You may want to read my post:

http://investorjunkie.com/the-4-percent-rule-to-investing

There are alternatives to the traditionally “safe” investments that are currently earning next to nothing.

I agree that there is no question. He simply reported the disagreement. And when you replied with gigantic messages, his response was that “unfortunately” they were an example of what he meant by “catastrophically unproductive”. I agree with him. You can’t make up for a lack of data with an unlimited number of words. I’ll waste no more of Frugal Dad’s bandwidth on this deteriorated blog entry.

I disagree with you that there is something “problematic” with taking advantage of the fact that valuations matter, Simon. But I also think that you have your finger on a point of huge importance in the words quoted above.

Warren Buffett is the most effective investor alive. If we could all copy him, we should all copy him. We cannot. But Bogle’s Indexing Revolution gives us all the opportunity to come much closer to doing so than we imagined possible in earlier days.

Buffett practices Value Investing. That is the opposite of Buy-and-Hold. With Buy-and-Hold, you ignore the value proposition of stocks, you invest heavily in stocks regardless of whether the long-term value proposition is strong or weak. Buffett analyzes the value proposition. He puts his money only in strong value propositions and protects himself by not putting any money into poor value propositions.

Buffett’s approach is extremely complicated. That’s the rub.

But we no longer need to go through all the work that Bogle goes through to insure that our stock purchases reflect strong value propositions. With indexes available to us, all that we need to know to know the long-term value propositions of our stock purchases is the valuation level that applies at the given time to a broad index. By looking at that information, we avoid 80 percent of the risks of stock investing that apply for those who are unwilling to question Buy-and-Hold.

That’s what I propose. That’s Valuation-Informed Indexing.

There’s nothing fancy about it. There’s nothing complicated about it. There’s nothing tricky about it. It’s pure common sense. Why wasn’t it discovered a long, long time ago? It was! Benjamin Graham (Buffett’s mentor) advocated the same approach back in the 1930s. The trouble was that, in Graham’s day, index funds were not available. So the only way to follow this approach was to engage in the extensive research that Buffett and his followers need to engage in. With the availability of index funds, all investors can enjoy the high risk and the low returns of Value Investors without having to engage in the extensive research that has in the past been required to obtain such benefits.

There is no excuse not to let people know about these opportunities, Simon.

Bennett claims the fact that pretty much the entire world disagrees with him is puzzling

There are of course hundreds of thousands of people practicing informed investing strategies today, Simon. If you go to the Bogleheads board (recommended yesterday by Anti-Crank), you will see fine posters like CJKing talk about these strategies regularly. There are many others who have explored them in great depth and who were banned from the board for doing so. And there are numerous experts who have endorsed these ideas: (1) Rob Arnott; (2) Cliff Asness; (3) John Walter Russell; (4) Andrew Smithers; (5) William Bernstein; (6) Jeremy Grantham; (7) Ed Easterling; (8) John Mauldin; (9) Robert Shiller; and on and on.

Here is a link to an article at my site that provides links to 20 studies showing that these ideas work:

http://www.passionsaving.com/buy-and-hold-is-dead-part-one.html

I am some guy who posts stuff on the internet, Simon. Most of the ideas that I write about are not ideas that I discovered on my own (there are a few exceptions). Most are ideas that I picked up from others either by doing research on the internet or by talking things over with my fellow community members on discussion boards and blogs. There is a wealth of evidence in the record today that Buy-and-Hold is the investing model of the past and that Rational Investing is the investing model of the future. The idea that seems to have formed in your head that Buy-and-Hold has in some sense been “proven” is the source of the entire disconnect. The now-dominant model has by no mean been proven.

Norbert Schenkler is a critic of mine (he banned me from a discussion board that he owns). But Norbert to his credit once went to the trouble to see what the historical data actually says about Valuation-Informed Indexing. His conclusion was that: “Valuation-Informed Indexing is pretty clearly superior everywhere, although there are a few occasions ending in the last half of the 90s, i.e. starting in the last half of the 60s, where Buy-and-Hold has a small advantage [Note: These words were written prior to the September 2008 stock crash -- they no longer apply]. Recent differences appear to be quite minor, although I would point out that an extra 1/2% a year over 30 years is not chicken feed.”

It’s not just me, Simon. There have been lots of people who have expressed grave doubts about Buy-and-Hold going back to the first days when it was put forward. More and more are coming around all the time to the view that this “strategy” can never work in the real world. All personal finance blogs need to be exploring these questions in a positive and constructive spirit, in my assessment.

Rob

I am happy to proceed in any way in which you would like to proceed, Frugal Dad. I have sent you e-mails on these questions before and not received responses. My goal is just to get the ideas out before people. I am happy to do it in e-mails or telephone calls or blog comments or private meetings or whatever. What matters to me is that we get about the business of opening the internet to honest posting on investment topics and thereby work our way out of this investment crisis.

As for the length of the comments, my entire message can be reduced to five words — Valuations Affect Long-Term Returns.

Anyone who accepts that as true (I don’t know of anyone who does not) and who thinks through the implications understands that Buy-and-Hold can never work. If valuations affect long-term returns, the value proposition of stocks is obviously changing with each change in valuations. It follows that sticking with the same allocation in the face of big price changes is an act of insanity. It is not only that it has never worked in the historical record. It is that it is not even possible for the rational human mind to imagine any circumstance in which it ever could work.

It’s that simple, Frugal Dad. Five words.

The problem is that people have been hearing the opposite message for 30 years. Over and over and over and over again. It shocks people to hear that Buy-and-Hold doesn’t work. I am not responsible for that. I have never promoted Buy-and-Hold. All that I am doing is reporting the realities. There shouldn’t be anything even a little bit “controversial” about anything that I say. The controversy stems solely from the fact that what I say is 100 percent opposed to the conventional investing wisdom of the past 30 years.

The result of our all hearing the wrong messages for 30 years running is that we are all terribly confused about all sorts of points. I can’t just make a simple point and expect everyone to get it. People have come to sincerely believe in all sorts of “myths and urban legends” and those mistaken beliefs trip them up. Given the importance of these questions, I believe that the responsible thing to do is to make an effort to be as clear as possible, to go through each step of the logic chain as slowly and as carefully as possible. That’s why I post long. I want people to understand what is being said despite the fact that they have taken in so many contrary claims for so many years now.

If you have any ideas for better ways to proceed, I an entirely open to them, Frugal Dad. The reality today is that there are a good number who are looking for new and better ideas. I have spoken to a large enough number of such people to know with certainty that there are a lot of such people out there. There also are a good number who are intensely opposed to the idea of these discussions being permitted. That is a stone cold fact for which there is a wealth of supporting evidence at this time.

How do we proceed?

It seems to me that we must go forward. But it also seems to me that we must take into consideration the sensitivities of those who find some of these ideas shocking and offensive.

My thought is that the way to proceed is to combine two principles — honesty and love. I engaged in extensive discussions of these questions with a friend of mine (Brian) back in the late 1990s. We used to meet for lunch a couple of times per week and discuss these questions in great depth. Brian often said that I was “nuts” but he always did so in a tone of friendship and affection and respect. So there was of course no problem. Today Brian believes that I was right all along (it was the stock crash that brought him on board).

I believe that it is this combination of honesty and love that is the answer. I strongly oppose Buy-and-Hold Investing. But I also feel great respect for many of the smart and good people who believe in Buy-and-Hold. I separate the idea (which I hate) from the people who believe in it (whom I love). I believe that the answer to our current economic troubles lies in doing all that we can to make this Love/Honesty Approach the common approach to these questions.

I believe that we need further discussion of these questions, not just here but at lots of places in the Personal Finance Blogosphere. But I also believe that the discussions will tear us apart unless we go into them with a sincere desire to insure that the discussions are conducted in a warm and friendly environment. On the intellectual points, people should of course be encouraged to express any skepticism they sincerely feel. That’s how we learn. But we need to adopt strong limits on how much of the nasty personal stuff we will tolerate. That stuff hurts us and sends our efforts backwards every time we show a bit of unfortunate tolerance for it.

My strong hunch is that there are people reading these words who would like to ask questions about these ideas but who today are holding back from doing so because they fear what will be said about them if they give voice to the concerns that are truly on their minds. People don’t want to be made to feel that they are dumb for asking a question. We need to protect those people from abusive posting. We of course at the same time need to encourage those with genuine doubts about the new ideas to give full expression to those doubts (but in a friendly and warm and civil way).

Those are my thoughts re the best way to proceed at this point, in any event.

Rob

Stocks are a wonderful asset class, Carlyle. That’s the entire explanation.

When The Stock-Selling Industry shows you charts purporting to report on the returns provided by these funds, they are not reporting the returns earned by investors. They are reporting the returns earned by the funds. Those are two very different things.

Look at what happened in the 1929 crash. Stock prices fell by 89 percent, 80 percent in real terms. How many middle-class investors do you imagine remained fully invested after an 80 percent price drop? I think it would be fair to say that the answer is: “a number closely approaching zero.”

Since the vast majority of middle-class people cannot live through the devastating losses always associated with Buy-and-Hold Investing (Buy-and-Hold was extremely popular in the 1920s), virtually no living person earns the returns reported in the sorts of charts you are referring to. The funds earn those returns on paper. Those are the returns that apply in a theoretical sense when the “analysis” is set up in the way in which The Stock-Selling Industry likes to set things up. But there are few or no real live human beings who get to use those sorts of returns to pay the electric bill or the health bill or the mortgage. The sorts of charts you are pointing to are do not report real-life stuff. That’s fantasy world stuff. Those charts are promotional tools developed in the marketing departments of the big fund companies.

That said. those charts tell us something important. They tell us that informed investing in stocks is the road to financial freedom for middle-class workers. We cannot get those returns by following Buy-and-Hold strategies. But we should want to be figuring out a way to obtain those sorts of returns. If we could figure out a way to obtain those returns in the real world, we could all retire many years sooner than if we invested in super-safe asset classes like certificates of deposit.

Can it be done?

Easily.

There is only one simple secret that needs to be kept always in mind. Never, never, never give in to the emotional impulse to buy into what The Stock-Selling Industry and its Marketing Machine is telling you about Buy-and-Hold Investing. The secret to buying stock is to follow the same exact practice as the one you follow when buying a house or a car or a comic book or a banana — always look at price, never practice Buy-and-Hold.

The magic of looking at price is that you avoid those 80 percent price drops that cause you to lose out on the benefits of decades of saving efforts. Stock crashes are not random events. We have never seen a price crash of any great consequence starting from a time of low or moderate prices. We have never gone to the sorts of prices that applied from 1996 through 2008 and not experienced a huge price crash. Anyone who loses his retirement to a price crash does so voluntarily. Anyone who loses his retirement to a price crash does so as the result of giving in to the emotional impulse to participate in the Get Rich Quick scheme that is known by the name of “Buy-and-Hold Investing.”

Buy stocks heavily only when it makes sense to buy stocks heavily and you really will enjoy the sorts of returns reported in those charts. Buy stocks foolishly (according to the Buy-and-Hold marketing slogans) and you will spend your life saving what you need for retirement and then losing most of it and then starting over again at a far more advanced age.

The root problem is that the financial interests of The Stock-Selling Industry are directly opposed to the financial interests of the middle-class investor. The middle-class investor wants to see good returns with low risk. The Stock-Selling Industry wants to sell product at whatever price possible. So long as you tune out the industry “experts,” you are home free. For the investor willing to tune out the marketing slogans, stocks really do offer great returns at minimal risk.

In the days before the internet, most of us had no choice but to accept the investing “advice” of The Stock-Selling Industry as gospel. We did not have easy access to better-informed takes. With the growth of numerous blogs that permit us to share with each other what works rather than what sells, this is no longer so. Starting here, starting now, we could begin sharing with each other what we have learned and thereby change the history of stock investing.

Most of us who post to blogs are not employed by The Stock-Selling Industry. We are free to tell people what really works and to point out the trickery used in the various marketing materials and all this sort of thing. I see this as a golden opportunity to change the world in an extremely positive way. I’d like to see hundreds of influential blogs opened to honest posting on investment topics. Of course we need to start with one and thereby get the ball rolling in the right direction.

The idea of permitting honest posting on investment topics is something that has not been tried before. It is something new and exciting. I see huge potential in the idea.

Rob

To me, that makes perfect sense, is not magic, but neither is he the wizard able to see the future that some tout him as. He is a sound businessman who now has a ton of resources and experience and gravitas at his disposal.

It frankly, IMHO, also has little to no relevance for the average investor with a regular job and a desire to retire early.

Rob, I admire your passion, but may I suggest a more concise approach to getting your point across, and a more private way of soliciting help from others to meet that goal?

I want to keep the “community feel” alive and well here at Frugal Dad, and the best way to do that is to continue with the idea that all ideas are good ideas, because different things work for different people (and their specific situations). After writing and interacting with others the last few years, I find myself to be much less “black and white” about many of these topics than I was early on. I’m still opinionated, and have my own set of beliefs, but I’m not out to convert the rest of the world into thinking like I do.

Thanks to all of you for participating with passion – but let’s try to keep it all friendly in the interest of civil discourse.

“I’ve thought about it and thought about it and thought about it and the best explanation that I have come up with is cognitive dissonance.”

How about another round of thinking, Rob, but this time guided by some helpful ideas, okay?

– Valuations matter. True. And you sometimes do admit that you have had no one disagree, so why you keep claiming they do is beyond me. But let’s go on…

– Doing something about the fact valuations matter is problematic. Arguably*, Buffett seems to have a method to deal with this, but anyone else? Not so much.

– The market tends to return six or more percent per year over time. Most people’s horizons are sufficiently long that they feel (and data supports) that capturing this return through low cost broadly diversified index funds is realistic.

– It is axiomatic that you should only take the risk required to achieve your goal, and no more.

– It is largely believed (but often argued) that timing the market or picking individual stocks is a fool’s errand for the layman.

The best thought exercise I can offer you if after all that thinking, thinking, thinking, you are still interested in resolving the puzzle of why you alone appear to disagree with the world is to ask you to consider this: When listening to the radio, there is always a certain amount of static (noise) along with the music (signal). The long term return of the market is the music. Price fluctuations up and down on temporal feelings or events are the noise. Most people seem to be intently trying to find and capture the music. You, on the other hand, seem intensely curious about what others consider noise.

Rob, many great breakthroughs have been made by ignoring the mainstream, following your muse, and discarding conventional wisdom. But here is the rub: The laws of science and physics and simple arithmetic always apply. They are immutable. The difference, then, between cranks and visionaries might be thought of as:

– Visionaries discard conventional wisdom, but never logic and science and math.

– Cranks discard conventional wisdom, and also refuse to agree that their ‘new’ theories must (in order to be useful and adopted) not only discard the current orthodoxy, but must also conform with the known laws of the universe.

I am sorry to say that your own thinking and theories do not impugn today’s best information in any way, shape, or form. Any idea you have with merit was already incorporated into the body of knowledge long ago. Anything you tout as novel is found to be simply unsupportable. I’d give you a friendly suggestion that you pack it in, and try another field, truly. Something where you can use your hands, ideally.

No. Bogle is part of The Stock-Selling Industry. He is the founder of one of the biggest mutual funds, for heaven’s sake. His company makes money through a somewhat different business model than its competitors but it is of course also run with the aim of selling product and making money.

Any fund participating in “lots of turnover” is following a strategy of short-term timing. The historical data shows that that never works.

Any fund following Buy-and-Hold is failing to practice long-term timing. The historical data also shows that that never works.

Your comment suggests that the only two options open to stock investors is to lose lots of money by engaging in short-term timing or to lose lots of money by failing to take price into account when setting their stock allocations. These are obviously not the only two choices open to the informed investor.

The entire record of stock performance going back to 1870 shows that what works is Valuation-Informed Indexing. You avoid short-term timing because it doesn’t work but you always practice long-term timing so that your nest egg doesn’t get destroyed in the stock crashes that inevitably follow time-periods when Buy-and-Hold Investing (ignoring price) becomes popular.

You are not describing the two alternative possibilities available to us, DocWal. You are describing the two extremes. My belief is that the goal of the middle-class investor should be to avoid the extremes. We need to tune out both those who advocate short-term timing and those who advocate Buy-and-Hold. That’s Rational Investing.

In the world in which I live, there is CLEARLY no taboo against discussing each and every possible approach to investing. I think Mr. Bennett lives in a different universe than me. I wonder if there’s anyone there with him.

Here is a link to an article at my site that quotes 101 community members in the Retire Early and Indexing discussion-board communities who express a desire that honest posting on what the academic research of the past 30 years has taught us about the dangers of Buy-and-Hold be permitted on all of our boards:

http://www.passionsaving.com/investing-discussion-boards.html

Sample Comment: Rob’s da man! Never in the history of the Diehards forum has one poster, always making civil and well thought-out posts, managed to irritate so many without anyone being able to articulate a good reason as to why.

Lots of middle-class investors have expressed anguish over the financial ruin caused by the reckless promotion of Buy-and-Hold, DocWal. The trouble has been that there is another group that intensely opposes the idea. I think it would be fair to characterize the “arguments” of this group as defensive in the extreme.

Those who have followed Buy-and-Hold strategies and/or recommended them to others are feeling real pain today. I get that and I am of course sympathetic. The question is — What is the most responsible course of action given the realities? The pain and anger and shame that many of us are feeling are not going to go away through a collective decision to continue to duck the important questions. Ducking the important questions for the past 28 years is what got us into this mess in the first place.

I advocate a policy of dealing with the sensitive issues in a spirit of charity for all involved. The goal here is a positive goal. But I see no way that we can make progress without accepting the need to permit people to speak honestly. We all have different views. To learn together, we all must express those views honestly. It is the social taboo on honest exchanges of different viewpoints that has come to govern investing discussions during the Buy-and-Hold Era that is the obstacle to us all moving forward to the place where deep in our hearts we all very much want to be.

There is not one person alive on Planet Earth today who will be worse off if we all begin discussing these questions openly and civilly and reasonably. The Buy-and-Hold Era has come to an end. We need to accept that and move on to the next thing. There are obviously going to be different thoughts about what the next thing is. That’s a it should be. That’s healthy. The idea that Buy-and-Hold may not be questioned is not even a tiny bit healthy. That idea runs counter to all that our nation has stood for dating back to its formation. That idea needs to be placed 20 feet in the ground where it can do no further harm to any of us.

The idea of a discussion on a blog is to learn. Learning begins with an acceptance that there is no one group among us that knows it all and that we all need to show respect and affection for those with different viewpoints who are taking time out of their day to help us discover understand something that they understand better than we do.

It is only those who are able to accept that they do not already know it all who are able to take part in any learning experiences whatsoever. And we are all in great need of learning experiences today. That much is as clear as clear can be to all reasonable people.

Rob

I’ve noticed that Frugal Dad has not responded.

Frugal Dad’s silence can be interpreted in several different ways. One possible explanation is that he is looking to hear more before making a decision. In the event that that’s the explanation that applies, my job is to provide the best possible responses to any questions posed to me in an effort to get Frugal Dad on board. So I do what I can in that regard.

I have the greatest possible respect for Frugal Dad and his work. He is a different person than me with a different set of life experiences. So he sees things from a different perspective. My job is to make the plea for help. His job is to filter that plea through the perspective provided by his set of life experiences and act accordingly. My job upon hearing the word “yes” is to do all that I can to make the initiative a success. My job upon hearing the word “no” is to accept that that is God’s will and that that decision is part of some bigger plan under which all things will work out for the best in the long run.

I can live with “yes” (happily!). I can live with “no” (discouraged, but hardly for the first time). I could not live with myself if I became the sort of person who, knowing what I know, failed to work up the courage to make the plea. The way in which I have often put it over the course of the past seven years is: “I can do no more and I can do no less.”

Rob