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How to Build Wealth, Ignore Wall Street, and Get on With Your Life Print
Wednesday, 13th May 2009 (by J.D.)This article is about Basics, Books, Investing
This is a guest post rom Bill Schultheis, author of The New Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life. Schultheis is an investment advisor in Kirkland, Washington. To learn more, visit his website.
What a difference a decade makes.
Ten years ago everyone was chasing the next hot stock. Equity markets were generating double digit annual returns and dot-com companies were doubling overnight. Greed was widespread in the psyche of investors and no one wanted to miss out on the next sure thing: a social epidemic of excitement running rampant.
Everyone was getting rich.
Quickly.
Or so it seemed.
Fast-forward to today and everyone is running for cover. The country is mired in a deep recession and major stock market indices have declined over 40 percent from their highs. Fear has set in with investors of all ages. Our country is now struggling with a social epidemic of pessimism as investors cope with how to build back portfolios that have been sliced in half.
With one eye on the grim economic headlines and the other on a depleted portfolio, there is a tendency to think that everything is out of your control, and, unfortunately, that is when financial paralysis sets in.
Despite all the bad news thrown at us by an overbearing media, the truth is that you are in control of your financial future, and now is the time to recognize it and take charge of it. Why is this so important now? I am not saying this is an opportunity of a lifetime, but because of the significant declines in the stock market, current valuations suggest that the next decade, and beyond, are likely to generate attractive returns in common stocks. Don’t let this next decade pass you by.
In my book, The New Coffeehouse Investor, first introduced in 1999 and now in its third edition, I share three simple principles to guide you in building wealth. These are principles you already know to be true and in your control.
- Save for a rainy day. Establishing your own personal financial plan is paramount to building long-term wealth. In doing so, you create an awareness of whether or not your current saving and spending levels translate into achievable financial goals down the road. If not, what changes need to be made? You might not be able to make enough adjustments immediately to reach your savings goal, but at least you have created an awareness of the gap between today’s current saving and spending levels and your future expectations. Then, when saving and spending choices come up in the future, this financial awareness is at least present at your decision-making table.
- Don’t put all your eggs in one basket. The key to building a successful portfolio and reaching your financial goals is to diversify your assets in such a way that you maximize your chances of achieving your goals with a minimum amount of risk. The personal financial plan you have created for yourself brings clarity to your saving and spending issues. It also allows you to determine how to best allocate your investments between stocks, bonds, real estate and other asset classes to achieve a required rate of return based on a level of risk that is appropriate for you in relation to your goals and where you are in your life.
- There is no such thing as a free lunch. Because markets are relatively efficient, any attempt at beating the market through the selection of individual stocks or actively managed mutual funds is likely to prove disastrous to your long-term financial health. The smartest way to build a globally diversified portfolio is through a line-up of low-cost index funds. This investing strategy is at the core of Coffeehouse Investor portfolios. Wall Street will forever tout its stock picking prowess. Don’t let them gamble with your money. Low-cost index funds are the surest way to capture the entire return in any asset class over the long haul.
The benefits of embracing these three principles are straightforward. First, from an investing standpoint, you maximize your return potential in each asset class by capturing its entire return. Second, and more important, it allows you the emotional freedom to turn your attention away from Wall Street and focus on the one component of wealth that matters most of all: How much you save and spend.
The financial media is quick to remind us that we are a nation of irresponsible, overspending consumers, living for today at the expense of saving for tomorrow. Along with the woeful tales of those who spend too much is another story that needs to be told: that of millions of Americans who do want to take responsibility for their saving and investing decisions by making the right choices today.
The problem is that we have been so inundated by the financial industry’s marketing machine over the past quarter century, that we have been brainwashed into thinking that the secret to our long-term financial well being lies in Wall Street’s hands, instead of our own hands. Nothing could be further from the truth.
For Coffeehouse Investors, our three simple principles allow us to be in charge of our own financial future. We wouldn’t have it any other way.
May 13th, 2009 at 5:11 am
Sounds like rational, uncomplicated advice. It’s so easy to get caught up in the hype; I prefer a simple, less emotional approach like this one.
Thanks for the post, Bill.
May 13th, 2009 at 5:28 am
While I appreciate the sentiment, we are most definately NOT in control of our own financial future, and that type of thinking creates a false sense of security.
Even the suggestions above put your fate into someone else’s hands: index funds, real estate, etc. All of those investments will be affected by external events outside of your control — index funds took the same type of beating that actively managed funds did.
Rather than preaching that we need to take control, one should have a sense of that things that are not in your control — stocks, real estate — and those that are — investing in your own skills/business, cash, bonds (I know, still risk of loss, but legal protections for your capital).
You can then decide a mix you’re comfortable with. Call it your “In Control” and “Out of My Control” portfolios. And then repeat the serenity prayer…
May 13th, 2009 at 5:31 am
Long-term, buy & hold, index fund investing: There’s a reason it’s practiced by just about every unbiased observer of the financial markets.
May 13th, 2009 at 6:00 am
Bill,
Good article and well put together, but you do seem to be stuck in the rut of wall street investments.
The three pieces of advice is sound, whether you are considering an investment or advising your child about his or her future.
In your article you mention that”control of your financial future” and then unfortunately return to give advise about investing in the stock market. What happened to investing in your own skill sand potential business like Tim recommends?
I have consulted in 14 different countries that have gone through financial turmoil long before this current world wide crisis got to us and in most of the (developing and other) countries the individuals that really made a difference to their financial independence were the once that actually put their so called job security at risk and backed their own skills to increase their wealth.
It is true that there are also tales of failure here, but the percentage success of people seeking their wealth in areas where they were in control outstripped any other wealth building mechanism. most of the successful entrepreneurs started in areas where they have special skills. the ones who exploited their favorite hobby and converted that into a business were especially successful.
I am sure that investments in the stock market will continue to grow over the next decades, however there is a new bread of entrepreneurs in the world that is slowly but surely making a significant difference to their own wealth, and at the same time they are enjoying it.
I still have to meet one of these businessmen who is looking forward to retirement. In fact I spoke to one such guy just this morning. He lives in Western Australia (Perth), is 66 years old and plans to expand is business to Canada. That does not sound like a guy who is planning for retirement, and I have seen his balance sheet, financially speaking he can retire 100 times over but enjoys what is is doing to much to stop now.
May 13th, 2009 at 6:00 am
Good post. It’s advice that’s been repeated a thousand times…probably because it’s right.
@Tim — You’re right that broad trends in asset classes might be out of your control. But you can control your savings rate. Taking how much you save from 10% to 15% or 20% makes up for peculiar performances in the market. I think you’re basically saying the same thing with your “In Control” portfolio.
So much money is in the hands of professional money managers, that if you put every actively managed mutual fund together, they would about perform the same as an index fund, except for the increased fee taken out. So by picking an index fund with a low fee, you have a slightly more than 50% chance of beating actively managed funds over a long period of time.
I don’t think it’s because markets are efficient. I think it’s probably because managers are under tremendous pressure to make shortterm gains over longterm investments that might not pay off for years. They can’t always just invest for the longterm, because if their investments underperform while they wait for their companies to be recognized by the rest of the market, they might lose their jobs.
May 13th, 2009 at 6:17 am
I think this is a good post. However, I think it still has an overconfident attitude. Buy-and-hold investors *expect* to get, conservatively, a 6% annual return on average over the long run. Many expect 10%. Why? Because that’s how it’s always been. But that is a gross oversimplification. The marketplace changes wildly, especially with regard to regulation. Tomorrow the government could pass a new regulation that makes all historical data irrelevant to future returns. In fact, it may have already happened. You won’t know until you get the returns.
So to be so confident that “setting it and forgetting it” will build wealth is a little risky. There are a lot of ways you could lose money, especially when you factor in taxes and inflation.
While I applaud the cautionary tone of this post and the criticism of the exuberance of a few years ago, I think it stops short of rationality. I do not agree that investing in securities is the way to build wealth. I think that is the way to protect wealth from inflation. Meanwhile, the way to build wealth is through production of things of value, either your labor or another product/service.
May 13th, 2009 at 6:25 am
Well, I did all the right stuff as did my parents. And we still lost 40% on our index investments. This may turn out OK for me, but my mother is in her late 70s. As many have said, there was no safe haven in the recent downturn.
So hopefully all the “common wisdom” will turn out to be right…but who knows?
May 13th, 2009 at 6:45 am
It is sound advice, and I like the title, “The Coffee House Investor,” but so many books say this exact same thing that I wonder what inspired you to write it? It’s not a fresh or different take on investing or managing your finances. Not that it has to be - I guess you can’t hear this logic too many times. I mean no offense by this comment, as I’m sure it’s a fine book, but I am curious as to what inspired you to enter the PF/Investing book foray with this idea.
May 13th, 2009 at 7:00 am
It is this sort of article that is the true “marketing machine,” in my assessment.
The market is not “nearly efficient.” It is wildly inefficient. At the top of the out-of-control bull, stocks were selling at three times fair value. A regression analysis showed that the most likely 10-year return from the purchase of a broad U.S. index fund was a negative number. An efficient market would never permit stock prices to rise so high that the long-term return became a negative number.
And the problem did not come about because most of us were trying to pick “hot stocks.” The “experts” have been pushing Passive Investing down our throats for three decades now and most of us bought in. That’s the problem.
It makes no sense to stick at the same stock allocation when prices go to the insane levels where they were from 1995 through 2008. The “experts” should have been warning us about what happens when we ignore this common-sense investing wisdom.
Passive Investing has failed. It needs to be replaced with something that satisfies the dictates of the common-sense observation that price matters when buying stocks just as it does when buying anything else.
Rob
May 13th, 2009 at 7:39 am
I like the author’s emphasis on self-sufficiency and steering away from Wall Street stocks as our financial salvation. I have empathy for people whose assets have largely disappeared in the downturn. But at the same time, the more grandiose our culture’s expectations of returns on investment have become, the more we set ourselves up for debacles like Exxon and more recently, Bernie Madoff’s scheme. It defies common sense and ethics to expect wealth without work (Gandhi’s insight, not mine). I explain this more here: http://www.diamondcutlife.org/ken-madoff-and-wealth-without-work/
May 13th, 2009 at 7:58 am
“The key to building a successful portfolio and reaching your financial goals is to diversify your assets in such a way that you maximize your chances of achieving your goals with a minimum amount of risk.”
‘Nuff said.. How you get there is a whole other subject. Life is about risks. Some risks you can control somewhat and some you can’t control at all. I will NEVER buy another individual stock without being hedged.. THAT is controlling risk..
May 13th, 2009 at 8:01 am
Good advice and something that I can attest to.
My 401k (nearly 20 years) never dropped below my contribution levels. In fact at the bottom (if we’ve hit bottom) was still 50% above my (and employer match) contributions.
On the other hand, my actively managed fund has dropped below my investment. Although I only opened it a few years ago. In the last month it’s regained most of my investment back.
Lets just say that my fingers are crossed on my individual stock picks.
May 13th, 2009 at 8:21 am
Great post. I wish I would have started out using index funds when I began investing in 1995. Going forward, I try to use index funds almost exclusively. But sometimes the allure of the single stock gets to me…
May 13th, 2009 at 8:30 am
A few comments. . .
For 8 years following the release of the first book, I wrote a weekly column for a local paper, posted on my web site as well - 384 in all. I consistently reminded investors that before you blindly invest in the stock market, determine whether or not you need to invest in the stock market and take on the additional risk. I know countless people who live a successful life, are successful investors, who don’t have anything in the stock market, everything in CDs and municipal bonds. That is my goal when I retire (though I love my work and never plan to retire.)
IF you do decide to commit money to the stock market, the most efficient way to invest in the stock market to maximize your return potential is through low cost index funds.
For those who suggest that the best way to build lasting wealth is through your own entrepreneurship, I couldn’t agree more. That is why I wrote the book. So that you can turn your attention away from the stock market and daily ups and downs of Wall Street and focus on your own passions, your own dreams, your own gifts to make this a better world. That is ultimately what gives us life and energy. In the recently released third edition, I write an entire chapter on this topic.
For investors who are getting close to retirement and have lost 40 percent or more in last year’s bear market, I feel for them, and is another reason why I wrote the book, trying to explain the importance of asset allocation, the second Coffeehouse principle. Using Vanguard founder John Bogle’s rule of thumb, matching your fixed income allocation to your age means that a 60-65 year old investor would be down 10-15 percent total in the recent bear market. Not fun, but hardly a devastating financial experience.
Rob Bennett, thanks for your comments, I will respond later today, as you bring up some very interesting points, and will share my thoughts.
May 13th, 2009 at 8:39 am
I also reviewed this book, nice advice he gives
May 13th, 2009 at 8:44 am
I like the part about ignoring Wall Street. Colluding with the media, they hardly have the common man’s interests at heart. Investors should take heed and seek out more independent money mangers that are less hype and more substance.
May 13th, 2009 at 10:51 am
Only one minor quibble here Bill from me. The efficient market hypothesis is bunk, practically. Markets are loosely efficient, but they hardly are efficient. There is literature about “positivity premiums and panicked bargains”, something I exploited quite well a few months ago. The problem I see is that the finance guys took some very basic economics courses, but failed to understand how much economic models depend on underlying assumptions, and how wrong those underlying assumptions can be.
After maxing out investing in index funds, choosing other asset classes, including individual companies, or bonds, REIT, commodities, etc, is based on solid economic principles (a whole thing about asset covariance and such).
Just really, must quibble that markets are NOT efficient. That is a good reason to just buy the index, because if its not efficient, its not exactly rational, so good rational insight may not help.
May 13th, 2009 at 10:56 am
Buying stocks (or funds composed of them) is the *WORST* way to “ignore Wall Street”. There was a time, several years ago, when I didn’t own any stocks at all. I was free to ignore Wall Street completely. Stock market up or down? Who cares, doesn’t affect me, since I don’t own any stock. I never cared about anything that happened on wall street until I owned stocks, and now checking in on what Wall Street’s been up to is a daily occurrence for me.
And how awesome would it be to read about building wealth by actually *building wealth*, rather than buying a stake in someone else who’s trying to build wealth and hoping that they succeed and take you along for the ride? There’s noting wrong with investing in stocks. It’s an easy way to potentially make some money, and I wont fault anyone for that, but people are talking about it so often that an article or two on building wealth through hard work and good ideas would be refreshing.
My uncle built his own house — literally creating wealth from the ground up. My father started his own business and builds alarm systems, designing and building wealth in his workshop. A man I know built his own sailboat, turning a pile of wood into an object of value.
Buying stocks isn’t building wealth. It’s funding other people who are actually building wealth, and sharing in their profits.
I guess I’m just getting bored of reading about it: “diversify”, “buy index funds”, “hold for the long term”. Ok, fine, it’s not bad advice. But neither is “wash your hands after going to the bathroom” or “look both ways before crossing the street”, and at some point people figured they didn’t need to keep telling me those things over and over.
May 13th, 2009 at 1:18 pm
This is ridiculous. There is a lot of potential on the stock market now, even during recession.
May 13th, 2009 at 11:30 pm
Tim: have got to disagree with you on your comment that we are not in control of our financial future. For those who choose to be in control, they are in control. It all boils down to saving more than you spend. I have worked with literally thousands of investors in my 27 years in the business, and those who have a firm handle on their spending and saving issues are most definitely in control of their financial future. That is what the Coffeehouse Investor is all about. Ignore the things you can’t control and focus on the things you can. You comment “invest in your own skills/business.” That is the underlying theme of the book! Ignore the daily ups and downs of Wall Street and focus on your dreams and passions. With that said, I do feel that an investment in the stock market is an appropriate investment for the vast majority of investors who have a long term time horizon with a portion of their money. If one does choose to invest in the stock market, then low cost index funds are the obvious solution.
Carl Marx: I couldn’t agree with you more – that investing in one’s own skill and potential is the best investment there is. I see it every day in my own life, and with the folks I work with. The subtitle of my book is “How to build wealth, ignore Wall Street and Get On with your Life.” Because I am such a strong proponent of low cost index funds if one “chooses” to invest in the stock market, some folks mistakenly think that the subtitle of the book is “How to build wealth solely by investing in the stock market, ignore Wall Street, and get on with your life.”
IndepdentOperator: Great comments, great insights. Many people have unrealistic expectations of the stock market, especially when the valuations of the market are high and expected returns are low. I have never been an advocate of “set it and forget it.” I am constantly encouraging investors to review financial game plan at least once a year and adjust allocation based on need and ability to take risk. You comment “I do not agree that investing in securities is the way to build wealth.” I agree with you. But it can be one component of building long term financial and emotional wealth if done in the right way.
Todd: The first edition came out 10 years ago, and while the three principles can be viewed as “stale,” they can also be viewed as timeless. The fact is that millions of investors need to be reminded of the three simple principles, again and again and again to keep them from following the Motley Fools and Jim Cramers of the world. As someone once commented to me, repetition doesn’t just work in rock ‘n roll.
Rob Bennett: There is a big disagreement on the meaning of “efficient markets” in the academic and financial world. “Efficient Markets” means that few investors can consistently beat a benchmark average over time. It does not mean that no one will ever beat it, but predicting who can beat it in advance is a loser’s game and very destructive towards one’s ultimate goal. I agree with you that markets can be highly irrational at times, but even then, they are still relatively efficient at processing information.
You comment “Experts have been pushing Passive Investing down our throats for three decades now and most of us bought in.” Have got to strongly disagree with you on this one. Even though people like Warren Buffett and John Bogle are strong advocates of indexing, the majority of the financial industry still promotes active management. Statistics bear this out. Less than 20 percent of all dollars invested in the stock market on the retail side are in index funds.
I agree with you that prices matter in regards to future returns on equities. How do you suggest one integrates that into a portfolio? I am very familiar with the studies that recognize that valuations matter. Using that information to build portfolios and allocate assets is a challenge, and a slippery one at that.
Alison Wiley: Thanks so much for your comments. I agree with you, society has gotten carried away with expectations on investment returns, and it has set us up for debacles. I devote an entire chapter to that in the third edition of the book. That is why index funds make so much sense if one chooses to invest in the stock market, because it puts the pursuit of performance in perspective.
May 14th, 2009 at 3:18 am
I agree with you that prices matter in regards to future returns on equities. How do you suggest one integrates that into a portfolio?
I’m grateful for your response, Bill.
The key is understanding the difference between short-term timing (changing your stock allocation with the expectation of seeing a benefit within a year or two) and long-term timing (changing your stock allocation with the understanding that you may not see a benefit for five years or possibly even ten years). Short-term timing never works. Long-term timing always works. We should be encouraging people to engage in long-term timing as often as we discourage them from engaging in short-term timing. The investor who fails to engage in long-term timing is thereby permitting his risk level to get wildly out of whack from what he had intended it to be when he set his allocation (because the riskiness of stocks is far greater at high valuation levels).
The way to integrate this critically important reality into a portfolio construction strategy is to accept that to “Stay the Course” meaningfully one must keep one’s risk level roughly constant. An investor who stays at the same stock allocation when the risk of owning stocks has increased dramatically is NOT staying the course in a meaningful sense. He is staying the allocation. That’s not at all the same thing.
Indexing is not the problem. Indexing is fantastic. The problem with Passive Investing is the passive part. The problem is the idea that “timing doesn’t work,” that there is no need to change one’s stock allocation in response to big price changes. The data shows that timing always works (and is in fact required for long-term success) as much as it shows that timing never works. It depends on what form of timing you are talking about. Short-term timing never works, long-term timing always works (and is required for long-term success). It is the idea that “timing doesn’t work” (which investors interpret as meaning that ALL forms of timing do not work) which has caused all the trouble.
Here is an article at my site entitled “Market Timing — What Works and What Doesn’t” that sets forth the implementation basics:
http://www.passionsaving.com/market-timing.html
You also might want to check out The Stock-Return Predictor. This calculator uses a regression analysis of the historical data to reveal the most likely 10-year return starting from different valuation levels and thereby to reveal how the long-term value proposition of stocks changes dramatically with big changes in price.
http://www.passionsaving.com/stock-valuation.html
I’d love to get a dialog started with you about these issues. I believe that we need to launch a national debate on the flaws in the Passive Investing model (which would of course also affirm the many wonderful things about this model) and you are obviously in a position to help get something like that off the ground. I’ll send a follow-up e-mail suggesting some possibilities for taking this to the next step.
Rob
May 14th, 2009 at 11:04 am
One of the biggest problems with investing is our emotions. In the last decade many people were lead by their emotions instead of common sense. Wall Street knows this very well and they are working hard to control our emotions.
Markets are down and there is a potential for growth and return, if you do it right. Find a financial advisor who knows what she/he is doing. One of the mistakes financial planners and advisors made in the last couple of years is not taking the time to know their clients well. Just because the market was great that does not change a person risk taking approach. Often when investors are saying that they are OK with risk they do NOT mean that they are ok to loose 20-30% of their investments. I can see in my experience that those who took the time and made the right investment choice they lost less. Do not make emotional investment choices.
May 14th, 2009 at 5:36 pm
Hi Bill,
For years Rob Bennett has been promoting an investing system called Valuation Informed Indexing. He has a name and marketing slogans like “the human mind cannot imagine a better system” but what he doesn’t have is a definition of what it actually is. For many years now, he has been appearing on forums and blogs and claiming that he is ahead of the market regardless of how the market has performed.
Rob has repeatedly been asked to define the system or to compare its returns to the Coffeehouse portfolio. Here are a few recent examples of requests for comparisons to Coffeehouse:
http://www.s152957355.onlinehome.us/cgi-bin/yabb2/YaBB.pl?num=1241871189/30#30
http://www.s152957355.onlinehome.us/cgi-bin/yabb2/YaBB.pl?num=1240494169/26#26
http://www.s152957355.onlinehome.us/cgi-bin/yabb2/YaBB.pl?num=1240879140/28#28
http://www.s152957355.onlinehome.us/cgi-bin/yabb2/YaBB.pl?num=1240790444/39#39
http://www.s152957355.onlinehome.us/cgi-bin/yabb2/YaBB.pl?num=1242134244/8#8
As you can see, Rob is a very frequent poster at that forum (user ID hocus2009), but these requests are met with silence. I wish you luck at getting a testable definition of Rob’s system.
May 15th, 2009 at 5:47 am
Rob has repeatedly been asked to define the system or to compare its returns to the Coffeehouse portfolio.
After responding to Bill Schultheis yesterday on this thread (see Bill’s Comment #20 and my comment #21), I sent him a follow-up e-mail making the case for why we need a national debate on the flaws in the Passive Investing model. Bill said that he had checked out my site after seeing my first post and that his reaction was: “Holy Toledo, this is great stuff!” He noted that there are many issues at play and said that he wanted to take a few days to think things through before responding at length. He thanked me for beginning the dialog. I of course said that that sounded great and that I too looked forward to further discussions.
An entire section of my site is devoted to describing the Valuation-Informed Indexing strategy. The short version is that this is an approach to indexing in which the investor changes his stock allocation in response to big price swings. A Valuation-Informed Indexer would have been going with a high stock allocation from 1975 through 1995 (because stock valuations were low or moderate). He would have been going with a low stock allocation from 1995 through the first part of 2008 (because valuations were insanely high). He would now be at a moderate stock allocation (valuations are fair but we are still working through the damage done to the market and the economy by the long time-period of insane prices).
Valuation-Informed Indexing always provides better risk-adjusted long-term returns than Passive Indexing. There is a calculator at my web site (”The Investor’s Scenario Surfer”) that you can use to check this out for yourself. The calculator lets an investor choose his stock allocation for each year of a 30-year return sequence (that is consistent with the returns sequences we have always seen in the historical record) and compare his results with what he would have seen had he followed a rebalancing strategy. Valuation-informed strategies leave you ahead about 90 percent of the time. I think it is fair to say that a strategy that puts you ahead only 10 percent of the time is a higher-risk strategy. So I think it is fair to say that Valuation-Informed Indexing always beats rebalancing on a risk-adjusted basis.
It is not hard to understand why. The valuation level that applies on the day you purchase an index is the price tag that applies for that purchase. Price matters with anything you buy, including stocks. To invest passively is to ignore price. If you do not change your stock allocation in response to big price swings, you are ignoring price in your stock investing decisions (rebalancing is a small effort to take price into consideration but not nearly sufficient considering the extent to which price has always affected long-term returns in the past). That cannot possibly be a good thing. The historical data shows that it is in fact a very bad thing.
I am trying to launch a national debate on these questions. It is my view that the heavy promotion and subsequent popularity of the idea that “timing never works” caused the economic crisis. The only brake on an out-of-control market is investor fear that there will be a price to be paid for investing heavily in stocks at times of insane prices. The widespread promotion of the Passive concept took away that fear. So we destroyed our market and our economy. We need to get about the business of rebuilding both. That means talking straight to middle-class investors about what we know today (which is a great deal more than what we knew at the time the Passive concept was developed) about the effect of valuations on long-term returns.
There is not one investor on Planet Earth who would be hurt by a civil and reasoned discussion of the realities. There is a mountain of evidence showing that valuations affect long-term returns and that, while short-term timing never works, long-term timing ALWAYS works. For people to understand these things, they need to be able to ask questions and explore the ideas from different angles. The first step to making that happen is overcoming the oppressive dogmatism that has come to characterize the Passive Investing mindset in recent years. The advocates of Passive Investing have made many wonderful contributions to our understanding of stock investing. But their blind and stubborn dogmatism on the “timing never works” claim has caused more human misery than any other mistake in the history of personal finance, in my assessment.
I am hopeful that Bill may be willing and able to help us get discussions of these matters on a better track than the one they have been traveling for the past seven years (these discussions began with a post that I put to a Motley Fool discussion board in May 2002). I am certainly grateful and encouraged that he has shown a willingness to at least explore the issues a bit with an open and fair-minded and friendly attitude. That’s what we need to see from all Passive Investing advocates to bring things to the place where we all deep in our hearts very much want things to go.
Challenging questions advance the learning process. Negative attitude holds back the learning process. We all should be pleased and excited about the idea of learning more about how stock investing works in the real world.
Rob
May 15th, 2009 at 6:50 am
Did you notice that in all that typing, Rob still didn’t answer the question? So did I.
May 15th, 2009 at 7:15 am
Hi Rob,
A little background on The Coffeehouse Investor: I spent 14 years working for a wirehouse brokerage firm, stepping away from it in 1998 to create The Coffeehouse Investor. My audience for the book were the folks I met for coffee every saturday morning at a local coffeehouse in Seattle. These are successful people, most had families, recognized that building wealth was much more than the size of a bank account, and yet wanted to invest their 401k’s, retirement plans, in an intelligent manner.
I felt there were thousands, probably millions of investors like them, who wanted clarity with their investment decisions.
So, with those types of folks as an audience, how do you suggest they build a portfolio using your valuation method? John Bogle uses a simple rule of thumb to equate your bond allocation to your age. For most investors that probably makes sense. How would you vary from that? Warren Buffett, in a recent newsletter said, “Beware of Geeks bearing formulas.” I think Buffett has sound advice for the vast majority of investors who want to do the right thing.
I recognize that the market swings from being overvalued to being undervalued. I have yet to see anyone who can consistently take advantage of that. The easiest thing in the world to do is look backward and find patterns/valuations that could have been extremely profitable had one acted on them. Doing so in the future is a much larger challenge, and, a slippery one at that.
I am not saying that a person shouldn’t tweak portfolios when valuations are extremely high or extremely low, based on their inclination and risk tolerance. But am curious what you suggest for the millions of investors who have 401k plans and want to do the right thing with their investments. Should they all follow your valuation model?
Someboday once said that the enemy of a good plan is a perfect plan, and I think it applies to investing as well.
Bill
May 17th, 2009 at 9:14 pm
Bill,
As you conclude your post, the advice is to steer away from Wall Street marketing gurus. A few years ago they were able to bamboozle pretty knowledgeable financial people into buying subprime mortgages on the secondary market and look at the results. A disaster. Your three points are a solid foundation. Learn the basics of investing and do it yourself.
May 18th, 2009 at 10:37 am
Very interesting discussion. Rob Bennett’s valued informed index strategy is an updated version [using index mutual funds] of Benjamin Graham’s ideas as he wrote about 50 years ago [The Intelligent Investor]. You overweight stocks when they are relatively cheap and underweight them when they are expensive. It also combines what the trend followers insist is the only important factor, price, with the diversification of index funds. That advice is followed by Warren Buffett and many others sans the index funds. There is no doubt that this is sage advice as it has proven in the hands of experts to work very well. Rob said it very well here: “Passive Investing has failed. It needs to be replaced with something that satisfies the dictates of the common-sense observation that price matters when buying stocks just as it does when buying anything else.”
As to the Bill’s assertion that Buffett is an “advocate of indexing” he couldn’t be more wrong.
Indexing is all about diversification and here are a couple of quotes from Buffett about diversification:
“Wide diversification is only required when investors do not understand what they are doing” and “Risk can be greatly reduced by concentrating on only a few holdings.” And of course he is famous for concentrating his investments especially in the early years when that was possible for him.
I think this next quote is the most telling and provides with something real to think about:
“Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.”
Finally, Bill mentioning that Bogle suggests index funds is laughable because that is exactly how Bogle makes his money, by selling index funds to the masses! Hardly a unbiased source!
The real problems come into play when you take a look at the very real large drawdowns in index fund returns that happen, on average, every 11 years and take upwards to 7 years to recover from. This makes the timing of turning your index funds into income production for retirement very, very risky and really totally dependent upon luck.
There is, of course, much to love about the apparent simplification of index funds investing, its just that life [and the market] are never that simple!
May 21st, 2009 at 1:57 pm
Response to Post #25
“Did you notice that in all that typing, Rob still didn’t answer the question? ”
What Lindsay wants me to do cannot be done.
By “define the system” Lindsay means “tell me what stock allocation I should be at when stocks are at the various P/E10 levels.”
There is no responsible answer that I can give to that question. It depends on the particular investor’s life goals, financial circumstances and risk tolerance. There is no one-size-fits-all answer.
What would John Bogle say if you said to him: “We want to test your ’system,’ tell us what stock allocation all investors should go with?” He could answer in a general way. He could say that stocks offer a strong enough value proposition that most should be going with a stock allocation of 50 percent or more. But he would have to include caveats if he wanted to respond responsibly. He would have to note that for some the proper allocation might be a bit less than 50 percent and for others the proper allocation might be a good bit more than that.
It’s the same with Valuation-Informed Indexing. I can say that investors should always lower their stock allocations when prices rise to dangerous levels. And I can say that investors should always increase their stock allocations when prices drop to levels where the long-term return is absolutely mouth-watering. But I cannot give one stock allocation that should apply for each P/E10 level. It would not be responsible to do so and it would not be correct to do so and it helps no one for me to pretend otherwise.
It always makes sense to consider price when buying anything you buy, including stocks. That much I can say with certainty. There are a multitude of strategies by which this critically important reality of investing can be implemented in a portfolio strategy. All investors should be discussing the various possibilities on a daily basis. That’s how we refine and develop our knowledge of what works. The problem today is that a good number of Passive Investing advocates have ruled such discussions out of bounds on grounds that to even discuss the merits of different strategies suggests that it is not right to say that “timing never works.”
They’re right about that. The Passive Investing dogmatists want us to give up what we can learn from discussion of the many possible valuation-informed strategies to protect the dogma that “timing never works.” I want us to give up the dogma that “timing never works” so that we can learn from discussion of the many possible valuation-informed strategies. The Passive Investing dogmatists and the Valuation-Informed Indexing advocates are working at cross purposes.
The dogmatism is hurting us all. Big time.
Rob
May 21st, 2009 at 2:33 pm
Response to Post #26
“with those types of folks as an audience, how do you suggest they build a portfolio using your valuation method? John Bogle uses a simple rule of thumb to equate your bond allocation to your age. For most investors that probably makes sense. How would you vary from that?”
Bogle recommends that investors change their stock allocations in response to three factors: (1) life goals; (2) financial circumstances; and (3) risk tolerance. Bogle says that someone near retirement should go with a stock allocation different from what he would go with when he was not near retirement because his life goals are different (the investor near retirement is not in a position where he should be putting as much of his life savings at risk). He also says that financial circumstances should be considered. The investor who has already saved far more than what he needs for retirement might elect not to put too much of that money at risk in stocks. Finally, Bogle says that risk tolerance should be considered. Some investors are less able emotionally to accept losses. Those people should not be going with the same stock allocations as those who do not get as upset to experience losses.
I add a fourth factor. I say that investors should also consider the added riskiness of stocks that comes into play when prices are at insanely dangerous levels. The added risk that comes with sky-high valuations is certainly as big a factor as the three that Bogle takes into consideration. Why should the less important factors be considered and the most important one be ignored?
Valuation-Informed Indexing need not be complicated at all. It is entirely suitable for investors seeking a simple approach
A simple rule would be to go with a stock allocation of 90 percent when prices are amazingly low and the long-term value proposition is mouth-wateringly high (a P/E10 level below 12), a stock allocation of 60 percent when prices are in a moderate range and the long-term value proposition is strong (a P/E10 level from 12 to 21) and a stock allocation of 30 percent when the long-term value proposition is poor (a P/E10 level above 21). There is no need for Valuation-Informed Indexers to make more than one allocation shift every eight or ten years on average. There is no need to check the P/E10 level more than once per year. And, if the experts made it a practice to let indexers know when stock prices had gotten so high that the danger of investing in stocks had grown great, investors would hardly need to check the numbers on their own at all. They could just act on the warnings given by the experts (Bogle has delivered such warnings on several occasions — unfortunately, he has not specifically told indexers what action to take in response to the warning; investors need to be told in clear and firm terms that they need to lower their stock allocations until prices return to reasonable levels).
“The easiest thing in the world to do is look backward and find patterns/valuations that could have been extremely profitable had one acted on them. Doing so in the future is a much larger challenge, and, a slippery one at that.”
There is no need to look for “patterns,” Bill. We know that the risk/reward ratio for stocks is far less appealing when prices are high. That’s all we need to know to know that the same stock allocation that made sense when prices were low cannot possibly also make sense when prices are high. Investors should be setting their stock allocation with the goal of taking on the proper amount of risk. Big valuation shifts change the risk level. So allocation changes are mandatory for those seeking to “Stay the Course” in a meaningful sense (that is, to keep the risk level taken on roughly constant).
The Stock-Return Predictor (a calculator at my site) provides the information needed to set one’s stock allocation properly. The calculator says nothing about what sort of return pattern is likely to pop up. It tells the investor the range of possible returns that apply at the different valuation levels. Knowing the range, the investor knows roughly what his stock allocation should be. He doesn’t know with precision what return he will obtain. But he knows what he needs to know to keep his risk level roughly constant.
The investor who fails to change his stock allocation knows with certainty that he was taking on the wrong level of risk either at the time when valuations were high or at the time when valuations were low. How could deliberately following a policy insured to produce the wrong stock allocation at some times possibly be the right way to go? It is better to get things roughly right than to be certain of at times getting them dangerously wrong. Leaving your stock allocation at the same level when prices have climbed to sky-high levels is not a neutral choice. It is a reckless choice. Millions of middle-class Americans have lost a large portion of their life savings because of this highly unfortunate Passive Investing recommendation.
“I am not saying that a person shouldn’t tweak portfolios when valuations are extremely high or extremely low, based on their inclination and risk tolerance.”
Tweaking doesn’t do the job, Bill. At the top of the bubble, the historical data shows that the most likely long-term return on stocks was a negative number. Many Passive Investors were going with stock allocations of 60 percent or 70 percent or even 80 percent at the time. The proper stock allocation for the vast majority was more in the neighborhood of 20 percent or perhaps 30 percent. Going from 60 percent to 20 percent is not tweaking. We need to advocate something more dramatic than tweaking.
“Should they all follow your valuation model?”
I believe that all indexers should follow a Valuation-Informed Indexing strategy rather than a Passive strategy. I provide the four calculators at my site as tools to guide investors seeking to make effective valuation-informed choices. But I don’t think that it is at all healthy for people to be looking to only one person for guidance on these questions. I am a flawed human too with my own set of prejudices and biases. I would like to see hundreds of web sites offer access to hundreds of tools aimed at helping investors make effective valuation-informed choices. The more who are involved in giving guidance in this area, the better the guidance provided will be. I’d like to hear you offer recommendations in this area, Bill. And I’d like to hear Bogle do the same. And Bernstein. And Swedroe. And Mel Lindauer. And on and on. The more who get involved, the better, in my assessment.
“Somebody once said that the enemy of a good plan is a perfect plan, and I think it applies to investing as well.”
The failure to tell people of the need to take valuations into consideration when setting their stock allocations is not a minor imperfection in the Passive Indexing approach, in my view. It is a huge flaw. The analytical errors in the Old School safe-withdrawal rate studies alone are likely to cause millions of busted retirements. I believe that this mistake is big enough to bring on the collapse of The Indexing Revolution if it is not fixed. I believe that it is imperative that a national debate be launched in which the errors in the first draft of the Passive model will be explored in depth and as a result of which the most damaging errors will be fixed. It does no one any good for the process to be delayed or stretched out. The errors are serious. We need to acknowledge them, fix them, and get that part of this business behind us. Once there is a consensus that the errors need to be fixed, we are looking at smooth sledding all the way home. Indexing is wonderful when done right. The problem has been a reluctance on the part of many who have advocated the Passive model to be forthcoming about the extent of the problem they have inadvertently created by jumping to hasty conclusions and then by becoming unwillingly to embrace findings at odds with the findings responsible for the earlier thinking re these matters.
Rob
May 22nd, 2009 at 6:24 am
“What would John Bogle say”
John Bogle doesn’t claim it’s impossible to provide data or make comparisons. In fact, he does this all the time. Likewise the coffeehouse portfolio has published returns because it’s a real methodology.
Rob recently stated that he just keeps saying the name of his undefined investment system in the hopes that it will become a big search term on google and he can make money off that. “If it works, it should pay off big.” See:
http://www.four-pillars.ca/2009/05/21/leveraging-old-blog-posts/#comments
http://www.s152957355.onlinehome.us/cgi-bin/yabb2/YaBB.pl?num=1241703133/11#11
May 22nd, 2009 at 8:00 am
First, my thanks to J.D. for going to a lot of trouble in getting my last two comments on this thread to appear here. There was a technical mix-up that probably resulted from the site redesign and I was not able to get the comments to appear for some time. I believe that the issues being discussed in this thread are of great importance and I am grateful both to J.D. for hosting the guest blog entry and to Bill for writing it and for offering some fine comments. I have been in e-mail communication with both J.D. and Bill in an effort to bring about wider and more in-depth discussion of the issues explored here both at this blog and at lots of other places on the internet. So I was concerned that I was not able to get two of my comments to appear. It took a lot of patience on J.D.’s part to get things straightened out (I believe that the only thing that worked was him typing the comments in himself — I believe that I may have caused a formatting problem in my copy by storing them in an AppleWorks file after I first had a problem getting them to appear). Neither J.D. nor Bill agree with me on the investing issues being discussed. But both have helped me get these ideas before more people. I am grateful.
Lindsay’s comment links to a discussion we are having at the Four Pillars blog about my strategy of writing exclusively about the Valuation-Informed Indexing strategy at my blog (”A Rich Life”). This is in great contrast to the usual strategy of writing about a great variety of topics. This isn’t the place to discuss the merits of the strategy. But there is an investing point implicit in the strategy that I believe is worth highlighting.
What does it mean when I say that “Valuations Matter”?
It means that Emotions Matter.
It is emotions that cause both overvaluation and undervaluation. In an efficient market (a belief in an efficient market is core to the Passive Investing project), overvaluation and undervaluation are both impossible. Why? Because, an efficient market is a rational market (how else could prices be set properly but through rational acts by market participants?). In a rational market, prices always self-adjust. In a rational market, overvaluation causes investors to go to lower stock allocations and lower stock allocations bring prices back to reasonable levels. The very fact that we went to such insane price levels in the 1990s shows that the market is not efficient and that Passive Investing cannot work in the long term.
If we were rational, we would all accept this. If we were rational, there would be no books or calculators or studies arguing otherwise. The trouble is — we are not entirely rational creatures. We are to a large extent emotional creatures. Our emotions cause us to want to invest heavily in stocks at times when the price is high and the long-term value proposition is low. So there is a great demand during out-of-control bulls for books and calculators and studies showing that Passive Investing (sticking to a single stock allocation despite wild price changes) can work. These materials are not the product of human reason. They are the product of human emotion.
But –
Emotions change. When we get to a time-period when Passive Investing provides horrible results for many years in a row, investors become more interested in hearing the realities. We may be in the early years of a shift from Passive (emotional) beliefs about stock investing to Rational (valuation-informed) beliefs about stock investing. If that’s so, then my strategy of focusing my blog on deep examination of the Valuation-Informed Indexing may indeed pay off big time.
The investing point?
Don’t assume that the things you hear about investing at a time of out-of-control prices are the product of the best thinking on the subject. If valuations matter (and there are many who say they do), you need to discount all that you hear about investing to take account of the valuation level that applies at the time. We were hearing during the years of insane prices that insane prices don’t matter that much because prices were so insane. Investing analysis is a closed system of thought. You can only get outside of it and see things objectively by making adjustments to what you hear based on the level of emotion pervading the market at the time. And you learn about what level of emotion applies by looking at the valuation level that applies.
Rob
May 22nd, 2009 at 8:35 am
John Bogle doesn’t claim it’s impossible to provide data or make comparisons. In fact, he does this all the time. Likewise the coffeehouse portfolio has published returns because it’s a real methodology.
Nor do I say that it’s impossible to provide data or make comparisons. It is by providing data and making comparisons re the various strategies that we all learn.
There is a calculator at my site (”The Investor’s Scenario Surfer”) that permits the user to see how any Valuation-Informed Indexing strategy that he wishes to explore fares over the course of a 30-year returns sequence in comparison to any rebalancing strategy. I am obviously encouraging people to look at the data and to make comparisons.
What I do not encourage is the idea of trying to identify one particular stock allocation that all should go with at each particular P/E10 level.
Why do I feel so strongly that a one-size-fits-all approach can never work? Because of what I learned from John Bogle. Bogle says that adjustments need to be made taking into consideration the investor’s life goals, financial circumstances and risk tolerance.
The only difference between what Bogle says and what I say is that I say that adjustments are also needed for a fourth factor — the valuation level that applies at the time the allocation level is being set. There is no one stock allocation level that makes sense at all valuation levels for any investor.
Rob
May 22nd, 2009 at 8:53 am
“Nor do I say that it’s impossible to provide data or make comparisons”
Great, so you’re going to get around to answering the question at some point? It’s come up several times again at your forum. We’re all waiting.
eg:
http://www.s152957355.onlinehome.us/cgi-bin/yabb2/YaBB.pl?num=1241703133/20#20
http://www.s152957355.onlinehome.us/cgi-bin/yabb2/YaBB.pl?num=1242315333/37#37
May 22nd, 2009 at 10:48 am
Lindsay, obviously you have some sort of long-term animosity with Mr. Bennett. I did take a look at those links and anyone can cherry pick some years and make a comparison look valid [17 years???]. And anyone can pretend to not understand the point. The S & P 500 is regularly used as an sample index and as such is perfectly fine to use in an comparison. Have you actually looked at his calculators????
You do know that asset allocation strategies is just a way to adjust for relative values, right? That is of course Mr. Bennett’s point.
The obvious question to this late comer to the cat-fight is why the anger? name calling? etc. on both sides. You are free to ignore his thoughts and posts.
May 22nd, 2009 at 11:45 am
“…anyone can cherry pick some years and make a comparison look valid [17 years???]. And anyone can pretend to not understand the point. The S & P 500 is regularly used as an sample index and as such is perfectly fine to use in an comparison.”
Seventeen years because Bill Schultheis posts the annual returns for the Coffeehouse Portfolio dating back to its creation in 1991, 17 years. Yes, the S&P 500 is regulary used as a sample index. All the more reason for Rob to show a comparison of the returns for his strategy versus the S&P 500 and/or the S&P 500 in combination with bonds, say 60/40 for past periods of time.
Rob claims his S&P timing system is superior to all passive strategies. Here’s his chance to show how the returns compare for the same period versus a diversified passive strategy, the Coffeehouse Portfolio since its creation in 1991. And how his strategy would have performed against a mix of S&P 500 Index and bonds over the past. Preferably in a simple two column format.
Again, Rob is peddling an alternative system. He should be taking every opportunity to show the superiority of his timing system, not hiding behind a wall of words claiming his method is superior to other strategies but showing no evidence.
Lyndon
May 22nd, 2009 at 12:05 pm
It’s come up several times again at your forum.
That forum is owned by John Greaney, Lindsay. John is the author of one of the Old School retirement studies that have been discredited as a result of the work we have done in the Retire Early and Indexing discussion-board communities over the past seven years (I am the founder of the New School of Safe Withdrawal Rate analysis — please see the Retirement Risk Evaluator calculator at my site and the comments quoted there by numerous big-name experts that the Old School retirement studies do not work). That forum was set up for the purpose of organizing smear campaigns to destroy the various Retire Early and Indexing boards. My voice is the leading voice in both of those communities speaking out in opposition to the tactics employed by the Greaney Goons.
I’ve responded to the question you are asking here on scores of occasions. The rule that I follow is that, when I’ve answered a question so many times that I am myself tired of hearing the answer, it’s time to let go of it. So I have stopped answering the question at that forum. Since this is a different place, I can answer it here.
There is no one Valuation-Informed Indexing strategy for the reasons explained in my post above. Different allocation adjustments are appropriate for different investors. If you take the same portfolio as the Coffeehouse Portfolio or the Wellington Fund and instead of following a rebalancing strategy you adjust your stock allocation in response to big price changes, you will achieve higher risk-adjusted returns. I am not able to imagine how there could be any exception to this general rule.
Please note that I said the returns would be higher risk-adjusted returns. There are rare cases where a passive strategy beats a valuation-informed strategy. The calculators (which use the historical data) show that this happens in roughly one in ten tests. But something that works only in one case out of ten is risker than the something that works in nine out of ten tests. So I think it is fair to say that VII is always better on a risk-adjusted basis.
I have not specifically done tests of the Coffeehouse Portfolio or of the Wellington Fund. I think it would be fine if someone did that, but it is obviously going to take more work than testing the S&P index since the calculators permit easy tests of the S&P Index. There’s an important caveat that applies if you do only a 17-year test (as you suggest in the post at the link). The calculator shows that VII beats rebalancing about 90 percent of the time at the conclusion of 30 years. VII is a long-term strategy. The odds are obviously less that it will be ahead at the end of only 17 years. I can’t say what would happen at the conclusion of only 17 years.
The magic of VII is the way that it taps into the power of compounding returns. We never know when a crash is coming. When prices get insanely high, we know with certainty that one is coming. The point of VII is to protect yourself from the crash and then reap the benefits for many years to come. Run a test at the Scenario Surfer and then go back and look through the results year by year to come to understand why VII prevailed in the end. What happens is that sooner or later there is a crash that causes the Passive Investor to fall behind. Sometimes, he only falls behind by a small amount. But the VII investor puts that differential into stocks at a time when prices are reasonable. Over time, the power of compounding causes the differential to grow larger and larger and larger. That’s why the VII investor can sometimes have at the end of 30 years a portfolio of twice the size of that held by the Passive Investor.
The size of the difference caused by compounding is a counter-intuitive phenomenon. We all acknowledge that compounding is a plus. But it is only by looking at the numbers that you can come to appreciate how much of a difference it makes to have compounding working for you instead of against you. The Passive Investor insures that sooner or later compounding will be working against him (because those who do not change their allocations in response to big price swings will sooner or later lose most of their assets in a price crash, thereby giving up many years of forward movement). The VII investor sidesteps the big hits and thereby permits himself to tap into the benefits of long-term compounding in a far more effective way. The idea of taking valuations into account sometimes seems like a small thing in the short term. In the long term, it makes a huge difference.
Rob
May 22nd, 2009 at 12:21 pm
The obvious question to this late comer to the cat-fight is why the anger? name calling? etc. on both sides.
I hope that you are not trying to suggest that there has ever been even an iota of anger or name-calling from the 80 percent of the Retire Early and Indexing discussion-board communities that have on repeated occasions expressed a desire that honest posting on these matters be permitted at those boards. I can assure you that that is not the case. 100 percent of the anger and name-calling has come from the Passives and the defenders of the Old School SWR studies.
I certainly do not say that all Passives engage in such tactics or favor such tactics. That is certainly not even close to being the case. My sense is that the vast majority of Passives are repulsed by them, as are the vast majority of Rationals.
The problem is that most Passives have been reluctant to speak out against the use of the tactics employed by the small percentage of Goon posters that congregate at the boards. Every board at which I have posted has rules in place to protect the communities from these sorts of tactics. At every board, the site owner has failed to enforce the rules in a reasonable way and has banned effective questioning of the Passive concept (presumably because the Passive model is the dominant model today and thus the more popular model for the time-being) rather than the abusive posting employed to block the discussions from going forward.
If these tactics were being employed by Rationals, I would be deeply ashamed. I would want to disassociate myself from these tactics in every way possible. I have long argued that what we need to see for the discussions to become more fruitful is for a few leading Passive Investing advocates to speak out in strong and firm terms in opposition to the Goon posting tactics. Most Passives are good and smart people and add a great deal to the discussions; we cannot hold effective discussions without the strong questioning that only smart Passives can add to the mix. But the responsible Passives must disassociate themselves from the Goon element for the discussions to achieve their potential.
Most ordinary investors are unwilling to participate in discussions as ugly as what these discussions become when the rules that apply at all of our boards are not enforced in a reasonable manner. When we lose the participation of all ordinary investors, the Goons assume dominance and the tone of the discussions changes dramatically. Having responsible Passives step forward and insist (not ask!) that reasonable posting rules be enforced in a reasonable way is the key to making this all work for the 80 percent seeking to learn more about how stock investing works in the real world.
I assure you that there is no one who has spoken out in opposition to the ugliness as often as I have or in as strong language as I have. This has been so dating all the way back to the afternoon of May 13, 2002, the first day of the discussions. I hate trash posting. It makes us all dumber and meaner and smaller instead of smarter and richer and more loving.
Rob
May 22nd, 2009 at 12:39 pm
He should be taking every opportunity to show the superiority of his timing system, not hiding behind a wall of words claiming his method is superior to other strategies but showing no evidence.
The historical data is public information, Lyndon. It is available at Robert Shiller’s web site. Anyone who cares to can check this out 100 different ways.
I have provided four calculators that aid in the checking-it-out process. I have done hundreds of tests myself and I am personally persuaded.
I certainly do not advise that anyone go solely by what I say. You should check it out for yourself.
I can tell you something that would be even better. Go to the boards where honest posting on these topics has been banned and ask that the discussions of these questions that were held at those boards in earlier days be reopened. The Bogleheads.org board is a wonderful place to have these discussions. The board is comprised primarily of Passives. So we are sure to get challenging questions there (obviously a good thing). But most who post at that board are smart as smart can be. So the discussions tend to be at a high level. And there are scores of regular posters there who possess a solid understanding of the benefits of valuation-informed strategies. So we will be hearing both sides effectively represented if the discussions are reopened there. Plus — we can get Bogle and Bernstein and Swedroe involved since they participate in the annual meetings. It’s a win/win/win/win/win.
The internet provides us the communications medium we need to get to the bottom of this. If there are any flaws to the VII strategy, there is no one who benefits more from learning about them than I do. But even those on the Passive side benefit from learning that there are flaws. If we were to learn that there were flaws, that would build up the confidence of the Passives a bit, obviously a good thing for those following that strategy. If VII passes all the tests, that’s obviously also a big benefit. That means that those now following a Passive approach can learn how to retire at least five years sooner by making one small common-sense change in their allocation strategy.
I have a calculator at my site that tells those who have lost huge amounts of money in the crash how to make it all back overnight (effectively). The historical data shows that a $100,000 portfolio following a VII strategy is likely to end up in 30 years ahead of a $150,000 portfolio following a Passive strategy. That means that, if you lost one-third of your assets in the crash, you can effectively be made whole just by making a switch to the valuation-informed strategy. Sound promising?
You don’t want to do this because some fellow on the internet says it is a good idea. You want to know what all the people at Bogleheads think and what all the people at Vanguard Diehards think and what all the people at Early Retirement Forum think and what all the smart blog owners think. Let’s discuss! Let’s learn together! Let’s retire early!
Is anyone able to imagine any possible downside?
Rob
May 22nd, 2009 at 12:52 pm
I was reacting to the posts on the links from Lindsay.
As to Mr. Bennett’s thesis, I find it impossible to understand why it is so controversial. I defy you to find any great investor [with a public record] that says that price doesn’t matter. Additionally, you might ask anyone that has retired in the last 5 years or has plans to retire in the next 10 based on their investing how the buy and holding of mutual funds has gone for them [including those that used asset allocation strategies]!
Check out the real data for mutual fund investors to see the real world results of this strategy!
May 22nd, 2009 at 1:08 pm
A quick look at the coffee house portfolio results tells me that $1,000 invested for the 17 years would end up at $3,418 on Dec. 31, 2008.
Compare this to an investor who says price is the most important thing, Warren Buffett. Over the same time period your $1,000 would be $9,050 using Mr. Buffett to do your investing for you.
Kinda puts things in perspective doesn’t it!
May 22nd, 2009 at 1:19 pm
“That is of course Mr. Bennett’s point.”
No.
“The obvious question to this late comer to the cat-fight is why the anger? name calling? etc. on both sides.”
THAT’S Mr. Bennett’s actual point!
That’s how passive-aggressive trolling works. There’s always some newbie like Dave who jumps into the middle of a long running feud and thinks that it’s the passive-aggressive troll who needs defending. That’s what makes it fun to watch.
Just don’t get sucked in!
May 22nd, 2009 at 1:22 pm
I defy you to find any great investor [with a public record] that says that price doesn’t matter.
There are none. Even the people who post abusively at the forum linked to above are willing (to their credit) to acknowledge that valuations affect long-term returns. This appears to me to be universally accepted.
as to Mr. Bennett’s thesis, I find it impossible to understand why it is so controversial.
I can point to four big factors at work here (I believe that there are more than four).
One is that I don’t post about valuation-informed strategies at boards at which only other people who already believe in valuation-informed strategies congregate. I usually post at places where there are large numbers of Passive Investors. I write for the average middle-class investor, not niche groups. Some of the Passives (not all or even most, but some) do not think that it is proper for anyone to come to a board where they are in the majority and question their basic investing principles. They liken it to a dog lover posting at a cat lover’s board. Or to an atheist posting at an fundamentalists board.
My view is that we need to question our own ideas to learn more about how to invest effectively. I don’t question people’s ideas to get them stirred up, but to help them learn (and to learn myself while doing it, to be sure). I believe that ideas that cannot stand up to civil and reasoned and friendly questioning are not worth holding.
A second big factor is that I do not just say that Valuation-Informed Indexing is right, I also say that Passive Indexing is wrong. I have seen some people get away with making a quiet case for taking valuations into account and not get bricks thrown at them. I say things more clearly and more directly and more firmly and more boldly. It’s harder to ignore my stuff.
Again, I don’t do that for the purpose of upsetting anyone. I do it because I think that stating things clearly is the best way to achieve clarifications of the issues involved. If Passive really cannot work, I want to know that and I want others to know it. If I am wrong, I want people to show me that I am wrong. If I am right, I want to be able to see clearly why that is so. I don’t see the benefit of saying things in a hazy, vague way (although I certainly see the benefit of saying things in a friendly, respectful, civil way).
A third thing is that I specifically said that the Old School retirement studies (which contain no adjustment for the effect of the valuations level that applies on the day the retirement begins) are analytically invalid. There are people in our community who have Old School studies or calculators at their site or who recommend the use of such studies or calculators in books they have written. These people tend to be popular posters because they have web sites of their own. These people have special influence and they have an intense desire to block discussions that would require them to make changes in their books or studies or calculators if they were permitted to continue.
I have always extended the hand of friendship to all those who have posted abusively. I have zero desire to be in a battle with anyone. But I believe that these questions are of great significance and that the important thing is to come up with the right answers. I’ll acknowledge to having been unyielding on the question of whether the aim should be to learn the right answers to the most important questions. I don’t apologize for that. I think that people need to know the right answers when their retirement money is at stake.
A fourth reason is that I am a big believer in exploring the implications of ideas. I don’t find the answer to one question and then stop. I keep going and going. Some wouldn’t object so much if I offered the opinion that valuations matter and then never did anything with the idea. I am always in the process of developing a new calculator or writing new articles or recording new podcasts. The dogmatists (most Passive Investing advocates are not dogmatists but a not-tiny number are) don’t want me around because they see that my constant development of new tools is going to cause them endless trouble in their efforts to keep “the troops” in line. Again, I offer no apologies. I am excited about the new ideas and I want to see them developed as much as is possible in as quick a time as possible. My motto is — More! Bigger! Better! Bolder! Some love that. Those who do not tend to develop more than a mild distaste for the Valuation-Informed Indexing project.
Rob
May 22nd, 2009 at 1:48 pm
“Additionally, you might ask anyone that has retired in the last 5 years or has plans to retire in the next 10 based on their investing how the buy and holding of mutual funds has gone for them [including those that used asset allocation strategies]!”
As you can see from the Coffeehouse Portfolio returns, an investor with that or similiarly diversified asset allocation portfolio has fared pretty well despite the vagaries of the market. And the sky has not fallen upon a prospective or current retiree with such a portfolio, especially if he or she has an appropriate allocation of bonds commensurate with their age. No investment strategy which includes stocks looks very good when viewed at the botoom of a market downturn. Both Rob’s S&P 500 timing strategy and any portfolio including stocks is counting on stocks appreciating over the the long term. And of course price matters. Rob thinks he can use PE10 to predict when to make buys and sells. Passive strategies use rebalancing to accomplish much the same thing. Rob believes his calculators prove his position is correct that timing the S&P 500 is the only rational way to invest; I disagree.
I must congratulate you, Mr. Shafer. From your web site I see your scam is much more honest and upfront than Rob’s. You seek money up front before you divulge your investment strategy. Rob trolls every personal finance discussion boards and blog he can find in his quest to gain fame and fortune promoting his nebulous investing scheme.
You two have fun in your respective endeavors!
Lyndon
May 22nd, 2009 at 2:06 pm
Rob thinks he can use PE10 to predict when to make buys and sells. Passive strategies use rebalancing to accomplish much the same thing.
This is really the entire debate summed up into a few words. Passive Indexing says that we should always stay at the same stock allocation (that’s the purpose of rebalancing). Valuation-Informed Indexing says that high stock allocations are more risky at times of high prices and that thus we should go with lower stock allocations at times of high prices.
No investment strategy which includes stocks looks very good when viewed at the bottom of a market downturn.
That’s a fair enough statement. But before the market downturn the Passives were saying that there is no need to consider alternatives because the recent returns for Passive had been so good.
Say that Valuation-Informed Indexing really is superior. When are we going to go to the trouble to have the discussions needed to find that out? If we cannot question Passive at times when it is sailing and we cannot question Passive at times when it is failing, when can we question it? How do we ever advance to something new if we cannot question the thing that is old?
I disagree.
This part is healthy and helpful.
I see your scam is much more honest and upfront than Rob’s.
This part is yucky.
Bill’s blog entry says that we need to be protected from Wall Street. What street is it that is responsible for this yucky junk? How do we get protection from [i]that[/i] street?
I don’t like to think that it is Passive Investing Street that is responsible for this sort of thing. But I don’t hear too many Passive Investing advocates speaking out in strong terms against it. That saddens me.
If it’s a choice of the two, I think I prefer Wall Street. I don’t applaud everything that comes from Wall Street. But I don’t recall hearing too many comments quite that low from Wall Street. I think that Passive Investing is an idea that started out sweet and that over the years has been transformed into something sometimes very sour.
Rob
May 22nd, 2009 at 7:37 pm
@Lyndon, seems you proved my point for me.
Ever read a book called “True Believer” by Eric Hoffer?
You might find it interesting……
@Carlyle, yes the strategy was first outlined by Ben Graham, Buffett’s mentor. But he suggested using it along the lines of what Mr. Bennett suggests. I don’t think that the coffee house portfolio and Mr. Bennet’s value-informed indexing is that far apart, which of course is the ironic thing looking at all the animosity generated.
Personally, I have found success investing along the lines of Buffett thoughts and hitching a ride on his company. But, of course that is not for everyone.
I’ll leave it for the true believers to attack me for that one!
Have a great weekend, happy investing!
May 23rd, 2009 at 3:22 am
I don’t think that the coffee house portfolio and Mr. Bennet’s value-informed indexing is that far apart
I agree that the two approaches have much in common, Dave. I of course also think that taking valuations into consideration when setting your stock allocation is an important enhancement.
My view is that Bogle started a revolution in middle-class investing with his development of the indexing concept but that the first-draft version was not perfect in every particular. And that now we should be trying to fix what’s broken.
I think Buffett’s ideas are right on. But I think that most middle-class investors do not have the time or inclination to do the work needed to pick stocks effectively. I think of Valuation-Informed Indexing as a combination of Buffett’s best ideas with Bogle’s best ideas. You get both the value orientation of Buffett and the simplicity of Bogle. My motto is — Buffett and Bogle go together like chocolate and peanut butter!
Rob
May 24th, 2009 at 9:56 am
J.D. I noticed that you’ve had a run in with Rob on his blog. One thing you’ll soon learn if you haven’t already is that Rob doesn’t run an open blog. If you agree with him, praise him, or state a question in a way that he thinks is weak enough to totally refute, then your post will appear. Otherwise, not a chance. But if any blogger treats Rob the same way Rob treats his readers, he’ll complain about it like crazy and claim that that blog is a “corrupt enterprise”, has “banned honest posting”. etc. I see he’s already mentioned death threats over there. The reason he doesn’t provide a link to those is because he made them. Without a link you might ASSume it was the other way around.
May 24th, 2009 at 1:59 pm
One thing you’ll soon learn if you haven’t already is that Rob doesn’t run an open blog.
The link at my name goes to my web site. At the left side of the page is a link to my blog (”A Rich Life”). I welcome comments representing all points of view on the topics explored at the blog. My favorite comments are the ones that make the case for Passive Investing. Why? Because I often make the case against Passive Investing and I believe that we need more comments coming from the other side to give the discussions balance.
I delete abusive comments because I feel so strongly about the benefit added by community interaction. I have found that abusive comments intimidate many community members. When things get too nasty, some of the best contributors take their leave of a community. I’d rather hear the contributions of those who care about the subject matter and about their fellow community members than the contributions of those who are not willing to go to the trouble to present their views in a civil and reasonable way. I often invite those who have had abusive comments deleted to take another stab at expressing their thoughts without running afoul of the community norms. I feel a little bad when they are not willing to do so. But not as bad as I would feel if the vast majority that is willing to abide by the community norms were to feel intimidated by the ugliness that I have seen put forward by those who are not when no efforts are made by site administrators to rein them in. I believe we owe it to all community members (including those with a temptation to post abusively) to enforce reasonable posting rules in a reasonable manner.
It is true that J.D. and I recently had a disagreement. It has since been resolved. During the site redesign here, I became unable to post comments on this thread for several days. I have been banned from numerous discussion boards for posting my honest beliefs about the flaws in the Passive Investing model. I wrongly jumped to the conclusion that J.D. had banned me and wrote that at my blog. I have obviously since learned that that was not the case. As soon as I learned of my mistake, I added an addendum to the blog entry reporting on the realities accurately. J.D. asked that I remove the sentences saying that he had banned me (he rightly believes that it is important to his reputation that he be known for permitting different viewpoints to be expressed here). I didn’t feel comfortable removing the original wording as I believe that people should be able to view the entire record when forming a personal take about the events that transpired (for example, people might want to take into consideration the fact that I made a mistake in this matter in forming an opinion as to whether I have made mistakes re other matters). I ended up adding language in bold noting the mistake immediately underneath the paragraph containing the mistake. J.D. has told me that he is now satisfied with how the matter has been handled.
J.D.’s handling of this thread shows me that he sees the value in allowing both sides of the Passive Investing topic to be heard. I believe that his handling of this thread may end up serving as a model for other blog owners faced with similar circumstances. One of the big problems that we are struggling with today is that Passive Investing became so popular for a time that it was virtually beyond criticism. I am working hard to change that and some of the comments that I put forward shock people who have neverbefore heard such points being made.
I want to stress that I have great respect and admiration and affection for those who developed and refined and promoted the Passive Investing concept for many years. Their insights have helped millions (including Rob Bennett, to be sure!). That said, I strongly believe that there were serious flaws in the first-draft effort and that we all need to be working hard to correct those flaws today. I encourage all who work in this field to develop a greater skepticism re claims that it is not necessary for investors to change their stock allocations in response to big price swings. But I also strongly oppose any thought that engaging in personal attacks is an appropriate way to go about the Learning Together project that we need to engage in. The Passive Investing advocates made some mistakes. Guess what? They’re human too. When you’re putting together your list of humans who have made big mistakes, it would be perfectly appropriate to put Rob Bennett’s name up near the top of your list (please witness the situation with J.D. described just above).
Bill Schultheis and J.D. Roth are both Passive Investing advocates. I am bound in conscience to say that I believe they are are making a mistake when they suggest that there is no need for middle-class investors to change their stock allocations in response to big price changes. I am also bound in conscience to report that I respect the work they have done in this field and bound in friendship to hope that it will be possible for me to work with both of them to over time make both the investing advice that they offer and the investing advice that I offer more effective. My hope is that I will be able to learn some things from them and that they will be able to learn some things from me. I’ve seen the interaction of different points of view produce great work before and it is magic when it happens (this is why I chose a swirling magic wand as the favicon for my site).
I don’t know everything. Bill doesn’t know everything. J.D. doesn’t know everything. I make mistakes. Bill makes mistakes. J.D. makes mistakes. Working together, I believe we can produce great advances. And I of course believe that this is so not just for us three but for the millions who are beginning to open up to the idea of reexamining some basic investing questions as a result of the economic crisis we are living through today.
There’s an article at the “Banned at Motley Fool!” section of the site that provides the background re the death threats. The article is entitled “Internet Harassment by ‘Defenders” of the Conventional Retirement Studies.” It sets forth the text of an e-mail that I sent to my congressman (Rep. Frank Wolf) re this matter.
Rob
May 24th, 2009 at 4:05 pm
Bennett said: “There’s an article at the “Banned at Motley Fool!” section of the site that provides the background re the death threats.”
It also illustrates that there WERE not death threats to you. None.
However, the historical record does show death threats were authored BY you. Do you deny these two obvious facts?
I think it is important to know if the person who is allowed to expend so many column inches here is truthful or not. For instance, while he constantly insists Finance experts should “apologize” for some imaginary transgressions which only Bennett knows of, did you notice that Bennett completely failed to apologize (say three little words “I am sorry”) to J.D. over his ridiculous and ultimately incorrect tirade, that Bennett now admits belatedly was in error? No apology.
He claims *others* have made death threats, but is unable to provide evidence. Yet, evidence of his own death threats to innocent children is easily found on Google.
Bennett is simply not to be believed or trusted.
Read his own blog, and you will quickly see the signs of a disturbed mind; a man who needs mental help.
I wish he would seek it out.
May 24th, 2009 at 4:52 pm
Rob’s passive aggressive behavior is nicely demonstrated there as well. First he ascribes nasty motives to J.D. and lumps him in with all the other evildoers who have banned him or at least refused to praise him, and then he claims to have no idea what J.D. is upset about.
He has not only written to his congressman but he also claims to have written, the local police, the EFF, and the FBI. All with no results except possibly being added to their crank lists. (The EFF is particularly funny as their mission is to protect the internet FROM people like Rob.) Getting people to react to you and then calling on an authority is standard passive-aggressive practice. In fact many of Rob’s bannings have come after Rob demanded that other people be banned and the moderators decided that he was just too high maintenance.
May 24th, 2009 at 5:50 pm
This little tiff could easily have been avoided had Mr. Roth simply relinquished control of his blog and permitted Mr. Bennett to post whatever guest post he wanted to post whenever he wanted to post it. It seems to be a rather modest demand. After all, clearly whatever Rob has to say is vitally important (at least to Mr. Bennett) and Get Rich Slowly has more traffic than Mr. Bennett’s blog so it naturally follows that he be afforded the opportunity (at Mr. Roth’s expense) to get the word out about his “beliefs” for the good of the “community.”
May 25th, 2009 at 5:43 am
He has not only written to his congressman but he also claims to have written, the local police, the EFF, and the FBI.
The “EFF” is the Electronic Frontier Foundation. It’s true that I contacted all these people. In the case of Rep. Wolf and the local police, it was by e-mail (in addition to telephone calls), and in the case of the local police, there were several in-person meetings. In the case of the EFF and the FBI, the contacts were through telephone conversations. The local police referred me to a Virginia state police group that deals specifically with internet crimes. There were both telephone and e-mail contacts there as well.
I believe that the fact that such contacts have been needed tells a story about stock investing that is rarely told. The premise of the Efficient Market Theory (which is the theoretical foundation of the Passive Investing model) is that investors are 100 percent rational (that is why it is said that the market price is right and that “you can’t beat the market” by paying attention to valuations). If most investors really were 100 percent rational, there would obviously never be a need for such contacts to be made. In a 100 percent rational world, the Passives would make their case, the Rationals would make their cases, and those trying to decide between the two would do so based on a hearing of both arguments. That’s obviously not the world we live in today.
All with no results except possibly being added to their crank lists.
That is not precisely correct. But it is correct to say that the Campaign of Terror against the Retire Early and Indexing discussion-board communities continues on to this day. There have been numerous threads at the Vanguard Diehards board (and a smaller number at the Bogleheads.org board, where enforcement of the ban is tighter) expressing a desire that the ban on honest posting on valuation-related topics be lifted. Even post-crash, these requests have been denied (although we have seen a big positive change in investor willingness to hear new ideas since the crash and even in the willingness of some Goon-leaning posters to tolerate them). Again, this is something that we would not see in the 100 percent rational world envisioned by the Efficient Market Theory and the Passive Investing Model of understanding how stock investing works.
The EFF is particularly funny as their mission is to protect the internet FROM people like Rob.
My understanding is that their mission is to ensure free speech on the internet. My mission is to extent free speech protections to discussions of safe withdrawal rates and other valuation-related investing topics. My take is that we are pursuing the same general mission. Ron is right, though, that the woman who I spoke to at the EFF responded negatively to my request that her group help out. She did indeed suggest (without saying it explicitly) that her group would be more likely to help the abusive posters than the majority of community members who have on numerous occasions expressed a desire that honest posting be permitted. I was astounded by that response but I am confident that the woman was expressing her sincere views re what should be done.
Getting people to react to you and then calling on an authority is standard passive-aggressive practice.
I have never had any problem whatsoever getting the reaction I have wanted to see to my writings in this area. I have always had many fine community members get involved asking lots of great questions and offering lots of outstanding feedback. I couldn’t ask for a better reaction in that respect. I have certainly never once in any way, shape or form suggested that I appreciated the reaction of those who have posted abusively. There is no other community member who has spoken out as strongly or as often in opposition to the Goon tactics. I believe that that stuff does great harm to internet communities. I have seen it do great harm on numerous occasions.
In fact many of Rob’s bannings have come after Rob demanded that other people be banned and the moderators decided that he was just too high maintenance.
There’s a measure of truth to this. I have of course never once put forward a post that in any way, shape or form could be considered abusive by any reasonable person. And I have never had a site administrator remove a post of mine on grounds that it was abusive. Yet I have indeed been banned from numerous forums. So there clearly is something out of the ordinary going on here.
I believe that it is that the claims that I am making (that the Passive Investing model is not only imperfect but reckless, that it has caused great financial ruin and imperiled the entire economy) are shocking to many people, both those inclined to engage in abusive posting and those not so inclined (a far greater percentage of the population). The majority has always expressed a desire to be able to hear both sides of the story. But the Goons have always been unwilling to listen to any suggestions that they ease up in their relentless attack strategy. And those who possess a vague desire to hear the arguments but who are not yet convinced of their merit have generally ended up not being too upset when a ban on honest posting on these questions was imposed.
Most people who follow Passive Investing are not dogmatists. They think that the ideas generally make sense and they know that lots of experts endorse them. So they generally go along with the conventional strategies. They’re perfectly happy to hear about some new ideas and like to be given opportunities to ask questions about them. But they find the behavior of the Goons degrading and humiliating. So, when faced with site administrators who are unwilling to honor their promises (all of the discussion boards at which I have posted have rules in place that protect us from the Goon tactics) to protect us from the ugly stuff, they favor a ban on honest posting over having to hear more of the abusive stuff. It is true that the Goons have burned numerous boards to the ground (people of intelligence and integrity flee from communities that permit the Goon tactics) and the site owners obviously have an interest in protecting their communities from destruction.
The question is — Why have the site owners not acted to rein in the Goons? Imposing limits on the extent of abusive posting permitted would obviously solve the entire problem (and open the door to lots of exciting discussions of new ideas) in about three minutes. So why have we seen such a reluctance to adopt this common-sense solution?
I think that a big part of it is that the Passive Investing model became so dominant during the out-of-control bull. Many people (including site owners and experts) have a hard time believing just how flawed this model really is, given how popular it once became. That’s what needs to change. We cannot escape Passive Investing until we come to learn just how dangerous it is and we cannot learn just how dangerous it is until we are willing to open our minds enough to hear the full case against it. And we cannot hear the full case against it until we are able to work up the will to do something about the Goons. Which requires that we develop some serious doubts about the merits of the Passive model.
The stock crash has been a big help. It may be that it will take another huge stock crash to take us to where we need to be to have fully open discussions of the flaws of the Passive model. I certainly hope not and I am personally not convinced that this is so, but I don’t think that such a conclusion would be entirely unwarranted given what we have seen for seven years now. The good news is that the stuff on the other side of the mountain is so wonderful that even if we suffer another huge price crash we may someday look back and conclude that it all was worth it given what it led us to. That’s my guess for what we are going to learn on the last page of the saga.
Humans!
Rob
May 25th, 2009 at 6:34 am
did you notice that Bennett completely failed to apologize (say three little words “I am sorry”) to J.D. over his ridiculous and ultimately incorrect tirade, that Bennett now admits belatedly was in error? No apology.
I apologize for the mistake.
I also feel bound in conscience to put the matter in a more reasonable context than the words above provide.
How can it be said that my belief that J.D. had imposed a ban was “ridiculous” given what I have seen for seven years now? I was the primary person responsible for building the Retire Early board at Motley Fool into the most successful board in the Motley Fool site’s history and the co-founder of the site wrote an effusive endorsement of my book on saving. Yet I was banned from that site. There are scores of posters at the Vanguard Diehards board who said publicly that I was one of their favorite posters at the board and that the discussions I brought to it were some of the best discussions ever held there. Yet Morningstar banned me from the site. There are discussions of safe withdrawal rates nearly on a weekly basis at the Bogleheads.org site and yet my SWR calculator (The Retirement Risk Evaluator, the only analytically valid SWR calculator available on the internet today) is rarely linked to in these discussions largely because the regulars there know that that entire discussion-board community was founded as a means to escape my posting on the realities of SWRs (the “leaders” there had demanded for two years that Morningstar ban honest posting on SWRs and Morningstar had refused, so they set up an entirely new site and asked that their supporters make the switch).
Given that history, can it be said that it was not perfectly reasonable for me to believe that this was another case in which a ban on honest posting on the flaws of the Passive Investing model had been imposed?
If there had never been a ban imposed anywhere, the thought would probably not have entered my mind that there had been a ban in this case. That’s the world in which all Passive Investing advocates live. Passive Investing advocates assume that they will always have a right to post their honest views anywhere they please and this expectation is confirmed for them over and over and over again. It doesn’t work that way with critics of the Passive Investing model. There have been numerous posters banned from the Retire Early and Indexing boards and I am not able to think of one case in which a ban was imposed because the poster engaged in abusive posting. In every case it was because the poster pointed out flaws in the Passive Investing model and did so effectively and became popular in the board community because of his exciting and enlightening posts.
What is it about this investing model that causes those who support it to feel such intense defensiveness? That’s the question we should be exploring. Defensiveness is the opposite of confidence. For a long-term strategy (both Passive Indexing and Valuation-Informed Indexing are long-term strategies) to work, the investor following the strategy needs to feel enough confidence in it to stick to it through the hard times. Are there any Passive Investors who feel enough confidence in their strategy to invite questioning of it? I think it would be fair to say that, if there are any, their number is very, very small. I think it would also be fair to say that this reality represents a very, very big problem for this investing model.
I made a mistake about J.D. That’s an established fact. An apology is indeed in order. All that is so.
But that is not at all the entire story. Is an apology not owed to the thousands of people who built the Retire Early board and then watched Goon posters burn it to the ground? Is an apology not owed to the thousands who built the Vanguard Diehards board and watched it virtually burned to the ground when the “leaders” there abandoned Morningstar because Morningstar was not willing to compromise its integrity in response to the demands of the “leaders” that it do so? Are the millions of middle-class investors who lost large portions of their retirement money because the “experts” told them that there was no need to cut back on their stock allocations at a time when stocks were selling at insanely dangerous prices not owed apologies?
There should be all sorts of apologies coming from all sorts of places and being directed to all sorts of places. The bottom line on all this is that we all should be concerned about the possibility that our entire economy may be in the process of going over a cliff. We should be working to learn what it is that we need to learn to ensure that that does not happen. Apologies can help in the healing process that is needed, and when they can help, they should indeed be delivered. When demands for apologies slow things down, it might be better for us not to be too demanding until the healing process is far enough along so that the apologies will begin to appear on their own without being forced out.
We destroyed ourselves by giving in to a dark urge within that tempted us to engage in reckless investing behavior. That’s the bottom line re all this. We did great harm to ourselves. We need to apologize to ourselves. We need to start caring enough about our futures to work up the courage it will take to start putting things back together instead of working ever more furiously to tear things apart.
We made a mistake. We hurt ourselves and others. We need to own up to the mistake. And then we need to move on to something better.
I made mistakes along the way, just as has every single person involved in either the internet debate or in the out-of-control bull that preceded it and gave birth to it. I have no trouble with the idea of me being the first to step forward to say the words “I” and “Was” and “Sorry.” But I don’t think that I would be aiding the healing process if I were to fail to note that we need a whole big bunch of others stepping to the front of the room and offering similar healing words.
It’s only the entire U.S. economy at stake here. It’s only the financial futures of each and every one of us. The words “I” and “Was” and “Wrong” are the three magic words. They are words of great power. We need to see lots of good and smart people making use of that power to help carry us all to a far better place.
I was wrong.
Now –
Who wants to be the one to go down in investing history as having been the one to speak second?
Rob
May 25th, 2009 at 7:55 am
Bennett often claims boards that banned him were subsequently ‘burned to the ground’ by “Goons.”
Here are the current site statistics on four of his more favorite targets. I leave it to the observer to decide what to belive:
http://www.s152957355.onlinehome.us/cgi-bin/yabb2/YaBB.pl?num=1242742106/68#68
May 25th, 2009 at 8:18 am
“But they find the behavior of the Goons degrading and humiliating.”
Once again you go putting thoughts into the heads of the people that banned you.
“It is true that the Goons have burned numerous boards to the ground (people of intelligence and integrity flee from communities that permit the Goon tactics) and the site owners obviously have an interest in protecting their communities from destruction.”
A good example of this is the Bogleheads. After Rob’s posts at the Vanguard Diehards, a frequent request was for a forum just like the Vanguard Diehards, only free of Rob’s rants. Some threads contained the phrase: “This thread has been hocused.” based on Rob’s user name of “hocus”. Some posters started a thread and specifically asked Rob not to reply in order to keep the thread serious and on-topic.
One of the users there put up a new forum elsewhere and said it would be just the same, only he guaranteed that Rob would be permanently banned. Thousands of Vanguard Diehards users moved to the new board within the first few days. I have never seen so many people move so fast from one forum to another.
“The question is — Why have the site owners not acted to rein in the Goons? Imposing limits on the extent of abusive posting permitted would obviously solve the entire problem (and open the door to lots of exciting discussions of new ideas) in about three minutes. So why have we seen such a reluctance to adopt this common-sense solution?”
The Vanguard Diehards forum did, in fact, ban Rob. But it was too late. Most of their users had already made their new home at the Bogleheads forum. I think they originally made the mistake of treating their investing forum like Wrestling on TV. Because so many people point out the errors in Rob’s posts, they thought he had “good ratings” like the “bad guys” in wrestling. But once people had the opportunity to change the channel, it was all over. Likewise, Rob has his own blog but and has several times been given his own forum. But given the choice, no one goes there, so he returns to setting up shop on other people’s sites where he hopes that inertia will keep people around.
May 25th, 2009 at 8:38 am
Here are the current site statistics…
There has not been any significant discussion of how to retire early at the Retire Early board at Motley Fool for about five years now. The thousands of people who built that community resource have lost access to it because one individual got an important number wrong in a study that people use to plan their retirements and because the site owners did not honor their promises to protect us from the tactics that were used to destroy the board.
The Vanguard Diehards board today receives only a fraction of the posting that it attracted in earlier days. It was for a long time the most exciting investing board on Planet Internet. There are efforts to rebuild the board advanced there on almost a weekly basis. They are always shot down by the “leaders” of the Bogleheads.org board, who are obviously concerned about what it means for the Bogleheads.org board if honest posting on valuations-related topics is permitted at Vanguard Diehards.
The Bogleheads.org board gets huge traffic. But the posters who congregate there obviously suffered huge financial losses as a result of the ban on honest posting that has applied at that board since the day of its creation (the founding purpose of the board was to provide a way for the “leaders” there to escape Morningstar.com, which was at the time permitting honest posting on safe withdrawal rates and other valuations-related topics). Even Taylor Larimore, co-author of The Bogleheads Guide to Investing, has announced that he is giving thought to selling all his stocks if prices fall again. If investors were 100 percent rational (the core premise of both the Efficient Market Theory and the Passive Investing model for understanding how stock investing works), Taylor would make use of his discovery of the weaknesses of the risk-analysis aspect of the Passive model to learn about new and better strategies. But this has not happened and many of the Passive Investing enthusiasts who meet at that board have not insisted that it happen. Why?
I haven’t visited the Early Retirement Forum in some time. It was still attracting a good bit of traffic the last time I checked. But I think it is fair to say that the discussions there would be far more exciting and valuable if honest posting on the New School of Safe Withdrawal Rate analysis were permitted there. The Old School FIRECalc calculator is frequently promoted there (FIRECalc was created by the former owner of that site).
There were two fine boards at one time at NoFeeBoards.com, the FIRE board and The SWR Research Group. Neither of those boards even exists today. The entire site, which was once one of the most exciting investing sites on the internet, is today defunct. Why? The site owner there took a vow always to permit honest posting on SWRs. You can guess how the Goons responded to that one.
Passive Investing was a big mistake. It was not the first big mistake in the history of mankind. But it was indeed a big mistake. It is not so that investors do not need to adjust their stock allocations in response to a rise to dangerous levels of overvaluation. We all very much do need to make such adjustments if we are to hold realistic hopes of long-term investing success.
Should we be talking about how to know when to make the allocation adjustments we need to make rather than about the history of the Campaign of Terror against the various board communities that have held discussions on these important questions over the past seven years? It sure seems so to me.
I think it would be fair to say that the big step forward takes place when the millions of middle-class investors who have been done financial harm by the Goon tactics works up the courage to insist that effective action to rein in the abusive posting are taken.
It will happen. The mistakes that were made are too serious for us to continue to duck the question forever. Given that we know it is going to happen sooner or later, is the most sensible and charitable thing to do whatever can be done to see that it happens as soon as possible?
That’s certainly my take re all this.
When a few influential Passive Investing advocates work up the courage to speak out in support of the healing process that we all need to see and that the vast majority of us want to see, that’s when the true fireworks (the good kind!) begin!
Rob
May 25th, 2009 at 8:51 am
a frequent request was for a forum just like the Vanguard Diehards, only free of Rob’s rants. Some threads contained the phrase: “This thread has been hocused.” based on Rob’s user name of “hocus”. Some posters started a thread and specifically asked Rob not to reply in order to keep the thread serious and on-topic.
All of these words are accurate.
The full truth of course is that there were also many, many requests that honest posting be permitted and that something be done about the abusive posting problem.
Both things are so.
There were many, many community members at Vanguard Diehards who wanted the posting rules (which protect us from abusive posting) to be honored and there were a good number who favored the use of abusive posting to bring effective questioning of the Passive Investing model (I was certainly not the only one questioning the model — there were scores of us) to an end.
It is possible for dogmatists to insist that effective questioning of their investing strategy be brought to an end. It is even possible for them to see bans put in place for a time. But is a ban on honest posting re the flaws of an investing model a long-term strategy? I say “no.”
In the long term, the economic realities prevail. For the long-term investors, permitting civil and reasoned discussion of the pros and cons of all investing strategies is essential. That’s why the published rules at all of the boards promise to protect us from the abusive posting tactics that were used to do such damage to them.
There is wisdom in those rules. Those rules reflect the true beliefs of the community members who congregate at the boards. Most of us want to know the realities of stock investing.
Are we human? Are we weak? Are there times when we give in to temptations to engage in self-destructive behavior?
Yes, yes, and yes.
Still it remains so that in our hearts we want to know the realities of stock investing. And we want to interact with our fellow community members in civil and reasoned and friendly and warm ways.
We are weak. And we are strong.
We are human. We are all that that suggests.
We are not 100 percent rational.
It’s not even a close call.
Rob
May 25th, 2009 at 9:11 am
I think they originally made the mistake of treating their investing forum like Wrestling on TV. Because so many people point out the errors in Rob’s posts, they thought he had “good ratings” like the “bad guys” in wrestling.
I see some truth in this description of events. I think it is excessively harsh re Morningstar. But it is not entirely off the mark.
I see no evidence that Morningstar wanted its board to become akin to wrestling. Morningstar sincerely wanted posters with different views to interact in a civil and reasonable and warm and friendly way. And most community members wanted the same.
The big rub is that it was the “leaders” of the board who most wanted a ban on honest posting on the analytical errors in the Old School retirement studies in particular and on the flaws in the Passive Investing model in general. Many community members feel great respect and affection for the “leaders” and were willing either to help them out or at least to limit their criticism of the irresponsible behavior of the “leaders” because of the efforts that the “leaders” had taken in earlier times to build a fine community.
This is a reality not just on discussion boards, but everywhere that Passive Investing has been advocated. People look up to experts. The experts who have promoted this strategy have painted themselves into a corner. Passive has been advertised as an approach that is “rational” and “scientific” and “prudent” and “proven” and “safe.”
It is none of those things.
If people want to say that that’s just my opinion, that’s fine. It’s a good thing for people to be skeptical of what I say and it is a good thing for other viewpoints to be represented in any discussions held.
But it is not a good thing at all for the “experts” to continue the pose that Passive is The One True Way That Should Never Be Questioned.
I think it would be fair to describe me as the leading critic of the Passive model alive today. But I am certainly not the only one. The names of those who have questioned this model include: (1) Robert Shiller; (2) John Walter Russell; (3) Rob Arnott; (4) Cliff Asness; (5) John Mauldin; (6) Ed Easterling; (7) Andrew Smithers; (8) John Hussman; (9) Andrew Smithers; and (10) Jeremy Grantham. Are we to believe that allof these people are suffering from mental illness? That is just too much.
The documented reality is that the case against Passive Investing has been growing stronger and stronger and stronger for close to 30 years now. There is now a mountain of evidence showing that long-term investors must change their stock allocations when prices reach truly insane levels. Bans on honest posting are not going to make these realities go away.
We need responsible Passive Investing advocates to come forward, speak out in strong opposition to the Campaign of Terror, and urge the launching of a national debate on the pros and cons of the Passive model.
If it is a good model, it will pass the test with flying colors.
If it is a gravely flawed model, we will soon get about the business of moving on to something better.
That’s as it should be.
Rob
May 25th, 2009 at 9:16 am
But once people had the opportunity to change the channel, it was all over.
I think it is fair to say that every single person reading these words knows in his or her heart what channel the vast majority of middle-class investors are going to choose when they are for the first time offered a channel that permits honest and informed discussion of both the pros and cons of both the Passive and Rational models in an environment in which civil and rational and warm and friendly posting is encouraged and in which extreme violations of core community norms are reined in for the long-term good of all involved.
We all win when that channel moves to first place in the ratings.
Rob
May 25th, 2009 at 9:18 am
“All of these words are accurate. The full truth of course is that there were also many, many requests that honest posting be permitted and that something be done about the abusive posting problem. Both things are so.”
There is no “Both” - it is the same thing. Rob is banned at both places, both places have honest posting. The abusive posting has had to find new outlets. For those you haven’t picked this phrase up yet “ban on honest posting” means Rob was banned. And even though Rob tries to get the opposition banned, or even stopped by the FBI or an act of congress, he claims that he is not the abusive one. It’s really someone else. Trust him.
“Are we human? Are we weak? Are there times when we give in to temptations to engage in self-destructive behavior? Yes, yes, and yes.”
And yet, website owners have the right not to have all this on their websites. You can still do it on your own website. The EFF, the FBI, your congressman, and the police would fully support you in that, but they won’t force people to read it.
May 25th, 2009 at 9:28 am
I wish you the best of luck with whatever investing strategies you elect to pursue, Lindsay.
I hope that I can say that much without generating any additional “controversy.”
Rob
May 25th, 2009 at 9:30 am
“I think it is fair to say that every single person reading these words knows in his or her heart what channel the vast majority of middle-class investors are going to choose when they are for the first time offered a channel that permits honest and informed discussion of both the pros and cons of both the Passive and Rational models in an environment in which civil and rational and warm and friendly posting is encouraged and in which extreme violations of core community norms are reined in for the long-term good of all involved.”
Gee, Rob, you have your own website, your own blog, and you’ve been given several forums for your own use and control… And yet “the vast majority of middle-class investors” have never chosen to hang out with you. Perhaps your vision of “honest and informed discussion” is extremely different from everyone else’s?
If you could step back from your ego for a moment, I think you would see that there are many forums already that fit your criteria. You simply have the personal problem of being banned from them.
May 25th, 2009 at 9:31 am
There were two fine boards at one time at NoFeeBoards.com, the FIRE board and The SWR Research Group. Neither of those boards even exists today.
I had an email alerting me that Bennett was proffering his usual here.
Check my website link to see what happens when Bennett (hocus) is given rein over a board.
Check bogleheads.org to see how interested investors thrive in his absence.
I pity this blog’s proprietor. A word of advice in your ear: Unless your sole purpose in running this blog is traffic generation, you will ban him eventually. Save yourself the heartache.
May 25th, 2009 at 9:38 am
Perhaps your vision of “honest and informed discussion” is extremely different from everyone else’s?
My investing views are not the views held by the majority of investors today, Lindsay. That much is certainly so.
There’s a discussion in the book “The Wisdom of the Crowds” about what it takes to make an efficient market. The book argues that a large community can indeed under some circumstances possess a greater capacity than even the smartest investor in the world to set prices accurately. But the book points out that this magic happens only if all community members feel free to express their sincere views without compromise or dilution.
We’re not there today. The Passive Investing model put the cart ahead of the horse. it assumed the place that we should be trying to get to. When we can all develop the grace to respect each other’s viewpoints, the market will be reasonably efficient. It doesn’t happen just by us declaring that it is so. It will take work that we have not yet completed to get us there.
Rob
May 25th, 2009 at 9:51 am
“My investing views are not the views held by the majority of investors today, Lindsay. That much is certainly so.”
It is your views of “honest and informed discussion” that I was commenting on.
“I wish you the best of luck with whatever investing strategies you elect to pursue, Lindsay.”
And I wish you the best of luck at developing an investment strategy that you can sell, Rob.
May 25th, 2009 at 10:07 am
Why Rob (hocus) Bennett is banned in so many places:
#53 & #54
QED
May 25th, 2009 at 10:33 am
Rob said ‘The SWR board does not even exist today’
Not true, Rob.
Here is a link right here. Some of your best historical mania has been marinating there, ready for use in instructional settings, from up to six years ago! And still available for all who are interested:
http://s162532268.onlinehome.us/Sewer/viewforum.php?f=1
May 25th, 2009 at 10:56 am
Bennett asks:
“Should we be talking about how to know when to make the allocation adjustments we need to make rather than about the history of the Campaign of Terror against the various board communities that have held discussions on these important questions over the past seven years? It sure seems so to me.”
YES! By God, YES. Who is stopping you?
You could start with comparing the performance of Lucky Seven to a 60/40 mix of S&P index and corp paper over 30 year slices, *including* of course, your criteria for buy and sell using Lucky Seven (which should be simple, as I understand your system using a single indicator, the 100P/E10, correct?) L
Very much looking forward to that information!
May 25th, 2009 at 11:16 am
NOTE: EVERYTHING SAID ABOVE ABOUT ROB BENNETT, THAT WAS NOT WRITTEN BY HIM, IS A LIE. ROB IS CONSTANTLY FOLLOWED AROUND THE WEB BY GOONS AND PERSECUTED. THIS WILL NOT CHANGE UNTIL THE SITE OWNERS BAN ALL POSTS THAT DISAGREE WITH RATIONAL PEOPLE SUCH AS ROB AND MYSELF.
HAVE FUN.
May 25th, 2009 at 12:10 pm
Why Rob (hocus) Bennett is banned in so many places: #53 & #54
I don’t doubt for three seconds that there is great embarrassment among the Passive Investing dogmatists (and even among many Passive Investing advocates who are not dogmatic in their belief) about the negative events that have transpired during the first seven years of The Great Safe Withdrawal Rate Debate, critter.
Do you think that I have a magic wand that I can wave to make all that go away?
I do not.
There are things that I and many others can do to take a sad song and make it better. None of us possess supernatural powers.
The thing to do is to accept that the past cannot be changed and for all of us to work together to make the best that we can out of the future.
I have said on many, many occasions said that I would be thrilled to do all that I possibly can do (it is obviously not within the realm of possibility that I would agree to post dishonestly on what the historical data says re safe withdrawal rates). Every time I have been given some small bit of material to work with, I have done with it everything I could.
Would you be willing to consider the idea of being a wee bit more generous in your decisions as to how much to give me to work with? If you could find it in your heart, I think that might help lots of people feel better about lots of events that have done down.
Please give us all a hand here, critter.
Rob
May 25th, 2009 at 12:20 pm
Here is a link right here.
The material that appears at that link has been doctored.
And the person who hosts the material at the link does not possess a legal right to host it.
The material is owned by the person who owned the NoFeeBoards.com site. His screen-name was “El Supremo” or “ES.” After ES’s site was destroyed by the Goons, ES told John Walter Russell (my partner in the development of the calculators) that the material at the SWR Research Group belonged to him. He obviously did not give rights to the material to the people who destroyed his site.
There are several snippets of posts by ES available in the article at the “Banned at Motley Fool!” section of my site entitled “Internet Discussion Boards Ban Honest Posting on Valuations!” You can gain a sense of his general take re all this by reading those snippets. The short version is — ES was a strong proponent of Passive Investing but he was not generally (there are exceptions in the record) supportive of the Campaign of Terror against the Retire Early boards.
One of my hopes for future days is that we may be able to rebuild the NoFeeBoards.com site and attract back to it the many fine posters who built it as well as lots of new people every bit as excited about the idea of exploring the realities of stock investing in a warm and inviting and friendly posting environment (that was the ES vision that caused the site to be such a great success for a time).
Rob
May 25th, 2009 at 12:26 pm
Who is stopping you?
There are hundreds of fine posters who have contributed hundreds of wonderful insights over the course of the first seven years of our discussions, Caring Soul. Nothing has even been able to stop them. I certainly do not say different.
But I also certainly think it would be fair to say that the number of insights developed would explode if we could spread knowledge of what we have learned to tens of thousands and then hundreds of thousands and then millions of others.
I sure am not able to imagine any possible downside to doing so. Are you?
Rob
May 25th, 2009 at 1:18 pm
What Rob says is true. El Supremo gave ME the rights to the posts. I refuse to allow others to read them, however, without heavy censorship. Otherwise, naive readers might read the complete record without guidance and conclude that Rob is dishonest and misinformed.
It’s true, by the way, that I helped Rob develop the calculators found on our sites. Having a strong background in mathematics and statistics, I am unusually qualified to use programs as exotic as “Excel”. This program (called a “spreadsheet” by the cognosenti) allows the highly complex analyses that form the bases of my financial research that I allow Rob to share.
May 25th, 2009 at 1:43 pm
A trick that is often employed by the Goons is to post under the names of other people.
For example, the post above by JWR1945 was obviously not written by John Walter Russell (owner of the http://www.Early-Retirement-Planning-Insights.com site) even though that is the screen-name that John uses when posting on discussion boards.
Those who want to check out John’s research and learn about his take on the issues discussed in this thread can do so by going to his site. The materials made available there are exciting and helpful and valuable stuff indeed. John’s storehouse of research is one of the best things we have seen come out of the first seven years of our discussions.
Rob
May 25th, 2009 at 2:21 pm
Rob said: “John’s storehouse of research is one of the best things we have seen come out of the first seven years of our discussions.”
‘Storehouse’? It looks a heck of a lot more like a madhouse to me! I say that not to hurt him, but to help him.
For instance, below is the text list of his menu bar setup. Can you please explain to me the logic of JWR’s layout, and the reason for the apparently redundant labels (but unique content underneath), and why there is no evident logic or hierarchy to the JWR menu system?
I’d say if JWR’s skills as a numbers guy are reflected in his site layout acumen, then I can take a pass altogether! Permanently. As in “Forever”.
(The JWR menu system)
Notes
Notes
Notes
Notes
Notes Index
Short Posts
P/E10
Stock Returns
Year 30 SWR
Year 15 SWR
Scenario Surfer
Strategy Tester
TIPS Table
S&P500 Dividends
S&P500 Returns
Graphs
More Graphs
Guidelines
Foundations
May Highlights
Lucky-7 Archives
Current Research N
Current Re Index
Archives
Dividend Archives
Books
Contact Us
Letters Index
Letters
Letters
Letters
Letters
Letters
(end of menu)
Oh, and what evidence of ‘doctoring’ do you have for this site — are you saying this is not your post, requesting to be anointed a “Board General” — whatever that is! Rob, I am a guy who loves to fight for the underdog, so if you just give me evidence that this is not an accurate reflection of your original post, I will be 100% in your camp to get the record corrected.
“I want to be your Board General”
http://s162532268.onlinehome.us/Sewer/viewtopic.php?t=993&sid=ab4dd98c49a5dd813dd4b1de524ae506
May 25th, 2009 at 2:46 pm
I encourage those reading these words to take a look at John’s site and decide for themselves what value it possesses. My assessment is that it is the most important web site available on Planet Internet today.
I haven’t read the material at the link you provide to the “Board General” post. So I can’t say if that is a doctored version of my words or not.
I can explain the theme of the post with the title “I Want to Be Your Board General!” that I actually wrote for the http://www.NoFeeBoards.com site on the day it was shut down. Posting at that board was a wonderful experience. I met lots of smart and good people and we learned lots of exciting things together. I thought it was a terrible shame that the site was destroyed by abusive posters. The reason why it was destroyed is that too few of the board leaders were willing to speak up in support of the majority that wanted to focus on the topics of the board, not the ugliness brought to the table by the Goon posters. People look up to leaders, and when their leaders failed them, the entire board went down.
I have developed a reputation during The Great Debate of being willing to speak up in defense of the majority of community members and in opposition to the tactics employed by the Goons to destroy our boards. The purpose of my post was to give encouragement to those who are looking for a “leader” who is willing to put the interests of the community as a whole first and to put pursuit of any personal agendas far back in second place.
With leadership comes responsibilities, Caring Soul. The “leaders” who sat on their hands while that board was destroyed failed us. I think it is fair to say that I can do a better job. I am willing to take on the responsibilities involved because I think that our community deserves a lot better than what it has seen over the past seven years.
I’ve always been a community guy. I have always advocated reasonable enforcement of the published rules that apply at all of our boards. To make me the board general is to make the community as a whole board general. I think that the community should have a say in how the boards they create and build are run. I think that giving them a say is what works best in a long-term sense.
If the topic being discussed here were anything but investing, there is not one person who would consider these common-sense observations even a tiny bit controversial. Of course the community should have a say in how the boards it builds are run. Of course the site owners should honor the promises they make us when they are trying to entice us into participation at the boards.
When the question is whether we should permit effective questioning of the Passive Investing model, all of these obvious truths come into doubt in the minds of some. That’s a big part of the reason why we are suffering through an economic crisis today. We should apply the same common-sense rules that we apply in all other areas of life endeavor to our discussions of investing, in my view. These rules became conventional wisdom in all other areas of life endeavor because they make sense.
Rob
May 25th, 2009 at 2:59 pm
“I haven’t read the material at the link you provide to the “Board General” post. So I can’t say if that is a doctored version of my words or not. ”
Why not?
May 25th, 2009 at 3:04 pm
Rob: “To make me the board general is to make the community as a whole board general. I think that the community should have a say in how the boards they create and build are run. I think that giving them a say is what works best in a long-term sense.”
Do you want to be board general here, too?
If so, would you have allowed all of mine and other posts questioning you, so far?
If you have your own site and blog (which you do) and John has one at well, I’m confused as to why must you be “Board General” elsewhere? I don’t understand why if your movement is so great, and your case so strong, that you can’t just launch it in a place 100% in your control, and watch it catch on like wildfire.
Would that not seem a better use of your time than spamming boards that aren’t interested in “Lucky Seven” and John’s very bizarre site?
May 25th, 2009 at 3:09 pm
Rob, your link went to a dead domain parking service.
Domain servers in listed order:
NS1.SEDOPARKING.COM
NS2.SEDOPARKING.COM
I am not sure what your point was? Did you own the “Nofeeboards” domain at one time? Do you want it now? It seems that it can be completely yours for about $250.
May 25th, 2009 at 3:15 pm
Rob, you’ve made a serious allegation that the person who posted earlier on this thread at #64, Phoenix “doctored” your words and others.
Can you provide some support for that accusation?
“Doctored” is a word a lot like “Hocus” which is subject to interpretation, but neither one has a positive connotation, typically used to indicate trickery, deception, deceit, hiding of the truth…
I can understand why you choose that ‘handle’, but I really would appreciate you explaining why you claim the material at this link, where you seem to go ban-happy, is in anyway not an accurate depiction of the original posting. It seems completely in character with what I have seen from you so far at this site.
Sadly.
http://s162532268.onlinehome.us/Sewer/viewtopic.php?t=1009
May 25th, 2009 at 3:27 pm
Robert Bennett was emphatic:
“A “theory” that cannot stand up to scrutiny in a discussion held on an internet discussion board cannot work in the real world either.”
http://www.s152957355.onlinehome.us/cgi-bin/yabb2/YaBB.pl?num=1203105110
Here, some very smart people asked much the same thing, and got nowhere with you.
http://www.financialwebring.org/forum/viewtopic.php?p=238451#238451
Rob, please illustrate SPECIFICALLY how Lucky Seven performs against other strategies.
May 25th, 2009 at 3:28 pm
would you have allowed all of mine and other posts questioning you, so far?
No. If I were in J.D.’s shows, I would check out the realities for myself.
The quickest way to do so would be to go to the Bogleheads.org board or the Vanguard Diehards board, put up a post asking for comment on The Stock-Return Predictor or the Retirement Risk Evaluator, and see what happens. Once I confirmed for myself that there is indeed funny stuff going on at those board communities, I would write a blog post reporting on that and encouraging both those who believe in Passive Investing and those who do not to work together to open up these boards to honest posting on the flaws of the Passive model. That’s obviously would be a big plus for everyone writing in the investing field (since we all learn from the work done at these boards) or trying to learn about investing.
The reason why I did not bother checking to see whether the version of the “I Want to Be Your Board General” post has been doctored is that I have better things to do with my time. The fact that the person presenting the board does not even own it and that I have learned by checking that some of the materials have been doctored makes me suspicious of everything that appears there. I know what I said in the actual post that went by that title. I prefer to go by my memory of what I said than to waste time checking line by line a post that may or may not be a doctored version.
The other side of the story is that I provide a link to the doctored board at my site (at a section where I link to various resources for learning about the history of The Great SWR Debate). I have mixed feelings about doing that. I would prefer to link to a clean board. But there was lots of wonderful material presented at the SWR Research Group board and it appears to me that some of the posts presented at the board are not doctored. So my approach has been to warn people about the doctoring and to permit them access to the board via a link. When people have questions as to whether the material they find there has been doctored or not, I do my best to help out.
I believe that all who work on the internet have a responsibility to do what they can to make the entire communications medium more credible. We hurt the cause when we fail to speak out against the sorts of tactics we have seen employed by the Goons. I have spoken out on numerous occasions. I feel that I have done my part. The actual SWR Research Group board is a wonderful resource. The doctored board contains some wonderful material but there is obviously a lot of danger involved in making use of a board that you know was doctored.
I find it incredible that there are people who do not see a problem with the fact that people are presenting a doctored board. I think it is fair to say that the many community members who contributed to that board never dreamed that there would be a day when their words would be presented in doctored form and that few would speak out against this abuse. My hope is that there will come a day when we will have a consensus among leaders on the internet that this sort of thing is unacceptable, that people should be permitted to offer their honest views on investing topics and that the presentation of doctored archives (by parties who do not own the archives in the first place!) is unacceptable.
The Passive Investing dogmatists say that investing is a 100 percent raitonal endeavor. That claim is not backed up by my experience discussing these issues over the last seven years. Not by a long shot.
Rob
May 25th, 2009 at 3:36 pm
you’ve made a serious allegation that the person who posted earlier on this thread at #64, Phoenix “doctored” your words and others. Can you provide some support for that accusation?
Anyone who cares to can take a look at the material. The fact that there was doctoring is obvious to any reasonable person.
It is also obvious to any reasonable person that the purpose of many of these questions is not to learn the realities of stock investing, but to play games that puts off the day when the authors of the Old School retirement studies will need to make the necessary corrections to them.
I have been urging correction of the Old School studies for a long time now. A busted retirement is a serious life setback. Anyone reading these words who does not understand why the Old School studies are analytically invalid can learn the reasons why by checking out the articles at the “Retirement Risk Evaluator” section of my site. The short version is — they fail to adjust for the effect of the valuation level that applies on the day the retirement begins (the historical data shows that this is the single biggest factor influencing the safety of a retirement plan).
Rob
May 25th, 2009 at 3:40 pm
Rob: “I have learned by checking that some of the materials have been doctored makes me suspicious of everything that appears there. I know what I said in the actual post that went by that title. I prefer to go by my memory of what I said than to waste time checking line by line a post that may or may not be a doctored version.
The other side of the story is that I provide a link to the doctored board at my site (at a section where I link to various resources for learning about the history of The Great SWR Debate). I have mixed feelings about doing that. I would prefer to link to a clean board. But there was lots of wonderful material presented at the SWR Research Group board and it appears to me that some of the posts presented at the board are not doctored. So my approach has been to warn people about the doctoring and to permit them access to the board via a link. When people have questions as to whether the material they find there has been doctored or not, I do my best to help out.”
Incredible.
That is about the silliest thing I think I have ever heard of!
But, in accordance with your odd policy and wishes, Mr. Bennett, I hereby ask you to “Do your best,” to use your own terms, to confirm whether there is or is not doctoring in your “Board General” post, and further, to provide some examples of clearly “Doctored” posts, and your evidence as to why you make that conclusion. It seems to me that you can either do this, or else stand down with your accusations of dishonesty on the part of others, especially those providing a service by archiving the very material you find essential to refer to on your site! Do you not smell the strong odor of hypocrisy that I do?
As with my prior point, this goes directly to your believability, and since you provide no data, no specifics, all we can base our evaluation of you on is finding some evidence of consistency with what we know to be true, or inconsistency. Mr. Bennett, my own mind is rapidly being made up, and it is not complementary to your standing.
May 25th, 2009 at 3:45 pm
you’ve made a serious allegation
The most serious claim that I have put forward is the claim that I put forward on the first day of the discussions, the claim that the Old School retirement studies are analytically invalid. That claim has been supported by numerous big-name experts. Larry Swedroe has said that the Old School studies are a case of “Garbage-In, Garbage-Out” research. Bill Bernstein has said that anyone thinking of using an Old School study to plan a retirement would be well-advised to “ForGedDaBouDit!” Scott Burns has pointed to research showing that the the numbers in the Old School studies were off by a full 2 percentage points at the top of the bubble.
The fact that those studies were not promptly corrected when the errors in them became public knowledge is the cause of all of the ugliness we have seen in the time since. When studies that people use to plan their retirements are found to be in error, they should be corrected. That is nothing more than simple common sense.
The fact that many Passive Investing advocates have either opposed correction of the studies or have failed to take effective action to see them corrected tells a tale. It is a tale that argues for the need for a national debate on the flaws in the dominant investing model of today.
That’s my sincere take re all this.
Rob
May 25th, 2009 at 3:46 pm
Bennett: “Anyone who cares to can take a look at the material. The fact that there was doctoring is obvious to any reasonable person.”
I have no idea what this is supposed to mean. Consider me to be as a child, Mr. Bennett — innocent, bright, eager to learn and understand the truth, but unschoooled in your methods and what you see as apparently obvious.
So, please do take the time to walk me through the “Doctoring”, at least as many examples as may be needed to make the case. From reviewing your site, you fashion yourself as a reporter of facts, a teacher, one who is out to educate others.
That is all I ask of you.
Otherwise, I can only come to one very unfortunate conclusion, I’m afraid.
May 25th, 2009 at 3:53 pm
Bennett: “The most serious claim that I have put forward is the claim that I put forward on the first day of the discussions, the claim that the Old School retirement studies are analytically invalid.”
Be that as it may (and I am of an open disposition on that matter, not having investigated it), unless and until you can substantiate your very serious allegations of purposeful wrong-doing by others, made this very night, on this very board, why should I (or anyone) lift a finger to investigate any other claim you might make, or have made previously? Do you not see that the only thing a man has is his reputation?
I had seen yours was spotty, based on the words of others, but decided to treat you as a clean sheet, based only on what you do and say here. That seems tome to be a pretty square deal. One that it appears, you are going to fall short on. Pity, if your methods really did have some value, becasue it won’t be known to me — after having seen your behavior in the last few minutes, I am not inclined to believe ANYTHING you say, even if there were data — which of course, so far there is not. It makes me begin to wonder what you are really after in your voluminous and numerous posts here, frankly.
Why not just back up your own claims ,and let’s move forward? It’s a simple matter, really.
May 25th, 2009 at 3:55 pm
I’ll continue to report accurately what the historical data says re safe withdrawal rates, Caring Soul.
That one is non-negotiable.
Rob
May 25th, 2009 at 3:56 pm
Bennett: “The Passive Investing dogmatists say that investing is a 100 percent raitonal [sic] endeavor.”
Can you provide a reference for this claim, too, please?
Thanks!
May 25th, 2009 at 4:02 pm
I am confused as to the “out of the blue” nature of reply #89, Rob.
Have I asked you to do otherwise?
If I did not sense an intense desire to get heard on something you think is vital, I would (on the basis of that alone, not to mention the prior dialog) just dismiss you as another internet oddity. But I simply am not going to invest more energy into trying to discuss with you unless and until we can get to some basis of communication. All relationships are built on trust, Rob. It seems to me that you (for reasons I can’t understand) want to start not only at zero, but even below zero. If your case, your ’school’, your message is really as vital as you claim, would you not want to preserve your credibility? Right here in this thread, less sanguine people would have stopped chatting with you already, and just written you off. I like to think I am more patient than most, but you stress even my normally calm disposition with these oddities.
May 25th, 2009 at 4:18 pm
Reading the material above reveals a “dialog” typical of those involving Mr. Bennett. He makes sweeping, verbose posts. When challenged on details regarding his financial plans, he replies with thousands of words but never actually provides new information to support his claims.
When challenges continue, he engages in spectacular and incredible personal attacks. He claims death threats have been make, the record has been doctored, etc. When challenged to provide proof of any of these, he simply continues with extremely wordy posts that provide no evidence.
They do provide humor, of course. I snorted when he claimed that posts had been doctored, but when asked how, he replied he hadn’t read them!!!!!
What is this? Does he do his social communications the same way he does his financial prognostications…with a divining rod?
May 25th, 2009 at 4:25 pm
“The quickest way to do so would be to go to the Bogleheads.org board or the Vanguard Diehards board, put up a post asking for comment on The Stock-Return Predictor or the Retirement Risk Evaluator, and see what happens.”
As we have established the Bogleheads board was created expressly to be free of Rob and his need to “hocus threads” and he is also banned at the Vanguard Diehards board. But Rob just can’t stand that there are two islands on the internet where people can express opinions other than his so he is always trying to find some gullible newbie to spam those forums for him with links to his site.
“The fact that there was doctoring is obvious to any reasonable person.”
Once again showing that if you don’t agree with Rob’s opinion, then you are not reasonable, not rational, or more simply, a goon. Is it any wonder that the FBI didn’t take up Rob’s cause of banishing “goons” from the internet?
May 25th, 2009 at 4:28 pm
Bennett: “The Passive Investing dogmatists say that investing is a 100 percent raitonal [sic] endeavor.” Can you provide a reference for this claim, too, please?
One of the most common Passive Investing claims is that “you can’t beat the market.”
For this to be so, the market price must be rational.
If the market price is not rational, then all you need to do to beat the market is to use a rational price in setting your stock allocation (investing more heavily in stocks when the market price is irrationally low and less heavily in stocks when the market price is irrationally high). That’s Rational Investing (the alternative to Passive Investing).
Passive Investors assume rational markets. Rational Investors invest in such a way as to bring about rational markets.
Market are not inherently rational. For markets to become rational, we all must become aware of the extent to which the market has become irrational and invest in such a way as to counter the irrational pricing.
Rob
May 25th, 2009 at 4:33 pm
A couple of things:
1. I am not taking sides.
2. Rob, passive investors do not assume rational markets. These are two different issues. Efficient markets and passive investing are not related, though there is some overlap when discussing the two concepts. Also, passive investing does not claim that you can’t beat the market. It just claims that it’s difficult to do so consistently, especially when you factor in fees and expenses. Every passive investor I know is well-aware of Warren Buffett, who has managed to beat the market handsomely.
3. User Ilum1 (in comment #92) is posting from the same IP address as the user who posted as JWR1945 in the previous two comments, and is therefor presumably the same individual.
4. Don’t you folks have anything better to do on a holiday!
You may now resume your discussion.
May 25th, 2009 at 5:01 pm
passive investing does not claim that you can’t beat the market.
Thanks for joining in the discussion, J.D.
I have heard Passive Investing advocates make precisely that claim on numerous occasions. Valuation-Informed Indexing is rooted in a belief that investors who look at valuations can beat the market. That’s the entire reason why it is controversial (it rejects the Passive Investing claim arguing otherwise). If Passives agree that it is possible to beat the market, why is there any hoo-hah about any of this? Why don’t we all just agree that it would be a good thing to learn as much as possible about how best to beat the market?
It just claims that it’s difficult to do so consistently, especially when you factor in fees and expenses.
To “beat the market” in a meaningful sense you obviously need to be able to do so consistently and after taking into account fees and expenses. If you can’t do it after taking into effect fees and expenses, you aren’t really beating the market, are you? So I think we are back to the starting point. The Passives are saying that you can’t beat the market (all factors considered) and the Rationals are saying that you can beat the market (all factors considered).
The historical stock-return data shows that you can beat the market if you engage in long-term timing. The data is public information. So this is a claim that can be checked.
The data shows that investors who adjust their stock allocations downward when prices go to insanely high levels and upward when prices go to insanely low levels beat those who practice rebalancing (Passive Investing) by wide margins in the long run.
This is really the entire point under dispute — whether the market price is always rational or not, whether it is possible to beat the market or not.
If the market price is always rational, the Old School retirement studies make sense. The methodology used in the studies follows logicially from a belief that the market price is always rational and that it is not possible to know in advance when the long-term market return is likely going to be remarkably low or high.
If it is possible to know in advance where the long-term market price is going, it does not make sense to say that the safe withdrawal rate is a constant number (this is what the Old School studies say).
The entire debate revolves around this question. Are long-term returns to a large extent predictable? If yes, then it obviously does not make sense to be going with the same stock allocation at all times; you want to be going with a higher stock allocation when the long-term return is likely to be good than you go with when the long-term return is likely to be poor. And, if long-term returns are largely predictable, the Old School retirement studies cannot be right. An adjustment is needed for the long-term return that applies. That is, an adjustment is needed for the valuation level that applies on the day the retirement begins.
Rob
May 25th, 2009 at 5:05 pm
Every passive investor I know is well-aware of Warren Buffett, who has managed to beat the market handsomely.
They are all aware of him. But many dismiss his record as luck or else claim that the typical middle-class investor cannot replicate his success.
I agree that the typical investor cannot pick stocks as effectively as Buffett. But, in the days of indexing, you don’t have to!
If you change your stock allocation in response to big price changes, you have incorporated Buffett’s key insight into your investment plan without having to pick a single stock effectively. Valuation-Informed Indexers obtain the best of Buffett (a value focus) combine with the best of Buffett (a simplicity focus). The two go together like chocolate and peanut butter!
Rob
May 25th, 2009 at 5:07 pm
Don’t you folks have anything better to do on a holiday!
It’s a lot worse than even those words suggest, J.D. I haven’t been able to find anything better to do for seven years running!
Yowsa!
What was it that Bruce Springstein used to holler out when he would hit the ground after jumping into the air at those big stadium concerns –I’m A Slave to Safe WIthdrawal Rates!
Rob
May 25th, 2009 at 5:08 pm
“One of the most common Passive Investing claims is that “you can’t beat the market.””
Not true. Someone always beats the market. The market always beats someone. The average is simply the market. The difficulty is determining the winners prior to investing.
“For this to be so, the market price must be rational.”
Not true. What does rational have to do with whether you do better or worse than it. Rather it says that it is very difficult for any individual to get the information that would make you consistently do better than the market. Why? because word gets around and everyone else wants to do it too. Every bit of secret investing sauce simply becomes part of the market. If you could ever define your investing idea to the point where someone could implement it, it too would become part of the market. If it became dominant then you’d be trying to beat yourself.
“If the market price is not rational, then all you need to do to beat the market is to use a rational price in setting your stock allocation (investing more heavily in stocks when the market price is irrationally low and less heavily in stocks when the market price is irrationally high).”
That has nothing to do with rationality. There are times with growth, momentum and value strategies all beat the market. For example, from the 90s to 2000, growth and momentum strategies did MUCH better than the market. That’s easy to see now. The harder part was knowing in 1990.
May 25th, 2009 at 5:21 pm
If you want to invest like Buffet, no one is stopping you. There are dozens of mutual funds based on his style and there are websites that screen individual stocks according to his style. Or simply buy Berkshire Hathaway. Unlike Bennett, Buffet’s style is documented and has actual results. Bennett talks a lot more the Buffet but people listen to Buffet because he has the results and not just talk.
“I agree that the typical investor cannot pick stocks as effectively as Buffett. But, in the days of indexing, you don’t have to!”
Buffett doesn’t jump in and out of index funds. Buffet takes control of many of the companies that he buys. If you want the full Buffet experience including Buffet’s control of the companies he buys, then you should just buy Berkshire and let him do his thing. Problem solved.