The Financial Freedom Blog – May 2008

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May 1, 2008 05:15 “I Actually Think I Am Somewhat Convinced”

Tuesday’s blog space was filled by the text of an e-mail sent to me last week by Alex Sutherland. Wednesday’s blog space was filled by the text of my response to Alex. Today’s blog space is filled with the text of Alex’s reply to my response, followed by my commentary on the entire exchange:

“Thanks for your thoughtful and quick response. I just finished reading it and will reread it once I have some time to think things through more carefully. I actually think I am somewhat convinced. I’ll think about things more and possibly respond.

“Thanks for sharing your thoughts.”

Wow.

That was like — what do you call it? — a reasoned and civil discussion of investing topics.

Is that permitted when prices are at the levels that apply today? Is someone going to turn us in to the authorities?

Alex may ultimately decide that I am full of beans. Or he may not.

Does it matter so much? I say “no.”

What matters is that we both engaged in a conversation permitting us to learn about the subject matter. It’s a human thing!

John Bogle showed that he fails to see the value of this sort of thing when he gave the Lindauerheads permission to use his name to promote their board (which prohibits honest posting on Bogle’s views on the effects of valuations on long-term returns).

Morningstar showed that it fails to see the value of this sort of thing when it banned honest posting on valuations at the Vanguard Diehards board.

Motley Fool showed that it fails to see the value of this sort of thing when it banned honest posting on safe withdrawal rates (SWRs) at the discussion boards at its web site.

The Early Retirement Forum showed that it fails to see the value of this sort of thing when it banned honest posting on SWRs.

Scott Burns showed that he fails to see the value of this sort of thing when he declared that my attempts to get the Old School SWR studies corrected evidence a desire for “personal aggrandizement” and that my efforts to open up the possibility of honest posting on the SWR topic are “catastrophically unproductive.”

Bill Bernstein showed that he fails to see the value of this sort of thing when he failed to speak up against the Campaign of Terror used to destroy the Vanguard Diehards board. Larry Swedroe did the same. Rich Ferri did the same.

People who become so dogmatic in their investing views that they cannot discuss them in reasoned and civil tones are dangerous. People who are that intense are not capable of fairness or accuracy or balance.

There is something intrinsic to Passive Investing that brings on this type of behavior. The delusions encouraged by Passive Investing advocates were responsible for the out-of-control bull. The dogmatism of Passive Investing advocates has been responsible for the failure of millions of middle-class investors to learn what they need to learn to protect themselves from the aftermath of that most terrible of bull markets.

Who’s smarter about investing? Alex Sutherland? Or Bogle and Bernstein and Burns and all the others mentioned above?

Alex understands that he doesn’t already know it all. That opens him to learning experiences.

Alex is smarter. If we must call someone an “expert,” Alex is the one who comes closest to fitting the bill.

These others may have bigger I.Q.’s. That’s possible. They also have bigger egos dampening the power of their natural intelligence. They also have a greater emotional investment in the investing advice that became wildly popular during the most out-of-control bull market in U.S. history and that has been discredited in the years since it came to an end.

I place more confidence today in what I hear from Alex (and others like him) than in what I hear from Bogle or Bernstein or Burns or any of the others noted above. How about you? More on This Topic

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May 2, 2008 07:10 Buzz Updates

The University of Toronto lists the article “Stock Valuation Made Easy” (at the “Investing for Humans” section of the site) as “Recommended Reading.”

The University of Toronto refers its students to PassionSaving.com for background on Fundamental Analysis of stocks.

Johnny2000 gives us a push at LinkFilter.net.

The author of Texas Money Talk lists Passion Saving as one of his “Daily Reads.”

I post a Letter to the Editor at the early-retirement-planning-insights.com site entitled When P/E10 Equals 8. I say: “Drawing down from a portfolio with a high stock allocation is inherently a dangerous business. Most retirees of today have no idea what sort of risks they are taking on when that make that shift from the accumulation stage to the distribution stage.” More on This Topic

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May 5, 2008 06:11 The Movie of Your Life

You want to manage your money more effectively?

Figure out why it is that you want this thing. That’s my tip. That’s what works.

I want to be rich. I don’t want to have to worry about money. I want to retire early.

Yeah, yeah. So does everybody else. Those are secondary reasons. To save effectively, you need to dig deeper. You need to uncover the primary reason, the reason that applies only for you.

You want to be rich why? To do what with your life?

You want to worry less about money so that you can worry more about what? Even Bill Gates worries about something. Having more money wont relieve you of worry, it will just shift you to a more fulfilling form of worry. What is your idea of a highly fulfilling form of worry? Where is it that you want your saving efforts to take you?

You want to retire early to do what? Early means that there are lots of years to come after the job is done. What is it you are going to be doing with those years? Figure that one out and you won’t need to ask me for saving tips; you’ll be coming up with your own in the shower and when taking a bike ride and when waiting for a bus. Saving is not difficult for those who possess a clear idea of the purpose being served.

I came across a painfully beautiful and painfully honest video that I think might help you struggle with the key saving question — the purpose question (please scroll to the bottom of the page that the link takes you to and click on the section marked “Movie”). The purpose of the video is to promote the Catholic religion. That’s not the only purpose being served by it, however. What it really promotes is living a thoughtful life. The video is telling us that we need to start with the end-point and work backwards if we want to make good decisions today. It’s only about two minutes long, but those are a powerful two minutes.

The video tells us that the words we want to hear when the movie of our lives is played back are: “Well done, good and faithful servant.” Can effective use of dollar bills increase the odds that you will someday in the not so terribly distant future hear those soothing and encouraging and cheering and healing words? It is my hope and tentative belief that the answer to that one is “yes.” More on This Topic

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May 6, 2008 15:25 Obtaining “Permission” to Ignore Valuations

John Walter Russell recently added an article to his web site entitled Diversification.

Juicy Excerpt: If you like owning lots of companies, fine. By all means, do so. You have my blessings. Just don’t tell me that you are diversifying risk. Risk is tied tightly to valuations.

This morning I wrote a Letter to the Editor entitled Obtaining Permission to Ignore Valuations offering my views on John’s article.

Juicy Excerpt: This suggests a reason why there is so much confusion over indexing and Passive Investing. People talk of the two concepts as if they are the same thing. I don’t see any necessary connection at all. Indexing is a way of achieving large amounts of diversification at low cost. Passive Investing is a “strategy” for putting your head in the sand re the effect of valuations. Why are these two concepts perceived as being related? I’m beginning to think that people are counting on the illusory safety of indexing to make them feel better about the unacknowledged risk they take on by going with Passive Investing. More on This Topic

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May 7, 2008 13:39 The Beer Don’t Taste the Way It Ought to Taste Somehow

They all talk about fear and greed. How many mention shame as one of the emotions felt during times of out-of-control stock prices?

The Early Retirement Forum banned honest posting on safe withdrawal rates (SWRs) some years back. Bill Sholar was the founder of the forum. Bill developed the FIRECalc retirement calculator and didn’t want to correct the errors in it when they were brought to his attention. Hundreds of community members showed great interest in having honest discussions of the realities of SWRs. So Bill felt that he had “no choice” but to ban honest posting on this important Retire Early topic.

That settled things, eh?

Apparently not.

Going by the posts put forward by Cute Fuzzy Bunny (one of the Goon posters who posted in “defense” of Sholar’s decision to leave the calculator uncorrected) in this recent thread, I think it would be fair to say that the answer is “no, the ban on honest posting did not settle things.”

Surprise! Surprise!

It turns out that those same humans who cannot bear to hear what the historical data says about the effect of valuations on long-term returns during a time when stock prices are at extreme highs also cannot bear to think of themselves as the types of people who ban honest posting during a time when stock prices are working their way back to reasonable levels and millions of people are suffering the financial consequences that inevitably follow from the earlier deceptions.

We’re complicated beings.

We’re not entirely honest. That’s why stock prices from time to time will reach the sorts of levels that apply today. We’re not entirely dishonest either. That’s why, every time in history in which prices have reached the sorts of levels that apply today, we have seen a price crash in the days that followed. We’re too fearful to be entirely honest and we’re too loving to be entirely dishonest. Both things are so.

The newspapers talk as if all we need to do to get stocks back to performing as they are “supposed” to is to figure out how to fix the sub-prime mortgage problem. Its not as simple as that. Or perhaps its more simple than that. In any event, it’s not an economic problem that needs to be fixed.

The problem that needs to be fixed is an emotional problem, a human problem, a valuations problem. We don’t fix the real problem by talking about other problems brought up to take our attention away from the real problem. We fix the real problem by talking about the real problem and then taking the obvious steps needed to address it.

We told a lot of lies back in 1990s. We ruined a lot of lives with those lies. We feel a lot of shame over the role we played in ruining those lives.

That’s what needs to change. We need to figure out what we need to do to get over our shame, to get back to the place where we can talk about stock investing honestly again, where we can acknowledge that of course valuations affect long-term returns, that of course we should correct any errors we discover in studies and calculators that people use to plan their retirements, that this obvious truth should not be in any way, shape or form “controversial.”

When we get to that magic place, you’ll know it. The P/E10 value will be a lot lower. The Big Shots will speak with a good bit more kindness and warmth and humor and humility. Large numbers of ordinary people will feel comfortable participating at our boards again, sharing their sincere thoughts and beliefs and concerns and reactions.

Sound good?

My guess is that the one part that doesn’t sound so good to a lot of people is the part about the P/E10 value being a lot lower. That’s a necessary part of the picture. It’s honesty in the pricing of stocks that permits all the other sorts of honesty. It’s honesty in the pricing of stocks that frees us to act like humans again.

Internationally Renowned Asset Allocation Strategist Randy Newman nailed it:

The beer don’t taste the way it ought to taste somehow.
I don’t know.
More on This Topic

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May 8, 2008 08:14 All Good News Is Bad News

Many of today’s investors are looking for encouraging news re the economy. If you accept the premise of the Valuation-Informed Indexing approach (that valuations affect long-term returns), then all good news on the economic front is actually bad news.

It is not economic problems that are causing the price drop. So an improvement in the economy cannot halt it, except temporarily. Valuation-Informed Investors see that it is runaway investor emotions that cause runaway stock prices and the big price drops that inevitably follow from them. Once prices gets so high that the economic realities cannot support strong long-term price gains, investors become increasingly frustrated that stocks are not performing as they are “supposed” to. The frustration leads to sales of stocks, which lead to price drops, which in enough time lead to reasonable price levels.

Good economic news cannot change this dynamic. It can influence the timing of the return to reasonable price levels. But it cannot transform a poor long-term value proposition into a good one.

Good economic news can ultimately cause a worsening of the price decline. Good economic news encourages investors who have excessively optimistic views about stocks at today’s price levels. Those hopes are obviously going to be dashed with the passage of time. The temporary encouragement brings on a deeper long-term disappointment. What is today viewed as good news, when it produces little in the way of a lasting improvement in returns, will cause negative emotional reactions.

The moral?

Tune out the news.

Focus on the message of the historical stock-return data. That’s where the valuable insights re the long-term performance of stocks truly reside. The historical data provides actionable information. The news is noise. More on This Topic

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May 9, 2008 14:55 Buzz Updates

The FIRE Finance blog includes “The Financial Freedom Blog” in its list of “The Top 100 Personal Finance Blogs” (#94 in the “Compete Rankings” list).

Bob’s Financial Web Site presents tables showing the strong correlation between P/E10 values and Year 20 returns.

Bob’s Financial Web Site presents lots of tables on SWRs and P/E10 and such.

Cute Fuzzy Bunny reminds us in a post to the Early Retirement Forum that we had better not report accurately what the historical stock-return data says about safe withdrawal rates if we know what’s good for us.

I post a Letter to the Editor to the www.Early-Retirement-Planning-Insights.com site entitled “Obtaining ‘Permission’ to Ignore Valuations.’ I say: “I’m beginning to think that people are counting on the illusory safety of indexing to make them feel better about the unacknowledged risk they take on by going with Passive Investing.”
More on This Topic

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May 12, 2008 08:30 Bogle Needs to Read Bogle

There was an edifying exchange of five points of view aired in the Comments Section for the blog entry for April 22 (“The Broken Homes That Jack Caused”).

The blog entry argued that the oversized gains enjoyed by investors of the late 1990s were borrowed from investors of the future, which of course means us, the investors of today. A community member named “Dunter” expressed skepticism, asserting in a post filled with more than a healthy amount of attitude that, in the normal market, wealth does not come from other investors. I told a few jokes about cutting class on Friday mornings and such. John Walter Russell quite properly corrected Dunter’s mistaken impression, stating that: “It most certainly does. John Bogle calls this the Speculative Return.”

The five points of view being given voice in that brief exchange are the five points of view we have been hearing from Day One of our investing discussions, over and over and over again.

Dunter supplied the voice of The Goon. Ill-informed. Arrogant. Overbearing. Obnoxious. If you have been paying even a tiny bit of attention for the past six years, you know the type all too well.

Russell supplied the voice of The True Expert. Russell’s standard practice is just to tell people what they need to know to invest successfully, to answer their questions, to knock himself out doing so. How did this fellow ever get past the guards?

Bogle supplied the voice of The Crowd-Pleasing Expert. Bogle of course says all of the things that Russell says that he says. But he usually throws in some confusing gibberish too, just enough to permit those absolutely determined not to come to a clear understanding of the subject matter to remain in a fog. While it is of course true that Bogle has for years and years and years been talking about the speculative return, it is also true that Bogle has been for years and years and years playing the sorts of word games that need to be played for Goons like Dunter to be able to insist that their arrogant, overbearing, obnoxious views are viewed as The Only Possible Rational Ones by the big-name experts. Dunter views Bogle as a hero every bit as much as Russell does and arguably with roughly equal justification.

Bennett supplied the voice of The Joker. I admire Russell for his bottomless reserves of patience and kindness. I don’t exhibit quite bottomless reserves of these virtues myself, however. I somehow got the idea in my head that speaking directly and plainly and bluntly on investing topics is a virtue too. That’s the one that I put at the top of the list. When I hear the sort of nonsense being put forward by a Goon poster as was being put forward by Dunter (it would have been very different if I had seen genuine confusion being evidenced by a Normal), I tell jokes as a way of signaling my disdain for the dangerous and destructive game playing.

You supplied the voice of The Normal. You don’t recall putting up a post in response to that blog entry? That sounds right. You rarely do, do you? You usually sit and listen, taking it all in, saying little. That’s the way of the Normal, for good or for ill.

Russell is gold. He’s the gift of a good God to the Retire Early Community, in my assessment.

Bennett is tolerable. His posts are too long. Some of his jokes are not as funny as he thinks they are. His song lyrics are dated. He gets on people’s nerves at times. But he makes a reasonable point now and again despite himself. He gets at least a passing grade.

Dunter is a big pain in the community backside. Steps should be taken.

Bogle is the gift of a good God when he talks sense and a big pain in the community backside when he flatters the Goons with his jibber-jabber routine. Time will tell which side of him will ultimately come to be viewed as the dominant one.

You, dear Normal, are the tiebreaker. If you had not spoken out on so many occasions in support of the idea of us permitting honest posting on investing topics, we wouldn’t be where we are today. If you hadn’t failed to deliver the hard stuff when it very, very much needed to be delivered, we would be somewhere even better.

You need to stop being intimidated by the Dunters of the world, Normal. When people come off sounding really, really dumb, there’s often a good reason. The reason is often the most obvious one you can imagine.

I cannot tell you precisely why Bogle plays up to the Goons when it is so obvious that he knows better himself. All I can reveal is that he loses points with me for playing that game. That’s the reason why I mark him down as a Crowd-Pleasing Expert rather than as a True Expert. Russell’s investing advice is a big heap more sensible and more credible and better informed than Bogle’s. That’s certainly my take, in any event.

When we are talking about whether there is a speculative return or not, we are talking about a fundamental point. If what Bogle has been saying for years on this topic has left a good number confused about it (the Goons are not a majority, but their number is not a tiny one), he needs to examine his methods of persuasion; he’s doing something terribly wrong.

We shouldn’t be talking about so basic a question at such a late date. We all should know. Not just Russell. Dunter should know. You should know. We all should know.

Bogle should know!

I sometimes think that the key to resolving all this is for Bogle to sit down in a quiet place and read some Bogle!

And carefully this time, as if he believed that what he said about how to invest successfully for the long-term mattered.

He loves us Normals, he loves us not. He loves us Normals, he loves us not…. More on This Topic

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May 13, 2008 05:29 Year Seven

At 10:40 am, we enter Year Seven of The Great Safe Withdrawal Rate Debate.

Here’s the thread that kicked it all off.

Please be prepared for one of those tricky Alfred Hitchcock-type endings. Don’t believe anything I say in that last post! Someone must have slipped Goon pills into my coffee!

Juicy Excerpt #1 (Greaney words): If I was smart enough to be able to tell when stock prices were high or low, I would adjust my initial withdrawal rate accordingly. For example, the 100% safe withdrawal rate for a 77% stock/23% fixed income portfolio and a 20-year pay out period is 4.56% (The years 1929-1949). If I was bright enough to foretell the 20-year bull market in 1980, I could have raised my 20-year safe withdrawal rate to 16.00%. Unfortunately, I don’t count myself among the select group of individuals who possess this unusual talent.

Juicy Excerpt #2 (Russell words): There really is logic to hocus’s concern about valuations during the last few years before retirement. The stock market’s statistics are poorly described and there are extended periods of overvaluation and undervaluation. That is the reason that we like to use historical data. It reduces (but does not eliminate) one’s assumptions about the market’s behavior…. Maybe hocus is leading us toward something even better.

There are great difficulties in defining what constitutes overvaluation and undervaluation. Otherwise, everybody would be timing the market successfully over long periods of time. But I do think that we can identify the kind of biggies that hocus is talking about. And I do think that it is worth knowing how much they affect the safe withdrawal rates. Grouping the data into three sets is about right. It may turn out that there are two sets of outliers…extremely overvalued and extremely undervalued…that can be clearly identified.

Juicy Excerpt #3 (Bennett words): The results you obtain from the analysis are influenced by the factors you take into consideration in setting up the study. If you leave out important factors, you will not get the most accurate results possible, but something less than that. My contention is that the existing Safe Withdrawal Rate studies ignore one piece of data that would tend to result in lower safe withdrawal rates–the effect of purchase price.

Thus, the studies do not do what they purport to do, reveal to investors their “safe” withdrawal rate. The number they provide is something else–the safe withdrawal rate that would apply if we lived in a world where purchase prices didn’t affect safe withdrawal rates. In my view, we need to adjust the results obtained from the existing studies to provide guidance more useful for the world in which we actually do live.

Juicy Excerpt #4 (Normal words): The whole 4% debate isn’t hard science. It is just an attempt to come up with a reasonable number for people to live on. 1% is unattainable for most people ‘cept intercst. 10% is stupid. What is reasonably safe? Despite my own dislike for stats like “94.6% safe”, I do accept that “around 4%” works for a pile of assets like 75/25. [I myself willingly accept a lower terminal value in exchange for a higher withdrawal number (still under 5%) by including more asset classes in my plan – particularly REITs and investment properties.]

Juicy Excerpt #5: (more Normal words): I think you’re starting to question the premise of buying at market regardless of valuation. But you don’t want to slip into “the dark side” of market timing. I’m not sure you can have it both ways. I think in order to value the market one does have to embrace “timing” and come to terms with it.

Juicy Excerpt #6 (more Normal words): I wonder if what we are seeking is really beyond our grasp.

Juicy Excerpt #7 (more Greaney words): If you want to hold 100% TIPS instead of the mix of stock and fixed income that have been optimal over the past 130 years, that’s fine. But you should realize that worst 30-year period for stocks had an inflation adjusted yield of 3.35%. TIPS are trading at or below that level. My view is that only those with unusually keen market forecasting/timing abilities would want to make that bet, but we all ” put our money where our mouth is” when it come to our retirement investments…. We won’t know if the 3.4% I-bond yield beats stocks until the end of the 30-year period. A 3.4% inflation-adjusted yield has only beat the S&P500 in 1 or 2 out of the 100 30-year periods from 1871-2000, so you need very specialized forecasting abilities to identify when to use a strategy that only works 1% or 2% of the time. I confess that I have not been blessed with this remarkable insight. Perhaps hocus has.

Juicy Excerpt #8 (more Normal words): I believe there is no question that there is a relationship between future market performance and the overall valuation of the market, over the long term. Certainly overall market lows within bear markets eventually give way to market highs within overall bull markets. And vice versa. The problem is that no one knows how low the low point is, or how high the high point is, so timing the market is not possible to do with accuracy.

Juicy Excerpt #9 (more Normal words): If you reduce your stock exposure to 50% and invest the other 50% of your assets in 5-year treasury notes or ginnie mae funds,you would expect to earn 84% of what 100% S&P portfolio would earn, 84% of 4%s afe withdraw is 3.36%.

Juicy Excerpt #10 (more Russell words): I do think that hocus is on to something…. New failures are still clustered around the same bad starting years…. What we find is that 1899 through 1916 were problem years. The depression years of 1929, 1930 and 1937 were another cluster of bad years to start retirement. The third cluster of bad years were from 1960 through 1973.

Juicy Excerpt #11 (More Bennett words): The key variable in making something “worst case,” in my understanding, is how likely is it that you are going to have a big loss in one of your early retirement years. The worst case of all is that you retire in a year like 1929, or 1966, or 1969. If that happens, your portfolio is depleted by so much right out of the gate that you are never able to make it up. Doesn’t it matter to someone planning to retire in 2003 whether 2003 is going to turn out to be a year like 1966 or not? It seems to me that the study is presuming that years like 1966 and 1929 just sort of pop up every now and again, no one can really tell when. That’s not what I see when I look at the data. More on This Topic

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May 14, 2008 12:47 Buffett Treats Us Like Babies

Here are some words that Warren Buffett put forward in a recent interview in Fortune magazine:

“I always say you should get greedy when others are fearful and fearful when others are greedy. But that’s too much to expect. Of course, you shouldn’t get greedy when others get greedy and fearful when others get fearful. At a minimum, try to stay away from that.”

Valuation-Informed Indexing is all about following what Buffett genuinely thinks is best — getting greedy when others are fearful and getting fearful when others are greedy. Passive Investing (grrr…) is all about following what Buffett presents in the words above as the approach that makes sense if you don’t believe that humans are capable of what works best — sticking to a single allocation regardless of how greedy or fearful the market price shows most other investors have become.

Buffett sells us short. Based on what I’ve heard from tens of thousands of middle-class investors participating on discussion boards over the past six years, I have concluded that he is wrong.

He’s wrong about two things.

One, he’s wrong to think that we are not capable of learning how to get greedy when others are fearful and fearful when others are greedy. It certainly is so that most of us are not capable of doing this today. But many of us have shown a willingness to learn the realities of long-term stock investing. The big hang-up is that people like Buffett have concluded that we are not capable of doing the right thing and that thus there is no purpose served in even urging us to do so!

The biggest problem for most is that they cannot integrate what their common sense is telling them (to become greedy when others are fearful, etc.) with what the Big Shot Experts are telling them (that Passive Investing is an acceptable or even a good strategy). Buffett makes the problem worse when he says the sort of thing he says in the words above. I would be grateful if he (and all of the many others saying the same thing) would kindly knock it off.

Two, he’s wrong to think that Passive Investing is going to end up being good enough. It has been good enough in recent years because we have not experienced the worst that a bear market can dish out in recent years. Most investors have no idea what is likely going to hit them in days to come because they have been listening to people saying things along the lines of what Buffett says here and have come to believe as a result that Passive Investing makes sense, that Passive Investing can work in the real world. Passive Investing cannot work. People like Buffett should stop patronizing us and start telling us the story of what works in stock investing straight, with no chaser.

There are some investors who truly are not capable of reining in their emotions to the extent necessary to lower their stock allocations when prices get too high and to increase them when prices get too low. For that group of investors, an argument can be made that Passive Investing is dangerous but acceptable. So long as it is presented in that light (an accurate light), I have no problem with it.

It is irresponsible, though, to suggest that Passive Investing can ever be more than a poor choice viewed as minimally acceptable for those investors who just are not capable of implementing the better-informed approach (to lower one’s stock allocation when prices are high and to increase it when prices are low). Yes, I am saying that Warren Buffett is being irresponsible in the advice he offers on this one point. To be sure, I was surprised to see him say what he said in the Fortune interview; Buffett has a very good track record of offering straight talk when it is needed.

The problem with suggesting to investors that Passive Investing is acceptable is that our most negative emotions cause us to want to believe that Passive Investing is more than merely acceptable, that it is actually preferred, that it is actually rational, that is it actually effective. Investors who hear the sorts of words that Buffett puts forward above come to build their financial plans around the Passive Investing concept. Once they do, they develop a great emotional resistance to hearing of the far more effective alternatives or even to permitting others to hear of the far more effective alternatives. Bad money drives out good, and ineffective investing strategies drive out effective ones.

Valuation-informed strategies are what work. But Passive Investing has been pushed so hard in recent years that it has become taboo to state this reality aloud. The Old School safe-withdrawal-rate studies are rooted in acceptance of the Passive Investing model. It is because of the fairy tale that Buffett (and lots of others, to be sure) puts forward that it has become all but impossible to talk honestly about the risks that these gravely flawed studies pose to millions of today’s retirees. Passive Investing has done us great harm in recent years. We need to work to overcome the taboo on warning people about its dangers.

Buffett is holding back from offering the advice that he obviously knows really is best because he does not think we are emotionally mature enough to take it. There is a sense in which he is right. A good number of us are not emotionally mature enough in the investing area to accept realistic long-term investing advice today. But the failure of people like Buffett to talk to us straight is a big cause of the problem. The only way this vicious circle can be brought to an end is for people like Buffett to work up the courage to just tell it like it is, consequences be darned.

The experts should not be encouraging us in our vain fantasies about Passive Investing. They should be telling us what they know, telling us what the historical stock-return data shows has always been so. We can develop the emotional maturity to invest far more effectively than we do today. The first step is hearing from people like Warren Buffett what we are doing wrong and what we need to change to get to a better place than where we stand today.

Middle-class investors have been given the responsibility of providing for their own retirements in recent decades. If we are adult enough to be expected to finance our own retirements, we are adult enough to handle the truth about how long-term stock investing works. Middle-class investors need to grow up. To do so, we need people like Warren Buffett to stop chucking our chins and cooing “goo-goo, ga-ga” at us.

No more strained peaches for breakfast for us, Warren. The next time some big magazine offers you an opportunity to help middle-class investors figure out how they got on the wrong track, please tell it like it is. We’re big boys and girls. We can take it, our (usually) straight-shooting friend! More on This Topic

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May 15, 2008 07:08 A New Approach to “Staying the Course”

I wrote a guest blog entry that appeared at the Clever Dude blog yesterday entitled “A New Approach to Staying the Course.”

Juicy Excerpt: If you, like me, believe that it is possible for prices to be too high, then you should not be sticking with the same stock allocation in your effort to Stay the Course. For investors like us, changes in prices are causing the course to always be in motion. Risks are greater at times of high prices and long-term returns are lower.

If a 60-percent stock allocation was just right when you elected it during a time of moderate prices, it cannot possibly be just right today, a time of super-high prices (my valuation tool is P/E10, the price of an index over the average of the past 10 years of earnings). For an investor like you to Stay the Course, you need to lower your allocation when prices get to where they stand today, perhaps to 30 percent. Only when prices return again to moderate levels will a 60 percent allocation again be just right for you. More on This Topic

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May 16, 2008 15:22 Buzz Updates

1) The Kirk Report describes The Retirement Risk Evaluator as “a different retirement calculator.”

2) The And Freedom Tastes Like Reality blog says: “I’ve looked at the Passion Saving return predictor, and as of this post, the S&P 500 index is over 1500, so the Price/Earnings ratio is over 30. Unless I’m in a retirement plan with an employer match, my investment dollars will not go far in an equities market.”

3) The Generational Dynamics site notes the recent New York Times article that uses the P/E10 tool to form a reasonable assessment of long-term stock returns. It says: “This is an extraordinary and historic event in economic journalism.”

4) The 2Merrill blog links to the article on “Pros and Cons of Invdexing” in the first sentence of its description of John Bogle’s revolution in investing.

5) I post a Letter to the Editor at the Early-Retirement-Planning-Insights.com site entitled Is the Stock Market a Closed System? I say: “We are saying that there is more integrity to the portfolio numbers when stocks are at fair value than there is when stocks are wildly overvalued. I really think it is fair to say that that is the bottom-line point we are making. We are saying that at times of overvaluation investors need to mentally adjust down those numbers to have them reflect reality or else they are fooling themselves.”
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May 19, 2008 08:51 This Blog Will Be Terminated With Extreme Prejudice

I will post the last entry for the Financial Freedom Blog on Friday, May 30.

Then this blog with its clunky software will be no more.

I will post the second entry for the A Rich Life blog on Monday, June 2.

The new blog will employ the groovy WordPress software. We’re moving on up!

You are not just a reader to me. You are a friend. Don’t dump me!

I ask that you kindly bookmark the web page for the new blog (today’s real blog entry, the first posted to the new blog, appears there and is entitled “We’re Not as Fearful As We Think We Are.”]

If you are one of those clever people who knows about RSS feeds, please subscribe to the feed available at the page linked to above.

If you do not either bookmark the new page or subscribe to the feed, you may forget about me. And I will miss you. Terribly.

Please do not put off doing this. You are a human and you will forget. Do it now while you are thinking about it. Do it!

Blogs come and blogs go. The quest for financial freedom continues at new places. Come join us at the new place and —

Let’s disrupt!

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May 20, 2008 11:53 Taking Our Newfangled Concept of “Retirement” to the Streets

The Get Rich Slowly blog reported sometime back on the Liz Pulliam Weston articles that featured me and several other middle-class workers who opted for a newfangled approach to retirement. Both the blog entry and the comments filed in response to it are worth checking out.

Here are a few excerpts:

J.D.: For most of these couples, early retirement means partial retirement. Instead of leaving the workplace completely, they downshifted into jobs that are more meaningful, but for which they earn less. This supplemental income also means they don’t have to draw heavily on their retirement savings.

Brad: It would be great if there were a universally accepted term for this form of early retirement. I don’t like downshifting as many early retirees don’t really work any less hard than they used to, they just have the luxury of doing work they love to do, with less focus on having to maintain a certain pay level. [Note by Rob: I refer to this approach as “Retiring in Stages” — I am retired only from the need to do work that I do not love.]

Patrick: I think most people who retire at a young age will need something to do to keep them occupied. The difference is the couples in the article can choose what they want to do vs. working for the largest paycheck.

TosaJen: DH and I are trying to set up our lives so that we could live off our investment income (financial independence or FI from Your Money or Your Life). Then, instead of working so that soul-sucking corporations can make more money for shareholders, we can perform work that we think is important.

Me: Even Rob Bennett from passionsaving.com admitted he didn’t factor in the cost of healthcare very well.

Katie: I’m intrigued that for so many people retirement means working for yourself. I just don’t see that as retirement. It’s something, but not retirement.

Canadian Dream: I’ve always like the term FIRE (financial independence and/or early retirement) to cover it all. [Note: I believe that Wanderer is the person who coined the FIRE term while he was posting at Motley Fool, the first Retire Early board.]

Minimum Wage: I don’t see anything remarkable in these stories. I’m willing to bet a year’s income that I live more frugally than they do, and that if I had their income, I’d be wealthier than they. Let’s see some stories of REAL frugality. [Note: It certainly is so that there are a lot of people who live more frugally than I do.]

Icup: I really like how these people are stretching the definition of retirement. Very creative.

Mariette: I agree with everyone that you have to have some purpose in your life after you retire, at whatever age that is; whether that’s working part time doing something you love, volunteering, exploring hobbies, whatever.

Peter: The key we should take from this is to start taking steps towards your retirement and put yourself in the path of luck. [Note: I love the idea of putting yourself in the path of luck — that is how things happen in the real world.]

Millionaire Mommy Next Door: We’ve struggled with the word “retirement”, too, and would love to find another word.

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May 21, 2008 09:54 “Securities Markets Appear to Be At Least Partially Predictable After All”

I strongly recommend that you read a recent article by Joseph Picerno entitled Back to the Future — Again: The Financial Literature Now Favors Active Asset Allocation, But It’s Still Risky.

Juicy Excerpt #1: The conviction is supported by a growing body of academic research that has been piling up empirical evidence on the side of dynamic strategies. A crucial finding: Securities markets appear to be at least partially predictable after all.

Juicy Excerpt #2: The intellectual evolution that now favors active asset allocation conflicts with the random walk theory (RWT), a particular version of the efficient market hypothesis (EMH).

Juicy Ecerpt #3: The message is periodically repeated, often to deaf ears.

Juicy Excerpt #4: The academic bibliography is now flush with 20-plus years of empirical studies showing that fundamental data (dividend yields, interest rates, etc.) offers a richer source for predicting returns than what was thought possible via the early conceptions of EMH that focused on price alone. For example, one line of research shows that returns are mean reverting in the medium to longer term, which implies predictability, and so asset allocation weights should change. Such notions clash with the random walk account of EMH.

Juicy Excerpt #6: “The level of predictability [in equity returns] tends to be 25 percent, 35 percent,” says Reichenstein. That suggests that asset allocation strategies should be only partially dynamic, such as allowing for shifts in equity weights within a modest range without betting the farm on predictions.

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May 22, 2008 16:37 “The Truth Has a Way of Emerging Eventually”

There’s a second article recently authored by Joseph Picerno that I strongly recommend that you read. This one is entitled Rethinking Modern Portfolio Theory.

Juicy Excerpt #1: Perhaps the biggest shocker of all is the idea that the value strategies of Ben Graham and his disciples are in general agreement with modern portfolio theory (MPT).

Juicy Excerpt #2: While the academic interpretation of MPT has changed, the popular perception remains stuck in the 1960s and 1970s.

Juicy Excerpt #3: Recognized or not, there’s been a slow but steady accumulation of empirical research since the 1980s that’s altered financial economists’ view of capital markets.

Juicy Excerpt #4: If two formerly competing notions of money management–each commanding huge amounts of money under management–are now in basic agreement, it probably reflects a fundamental truth about how the capital markets function and how investors should build and manage portfolios.

Juicy Excerpt #5: This is the definition of investing, Graham preached, and anything else is speculation.

Juicy Excerpt #6: The early readings of MPT conveniently overlooked such observations. But the truth has a way of emerging eventually. Indeed, a new generation of researchers took a fresh look at the random walk in the 1980s and 1990s and the accumulating tide of studies began to turn the academic tide.

Juicy Excerpt #7: Although academics are latecomers to the party, the fact that they’ve arrived only adds more credibility to what Graham taught: valuation matters.

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May 23, 2008 15:15 The Buy-and-Hold Reality Checker Is Coming!

John Walter Russell (owner of the www.Early-Retirement-Planning-Insights.com site) and I are working on our fourth investing calculator, The Buy-and-Hold Reality Checker.

Our first calculator is The Stock-Return Predictor (see tab at left). This calculator employs a regression analysis of the historical stock-return data to reveal the most likely 10-year annualized real return from a purchase of the S&P 500 index made at any of the various valuation levels. It shows the big effect that the starting-point valuation level has on a stock investor’s long-term return.

Our second calculator is The Retirement Risk Evaluator (see tab at left). This is the first retirement calculator to show the effect of the valuation level that applies on the start-date of a retirement on the odds of that retirement going bust within 30 years. The Risk Evaluator shows that most retirement calculators report numbers that are wildly off the mark for retirements beginning when stock valuations are as high as they are today.

Our third calculator is The Investor’s Scenario Surfer (see tab at left). This is my personal favorite. The Surfer uses a random-number generator to simulate realistic 30-year returns sequences, allowing the user to test various allocation strategies and see what approaches are most likely to work in the real world. The calculator shows that long-term timing (changing one’s stock allocation in response to dramatic price changes with an understanding that this approach may not produce benefits for as long as 10 years) consistently beats rebalancing (sticking with the same stock allocation despite wild price changes).

The Buy-and-Hold Reality Checker will rely on the results of thousands of runs of the Scenario Surfer to provide data-based insights on scores of strategic options. Are there some circumstances in which rebalancing stands a good chance of performing almost as well or perhaps even better than long-term timing? How long are Valuation-Informed Indexers likely to have to wait in various circumstances to see positive results? To what extent is the compounding returns phenomenon responsible for the long-term edge enjoyed by Valuation-Informed Indexers? To what extent does holding for the long term mitigate the risk of stock investing? These are the sorts of questions that will be answered by the calculator now in development.

We expect to make the Reality Checker available at the two web sites sometime this Summer.

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May 27, 2008 09:13 Humans Stink

John Bogle is corrupt.

Scott Burns is corrupt.

William Bernstein is corrupt.

Jonathan Clements is corrupt.

Bill Sholar is corrupt.

Mel Lindauer is corrupt.

John Greaney is corrupt.

Motley Fool is corrupt.

Morningstar is corrupt.

The Early Retirement Forum is corrupt.

Robert Shiller is corrupt.

John Walter Russell is corrupt.

Rob Bennett is corrupt.

Humans stink.

Yet I want to wrap my arms around them and hold them for a million years.

Whatchagondo?

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May 28, 2008 08:56 Greaney Reports on Social Security Benefits “Loophole”

John Greaney, owner of the www.RetireEarlyHomePage.com site, reports on a loophole in the Social Security rules that could pay off big-time for some retirees in an article entitled Where Can a 70-Year-Old Buy the Least Expensive Life Annuity?

Juicy Excerpt: A little-known Social Security provision effectively allows you to “purchase” a life annuity from the Social Security administration at a substantial discount to what a commercial insurer would charge for the same monthly benefit. Delaying taking Social Security benefits until age 70 gives a retiree a monthly check as much as 77% larger than a retiree who started taking benefits at age 62. But you don’t have to delay taking benefits until age 70 to take advantage of this. The Social Security Administration allows you to “withdraw your application” for benefits, reapply at a later date, and get the same larger monthly check as someone who delayed taking Social Security until that age. Of course, you’ll have to pay back all the Social Security benefits you’ve received to date, but you won’t have to pay back interest on the money and you’ll be eligible for either a tax deduction or tax credit on the income taxes you paid on the Social Security benefits collected to date. If you save and invest the Social Security benefits you collect from age 62 to age 69 and then reapply at age 70 for the larger monthly benefit, you’ll likely have tens of thousands of dollars in after-tax earnings beyond the amount that you repay to the Social Security Administration.

There’s been some discussion of the strategy at the discussion board associated with Greaney’s site.

Juicy Excerpt: Social Security’s attitude is that this is a legitimate option for people to consider and, if it makes them better off financially, they should use it.
More on This Topic

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May 29, 2008 13:11 I’m Superman!

You want to be famous?

That’s easy. I can tell you the secret.

Go to a discussion board and post honestly about how valuations affect long-term stock returns. Everyone will know your name in no time.

I didn’t say you would be popular! I said you would be famous. There’s a difference.

They were talking about me again on the Bogleheads board yesterday. They didn’t mention my name. But they were talking about me all the same. In certain circles, I’m like Hillary or Prince or Cher. Except with me they don’t even need to say one name for all to know who they’re talking about. They say something like “remember how this board got started?” and everyone either knows or knows enough to keep his or her mouth shut about what he or she doesn’t know.

There’s a fellow named Apprentice_941 who put up a post saying: “I’ve belonged to more than two dozen forums ranging from topics like Photography to Investing to Firearms over the last 10 years. I’ve noticed that the Bogleheads Forum administration censorship – and the threat of censorship calls by other forum members – is the greatest I have ever encountered.”

There were various jizz-jazz responses supplied. But the juicy stuff was stated only in code.

One guy said: “You clearly were not around for the genesis of this forum.” Another offered: “I was around on the M* site and watched as it was taken over by a couple of posters who just wanted to stir up trouble.” Yet another came forward with: “Just try to understand how the forum came into being and maybe things will look different to you.”

It’s all Farmer Hocus’ fault! We have no choice but to censor you. That mean old Rob Bennett posted honestly on safe withdrawal rates for two years– You would practice heavy censorship too if you had lived through that!

I plead guilty. I’m the troublemaker, the one responsible for “how the forum came into being,” the poster whose posts served as “the genesis for this forum.” I knew that posting honestly on safe withdrawal rates would “disrupt” (honest posting had caused “disruption” on other forums I posted to before the Vanguard one) and I went ahead and did it anyway. “Disrupting” the promotion of demonstrably false retirement claims is a good thing, in my view.

Still, I’m just some guy who posts stuff on the internet. Why is it that so many Passive Investing enthusiasts as so afraid of me? How is it that I came to possess such amazing powers?

I posted faster than a speeding bullet. The resistance to accurate posting on safe withdrawal rates is more powerful than a locomotive. I caused a huge discussion board community to come into existence in a single bound. I’m Superman!

All that I did was to post at the Vanguard Diehards board about the same sorts of things that I write about here on a daily basis. You’ve read my stuff. I really am more of the mild-mannered reporter type, am I not? Superman, bah! I’m Clark Kent.

The truth is that I am both.

Rob Bennett is Clark Kent. He writes. About personal finance. Blah, blah, blah, blee, blee, blee.

It’s the historical stock-return data that transforms me into Superman. With the historical data behind me, I’m made of steel. Ban me or correct your safe withdrawal rate studies — I leave you no other options!

The historical data is kryptonite for the Passive Investing enthusiasts. An investing model that gets the numbers people use to plan their retirements wildly wrong is an investing model headed for the trashbin of history.

People want to believe in fairy tales for the length of an out-of-control bull. So they do. But it’s sorta, kinda hard to maintain the belief when there’s some reporter type pointing out that there has never in the history of the U.S. market been a time when the fairy-tale approach did not eventually bring ruin for the investors following it. Saying that causes a good number of Passive Investing enthusiasts to suffer tummy pains.

It never was my intent to cause anyone to experience tummy pains. But Clark Kent is a reporter. Of course he tells. That’s what reporters do. And what usually follows turns him into a discussion-board Superman whether he likes the idea or not.

Where’s Lois Lane? After all the nasty stuff I’ve heard said about me, I need a hug.

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May 30, 2008 12:17 “From Shattered Dreams of Early Retirement… to Reassurance from Quantitiative Research”

I’ve added Patricia’s story to the Middle-Class Millionaires section of the site.

Juicy Excerpt: The positive aspect is that the intelligence behind your retirement analysis, plus that of those who have applied Monte Carlo simulation, plus W Bernstein, plus the Trinity studies, etc.,empowers me to really understand the potential scenarios. They give reassurance that the plans that I may be making are supported by analysis, research and evidence so I may know what I’d be getting into. To be perfectly honest, I’ve been quite fed up with retirement books that oversimplify matters.

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May 31, 2008 17:44 We’ve Moved — Please Join Us at the New Place!

Please bookmark the A Rich Life blog or subscribe to its RSS feed. Starting June 2, that’s where all the aspiring early retirees are hanging out. We need you there to make it a fun party!

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April 2008

The Financial Freedom Blog – April 2008

PassionSaving.com Home Page : The Financial Freedom Blog : April 2008

A community member named “Squash500” speaks for many in a post he makes to the thread at the Financial WebRing Forum discussing its recently adopted ban on honest posting on investing topics. He says: “I agree with the banning of Hocus. What I don’t understand is how Hocus can correspond in such a sweet and polite way — yet he irritates me to no end! What does Hocus get out of all this nonsense? Is he trying to sell us his book for $24.95?” In a follow-up post, he adds the observation that: “Hocus was banned because he was a polite and radical PITA [that stands for pain-in-the-behind].”

Squash500 nails it.

I have indeed endeavored to be sweet and polite in my postings on the various boards. All community members share with me what they have learned without charging me one thin dime as compensation for services rendered and edification received They deserve sweet and polite, or at least a sincere effort in that direction. So that’s me.

Irritating? A radical PITA? Yep. That’s me too.

Bull markets are a lie. The U.S. economy has been generating sufficient productivity to finance a 6.5 percent annual real return for stock investors for a long, long time now. They don’t call it a bull market when the return is 6.5 percent real. That’s just a normal market. To earn the designation “bull,’ the return has to be a good bit more than that. Another way of putting it is that, to earn the designation “bull,” the return has to be a lie. That’s so by definition.

The rational investor understands that, when he or she buys into something referred to as a “Bull Market,’ he is participating in a grand act of deception. Whenever you hear the phrase “Bull Market,” it would be a good idea to substitute in your mind the phrase “Lie Market.” Hearing it that way makes it less likely that you will be one of the ones who gets ruined in the aftermath.

I think of the people who post on the boards that I post on as my friends. That’s why I am sweet and polite to them. That’s also why I let them know that Bull Markets are Lie Markets. If you saw your friend getting into his car at a time when he was nutso drunk and you took the keys from him and hid them, there’s a good chance that he would call you a radical PITA. Too bad, you know? It comes with the job of being a friend.

Become friends with me and you’re going to have a hard time finding the keys when you attempt to drive home drunk from my house. Become friends with me and you’re going to hear an earful about what the historical data says about the chances of you obtaining a decent long-term return on your money for savings invested in stocks at times when prices are at the levels they have visited in recent years.

I can’t take your investing keys away from you. It’s your call where you put your money. But I can respond to questions and comments put forward on discussion boards that encourage you to make the sorts of mistakes that have in the past always caused middle-class investors to suffer wipeouts. If someone tells you what the safe withdrawal rate would be in some imaginary world where valuations have no effect on long-term returns, I’ll do what I can to get the word to you that that world ain’t the world you are going to be able retire in. If someone plays some nonsense gibberish word game to entice you into leaving your stock allocation unadjusted at a time when prices have traveled to the la-la land levels where they reside today, I’ll do what I can to let you know that this is a strategy that has not once yet worked in the real world.

I’m a PITA to those who tell tall tales about how investing works at times of runaway price levels and to those who take comfort in the tall tales too. No apologies.

Do I know everything? Nope.

But then neither do the ones who are so afraid of what you will learn if honest posting is permitted that they spend years of their life energy running from board to board making sure that no thread in which people engage in reasoned and friendly sharing of investing ideas is permitted to remain in place long. I oppose those guys (and witches). I like to think that my voice is the strongest voice in the Retire Early Community calling for removal of the thugs who have done so much damage to so many of our boards in recent years. I put a post to the Motley Fool board urging Greaney’s removal on November 23, 2002. I think it would be fair to say that I’ve done my part and then a whole big bunch more on top of that and then a whole big bunch more on top of that too.

The ones who encourage you in your fantasies that this might be the first time in which all the rules that have governed the markets since the first day are stood on their heads are not your true friends, Squash500. That’s my take.

Sometimes what they say in advertising slogans really is so. It takes a tough man to make a tender chicken. Think of me as the Frank Perdue of InvestoWorld.

Think it over. It’s your money, my new friend. More on This Topic

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April 2, 2008 12:22 It’s Personal

There’s a revealing comment in the “explanation” sent to me by ModeratorQ for the ban on honest posting on investment topics recently adopted at the Financial WebRing Forum. He says: “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.”

What he is saying here is that it is all personal.

He’s not saying that he has personal negative feelings against me. The reference to me is exceedingly vague — he says that he is not blind to what I am doing but gives no indication that he views what I am doing as being in any way, shape or form harmful to the forum. The meat of that sentence is the reference to “long-time posters here who have made extremely positive contributions.” ModeratorQ likes the three abusive posters — Norbert Schenkler, DanielCarrera, and Scomac. The ban was imposed in deference to these three individuals (and their “defenders”). The motivation for the ban is personal in nature; its an expression of support for three abusive posters who don’t like being exposed as such on “their” board.

Crazy, huh? Why the heck would a board administrator act in support of abusive posters? Isn’t it the job of a board administrator to take action against abusive posting? When I sent my e-mail to ModeratorQ, surely he understood that my request that he “take action” against the abusive posting was not a request that he ban me!

He knew that I wasn’t asking that he ban me. He knew that I was asking that he suspend or ban Dan, who had with obvious and deliberate intent posted in contempt of ModeratorQ’s repeated warnings that he not bring up what had happened at other forums at earlier stages of The Great Safe Withdrawal Rate Debate. Yet the reality is that he did ban me and he did not ban Dan.

He tells us why in the words quoted above. Dan is one of “the long-time posters here who have made extremely positive contributions.” One of the most popular posters at the board was engaging in obvious violations of the rules of the board. What to do? What to do?

ModeratorQ is obviously not the first board administrator who has had to struggle with this dilemma. David Forrest at Motley Fool had to face it when John Greaney became unhinged and threatened to kill anyone who posted honestly on the safe withdrawal rate (SWR) topic. Morningstar Casey had to face it when Mel Lindauer elected to have his Goon Squad burn The Old Vanguard Diehards Board to the ground rather than permit honest posting on SWRs and other valuation-related investing topics. Andy Rabinowitz faced it when John Walter Russell’s posts to the Early Retirement Forum were so well received that BigMoneyJim and CuteFuzzyBunny and Nords made it clear that the board would be held hostage until a ban on honest posting on the SWR topic (and on other, related topics) was put in place.

The rules of what works in investing change as we shift from a bull to a bear. There is one set of rules that tells us what works at times of low and moderate valuations. There is a very different set of rules that tells us what works when prices reach the la-la land levels that have applied in recent years. The thugs who have destroyed so many of our boards are people who came to positions of “leadership” in times when one set of rules worked and who have continued insisting on the merit of their failed ideas after we entered an entirely different era.

Do you keep posters around who achieved popularity in an earlier time and have since become an obnoxious presence? Or do you give them the boot, angering their supporters? Another way of putting the question is — Do you honor your obligations to protect the integrity of the community discussions or do you pretend that you can’t see anything wrong with the use of deception, intimidation and word games to block discussions that bring to light the errors of popular contributors?

What if you yourself are one of the ones who has been putting forward poor investing advice for years now? How much would you be willing to wager that ModeratorQ believes in the Efficient Market Theory? I don’t know for sure. But I know for sure that I wouldn’t want to bet money against the possibility.

Huge bull markets become huge bear markets. That’s the way it has been playing out in the U.S. market for 138 years now. It’s also the way it has played out in every market that has ever existed anywhere on Planet Earth since the day the first market was set up for business. I have a funny hunch that it might play out that way this time too.

But that wasn’t the winning thing to say during the time when we were collectively electing to send stock prices up, up, up, was it? It may be that there were people posting honestly in those days, or at least making an effort to do so. Those people weren’t made to feel welcome. They were shown the door. They’re long gone now. The ones who rose to the top were the most stubbornly and mindlessly and viciously pro-bull posters.

The worst rise to the top in a wild bull. It’s no accident that we today see John Greaney possessing influence in one community and Mel Lindauer possessing influence in another and Norbert Schenkler possessing influence in another. Cartoonish pro-stock views were what sold in an earlier day; it was the most reckless of investing viewpoints that had “The Juice” back in the Summer of 1999. We are paying a financial price today for our too easy acceptance of the conventional wisdom back then.

This is what it feels like to experience change take place before you in real time. Change is what we are seeking when we ask that our boards permit honest posting. We’re not just seeking change re what topics may be discussed. We are seeking change re what community members will obtain Big Shot status. That’s why there is such heated resistance to the idea.

I’ts personal.

It would be nice to think that these sorts of things do not matter. It would be nice to think that politics does not enter into the determination of what can be said on discussion boards dealing with investing. It would be nice to think it, it would be a lie to say it. Politics affects every human endeavor. Investing is no exception.

You cannot trust most of what you read about how to invest effectively at a time when the P/E10 level is 24. No way, no how. What you read in investing forums and in newspapers and in magazines is all influenced by politics. The political reality is that there are lots of people who got a lot of things terribly wrong during the bull years and who have caused huge financial losses for millions of middle-class investors who placed their confidence in them. They are not in much of a mood today to say those wonderfully healing words “I” and “Was” and “Wrong.” They are in a cover-up mode. They are in a stonewall mood. They are in an abusive posting mood.

You are going to have to work up the courage to force the issue.

Or face the financial consequences of failing to do so.

You see, it’s personal. Not just for the Goons. Not just for the site administrators. Not just for me. Not just for the other Normals. For you too. It’s personal for all of us. That’s one of the many things that the Efficient Market Theory gets wrong. Politics isn’t always efficient but politics sure as shooting plays a role in the development of our investing strategies down here in the Valley of Tears.

The previously scheduled debates have been canceled at the Financial WebRing Forum. Three candidates who were big winners in the early primaries but who have been down in the polls a bit of late wanted it that way. The Big Shots who own the microphones clicked the “Off” switch. The decision is final.

Or is it? More on This Topic

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April 3, 2008 12:38 Why I Quote Song Lyrics in My Posts…

… and why it drives the Lindaurheads quite bananas.

The words below are from G.K. Chesterton’s Orthodoxy. There is talk of a major publisher putting out an annotated version later this year under the title The Case Against the Efficient Market Theory.The new version will include tables and all that junk, according to industry rumor, but it will not be peer-reviewed. They searched far and wide, but they couldn’t find any peers to Chesterton!

Anyway, here’s what this Chesterton individual has to say on our favorite topic:

If you argue with a madman, it is extremely probable that you will get the worst of it; for in many ways his mind moves all the quicker for not being delayed by the things that go with good judgment. He is not hampered by a sense of humor or by charity, or by the dumb certainties of experience. He is the more logical for losing sane affections. Indeed, the common phrase for insanity is in this respect a misleading one. The madman is not the man who has lost his reason. The madman is the man who has lost everything except his reason.

The madman’s explanation of a thing is always complete, and often in a purely rational sense, satisfactory. Or, to speak more strictly, the insane explanation, if not conclusive, is at least unanswerable…

Perhaps the nearest we can get to expressing it is to say this: that his mind moves in a perfect but narrow circle. A small circle is quite as infinite as a large circle; but, though it is quite as infinite, it is not so large. In the same way the insane explanation is quite as complete as the sane one, but it is not the world.

The lunatic’s theory explains a large number of things, but it does not explain them in a large way. I mean that if you or I were dealing with a mind that was growing morbid, we should be chiefly concerned not so much to give it arguments as to give it air, to convince it that there was something cleaner and cooler outside the suffocation of a single argument.

Curing a madman is not arguing with a philosopher; it is casting out a devil. And however quietly doctors and psychologists may go to work in the matter, their attitude is profoundly intolerant. Their attitude is really this: that the man must stop thinking, if he is to go on living. Their counsel is one of intellectual amputation. If thy head offend thee, cut it off; for it is better, not merely to enter the Kingdom of Heaven as a child, but to enter it as an imbecile, rather than with your whole intellect to be cast into hell

Such is the madman of experience; he is commonly a reasoner, frequently a successful reasoner. Doubtless he could be vanquished in mere reason, and the case against him put logically. But it can be put much more precisely in more general and even aesthetic terms. He is in the clean and well-lit prison of one idea: he is sharpened to one painful point. He is without healthy hesitation and healthy complexity….

The sane man knows that he has a touch of the beast, a touch of the devil, a touch of the saint, a touch of the citizen. Nay, the really sane man knows that he has a touch of the madman…. Madmen never have doubts. More on This Topic

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April 4, 2008 12:05 Financial WebRing Forum Entertains (Somewhat) Honest Discussion of Valuation-Informed Indexing

The Financial Webring Forum recently entertained a (somewhat) honest discussion of Valuation-Informed Indexing. The walls are (slowly) breaking down!

Here are some snippets of observations explored in more depth at the thread linked to above:

* Here’s a graph of 30 year annualized returns. B&H is black, VII is magenta. VII is pretty clearly superior everywhere, although there are a few occasions ending in the last half of the 90s, i.e. starting in the last half of the 60s, where B&H has a small advantage. Recent differences appear to be quite minor, although I would point out that an extra 1/2% a year over 30 years is not chicken feed.

* In 1996, you could not make an argument that the historical data ever showed a period where B&H was better. Timing was sometimes no better but it was never worse. But then the late 1990s happened and it all went to hell. B&H turned out to be a huge winner in the late 1990s. Tie it together with widespread acceptance of modern portfolio theory and efficient markets – and no looking too far back because really old history is probably less relevant – and B&H is obviously the way to go. The 2000-2002 bear market might make you question that, but maybe not. We have a few more years under our belt now. Is Shiller a hero or a fool? Is buy-and-hold appropriate because the old days aren’t coming back or are we fooling ourselves with recency bias?

* The B+H outperformance seems to be an “anomaly” to the extent that a massive bubble is an anomaly in market behavior.

* The B+H style is suited for the investor who lacks the time, talent or interest to watch market movements or to do the work required for VII. It has validity based on history. It is meant to deliver a sleep factor of 8 to 9/10 for this type of investor. VII is for the person who likes the work, can do the work, and takes the time for the work. NOT doing the work would be stressful. And that means this investor isn’t suited to B+H. VII also has validity based on history. Hence for this investor, the sleep factor is also 8 to 9/10.

* Pretty wimpy example of market timing! Real market timers are either 100% long or 100% cash. Nothing in between. Or, even better, 100% long or 100% short!

* Thanks, fascinating.

* VII is built at least partly on some very old wisdom from Ben Graham, namely that it’s unwise to go to extremes under any circumstances. IIRC Graham suggests varying equity allocations in the 25-75% range.

* I’m surprised by the limited number and muted nature of responses to this posting. Firstly, it appears stimulated by boredom: “Things have gotten altogether too stale. You can only talk so long about thrift and RRSPs and taxes and gold and diversification and the venality of politicians and whether blonde is he or she and … ” Secondly, through the ultimate sin of retrospective data mining, Norbert is casting doubt and dismay amongst the faithful, at a (market) time when most are already sufficiently stressed to start making errors.

* My concern with B&H is that one’s equities could be in a severe dip at the very moment when you need to cash some in to sustain a retirement lifestyle. Has this situation been discussed previously?

* Actually, the way you specify the model, it seems plausible. I’m presuming you’re using indexes to achieve stock exposure. What happens if instead it’s a stock basket (say 30 stocks)? The question is whether all stocks have to be within the P/E10 parameter.

WARNING! Discussions of the realities of stock investing have been found to be exceedingly dangerous to newbies at the Motley Fool site, at the Early Retirement Forum and at Morningstar.com. Do NOT read about Valuation-Informed Indexing if you have at any time had thoughts that most investing experts might not already know everything there is to know about the subject. Learning what the historical data says about the effect of valuations on long-term returns may render you unfit for Passive Investing and other strategies aimed at taking money out of your pocket and putting it into the pockets of the experts who have better ideas as to what you should do with it than you are able to come up with through use of your common sense. You have been WARNED. More on This Topic

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April 7, 2008 10:50 Can Passive Investing Beat Valuation-Informed Indexing?

A new community member named “Curious” asks a thought-provoking question in the comments section for Friday’s blog entry (“Financial WebRing Forum Entertains [Somewhat] Honest Discussion of Valuation-Informed Indexing”). Here’s the question:

“Let’s suppose that the market is made up only of buy-and-hold investors and valuation-informed investors. Do the buy-and-hold investors (who do not trade) lose money to the valuation-informed investors (who trade)?”

To read my response or to offer thoughts of your own, please go to the blog entry for April 4 and then scroll down to the section in blue entitled “Comments Posted” and click there.

Juicy Excerpt: What would happen if everyone tried to sell their shares when the market was valued at a P/E10 level of 44? I believe that the sales would cause prices to crash so that, by the time the last person selling received compensation for his shares, the total payout would be the amount that would have been paid out had the P/E10 value been 14 or 15. Early sellers would of course obtain more than fair value for their shares. But late sellers would obtain less than fair value. The overall payout would be fair value, an amount roughly one-third of what was suggested by the newspaper prices at the time when the market was valued at a P/E10 level of 44. More on This Topic

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April 8, 2008 09:30 Hocomania Never Sleeps

Every marriage has its moments. This one couple had tried everything. They tried talking it over and they tried hiring a babysitter and rediscovering the romance and all that other junk and finally came up with something that really seemed to work for them. The thing they came up with was, each time one spouse was annoyed by something the other spouse said or did, he or she would pick up a frying pan and hit the offending spouse over the head with it. That did the trick.

It worked so well for them that friends and neighbors followed their lead and found that the Frying Pan Theory for achieving marital bliss worked for them too (they lived in a strange neighborhood). Soon people everywhere were hitting their spouses over the head with a frying pan with great regularity. They were content. They were happy. They were fulfilled.

There are always troublemakers. There was a group that called themselves the No Fries who claimed that the Frying Pan People were nutso. Some of them really put their necks on the line. Some of them proclaimed the Frying Pan gibberish “dangerous.”

Something had to be done. The Frying Pan People had dollar bills in their eyes. If they could only persuade everyone to adopt Frying Pan Theory as their approach to marital bliss and get those Normals to shut up, all would be well. They hired some people to do some Studies. They needed to pass Peer Review, of course, so they asked some of the other Frying Pan People for recommendations. The Frying Pan Professors said, yes, it appeared to them that the Frying Pan Theory checked out. Frying Pan People got tenure. No Fries did not.

Time passed and the No Fries began to have doubts. So many people seemed to think that frying pans were the way to go. And they all looked so happy! Plus, there were those Studies. Were the No Fries missing out on something good?

A few No Fries tried hitting their spouses over their heads with frying pans. The spouses complained that they didn’t like it, it didn’t make them feel loving and warm and squishy inside. Something was wrong. They did the sensible thing and sent a letter in to one of the big magazines covering developments in the field and asked what was up. The magazine person explained that you have to really believe in Frying Pan Logic for this thing to work. Those with doubts don’t experience the magic. The very fact that the whiners were asking these sorts of questions showed why Frying Pan Logic wasn’t working for them.

Some of the No Fries began to enjoy getting hit by frying pans at this point. Or at least, if they didn’t, they were no longer willing to say so. It was one thing to get hit by a frying pan every now and again. It was something else to be a pariah in the neighborhood. It you didn’t really like frying pans, the thing to do was to at least pretend you did. Maybe you would get to like them over time.

A few of the more stubborn No Fries weren’t able to kid themselves that it felt good. “It hurts,” they would complain, “really, it does.” They were tolerated so long as they kept quiet about their strange ideas. If they mentioned now and again that they thought the frying pan thing was a sorta not great idea, no biggie. If they kept at it — well, you know.

More time passed and things got to a state where everyone had these ugly bumps all over their heads. The Fries didn’t want to admit to the No Fries that they had been right all along, but signs occasionally slipped out that they didn’t find it a big bunch of fun getting another pounding on top of the bumps already in place. “Yowsa!” they would cry out. Then, when someone asked why they had cried out “Yowsa!” they would say that there was no particular reason, it wasn’t like they were having doubts about Frying Pan Logic or anything like that. They meant it as a celebration of Frying Pan Logic. They meant “Yowsa!” in a good way. Yeah, that was it.

Eventually, people got bored not only with being hit by frying pans but with hitting their spouses with them too. It just wasn’t the thing to do anymore. The Study People got about the business of writing new sorts of studies proving new sorts of things.

People still got married. People still moved into houses together and had babies and all that sort of thing. Instead of hitting their spouses over the head with a frying pan when trouble arose, they fell back into the habit of yelling and crying and then seeing that look and then getting hot. That seemed to work out okay, more or less.

No one ever thought to write any Peer-Reviewed Studies about it, however. It seemed too obvious a thing to write a study about.

The couple who started the frying pan craze never got divorced. They have five kids today, three girls, two boys. They say that they don’t know what they were thinking. There was a lot going on at the time and this crazy idea somehow just popped into their heads. They gave it up long before most of their followers. She says it was his idea and he says it was her idea.

The kids say that their strong hunch is that they’re both right. More on This Topic

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April 9, 2008 12:12 Technical Analysis for Non-Dummies

I’ve added an article to the “Investing for Humans” section of the site entitled Technical Analysis for Non-Dummies.

Juicy Excerpt: I know little about technical analysis. I don’t practice it. I don’t recommend it. But hey! Where would I be today if I let little things like that stop me from spouting off my opinions on an investing topic?

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April 10, 2008 15:55 Warning: I Talk to Goons

I’ve added an article to the “Banned at Motley Fool!” section of the site entitled Warning: I Talk to Goons.

Juicy Excerpt: A good number of the Goons have posted constructively on other topics or at other times. Some even argued in support of the idea of permitting honest posting on safe withdrawal rates in the days before their turn to The Dark Side. I hate goonishness more than anyone else in the community. I don’t think it follows that I need to hate the particular individuals who post as Goons as people.

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April 11, 2008 12:18 “This is What Investing Should Be — Calculated, Deliberate, Confident, Informed and Simple”

I’ve added Aarons story to the Middle-Class Millionaires section of the site.

Juicy Excerpt: “You and Mr. Russell are on to the most valuable ideas about spending and investing I’ve ever encountered. Saving 30% can be easier than saving 10%? That is absolutely brilliant, and I know it’s true because I’ve been there. One is a quest, and the other is a drain. Totally different energy.

“I am not willing to save 30% anymore, but I do have 15 years of accumulated savings that I am dead-set against losing and will count on for financial independence some day. I’m waiting for another 1982 opportunity, but don’t know when or if it will ever come.

“Then I saw the PE10-weighted TIPS/S&P 500 portfolio and had an ah-ha moment. This is what investing should be — calculated, deliberate, confident, informed and simple. And based on mathematics and reason. We should know why our investments will work, and feel good about being able to invest. Faith should not be a factor, and sacrifice should not be the attitude.

“I’ve got a lot to learn, Rob. Thanks again for putting all your ideas out there. I really can’t express what I’m going through right now. It’s a turning point for sure.”

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April 14, 2008 13:04 “It Is the Rigidity of Passive Investing that Causes All the Sickness that Surrounds It”

A community member named “New Investor” asks a question in the comments section for Friday’s blog entry (“This Is What Investing Should Be — Calculated, Deliberate, Confident, Informed and Simple”) that in my view reveals the sickness at the core of the Passive Investing approach. He argues that, in the event that Valuation-Informed Indexing is the way to go, “clearly we need an ironclad strategy, in the form of a strict rules-based approach.”

I strongly disagree.

Juicy Excerpt: Why the intense resistance to considering what works? The resistance is the product of fear, New Investor. Investing is taking on risk. Taking on risk causes fear. Our search for relief from the fear we experience investing causes us to look for formulas that possess some magical power to always be right, to always work and to work without the need for us to exercise judgment and to take the chance of being wrong. Any investing approach that pretends to be responsive to this sick desire in time only magnifies our fears. There are no magic formulas. Your demand that I provide you with one is rooted in the same emotional weakness that caused you to fall for the Passive Investing mindset in the first place. I am encouraging you to try to overcome your fears, not to submit to them a second time, this time in the name of timing rather than in the name of Passive Investing.

Please take a step back and consider for a moment what it is about Passive Investing that causes such intensely self-destructive reactions among the investors who follow it. It is the rigidity of Passive Investing that causes all the sickness that surrounds it. The error in Passive Investing is that it insists that one stock allocation apply at all sorts of varying price levels. What you are asking for here is just a variation on this same doomed and dismal theme. You are saying that the allocation may change, but that it must change in formulaic ways based on some rigid set of pre-determined rules. Why? Why must investing be turned into a sick, neurotic game? Why cannot reasonable and emotionally healthy humans consider investing in reasonable and emotionally healthy ways? Did someone pass a law back about the time that Eugene Fama revealed to an awed universe the Efficient Market Theory?
More on This Topic

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April 15, 2008 12:08 Joke

Just about everything you have read about investing over the past 30 years was influenced in important ways by the Efficient Market Theory. The Efficient Market Theory is a joke — a dumb joke, a cruel joke, a very unfunny joke, but a joke all the same. We are watching in slow motion and in real time the greatest loss of middle-class wealth in the history of the United States play out before our eyes as a result of the lies told to us by advocates of this dumb, cruel, unfunny joke.

We don’t need intellectual arguments. We had all the intellectual arguments we needed to reveal the Efficient Market Theory as a joke on the day it was put forward. There never was even a sliver of intellectual integrity to this “idea.” So that’s not an issue.

What’s holding us back? Why haven’t the Old School safe withdrawal rate studies been corrected? Why haven’t middle-class investors been warned to bring their stock allocations down to levels that are reasonable for these prices levels? Why haven’t we gotten about the business of replacing the Sick Joke Approach to Investing Analysis with something more substantial and more realistic and more practical and more balanced and more reasonable and more life-affirming and more human?

Pride.

Or shame, if you want to look at it from that direction.

The people who pretended to believe in the theory for a time are too embarrassed today to acnknowledge the damage they have caused by putting forward such dangerous investing advice. They have built up in their own minds and in the minds of their followers an image of themselves as infallible and they don’t like the idea of seeing those perceptions go “pop!” even a tiny little bit.

They must eventually do so, of course. Theories that don’t make sense don’t stand the test of time. The Efficient Market Theory is today in the process of being tested for the first time. It is failing the test with flying colors. The Empire of Nonsense is crumbling. So the Big Shot Experts are eventually going to have to change their tune, whether they like the idea or not.

My thought is that it is better for them to get this over with sooner rather than later. I think it would be fair to say that there are two or three who have expressed displeasure with the veiled hints and vague suggestions that I have put forward in this regard. I’ll keep on doing what I do. I wouldn’t mind a bit more help.

The reason why I think it is better once you know you got something wrong to just come out and admit it is that the longer the con continues, the harder it becomes for those protecting the con from scrutiny to avoid looking bad for doing so. Here are some words from John Mauldin:

“This weekend Rob Arnott told the audience at my conference that he recently spoke to approximately 200 academics in the area of finance. He asked them how many of them believed in the Efficient Market Hypothesis that Woody wrote so cogently and negatively about above. Not one of the academics raised his hand. Then Rob asked how many of them use EMT in their research and assumes it to be true, and nearly every hand was raised.”

Not good. More on This Topic

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April 16, 2008 12:45 Does Mel Lindauer Run Vanguard?

I’ve added an article to the “Banned at Motley Fool!” section of the site entitled Does Mel Lindauer Run Vanguard?

Juicy Excerpt: Does Mel run Vanguard? Does Mel run this board? Is Mel unhappy? This board is more like a police state than a place to share ideas.

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April 17, 2008 15:44 Never Go to a Nerd for Investing Advice

Bernstein is a nerd with a creative mind.

Bogle is a nerd with courage.

Munger ain’t no nerd. He’s the opposite.

Buffett isn’t a nerd either. He might have some friends who are nerds. That’s the worst you can say about him.

Asness isn’t a nerd. Too funny.

Orman isn’t a nerd. Her eyes are too big.

Arnott isn’t a nerd. Arnott is a stud. Arnott actually pointed out that the nerds are deep down inside afraid to look at what the numbers say. This Arnott fellow is the real deal.

Russell isn’t a nerd. He’s too kind. And too generous.

Easterling likes numbers an awful lot. I can’t blame you for being suspicious. But he’s smart and he’s a straight-shooter. What do you suppose his game is?

Shiller is Superman wearing a nerd disguise. How did the guards happen to let that one past the gate?

Mauldin talks about baseball a lot. That makes me wonder that he might be a nerd trying to cover it up. And he writes such long posts; that’s always a bad sign. Still, If he’s a nerd, he does the nerds proud. There are exceptions to every rule.

We tackled the Lindauer matter the other day. He’s off the hook for a week or so.

Kiyosaki is an anti-nerd. Kiyosaki would benefit from taking nerd pills. It’s not often I run into one who I wish could be more nerdy.

Burns is a nerd who tries hard to overcome it. Let’s give credit where credit is due.

Bennett ain’t no nerd. He’s an idiot, sure. That’s different. More on This Topic

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April 18, 2008 15:36 “I Woke at 4:00 am and Stared at the Wall for 20 Minutes”

I’ve added Tasha’s story to the “Middle-Class Millionaires” section of the site.

Juicy Excerpt: I woke at 4:00 am and stared at the wall for 20 minutes before turning on my laptop to surf around looking for info on becoming debt-free and financially independent. I found you through a series of Google searches on financial independence. For my third search, I entered “what does financial independence mean?” At the bottom of the third Google page, I clicked on “8 Paths to Financial Independence,” which brought me to your well-thought-out, respectfully written piece at PassionSaving.com.

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April 21, 2008 04:23 Passive Investing — The Theory and the Practice

For an in-depth examinatiion of how Passive Investing works in theory, please click here.

For an in-depth examination of how Passive Investing works in practice, please click here.
More on This Topic

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April 22, 2008 09:22 The Broken Homes that Jack Caused

Taylor Larimore (co-author of “The Bogleheads’ Guide to Investing”) has a retirement home that he refers to as “The House That Jack Built.” The idea is that he earned such oversized returns during the wild bull that he was able to afford a home that he would not have been able to afford had he needed to rely solely on money he earned from the work he did. He attributes those oversized returns to Bogle and his advocacy of Passive Investing.

Where did the money come from? Taylor didn’t earn it from engaging in productive work. Bogle didn’t take it out of his pocket and put it into Taylor’s. Whose pocket did it come from?

It came from your pocket. And from mine. And from the pockets of all the other middle-class investors of today (including Taylor’s, to be sure).

Whenever you hear about a money-generating scheme that sounds a bit too good to be true, the thing to do is to to focus in on what’s going on step by step until you are clear where the money is coming from and where the money is going to. When you get clear on that, you know whether the approach being described is a Get Rich Quick scheme or not and who benefits from it. Follow that practice to examine Passive Investing and you learn that Passive Investing is a Get Rich Quick scheme. There’s no substance to the juicy returns bragged about by followers of this approach. Passive Investors get rich the new fashioned way — they borrow to the hilt!

Where did the money for Taylor’s retirement home come from? It came from the investors of today. Taylor (and all the stock investors of the late 1990s) borrowed that money from the stock investors of subsequent years. No, we didn’t sign any pieces of paper. They didn’t see a need to ask our permission. We all know Taylor is a fine fellow. We all wanted to help him out. We do what we can when opportunities present themselves, do we not?

There’s a reason why you often hear me referring to the historical stock-return data in the investing articles at this site. It’s because the historical data, being objective, tells truths that us subjective humans are often more than a little reluctant to give voice to. Taylor’s not going to tell you who really paid for his retirement home. Neither is Bogle. The historical data will, however.

The historical data will tell you that the U.S. economy has been generating enough productivity to support a 6.5 percent annualized real return for stock investors for a long time now. It will also tell you where the money comes from when the return goes far above 6.5 percent, as it did in the late 1990s. It comes from future returns. That’s been the case for the first 137 years of our stock market’s history. Presuming that the rule that one plus one equals two continues to hold, it will continue being the case for the next 137 years too.

Passive Investing is a Get Rich Quick scheme because it encourages people to believe that the excess returns they obtain during wild bulls count as real earnings, not borrowed funds. If we understood that those excess returns needed to be paid back, we wouldn’t be keeping our stock returns stable at times when the amounts borrowed grew too large. We wouldn’t invest passively, but actively, rationally. When the debt that we were buying into when we purchased stocks grew too large, we would moderate our participation in the stock market until it made sense again for us to return to our old levels of participation.

Taylor really did bring in the money to pay for the retirement home by following Bogle’s Passive Investing strategies. So what’s wrong with Passive Investing? Isn’t it just great that it lets us have retirement homes without having to do the work needed to pay for them?

It doesn’t do that, of course. People are paying for Taylor’s retirement home. That’s why we have had 10 years of poor stock returns and in all likelihood will have more years of poor returns coming up ahead in the not too distant future. There will be people not able to afford additions to their houses because of the debt we incurred back in the day when we all were pitching in to help Taylor afford his retirement dream. There will be people seeing strains in their marriages when the money troubles get too intense. There will be kids who won’t be able to go to college, old people who won’t be able to get the best medical services.

It’s not all about Taylor, you know? That’s my point.

There are people who are going to think that that comment is unfair. I don’t think it is. It of course would be unfair if I were suggesting that it is only Taylor Larimore who ripped off the investors of today by putting too much in his own pocket back in the 1990s. I of course do not mean that. Taylor was one of millions. And I of course acknowledge that the Taylor of today is one of those being ripped off. All of those who participated in the bull imposed a heavy burden on all of those who came after; to some extent the two groups are comprised of the same people and to some extent they are not. My point is that Bogle and Taylor and all the rest of us should appreciate where the money to build Taylor’s retirement home came from. It came from real flesh-and-blood people who had to contribute blood, sweat and tears to earn it. I see it as bad taste for someone like Taylor to gloat over how he got his by happening to be at the right place at the right time.

Should he give the money back? Obviously not. That’s dumb. What I think is that he should acknowledge that he knows that the money to build the retirement home didn’t come from nowhere and that it didn’t come from Jack Bogle and to the extent that it can be said that it came from Passive Investing, it also needs to be said that it came at a great price to millions of investors who should not have been required to bear the burden of financing Taylor Larimore’s retirement. It came from people who worked for a living and who put something aside for retirement hoping to see it grow and who haven’t seen it grow much in recent years because Taylor and millions of others took out too much for themselves back in the late 1990s.

When we agree to talk honestly about investing, we’re halfway there to understanding how this stock investing game works in the real world. More on This Topic

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April 23, 2008 07:32 Indexing Without the Emotional Baggage

I’ve added an article to the “Valuation-Informed Indexing”section of the site entitled Indexing Without the Emotional Baggage.

Juicy Excerpt: The very thing that made indexing the most appealing approach imaginable for 18 years has made it the worst approach imaginable for the past eight years and into the foreseeable future. Indexing gave investors not too interested in learning how stock investing works a free ride for 18 years. Now it is crushing them. This cannot continue. To survive (and indexing must survive), indexing needs to be reformed. We need a new and more reasoned approach to buying into the market return.

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April 24, 2008 10:08 Rational Investing vs. Passive Investing

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

Juicy Excerpt: To embrace Passive Investing is to set aside your capacity to engage in human reason. Don’t go there! Your need to justify to yourself your decision to reject your own capacity to reason will cause you also to reject the product of the reasoning power of millions of other investors traveling different paths to solve the same mysteries. Passive Investing is a lose/lose/lose proposition.

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April 25, 2008 10:23 Buzz Updates

Aaron Friday writes in his blog entry for February 8, 2008, that: “I stumbled across Rob Bennett’s website in one of my hazy and tired, nightly quests for truth on the internet. This man has a lot to say about saving, spending and investing, and all of it is worth reading. His ideas about using, saving and investing money are what kettlebells are to physical training. They’re functional, they’re powerful, and they’re simple. They will inspire you to learn what makes investing work and what makes financial freedom possible. Just be open-minded and get ready to read, a lot. We’ve exchanged a few emails, and he hasn’t even suggested that I buy his book, which I will. Smart, insightful man. Good guy. Go there and read it all. Your personal wealth is a tool. Use it masterfully, confidently and with a purpose.” I am grateful to Aaron for those extremely kind words.

CareerChanger at Squidoo.com lists as one of her Practical Career Change Resources the article at the “Retire Different!” section of the site entitled “Six Unconventional Mid-Life Career Change Tips.”

FrontierMidWife is using PassionSaving.com to “make some plans for my future lifestyle.” She explains that: “I listened to a podcast about this guy who coined this term, passion saving. It’s all about saving in order that you can pursue your passions now, or soon, NOT saving for retirement. She adds that, “It actually is a lot like the Your Money or Your Life idea,” which is so (that book was the single biggest influence on my thinking in the saving area).

InvestorBlogger links to the article “Financial Pornography Is Not Sexy,” in the “The Self-Directed Life” section of the site.

I post a Letter to the Editor at the Early-Retirement-Planning-Insights.com site entitled Valuations Before the Great SWR Debate. I say: “The Great Safe Withdrawal Rate Debate is the product of three recent developments. One, we have more access today to statistical data on the long-term performance of stocks than we have had in the final years of any earlier out-of-control bull market. Two, middle-class participation in the stock market is greater today than it was in earlier out-of-control markets (because we now provide for our own retirements, and such). Three, the internet discussion-board communications medium permits sustained questioning of arguments and methodologies to an extent that earlier communications mediums did not.” More on This Topic

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April 28, 2008 05:11 “I Now Live on SS and in HUD-Subsisized Housing…But My Time’s My Own”

I’ve added Mary’s story to the “Middle-Class Millionaires” section of the site.

Juicy Excerpt: I forthwith dropped out of the commercial world. Walked out of my “job.” I moved back to New England and lived with various friends for five years, and now I live on SS and in HUD-subsidized housing. Medicaid for healthcare (the best healthcare I’ve ever had!) But my time’s my own.

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April 29, 2008 11:52 “You Have Not Addressed the Actual Problems Investors Face”

Today’s blog space is filled by the text of an e-mail sent to me last week by Alex Sutherland (Alex has kindly given me permission to set forth the text of his e-mail here):

I just read your commentary on Stocks for the Long Run [the reference is to an article that appears at the “The Book I Read” section of the site] and you bring up some very interesting points.

Unfortunately what I understand as your two main points are intermingled in a way such that I have some difficulty unraveling.

My understanding of your two main arguments is that:

1. You do not believe that buy and hold investors exist because you believe that emotional investors will sell their stocks after major losses.

“Do you know anyone who would not sell stocks after experiencing a 68 percent price drop? Neither do I. My strong hunch is that neither does Siegel.”

2. You believe that long run performance is predictable based on Valuation-Based Indexing.

For the sake of argument assume that I’m very used to risk and taking big losses (maybe a professional poker player, for example, who has no qualms flipping a coin for a month’s salary) and completely capable of buying and holding my stocks even if they lose 90% of their value or 68% or whatever over the next few years. Also suppose that I’m 23 so investing with a 30-40 year horizon is perfectly plausible.

Given these assumptions to really argue that I shouldn’t put all my money in stocks regardless of valuations, it is not sufficient to simply show that buying at a low valuation is more profitable than buying at a high valuation. You then need to show that this more complex strategy will do better 40 years from now than buying and holding stocks for 40 years.

My problem with your argument is that I cannot time the market in the long term without choosing a time to buy which under your approach involves waiting until valuations are low. This could be a very long time or a very short time.

My understanding of what you’ve demonstrated suggests that you have not addressed the actual problem investors face.

As an investor today my options are very simple. I can wait for lower valuations or I can buy stocks. Do you have a solid estimate of the distribution of the time it would take from today for the S&P’s P/E ratio to drop below a given value? Without such an estimate how can you really compare you ideas to buying and holding stocks?

I’m interested to hear your ideas.

Tomorrow’s blog entry will set forth the text of my response to Alex. More on This Topic

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April 30, 2008 04:15 “Choosing Passive Investing Is Like Choosing to Take on Hundreds of Thousands in Student Debt”

Yesterday’s blog space was filled by the text of an e-mail sent to me last week by Alex Sutherland. Set forth below is the text of my response to Alex:

Thanks for writing. Yours was a thoughtful note that I much enjoyed reading.

The points you raise are intelligent ones. I obviously come down strongly in favor of long-term timing. I’d like to hear more people aim to present a reasoned case against the idea, as you have. I doubt at this point that those arguments are going to entirely persuade me. I do think they will persuade others, however. And I am sure that considering the ideas will cause people to think over some important questions in a new light. Finally, it could be that you are right and that I am wrong. I can’t see it today, but I obviously am not God. The only way I am ever going to get there is to have people like you make an effort to raise these points. So I am grateful for that and I encourage you to consider offering comments to the blog if ever time permits.

I do not agree that Valuation-Informed Indexing is more complex than Passive Investing. You certainly are not the only person who thinks this; most people do. My view is that it is less complex because it is a more natural way to invest. Passive Investing is an unnatural act. When we buy any other sort of asset, we look at prices; it is only re stocks that this basic step of the buying transaction is thrown out the window. Doing that goes against something fundamental in human nature and we feel compelled to work up all sorts of rationalizations to justify what we have done. I believe that the simpler approach is just to do what makes sense — to pay attention to prices. There’s nothing hard about it except that it goes against conventional thinking for the length of time that we remain at sky-high price levels.

Your analysis of what I need to show to make the case for Valuation-Informed Indexing (VII) sounds essentially right to me. My only hesitation in endorsing it is that you might be exaggerating the extent to which things must be known to precision to make VIII work. It certainly is so that you must compare the return you would receive from Passive Investing with the return you would obtain from VII — the argument has to be that there is a relative benefit. And you need to know that prices are going to come down at some point in the future; if prices never came down, VII would never pay off. However, you don’t need to know precisely when this is going to happen. You need to know that the probabilities are on your side. If the probabilities are on your side with VII, you should practice VIII.

The purpose of the Scenario Surfer (see the tab at the left side of each page at the site) is to help people form assessments of the rough probabilities (working on an assumption that stocks are likely to perform in the future at least somewhat as they always have in the past). My experience is that VII beats Passive Investing/Rebalancing in about 9 out of 10 tests. My view is that this means that VII is offering the best deal even in those cases in which VII does not come out ahead by the numbers. In that rare case in which rebalancing beats long-term timing, what is happening is that the investor is getting a lucky draw of the cards; he ends up ahead but at the cost of taking on great risk. I think it is fair to say that VII always offers a better long-term return at lower long-term risk (if properly implemented, of course).

You might want to look at the article “Market Timing — What Works and What Doesn’t” in the VII section of the site to get more background on how one uses rough assessments of the probabilities of various outcomes to make decisions as to how much to change one’s stock allocation in response to price changes.

Since your focus is on young investors, you need to pay particular attention to the compounding issue. Say that an investor is in his 20s and has $10,000 invested. Say that he experiences a 50 percent loss, a loss of $5,000. That’s a devastating loss to an investor in his 20s. If you calculate the compounded value of that loss to this investor by the time he is 65, you will see that it is huge. No one should be glib about such a devastating loss. I think that the conventional advice does a great disservice to young people in the way it makes light of the losses they are likely to suffer as a result of following the Passive Investing approach. Young people need to protect their money too. Losses are never a good thing for an investment plan.

In answer to your direct question, I do not have “a solid estimate of the distribution of the time it would take from today for the S&P’s P/E ratio to drop below a given value.” I believe that you may be guilty of a certain amount of black-and-white thinking here. You don’t need to know these things with much precision at all to be confident that VII will pay off in the long run.

The key is understanding that you do not need to place all-or-nothing bets. You don’t need to go to a zero stock allocation with the expectation that stocks will go to a valuation level of X within Y number of years and that you will then go to a 100 percent stock allocation. That’s extremist thinking. You need to think in terms of relative long-term value propositions. If you have determined that an 80 percent stock allocation makes sense for you if stocks are at reasonable prices, then an 80 percent stock allocation cannot also make sense for you if stocks are priced as they are today. Some sort of adjustment is logically mandated. If you are not able to say with much precision when valuations will change, that should influence the size of the adjustment you make, but it does not justify making a zero adjustment (unless you believe that high valuations have a zero effect on the long-term value proposition).

You are right to suggest that someone who really can hold through thick and thin will end up in the end obtaining a decent deal from stocks (it could take 25 or 30 years for this to be so). But have you stopped to consider how much better that person would make out by lowering his stock allocation at times of high prices, thereby protecting his capital until prices dropped, and then investing a far larger sum in stocks at a time when prices are reasonable and the long-term returns truly outstanding?

If you incur a huge loss sometime early in your investing career, you are going to take on a “debt” that it is going to take you decades to pay off. If you protect most of your money until the long-term value proposition improves, you are at a later date going to feel like you are the only one of your peers able to swim without a huge weight tied to his legs. To my mind, choosing Passive Investing is like choosing to take on hundreds of thousands in student debt. It is something that lots of people do and it’s something that lots of people will manage to overcome. It’s an unfortunate reality, however. It’s a choice that will be having negative ramifications for millions of young people for decades to come. It’s never a good idea to choose the weaker long-term value proposition, in my assessment.

Again, thanks for writing and do come back with more questions or comments if you feel so inclined.

Tomorrow’s blog entry will set forth the text of Alex’s reply to my response. More on This Topic

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March 2008 << >> May 2008

The Financial Freedom Blog – March 2008

PassionSaving.com Home Page : The Financial Freedom Blog : March 2008

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

The Financial Freedom Blog – January 2008

PassionSaving.com Home Page : The Financial Freedom Blog : January 2008

January 7, 2008 09:27 Portfolio Allocation by Intimidation

Drip Guy put up a post at the Goon Board last night threatening to sue me for reporting the safe withdrawal rate accurately. This is not the first time this has happened; it is standard Goon practice to up the ante on intimidation campaigns when earlier efforts do not yield the desired results.

I bring it up today because I want to draw your attention to the broader implications. What does it mean for the investing strategies that you are following today that Drip Guy has threatened to sue Rob Bennett because Rob Bennett has dared to “cross” John Greaney by reporting accurately what the historical data says about safe withdrawal rates?

It turns out that it means quite a lot. If you have put your trust in the conventional investing wisdom of today (a day in which stock prices are at one of the highest levels ever reached in the history of the U.S. market), the fact that there’s a fellow living somewhere on our magnificent planet who feels such seething rage about what the historical data says re safe withdrawal rates that he would threaten lawsuits against those posting accurately about them means that you are in danger of suffering severe life setbacks in days to come.

What? The fact that some nutcase on the internet goes off his rocker means that you will suffer financial losses? How so?

Here’s how so.

Drip Guy is not the only nut case amongst us. There are others. In fact, I think it can be fairly said that we are all nutcases to some extent. We’re human. Humans do crazy things from time to time. Perhaps you’ve noticed.

No, we don’t all take it as far as Drip Guy or Mel Lindauer or John Greaney. We’re capable of taking it pretty darn far all the same.

If you are not willing to acknowledge that you could ever take it as far as Drip Guy or Mel Lindauer or John Greaney, how about acknowledging that you could take it as far as John Bogle or William Bernstein or Jonathan Clements or Scott Burns? Those are reasonable people, right? Those are smart people, right? Those are people of integrity, right? Those are not internet nut cases, right?

We make a mistake when we dismiss the Campaign of Terror as being solely a product of ill-policed internet discussion boards. It is indeed that. But it is also a lot more than that. It is also a product of ill-policed bull markets.

I’ll explain.

Robert Shiller has compared bull markets to Ponzi schemes. A Ponzi scheme is an act of fraud in which the people who get in early make gobs of money by persuading people who end up losing lots of money to buy into the investment they are selling by pointing to the huge gains made by those who got in early. After the thing collapses, people always describe those who fell for the fraudulent claims as having been taken in by their own greed. That’s a truth, but only a partial truth. It’s not only greed that causes us to fall for Ponzi schemes. It’s also the evidence put before our eyes during the time when the Ponzi scheme is paying off. The people who make gobs of money really do look smart sitting there with smiles on their faces and big bags of money all about them. Making money is the point of investing. Seeing people sitting among big money bags is compelling evidence to a lot of people trying to figure out what investing “expert” they should listen to.

The stock market during a bull market acts according to the same principle. Stocks are shares of ownership in corporate enterprises. The U.S. stock market has been paying a long-term real return of about 6.5 percent real for a long, long time. When we see returns of 20 percent and 25 percent and 30 percent, we have good cause to be skeptical, just as the people being enticed into Ponzi schemes after the point at which they can pay a positive return have good reason to be skeptical of the get-rich-claims used to entice them. We also have good reason to fall for the enticements. The people who get in early in wild bull markets really do make gobs of money. In the minds of a good number of generally smart and reasonable people, this makes them “experts.” The way it is.

The worst rise to the top in a wild bull market. The more irresponsible your investing strategy, the better it does when prices are going to la-la land for no rational reason. The more irresponsible your investing strategy, the more “expertise” you can claim.

The more irresponsible your investing strategy, the more inflated your ego will become by the results you obtained during the Ponzi scheme years. The more irresponsible your investing strategy, the more defensive you will become when the strategies that worked so well during the Ponzi scheme years begin working not well at all.

You will be tempted to ignore findings and arguments and claims contrary to the views you came to have confidence in during the Ponzi scheme years. You will be tempted to trivialize, to rationalize, to obfuscate. When pressed, you might experience flashes of anger. Who are these people questioning your expertise? Where are their gobs of money? How dare they?

Scott Burns has written three columns about the New School of safe-withdrawal-rate analysis. That’s good. He has continued to cite the findings of the Old School studies after having done so. That’s not so good.

William Bernstein has said that a 4 percent withdrawal rate is at today’s valuation levelsis ” risky.” That’s good. When questioned in a hostile environment about his SWR findings (this happened at The Old Vanguard Diehards Board, which was subsequently burned to the ground by the Lindauer Goons), he said that he had “no idea” what the safe withdrawal rate is at today’s valuations. That’s not so good.

Jonathan Clements has acknowledged that the Old School findings are “not the last word in safe withdrawal rates.” That’s good. He has failed to follow up on suggestions that he explore just how far off the mark the Old School findings are and then write an article sharing with his readers what he learns. That’s not so good.

John Bogle has explained the realities of where stock returns come from better than anyone I know; it was his book that helped me first understand why the Old School studies are analytically invalid. He watched the Campaign of Terror waged against The Old Vanguard Diehards board for close to two years by the Lindauer Goons without raising a peep of protest to Morningstar, the site that hosted the board. That’s not so good.

Here’s Shiller: “Behavioral finance corrects a major error in most traditional finance — the neglect of the human.”

Do you see?

You cannot tell the story of stock investing in an accurate and complete way without taking the human factor into account. Humans fall for Ponzi schemes. This has been going on since Adam and Eve fell for the one about the apple and the peer-reviewed studies showing that taking just one bite could not possibly do any harm. It has happened in every case in the history of the U.S. stock market in which the P/E10 value has gone above 20. The average price drop we saw on the three earlier occasions in which we reached such price levels is 67 percent. Wild bull markets are not kind to people who ignore the message of the historical data and fall for the claim that this particular Ponzi scheme is sure to end differently than all of those that came before it.

Do the experts possess a desire to warn us of the dangers of investing our retirement money in Ponzi schemes? I can point to a good bit of evidence showing that they do. Bernstein reported the safe withdrawal rate accurately in his book; he didn’t need to do that, did he? Bogle has on numerous occasions reported accurately where stock returns come from; he didn’t need to do that, did he? Scott Burns has reported three times on the New School findings; he didn’t need to do that, did he? Clements wrote a column reporting on Bernstein’s findings that valuations affect safe withdrawal rates; he didn’t need to do that, did he?

Most humans have something inside them that drives them to want to be honest. It’s the way God constructed us. Overly cynical arguments about Ponzi schemes and about much else generally leave me cold. Exaggerations are a bore; they lead to dead ends.

Most humans also have something inside them that drives them to acts of self-preservation. During this most recent Ponzi scheme (stocks reached valuation levels far higher than those we saw in 1929 at the top of the recent out-of-control Ponzi scheme), we have seen death threats made against those who reported accurately on safe withdrawal rates. We have seen board bannings of those who reported accurately on Bogle’s views on the effect of valuations on long-term returns. We have seen lawsuits threatened against those who have asked that their fellow Retire Early Community members be permitted to discuss investing topics in peace once again.

Scott Burns has been intimidated. William Bernstein has been intimidated. Jonathan Clements has been intimidated. John Bogle has been intimidated. Heck, I have seen signs that Robert Shiller has been intimidated in small ways. I know darn well that I was intimidated. I learned that the Old School safe-withdrawal-rate studies were analytically invalid back in 1996 but I did not put forward the post kicking off The Great Safe Withdrawal Rate until the morning of May 13, 2002. Intimidation is omnipresent during a wildly out-of-control Ponzi scheme.

It’s not just Drip Guy.

That’s the point. It’s Drip Guy and thousands and thousands and thousands of others. Only a tiny number are as abusive as Drip Guy. But almost all are intimidated by the Drip Guys of the world. Only a tiny number are willing to tell the story straight and true, and those few almost always bend over backwards to enfeeble their own arguments so that they don’t shock the Drip Guys of the world enough to bring on their sustained wrath. Jonathan Clements doesn’t want to be sued and Jonathan Clements doesn’t even want to be threatened that he will be sued. Neither does Scott Burns or William Bernstein or John Bogle. Neither do millions of other humans.

Fail to consider the implications of that reality when setting your stock allocation, and you are all but certain to get it wrong. Intimidation isn’t a good reason for going with a high stock allocation at times of extremely high stock prices.

Ignore Drip Guy. He has little of consequence to tell you. Look to the reaction we see to the appearance of Drip Guy types at our boards. When you see Scott Burns go into hiding at the appearance of a Drip Guy type, make a mental note to yourself to factor in the amount of distortion this suggests is present in everything that Scott Burns says until the intimidation campaigns and deception campaigns and smear campaigns come to an end. For so long as prices remain at one of the highest levels ever seen in the history of the U.S. market, the Drip Guys of the world hold the field. For so long as the Drip Guys of the world hold the field, the Scott Burnses and the William Bernsteins and the Jonathan Clementses and the John Bogles of the world cannot be trusted to tell the complete and plain and unvarnished truth about how stock investing works. It’s a sad enough reality, but it’s not a reality that someone seeking to attain financial freedom early in life can afford to ignore.

For now, all investing advice you hear is investing advice delivered by an expert with a gun to his head. Scott Burns told us that the reason why we have not seen more big-name media reports of our safe withdrawal rate findings is that: “It is information most people don’t want to hear.” Free speech is the first casualty of wars and out-of-control Ponzi schemes.

When will we get back our freedom to speak openly and clearly and honestly and compassionately? When will we get back our feeling of concern that our fellow community members not suffer busted retirements? When will we get back our self-respect? When prices fall. When the Ponzi scheme is exposed and going with a large stock allocation becomes a decent and good and respectable and profitable form of investing once again.

It will happen. Humans have on prior occasions survived worse than anything that the Drip Guys of the world can dish out, and I am confident that we will make it safely (but a good bit poorer, to be sure) to the other side this time too.

Let up pray! More on This Topic

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January 8, 2008 11:06 “Here Was Someone Who…Was Not Afraid to Call the Corporate Culture B.S.”

I’ve added Tmeri’s story to the “Middle-Class Millionaires” section of the site.

Juicy Excerpt: To attain early retirement, you need to desire early retirement. To desire early retirement, you need to know that early retirement is possible for you. To know that early retirement is possible for you, you need to hear how lots of different people have done it and how they have gone about doing it and what obstacles they encountered and how they overcame them. You don’t learn about this stuff by reading a single article or a single book. You learn about it over time as your mind gradually becomes open to a greater and greater number of new ideas, each one building upon some earlier one. It’s a process that can only be pursued in a totally effective way in a community of people pursuing similar life goals.
More on This Topic

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January 9, 2008 05:50 My E-Mail to the St. Petersburg Times re the Lindauerheads

Helen Huntley, the personal finance editor of the St. Petersburg Times, wrote a blog entry on January 7 entitled Jack Bogle Weighs in with the Bogleheads. Set forth below is the text of an e-mail that I sent to Helen in response to her blog entry.

If I hear from Helen, I will report on her response at this blog. I will quote her response in the event that she gives me permission to do so.

Helen:

I am Rob Bennett, owner of the PassionSaving.com site and author of the Financial Freedom Blog. I am posting the text of this e-mail at my blog as there are many people in the Financial Freedom Community who are concerned about the matter being discussed.

I was glad to see you write about Jack Bogle’s appearance at the Bogleheads board. I have written many thousands of posts at internet discussion boards and learned much from the experience. I see the discussion board as an important communications medium of the future.

There’s a big problem with this medium, however, and I think it needs to be noted in connection with the Bogleheads board. This board was created by a group of highly abusive posters who destroyed the Vanguard Diehards board because it permitted honest posting on Bogle’s views on the effect of valuations on long-term returns (some of Bogle’s views are highly controversial at times of high stock prices).

There are many fine posts appearing at the new board everyday, but a prohibition on honest posting on valuations remains in effect there today. I think it would be fair to characterize a board that prohibits honest posting on so important a question as a corrupt enterprise. It is my strongly held view that Bogle should insist that the ban on honest posting on valuations be lifted and that he should not offer further endorsements of the board until it does.

A large number of posters at the Vanguard Diehards board favored the idea of permitting honest posting on the effect of valuations. I have an article at my web site that provides snippets from a good number of their comments:

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

If you have an interest in writing an article on this matter, I would be happy to provide any background information needed to do so and to answer any questions about it that you might have.

Rob More on This Topic

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January 10, 2008 11:08 The Shame (and Pride!) of Expecting an Inheritance

I’ve added an article to the “Retire Different!” section of the site entitled The Shame (and Pride!) of Expecting an Inheritance.

Juicy Excerpt: One of my father’s unrealized dreams was to start his own hardware business. To the extent that his inheritance permits me to get my writing business off the ground, I am letting him live his dream through me. One of my mother’s unrealized dreams was to have an education (she was forced by her family’s difficult financial circumstances to quit school after completing eighth grade). To the extent that her inheritance permits me to put my schooling to good use, I am letting her live her dream through me.

Programming Note: The blog will not be updated on Friday (I will be away from the computer). Please visit us again on Monday, January 14, for more exciting reports on safe withdrawal rates, fun units, early retirements and such like. Same bat time, same bat channel.

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January 14, 2008 12:42 My Advice to Bogle on Dealing with the Lindauerheads

Vanguard Founder John Bogle has recently put posts to both the Lindauerheads board and The New Vanguard Diehards Board suggesting (but not stating with clarity) that he is losing patience with the abusive posting tactics that were employed by defenders of Mel Lindauer (co-author of The Bogleheads’ Guide to Investing) to destroy The Old Vanguard Diehards Board and that have been recently used to intimidate the group trying to build The New Vanguard Diehards Board and to open that board to honest posting on the effect of valuations on long-term returns. Whew! That was a long sentence.

Good for him. It would not be entirely unfair to describe this initiative as a case of too little too late. But Bogle does indeed possess the “juice” to rein in the Lindauerheads and every little effort on behalf of the thousands of constructive posters who built the old board helps. I applaud Bogle for taking the steps he has taken and encourage him to move a lot farther and at a far greater speed.

In his comments at The New Vanguard Diehards Board, Bogle asked a question that I sense is on the minds of many. “Why can’t we all just get along?” he wondered. This blog entry aims to respond to that question by offering 10 tips for helping Bogle deal more effectively with the Lindauerheads in the future than he has in the past.

Tip #1 — Forget About the Idea that Bogleheads and Lindauerheads Can Co-Exist in Peace. Why can’t the Bogleheads get along with the Lindauerheads? Because the Lindauerheads hate us.

It’s that simple, that human, that emotional.

Many of us think of investing as primarily a rational endeavor. I have certainly been guilty of this in the past; Bogle is certainly guilty of this in the present. Imagine investing as primarily a rational endeavor and it is not possible to make sense of the behavior exhibited by the Lindaurheads toward the Bogleheads. Learning together is what it is all about, no? Learning together is how we all make money and achieve financial freedom, no?

That’s a rational truth. The emotional truth is that the Lindauerheads hate the Bogleheads. They hate it that the Bogleheads are rational. They hate it that the Bogleheads are balanced. They hate it that the Bogleheads are open to learning. They hate it that they see in us the virtues that they know somewhere deep inside that they lack.

Talking nicey nice will not change this. Trying to negotiate compromises will not change this. Letting the Lindauerheads have their way on a host of issues while bowing down and requesting that little bits of honest posting on the valuations question be permitted will not change this. The Lindauerheads are not interested in nicey nice talk or in compromises or in honest posting on valuations.

You cannot get to first base pursuing these types of approaches. The Lindauerheads are not motivated to negotiate in good faith. The Bogleheads cannot negotiate with themselves. Bogleheads and Lindauerheads will never be able to co-exist in peace until the Lindauerheads become motivated to work out compromises. Getting them motivated is the very first step.

That means kicking them off the boards we built for purposes other than the purposes they pursue. You dig?

What the Bogleheads need to hear from Bogle is not that he will be the 1,000th Boglehead who will try to work something out with the Lindauerheads. That sort of effort will not produce a payoff. Bogle’s suggestion that that is the path he is walking down today encourages the Lindauerheads in their current course of action. It’s a loser strategy.

Don’t ask why we cannot all get along, Jack. Ask what can be done about those who have made it only too clear that they possess no desire to get along.

When you (and others with influence, to be sure) stop playing the Lindauerheads’ game, good things start to happen. The first step to getting from where we are now to where we want to be tomorrow is for you to stop demonstrating weakness by wondering aloud why we cannot all get along and to get about the business of taking the perfectly reasonable steps you must take if the idea of us getting along is to become a reality not in your wishes, hopes and dreams, but here on good old Planet Internet.

I’m speaking from experience. I think it would be fair to say that I speak with the voice of authority re this one.

Tip #2 — Encourage the Humans. Bogle offered some comments in his post at the Lindauerheads board that were so precisely on the mark that I feel obliged to highlight them here. He applauded Petrocelli (one of the posters seeking to rebuild the Vanguard Diehards board) for his winning sense of humor. Yes, yes, a thousand times yes! This is the sort of message that the Lindauerheads and the Bogleheads both very much need to hear.

We will never persuade robots; we can reasonably hope to persuade humans. It is the humanity of the Lindauerheads that is their greatest weakness (it is really their greatest strength, but they of course do not see it that way today). Petrocelli’s humor is a powerful weapon for the forces of good. It is through the use of humor that Petro shows that he knows 50 times more about life and investing than the puffed-up Lindauerheads with their studies and statistics and dogmas and trite maxims.

Encourage the humans. Let the sun shine in! This is the right path. I’m sure of it.

Tip #3 — Show Your Own Humanity. Even more devastating to the Lindauerhead mentality than seeing Bogle encourage the humanity of others is seeing Bogle demonstrate an awareness that he himself is one of the humans. Bogle objected to the practice of the Lindauerheads referring to him as “Saint Jack,” noting that his wife is only too aware of just how human he really is. This was perfect. I could not have written more effective words than the ones put forward by Bogle on this point.

The message that was being delivered with these words was: “My sympathies are with the humans, not with the know-it-alls.” We all very much needed to hear those words. We cannot hear that sort of thing often enough. Hearing those words at this stage in the proceedings was like seeing manna come down from the sky during our long trek through the hot, sandy desert. Community applause!

Tip #4 — Admit Your Mistakes. Bogle took an important step forward by acknowledging that he ain’t no saint. It is the logical follow-up that really gets the job done. Bogle needs to acknowledge that he has made mistakes in his development of the investing advice that he has put forward in the past. At a minimum he needs to affirm that it is possible that he has made mistakes (he has said this on earlier occasions, but I think it would be fair to say that the Lindauerheads have a tendency to “forget” Bogle’s teachings on this point, which are probably his most important teachings of all).

Bogle’s admitting than he has been wrong or that it is at least possible that he has been wrong changes everything. That step leaves the Lindauerheads defenseless. It pops the balloon.

Tip #5 — Identify Your Priorities. Bogle’s dilemma is that some of his ideas are in contradiction with others of his ideas. You can’t on the one hand say that you believe in common-sense investing and then tolerate the dogmatism that is characteristic of the Lindauerheads and not expect to see the contradiction reveal itself over time. You can’t on the one hand say that reversion to the mean is a reality and then suggest that it is okay for investors not to adjust their stock allocations when prices get to the sorts of levels that apply today and not expect to see the contradiction reveal itself over time.

Bogle needs to decide which set of his ideas are the ones he really believes. Then he needs to state those ideas in clear and plain and understandable terms. He owes that both to the Bogleheads and to the Lindauerheads. Truth be told, he owes it most of all to himself.

Tip #6 — Reject Your Natural Desire for Certainty. The Lindauerheads didn’t inherit their inclination toward dogmatism from anyone strange. Bogle ain’t no Lindauerhead. He is often guilty of dogmatism, however. Dogmatism is the product of vulnerability. Humans are vulnerable creatures. Investing is inherently a vulnerable act. It means giving your money up and hoping that it will still be there at a later date when you need it to pay the electric bill and the hospital bill and the gifts-for-the-grandkids bill. We can struggle to overcome dogmatism. We can never entirely succeed in this struggle.

Overcoming dogmatism is not an act of the intellect. There are many things that Bogle knows that I do not know. His superior knowledge does not translate into a capacity to avoid the dogmatism that has historically been the single biggest factor causing stock investors to suffer bone-crushing losses once prices got to today’s levels, a factor far bigger than the lack of intellectual skill or experience that holds people like me back. Bogle’s intellectual talents if anything make it harder for him to avoid the lure of dogmatism.

Endorsing Valuation-Informed Indexing would be a help. Valuation-Informed Indexing is inherently a less dogmatic approach than the conventional indexing approach. That doesn’t mean that vulnerable humans will not figure out ways to incorporate elements of dogmatism into the new approach. Doing battle with the lure of investing dogmatism is a quest that never comes to an end. It is a battle re which the Big Shots of the world (and Bogle is the biggest of shots walking about in the year 2008) begin at a big disadvantage.

Tip #7 — Brush Up on Your Reading and Incorporate What You Learn Into Your Thinking. I was shocked and dismayed and appalled when I read reports of the annual meeting of the Vanguard Diehards at which Bogle argued that stocks are not terribly overvalued today by looking at the P/E1 indicator. I learned why P/E1 is not a good valuation indicator a number of years ago. It is common to see accounts in the media refer to P/E1, but I don’t know of anyone who I consider well-informed who is not aware of the grave flaws of the P/E1 tool. Shiller knows. Russell knows. Easterling knows. Bogle should know.

Is Bogle’s lack of understanding of how valuations are measured a failing of intellect or a failing of emotion? On the surface, it appears to be a failing of intellect. He just needs to catch up on his reading, right?

I don’t believe that that’s entirely it. I believe that it is the inclination to dogmatism discussed above that is the cause of Bogle not seeing the need to keep up with developments in the valuations area (or the need to incorporate those he does hear about into his own thinking). There was a day when he was the king in this field. Findings of recent years appear to a large extent to have passed him by. He needs to deal with the emotional failings first. Getting over the emotional hurdles will reignite his interest in learning how investing really works.

John Walter Russell has a catch phrase that he uses at the end of his posts — “Have fun!” My guess is that that is advice that Bogle needs to take to heart. When you start thinking that maybe you really do know it all (and I think it would be fair to say that Bogle has been remiss in not shooting down the “Saint Jack’ comments frequently enough in recent years), there’s not much chance for enjoying a learning experience. Rule out the possibility of enjoying a learning experience, and you rule out the possibility of having fun.

Get back to where you once belonged, Jack!

Tip #8 — Stop! In the Name of Love. JohnDCraig put a post to The Old Vanguard Diehards Board in which he argued that 90 percent of that board community were Bogleheads and only 10 percent or less were Lindauerheads. I don’t have quite so optimistic a take. It seems possible to me that 20 percent of the community either participated in or supported the deception posts, the intimidation posts, the word game posts, the Smear Campaign posts. Still, that left 20 percent who were driven by love (a desire to learn is a love-rooted desire), not hate.

Bogle needs to spend some time thinking about those people, about their desire to learn, about their quests for financial freedom, about the trust they have placed in him. When a ban is imposed on honest posting on safe withdrawal rates, that doesn’t mean that the Goons score points in some debate-club discussion. It means that lives are destroyed. Lives of people who placed their confidence in Bogle. Lives of people who took the promises of Morningstar to protect them from the Lindauerheads to heart. Those people deserve better than what they are getting from Morningstar and Bogle today. A lot better.

I once opened a fortune cookie that advised me that: “The best thoughts come from the heart.” I have often found this to be so.

Tip #9 — Reject Hate Without Apology. If Bogleheads comprise 80 percent or more of the two boards, how is it that the haters have managed to put in place bans of honest posting on safe withdrawal rates and on Bogle’s views on valuations? Love has the numbers because most humans are more oriented to love than to hate (if this were not so, we would have blown ourselves up a long time ago). When prices are where they are today, however, hate has the intensity. The haters are 50 times more intense than those who have expressed a desire that honest posting be permitted (that’s everyone who has not expressly signed up with the Goons, really, when you consider that we all had to click “I agree” to the Morningstar rules before being permitted to post at either of the Vanguard Diehards boards).

Those who favor honest posting possess the power needed to have their way. What they lack is the confidence that honest posting and civil discussion really matter. Bogle’s own recent words tell the tale. He has put forward words suggesting that he wants us all to get along but at the same time he has done nothing of practical value to rein in the Lindauerheads. Word games don’t pay the electric bill when it’s cold outside, you know?

Vague admonitions to try to get along will not do the trick. Bogle needs to overcome his fear of what the Lindauerheads will say about him in the event that he comes down strongly in favor of reasonable enforcement of the rules that govern posting at the two boards. Where is this courage to come from? It has to come from the love that he feels for the many community members who have expressed their admiration for him and who have also expressed a desire that honest posting on valuations be permitted at the two boards.

Bogle owes those people something. Those are the people who built our boards. He has to stop apologizing for the feelings he has for those people and start taking practical steps on their behalf. We cannot get along because some of us are motivated primarily by love and some of us are motivated primarily by hate. The purpose of the posting rules is to keep those motivated primarily by hate from poisoning our discussions. Those motivated primarily by love need Bogle’s help in seeing that the rules are enforced and in seeing that those motivated primarily by hate are removed from the scene before doing more damage.

Tip #10 — Take It Personal. The Lindauerheads claim that they too are Bogleheads. For obvious reasons. The reality is that they are nothing without Bogle’s endorsement. Who even knew who Mel Lindauer was in the days before Bogle graced The Old Vanguard Diehards board community with his presence? When the Lindauerheads turned ugly, Bogle should have withdrawn his support. End of sentence, end of paragraph, end of section, end of chapter, end of story.

I know whereof I speak on this question. I feel a deep love to this day for the Motley Fool Retire Early Board (now defunct). There were thousands of people who contributed constructively to that board, making it the most important resource for learning what it takes to achieve early retirement that existed on Planet Earth. When the Goons took over the board, I knew that I had to ask Motley Fool to help out and, when that failed to bring effective action, to work with my fellow community members to make the board again a place where people of intelligence and integrity would feel comfortable congregating.

Did I pay a price for speaking truth to power? I did.

Did I learn things that I never could have learned had I allowed the board to go down without a fight? I did.

Will Bogle be smeared like the rest of us if he speaks up? He will be.

Will Bogle learn wonderful things now beyond his imagination if he takes the side of the angels on this one? He will.

Bogle has the power to win us back our boards. He has the “juice” needed to take out the Goons. Lindauer is nothing without Bogle in his corner.

I hope that Bogle takes the necessary steps by the close of business today.

I whispered: “Sometimes love is only sleeping.”

–The Monkees, “Love Is Only Sleeping” More on This Topic

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January 15, 2008 14:11 Seth Godin on The New School

Seth Godin has written a blog entry entitled Encyclopedia Salesmen Hate Wikipedia.

He’s right, of course.

The punch line is the killer: “Apparently, technology doesn’t care who you hate.”

How many times have I said something very much like that in connection with the historical stock-return data and the “defenders” of the Old School studies? The historical data is like a mountain or an ocean. Those seeking to defend the Old School studies can put forward their deceptions and their threats and their word games from early in the morning until late at night, and the historical data just does not care.

There is nothing that they can do to get it to care. The historical data is, and that’s all. It says what it says. You cannot change that by threatening it or by deceiving it or by playing word games with it.

You can change what the humans say. Threats influence humans. Deceptions influence humans. Word games influence humans.

They don’t influence the data, though. The data itself is solid, objective. That’s why what the data says matters.

The data tells us what we need to know to see through the fog that envelops all investing discussions when stock prices get to the sorts of levels that prevail today. That’s the benefit. That’s the value proposition.

Will the New School sweep the world as Wikipedia has swept the world? I think it will. Roughly accurate beats wildly inaccurate every time. There is no reasonable case to be made for the Old School methodology.

So what’s holding us up?

Our case is too strong. Our value proposition is too great.

That’s a counterintuitive explanation. But I think it really is so. If the New School improvements were minor improvements, we could make small and steady gains, taking over the world in gradual steps. The problem we face is that the value of accurate retirement studies is so great compared with the value of inaccurate retirement studies that those with something invested in the Old School methodology cannot bring themselves to acknowledge the need for the change.

Small improvements might be acceptable. Big improvements require saying those words “I” and “Was” and “Wrong.” That’s a sticking point for a good number working in this field.

It’s what the data says that matters in the end, though. The data is New School. That’s our edge.

The “defenders” of the Old School studies show that they know this each time they reveal their hate for the New School. Hate is the emotion of losers.

We won!

It’s not me saying that. It’s the encyclopedia salesmen saying that with their behavior. More on This Topic

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January 16, 2008 14:36 The Failure of Buy-and-Hold

A recent thread at the Lindauerheads board entitled Does the Market Worry Anyone? shows why the old approach to buy-and-hold has failed us.

A poster named “JemHunter” notes that “stock prices are no higher today than they were eight years ago” and that the conventional advice assures us that stocks always provide a good return over the long term. What gives?

The people touting stocks at times of sky-high prices rarely define how long it takes to reach the long term. Middle-class investors usually presume that they are talking about a time-period of 10 years or so. The reality is that, when prices get to the levels we saw at the end of the 1990s, it can take over 20 years for stock investors to see any positive return at all. To see returns that beat those available from the super-safe asset classes can take 25 years.

A poster named “Zingi” says that he missed the huge bull market and is excited about the recent price drop because it will permit him “to play catch up.” Are things looking up for Zingi?

I think it would be fair to say that Zingi has been misinformed as to the realities of long-term stock investing. We are now at one of the highest price levels ever seen in the history of the U.S. market. The average price drop we saw in the three earlier times when we got to these prices levels was a price drop of 67 percent (counting dividends, the likely real portfolio loss is 40 percent). We are not today anywhere remotely close to the price levels where it would be possible to play catch up.

A poster named “Soaker” argues that “the S&P 500 is more or less on its long-term trend line right now, after having gone well above the trend in the 1995-2000 period.” True? Or False?

It’s true that valuations are down markedly from where they were in early 2000. The P/E10 level was then 44 and it’s now in the mid-20s. Things are beginning to look up — a bit.

The other side of the story is that any P/E10 value above 20 puts us in the red-alert danger zone. We have a huge price drop ahead of us before stocks will again offer a strong long-term value proposition. We are indeed back to where we were in the mid-1990s. It’s important to remember, though, that stocks were already dangerously overvalued in the mid-1990s (the huge bull began in 1982 and ended in late 1999).

A poster named “EyeDee” tells us that “I read Bogle in the mid-1990s, so we purchased most of our stocks in the very late 1990s and mostly bought the SP500 and TSM, since at that time he said foreign was not needed.”

This comment points to one of the big flaws in the investing approach known as “passive investing.” Advocates of passive investing like the numbers to look good, so they often change the mix of investments that they advocate. When the S&P is going gangbusters, they advocate putting all of your stock money in the S&P. When the S&P is doing poorly, they advocate asset classes doing better than the S&P. The trouble is, they never say in advance what asset classes are the right ones to invest “passively” in. Many of Bogle’s followers advocate a highly active approach to passive investing.

EyeDee also comments that: “When I see the SP500 basically flat for the last eight years, I worry a lot and wonder if large U.S. stocks will ever recover.”

This is the one that pains me the most. The S&P is going to recover. People are going to make a lot of money by investing in the S&P in days to come. It’s not going to be people like EyeDee making that money, however.

The people who will be making money will be people who bought their S&P shares when they were selling at reasonable prices. In order for those people to earn big returns on their stock portfolios, they need to have people like EyeDee become convinced that prices don’t matter and that the S&P is a good buy even at today’s prices; those seeking to buy when prices are good and to sell when they are bad rely on the mistakes of those who buy when prices are bad (like today) and sell when prices are good (those who are going with high stock allocations today are likely going to suffer such bone-crushing losses that they will have no choice but to sell after the huge price drop).

Now do you begin to understand why most of the big-name stock experts don’t like it when people like me ask questions about what the historical stock-return data says about the effect of valuations on long-term returns? Buy-and-hold works. But it works only for those who are price-conscious. There is a highly technical term used in the literature to refer to those who place their trust in experts who assure them that stocks are a good buy even when sold at la-la land prices. These people are referred to warmly as “customers.” Or sometimes even more affectionately as “suckers.” (No offense to EyeDee intended — my intent is to foster consumer awareness in the investing realm.)

The purpose of Valuation-Informed Indexing is to make buy-and-hold a realistic investing strategy for middle-class investors like EyeDee. Not everybody who wears a nice suit and a nice smile is your best friend, EyeDee.

EyeDee also says: “When I see charts of returns for those eight years or even for the last 10, 15, 20 years, I do not understand why some people say stocks are expensive or have high valuations.”

The fair value P/E10 value is 14. Today’s P/E10 value is 26. Stocks are today priced at nearly double their fair value. People have a hard time grasping how high prices are today given how long it has been since stocks provided a return competitive with the returns provided by the super-safe asset classes. To understand, you need to look at how long the great bull continued and how out-of-control prices got during those days. We have never in the history of the U.S. market seen anything like it. That means that the return trip to normal price levels also needs to be something the like of which we have never seen before.

I think it would be fair to say that true experts would have spoken out in strong terms back when prices were first getting out of control. My sense is that many feel that it is far too late for them to come forward now. Personally, though, I wish they would. What’s done is done. We can only change the future.

“SchoolyD” says: “I think many of us would find it easier to maintain peace of mind during market downturns if, instead of having to rely only on statistical principles (e.g., reversion to the mean) and atheoretical extrapolations from past market behavior we understood why over the long haul equities can be expected to return 8-10% per year on average.”

The historical long-term real return has been about 6.5 percent real. That was the amount generated during the American Century. If anything, we should expect a lower return in the years ahead. Given that 6.5 percent real is the average return, you obviously cannot realistically expect anything close to 6.5 percent starting from today’s valuations (unless you are willing to wait over 30 years to see it). The historical data puts the most likely 10-year annualized return today at 1.3 percent real. The odds of it being a good bit lower are just as good as the odds of it being a good bit higher.

Middle-class investors need to understand where stock returns come from. If you understand where stock returns come from, you will not be taken in by all the mumbo jumbo that the experts use to sell stocks at times when a rational case for investing heavily in stocks is just not there.

Stock returns come from the earnings of the underlying companies. That means that there is a limit on how high returns can go. When we have many years in which returns are far higher than what the economic realities permit, the extra returns comes from the returns that otherwise would have been earned by future investors. Remember when everyone was jumping up and down about the absurd returns being earned in the 1990s? The returns you earn from stocks today have been diminished so that we can collectively pay back the debt incurred when returns of 20 percent and greater were paid to stock investors of the late 1990s. Out-of-control bull markets sure are a laugh, eh?

If you don’t care, you don’t care. It is my strongly held view that you should care.

Too many people are not even willing to tell you the realities because they are worried that you will get mad at them if they do. I don’t want you to get mad at me. But I see it as my job to tell you the realities regardless. So I just did. (To the best of my ability — please let me know if you see holes in any of my claims). More on This Topic

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January 17, 2008 14:40 Investing Experts ISO Common Sense

I recently wrote a Letter to the Editor posted to the www.Early-Retirement-Planning-Insights.com site setting forth my thoughts on the inadequacies of many of today’s big-name investing experts.

Juicy Excerpt: My sense is that the experts are to some extent telling people what they want to hear (I find this shameful behavior) and to some extent really are taken in by the traps themselves. My sense is that they allow themselves to be fooled on a few core points and then they genuinely lose the capacity to reason things through carefully on more subtle points. More on This Topic

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January 18, 2008 14:18 Poof!

There’s a question that comes up on investing discussion boards whenever there’s a significant drop in the price of stocks. People ask: “Where did all the money go?”

Call on me, teacher! I know this one, I know this one!

It goes “poof!.” It goes back to the same place that it came from — nowhere.

This message has been presented to you as a public service announcement. We now return you to your regular programming.
More on This Topic

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January 22, 2008 09:16 Stock Slaves

I don’t care about astronomy.
I don’t care about economy.
But it sure does bother me to see my loved ones turning into puppets.

–Dylan, “Slow Train Coming”

Slavery was outlawed in the states some time back. It was in all the papers.

The evil in man’s heart that permitted slavery to exist remains with us, I’m afraid to say. You can’t pass a law turning men into angels.

There were a lot of things going through my head in the days leading up to my posting of that fateful May 13, 2002, post. I’m like everybody else. I didn’t want people yelling at me and smearing me. I didn’t want to see any harm done to our boards. I wasn’t 100 percent sure that I was right. I was reasonably sure — I would say 90 percent. I wasn’t 99.99 percent sure until I had had a chance to talk things over with my mates.

The smear campaigns were getting worse, though. It was becoming more and more clear to me that something had to be done. If I was not willing to pull together the courage needed to step forward, could I reasonably expect others to do so?

One of the things that got me over the line was a post by some fellow whose screen-name I can no longer recall. He was heavily invested in stocks and something in the part of the human brain that is controlled by common sense had him worried. He put up a post saying that he was cutting back. He was smeared every which way from here to New York. He was a dummy, a loser, not the sort of individual fit to even dream about early retirement. You know the routine.

One of the tricks that writers use is that they try to form a picture in their mind of the person they are writing to. When you do that, the writing comes out more conversational, less stuffy, more natural-sounding. This guy was the sort of person I pictured in my mind when I composed my posts. My reader, my fellow community member, my friend, was being vilified for the terrible crime of trying to help us all out by sharing his sincere thoughts. I was witnessing this ugliness and saying nothing. Yowsa! I began to have doubts as to whether I was really the person I liked to tell myself I was.

The beer don’t taste the way it ought to taste somehow.
I don’t know.

— Randy Newman, “Christmas in Capetown”

That told me that something was terribly, terribly wrong re the direction in which our boards were headed. I had little idea at the time as to the true nature and the true scope of the problem. But I knew enough to worry that I was not going to be able to hold the reins on that May 13, 2002, rip-snorter too much longer.

That guy should feel welcome to post at our boards. His voice is a voice we need to hear.

Not just him, of course. All of the many thousands like him should be able to post without fear at our boards.

And honestly. They should be not only permitted but encouraged to post their sincere views. When posters lie for the purpose of appeasing Big-Shot Goons, we all lose. How can we have confidence in what we see on our boards once we know that a good number of the posts are being put up as the price of admission to communities controlled by hateful and spiteful and narrow-minded tyrants?

I learn more from guys like him than I do from Big Shots, you know? Big Shots have their place. But the types of people who become Big Shots on discussion boards often just post reiterations of stuff I have seen put forward in magazines and books by people far smarter and more experienced than the Big Shots. I prefer to read that sort of thing in its original language; my experience is that the Big Shot translations often leave a great deal to be desired. It’s the Normals that tip me off to things that I cannot learn elsewhere. The Normals show me how the stuff that the big-name experts put forward in the magazines and books works out in the real world. The Normals add a dimension to my understanding of how stock investing works that the Big Shots simply cannot provide me.

So I stuck up for the guy. I dropped the nuclear bomb. I posted honestly on the safe withdrawal rate topic. Imagine! How “catastrophically unproductive” of me! The world of Retire Early boards will never be the same. I did that!

When we allow people to post honestly, we learn things from boards that we cannot learn anywhere else. That’s exciting as all get-out. When we ban honest posting, we degrade our own community members. No one should have to post dishonestly as the price of gaining admission to a discussion board. No way, no how. That one should not be controversial. I mean, come on, people!

But Bogle permits it, doesn’t he? Vicious smear campaigns are used to maintain “order” at both The New Vanguard Diehards Board and the Lindauerheads board and the best that Bogle can come up with to say in objection is: “Why cant we all just get along?” Uh, hello, Jack? We can’t get along because some of us are not following the rules they agreed to follow when we granted them posting privileges and those are the ones that you are joking around with up on the stages of those annual get-together things you go to. “Wasn’t that a tasty chicken dish, Mel?” Yuck, yuck, yuck.

To suffer a busted retirement is a serious life setback. I don’t get the joke, Saint Jack. Sue me.

It’s not just Bogle, of course. Motley Fool banned honest posting on safe withdrawal rates. The Early Retirement Forum banned honest posting on safe withdrawal rates. Morningstar banned honest posting on safe withdrawal rates. This isn’t just a Bogle matter. Bogle is part of it. It’s a lot bigger than him, though. He is a contributing factor to a very big problem.

The idea that the first rule of becoming an investing expert is taking a vow to never, never, never, not under any circumstances admit to having gotten something wrong applies in all sorts of places you would not intuitively expect to see it apply. It’s a bad scene.

Looks like we’re in for nasty weather.

–Creedence Clearwater Revival, “Bad Moon Rising”

I see it as a form of slavery. It’s degrading to have to lie, especially about a matter that is likely to cause hundreds of thousands of your fellow community members to suffer busted retirements. It’s sick. It’s not just a dollar loss that we are talking about here. This is a loss of personal integrity. To have to forfeit your personal integrity to please some discussion-board goons is a kind of slavery in my eyes. The self-degradation being agreed to goes that deep.

I never engaged in deliberate deception on safe withdrawal rates or on any other matter. I did keep my mouth shut for a time. I didn’t cross the line, though, and tell a lie knowing that it was a lie. I felt slightly degraded for having to hold back on what I knew, but I never went the distance that hundreds of my fellow community members have felt themselves forced to go to avoid a whipping since my posting of The Post Heard ‘Round the World.

I don’t think that any of you should degrade yourselves. I don’t think it is good for the people who are tricked. I don’t think it’s good for you either. I don’t even think it is good for the goons. I believe that any healing process that is going to help the goons is going to come only after the Campaign of Terror is brought to a full and complete stop.

I think that the ways in which discussion boards are run today turns us into slaves. When you say things that you don’t believe to avoid a whipping, you are more a puppet than a person. I think that the owners of Motley Fool should be ashamed of themselves. I think that the owners of Morningstar should be ashamed of themselves. I think that the experts who have posted at the Lindauerheads board and have not spoken up should be ashamed of themselves. Is the money really that good? Come on.

I don’t like to see people losing money as the result of demonstrably false investing claims. It sickens me. But I think of myself as a human-behavior expert as much as I think of myself as a personal finance expert. The human degradation thing sickens me more. It tells me that those of us working in the investing advice biz are dealing with a very twisted system indeed.

Let’s change it! Let’s take a sad song and make it better! Let’s boogie ourselves into a better place, fellow slaves!

She was a backwoods girl, but she surely was realistic.
She said: “Boy, without a doubt,
You need to quit your messing and straighten out.
You could die down here and become nothing more than just another accident statistic.”

— Dylan, “Slow Train Coming” More on This Topic

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January 23, 2008 10:48 Bogle Laughed

Bogle appeared on one of those idiotic television shows yesterday where they ask experts what their analysis is of what happened in the last eleven seconds and what it all means for what might happen in the next seven seconds.

He laughed.

He was making a point. He was telling us that focusing on the last eleven seconds and on the next seven seconds is not the way to go. Bless him for that.

But don’t stop there. Bogle needs both a blessing for the wonderful work he has done and a kick in the pants for his failure to get down to the business of addressing his own failings.

The idiots on the television show didn’t aspire to become idiots when they were little boys and girls. They aspired to better things. Pressures came along to steer things in an unanticipated direction. The eleven-seconds stuff sells. The seven-seconds stuff even more so. We all have mortgages, right? It doesn’t really hurt anyone to tell it the way it isn’t, does it? We’re all grown-ups. We can change the channel if we don’t like the broadcast, right?

We can change the channel. The other way to look at it is that they could change the nature of the broadcast. They could make it less idiotic and then we wouldn’t have to change the channel. There’s no law of the universe that says that we must always rationalize bad behavior and never reach inside to come out with something better and stronger and finer and truer to what we really want to be.

But, yes, we can change the channel. It’s a true enough observation. Whatever.

They probably laugh at Bogle too, you know? From their standpoint, he is the idiot. Who’s to say who’s right?

I’ll say.

Bogle is right. They are idiots. The eleven-second stuff and the seven-second stuff is nowheresville. God bless Bogle.

Except….

He gets a lot of important stuff wrong too.

He’s right to laugh because they really are idiots and we really need to know that. A laugh conveys the idea effectively. I applaud Bogle’s laugh.

I worry about it too.

Bogle knows more than the idiots. He doesn’t know more than the investing experts of the future who will look back at Bogle’s ideas and laugh at what an idiot he was. His laugh says that he’s above all that, that he’s got it figured out, that he’s cool. Famous last thoughts. I bet the idiots think they’re cool too. Their faces appear on the television screen every day.

Bogle should be applauded for laughing and Bogle should be condemned for laughing. Both things are so.

If the idea is to have a little fun, fine. Laughter can be a healthy outlet for frustration. Maybe he cannot stand the idea of being asked the same idiotic question one more time. I’d rather see him put forward a gentle laugh than an acerbic or sarcastic or mean-spirited comment. I see where he’s coming from.

A laugh can also be a sign of arrogance. The genius of Bogle’s approach lies in its humility. T-Bone Burnett informed us that: “As soon as you know you’re being humble, you’re no longer being humble.” The title of that song was “Trap Door.” Bogle risks a fall through the trap door when he laughs. He risks becoming too full of himself and ruining his own parade.

I laugh at the Goons. They are so absurdly over the top with their claims and their behavior that I think it’s the proper thing to do. There’s risk there, however. I was born with whatever poison it is that turns someone into a Goon working within me. It might be said that, as soon as you call someone else a Goon, you risk becoming a Goon thyself. That’s so.

I laugh at the Efficient Market Theory. I call it the Efficient Market Disease. Har-de-har-har.

I could become like the television idiots if I laugh too long and too hard and too often. So could Bogle. So could you.

It’s funny. And it’s not. More on This Topic

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January 24, 2008 08:01 Hate Story

What do you see about you? I see confusion. I see fear. I see anger. I see remorse. I see anguish. I see hate.

Hate is evidence of pain. Is that not so? Healthy and strong and confident people do not hate, do they? Hate is a sign of weakness. Hate is a sign of despair. Hate is a sign of pain.

When investing experts see that the people trying to implement their theories in the real world are feeling a great deal of pain, they should revise the theories. My sincere take.

Here is a statement about Bogle’s investing ideas taken from the article at the “Banned at Motley Fool!” section of the site entitled “Investing Discussion Boards Ban Honest Posting on Valuations!”:

The Diehard mentality has done more to discourage investing dialogue and an open exchange of ideas than any other philosophy I know of.

Yowsa! That doesn’t sound good. That was put forward by a poster named ” Werman.” There are lots of other observations like it in the article, and of course thousands more like it have appeared over the years at the boards at which Bogle’s investing ideas are discussed.

Do you think there might be some serious flaws with those ideas?

Me too.

I’ve made my living as a reporter for many years. I used to work on Capitol Hill. I’ve seen people discuss wars, abortion, gun control, taxes, all sorts of things that you would intuitively expect would generate divisiveness. You know what? Never in any of those discussions have I seen a fraction of the hate evidence itself that I have seen evidence itself during my participation at investing discussion boards in recent years.

Whatever could I have said to cause this overflowing of hate?

I reported accurately what the historical data says re safe withdrawal rates.

I say again — Yowsa!

Something is rotten in the state of Vanguard.

I don’t mean to pick on Bogle. I focus on him not because he is one of the worst out there, but because he is one of the best. It wouldn’t shock me so much if some fly-by-night con man was inspiring all this hate. Bogle is not some fly-by-night con man. Bogle is a hero to the middle-class. Bogle is the real thing. When his ideas inspire hate, that’s news.

Bogle is like a tragic hero in a Shakespeare play. Lear wasn’t an idiot. He was a great leader. That’s what made his fall so hard to take. It is the story of how low the great can be brought low by one tragic flaw that supplies the drama in a tragedy. It is because Bogle’s ideas promise so much that their failure to deliver in the real world causes such angst.

There are four reasons for the hate:

1) Investing affects more people in a personal way than war or abortion or a political campaign. We all need to finance our retirements. It is a universal. When ideas that we have been told about how to finance our retirements are shown not to work, all take a hit;

2) Investing is perceived as being sufficiently complicated that many of us feel that we need to take the word of experts rather than research things on our own. That puts us in a position of vulnerability. The vulnerable are obviously more sensitive than the secure;

3) The flaws in the conventional investing ideas (conventional for the length of extreme bull markets only, to be sure!) are obvious. You don’t need an I.Q. of 140 to figure out that the prices at which stocks are sold affect the long-term return provided by them. Middle-class investors who place their confidence in the experts are put in the difficult position of “believing” in things that defy common sense. They are forever forcing down their feelings of concern, forcing themselves to ignore things they really do at some level of consciousness “know.” Do that for long enough and there will come a time when you will explode;

4) Stock prices are set primarily by emotion (in the short term). That means that each investor’s hopes that this will be the first time in history in which an out-of-control bull will not be followed by an out-of-control bear depend on what every other investor says and feels and does. Telling the truth about valuations in an environment like that is like tossing a match into a dry stack of hay.

Many of the experts have determined that it is better to keep quiet, not to stir things up. Many have concluded that it is better that they not look at the realities too closely themselves lest they be tempted to say the wrong thing at the wrong time. I have a different take on things.

I see the hate as the natural and inevitable consequence of the tall tales that were told during the out-of-control bull. Had our experts been straight-talkers then, we wouldn’t be in the mess that we are in today. Fearing to discuss the realities does not make them go away. We learn to cope with the realities by addressing them squarely. Learning is a function of love. It’s not a more powerful ignorance that overcomes hate. It is love that overcomes hate.

Most of today’s investing experts don’t even address the problem of hate. They talk about numbers, tables, charts, blah-blah-blah, blee-blee-blee. You cannot get from there to where we all need to go. Hate can be overcome. It cannot be overcome by ignoring it. Ignoring it causes it to grow.

Hate is a strong force in InvestoWorld today. It will not always be a strong force. Remember what noted portfolio strategist Jimi Hendrix so sagely observed during a particularly ugly moment of an earlier bear market:

I’m a coming to get you! More on This Topic

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January 25, 2008 12:33 Newspaper Prices

There are one million shares of Company ABC outstanding. The stock sells for a price of $50 on the morning of January 25. Late in the day, some fellow gets enthusiastic about the company’s prospects and offers $51 to buy a share. The offer is accepted.

How much has the total value of the outstanding shares of Company ABC increased?

My understanding is that total value as reported in the newspapers increases by $1 million. A single share in this company used to be reported as being valued at $50. It is now reported as being valued at $51. That’s an increase of $1. Multiply the $1 by the number of outstanding shares, and you get $1 million.

Is that right?

I possess little confidence in my ability to work numbers. So it could be that I am off base here. I am putting forward my understanding as to how the newspaper prices for the stocks we buy are determined. I think that the point being made here is important to our efforts to come to a better understanding as to how long-term stock investing really works. So, if you are better skilled at working numbers than I am and can identify flaws in what I am saying here, I would be grateful if you would let me know either by posting comments to the blog or by sending me an e-mail (please see the “Contact Rob” tab to the left).

Let’s say that I am right in how I describe things. It’s a problem, no?

It enters the head of one fellow that ABC Company is really worth $51 and not $50 and that one guy’s belief causes a $1 million increase in the reported value of the outstanding shares of ABC Company. Make sense? No, not make sense. Not to this boy.

Middle-class workers use those newspaper numbers to plan their retirements. It’s kinda sorta important that they be reasonably accurate. It’s silly to think that the value of the outstanding shares of ABC Company increased by $1 million because it entered one fellow’s head that up until January 25 he was being a bit under-enthusiastic about the company’s prospects. That same fellow could change his mind on the next day and send the combined value of outstanding shares of ABC Company downward by $1 million, could he not?

That surely wouldn’t be any fun for the people counting on shares of ABC Company to finance their retirements. Do we like the idea of having our retirement hopes soar or fail because of a whim that enters some one individual’s head, or even the heads of a small group of individuals? I sure don’t like the idea of my retirement plans being grounded in such sandy soil.

It seems to me that thinking about things this way helps us answer that disturbing question we hear so often when prices are falling rapidly — Where did all the money go? I put forward a response to that question in last Friday’s blog entry. I said that the money goes “Poof!”, that it goes back to where it came from in the first place — nowhere. Easy come, easy go, you know? This blog entry is really just a more extended take on the same question. I am here trying to explain in a bit more depth how it is possible when stock prices are what they are today for a large portion of your retirement money to over the course of a few months go “Poof!”.

I don’t have confidence in the Newspaper Prices. I don’t think you should either.

I think we deserve better. A lot better.

I say that honesty matters. Yes, even in discussions of investing. Yes, even in discussions held on the internet. Yes, even in reports of what the historical data says re safe withdrawal rates. Yes, even in the reporting of prices that determine the value of our retirement portfolios.

Please do let me know if you see anything wrong in the calculation discussed above. It is my intention to use this one to help a large number of middle-class workers come to a better understanding of how to invest effectively for the long run. I very much want to get this one right. More on This Topic

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January 28, 2008 10:10 IndexUniverse.com on “Guys Named Rob”

Jim Wiandt, the publisher of IndexUniverse.com, today posted a blog entry entitled Guys Named Rob and Hougan’s Folly. I’ve allowed myself to feel a flicker of hope that this development offers us a way of being able soon to bring the Campaign of Terror to an end and to begin enjoying the fireworks (the good kind!) that follow from bringing our breakthrough investing insights of the past six years to a much larger group of indexers.

Juicy Excerpt: “What is it with guys named Rob? Longtime index agitator Rob Arnott has now been joined on these pages by a Vanguard Diehard agitator named Rob Bennett….”

I don’t like being referred to as an “agitator” one tiny bit. But when the unfair adjective comes as part of a sentence applying the same adjective to Rob Arnott, I can take it as being all a part of the wonderful game. Arnott is a stud, one of the true straight-talkers in a field dominated by mush-mouths. It’s not that Arnott and I give them hell, it’s that we tell it like it is and some of them feel as if we are giving them hell.

A community member put up a thread re this development on the Lindauerheads board. It was quickly deleted by Goons in High Places. I wonder why.

When you so fear talking about something, it’s a sign that you need to talk about that something real bad.
More on This Topic

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January 29, 2008 11:27 The Lighter Side of The Great Debate

BigMoneyJim used to be one of my biggest fans. Then I put forward The Post Heard ‘Round the World. That one caused him to run away from home and join the goon circus. Oh, well.

Jim started a smear site some time back that I think can fairly be described as being in general a big pile of smelly garbage. Still, a confirmed optimist finds life-enhancing stuff in the strangest of places. Jim has a section of the site at which he reports on quotes that I have put forward during The Great Safe Withdrawal Rate Debate, adding his own whimsical titles to the quotes. I think it is a good idea to try to focus from time to time on the lighter side of just about any bad situation, and this section of Jim’s site brings a smile to my face even on my third or fourth read of some of the items.

Here are a few samples:

What Happens If the Writing Income Doesn’t Come In?: “My wife divorces me, takes the kids, I turn to alcohol, and then a life of crime, I get arrested, sent to jail, lose my faith, and shoot myself to end the pain. That’s the plan, anyway.”

Unfortunate!: “My hope is that this site will serve as a Learning Together resource rather than as a place for Rob to stand up on a box and shout his opinions at unfortunate passers by.”

Inevitability: “That depends. What’s the latest count on how many sites have been formed dedicated to the task of trying to slow me down?”

Perception of Reality: “Things seem to be swinging in my direction for a few weeks straight now.”

Accomplishment: “Getting a good number of Diehards to put me on ‘ignore’ is one of my biggest breakthrough accomplishments thus far in the discussions!”

Untitled: “I write for humans. To write for humans, you need to understand humans. To understand humans, you need to be a human.”

On [the Launching of] Hocoreseachers Labs: “My sense is that there is a large segment of the community that has been getting fed up with the decline in abusive posting we have all noted with alarm in recent months. I believe that there are a good number of posters who have in the past few days reached the point where they were about to insist that something be done and pronto. They will no doubt view your news as the answer to their prayers.”

On Hocus Bingo: “I really need to get around to sending a note to the good people at the Guiness Book of World Records. I don’t know precisely where “the Top” is in internet discussion-board debates. But, wherever the Top is, this thing has found its way over it.” More on This Topic

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January 30, 2008 10:57 “It’s Not Like You Are Proposing Some Wild New Idea”

Jim Wiandt, publisher of IndexInvestor.com, on Monday afternoon extended to me an invitation to submit an article on Valuation-Informed Indexing for publication at the site. He said that: “if it’s good, and if it’s pertinent, we’ll run it.”

I submitted an article yesterday afternoon. It’s entitled “A New Approach to ‘Staying the Course.’ ” It argues that an investor seeking to Stay the Course in a meaningful way needs to lower his stock allocation at times of high prices to maintain the same risk level, rejecting Bogle’s advice to stick to a single stock allocation while prices go through dramatic changes. These are the same points that I make in the “John Bogles Big Mistake” article (please see the “Heroes and Villains” section of the site).

I chose to go this route with my first submission to IndexUniverse.com in part because it was my “Bogle’s Big Mistake” post at The Old Vanguard Diehards Board that caused the Lindaurheads finally to abandon Morningstar.com and set up a new board where they would be free of those pesky Morningstar posting rules. I believe that the point being made is an important one for indexers to hear, and I have heard a good reaction to it from a good number of community members. The fact that so many see value in allowing the point to be expressed illustrates the damage done by the ban on honest posting. Moreover, I thought that focusing on this point was a good way to introduce the Valuation-Informed Indexing concept to Jim as it is a pure substance point (Jim has expressed a desire to avoid getting “in the middle of a personal feud”).

Jim sent me an e-mail last night. His first words of reaction were: “This is what all the fuss is about?” He went on to observe that, while he does not agree with my argument (I think it would be fair to say that there are more than one or two others who have expressed some reservations, eh?), “it’s not like you are proposing some wild new idea.”

Precisely so.

The idea that valuations affect long-term returns has been around since the first stock market opened for business. It will be around until the end of time, just as will the crazy (from my point of view) idea that market prices are in some mystical sense efficient, or true, or accurate, or right. Believing that the tension between these two positions could ever be resolved is like believing that the tension we all feel between our desire to eat more chocolate-chip cookies and our desire to get in better shape is ever going to be resolved. Coming to terms with the tension between these two ideas is coming to understand what investing is all about. Both points of view are fundamental points of view. Where you stand on the fundamentals affects where you stand on every other question you need to resolve in deciding what to do with your money.

Going by Jim’s words alone, I think I would be justified in expecting soon to see my article appear at IndexUniverse.com, and in expecting to see additional articles exploring other aspects of the Valuation-Informed Indexing approach in the days and weeks and months and years to come. Perhaps it will work out that way. I certainly hope so. I have my worries, however.

My worries stem from a decision made yesterday by Matthew Hougan, the fellow in charge of editorial matters, to delete the many posts (by me and others) pointing out deficiencies in a column pointing out the good that is done at the Lindauerheads board while failing to note the great harm that came from the destruction of The Old Vanguard Diehards Board and that is still being done today by the ban on honest posting on safe withdrawal rates and on the effect of valuations on long-term returns. I sent Matt an e-mail warning him that the Goons have a long history of watching for weakness and jumping on it when they see it. I believe that his decision to delete those posts sends the worst possible sign.

Both Jim and Matt have expressed an intent to avoid the ugly stuff that I refer to as “the Campaign of Terror” while encouraging the expression of the healthy differences of opinion that indexers need to hear to be able to make sound strategic decisions. The way in which Jim put it in an e-mail sent this morning is that: “The personal stuff is a waste of time, so that’s the kind of thing we’ll nip in the bud to ensure that the discussion is, sure, lively, but also civil and substantive.”

Those are good words. Jim is a Normal. Matt is a Normal. The vast majority of indexers and aspiring early retirees would like to see honest differences of opinions voiced on all of our sites and all of our boards. Nothing could be more clear. So why do I remain concerned? Everything is all set, no?

Perhaps. But something deep inside tells me not to break out the champagne just yet. The Goons have been around a long time. The Goons have survived cliffhanger situations on numerous earlier occasions.

There are rules at the Motley Fool site that permit the expression of honest differences of opinion. There are rules at the Early Retirement Forum that permit the expression of honest differences of opinion. There are rules at Morningstar that permit the expression of honest differences of opinion. If a widespread desire that the expression of honest differences of opinion be permitted were all that we needed to make it so in the real world, the first poster who resorted to Goon tactics at Motley Fool would have been suspended for a week, all the others tempted to go in that direction would have picked up on the point, and there never would have been a Campaign of Terror, just wonderful Learning Experiences all the way around.

Could it happen this time? Sure, it could. But the Normals need to show some firmness of purpose. Rules of civility don’t exist to protect majorities. Majorities can take care of themselves. Rules of civility exist to protect minorities. The idea that indexers should change their stock allocations in response to changes in price levels is very much a minority opinion today and will remain a minority opinion for so long as prices remain at today’s level. Rules that are not enforced are empty words. We need responsible people who care about the integrity of our discussions to speak up louder and to insist (not ask!) that those who resort to the ugliness we have seen put forward by the Goons be shown the door.

We all are embarrassed by the Goons. We are all ashamed to be associated (even just by having our screen-names appear on the same boards) with the tactics employed by the Goons. That’s all to the good. We need to back up our embarrassment and our shame with effective action to rein in the Goons. It’s effective action backing up the nice-sounding words that has been the missing ingredient in our efforts to keep our boards clean for far too long a time now.

Adopting a Zero Tolerance policy toward Goon tactics is a win/win/win. It allows us to win back our integrity the same way we lost it, little by little, bit by bit. It enriches our discussions, helping us all learn what we need to learn to achieve long-term investing success. And it helps the Goons learn the facts of life; when Goon tactics are repulsed, the individuals employing them are forced to go back to the drawing board and come up with more civil and reasonable means of making their case. That’s a winna!

Help a Goon! Come out strongly in favor of a full and complete stop to the Campaign of Terror by the close of business today. Pray for a rain of grace to come pouring down upon all our poor, misguided heads and hearts. Or, as noted index-fund strategist Paul McCartney once so effectively urged, let’s all get down to the important business of getting back to where we once belonged. Let’s Retire Early! More on This Topic

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January 31, 2008 12:46 A Strange Babyland

Last Friday’s blog entry (“Newspaper Prices”) explored how one of our fellow middle-class workers can by spending $1 increase overall middle-class wealth by $1 million. He offers to pay $51 for a share of Company ABC, valued at the time at $50, and thereby increases the value that the newspapers report for all one million outstanding shares of this stock. Neat trick, huh?

Yes, it’s a neat trick. So neat that word inevitably gets out. You know how those humans are.

Before you know it, there are 3 happy stout fellows in Iowa spending $1 to increase middle-class wealth by $1 million, and 6 nice middle-aged ladies in New Jersey doing the same, and 74 wise elderly gentlemen in Chicago doing the same and 42 Extremely Cool Girls in Colorodo doing the same and so on and so on and so on. We all work hard for the money, right? What would you expect us to do when we find out how easy it is to turn $1 into $1 million, say that we need to wash our collective hair that night?

The colloquial term used to describe the decisions of millions of otherwise reasonable people to say “insto presto!” and thereby change $1 into $1 million is “bull market.” When those of us in the investing advice biz are attending one of those super-secret, behind-closed-doors, absolutely-no-admittance-without-invitation pow-wows reserved for those in the investing advice biz only, we often use a more technical term of art. We call it “telling a whopper.” Same difference.

We tell whoppers. It’s one of the things we humans do, there’s probably a genetic explanation. We have the power to make the price of the stocks we own just about anything we want to make it, and we use it. We’re like those poor rats that scientists are forever conducting experiments on. At first, they are shy about taking whatever action it is that they need to take to get the food pellet. Eventually, they get it, however. And so do we. We push the food-pellet bar gently at first; bulls climb a wall of worry, they say. Once we see how well it works, though, we push the thing harder and faster and harder and faster. Like teenage boys playing a video game, we push until our fingers are sore from pushing.

We’re all going to be rich!

You have doubts? You worry that there might be some sort of payback down the road a piece?

I suppose you might be right. Oh, well. It was a fine idea at the time, now it’s a brilliant mistake.

Take a look at The Stock-Return Predictor (tab at left). We pushed the food-pellet bar so hard and so many times back in the 1990s that we jolted the P/E10 number up to 44. Please enter that number into the calculator and see what 10-year return comes up. The most likely annualized 10-year real return for those buying stocks at the top of the dear departed bull was a negative 1.09 percent. Treasury Inflation-Protected Securities (TIPS) were at the time paying a real return in the neighborhood of 4 percent.

No fair! Stock investors take on far more risk than TIPS investors. They should be compensated. Stock returns should always be higher than TIPS returns, never lower. We wuz robbed!

It’s true. We really wuz robbed. The sad, pathetic part is that we wuz robbed by ourselves. We have the power to vote ourselves raises by pushing the food-pellet bar but we have to borrow from our future returns to finance them. Push that darn food-pellet bar too many times and you end up with stocks paying the sorts of returns that they have paid for the past eight years.

Bummer, man.

Can we get our old stocks back? We can. All it takes is a decision by a lot of us to push the food-pellet bar many, many times in the opposite direction. The fair-value P/E10 number is 14. We are now at 24. We still have a long ways to go before stocks will be able to pay an appealing long-term return again. But a P/E10 of 24 is a whole big bunch better than a P/E10 of 44. Slowly but surely, we are getting from the dizzy place we got to by pushing that darn food-pellet bar too many times to the groovy place we need to be in to be able to obtain the long-term returns from stocks needed to finance decent middle-class retirements.

I am not a fan of the idea of pushing the food-pellet bar too forcefully and too often. It sounds like fun. Eating chocolate brownies six times per day sounds like fun. Sometimes the kid in us needs a responsible adult to point out the downside of having too much fun all at once. It sure would be nice if there were some responsible adults among the big-name investing advisors (you can’t count Robert Shiller, as we have been infomed that he’s one of those weirdo bears and thus may safely be ignored).

Here are some words from the song “Glad to Be Unhappy.”

Like in a strange babyland
With no mammy and no pappy,
We’re so unhappy.

Faces are growing long in InvestoWorld lately. I have some discouraging news and some encouraging news to report.

The discouraging news is that all that your common sense tells you is so. We don’t get to keep the phony returns. The Summer of 1999 is over and it’s not coming back anytime real soon. It was a mistake. The sooner we face up to that, the better.

The encouraging news is that all that your common sense tells you is so. It really is possible to make sense of stock investing. It’s not nearly as complicated as the “experts” make it out to be. Buy when prices are fair, and your long-term return will be very good indeed. Say “Yes!” to every telemarketing call and you’ll spend your entire life running hard just to stay in place. It makes sense for those who want it to make sense.

Programming Note: I am putting the blog on hiatus for the month of February so that I can spend some concentrated time on my second book, Investing for Humans: How to Get What Works on Paper to Work in Real Life. I’ll be back (God willing) on the morning of Monday, March 3. Take care! More on This Topic

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December 2007 << >> March 2008

The Financial Freedom Blog – December 2007

PassionSaving.com Home Page : The Financial Freedom Blog : December 2007

December 3, 2007 06:51 Gift Overload

Gift overload is making our children depressed, In some extreme cases, it is even making them angry. A big part of the fun of Christmas morning is the expectation of what may or may not come followed by the release of the tension when gifts really do appear under the tree. When there are too many gifts, the ritual becomes a burden: the gifts must be opened; thanks must be offered; token efforts at playing with the toys received must be evidenced. Many kids today find this a bore, especially when they have to do it multiple times (as is the case with kids whose parents are divorced).

Children do not know the secrets of happiness. It is the job of adults to teach them. Happiness never comes with excess. Giving and receiving gifts is wonderful. But the parents of today are letting their children down by taking the easy path. It is easier today to buy ever more gifts than it is to draw a line and say “no.”

I do not say this without sympathy for the plight of the parents and other adults involved. My wife and I have tried to limit the number of gifts given to our two boys. It’s very hard. Uncles and aunts and grandparents all enjoy the process of trying to find the perfect gifts for our boys. There has to be a widespread cultural recognition that the buying is out of hand. If each relative purchased one gift for our boys, that would be acceptable. Many feel a desire to do more than that. It is not healthy for our children to be handed too much without having been required to overcome a challenge to obtain it.

Two chocolate -chip cookies are a treat. Twenty chocolate-chip cookies are a seriously bad feeling. It is the same with Christmas gifts.

Buzz Update: The November issue of the online magazine NoNiche features an article that I wrote entitled How I Became Addicted to Not Watching Television (there’s a charge of $1.11 to download the publication).
More on This Topic

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December 4, 2007 12:01 Networking for the Shy

It is possible to some extent to be engaged in networking without knowing about it. However, if you don’t know what you are doing, the odds are that you are not doing it well.

I suggest that those who are shy about networking acknowledge both the good and the bad side of this reality. There is no question but that shyness about networking hurts your career prospects. The other side of the story is that those who are shy often form deeper and more loyal attachments. So those who are shy need to avoid feeling shame about their drawback and need to seek to take advantage of the opportunities that being shy present to them.

How about networking with others who are shy, forming a sort of “club” at your place of work? The shy person knows who the other shy people are. They are easier to approach in some ways than the ones who are outgoing. Be the one who takes a chance and forms a networking bond with the others and they will be grateful to you for doing so. They will help you and you will help them and it all will be for the good. Shy people disdain phoniness. There is nothing phony about this sort of arrangement.

Shy people tend to be more sincere. The shy networker can take advantage of that too. Shy networkers will put forward fewer hiring recommendations to his or her boss but those that he or she puts forward will count for more because they are rare and stand out. Again, the idea here is not to apologize for what you are but to see the good points of something generally viewed as a negative and to make the most of them.

You get over the fear of talking to strangers by focusing on a topic over which you feel strongly. Shy people are horrible at small talk. They will never be good at it. They need to move the discussion away from small-talk topics. They can break the ice by finding some topic re which they possess strong feelings (it cannot be something too controversial if the other person is a stranger but there needs to be a bit of substance to the topic to engage the shy networker). Once the ice is broken, things happen naturally. Shy networkers generally do not have a problem once they get over the initial difficult hump.

Baby steps are best. Shy people will not be forced into social encounters. If forced, they will pull back all the more. The key is being sure to take some baby steps and not to hide out because of the pain that networking causes for the shy. The shy networker should make deals with himself or herself in which he or she promises that he or she will make a small effort within a specified time-period. He or she should insist to himself or herself that that effort be made, but then let himself or herself “off the hook” once the promised effort has been completed.

Buzz Update: The Digerati Life says that “market timing appears to have various flavors and not all timing approaches may lead to investment underperformance. I say this, while citing this piece about market timing [these words link to the article “Market Timing — What Works and What Does Not,” which appears at the “Valuation-Informed Indexing” section of the PassionSaving.com site), which attempts to describe different approaches that fall under the timing umbrella.” More on This Topic

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December 5, 2007 11:04 Who’s Afraid of the Efficient Market Hypothesis?

I’ve added an article to the “Stock Drunk” section of the site entitled Who’s Afraid of the Efficient Market Hypothesis?

Juicy Excerpt: It’s not done. I have never known anyone who at one time was an advocate of the efficient market hypothesis say that he or she has seen the light and now sees the error of his or her former ways. Why not? Shiller’s book is an extended argument against the hypothesis. The book was a widely praised bestseller. Did it not change anyone’s mind? If it did, did that person go public with acknowledgment of the change of heart? Can you tell me who that person is?

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December 6, 2007 12:14 If the Random Walk Is Real, the Efficient Market Isn’t

I’ve added an article to the “Stock Drunk” section of the site entitled If the Random Walk Is Real, the Efficient Market Isn’t.

Juicy Excerpt: It appears that the confusion stems from a failure of the adherents of the two theories to specify the time-period to which they are referring when they make their claims. There are indeed circumstances in which stock prices appear to follow a random walk. There are also circumstances in which the Efficient Market Theory appears to apply. Stocks are the Certs of InvestoWorld — they are two, two, two investment classes in one!

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December 7, 2007 12:54 Writing for the Internet of Tomorrow

I’ve added a new section entitled “The Million-Dollar Idea” to the site. The first article written for the new section is entitled Writing for the Internet of Tomorrow.

Juicy Excerpt: I face a lot of competition getting ranked for the phrase “buy-and-hold.” But I know of no one else writing on the internet who puts forward the take on how to succeed at buy-and-hold investing that I put forward. As search engines become more customized, I expect that I will stand a better chance of ranking for search queries relating to buy-and-hold investing. I won’t rank for all such queries. I’ll rank for buy-and-hold queries put forward by searchers who have demonstrated a preference for long, thoughtful, non-numbers-oriented, soft-side stuff.

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December 10, 2007 09:42 Spending Guilt

Guilt serves an important purpose. It is the voice of our better selves expressing disappointment in our failure to live up to our potential. Fortunately for us, we are generally not able to silence the voice of guilt through the strength of our will.

Guilt is silenced by taking action on the matter prompting the guilt. If someone is guilty of overspending, he or she can silence the guilt experienced by taking constructive steps to solve the problem. Writing a budget would do it. Once the budget is written, the person’s mental energy will be channeled in a forward direction and the act of overspending will be forgotten.

Buzz Update: An article in the November 27, 2007, issue of Fortune shoots straight on why stock prices are falling. It says: “Forget the chatter, ignore the headlines, and follow the math. Prices will get a lot more attractive. The process is underway. All investors have to do is wait.” Right on!

This article does not make direct reference to the Valuation-Informed Indexing approach to investing. However, it provides a good summary of the principles that demand that rational investors lower their stock allocations when prices reach the sorts of levels that apply today as well as an explanation of why P/E10 is a better valuation tool than the more frequently cited P/E1.
More on This Topic

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December 11, 2007 12:04 The How-To of Investing the Valuation-Informed Indexing Way

I’ve added an article to the “Valuation-Informed Indexing” section of the site entitled The How-To of Investing the Valuation-Informed Indexing Way.

Juicy Excerpt: Think about it. Does it make sense? If yes, move ahead slowly. If not, jump off the tracks before you get hurt; if it does not make sense to you, it does not make sense for you.

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December 12, 2007 06:10 Saving Too Much Is a Big Problem

I’ve added an article to the “Upsizing” section of the site entitled Saving Too Much Is a Big Problem.

Juicy Excerpt: There is a b.s. detector present in all of our brains that filters out saving advice rooted in the idea that saving too much is not possible. We know from our life experiences that this is nonsense and that causes us to be more than a little suspicious of any money management model that puts forward such an idea.

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December 13, 2007 12:09 “I Was Able to Take an Extended Leave”

I’ve added Javier’s story to the “Middle-Class Millionaires” section of the site.

Juicy Excerpt: I went from being thousands of dollars in debt to having thousands of dollars in savings in a time-period of two years. Thanks to your words I was able to take an extended leave for three months and take care of my wife and newborn. I did this without getting in debt, paying hospital bills, buying a used but dependable sports utility van, taking care of my family, and still not wiping out my savings.

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December 14, 2007 14:30 Santa’s Got a Brand New List

Ten tips for keeping holiday shopping from getting out of control:

  1. Write a budget just for holiday spending with a dollar amount specified for each item and bring it with you when you shop. Writing things down at a time when you are not caught up in a spending spirit makes a big difference;
  2. If you feel tempted to go over the holiday budget on one item, make it up by subtracting from the amount allocated elsewhere. This imposes a necessary discipline;
  3. Be satisfied with token gifts when buying for someone hard to buy for. People who “have everything” understand, and only are made to feel uncomfortable when friends and family members spend too much on something that they will not be able to put to use;
  4. Don’t assume that others want the things you want. It’s easy to overspend when you see something that you view as “perfect.” Unless you are sure that the person for whom the gift is being purchased will view it as perfect, don’t let this “find” cause you to go over your budget;
  5. Ask several adult friends or family members to agree not to exchange gifts. Many will be relieved to hear the suggestion;
  6. Check with the parents of children as to whether gifts are a good idea. Many parents today are trying to de-commercialize the holidays for their children and are seeing their efforts undermined by friends and relatives. There is such a thing as getting too many gifts. It is important that children not get everything they want.
  7. Watch less television during the holiday season so that you do not get caught up in the advertising campaigns. Plan non-commercial ways to enjoy the holidays so that your mental energy is not focused on buying.
  8. Resist the temptation to think that gifts mean as much today as they did in the Christmases of your youth. They do not.
  9. Limit your holiday shopping to one or two trips. If you are spending more than that amount of time on holiday shopping, you are too focused on the commercial side of the holidays.
  10. Identify a charity to which you will donate a specified sum plus any amount by which your overall spending comes in under-budget. This will give you an incentive to spend LESS than the amount specified in the holiday budget.

Buzz Update: The West Coast Wiccan blog says: “It seems to be a truism that pagans are always broke (and therefore I fit right in!)…. I came across an interesting website which I think may help: http://www.passionsaving.com/ The theory of it, that you need to plan your debt reduction and saving and so forth according to exciting goals rather than boring, distant ones, seems to tie right into the conclusion I had already reached when I decided to have a five-year plan of emigrating to England – and doing it debt-free.” More on This Topic

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December 17, 2007 08:15 False Investing Claims Hurt Humans and Other Smart, Fun-Loving Mammals

I’ve added new language to the “Disclaimer” section of the site.

Juicy Excerpt: I care about you. That’s why I say the harsh things that I say about the now-dominant model. I believe that the now-dominant model is likely going to do you great harm in time. I want to replace the now-dominant model with a model that encourages a healthy mix of knowing and caring (I call the new model the Investing for Humans model). A key precept of the new model (one that distinguishes those of us who follow it from those following the old model in an extremely important way) is that those of us who follow the new model must be willing to acknowledge mistakes when they are brought to our attention. We appreciate that our mistakes can hurt our fellow humans. That’s our driver. That’s more important to us than concerns about potential lawsuits.

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December 18, 2007 10:19 “A Less Secure Future, But a Good Retirement Already Had”

I’ve added Arty’s story to the Middle-Class Millionaires section of the site.

Juicy Excerpt: I “subtracted” myself from the conventional work mode, and essentially, remained subtracted, living as a writer with few expenses, a good, full life for me. While I still write, and am paid to do freelance marketing, consulting and editing, I do not regret the decision to abandon a good, regular job and “live” my life, albeit poorer, than my peers and friends who got good-pension jobs but still await the day to spend it…. So, in that sense, I’m living life “backwardly”, with a less secure future, but a good retirement already had.

Buzz Update: BankRate.com recently posted an article entitled Find Frugal — But Not Cheap — Gifts. Here is the text section of the article quoting my views:

“Agreeing to a low spending limit for your honey can actually be a romantic gesture.

” ‘Show your affection not by spending a lot but by being creative in picking the perfect gift within the spending limit,’ suggests Rob Bennett, author of the daily Financial Freedom Blog at PassionSaving.com.

“For example, find an out-of-print book by your spouse’s favorite author in a used bookstore for $5.”

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December 19, 2007 11:39 Yes, Virginia, There Is a Free Lunch for Smart Investors

I’ve added an article to the “Scenario Surfer” section of the site entitled Yes, Virginia, There Is a Free Lunch for Smart Investors.

Juicy Excerpt: Life itself is a free lunch. You never paid for a ticket, did you? To reject any good thing you happen to discover on grounds that to believe in it would be to believe in a free lunch is morose madness. The entire trip is a free lunch, for heaven’s sake. Come on.

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December 20, 2007 10:02 Taking Risks Isn’t What It Used to Be

I’ve added an article to the “The Self-Directed Life” section of the site entitled Taking Risks Isn’t What It Used to Be.

Juicy Excerpt: Saving is risky. If you go on a vacation today, you know what you are getting; the value proposition is solid and clear. If you save, you don’t know how much that money is going to help you out later on. It might be that it will keep you from going hungry. It might be that it will allow you to pursue an opportunity that will make you rich. It might be that you will get so many raises between now and the day you retire that the money you save by not taking the vacation will end up just being extra money to give to your heirs.

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December 21, 2007 15:03 The Future of Behavioral Finance

I’ve added an article to the “Stock Drunk” section of the site entitled The Future of Behavioral Finance.

Juicy Excerpt: The future belongs to the Behavioral Finance School. But not the Behavioral Finance School as it now exists. As Behavioral Finance becomes the dominant model for understanding how stock investing works, the outlaw will become the sheriff. Proponents of the Behavioral Finance School will become more confident, more expansive, more assertive.

Programming Note: I hope that, like Clarence (The Big Man) Clemons, you wake up Christmas morning to find a shiny new saxophone (or the equivalent for someone in your particular financial circumstances and pursuing your particular Life Goals) under the tree.

The blog will return (God willing) on the morning of Monday, January 7, 2008. At that time, we will continue our exploration of the money management implications of Bruce Springstein’s observation that:

The poets around here don’t write nothing at all.
They just stand back and let it all be.

Merry Christmas!

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November 2007 << >> January 2008

The Financial Freedom Blog – November 2007

PassionSaving.com Home Page : The Financial Freedom Blog : November 2007

November 1, 2007 08:39 Scott Burns: “The Whole Idea That There Is a New School of SWRs Reeks of Personal Aggrandizement”

I promised in last Thursday’s blog (Scott Burns Distances Himself from the New School SWR Approach) to file a report today on his e-mail to me dated October 22, 2007.

This response was six paragraphs long.

Scott justified his banning of discussions of the New School approach to safe withdrawal rate (SWR) analysis from his discussion board on grounds that “your approach to communications seems to provoke” the abusive tactics engaged in by Greaney defenders. He described the contributions of the Goons as “useless name calling.”

The Dallas Morning News columnist said that he appreciated my “efforts to add another level to the safe withdrawal rate discussion.” But he added that: “You go about it in a manner that is catastrophically unproductive by adding missionary zeal that inflates your importance and demeans others. The whole idea that there is a new school of Safe Withdrawal Rates reeks of personal aggrandizement.”

The e-mail pointed to research done by Stephen Leuthold more than 25 years ago that showed the connection between starting-point valuation levels and the long-term returns provided by stocks. Scott expressed agreement with the core principle of the New School approach — that the valuation level that applies at the start date of a retirement affects its survival prospects. He noted that it is not possible to predict long-term returns with precision. And he observed that it is possible that there has been “a secular change in corporate return on equity in the last three decades.”

Scott concluded that: “The bottom line is that the foundation for your new school is planted on very soft and muddy ground. It’s an idea that deserves notation, not messianic conversions.”

I sent the following response early the next morning (due to the length of the response, I will not use quote marks — my response continues until the last two paragraphs of this blog entry):

Scott:

I am grateful for your response.

Is it okay with you if I set forth the text of your e-mail in my blog or in an article at my site?

John Greaney (author of the Old School study posted at www.RetireEarlyHomePage.com) has a long history as a highly abusive poster. There is no question but that, if you permit either Greaney or those who post in defense of him to participate at your forum, the forum will be trashed. The appropriate response is to remove abusive posts as soon as they are brought to your attention. That permits the many investors who would like to be able to participate in reasoned discussion of the New School findings to engage in civil and reasoned discussion. What’s the potential downside?

Here is a link to an article at my site quoting from a number of posts from the early days of the Motley Fool discussions, at which numerous community members expressed excitement at the learning experience that was provided when I first raised the idea of discussing SWRs in a realistic way:

http://www.passionsaving.com/community-comments-on-the-great-safe-withdrawal-rate-debate.html

Those people (and tens of thousands more like them) have been denied a great learning experience because one individual who got an important number wrong in a study posted to his web site in 1996 has not been able to bring himself to acknowledge the error. Do you want to be part of that? When you ban honest discussion of the SWR topic at your forum, you become part of it. What you should be banning is abusive posting, not honest discussion of important issues raised in your own columns.

To say that I have a “missionary zeal” re the SWR topic is to vastly overstate things. I learned (from reading John Bogle’s book) of the flaws in the Old School studies back in the mid-1990s. I began posting at the Motley Fool board in May 1999, I did not put up the kickoff post to The Great Safe Withdrawal Rate Debate until May 13, 2002. Does that sound like missionary zeal to you?

A more accurate way to state this would be to say that I continue to explore the SWR matter because of the “missionary zeal” that it provokes in others. The normal and healthy response to finding that studies that people use to plan their retirements get an important number wrong is to seek corrections of the studies. Is that not what we would see if these studies related to the risks of smoking or the risks of playing with dangerous toys? The “missionary zeal” here is all on the other side.

I am a simple man with simple dreams. I made a lot of friends as the result of founding the Retire Early Community of discussion boards (Greaney founded the first board, but I was the one who founded the community by posting on the Passion Saving approach to money management and thereby transforming that board community from a small group of Greaney supporters into what I think can fairly be described as the most exciting board in the history of the Motley Fool site). Thousands of these friends of mine were taken in by the claims of these dangerous (but surface-plausible) studies. I tried to help them out. They thanked me. And a small band of highly abusive posters then burned six boards to the ground in an effort to stop honest and informed discussion of this topic. If that is not “missionary zeal,” what the heck is?

All of the negative emotion re this issue is on one side. I have spoken with thousands and thousands of people on this matter. I do not recall a single instance of someone who favored honest discussion making use of abusive posts to intimidate or deceive. I have seen this tens of thousands of times from people seeking to “defend” the Old School studies. Does this not tell you something about the confidence that these people feel in the rationality of their “defense”?

There has never in the history of the internet been a debate on a personal finance question that has generated even a fraction of the number of posts that have been directed to discussion of the SWR topic. The number is in the hundreds of thousands. People care intensely about this. The unfortunate reality is that the intensity is far, far, far higher on the side defending the discredited studies than it is on the side seeking to learn more about the New School approach. There are many who would like to learn, however. They are not willing to sort through hundreds of trash posts to do so. But they would be pleased to make constructive contributions if a forum were made available at which they were protected from the sorts of individuals who have posted in defense of Greaney.

I have never demeaned the contributions of others, Scott. I have stated on numerous occasions that the breakthrough findings achieved by the Retire Early community were in every possible way a group effort. We have seen hundreds of fine people taking time out of their day to help us out, and in the face of bitter opposition on the part of the Greaney defenders. John Walter Russell has been working on this 50 hours per week for over five years and has been paid not one thin dime! I think it would be fair for me to describe him as the most generous-spirited individual I have ever encountered. My role was to get the ball rolling and to keep it rolling by asking questions about our findings at each stage of our development of the issues. I have put a lot of time into this and I certainly think that it would be fair to describe me as the leader of the New School. But by no means do I think that it would be fair to suggest that I have been doing this important work alone. This has been a group effort from the first day.

You are the one who coined the phrase “New School,” Scott! That phrase comes from your column of July 2005! When you mock it, you are mocking your own coinage!

Ever since publication of that column, I have considered you a member of the New School. I have my doubts today (because of the content of your recent column, your recent e-mails, and your defense of the Old School number as “a good rule of thumb”) as to whether it is still appropriate to describe you as a member of the New School. If you do not want to be so described, please just let me know and I will refrain from doing so. I am inclined to refrain from doing so (at least not without noting caveats) at this point in any event.

I think it would be fair to say that it is impossible for a reasonable person to determine on what side of this issue you stand, Scott. Your July 2005 column described work showing that the Old School numbers were off by up to two full percentage points. You wouldn’t have published the column if you did not think that that work had value. So at the very minimum you were saying that there are grave doubts today as to the safety of the Old School numbers. That puts you in the New School!

Today you are saying that the Old School studies provide “a good rule of thumb.” Huh? Studies that people use to plan their retirements get the number wrong by up to two full percentage points and yet these studies provide a good rule of thumb? This is nonsense gibberish of the worst sort, Scott. These are dangerous, dangerous studies. The fact that somebody as smart and as well-informed as you was taken in by them at an earlier time points out the danger. Studies that cause people seeking to put together safe retirement plans to instead put forward high-risk retirement plans are dangerous studies. No responsible person who is informed of the grave flaws in the methodology of these studies should be linking to them or defending them in any way, shape or form. We need to warn people about these studies, not to encourage them to make use of them! Do you see?

You say: “Had one retired in 1996 or 1997, the subsequent decline would have been far less damaging to a retirement as retiring in 1999 or 2000.” That’s so. It’s also irrelevant to the topic we are discussing. We are discussing whether the Old School studies accurately report the withdrawal rate that is safe. They do not. No one knew in 1996 that the price drop would not begin until 2000. A 4 percent withdrawal was a high-risk withdrawal for a retirement beginning in 1996. The Old School studies got the number wrong. It may be that those retirements will survive. It won’t be because they were safe. It will be because they were lucky. There’s a difference.

It is no defense of the discredited SWR studies to say that some of the retirements constructed pursuant to their claims will survive. You could say that of retirements based on hopes of lottery tickets paying off. No sane person would say that hoping for a lottery ticket to pay off is a safe way to finance a retirement and no sane person should be saying that hoping on an unsafe withdrawal rate not to cause a retirement to fail is a safe way to finance a retirement. The question you should be asking yourself is — Do these studies report the SWR accurately or do they not?

You acknowledge that: “High starting P/Es tend to reduce future returns, and, thereby, portfolio survival rates.” Precisely so. The Old School studies include no adjustment for the valuation level that applies on the retirement start-date. Thus, the Old School studies get the SWR number wrong. The Old School studies will likely cause millions of busted retirements in days to come, in the event that stocks perform in the future anything at all as they always have in the past.

You say: “What you haven’t incorporated into your thinking is that the spreads on future returns from any given P/E level are very wide.” Why do you say this, Scott? Have you looked at The Stock-Return Predictor, a calculator available at my web site?

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

The calculator reports that the most likely annualized real return for the S&P over the next 10 years is 0.76. The best possible return (if stocks perform in the future as they have in the past) is 6.76. The worst possible return (the same caveat applies) is a negative 5.24. Is that not a pretty big spread? I do not know where you got the idea that I believe that the spreads on future returns from any given P/E level are not wide. I think it would be fair to characterize this as a strange claim for you to be putting forward. I can assure you there is no basis to it.

This reality has no bearing on the calculation of the safe withdrawal rate, Scott. The SWR is by definition the number that works in a worst-case scenario. The SWR is not a number telling us what might work, if we get lucky. It is a number telling us what will work, assuming only that stocks perform in the future no worse than they have in the past.

I don’t mean to be insulting here, Scott, but I feel that I need to point out that it is your job to understand this sort of thing. Do you understand it? Are you just pretending not to understand it? Is there something about this issue and the reaction of some to honest reporting on it that causes you to not want to let into your consideration of it knowledge that in other circumstances you would be happy to make use of? I do not know the answer to these questions. I am baffled by some of the words you have put forward.

If you “get it” that valuations affect long-term returns, then you should “get it” that a methodology that makes no adjustments for starting-point valuations must report the number inaccurately. Why do you twist yourself into logic pretzels in an effort to avoid the obvious realities that apply here? Again, I mean no insult, I am entirely sincere in expressing a desire that you reflect on these mysteries. If we were able to deal with that question in an emotionally healthy way, I believe that we could make a lot more progress in our back-and-forth in a lot less time. All of my words will not convince you if you do not want to be convinced. You should be asking yourself why you put up so much resistance to being convinced of things that are so obviously so.

You are viewed as a leader in the SWR field, Scott. You pointed out that Peter Lynch got the number wrong at an earlier time. The errors in the Old School studies are every bit as grave as the errors made by Lynch. We need you to come forward with clear and plain and simple and understandable words warning people of the Old School studies and condemning efforts to block honest discussion of their flaws. Your actions could make a big difference. I think it is fair to say that this is the most important topic that you have ever addressed in your time as a journalist. You have it in your power to save millions of retirements. The research work is completed. All that we need at this point is for a well-respected journalist to come forward with clear and plain and simple and understandable (no word games!) words letting people know the obvious realities. That would make a big, big, big difference, in my estimation.

You say: “The algebra of corporate returns…” blah, blah, blah, blee, blee, blee. No one cares about algebra, Scott. That sort of talk is for insiders or for a talk to a convention of academics in the investing field. I write for real live people who have real live concerns as to whether their real live retirements are safe in the real live world or not. You do too. Please try to keep those people and their needs in mind when addressing this topic. Those peoples’ retirements are in grave danger as a result of the demonstrably false claims of the Old School studies. That’s the bottom line. I implore you to make that your focus in your consideration of how to proceed re this issue.

You say “I don’t know” how things will turn out for today’s retirees. Precisely so. If you don’t know how things will turn out, you know that the Old School studies get the number wrong. Uncertainty is not safety. The full reality is that we do not even know that the New School study numbers will work out. It is entirely possible that stocks will perform in the future worse than they ever have in the past. The difference is that the New School studies do what they purport to do; they report what will work in the event that stocks perform in the future as they have in the past. The Old School studies do not do this. The Old School studies are not science, they are science fiction (they assume an imaginary world in which starting-point valuations have zero effect on long-term returns).

You say: “Leuthold himself nearly drowned in that river in the late ’90s because the averages told him the market was overpriced around 96 or 97 .” Leuthold was right, Scott. The market was wildly overpriced in 1996 and 1997, God bless him! I wish that we had had more people pointing out at the time the dangers of stocks for long-term investors. The tone of your comment here suggests criticism of Leuthold. If you are being critical of the guy for getting it right when so many others were getting it wrong, then all I can say is that we have a serious disconnect re this one. Is it not the goal to get it right? It seems to me that we should be praising Leuthold and others like him rather than finding fault with them. If a greater number had listened to Leuthold when he made the statements you refer to, we wouldn’t be in the mess we are in today, would we?

Your added comment that Leuthold made these observations “years before the actual peak” is embarrassing to read. Do you think he has a crystal ball? Again, I mean no insult and I am no fan of sarcasm. But this is very basic stuff, Scott, stuff that I am confident you understand better than you are pretending to understand it in some of the words you have put forward here. Leuthold does not see into the future. He reported that stocks were wildly overpriced and therefore dangerous for the long-term investor at a time when stocks were indeed wildly overpriced and therefore dangerous for the long-term investor. He did his job — good for him! I only wish that we had a lot more like him protecting middle-class investors from the Efficient Market Theory nonsense that has done financial harm to so many middle-class investors in the days since we hit the peak in 2000. Leothold did not pick the day and time because it is not possible to pick the day and time. He gave accurate and informed and reasonable advice when lots of others were failing to do so. That’s the job!

You say: “The algebra of corporate returns says that a higher ROE would allow both higher P/Es and higher stock returns, thereby increasing portfolio survival at higher P/Es from the levels that prevailed in the past.” There’s no harm and probably some good done from engaging in such speculation, Scott. Such speculation has no place in a SWR study, however. The root assumption of SWR research is that stocks are likely to perform in the future at least somewhat as they always have in the past. Assumptions that it is all going to turn out different this time are not a foundation for safe retirements. I have no objection to any investor putting together his retirement plan based on such an assumption. You puts down your money and you takes your chances. I have a big objection to the idea of such an assumption being used to justify putting forward research that purports to tell us what withdrawal rate is safe according to the historical data but which in reality does no such thing. Yuck!

You say: “The foundation for your “new school” is planted on very soft and muddy ground.” You are entitled to your opinion, Scott. I would be grateful if you would let me know of any arguments that you know of that can be put forward in support of this assertion. Anyone who reports to me any holes in the New School case is doing me a huge favor by bringing them to my attention. These ideas have been debated in the court of public opinion for over five years now. Not one of the defenders of the Old School studies has been able to put forward a single rational argument in support of their case over that time. The bans on honest posing on the SWR topic that have been imposed at numerous discussion boards (including your own!) speak for themselves. If there were a rational case that could be made in defense of the Old School studies, why would the authors of those studies be so aggressive in seeking bans on honest discussion of this topic?

You say: “It’s an idea that deserves notation, not messianic conversion.” The Retire Early Community’s findings on SWRs have led us to a lot of interesting places in recent years, Scott. The Retirement Risk Evaluator is fruit of The Great Safe Withdrawal Rate Debate. The Stock-Return Predictor is fruit of The Great Safe Withdrawal Rate Debate. The Investor’s Scenario Surfer is fruit of The Great Safe Withdrawal Rate Debate. John Walter Russell’s site (www.early-retirement-planning-insights.com) has over 500 articles of original research that is the fruit of The Great Safe Withdrawal Rate Debate. My site (www.passionsaving.com) has scores of articles on investing that are the fruit of The Great Safe Withdrawal Rate Debate. I am working on a book (Investing for Humans: How to Get What Works on Paper to Work in Real Life) that is fruit of The Great Safe Withdrawal Rate Debate. There have been thousands of threads setting forth tens of thousands of investing insights that are fruit of The Great Safe Withdrawal Rate Debate. I think it is safe to say that our community’s discussions of the SWR matter have already generated work that counts for more than a “notation” to the investing literature. I also think it is safe to say that we are today in the early innings of our exploration of the issues that have been brought to the surface as the result of our efforts of the past five years.

I detect hostility in a good number of the words that you have put forward , Scott. I respect your many contributions. I certainly do not question your intelligence. On this very issue, you clearly “get it” to an extent that few others do. All that said, I detect hostility. I have a good bit of experience in discussion of the SWR matter and I do not believe that I am imagining things. I am detecting hostility because there is some measure of hostility present in you re the work that I have done bringing the flaws of the Old School SWR studies to light.

Investing is primarily an emotional endeavor. It is only in a secondary sense a rational endeavor. This is our most important finding of all. You feel emotion over this issue, Scott. You shouldn’t be feeling emotion, according to the Efficient Market Theory. According to the dominant theory of how stock investing works, we are all robots who make rational investing decisions that cause the markets to work efficiently. This is of course nonsense. Your own words in the e-mail below tell the story of how emotions affect our understanding of how investing works.

This is the biggest story of your lifetime, Scott. I have studied this matter in great depth and I can tell you that it affects lots of people in lots of different ways. It is a big, big story. Part of it is the millions of busted retirements that we will see if people are not warned of the dangers of using these studies to plan their retirements. But even that is not the most important angle to the story. The most important angle is the emotional angle. If a leading journalist in the field, one who has a history of speaking as an expert on the SWR topic, is not able to work through these questions rationally, who is?

All humans have emotions. All humans have dark sides. All humans must struggle at times to face the truth and to tell the truth. Yes, that includes me. I held back on reporting to my friends what I knew about safe withdrawal rates because I was afraid of the attacks that would be made on me as a consequence of my reporting accurately what the historical data says. I was wrong to hold back. I learned my lesson. I struggle today to tell it as plain and real and true as I possibly can, knowing all the time that I am human too and that I too am flawed and therefore at times file imperfect reports.

The story is important, you are important, and the people you write for are important. If you have additional questions or comments now or at any later time, my offer to do everything in my power to bring you to a better understanding of the SWR topic (I don’t refer here only to an understanding of the academic research, I refer also to an understanding of the human suffering that results from studies that put forward demonstrably false claims for use in planning retirements — the latter is the more important part of the story, in my assessment) stands. Please just ask when there is something that you think I might be able to do.

The goal is to “Save the Retirements!” That’s not a joke to me. I put the idea forward in a somewhat lighthearted way because I don’t think that excessive heaviness serves any of us. But I am entirely serious in stating that that is my goal. Numbers are a big part of the SWR story. To me, though, this is not at heart a numbers story, it is a people story. This is a story of people hurting people and of other people trying to help people (I don’t mean just me, there are hundreds of Retire Early Community members who have taken time out of their day to put forward constructive contributions).

My intent is to post these words at my blog and possibly later as an article at my web site. My preference is to post your words as well so that people are able to understand the context in which I put forward my words. If you do not give me permission to post the words of your e-mail, I will not do so. However, I will post the words of my e-mail, which of course include a few quotes of your words. If there is any particular reason why you do not want one of the quotes reported, please let me know and I will make an effort to find a way to report the thought I was expressing in that section of my e-mail without quoting your words in that case.

Again, thanks for participating in some back-and-forth, Scott. I continue to have hopes that we will bring you around in time. I no longer view it as appropriate to cite you as a “supporter” (the New School disdains word games, and it is the ultimate word game to characterize the Old School’s 4 percent number as “a good rule of thumb”). But I also believe that you have advanced the ball on this issue in several significant ways. I believe that in time you will come to see that the Old School studies are indefensible. I see it as my job to do whatever can be done to speed up the day when that happens.

Please respond if you have any further thoughts or concerns or questions. If you do not respond, please know that you have my best wishes despite our differences on the SWR topic. I will send e-mails from time to time to let you know of significant developments but I will make an effort not to do so with any great frequency.

Take care, my old friend.

Rob

Later that day Scott sent me the following 10-word response:

“Sadly, your response is exactly what I wrote you about.” More on This Topic

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November 2, 2007 17:22 Staying Married Just to Be Different

I’ve added an article to the “The Self-Directed Life” section of the site entitled Staying Married Just to Be Different.

Juicy Excerpt: My wife and I have very different personalities. This makes for a great marriage when things are going well because she is strong in the areas where I am weak and I am strong in the areas where she is weak. However, there are times when it causes communication problems. There are times when I just do not make any sense! Well, the reality is that at times she just does not make any sense, but I am bending over backwards to be diplomatic here.

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November 5, 2007 15:15 What Do I Owe You?

1) The Airport Drive — The friend who drove you to the airport is not expecting any particular “payment.” This is an act of friendship and it is an insult to suggest that there be direct compensation for the favor. It is the rules of friendship that apply here. What you should do is stay alert for an opportunity to do something for the friend down the road a bit (perhaps you could help carry boxes on moving day). The payment does not have to be “equal in value” to the favor. These things are not precisely measured under friendship rules. The important thing is that you offer without being asked and that you don’t expect compensation either (although you will of course get it somewhere down the road a bit).

2) The Sister Babysitter — More frankness is called for in maintaining a healthy relationship with a sibling. In this relationship, there is much more giving going on (so there is a need to mention the inevitable problems that come up) and there is enough history to support a better understanding of the realities. You can say “no” to the babysitting assignment so long as you give a reason that makes sense and is not offensive. If you simply do not deal well with children, you can give an across-the-board “no” (but this has to be true — your sister will obviously know if it is not). If this is a busy time for you, you can say “this is a busy time, but I’d be happy to babysit sometime in the future.” The only time asking for money would be acceptable is if you really were low on funds and if you were asked to babysit regularly.

3) The Co-Worker Lender — With a co-worker, you have to repay the debt. The best solution here is to pay cash (the insult that applies with a non-work friend does not apply here). If the co-worker refuses the payment, she is telling you that she sees the relationship as rising to the level of non-work friendship. In that case, the rules for Scenario One apply. You pay back in a less defined but more generous way. If you are not comfortable taking this friendship to a higher level, you could offer payback by bringing back something for her when you go on vacation and thereby “evening the score.”
More on This Topic

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November 6, 2007 11:26 Learning from Mistakes — I Never Should Have Bought that Leo Sayer Album

I’ve added an article to the “The Self-Directed Life” section of the site entitled Learning from Mistakes — I Never Should Have Bought That Leo Sayer Album.

Juicy Excerpt: I was wrong to buy that Leo Sayer album. I was wrong to leave the Church for so many years. I was wrong to stay single for so many years. I was wrong to be afraid to have kids. I was wrong to waste so much time following politics. I was wrong to spend so much time reading newspapers. I was wrong not to exercise regularly for a time. I was wrong to go so many years without even giving thought to writing down a Life Plan. I was wrong to take dumb risks, like I did that time I drove a car after attending a party to celebrate my graduation from law school. I was wrong not to work up the courage earlier in life to take some risky career moves that stood a reasonable chance of generating a big payoff. I was wrong not to visit my brother more often when we lived so close together that it was easy to do so. I was wrong not to recognize earlier signs of Alzheimer’s in my father in the years before he died. I was wrong to read so many magazine articles, thereby limiting the time that I had to devote to reading books. I was wrong to believe the Phillies of the late 1960s when they claimed each Spring that they had some rookies coming up who were going to turn the team around.

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November 7, 2007 09:12 The Case Against Valuation-Informed Indexing

I’ve added an article to the “Valuation-Informed Indexing” section of the site entitled The Case Against Valuation-Informed Indexing.

Juicy Excerpt: It truly does seem that someone other than me should have come forward with these ideas a long, long time ago. From one way of looking at things, a good number did so. For example, Benjamin Graham, author of Security Analysis, put forward similar ideas decades ago. So perhaps there really is nothing new under the sun. My view is that the popularity enjoyed by the Efficient Market Theory during the wild bull of the 1980s and 1990s caused most experts to forget the essentials of common-sense investing for the exceedingly strange stretch of stock-market history that we happen to be living through today.

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November 8, 2007 11:23 You Can and Must Beat the Market

I’ve added an article to the “Scenario Surfer” section of the site entitled You Can and Must Beat the Market.

Juicy Excerpt: Investors are often described as being greedy and out to make a killing in the market. I don’t see it. Most investors I have spoken with (I have spoken with tens of thousands on discussion boards) are intimidated by stock investing. The last thing on their minds is making a killing. Their hope is that they will manage to do okay, to at least come close enough to matching market returns to be able to finance a decent middle-class retirement.

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November 9, 2007 18:17 20 Dangerous Money Myths — They Think We’re Stupid!

I’ve added an article to the “Start Me Up” section of the site entitled 20 Dangerous Money Myths — They Think We’re Stupid!

Juicy Excerpt: Banks write mortgages to make money. They charge an interest rate high enough to earn a profit after paying all their expenses. You are incurring a cost when you take on a mortgage. It’s often a cost that is worth taking on because of the benefits of having a mortgage. But it is a mistake to think that a mortgage is cost-free or that there is not a benefit associated with paying off a mortgage.

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November 13, 2007 08:18 The Problem with/for Today’s College Grads

Reasons Why It Is Hard for Today’s College Graduate to Establish Himself or Herself on a Career Track:

1) Jobs are more specialized today and so it is harder for a college graduate with a general education to find the first step on an appealing career path;

2) Jobs have changed so much that many young people are not able to tap into valuable information on how to get a good job by talking to their parents or other relatives, who entered a job market that followed very different rules;

3) Both opportunities and downside risk are greater than they have been in earlier eras. There have always been some college graduates who became paralyzed by the awesomeness of the choice being made when taking a first job. Today the potential for being paralyzed is greater than before;

4) There are fewer required courses in college today. That means that some graduates have not had as wide exposure to the job possibilities open to them; and

5) There is more stigma attached to taking a “menial” job today. The media encourages a success mentality. The menial tasks that often need to be done as part of a plan to achieve long-term success are not glamorized in the media. So some young people look down on them and their attitudes influence others who might not otherwise have those attitudes themselves.

Buzz Update: ExpertRetirementPlanning.com says: “You should check out The Retirement Risk Evaluator, an innovative new school retirement calculator. The Retirement Risk Evaluator is the very first retirement calculator to take valuation under consideration.” More on This Topic

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November 14, 2007 09:19 My E-Mail to Money Magazine re the Lindauerheads Board

Set forth below is the text of an e-mail that I sent to Money magazine on October 31:

Hello:

Pat Regnier posted a message to the Bogleheads discussion board seeking comments re this board for an article that he is writing. I would be happy to discuss my experiences with him.

I am the poster primarily responsible for formation of the Bogleheads board. I posted for a bit under two years at the Vanguard Diehards board under the screen-name “hocus.” The focus of my posting there was the effect of valuations on long-term stock returns, as aspect of investing that I first learned about from reading John Bogle’s books and speeches.

One of the “leaders” of the board (Mel Lindauer, one of the co-authors of The Bogleheads’ Guide to Investing) took great offense to my posting on the valuations question and organized a long-running smear campaign against me and those who posted in support of me. This smear campaign grew so intense and ugly that the new Bogleheads board was formed as a means for community members who wanted to escape the ugliness to be able to do so.

My web site address is: www.PassionSaving.com. There are numerous articles posted there about the Valuation-Informed Indexing approach to investing. There are also three calculators that show the effect of valuations on long-term returns. The Stock-Return Predictor shows that the most likely annualized real return for the S&P index over the next 10 years is less than 1 percent:

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

Here is a link to an article at my site setting forth snippets of posts of scores of contributors to the Vanguard Diehards board who objected to the smear campaign and who expressed a desire that honest and informed posting on the valuations topic be permitted in that board community (which is now the Bogleheads community):

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

I believe that discussion boards are a powerful communications medium of the future, especially in the personal finance field. They show us not only what people believe about investing, but also what they feel about what they believe. The destruction of the Vanguard Diehards board and its transformation into the Bogleheads board (where honest and informed discussion of the valuations topic is not permitted) tells us something important about what works for long-term investors. For buy-and-hold to work, those using this approach must have confidence in it. The destruction of the Vanguard Diehards board (which was once one of the most successful discussion boards in the history of the internet) reveals a lack of confidence in buy-and-hold among a good number of advocates of the conventional indexing approach.

The failure of the Vanguard Diehards board (which was achieved through formation of the Bogleheads board) is testimony to the ongoing (and likely soon to be accelerating) failure of the conventional approach to indexing. An investing approach that cannot be defended in rational debate on a discussion board is an investing approach not long for this world.

Indexing is a wonderful strategy that helped millions of middle-class workers become successful investors during the length of a wild bull market. But the principles followed by the “Bogleheads” must be changed to include making adjustments to stock allocations in response to dramatic changes in stock valuations if this strategy is to continue to be successful now that the wild bull market of the 1980s and 1990s has come to an end.

Update: I received a note from Money indicating that my e-mail had been forwarded to Pat Regnier, the reporter working on the article on the Lindauerheads board (I refer to the board as the Lindauerheads board when speaking to those who know of the background of its formation and as the Bogleheads board to newcomers to The Great Debate). I have not heard from Regnier. More on This Topic

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November 15, 2007 10:05 What Do Early Retirees Do About Health Insurance?

Liz Pulliam Weston recently wrote a follow-up to her article telling the stories of people who retired before turning 50. The new article is entitled How Early Retirees Insure Their Health. Here is the text of the section of the article describing my circumstances:

“The Bennett family of Purcellville, Va., has a $10,000 deductible as well as a higher monthly premium: $700. The policy includes maternity benefits, which some high-deductible policies don’t, and the coverage came in handy during Mary Bennett’s pregnancy with her younger son, now 5, when complications required her hospitalization.

” ‘On the one occasion when we faced a true emergency’, said Rob Bennett, 51, ‘the insurance covered what we couldn’t cover on our own.’ ”

I found it encouraging to read that: “Reader response to the two columns I recently wrote on early retirement, Retired by 50: Real Life Stories and Retired by 50: What It Really Takes, has been strong and overwhelmingly positive.” When I began researching the Retire Early concept back in the mid-1990s, there was little information available. The conventional media still treats this as a niche topic, but there is much more information available today.

The big breakthrough will come when people stop thinking of retirement as an all-or-nothing proposition. Most people see it as too weird to give up work altogether at age 40 or at age 45 or at age 50. There are millions, though, who would benefit from retiring from the bad side of paycheck dependence while continuing to find joy in doing fulfilling work for many years to come.

There is no rule of the universe that says that the only options available to you are to remain a wage slave until you grow old or to give up entirely on the idea of engaging in productive activity. Why not save enough to be able to do work that pays less but is more fulfilling? Or to be able to start your own business without taking on unacceptable amounts of risk? Or to cut back to a part-time schedule and have time for a life outside of work too? Or to take a self-financed sabbatical? Or to work for a non-profit enterprise?

I believe that the reason why most find it hard to save is that most think that saving is something you do to provide for an old-age retirement and most are bored by the idea of planning for their old age. Change retirement into something that is achieved in stages over the course of a lifetime spent in pursuit of ever greater levels of autonomy, and you make saving the exciting money allocation option.

By adopting a broader understanding of what it means to retire, we would provide people a realistic approach to life planning which would motivate large numbers to save far higher percentages of their income than most now think possible while also liberating lots of human spirits to do work far more important than the work they are engaged in today.

The potential downside? I am not aware of any.

Retire Different! More on This Topic

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November 16, 2007 08:05 Stock Panic Up Close and Personal

I’ve added an article to the “Stock Drunk” section of the site entitled Stock Panic Up Close and Personal. This article explores the behavioral finance implications of comments set forth in the “Investing Discussion Boards Ban Honest Posting on Valuations!” article.

Juicy Excerpt: I became radicalized. The word radical means “to the root.” The investing advice field is intellectually corrupt to the root. Most of the people in it are good people. But they are trying to adhere to a model for understanding how stock investing works that just does not make sense. We need to pull up the Efficient Market Theory by the roots and start over with something else. I couldn’t have told you what the Efficient Market Theory was on the morning of May 13, 2002. Today I say that we need to pull it up by the roots. That’s because of what I have seen and what I have learned during The Great Debate.

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November 19, 2007 15:47 Supporting a Spouse After a Job Loss

Three Suggestions:

1) The employed spouse needs to express to the unemployed spouse how comforting it is to him or her to know that, when the tables are turned, he or she will have the other spouse to lean on. Otherwise the unemployed spouse may feel resentment at needing to depend on the financial help of the employed spouse;

2) The employed spouse should refrain from suggesting that the unemployed spouse consider work at a lower pay or a lower status than he or she enjoyed previously. It may be that such positions should be considered at some point. The suggestion to consider them should come from the unemployed spouse; and

3) The employed spouse should make an effort to encourage as little change in the couple’s daily routine as possible. It is a mistake to come to rely on the unemployed spouse to run errands. Some of this will obviously go on. But the unemployed spouse should be focused on obtaining employment, and running errands can detract from that purpose in a way that can undermine his or her confidence about his or her talents and contributions.

Buzz Update: Andrey’s Blog says “I like this down-to-the-earth blog about gaining financial freedom. Simple tips for regular people.”
More on This Topic

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November 20, 2007 06:13 Girls Like Me

A little boy sat down and cried.
An old man passing asked him why.
He said: “I can’t do what the big boys do.”
The old man sat down and he cried too.

There’s a web site that tells people who advertise on the internet the demographic characteristics of the people who visit various sites. PassionSaving.com attracts people who are smarter than average and people who are wealthier than average and we get more women than men. Girls like me! That’s good!

I checked some other money sites and found that most of them are winning over more men than women. That means they’re dumb sites. Men are smart, but women are smarter, just as the Robert Palmer song (it belonged to Harry Belafonte in an earlier day) quoted above argues. That’s right, the women are smarter! They’re smarter than the men in every way!

Here’s what I really believe. It’s not that the women are smarter. It’s that they are smart about different sorts of things. The personal finance field is a field that has been dominated by men for a long time. They’ve scored some touchdowns, as grown-up boys are known to do. They’ve committed some fumbles, as grown-up boys are known to do too. We need to see women’s wisdom brought to bear on some of these questions. We need that real bad.

I bring a mix of the two perspectives. I like to argue. That’s a boy thing. I try to soothe ruffled feathers when I see the arguments turning personal. That’s a girl thing.

At the Motley Fool board, we used to talk about this using Myers-Briggs personality assessment tool terminology. The personal finance field is filled with INTJs. A quick Google search tells me that this is the “Scientist” type. I am told that: “INTJs live in the world of ideas and strategic planning. They value intelligence, knowledge, and competence, and typically have high standards in these regards…. The INTJ’s interest in dealing with the world is to make decisions, express judgments, and put everything that they encounter into an understandable and rational system…. INTJs tend to blame misunderstandings on the limitations of the other party, rather than on their own difficulty in expressing themselves. This tendency may cause the INTJ to dismiss others’ input too quickly, and to become generally arrogant and elitist.”

Songwriting is not the INTJ’s strong point. I think that much would be fair to say.

I’m an INFJ, one of the “Protectors.” The story on INFJs is that: “INFJs are gentle, caring, complex and highly intuitive individuals. Artistic and creative, they live in a world of hidden meanings and possibilities. Only one percent of the population has an INFJ Personality Type, making it the most rare of all the types…. INFJs have uncanny insight into people and situations. They get feelings about things and intuitively understand them…. They have strong value systems, and need to live their lives in accordance with what they feel is right.”

This is not the place to come to hear the conventional ideas on how to save or how to invest.

I take a look around me and notice that lots of people are unhappy with the amount that they save and it is instantly as obvious as obvious can be to me that the old rules do not work. The old approach does not do the trick for the people it is supposed to help. So it is broken and needs to be replaced. Does that not follow? Why are there some who give me such a hard time over this?

It’s even worse on the investing side. There I see extreme defensiveness among the “experts” and lots of normal people who evidence doubts about what the experts are telling them but who appear to be too intimidated by the fancy talk dished out by the experts to question them too much. Again, this tells me that the system is broken. So I quickly get about the business of building something better (driving the INTJs up a wall by presuming that it is possible to do so).

I begin with the premise that the conventional money advice doesn’t work. I’ve never even given a thought to reporting on the stuff you hear about at most other sites. The conventional stuff has failed people and thus it has failed, period. The pretty numbers lined up in pretty rows don’t impress me a jot. What doesn’t work for people doesn’t work, going by my way of looking at things. Things that don’t work are broken. In my eyes, it really is that simple.

If you want to say that it’s INTJs vs. INFJs, that’s fair. More people would see this as a girl vs. boy thing, I think. The INTJ exhibits traits that are generally characterized as boy traits. The INFJ exhibits traits that are generally characterized as girl traits. Scientists are boys and Protectors are girls (and there are lots of exceptions to both rules). It doesn’t surprise me that more girls than boys visit this site. I am telling the money story in a different sort of way, a way that has more natural appeal to girls than the dumb old boy way of telling it.

INTJs are smart. That’s one of their good points.

They have a hard time admitting it when they are wrong. That’s their biggest weakness.

INFJs understand people. That’s one of their good points.

The types of things they see are not the types of things that can be demonstrated with pretty numbers lined up in pretty rows. That’s their biggest “weakness” (I don’t see this as a true weakness — but then I wouldn’t, would I?)

Is it the INTJs or the INFJs who possess the truth?

God possesses the truth. God created INTJs and INFJs both. God loves us all and God wants us all to try to get along.

I know that I am right about this. I can just tell. More on This Topic

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November 21, 2007 14:27 Part Two of Rob’s Interview on the Money, Mission and Meaning Podcast

Mark Michael Lewis, host of the Money, Mission and Meaning podcast, recently completed an hour-long interview with me about my book Passion Saving: The Path to Plentiful Free Time and Soul-Satisfying Work. Part Two of the interview is now available for your listening pleasure.

Juicy Excerpt: It’s just amazing to me that in all of the years that I have been studying this, I have never heard this particular way of putting it and how much it opens up…. I was in the financial planning business…. I probably read 50 books on finance and money and saving and investing, and I can count the number of them on one hand for which I said, “well, there is something really new and important in here,” and your book is definitely in that category. I just want to thank you for that because that’s a gift to me.

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November 26, 2007 16:14 Motivating Kids to Save

Your child needs to be motivated to rein in spending or the battle to get him or her to appreciate the need for frugallity will be a never-ending one. My wife Boo and I have two boys — Timothy (8) and Robert (5). When they receive money from their grandmother or from their lemonade stand, we suggest that they save a portion of it to buy something big that they would not otherwise be able to buy on their own. They both love Star Wars Lego sets. So the goal might be to save enough to purchase a set that sells for $100, something they could otherwise obtain only on a birthday or on Christmas.

For an older child, the goal might be to save to buy a used car. The idea is to make saving a positive — saving permits us to own things that we otherwise could not own. If the child cares about the goal purchase, he is going to be more careful about each act of spending because he is excited to make progress on financing the goal purchase. More on This Topic

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November 27, 2007 11:15 Dating Up

True “success” requires money, but it also requires tapping into a lot of things that cannot be translated into dollars. A woman who thinks of dating a man who earns less as “dating down” is likely entering a doomed relationship by doing so. But a woman who takes little interest in how much income a potential dating partner earns can be making a smart choice if she dates down because she identifies a man who can bring things to her life not available to her today.

Earning more opens up opportunities, it allows for a greater scope of choices (because the woman need not worry about financial considerations). It is turned into a negative by a woman who equates “low income” with “low status” or “low value” or “low attractiveness.”

Buzz Update: A poster discussing The Stock-Return Predictor at the Motley Fool Investment Analysis Clubs (recently opened to the general public) says: “It sounds like Bennett and Russell have put in lots of time into the research behind this calculator, so it will be interesting to see if they are right.” Another observes that: “Move the P/E slider to about 6 and watch your possible returns grow! As you say, it’s an interesting tool.” More on This Topic

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November 28, 2007 08:35 The Efficient Market Concept Is a Big Bunch of Hooey

I’ve added an article to the “Stock Drunk” section of the site entitled The Efficient Market Concept Is a Big Bunch of Hooey.

Juicy Excerpt: The Efficient Market is so ill-defined that trying to prove its nonexistence is akin to trying to prove the nonexistence of a ghost. The advocates of the theory give it little shape or outline or matter. So those of us seeking to prove its nonexistence are left saying: “Do you see all of that nothingness in front of you? That’s not a ghost as you insist it is, it really is just the nothingness that it appears to be!”

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November 29, 2007 09:35 The Lindauerheads Explore Valuation-Informed Indexing

The Lindaurheads are celebrating the holidays in a positivelootingly splendalicious way. They are learning the steps to the latest dance craze — The Valuation-Informed Indexer’s Romp!

Let’s listen in.

The concept of Valuation-Informed Indexing is really just that (i.e., he’s an indexer who’s read Shiller and thus worries about valuations), no?

That’s essentially correct.

I try to learn from anyone who has something to teach me. I’ve learned many important things from John Bogle, the founder of the conventional indexing approach. I’ve learned many important things from Robert Shiller, the author of Irrational Exuberance. It would certainly be fair to say that the things that I learned from these two individuals (and from many others, to be sure) are reflected in my development of the Valuation-Informed Indexing approach.

I object when people try to fit me into a box, when they say that I must declare myself a bull or a bear or whatever. Yucko! I love stocks too much to ever feel comfortable being called a bear. And I love financial freedom too much to ever be willing to ignore the effect of valuations on long-term returns when setting my stock allocation.

My aim is to identify investing strategies that work in the real world. I have found insights from people from all sorts of schools of thought helpful in doing this. I am grateful to all of them for the help they have provided and I swear blind allegiance to none of them when writing the articles that I write to help my fellow middle-class investors attain financial freedom early in life. I would feel that I was not doing my job if I failed to report on both the good and bad of Shiller, Bogle, and lots of others.

Why is it that this approach is viewed as controversial in some quarters? That’s what gets me. To me this is just common sense. If you were the manager of a baseball team and you learned about a great strategy from another team, would you refuse to make use of it because you’re an Oriole and the idea was developed by a Yankee? That makes sense — not! I find the extreme dogmatism that evidences itself in a good number of investing discussions (this is a particularly severe problem among conventional indexers, but I’ve seen it elsewhere too) a big-time turn-off.

Is it just the messenger and the tone or is it also the message?

It’s the message.

I was one of the most popular posters in the history of the Motley Fool site on the morning of May 13, 2002. That was when I put up the post that kicked off The Great Safe Withdrawal Rate Debate. I think it would be fair to say that there has never in the history of the internet been an individual who has had as many smears directed at him as I have had directed at me as a consequence of my putting up that post and then responding to many of the hundreds of thousands of posts responding to it or asking questions about it that have been put forward in the years since. I am the same person today as I was on the evening of May 12, 2002. The difference is that I am today widely known as The Man Who Dared to Post Honestly on Safe Withdrawal Rates. Shivers!

The hate that a good number have evidenced toward me is not the result of me getting the number wrong. That could easily be forgiven (the authors of the Old School studies have rarely been taken to task for getting the number wrong). My terrible crime is that I got the number right. Honest and accurate reporting of the safe withdrawal rate is something that we had never seen before. This had to be stopped! This was unacceptable!

You see that this is insane, right? The Efficient Market Theory is today the dominant model for understanding how stocks work. The theory presumes that stock investing is a 100 percent rational endeavor. If that were so, people would be happy to know the true safe withdrawal rate. The very fact that some have responded with anger and hate and fury to accurate reports of what the historical data says about safe withdrawal rates shows that the Efficient Market Theory is a poor model for understanding how stocks work.

Is that not right? Do you see any flaws in that logic? I think this stuff is insane. I think I did a good thing in pointing out the flaws of the Old School studies and in working to develop an analytically valid methodology (John Russell deserves the lion’s share of the credit re that one). I’d do it again (not that I’m asking to relive the experience).

Trying to depend on valuations as an indicator for market timing is not a dependable way to manage risk.

The historical stock-return data says otherwise.

My guess is that this poster is confusing short-term timing with long-term timing. It is true that the historical data indicates that short-term timing does not work. However, the same data that shows that short-term timing does not work also shows that long-term timing does work. If we can trust the data on the one point, why should we not trust it on the other?

Bogleheads are more concerned with the risk management part, or keeping their portfolios balanced to their risk tolerance.

These words point to the big flaw of the conventional indexing approach. Investors should aim to keep their risk level roughly constant as prices change. When stocks go to the sorts of levels that apply today, investors who set their allocations at times of reasonable valuations see their risk levels increase dramatically. Conventional indexers often speak of the need to “Stay the Course!” It is not possible to Stay the Course in a meaningful way without adjusting one’s stock allocation in response to big price changes. The point of the Valuation-Informed Indexing approach is to make indexing a realistic investing strategy for both bull and bear markets.

Valuations do come into play though, through the usual rebalancing process, albeit free from the use of market timing indicators.

The Investor’s Scenario Surfer (see tab to left) shows that Valuation-Informed Indexing consistently beats rebalancing in returns sequences similar to those we have experienced in the historical record. In the event that stocks perform in the future anything at all as they always have in the past, Valuation-Informed Indexers will do better in coming years than investors following a rebalancing approach. The problem with rebalancing is that it keeps you at the same stock allocation even when the long-term value proposition of stocks has dropped dramatically.

I’ve been further looking at Bennett’s site and it certainly is an interesting read.

I am grateful for those kind words of Peter71.

You’ve got to love that he gives “twenty criticisms” of his own approach and “ten weaknesses” with himself as a money advisor.

I hope to do more of this sort of thing in days to come. The key to successful long-term investing is keeping one’s negative emotions under control. One that messes up lots of people is pride. People have some success in a bull market, falsely attribute that success to skill rather than luck, and then become locked into dubious strategies for fear that being open to new ideas would diminish their own and others’ perception of their great genius. We need to do what we can to stop ourselves from buying into such nonsense.

It can never be done away with entirely so long as man remains a fallen creature. Still, I see it as the job of all investing experts to do what they can to steer us in emotionally healthy directions. Excessive pride is not the way. Those who point out to us our weaknesses are our friends. We need to search within to learn what we are doing wrong more often and pat ourselves on the back for our great genius less often.

He’s a self-described “egomaniac.”

It actually was my wife who used that word to describe me (she said it out of love, and I am of course grateful for both her love and her honesty). I once heard someone say that anyone who writes a book is a bit of an egomaniac. To write a book is to proclaim to the world: “I know something that you should be paying attention to.” So I don’t see this comment as being entirely out of line. I try not to let my ego become a problem. But I think there probably is indeed some ego driving some of the effort that I put into building up my site.

There’s another side to this one, however. I think it would be fair to say that my investing approach is an extremely non-egotistical approach. When it comes to investing, I take the side of the Normals, regular middle-class investors who impress me far more with their commonsense observations than do the Big Shot Experts who react with rage and hostility and word games when their oh-so-important views are questioned. I also put a good bit of stock in the historical data, which I see as an objective tool that can be used to keep investors who otherwise might fall to the sin of excessive pride humble (the data shows that those who become too full of themselves always pay a price).

I do not believe that it is right for investors who follow realistic strategies to shiver and shake in the corner while the blowhards who had a few lucky years during the most out-of-control bull market in the history of the nation control the field. The Big Shots need to be called on their nonsense. Those who follow realistic strategies have nothing to apologize for. I think we need to speak up more out of charity for the millions who have a desire to learn about more realistic ideas but who have been blocked from doing so by a small group that believes intensely that it should never under any circumstances be questioned.

If that makes me an egomaniac, then so be it. I’m with the Normals all the way. I care about the Big Shots too. I offered to shake Mel Lindauer’s hand at the annual meeting of the Vanguard Diehards and that offer still stands today. I’m not such an egomaniac that I cannot shake the hand of a fellow who disagrees with me on a few points. I see no reason why investing discussions should not be conducted in a warm and friendly manner. But when Mel wages his smear campaigns at the Normals, I feel that it would be disloyal of me not to speak up on their behalf. I am just enough of an egomaniac to believe that whatever words I can put forward on behalf of a fellow community member under attack by the Big Shots might do a little bit of good (and there are indeed a number who have been kind enough to thank me for my efforts in this regard).

and/ a “numbers dunce.”

I really am a Numbers Dunce. That’s not a smear. That’s a truth.

I’m not sure he’s the one to be taking the non-stationary correlations from the Shiller paper and reifying them in the form of a retirement simulator.

That’s a fair comment so far as it goes. The reality, of course, is that the statistical work for all of our calculators was done by John Walter Russell. He’s the opposite of a Numbers Dunce. He’s a Numbers Wiz. So I think our work product has survived my personal deficiencies.

The other thing is — If John and I did not do what we do, who would do it in our place? Middle-class investors need the tools we have produced. And I don’t see anyone else jumping in to take over the work we do when we take a few days off.

It’s certainly a good idea for people to scrutinize our work product carefully and to offer constructive ideas for improvement (I’d like to see more of that). I have a hard time seeing how the world would be a better place if we hadn’t done what we have done, however. At the very minimum we have started some important discussions questioning what passes as the conventional wisdom on investing in the year 2007.

I think there’s definitely something to be said for the basic strategy.

So long as that is so (and it should be obvious at this point to all reasonable people that this is indeed so), the thing to do is to keep on doing. I like it when people ask hard questions because that is how we all learn. I do not like it when people engage in abusive and hostile posting. That sends away posters of intelligence and integrity. That hurts us big time.

While that messenger has some problems,

My problem is that I was the first human to point out that the Old School safe withdrawal rate studies are analytically invalid. That shouldn’t be a problem.

What makes it a problem is that the authors of the Old School studies do not want to acknowledge the analytical flaws in their studies and to correct them.

There are some who say to this day that investing is a 100 percent rational endeavor. Sure it is.

I personally agree with the concept of owning relatively more stocks when prices are reasonable or cheap and relatively less when they are expensive.

Lots of people see the merit of this when it is explained to them. That’s why Lindauer sees the Valuation-Informed Indexing concept as such a threat. These discussions have been going on for over five years, and never has a defender of the conventional indexing approach put forward a rational argument for why indexers should not lower their stock allocations at times of extremely high prices.

The investing ideas that I put forward are new only to those who learned about investing during the most out-of-control bull market in the history of the United States. The idea that prices matter was considered simple common sense in the years before the wild bull. My expectation is that it will be considered simple common sense again in a time not too terribly distant from today. The problem with investing pursuant to the fashion of the day is that fashions change.

But what valuation technique or model will you use as your crystal ball?

Note the use of the phrase “crystal ball” in a discussion of the importance of looking at the price being charged for stocks before buying them. If someone asked you to buy a house without first looking at the price, would you do it? What if the person laughed at you for wanting to use a crystal ball? Would that sort of argument persuade you?

Taking price into consideration is not akin to looking at a crystal ball. Taking price into consideration is examining the long-term value proposition available to you.

What is the alternative? Ignoring the long-term value proposition? What sort of crystal ball is it that tells some that that is an idea that might work out?

I cannot see into the future. I can see into the past. I can tell you that ignoring the long-term value proposition of stocks has never before in the history of the U.S. market worked out for those who tried it. It could turn out different this time. I am not going to put my retirement at risk on a bet that it will. I prefer to bet with the probabilities on my side. Counting on something that has never happened before to come through for you now is not a good-probability bet, in my assessment.

Sitting on the sidelines for the past 10 years hoping for a market crash has cost Rob and his followers (if he has any) a lot of money.

This is a false statement. It is a false statement that has been put forward scores of times and it is a false statement that has been corrected scores of times. I am ahead today as the result of my decision to look at how stocks have always performed in the past to form my decisions as to how much to invest in stocks in the present. I will end up much farther ahead in the event that stocks continue to perform anything at all as they always have in the past.

Bennett seems to be mentally ill.

Please check out the article entitled “Investing Discussion Boards Ban Honest Posting on Valuations!” at the “Banned at Motley Fool!” section of the site. Are the thousands of Retire Early Community members who have expressed a desire that honest and informed posting on the valuations topic be permitted at our boards all also mentally ill? When you find yourself making public pronouncements that thousands of smart and good people are mentally ill, it’s a good idea to check what it is that is driving you to make such a statement. I think it would be fair to say that it is not the strong confidence you feel in your current investing strategy.

These sorts of statements reveal an extremely weak hand.

This message is dangerous and heavily data mined.

If making use of the entire historical record dating back to 1870 is data mining, then any reference to how stocks have performed in the past is data mining. This poster is saying that it is not possible for us to know anything about stocks. If it is not possible for us to know anything about stocks, we should not be investing in stocks.

If it possible to know things. Those who possess a rational desire to learn have managed to learn things by looking at the historical data. Those who possess an emotional desire not to know what the historical data says have managed not to learn. My beef is with the experts who encourage the latter group and discourage the former group. We all should be working together to learn all that we can. I have never in my life seen so much human energy directed to the task of blocking learning experiences as I have seen during The Great Debate.

Whatever I’ve said above I mean in a courteous, but cautionary, way.

Do these words sound threatening to you? What is this poster concerned will come out if discussions are held?

I have never encouraged the Goons to engage in deceptive and abusive posting. Each time they do so they make it harder on all other community members but also on themselves. There is obviously a need for integrity in investing discussions.

How did things ever reach a point where certain Big Shot Experts felt that they could say absolutely anything, no matter how deceptive and no matter how abusive, and get away with it? Take a look at the P/E10 value that applied in January 2000 for an important clue.

Bull markets are exercises in deception. What we do in a bull market is to make a collective decision to pump up the nominal (but not the real) value of our stock portfolios for a time. Wild bull markets always end badly. There is not a single exception in the historical record. That’s because lies always end badly. Bull markets are lies. That’s the reality, stated in plain and simple terms.

What sustains bull markets? Lies. That’s what it takes.

When we have told so many lies that it makes us sick, we return to reasonable price levels.

What distinguishes me is that I got sick of the lies a bit sooner than some others. Others are catching up with me as we speak.

Or pursue the question in terms of the concept of adjusting exposure to “stocks” or whatever based on valuations (or expected future returns), rather than in terms of “so what’s all this about Rob Bennett, then?”

Both paths lead to the same place.

Anyone who examines the valuations question closely is going to end up studying the historical data. Anyone who studies the historical data is going to see that a lot of what we have been told about stocks over the past 20 years just does not add up.

“Rob Bennett” is the name of a reporter who tells people what the historical data says and then responds to their questions about what he has reported in as clear and plain a manner as possible. This reporter has been banned from several discussion boards because what he says upsets a number of individuals who have come to think of themselves as Big Shot Experts Who May Not Be Questioned.

Banning Rob Bennett is not the same thing as banning the historical data. The historical data is like an ocean or a mountain. It cares not what smears are aimed at it. It’s going to continue to do its thing just as it always has, Goon posters be darned.

The Normals need to develop the fortitude to stand up to the Goons. That’s when things flip. That’s when the healing process begins.

A true Expert would be encouraging the Normals to get up and stand up for their rights. My beef with the Experts is that many have failed to do this. Too many have on occasion put forward words of comfort for the Goons.

I also would not agree with relying on one “magic” metric such as P/E10.

And of course there is no one who recommends such a thing.

If you look at Rob’s book on Amazon, there is a negative review. Rob responded to it simply with “What have you got against Mallo Cups?”

I have never offered my book for sale at Amazon.com. There have been a few cases in which someone who purchased a copy at my web site offered the used book at Amazon.com. Greaney asked his Goons to go over there and post negative reviews. He asked this before the book was even published, before he even had a chance to read it.

How would you respond to such obvious and such vicious nonsense? I responded with a joke. My take is that that’s a pretty darn emotionally healthy way of responding, given the nature of what it is that I am responding to.

Greaney got the number wrong in his study. That error will cause hundreds of thousands of busted retirements in days to come, in the event that stocks perform in the future anything at all as they always have in the past. That’s a joke that’s not so funny, in my assessment.

Greaney has not betrayed us only on the investing side. He has betrayed us on the saving side too. Greaney is one of the people who encouraged me to write Passion Saving: The Path to Plentiful Free Time and Soul-Satisfying Work. He said in his five-star review of my Secrets of Retiring Early report that he was sure that if I ever wrote a book on the subject , it would become “the Bible” of the Retire Early movement.

When did he change his mind? He changed his mind on the day when I pointed out the error he made in his study (an error that he has not corrected to this day).

Investing is 100 percent rational? No. Investing is primarily an emotional endeavor and only secondarily a rational one. Greaney is emotionally invested in his study. He is not able to bring himself to correct it. So he lashes out at any who post honestly on the safe withdrawal rate topic.

We are not just talking about one highly abusive internet poster. There are hundreds who have posted in defense of Greaney and his study. Why? What possible reason could there be for investors to want to be told the analytically invalid safe withdrawal rate and never to be told the analytically valid safe withdrawal rate?

There is no possible rational reason. There are only emotional reasons. The Efficient Market Theory has been disproven by the anger and hate and hostility and rage that we have seen evidence themselves in our investing discussions in recent years. Denial does not work. The purpose of that rage is to hold back reality. Reality is going to crash down on us no matter how hard we fight to hold it back. When you travel to the P/E10 levels we traveled to in 2000, returning to reality hurts big bunches.

Your toy balloon has sailed
Into the sky, love.
Now it must fall
To the ground.
Your sad eyes reveal
Just how badly you feel
Because there aint no easy way down.

–“No Easy Way Down “– Written by Goffin/King, Sung by Dusty Springfield

The links in this post will lead to plenty of discussion about (and by) Mr. Bennett.

The site linked to is owned by John Greaney.

Why would people who purport to be followers of John Bogle be linking to a site owned by John Greaney? This is why I refer to the board as the Lindaurheads board rather than the Bogleheads board (its official name). John Bogle is one of my heroes. It is an insult to him and to his investing philosophy for a board that carries his name to be linking to Greaney’s site. I mean, come on!

Is Bogle a Lindauerhead? I say “no.” I think it would be fair to say that there is evidence pointing in both directions. I will continue to say “no” unless and until I see clearer evidence that I am wrong to do so.

Given there’s also some posts on Rob’s site about how no one on this site is willing to discuss valuations at all (certainly not what I’ve found) I think you could argue that actually doing so might be the best revenge.

There’s huge interest in the valuations topic. I have never seen any other issue in the personal finance area generate so many questions and comments and responses.

I certainly do not say that there are few people willing to discuss valuations. There are large numbers with an intense interest in doing so. However, realistic discussion of the valuations topic has been banned at a number of boards, including the Lindauerheads board.

Posters at that board are permitted to say that valuations are high and that returns are likely to be somewhat lower as a result. They are not permitted to calculate how much lower returns are likely to be (presuming that stocks perform in the future somewhat as they always have in the past). Why not? Investors need this practical bottom-line information to be able to act on what they learn about the effect of valuations. It is not enough for investors just to know things in a vague way. Unless we act on what we learn, we suffer the losses that follow from failing to act. People need actionable information.

Posters are also not permitted to point out the contradictions in John Bogle’s statements re valuations. Bogle is one of the leaders in the field in pointing out that high valuations cause low long-term returns. Yet Bogle tells investors that they do not need to lower their stock allocations at times of high valuations. This advice is in conflict with his “Stay the Course!” injunction. When the risk/reward profile of stocks changes, investors must adjust their allocations if they are to Stay the Course in a meaningful way.

Posters are also not permitted to point out the flaws in the Old School safe withdrawal rate studies. The analytical errors in the Old School studies are going to cause hundreds of thousands of busted retirements in days to come, in the event that stocks perform in the future anything at all as they have always performed in the past. Retirees and aspiring retirees should be put on notice of the dangers of the demonstrably false claims put forward by the authors of these studies and should be pointed to analytically valid studies (please see the “Risk Evaluator” tab to the left).

I hadn’t known Shiller owns stocks himself so that’s something learned in the process.

We learn all sorts of things when we explore a topic. That’s the benefit of setting up investment discussion boards in the first place.

I’ve read that Shiller has a 60 percent stock allocation, but with only a small amount in U.S. stocks. I’ve only read this in one article and the article provided few details. I would like to know more about Shiller’s portfolio decisions.

I’ll spare people the “Why No Love for Dow 36,000?” thread, but as I’ve suggested a couple times before I do think there could be a shred of truth to the idea that whereas P/E’s (including P/E 10’s) were once quite meaningful as predictors of 10 year returns (basically Shiller’s claim) they’ve now for various reasons become less so.

I agree with Peter that there may be something to these arguments and that it would be a good idea to explore them in more depth.

I haven’t read that book either, though, so I have only the vaguest sense of what those reasons are.

The argument made in Dow 3600 is that the middle-class has only recently discovered that stocks are not as risky as once thought and that this is going to cause the risk premium attached to stock ownership to change forever. The adjustment to a new risk premium would cause stock prices to skyrocket for a number of years. From that time forward, long-term stock returns would be permanently diminished.

The reason valuations matter so much in the writings of Shiller and Bennett is because they are considering only one slice of the stock market.

All of the articles at this site are rooted in research of how the S&P 500 has performed in the past. There is enough data available on the S&P 500 to permit meaningful statistical insights. Shiller and Russell (John Walter Russell did the statistical work on the calculators that appear at this site) are certainly not the only researchers using data from the S&P 500. This is common practice.

That said, it is so that investors not investing in the S&P can realistically expect at least somewhat different results. I certainly have never claimed otherwise.

After Stein & Demuth’s Yes, You Can Time the Market! book came out, there were a whole bunch of discussions on avoiding stocks when their valuations were high. Unfortunately, said strategy stopped working after 1985, oopsie.

The data shows that stocks have performed over the past 22 years in accord with how they have always performed before that. The price level reached in the late 1990s is the highest ever reached by far. So we should expect the price drop to follow to be the biggest ever seen in the history of the U.S, market. We have seen a significant price drop over the past eight years, but we are still at extremely high prices levels. In the event that prices continue down to normal levels, the strategy of taking prices into account when investing in stocks will have worked one more time.

It is only if that does not turn out to be so that we will be able to conclude that stocks have for the first time behaved in a manner totally unlike how they have always behaved before. It is hard for me to understand why this poster believes that the question has already been settled. My personal take is that the head -in-the -sand attitude being evidenced here is a bad sign indeed.

We don’t know the future. We cannot entirely rule out the possibility that stocks will indeed perform this time in ways in which they never have before. But why do we see this rush to judgment, this intense desire to conclude that stocks have already performed in ways in which they never have before? This I do not get. I do not view this as rational. I view it as highly emotional and I view it as a ominous phenomenon for those invested heavily in stocks today.

Even if you are personally convinced that stocks really are going to perform in the future differently than they ever have in the past, I would suggest giving consideration to the idea of hedging your bets a bit. I would also suggest to this poster that he try opening his mind a bit to the other side of the story. Banning discussion of what the historical data says protects you from hearing the message of the historical data. It does not change the realities of what the historical data says.

Rob Bennett [aka Hocus] totally exited stocks in 1995-1996 and has suffered severely for it.

I noted above that this is false statement. I am financially ahead today on my decision to use the historical data as a guide in setting my stock allocation.

Say that we were discussing a topic other than investing and that you saw one side in the discussions put up the same deceptive statements over and over and over again. Would you not conclude from that that those on that side of the discussion were holding a weak hand? I sure would. I see no reason why we should not apply the same tests that work in all other areas of study to the stock investing area. When people engage in these sorts of tactics, there is a reason.

This is a sign of intense defensiveness. Why is it that those trying to argue that stocks will perform differently in the future than they ever have in the past are so defensive? I think it is because they themselves possess inner doubts about their position. This stuff is eating them alive. They are not only financially invested in stocks, they are emotionally invested too. They need to try to chill out a bit for their own good, in my assessment.

Not just M*. He was banned at 10 web forums before he found M* and has been banned by another 4 since M*.

This is of course nonsense. Orion has a long history as an abusive poster at the board owned by Greaney. He has never been banned, to my knowledge.

He actually lists most of his bannings on his website. He seems to think – or wants the reader to think – that this proves he knows something that “they” don’t want you to hear.

I list the bannings because I think it is information that my readers should know about. Those who support the Campaign of Terror take one view of the bannings and those who oppose it take another. In either event, the fact that the bannings took place is a significant fact.

I generally go along with the statement that I believe that I know something that the Big Shots do not want you to hear. The only part that causes me some unease is the possible suggestion that I possess some sort of super-level intelligence that permits me to know these special things. That’s not even a tiny bit true.

There are many people who know what I know. I have several Community Comments articles at this site that provide snippets of posts from hundreds of such people. The reason why I founded the Retire Early Community in the first place was so that we could all get together and talk these things over and thereby come to know more than we could ever know just by listening to the experts. On that score, our community has been a huge success. We do indeed today know all sorts of things that few of the big-name experts are willing to say publicly.

We just can’t talk about what we know on the boards that we built for that purpose! That’s the frustration.

We know what we know. Those who do not want to know what we know of course do not know and cannot be forced to know. We just need to continue to move forward, one step at a time. We built the boards as a learning project and we have every right to use them as such. The reality is that even the Big Shots would be better off permitting honest and informed posting on all topics relating to the Retire Early project.

Permitting honest discussions is a win/win/win. Prohibiting honest discussions is a lose/lose/lose. We now have many “leaders” whose noses are out of joint because they have many deceptive and abusive posts in their files and are too proud to acknowledge this. That’s extremely unfortunate and it is certainly not something that I ever wanted to see happen.

We all have an obligation to do what we can to help those people out. We don’t do that by encouraging them to continue the Campaign of Terror. We do it by insisting (not asking!) that the site owners enforce the published rules of the various sites in reasonable ways. The rules needed to permit our boards to achieve their full potential are already in place. The task ahead of us is persuading the site owners to enforce those rules for the good of the entire community, the Big Shots very much included.

Please read the Lindaurheads thread if you have some time available to do so. And please think through the points made from both sides of the table. This is important stuff. It’s not hard to understand. It takes a little time, though, because we have heard the nonsense gibberish bull-market stuff for so long now. The Summer of 1999 is over. We need to begin adjusting our investing strategies to what makes sense for investors living in the Autumn of 2007.

I thank Peter71 for having the courage to put up the kick-off post. That’s how it is done. When one community member sticks his neck out a bit, that puts the idea in other peoples heads that perhaps they might try the same. The idea eventually catches on and honest and informed posting over time becomes more and more and more accepted. Eventually we get to a point at which the idea of placing a ban on honest posting is viewed as an absurdity.

What we really need to see is a reversal of what took place during the surging of the out-of-control bull. The investing ideas explored at this site were considered simple common sense in the days before the wild bull. It is the desire among many to keep the artificial and deceptive bull prices in effect a bit longer that is the driver behind the prohibitions on straight talk on stock investing that we have seen grow so powerful in recent years. This is all reversed in the same way that it was built up — bit by bit, little by little, poster by poster, investor by investor.

Each time we see another plunge in stock prices, we become able to be a bit more honest in our discussions of this important topic. I don’t like to see people lose money, but I do like to see people become more in touch with the positive side of their humanity. Let’s first lower our stock allocations so that we personally are protected from the awful downside of the huge bull and then get about the business of doing what we can to get prices back to more reasonable and more appealing and more honest levels.

Yes, humans are capable of out-of-control greed. But guess what? Humans are capable of brave and noble and tough-minded and charitable acts of honesty too. Both things are so. Let’s all work together to make stock investing safe for humans once again! And then let’s get back to the business of putting together realistic plans to retire early!

Perhaps we’ll see an end to the Campaign of Terror wrapped up in a pretty box under the Retire Early Community’s Christmas tree on the morning after Santa comes. It couldn’t hurt to put this item first on all of our lists, could it?

Come on, Mel — Do the Romp! More on This Topic

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November 30, 2007 16:47 The Dark Side of Compounding Returns

I’ve added an article to the “Upsizing” section of the site entitled The Dark Side of Compounding Returns.

Juicy Excerpt: You face a choice to spend money on a gym membership and to get in shape or to put the money in your Section 401(k) account. Most money guides suggest that the better choice is to save. This is not necessarily so. The reason why it is not necessarily so is that spending generates compounding returns too, often benefits greater than the benefits that can be obtained from saving.

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October 2007 << >> December 2007

The Financial Freedom Blog – October 2007

PassionSaving.com Home Page : The Financial Freedom Blog : October 2007

October 1, 2007 09:57 Why Retirements Fail

I’ve added an article to the “Retire Different!” section of the site entitled Why Retirements Fail.

Juicy Excerpt: The “Die Broke!” concept is a radical one. The idea is that you should not aim to have lots of wealth to pass along to your children or to charities when you die but to use up every last bit of your accumulated wealth during your own lifetime, except perhaps for a few dollars to cover funeral expenses. I don’t like. This idea is going to cause a lot of busted retirements.

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October 2, 2007 13:11 Spending on Food

I’ve added an article to the “The Turned-On Budget” section of the site entitled Spending on Food.

Juicy Excerpt: McDonalds prices can sound awfully low when your frame of reference is what you spend in sit-down restaurants. You should calculate how much you spend per person per meal on home-cooked meals. It is possible to get this number down to $2 or less, including drinks. It’s hard (but not impossible) to beat that at McDonalds.

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October 5, 2007 10:37 NYT Discovers P/E10

The biggest problem I face in trying to persuade middle-class investors of the benefits of following the Valuation-Informed Indexing approach to investing is the lack of experts endorsing this approach. Money questions are serious questions. People like to see serious people backing a money idea before taking action on it.

I’m cereal! I’m cereal!

Well, perhaps not.

I’m a guy who posts stuff on the internet. Numerous people have told me that my investing articles make a good bit of sense to them, but that they feel more comfortable going with what the “experts” say. Life is so unfair!

Well, today it’s nyeh, nyeh, nyeh to the naysayers! The New York Times says I’m right! So there, Big Shots!

I might forgive the Goons if they ask nice. Probably not, but I might. They certainly should feel free to make an attempt at asking nice.

The article is by a smart and dashing and kind and fascinating fellow named David Leonhardt and is entitled Remembering a Classic Investing Theory.

That title says precisely what needs to be said. Valuation-Informed Indexing is not some wild new concept I cooked up sitting in a room by myself thinking grand thoughts. Valuation-Informed Indexing is common sense. Common sense has been around for a long time. Common sense has stood the test of time. Common sense is here to stay.

People see the ideas driving Valuation-Informed Indexing as being new only because the time-tested ideas on how to invest successfully were “forgotten” over the course of the longest and strongest bull market ever seen in the history of the United States. There’s nothing new about the idea that stocks offer a poor long-term value proposition when they are wildly overpriced. What’s new is this crazy idea that took hold of the public imagination while prices were going up, up, up that stocks are always the best investment choice for the long run. That idea is both new and preposterous. I don’t care how many “experts” endorse it. Even a guy who posts stuff on the internet can see that it is a flat-out dumb idea.

Why is it that we forget the time-tested rules of investing when prices rise to unsustainable levels? It’s because we want to forget them. Investing is primarily an emotional endeavor and only secondarily a rational endeavor. We always forget the fundamentals of investing when prices get to the levels where they reside today. To some extent, we probably always will. Such is our fate down here in the Valley of Tears.

Please take a look at the historical stock-return data if you doubt what I am saying here. The last time prices got to the la-la land where they reside today (the mid-1960s), we forgot how painful it is to invest in stocks at these prices and paid the price for it. And the time before that when prices got to the levels where they reside today (the late 1920s), we forgot how painful it is to invest in stocks at these prices and paid the price for it. Some types of pain are so great that we block the memory of it out of our minds. If women remembered childbirth, the government of China wouldn’t have such a tough time enforcing its one-child-per-family law. You have to a large extent forgotten the pain you felt when the person who you thought for a time was the love of your life dumped you, right? You had to forget to be able to move on. You did what you had to do. No shame in that.

There are things you need to remember too, however. That’s the point of the bluntness of my writing in the investing area. It’s fine to block out the feelings you experienced from a painful experience. You don’t want to block out the lessons learned too or you will put yourself in circumstances in which you will likely experience that pain again. I like you. I don’t want to see you hurting. So I see it as my job to tell it the way it is, whether it causes you some pain to hear the words or not.

Lots of people are now in circumstances in which they are going to experience pain as a result of our collective decision to forget the significance of the P/E10 number. We all should be doing what we can to persuade those people to move to a safer place. Is that not what offering personal finance advice is all about? At its root, is this investing advice biz not a caring biz? I sure hope so. If caring about our fellow investors is not permitted, I think it would be fair to say that I (and the thousands of other fine people who built the Retire Early boards into what they once were) got on the wrong bus.

There is no rational justification for going with a high stock allocation when prices are where they are today. But some of us really, really, really want to believe otherwise. So we do things like using P/E1 as our guide to valuations rather than using P/E10, which is far more accurate. There are lots of people who are taken in by this rationalization. That doesn’t impress me. Rationalizations don’t pay the electric bill when it gets cold outside.

P/E10 is the tool recommended by Benjamin Graham in his classic text Security Analysis. P/E10 is the tool recommended by Robert Shiller, the foremost stock valuations expert alive today. P/E10 is the tool recommended by John Walter Russell, the best loved and best informed Numbers Guy in the Retire Early Community. P/E10 is a cool tool. P/E10 is where it’s at. P/E10 rocks!

Use P/E1 if you like. There’s nothing Farmer Hocus can do to stop you.

I’ll say this, though. P/E1 is the valuations assessment tool used by meanies and dummies and drones and people who dress funny. P/E 1 hurts people. Do you want to be a meanie? Do you want to be a dummy? Do you want to be a drone? Do you want to dress funny? Do you want to hurt people?

Obviously not. You wouldn’t be pursuing the wonderful dream of early financial freedom if you were that sort.

For you and millions like you, P/E1 is where it’s at. Please tell your friends.

And thank you, David Leonhardt, for bringing some sanity to the consideration of a topic that very, very, very, very, very much would benefit from some heavy doses of it.

P/E1 hurts people. Don’t forget. Don’t let your friends assess valuations using P/E1. Insist on P/E10, the better and more up-to-date (and yet also more classic!) valuation assessment tool.

Here’s the Executive Summary version: P/E1 stinks!; P/E10 rocks!

Who’s going to be the one to break the news to Bogle? More on This Topic

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October 8, 2007 08:27 “Time” Is Not a Four-Letter Word

Yes, I know now, traps are only set by me,
And I do not really need to be assured
That love is just a four-letter word.

— Dylan, “Love is Just a Four-Letter Word”

Love is not the answer. But love is not not the answer either.

Sentimentality is a mistake. So is cynicism.

Short-term timing doesn’t work. Long-term timing does. Which lie will end up having done greater harm to middle-class investors, the lie that used to be often told that short-term timing works or the lie that is often told today that long-term timing does not? We’ll see.

Jan Geiger has posted an article that I wrote about the personal finance implications of Dylan’s song (made popular by Joan Baez) at her www.GetYourAssetsInGear.com web site. It’s entitled Time Is Not a Four-Letter Word.

Juicy Excerpt: The problem is that valuations went so high in the late 1990s that it is taking a long time for stocks to get back to the price levels where they again provide the usual annual real return of about 6.5 percent. We’ll get there, however, and, when we do, stock investing for the long term will be fun again.
More on This Topic

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October 9, 2007 10:15 Saving and Investing Go Together Like a Horse and Carriage

I’ve added an article to the “Start Me Up” section of the site entitled Saving and Investing Go Together Like a Horse and Carriage.

Juicy Excerpt: Money works it’s way through our lives via a three-step process. We get hungry. We work. That’s trading our time for money. That’s earning. Eventually, we put aside a portion of what we earn to allow us to buy stuff not today but tomorrow. That’s saving. Then we figure out that by becoming more sophisticated about this business of putting aside a portion of what we earn, we can overcome the need to work earlier in life. That’s investing.

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October 10, 2007 10:19 The Lunch Hour

A lunch hour facilitates unstructured communication between co-workers. Since there is no requirement to talk about work during the lunch hour, the work-related conversations that develop are ones that develop because the workers are trying to figure something out between themselves. It is these sorts of conversations that generate the biggest advances.

There is a need for structured conversations to get done the tasks that must be completed. There is also a need for non-structured conversations to enable a business to achieve the sorts of breakthroughs that have even more value in the long-term.

How many times have you come up with a solution to a problem by letting it be and turning your attention to something else while you still continue to mull over the problem with a portion of your consciousness? When workers go home, they turn their mental energies entirely to other things. When they take a break for lunch, they still have part of their minds on the job. This is the sort of set-up that encourages people to think about things in a fresh way.

Many lunch hours of course produce nothing of value to the workplace. However, the few that are productive can be highly productive, productive enough to “pay for” the many that are not. There are different ways of thinking about problems. The lunch-hour way of thought pays long-term benefits that are hard to quantify but that are real all the same.

At least that is old Farmer Hocus’ take on the matter.
More on This Topic

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October 11, 2007 08:55 Smart Vacations Recharge Your Batteries

I’ve added an article to the “The Self-Directed Life “section of the site entitled Smart Vacations Recharge Your Batteries.

Juicy Excerpt: A vacation should not be an exercise in hedonism. The goal is recreation. That is, re-creation, a creating again.

The thing that you are trying to re-create is your Life Plan. You want to become newly enthused, newly committed, newly determined.

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October 12, 2007 16:46 Forbes Fires Back at the Goons

The cover story for the October 15, 2007, issue of Forbes is entitled Anonymity and the Net: Anonymity Lets Creeps, Criminals and Malicious Mobs Run Wild. And there were some who argued that it was only old Farmer Hocus who was repulsed by the tactics employed by the Goons who have destroyed or greatly damaged five Retire Early boards in recent years!

Juicy Excerpt: Question the right of Net anonymity and you risk an unmitigated thrashing (anonymously, of course). So maybe we are asking for trouble when we dare to say that Internet anonymity is out of control…. It emboldens the mean-spirited and offers them a huge audience for spewing hatred and libel. Caustic cowards are free to one-up one another in invective and vitriol — haters who would tone it down if they had to identify themselves.

Here’s the text of an e-mail to the editor that I sent yesterday afternoon:

“I have directed years of my life energy to building up five discussion boards that helped tens of thousands of people learn what it takes to attain financial freedom early in life. I then watched each of them be destroyed by abusive posters employing tricks so nasty that most people to whom I tell the story find it hard to accept that the things I saw take place really did take place.

“The concern that making the internet civil will diminish our ability to engage in free speech is misguided. Threats of violence are not acts of speech, they are acts of intimidation. I considered many of the people who built the boards at which I posted to be personal friends. They opened their life stories and their budgets to examination by others. Their reward was to become the subjects of vicious smears.

“Abusive posters seek power, not free speech. I’ve seen thousands of fine people intimidated into silence in the name of free speech. The ugliness that I have seen advanced on the internet in the name of free speech sickens me.”
More on This Topic

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October 15, 2007 08:49 The Scenario Surfer Is Here!

I’ve added a section to the site entitled “Scenario Surfer” to house the third calculator that John Walter Russell and I have developed together. The first article posted to the new section is entitled Portfolio Allocation Shocker — Timing Beats Rebalancing!

Juicy Excerpt: The Investor’s Scenario Surfer uses a random number generator to permit investors to test various portfolio allocation strategies without putting money at risk. The calculator tells the investor what annual return he would have received for each year of a hypothetical but realistic 30-year returns sequence, and permits him to make changes in his portfolio allocation at the beginning of each year. By comparing his results to the results that would have been obtained had he followed any of three rebalancing strategies, the investor can see with his own eyes the great benefits that generally follow from adoption of a valuation-informed asset allocation strategy.

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October 16, 2007 17:15 Integrity and Debt

If living an ethical life were easy, everyone would be doing it. People do things that they know to be wrong because they feel pressures to do so. In response to the pressures, they rationalize bad behavior.

Debt increases the pressure you feel to compromise your principles. Those who are free of debt are better able to live lives of integrity.

(Yes, I know it’s short. I thought that maybe this one would make up for the one entitled “The Terrible Truth About Cute Fuzzy Bunny,” which went on for a bit.) More on This Topic

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October 17, 2007 09:00 The Saving Marathon

Say that you were planning to run a marathon. How would you go about getting from where you are today to where you want to be on the morning of the race? You wouldn’t try to run 26 miles on the first day, and after failing to do so, try the same thing on the second day, continuing with that approach until you had managed to run 26 miles all in one stretch, would you?

If you did that, you would hate running so much by the end of the first week of training that you would give up the sport without having had a chance to discover its appeal. You don’t prepare to run 26 miles by trying to run 26 miles over and over again, each time failing to make much progress and becoming increasingly discouraged. Nor is it a good idea to prepare for your old age by trying to save all the money you need to finance an age-65 retirement over and over again, each time failing to make much progress and becoming increasingly discouraged.

There’s a better way.

A better way to prepare for a marathon is to aim today to run a distance that is manageable for you at whatever stage you are in now in your development as a runner. Perhaps you can run three miles. After becoming comfortable completing three-mile runs, you aim to master five-mile runs, and then seven-mile runs, and so on. You never lose sight of your ultimate goal of running 26 miles. But at each stage of the long journey you pursue smaller goals more appropriate to that time. You achieve a series of small successes, building on them one on top of the other, until one day the thought of a 26-mile run does not overwhelm you but inspires you.

Passion Saving is an approach to money management in which you apply that sort of process to the task of becoming financially independent. You never make money choices with the aim of saving the huge amounts needed to become entirely free of the need to work for a living. You retire in stages, gaining increasingly greater levels of financial independence as you age. You save in your 20s, 30s, 40s, and 50s not for what it can do for you in your 60s, 70s, 80s, and 90s, but for what it can do for you in your 20s, 30s, 40s, and 50s.
More on This Topic

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October 18, 2007 07:45 Why Is Scott Burns Afraid of Me?

Dallas Morning News Columnist Scott Burns is afraid of me. He shouldn’t be. I’ve been known to engage in a bit of excited barking from time to time, but I hardly ever bite. My sincere take, however, on a recent column of his is that he is indeed afraid of me and my message on what works re long-term investing.

I’ve put forward more than the usual number of words in this blog entry in hopes of sorting things out point by point. I hate to think of one of my favorite columnists greeting my reports on the latest findings of the Retire Early Community with any but the most positive of emotional reactions. Our work together should be building up people’s hopes, not their fears!

Burns discusses the Retire Early Community’s findings re safe withdrawal rates in the column he wrote that is dated October 11, 2007. That in itself is great news. We need to get more publicity for our findings.

There are millions of retirements that were constructed by people who relied on the Old School safe withdrawal rate findings (these findings are the foundation of 80 percent of what you read in the conventional media about using stocks in a retirement plan) in putting together their plans. A busted retirement is one of the worst life setbacks that a person can suffer. So it is critical that we get the word out far and wide that the methodology used in the Old School studies is analytically invalid and that the findings reported in those studies are nowhere even remotely in the neighborhood of the findings of the analytically valid New School studies.

I applaud Burns for writing the column. This is the second time he has written a column on the New School findings (I engaged in extensive e-mail correspondence with Burns in the months leading up to publication of the earlier column, which came out in July 2005), and that’s a good bit more than most others whom I have contacted on this matter have done. The very title of the column (“Rates of Withdrawal Add Up to Confusion”) points out how irresponsible it was for the site administrators of a number of the Retire Early boards to ban posting on the New School findings. If the Old School studies were so obviously correct as to justify a prohibition on questioning of the methodology used in them, we would not be seeing a leading journalist in the field referring to today’s understanding of the safe withdrawal rate topic as being characterized by “confusion.” During a time of mass confusion, free discussion of all points of view is critical. Listen up, Motley Fool! Listen up, Morningstar! Listen up, Early Retirement Forum!

So — Bravo, Scott Burns!

That said, the new column has its problems.

One, Burns fails to provide a link to the Retirement Risk Evaluator (see tab at left). The column creates several misleading impressions about what the New School studies say. Had Burns provided a link to the calculator, interested readers could have checked things out for themselves and become aware of the realities. What possible justification could there be for not providing a link (Burns has provided links to Old School studies and calculators on numerous occasions)?

Two, Burns says in the column that the “very vocal group on the internet” (that’s us!) that rejects the Old School claims “believes the 4 percent to 5 percent withdrawal rate is far too high most of the time.” False statement. When stocks are at moderate valuations, the infamous 4 percent number is too low, not too high. The 4 percent number is certainly too high today, but today’s valuation levels are hardly the norm.

This is a factual error that simply should not appear in a column published by a respected journalist. I have sent an e-mail to Burns directing his attention to this blog entry and requesting that he correct this false statement of what the advocates of the New School of SWR Analysis assert.

Three, Burns says that the safe withdrawal rate for a portfolio of 100 percent Treasury Inflation-Indexed Securities (TIPS) is 2.4 percent. Highly misleading claim. Burns needed to employ an unusual meaning for the term “safe withdrawal rate” to be able to make this claim. Calculated in the usual way, the safe withdrawal rate for an all-TIPS portfolio is about 4.5 percent. That is far better than the 2.9 number that applies for an 80-percent-stock portfolio.

Burns makes TIPS sound far less appealing than they are in reality by stating the number that applies for TIPS if the retiree is unwilling to see any drop in portfolio value over the first 30 years of his retirement. If the stock number were calculated that way, the safe withdrawal rate for an 80-percent-stock portfolio today would be 2.0 percent. Switching to TIPS doesn’t delay the coming of the day you can retire safely, it speeds it up.

Four, Burns describes the Old School’s 4 percent number as “a good rule of thumb.” The New School studies show that the safe withdrawal rate for an 80-percent stock portfolio in January 2000 was 2.0 percent. The Old School studies put the number at 4.0 percent. For someone with a portfolio of $1 million, that’s the difference between living on $20,000 for the last 30 years of her life and living on $40,000 for the last 30 years of her life. If a good rule of thumb is one that gets the number wrong by $20,000 per year for 30 years in a row, I’d hate to see what a poor rule of thumb would look like.

Computed accurately, the safe withdrawal rate is a number that varies from 2 percent to 9 percent. To describe 4 percent as “a good rule of thumb” because it happens to fall somewhere between the two extremes is madness. The analytically valid studies show that those retiring today with a high stock allocation and planning a 4 percent withdrawal are staking their futures on high-risk plans; the odds of long-term survival for these retirements is about 50 percent. Staking your entire life savings on a coin flip ain’t nobody’s idea of a safe way to go about retirement planning.

The words “safe” and “risky” are not synonyms, they are antonyms. Using the phrase “rule of thumb” to characterize a false claim does not transform it into an accurate claim.

I know of no field of endeavor other than investing in which, faced with a choice between reporting an accurate calculation of a number and an inaccurate one, a leading journalist in the field would twist himself into a pretzel to defend his continued promotion of the inaccurately calculated number. What possible constructive purpose is served by doing so?

Once the flaws of a methodology are uncovered and a new and more accurate methodology is developed, the old methodology should be cast aside. When a number is being reported for use in the planning of retirements, the number should be reported accurately. End of sentence, end of paragraph, end of chapter, end of story.

Burns once corrected Peter Lynch for reporting the safe withdrawal rate to be 7 percent, relying on the findings of the now discredited (but then state of the art) Old School studies to argue his case. Lynch graciously acknowledged his mistake and millions of investors were left better informed of the realities as a consequence. The shoe is now on the other foot for Scott Burns. I think it would be fair to say that he has responded with a good bit less grace to his discovery that he has made a similar kind of error in citing the Old School findings on numerous occasions.

The goal should be to bring investors up to speed on the latest discoveries, not to avoid having to acknowledge mistakes made in earlier days (I find no fault with Burns for citing the Old School studies in the days before he learned of the analytical errors committed by their authors — I agree with William Bernstein that there was a day when the Old School studies constituted “breakthrough research”).

If Burns for some reason thinks that the Old School numbers are not wrong, he should make his case rather than evading the point by suggesting that it okay to cite inaccurate numbers as a rule of thumb. If he understands that the Old School numbers are in error (my strong sense is that he does understand this to a large extent, but not perfectly), he should be citing only the New School numbers from this point forward and warning those of his readers who relied on his earlier endorsements of the Old School studies that they need to make changes to their retirement plans as a result of our findings.

The biggest problem with the rule-of-thumb argument is that it encourages a fundamental misconception of how stock investing works. Say that we did live in a world in which the safe withdrawal rate was a number that didn’t change that much from time to time, a world in which the number was stable enough that it would be reasonable to cite a single number at all times as a rough approximation of the true safe withdrawal rate. In such a world, the value proposition of stocks would also be stable. In such a world, long-term timing would not work. In such a world, changes in stock prices would not affect long-term returns. In such a world, the market would be efficient!

Scott Burns is implicitly endorsing the Efficient Market Theory when he says that the Old School numbers provide a rough approximation of the true safe withdrawal rate. Not good. It is belief in the Efficient Market Theory that got us into the mess we are in today. It is belief in the Efficient Market Theory that has caused so much confusion among middle-class investors as to how stock investing really works. It is belief in the Efficient Market Theory that has made it so difficult to engage in civil and reasoned conversations on the realities of long-term investing on internet discussion boards.

The rule-of-thumb argument is a loser. Ataloss raised it on our boards on numerous occasions. It never took us anyplace good. Scott Burns should disassociate himself from this loser of an argument before it does more harm to an even larger community of middle-class investors.

Do you want to hear my sincere take on the rule-of-thumb argument? Boo, baby! It’s a kerplooey take! Absolootingly bonkericious!

Five, Burns offers a caveat to his claim that the Old School studies provide a good rule of thumb by acknowledging that this is not so at times of extreme overvaluation. That’s good. That’s a step forward.

But he then fails to note that we are at times of extreme overvaluation today! His words sounds soothing. He suggests that the errors in the Old School studies are nothing too much to worry about today. But the reality is that, even with the drop in valuations we have seen since the late 1990s, we are still at one of the highest valuation levels ever seen in the history of the U.S. market.

This is so only when P/E10 or one of the other valid valuation assessment tools is used, of course. But what excuse is there to use valuation tools (like P/E1) that have been demonstrated to provide misleading indications when more accurate ones are available?

It’s worth noting here that Burns did not warn his readers of the dangers of the Old School studies in clear and compelling terms even in the days when stocks were at still higher valuations than those that apply today (the P/E10 value hit levels far above those experienced in the months before The Great Crash of 1929 back in January 2000 — that’s why stock prices remain frighteningly high today even after eight years of poor performance for this asset class). None of the other defenders of the Old School studies did either.

The damage done in earlier days is done and there’s no point in harping on it today. It would be nice, however, if the experts who were taken in by the Old School claims in the late 1990s would show a bit more humility and attempt to learn a lesson from the experience.

By continuing to defend the Old School studies as offering “a good rule of thumb” after having been taken in by their demonstrably false claims back at the height of the wild bull, Burns is compounding the damage that was done to his readers at the earlier time. Were the warnings that should have been put forward then put forward today, many could mitigate the damages they will ultimately suffer from having relied on these dangerous retirement studies and on Burns’ promotion of them.

Six, Burns concludes that: “So it all comes down to taking some amount of risk to earn a higher return.” Dubious and inappropriate conclusion. The suggestion here is that investors are likely to obtain a payoff for investing heavily in stocks even at today’s la-la land price levels. No! The risk premium is a negative number today (please see the Return Predictor tab at left).

It’s a perfectly reasonable idea to take on risk when there is compensation being paid for doing so. To take on extreme levels of risk (stocks are risker today than they have been at nearly any other time-period in the history of the U.S. market) in exchange for accepting a lower return (the certain return on TIPS handily beats the most likely return on stocks for the next 10 years) makes little sense.

Seven, Burns ignores the obvious strategic lesson of what the historical data says about safe withdrawal rates today. He suggests that the only choices available to us are to overinvest in stocks or to accept forever the lower returns available through safe asset classes like TIPS. Not so! The commonsense investor moves a portion of his assets out of stocks when prices get to the la-la land where they reside today and then moves them back when prices return to reasonable levels.

It is not my intent here to rag on Scott Burns. Burns has long been one of my favorite columnists and I really do think he is making an effort to raise a red flag by noting that there are people who find serious fault with the Old School studies. The words he uses to begin his discussion of the New School findings — “You should know…” — suggest that he is feeling pangs of conscience over the retirement advice he has put forward at earlier times. I can’t say that I am not frustrated that he has not put forward much stronger warnings at this late date, however.

It’s one thing for different investing experts to offer different viewpoints on different strategies. The safe withdrawal rate is the product of a mathematical calculation. There should be no disputes over what the numbers say. The data shows that the most important factor in the calculation is the valuation level that applies at the starting date of the retirement, and yet the Old School studies ignore this factor. It should not be hard for anyone who is aware of this to understand why those studies get the number seriously wrong.

When widely cited studies reporting a number that millions use to plan their retirements are found to be in error, that’s news that should be reported far and wide. Are the experts going to openly acknowledge the flaws of the Old School studies only after millions of retirements have actually gone bust and there is no good that can be done anymore for the many people who have been taken in by these demonstrably false claims?

I believe that it is because I bring these sorts of questions to the surface that Scott Burns (and a good number of other “experts,” to be sure) resort to word games to fend off my challenges to the now dominant take on how long-term stock investing works. This is why I conclude that Burns is afraid of me.

Burns sees the flaws in the Old School safe withdrawal rate studies, at least to some extent. He told me at one time that he thought I was generally right in my criticisms of those studies. So how is it that he manages to commit seven, count them seven, blunders in a single column? My guess is that it’s because he cannot quite bring himself to say in his column what the numbers are telling him is so.

The reason why the Old School studies report safe withdrawal rates so wildly off the mark from the numbers obtained by performing an analytically valid examination of the historical stock-return data is that the Old School methodology was concocted by people who believed in the Efficient Market Theory. That theory posits that stock prices are always right, that it is impossible for humans to let their emotions run away with them and cause prices to rise to absurdly high levels.

Uh, no. That’s not quite right. I get it that it is viewed in some quarters as rude to point this out. But come on, people’s retirements are at stake here! Do people not get this? Someone needs to report the obvious reality that the Efficient Market Theory emperor is wearing no clothes.

The historical stock-return data shows that stocks offer an incredible value proposition at low prices, a very strong value proposition at moderate prices, and a dubious value proposition at the sorts of prices that prevail today (today’s P/E10 level is 29, one of the highest on record). If the value proposition changes so markedly, how can it be argued that prices are always right? Different value propositions translate into different levels of “rightness.” Are we to believe that the market is always perfectly efficient but that at some times it is a good bit more efficient than at others? George Orwell, call your office!

The Old School safe withdrawal rate studies are an outgrowth of the Efficient Market Theory. Any theory of stock investing that produces studies that generate retirement guidance so wildly off the mark as the Old School studies is a poor model. We need a model that makes sense, a model that works in the real world, a model that hangs together.

My guess (I can do no more than speculate on this point) is that Scott Burns understands that there is a lot about the Old School safe withdrawal rate studies that just does not add up. My further guess is that he is smart enough to see that, when the Old School studies go down, the Efficient Market Theory will be on its way to the trashbin of history too. So he understands that stating in clear and direct and simple and understandable terms that the Old School studies get the number wildly wrong is a big step for him or anyone else to take.

I am asking him to take that step. I am asking all who call themselves investing experts to take that step. That’s why I scare people. That’s why a number of the experts are afraid of me and my message.

Burns is right about the import of my request of him. I am indeed asking him to take a big step. I am not entirely unsympathetic with Burns for being afraid to go down the path that I urge him to go down. Perhaps it will help for me to make note of the biggest factor that persuaded me in earlier days that I had no choice but to go down that path.

I write for aspiring early retirees. I have posted on discussion boards at which thousands of aspiring early retirees were misled by Old School claims to construct retirement plans that have little chance of surviving 30 years (a retirement beginning in January 2000 that employs the infamous 4 percent rule stands a one in three chance of success, according to the historical stock-return data). I consider a good number of those people friends. I dont like to see my friends get hurt in such serious ways.

That’s why I have limited patience for the sorts of word games that Scott Burns plays in his recent column. This is personal for me. It’s personal in the sense that it is persons who get hurt by these mumbo jumbo word games. Either valuations affect long-term returns or they do not. The Old School studies make no adjustment for valuations. If valuations affect long-term returns (most of the big-name experts agree that they do; I do not know of anyone who has put forward a credible argument that they do not), the Old School studies get the number wrong. This entire controversy is just that simple and just that complicated.

Word games bore me. I write about this stuff not to show that I am capable of constructing more sophisticated word games than the next fellow. I do what I do to help steer people around the minefields that threaten to blow up their hopes of attaining long-term financial security. My aim is to tell it clear and clean and straight and true.

Do you care about your readers? Do you care about your friends? Do you care about living a life of integrity and creating a body of work that evidences the desire for integrity that guides your life decisions? These are the questions that all of today’s experts taking on this issue need to be asking themselves.

If you care, you don’t play word games. If you play word games, that choice says that you care more about maintaining your membership in “The Club” than you do about the financial futures of the people who read your stuff. Sooner or later, we all are put in circumstances that require us to choose one path or the other.

If you care about the people who are going to be hurt by the Old School claims, you will be able to overcome the temptation to play nonsense gibberish word games suggesting that the analytical errors in the Old School studies are not all so terribly bad. We understand that false claims about the safety of smoking are bad. We understand that false claims about the safety of toys are bad. Well, guess what? False claims about the safety of our retirement plans are bad too.

Scott Burns and I are both afraid of something. Scott Burns is afraid of what might happen if he points out that the Efficient Market Theory is a model for understanding how stock investing works that does not stand up to serious scrutiny. I am afraid of what might happen if I do not. More on This Topic

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October 19, 2007 12:39 Sex Is Overrated (Or So My Wife Often Observes)

I’ve added an article to the “The Self-Directed Life” section of the site entitled Sex Is Overrated (Or So My Wife Often Observes).

Juicy Excerpt: Forming a real connection with another human is a difficult business. It’s a hard sell getting people to buy what they need to buy to feel less lonely. But we all “get” sex. As marketing becomes more and more efficient, more and more of the pitches directed at us promise sexual intimacy to the millions in dire need of the real kind.

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October 22, 2007 10:50 About Our Unique Asset Allocation Calculator

I’ve added an article to the “Scenario Surfer” section of the site entitled About Our Unique Asset Allocation Calculator.

Juicy Excerpt: The risks of placing one’s confidence in the old model are so great that I feel compelled to speak out strongly against it. But I think that prudence demands that my advocacy of the new model be reined in by a certain measure of humility until enough smart people have studied it in depth for us to be sure that there are no big flaws in the thinking of the many Retire Early Community members who made contributions to its development.

We need more research based on the new Investing for Humans model to replace the research that was done under the old Efficient Market Theory model. While we are in a time of transition from the old model to the new one, caution (combined with an appropriate measure of excitement over our breakthrough findings) is advised.

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October 23, 2007 11:56 “We Will Not Compromise Our Principles in the Rest of Our Life Endeavors”

I’ve added Charlie’s Story to the Middle-Class Millionaires section of the site.

Juicy Excerpt: “Unfortunately I know first hand the pressure to do something unethical at a job to keep a paycheck coming in. As my wife and I get closer to debt freedom (thanks to a lot of great material read, namely your book Passion Saving and Tim Covell’s Rational Simplicity), we will not compromise our principles in the rest of our life endeavors.”

You should not be saving to finance an old age retirement. You should be saving to finance a good life in the here and now and in future days too. Saving is not a compartment of a life filled with lots of other stuff of generally more compelling appeal. Saving affects all aspects of life. Saving possesses compelling appeal to those who understand how it adds to the enjoyment of life in the here and now, just as spending does.

People sometimes say that I put more stress on motivating people to save than I do on putting forward suggestions as to where they can cut spending. I do not dispute this. I boast of it. Motivation is the most important aspect of the saving project, in my assessment.

My experience is that those who are motivated to save figure out how to do it. Each story is different, so there is not one set of detailed steps I can list that will work for all. What I can say is that the distinguishing factor in every case is motivation. Get motivated, and you cannot lose. Fail to get motivated and you cannot win. I’d like to see more money advisors place a good deal more emphasis on instilling motivation to save.

People do not become good savers because you show them that 26 dollars saved today will grow into 11 billion if only you leave it untouched for 8,500 years. No! People don’t care! They are not dumb! They hear what they have been told for decades now. They do not care. They do not care.

They care a little, not enough for it to inspire action. The full truth is that they care more about other stuff. What is it they care about? Getting a promotion. Figuring out their kids. Having fun. Getting their weight down. Getting their teeth fixed. They care about Life.

Show how saving influences success in life pursuits and you have the not-caring problem licked. You don’t have to do anything dishonest to make the case. Saving really does affect life success. You just have to stop talking about financing an old-age retirement and start talking about all the other wonderful things saving does to enhance the enjoyment of life.

Charlie is telling us about one of the wonderful things saving does for you. It gives you the power to stick to your guns when someone is trying to compromise you. This guy is witnessing his faith in a new approach to saving.

Your proper response is: “Tell it brother, tell the people!”

And then we all join in together and shout “Amen!” And the devil who has enticed us into mindless spending all these years tucks his long red tail between his legs and walks away defeated.

Good! I’ve spent a good bit of time talking things over with that fellow over the years but the truth is that I’ve always thought that there was something a little off about him.

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October 24, 2007 11:09 “Saving Doesn’t Have to Be Boring or Painful”

I remember Mohammad Fauzi Taib from the days some time back when he shared some of his thoughts on saving at the comments section of The Financial Freedom Blog. He now has his own blog, Owning My Own Life. In yesterday’s blog entry, he put forward some kind words re the www.PassionSaving.com site.

Juicy Excerpt: “I love reading through the articles and little tidbits on saving. The best part I learn is that saving doesn’t have to be boring or painful!…. Then again, I didn’t know you can save enough to retire young either. So, this site is pretty interesting and can really open up your mind about saving.”

I am a big believer in focusing on the basics. There’s an 80/20 rule that applies for just about any subject you try to master — 80 percent of the important lessons are contained in 20 percent of the material. The 20 percent is the fundamentals. If you master the fundamentals of a subject, the rest will come easy. If you fail to master the fundamentals, you can devote years of effort to reading the other 80 percent of the material and never make much progress.

My Big Huge Idea re saving is that saving is fun if you save to enhance your enjoyment of life in the here and now rather than to finance an old-age retirement. It’s one idea but it is an idea with implications that extend in dozens of directions. To enjoy saving changes everything. Enjoy saving and you’ll actually save. That makes all the difference.

I like hearing feedback from someone like Mohammed Fauzi because hearing him get excited about this stuff reminds me of the emotions I experienced when I was first exploring the Passion Saving concept. He says that he did not realize that it is possible to retire young. There are millions like that. It’s a very simple insight — everyone who works should give some consideration to this option. The incredible reality is that only a small percentage of workers ever give the idea serious thought.

We need to change that.

That’s the goal of this site. That’s the goal of my book. That’s the goal of the Retire Early boards.

It is of course fine if lots of people give the idea some thought and elect to continue working until age 65. So long as that’s a conscious choice, I of course have no problem with it. It troubles me, though, that so many are not even aware of the options available to them. This is unacceptable. Something must be done!

What I try to do is to put the idea before people in lots of different ways. It’s one simple idea but there are different ways in which the idea can be put to use in different people’s lives. If you talk about early retirement, some people get excited and some people hardly are even aware that you said something; some are just not turned on by that option. There’s another group that gets excited about the idea of paying off the mortgage and the feeling of security that comes with doing that. There’s another group that likes the idea of making a shift to work that pays less but that is more fulfilling.

What I sell at this site is freedom. That’s what saving is. Most people don’t get it that that is what saving is. So I try to focus on that point. Once that get it, there’s no turning back for them. The only reason why I don’t put up the same article every day is that freedom means a hundred different things to a hundred different people. We are always talking about the same thing, but yet we are always talking about something new.

The message of this site is a simple one — saving equals freedom. That’s the 20 percent that you must get to make sense of all the rest.

Once you get that, you can pick and choose between the other stuff. Some of it will appeal to you because it relates to your particular vision of what freedom means in the flesh-and-blood world. Some of it you can let pass as stuff that was written for people pursuing some other version of the saving/freedom dream.

We’ve connected with Mohammed Fauzi. He gets it. I thank you, Mohammed Fauzi, for devoting one of your blog entries to passing the simple but important message of this site along to some others who, like you, can benefit greatly from learning that saving equals freedom but who have not yet been exposed to that message in a way that connected. More on This Topic

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October 25, 2007 09:47 Scott Burns Distances Himself from the New School SWR Approach

The blog entry for last Thursday (Why Is Scott Burns Afraid of Me?) examined seven logic blunders committed in a recent Scott Burns column on the findings of The New School of Safe Withdrawal Rate Analysis (a school that arose from the discussions of the flaws of the Old School studies that have been ongoing at the various Retire Early boards for over five years now). Here is the text of an e-mail that I sent to Scott immediately after posting the blog entry:

“Scott:

“I hope things are going well with you.

“I was happy to see you write another column noting the Retire Early Community’s findings re the flaws of the Old School safe withdrawal rate studies. I did see a number of problems with the column, however.

“Here is a link to a blog entry I wrote examining the arguments put forward in the column in some depth:

http://www.passionsaving.com/200710.html#e508

“I ask that you correct the error in your reporting of the New School claims noted as Point Two in my blog entry.

“Please do not hesitate to contact me at any time you have questions about the New School claims, the Retirement Risk Evaluator calculator, or any of John Walter Russell’s research findings (at www.Early-Retirement-Planning-Insights.com).”

Scott e-mailed me a response that afternoon. He has not given me permission to post his response here. The response is three paragraphs long. It argues that I need to “view the issue more broadly.”

An argument is put forward that the safe withdrawal rate that Scott quoted for Treasury Inflation-Protected Securities (TIPS) includes an inflation adjustment. This is an irrelevant and undisputed point put forward presumably in response to my Point Three, that Scott compares apples to oranges in quoting the safe withdrawal rate that applies for TIPS for an investor who insists that his portfolio retain its full value at the end of 30 years while quoting the safe withdrawal rate that applies for stocks for an investor who is willing to see his portfolio value depleted to zero over the course of 30 years.

The e-mail also cites several experts who have put forward ideas for withdrawal strategies that can be used by investors seeking to avoid seeing their retirements go bust. We have discussed a number of these strategies during The Great Safe Withdrawal Rate Debate. I see value in some of the strategies that have been advanced. There’s a big flaw with the work done by these experts, however. Their work assumes the accuracy of the Old School studies. Thus, they incorporate the errors of those studies into their own discussions of withdrawal strategies. A withdrawal strategy that makes sense standing alone can become dangerous indeed when used in conjunction with an inaccurately calculated safe withdrawal rate.

Scott’s response e-mail does not address the need for the correction that I pointed out in Point Two of my earlier blog entry. Nor does it address my criticisms of Scott’s decision to continue to cite the demonstrably false Old School safe withdrawal rate claims as “a good rule of thumb.” My view is that only accurate numbers constitute a useful rule of thumb and that giving further endorsements to false retirement claims is irresponsible in the extreme, especially given how many people were taken in by the Old School claims in the years before the analytical errors in the Old School studies were discovered.

I do not agree with Scott that I should aim to view the issue more broadly. No! That’s precisely what I must not do!

There are many investing experts today who view the safe withdrawal rate issue “broadly.” They focus their attention on every possible issue except the one that matters most — whether the numbers generated by the Old School studies are accurate or not. The inaccuracy of the Old School studies is the narrow point that I hit on again and again and again and again. I think it would be fair to say that my terrier-like tenacity on this point has been largely responsible for us generating so many mind-blowing insights as a result of our explorations into a topic that one community member observed on first impression sounds like it is something that would be of little concern outside the bounds of “an economists’ tea party.”

There are lots of people better qualified than I am to drill down on all sorts of peripheral issues. My “expertise” is in the commonsense area. I am the guy who looked at the fact that the Old School studies include no adjustment for valuations, observed that lots of big names like John Bogle and William Bernstein say that valuations affect long-term returns as a matter of “mathematical certainty,” and asked: “How can the Old School studies possibly be right given that they ignore so critical a factor?”

The obvious answer to any clear-thinking person is that the Old School studies cannot possibly be right. Oh, what I would give for a clear-thinking investing expert with the pull needed to get a front-page article reporting on our findings on the front page of the Wall Street Journal!

The Old School studies get the number wildly wrong. This error is likely going to result in millions of busted retirements in days to come, in the event that stocks perform in the future anything at all as they always have in the past. Our effort to prevent this tragedy from playing out slow-motion style in front of our eyes requires that we maintain a laser-like focus on the narrow question of the accuracy or lack thereof of the Old School studies — we don’t want to debate peripheral issues, we want to save retirements!

Investing is primarily an emotional endeavor and only secondarily a rational one. But imagine for a moment that we lived in an alternate universe in which stock investing was a rational endeavor and in which the Efficient Market Theory was a reasonable model for understanding how stock investing really works. What would the reaction be in that alternate universe to the post that I put forward on the morning of May 13, 2002, The Post Heard ‘Round the World?

The reaction would have been: “Hocus, man, you saved our necks! Holy smokes, here we are putting together early retirement plans and using these goofy Old School studies that generate numbers from Bonkersville! Thanks, man, thanks big bunches! Can you imagine the doo-doo we would have found ourselves covered in if you hadn’t taken time out of your day to help us discover the realities re this one! I mean it, man — thanks again!”

If you have not checked the Post Archives yourself, you’ll have to take my word for it re this one but the reality is that that is not the sole reaction that the words of that famous post generated. We did hear those sorts of comments from a good percentage of the community that congregated at the Motley Fool board in the days when it was the most exciting discussion board on Planet Internet. We also saw another kind of response from a group of Goon Posters led by John Greaney, the author of one of the Old School studies. I think it would be fair to say that Greaney and his defenders take what can fairly be described as “a broad view” of what the historical data says in claiming to this day (like Scott Burns and a good number of others) that the Old School studies provide us with “a good rule of thumb.” Many experts’ good rule of thumb is a million middle-class retirees’ death sentence.

The entire point of making reference to the historical stock-return data to gain a sense of how stocks may perform in the future is that the historical data provides us with objective information. I think it would be fair to interpret the phrase “taking a broad view” as being code language for freeing ourselves of the need that would ordinarily apply to report the numbers accurately. I do not want to be so liberated! I want my readers to learn what the data really says! I want others to report the numbers accurately too so that their readers too can learn what the data really says!

The data says that the safe withdrawal rate today for a high-stock-allocation portfolio is 2.8 percent. The discredited Old School studies say 4 percent. Scott Burns says (implicitly, this is not a real quote): “Close enough for most investing experts!” I say “No!” I say that investors planning their retirements should be told the real numbers, the accurate numbers, the valuation-adjusted numbers.

I do not object to the idea of using the safe withdrawal rate number as a rule of thumb. Where I differ with Scott Burns is that I say that we should use the New School numbers, the accurate numbers, the valuation-adjusted numbers, as the rule of thumb. I say that we should throw the Old School numbers in the trashbin of history before they do more financial harm to even more unfortunate aspiring retirees.

There would be no controversy over any of this were investing primarily a rational endeavor. It is Scott Burns who gave us our most important clue as to why so many experts see it as critical to take “a broad view” when considering whether to report that the Old School studies get the number wrong. He told us in a column from July 2005 that the reason why we have heard so little in the conventional media about the New School findings is that: “It is information most people don’t want to hear.”

Bingo! That’s the Scott Burns I love. That’s the real turtle soup and not the mock. That’s a guy telling his readers what they need to hear instead of what some of them might want to hear him say.

It is information most don’t want to hear.

If you have money invested in stocks today and those words don’t cause you to break into a sweat, you need to give this matter another think.

It is information most don’t want to hear.

We don’t tell people the realities because it would upset them too much. The experts take their lead from the most highly emotional of their followers. Those who cannot rein in their emotions call the tune for all the rest of us. We are told what they can bear to hear.

It is information most don’t want to hear.

So we don’t dare to report that studies that people use to plan retirements get the numbers wrong. We take “a broad view” of these matters. Millions suffer busted retirements. But it’s no biggie. We don’t say anymore that the Old School studies report accurately what the historical data says. We’re up to date and with it. What we say now is that they provide “a good rule of thumb.” That’s progress, no?

It’s a very limited sort of progress. It’s a word game.

We’re in a fix, people. We need to hear the truth about how stock investing really works in the long run but the sort of people now widely cited as experts are not the sort of people who are well-motivated to say things that would bring on the sort of abuse that is sure to follow in the wake of fully honest and fully informed reports of what the historical data says re safe withdrawal rates. Maybe after a million retirements have gone under it will be safe to report what is safe. Not now, not now. We need to be patient.

We need a new type of investing expert. We need Scott Burns and the others that do what he does. They add real value on lots of questions. But they do not possess what it takes to deal with the emotional side of the investing project, which appears to be the most important side. We need to get experts in place who will see that it is precisely because it is information most don’t want to hear that we all most need to hear it. It is the things that we are in denial about today that do us the most harm down the road a stretch. An expert possessing a different sort of skills set than that possessed by Scott Burns would have jumped on the safe withdrawal rate story on the day when he learned that the Old School studies get the number wildly wrong and that this is information most don’t want to hear.

I am a Scott Burns fan. I am a William Bernstein fan. I am a John Bogle fan. I am a Jonathan Clements fan.

I am a fan of the hundreds of thousands of aspiring early retirees who have been done serious financial harm by the demonstrably false claims of the Old School studies in recent years too.

My take is that I shouldn’t have to choose between being fans of the “experts” and being fans of their readers. I long for a day when Burns and Bernstein and Bogle and Clements are able to find it in their hearts to take a less broad view of this question and report accurately (with no hedging whatsoever!) what the historical data says about safe withdrawal rates. I long for the day when we are told those things that we very much do not want to hear because we need to hear them before we spend another day invested in stocks whether we like the idea of hearing them or not.

Here’s the text of the reply to Scot’ts e-mail that I sent last Thursday:

“Scott:

“I’m grateful for your response.

“Is it okay with you if I post the words of your response in a future blog entry?

“Have you looked at the Retirement Risk Evaluator (the New School SWR calculator at my site)? If you do, I think you will see that the New School research is in general very good news for stock investors. At today’s valuations, it shows a SWR for a high-stock-allocation portfolio of only 3 percent. At lower valuations, however, it shows SWRs a good bit higher than 4 percent. One of the reasons why I believe it is so critical that investors (especially those nearing retirement) be warned of the dangers of high stock allocations today is so that they will preserve the funds needed to invest heavily in stocks when the long-term value proposition has improved.

“As I noted in my blog entry and even more so in the article that I wrote about your SWR column from July 2005, I think you have done a service in bringing this matter to the attention of a good number of investors. I feel strongly that there is a need for more to be done. But I appreciate that you have done more than most others.”

Scott responded to this e-mail on Monday night. I will report on his response in next Thursday’s blog entry.

On Saturday I learned of a discussion board at which Scott answers questions put to him by readers of his column. I put up a post letting people who visit there know of The Retirement Risk Evaluator. One of the Greaney Goons put up an abusive post. I reported the abusive post. Scott took down both my post and the abusive post.

Here are the words of a post that I put to The Little Stinkers board after learning of this:

“It’s not just a clear message to me, GW. It’s a clear message to everyone.

“Burns is not superman. Burns is not able to offer a coherent defense of the Old School methodology. No one else has been able to do it for over five years and now we see with clarity that he’s not able to do it either.

“The remaining step is for us to help him get over his fear of acknowledging the obvious reality — the Old School studies are a con. When that is widely and clearly understood, the Efficient Market Theory is history. Any investing “theory” that puts millions of retirements at risk of going bust is an investing “theory” soon due to be replaced.

“I’m not afraid to say that today. Scott Burns is. Who do you think is going to change his views as we see stocks either experience a Big Price Drop or continue for a long time forward to offer a poor long-term value proposition? Events are going to leave Burns (and lots of other investing “experts”, to be sure) with no option but to get over their fears and acknowledge the obvious reality that the Old School methodology is analytically invalid (and all the rest that follows from acknowledging that too, of course).

“And then the real fireworks (the good kind!) begin!”

Scott is right that the New School findings are information that some (I have serious doubts as to whether it can be said that this is so of most investors — my strong impression is that the Normals greatly outnumber the Goons, but that the Goons are able to make use of their far greater intensity to poison the efforts of the Normals to have reasoned and civil discussions of the investing realities among themselves) do not want to hear. I think he is wrong as wrong can be to conclude that that justifies those of us who have gained reputations as “experts” (I am not sure that any of us really qualify — please see my blog entry for June 15, 2007, entitled “John Bogle Started Out as a Little Boy” re this point) servicing this want.

Our job is to tell it like it is. Our telling of the straight story about how long-term stock investing works should be tempered by compassion and warmth and a sense of humor and an encouraging tone, to be sure. But telling it like it is re all this is the only possible way to go in this newfangled sort of investing expert’s sincere assessment.

I appreciate Scott’s willingness to participate in a bit of back and forth on the safe withdrawal rate topic. I take that as a positive sign. I am willfully continuing to see the glass as half full, despite all the craziness engaged in by Scott and a good number of others. I urge you to do the same — after warning your friends of the dangers of the Old School safe withdrawal rate claims, if you please! More on This Topic

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October 26, 2007 04:00 Part One of Rob’s Interview on the Money, Mission and Meaning Podcast

Mark Michael Lewis, host of the Money, Mission and Meaning podcast, recently completed an hour-long interview with me about my book Passion Saving: The Path to Plentiful Free Time and Soul-Satisfying Work. Part One of the interview is now available for your listening pleasure.

Juicy Excerpt: I want to say straight out that I think you’ve accomplished something radical with your idea of Passion Saving. From my perspective, you’ve really created not just another ‘how to’ money book, where you show people how to invest, or a motivational book that just has people do the things they already know to do. You actually offer a whole new way of thinking about saving money that taps into our human psychology and desire. Now, I am going to have you highlight each of the key ideas in Passion Saving for my listeners so that they can have their minds blown like mine was.

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October 29, 2007 14:32 A Good Retirement Is a Busy Retirement

Too many view retirement as a time for preparing to die. Those who retire with exciting plans for new things they can do with their lives do not have problems with their spouses as a result of the life change. If anything, the change gives them new stories to tell and allows them to explore a different side of their personality, making the marriage stronger.

When age 65 was chosen as the normal retirement age, most who were 65 were in failing health. This is not so today. So it makes no sense for most to be planning to do little work in retirement. It makes perfect sense for retirees to want to avoid paid work if they no longer need the money. But there are all sorts of hobbies that can be taken up and important volunteer work that needs to be done and new businesses that can be started not for the money they are likely to bring in but for the fulfillment that comes from running them.

A successful retiree is one who is as busy or even busier than he or she was in his or her pre-retirement years. The idea is to escape paycheck dependence, not to escape the good feeling of being actively involved in exciting life projects.

SWR Update: Mohammad Fauzi Taib lets the defenders of the Old School safe-withdrawal-rate (SWR) studies have it with both barrels in his Owning My Own Life blog dated October 26, 2007. He says: “They’re like an ass hee-hawing, making so much noise but they don’t realize they’re just making stupid noises.” I can only add that stupid noises often in time become transformed into busted retirements. Or so the historical stock-return data indicates.
More on This Topic

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October 30, 2007 10:40 All You Need to Know About Stock Price Changes

I’ve added an article to the “Scenario Surfer” section of the site entitled All You Need to Know About Stock Price Changes.

Juicy Excerpt: My web site is the new kid on the block. The good people at Google World tend not to give lots of points to the new kid on the block. They employ all sorts of nefarious schemes to keep mention of the articles at this site buried in the results handed back to searchers looking for information on saving or investing or career growth. Drats! Curses! Life is so unfair!

There are some exceptions to the usual rule, however. Enter a search for the term “P/E10” and you will find articles from my site sitting there right at the top of the pile. It shouldn’t be that way!

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October 31, 2007 11:31 Why Stocks Crashed

I’ve added an article to the “Stock Drunk section of the site entitled Why Stocks Crashed.

Juicy Excerpt: Stock prices are at a level today that virtually assures that people will be asking in days to come why stocks crashed. When the price crash comes, we will all be caught up in whatever disaster it is that is being widely cited as the cause of the stock price crash. I thought it would be better to write my explanation of why stocks crashed now, when I can think more clearly about the factors that made the upcoming (who knows when!) price drop inevitable.

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September 2007 << >> November 2007

The Financial Freedom Blog – September 2007

PassionSaving.com Home Page : The Financial Freedom Blog : September 2007

September 4, 2007 08:01 Saving for Retirement Is a Dumb Idea

I’ve added an article to the “Upsizing” section of the site entitled Saving for Retirement Is a Dumb Idea.

Juicy Excerpt: Spending is not generally wasteful. Tie the success of your saving plan to persuading yourself that it is, and you have rooted your saving plan in a lie. Not good.

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September 5, 2007 09:42 Investing Research and the Tricky Tricks Used to Trick You

I’ve added an article to the “Valuation-Informed Indexing” section of the site entitled Investing Research and the Tricky Tricks Used to Trick You.

Juicy Excerpt: He opts against making the move that would increase shareholder return in favor of the move that will allow him to keep his high-paying job a bit longer. You’d be surprised how persuasive even the smartest mutual-fund managers find the arguments of their tummies telling them to do whatever it takes so that they will be able to continue to have something to put on the table indefinitely into the future.

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September 6, 2007 08:12 Shopping Partners

The Milwaukee Journal Sentinel recently published an article entitled Better Shop Around: Save Time, Aggravation, By Picking the Right Shopping Partner.

Here is the text of the section of the article quoting my views:

“It’s one thing to go out looking around with a couple of girlfriends. But when you’re serious about making a purchase, if you’re going to make a date of it, it’s wise to pair up with someone who has a similar shopping style ‘The key in selecting a shopping partner is finding someone who shares the same general life goals and who communicates well with you,’ said Rob Bennett, author of the Financial Freedom Blog at PassionSaving.com.”

For most, shopping is more of a social activity than it is a financial transaction. Advertising shows this. When marketers are seeking to entice us to shop, they stress the social interaction that it facilitates. More on This Topic

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September 7, 2007 07:04 Investing Discussion Boards Ban Honest Posting on Valuations!

I’ve added an article to the “Banned at Motley Fool!” section of the site entitled Investing Discussion Boards Ban Honest Posting on Valuations!

Juicy Excerpt: Rob’s da man! Never in the history of the Diehards forum has one poster, always making civil and well thought-out posts, managed to irritate so many without anyone being able to articulate a good reason as to why. — Mephistopheles, Vanguard Diehards board, June 4, 2006.

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September 10, 2007 15:27 You’re a Mean One, Mr. Effective Saver

The Cat in the Hat is a hero to children. The Grinch is a villain.

I ask people seeking to manage their money more effectively which of the two they think of as a “free spender” and which of the two they think of as a “miser.” Most think of the Grinch as the miser and the Cat in the Hat as the free-spender.

Why? There is nothing in the stories that indicates that the Grinch spends little or that the Cat in the Hat spends freely.

It’s because we think of those who are careful with money in all sorts of negative ways. We think of them as “cheap,” “tight,” and “stingy.” We think of spenders as “generous,” “easygoing,” and “happy.”

This is why so many of us have a hard time managing our money effectively. No one wants to be like the Grinch. Everyone wants to be like the Cat in the Hat.
More on This Topic

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September 11, 2007 14:14 Prepare Your Kids for Inevitable Career Change

Three tips:

1) Focus on the liberal arts in educating your kids. Most people downplay the liberal arts today on the thinking that studying the liberal arts doesn’t give the specialized training needed to get a first job. This is so. But studying the liberal arts gives the general skills needed in all jobs. When your area of specialization is going to be changing several times throughout a career, you don’t want too much focus in any one specialized area. You want strength in basic skills that you can fall back on no matter what. Our boy (Timothy, age seven) is learning Latin. This will not lead to any one particular job. But it will enhance his thinking skills and he will use those skills in all his jobs;

2) Stress the need to save to attain limited levels of financial freedom at an early age. People should not be shocked when they lose jobs. This is the new reality. The way to prepare is to think of yourself as You, Inc., a entity that is going to go through cycles of expansion and pullback. When you open your eyes to this, you see that you need to do something to even out your cash flow through the different stages of the cycles. Financially, you need to be taking money from the up times and making it available to yourself in the down times. You need to be saving not just for your old age, but for the workplace realities that affect you in your 20s and 30s and 40s and 50s; and

3) Teach your kids a love for independence. An independent-minded child will not want to return home after a job loss and will find a healthier way to respond to the problem. It is too late when the job loss comes. The desire for independence needs to be instilled far earlier. And it is best taught through example. The child needs to see the parent making sacrifices to insure his or her own independence. More on This Topic

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September 12, 2007 15:48 Embarrassing Work Incidents

The key to surviving an embarrassing work incident is turning to humor to help people feel at ease about what has happened. It is important, though, to understand the purpose of employing humor and thereby to know how to make use of it.

Say that you have accidentally sent an e-mail containing personal information to a large number of people. You need to make use of humor to make light of the incident. You should send a follow-up e-mail to the people who were sent the first e-mail with a message saying: “You may have noticed that yesterday I mistakenly sent an e-mail containing personal information to a large list of people. I apologize for spicing up your day that way! Please be assured that I will not be sending any additional e-mails without double-checking the list of names listed as recipients.”

Note that the humor used here is understated and that the explanation is short. The idea is not to get people to laugh. It is to put them at ease. There is a need for a little humor, but not much. What is needed to restore people’s comfort in you in a professional sense is that you demonstrate that the embarrassing incident is in the past. Once it has been dealt with, do not bring it up again. Move on. The office culture can accept that these things happen. It cannot accept dwelling on them. More on This Topic

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September 13, 2007 09:00 Middle-Class Investors Are At a Disadvantage

I’ve added an article to the “Investing for Humans” section of the site entitled Middle-Class Investors Are at a Disadvantage.

Juicy Excerpt: One investor has $3 million in assets and experiences a price drop of 50 percent. Another has $600,000 in assets and experiences a price drop of 50 percent. The first investor is left with assets of $1.5 million. The second is left with assets of $300,000. Which investor feels more pressure to break his buy-and-hold commitment and to sell? It’s the middle-class investor who is feeling far more pain in these circumstances.

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September 14, 2007 10:51 The Early Retirement Forum Discusses “The Troubles”

Here is a link to a thread at the Early Retirement Forum where the community discusses “The Troubles”:

Juicy Excerpt: But beyond hostility to some people, there is also hostility to some ideas. Something Twad said earlier in this or possibly another thread goes to the heart of too much of this board’s hostility to certain ideas. He said this is his church, where he comes for help in keeping the faith in the safe withdrawal rate (SWR), etc. I know it was hyperbole, but others also over the years have openly talked of keeping the faith. I know this is only a metaphor, but perhaps less farfetched than we might hope, especially at times of market stress.

Here is a link to a thread at the Greaney’s Little Stinkers board where I offer play-by-play analysis on the Early Retirement Forum thread:

Juicy Excerpt: It’s like children who have parents who let them eat nothing but candy. The children get sick and they long for parents who impose some reasonable guidelines in a loving and effective way. We are the loving parents of the Retire Early community. The Goons start out thinking that it would be a blast to run wild with their Smear Campaigns. They end up hating themselves for having done so. Our job is to rein them in. Our job is to see that they become better versions of themselves, to over time transform the Goons into Normals. More on This Topic

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September 17, 2007 06:19 Knowwho

MSNBC’s “Your Career” column recently ran a piece entitled On Labor Day, Readers Seek Some Work Advice. Here is the text of the section of the article quoting my views:

“You sound like you’re going through serious financial pressures, and just walking away from a job isn’t an option for you. So you have two options: Start looking for a new job, or try a different tack at your present one.

“If you want to try out the latter first, Rob Bennett, author of the Financial Freedom blog and author of Passion Saving: The Path to Plentiful Free Time and Soul-Satisfying Work, suggests getting on your networking hat right away. Connect with other managers in other departments if you can. Get friendly with them. Ask them to lunch. By knowing the right person at the right time you can make big leaps in your career, he says.

“Don’t go overboard and start muscling your way into other managers’ offices. Feel people out and see if there is an opening for you to get to know them. For example, say, ‘I like what your department is doing and I want to learn more about it.’ Also, take advantage of any mentoring programs at your work; or approach a manager you admire and ask them if they’d mentor you. But be sure not to alienate your present boss.

“This type of relationship building can take time to pay off, Bennett stresses, but when a new position comes up at least you’ll be on the radar screen of more than just your boss.” More on This Topic

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September 18, 2007 08:47 “We Didn’t Need to Get Married”

I’ve added Jan Geiger’s story (she is the author of Getting Your Assets in Gear) to the “Middle-Class Millionaires” section of the site.

Juicy Excerpt: When I met the man who became my next husband five years later, he was really terrible with his money. I told him that if he would not get out of debt, get on a budget, and start saving for our financial independence, we didn’t need to get married. In the first eight years we were married, we more than quadrupled our net worth.

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September 19, 2007 08:25 Eight Investing Questions You Need Answered Before Putting Money Down

I’ve added an article to the “Investing for Humans” section of the site entitled Eight Investing Questions You Need Answered Before Putting Money Down.

Juicy Excerpt: Would you fall for that if a fellow trying to sell you a car pulled it on you? If you were looking for a car with a fair market value of $20,000 and you went to a dealer who quoted a price of $40,000, you would walk out. What if he called you the next week to tell you the good news that he was now willing to take 10 percent off and let you have the car for $36,000?

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September 20, 2007 09:30 Boss Annoyances

The Top Ten Boss Annoyances:

  1. Making excuses for not getting the job done or for not getting the job done right;
  2. Complaining about the deadline for a project or the difficulty of the project;
  3. Being critical of team members to outsiders;
  4. Being overly pushy in drawing attention to one’s own accomplishments;
  5. Giving vent to frequent expressions of negativity or pessimism;
  6. Failing to listen to instructions;
  7. Failing to seek clarifications of requirements at an early stage of a project;
  8. Being critical of customer demands;
  9. Missing deadlines without warning; and
  10. Stretching out staff meetings with excessive discussion of minor points. More on This Topic

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September 21, 2007 11:02 MSN Money Profiles Rob’s Retire Early Plan

Liz Pulliam Weston has written a profile of my early retirement plan for MSN Money. It is entitled Retired by 50: Real-Life Stories.

Here is the text of the opening segment of the profile:

“Rob Bennett was 35 and had no savings when he was laid off in 1991. He’d loved his job as a reporter for a tax newsletter and hadn’t seriously thought about doing anything else.

“But being jobless made him feel vulnerable enough to consider other possibilities.

” ‘It was a horrible feeling,’ Bennett remembered. ‘I told myself I would never be in that position again.’

“Bennett and his soon-to-be wife, Mary, decided to make financial independence a priority. The first step for Bennett: Make more money, and save as much of it as possible.”

If you’ve been wondering what I look like, click that link! More on This Topic

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September 24, 2007 14:47 Gift-Giving Madness

Those practicing a frugal lifestyle at some point need to face the question of how to gracefully decline participation in gift-giving madness. It truly has become a madness in today’s culture.

The best approach is a direct and simple and quiet one. My wife and I do not exchange gifts with adult relatives at Christmas. There is a great amount of waste attached to such gifts; many of the gifts are never used and were purchased only to satisfying the “requirement” to give a gift. Explanations should be kept short (“we are electing not to participate in this sort of gift-giving”) because explanations of any length will generate defensive reactions (those who do participate see the craziness of what they are doing and feel a need to justify their behavior). The idea is not to change minds, but just to give notice that you are opting out.

People think it’s odd. But they forget about it quickly if no fuss is made over it. In time, they come to respect it and in some cases even to question their own gift-giving practices. This doesn’t happen on the spot, however. It takes time. So the explanation given up front should be kept short. It is not the time to explain the “philosophy” of electing out of gift-giving madness. More on This Topic

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September 25, 2007 11:12 Cash Is King — I’ll Prove It With Numbers

I’ve added an article to the “Valuation-Informed Indexing” section of the site entitled Cash Is King — I’ll Prove It with Numbers.

Juicy Excerpt: Stock prices reached new highs recently. It means little. The numbers cited as new highs are not inflation-adjusted.

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September 26, 2007 11:43 Why Investing Books Are Boring

I’ve added an article to the “Investing for Humans” section of the site entitled Why Investing Books Are Boring.

Juicy Excerpt: Do you remember how people used to say that Ronald Reagan had no business in politics because he was just an actor in B-Grade movies? It turned out that Reagan went pretty darn far in the politics field despite his lack of credentials. What he possessed was communication skills. Communication skills matter.

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September 27, 2007 10:39 The Taboo on Talking About Money Hurts Us

I’ve added an article to the “Start Me Up” section of the site entitled The Taboo on Talking About Money Hurts Us.

Juicy Excerpt: Thoughts don’t travel from the pages of a book to your eyes and then into your brain. It is by giving voice to new ideas that we come to understand those new ideas. If you cannot repeat something you have learned, you probably do not understand it well. If you do not give voice to new money ideas, it is not likely that they will remain in your memory for long enough to inspire a change in behavior.

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September 28, 2007 15:42 “Made Me Want to Raise the Bar a Bit”

I’ve added a testimonial by Anson for my book Passion Saving: The Path to Plentiful Free Time and Soul-Satisfying Work to the Can I Get a Witness? page of the site.

Juicy Excerpt: It is a great philosophy on saving and I will adopt some of the ideas that are in it. In a way, it is kind of what I always felt and it is nice to see it written down to get motivated by. It also filled in a lot of the gaps that were missing in my saving strategy…. Reading your book made me want to raise the bar a bit and see how much sooner I can start enjoying the good life.
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July 2007 << >> October 2007

The Financial Freedom Blog – July 2007

PassionSaving.com Home Page : The Financial Freedom Blog : July 2007

July 2, 2007 14:42 The Fire Alarm Has Not Been Tripped

William Bernstein, author of The Four Pillars of Investing, was asked at the recent Vanguard Diehards meeting to comment on safe withdrawal rates (SWRs). He said that, at today’s valuations, taking a 4 percent withdrawal from a high-stock-allocation portfolio is “risky.” This confirms one more time findings of the Retire Early community dating back over five years that have been confirmed on hundreds of earlier occasions.

The FIRECalc calculator says that taking a 4 percent withdrawal from a high-stock-allocation portfolio is safe.

The SWR study published at the RetireEarlyHomePage.com site says that taking a 4 percent withdrawal from a high-stock-allocation portfolio is safe.

There’s an article at the at the Wikipedia.com site on William Bengen that says that: “Bengen found that retirees who draw down no more than 4 percent of their portfolio in the initial year, and adjust that amount subsequently every year for inflation, stand a good chance their money will outlive them.” There is no mention in the article of the New School SWR findings of recent years discrediting the methodology used by Bengen.

The book The Number discusses the findings of the Old School studies without letting readers know that these studies have been discredited.

There is an article at the bylo.org site providing links to numerous materials advancing the Old School claims but not to any describing the discrediting of the Old School claims by the New School studies. I wrote to the owner of the site two years ago suggesting that he link to some of the materials describing the New School findings. I did not receive a response.

Honest posting on the SWR topic was banned at the following six discussion boards after many community members showed great interest in learning about the New School findings and defenders of the Old School studies deluged the boards with abusive posting to block the discussions: (1) The Retire Early board at the Motley Fool site; (2) The Vanguard Diehards board at the Morningstar.com site; (3) The Raddr-Pages.com site; (4) The Early Retirement Forum; (5) The SWR Research Group board; and (6) The FIRE board at NoFeeBoards.com.

Articles on retirement in major newspapers often refer to the finding of the Old School SWR studies that taking a 4 percent withdrawal from a high-stock-allocation portfolio is safe without mentioning that this does not come even close to being true at times of high valuations (like today).

Dallas Morning News Columnist Scott Burns has linked to Old School studies even after publishing a column reporting on the New School findings and after telling me in e-mail correspondence that he agrees with my views on SWRs (I am the founder of the New School of SWR analysis). An analytically valid SWR methodology shows that a high-stock portfolio for a retirement beginning today that requires a 4 percent withdrawal stands only a 50 percent chance of surviving 30 years.

Wall Street Journal Columnist Jonathan Clements has linked to the FIRECalc calculator even after his newspaper published an article reporting that many financial advisors have adjusted their retirement withdrawal recommendations downward in recent years because of the effect of high stock valuations. I notified Clements of the tactics that have been used to block questioning of the methodology used in the FIRECalc calculator, which included death threats directed at Retire Early community members who posted honestly on this question. Clements response was to say that the Old School methodology is “not the last word” in SWR analysis but to refrain from promising not to provide further links to FIRECalc and to refrain from publishing an article warning his readers of the dangers of planning a retirement based on FIRECalc’s findings or informing them of the tactics that have been used to block questioning of the methodology used in FIRECalc.

Millions of retirees who began their retirements over the past ten years relied on studies and articles that told them that taking a 4 percent withdrawal from a high-stock-allocation portfolio is safe. Thousands today are aware that these studies and articles make false claims. No article has been published in a major newspaper warning these people of the fate they are likely to suffer in their old age in the event that U.S. stocks perform in the future anything at all as they always have in the past. I have notified several reporters at large newspapers of the need for such an article. I have not yet received a positive response (I have managed to get a few articles published on web sites, but not in major newspapers).

The ban on honest SWR posting that applies at the Vanguard Diehards board remains in place despite the fact that Bernstein is a respected poster at that board. Bernstein never spoke up in opposition to the abusive posting that was used to block honest posting at that board, despite his personal knowledge that the Old School claims have been proven false in recent years.

Vanguard Founder John Bogle attended the meeting at which Bernstein made his remarks, but has made no effort to have the ban on honest posting lifted or to notify the millions of retirees whose retirements are at risk of the dangers they are facing as a result of the demonstrably false claims of the Old School studies. Demonstrably false SWR claims are put forward at the Vanguard Diehards board and at its split-off board (the board split in two as a result of the abusive posting by defenders of the Old School studies) to this day.

The building is on fire. The fire alarm has not been tripped.

Maybe tomorrow. We’ve all been awfully busy in recent years.

Or maybe it will rain so hard one of these days that the fire will go out without us having to do anything.

It could happen. You never know. More on This Topic

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July 16, 2007 17:16 Buy Yourself Some Courage

Bankrate.com recently published an article entitled Working Life Goes on for Serial Retirees. Here is the text of the section of the article that quotes my views:

“It takes a certain amount of courage — and financial freedom — to start your own business later in life. Rob Bennett, a tax attorney and journalist, dreamed of writing a book but needed to work a full-time job for financial reasons. With his dream as a goal, he ‘worked and saved like a madman until I got to the point fairly early in life where I had saved enough so that I could do what I wanted to do,’ he says.

” ‘Now I’m at the point where I only have to make $12,000 a year or so to pay my bills and that covers food, utilities and other day-to-day expenses,’ he says. ‘My mortgage is paid off and if I make more than my minimum, we can take a nice vacation.’ His book, Passion Saving: The Path to Plentiful Free Time and Soul-Satisfying Work, and his blog, promote the idea of early savings as a path to financial freedom.”

There’s a good reason why you are afraid to ditch the safe corporate job and chase your dream job. You might fail. Or it might take a lot longer to succeed than you were expecting it to take. There are all sorts of things that can happen out in The Big Bad World.

Acquire some financial freedom, and there are fewer bad things that can happen. Many of the things you are afraid might happen are problems that can be solved with money. You can spend years going back and forth in your mind as to whether you should take the chance or not. Or you can save effectively for a few years and put the odds a good bit more in your favor.

Your dream will never be a sure thing. That’s probably for the best. You need a little risk in your life to keep the blood flowing.

But you don’t want too much risk. Too much risk really is a bad thing. Don’t try to work up your courage by talking yourself out of your fears. Buy some courage at The Freedom Store by putting money in the bank to serve as your back-up means of paying the essential bills in case it takes a few years to get from where you are today to where you want to be tomorrow.

Save and dream. And save and dream some more. And save and dream some more. The dreaming encourages the saving. And the saving encourages the dreaming.

When you have saved enough that it makes sense to test your dream in the real world, pick up your trombone and blow. More on This Topic

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July 17, 2007 14:38 The Terrible Truth About Cute Fuzzy Bunny

I wrote a sentence in a post that I put to the Greaney board this morning that on rereading struck me as being more than a little odd. Here’s the sentence: “That show of weakness has now prompted a second challenge to his integrity, whether he would stand up for SG against the attacks of Cute Fuzzy Bunny and perhaps Nords and some others.”

There’s some individual being discussed here who goes by the name of “Cute Fuzzy Bunny” and who is engaged in some sort of attack behavior. That’s not cute, is it? It’s not terribly fuzzy either. Truth be told, attacking others is not bunnylike behavior in any way, shape, or form. This Cute Fuzzy Bunny individual is engaging in deliberate deception of his fellow community members. He’s not cute, he’s not fuzzy, and he’s not a bunny. He’s a fraud!

He’s not the only one. I have seen a lot of this sort of thing in my first eight years of posting on the internet.

Please be careful when proceeding to the next link in the logic chain. Most people who have spent some time on discussion boards have come to notice that all is not what it seems with individuals who purport to be cute fuzzy bunnies. That’s a good thing. Skepticism is appropriate. Cynicism is not. Some permit the disillusionment they experience when discovering that not all who claim to be cute fuzzy bunnies really are such to go too far. They start thinking that nothing said on the internet matters.

It’s not so. What we say on the internet matters a lot. When we say good and kind and intelligent things, we help people. That’s the other side of the story. That’s the side that makes it imperative that we develop the courage it takes to stand up to the Cute Fuzzy Bunnies of the world.

There’s a fellow who called me a “nut” yesterday because I say that the owners of Retire Early boards have no right to ban honest posting on the topic of early retirement (the particular question under discussion was our community’s findings about safe withdrawal rates). Me, Rob Bennett, a nut! He really said that. It’s in the Post Archives.

I have been known to opt for an Almond Joy over the more staid and conventional Mounds bar, that much is fair to say. But I don’t think that what I am saying about the responsibilities of the owners of Retire Early boards is so terribly off base. Butter up some popcorn; I’m going to tell you why and I’ll try to make it a show.

There was a guy who used to post to the Motley Fool board back near the time when The Great Debate was taking off. It’s been so long that I don’t remember the name. I remember that he was a human, though. That’s something that matters to me, so I always make a note of it. This guy was a human and he had a concern about investing and I interacted with him and he thanked me and I came to care about him a little as a result and I always will.

The internet discussion board is a personal medium. It’s important to get that to be able to grasp what follows. It’s about people getting together and talking things over and coming to care about each other. The rest won’t make sense unless you keep that in mind.

So, anyway, there’s this human individual posting at this board owned by Motley Fool and he’s having a good time and everyone likes him and then out of nowhere he does this nutty thing. He expresses some doubts about whether he should be as heavily invested in stocks as he is.

There’s another fellow who posts on this board who was forward-thinking enough to put together a Goon Squad before putting up his first post and he feels a deep contempt for anyone who expresses doubts about putting all his money in stocks. So he snaps his fingers and the attack dogs race off to tear the nutty guy into bits and to make sure that no one else posting at that board ever tries something similar.

I see this play out before my eyes.

I feel ashamed.

I built this board. It was a tiny board before I came along with my ideas about the Passion Saving approach to money management, and then I post that stuff and it explodes in popularity and becomes the most successful board in the history of the Motley Fool site. I happen to agree with the chewed-up guy about stocks. More important than that, though, I feel a kinship with him. I’m a human too.

I don’t want this to get out. I’m trying to make it as an investing expert, and I of course understand that this sort of thing will count against me. Still, you’re my friend and I know I can trust you to be discreet. The complete truth is that, yes, I really am a human. My wife remarks on it from time to time (both as praise and criticism, depending on the circumstances, as is proper). My friends too. There’s really no sense in denying it. I feel better just acknowledging the horrible reality and getting on with things. I’m a human! Sue me!

I’m a human who feels ashamed because I watched a friend (not a close friend, an internet friend, but a friend all the same) get chewed up into bits and I said nothing.

So I don’t do that anymore.

You might have noticed.

You know what I do now when Cute Fuzzy Bunny shows up on a board where I post? I punch him smack dab in the middle of his little button nose. I do! I do!

As he hops off, I throw a pebble at his bushy tail so he doesn’t forget that we don’t want his kind in our cabbage patch anymore. Cute Fuzzy Bunny can dig himself a hole in the ground and stay down there for a long time, so far as Farmer Hocus is concerned. That’s the new law in these here parts and it is going to be enforced.

Maybe not just yet. There are a few technical details that I haven’t entirely worked out. But just you wait, Henry Higgens, just you wait! We’re going to clean up Retire Early World and then we’re going to take the broom to the rest of Planet Internet too. We’re going to Take Back the Internet!

There are people betting that I cannot do it. They are entitled. That’s all part of the wonderful game. I need to tell you why I think they are underestimating what they have unleashed. I need to tell you why I think we’ve truly got a tiger by the tale re this one.

Everyone gets it that Cute Fuzzy Bunny is neither cute nor fuzzy nor a bunny. The problem is getting someone to do something about it.

You know what happens, don’t you? You say: “Arrest that bunny, officer, he is an impersonator of bunnies, not the real thing at all.” And the nice policeman says: “Oh, calm down now, Farmer Hocus, he was just joshin’. This is the internet, this is all make-believe, no one believes anything they read on the internet, my good fellow.”

My fat bottom!

Go to one of those Vanguard Diehard annual meetings and tell me that no one believes anything they read on the internet. Why do they invite Rick Ferri if they don’t want anyone to believe it? Why do they invite Larry Swedroe if they don’t want anyone to believe it? Why do they invite William Bernstein if they don’t want anyone to believe it? Why do they invite John Bogle if they don’t want anyone to believe it?

Google the names. Read what they do and try to imagine how much money these individuals bring in offering investing advice. And then tell me again that the whole thing is a big joke, that integrity doesn’t matter in discussions held on the internet. That it’s all “for entertainment purposes only,” as the good people at Morningstar.com tell us.

Integrity matters. Always. No exceptions. Yes, even when discussing investing strategies. Yes, even on the internet.

When William Bernstein sits on his hands while Mel Lindauer runs vicious smear campaigns against posters who dare to try to use the Morningstar discussion boards for the purpose for which they were created, there’s an integrity deficit evidencing itself. When John Bogle stands on the same stage as Lindauer and jokes with him about the food served at the luncheon, there’s an integrity deficit evidencing itself. When people come to the RetireEarlyHomePage.com site for the purpose of planning their retirements and read claims about safe withdrawal rates that the author of that web site knows to be false and has known to be false (or at least indefensible in reasoned debate) for five years now, there’s an integrity deficit evidencing itself.

As the older Bush once said about something or other (who can keep track of all that political junk?), “This cannot stand.”

People use the internet today to get together and talk over investing ideas. Those people have a right to have their discussions in peace, without people like Mel Lindauer or John Greaney or Cute Fuzzy Bunny sticking their fake button noses and phony bushy tails into them.

We’ve got pebbles. These individuals better start running for the holes they live in or we’re going to start figuring out how to make good use of what we’ve got.

There is no accomplishment of mine in the personal finance field of which I am prouder than I am of what I did to build our discussion-board communities. If you want to get a sense of what ordinary middle-class people can accomplish when they are able to get together on the internet and discuss their ideas in peace, please click on the “Start Me Up” tab to the left and read the article entitled “20 Insights You’ll Likely See Only Here.” I wrote the words. Your contributions helped flesh out a lot of the ideas. Please take a bow, fellow community member.

Cute Fuzzy Bunny contributed nothing. Zero. He gives us pictures of animals with food on their heads. He may consider himself warmly invited to take his posting energies elsewhere. He is no longer welcomed at the party. He’s a con of a bunny and The Great Bunny Con no longer amuses us. Truth be told, it never much did. It is a stone cold bore and it always was. Put that pancake on your head and take care that it doesn’t slide off, my bunny friend!

I need to get back to the point about the guy who got chewed up at the Motley Fool board before I run out of running room. He matters. Each of the humans matter. It is humans who make our engine purr. It is because we focus on what the humans do instead of what the experts say that we have been able to come up with so much exciting stuff that no one came up with before we came along.

If we want the humans to continue putting forward outstanding contributions, we need to stick up for them when the Cute Fuzzy Bunnies of the internet show up on the scene. Do you see? Please tell me that you see, and that you are prepared to act. I am telling you that we need to begin punching the Cute Fuzzy Bunnies of the internet in their button noses (which are fake, of course) when we see them causing trouble with the humans.

I’ll be watching to see what you do in response to these words of mine. Please do not let me down re this. I don’t want to see any shivering and quivering. I don’t want to hear any lame excuses.

Integrity matters. Even in investing discussions. Even on the internet. It matters big bunches.

Watch your tail, Cute Fuzzy Bunny.
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July 18, 2007 14:15 Quiet!

Monster.com recently published an article entitled Take Time to Think About Work. Here’s the text of the section of the article quoting my views:

” ‘Many of us have our only quiet time when we’re heading off to sleep,’ says Rob Bennett, author of Passion Saving: The Path to Plentiful Free Time and Soul-Satisfying Work. ‘Just the act of putting the notepad on the bedside table will send a message to your brain to start coming up with thoughts about your career shift.’ ”

Three tips on doing the thinking needed to begin plans for a career shift:

1) There’s no better place to do this than at the beach. Getting away from your routine helps you to focus on the big picture. Plus, we have stronger memories of our vacation weeks than we do of most of the other weeks of our lives. So, being at the beach will bring back memories of earlier times when you were thinking of making a career shift, putting the latest plan into the context of a larger Life Plan. Bring a notebook to the beach the first few days, and then use the last few to organize your ideas and write down some action steps;

2) Stop using an IPod! Seriously, you must have quiet to engage in serious thought. A great time to think about a career shift is when you are taking a long walk or a bike ride. For thoughts to develop, you need a nice stretch of uninterrupted quiet time and a walk or bike ride provides that; and

3) Keep a notepad by your bed. Again, quiet is required for sustained thought. Many of us have our only quiet times when we are heading off to sleep. If you have a notepad handy, you might be willing to switch on the light and write down the idea that comes into your head. If you do so, there’s a good chance that, as you write down the first idea, new ones will flood into your brain. The act of putting the notepad on the bedside table is a way of telling yourself that you are serious about wanting to think about this topic. More on This Topic

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July 19, 2007 14:41 Some Goofy Kid Interviews for the Marketing Director’s Slot

Woman’s World recently (actually it wasn’t so recently — the article is in the April 3, 2007, issue, but I only recently was able to get my hands on a copy) published an article entitled “10 Ways to Recapture Your Childhood Spirit.” Here is the text of the section that quotes my views:

” ‘Listen to records that were important to you as a child,’ says Rob Bennett, author of Passion Saving: ‘They will remind you that you are the same person.’ ”

God gives us a time in life when we are kids and a time in life when we are coming of age and a time in life when we are grown-ups and a time in life when we are preparing to die. There are upsides and downsides to all of these stages of life. A great trick to play in seeking to make a success out of your life is to shift your thinking from that that applies at the stage you are in today to the thinking that applies at the stage you were in at an earlier time or will be in at a later time to see whether that causes you to come up with some ideas for playing things differently.

Say that you’re bummed because you lost a job paying $60,000 and are now only able to get one paying $50,000. Losing $10,000 of income is a big deal. But when you were a kid looking forward to the day when you would be a grown-up, you might have looked at the idea of earning $50,000 as a sign that you were a great success. Maybe you are a great success and you just don’t know it! Perspective is everything.

You can play this game the other way. Perhaps you’ve recently received a big raise and you’re bringing in heaps of money. You’ve got a big apartment, a new car, and can afford an expensive vacation. You’re feeling pretty darn satisfied with yourself. Should you be? Would the kid version of you think of you as a success or a sellout? You really are just a grown-up version of the kid version of you. If the kid version thinks of you as a bit of a sellout, that’s what you think of you deep inside. You better do something about it.

You never outgrow the kid version of you. And the old man or old woman that you will someday become is always waiting inside looking for his or her chance to come out. Make friends with these early and late versions of the concept of you. Talk things over with them. Listen to their praise and their criticism. Learn from them.

Say that you’re going to a job interview and you need to present yourself well. If you try too hard to impress, it might make you nervous and you might mess up. If you take to heart the reality that you are just a big kid version of the earlier you, it might take some of the heat off. It might help you to tell a joke that wins the job.

Please don’t tell me that this is not practical advice. We all tighten up at times and we all get too loose at times. Your inner child reminds you to loosen up when you’re too tight. Your inner adult reminds you to tighten up when you’re too loose. Or maybe with you it is the other way around.

There’s no one whom you can trust as well as you can trust yourself. So you need to stay on speaking terms with the person who is lovingly referred to as “You.” All of them.
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July 20, 2007 14:09 Not Working Is the Most Boring Work of All

Last Sunday’s edition of The New York Times included an article entitled To Showcase Your Skills, Seize the Initiative. Here is the text of the section of the article quoting my views:

“Staying too long in a job where you don’t feel relevant takes a toll, said Rob Bennett, who worked for years in a well-paying corporate communications job where he didnt have enough to do.

” ‘You go to bed at night thinking you aren’t being productive, you’re not making contacts and your professional skills are eroding,’ he said.

“Mr. Bennett eventually left his job in order to write, and now publishes the Financial Freedom Blog, which provides information about investing and early retirement.”

Back in those days, I had more money coming in than I knew how to make good use of and little job satisfaction. Now I love the work I do so much that I don’t need to set an alarm to be up hours before everyone else, but I have little money coming in. The career puzzle can be a tricky one, eh?

Boo and I were taking two-hours walks each weekend in those days during which we would talk over what happened to us during the week. There were several occasions at which I told her that I just could not stand my job any longer and in six months I was quitting and that was that.

Guess what happened each time?

I got a big raise. So big that it seemed too stupid to give up that meal ticket, no matter how frustrated I was at the lack of a challenge in the work I was doing. I doubt that there is anyone on Planet Earth who has complained about getting big raises as many times as I have. I was getting paranoid about it. I was thinking that maybe they had spies and each time they knew I was ready to leave they made sure that I got so big a raise as to make it impossible.

I now see that it wasn’t personal. They probably just had too much money coming in. It’s easy to be critical of corporate entities that behave that way but the truth is that even individuals sometimes have too much money coming in. It causes us to get big heads and to develop bad habits and to do dangerous things.

The purpose of this site is to teach you (and me) how to live a rich life. A big part of it is having enough money so that you can call the shots about your own future. Another important part of it is understanding what you want to do with your life. Having money and not an understanding of what to do with it can be worse than not having money. Many people have a hard time accepting that that is so but it is so all the same.

It’s all about integration of your life, work and money goals. When you keep your life and work goals in mind when making your money decisions, you get it right. There is no other way to get it right, in my assessment.

I told Timothy about my decision to give up the big paycheck and he said: “But, dad, if they were willing to give you all that money for not doing much, why didn’t you just take it?” Then I reminded him of the time we watched the Honeymooners television program together and inquired whether he had been paying attention to Ralph’s explanation of the “Pow, Zoom, To the Moon!” concept. That quieted him down for a spell. More on This Topic

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July 23, 2007 11:07 Jeremy Siegel Is a Dangerous Individual

I’ve added an article to the “Heroes and Villains” section of the site entitled Jeremy Siegel Is a Dangerous Individual.

Juicy Excerpt: What Jeremy Siegel did was to make investing analysis scientific. Too many investing claims are subjective in nature. People hear six different experts giving six different viewpoints that all conflict with each other and have no idea what to make of it all. Jeremy Siegel cut through the nonsense by looking to something objective to make his points — the historical stock-return data. Many looked at the data before Siegel came along, of course. But he did so in an exhaustive way, giving added power to all his findings by setting them forth in a book that appeared to evidence a deep and complete understanding of the objective realities.

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July 24, 2007 08:57 The 10 Most Common Objections to Following a Realistic Investing Strategy

I’ve added an article to the “Valuation-Informed Indexing” section of the site entitled The 10 Most Common Objections to Following a Realistic Investing Strategy.

Juicy Excerpt: Your stock portfolio is not worth what you have come to believe that it is worth.

I know you don’t want to hear it. I get that message loud and clear. It’s my job to tell you the reality all the same.

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July 25, 2007 09:19 11 Benefits of Humor in the Workplace

Eleven benefits of humor in the workplace:

  1. It makes it easier for everyone to admit mistakes, a key to long-term success;
  2. Worker don’t feel a need to “rebel” against a boss with whom they can kid around;
  3. Humor allows you to say things that need to be said but that would sound harsh unless the edge were softened by the addition of humor;
  4. Humor makes the time pass more quickly;
  5. Humor provides a way for workers to “protest” unreasonable deadlines in a way that preserves their self-respect and allows them to let off steam while still acknowledging the need to meet the deadline;
  6. Humor (handled properly) pulls employees from different cultural and ethnic backgrounds together;
  7. Humor gives workers the courage to take on projects that they otherwise would be reluctant to tackle;
  8. Humor prevents workers from overreacting to losing streaks and causing them to continue longer than necessary;
  9. Humor creates good memories, which is a different sort of compensation received for work done, a form of compensation that many view as being more important than cash;
  10. Humor generates company loyalty — people view those they laugh with as a sort of substitute family; and
  11. Humor helps us come to a better understanding of those with different personality types. More on This Topic

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July 26, 2007 09:50 Personal Finance Advice for the Rest of Us

I’ve added an article to the “Start Me Up” section of the site entitled Personal Finance Advice for the Rest of Us.

Juicy Excerpt: Most money advice is aimed at the lowest common denominator. People cooked up this stuff to have appeal on broadcast television or in magazines that sold in huge quantities. There aren’t many magazines like that around anymore. Today everything is segmented. But many of us are still listening to money advice that was designed to work “okay” for everyone but not particularly well for anyone. You don’t need to settle for that sort of thing anymore.

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July 27, 2007 16:45 The Scenario Surfer Is Coming!

John Walter Russell and I are at work on a third investing calculator. It will be called “The Investor’s Scenario Surfer.”

Our first calculator is called “The Stock-Return Predictor.” The Return Predictor tells you the odds of various returns on a purchase of the S&P index made at the valuation level that applies today or at any other valuation level you elect to examine.

The second calculator is called “The Retirement Risk Evaluator.” The Risk Evaluator is the first retirement calculator developed pursuant to the New School of safe-withdrawal-rate analysis. It shows that the Old School studies, frequently cited in the general media to this day, report numbers wildly off the mark from those obtained through use of an analytically valid methodology (one that includes adjustments for changes in starting-point valuation levels).

The Scenario Surfer will allow you to examine various hypothetical but realistic return scenarios for a portfolio-allocation strategy beginning at any of a number of starting-point valuation levels. Again, the results generated will be rooted in Russell’s research into what the historical stock-return data tells us about how stocks perform in the real world. Again, the calculator generates results that would be impossible in a world where starting-point valuation levels did not make a big difference, the world presumed by advocates of the Efficient Market Theory model for understanding how stocks work.

One strategic point made clearly by the upcoming calculator is that rebalancing does not work. Rebalancing makes sense when it causes investors to lower their stock allocations at times of sky-high prices. That’s not because rebalancing is a great idea; it’s because stocks offer a dubious value proposition when prices get too high. The Scenario Surfer will show that investors who adjust their stock allocations in response to big price changes do better than those who engage in mechanical rebalancing strategies that fail to take price levels into account in a direct way.

John and I expect to be able to make the new calculator available at our web sites (John’s site is www.Early-Retirement-Planning-Insights.com) by the end of September.

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July 29, 2007 18:46 Why You Want to Buy Investing Newsletters

I’ve added an article to the “Investing for Humans” section of the site entitled Why You Want to Buy Investing Newsletters.

Juicy Excerpt: Most investing newsletters provide the same general information over and over again. That’s a rip-off, in one sense. In another sense, it’s a good thing. If the information is good, you are better off being exposed to it twelve times than you are being exposed to it one time. Newsletters that repeat a good message thereby make it more likely that that good message will result in good long-term investing returns for you.

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July 31, 2007 15:55 8 Paths to Financial Independence

I’ve added an article to the “Community Rules!” section of the site entitled Eight Paths to Financial Independence.

Juicy Excerpt: I acknowledge the workplace problems that fill the disgruntled cubicle dwellers with such anger and have tried to put forward a more positive approach for dealing with these problems. I appeal to people’s idealism in urging them to use their desire to do wonderful things with their lives to motivate better financial decisions without going so far as to suggest that we all need to retire from the corporate workplace to sign up with nonprofit organizations. I encourage the exploration of frugal ways of living without showing disdain for the consumerist choices that I believe have added a great deal to many middle-class lives in recent decades. I take a maverick position on many topics as a result of my belief that the old rules no longer work while showing what I hope is the proper measure of respect for the good that has been achieved in earlier times by the conventional money advice.

Programming Note: The Financial Freedom Blog will be on vacation through Labor Day. The next entry will appear (God willing) on Tuesday, September 4. Enjoy the rest of your summer!

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June 2007 << >> September 2007

The Financial Freedom Blog – June 2007

PassionSaving.com Home Page : : June 2007

June 1, 2007 14:51 Finding the Love of Your Life in 10 Easy Steps

You would like to fall in love. You see the cover of a magazine that promises an article inside on “Finding the Love of Your Life in 10 Easy Steps.” What is your reaction?

Most of us respond with skepticism to such a pitch. There might indeed be some helpful suggestions put forward. Perhaps the article points out that, the more desperate you are to find someone, the less likely it is to happen. That’s so. So it is a helpful tip to consider.

You cannot really find the love of your life by following 10 easy steps, however. Everything you do from the time you are born is part of the project that leads somewhere far down the line to you finding the love of your life. Heaven help us all, but my boy’s obsession with Star Wars may in some way influence his quest for the love of his life. Some girl will have a vocal tone that reminds him of Princess Leia and that will trigger something inside that, combined with all of her other wonderful qualities, will make her irreplaceable to him. I’m exaggerating, but not all that much.

Saving tips work the same way.

Saving tips are valuable. I would like to see people in our community share saving tips with each other. We all can learn about what is likely to work for us by hearing what has worked for others.

It is my belief, though, that saving tips can only take us so far. The purpose of saving is to build a new and more free life for yourself. That’s a big project, a project of roughly the same consequence as the falling-in-love project (not quite, perhaps, but it comes close). You cannot get there on tips alone.

Seeking Financial Balance told an illuminating story in the blog comments from a few days back. It was a story about how she is pushing her husband to get more enthusiastic about saving and he is resisting the push a bit. She was feeling frustrated that he does not feel the same way about saving as she does. My take is that it is the feeling of the frustration that she is feeling and her struggle to figure out how to get beyond it that is the saving project. Dealing with the struggle that she is dealing with is what saving is really all about.

We all have different obstacles holding us back. With some, it is a reluctant spouse. With some, it is a moderate income. With some, it is not realizing the importance of saving until late in life. And on and on.

There are no tips-style answers to these sorts of problems. The problems can be overcome. But not in 10 easy steps. These sorts of problems are problems that you do battle with on a daily basis for years before you find yourself standing safely on the other side of the river.

What we need to deal with problems of this sort are not tips so much as stories. We need to share stories of how we kept our courage and our focus and our determination and our hope.

It’s stories that really help when trying to find the love of your life, isn’t it? You need something bigger than a tip to gain confidence that you can tackle so large a life endeavor. Sometimes you need a novel. Sometimes a Beatles single does the trick. Sometimes you need to hear a real-life story told by a good friend.

This is the sort of thing we most need in trying to become effective savers. Saving is not so small an endeavor that effective advice about how to do it can be reduced to the number of words used to convey a tip. Tips do help. Tips do have their place. But becoming an effective saver requires hearing stories of effective saving told by others who have been there before us and who have found their way to where we want to go.

If I fell in love with you,
Would you promise to be true?

That’s from one of those Beatles singles. It has a message to tell to aspiring early retirees.

You like the idea of financial freedom, just as you like the idea of falling in love. You don’t know starting out what sort of price you are going to be asked to pay. You don’t know for certain how things are going to turn out. Will you be sitting on top of the world? Will you be feeling like a fool?

To save, you need to give something up in hopes of attaining something else. Saving means taking a chance. Saving is risky.

It’s a drama. It’s a quest. It’s a heroic adventure.

It’s more than just holding hands.

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June 4, 2007 10:07 Workplace Nicknames, Charitable and Otherwise

The Albany Times-Union today published an article exploring whether it’s a good idea to assign nicknames to coworkers. I argued in favor of nicknames, but with an important caveat. Here’s the text of the section of the article quoting my views:

” ‘Humans assign nicknames to others in all human endeavors. They promote bonding. So they very much belong in the workplace,’ says Rob Bennett, who is based in Purcellville, Va. He studies the workplace and writes a financial blog on PassionSaving.com. ‘To frown on them is to frown on creativity.'”

“He adds, though, the only good nicknames are the ones the named knows about (so McNightmare and Tootsie would not apply). Secret titles are not the product of a charitable mind, he says, and that’s when problems erupt.”

So, for example, “You Know Who” might not be a good way to refer to someone with whom you interact on internet discussion boards. And “El Hoco Loco” is definitely not cool.

Before some smart guy brings up “The Little Stinkers,” please be advised that it took me a long time to come up with one that was even halfway accurate and that didn’t sound a lot worse. On Planet Internet, finding charitable things to say about some of the individuals that the guards permit through the gates can be challenging work!

In all seriousness, I was troubled by the line in the article following the ones quoted above in which the reporter noted that: “With that in mind, the majority of local submissions we received were names of the noncharitable type.”

If you are ascribing ugly names to your coworkers, you need to reconsider whether that is something you really want to do. You’re hurting yourself. You’re letting negativity have too much influence on your thought processes, and that’s going to do harm to your quest to achieve financial freedom early in life. I’m sure of it.

One office worker quoted in the article argued that: “It’s the people we don’t like or who give us a hard time [who we nickname] — the ones we are usually powerless against because they are our superiors in the chain of command, so we can’t very well beat them up, or yell at them. We have to find some way to deal with it.” I can go along with that to a point. There was a group of us at one of the newsletter companies that I worked at that referred to a boss of ours as “That Woman.” I didn’t see that as an entirely unconstructive way to let off some steam over the frustration she caused.

J.T. O’Donnell, who co-authors the syndicated column “J.T. & Dale Talk Jobs,” argues in the article that: “If you look at nicknames, they are really one-word critiques, and it’s bias labeling.” She sees the assigning of nicknames as a sign of insecurity. I can see the point. I don’t think that the “That Woman” name crossed the line. Perhaps I’m wrong.

Sometimes you need a shorthand way of saying something. I refer to today’s stock prices as “la-la land stuff” and I refer to the Old School safe-withdrawal-rate studies as “science fiction.” It upsets some people when I do that. Should I refrain?

There are lots of people who will get hurt if these points are not communicated clearly and directly and firmly and effectively. I see it as part of the problem of bull markets that those overinvested in stocks get to be too touchy about having their views questioned just at the time when it becomes most important that they be questioned. Part of the point of using strong language is to be assertive and thereby to give encouragement to those who are beginning to experience doubts about the conventional wisdom of the day to work up the courage to themselves say out loud things they have never before said out loud. I believe in sportsmanship. I don’t believe in applauding the umpire when he makes a bad call against my team.

So I have one foot in both camps on this one. We need to call things what they are. If a boss is a tyrant, it’s perfectly natural for those who suffer the effects of the tyranny to give voice to their discontent in some way. There must be lines, however. Those who are inappropriately personal in the nicknames they assign to coworkers or bosses dehumanize themselves in the process of trying to dehumanize others. Crossing the line shows that you have lost your perspective and your sense of humor. It shows that you let the coworker or boss get to you in a serious way. Yes, it reveals insecurity.

The difference is one of intent. Letting off steam is a constructive purpose. Talking straight is constructive purpose. Bonding with your fellows is a constructive purpose. Doing harm to another of God’s creatures because he or she ruffled your feathers a bit and you are not a big enough person to take it as all a part of the wonderful game is not a constructive purpose. And, yes, the boss who didnt give you the raise you were hoping for is one of God’s creatures. Even if she’s in need of an exorcism, she’s one of God’s creatures (a joke!).

Would I have called my old boss “That Woman” to her face? Probably not. But you know what? I don’t think she would have been upset to know that that’s what we called her. She was big on creating distance between the boss and the workers. To those who used the name, the nickname was intended as a criticism. To the one assigned the name, the attribute being given recognition was a point of pride. That’s why I think it was on the right side of the line. Our primary purpose was to describe her rather than to ridicule her.

Those who engage in the truly ugly stuff are, oh, how can I put it? They have a certain, well, you know, a certain, um…quality of, um….

Oh, what’s the point of holding back? Lets just say it the way it is and let the chips fall where they will.

They’re Little Stinkers, that’s what they are! More on This Topic

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June 5, 2007 09:37 The Normal Retirement Age It Is a Changin’

I’ve added an article to the “Retire Different!” section of the site entitled The Normal Retirement Age It Is a Changin’.

Juicy Excerpt: The passing of the normal retirement age is a frightening specter to many. For good reason. Most of us have devoted little time to planning our careers or our financial affairs. Still, the news is not all bad. Those who do plan have before them more opportunities than were available to workers of any earlier time. Today you can choose your retirement age just as you can choose your pizza toppings or your cola.

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June 6, 2007 09:47 Life/Work Balance Begins with Money Balance

I’ve added an article to the “The Self-Directed Life” section of the site entitled Life/Work Balance Begins with Money Balance.

Juicy Excerpt: I don’t believe that our employers can solve our life/work balance problems. Perhaps they can do better than most do today. But I don’t think they can ever entirely give us what we want in this area. I’ve come to believe that seeking to change our employers to achieve life/work balance is the pursuit of an impossible goal. We should let our employers at least partly off the hook. We should put more energy into trying to achieve life/work balance for ourselves through the adoption of more effective money management strategies.

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June 7, 2007 10:08 Bogle Disgraces Himself

Morningstar.com says that its discussion boards are to be used “for entertainment purposes only.”

No.

That’s stupid lawyer talk. It’s not real.

I’ve posted at the Vanguard Diehards board. I’ve spoken with and made friends with hundreds of fellow community members there. Many of those people are not there for entertainment. They are there to learn about how to invest successfully.

That shouldn’t come as a shock to anyone. John Bogle is the founder of the Vanguard fund group. Bogle started a revolution in middle-class investing when he began promoting the indexing concept in the late 1970s. Indexing gave middle-class investors a way to enjoy the exciting returns provided by the stock market without needing to spend large amounts of time doing research on individual companies and without needing to take on large amounts of risk. Bogle is a Hero of the First Rank to the Retire Early movement. Without Bogle’s help (I first learned about the effect of valuations on long-term returns by reading Bogle’s book), I could not have developed the Valuation-Informed Indexing approach to investing.

Bogle has failed us in an important way.

One of the things that draws people to Bogle is his humility. He points out to his readers near the end of his book that, like all of the humans, he is capable of making mistakes. So he asks his readers not to take his claims on faith. Good for him. That is precisely the sort of thing that needs to be said more frequently by investing experts.

And be meant. The words alone don’t do it. The sayers of those sorts of words need to in circumstances that require it translate the words into real-world action.

Bogle has made mistakes. He needs to get about the business of learning about them and fixing them. The very first step is getting about the business of seeing to it that those who follow his investing approach can have honest and informed discussions among themselves about the flaws we have identified in his ideas. Bogle does not need to do all the work on his own. The Vanguard Diehards board has a mission that runs in two directions: it teaches followers of Bogle’s approach what he knows and it teaches Bogle about what his followers have learned by testing and studying and exploring his approach in the real world.

Bogle tells his followers to stick to the same stock allocation regardless of the extent to which valuations change. That is dangerous advice. Stocks become a far more risky investment class when prices travel to the levels where they reside today. Most of today’s indexers are in far deeper waters than they realize.

Bogle hints at the dangers frequently. The hinting has not communicated the message that needs to be communicated. It is very difficult for people to engage in common-sense investing when prices are where they are today. People hate the idea of engaging in common-sense investing when prices are where they are today. Bogle needs to speak in clear and direct and plain and understandable terms on this issue. He needs to implore people to lower their stock allocations and thereby to “Stay the Course” (one of Bogle’s favorite phrases) as to the risk levels they elected for themselves in earlier days.

I cannot tell you why Bogle has not done this. My sense is that there are numerous factors involved. I will explore them in future blog entries and in articles posted to the site. Today’s sermon is a call on Bogle to take action to see that others in his movement can explore these issues while we are waiting for him to come around.

There have been hundreds of community members at the Vanguard Diehards board who have expressed a desire that honest and informed posting on the valuations topic be permitted. The Three Authors (Mel Lindauer, Taylor Larimore, and Michael LeBoeuf — they wrote a book entitled The Bogleheads Guide to Investing) have made clear that these requests will not be honored. They have worked with the site administrator at the Morningstar.com site (Casey) to have posters who repeatedly post in an honest and informed way on this topic banned from the site. I am one of those who has been banned. I am not the only one.

This is unacceptable.

Thousands of middle-class investors are likely to suffer serious financial harm as a result of the prideful and obstinate and degrading and dishonorable actions of three individuals and their defenders. Not good.

Bogle has had words posted to the Vanguard Diehards board on his behalf. Bogle speaks at the annual convention held by this board community. There was an article published in Money magazine about this board community that included comments from Bogle making clear that at times he follows the board closely. I strongly doubt that Bogle knows the full story of the behavior engaged in by The Three Authors and their defenders. I find it all but impossible to imagine that he does not know enough at this point to know that a man of his stature should not be associating himself with these sorts of individuals.

There is an old saying that informs us that we are known by the company we keep. Lindauer defends Greaney. Bogle stands on the same stage as Lindauer. What does that say about Bogle?

One of the Greaney Goons informed me when I began posting at the Vanguard Diehards board that The Three Authors had the “juice” at Morningstar.com to get honest and informed posting on valuations banned. My strong hunch is that Bogle has the juice to get it unbanned. A problem that we have been dealing with since the early days is that the bad guys are consistently willing to put any juice they possess to work doing us harm while the good guys seem inclined to keep their juice bottled up until it turns sour. I’m beginning to think that a good way of describing an out-of-control bull market is as “a time for the drinking of sour juices.”

Mr. Bogle, you disgrace yourself by your continued association with internet Goons. Please fix. More on This Topic

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June 8, 2007 09:54 Rob Bennett’s Weaknesses as a Money Advisor

I’ve added an article to the “Heroes and Villains” section of the site entitled Rob Bennett’s Weaknesses as a Money Advisor.

Juicy Excerpt: It would be nice if I were The Answer Grape and I could tell you whatever you wanted to know about any money question without having to consult any notes. I can’t, though. Part of the reason why I got out of the accounting firm is that it was clear to me that I could never rise to the top competing with tech-heads (I mean no disparagement — these people do important work). I think that God meant for them to do what they do and for me to do what me do. What we do. What us do. Oh, you know what I’m getting at. What I do!

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June 11, 2007 09:12 Bet Big on Brazil! (Or Don’t.)

Robert Shiller, author of Irrational Exuberance, is my second favorite investing analyst (John Walter Russell is of course at the top of the list). There was an article in the Wall Street Journal on Friday which stated that Shiller “loaded up” on Brazilian stocks a few years ago and continues to believe that “things are really looking good.”

I offer below ten comments brought to mind by reading the article.

Comment #1: The article suggests that the reason why we should care what Shiller thinks is because “he explained the 2000 stock-market slide (before it happened).” I find that comment highly annoying.

Shiller’s book was not directed solely at exploring the tech stock bubble. Yes, it did do that. But it did much more than that. It explored how bubbles work in general. And it showed that the S&P index remains in bubble territory to this day.

U.S. stocks rose in the late 1990s to price levels far higher than they had reached at any earlier time in history. They have since dropped to about where they were in the months just prior to The Great Crash of 1929. Is that a “slide”? Yes, in a technical sense. A more accurate way of putting it is to say that U.S. stocks have in the past seven years completed the first of a series of slides needed to bring them back to reasonable and sustainable price levels. It is dangerously misleading for a reporter to speak about the slide in the past tense, or to suggest that Shiller believes that the slide is something that has already been accomplished.

The number of investors who were seriously hurt by the tech bubble is small compared to the number who likely will be seriously hurt by the S&P bubble. Apologists for the S&P bubble feel a need to paint the tech bubble as an aberration. But many of (not all of) the same factors present in the tech bubble are present in the S&P bubble of today. There are good reasons why Shiller is avoiding U.S. stocks today. If his views on Brazilian stocks are worth knowing, his views on U.S. stocks are worth knowing too, and Shiller’s research shows that U.S. stock investors have something ahead of them much worse than the slide of 2000.

Comment #2: I was glad to see the article. The only flaw I have been able to find in Shiller’s writings is that he rarely offers practical advice for those who take seriously his warnings to steer clear of heavy investing in U.S. stocks at today’s prices. A few weeks ago, I saw an article that said that Shiller held a stock allocation of about 60 percent. The obvious question was — What stocks does he like, if not U.S. stocks? This article provides a partial answer.

Comment #3: It bugs me that the article ends with a quote from someone other than Shiller suggesting that now is not a good time to buy Brazilian stocks. Placing opposing quotes from different experts side by side strikes me as a cheap way to present a show of balance.

I prefer articles in which balance is achieved through a presentation of different arguments rather than through the presentation of different sources. When it is just two different people saying two different things, it leaves the reader not knowing which argument the author finds more compelling. I see it as part of the job of the writer of an article to offer some thoughts as to who is right. The reporter should know something about the topic or he shouldn’t be writing about it, and, if he knows something, he should be willing to share what he knows with his readers.

Comment #4: Shiller’s recommendation is enough to put Brazilian stocks on my list of “Topics for Further Study If Time Permits.” I know nothing about Brazilian stocks. But I know a lot that’s good about Shiller. Shiller is not just smart; he’s gutsy and he’s a straight-talker.

We all need shortcuts to cut through the mass of data potentially influencing our investing decisions. For me, every word put forward by Shiller counts for ten put forward by just about any other investing analyst (Russell and Buffett and Munger are exceptions).

Comment #5: I advise you not to put money into Brazilian stocks just because Shiller said it is a good idea. There’s a big difference between putting something on your list of Topics for Further Study if Time Permits and putting money on the table in regard to that something. When money is on the line, you need to be sure. If you are not sure, there’s a good chance that you will lose confidence in your investment choice at just the wrong time. Being sure requires personal research.

The benefit of an article like this is that it tells you what you should be studying, not that it tells you what to invest in.

Comment #6: Personally, I am unlikely to find the time needed to research Brazilian stocks until the opportunity to make money by doing so passes.

That’s sad, isn’t it?

Not really.

The reason why I don’t have time is that so much of my time today goes into building up my writing business. The potential payoff from that investment is more exciting than what is available from any non-customized investing choice. Never hesitate to pass up a sweet opportunity for an even sweeter one.

Comment #7: Shiller’s Brazil recommendation highlights one of the drawbacks of the rigid investing approach followed by indexing purists. The purists say to put everything in the S&P index and forget about it. The benefit of that approach is its simplicity. The downside is that simplicity comes at a price; there are rewards paid to those who shift their money to take advantage of changes in the investing realities.

Comment #8: Shiller’s Brazil recommendation does not suggest that indexing is a bad idea for most middle-class investors. So long as you are willing to acknowledge (it is denial of the realities that leads to an unhealthy rigidity) the reduced returns that follow from adoption of an indexing approach, pursuit of the simplicity of indexing makes all the sense in the world. Many investors don’t have the time or skill to be making well-informed shifts. Those investors are better off acknowledging that reality than making half-informed shifts, which can be costly indeed. Indexing is “the good enough investing choice,” in my assessment.

Comment #9: I continue to believe that Treasury Inflation-Protected Securities (TIPS), IBonds, and certificates of deposit (CDs) offer a strong value proposition today. The real-world returns provided are higher than the direct returns because each dollar of capital you can hold onto until U.S. stock prices fall will be providing a great long-term return when moved into U.S. stocks.

I get the sense that some investors would rather walk out of the house naked than invest most of their savings in something other than stocks. Those who lack the patience to wait for U.S. stock prices to return to reasonable levels might want to do some research on the idea of investing in Brazilian stocks. Given Shiller’s enthusiasm, it seems likely to me that this option is at least a not-entirely unreasonable one.

Comment #10: I hate it that the article contains a table showing year-to-date performance figures for the stock markets of various countries. I understand why it is there. I couldn’t suppress the desire to look at it myself. It teaches the wrong lessons, however.

Most of today’s investors brag of a long-term focus. The editors of the Wall Street Journal obviously are not yet convinced that we are entirely sincere in our professed belief that it is the long term that matters. Their skepticism is well-founded. We need to do better. And they need to do better at their assigned task of helping us to do better. More on This Topic

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June 12, 2007 10:15 “Preach It, Brother!”

I’ve added a testimonial for my book Passion Saving by Janine Bolon, author of Money — Its Not Just for Rich People! to the Can I Get a Witness? page of the site.

Juicy Excerpt: Then I hit page 106 where you say something most important. “To be middle-class almost by definition means to be on a quest for more meaningful work.” Preach it, brother! That is the single greatest message we can deliver to folks trying to become wealthy. More on This Topic

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June 13, 2007 10:46 The Questions Bogle Wasn’t Asked at the Vanguard Diehards Meeting

The Vanguard Diehards discussion-board community has an annual meeting at which Vanguard Founder Jack Bogle often speaks. The Retire Early community has in recent years discovered serious flaws in the approach to indexing recommended by Bogle. So I made plans back in February to attend this year’s meeting (I was at the time a long-time regular contributor to the Vanguard Diehards forum).

My announcement of that decision caused Mel Lindauer (one of The Three Authors of The Bogleheads Guide to Investing) to flip his lid. Lindauer changed the rules for attendance at the meeting, expressing a concern that Bogle needed “protection” from the sorts of questions about valuations that I frequently raised in my posts to the Vanguard Diehards board. I argued in response that Lindauer’s position represents a “dissing” of Bogle because it suggests that Bogle is unable to respond in a reasoned way to important questions about his investing recommendations.

Lindauer then urged community members to abandon the Vanguard Diehards board (moderated by Morningstar.com) for a new one at which two longtime Greaney Goons agreed to serve as moderators and at which I was banned before ever putting up a post. After hundreds of community members took him up on his offer, Morningstar.com banned me from the Vanguard Diehards board as well. Several other popular posters who at earlier times had raised serious and well-founded questions about valuations have been banned or effectively banned in the time since.

I think it would be fair to say at this point that Bogle’s treatment of the valuations question is the Achilles heal of the conventional approach to indexing. Research done in the Retire Early community in recent years shows that Bogle’s recommendation that indexers refrain from reducing their stock allocations in response to concerns over today’s price levels will likely cause billions of dollars of losses to middle-class investors in days to come, assuming that stocks perform in the future at least somewhat as they always have in the past.

An attendee at Bogle’s presentation has filed a report on it. I respond below, presuming that the report is reasonably accurate. In the event that I learn that it is not accurate, I will of course post a follow-up blog entry.

Here is the report on what Bogle said on the valuations topic:

“He noted that maybe six times in a lifetime the market is way over or under priced. ‘Markets make us want to do the wrong thing.’ He stated that he believed it was ok to change one’s allocation when one of these conditions happens (again very rarely) and suggested perhaps when the S&P PE is >=35. Today’s PE is around 18 and doesn’t warrant change.”

Here are my comments on this report:

He noted that maybe six times in a lifetime the market is way over or under priced.

What precisely does he recommend that indexers do at these six critically important times? Should they leave their stock allocation where it was when stocks were at reasonable prices and thereby allow their risk level to go wildly wrong or should they “Stay the Course” (a Bogle pet phrase) re their risk level by lowering their stock allocations or increasing their stock allocations to bring the risk level back where it is supposed to be?

“Markets make us want to do the wrong thing.”

That’s exactly right. Mr. Market is a manic depressive. If there is one thing the market is not, it is not efficient. It is the farthest thing from it imaginable. The fact that today there are so many investors (it is human investors who make up the market, of course) who believe that stocks are safe is one of the surest signs there could be that today they are frightfully dangerous.

He stated that he believed it was ok to change one’s allocation when one of these conditions happens

Bogle’s use of the word “okay” here is telling of where he is coming from on the question of the need to adjust one’s stock allocation at times of extreme valuations. Why does he suggest that it is only “okay” to make such an adjustment? Is it not mandatory that indexers seeking to Stay the Course re their risk levels make the necessary adjustments in their stock allocations?

(again very rarely)

Bogle said above that this change would be required perhaps six times in an investing lifetime. For many investors, six allocation changes in the course of an investing lifetime could come to one change every 10 years or so. The dollar loss that could be sustained from failing to make the changes when needed could well be in the hundreds of thousands of dollars per indexer, especially when the effect of compounding is taken into consideration (as it should be).

and suggested perhaps when the S&P PE is >=35. Today’s PE is around 18 and doesn’t warrant change.

Did anyone speak up and inform Bogle of the findings in the Retire Early community in recent years that P/E1 is a gravely flawed valuation assessment tool and that P/E10 is far more effective? Has he not informed himself of this? Is there some reason why our community has been able to learn things about investing that Bogle has not been able to learn?

These are the sorts of questions that truly “rational” investors [conventional indexers claim to be following a “rational” approach to investing) would be asking of Bogle if they attended a meeting at which he put forward the sorts of statements attributed to him above. These are the sorts of questions that I would have asked had I been permitted to attend the meeting.

We all lose when “experts” like Bogle are “protected” from hearing questions helping them to come to terms with the fundamental investing realities. The Vanguard Diehards community very much included. Lindauer very much included. Bogle very much included. More on This Topic

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June 14, 2007 11:40 Air Conditioning — A Costly Convenience

If air conditioning had been widespread in the 1950s, the entire pop music genre known as “doo wop” would have been lost to us. Doo wop (groups of kids singing beautiful harmonies) was created by New York teenagers who “hung out” together outside of their houses during the hot summer months. Why were these kids not at home watching television? Because it was too darn hot to be inside in the days before air conditioning! Air conditioning added to our comfort in an important way, but at a price.

My mother is 90 years old. My father is dead. One of the things my mother needs most at this stage of her life is people to talk to. When I was growing up, the people living in the row houses of Northeast Philadelphia stayed out on the front steps talking nearly every night in the summer months. Now everyone stays inside in the comfort of the air conditioning. My mother would rather have long and aimless conversations with neighbors than cool air.

I’m one of those guys who likes the feel of air conditioning going full blast. I’m like a dog; I just stick my face in front of the cool air blowing out. But even a dog can see that there are two sides to this story. More on This Topic

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June 15, 2007 11:56 Jack Bogle Started Out as a Little Boy

The last paragraph of my blog entry for Wednesday (“The Questions that Bogle Wasn’t Asked at the Vanguard Diehards Meeting”) contained the phrase “experts like Bogle.” I put quotation marks around the word “experts.” The suggestion was that I have doubts as to whether Bogle is properly referred to as an expert.

I hope you thought that was odd. Bogle is the founder of The Indexing Revolution, He gave us an approach to investing that radically transformed the project for millions of middle-class investors and increased their wealth by billions in the process of doing so. If Bogle isn’t an expert, who the heck is?

Maybe no one.

That’s the point.

Consider two sentences taken from the preface to Robert Shiller’s book Irrational Exuberance. Shiller said: “Most investors also seem to view the stock market as a force of nature unto itself. They do not fully realize that they themselves, as a group, determine the level of the market.”

To quote a phrase from the 60s, “heavy, man.”

Shiller’s entire book is summed up in those two sentences. The book is about the stock market. There have been thousands of books written about stocks; how is it that Shiller was able to come up with a fresh take? He didn’t write about the stocks themselves. He wrote about the second word in the two-word phrase “stock market.” He wrote about the people making up the market in which stock transactions are completed and their role in determining whether stocks offer a strong value proposition or not.

Stocks are owned by people, you see. It’s odd that no one noticed before this Shiller individual came on the scene. But that’s indeed pretty much the way things seem to have played out. It’s not just the stocks that matter, his research showed him. The people matter too. Stocks sometimes really are the best investment class for the long run and at other times they are not. It all depends on how much the people who own these stock thingies bid up or bid down their prices.

What a botheration!

Here we thought that folks like Bogle knew all about investing and it turns out that at best Bogle knows half the story, the boring half. Given what he said about valuations (the people side of investing) at the recent Vanguard Diehards meeting, I think it is fair to say that Bogle’s grasp of the more interesting half of the investing story is less than firm.

Bogle ain’t no investing expert.

Maybe Shiller isn’t either. Shiller has only written one book on the people side of the story. My guess is that he would acknowledge that it is not possible to report all that there is to know about the people side of investing in a single book. And Shiller doesn’t know all the non-people stuff that Bogle and so many others specialize in . So an argument could be made that Shiller too falls short of being a complete investing expert unto himself.

Mel Lindauer? John Greaney? If Bogle ain’t no expert and even Shiller is under question, these guys surely ain’t no investing experts. Not even close.

So why do they assert themselves to be experts in such authoritative terms? What inner drive is it that causes Lindauer and Greaney to insist that they and only they possess their special level of expertise in the investing field and that the hundreds of Retire Early community members who have dared to express a desire to share a few of their thoughts at discussion boards at which these individuals appear can shove sand?

It’s insecurity. I’m sure of it.

It’s not just that Lindauer and Greaney lack true expertise on the topic of investing. What makes it worse is that they know they lack it and they know how much they need to possess it. Investing matters. Mess up your investments and you mess up your Life Plan. But if you are only as smart as a Lindauer or a Greaney (or a Bogle), you’re almost sure to mess up your investments somewhere down the line. One day you wake up and feel a need to report to your partner: “Honey, We Forgot the People!” She responds: “Thanks a bunch for figuring that out now that we are hundreds of thousands down from where we need to be and too old to go back to work, you colossal jerk!”

She thinks better of it and apologizes for the “colossal” part. That wasn’t fair. She’s been through enough with you to know that you really are just the regular garden-variety brand of jerk.

Still, you really do end up poorer in your old age than you had expected to be in earlier days. Because you really did act like a colossal jerk in the investing area. Her not saying it doesn’t stop you from thinking it.

Bogle’s a jerk. The same goes for Lindauer. And for Greaney. Especially for Greaney.

Put me down as a jerk too, if you’ve been put in charge of keeping the official scorecard. I’m not putting quote marks around the word “expert” only as it applies to Jack Bogle. I’m doing that across the board.

We’re all jerks because wer’e all insecure and we’re all trying to figure out something that it is not possible for any of the humans to figure out completely as of June of 2007. We all suffer from Boy Disease (even Suze Orman, to some extent). We swing swords and yell out swear words to imaginary dragons because we know how much it hurts to skin our knees and we don’t want anyone to see us go running off crying to mommy again anytime real soon.

Jack Bogle started out as a little boy. That should tell you something about what sort of an investing expert he is. Plus, he forgot the people! That’s some amazing expertise he possesses, huh?

I listen to what Bogle has to say. I listen to what Shiller has to say. I listen to the bits of what Lindauer has to say that make sense. Heaven help us all, but there was a time when I listened to bits of what Greaney had to say. I listen to them all. I don’t want to be heard crying to mommy when my retirement goes bust. I don’t want to be telling my wife when we’re both too old to work that: “Honey, I Forgot the People!”

If there were a good number of true investing experts on the scene today, they wouldn’t have allowed us to get into this mess in the first place. True experts would have spoken up when stock prices first began getting seriously out of hand.

Bogle didn’t do it. Lindauer didn’t do it. Greaney didn’t do it. They’re not experts. They’re schoolboys. They’re learning.

Shiller? He’s the big brother. He read some of the books that the library lady won’t permit the rest of us to take home with us until we grow up some more. He cannot figure it all out on his own, however. Even Shiller needs some pals with whom to talk things over.

Those who shout out “I’m an expert and you’re not!” are suffering from Boy Disease. Those on the road to becoming men are smart enough to know how much they do not know. They give up their weekends to crack the books until they can figure out this newfangled people/valuations aspect of the question.

I started out as a little boy too.

I’m not an expert.

I’m working on it! I’m working on it! More on This Topic

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June 18, 2007 08:26 Rob Bennett’s Favorite Saving Advice Sayings

I’ve added an article to the “Start Me Up” section of the site entitled Rob Bennett’s Favorite Saving Advice Sayings.

Juicy Excerpt: It’s human nature to complain about how tough we have it. There’s plenty to complain about in the modern world. I don’t think that those of us who live in the modern industrialized economies can rightly complain too much about our buying power, however. The increase in middle-class buying power is one of the most positive developments of the past century.

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June 19, 2007 12:36 Taylor Larimore and the Monster Mistake That Ate Middle-Class Wealth

I’ve added an article to the “Heroes and Villains” section of the site entitled Taylor Larimore and the Monster Mistake That Ate Middle-Class Wealth.

Juicy Excerpt: Larimore did something very important in the words quoted above. He defined for us what he means when he uses the phrase “investing for the long-term.” Most defenders of the “Stocks for the Long Run” model fail to do this. They advise investing for the long term, but don’t say what that means. Is three years the long term? Five years? Ten Years? Fifteen years? What? Larimore suggests in the words quoted above that the 10-year mark is where the short-term ends and where the long-term begins.

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June 20, 2007 15:14 You’re Smarter Than the Experts

There are two people who wrote about investing topics frequently addressed at this site in columns published today. One is Karthik Narayanaswamy, who writes the Karthik’s Random Ramblings blog. The other is Jonathan Clements, who writes the “Getting Going” column for The Wall Street Journal.

Guess which one of the two put forward words that are brave and caring and insightful? Guess which one of the two put forward words that are trite and dangerous and inaccurate?

Here’s Jonathan Clements:

“After years of debate, there’s an emerging consensus among financial advisers that retirees ought to use a 4 percent or 4.5 percent portfolio withdrawal rate.”

No mention that it is absurd to believe that there could ever be a single withdrawal rate that would make sense for all of the many circumstances that can apply for retirees. Can retirees who have large stock allocations safely plan on a 4 percent annual withdrawal? Or is it only those who were smart enough to lower their stock allocations when prices went to the moon and thereby to lock in the more appealing long-term returns now available from safer asset classes? Jonathan Clements doesn’t know. Or, if he knows, he isn’t telling. He leaves it to us to figure out those “details” on our own.

Here’s Karthik Narayanaswamy:

“By using a 10-year moving average of earnings for the P/E, Prof Robert Shiller of Yale, of Irrational Exuberance fame, shows that the P/E10 of the stock market is close to 30, the highest level with the exception of during the dot-com boom. The median value historically has been closer to 14. The value in 1982 at the start of the great bull market in stocks was under 6…. Valuations matter, and in an environment where real estate and stocks and longer-term bonds have been pushed up, the best an investor can do is to select a flexible bond fund or keep money in a short-term bond fund yielding about 5% until better options emerge.”

Jonathan Clements may possess more I.Q points than Karthik Narayanaswamy. I’m not so sure that’s so, but it could be so. No matter. Karthik is telling it straight about how long-term investing works. That’s what we need to know. The fellow who writes Karthik’s Random Ramblings is more of an expert where it matters to us than the fellow who writes for The Wall Street Journal.

Just last week, we saw John Bogle talking to the Vanguard Diehards meeting and making the elementary-school error of using P/E1 rather than P/E10 to determine whether stocks are dangerously overpriced today. Please note that the guy who writes Karthik’s Random Ramblings “gets” what John Bogle does not. Karthik Narayanaswamy is smarter where it counts than John Bogle too. This fellow must stay up late nights putting in extra reading time.

It’s a counterintuitive reality. You would expect the Big Fishes to know more than the Little Fish. It would take a lot of words to explain fully why it doesn’t work that way. The bottom line, though, is that The Wall Street Journal relies on advertising to pay the bills. I think it would be fair to say at this point that that reality compromises the coverage of investing realities you read in that newspaper (and in lots of others, to be sure).

Karthik Narayanaswamy is an amateur. He does what he does out of love. Love beats brains when the brains are compromised by the need to pacify advertisers (who in turn need to pacify investors, who have let their greed run out of control in bidding stock prices up to where they stand today).

Karthik says nice things about my web site and my calculators (and indirectly about the mind-blowing research of John Walter Russell that is the engine behind the calculators that John and I developed together) in his blog entry. So I am biased. It would be a good idea for you to subtract some credibility points from what I say here because of that. Still, the reality is that the Little Fish is making sense and the Big Fishes are not.

You can be your own investing expert. Learning about investing is like diving into a pool. It’s hard to force yourself to do it, but once you do, you wonder why you ever made such a fuss.

The alternative is to put your trust in the people who have gained reputations as “experts” during the wildest and most out-of-control bull market in the history of the United States. Not recommended.

You’re smarter than the experts. How do I know? Because you were smart enough to earn the money you are looking to invest. That means that you possess at least a little bit of common sense.

Plus, you don’t take advertising, you ethical little devil you.
More on This Topic

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June 21, 2007 16:46 Borrowed Bling

From one way of looking at it, borrowed bling makes all the sense in the world. The purpose of the sorts of items that constitute bling (jewelry, expensive cars) is to show off. It’s obviously a lot cheaper to borrow stuff to show off instead of buying it.

Also, this stuff quickly becomes boring. You can wear an expensive piece of jewelry once or ride in an expensive car once and then switch to something else the next time you go out to a big event. It makes it easier to keep up with trends.

Or to try out different personas. Renting bling lets you test a certain “look” before putting down the big money it would take to acquire it rather than just to rent it.

The downside is that, what we play at being, that is what in time we become. The modern world permits us to play at all sorts of things, so why choose playing at being rich or being a celebrity? Why not use a camcorder to play at being a director? Or use a computer game to play at building a city?

If you play at being wealthy or at being a celebrity, you are reaching in the wrong direction for lasting happiness. Sure, it’s just people having fun. The ways in which we choose to have fun do say something about us, however.
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June 22, 2007 16:49 Live the Good Life and Avoid the Goons That Haunt It

I’ve added an article to the “The Self-Directed Life” section of the site entitled Live the Good Life and Avoid the Goons that Haunt It.

Juicy Excerpt: If we lived in a perfect world, people would look up to those living the good life and seek to emulate them. We don’t live in a perfect world. Live the good life and some are going to hate you. It’s called jealousy. It’s a depressing reality. It’s a reality all the same.

Don’t flaunt your wealth. Most of all, don’t flaunt your independence. Independence is more rare than wealth. It provokes more jealousy.

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June 25, 2007 11:19 Money Is Cereal Business

People learn from talking things over with each other.

There’s a sense in which everyone knows this. When you’re trying to figure out whether the rash on your kid’s leg is something serious or whether little league is too competitive nowadays or whether Tom Cruise is a nutcase or whether the war is a good thing or whether Maine is a nice place to take a vacation, your first thought is to ask your friends. Your actions say that you place great credit in what can be learned from talking things over with other people.

There’s another sense in which everyone does not know this. If you took a poll, I bet that a lot of people would say that the way to learn things is to read books or take classes or listen to speeches given by experts. This is especially so in the money area. Money is cereal business. Deadly cereal. When it comes to money, people seek out Poobahs. They demand Credentials. The type of Poobahs that they want to consult with are Poobahs who demand to be taken cereally.

That’s not me. You might have noticed.

This came up at a thread at Greaney’s discussion board (not recommended) the other day. Here are some words that came out of me:

“I see it as one of the big flaws of the current personal finance literature that there is too much focus on being taken seriously. The stuffiness of much of what you see is a big-time turn-off to me.

“I want to help people (and be helped by them). I want to talk to people (and to have them talk to me). I want to make people laugh (and to be made to laugh by them). I want to educate people (and be educated by them). I want to inspire people (and be inspired by them).

“I see those as different sorts of goals than wanting to be taken seriously.”

I love books. All this business of having conversations with people wouldn’t work out so hot if none of the people participating in the conversations read books. You need to have some content on which to ground the conversations. If none of us ever read any books, we would probably end up grunting at each other rather than laughing with each other and inspiring each other. So the message that I am putting forward here is not an anti-book message.

The message is that we advance our understanding of what we read in books in important ways by talking it over amongst ourselves. After you have talked about a book, you understand it better. Talking is learning.

The internet opens up wonderful opportunities to advance our knowledge of how to put together successful Retire Early plans by talking things over with each other. In the old days, you could have read some books. But what were your chances of finding someone with whom to talk over what you read? Today, we have a means for doing this. That’s a big deal.

It changes what it means to be a personal finance expert. An expert isn’t anymore the person who has read the most books or the person who has attended the most classes or the person who has given the most speeches. Those things remain important. But there’s a new dimension to be considered. There’s this new expertise to be gained by talking things over with people pursuing the ultimate goal of learning about money management — financial freedom.

Our community is a learning community. We have learned things about personal finances that no one else had ever learned before we began talking things over amongst ourselves. How did we accomplish this amazing feat? We took advantage of a learning tool that was not available to those who came before us — the internet discussion board. We’re not necessarily smarter in the sense of having more I.Q. points. We do know things that the others don’t know, however. We’ve been working it from a different angle.

Stuffiness does not work on internet discussion boards. Cereal — is that a joke? Who wants to be taken cereal?

Things change. Not all changes are for the good. Some are. More on This Topic

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June 26, 2007 10:14 The Criminal Underneath My Own Hat

Here are some words that came out of me during a recent conversation with the Goons that I believe are worthy of consideration by Normals:

“Bogle was right to say that he makes mistakes. He gets points with me for that. He loses points for not following up with sufficient vigor. He needs to be checking with people on that board (and elsewhere too, of course) to find out what his mistakes are. He needs to be sending a message to his followers that he doesn’t want people covering up his mistakes, he wants people bringing them to his attention. That’s the sort of thing I am trying to encourage.

“He should be looking within, trying to spot any signs of inner goonishness. It’s not just Bogle who should be doing this, of course. Greaney should be doing this. Lindauer should be doing this. Bernstein should be doing this. Anyone who offers money advice should be doing this. We all have sinful ways. We all should be performing examinations of conscience.

“Investing is not primarily a numbers game. Investing is primarily an emotions game. That’s the point.

“This examination-of-conscience business is not easy work. But it’s profitable work.”

Whenever someone promises to pay you big money for doing what appears to be little work, you should be asking questions as to what is really up. If a stranger says “just carry this paper bag for me onto the airplane and then deliver it to a friend of mine in the city to which you are traveling,” you need to check what’s in the bag before saying “yes.” Warren Buffett reminds us from time to time that someone who has been playing poker for 20 minutes and has not yet figured out who the patsy is may well himself or herself be the patsy.

Who’s the intended patsy for the huge bull market of the late 1990s?

They cannot force you to play the role of patsy. They need to entice you. This is done through flattery. Participants in Ponzi schemes always look smart before the bottom falls out. They are told that they are smart. They are told that that’s why so much unearned money has been directed their way. They are flattered. They are fattened for the kill.

If you possess a strong understanding of how stocks work, the attempts at flattery do not work. Knowledge of the fundamentals is your best defense. Knowledge of your own human weaknesses and of the power of flattery is your best defense.

Where did the money come from to finance the huge returns paid out during the late 1990s? If you know the answer to that one, you’re safe. If you don’t, you’re in trouble. I would go so far as to argue that, if you don’t know the answer to that one, you have no business investing in stocks at all. If you don’t know the answer to that one, you’re being set up to be the patsy.

Every time someone thinks he is smart to have bought a share of stock, someone else thinks he is smart to have sold one. Sometimes you have to wonder what those guys and gals on the other side of the transaction might know that you don’t. More on This Topic

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June 27, 2007 09:08 Staying Young at Heart

I’ve added an article to the “The Self-Directed Life” section of the site entitled Staying Young at Heart.

Juicy Excerpt: We look back at youth as an idyllic time because we have a clear recollection of the ways in which it is easy to be young and a foggy recollection of the ways in which it is hard. We think: “If only I had the energy I had then.” Or: “If only I weighed what I weighed then.” Or: “If only I had the good health I had then.” We don’t often think: “If only I were as uncertain of myself as I was then.” Or: “If only I knew as little about how the world really works as I knew then.” Or: “If only I had as little judgment as I had then.”

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June 28, 2007 14:17 Getting Fired — Something Dies and Something Is Born

I’ve added an article to the “Retire Different!” section of the site entitled Getting Fired — Something Dies and Something Is Born.

Juicy Excerpt: You got fired, you’re a loser. That’s what it means.That’s not actually so, of course. But you’re worried that people will think that, aren’t you? For good reason.

The reality is that few employees get fired. The reality is that many employees who should get fired do not get fired. What does that say about the ones who do? The ones who get the ax must really be something else, eh? More on This Topic

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June 29, 2007 13:01 Give Up Television and Grow Rich

I’ve added an article to the “The Self-Directed Life” section of the site entitled Give Up Television and Grow Rich.

Juicy Excerpt: It takes you roughly an hour to eat breakfast, get showered and dressed for work. Another hour goes to eating lunch and dinner. You sleep eight hours. You exercise one hour. You read in bed an hour before going to sleep. Getting to work and back sets you back two hours. You put in close to 9 hours at the office on many days. What’s left? One hour.

That’s the hour you spend watching television.

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May 2007 << >> July 2007