The Great SWR Investigation - Part 1

Financial Independence/Retire Early -- Learn How!
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ataloss
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Post by ataloss » Wed May 28, 2003 3:38 pm

A safe withdrawal rate calculation must always favor starting out at lower valuations.

This is the essential point of my May 13, 2002 post at the REHP board. The intercst study does not take the reality stated above into account. My request in the May 13, 2002, post was that the community of people interested in FIRE consider developing a SWR analysis which does take the reality stated above into account. This is what all the noise has been about from the first day of The Great Debate.

I think this is flatly wrong. The ultimate maximal withdrawal rate will depend stongly on valuation. A safe withdrawal rate would depend on worst case situations (wars, depressions, overvaluation.) In an era of low valuation you would be increasing your risk by taking a higher payout since under and overvaluation may persist before correcting.

I though this was wise advice:
I'm not aware of anyone who has been successful in timing when stock prices are high or low over the long-term. If you possess this unique ability that others lack, perhaps the easiest thing to do is to adjust the safe withdrawal rate by the amount that you consider stocks to be higher than they have ever been. If stocks are 25% higher, drop the 4% withdrawal to 3%. If you feel stocks are 50% higher than they have ever been, then drop the 4% down to a 2% withdrawal.


Intercst 5/13/02
http://boards.fool.com/Message.asp?mid=17209707

I realize the board degenerated at some point after the 5/13/02 thread but I am not seeing anything of unusual significance in the 5/13/02 thread.
Have fun.

Ataloss

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Post by wanderer » Wed May 28, 2003 4:11 pm

consider youself "rehabilitated". at least in catmeyoo's eyes. :wink:

I realize the board degenerated at some point after the 5/13/02 thread but I am not seeing anything of unusual significance in the 5/13/02 thread.

would you agree that the board had degenerated by the time the "mild mannered" arrete referred to hocus as a "parrott", "macaroon", and "intransigent knucklehead?" :wink:
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wanderer

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Post by JWR1945 » Wed May 28, 2003 4:14 pm

ataloss
I realize the board degenerated at some point after the 5/13/02 thread but I am not seeing anything of unusual significance in the 5/13/02 thread.

That's the problem! intercst won on that particular thread and hocus apologized.

Then I looked into the issue. I found that there really was something worth looking into. I started writing posts such as "hocus started it all." (I wrote an earlier post whose title I don't remember. It was something like "hocus is on to something.") The more good things that I found and that others found, the more hostile and dogmatic the opposition became...along with stronger assertions that valuations don't matter.

Have fun.

John R.

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Post by wanderer » Wed May 28, 2003 5:29 pm

can someone please give equal time to researching jwr's assertions?

thay jive with mine, but, i rarely go back to that site.

if posting volume is any indicator, neither do a lot of folks since hocus left:

In early may (ended May 6), when hocus was posting, one week generated 1,257 posts. In the most recent week (ended about 1100AM May 27th): 762. That's a 39% drop off.

Maybe the decline in activity at the re*p is due to one of those "things unseen" the Gardner's are so fond of investing in. :wink:
regards,

wanderer

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Post by raddr » Wed May 28, 2003 10:14 pm

wanderer wrote:
would you agree that the board had degenerated by the time the "mild mannered" arrete referred to hocus as a "parrott", "macaroon", and "intransigent knucklehead?" :wink:


I find this quite interesting. She bashed yours truly for simply pointing out the obvious - that she was a "fawning admirer" of intercst after gushing over some of his SWR research, the content of which I was glad to show was statistically innacurate junk science. :wink: IIRC she has made numerous insinuations that she is above name-calling. Looks like she needs to reread some of her own posts. :lol:

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Post by [KenM] » Wed May 28, 2003 11:15 pm

Ahem ...... as a newcomer to NFB I'm not quite sure how to put this but I see that ElSupremo has said at the Town Centre
I would like to extend an invitation to all of our "guests" to register and become part of our little family. Why not join in all the fun

With all this anguish and agonising over who said what on the MF board many years ago (in internet years) I'm beginning to doubt that many guests will take up ElSupremo's generous offer and join our happy, forward looking, little family (the irony is meant in the nicest possible way :))

wrote this on the spur of the moment after reading previous posts. If it's not productive/appropriate/in the right place, I'm happy to delete/remove it :).
Last edited by [KenM] on Thu May 29, 2003 6:06 am, edited 1 time in total.
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Post by bpp » Thu May 29, 2003 12:13 am

What KenM said.

Is it possible to suggest that discussion board politics at least be redirected to Town Center or something? (Or maybe even set up a dedicated board for it? :))

Cheers,
Bpp

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Post by ataloss » Thu May 29, 2003 1:40 am

Hi KenM and bpp,

I am sorry for bringing up posts from the other board but I am trying to understand the issue about the 5/13/02 thread that was such a seminal event in swr "science." Several of the most innovative and thoughtful posters here were treated badly at that other place and I think we are seeing the effects of that here. I disagree with some of what hocus is saying but I respect him enough to try to state my disagreement with his ideas without in any way meaning to suggest that he isn't intelligent or (a tactic used elsewhere) that he is mentally ill.
Have fun.

Ataloss

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Post by hocus » Thu May 29, 2003 2:07 am

The more good things that I found and that others found, the more hostile and dogmatic the opposition became...along with stronger assertions that valuations don't matter.

JWR1945 has it right.

The history of this is that I researched SWRs on my own in 1996. When I saw the intercst study in 1999, I knew right away that it was flawed by its failure to consider the effects of changes in valation levels. I wanted to post on the question, but I could tell from how intercst responded to questions that it would cause a good deal of friction for me to tell the board what I knew. My primary concern was for the growth of the board. So I kept my mouth shut.

Wanderer was driven off of the board in February 2002. It alarmed me how few were willing to go public in support of him despite his great popularity. I saw it as a sign that what one poster had referred to as the "cult of personality" re intercst had grown so dominant that the board's continued usefulness as a learning resource was in question.

I determined that the most constructive response was to do something to generate more on-topic debate. I thought that an examination of the realities of SWRs would do that. I was not nearly as clear in my understanding of the realities of SWRs then as I am today (not that I am 100 percent clear on all points today). So I was tentative in my initial post. I framed it as a question. I was asking whether the board thought it might be a good idea to consider whether changes in valuation levels affect SWRs.

The initial board response was extremely positive, as JWR1945 suggests. There were dozens of posts in which people said that the discussion was the most exciting that any one had brought to the board in many months. Ironically, it was the great support that several of my posts generated (two had in excess of 80 recs, making them two of the five most popular posts of the entire year) that caused all the trouble. It was the intercst response to the positive board reaction to the matter I brought to the table that sent things in a downward spiral. As the personal attacks escalated, the more reasonable community members left the board or fell into silence. The learning process was aborted. I don't believe that this happened by accident.

JWR1945 is also right that the initial thread ended with an apology from me to both intercst and the board in general. The mistake that I made was on a small technical issue, but it was a mistake and I thought that an apology was required. The apology does not mean that I was wrong about the valuation question in general. The mistake was on a narrow point.

Changes in valuation levels always affect SWRs, I believe. But there are times when this is relatively easy to see and there are times when this is relatively hard to see. In cases like the year 2000, there is just no question. In 2000, the valuation level was at a point it had never reached in the 130-year time-period examined in the intercst study. It is simply not possible for a study that did not even take into account those sorts of valuation levels could possibly get the SWR right for that year. On this point I am dogmatic. There is no grey area. The study is wrong.

In years in which the valuation level is within the range of valuation levels covered by the study, I still believe that the failure to take changes in valuation levels into account is a serious flaw. But it is not as serious as in a year like 2000, and it is not nearly as easy in those cases to explain the reason why there is a problem

To see the concern re these sorts of years, you need to look at the study's treatment of SWRs with a less than 100 percent safety assessment. The study reports results for plans aiming at 95 percent safety or 90 percent safety or whatever. If a plan is assigned 95 percent safety, that means that, in 5 out of 100 start years, the retirement plan went bust. Intercst is saying that this means that someone retiring with that plan has a 95 percent chance of success.

I am saying that he is guilty of a logical fallacy. He is presuming that the years resulting in busted retirements are randomly distributed, that you have an equal chance of going bust no matter when you retire. I am saying that is not so, that the start years leading to busted retirements are bunched in years of high valuation.

If that is so, you have a greater than 5 percent chance of a busted retirement if you retire in a high-valuation start year. The converse implication is that you have a less than 5 percent chance of going bust if you retire in a low-valuation start year. By failing to account for changes in valuation levels, you cause people to have unreasonably high expectations of safety in some circumstances and unreasonably low expectations of safety in other circumstances.

Neither of these results is a good thing for aspiring early retirees. You obviously want to achieve your desired safety level. If you are seeking 95 percent safety, and in fact the data tells you that you do not have it when you retire in a high-valuation start year, you could still retire with 95 percent safety in that year, but you would need to lower your withdrawal rate to do so. The study should tell people this. The other side of the story is that, in low-valuation start years, you could retire with a higher SWR and still possess the level of safety you were seeking. A study not taking account of changes in valuation levels is wrong in different directions at different times, but it is always wrong, in my view.

What I needed to make an apology about is that in my posts in the first thread, I had not been careful to note that not all cases examined in the study have fail possibilities. In the 100 percent safe scenario, there are no start years causing busted retirements so what I am saying above as a technical matter is not so. I should have pointed that out. I knew that there were 100 percent safe scenarios, of course. My mistake was that I was focused on the point I was trying to explain, and overlooked the need to note the caveat re its application.

This does not necessarily mean that there is nothing wrong with the intercst approach in deaiing with scenarios where there is 100 percent safety. My personal belief is that there is probably still a flaw resulting from the failure to account for changes in valuation levels. My belief is that the problem in uncovering it is that there is not enough data in the study to bring it to light.

I beleive that if you ran a Monte Carlo analysis for the 100 percent safe scenarios, you could generate start years leading to busted retirements and thereby show the effect as you now can for scenarios assigned less than 100 percent safety assessments. I do not know enough about the technical aspects of statistical analysis to know if this is true for sure. Raddr would probably know.

JWR1945 is right that he is the one responsible for reigniting the debate. I intended the "My Plan" post to be my kiss-off to the board. You may not see it by reading the words, but there was steam coming out of my ears when I wrote that post. I felt that the board had been tricked, and that people were going to suffer serious life setbacks as a result, but that there was nothing I could do about it.

At that time I made a decision to start a new Motley Fool board when time opened up for me to do so. Me and JWR1945 agreed to exchange e-mails in the interim. I crafted the "Coin Toss" post solely for his eyes in an e-mail I sent to him. He told me that he thought I was wrong in my conclusions about the impossibility of holding a reasoned debate on the board, and ultimately convinced me that I should give the board another try. I submitted the "Coin Toss" post to the full board, it generated great enthusiasm, and the monster had been brought back to life.

The questions I have raised are valid ones deserving of serious consideration. Not all of the points are easy to understand, but the claims I am making about SWRs are important to the future of the Retire Early movement. If I am wrong in what I am saying, I should be proven wrong. That's a completely OK result. Alternatively, I should be proven correct. In no circumstances should the issue just sort of lay out there, unresolved.

My primary objection to what happened at the other board is not that I was attacked in extremely personal ways. I can deal with that. My objection is that the discussion was aborted. The questions raised were not resolved in a reasonable way. My contention is that this was deliberate. I believe from what I have seen in his posts that intercst came to understand that his approach is flawed and deliberately poisoned the debate to shut it down. Things got so out of hand with the various semantical games that no one could make sense of the arguments.

That is what I want to avoid here. I don't object at all to people challenging my points so long as the challenges are sincere ones and not exercises in pure word play. We should adopt a practical perspective. What is it that an aspiring early retiree needs to know when planning to hand in the resignation notice? Whatever approach best answers that question is the best approach. It is the approach that does the job that needs to be done that is best.

If we had perfect data on all aspects of the question, there would be one clear answer to the question "What is the safe withdrawal rate?" We don't have that. So as a practical matter we need to make compromises. There are some areas in which one person's view of what is the best compromise will not be the same as another's, and we should leave open the option of a variety of approaches in those areas.

There are other areas, however, where there is a right and wrong way to go. Would anyone say that an SWR analysis using the historical sequence methodology that does not include the Depression years or the 1970s is a valid analysis? I say no. I don't say that people should be forbidden from doing that analysis. It might tell you some interesting things. But I do not think that the claim that the result it produced is the SWR is a fair claim. Others may disagree, but that is where I am coming from.

I think that the result of that analysis might be of some use, but that ithat sort of analysis should be called something other than SWR analysis. It is not telling you what it really "safe." Perhaps it's as "Analysis of Allocaton Options for Those Comfortable Taking Risks with Their Retirement Plans." People can call it what they want so long as they do not call it SWR analysis. I think it is a bad thing for the future of SWR analysis if people do studies like that and call them SWR analysis. We can't stop them, but I think we should do what little we are able to do to discourage them.

I feel the same way about studies that do not account for changes in valuation levels. The results might provide you with some insights, it may be worth doing such studies. But such studies do not tell you the true SWR. They leave out a variable with a critical effect on the answer to the question you are posing. I do not think that such studies should be termed SWR analysis, but something else. I have no objection to disagreement on this point, of course. I am just saying what I think.

Regardless of whether such studies are valid or not, however, there is simply no question but that it was a fatal error for intercst to fail to make an adjustment for the fact that the valuation level in the year 2000 was one never seen in his 130 years of data, or at the absolute minimun to note that this caused problems with the analysis. There is no reasonable view that can be put forward that it is possible to obtain the right result from the historical sequence methodology in that circumstance. It is the faillure of the historical sequence methodology to account for valuation levels higher than ever experienced before that caused Bernstein to refer to the historical sequence methodology as "sometimes misleading."

A misleading result is not a good result. When you are offering advice on money matters, putting forward a misleading result has potentially grave consequences. Using a 4 percent SWR rather than a 2 percent SWR for a retirement beginning in the year 2000 would cause an early retiree to be $1 million off in his accumulated savings from what he needed to support a retirement at the recommended stock allocation percentage. A $1 million mistake is not a rounding error. It is a serious, serious mistake.

I do not fault Intercst for making the mistake. Presumably, he did not realize at the time he did the study that the historical sequence methodology does not work in some circumstances. But I fault him for not acknowleding the mistake when it was brought to his attention. Instead of thanking me for bringing the matter to the board's attention, he engaged in prohibited posting practices to poison the discussions and have the poster asking valid questions removed from the board.

The result is that people making use of the Motley Fool board to learn about early retirement will continue to suffer serious life setbacks because they are not being exposed to both sides of the story. People should be allowed to hear both sides and make up their own minds. They cannot. Only one side of the story can be voiced in an effective way at that board. The integrity of the board experience there has been severely damaged.

I don't want to dwell on the Motley Fool experience in our discussions here. But we should all try with great effort to avoid the mistakes that did so much damage over there. The key is that we all adopt an attitude that the goal never be for one side to "win" the debate and the other to "lose." The goal should be that we all learn. If we pursue that goal, there is no way that this will not end up being a positive experience for this community.

We need to begin to understand that intercst statements cannot be taken at face value. I said in an earlier post that I have always been a straight shooter. Well, the opposite is true of Intercst. He has never been a staright shooter. He crafts his posts to contain just enough surface plausibility to trick people who have not been able to study a matter in depth, but just enough deception that those trying to explain a concept fairly will not achieve their communication goals. This can be demonstrated by making reference to the REHP Post Archives.

My hope is to be able to discuss the SWR issue here without making undue mention of the history of the Motley Fool discussions. But if I am challenged with beliefs that people acquired from reading the TMF board or with statements made there, I am left with no choice but to address the credibility of the people who put forward those ideas or who made those statements.

I am prepared to go into the credibility issue in depth when I return to regular posting in October. But I am also happy to aim to avoid such discussions to the extent possible. I leave it to the board community as a whole to indicate which it thinks is the best way to go. My goal is to advance the communty's understanding of the realities of SWRs. I don't care one way or the other about the personalities involved. It doesn't trouble me to reveal to you in detail what intercst has done (because he is a public figure who did what he did knowing that it could cause great harm to people's hopes for a safe retirement), and it doesn't concern me to let that matter rest. I will do whatever appears to best serve the goal of advancing an understanding of the subject matter of the board.

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Post by hocus » Thu May 29, 2003 2:33 am

I disagree with some of what hocus is saying but I respect him enough to try to state my disagreement with his ideas without in any way meaning to suggest that he isn't intelligent or (a tactic used elsewhere) that he is mentally ill.

OK, Ataloss. That's a fair statement.

We face a genuine dilemma. The board community here strongly wants the personal stuff removed from these discussions. That's a univeral desire.

But we are seeing that it is not so easy to do that. The problem is that many of us have long histories at that board and we carry that history with us. One or the other of us mentions some aspect of that history, and then the context in which that history dveloped comes into play, and we are back in problemmatic territory.

Here is what I suggest. We should agree to set the Motley Fool history to one side and to have this board take up the question of the realities of SWR analysis with a fresh persective.
We need to do away with our preconceptions for purposes of these discussions and act as if we were creating SWR analysis ourselves. If we were the first people on earth to design a SWR study, how would we design it?

IF we are able to reach consensus on that effort, we can then go back and compare whatever we come up with to what intercst produced. But at this board we need to deal with the content question first . I think it is just the opposite at the other board,. They must deal with the process question before they have any hope of dealing with the content question in a fair way. But we do not suffer from their unfortunate history. We can take the more pleasant road.

Let's not refer to "the intercst study." Let's refer instead to "the historical sequence methodology." Let's drop references to personal matters altogether and focus on matters of content. That means that we cannot put forward a statement that intercst has made as support for any sort of claim. We can refer to intercst statements in development of our own assertions, but we need to formulate the arguments in our own words to put them forward here and keep the intercst stuff off of the table here.

I don't want to get into sustained debate now. Others may, if they wish, of course. But I need to take my leave of posting for about four month's time. When I get back, I'll present my case for what I am saying and respond to questions about that case to the best of my ability.

I do not want to discourage you in any way from making the points you are making. There are several board members who have indicated that they agree with you, and there are no doubt others who agree who have not publicly said so. I need to address your points if I am to hope to bring the board to a consensus on SWRs, and I would like to achieve a consensus at least on the most fundamental points. So I want to address your concerns in detail.

My proposal is that we make another run at it in October, and that we ban the word "Intercst" from our vocabulary for at least the threads in which those particular discussions are conducted.

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Post by [KenM] » Thu May 29, 2003 3:57 am

I am sorry for bringing up posts from the other board

ataloss
I'm happy with someone querying hocus :)
I'm happy with hocus responding :)
I definitely like Bob :)
I like the May13, 2002 thread :)
I like the retire early home page :)
I distinctly dislike the MF board - doesn't go anywhere except in circles :D

I very much like NFB which usually goes forward - except that recently the intercst issue seems to hijack every topic :(
But maybe I'm jealous (always wanted to use that emoticon) - I've always aspired to the sort of notoriety that intercst seems to have :D

.........but is it reasonable to expect that refugees from MF might seek sanctuary here for well reasoned, rational debate if there's no escape from the intercst issue?????

Again if I've spoken out of turn or in the wrong place I'm happy to delete or move this post :)
KenM
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Post by therealchips » Thu May 29, 2003 4:58 am

Note to arrete:

What does it mean to call someone a macaroon? I'm not familiar with that particular epithet. How about an eclair or ladyfinger? I have heard creampuff and oreo and Napoleon as insults, but macaroon?

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Post by ben » Thu May 29, 2003 7:09 am

Hi Ken! I sing the same tune! :P And looks like Hocus agrees too. So let's move on. Could somebody do a SWR study with a (simple 3-level?) show of starting (of withdrawel) p/e valuation levels?
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Post by ben » Thu May 29, 2003 7:40 am

To answer myself: looks like JWR have some good stuff under the "safe now?"thread - will read it in detail now :lol:
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Post by ataloss » Thu May 29, 2003 7:43 am

My proposal is that we make another run at it in October, and that we ban the word "Intercst" from our vocabulary for at least the threads in which those particular discussions are conducted.


Deal
If I didn't agree people would start calling me a macaroon :wink:
Have fun.

Ataloss

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Post by ElSupremo » Thu May 29, 2003 10:43 am

Greetings Ken :)
I'm beginning to doubt that many guests will take up ElSupremo's generous offer and join our happy, forward looking, little family


Yes. I think we can all see that by the hundreds of new members that have signed up since that post! :shock:I've launched a few duds in my day but that may be one of the biggest. :cry:I'll keep hoping. :?
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Post by wanderer » Thu May 29, 2003 3:48 pm

Yes. I think we can all see that by the hundreds of new members that have signed up since that post! I've launched a few duds in my day but that may be one of the biggest.

judging from the # of views and the threads viewed, i would thank your lucky stars. :)
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Post by bpp » Thu May 29, 2003 3:49 pm

Along the lines that Ben has asked about, has anybody made a scatterplot using historical data with PE/10 along the horizontal axis and subsequent maximum withdrawal rate along the vertical axis?

Cheers,
Bpp

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Post by wanderer » Thu May 29, 2003 4:11 pm

jwr may be able to shed some light - i thought bensolar did this.
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PE-10 vs SWR

Post by BenSolar » Thu May 29, 2003 4:52 pm

bpp wrote: Along the lines that Ben has asked about, has anybody made a scatter-plot using historical data with PE/10 along the horizontal axis and subsequent maximum withdrawal rate along the vertical axis?


Yes, and it is pretty interesting I think. See the graph at the bottom of this page: http://rehphome.tripod.com/pestudy1.html

That chart, which uses PE-10, has pretty tight clustering of the data around the regression line, and a sharp slope. Seems to be a relationship there to me, which is backed up by the logic that receiving greater cash dividends supports a higher SWR. The other graphs on that page of PE vs. SWR are pretty useless: they use some kind of odd calculation for "the P/E ratio for the year prior to the start of the 30-year pay out period" which uses year old price data.

I like a crude approach to using the PE-10 chart: look at the center of the chart where most of the data points are. Note the scatter of SWR: it extends to roughly 3% above and below the regression line. I see the 3% below the regression line as a rough SWR. This assumes a linearity which can't exist, since a rate below zero is nonsense. I assume that the actual line that the scatter would approach would be an asymptote approaching zero as the PE-10 approaches very high numbers. And also which gets extremely large as PE-10 approaches 0.

Of course as PE-10 gets closer to 0 then that means that people are betting the odds of an black swan event are rising: an event that will make their shares of SPY paying 100% dividends completely worthless.

In short, I think that very low valuations (single digit) combined with a clear eyed assesment that the nation isn't in danger of destruction would make me grab lots of SPY or US-TSM and be comfortable planning for a 5 or 5.5% withdrawal rate over 30 years. On the other hand, I think that PE-10 over 20 means you are in the danger zone for a 4% withdrawal.

Peak PE-10 in 2000: 44 :shock:I personally think there are good odds (it's probable) that a 4% WR will fail from PE-10 in the upper 30s or higher. If the you linearly extend the regression line to 40 and up, it's zero at about PE-10 of 38.

BenChartin

PS I can claim a small amount of credit for the above chart, as I pestered the unnamed one about it for quite a while. 8)
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