by Rob Bennett
I want to draw your attention to a recent blog post by my favorite investment researcher, Wade Pfau, Associate Professor of Economics at the National Graduate Institute for Policy Studies. The blog post is titled Role of Valuations for Long-Term Investors.
There are a few lines in Pfau’s post that make me want to cry. He says: “The primary study I was working on is still only half-finished and may stay that way forever…. Valuations and long-term investors is a rather controversial topic…. I think anything that I can say about this topic can fit into one paper. I don’t need to be writing many papers about it.”
I would like to see Pfau (and many, many other talented researchers in this field) writing thousands of papers about valuations and long-term investors. Thousands.
If you read the comment that I put to the blog post, you will see that I believe that our discovery in 1981 that valuations affect long-term returns is akin to mankind’s discovery of how to harness electricity to enrich our lives in hundreds of different ways.
Imagine that the discovery of how to make use of electricity was as controversial in its time as the discovery that valuations affect long-term returns is in ours and that the controversy caused thousands of talented inventors not to pursue their visions. We wouldn’t today have television or computers or radios or waterpiks if there had not been people who came before us who taught us how to harness the power of electricity.
Great advances in human knowledge are always controversial. Small advances are not because small advances don’t matter much one way or the other. Great advances shake things up. Great advances inspire both attacks and defenses. Great advances are where the action is.
Pfau needs to ask himself — Why are people so upset to learn how stock investing really works?
It’s because investing is important.
People use the money they invest to finance retirements and college educations and purchases of new cars and new houses. People want to get this stuff right.
So they naturally experience shock and dismay to learn that they have been getting it wrong for a long time now. It is the job of us doing research and writing in this field not to patronize those feeling emotional pain by patting them on the head and telling them that it is all really no big deal but to help them make the transition to a better and safer way to invest.
People become upset to hear about Valuation-Informed Indexing because it causes them to think about how many life opportunities they missed out on as the result of their years of following Buy-and-Hold strategies. They won’t overcome that pain by experiencing even more losses. They will overcome the pain by learning about a new strategy that will permit them to make up for the dollars and years lost.
Please don’t misunderstand my message here. Pfau is a hero to me. His research is the most important investment-related research I have seen; it takes us to places that even Shiller’s breathtaking research did not take us (that as it should be — Shiller built on the work done by those who came before him, Pfau built on the work of Shiller, and those coming after Pfau will build on the work of Pfau). I just wish that giants like Pfau would not be scared off by the nasty comments of some disgruntled Buy-and-Holders.
Come back, Wade — We need you, man!