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The Financial Freedom Blog – March 2008

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March 3, 2008 06:05 A New Set of Building Blocks

I recently submitted a Letter to the Editor to the Early-Retirement-Planning-Insights.com site entitled A New Set of Building Blocks.

Juicy Excerpt: The Efficient Market Theory is the foundation of the conventional investing advice of today. Even people who care not for theory and who have never bothered to learn what the theory says employ ideas that are the product of the Efficient Market Theory in their recommendations. These ideas are like air in investing circles. They are so ever-present that few even notice their presence at this point. But they influence just about everything that is said.

The foundation stone is gravely flawed. Thus, everything that follows from it is gravely flawed. We need a new foundation stone. More on This Topic

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March 4, 2008 08:57 10 Rarely Voiced Realities of Investing Today

I’ve added an article to the “Start Me Up!” section of the site entitled 10 Rarely Voiced Realities of Investing Today.

Juicy Excerpt: Discussion boards permit us to learn things about investing that we couldn’t learn from books or speeches. One thing I’ve learned is that most middle-class investors of today do not possess a sure understanding of the basics –where stock returns come from, what causes prices to change, the distinction between the forms of timing that work and the forms that do not work, that sort of thing. I’ve become a big believer in stressing the basics over and over and over again.

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March 5, 2008 11:08 Network Abundance Radio Interviews Rob on the Passion Saving Concept

Network Abundance Radio recently interviewed me for the first half-hour segment of its one-hour radio program. The interview was conducted by Noah St. John of SuccessClinic.com.

To listen, please click the Play button at the link above. The program was first aired yesterday and is being replayed continuously for the remainder of this week (a new airing of the program begins shortly after the immediately preceding airing is completed). The segment featuring me is the first of two segments. So, if you click on the link and hear a woman being interviewed, you need to wait until the program ends and then restarts again to hear the segment featuring old Farmer Hocus.

For those who read this blog entry after this week, my understanding is that downloads will be made available at ITunes.com. Please check at NetworkAbundance.com for details.

Juicy Excerpt: It’s so amazing that you teach this. No one does anything for no reason…. You’re talking about the why-tos, what makes human beings do the things they do…. What a fascinating and different and unique spin.
More on This Topic

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March 6, 2008 15:41 Following the Smart Makes Us All Dumb

Last Sunday’s New York Times carried an important article by Robert Shiller on Information Cascades.

Juicy Excerpt: “Were all these people stupid? It can’t be…. Ultimately, people sometimes need to rely on the judgment of others, and therein lies the problem.”

Precisely so.

In the real world, people do not make completely rational decisions as to how much to invest in stocks. To make completely rational decisions would require studying all sorts of things in great depth. Who has the time? Not me, not you.

In the real world, people often rely on the judgments of others. We look to our fellow investors for reassurance. If they think stocks are okay, we think stocks are okay. We look to Experts. If they say everything is cool, we believe that everything is cool. That’s how it’s done.

Is it possible for the prices set by such a process to be right, rational, efficient? This is certainly not so today. I think it’s possible that this could someday be so to a greater extent than it is now. But for this change to happen, both the experts and the investors would need to possess much more self-awareness than most possess today.

Today’s dominant model for understanding how stock investing works is something called the “Efficient Market Theory.” This theory posits that investing is a 100 percent rational endeavor. Who are these people thinking about investing in entirely rational ways? I can’t say that I have run into too many on our boards. Have you?

Is it rational that the Old School SWR studies have not been corrected to this day? Is it rational that honest posting on SWRs and on other valuation-related topics has been banned at numerous boards? Is it rational that death threats and word games and smear campaigns have been used to shut up the hundreds of community members who have expressed a desire to talk things over in civil and reasoned ways? This sort of thing is not rational. No way, no how.

There are patches of rationality, to be sure. We all struggle to become rational. We just never get there. To become better investors, we need to work harder. We need to take our struggle to new places.

The Efficient Market Theory is the block. The Efficient Market Theory says that all that we should look at is things that can be reduced to numbers, things that can be measured and manipulated and calculated. You cannot measure the pain that causes an investor to put forward a death threat, can you? You cannot so manipulate a word game as to find value in it, can you? You cannot calculate your way to a determination of the cause of a smear campaign, can you?

Leave out emotion, and you leave out at least 50 percent of the story of investing.

The study of stock investing up to this time has been the study of numbers, the hard side of the investing project. Honey, We Forgot the Humans! When we talk about valuations, what we are talking about is the human side, the emotional side. It is human emotions that cause stocks to go to the sorts of price levels that have applied in recent years. These sorts of prices levels ain’t rational and there ain’t any way that we can ever come to understand them so long as we confine ourselves to the evidence permitted in under a theory that posits that only rational factors make a difference.

We need a new model. We need that real bad.

People sometimes rely on the judgment of others. That’s reality.

Are those others smart?

Sometimes they are. Sometimes the danger is greatest when the others are smart.

Why? Because the smart are more persuasive. Yet they are just as emotional as all the other mixed-up humans. Listen to a smart human, and he or she might lead you to your ruin. Heaven help you if you listen to an expert. They are the smartest of all. And the most persuasive of all. And the most emotional of all. They’ve got the most at risk, afterall (I don’t necessarily mean in a financial sense).

Can we ever escape from this house of mirrors?

We find release by acknowledging the role of emotions rather than denying it. Denial is the disease that the Efficient Market Theory promotes. This false model is the obstacle standing in the way of our efforts to develop an informed understanding of the realities.

When we deny that we possess emotions, we become rationalizing monsters.

When we acknowledge that we are emotional, we become more reasonably rational. More on This Topic

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March 7, 2008 14:14 Stories, Songs and Parables

I put a post to the Financial Webring Forum this morning making the case for using the wisdom of stories, songs and parables to understand the realities of investing during a time of widespread belief in rational markets.

Juicy Excerpt: It is perfectly natural to use insights from all areas of life endeavors to help in solving problems coming up in all the others. When Frank Sinatra says that “when somebody loves you, it’s no good unless she loves you all the way,” he is making a powerful argument for the merits of buy-and-hold. When Smokey Robinson observes that “I don’t like you, but I love you,” he is exploring the contradictory emotions that investors feel when they see strategies that they once believed in failing to produce satisfactory results in the real world. When Dylan argues that “I got troubles so hard I just cannot stand the strain, some young, lazy slut has charmed away my brains,” he is offering assurance to the investor learning that he has fallen for a Get Rich Quick asset class. More on This Topic

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March 10, 2008 10:47 The Three-Inch Ruler

I draw your attention to the comments sections for two blog entries posted last week and ask you to consider the implications of how the point being made in one of them relates to the point being made in the other.

In response to the blog entry for March 6 (Following the Smart Makes Us All Dumb), I was asked by Evidence-Based to explain my view that there never can be an efficient market.

Juicy Excerpt: A market is people. Is that not so? People are emotional, right? Always have been, always will be. Emotions are not “efficient,” a word that suggests “orderly” or “rational” or “productive.” So how the heck are you going to define a concept that signifies “Efficient Market.” The second word contradicts the first. These two things can never be combined in a single concept that makes logical sense….Say that we left it to an opinion poll to say how long a ruler is, and then we provided huge incentives for people sometimes to say that a ruler is far less than 12 inches long and sometimes to say that a ruler is far more than 12 inches long. You could say that this approach always produces “efficient” conclusions about the length of a ruler because it is always based on the inputs of all the people participating in the survey. It would also always produce wrong results. We would hear sometimes that rulers are 3 inches, sometimes that they are 39 inches and so on. None of these answers would be right. They would all be “efficient” in the sense that the market price for stocks is always “efficient.”

Arty posted a comment in response to the blog entry for March 4 (10 Rarely Voiced Realities of Investing Today) that adds some flesh to the bones of my suggestion that incentives are offered for concluding at times of overvaluation that overvaluation doesn’t matter and for concluding at times of undervaluation that undervaluation doesn’t matter. The excerpt below is a quote from John Hussman brought to our attention by Arty.

Juicy Excerpt: I appeared briefly on CNBC last week to discuss recession risk, but beforehand, I was asked to put a positive tone on my comments.

At times when investors are at risk of losing a large portion of their life savings because valuations are out of control, only those experts willing to say that a ruler is three inches long are permitted air time to hawk their books. At times when valuations have gone low enough that investors should be buying stocks but are instead feeling intense pressures to sell (because they weren’t warned to sell at the earlier, appropriate times for doing so), I think it would be fair to guess that the incentives are reversed and it is only those willing to say that the ruler is 39 inches who are awarded precious air time.

Our efficient market is a market in which we investors are told that stocks are safe when they are most risky and that stocks are risky when they are most safe. The market price can reasonably be presumed always to be right so long as it is understood that in InvestoWorld all words in the English language have been given a meaning opposite to the meaning assigned to them when they are used in any other field of endeavor. “Safe” means “risky.” The “optimal” allocation is the worst one that can be imagined. “Rational” means”highly emotional.” “Efficient” means “random, fanciful, lacking meaningful structure or direction.” The phrase “the market price is always right” means “the market price is always wrong.” “Expert” means “stunningly uninformed of the realities.”

So long as you know enough to make the necessary mental adjustments to every message about stock investing that you hear, you’ll do fine listening to the “experts” and putting most of your life savings in the “efficient” market.

I am grateful to both Evidence-Based and to Arty for their contributions to our ongoing Learning Experience. More on This Topic

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March 11, 2008 12:30 Rounding Up

Here is a link to an article by James P. OShaughnessy entitled Expected Rates of Return: Back to the Future?

OShaughnessy is one of the good guys. The fact that he’s one of the good guys doesn’t mean that he does not feel the temptations that all investing experts feel to tell it the way it isn’t in a world in which the Efficient Market Theory is a fiction and the Emotional Market Theory is the real thing.

Juicy Excerpt: “Conversely, when the S&P 500 is coming off of an unusually high 20-year real rate of return, the news is rather dire. Based on the 71 times this happened, the minimum return 20 years after the index enjoyed a real return of 12 percent or higher was 0.55 percent. The maximum real return was 4.42 percent, and the average was 2.8 percent. With this knowledge, we concluded that pension plan managers would be best served by using a real expected rate of return for the S&P 500 in the 3-5 percent range. Given our current position in the cycle, we expect that for the next 15 years, the S&P 500 will provide a real rate of return below its historical 7 percent average.”

He first gives numbers that would justify an expectation that returns will be between 0.55 percent real and 4.42 percent real . Then he jumps to a discussion of them being between 3 percent real and 5 percent real. 5 percent is in the same general neighborhood as 4.42 percent. But 3 percent is not anywhere close to 0.55 percent. In fact 3 percent is higher than the number midway between the two extremes (2.8 percent). Why is he using 3 percent as his low number if 3 percent is higher than the midpoint of the two numbers discussed earlier in the paragraph?

I asked this question on the Financial Webring Forum and a fellow named “Parvus” suggested jokingly that this was a matter of “rounding up.”

I think that was a fine answer. I think that is very funny. More on This Topic

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March 12, 2008 08:18 Valuations Do Not Matter, and Then They Do, and Then They Do Not

Please take a look at a set of charts that appears at Bob’s Financial Website. Click on “Real Returns vs. P/E10.”

The correlation between the starting-point P/E10 value and the stock return obtained at Year 5 is weak. It is statistically significant at Year 10. It is stronger at Year 15. It is extremely strong at Year 20. Then the correlation begins to grow weaker.

What goes on?

Paying attention to valuations does not provide much help in the short-term or in the very distant long-term.

It doesn’t help in the short-term because in the short-term prices are a random walk. In the short-term, it is investor emotions that are the primary influence on stock prices. There’s no predictability.

It doesn’t help in the very distant long-term because in the very distant long-term we really do have an efficient market. In the very distant long-term it is the economic realities that are the primary influence on stock prices. Valuations make a small difference at 30 years out, but not enough to justify investing in something other than stocks.

Valuations tell the story from about 10 years out to about 25 years out. That’s the time-period in which the market is becoming increasingly less of a random walk and increasingly more of an efficient market. The correlation between the starting-point valuation level and return becomes stronger up to Year 20 and then begins to diminish. Stock returns are highly predictable at Year 30, but not by making reference to starting-point valuations. At Year 30, you can expect returns to have moved close enough to 6.5 percent real that stocks offer the better deal over alternative asset classes.

You don’t need to look at valuations to form a reasonable assessment of what your return is likely to be 30 years out. It’s impossible to form a reasonable assessment of what your return is likely to be 10 years out or 20 years out without taking valuations into account. Valuations are a significant influence on returns from about 10 years out to about 25 years out. More on This Topic

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March 13, 2008 04:21 Rob the Irrational

Derek Tinnin argues in a recent entry at his blog Invest on Purpose that: “Rational investors assume the market is rational and irrational investors assume the market is irrational, which ironically, makes perfect sense.”

He means that as an insult, fellow Passion Savers. All the same, I don’t feel insulted by those sorts of words anymore.

I used to. I recall a thread at the Motley Fool board entitled “Irrationa” in which we considered whether those who believe in the Efficient Market Disease are being rude when they call us this name. It obviously is their intent to be rude; I said that then and I say it now. Few use the term “irrational” as a term of endearment (“you big dummy” comes close, I suppose). Today, though, I am better able to shake off the insult. Six years later, I see more clearly why those who claim to possess complete rationality are really insulting themselves.

Mr. Spock is 100 percent rational. Mr. Spock is a Vulcan. Humans are not 100 percent rational. I would rather be a human than a Vulcan any day. Why should I feel offended when Derek Tinnin says that my wish has been granted?

I’m human. I’m irrational. I invest. Sue me.

Derek Tinnin is missing the paradox in what he says. Once you see that there is no such thing as a 100 percent rational investor and that there never can be such a thing as a 100 percent rational investor, you can see the subtext of his insult. Given that none of us can ever achieve perfect rationality, which group is the one being more rational, the one that acknowledges this reality and aims to make the best of it or the one that lives in denial of his unavoidable irrationality? You know what I think.

The idea that investors can achieve perfect rationality is rooted in the Efficient Market Disease. Accept the idea that the market price is always right and you are a small step from believing that investors are perfectly rational. Market prices are set by investors.

If we acknowledge our unavoidable irrationality, we have a hope of investing in at least somewhat rational ways. That’s because being alert to the pitfalls helps us avoid stepping into them. Investors that acknowledge that prices can go to crazy levels know to sell when that happens. Their selling pulls the market price back down to more reasonable levels. The most efficient market is the market in which few investors believe in market efficiency.

The other way of saying it is that the most insane market is the one in which nearly everyone believes in market efficiency. Come to believe in market efficiency and you no longer even bother checking prices before you buy — what’s the point? A market comprised of investors who believe in market efficiency is a speeding car with worn-down breaks. The only unknown is when the crash will come.

The reality is that man really is a rational being and that man really is an emotional being. The job is to maintain a healthy balance between the two impulses. Shift all the power to one side and you flip over. Did you ever get in an argument with a first-year law student? That’s your efficient-market investor. Heaven help us all.

The great irony is that, it’s because the eggheads say that we are 100 percent rational that we are told that we may feel safe in giving up our ability to reason. In every other type of money transaction, we are told to pay attention to price. With stocks, it’s different. With stocks, we are told it’s unnecessary, a waste of time. How come? We’re all rational, so there is no chance the price could ever be wrong. But if we listen when we are told that its a waste of effort doing what is needed to invest rationally, how is it that our collective rationality ever works its way into the market price?

I’m confused.

Oh, but I’m an investor. So that cannot be. I feel better now.

There’s a reason why I call the thing that most people refer to as the Efficient Market Theory the Efficient Market Disease. Denial of our emotional humanity turns us into rationalizing monsters. If you want to see what people become when they flatter themselves that they are 100 percent rational investors, take a visit to Goon Headquarters (not recommended for too many other purposes). That’s what Eugene Fama’s masterstroke looks like when taken out of the Ivory Tower and attempted in the world of flesh and blood. The investor who believes he is 100 percent rational lives in a hell of his own making.

C.K. Chesterton wrote that the man who aims to be completely rational goes completely insane. C.K. Chesterton was a Valuation-Informed Indexer before Valuation-Informed Indexing was cool.

You bet I’m irrational. Proud of it too.

You wanna make something of it, pal?

Programming Note: I will be taking the day off tomorrow in honor of my more emotional boy’s sixth birthday. My instructions are to fit as many Star Wars-related events as possible into the 24 hours available to us and so there’s just no time to spare Friday for the writing of this blog. I will return (if the Force be with me!) on Monday. More on This Topic

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March 17, 2008 08:38 Triumph of the Marketers

A community member named “Capecod” recently put a fantastic post to The New Vanguard Diehards Board.

Juicy Excerpt (actually I’ve quoted the entire post here as every word is critical to imparting the insight provided, but this post is of course only a tiny fraction of the thread in which it appears): “As someone intimately involved in the trading and investment business since the late 60’s, I’ve felt for years that many individual investors have been unnecessarily damaged because the marketing push/arguments that stress the benefits of passive investing have taken on the aura of a religion. It’s important to recognize that: (1) there ARE some real benefits that can accrue from passive investing but; (2) there can also be some really devastating financial consequences from passive investing and finally; (3) like all other investment products, the passive investing/limited asset re-allocation product suite was (very successfully) developed in the marketing departments of financial product vendors when the old stock distribution gang met early versions of the (then) new stat-based academic finance.

“In times of market distress, these forums are filled with continuing self- and group reassurances that the correct strategy is to “stay the course.” and continue to average down (keep buying assets that are going the wrong way) because we cannot know what will happen next in markets. Sadly, most of the persons writing those reassurances demonstrate through their words (or just in feeling compelled to post) that they in fact do know what is going to happen next, but they are (very) emotionally and intellectually committed to inaction/limited action because the many valid investment and marketing rationales that support passive investment products have through time morphed into an unquestioning devotion.”

I often hear experts ridicule those who use discussion boards as a source of investing insights. And I think it would be fair to describe me as the world’s foremost authority on the bad stuff that goes on at poorly moderated boards. What keeps me coming back is the realistic takes we hear from community members like Capecod.

How many times have you read that sort of comment in the conventional media? The answer is — not often. That post is the real deal. The Retire Early Community salutes you, Capecod, for having the courage to tell it like it is at a time when valuation levels are at a level that make that not at all a popular thing to do. More on This Topic

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March 18, 2008 09:10 Investing School

There’s a thread at Goon Central today that examines advice put forward at Yahoo Finance by Paul Merriman that: “You can’t outwit the bear by avoiding all risk.”

I find those words insulting to the intelligence of the millions of middle-class investors who are beginning to work up the courage to look for a way to protect a portion of their diminishing stock portfolios.

Please don’t take anything I say as a hit on Merriman as a person. I am confident that he is a perfectly nice fellow. It appears to me that he has bought into at least some elements of the Efficient Market Theory. My experience of the past six years is that anyone who buys into this “idea” ends up somewhere down the road sounding like an idiot. I laugh at the “ideas” put forward by EMT advocates but I do not laugh at the persons. That’s an important distinction, in my eyes.

The reason why I feel compelled to laugh at the “idea” is that it has done so much harm to the middle-class investors who have elected to place their confidence in “experts” using the EMT as a starting point for their investing “analyses.” A good number of the millions of middle-class investors getting hurt are perfectly nice people as well. I believe that the balanced way to go is to mock the harmful “idea” while noting that the people pushing it have emotions like all the rest of us and have felt great pressure to buy into some “ideas” that in other circumstances they too would dismiss as laughable.

Juicy Excerpt: Say that you blew a tire out on the road and you called Triple A for some help. You wanted to know where the closest repair shop was and what the best way to get the car there was and so on like that. And instead the guy says: “My advice is that you not junk the car. There is no need to junk the car just because of a flat tire.” Okay, fine. You’re not going to junk the car. Got it. Now what do you do? You’re stuck on the side of the highway with a car that won’t move…. Maybe if I went to investing school for 20 years all of this would make more sense to me. More on This Topic

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March 19, 2008 11:45 “For Entertainment Purposes Only”

We’ve done amazing work in our first eight years. Most of the saving and investing insights set forth at this site are the product of thousands of aspiring early retirees working together to learn themselves while helping others to learn at the same time. Take a bow, fellow Passion Saver! You should be rightly proud of a job well done.

There’s of course been an ugly side to the work we have done together as well. That’s the Campaign of Terror. That’s the smear campaigns, the death threats, the board bannings. What is it we are going to do about all that? How is it that we are going to open our board communities again to honest posting on safe withdrawal rates and other valuation-related topics?

We’re going to do it as a community. We built our boards as a community and we will rebuild them as a community. I see no other way. I saw an article at Yahoo this morning that I think provides some clues to what the future holds. It’s entitled College Gossip Site Under Scrutiny.

Juicy Excerpt: “JuicyCampus may be violating the state’s Consumer Fraud Act by suggesting that it doesn’t allow offensive material but providing no enforcement of that rule and no way for users to report or dispute the material, New Jersey Attorney General Anne Milgram said Tuesday.”

Do you see what’s happening?

When Al Gore invented the internet, he invented a tool of incredible power. It’s because of the power of the internet that thousands of us have been able to congregate and share our saving and investing strategies. It’s because of the power of the internet that thousands of us have been able to develop new saving and investing ideas more realistic and more effective than just about anything being put forward in the conventional media. But it’s because of the flaws in the internet that Goons have been able to hold us back, to cause so much damage to the wonderful learning resources we have built together.

This cannot stand.

Why? Because humans are not Goons. We all have a bit of goonishness inside us, that much is fair to say. We have tolerated goonishness at the Retire Early boards far longer than we should have, that too is fair to say. But will we tolerate it forever and ever, amen? I find that one hard to swallow. If I know humans the way I think I know humans, there will come a time when we will collectively discover that we cannot tolerate it one day longer. Batman and Robin will arrive on the scene and the Joker’s sick Campaign of Terror will come to a crashing end. They’ll send the guy with the phony smilies up the river, where he belongs.

Consumer fraud.

Those are the words that are being used in the article linked to above to describe the actions of the owners of the JuicyCampus site. These people indicated that they would protect people from “offensive material.” And then they failed to honor that promise. There’s a word used to describe that sort of behavior in that funny planet that rotates outside the solar system of Planet Internet, the one with the beaches, the one called Planet Earth. Back on Planet Earth, they call a broken promise a “lie,” they call someone who breaks promises a “liar.”

So the owners of Motley Fool were liars for promising to us when we built our Retire Early board there that we would be protected from Goon posters. And the owners of Morningstar.com were liars for promising to us when we took the Vanguard Diehards board in exciting new directions that we would be protected from Goon posters. Right?

That’s right. The published rules of a site have significance. They are a promise by the owners of the site to the people building the site. When we post to boards that promise to protect us from the tactics of the Greaneys and the Lindauers of the world, we have a right to expect that they will honor their promises. Smear campaigns are out. Death threats are out. Destruction of entire board communities is out.

It’s all about community. We built our boards as a community,. We rebuild them as a community. The people who own these boards comprise communities. There are responsibilities that go with that. We get our boards back by insisting that those responsibilities be honored. It’s as simple and as complicated as that.

John Bogle has a role to play. He founded Vanguard. When he permits the name of the company he founded to be used at a board, there are responsibilities that come into effect. Bogle has failed to honor those responsibilities to date. But I don’t believe that the community of investors is going to permit him to continue to fail to honor those responsibilities forever. The same applies (to different degrees) for William Bernstein and Jonathan Clements and Scott Burns and Larry Swedroe and Rick Ferri and lots and lots of others.

We will insist that these people honor their responsibilities. They will do so. We will take back the internet. We will get our boards back. Does all that not make sense?

Why haven’t we already done these wonderful things?

It is investing issues that are at the heart of the “controversy” that has brought on all the trouble. We know that death threats and smear campaigns and all the rest are wrong, wrong as wrong can be. But something holds us back from taking effective action. Taking effective action means acknowledging that valuations really do affect long-term returns, just as Bernstein says. Taking that insight seriously changes everything about the investing project, and, while the stuff we have learned as a result of doing so is exciting as all get-out, it’s scary too. It means that most of what we have been told about how long-term investing works over the past 30 years is wrong. Yowsa! What a predicament!

We’ll figure it out. As a community.

Here’s my take. Honesty matters. Yes, even in discussions held on the internet. Yes, even in discussions of investing. Yes, even in discussions of safe withdrawal rates.

Honesty matters. And personal integrity matters. I think that tells us what we need to know to gain a good fix on how this one is going to turn out after Batman and Robin figure out a way to cut the ropes, jump into the Batmobile, and hit the gas.

There are words at the Morningstar.com site suggesting otherwise. There are words there claiming that the threads that appear at the discussion boards are “for entertainment purposes only.” Nice try, Morningstar lawyers, but no cigar.

John Bogle has posted at that board. The board has been cited in Money magazine. Thousands of people have used the material appearing at the board to plan their retirements. Money discussions are not held for entertainment purposes only. A certain amount of clowning around is permitted and even to be encouraged. But money discussions are ultimately addressed to serious purposes. Integrity matters. Honesty matters. Reasonable enforcement of the site’s posting rules matters.

Busted retirements aint funny. Not even a wee tiny bit.

The Morningstar lawyers got it wrong. New Jersey Attorney General Anne Milgram got it right. When people’s retirements are at stake, corporate entities are obliged to honor their promises. I have a funny feeling that there is going to come a time when a whole big bunch of us find it something less than entertaining that a number have failed to do so.

As Catwoman might observe, New Jersey Attorney General Anne Milgram’s move is just purrfect.

Hey! Maybe she isCatwoman!

Holy cognitive dissonance! More on This Topic

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March 20, 2008 13:19 Telling the Truth — Practice Helps

I’ve added an article to the “The Self-Directed Life” section of the site entitled Telling the Truth — Practice Helps.

Juicy Excerpt: I have often found truth to be like a photograph that develops before your eyes. You start out with a hazy idea of what it looks like. Apply patience and courage and elbow grease and you end up in time with something that is sharper and more colorful and more compelling.

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March 21, 2008 07:33Passion Saving is the Your Money or Your Life Book for a New Generation”

The Dollar Stretcher web site has published a review of Passion Saving: The Path to Plentiful Free Time and Soul-Satisfying Work.

Juicy Excerpt: Bennett questions the popular notions and rules of personal finance and introduces a new way of thinking about money management…. Bennett also espouses the idea of partial financial independence, a goal that can be achieved earlier in life than complete financial independence…. I found Bennett’s style very enjoyable to read and his ideas intriguing. I even experienced my own ‘aha!’ moment while reading this book. You could say that Passion Saving is the Your Money or Your Life book for a new generation! More on This Topic

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March 24, 2008 06:29 Passive Investing Is Dangerous

I’ve added an article to the “Valuation-Informed Indexing” section of the site entitled Passive Investing Is Dangerous.

Juicy Excerpt: The desire to index comes from a healthy place. Acknowledging that you are not likely to be able to outsmart the market is an act of humility. The desire to invest passively comes from a sick place. Thinking that stocks will perform during your lifetime in ways in which they never have before is an act of arrogance.

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March 25, 2008 10:18 Emotion Denied, Emotion Empowered

A recent thread on the Efficient Market Disease (EMD) at Goon Central has a little bit of everything in it. Take a look at a few of the brief excerpts below to decide whether it is worth donning your protective clothing to descend into the sewers to check this one out.

* I can put forward a study proving that all stop signs are green. All that I need to do is to tell the people doing the research work that, each time they come across a stop sign that is red to record that as a green stop sign. If they follow my instructions, I will have data showing that 100 percent of stop signs are indeed green. Studies that do not begin with an assumption that the EMD is true show that the EMD is false. I wonder why.

* The EMD is the product of fear. The EMD itself is the product of an emotion. In a world in which investing were a rational endeavor there would be no EMD because rational people find better ways of dealing with their fears than denying that they exist.

* The very fact that you describe overvaluation and undervaluation as “arbitrary distinctions” is a product of an EMD mindset. These “arbitrary distinctions” are what determine whether stocks offer an appealing long-term value proposition or not.

* Malkiel needs to do more than “discuss” overvaluation. He needs to tell us when overvaluation is a serious enough factor to require us to lower our stock allocations to “Stay the Course” in a meaningful way. This he fails to do.

* The entire purpose of the EMD is to provide investors who want to invest in stocks at times of overvaluation a rationalization for doing so. If investors were not seeking to rationalize investing in overvalued stocks, there wouldn’t even be an EMD. Do you know of any purpose other than the rationalization of investing in overpriced stocks that is served by the EMD? Is there anything else that it does?

* You’re absolutely right that only a small percentage has examined the “theory” in any serious way…. But any investor who has read an article on investing or listened to a speech on investing or consulted an advisor re an investing question at some time over the course of the past 30 years has been influenced by the theory.

* Um, biglotta deepum. It be the histo dato, Duh! Histo data goo de rocko! Yegoot? More on This Topic

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March 26, 2008 10:24 My Take on Why Smart People Make Big Money Mistakes

I’ve added an article to the “The Book I Read” section of the site entitled My Take on Why Smart People Make Big Money Mistakes.

Juicy Excerpts: We behave like sheep because we are disinclined to take personal responsibility for our decisions. Many of us would rather lose money as the result of decisions that we can attribute to an expert than stand a good chance of earning money as the result of decisions attributable to ourselves alone. To make a decision is to live. We are afraid to live.

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March 27, 2008 12:03 The Realistic Investor Packs a Bag and Catches a Bus

Here are some words that a community member named “NorbertC” recently put to The New Vanguard Diehards Board:

“There are forums at Morningstar with a terrific, constructive atmosphere. We see such qualities as: (1) curiosity; (2) self-questioning modesty; (3) tolerance and appreciation for multiple points of view; (4) respect and mutual support; (5) humor; and (6) integrity.

“You never feel like you’re dealing with a know-it-all Scientology salesman: disingenuous, preaching, defensive, and arrogant.

“It’s sad, really. Being a long-time Vanguard client I’d like to see this forum welcome any serious investor regardless of his or her investing style. It would be no problem to have specific threads dealing with passive investing; but the entire forum is built around this philosophy.

“Vanguard itself offers good prices and great customer service; it’s no problem buying funds from other Fund families or trading ETFs and stocks. The choices are generally better than at Fidelity (where I manage my sister-in-law’s account). I have complete confidence in the company.

“Perhaps it’s time to write Vanguard a letter concerning this forum? There are certainly many sample posts on this thread that illustrate the problem.”

Good words. Emotionally healthy words.

Reasonable people should be asking themselves how things ever reached such a state. Goon posters have banned honest posting on safe withdrawal rates and other valuation-related topics at all Retire Early boards. The Old Vanguard Diehards Board was burned to the ground by a group of thugs who were unhappy that the owner of the site (Morningstar.com) permitted limited amounts of honest posting on these topics. After burning to ashes a board that was arguably the most successful investing board in the history of the internet, the thugs started their own board where honest posting was banned in no uncertain terms on the first day. When a small group of constructive posters tried to bring the Morningstar.com board back to life, the thugs returned and demanded that they be given control of the Morningtar.com board as well.

Yowsa!

I think it is fair to say that what NorbertC refers to as the Passive Investing “philosophy” is one mighty sick set of ideas. It’s not a “philosophy” that I want to be associated with in any way, shape or form, that much is for sure. You either, I bet.

Yet we are associated with it, are we not? Most of us are not Goons, to be sure. But we are humans. A certain number of humans go over to the Goon side during out-of-control bull markets. Many of those who do not become tolerant of Goon behavior for a time. Even us Normals have at times of out-of-control stock prices an inner Goon working away at our common sense and at our human decency and at our self-respect and at our courage and at our compassion. Is that not so?

Noted portfolio allocation strategist Roseanne Cash once did an in-depth study of this matter entitled “Rosie Strike Back.” It’s on her King’s Record Shop collection of investing studies. She argued on that one that hitting is simply not acceptable, that Rosie needed to pack a bag and catch a bus.

Cash’s breakthrough study only confirms what our common sense told us all along. The self-respect of realistic investors hit an all-time low in January 2000, when the P/E10 level went to 44. We are slowly working our way back to understanding that honesty and decency and realism and compassion are all things that matter in investing just as they do in all other areas of human endeavor. We are gradually working up the courage to demand that responsible people honor their promises to protect us from the sorts of thugs who post in defense of the likes of Mel Lindauer and John Greaney.

Calling Vanguard is a wonderful idea. Vanguard’s name is on the board. Vanguard should care that its once good name is being dragged through the mud on a daily basis. Someone at Vanguard should have the self-respect to pick up the telephone and demand that Morningstar take action not tomorrow afternoon, but now, this morning.

What do we do if Vanguard ignores the e-mail?

We write again. We use stronger language. We make it clear that we do not intend to take “no” for an answer, that we expect that steps will be taken, that action will be forthcoming.

You can’t put the historical data on “ignore” and maintain a credible claim that you are a rational investor. The likelihood is that stocks are going to perform in the future at least somewhat as they always have in the past. Each day that Vanguard permits the situation to continue is another day that investors who have put their trust in this institution suffer large financial losses as a result of its corporate irresponsibility.

We got into this mess as a community and we will work our way out of it as a community. When Vanguard acts, that makes it easier for Morningstar to act. When Morningstar acts, that makes it easier for Motley Fool to act. When Motley Fool acts, that makes it easier for the Early Retirement Forum to act. Each community member who does the right thing makes it easier for all the others who want to do the right thing, just as each act of tolerance of the Goons made it easier for Lindauer and Greaney to attract still more Goons to our board communities.

We walk back to a human place in the same way we walked to the different sort of place we are in today. We do it one step at a time.

The first step is buying the bus ticket. The first step is working up the level of self-respect needed to decide that we are worthy of something better than a husband who smacks us around when we dare to “talk back.” More on This Topic

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March 28, 2008 12:22 A Gradual Opening to the Idea of Permitting Honest Posting

I am seeing on our boards a gradual opening to the idea of permitting honest posting on safe withdrawal rates and on the general question of what the historical stock-return data says about the effect of valuations on long-term returns.

Here’s the text of a post that I put to the Financial WebRing Forum this morning:

If you have any specific and reasonable suggestions, I am happy to follow them. Moderator Q. One thing you have said that is specific and reasonable is that no one should bring up the history from other boards. I am happy to honor that injunction.

I cannot say whether I can follow your injunction not to “stir the pot” without knowing specifically what you mean by it. I believe that the Efficient Market Theory (EMT) is a dangerous theory. I believe that Passive Investing (staying at the same stock allocation despite huge price swings) is a reckless investing approach. For some, these very statements “stir the pot.” Yet I am not able to post honestly about my investing views if I do not put forward these statements and explain them when questioned about them.

If it is the view of the owners of this site that the idea that the EMT is a dangerous approach is too “controversial” to be said aloud, you should state that in the rules of the board. I do not belong in any board community that states that as part of its rules. So, if you state that, it is obviously best for me not to continue to post here.

You haven’t stated that as of this morning. As of this morning, it is within the rules of this board to state that the EMT is a dangerous approach. So as of this morning I intend to continue to post that view and to respond to questions asked about it. I see this as a message that many investors need to hear today. I have heard from hundreds of people who have graciously thanked me for bringing these ideas to their attention. So I am going to continue to do what I can to get the word out, both here and elsewhere.

There is nothing whatsoever personal in any of this from my end. There is no desire to “stir the pot” except to the extent that that is an inevitable consequence of people who once believed in an investing theory learning that there are some who strongly believe that it does not hold water. I will always post in a polite and warm and sincere and friendly way. I will always post with the aim of helping the board achieve its highest potential for helping people learn about the subject matter. But I will never post dishonestly. That is of course non-negotiable. It should be shocking to all reasonable people that that even needs to be said.

If you ban posting on the flaws of the EMT while not stating that you ban it in your published rules, you are running a corrupt enterprise. That’s my sincere belief. There is no possible excuse for pretending that you allow questioning of investing theories but then in reality banning effective questioning of the one that for a brief period of time has become most popular (and thereby most dangerous in the event that it is greatly flawed).

My primary obligation is to the people who want to learn more about these important questions. I respect your authority and I will work hard to make any reasonable rules succeed. It is not reasonable to permit posting in support of the EMT and to prohibit posting in opposition to it. That is the most irrational board administration policy that I can imagine. That sort of board administration policy is the product of a wild bull market and does not help us advance on our mutual journey from where we stand today to where we all in our hearts really want to end up somewhere down the road a bit.

Here’s the text of the post that I put forward in answer to ModeratorQs response post:

I like that response a lot, Moderator Q. It sounds real. It sounds sincere. It sounds well-intended.

I read the material at the link you posted and those guidelines are fine guidelines. I of course understand that the work you do here is hard work at times. I promise you that I will do all that my poor brain is capable of coming up with to make your job easier rather than harder.

One thing that I am going to do right now is to back off in the pace of my posting for a bit. I’ll continue to post, but not so often. My voice has become too prominent. That means that I will not be able to respond to all of the questions directed at me. People will just need to understand that that is the way it is.

I want the board to succeed. I am grateful to all who make contributions aimed at making it succeed (that obviously includes people like Dan and Scomac and Norbert). It may be that I will not be able to lower my voice enough to make all happy. I’ll make a sincere effort, and just let it go at that.

I am grateful for the feedback and for the work you do here, ModeratorQ. More on This Topic

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March 31, 2008 08:58 They Hate Me! They Really, Really Hate Me!

History repeats, they say. What first happens as tragedy later takes place as farce.

I have in recent days put forward several posts at The Financial WebRing Forum noting the grave flaws in Passive Investing strategies. Three community members aimed to block the discussions with highly abusive posting tactics. ModeratorQ on Friday posted a warning that the next poster who engaged in abusive posting on this topic would be suspended from participation at the forum. He also asked that, rather than pointing out the next case of abusive posting on the board, I notify him with an e-mail.

On Sunday morning, a poster named “DanielCarrera” posted abusively on this topic in a thread dealing with Technical Analysis. I sent an e-mail to ModeratorQ saying that I would be grateful if he would take action. Set forth below is the text of the response (entitled “Permanent Ban”) I received to this e-mail:

“I’m not blind to what you are doing or to the response that you are generating from long-time posters here who have made extremely positive contributions.

“I’ve done some research on your posting in other forums and at your own blog and have concluded that we are seeing the same thing here with the same resulting disruption.

“Since I’m no fool either and cut my losses early, I decided not to let this unfold until we get to the same position that other boards have gotten to when they banned you. I’m pulling the plug now. You are formally banned from this forum. You should understand that re-registering under a new alias will result in that alias also being banned but with no warning.”

Hey! I said that the opening to the idea of permitting honest posting at our boards appeared to be evidencing itself only gradually, didn’t I? More on This Topic

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January 2008 << >> April 2008