"Throw away William Bernstein's writings"
Now you've gone too far!!!
"The key is how humans react to information: the psychology of markets. "
Here's a post that I saw this morning at the Berkshire-Hathaway board:
http://boards.fool.com/Message.asp?mid=21330973
RalphCramden:
"My financial adviser JoeJoeBubbaJr gave me a different view into that phenomenon. He perceives his clients as disliking being told to buy more foreign stocks. His own "dynamic asset allocation" scheme was telling him something over 50% weighting in foreign assets for the last year or two. He wailed and gnashed his teeth over how most of his clients would react to this.
"I don't think there are too many of us who will pay to receive advice we don't like. "
He is saying that people who know better are telling middle-class investors what they want to hear rather than what is. They are pandering. The are not shooting straight.
I hate that stuff. It causes people to lose large amounts of their accumulated capital. It delays the time at which middle-class workers win their financial freedom by years or even decades.
The problem that I have to deal with, as someone who writes about personal finance stuff for a living, is--how do you get around the marketing reality? The marketing reality is what Ralph Cramden says above, people generally will not pay you for telling them what they do not want to hear.
The best solution that I have come up with is to tell it straight but to do everything possible to avoid the emotional hot buttons. That's why I make it a point to stress the "data-based" aspect of the data-based SWR tool and to avoid to the extent possible translating that into investment advice. You don't often hear me saying" "Oh, you should be 50 percent invested in stocks," or 10 percent, or 90 percent, or whatever. I try to the extent possible to stick to revealing what the historical data says.
There's a point at which this cannot be done. People ask me to reveal my personal allocation, and at some point I feel that I need to say that I have a zero percent allocation to stocks at this time. And I think that when you are posting at boards at which there are others claiming that the historical data reveals a 4 percent withdrawal from a high-stock portfolio to be "100 percent safe," that you have to let people know the take-out number that really is "100 percent safe" at the current valuation levels (it's something near 2.5 percent), and the act of revealing that reality contains an inherent recommendation that some people lighten up on stocks a bit. So my stratagy is not a perfect solution to the marketing problem.
My view is that it is the best that can be done under the circumstances. I refuse to be something less than a straight shooter. The entire point of my saving project was to get myself into a position where I could shoot straight with people, to not have to engage in all the phony baloney stuff that most journalists must engage in to hold onto their jobs. So I cannot go along with the "tell them what they want to hear" concept. But I don't like the idea of alienating my readers one tiny bit. I want to spread these ideas as far as I possibly can. I don't want this to be a little niche movement. I want all middle-class workers with an interest in financial freedom to at least have access to the insights developed at the various boards.
The place where I draw the line is "Is it data-based or is it really opinion?" When I say that I have a zero stock allocation, I am stating a fact, but I am NOT making a recommendation. There really are particular circumstances that apply only in regard to me that make that allocation appropriate. I really bellieve that most investors should keep some skin in the stock gain even at valuations like those we have experienced in recent years. My way of dealing with the marketing problem is to play that reality up, to try to present our findings in the least threatening way possible.
My approach is to say "here is what the data says, but please understand that there are all sorts of non-data-based considerations that you need to take account of in determining your stock allocation." That way those who do not feel comfortable acting on what the data says have an out. They can act on what their emotions say and not feel that they need to "disprove" that data-based analysis.
My goal is to reach the group (a group which I believe is large) that is not so data-focused that it is going to act solely on what the data says but that is enough interested in what the data says that it wants to at least be informed as to the realities. This is the group that I am in! I am not the type to make decisions solely based on what the historical data says. In ordinary circumstances, SWR analysis is not something that I would be spending time on. But I am not the sort of person who rejects data-based analyses either. I see value in them. I like to have my decisions informed by what the data says.
What I am really aiming to do is to help people use their common sense in making their investment decisions. In ordinary circumstances, that should be an easy goal to achieve. People have a natural inclination to act on the basis of what their common sense tells them.
With stocks, however, there are all sorts of impediments to the use of common sense. Lots of people suspect just from the use of their common sense that the conventional methodology claims cannot possibly be true. Can it really be that a 74 percent stock allocation is ALWAYS optimal, REGARDLESS of the valuation levels that apply? It can't be, and most reasonable people know this.
Most reasonable people do not like to take action solely based on common sense, however. Most people want to find some support for their common-sense views in the literature dealing with a subject matter. It is damn hard to find much support for common-sense insights in the lnvesting literature of the past 20 years! The literature is polluted with junk science. People craft all these fancy spreadsheets and calculators and things that look real pretty but are rooted in nonsense assumptions. People see that "everybody" is saying the same thing, and they assume that their common sense must be faulty in this case.
The average investor's common sense is not faulty. It is the studies being put forward by the "experts" that are wrong. The experts are not even trying to get it right. They are trying to be popular. When stocks go down, the same experts who today are saying that stocks are always the best investment choice for the long run will be saying instead that no middle-class investor should be invested in stocks at all. The wheel just goes around and around on all this nonsense gibberish.
I don't like being thought of as a "bear." I do not view myself as a "bear." I am a Retire Early guy, a FIRE guy, a Passion Saving guy. I did not get into SWR analysis because I care about numbers of spredsheets. I got into it because I care about achieving financial freedom early in life. Once I started down the path of making that happen, I saw no choice but to take a look at the historical stock-return data and see what it said. Once I looked at it, I saw no sensible reason to ignore the message of the data for the sake of appeasing the "experts" who were pandering and telling people a very different story.
Pandering can do great harm to people. I don't see it as a joke. I understand the pressure that a lot of the investment analysts feel to play up stocks in the middle of the hottest bull market ever experienced in history. I get that, and I don't really fault them up to a point. But when people start saying that the historical data backs up these pandering claims, I see an important line being crossed. When you cite historical data as your support, you incur an obligation to report it straight. When you cite data, you are leading people to believe that there is some sort of science involved. When there is science involved, you should aim for objectivity. No exceptions.
The clash that we experience in the Great Debate is the clash between the standards that apply in most fields other than investment analysis (reports on data should aim for objectivity) and the standards that apply in investment analysis (pandering is commonplace, stocks are talked up to the moon during bull markets and rejected out of hand during bear markets). I am trying to find a way to step around the emotional minefields, to create a tool that does not threaten people (because it does not tell them how they must invest) but which does inform them as to the realities (because it does accurately report what the historical data says). I am trying to create a space in the marketplace of ideas for an honest and informed data-based investment analysis tool.
I like Dreman. I find some appeal in the idea of contrarian investing stratagies. But I don't like the idea that only the small portion of the population that is contrarian by nature knows about these stratagies. I don't expect to be able to turn everyone into a contrarian (that goal would be an absurdity, would it not?). I am seeking to allow some contrarian insights to make their way out of the contrarian ghetto and into the mainstream. People can reject Dreman's insights as "contrarian," put them in the category of oddball stuff that they can safely ignore. Can people put the entire historical record in the category of oddball stuff? I think it is hard to argue with a straight face that the entirre historical record is an anomoly. There must be some reason why the historical data keeps repeating the same message over and over again--valuation matters, valuation matters, valuation matters.
Valuation matters. That's really all that I am trying to say. There are some who will say "Oh, we accept that valuation matters, it's no big deal that you have found historical data supporting that claim." Well, if valuation matters, then stocks cannot possibly always be the best investment class for the long run. If valuation matters, then there has to be some point at which a 4 percent withdrawal from a 74 percent S&P portfolio is no longer "100 percent safe." I'm not a Numbers Guy, so it is not for me to identify that point for people. But William Bernstein is a Numbers Guy and he identified it. And JWR1945 is a Numbers Guy and he identified it. The points identified by these two Numbers Guys are not anywhere remotely in the same neighborhood as the point identified as "100 percent safe" in the REHP study. I wonder why.