August 29, 2006 Letters to the Editor

Updated: October 3, 2006.

P/E10 Predictions Revisited

I received this letter from Rob Bennett.

I loved the article entitled "P/E10 Predictions Revisited."

P/E10 Predictions Revisited

What makes this article even more exciting than your usual stuff is that it highlights the CONNECTION between the numbers side of investing and the emotional side of investing.

The numbers steer you wrong if you ignore the emotions. The emotions steer you wrong if you ignore the numbers. The numbers need to guide the emotions, and the emotions need to contextualize the emotions.

I rarely see effective discussions of the interaction of numbers and emotions in the literature. There are lots of articles that discuss emotions. There are lots of articles that discuss numbers. There are few that discuss realistically how they work together. The exploration of how they work together is both the most interesting and the most important aspect of the investing project.

Bogle made some important steps in the right direction. He used numbers to prove his points. But his advice is not the advice that one would intuitively expect to follow from making reference to the numbers. He incorporates an emotional overlay. He says (this is a paraphrase, not a quote), "Be humble above all else, be satisfied with 'good enough' results and give up trying to obtain the best possible results."

I view that as a breakthrough insight. I believe that much of Bogle's appeal can be attributed to the appeal of that insight. What Bogle is saying makes sense to people in a way that the things that most other experts say about investing does not. Bogle's advice is in important ways in tune with what people have learned about how life works. So Bogle's advice prompts a click experience for many people.

Bogle got important things wrong, unfortunately. I don't know if it was because he was in the business of selling stocks and he just couldn't bring himself to tell it entirely straight or if it was just beyond the reach of one person to get it all right on his first try. He did get some very important things wrong, though, while also getting a bunch of very important things right. I think that the key to successful long-term investing is taking Bogle's insights and modifying them and enhancing them to bring them more into accord with how stocks actually work in the real world.

I see great potential in the sort of mental exercise that you are reporting on in your latest article. You are already generating powerful insights from it and my sense is that you are only scratching the surface of what is possible.

HERE IS MY RESPONSE

Thank you for your kind words.

You have just described the key goal of System Engineering: to maintain a balance among all aspects of a problem. It is easy for engineers to get sidetracked, focusing on one or two fascinating technical details, while losing sight of the overall objective.

I prefer to give John Bogle the benefit of the doubt. I believe that his reluctance to correct the details stems from his background and his priorities. His greatest priority is to clean up the mutual fund industry. He is less concerned about advocating investment strategies. Doing so could quickly consume all of his time. The nature of investments is such that every point is vulnerable to attack, no matter how obvious, no matter how sound.

John Bogle cautioned investors during the last portion of the bubble. But because he did not get everything EXACTLY right and because financial reporters did not know enough to ask for confidence limits, John Bogle's predictions are treated as folly. The truth is, of course, that John Bogle provided outstanding information to people who did not want to listen.

John Bogle still cautions investors. He is still being ignored by those who do not want to hear his message. He is not pressing the issue.

I believe that John Bogle is much more intelligent and much more sophisticated than many people imagine. He does get his numbers right. He keeps everything consistent. There is so much short-term randomness in stocks that he limits himself to only a few highly reliable, important points.

Calculators

I received this letter from Mike.

I am interested in retirement planning calculators, particularly safe withdrawal rates. The articles on your site reference a number of interesting calculators, but I don't find any links to download the calculators. How can I do this?

Thanks for your help.

HERE IS MY RESPONSE

You are very welcome.

You can download them all from my Yahoo Briefcase. All downloads are free. My calculators are available to everyone. My Yahoo username is jwr19452000.

I have found it necessary to click on refresh repeatedly when downloading from my Yahoo Briefcase. This can be a nuisance. But I am always able to complete a download.

Right click to "Save Link As" or to "Save Target As" or equivalent.

I recommend that you download Super Variable Terminal Value Rate SVTVR Calculator L and Year 15 Calculator A from The Big Project folder. I think that you will like my Simplifed Retirement Trainer A as well.

Yahoo Briefcase

"Denial Is Expensive" and the Future of Buy-and-Hold

I received this letter from Rob Bennett.

The entire article "Denial Is Expensive" is a fine piece of work. The following words (a description of one of the flawed reactions to your findings) hit me with particular impact:

"Reject any action for today that differs from what worked best during the extended Bull Market that led to the bubble."

Human beings are not designed to take a long-term perspective. Buy-and-hold is an inherently troubled strategy.

Bull markets last long enough to fool many investors into thinking that bull market realities are permanent realities. The key to developing an approach to buy-and-hold that stands a good chance of working in the real world is to focus on giving investors a realistic picture of how stocks work in a long run that includes both bull and bear markets.

What passes for buy-and-hold investing today is a fake buy-and-hold. It purports to be a long-term strategy, but it is rooted in assumptions that only apply for the length of a bull market. For buy-and-hold to become a realistic long-term strategy, it needs to be reformulated to take into account the realities of bear markets as well as the realities of bull markets.

HERE IS MY RESPONSE

Thank you.

Keep in mind that It’s Different This Time applies to today’s investment advice. A two-decade Bull Market created today’s mantra: buy-and-hold, maintain a fixed allocation, ignore prices. Benjamin Graham’s time tested advice was to vary allocations according to valuations with a 25% minimum, just in case.

Buy-and-hold makes sense only when it includes adjustment for valuations.

Denial Is Expensive

Letters to the Editor in 2006

Letters to the Editor in 2005