Set forth below is a comment that I posted in response to a comment by a community member named “What” on the discussion thread for the blog entry titled It Breaks My Heart When People Don’t Comment on My Investing Posts.
All you did was point out some underlying assumptions and limitations of the study that any educated reader already knew and understood.
No.
I was at the Motley Fool’s Retire Early board in the years when people were putting up threads on a daily basis about Greaney’s safe withdrawal rate study and how they were using it to plan their retirements. These were people who possessed enough intelligence and self-discipline to be able to accumulate the assets needed to retire in their 50s or in some cases even in their 40s (my recollection is that Greaney himself retired in his early 40s). Are you telling me that these people were not “educated” re personal finance issues?
They were plenty educated, What. They were emotionally addicted to Buy-and-Hold, which means they were emotionally addicted to Get Rich Quick. An emotional addiction to a Get Rich Quick strategy cancels out the benefits of any education or intelligence you possess. Once you become emotionally addicted to a Get Rich Quick approach, all of your mental energies are directed to coming up with rationalizations for why it might all turn out different this time and this might be the first time in history when Get Rich Quick actually pays off in the long term.
Bogle doesn’t lack education, What. Bernstein doesn’t lack education. Swedroe doesn’t lack educations. Burns doesn’t lack education. What these people lack is an appreciation of the dangers of Get Rich Quick investing strategies and a lack of appreciation that a belief that it is not necessary to change your stock allocation in response to big price swings transforms any investment strategy you are following into a Get Rich Quick strategy. These people are blind to the realities of stock investing not because they lack intellect but because their emotional attachment to Buy-and-Hold renders them unable to let in to their consciousness all data points revealing the dangers of this strategy. These are highly intelligent and highly educated people suffering from cognitive dissonance on all topics relating to stock investing.
If the people who developed and promoted these studies had known that they were going to cause millions of people to suffer failed retirements, they never would have developed them or promoted them in the first place. Nothing could be more obvious to any halfway reasonable person. If you don’t see that causing millions of failed retirements is a bad thing, you either are suffering from cognitive dissonance yourself or are a psychopath. There is no third explanation of the words you put forward in this comment, What.
Rob
Set forth below is the text of a comment that I put today to a discussion thread at the Free Money Finance blog on the topic of the merits or lack thereof of market timing:
Thanks for your kind words and thanks for indeed adding some thoughts that those listening in here very much need to take into consideration, MBTN There’s no question (at least in my mind, but I believe that I probably speak for a lot of people re this one) that you are making an important point.
Stock prices can be affected by either rational/economic factors or by irrational/emotional factors. I think we are in agreement re that. And I think we are also in agreement in a belief that we can never know for certain which it is that is having the dominant effect. So we don’t know everything that we would like to know.
The question is — What do we do about this unfortunate reality? There is no neutral ground. We either report the nominal stock price as if it is real (which is what we have been doing during the Buy-and-Hold Era). Or we let people know that there is good reason (but not 100 percent compelling evidence) that the nominal price is heavily affected by emotional inputs. The key message that I want to get across is that THERE IS NO NEUTRAL GROUND. Both of the two possible choices (ignoring the emotional inputs that we believe are there or incorporating the emotional inputs into a price adjustment) carry risks.
Consider the situation in January 2000. The P/E10 valuation metric (the metric used by most of the people who are best informed about valuation questions) indicated that stocks were priced at three times fair value. Say that there is an individual who has a nominal portfolio value of $600,000. If we ignore valuations (which is what we did during the Buy-and-Hold Era), we send him a portfolio statement saying that he possesses $600,000 in stock wealth. If we incorporate a valuation adjustment into our reporting of his stock value, we send him a portfolio statement saying that he possesses $200,000 in stock wealth.
You are right when you say that we do not know with certainty that the true metaphysical value of his portfolio is $200,000. But I am right that we do not know with certainty that the true metaphysical value of his portfolio is $600,000. And getting the number wrong in either direction is going to have horrible consequences for the economy. If you tell someone that he possesses $600,000 in wealth when he really possesses only $200,000, he is going to spend money on houses and cars and vacations that he cannot afford to spend. Then a few years later he is going to regret having overspent for all those years and is going to pull back on his spending and cause an economic crisis. I believe strongly that the crisis we are living through today is the consequence of 30 years of promotion of Buy-and-Hold Investing.
I think that a lot of people experience unease with the thought of putting any number on that portfolio statement other than 600,000. In people’s minds, the $600,000 is a hard number while the $200,000 number is just sort of a guess. So people say “it’s okay to mention that there might be some overvaluation present, but you have to report the $600,000 number on the portfolio statement.” This is where I get off the Buy-and-Hold reservation.
I acknowledge that the $200,000 number is not 100 percent solid. If you asked informed people, some would say a better number is $250,000 and some would say a better number is $150,000. But I really don’t think that there is any reasonable person who would say that the best number is $600,000, that there was zero overvaluation present in the market in January 2000. In January 2000 we were reporting numbers that we all knew to be wildly wrong on millions of portfolio statements because we were not as a society willing to look at these difficult questions squarely and come up with REASONABLE AND BALANCED solutions to them.
My claim is not that there is a perfect way to do things and that the Buy-and-Holders won’t go along. My claim is that there is a better way than the Buy-and-Hold way and that the Buy-and-Holders are using a demand for absolute 100 percent perfection that they apply only to non-Buy-and-Hold approaches get in the way of consideration of approaches that are better than Buy-and-Hold but something short of perfect. Using $600,000 as the portfolio number was no more “right” than using $200,000 (my personal view is that it was far less right). So why did all of our portfolios use the $600,000 number? Why was there not even a DEBATE about this at the time?
The consequences of avoiding the debate are huge. I discussed above the retirement question. I have a retirement calculator that includes a valuation adjustment. If this debate were proceeding as it should, that calculator would be getting linked at thousands of web sites where people could check it out and DECIDE FOR THEMSElVES whether they want to use valuation-adjusted numbers in planning their retirements or not. The reality is that the calculator is linked at only a tiny number of sites. Not because it does not add something important to the debate. Because Buy-and-Holders feel that it makes them look bad for people to see how far off their numbers turn out to be if a valuation adjustment is employed.
When there is not even a debate about these questions, there is no brake on the car. People have a natural tendency to want to see stocks overvalued — overvaluation makes for bigger numbers on our portfolio statements and we all want to be prepared for retirement as soon as possible. All humans have an inclination for self-deception and the only thing that can rein this in is a voicing of the dangers. But for so long as we do not permit the debate (because it embarrasses Buy-and-Holders), there can be no voicing of the dangers! And the worse the problem goes, the greater the embarrassment becomes!
We left the market no way to correct prices except through a huge crash. We did that by cutting off the only way that overvaluation steam can be released outside of a crash — HONEST and REASONED DISCUSSION of the risks of overvaluation. I am proposing a sea change in how investing analysis is performed. I am NOT disputing the point you are making, MBTN. I see it as an important and legitimate point and I consider you a friend for being willing to go to the trouble to advance it here. The sea change that I am proposing is in asking/insisting that in future days the Buy-and-Holders extend that same hand of friendship to Valuation-Informed Indexers, that we all think of each other as friends engaged in a mutual effort to overcome our personal flaws and come to the best overall answers we can come to.
I am biased. I have been invested solely in super-safe asset classes for 14 years. That inevitably biases me against stocks. But the Buy-and-Holders are also inevitably biased in favor of stocks. If we want our boards and blogs to work, we need to acknowledge these biases and make an effort to work together to give ourselves and others the best possible discussions of the issues possible. When all of the people on one side of the table are not participating because it has been made clear to them that their comments will be dismissed as “rude” if they state their honest views, the discussions become misleading and dangerous and irresponsible. None of us really want that. So we all need to make a greater effort to try to put ourselves in the shoes of the other fellow and treat him as we would want to be treated if we held his viewpoint.
That’s my strongly held belief re all this, in any event. It is possible that I am wrong on the substance. I am certainly sincere in what I am saying (my record shows this beyond any reasonable doubt whatsoever). Again, I need to say that I am grateful to FMF for providing the forum for this discussion and I offer to do anything that it is in my power to do to see that it proceeds to a good place for every single person involved in it or affected by it.
Rob