investing choice, in the event that stocks perform in the future anything at all as they always have in the past.
Most of today’s investors with dreams of coming out okay in “the long term” are walking around in public with no clothes on. Even worse, they don’t know it!
By putting forward a definition of “long term,” Larimore has given them a tool for figuring out for themselves what they need to know. Those with a sincere interest in investing effectively for the long run can check the historical data to determine whether Larimore’s 10-year rule makes sense. They will learn that it does not. Learn that important lesson, and you are well on your way to getting about the business of putting some clothes on and winning back your investing self-respect.
Taylor Larimore and the Monster Mistake, Fright Scene #5 — The Salesmen With a Desire to Drink Our Blood
It cannot be that easy, can it?
We’re talking about the Stocks-for-the-Long-Run Investing Model, the dominant investing model of our day. I am saying that the whole thing crumbles apart in our hands if we merely work up enough of the spirit of self-assertion to say to the kind and generous and saintly experts: “Oh, please, sirs, could you give us sad figures so entranced by your superior wisdom some little sense of what it is you mean when you say that we need to be willing to wait for the long term for stocks to pay off?”
The usual response is: “Shut up and eat your gruel if you know what’s good for you, sucker boy! You pay the bills, and that’s all you’re good for. If we Experts have any questions we want to have directed at us, we’ll be sure to let you know. For now, the Great Oz has spoken!”
Taylor Livermore did better than that in the comments he put to the Vanguard Diehards board the other day. He put a number to the sleazy long-term promise. It’s like a 20-year-old boy on the make telling his girl that he will still love her in the long term if only she will give him everything he wants in the here and now. Why is it that those making promises that involve the phrase “the long term” are so reluctant to discuss specifics? Why is it that so many loves sealed by vows re what will happen in “the long term” in the real world cannot survive much past next Saturday night?
What is it that a stock “expert” is “expert” in? Selling stocks! It’s not an accident that they never get specific about the meaning of the phrase “the long term.” That sort of thing comes off to the boys and girls in the club as being so darned unprofessional. It’s safer being vague than being unprofessional.
For everyone except the schmucks and schmuckettes left the job of paying the bill. Oh no! A terrible thought just occurred to me. Some of them might be listening in!
Taylor Larimore and the Monster Mistake, Fright Scene #6 — The Schmuck Who Came Back from the Dead
Taylor Larimore has played the role of the Schmuck before. He talks about it in his posts to the Vanguard Diehards board. He says that he fell for just about every investing hardsell that came down the pike. Until he discovered Saint Jack. That’s the day he died and went to investing heaven, where the motives of all those who become wealthy on the commissions obtained from completing stock transactions are pure.
Uh — good point, Taylor. Um — outstanding post!
I don’t think it works that way. Warren Buffett says that, if you’ve been playing poker for 20 minutes and you haven’t yet figured out who the patsy is, there’s a good chance that you are the patsy. The historical data tells us that the patsy is the guy who believes that, for those who purchase stocks at today’s prices, the long term is 10 years. Taylor Livermore is the patsy. Again.
Taylor Larimore and the Monster Mistake, Fright Scene #7 — A Sh-Sh-Shiver and a Sh-Sh-Shake
Is he a bad guy? I don’t think so (I do think he has done bad things, of course). I think he sincerely wants to do well for the people who post to the Vanguard Diehards board and for the people who read his book. I think he is too trusting a soul for his readers’ good. I think he has fallen for a line again, as he himself acknowledges he has before. I think he has fallen in with a bad crowd that has persuaded him against his better instincts that goon tactics are needed to “protect” the salesmen from the questions that the goons all know they cannot possibly respond to effectively.
Millions will suffer busted retirements. Millions more will see large portions of their life savings go “poof!” And you wonder why Scooby-Doo gives us a shiver and shake? Scooby’s no Schmuck. Scooby and those meddling kids know the score. They know to run at the sighting of an absurdly high P/E10 level.
It’s a terrifying reality. You do what the experts tell you to do. You buy the stupid stocks and you never dare to ask a single question about the prices you are asked to pay even though you do notice that they seem a trifle high. Then, as all around you are selling, you stick to your buy-and-hold guns for ten long years. And what do you find at the end of this journey into the heart of darkness? No Scooby Snack!
You gave me a scare with your frightening look into the realities of long-term investing, Taylor Larimore. Like my boys Timothy (age seven) and Robert (age five), I enjoy being scared. Do it again! Do it again!