Investing: The Stock Investing Truths No One Can Talk About

Investing--The New Rules

Investors should always be searching for the truth. Pontius Pilate famously asked “What is truth?” Fortunately, the Roman prefect of Judaea didn’t have to deal with the Buy-and-Hold investment strategy or the safe withdrawal rate tables. But Rob Bennett does have to deal with them–and deal with them he does in this week’s Investing–New Rules.

I often use this space to complain about something I call “The Ban on Honest Posting” on how valuations affect long-term stock returns. Lots of good and smart people think I am nuts. People talk on discussion boards and blogs about valuations all the time. What I am saying is obviously not so.

And yet I continue to say that it is so.

It’s true that people talk about valuations all the time. All of the investing ideas that I write about here are rooted in the research of Yale Economics Professor Robert Shiller. Shiller’s book (Irrational Exuberance) was a positively reviewed bestseller. This suggests that free speech is a reality in this field.

To appreciate the problem that I am pointing to, you need to listen for the dog that doesn’t bark. My copy of Shiller’s book is 233 pages long. The book explains why the conventional thinking on investing (the thinking behind Buy-and-Hold) is not supported either by logic or by the 140 years of historical return data. Would you like to take a guess as to how many of those pages are used to offer investors practical information on how to set their stock allocations so that they will not suffer the terrifying losses that have always followed when large numbers of investors came to believe Buy-and-Hold can work?

The answer is —

Not one.

You can say that valuations matter. No one cares. Claims that valuations matter do not threaten The Stock-Selling Industry’s ability to promote Buy-and-Hold. Claims that valuations matter do not offer interested investors any actionable alternative to all the Get Rich Quick mumbo jumbo that passes as investment advice today.

You can say that valuations matter. You cannot say that those for whom an 80 percent stock allocation made perfect sense when stock prices were reasonable should have dropped down to a 20 percent stock allocation when prices rose to insanely dangerous levels because the risks of owning stocks is so much greater when prices are insanely high. That’s the kind of statement that hurts The Stock-Selling Industry in the pocketbook.

A recent monster thread (149 comments!) at my blog makes the point in compelling fashion. For years, the “experts” denied that there was anything wrong with the Old School retirement studies. No one does that anymore. Now that the millions of middle-class people who were taken in by these studies are in the process of watching their retirements go under, a new tactic has become popular. The “experts” now acknowledge that the studies get the numbers wrong but argue that there is no need to correct them.

You read that right.

The blog entry points to an interview with California Financial Planner Bill Bengen in which Bill acknowledges that retirements constructed pursuant to his study may well go bust because he failed to include an adjustment for valuations in the study. But he notes that it is possible that the retirements might not fail (this is true — the analytically valid New School retirement studies show that there is a one in three chance that these retirements will survive) and makes clear that he has no intent of correcting his study or of notifying the people who were taken in by the false claims put forward in it.

Wade Pfau, Associate Professor of Economics at the National Graduate Institute for Policy Studies and author of the most important investment research published since Shiller’s breakthrough work of the early 1980s, commented that my treatment of Bengen was “too harsh.” I pointed out that millions of middle-class people will likely be suffering one of the worst life setbacks imaginable if these studies are not promptly corrected. That argument persuaded precisely one of the people participating on the thread –a fellow posting under the name “Rob Bennett.”

If you have limited time to direct to this matter, please skip to the bottom of the thread. In Comment 143, I am told (by a poster named “Arty” — a regular visitor to my site and a smart, constructive poster) that: “There are good minds here who, in their various ways, are trying to help you with this… It seems you confuse adjustments to manner, persuasion, tone and rhetorical adeptness with ‘burying things’ or utter compromises.” The idea here is that, if I would just change my style of saying things, I could say what I pleased without being met with death threats and smear campaigns and board bannings.

I point out that my aim is to get the Old School SWR studies corrected before they do more harm and say that, so long as it is viewed as bad style for me to make that point, it would be dishonest of me to post pursuant to the style rules today viewed as appropriate by the defenders of the Old School studies and of the Buy-and-Hold Model in general. At that point the conversation dies out. There is nothing left for anyone on either side of the table to say.

I don’t entirely believe that this happened either.

All I can tell you is that I checked what appeared on my computer screen five times before writing this column just to be sure and I am reporting to you accurately what I saw appear before my eyes when I opened up that thread. If it says something different when you look at it, I hope you will be kind enough to let me know what adjustments I need to make to my internet browser to get my computer working properly again.

by Rob Bennett
images: dbkp file;

Rob Bennett writes about how to obtain investor confidence that lasts. His bio is here. And please don’t even think about failing to read these Important Cautionary Words.

1) Bear Market Analysis

http://www.passionsaving.com/bear-market-analysis.html

2) Bio

http://knol.google.com/k/rob-bennett/rob-bennett/1y5zzbysw7pgd/4#

3) Important Cautionary Words

http://www.passionsaving.com/disclaimer.html

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