Am I Crazy saying what I do about the Stock Market?

Beyond Buy-and-Hold #50

This question has been raised by numerous people, a good number of them smart and good people. So I think it needs to be addressed.

The problem with me being the one to address it is that truly crazy people often don?t recognized their own craziness. It could be that that?s the case here.

I?ll try to circumvent this problem to the extent possible by presenting both sides of the story with the greatest amount of fairness that I am able to muster as a lifelong practitioner of journalism who believes that fairness is the essential trait that a reporter must possess to do good work.

Do ?outrageous? claims make someone crazy?

The first argument in support of the claim that I am crazy is that I put forward such outrageous claims. I don?t just say that Buy-and-Hold has a few flaws, I describe it as the most dangerous Get Rich Quick scheme ever concocted by the human mind. I say that the promotion of Buy-and-Hold caused the economic crisis. I say that Valuation-Informed Indexers take on only one-fifth of the risk taken on Buy-and-Holder and yet earn higher returns. There is not anyone else alive on Planet Earth making these claims today.

When one person?s claims are that far removed from the norm, it is evidence that that person is crazy.

The response argument that my far-out claims do not prove that I am crazy is that many of the claims that I made in the early years of our nine years of internet discussions were considered equally far out at the time I made them but have since been verified as accurate by big names in the field.

Challenging the safe withdrawal rate

My first big claim was that the Old School safe withdrawal rate studies get the numbers wildly wrong. The Economist, one of the most respected magazines in the world, recently ran an article saying just this nine years after Crazy Rob said it at the Motley Fool discussion board. Crazy people are rarely able to come up with insights years ahead of the leading experts in their field.

The second argument in support of the claim that I am crazy is that I have been banned by at least 15 different web sites and none of the big names in the field that I have contacted (John Bogle, Robert Shiller, Bill Bernstein, etc.) have taken up my cause. It takes a lot to get banned from an internet site.

That one person could manage to get banned from 15 of them is evidence that something is not right with that person?s mental faculties. If by some wild coincidence all 15 sites were in the wrong, you would think that an expert in the field would point out the injustice and demand that action be taken. That hasn?t happened in my case.

The response argument that my bannings do not prove that I am crazy is that a good percentage of the people who banned me have written me e-mails apologizing to me for doing so. Several have told me that they have the greatest respect for my work and that they think my work has huge value. There?s something exceedingly odd about these bannings.

Also, the expert whose investing views are closest to my own (Robert Shiller) has said in interviews that he has never publicly told all that he knows about investing because he would be viewed as ?unprofessional? if he did so. That?s another way of saying that he fears what would happen to his livelihood if he were branded as crazy.

There?s risk in being ahead of your time

It could be that there are many big names in the field who are sympathetic to what I say but refrain from saying so in clear terms because the changes we are soon going to see in our understanding of how stock investing works are so revolutionary that the jump from where we are today to where we will be tomorrow is a big one, one big enough to make the pioneers look to be a bit crazy for a time.

The third argument in support of the claim that I am crazy is that Buy-and-Hold remains popular despite a stock crash that has caused people to lose large percentages of their life savings. If Buy-and-Hold were as bad a strategy as I say it is, one would think that those who followed it and lost money as a result would have turned on it by now and that my web site would today be the most popular web site on the internet. My web site is not today the most popular web site on the internet. It is not a close call.

The response argument that the continued popularity of Buy-and-Hold does not prove that I am crazy is that we are not yet even close to seeing how much financial destruction Buy-and-Hold will cause by the end of this bull/bear cycle.

The argument that I make about stocks is that insanely high valuation levels reveal investor irrationality. Stock prices are still very high today (although certainly they are not as high as they were at the top of the bubble). Thus, we should expect to see huge support for Buy-and-Hold today.

It is only when prices have fallen to their lows for this Bull/Bear cycle (that?s a 50 percent price drop from where we are today) that we will be able to say that Buy-and-Hold has remained popular despite a return to rationality. My guess is that another 50 percent price drop will cause much of today?s support for Buy-and-Hold to dissipate. When that happens, those today viewed as sane will be viewed as crazy and those today viewed as crazy will be viewed as sane.

The bottom line on all this?

It?s like they say in that Mounds Bar television commercial:

Sometimes I feel like a nut —
And sometimes I don?t!

Rob Bennett rejects the conventional advice that it is never a good idea for investors to lower their stock allocations during a prolonged market downturn. His bio is here.

Rob Bennett rejects the conventional advice that it is never a good idea for investors to lower their stock market downturn. Rob?s bio is here.

( Photo from Flickr by Helico )

2 Responses to Am I Crazy saying what I do about the Stock Market?

  1. For me at least when you say stuff like “. . . is the most dangerous Get Rich Quick scheme ever concocted by the human mind”
    I lose interest. I am willing to read and consider when one conducts reasonable discussions on a subject. I think that your outlandish statements create a giant chasm that regular people view as just another infomercial, over the top claim. They serve more to inflame rather than convince.

    And I know that turns me off because I know that as a buy and holder, contrary to many of your statements, my returns have been competitive over the past 10, 15 and 20 years. Oftentimes, I do not see your data as backing up your arguments.

    At least that is my opinion.

  2. Thanks for taking the time to write, Spokane Al.

    I am 100 percent convinced that what you are describing here is a real phenomenon. Most people see my claims as extreme and tune me out when they see me say something extreme. It’s a big problem for me.

    What would you have me do?

    I am 100 percent sincere in what I say.

    What if I am right and Buy-and-Hold really is the most dangerous Get Rich Quick scheme ever concocted by the human mind? In that event it is going to end up causing the Second Great Depression, no? Should I keep quiet about that?

    My intent is not really to inflame OR to convince. My intent is just to say what I really believe and let people add that to the mix and decide for themselves what to think. I think that if we all do that, we will sooner or later end up in the right place. I believe that we need to hear all views to have any hope whatsoever of ending up in the right place.

    I believe that if we all had been saying what we truly believed for the past 30 years, not one of us would still be following a Buy-and-Hold strategy today. But we have adopted a Social Stigma against pointing out the dangers in this strategy. The result is that we all keep quiet so as not to hurt each other’s feelings. And our economy continues making its way closer and closer to a cliff.

    I have great respect and affection for all Buy-and-Holders, Al. I have leaned many important things from them and I am grateful. There wouldn’t be any Valuation-Informed Indexing without the important contributions of the Buy-and-Holders, who built the foundation for the investing strategy that I believe is the BEST strategy ever concocted by the human mind, one that will in days to come eliminate 80 percent of the risk of stock investing for all of us.

    The things that are wrong about Buy-and-Hold were mistakes. I find no fault with people for making mistakes. I have made hundreds of doozies myself. But we must FIX these mistakes. They are killing us. We MUST do this. The only gripe I have with Buy-and-Hold is the unwillingness on the part of many Buy-and-Holders to acknowledge the mistakes and fix them.

    It’s not right for you to say that you have enjoyed good results from Buy-and-Hold for 20 years. Valuation-Informed Indexing would have had you going with a high stock allocation until 1996. So returns you enjoyed prior to that are not due to following Buy-and-Hold but just due to investing heavily in stocks when they were priced to give good long-term returns. I don’t understand how you could have good returns from 1996 forward. The publicly available record shows that super-safe asset classes like TIPS and IBonds and CDs did better than stocks from 1996 forward at greatly reduced risk. I guess it’s possible that your returns are “competitive” with those that you could have obtained with TIPS or I Bonds or CDs. But you took on far more risk to get those similar returns. And the data (as I read it!) indicates that we are going to see another crash within a few years that will leave you far behind, so far behind that your retirement may be delayed not just by years but by decades.

    I am 100 percent sure that you are being sincere and trying to help. I am grateful to you for that. I wish that you could see that I also am sincere and am trying to help and that we all would be better off if everyone felt free to post his or her honest thoughts on these questions (I have had hundreds of people tell me that they are afraid to post honestly because they have seen what Buy-and-Holders do to those who question The Sacred Dogmas).

    We all want the same thing, Al. We all want to get a good return on our money while not taking on excessive amounts of risk. Maybe I am wrong about everything I say. If I were, I would probably be the last to know, right? But you know what? It could be you who are wrong. It could be Bogle who is wrong. We’re all human. Even the Big Shots can make mistakes, no?

    The only way I know to get along in a world in which any of us might happen to be wrong is to permit everyone his or her say and to treat those with other viewpoints with respect and affection on the thinking that they are trying to help out even if they happen to be confused or wrong.

    I am trying to help out. You are trying to help out. Bogle is trying to help out. I much look forward to the day when we all can sit down as friends and just talk things over in warm and polite and calm and reasoned discussions. Perhaps we would be able to find some common ground. It sure seems to me to be worth taking a try.

    Thanks much for sharing with us what you sincerely believe. I am highly confident that lots of people strongly agree with you and that you are helping all of us, even those who do not happen to agree with you. While I do not personally believe your investment strategies are likely to work out, I certainly acknowledge that I could be wrong and I certainly wish you the very best of luck with them. Most of all I hope we can remain friends despite our differences on the investing jizz-jazz.


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