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How to Be a Successful Investor

It’s no wonder that people find the topic of investing to be confusing. Everyday we receive conflicting messages about how to be a successful investor.

The mutual fund industry and the stock-tip-newsletter industry tell us that:

  • Picking stocks successfully is difficult for the average investor, but
  • A professional has a good chance of picking stocks that will outperform.
  • A mutual fund (or stock newsletter) that has outperformed the market in the past is likely to outperform the market in the future.

The discount brokerage firms tell us that:

  • Picking stocks on your own is easy!
  • Rapid buying and selling of stocks (or other investments) is the best route to profits.
  • With up-to-the-minute information, you can time the market successfully.

The mainstream financial media tells us that:

  • Knowing what happened in the market yesterday (or last month) is essential for your success as an investor. If you watch the news enough, and listen to enough economists/market analysts, you have a good chance of predicting the next market move.
  • You can improve your performance by picking hot funds (particularly, those mentioned by a magazine).

The academics tell us that:

Who do you believe?

Given that three of the four parties involved are trying to sell us something while they give us advice, I’m personally inclined to believe the fourth. (It probably doesn’t hurt that the academics appear to be the ones with the best evidence to backup their claims.)

What about you? Who do you believe?

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Comments

  1. Nice list!

    I believe that nobody can consistently beat the market (not even Buffet) the best strategy for small investors is to :
    1. Have a mix of equities, fixed income and cash
    2. follow the index
    3. ignore media and “experts”
    4. review regularly
    5. contribute regularly (regardless of markets)
    6. make changes as need by your circumstances

    no point in trying to beat the market and “pick hot” stocks….just my 2 cents and I have no invested interest :)

  2. When I got to the academics part I thought “which of these 4 options makes money if you follow their advice?” and of course you pointed this out at the end. Love it!

  3. We are all in agreement that an individual investor (with very few exceptions) cannot consistently beat the market averages. Thus, passive investing is worthwhile – and a money saver.

    I read Ray’s response. It makes perfect sense. It’s solid advice. But it’s so out of date.

    A mix doesn’t do the trick anymore. I’ve blogged on that point today – as the first post in an ongoing series about asset allocation.

    What the average investor needs is insurance – a guarantee of no significant losses. My question is: why do the vast majority of individuals ignore that idea?

    The cost of such insurance is not out of pocket cash. Instead it’s limiting profits. Is that so bad? Growing your net worth (limited growth) when markets are rising and being protected against large losses when bear markets arrive – why is that idea shunned?

    Isn’t it worth your time to learn how to do this and then decide if it works for you? Adopting the simple, conservative option strategy known as collars accomplishes all this.

    Yet, a knowledgeable investor like Ray doesn’t even list it among the possibilities. Why is that?

    Mark

  4. Mark:

    a) A “mix” does appear to “do the trick” still. In 2008 when the market crashed, T-bonds had a great year. It’s a perfect case-in-point of asset allocation working as intended.

    b) Limiting your upside is just as real of a cost as paying cash. Just because it cannot be calculated does not mean it isn’t a cost. Again, if you have any data whatsoever to indicate that options reduce your downside at a lower cost than simply reducing your stock allocation, please feel free to direct me to it.

    c) Every conversation does not have to be about options. I know that’s your field of interest (as well as the topic of your blog and your books), but in the future, I’d appreciate it if you could refrain from derailing unrelated conversations.

  5. Every conversation does not have to be about options. I know that’s your field of interest (as well as the topic of your blog and your books), but in the future, I’d appreciate it if you could refrain from derailing unrelated conversations.

    I’ve had this sort of complaint directed at me on many occasions for pointing out the flaws of Passive Investing. It is of course true that every conservation does not have to be about options. But some should be. The economic crisis caused by the massive marketing campaign for Passive Investing has caused financial ruin for million. Those who advocate indexing (which makes sense if not pursued passively) need to begin accepting their responsibilities in this regard.

    The blog entry points out that the academics are the best source of advice. True enough. But the academic literature has been saying for 28 years now that Passive Investing cannot possibly work in the real world. It was in 1981 that Shiller published the first research showing that valuations affect long-term returns.

    The enthusiasts for Passive Indexing want to have it both ways. They want to pretend that they believe in looking at academic research because academic research does indeed support the indexing concept. But when it comes to reporting on the 28 years of research showing that Passive Investing does not work in the real world, the interest in academic research becomes very thin indeed.

    No. It doesn’t fly.

    We need people posting their honest comments in this blog. It is fine for blog owners to use their blogs to market their books. But there has to be honesty. If we are going to hear about academic research, we nee to hear about all the academic research. We need to rely on community members other than the blog owner to fill us in on what the blog owner does not want to talk about. The blog should be open to honest posting on points of view other than that held by the blog owner.

    My sincere take.

    Rob

  6. Hoo-boy! Now that’s some funny stuff, @Rob. Especially the part where you write “The economic crisis caused by the massive marketing campaign for Passive Investing…” Will that Vanguard stop at nothing?? Thanks for lightening up the conversation with your comedy.

    jb

  7. Will that Vanguard stop at nothing??

    I don’t believe that the good and smart people at Vanguard caused this economic crisis intentionally, Jim. But I have studied this matter in great depth and, yes, I do very strongly believe that it is the hundreds of millions that were spend promoting the Passive Investing idea that are the primary cause of the crash.

    You are of course free not to agree. That’s what makes the world go around. But I believe this as the result of spending seven years of my life studying the question.

    This is not the right place to be answering questions about this matter. If you or anyone else reading these words has questions, I invite you to my blog (“A Rich Life”) where you may ask them and where I will do my best to respond to them.

    Smart and good people do make mistakes, Jim. And the longer those mistakes go uncorrected, the more harm they end up doing for every single person concerned. I hope that we will be able to get this particular mistake (the most costly mistake ever made in the history of personal finance) corrected in the not-too-distant future.

    Rob

  8. Great summary of the sources of conflicting investing information, but it seems you forgot an entire category in your original post.

    The activist personal finance blog commenters tell us that:

    * We should use options to limit our profits because it also pays for protection from market declines, even in periods you’re planning to sell.

    * Indexing only works on paper a and cannot possibly work in the real world.

    * Money spent promoting passive investing caused the recent market crash.

  9. Just to be clear: It’s not the activist personal finance blog commenters that I believe. I was just pointing out the omission. I’m in the academic camp myself.

  10. “I think it would be fair to say that the academic studies showing that short-term timing never works have been reported about 5,000 times more frequently than have been the academic studies showing that long-term timing always works.”

    @ Rob,

    There are no such academic studies indicating either of those claims. If you actually understood how markets work, you’d understand that market timing has to “work” and “not work” in equilibrium. The money that didn’t work for goes to the people it did work for. Academics understand this. There cannot be “always” and “never.” And even if there were, Rob, at what magical point does “short-term” become “long-term,” where “never” turns to “always?” Moreover, once you add costs, the zero-sum equation, becomes negative-sum. So the longer market timing is practiced, the less it can mathematically work.

    How about citing some of the reviewed, academic research that backs up you claims? Without that I am not interested in hearing any more of your arguments that it’s being ignored by bloggers or anyone else.

  11. it seems you forgot an entire category in your original post.

    You’re right, Dylan. Personal finance blogs represent an entirely new communications medium, with strong points of its own and weak points of its own. My sense is that many are struggling today to figure out what the rules are going to be to for governing this new communications medium to achieve its full potential.

    The world of investing and the world of personal finance has changed with the introduction of blogs to the communications mix. And there will be greater changes day to come. My view is that this is a good thing. But there are of course challenges as there were with the introduction and development of all the earlier communications mediums.

    As always, It’s been left to the humans to figure out how to steer things in the right direction. Yikes!

    Rob

  12. the longer market timing is practiced, the less it can mathematically work.

    The reality is that, the more frequently long-term timing is practiced, the more stable our markets become. Every single investor benefits from stable markets.

    In a world in which investors are informed as to how to act in their own self-interest, prices can never reach the levels that they reached in the years before the huge crash. When prices reach a point where stocks offer a poor long-term value proposition, informed investors naturally sell and the selling brings prices back to reasonable levels. Stocks can never become a poor buy in a world in which middle-class investors have access to realistic and helpful investing advice.

    All rationality goes out the window in a world in which The Stock-Selling Industry is permitted to direct hundred of millions to the promotion of Passive Investing. Investing in stocks passively is like driving a car without brakes. In a world in which millions invest passively, the sorts of prices that we saw prior to the crash become possible because all price discipline has been removed from the market. At that point the only way the market can continue to function is for it to suffer a huge price crash. Price crashes leave middle-class workers afraid to spend and cutting back on spending causes businesses to fail.

    The answer is to permit investors to learn the realities of what the academic research has been saying for three decades now. We should not be permitting The Stock-Selling Industry to dictate what academic research we can hear about. Those of us who care about the future of our economic and political system should be pushing for regulation of this industry so that never again can investors be blocked from learning the latest and best findings of the academic researchers. When the economy goes over a cliff, we all lose, including The Stock-Selling Industry itself. It’s a lose/lose/lose/lose/lose.

    Rob

  13. I’m in the academic camp myself.

    I’m in the camp that says that we need bloggers who will report the academic findings that those trying to sell us something want to cover up. The research we don’t hear about doesn’t help us.

    And The Stock-Selling Industry is not a disinterested party that feels inclined to report things accurately. I think it would be fair to say that the academic studies showing that short-term timing never works have been reported about 5,000 times more frequently than have been the academic studies showing that long-term timing always works. One of the roles of bloggers is to address that imbalance and thereby help investors learn what the academic research really says.

    Rob

  14. Academics understand this.

    No. They once thought they did. But true scientists understand that nothing is ever learned definitively. Truly scientific findings are always open to new research and can always be changed or reversed based on what the new research says. Marketing is different, of course. Good marketing pitches continue for so long as they bring in the bucks.

    The Passive Investing Model is rooted in the Efficient Market Theory. That was state of the art belief in the 1960s. The first research showing that the market has never been efficient came out in 1981. That research is now a mountain. There was even a book recently published entitled “The Death of Rational Markets.” Without the Efficient Market Theory, there is zero logical reason for anyone to believe that Passive Investing could ever work as a long-term investing strategy.

    at what magical point does “short-term” become “long-term,” where “never” turns to “always?”

    That’s a great question, Dylan. It’s possibly the most important question in investing. It is this question that all investing analysts should be spending 90 percent of their time trying to answer. The reason why we are facing a huge economic crisis today is that we have all spent 30 years avoiding this question rather than trying to answer it.

    Successful long-term stock investing is all about knowing when to lower your stock allocation and when to increase it, when the price of stocks is so high that you must protect your portfolio by moving to safer asset classes and when the long-term prospects of stocks are good enough to justify taking on the risks attached to owning them. Passive Investors never look at these questions because the thing that they are passive about is their stock allocation. That’s why Passive can never work in the long term.

    The first step to learning something about a subject area is acknowledging that you don’t already know everything there is to know about it. There is nothing “scientific” in pretending to know more than you do. The first step to recovering from the economic crisis is acknowledging that we have made some huge mistakes in allowing The Stock-Selling Industry to promote this one idea for so long and with so much money, even for decades after it was discredited by the academic research.

    We need to begin putting more focus on the needs of the people who buy stocks. They matter too.

    Rob

  15. Mike,

    a) T-Bonds may have done well, but how did commodities, real estate, art do? If someone wasn’t loaded with T-bonds, did they have any significant protection from the market debacle? I truly don’t know the answer, but all I read tells me asst allocation failed miserably last year. Here is one quote: “Asset allocation did not work,” he says. “Everything went into the abyss.” True? I don’t know.

    b) I know that if you missed the biggest upside days in the market, your overall returns were significantly diminished. But that’s true in reverse. Missing the debacles also contributes to long-term financial health.

    I don’t have such data, and I doubt anyone has such records, but perhaps I can dig up something.

    But going forward – at least to me – I believe it’s far more important to avoid the debacles than it is to cash in on the market surges. I don’t have the data you requested, but it seems to me that the huge declines outweigh the huge gains in importance.

    Plus I’m certain age makes a difference. A 30 year-old looks for growth and feels invincible. A 60 year-old look for preservation of capital and is concerned about losses.

    c) Fair enough

  16. Mark:

    I appreciate the reply. You’re right, real estate and stocks both plummeted last year. But, gold held up well, and as I mentioned, bonds did spectacularly.

    For the most part, I tend to think that people’s portfolios should consist of a simple stock/bond allocation, perhaps with a small portion allocated to precious metals and/or real estate. Such a portfolio–depending upon how aggressive the stock/bond allocation was–would have done reasonably well (that is, not gotten slaughtered) even in the last 18 months.

    I’m less than convinced about missing the worst days having a bigger impact than missing the best days. (Currently looking for data…so far I’ve found this post from The Finance Buff, but admittedly it only includes the period from ’97-’07.) The point though, is that regardless of what historical data says one way or the other, I don’t see why we can reliably expect the worst days to have a bigger impact than the best days. What’s your reasoning?

    The point you make about age is a valid one. For somebody who is looking only to preserve capital, options can make sense. (Though again, I’m still not convinced they’re better than simply increasing the allocation to cash, nominal bonds, or TIPS.)

  17. I rarely post but here there is an interesting discussion going on. (I guess that’s going to be a long post – sorry about that).

    I read this blog very regularly, and I do realize Mike that you are pro buy and hold so my comments may not be in line what you are thinking.

    So I went thru every investing stages (pick stocks, mutual funds, newsletters and what not). I really clearly remember thinking back the first week of november 2007 “huh my portfolio is down compared to last week, is it the beginning of the end?”. I decided not to sell because after all “I can’t time the market”. After that everything went downhill with huge losses. I’m relatively young so I can afford to be have mostly stocks, but never the less, it’s not an happy experience.

    And then in 2008 trying to get a better control of what was going on, I looked at options, tested some stuff, earned some, lost some, etc… Read a ton of books and academics studies, etc… And yeah, many say, “You can’t time the market”, “Don’t even think about it”, “Just buy as much as you can that’s the best you can do”, making it a ponzy- kind of thing: as long as every buy, everybody win. Until the dance stops, and the last one holding the bag is the loser. With the Sept-Oct 2008 crash I really understood the rule “If you have to panic, panic early”.

    But hey I was a man. Men don’t sell, men don’t time the market. That would be weak and stupid. So I stood up and swallowed my losses with pride (with my wife panicking and constantly asking me to sell – she was the smart one). So okay, I did a mistake, I was not diversifying well enough, etc… etc… But never the less I wanted to learn about this experience. For me being mostly bonds doesn’t seem the right answer, or actually it may.

    So afterward I spent quite some time looking for things, like how I could have prevented the issue to begin with, but not time the market at the week level, but several months ahead. Because after all, once you lose money, you don’t want to sell as you want to get back what you lost. And then things gets even worse, and too late… Ah, human nature… And I discovered that there was quite some stuff going on that helped predict the various crashes: Whether it’s PE, ratio of stock market / GDP, 200 days MMA, 10 months MMA, etc…

    They are some many things that can be done to indicate how much exposure we should have and get ready for a potential downturn. After all bonds or even gold have a better return in the past 30 years than stocks, so why not switch to them when stocks are expensive? Granted that some newspapers selected the 30 years time frame carefully, never the less that was the return. Where is it written that stock has to be the better return of all? Return pays for the risk, but there is not a strong relationship, just a loose one.

    So the solution would be to not be completely passive anymore, you just get ready for the next market cycle. One can argue that studies are biased due to suvivorship because we know only about the winning startegies, and not the losing ones. Maybe. But they all make sense too (and it’s making as much as buy and hold to me). And yeah, in may cases returns are suprisingly consistent, and more stable.

    And then that got me thinking that I would want to actually not feel like a loser when the market is down (buy and hold makes me feel that way unfortunately). And what if there is another 9/11 in a downturn, what about 2 or 3 several months apart? Would it still make sense to buy and hold? It may be considered a black swan but nevertheless it happened in the middle of the previous recession.

    Things like 200 days MMA (selling below, buying above) actually do protect against those extreme moves. I understand your concerns about options, but I studied that more and I’m sorry to say but they are a very useful hedging tool. As Nassim Taleb said, in his Montercarlo simulations, only option buyers survived. So whether we like it or not, if we want to be serious we need to use them as a tool.

    So I investigated that more, and yeah collar are actually a very simple tool to protect against heavy loss, and have more consistent return.
    You can even have more advanced strategies, like this one: http://www.swaninvesting.com/vs.thes&p500
    I reverse enginneered the strategy, back trade it for the past few years, applied it for the past 8 months or so and yes it works in most markets. And it makes sense, and I sleep much better at night knowing that I’m ready for the next crash.

    I do realize that it is way more involved that probably the audience of your book (KISS is fine, but call me stupid I want to retire early and earn more while reducing my risks).

    I would personally not say anymore that buy and hold is always the right answer. I mostly agreed with it in the past, but it worked only on the assumption that the market goes always up. Buy And Hold is not dead, it is just a small part of the answer. (If we had invested in the Japan indexes instead of the US indexes, the results would be much more obvious concerning the value of buy and hold – Hopefully are we not going the same way…). I don’t consider active market timing to be the answer, but more an hedged buy and hold, with some balance with overweight and cheap assets compared to expensive assets.

    Obviously for somebody that doesn’t have the time / interest to look at that, buy and hold is better than treasuries (actually that’s not exactly the case for the past 30 years for what I read 2 months ago – Things change so quickly after a rally :) ).

    I’m done :)
    X

  18. Everything I’ve read says that getting the right bond to stock mix is the most basic part of asset allocation and the right bonds to use based on MPT are treasuries. After that, if you want to get fancy, you can split the equity ownership portion up (slice and dice) but if you didn’t have enough treasuries for your risk tolerance then you missed the most basic element of asset allocation. The other slicing is just noise compared to getting the right amount of treasuries.

    And a little cash doesn’t hurt either.

    Treasuries really saved us last year.

  19. Punch My Ticket says:

    There was even a book recently published entitled “The Death of Rational Markets.”

    I assume you mean Justin Fox’s new book “The Myth of the Rational Market”. An interview with the author was published yesterday, concluding with this quote from Fox.

    “I actually moved more of my assets into index funds over the course of doing the book. … To a certain extent, one of the great lessons of all of this is: No, the market’s not unbeatable. There are actually people who possess the skill to beat it. And it’s not necessarily a skill that you have to have massive resources to exercise. But most of us can’t.”

  20. Punch My Ticket says:

    “I don’t have the data you requested, but it seems to me that the huge declines outweigh the huge gains in importance. “ – Wolfinger

    I would think that someone familiar with options would not use arguments with “it seems” in them. The kernel of option pricing theory is that the effect of the declines must match the effect of the gains otherwise there is a risk free profit to be had. (Not by you if you don’t understand this principle!)

  21. Who do I listen to? For the most part, I’ll take the academics advice.
    I’ve been investing in my retirement fund for close to 20 years now. With my balanced allocation of funds I have weathered the current crash and still have more in my 401k than my (and my employer match) contributions.
    Personally I have a hard time buying into what some so called “financial expert” is trying to sell me. I’ve read a number of financial magazines and the free portions of newsletters. All to often it reminds me of the commercial (I can’t remember for what company) where the announcer asks the guy on the bike, “Is your broker objective?” Reply, “Yes. His objective is to sell me something.”

    Now that my non-mortgage debt is gone, my emergency fund is full and my Roth IRA is fully funded for the year, I am investing in the stock market. Am I listening to the talking heads and Motley Fools of the world? NO!
    I started with McDonalds. Why? Look at any MCD drive thru during the day. There is always at least one car in line. Then look at their stock price, financial strength and (important for me) their dividend rate. I’ve done the same for the rest of my purchases. Find an industry leader, do the research and then I decide if I want to take the risk.
    Right now is a good time to invest, whether it’s carefully researched stocks or an Index Fund. Just don’t expect me to be investing in any car companies or banks.

  22. I assume you mean Justin Fox’s new book “The Myth of the Rational Market”.

    Yes, that’s right. Thanks for the correction, Punch My Ticket.

    “I actually moved more of my assets into index funds over the course of doing the book.

    Indexes are wonderful. One of the things that the experts got right was their promotion of indexes. Unfortunately, most of today’s advocates of indexing also advocate Passive Investing, which is the most dangerous approach to investing ever concocted by the human mind. The financial ruin caused by Passive Investing is going to tarnish The Indexing Revolution in serious way if those of us who believe in indexing don’t start making more of an effort to make clear to people that there is no reason to invest passively just because you index. I advocate Valuation-Informed Indexing, an anti-passive indexing strategy.

    one of the great lessons of all of this is: No, the market’s not unbeatable. There are actually people who possess the skill to beat it.

    One of the things that the “experts” got 100 percent wring is this idea that it takes “skill” to beat the market. All it takes is common sense.

    Say that you were buying a car and you learned from reading Consumer Reports that the fair value was $20,000. Would you think it smart to pay $60,000 for the car? No one would. But back when stocks were selling at three time fair value and when the most likely long-term return was a negative number, 90 percent of the “experts” were saying that it was perfectly reasonable to put a good portion of your retirement money into stocks. Huh?

    It is simply not reasonable to take the advice offered by people in The Stock-Selling Industry at face value. Their primary goal is to persuade you to buy stocks! We need independent voices, people willing to provide the straight story.

    “Beat the market” can mean lots of different things. To some it means picking stocks. To some it means short-term timing. It truly is hard or even in some cases impossible to beat the market in those ways. So the experts are helping us out when they point out the pitfalls. But it’s the easiest thing in the world to beat the market by knowing to lower your stock allocation when prices get to the sorts of levels we saw from 1996 through 2008. No one can hold realistic hopes of achieving a decent retirement who is not willing to at least take price into consideration when setting his or her stock allocation (that is, to engage in long-term timing).

    I believe that blogs should be making an effort to educate their readers about the most important realities of stock investing. When the experts point out the dangers of certain ways of trying to beat the market, we should applaud them for doing so. But when the “experts” are telling us to ignore price because they see it as their primary job to jack up short-term profits for the industry that employs them, blogs should offer an independent voice aiming to help the middle-class investor rather than trying to get in good with the “experts.”

    When we all become mouthpieces for The Stock-Selling Industry, the entire economy goes over a cliff. That hurts everyone, including the people who make a living tricking people into buying stocks when that is a very bad idea from a financial perspective. That’s a loser idea all the way around, in my assessment.

    Rob

  23. I would think that someone familiar with options would not use arguments with “it seems” in them.

    Yuck!

    That sort of “argument” serves to limit learning rather than enhance it, in my experience. I detect a “know-it-all” tone in these comments. Not good.

    Rob

  24. Punch My Ticket says:

    I detect a “know-it-all” tone in these comments. Not good.”

    What sort of tone do you detect in these comments?

    the most dangerous approach to investing ever concocted by the human mind

    financial ruin

    One of the things that the “experts” got 100 percent wring[sic] is this idea that it takes “skill” to beat the market. All it takes is common sense.

    Would you think it smart … No one would.

    It is simply not reasonable to take the advice offered

    mouthpieces

    the people who make a living tricking people

    That’s a loser idea all the way around

    And I’m the know-it-all?

  25. Let’s keep the comments civil, please.

  26. Interesting discussion here. Rob’s advocating a hedged active indexing strategies. I assume this is based on PE ratio and valuation, so you would adjust your asset allocation (more to the bond side) when PE’s get to high?

    Is there any data to back up these claims?

  27. I should always show respect for the Passives.

    We prefer to be referred to as, “Indexing-Americans” or “passive investors.” I’m not sure who actually likes to be called a “Passive.”

    The Passives came on like gangbusters saying that they had data on their side and academic research on their side and all this sort of thing

    You forgot to mention math. We also have math on our side.

    Rob, you might find your mission more productive if you actually cited actual data, academic research, or used accurate math to support your arguments rather than just claiming others are wrong.

  28. Punch My Ticket says:

    I believe what I believe and I believe what I believe strongly….. How do we learn more? I believe that to learn more we need to challenge each other’s ideas.

    I don’t understand this juxtaposition. The first part is a profession of religious faith ie. not much room for dispassionate scientific inquiry. The second part suggests a scientific attitude. Let’s stick to that.

    The Passives came on like gangbusters saying that they had data on their side and academic research on their side

    The passives didn’t just say they had data on their side. They had and still have data on their side. Enough data that they upended the investing universe with it starting in the 60s and continuing to this day.

    Where is your data to upset what has now become the consensus?

    I should always show respect for the Passives. And I do. If you check my work, you will see that I refer to the Passives as good and smart people

    All I know about you is from the comments above. I see one “good and smart”. I also see “dangerous” and “experts” (in quotes so I assume sarcastic) and “mouthpieces” and “tricking” and “know-it-all”.

    We’re getting off track though. This isn’t about people. It’s about data and logic and sound argument. Present some. Demolish the consensus.

  29. Punch My Ticket says:

    The Predictor uses a regression analysis of the historical stock-return data

    Per the link the analysis was done by a John Walter Russell. Is he one of Shiller’s grad students?

    The Stock-Selling Industry promotes Passive Investing.

    What?

  30. you might find your mission more productive if you actually cited actual data, academic research, or used accurate math to support your arguments rather than just claiming others are wrong.

    Common sense is my default position, Dylan. I don’t believe that any of us have all the answers. But we all need to invest our money, so we need to come up with some idea to guide our investing choices. My view is that we should start with common sense. We know that the price that we pay for all other assets affects the value proposition we obtain from them. I think it makes all the sense in the world to believe that the same should be so with stocks.

    That would change if one of the Passive Investing enthusiasts put forward some sort of rational argument or pointed to historical data showing that the common-sense rule does not apply with stocks. But I have discussed these ideas with thousands of Passive Investing enthusiasts and none has ever done so. I’ve even contacted a number of big-name experts — John Bogle, Bill Schultheis (author of “The Coffeehouse Portfolio), Bill Bernstein (author of “Four Pillars of Investing”), Scott Burns, Mel Lindauer, Taylor Larimore, Bill Bengin, and Michael Kitces. None has ever disputed that the historical data shows that valuations affect long-term returns or offered any logical case for investing passively.

    After spending seven years of my life trying to discover a justification for investing passively and coming up empty-handed, I am personally convinced that no justification exists. The entire Passive Investing Model is a huge mistake. It’s all a product of an earlier belief in the Efficient Market Theory, which has since been discredited. By the time the research was published showing that valuations affect long-term return, there had already been millions spent promoting Passive Investing. The Stock-Selling Industry elected not to reverse or modify its claims and this decision led to the greatest loss of middle-class wealth in U.S. history.

    The good side of the story is that a switch to Valuation-Informed Indexing would permit middle-class investors to make up (over 30 years) all the losses they suffered in the crash. If we could get the word out about how stock investing really works, I believe that we could restore confidence in the markets and thereby bring this economic crisis to a quick end.

    Rob

  31. The passives didn’t just say they had data on their side. They had and still have data on their side. Enough data that they upended the investing universe with it starting in the 60s and continuing to this day.

    No, that’s not right, Punch My Ticket. There’s a reason why the book is entitled The Myth of Rational Markets.

    Shiller published the first research showing that valuations affect long-term returns in 1981. There is now a mountain of research showing that Shiller was right.

    And there has never been any research showing that Passive Investing could work. The Efficient Market Theory is not something that has been proved with research. It is an assumption. In fact it has often been referred to as the Efficient Market Hypothesis.

    The assumption on which the conventional investing advice of the past 30 years is based was discredited by academic research published 28 years ago. The job today is to pick up the pieces of the economy destroyed by The Stock-Selling Industry’s failure to let middle-class investors know what the research has been saying since 1981.

    Once we overcome this man-made disaster and being discussing realistic investing strategies once again, the future looks bright. But it’s not going to be The Stock-Selling Industry that is going to lead us into the promised land. We are going to need to show some concern for our own financial futures and insist on our right to talk over these ideas amongst ourselves and thereby learn what we need to learn to finance our retirement dreams.

    Rob

  32. Demolish the consensus.

    Talk to some middle-class investors, Punch My Ticket.

    The joke grows less and less funny all the time.

    Rob

  33. Rob, it would seem by you own claims that the majority has it wrong, that your common sense is not common. You may want to find a different default position.

    Anyway, I’m going to wrap up my involvement in this exchange because I’m not really sure there is much more I can say.

    I think there is no disputing Mike’s observation about all the conflicting messages about how to be a successful investor. I trust most folks reading these comments will figure it out.

  34. What sort of tone do you detect in these comments?

    I agree with Mike that we need to keep it civil. I also think that Punch My Ticket’s question is a fair one. So I am going to try to respond — both honestly and civilly.

    The statements of mine that you have quoted are certainly strongly worded statements, Punch My Ticket. It’s probably so that some believe that I suffer from Know-It-All Disease. All that I can say in my defense is that I hope that I do not and that I struggle to avoid giving in to a temptation that I think we all face to believe that we have discovered the One True Way.

    I believe what I believe and I believe what I believe strongly. But I do not think that anyone should take my word as gospel. That would be foolish. My view is that the state of the world’s understanding of investing today is primitive. That of course includes me.

    How do we learn more? I believe that to learn more we need to challenge each other’s ideas. I believe that one of the reasons why we have gotten ourselves into such terrible circumstances is that too many of those who have long had doubts about Passive Investing have held back from stating things as strongly as they believed them. The Passives came on like gangbusters saying that they had data on their side and academic research on their side and all this sort of thing and those who didn’t buy it got real quiet for so long as prices remained sky-high. That was an act of cowardice and that act of cowardice hurt us all. It made it impossible for us to learn what we needed to learn.

    None of us knows it all. Not me. Not you. Not Shiller. Not Bogle. We all help each other by challenging each other’s viewpoint in a spirit of friendship and warmth and civility and mutual respect. That didn’t happen during the Passive Investing Era. As prices zoomed to the moon, the Bogleheads grew arrogant. The Shillerites grew timid. All suffered as a result.

    I help you and all other Passives only if I make the case against Passive Investing as strongly as I can possibly make it. That’s my job. A community needs to have different points of view expressed within it for learning to take place. If I pull punches (so long as they are fair punches), I let you and all the other Passives down.

    I should always show respect for the Passives. And I do. If you check my work, you will see that I refer to the Passives as good and smart people as often as I point our the recklessness of this investing strategy. I believe that Passive Investing has caused more human misery than any other idea in the history of personal finance. So I should always be trying to bring it down. That is not at all so of the people who have advocated the idea. The people have helped us in many ways and will be helping us in many ways for many years to come. To want to bring down the people would be wrong.

    These two ideas are not contradictory, in my view. I attack the idea because the idea hurts the people for whom I feel respect and affection. Attacking the people would be an act of hate. Attacking the idea that hurts the people who hold it is an act of love.

    That’s where I am coming from, in any event.

    Rob

  35. Is there any data to back up these claims?

    Thanks for your question. The entire historical record backs up the Valuation-Informed Indexing strategy, Brian.

    Here is a link to The Stock-Return Predictor:

    http://www.passionsaving.com/stock-valuation.html

    The Predictor uses a regression analysis of the historical stock-return data to reveal to investors the likely long-term return of a broad U.S. stock index starting from any possible valuation level. Starting from the valuation level that applied in 1982, the most likely 10-year annualized real return is 15 percent real. Starting from the valuation level that applied in 2000, the most likely 10-year annualized return is a negative 1 percent real.

    Isn’t that just what your common sense would tell you must be the case? In 1982, stocks were priced at one-half of fair value. In 2000, stocks were priced at three times fair value.

    Stocks are easy to understand if you are willing to look at how they have always performed in the past. All of the confusion that most investors experience comes from their attempt to square Passive Investing (which says that there is no need to change one’s stock allocation in response to big price swings) with common sense and the historical data (which says that there is).

    The Stock-Selling Industry promotes Passive Investing. For obvious reasons. I oppose Passive Investing because I am not part of The Stock-Selling Industry. I really think that it is as simple as that. There is no reason to believe that Passive Investing could ever work in the real world and there has been any reason to believe that. Millions of good and smart people believe it, that’s for sure. But there has never been any logical reason to believe. The claim that “timing never works” is a marketing slogan, nothing more and nothing less.

    Rob

  36. Kalinda says:

    Hey Rob, not sure if you’ll be back or not but I have two questions based on all the discussion going on here.
    1) How come blame for recent market trouble is placed solely on passive investors? Aren’t they the people who are buying and holding? Isn’t volatility caused by people buying and selling (ie: stockpickers)? You seem to equate passive investors with “The Stock-Selling Industry” but I don’t think they’re the same thing.
    2) Also you suggest the passive investors pay no attention to asset allocation. Since when do passive investors never adjust their asset allocation?
    Ok so that’s more than two questions. ;) Two general thoughts though, and it’s what I was wondering after reading your comments.

  37. your common sense is not common.

    I’ve spoken with thousands of middle-class investors who have told me that they think it makes perfect sense to believe that valuations affect long-term returns. The problem that many have is the massive marketing campaign. Many find it hard to believe that millions would be spent promoting ideas with no foundation.

    I found that one hard to believe myself until I had seen with my own eyes how many site owners and blog owners put marketing considerations above concern for getting the investing advice right. Humans are flawed creatures — there’s no getting around it.

    The other side of the story is that I couldn’t have built all the calculators at my site or developed all the investing strategies explored at my site without the help of the hundreds of my fellow community members who have been making constructive contributions to our discussions for over seven years now. So, yes, we are flawed — but we are also generous-spirited and loving. Both things are so, according to the Post Archives of The Great Safe Withdrawal Rate Debate.

    I trust most folks reading these comments will figure it out.

    We agree, Dylan. I am confident that, if people are permitted to hear both sides of the story, they will figure it all out in time. I believe that we have make important strides in the right direction since the price crash and that we will be continuing to do so in the day and weeks and months and years to come. It’s a slow process but there is some truly wonderful stuff on the other side. It’s when we make it to the other side that the true fireworks (the good kind!) begin!

    Rob

  38. Isn’t volatility caused by people buying and selling (ie: stockpickers)?

    In the short term.

    But stock crashes are always caused by Passive Investing.

    The market is self-regulating so long as investors invest sensibly and do not fail to adjust their stock allocations in response to big price changes. Each time prices begin to get too high, investors sell stocks (because the long-term value proposition is diminished) and the selling brings prices back to reasonable levels.

    None of this works in an environment in which Passive Investing is being heavily promoted. We all have a Get Rich Quick impulse. We all have a weakness for fantasy claims that perhaps this will be the first time in which investing passively will not bring financial ruin. It’s like the desire we all have to eat six pieces of chocolate cake each day. We all face the temptation but in ordinary circumstances we are able to overcome it because we know where we will end up if we give in to the temptation.

    However, there is a big difference between what we are told by medical experts and by investing “experts.” Medical experts tell us NOT to eat six pieces of chocolate cake each day. Investing experts say “oh, go ahead and stick with that same stock allocation even though it is now many times more risky than it was when you decided it was right for you, it might all work out different this time.” Except it never works out different in the real world.

    We have tried Passive Investing four times in U.S. history. It brought on massive losses for all who followed it plus an economic crisis the first time. And the second time. And the third time. And the fourth time. We have never since 1870 suffered an economic crisis that was not preceded by the widespread popularity of Passive Investing. And we have never seen Passive Investing become popular without an economic crisis soon coming to pas. I am beginning to see a pattern.

    Short-term volatility doesn’t really matter for long-term investors. We should just tune that stuff out. But we cannot tune out the volatility caused by the widespread promotion of Passive Investing. That is the kind of volatility that brings the entire economy to its knees. When the entire economy is destroyed, we all lose out.

    All investors should care about the health of the economy in which the companies they own are operating. When we destroy the economy through the promotion of Passive Investing, we see short-term gains but also devastating long-term losses.

    Rob

  39. You seem to equate passive investors with “The Stock-Selling Industry” but I don’t think they’re the same thing.

    It is the heavy promotion of Passive Investing by The Stock-Selling Industry that made Passive Investing so popular. Most middle-class investors possess a reasonable amount of common sense and most are naturally risk-averse. So few would think to invest passively on their own. But many of us have never looked at the historical data on our own and leave it to the “experts” to tell us what it says.

    That is a terrible mistake.

    This ties back to the point being made in the blog entry. The point made in the blog entry is that academic research can tell us a lot about how stock investing works. That is 100 percent so. But what academic research is it we are going to go by? The academic research itself reports a message 100 percent the opposite of the message that The Stock-Selling Industry says that the academic research reports. Which are you going to go by?

    I am saying that we should go by what the actual research says rather than by what The Stock-Selling Industry says it says. The industry is obviously biased in favor of selling stocks and not in a position to give us the straight story about what the research says.

    Would you ask the dealer at a used car lot whether it is a good idea to buy a car or not? If not, then why would you ask an “expert” with ties to The Stock-Selling Industry whether it is a good idea to buy stocks when they are selling at insane prices or not?

    We need to look at the actual research, not reports of what the “experts” say that it says.

    Rob

  40. How come blame for recent market trouble is placed solely on passive investors? Aren’t they the people who are buying and holding?

    Thanks for your questions, Kalinda. They are great questions.

    The term “Passive Investing” can be defined in several different ways. Many people think if it as a package of ideas, most of which I view as being pure gold. The idea that middle-class investors should index is pure gold. The idea of tuning out the short-term noise is pure gold. The idea of paying attention to costs is pure gold. The idea of making stocks your path to long-term wealth is pure gold. I love these ideas. I think that John Bogle started a revolution in middle-class investing. I want to see these idea succeed.

    The other way to define “Passive Investing” is in a narrow way, to say that it is the idea that investors need not change their stock allocations in response to big price changes. This is the definition that I am using when I find fault with the Passive Investing Model.

    I believe that the error made when the people who advocate the wonderful package of ideas endorsed the passive idea (the idea that you don’t need to change your stock allocation in response to big price changes) is a national tragedy. The package of ideas makes investing make sense for the first time. It has the potential to help millions achieve financial freedom years sooner than would otherwise be possible. But the one wrong idea (that you don’t need to change your stock allocation) has already caused the greatest loss of middle-class wealth in U.S. history and threatens to undo all the good that otherwise would be accomplished by the wonderful ideas that are also part of this package.

    I come not to bury indexing, but to save it. That’s what it comes down to. I want these ideas to succeed and I have studied this matter in great depth and what I have learned has convinced me that the ideas cannot succeed unless the mistake that was made about the passive part is corrected. And the reluctance that I have seen among many big-name Passive Investing enthusiasts to correcting the mistake is just amazing and heart-breaking. Decades of important work is being flushed down the toilet for no reason other than the fact that a number of “experts” feel uncomfortable acknowledging a mistake.

    The mistake doesn’t trouble me at all. We all make mistakes and this mistake came as part of a package that points the way to the most effective way to invest ever developed. But why the refusal to admit the mistake? That drives me crazy. So many have suffered so much. And it seems to me that these people are going to need to admit the mistake at some point in any event. How can they not when the mistake is in all likelihood going to send the entire U.S. economy over a cliff in time?

    My guess is that you will have a hard time believing how much damage is being done by the refusal to admit the mistake, Kalinda. I would have found this all extremely hard to believe back on May 12, 2002, the day before the discussions in which we learned all this stuff began at the Motley Fool site. What I have learned (with the help of thousands of my fellow community members) since then is just amazing. I learned all that I know by looking at the historical data. It is impossible for me to overstate just how reckless an investing strategy the Passive model is. To understand why I feel as strongly as I do, you would need to study the data a bit yourself. The extent to which the data conflicts with what we hear from the “experts” is just startling. And frightening.

    Please do not think that I am saying that any of this damage was done by intent. I do not believe that. It is clear to me that this is the result of a mistake. The frustrating thing is that it has been so difficult trying to get the mistake corrected. I knew that we were going to see a huge stock crash all the way back in 2002. How do you think it felt for me to see the financial futures of my thousands of internet friends destroyed when I could have helped them if only one or two “experts” had been willing to speak up? It’s a tragedy that I have had to watch play out before my eyes in real time.

    It’s the difference between the potential and the current-day reality that makes it so awful to watch this play out. We know all that we need to know today to bring this economic crisis to a quick stop and to help every middle-class investor make up for all the losses that he or she suffered in the crash. Or we can just continue pretending that we have learned nothing and watch the entire U.S. economy go over a cliff. That’s a stark difference in outcomes. And if you look at the historical data using an analytically valid methodology (one that takes the effect of valuations into consideration), you see that the difference in those two outcomes really is what is at stake here.

    I feel that I am obligated to do all that I can to help get things moving in a positive direction. I understand that at some point I have to let it go if it just becomes impossible to do anything positive. But I believe that all of us who have been fortunate enough to learn the realities should make a serious effort to get things back on the right track given the stakes that apply.

    Rob

  41. Aren’t they the people who are buying and holding? Isn’t volatility caused by people buying and selling (ie: stockpickers)?

    The phrase “buy-and-hold” sounds wonderful. It sounds like the idea is to stick with a strategy for the long term, to not be flighty.

    But the way in which buy-and-hold is practiced under the Passive Investing model requires that investors be changing their strategies dramatically all the time.

    Say that you begin investing at a time of low prices. And you determine that your risk tolerance permits you to take on a “3″ level of risk. That might translate into a 60 percent stock allocation.

    Now say that prices rise to the insane levels we saw from 1996 through 2008. You believe what you’ve been told about Passive Investing, so you keep your stock allocation at 60 percent. But at the new price level a 60 percent stock allocation is now a “9″ level of risk.

    Why the change?

    And is it really sticking with a strategy for the long term for an investor too go from a “3″ level of risk to a “9″ level of risk just because Mr. Market went on one of his drunken binges? I say “no.”

    True buy-and-hold investing is sticking with the same risk level over time. That requires the investor to change his stock allocation as the riskiness of stocks changes. Passive Investing advocates often argue for Staying the Course but sticking with the same stock allocation when the riskiness of holding stocks changes dramatically is not Staying the Course but Changing the Course. I advocate Staying the Course by making whatever allocation changes are needed to keep your risk level roughly constant.

    Rob

  42. There is an academic study that shows market sentiment is a good predictor of stock market returns.

    http://investmentscientist.com/2007/07/31/sentiment-returns/

    A market timer could theoretically earn excess returns by entering the market when the sentiment is low and exiting the market when the sentiment is high. He has to be very good at self-c0ntrol though. How many people would like to go to work when drowsy and go to bed when excited?

    Michael Zhuang
    http://www.investment-fiduciary.com

  43. Since when do passive investors never adjust their asset allocation?

    The thing that Passive Investors are “passive” about is their stock allocation.

    I noted above that the most likely long-term return on stocks in 2000 was a negative 1 percent. TIPS were at the time providing a positive 4 percent. That’s a differential of 5 percentage points of return every year for 10 years running.

    Guess which of the two asset classes most of the “experts” were saying we should have most of our retirement money in at the time?

    That’s why we are suffering an economic crisis today. When middle-class investors see their retirement accounts wiped out, they cut back on spending. When the middle-class cuts back on spending, lots of busineses fail.

    We all have an interest in providing means for middle-class investors to learn how stock investing works in the real world, in my view.

    Rob

  44. Kalinda says:

    Hmm…Here’s my problem with your argument. Passive investors get blamed for crashes caused by stock pickers/active investors.

    If people are passively investing in index funds (and holding their allocations constant), why would sudden jumps in price ever happen?

    To this you reply that it’s not the indexers that cause the market volatility, it’s the stock pickers. You say that the problem is that the passive investors don’t react.

    You blame “The Stock-Selling Industry” for pushing passive investing. Do some segments of the investment industry push passive investing? Sure. But what about the other (huge) segment that pushes those active investing strategies that actually cause the volatility? How come there’s no culpability there?

    It appears that you’re blaming the passive investors for not fixing the problem. Why not blame the active investors who actually cause the problem in the first place?

  45. Punch My Ticket says:

    As far as I can tell, Rob’s “Passive Investing” is not what is normally called passive investing ie. indexing preferred to active management. Instead, it’s avoidance of what academics call market timing.

    And there has never been any research showing that Passive Investing could work.

    Given your definition of Passive Investing, you are mistaken. Journals are full of articles that demonstrate no market timing ability among pension fund managers, mutual fund managers, individual investors, endowment funds and so on. You might not know of any such research but it exists and has been published in many variations and thousands of times.

    The assumption on which the conventional investing advice of the past 30 years is based was discredited by academic research published 28 years ago.

    No, it wasn’t. If that was true, conventional wisdom would have changed by now. It hasn’t. By now, the names of those who had discredited and overturned convention would be well known. They aren’t. I can’t imagine you have ever encountered academia in any way because it’s a big collection of smart hard working people who are more interested in oneupmanship than anything else. If anyone had managed to demonstrate that market timing works or can work or has worked, they would have done so and we would know who they were. The people who just tinker at the edges of MPT and EMH (Fama & French, the behavioural economists) are already famous. Behaviourists have won the Nobel Prize!

    Market timers? No one knows their names. Their research doesn’t survive peer review or time.

    the “experts” were saying we should have most of our retirement money in [stocks] … That’s why we are suffering an economic crisis today.

    Now I know you are putting us on. The economic crisis today has nothing to do with stocks, allocation to stocks, or expert recommendations. Today’s crisis is about idiot oversight of loans against houses.

    I’m done with you, Rob. There isn’t enough time in the day for this.

    A serious question for Mike, the proprietor. Is this a traffic generation gimmick?

  46. PMT: I assure you, long/heated comment discussions generate no noteworthy traffic. At all. For me personally, they’re a pain in the neck. The only reason I haven’t closed comments on this thread is that I believe in the value of open conversation (in general, not necessarily this conversation, heh). Hence my original request above (which was directed at Mark) to keep conversations on topic.

    Also, how could it be a gimmick? I didn’t start this conversation–it’s barely even related to the original post.

  47. Journals are full of articles that demonstrate no market timing ability among pension fund managers, mutual fund managers, individual investors, endowment funds and so on. You might not know of any such research but it exists and has been published in many variations and thousands of times.

    This is of course a false claim. I have asked thousands of confirmed Passive Investing enthusiasts to supply any such research that they were aware of. There has of course never yet been one who rose to the challenge.

    The trickery that is being worked here is that Punch My Ticket is trying to plant in our heads the thought that because fund managers do not engage in long-term timing that find managers are not capable of engaging in long-term timing. The two claims are of course not even close to being the same thing.

    The historical data shows that there has never been a time in the history of the market in which fund managers (or anyone else!) could not have engaged in long-term timing effectively. The historical data is public information. Anyone who cares to can check it out.

    Do most fund managers take advantage of what the historical data teaches us about how to invest effectively for the long-term?

    Would you? If you were earning a million-dollar salary and the key to you keeping it was to get lots of people to invest in your fund and The Stock-Selling Industry was spending hundreds of millions of dollars persuading people to invest in the worst possible way imaginable, would you elect to instead invest in the best possible way imaginable? Very, very few do this.

    But what if the hundreds of millions were being spent to help people invest effectively? Would that not change things?

    Long-term timing is what works. Passive Investing is what has short-term emotional appeal. As of today, all of the hundreds of millions of marketing dollars are directed to persuading us to do what has never worked. What if we changed that? What if we demanded that the money now being spent to persuade us all to do what doesn’t work were instead spent to persuade us to do what does work?

    When we make that change, most fund managers will invest rationally. So will most individual investors. When we make that change, there will be no more stock crashes or economic crises or stimulus plans. When we make that change, we will all be a richer and more productive and more honest and more loving people.

    Does anyone see any potential downside?

    Rob

  48. If that was true, conventional wisdom would have changed by now.

    If investing were a 100 percent rational endeavor, what you are saying would be so, Punch My Ticket. It’s not.

    The typical middle-class investor is a fellow who has invested in a way that has caused him to delay his retirement at least five years. How do you think he feels about that? He has probably shared his investing “wisdom” with his friends and caused their retirements to be delayed by many years as well. He may have had discussions with his wife in which she argued that stocks seemed awfully dangerous to her given that they were selling at such insane prices and in which he assured her that he had read hundreds of articles financed by The Stock-Selling Industry that made clear that everyone should always buy lots and lots of stocks no matter how crazy the prices.

    Do you think that fellow wants to apologize to his friends for the financial harm he has caused them? Do you think that fellow want to admit to his wife that she was right and he was wrong? Do you think that fellow wants to acknowledge to himself that he has been played for a fool, that he messed up his retirement hopes by believing what a bunch of salesmen told him when they told him that their product is the only one on Planet Earth for which the price paid makes absolutely no difference whatsoever?

    The typical middle-class investor today feels like a damn fool. It’s going to take some time before he is able to admit the harm he has done to his financial future. That’s why it’s likely that we have not seen the last of the huge price drops. People let this stuff in in stages. We took as much as we could take last Fall. If prices end up where they have ended up on every other occasion in which Passive Investing became popular, we have another 50 percent price drop to look forward to sometime over the next few years.

    Then we need to get about the business of rebuilding the economy we destroyed with our tolerance of dangerous and irresponsible marketing slogans.

    Investing is not a 100 percent rational endeavor. If you don’t believe me, take a look at the historical data. The entire historical record of stock investing tells the tale to those willing to listen to it.

    Rob

  49. He has to be very good at self-c0ntrol though. How many people would like to go to work when drowsy and go to bed when excited?

    You’re raising an interesting point, Michael. Rational Investing is counter-intuitive. We humans are programmed to go with the crowd. Lowering your stock allocation when everyone around you is making a short-term killing goes against what the weaknesses of human nature tell you to do.

    But isn’t that precisely what the Bogle Revolution is all about? Does Bogle not advise us to tune out the short-term noise? Does he not say that we should focus on the long-term? That’s Valuation-Informed Indexing. It’s what works in the long term. Passive Investing is what feels good in the short term.

    We do need help in overcoming the weaknesses of human nature. We need all investing advisors stressing to us on a daily basis that we must resist the urge to invest passively. I have my moments of doubt. When I experience doubt, I look at the historical data to strengthen my convictions. We all should have blogs and discussion boards we could go to for help in sticking with our plans to never invest passively.

    Effective long-term investing is not a solitary endeavor. It is a community endeavor. We should all be helping each other out and thereby making our entire society a richer and more stable one. This is all about humans helping other humans overcome their worst emotional inclinations.

    Rob

  50. It appears that you’re blaming the passive investors for not fixing the problem. Why not blame the active investors who actually cause the problem in the first place?

    The point you are making is a perfectly fair one, Kalinda. If everyone invested passively, market prices would never get out of control and we would not see these problems. That sounds right to me.

    It’s not really my intent to blame anyone. My intent is to help people invest more effectively. I don’t think it is a good idea for people to engage in short-term timing. So I speak out against that. I don’t think it is a good idea for people who aren’t willing to put a lot of time and effort into the project to pick individual stocks to pick individual stocks. So I speak out against that. I don’t think it’s a good idea for people to invest passively. So I speak out against that.

    I certainly don’t think that Passives are bad people. Some of my best friends are Passives!

    Passives are knuckleheads, you know? They’re mixed-up humans, like all the rest of the humans. From time to time they find themselves walking the wrong path and they need to be reminded to stick to the real long-term plan. The point is not to criticize but to offer a helping hand.

    The enemy is not the Passive Investors but the Passive Investing idea. I do believe that Passive Investors have responsibilities to their fellow community members to help get the stock market back on track when non-Passives put it in jeopardy. And I believe that most Passives in their hearts want to help out. I believe that these marketing campaigns have caused massive confusion about how stock investing really works.

    We all have messed up in some way or another at some time or another. It wasn’t one small group that caused this economic crisis. Millions contributed. It’s not even right to place full blame on The Stock-Selling Industry. The marketing campaigns wouldn’t have worked if we had been more skeptical. They were able to con us largely because we very much wanted to be conned.

    The bottom line here is that we all need to pay more attention to the emotional aspects of the investing project. Mike is right to argue that we should be using the academic research as our guide. But we cannot just inject the academic research into our bloodstreams. Our emotions filter what findings reach our brains. During an out-of-control bull, millions see in the academic research precisely the opposite of the message it delivers to an objective observer (as if there were such a thing!).

    Rob

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